Qube Holdings Ltd

ASX:QUB

Earnings Call Analysis

Earnings Call Transcript 2022-Q4

[Operator]

Thank you for standing by, and welcome to the Qube Holdings Limited Full Year Results Call. [Operator Instructions]

I would now like to hand the conference over to Mr. Paul Digney, Managing Director. Please go ahead.

[Paul Digney, executive]

Good morning to everyone on the call, and welcome to Qube Holdings Full Year 2022 Results Call. Alongside with me today, presenting our full-year results and for the first time, is our CFO, Mark Wratten, and a very big welcome to Mark and this audience.

And also, I call out to our outgoing CFO, Paul Lewis, for his contribution throughout this year and the many years before, and it's great that Paul has remained active in the Investor Relations role.

If I could move to Slide 5 of the presentation released this morning, Qube's full-year highlights. I'm very pleased to announce that Qube delivered a strong financial performance, with record underlying results across all metrics, calling out a few here. Underlying revenue, up 26%. Underlying NPATA, up 25% and underlying EPSA, up 26%. Our result was achieved by strong revenue and earnings growth from both Qube Operating Division and the Patrick's business.

The contributions from organic growth with strong volumes across most sectors, contribution from acquisitions and growth CapEx. And more importantly, our ability to effectively mitigate inflationary pressures and other challenges throughout the year.

The other highlight during the period was our successful completion of the Moorebank monetization in December '21, followed by a $400 million share buyback in May this year.

So I'm also pleased to announce today that the full-year dividend has been increased by 17% to $0.07 per share, fully franked. This is inclusive of the $0.033 per share final dividend and a $0.07 special dividend announced today.

If I can move to Slide 6. Slide 6 highlights our competitive strategic strength. Our competitive strengths listed on the slide, combined with our proven strategy to build a very robust and highly diversified business over many years, allowed Qube to deliver again this year.

And moving forward, we will continue to [ enhance ] our competitive strengths. This slide also highlights the diversification of earnings in the year, spread across Qube's 3 core areas of business, being Logistics & Infrastructure, Ports & Bulk and Patrick's terminal, which sometimes -- Patrick's EBITA metrics are sometimes missed when assessing Qube's performance at an EBITA level, which is [ hanging ] on this slide.

I can turn to Slide 7, our safety performance. In summary, our performance across the 3 key [ lag ] safety KPIs on this slide, having the CIFR and the [ LTIFR ] scores well below the 1 and keeping our [ TRIFR ] below 3 is an industry-leading performance by our team this year. So well on -- well done by the team, the management and all employees on that result.

Management continued its commitment to deliver a safe and healthy workplace for all workers, and the team delivered out a multitude of continuous improvements to the safety, health and sustainability programs within Qube, with a key focus on critical risk and safety leadership.

If I can turn to Slide 8, our sustainability performance. If I can start on the climate box in the -- on the slide, Qube decreased its carbon emissions intensity by a further 8.9% during the last reporting period.

During the period, we also developed a decarbonization plan. That plan includes a potential roadmap for Qube to transition its way from its reliance on fossil fuels and to focus on the potential options of using renewable fuels into the future. Our intention is to be an industry leader in this space with this plan.

Also today, we will release our first TCFD statement within our sustainability report. The report and the statement contains information on our decarbonization journey plan. Also in the sustainability report released today, there's a number of things that showcases the tremendous amount of work done by the Qube team across a number of areas, such as people and culture, community, diversity and inclusion. Please find time to read this report when you can.

Lastly on this slide, in the sustainability future box on the slide, we also commenced the development on an exciting program called the Thrive Qube program this year. Thrive will be applied across all aspects of our business. Thrive covers 5 key pillars: Safety, Well-Being, Planet, Opportunity and Success. It's a part of a rebranding program for Qube.

The program is designed to enhance everyone involved in Qube from our people to our customers, to our shareholders for everyone to thrive with Qube into a sustainable future.

I'll turn now to the divisional performance part of the slide deck. Turning to Slide 10, Operating Division. Overall, our Operating Division had strong and healthy revenue growth, revenue up by 28%, a result of the combination of high volumes, increased rates, new contract wins, expansion into new services, a full-year contribution from full-year '21 acquisitions and a partial year contribution from the acquisitions made in the year.

