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Edited Transcript of AZJ.AX earnings conference call or presentation 14-Feb-21 11:30pm GMT

·70 min read

Half Year 2021 Aurizon Holdings Ltd Earnings Call Brisbane Feb 15, 2021 (Thomson StreetEvents) -- Edited Transcript of Aurizon Holdings Ltd earnings conference call or presentation Sunday, February 14, 2021 at 11:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andrew T. Harding Aurizon Holdings Limited - MD, CEO & Director * Drew Prescott * Ed McKeiver Aurizon Holdings Limited - Group Executive of Coal * George Lippiatt Aurizon Holdings Limited - CFO & Group Executive Strategy * Michael G. Carter Aurizon Holdings Limited - Group Executive of Technical Services & Planning * Pam Bains Aurizon Network Pty Ltd - CFO, Executive VP & Director ================================================================================ Conference Call Participants ================================================================================ * Anthony Longo CLSA Limited, Research Division - Research Analyst * Anthony Moulder Jefferies LLC, Research Division - Equity Analyst * Cameron McDonald Evans & Partners Pty. Ltd., Research Division - MD & Head of Research * Ian Myles Macquarie Research - Analyst * Jakob Cakarnis Jarden Australia Pty Limited, Research Division - VP of Equity Research * Matthew H. Ryan UBS Investment Bank, Research Division - Executive Director and Research Analyst * 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 ================================================================================ Presentation -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [1] -------------------------------------------------------------------------------- Good morning, and welcome to the interim results for the 2021 financial year. We're based in Brisbane today. Therefore, I acknowledge the traditional custodians of this land, the Turrbal and Yugara 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 by the CFO, George Lippiatt, and we will go through the presentation that we lodged with the ASX this morning, which is available on our website. At the end, we will take your questions with the rest of the executive team who are in the room with me here in Brisbane today. Just to remind you, the team is: Ed McKeiver, Group Executive, Coal; Drew Prescott, Acting Group Executive, Bulk. Clay McDonald is not available to attend today, so Drew is acting on his behalf. Pam Bains, Group Executive, Network; and Mike Carter, Group Executive Technical Services and Planning. Tina Thomas, who was our Group Executive Corporate, retired last year, and we have decided to not replace the role. In conjunction with this decision, we have commenced a review of our corporate support areas in order to determine the most efficient structure and cost base, and we will update you on this later in the year. Now turning to safety performance. At Aurizon, we always start with safety. Total recordable injury frequency rate, or TRIFR, has deteriorated by 25% to 12.38 incidents per million person hours worked compared to the prior year. This has been driven by low-severity strain injuries with a high number of short-term, lower-body sprains from walking on uneven ground and upper-body manual handling sprains. TRIFR data includes all recordable injuries, regardless of whether time away from work was required. For lost time injury frequency rate, or LTIFR, this measure has improved to 30%, continuing the positive results from the prior year. This equates to 11 lost time injuries in the half compared to 32 in FY '20. Rail Process Safety, a fatality-prevention measure, which measures operational safety, including derailments, signals passed at danger and rolling stock collisions, improved 4% in the half to 4.55 incidents per million train hours traveled. We have maintained our COVID-19 protocols to ensure the continued well-being of our team, including restrictions on nonessential travel, promoting flexible and remote working and ongoing cleaning and sanitation processes. Our focus remains on preventing events that have potential for serious injury and fatality. This is clearly fundamental to protecting our employees, our customers and the communities in which we operate. Over the past year, we've continued to embed critical controls across our operations to prevent serious incidents, combined with a range of safety, leadership and technical initiatives. Turning to the first half highlights. The financial results for the last 6 months was solid, despite lower Coal and Network volumes with Bulk EBIT continuing to grow and recognition of WIRP fees for the first time. Underlying EBIT was steady at $444 million (sic) [$454 million] due to growth in Bulk and WIRP fees in Network, $49 million of which relates to prior years. In Coal, volumes were down 4%, and whilst we anticipated a softer first half, the current trade situation with China has further challenged export volume, a point I will discuss in more detail shortly. Network volumes were 11% lower with the reduction in demand, as noted, and other impacts such as the continued stoppage of Anglo's Grosvenor mine. Statutory NPAT was down 22% to $267 million due to the $105 million pretax gain on sale for the Rail Grinding business in the prior year. The sale of Rail Grinding in the prior year is also the reason for free cash flow being down 38%. If we excluded $165 million of proceeds from the prior year, the reduction in free cash flow would have been 4%. Free cash flow will step up in the second half, given the completion of the sale of Acacia Ridge next month. ROIC improved 0.3 percentage points to 10.8% due to an increase in the last 12 months' EBIT more than offsetting a moderate increase in invested capital. Our continued commitment to shareholder distributions through dividends and buybacks has been demonstrated again this half. The interim dividend of $0.144 is based on a payout ratio of 100%, which we have maintained for 6 years now, with the dividend 5% higher despite flat NPAT due to the lower share count from ongoing buybacks. This is our highest dividend ever for a 6-month period. And finally, we've already completed more than 80% of the year's share buyback commitment of $300 million, which takes the total buybacks completed to over $1.2 billion since 2016. Moving to Coal. After being heavily impacted in the first half of the calendar year, steel production recovered during the remainder of 2020 with production returning to pre-COVID-19 levels as economic activity resumed in major export nations. Although a curtailment of aggregate coal import volume for China was expected in the second half of the calendar year, the prioritization of non-Australian coal has created a challenging trade environment. In the December quarter, Australian coal export volumes to China was down by 79%. And while coal is being redirected to markets outside China, it has not completely offset the negative impact so far. As shown on the chart here, 10 million of the 18 million tonne reduction to China has been redirected to other markets, including record quarterly export volume to India. While it is difficult to accurately predict a resolution to the current trading environment, I am confident in the resilience of Australian coal in the face of this challenge. A reminder that the metallurgical coal-dependent method of steel production, some 1.3 billion tonnes, commands 72% of global steel production. And if we're focusing on Asia, where 90% of Australian metallurgical coal was exported to, this share is even higher at 82%. For thermal coal, the reality regarding demand for Australian coal is often lost in commentary regarding global coal-fired generation. Over the past 3 years, 61 gigawatts of global coal-fired generation capacity has retired. But at the same time, 105 gigawatts of capacity came online. That is for every gigawatt that was retired, 1.7 gigawatts came online. Looking further into these figures, almost 90% of the retired capacity was located in Europe and North America. And conversely, 90% of the capacity that came online was in Asia. As a reminder, 98% of Australian thermal coal was exported to Asia in 2020. Our export volume projection over the next decade is moderate at around 1% per annum. This is a future driven by steel-intensive growth in India, already Australia's largest metallurgical coal trading partner; and prolonged thermal electricity generation from a relatively young existing fleet in Southeast Asia. This projection is appropriately cautious and takes into consideration slowing coal-fired generation capacity additions in the decade ahead and, therefore, was reduced from a projection of a range of 1% to 2% that was previously referred to. Finally, the average age of coal-fired generation capacity in Asia is just 13 years, with its existing fleet capable of driving demand for thermal coal for decades. Turning to the Coal business. Although our view of the long-term coal market is unchanged, the trade environment with China does impact coal demand in the near term as the market rebalances. This, combined with other issues such as an unforeseen shiploader issue in Newcastle, results in a reduction in our above-rail volumes by 10 million tonnes to a range of 200 million to 210 million tonnes. Beyond FY '21, we are anticipating volume growth through increasing contract utilization. However, it is now coming off this lower base. In addition, our forecasted contracted tonnes are 13 million tonnes lower in FY '22 compared to FY '21, which is driven mainly from the end of a few contracts, as you can see, plus some lower customer nominations. We were unsuccessful in retaining Stanwell, and New Hope's New Acland mine reaches end of mine life this year and has been ramping down while the proposed expansion was subject to court approval. We still hold a significant number of long-duration contracts with 56% of volumes being contracted for more than 7 years and current levels of fixed revenue through capacity charges are around 60%. Long-duration contracts and high fixed charges remain a key feature of the Coal business. However, as we've indicated for some time, this level of capacity charge will settle in a range of 50% to 60% long term as previously executed contracts on reduced rates come into effect. Therefore, the focus remains on making the business more efficient in both the short and long term through various initiatives. In the short term and in response to lower demand, there are levers we can pull such as reducing leave and overtime and standing down train consists when they are not needed. While they have some impact, the larger benefits will be realized through initiatives such as Precision and TrainGuard, which will improve productivity and lower costs. The first major piece of work under Precision that we've spoken to you about was scheduled adherence, which we now call disciplined train operations. This has been extended to Goonyella and Newlands after a successful rollout in Blackwater and Moura. For Goonyella, we have seen on-time arrival at mine improved from 55% to 88%, and on-time arrival at port improved from 54% to 75%, and there have been similar improvements in Newlands. Since starting this week, it became apparent that further benefits will be derived through improving the schedule through 2 areas: first, network now offers integrated planning to all operators, which removes duplication; second, we are using modern computer software to determine the optimal distribution of trains based on demand. Combined with improved processes designed to work more collaboratively with all operators, this enables the delivery of an integrated plan that determines the maximum number