The Operating Division returned EBITA growth up 19%. Logistics & Infrastructure had strong EBITA growth and good margin improvement. The Ports & Bulk had a more modest EBITA growth due to a number of factors, which I'll touch on shortly.

Over to Slide 11. This slide summarizes the year, a year of multiple challenges for Qube. COVID, inflation, extreme weather events, supply chain disruptions, labor shortages and China volume impacts. While every financial year usually presents some challenges for Qube, in 2022, it was unprecedented in terms of a number of headwinds to have in a single year.

However, due to our robust business model and our management team and the proven diversification strategy, I'm proud to say that Qube was able to overcome these multiple challenges throughout the year and still deliver a strong financial result. We believe some of these factors that impacted the earnings last year are more permanent in nature. So our cost structures, pricing and operational practices have already been adjusted to reflect this going into 2023.

Other factors such as those related to China and the housing construction slowdown are likely to continue into this year and hopefully reduce in severity in the course of 2023.

So I can now turn to Slide 12. Here, we highlight the diversification of the Operating Divisions by geography and product to call out a couple of items here for '22. We achieved growth across all regions, except in New Zealand due to the lower China log exports.

We achieved high growth in New South Wales, with additional grain-related revenues, and also in WA across our bulk activities. We achieved growth in most commodities and sectors, with higher growth particularly in the agri, mining and energy sectors. We saw some weakness in infrastructure revenues due to global supply chain delays with equipment and/or due to extreme weather events, and we saw weakness in forestry volumes due to the China factor again.

More details of our well-diversed geography and product revenue mix are found in our appendices on this slide there.

I can now stand to Logistics & Infrastructure. Logistics & Infrastructure returned a strong full-year '22 performance and is well positioned for further growth. Revenue grew by 31%, EBITA grew by 37%, and we saw good margin improvement. This strong performance is delivered despite the numerous challenges, as I've mentioned earlier.

The business benefited from higher volumes across most parts of its core container business, a strong contribution from grain activities, including rail, storage and loading revenues. AAT performed strongly with higher general cargo and steel beams and roll-on roll-off work.

The business also benefited from a partial contribution from the BlueScope contract and from 3 acquisitions during the period. The Newcastle Agri-Terminal being the larger of those 3, which was acquired in September 2021.

Moving on to Slide 14, Ports & Bulk. Ports & Bulk had continued earnings growth despite the multiple challenges during the period. Revenue grew by 25%, EBITA grew by 6%.

Margins were impacted by a number of factors. They include skilled labor shortages, particularly in WA regional areas due to the COVID border closures throughout most of the year, high revenue in some areas for no incremental earnings benefit such as fuel inflation and timing lags in some contracts from recovering inflationary rises.

The Ports & Bulk business benefited from strong contributions from Australian stevedoring business in most ports with strong steel and grain volumes and some improvement in vehicle guidance later in the period. Our energy business delivered a strong result, with increased revenue and earnings from new contracts and existing customers.

Overall, our bulk activities delivered solid results across the board, except in those areas, which I mentioned before, due to border closures and COVID impacts. The 2 areas that underperformed during the period in Ports & Bulk, the mobile crane business was impacted by project delays due to overseas supply chain issues and extreme weather events, and there is also a decline in New Zealand forestry log exports due to the China factor, as I've mentioned previously.

Moving on to Slide 15, Patrick. Patrick's had an improved revenue mix and productivity gains, which delivered a strong performance in 2022. Revenue grew by 7%. EBITA grew by 27% and Patrick's contribution to Qube's underlying NPATA earnings to Qube was $64 million, up 27% on last year. And during the period, Qube received $85 million in cash distributions from Patrick.

We saw good margin improvement against [ flat ] volumes. The business largely benefited from productivity benefits from investment in facilities, equipment and automation in future years and -- in past years and from improved labor productivity post the finalization of the enterprise agreement negotiations with MUA in April this year.

Patrick's also benefited from an increase in landside and ancillary charges that were implemented in March 2021 and a partial benefit of further increases that were implemented in March this year. Patrick's also benefited with higher storage revenue during the period.

Slide 16 also just staying on Patrick's for a minute. This slide notes that Patrick's market share declined by 2% in the year, mainly due to vessel scheduling issues and the industrial action that occurred in the first half of the year. Also to note here, during the period, Patrick renewed a number of its major contracts, which means a majority of its customer book now is contracted out beyond 2024, with minimal contract renewals on the table for 2023.

Patrick's also continued to invest in its facilities and innovation projects during the period. Key works continued on both the Port Botany Automated Rail Terminal project and the East Swanson Dock rail facility. Both of these key projects are due to be fully constructed and operational by mid- to late 2023 calendar year. And the terminal development work that commenced in the Fremantle terminal during the period.

Slide 17, Property Division. As mentioned earlier, a key highlight for Qube this year was the achievement of the sale of Qube's interest in the warehouse and the property components of Moorebank for $1.66 billion. We received $1.36 billion of those proceeds in December 2021. We've recently received in August this month another $200 million of the deferred payment.

So we've only got $100 million of those proceeds to collect from LOGOS, which will be received progressively as Qube completes the construction of Stage 1 of the interstate rail deal, which will be sometime between now and early 2024 as we receive those funds progressively.

On another note, as the Property Division has been discontinued, all remaining activities are now managed by Logistics and Infrastructure business, those being the IMEX Rail Terminal of 100% ownership. The construction of the interstate rail terminal over the next 1.5 years and therefore, our 65% ownership of the Interstate rail terminal and operations and the Beveridge call option.

So I will now hand over to Mark Wratten to take you through some of the key financial aspects of 2022. Over to you, Mark.

[Mark Wratten, executive]

Thank you, Paul, and welcome to everyone on today's call. I'm very pleased to be presenting my first set of full year results for Qube Holdings, particularly given the strong financial performance of the business delivered in FY '22 as well as a sound balance sheet position that it is in post completion of the Moorebank Logistics Parks monetization.

Starting on Slide 19 on our statutory results. We've set them out here showing exclusive -- sorry, exclusive and inclusive of the discontinued Property Division. But as with prior reporting periods, our view is that the financial performance of Qube is best reflected in the underlying earnings that Paul has highlighted earlier.

The reconciliation adjustments from statutory reported underlying results are consistent with our past practice, with the key adjustments being the reversing of the impact of AASB 16 lease accounting, adjusting to remove any impairment and/or fair market gains or losses and the adjustment to remove in this year, a small book gain on the sale of Moorebank.

In addition, we adjust out acquisition costs such as stamp duty. And in FY '22, given that the Property Division has been discontinued, that's been adjusted for as well. In the appendix to this investor presentation and in our financial statements, we have included additional slides covering the underlying adjustments.

One important item to point out in our statutory result is a high effective tax rate for FY '22, which is around 41%. This is due to a derecognition of the Moorebank-related deferred tax assets and has no impact on our cash tax payable, including in relation to the capital gain. As set out in Slide 17, the estimated tax payable on the Moorebank divestment is $190 million to $200 million, and this will be payable in December of 2022.

Moving to Slide 20, our underlying results. Paul has already talked in detail to the strong underlying results generated in FY '22 from both the Operating Division and Patrick.

A few other points to note. The net finance costs of circa $7 million is a result of a combination of lower debt levels post the Moorebank monetization in December, higher base rates as we got through it into quarter 4 of this year and is net of the interest income received from shareholder loans to Patrick as well as the capitalization of interest associated with the Moorebank development.

The decline in EBITA margin in '22 from 9% to 8.6% is from a combination of business mix changes as well as the impact of pass-through revenues, with no incremental earnings as a result of the contractual mechanisms that have enabled Qube to recover cost increases such as fuel and labor, that Paul has already mentioned.

Again, as Paul highlighted earlier, our underlying earnings per share adjusted for amortization increased by 26% to $0.106 per share. And on the back of this strong financial performance, the Qube Board declared a fully-franked ordinary dividend of $0.033 per share, bringing the total ordinary dividends for '22 at $0.063 per share fully franked. That represents a payout ratio at the top end of the 50% to 60% underlying EPSA payout ratio that the Board had adopted.

In addition to that, we declared a special fully-franked dividend of $0.07 per share, bringing the total dividend to $0.07 per share, which is 16.7% increase over '21 dividends. Final dividend and special dividend will both be payable on the 18th of October, and we will not be applying our [ DRP ].