of train services across each system. We call this approach modern scheduling. In periods of high demand, this approach can result in additional services compared to conventional techniques. And in periods of low demand, this can assist with reducing the number of train consists deployed. Modern scheduling has been rolled out in Newlands and is progressively being rolled out in other systems over the next few months. We would expect further improvements once modern scheduling is deployed in all systems. And finally, with TrainGuard, preparations continue for the deployment on the Blackwater mainline after successful demonstrations last year. TrainGuard provides safety benefits through enhancements to speed control and signal enforcement and provide a pathway to expanding driver-only operations in Central Queensland. It is scheduled for deployment in the first half of calendar year 2022. Moving to Bulk. The Bulk business has had another strong performance with revenues increasing 8% from volume growth and is on track for full year EBIT of more than $100 million. This represents an impressive turnaround from a $40 million loss in 2017. Of the total above-rail business, Bulk now accounts for 32% of revenue and 26% of EBIT, and we expect these numbers to increase in coming years. As we've noted previously, the growth rate will naturally slow as the earnings base becomes larger. The growth has been broad based and has resulted in Bulk having a more diverse spread of revenue by commodity compared to prior years. We believe that this will provide a more sustainable base for the expansion of future earnings. It continues to be busy commercially for Bulk, and the CBH contract marks the return to providing services to this customer, albeit on a short-term basis at this stage. We've also expanded our services with mineral resources with additional services into Kwinana, as they grow to take further advantage of the strong iron ore price. This is balanced against the loss of BHP Nickel West. Although as this was our reform contract, the loss will not impact Bulk's future EBIT. Bulk has also expanded its port services business with the $42 million acquisition of ConPorts in Newcastle. This is an export terminal and ship loading facility, which is adjacent to rail lines at the Port of Newcastle. About 500,000 tonnes of mineral concentrates are exported annually through the terminal, including copper and zinc concentrate. This acquisition provides Bulk with the opportunity to expand an already profitable business by leveraging its expertise in heavy-haul rail and logistics to provide customers additional services. This is similar to the recent acquisition in Townsville as the Bulk business looks to redefine the markets in which it operates, providing a platform for further growth. Turning now to Network. EBIT for Network was higher than the prior year due to the resolution of the court process surrounding the Wiggins Island Rail Project, which has been ongoing for 5 years. The customer appeal was dismissed last year, and that enabled the commencement of billing for the work fees, which represents the commercial return that is in addition to the regulated access tariff. We have recognized $55 million this half, $49 million of which relates to prior years, given this case stretches back to FY 2016 when the project was completed. No revenue had previously been recognized, and the annual fee is approximately $11 million per year until 2035. Separate to the decision from the courts, which enabled Aurizon to commence billing, an expert determination in 2019 stated that the fees should be partially reduced. We have commenced an appeal of this determination, where success would represent upside to what we've recognized so far. Volumes for Network were 11% lower in the first half, and based on this, full year volumes are expected to be well below the regulatory forecast of $239 million. This will result in a revenue under recovery. Given that the volume run rate -- given the volume run rate, it is also our expectation that take-or-pay will trigger, which means that some of the revenue recovery will be in this year instead of FY '23. Our guidance assumes this, as I will talk about later. In terms of the update of UT5, the key near-term event remains the initial capacity assessment by the independent expert, which is now expected in the September quarter. This has been delayed a few months with several steps still to be completed by external consultants and the independent expert. All parties remain committed to achieving the report data as quickly as possible. We've shown a process map of the work required in the appendix. An adjustment to reflect the delay in the step-up of the WACC will be captured in the FY '22 revenue cap process, and as a reminder, each month is worth about $2 million. The maintenance and capital tool submission to the Rail Industry Group is due at the end of February, which is a key step in this annual process. This determines the scope of CapEx and maintenance works for FY '22 and is part of the greater collaboration with the customer group. In terms of operating and maintenance costs this half, we were below the regulatory allowance by about $13 million for OpEx and $3 million for maintenance. As a reminder, any OpEx savings are retained by Aurizon and any maintenance savings are retained by customers as part of the regular true-up process. And before I hand over to George, an update on the progress of some legal matters. Some of these matters have appeared on this page for a long time, so it is great news that we are resolving a few of them. The sale of Acacia Ridge is nearing completion after the ACCC was denied leave to appeal to the High Court, allowing this transaction to finally proceed after more than 3 years. 2 weeks ago, further approval was received making the completion of the sale unconditional, which is expected next month. This is a great outcome after many years through the courts, and the final proceeds received will be $170 million. I already went through WIRP, which was another favorable decision after many years, and we will keep you updated on the progress of the appeal of the expert determination. There is no significant update on the legal proceedings against Genesee & Wyoming, with the matter currently before the court with no trial date set as yet. And finally, we've commenced declaratory relief proceedings against the ATO. This relates to the treatment of our share capital account balance from prior to the IPO, and George will go through additional detail later. And on that note, I will hand over to George. -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [2] -------------------------------------------------------------------------------- Thank you, Andrew, and good morning to everyone on the call. As usual, the results I will cover today are based on continuing operations, meaning they exclude the financial performance of the Acacia Ridge Terminal, which I'll have to say just once more, given the sale will complete next month. Overall, the business performance this half has been solid in the face of some volatility in coal markets, and we have resolved significant matters relating to WIRP and Acacia Ridge. The flat EBIT performance at $454 million for the half was driven by volume decline in Coal being more than offset by improved earnings in Bulk from revenue growth and Network due to the commencement of WIRP fee billing. In addition, there was also an improvement in the other segment due to lower redundancy costs, and I can confirm that Aurizon didn't apply for any JobKeeper or payroll tax relief from government in the first half or at any stage in calendar year '20. Group revenue declined 2%, mainly due to Coal and the sale of the Rail Grinding business last year, but we also had a 5% improvement in total operating costs due to savings associated with lower volumes such as fuel and access costs, in addition to ongoing cost efficiencies. I will provide more detail for each business unit shortly. The decline in statutory EBIT, statutory NPAT and free cash flow is due to the sale of the Rail Grinding business in the prior year. As a reminder, the proceeds were $165 million, and the profit from sale was $105 million. If we add back the proceeds of $165 million, free cash flow would have been only 4% lower and would have been higher than the prior period if acquisitions such as ConPorts are excluded. We continue to maintain our 100% dividend payout ratio with an interim dividend of $0.144 per share, an increase of 5% despite the flat underlying NPAT. This is a record per-share dividend, and it's franked at 70%. Moving now to Coal. EBIT decreased $35 million or 17% to $171 million with volumes down 4%. As Andrew noted, we accurately anticipated 2 major drivers of Australian coal exports for FY '21, the return to pre-COVID steel production rates in India and China maintaining its overall coal imports at around 300 million tonnes for calendar year '20. Despite that, a shiploader issue at Newcastle and Australia-China trade challenges has led to a revised full year coal volume assumption of 200 million to 210 million tonnes. In terms of revenue quality, shown on the bridge, despite our average contract rates reducing, this was only a small downward impact. This is due to the one-off recovery of a disputed capacity charge in a prior period and lower contract utilization. As a reminder, as contract utilization falls, this is typically a positive for revenue quality, assuming fixed revenue remains constant, which it broadly did this half. The opposite will also apply when contract utilization increases. Although volumes were lower, operating costs, excluding fuel and access, were higher due to maintenance costs associated with increased fleet in the CQCN. Train crew costs were flat with enterprise agreement escalation being offset by lower overtime and increased annual leave in response to the softer demand. Moving to Bulk. Bulk continues its strong performance with EBIT growth of 39% to $61 million and is on track for greater than $100 million this year. The acquisition of ConPorts will contribute to that in future periods, as will some of the newer contracts that we announced today. The EBIT bridge we show here is straightforward with volumes driving revenue growth and higher operating costs to support that revenue growth. Depreciation will continue to increase with higher revenues, and we will invest further capital in Bulk, both in absolute dollar terms and as a percentage of the overall group. This allocation of capital is based on our confidence in retaining and attracting new Bulk customers as well as our view that Australian bulk commodity exports will grow at GDP plus rates. In our Bulk business on the East Coast, half 1 revenue growth came from a stronger volume performance on the Mount Isa corridor and the acquisition of Townsville Bulk Storage and Handling, although this was partly offset by lower livestock volumes. In the west, the main drivers of revenue were the new Rio Tinto and Mineral Resources contracts, which commenced towards the end of FY '20. The increase in operating costs, shown in the bridge, reflects the higher volumes and acquisition in Townsville, partly offset by ongoing operational efficiency benefits. Looking forward for Bulk, we expect a slightly lower EBIT performance in the second half, mainly due to the end of Mount Gibson railings just prior to Christmas, more than offsetting earnings growth from new contracts and acquired businesses. In summary, another strong performance from Bulk with further growth available from the expanded Aurizon Port Services businesses. We're looking forward to seeing 3 figures