Finally, as set out in the final dot point, and Paul's talked about it earlier as well, we wanted to highlight Qube's growth across revenue and EBITDA lines inclusive of Patrick as seen on a proportional basis. In FY '22, revenues grew around 24% to a little over $2.9 billion, and EBITDA grew 18.6% to over $528 million, again, on a proportional basis.

Flipping to Slide 21, CapEx. In FY '22, we invested gross CapEx of $517 million across 4 categories. This excludes any CapEx that we spent on the Moorebank development precompletion of the sale to LOGOS, which was effectively reimbursed as part of the monetization process.

The $517 million on this page comprises $127 million on 4 acquisitions, which we closed during FY '22. The largest, as Paul said, was the Newcastle Agri-Terminal and CTC Terminals, which was a one transaction effectively for around $101 million. And this acquisition is performing very well, particularly given the strong grain volumes.

Out of interest, in Slide 35 of the appendix, we have set out the acquisitions the business has invested in over the past 5 years. And this highlights the recurring nature of the strategic bolt-on acquisitions that Qube has been very good at identifying and completing.

The next category of growth is -- sorry, CapEx is growth CapEx. That's -- we spent $194 million during the year. This includes the BlueScope contract, locomotives and wagons, other new rail equipment, storage sheds, warehouses and other organic growth assets required by the Operating Division. This category of CapEx typically starts to see returns soon after delivery and commissioning and commencement of the contract or service that it relates to.

The third category is the $143 million spent on maintenance CapEx within the Operating Division, which is required to replace older equipment, aging assets. As we set out in our outlook slides, we expect maintenance capital to run around -- 85% to 95% of our underlying depreciation expense in future periods.

And finally, we spent $52 million on the Moorebank Terminals. This includes expenditure on the IMEX Terminal as well as some early costs associated with the development of the Interstate Terminal.

As we've pointed out in the past, the investments in these terminal infrastructure assets is expected to deliver medium- to longer-term returns, particularly as LOGOS completes the warehouse build-out of the Moorebank Logistics Park and new tenants create incremental demand across both of those terminals.

If I can take you to Slide 22, now cash flow. Qube was able to reduce its net debt in 2022 by -- FY '22 by almost $500 million, thanks clearly to the Moorebank monetization. The major cash flow items included the proceeds of Moorebank, which is in the cash flow of about $1.4 billion, which does include the initial cash receipts plus subsequent amounts received relating to CapEx and working capital and other adjustments.

Subsequent to the year in early August, we did receive an additional $200 million of the deferred consideration, and that was linked to the receipt of planning approvals for further warehouse developments. $400 million was the share buyback capital management initiative, which was successfully completed in May '22.

The net capital expenditure of $490 million, I spoke to on the earlier slide. About $165 million on that waterfall relates to the Moorebank development CapEx, predominantly, as well as some divestment transaction costs and some precinct infrastructure costs for work that we are committed to complete as part of the sale process. The vast majority of that was recovered, however, in the proceeds we received.

An important call-out on this slide is the $276 million of operating cash flows, which represent about 71% cash conversion ratio on our underlying EBITDA of $388 million.

Cash conversion was negatively impacted by an increase in trade and other receivables during FY '22, with the drivers for the increase, including the growth in our overall revenues and associated monthly billings, higher billings in Q4 relating to the timing of some projects as well as those related to rate increases, recovering fuel and other cost increases, the addition of some new blue-chip customers with longer contractual payment cycles as well as us sorting through customer billing cycles and interface complexities, which we are working our way through.

Given this cash conversion result, I did undertake a detailed review of our working capital, particularly as it pertains to trade and other receivables. And I'm very confident that in '23, we should see a return to cash conversion ratios closer to the 100% that Qube has historically delivered.

Finally, on Slide 23, I'll just mention a few points covering our balance sheet and funding. With the reduction in net debt, coupled with an increase in earnings across FY '22, Qube is well positioned with a strong balance sheet and significant available liquidity, which will allow us to fund future growth, both organically-driven and through continued acquisitions.

Whilst our weighted average debt maturity has reduced, we are already -- we have already in July '22 extended the tranche of the current debt, and we'll be reviewing our overall capital structure in the coming months with the longer-term needs of the business in mind.

I should call out that in FY '23, both Qube and Patrick will be impacted by the increase in base interest rates that we have seen in recent months and more so, should they continue to rise during FY '23.

Specific to Qube, you'll see that in our FY '23 outlook, we are guiding to net interest expense of between $25 million to $30 million higher than what we reported in FY '22. This increase is based on expected levels of debt, the impact of higher base rates and a reduction in the level of capitalized interest versus '22, which is driven by effectively the completion of the IMEX development.

That's it from me. I'd just like to hand back to Paul now, and he'll take you through our strategy and our '23 outlook.

[Paul Digney, executive]

Thanks, Mark. Summary and outlook. So turning to Slide 25. Business and strategy outlook for 2023. As mentioned earlier, our strategy is very proven and will remain at our core for 2023. Our business is based on a highly diversified and robust business model, focused on providing a quality, integrated supply chain product across many markets, using our key infrastructure, innovation, technology and industry smarts.

In 2023, we will continue to focus on our operational and our financial competitive strengths, as mentioned on this slide, as we are well placed to build on these strengths in the changing world.

We believe there's plenty of growth opportunities in our existing markets, and we'll focus on that. And we'll continue to assess any new markets or new services. We will also continue to seek out complementary bolt-on acquisitions, which has been a proven -- been a very proven successful strategy of Qube in the past. And we'll remain patient as we assess other opportunities as to when they come to market.

Moving to Slide 26. Slide 26 demonstrates just how robust Qube's earnings have been through the past 5 years despite all the economic challenges, including COVID. I like this slide, especially like the yellow 2022 bar, which gives credit to our business model and our strategy and more importantly, management's execution of that strategy.

If you turn to Slide 27, our financial outlook. Focusing -- turning to the Operating Division first. Strong growth in underlying earnings is expected in 2023. Logistics and Infrastructure is forecasted to have continued strong growth volume in 2023 across most areas of its business.

The Ports & Bulk business is forecasted to have solid volume growth, with some of the same cost challenges in 2023 but to a lesser degree, to the actions taken to mitigate some of the margin-eroded areas in 2022.

Areas such as the mobile crane business within the business unit is expected to rebound in volumes. However, the New Zealand business is one area that is likely to remain subdued in 2023 due to China's housing construction slowdown. The overall extent of the growth in the Operating Division will depend on a number of factors, which are highlighted on this slide.

Earnings are not expected to be materially impacted by cost inflation, given Qube's ability to recover higher costs through a combination of contractual protections, rate adjustments and productivity improvements.

Moving to Patrick's Terminals. Patrick's is forecasted to have continued strong underlying EBITDA and EBIT growth earnings on modest volumes and a stable market share. Ongoing improvement in the margins will again come from forecasted productivity improvements and a benefit from full-year pricing increases to infrastructure and ancillary charges.

Patrick's NPATA contribution to Qube will only be modestly higher than last year, as Mark mentioned, due to the increased interest cost forecasted for 2023.

Qube Corporate. Corporate overhead costs are forecasted to be slightly higher. And as Mark mentioned before, with the higher interest costs in the back end of '22 and that -- the ongoing in 2023, there will be a significant increase in net interest costs around $25 million to $30 million we are forecasting for 2023.

Moving to the next page, CapEx, forecasted in relation to the Qube operations only, is to be within the $400 million to $500 million range. That includes growth CapEx, Moorebank's Terminal CapEx and maintenance CapEx. This range doesn't include any growth CapEx for [ bolt ] acquisition or does it consider any recoveries we get from LOGOS in regards to the Interstate Terminal deferred payment.

So turning to the Qube Group. In summary, underlying NPATA is expected to grow, although the extent of the growth is highly dependent on market conditions. Growth in underlying EPSA is expected to be higher due to the benefit from the buyback in May.

The current outlook is for the full-year '23 and is expected to be another positive year for Qube, although significant risks and challenges remain. And we are in a fantastic position here at Qube, both operationally and financially, to deliver long-term sustainable growth.