at the end of this earnings bridge in 6 months' time at the full year. Moving to Network. Network EBIT increased $9 million or 4% to $241 million. This was due to the commencement of WIRP fees and operating cost improvements, offsetting higher depreciation and a revenue under recovery due to the 11% reduction in volumes. As a reminder, our Network business has 2 revenue protection mechanisms in the form of take-or-pay and revenue cap. Take-or-pay is a contractual measure that recovers revenue in the same year, while revenue cap is the regulatory protection mechanism, which recovers anything left after take-or-pay and other adjustments 2 years later. A summary of these mechanisms is included in the appendices. Focusing now on the earnings bridge, and you can see the track access revenue has increased by $4 million. As usual, we have provided a detailed breakdown of this amount in the appendix. The summary version is that a net $55 million volume under recovery was offset by the first time booking of WIRP fees, also totaling $55 million, and including $49 million related to FY '16 to '20. Looking forward, the annual amount of the WIRP fee is about $11 million until 2035 with final amount subject to the appeal of the expert determination and the finalization of a cost variation factor related to WIRP project costs. Other revenue, as shown in the bridge, decreased by $7 million due to lower external construction works and insurance recoveries. Other operating costs were $16 million lower, also due to lower external construction works, as well as lower electric connection costs and lower labor costs from efficiency initiatives. FY '21 operating and maintenance costs are tracking below the UT5 regulatory allowances. The benefit from lower operating costs will be retained by Aurizon, while the benefit from lower maintenance costs is passed through to the customers. Depreciation increased $4 million due to increased levels of ballast and asset renewals. We also show in the appendix the forward view of the MAR with updated numbers. This has been completed on a consistent basis as before. So it assumes the independent expert report date has already occurred, meaning tariffs are based on a WACC of 6.3% for FY '21 and beyond. As the report data is now not expected until early in FY '22, the actual MAR will be adjusted to reflect that delay with each month worth $2 million in revenue. This will be washed up in the revenue cap process for recovery in FY '23. And based on the first half, there will be a large volume under recovery with some offsets from take-or-pay and the WACC adjustment. As Andrew indicated, based on the volume run rate for the first half, it is very likely that take-or-pay will trigger, which means that some of the revenue recovery will be this year with the revenue cap to recover anything left in FY '23. Any revenue from take-or-pay would be booked in the second half, and our guidance assumes this occurs. Therefore, we would expect broadly similar network earnings in the second half. Let's turn to cash flow, my favorite slide, and because it's my favorite, we've added an extra chart, which I'll talk to shortly. Free cash flow has reduced this half. But this was mainly due to the sale of Rail Grinding in the prior year, which we have split out here. This half also includes $63 million of acquisitions, including ConPorts, which will provide future cash flows as it is integrated into the group. But as you can see, free cash generation is fairly stable. It's this stability that has enabled shareholder returns with over $4 billion distributed since 2016 in the form of dividends and on-market buybacks. We've made good progress through the FY '21 buyback with over 80% completed. At the conclusion of this buyback, we will have $900 million of further funding capacity based on maintaining our BBB+/Baa1 credit metrics. The newcomer on this slide is the dividend per share chart. As noted earlier, at $0.144, this is a record per-share dividend payment despite underlying NPAT being flat. This is, of course, due to the subsequent cancellation of any shares bought back during the period, which lowers the number of shares for the dividend payment to be distributed amongst. It's also worth providing some more detail on the ATO declaratory relief proceedings in the Federal Court. This issue dates back to the privatization and the Queensland government contribution of capital, which occurred just after the IPO shares were created but prior to the IPO of those shares. This contribution has been separately accounted in a capital distribution account, but we believe that a capital contribution from a single government shareholder should be treated as share capital for the purposes of tax law, and this is the declaration we are seeking from the court. As at 31 December, we have $259 million in our share capital account and $3.4 billion in the capital distribution account. These proceedings are relevant to our strong track record of returning capital and maximizing returns to our shareholders. Share capital can be returned to shareholders without impacting Aurizon's franking credits balance, and this, in turn, also enables us to maximize the franking of our dividends. Given our desire to keep open to us the current strategy of executing on-market buybacks and paying franked dividends, we are seeking confirmation that the capital contribution is share capital. Should Aurizon undertake an on-market buyback once the share capital account is exhausted, the dividend paid in the same 6-month period is likely to be unfranked with any franking credits retained for future dividends. So the franking credits don't disappear. The use of them would just be delayed until after on-market buybacks are completed, but this assumes we don't get the declaration we are seeking. We will keep you updated as this progresses. Briefly to CapEx. CapEx totaled $240 million, which is $10 million higher than the first half of FY '20 and consistent with our full year guidance, which remains $500 million to $550 million. The growth capital spent so far relates to the delayed wagons for Central Queensland Coal and new locomotives for Bulk. Our total spend excludes $63 million of acquisitions during the half, including ConPorts. Long-term expectations sustained business CapEx remain around $500 million per year, although this is constantly reviewed in conjunction with our long-term volume outlook. And last but not least, to funding. It continues to be a busy time for the treasury team as they execute the strategy of prudently increasing leverage, diversifying funding sources and lengthening tenor of debt facilities. Aligned with that strategy, there were 2 major funding activities undertaken during the half. First, for Network in September, we issued a 10-year AUD 500 million bond at a coupon of 2.9%. This was done ahead of a maturing bond in October that had a yield of 6%. So our new funding is half the cost of that, which it's replacing. It was a great outcome given capital markets in Australia were closed for some months during the heart of COVID-19, and it marked our first 10-year issuance in Australian dollars. Second, for operations. We increased its bilateral bank debt facilities by $175 million with the addition of new lenders into those facilities. Over the coming years, we will look to increase operations debt further, which we can do while maintaining our current credit ratings. You can see from the maturity chart that we have significant available liquidity with over $1 billion, including undrawn working capital facilities. Following the recent bond for Network, we will look to further term out some of our bank debt into the capital markets over the coming years, noting that we have no major maturities until 2023. With interest rates coming down, we expect our interest costs to trend lower, albeit at a slower pace, given we have high levels of fixed debt within Network to align to regulatory reset periods. The recent bond will help bring the effective rate lower, and with all debt floating beyond FY '23, interest costs will come down again from that point, assuming rates remain low. In summary, the overall financial performance of the business continues to be reliable. We are confident in demand from Asia for the commodities we haul. We are also confident in our long-dated haulage contracts and regulated revenues. This confidence enables strong shareholder distributions and further investment to accelerate the growth of the Bulk business. Thank you, and I'll now hand back to Andrew. -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, George. Turning now to the financial outlook for the '21 financial year. Group EBIT guidance is now $870 million to $910 million, and we've listed the key assumptions here on the page. As I indicated earlier, Coal volume expectations have been revised down by 10 million tonnes to a range of 200 million to 210 million. Network volumes will also be lower than original expectations. However, that volume reduction will mean that take-or-pay is likely to trigger, which recovers some of the revenue shortfall this year. Any remaining shortfall will be recovered through the revenue cap in FY '23. The guidance includes a net amount of the retrospective WIRP fees of approximately $40 million. This represents the $49 million revenue with some expected associated costs. As per our normal practice, we do not assume any material disruptions to commodity supply chains such as adverse weather or COVID-19. Before we move to a summary of key takeaways, we have a placeholder here for an Investor Day that we will hold in June. This will be an opportunity to talk to investors in more detail about long-term coal and bulk markets and how we believe we are positioned for success. I'd like to end on this slide, which summarizes the journey of Aurizon over the past few years, as it reinforces the delivery of shareholder value. Whilst there's been some market uncertainty recently, our strategy has not changed, and it continues to create value as indicated by what we have achieved this half. This includes increasing our FY '21 financial guidance; success in the WIRP dispute and having WIRP fees finally commence; the successful resolution of the sale of Acacia Ridge, which should complete next month; acquiring another port asset for the Bulk business, which will enable further growth and an entry into the New South Wales market; maintaining 100% dividend payout ratio for 6 years, which has resulted in a record dividend of $0.144 per share; and completing more than 80% of our $300 million on-market buyback commitment. And finally, we released Aurizon's first climate strategy and action plan in October. This plan significantly expands on the initiatives we've previously included in the Sustainability Report and provides a road map through to 2050 on how we will decarbonize Aurizon's operations and contribute more broadly to a low-carbon freight transport sector for Australia. We look forward to continuing the journey for Aurizon and to continue to create value for shareholders. I now welcome your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Anthony Longo from CLSA. -------------------------------------------------------------------------------- Anthony Longo, CLSA Limited, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Just a quick one. So with respect to the guidance commentary and the upgrade, is it fair to say that it's all largely driven by those WIRP fees, just given the softer outlook that you are seeing on Coal for the year? So underlying was actually down about 10% at a group level. Is that the right way to think about that? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [3] -------------------------------------------------------------------------------- George, do you want to help Anthony with that? -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [4] -------------------------------------------------------------------------------- Yes. Sure, Anthony. So if you look at what we said around the WIRP fee, we said we expect it to be net $40 million for the full year. So if you back that out of our revised earnings guidance, $870 million becomes $830 million, and the top end is broadly the same. So that's the first part of your question. The second part of your question, we booked $49 million of WIRP fees during the half. So if you took that out, the result would have been $405 million of underlying EBIT during the first half. -------------------------------------------------------------------------------- Anthony Longo, CLSA Limited, Research Division - Research Analyst [5] -------------------------------------------------------------------------------- That's great. Really helpful. Second question for me. Just looking at the coal end markets, and you do appreciate the current Chinese relationship. I think it's a good result that you're starting to find a new home for some of that coal. Other than India, I mean can you perhaps highlight some of the other regions that are looking to take that? And playing devil's advocate, if China completely drops off a cliff, which hopefully it doesn't, is there enough jurisdictions that would hopefully absorb that demand that you typically would do? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [6] -------------------------------------------------------------------------------- Yes. Look, so starting from the longer-term part of your question and going to the shorter term. Longer term, there are ample jurisdictions outside of China to place the high-quality Australian coal. What we have seen over time is -- in recent times since the ban has taken effect, you're seeing other countries supplying the shortfall in China for their domestic coal requirements. But those supply countries would normally have supplied some other country. And those third-party countries are now getting coal from Australia. And the reason it's not instantaneous is it takes a long time for the new relationships to be established, the deals to be kept, the contractors -- contracts to be signed and those sort of things. And encouragingly, what we're seeing is that's actually taking effect. In a sense, the worst is behind us. And I don't -- again, finishing where I started, is I think, in the longer term, it will have no impact. -------------------------------------------------------------------------------- Anthony Longo, CLSA Limited, Research Division - Research Analyst [7] -------------------------------------------------------------------------------- Okay. And sorry, one last one for me. So the buyback for '21, so 80% done. I mean how should we be thinking about commitment for the balance of the year but then thereafter, just given your funding position at the current stage? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [8] -------------------------------------------------------------------------------- So I think we fall back on the basic principle that if we don't have another source of use of funds, we'll continue to do the -- to where we take the -- and spend the money, we would do it -- hand it back as a buyback, and we've done that. Several years ago, we talked about changing the corporate structure and having $1.2 billion available and that -- over a number of years, [using that] appropriately. And you've seen us doing that at $300 million clip in each calendar year. Last year, we did come through unexpected results of the Rail Grinding business, which hadn't been in our plan, or it is something that we were obviously considering and we're able to execute, we found ourselves with cash in excess of our plan. So that was actually handed back at that point in time. I might just get George to just talk a little bit about any additional color that you want to add to the buyback. -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [9] -------------------------------------------------------------------------------- Sure. Maybe just to build on that for you, Anthony. So pains me to say it, but we actually signed the Acacia Ridge deal 3.5 years ago. So the net cash proceeds from that were already factored into our $1.2 billion, which is different to Rail Grinding, as Andrew said. The other point to note on capital management is we really do focus on our capital allocation framework, which is included in the appendices in the pack. And what we're starting to see, as evidenced by our acquisition of ConPorts and TBSH, is some opportunities in the bulk market. We can see some further opportunities going forward. So we'll consider those vis-à-vis capital management each progressive year, as Andrew described, and it will be a matter for the Board how we pursue further capital management. -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [10] -------------------------------------------------------------------------------- And lastly, when we set out a longer-term plan for how we would increase our leverage, the idea was to do it progressively over time because, to an earlier question, there is some uncertainty around the coal market. And it was -- while we are confident in our view as to what would happen, we need to be cautious in how we increase the leverage of the business, although we were starting from a position of being extremely underleveraged. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Your next question comes from Matt Ryan from UBS. -------------------------------------------------------------------------------- Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [12] -------------------------------------------------------------------------------- I've got a question on coal volumes and your comment towards the start of the presentation around lower volume nominations. Can you just give us a sense of, I guess, the proportion of the customer base that you're talking about here? And just any color that you can share on those conversations? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [13] -------------------------------------------------------------------------------- Ed, I think we might get straight into you answering this question. -------------------------------------------------------------------------------- Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [14] -------------------------------------------------------------------------------- Yes. Yes. Sure. Thank you, Andrew. Matt, the -- you'll see in our contracted volume graph, our volumes dropping off to 232 million as a forecast for '22. That's driven by, as Andrew had said, the loss of the Stanwell contract and the loss of the -- and the cessation of mining at New Acland coal and a new South Wales agreement that I'm not permitted to talk about, given our confidentiality agreements with our customer. So the nominations, that if you look -- if you consider that's about $13 million tonnes down on our contracted volume for next year, that gives you a sense of a dimension in relation to the size of the nominations. It's low single digits, and some customers, and it's proportionately -- it really is mixed across all regions, and some of our customers actually increased nominations during the period. -------------------------------------------------------------------------------- Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [15] -------------------------------------------------------------------------------- And then just looking at operating costs within Coal, it looks like underlying operating costs were actually up after you remove volume-related costs. Can you talk, I guess, firstly, about how much of that related to rolling stock maintenance? And then secondly, just how we should think about these shorter-term initiatives that you can put through in a lower-volume environment. And I guess, as a result of that, any sort of comments you could make around margins, especially for the second half? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [16] -------------------------------------------------------------------------------- Ed, I'm going to let you keep going. -------------------------------------------------------------------------------- Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [17] -------------------------------------------------------------------------------- Yes. Thanks. Certainly, Matt, I'll try my best. There's a few questions in there. The first one, in terms of acknowledging that the Coal business is largely a fixed cost business. That's true. And with volumes down in the first half, we've seen that flow through to the bottom line. The costs are up. Our contracted volume, as you know, is about 248 million for the current year. And the run rate for the business is about 105, an 81% utilized -- sorry, 205, so a utilization of about 81%. The cost we've seen come through in terms of the upward pressure on cost is largely associated with building the capacity for that contracted volume. And so -- and we brought on -- and also some cyclical investment in maintenance we're doing. So costs are broadly up. The EBIT impact is about $7 million for the year, and approximately half of that is due to increased maintenance on the fleet and also bringing our Jilalan wheel overhaul facility online in the Goonyella system where we're going to do our overhauls. We'd also built capacity for some train crew capacity and reinstated some locomotives for the new business we started in the period, specifically the Peabody portfolio and also the BlueScope Steel contract that we had picked up in Illawarra. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Your next question is from Anthony Moulder from Jefferies. -------------------------------------------------------------------------------- Anthony Moulder, Jefferies LLC, Research Division - Equity Analyst [19] -------------------------------------------------------------------------------- First on Stanwell, if I could please. The loss of the Stanwell contract, I believe that, that's gone to Pacific National. Can you talk to the competitive environment that we're seeing and specifically the level of surplus equipment that competitors might still have in the Queensland market, given, I guess, some of those contract wins you just talked to? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [20] -------------------------------------------------------------------------------- Yes. Certainly, Anthony. You're breaking up a little bit there. I think you asked about the Stanwell contract and the competitive environment. So the -- look, never like to lose a contract, and we'd railed to Stanwell for a long time. And we're pretty proud of the service, and they run a very tight procurement process. And ultimately, though, we have -- it's a 3 million tonne contract in a portfolio of close to 250 million, and we -- given our hurdle rates and the particular risk positions the customer is looking for in that particular contract, we didn't get there in the end. And yes, you're right, Pacific National picked up that contract and started railing last month. As I've spoken about in previous sessions, look we're alert to the competitive environment, and our success in recent years, recontracting, particularly the Peabody portfolio in Queensland and also the Glencore -- Queensland portfolio, which commenced in January, that certainly has displaced some competitive capacity. And we're seeing that come back to us, and we're seeing that increasing downward pressure on rates. And that's probably all I can say at the moment, Anthony. -------------------------------------------------------------------------------- Anthony Moulder, Jefferies LLC, Research Division - Equity Analyst [21] -------------------------------------------------------------------------------- How much more capacity do you think is available? And related to that, what kind of contracts do you have that are reviewing over the next 12 months that could potentially go? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [22] -------------------------------------------------------------------------------- We've got limited exposure over the next 12 months. 18% of our books due for recontracting in the next 3 years. And we're at late-stage discussions with a number of the customers there. Nothing is certain, of course. So... -------------------------------------------------------------------------------- Anthony Moulder, Jefferies LLC, Research Division - Equity Analyst [23] -------------------------------------------------------------------------------- All right. And if I can switch to Bulk. Obviously, a very strong result after several other strong results. So -- and obviously, cautious not to extrapolate that strong level of growth into the -- from the first half into the second half. But new acquisitions, it seems like this is more of a focus for Aurizon for capital allocations into growing buyer acquisitions. I think, Clay, in the past has talked to the level that you see as far as Aurizon's level of market share. But is it fair to expect that we'll see further capital allocations into Bulk and further growth that will be focused on that part of the business? -------------------------------------------------------------------------------- Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [24] -------------------------------------------------------------------------------- Yes. I think that's a very fair understanding of the opportunities with Bulk. At the end of the day, what we're seeing with our Bulk is that the more we get experienced in this particular part of the business, the greater the opportunities have become, and actually, the larger the market has become for us. I think the second thing we've also seen is that we've got a big fleet scale across the country, and then in itself is actually helping us with some opportunities in the Bulk area. And look, finally, I'll readvertise the Investor Day and dangle in front of you the opportunity to hear in more detail from the Bulk team about what they think the further opportunities are for the business, but it's definitely got a reasonably strong growth pathway in front of it. Drew, have I done it enough justice? Would you like to add something? -------------------------------------------------------------------------------- Drew Prescott, [25] -------------------------------------------------------------------------------- Thanks for the question, Anthony. I mean we're really excited about the 2 acquisitions we've done today. We'll consistently look at opportunities that enhance our core rail offering and allow us to provide integrated solutions to our customers. That's something our customers are asking for. And we've been doing that well on the back of the Townsville acquisition for around 10 months now. We'll look to grow through 3 key strategies: one, grow with existing customers, and that can be doing more for our existing customers to putting in some capital and generating rates greater than our hurdle rates; grow with new customers, and you can see from this half, the benefit that, that's contributed to through Mineral Resources and Rio Tinto; and then thirdly, grow through acquisition, and we'll be looking to execute on all 3 of those areas. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Your next question comes from Jakob Cakarnis from Jarden Australia. -------------------------------------------------------------------------------- Jakob Cakarnis, Jarden Australia Pty Limited, Research Division - VP of Equity Research [27] -------------------------------------------------------------------------------- Just a quick one, if I may. Can we just talk about the portfolio mix as it stands at the moment? I think historically, you've been evenly balanced between met and thermal coal. And maybe if you can, Ed, talk to the spot market performance in the second quarter of '21 and how that may look heading into the second half of '21? -------------------------------------------------------------------------------- Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [28] -------------------------------------------------------------------------------- Yes. Certainly. Thank you for the questions, Jakob. The portfolio mix is flat, so it's still effectively 50-50. And in terms of the spot market, we've seen -- it depends -- there are some customers that have managed to have -- adopt their sales strategies to be able to surge in the second half, which we -- but it's low single digits in relation to volume. The spot market's not particularly active at the moment. And as you can imagine, if you look -- if you consider the corridors in the Hunter Valley, we've got the NCIG supply chain sort of throttled by port exports. And you've got the cessation of business in the Southeast Queensland where we're the only operator, and in Central Queensland, what we're still seeing the impact of China trade issues flowing into the second half. -------------------------------------------------------------------------------- Jakob Cakarnis, Jarden Australia Pty Limited, Research Division - VP of Equity Research [29] -------------------------------------------------------------------------------- Great. And just one on the Bulk business. So you've spoken about now the investment in Townsville. Obviously, we've got Newcastle coming in. Can we talk about the relative rates of return maybe in those businesses relative to Coal, Andrew, from a portfolio perspective? And then maybe just give us some visibility on the strategy and CapEx required to bring those to a return on capital that you guys are focusing on? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [30] -------------------------------------------------------------------------------- Sure. I might get George to run through. -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [31] -------------------------------------------------------------------------------- Yes. Sure, Jakob. So the first thing I'd say is that over the life of those business cases, they both hit our hurdle rates adjusting for risk. So we're very happy with getting a return on that capital we've invested. In Townsville, there's probably a bit more capital to invest than Newcastle. And that's because in Townsville, we're redoing the hard sand and also relaying some of the track adjacent to that terminal. So that's the capital question. In terms of the return profile, look, those businesses are broadly consistent with our Bulk and Coal businesses that probably sit somewhere between Coal and Bulk. But we don't look at those businesses in isolation from our core bulk rail offering. We want to provide, as Drew said, an integrated service to our customers, and that's what we're focused on doing. So when we look at margins and returns, we look at rail and port together. -------------------------------------------------------------------------------- Jakob Cakarnis, Jarden Australia Pty Limited, Research Division - VP of Equity Research [32] -------------------------------------------------------------------------------- And just one final one. George, just can you talk -- sorry, Andrew. -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [33] -------------------------------------------------------------------------------- I just want to reinforce, while it's our action to provide an integrated service offering, and we want to do that, it's obviously valuable for us to do that. It is actually a customer-led activity. And we are responding to needs that the customers have actually given us. -------------------------------------------------------------------------------- Jakob Cakarnis, Jarden Australia Pty Limited, Research Division - VP of Equity Research [34] -------------------------------------------------------------------------------- Sorry, just final one for George. Can you talk about the timing of the WIRP payments into the cash flow, particularly in the first half from what I understand might have been those catch-up payments? -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [35] -------------------------------------------------------------------------------- Yes. So in terms of cash flows we invoiced and booked in the first half, we invoiced and booked more in cash than we booked in revenue. And that's just because the accounting standard drives you to be conservative with what you book from a revenue perspective and also the structure of those WIRP payments. The last thing I'd say on that is that the WIRP fee itself is still subject to our appeal of the expert determination and also the finalization of project costs. Both of those 2 things could see a change to both the retrospective WIRP fee and the WIRP fee on a go-forward basis. But what I'd reiterate is that the accounting standard drives you to be conservative, and that's what we've done in our accounts. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Your next question comes from Paul Butler from Crédit Suisse. -------------------------------------------------------------------------------- Paul Butler, Crédit Suisse AG, Research Division - Director [37] -------------------------------------------------------------------------------- I just had a question around buybacks. You've got, I think, $53 million of buyback authority remaining under the previous announcement. And I was sort of surprised that given where the share price was, you didn't take the opportunity to top that up. Is that -- I mean is that just the normal timing that you would sort of think about and preferring to do that at the full year? Or is this about opportunities within the Bulk space where you may look to deploy the capital instead? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [38] -------------------------------------------------------------------------------- I'll let George to go through that. -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [39] -------------------------------------------------------------------------------- Yes, Paul, George here. Look, it's a bit of both. We announced $300 million at the start of this year. We announced $300 million the prior year. A bit like the cash flows of our business, we try and be pretty predictable and pretty stable with what we do as a buyback. As I mentioned before, the one thing we did consider is Acacia Ridge proceeds coming in, but that was already factored into the $1.2 billion of funding capacity. And as you mentioned, there are opportunities in Bulk to grow, and that's also factored into our thinking. But as we normally do, we'll reassess what we do for FY '22 ahead of August, in line with our capital allocation framework. -------------------------------------------------------------------------------- Paul Butler, Crédit Suisse AG, Research Division - Director [40] -------------------------------------------------------------------------------- Okay. And if I could also ask, what's the competitive environment in the Bulk business? Because, I mean, obviously, in the above rail coal business, there is an element of competition there, and you're citing pressure on pricing there. But that doesn't seem to be the case in the Bulk business. Is that really the case? And can you give us some color on why that is? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [41] -------------------------------------------------------------------------------- Yes. Look, I'll start. When I look at the comparators between -- from competition between the Coal, just generally not getting into the specifics of both states, and the Bulk business, I'd say the Bulk business is a more competitive environment. And one of the -- like a key fact in that is that you're actually dealing -- often dealing with smaller volumes that fall on the edge of being easily or readily truckable depending on the customers' desires to either go with truck or rail. So that's one issue. The other issue is the contract length is a lot shorter. So you're actually constantly in a recontracting sort of environment. So I think those 2 factors by themselves point to a more competitive environment for Bulk. And it's probably fair to say there's a number of other players that turn up regularly when you're actually going into tenders with customers. So net-net, definitely more a competitive marketplace. What I might do is hand over to Drew if there's something I've missed or you want to add something. -------------------------------------------------------------------------------- Drew Prescott, [42] -------------------------------------------------------------------------------- Thanks, Andrew. Thanks for the question, Paul. Listen, Andrew is right, we compete in a variety of markets and geographies across Australia. And we face a mix of road and rail competition generally. You've probably heard Clay talk about the shorter distance, smaller volume is a sweet spot for road. Longer distance, higher volume is where rail really comes into play. Yes, what we're constantly doing is looking at strategic footprint where we can provide integrated road and rail solutions for our customers. -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [43] -------------------------------------------------------------------------------- And look, there is a community pressure on the amount of vehicles on road. So that actually does play into helping the rail part of the road-rail sort of competition when it comes to the higher larger volumes. But I'm still talking volumes that are significantly below the sort of volumes you see contracted in the Coal business. Does that help? -------------------------------------------------------------------------------- Paul Butler, Crédit Suisse AG, Research Division - Director [44] -------------------------------------------------------------------------------- Yes. Yes. And just one last one, if I may. Given you're expecting a decline in contracted volumes in the Coal business, can you -- is there things you can do on the cost side to offset the margin impact there? Or are we -- are you expecting to see some margin impact from that decline in contracted volumes? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [45] -------------------------------------------------------------------------------- So we're still fighting a good fight. We have a large number of improvement initiatives underway to help us in that -- in the battle. Everything from the project precision, which we've talked about for a number of years, which is progressingly increasing -- progressing increasingly well over time. And I have considerable regard for what that's going to deliver for us. That's in the main, i.e., how do you get people to work better and how do you restructure things. It's not so much around spending capital. In the capital initiative space, you've got TrainGuard, which, next year, you'll see. We had good trials on that, and we will see the implementation of that completed in one system next year. And then we're continuing to work on the cost efficiency and effectiveness of our above rail asset management business and quite numerous other activities underway. So that's just... -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Your next question comes from Owen Birrell from Goldman Sachs. -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs Group, Inc., Research Division - Metals and Mining Company Analyst [47] -------------------------------------------------------------------------------- Just a few questions for me. Just wanted to start with the Network business. George, you made a comment just before that the retrospective WIRP fees that you were booked -- that you booked during this result were conservative and that the cash proceeds had exceeded that level of booked revenues. I'm just wondering, can you give me a sense of what the upper level of possible WIRP fees would be if you weren't been conservative? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [48] -------------------------------------------------------------------------------- Yes, Owen, I won't, and the reason for that is it's subject to court proceedings but also subject to commercial discussions with those WIRP customers. So I was deliberately not providing you with the upper end of that. -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs Group, Inc., Research Division - Metals and Mining Company Analyst [49] -------------------------------------------------------------------------------- But it's probably fair to say that if you are successful in that negotiations that you will basically account for additional retrospective fees in the future if your negotiations are successful? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [50] -------------------------------------------------------------------------------- That is absolutely correct. -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs Group, Inc., Research Division - Metals and Mining Company Analyst [51] -------------------------------------------------------------------------------- Okay. And then the second question is just on Network, looking at the take-or-pay protective structure that you highlighted within that business. What is the best way for us to think about that protection, noting that you obviously also have the MAR protections above and beyond that? But how should we think about the take-or-pay protections within each period? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [52] -------------------------------------------------------------------------------- Yes, you can go, Pam, if you want. -------------------------------------------------------------------------------- Pam Bains, Aurizon Network Pty Ltd - CFO, Executive VP & Director [53] -------------------------------------------------------------------------------- From a take-or-pay perspective, it's very hard to put a value on take-or-pay until you get through the full year because it depends on railings and cancellations. But going back to George's comments, what we do recover through take-or-pay, obviously, within the year and what we don't goes back into revenue cap in 2 years' time. -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs Group, Inc., Research Division - Metals and Mining Company Analyst [54] -------------------------------------------------------------------------------- Yes. Is there a simple way for us to think about that in terms of how we're trying to forecast that number? Because at the moment we probably sort of getting into the MAR revenue cap. But is there a 30% of the volumes that are protected each half by take-or-pays? -------------------------------------------------------------------------------- Pam Bains, Aurizon Network Pty Ltd - CFO, Executive VP & Director [55] -------------------------------------------------------------------------------- Unfortunately, there isn't a simple way. However, I think if you could be guided by George's comments, assume a similar first half to second half based on how we've looked at guidance. -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs Group, Inc., Research Division - Metals and Mining Company Analyst [56] -------------------------------------------------------------------------------- Okay. Understood. And can I just ask a question around the ConPorts acquisition? Is there any way that you've provided, I guess, the size of that investment and the potential for the earnings contribution going forward? -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [57] -------------------------------------------------------------------------------- Yes. Owen, I think we talked about acquisitions of $63 million. ConPorts was a bit more than $40 million of that during the half. We don't tend to provide forecasts on each segment within a business unit, but fair to say it will return its cost of capital, and it should be doing that in the first year. -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs Group, Inc., Research Division - Metals and Mining Company Analyst [58] -------------------------------------------------------------------------------- And can I ask, is there any thing skew, like seasonal skew in that business in terms of the contribution? -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [59] -------------------------------------------------------------------------------- No, it doesn't tend to because it's mainly, as Andrew said, copper and zinc. They tend to be more steady-state productions. So not seasonal products. -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs Group, Inc., Research Division - Metals and Mining Company Analyst [60] -------------------------------------------------------------------------------- Excellent. Just one last question, if I may. Just on the coal volume guidance. You mentioned that a lot of the broader underlying operating dynamics were in line with your -- I guess, your internal expectations, but there was the Newcastle loader issue, I believe. Just wondering if you can give a sense of what the absolute impact of that was? And has that been resolved? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [61] -------------------------------------------------------------------------------- Ed, can I get you to talk? -------------------------------------------------------------------------------- Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [62] -------------------------------------------------------------------------------- Yes. Most certainly. Thanks, Owen. The -- yes, I mean our volumes half-on-half in New South Wales were down about $1.4 million, and that was a combination of both -- it's difficult to put a precise split on what was driven by the NCIG outage. So that shiploader was impacted in early November, and the supply chain has responded relatively well. And once we've got through the normal half year, usually, January is a little soft in the Hunter Valley. We're actually seeing some modest strengthening in orders as we've got into February. So it's no -- it's certainly no more than the 1 million-tonne range, Owen, and it's going to be up for approximately 6 to 12 months. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- Your next question comes from Cameron McDonald from E&P. -------------------------------------------------------------------------------- Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - MD & Head of Research [64] -------------------------------------------------------------------------------- Just a couple of questions from me. Just looking at the retrospective WIRP fees. You called out some costs in the second half in your guidance. Any particular reason you didn't provision for them in the first half? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [65] -------------------------------------------------------------------------------- George, can I let you handle that? -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [66] -------------------------------------------------------------------------------- Yes. So fair to say, Cameron, that about half of that we did provision for, but just because of materiality, we haven't separately called that out. So of that 9, half of it is provisioned in the first half. -------------------------------------------------------------------------------- Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - MD & Head of Research [67] -------------------------------------------------------------------------------- Okay. Excellent. And then in terms of your -- the comments around the competitive environment on [contracted volume rates,] can you give us a sense of sort of what sort of downward pressure you're seeing on that? Is it a low single-digit, mid-single-digit, high single-digit-type reduction in the rates? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [68] -------------------------------------------------------------------------------- Ed, I let you deal with that without being too specific. -------------------------------------------------------------------------------- Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [69] -------------------------------------------------------------------------------- Without being too specific, I probably don't mention it at the half-on-half, which is publicly available information. If you look at the -- you look at our half year volumes for the first half '20, also half year revenues of 6 28 divided by the 106-tonne volume, we had an average rate per tonne of 5 91. If you compare that to the first 6 months of FY '21, this year, December 30 first half, revenues were down $44 million to 5 84, and volumes were down 4.5. So when you do that math, you end up with $5.74 per tonne, which is -- it was just 2.9%. So that's how I'd answer that one there, Cameron. The fuel price that as well, of course, I would say, sorry. But most of that's passed through. -------------------------------------------------------------------------------- Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - MD & Head of Research [70] -------------------------------------------------------------------------------- Yes. But not all of your tonnes have been exposed to reduced rates during that period through new contracts. -------------------------------------------------------------------------------- Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [71] -------------------------------------------------------------------------------- No. That's most certainly the case, yes. Mostly, the contracts that were -- approximately a decade old that have been recontracted in the current environment that we'd announced in the last -- over the last couple of years. -------------------------------------------------------------------------------- Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - MD & Head of Research [72] -------------------------------------------------------------------------------- Yes. And then just given the lower export volumes that we've seen come out of the ports versus your railings and volume haulage, have you got a sense of what the stockpiles look like at the ports and how full they are? And will that impact your railings in the second half? -------------------------------------------------------------------------------- Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [73] -------------------------------------------------------------------------------- We watch support stocks pretty carefully. And yes, you're right, the stocks are built -- have built. And -- but we -- but it's not changed significantly in the last 3 months. So we were watching it carefully as we entered the second quarter. But we've not seen it impact our volumes significantly. So I mean, for -- and I think it's due to the -- it's partly due in the CQCN to our contract bases with some very large customers and which have stockpile space and sufficient capacity at the port. -------------------------------------------------------------------------------- Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - MD & Head of Research [74] -------------------------------------------------------------------------------- Okay. And last question, is there any update on the Galilee and sort of potential developments there? -------------------------------------------------------------------------------- Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [75] -------------------------------------------------------------------------------- Look... -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [76] -------------------------------------------------------------------------------- I'll hand over to Pam in a second to add anything to this, but the reality is for -- the main action in the Galilee port is with Adani. And if you want updates on what's going on with -- sorry, Brothers. If you want updates with what's going on with the Brothers business, it's absolutely a need to actually talk to them. But I might just hand over to Pam for anything else. -------------------------------------------------------------------------------- Pam Bains, Aurizon Network Pty Ltd - CFO, Executive VP & Director [77] -------------------------------------------------------------------------------- Yes. Not too much. Cameron, not too much to add to Andrew's comments. The construction work continues, and we're doing what we will require to do for any customer wanting to access the network. -------------------------------------------------------------------------------- Operator [78] -------------------------------------------------------------------------------- Your next question comes from Ian Myles from Macquarie. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [79] -------------------------------------------------------------------------------- A couple of quick ones. You mentioned in Coal that you received a one-off revenue payment for a disputed capacity charge. Just wondering how much that was? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [80] -------------------------------------------------------------------------------- That's very eagle eyes, Ian. I'll hand that over to Ed, if you just talk if you can. -------------------------------------------------------------------------------- Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [81] -------------------------------------------------------------------------------- Yes. I can't specifically reveal the number, Ian. It is -- but it is in the low single digits. And it's related to a dispute going back about 4 years, which we've had on the book. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [82] -------------------------------------------------------------------------------- Okay. And in terms of One Rail coming to market, what's your attitude towards that? Is it -- historically, you actually did have an attempt to go and bid for that asset through the -- with the actual -- apply through the ACCC. What would be your approach this time? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [83] -------------------------------------------------------------------------------- George, do you want to talk through our approach? -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [84] -------------------------------------------------------------------------------- Sure. Thanks for your question, Ian. I mean there's 2 parts to that One Rail business. The first is the South Australian Northern Territory assets. The second is the old GE Rail business in the Hunter Valley. Both of those we're interested in. We actually had a right of first refusal relating to the South Australian Northern Territory business going back to 2006. So we were interested in it then. We're interested in it now. And in 2016, when Glencore ran the sale process, we competed in that auction, and nothing really has changed. We still look at that business now. So it is something we're interested in, and we'll see what the current owners do with that business going forward. -------------------------------------------------------------------------------- Ian Myles, Macquarie Research - Analyst [85] -------------------------------------------------------------------------------- And does that influence the outcome of share buybacks? And the other thing on share buybacks, I was just trying to clarify, if you would lose the tax -- the court's treatment, the tax offer, when you do a share buyback, you're given then to the subsequent 12 months run franked? Is that what you're trying to say, which would change the advantages of doing share buybacks? -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [86] -------------------------------------------------------------------------------- Yes. So let me tackle those 2 parts of those questions. Firstly, the decision on share buyback is more about just being steady state and predictable. But the opportunities we have to grow Bulk are a factor in it. They're not the dominant factor in terms of share buybacks. On the second question around the tax impact. So firstly, we expect to have a hearing in the Federal Court this year. And post FY '21, we'll have a share capital account balance of around $200 million. Beyond that, should we undertake an on-market buyback after the share capital account is exhausted, the dividend paid in the same 6-month period is likely to be unfranked with any franking credits retained for future years. So it's 6 months, not 12 months, Ian. And the other thing I'd reiterate is that in a worst case, it's a timing issue, where the use of franking credits is delayed, but the credits aren't lost. -------------------------------------------------------------------------------- Operator [87] -------------------------------------------------------------------------------- Your next question comes from Scott Ryall from Rimor Equity Research. -------------------------------------------------------------------------------- Scott Ryall, Rimor Equity Research Pty Ltd - Principal [88] -------------------------------------------------------------------------------- Andrew, just following on to Ian Myles' question on One Rail. What ended up happening with the court case trying to assert your first right of refusal on that one, please? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [89] -------------------------------------------------------------------------------- Well, it's just, I think, very few words I said. There's nothing much has changed. And to date, nothing much has changed. It's still a matter in front of the courts we're still pursuing vigorously. Yes, it's just not safe to say anything else. Sorry, Scott. -------------------------------------------------------------------------------- Scott Ryall, Rimor Equity Research Pty Ltd - Principal [90] -------------------------------------------------------------------------------- Okay. What's the time frame over which that gets resolved, calendar year? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [91] -------------------------------------------------------------------------------- It's definitely not short-term resolution. It's a fairly long slog. -------------------------------------------------------------------------------- Scott Ryall, Rimor Equity Research Pty Ltd - Principal [92] -------------------------------------------------------------------------------- Okay. All right. And second question is on Bulk. The first part of it, is Clay okay? Like is he going to be the one presenting in June? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [93] -------------------------------------------------------------------------------- Yes. I can't -- it's just a personal issue that he's dealing with. It's not about his health. -------------------------------------------------------------------------------- Scott Ryall, Rimor Equity Research Pty Ltd - Principal [94] -------------------------------------------------------------------------------- All right. Partly good to hear, I guess. Hopefully, the other bit of that is okay. In terms of the ConPorts acquisition, these are hopefully just really a quick question to answer, but is CBH the only party using that port at the moment? Is there opportunity for more and capacity for more? And is this -- can you offer integrated offers into there from Broken Hill [and tie those]? Is that the idea, is to actually have a path to market that involves a little bit more than just rail services, similar to what you've done in Townsville? -------------------------------------------------------------------------------- Drew Prescott, [95] -------------------------------------------------------------------------------- Yes. Scott, it's Drew here. Thanks for the question. Pretty much yes to everything you've said there. There's 4 major customers for the site. And yes, we'll be looking to provide integrated solutions into that site, and we'll also be looking to grow that site from what it is today. -------------------------------------------------------------------------------- Scott Ryall, Rimor Equity Research Pty Ltd - Principal [96] -------------------------------------------------------------------------------- Okay. Great. That's easy. And then maybe it's Andrew, maybe it's Ed on TrainGuard. So are we now -- this -- the implementation of this, particularly around what you were calling ETCS back in your 2018 Investor Day, seems to have come reasonably about slower, I guess, and [we always sit] on the outside and see if things go slower than what they've perhaps taken once you get into the company. But are you now satisfied with the trials around the technology that goes behind single-driver trains, and that is going to be, for sure, implemented in the Blackwater system next calendar year, and then you would expect that, that will roll out to other systems after that? Is that a fair summary of where we are? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [97] -------------------------------------------------------------------------------- Scott, it's not myself or Ed will talk to that. That the responsibility for TrainGuard rests with Mike Carter, who is thankfully in the room and can give you a pretty good update on where we're up to. -------------------------------------------------------------------------------- Michael G. Carter, Aurizon Holdings Limited - Group Executive of Technical Services & Planning [98] -------------------------------------------------------------------------------- Scott, yes, high level is pretty close. We did our operational demonstration. There's normally 4 phases to a project like this: one, the initial proving of the system; two, put it onto the system and operationally demonstrate it: three, implement the system; four, implement the operational changes with the drivers. We've done the first 2, and they went reasonably smoothly. We had allowed a fair bit of time for discovery of issues that would be different on our systems, and we found a few. And now we're into the phase of implementing the system into the Blackwater. And as we've gone from operational demonstration to the full system, there's been a few scheduled delays with a few particular areas where we've got to adjust the system for some of the operation. It's not an issue that the system won't work. It's just adapting the system for the particular operation. So if you went back a couple of years, yes, you would find we've got a little bit of a scheduled delay. But I'm happy to confirm that the business case remains intact, and we will implement next year, and then we will go on to the other systems. -------------------------------------------------------------------------------- Operator [99] -------------------------------------------------------------------------------- (Operator Instructions) Your next question is from Rob Koh from Morgan Stanley. -------------------------------------------------------------------------------- Robert Koh, Morgan Stanley, Research Division - VP [100] -------------------------------------------------------------------------------- Just one quick question for me, possibly for the treasury team. I guess there were some media reports that one of the big 4 banks has a policy of not lending to coal infrastructure. And just wondering how you guys are factoring that into your debt capacity and capital structure plans? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [101] -------------------------------------------------------------------------------- So Rob, I'll get George to deal with that. -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [102] -------------------------------------------------------------------------------- Rob, yes, look, it's something we watch, and we saw the news. And as Andrew mentioned before, we have a plan to increase leverage, but we're doing it progressively over the next 3 years. That's always been the plan. More recently, though, we're pretty confident in the availability and cost of debt capital for our business. And the 2 data points I'd point you towards, we did a AUD 500 million bond for network at a 2.9% coupon with a 10-year term. That was oversubscribed. Very happy with that outcome. And secondly, on the operations side, we actually added 2 new banks to that facility about 3 months ago. So we haven't seen the impact in terms of availability or cost of capital at this point. -------------------------------------------------------------------------------- Operator [103] -------------------------------------------------------------------------------- Your next question comes from Nathan Lead from Macquarie -- pardon me, from Morgans. -------------------------------------------------------------------------------- Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [104] -------------------------------------------------------------------------------- Just 3 questions for me. So first up, the federal government budget allowed for media expensing of CapEx. I would have thought with your fairly heavy CapEx program, there might have been some opportunities there on the tax and -- or at least the tax front that has an impact on franking. Maybe if you can just talk through that? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [105] -------------------------------------------------------------------------------- Go for it, George. -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [106] -------------------------------------------------------------------------------- Yes. Sure, Nathan. Yes, we saw that announcement and looked at it with interest. It will have a cash tax benefit to us for FY '22 and '23. We're working through as well what capital we can bring forward to do further capital spend while those arrangements are in place. As you identify, because we're paying lower cash tax in '22 and '23, that could have an impact on franking and bring it down slightly from the current 70%. -------------------------------------------------------------------------------- Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [107] -------------------------------------------------------------------------------- Do you have the potential to wipe that, you admit the tax you actually pay? -------------------------------------------------------------------------------- George Lippiatt, Aurizon Holdings Limited - CFO & Group Executive Strategy [108] -------------------------------------------------------------------------------- Yes. It would effectively bring forward your write-off of your assets sooner and then reduce your cash tax. So it brings forward the timing benefit of that write-off. -------------------------------------------------------------------------------- Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [109] -------------------------------------------------------------------------------- Yes. Okay. Second question just on Bulk. You previously said about how the Bulk margin is competitive in sort of at commercial levels now, but it looks like it really stepped up in the first half '21. What's the sort of the go-forward run rate now? I noticed also your -- is it part of those access costs that now are being directly paid by customer? So if you could just sort of talk through what that sort of run rate is going forward? -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [110] -------------------------------------------------------------------------------- Yes. I'll give Drew the opportunity to really land the commitment for Clay. So when Clay's back, he has to live with it. -------------------------------------------------------------------------------- Drew Prescott, [111] -------------------------------------------------------------------------------- Thanks, Andrew, and thanks for the question, Nathan. Listen, that growth year-on-year in the margin would definitely be a result of the new contracts coming online, particularly the Mineral Resources contract. Moving forward, I would -- yes, as we talked about before around the competition within the Bulk, I'd like to think we can hold that margin. I wouldn't think that, that margin would increase. -------------------------------------------------------------------------------- Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [112] -------------------------------------------------------------------------------- Right. And then third one, maybe for Pam. I think there was a reference there in the presentation about $3 million spend below the OpEx allowance within the regulatory revenues. Could you just talk through, I suppose, there's a pretty big cost-out opportunity there. Are you really starting to get going on that now? And have you revised your targets on just how much you think you can take out? -------------------------------------------------------------------------------- Pam Bains, Aurizon Network Pty Ltd - CFO, Executive VP & Director [113] -------------------------------------------------------------------------------- Nathan, thank you for the question. In terms of OpEx, there was a $2 million on maintenance and a slightly larger -- OpEx was $16 million down in total. That includes fuel and energy, lower reg OpEx and in addition to construction costs. We haven't provided a target in terms of that number, but we are continuing to focus on costs, both operating costs and maintenance. So at the half, there is a benefit, and that will flow through into the second half. -------------------------------------------------------------------------------- Operator [114] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back for closing remarks. -------------------------------------------------------------------------------- Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [115] -------------------------------------------------------------------------------- Okay. Well, thank you very much all for attending this conference call where you've heard that we've delivered on our guidance and boosted dividends despite the impacts of COVID-19 and the Chinese import restrictions. We've shown you that how that underlines the strength and resilience of Aurizon and the work that we've done in the past to simplify and optimize the business. So you've also heard how our confidence remains in the long-term demand for Australian coal, and it's based on hard data out of Asia for steel production and coal-fired power generation. And several times, we've reinforced how the Bulk business is growing rapidly, its profitability and customer base, and it delivers now more than 25% of profit for Aurizon's rail haulage operations. Thank you very much.