Turning to the last slide of the presentation today. Last, I just called out an upcoming Investor Day that we're having -- that we intend to have in Sydney on the 27th of October. It is a great opportunity to showcase our business on this day, and we look forward to seeing everybody there on the day.

With that, that concludes our presentation for today, and I'll hand back to the moderator for any questions.

[Operator]

[Operator Instructions] Your first question comes from Jakob Cakarnis with Jarden.

[Jakob Cakarnis, analyst]

I was just wondering if you could provide some quantification of the weather issues that were faced in the third quarter in Operating Division?

[Paul Digney, executive]

Yes. So we had more extreme weather events in the second half of the year than the first half of the year. A lot of that was on the East Coast of Australia, especially in the northern parts and [ into ] New South Wales, so impacted a fair bit of our business, from port operations to rail operations.

We also saw some weather impacts in New South Wales and in New Zealand as well with some [ swell surges ] around ports being closed. So that one [indiscernible] those sort of the main areas, but they were significant in the period, third quarter and the fourth quarter.

[Jakob Cakarnis, analyst]

Okay. And then just in terms of the inflation lag, I think you've called out 1 to 6 months. If inflation accelerates from here, is there any issues that you guys might face in terms of indexation or catch-up? Or do we expect it to be kind of in line with the increase in prices that you guys are realizing through the business?

[Paul Digney, executive]

We've made some adjustments through some pricing increases. And we also made some adjustments in regards to delaying factors in some of our commercial contracts throughout the year.

So -- and some areas are a work-in-progress at the moment. So we've made some improvement in the course of the second half of the year.

[Jakob Cakarnis, analyst]

Maybe I'll ask a question [Technical Difficulty], Paul. Are we expecting some of that margin that you kind have lost through FY '22 to be caught up in FY '23? And is there any [indiscernible] [ promoting ] expense above that?

[Paul Digney, executive]

We have [ side ], depending on volumes and other market conditions.

[Jakob Cakarnis, analyst]

Okay. Just one final, Mark. How are you guys seeing the M&A environment at the moment? Are there a lot of opportunities to deploy the balance sheet, now that you've got it in a strong position?

[Mark Wratten, executive]

Yes. There are opportunities, Jakob, since I've been here. I mean, we have regular catch-ups and we -- our businesses are sort of constantly engaging with various opportunities, and they might have for quite a period of time. I'm not going to sort of give any specific guidance in terms of which ones we might be looking at. But yes, we are active in that area.

But as Paul said, we will be disciplined. It needs to be the right opportunity, strategically. It needs to be the right opportunity from a financial perspective.

And since I've been here, I think we've said no to a few because they just don't tick the right boxes. So I've been pretty impressed as the new CFO coming on board with the process that they go through to evaluate acquisitions both from -- across multiple angles, as I said, strategic fit, financially does it make sense and other factors.

So risk factors such as -- ESG's now coming into that in terms of one of our risk factors. So we won't be sort of rushing that in. We -- and I think as you probably -- if you've been following us for a while, you'll see that in the past 5 years, those acquisitions, they can be lumpy.

You might get a rush of -- like we did before in the first half and then none for the second half and maybe you might get a rush again. So -- but yes, look, we definitely are continuing to be active in that space.

[Operator]

Your next question comes from Andre Fromyhr with UBS.

[Andre Fromyhr, analyst]

Just maybe following on from the question about M&A. I thought you could say a bit more about the overall intended use of balance sheet capacity. Obviously, the gearing position is below target range. You've added a little bit of a special dividend today.

Should we infer from that, that the capacity between where you are today and the sort of the midpoint of the target range is around the size that you're intending on deploying on growth?

[Paul Digney, executive]

Not necessarily. I think we just -- we'll be patient. We don't acquire for the sake of acquiring. We've got, as Mark mentioned before, we have a number of -- we meet monthly on an investment committee meeting. It's a healthy pipeline, but we're going to be selective in what we do. We're not going to buy something that we may not want to buy or we want to wait for something else.

So it's just a combination as being selective at this point in time, but there's a lot of opportunities for us. [ These ] are ones that we have direct contact with or ones that come to market. And there's probably a number of things that may come to market over the next 1 to 2 years. And we'll assess them when they do come to market. So I think we're in a really good position. It's just we're happy to be a little bit patient, but there will be acquisitions.

[Mark Wratten, executive]

I think if I can add to that as well that this business has an enormous amount of organic opportunities. So rather than M&A, it's our business leaders looking at building organically in an opportunity. So there will be some CapEx, I'm sure, deployed in that space as well.

[Andre Fromyhr, analyst]

Great. And just a little follow-up on that is the -- should we assume that the deferred consideration relating to Moorebank is sort of net neutral impact on the balance sheet because you've still got investment to make?

[Mark Wratten, executive]

No. So in the review of operations, we actually give guidance to FY '23 CapEx on Moorebank Terminals of about $140 million to $160 million. And the $100 million will be paid progressively as we construct Stage 1A of the Interstate terminal, which a large part of that will be completed during FY '23, but it's not scheduled for completion until the back half of the first -- sorry, first half of FY '24.

So we'll get a large part of that $100 million in FY '23, but it won't match the $140 million to $160 million that we're budgeting to spend on those terminals.

[Andre Fromyhr, analyst]

Right. And just one more on the terminals. There's a comment in the -- about the fact that the combined terminals won't sort of materially contribute to underlying earnings in the near term. But can you help us out with sort of your updated expectations around the maturity profile and when they will become material?

[Paul Digney, executive]

Well, the IMEX Terminal is operating now, we're going to go into automation phase later in this financial year, which will bring on a bit more capacity.

It's in line with previous expectations, but it's probably, if anything, a little bit better as we're seeing the market and our products sort of be more marketable against [ rail ] at this point in time. I guess, inflationary costs and focus on carbon emissions is very helpful in regards to the IMEX.

In relation to the Interstate, Interstate is -- it won't be finished until 2024. So we won't see any revenues until 2024, 2025 year, and we're working through strategy in regards to what volumes will go through that terminal being with ourselves or others.

[Operator]

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

[Cameron McDonald, analyst]

Mark, can you just delve in to the guidance a little bit with the 25 to 30 higher interest costs. When we backsolve that into EBITA growth rate, you're looking at in excess of 10%.

How much of that is actually sort of flowing through all effectively locked in from the annualization of new contracts like BlueScope and also the prior-period M&A activity?

And how much of it is what you think some of the reversal will be from the $15 million EBITA impact you outlined on Slide 11, noting that you said some of that is actually permanent in nature?

[Paul Digney, executive]

I'll go first, Mark. I think it's predominantly around the operations.

Yes. So I mean the $15 million, we think some of that's been addressed. Obviously, some of it is permanent in nature. So it's a big portion of that benefit going forward, some of the work we've done throughout the year.

Some things out of our control will impact -- could impact 2023, if it's further -- the weather impact is bigger than this year. Hard to see if it could be any worse than this year, but that could happen. The BlueScope contracts, in fairness, we've got it operational.

It's a very good operational implementation plan. But we did see some financial impact to that because of the weather events and having rail lines down during the third and fourth quarter of the year. So there's some potential benefits of moving more train services going forward on that contract.

[Mark Wratten, executive]

Yes. So I mean we have really good earnings and -- revenue and earnings profile coming in -- momentum leading into '23 across the business. As Paul said, that BlueScope is pretty much fully ramped up now, was impacted from rain events. So if we don't get more of those, that will get a full year of that clean year.

The acquisitions we did during the course of last year will have full year benefit of those as well as any others that we can bring on board. There's other contracts, new contracts that are starting. There's other contracts that are ramping up. So we can't sort of guide to exactly how much is sort of in the bag versus how much need to be -- get out and when. But Paul has spoken about our level of confidence is very good.

[Paul Digney, executive]

Yes. We've made some adjustments to some pricing that we have to -- on the inflationary factors and grain volumes look healthy for this year.

[Mark Wratten, executive]

I think the other thing, Cam, from my perspective -- just been here a few months and I've been to a number of sites, the guys, the opportunities for our people and what they do in terms of being able to improve productivity and efficiencies across each of their operations is something that they focus on daily. And sometimes they're within our control, either new processes, new equipment. Other times, it's within the customer's control or other people. And so there's opportunities constantly being looked at to improve the earnings across our existing assets and contracts just through reengineering processes.

[Cameron McDonald, analyst]

Can I ask just another question just in terms of the operational headwinds and the underlying demand environment. So -- and the question really is around this expectation of some sort of slowdown at some stage, and we can sort of have a debate about the time and the quantum of that.

But are you currently seeing any sort of cost impost because people are holding -- or customers are holding more inventory, that is constraining your warehousing or your logistics, and if you actually -- or even in the containing yards on the wharves. So if you actually did see a reduction in the level of activity or volumes that, that could actually help in the short term?

[Paul Digney, executive]

It's a balancing act. We've not seen any slowdown of requirements to store containers or product in warehouses at this point in time, and pipeline seems to be pretty healthy. I mean it's just really our ability to flex out a bit more, which we have the ability to do, which has proven beneficial for us, and I think it continue will be.

Yes, you're correct. If we can get some better efficiencies or having something running at 90% instead of 110%, there is some productivity efficiencies. But it's sort of a bit of a balancing act, and I don't think it's -- the way that guys are managing on the floor, they can sort of balance that out fairly well.

[Cameron McDonald, analyst]

Okay. So you're not actually hiring things like short-term storage or anything like that to carry that overflow at the moment.

[Paul Digney, executive]

Yes, we are. We are in pockets of our business. We'll do that for customers, and we'll obviously price it accordingly.

[Operator]

Your next question comes from Paul Butler with Credit Suisse.

[Paul Butler, analyst]

I just wanted to ask about the guidance because in the results release, you have a statement there on Page 5 saying you're expecting strong growth in underlying revenue and earnings. Whereas in the presentation, it -- amidst the word strong. I just wanted to just sort of clarify that.

And then the other sort of part to it is that sort of 12 months ago, when you gave us the guidance for FY '22, you were talking about solid growth. And clearly, there's been some challenges in the past 12 months with the weather impacts, with higher cost inflation in the business, I think, than you expected. So I just wonder if you could sort of talk to what solid means versus what strong means in terms of earnings growth?

[Mark Wratten, executive]

Yes. So we -- in our outlook, in the operating division, we've used the word strong. And in Patrick's, we've used the word strong similar to this year in regards to those 2 businesses. If it's much stronger or a little bit less stronger will be determined on factors in regards to what we're seeing at the moment. We're 6 weeks into this financial year. It looks healthy, but you still have a long way to go.

[Operator]

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

[Reinhardt van der Walt, analyst]

Mark, congratulations on your appointment. It looks like the largest customer now represents about 4%. I think it was about 2.5% last year. I'm guessing this is potentially BlueScope. Can you just give us maybe a bit of comfort around how that contract is structured in terms of termination and break fee? Are there kind of recoveries of this contract hypothetically walked away?

[Mark Wratten, executive]

In regards to BlueScope contract?

[Reinhardt van der Walt, analyst]

The 4% versus 2.5% last year?

[Mark Wratten, executive]

We don't disclose who they particularly are. But BlueScope, as we mentioned, is only in ramp-up phase. So you could sort of assume from that, that it's actually not got its run rate revenues happening, so probably not that customer. But I think in terms of it's a 10-year contract, I mean, in terms of protection, there's fixed protections. There's variable uplift charges, There's a whole -- even of the 10-year contracts. Yes, so...

[Reinhardt van der Walt, analyst]

Yes, got it. And can we maybe just get an update on the labor cost base, just in terms of how much of your workforce is on award, how much is on EBAs? How mature those EBAs are maybe and whether you have to rely on any labor hire over the year?

[Paul Digney, executive]

We've got a multitude of enterprise agreements across the country. I can't remember, it be over 100 agreements. We do have a large spread between -- we don't have -- we don't have a lot of national agreements. So there's -- the time frames are anywhere between expiring in the next year to in 3 years' time. So they're well -- I guess they're well hedged in regards to that spread. So majority -- I couldn't tell you the percentage off the top of my head, majority is under an enterprise agreement. And I'd say a high majority be enterprise agreement and the others would be under awards.

[Reinhardt van der Walt, analyst]

Got it. And any impacts from labor hire over the year?

[Paul Digney, executive]

As in shortages?

[Reinhardt van der Walt, analyst]

Or is it having to extend the contract?

[Paul Digney, executive]

Yes, it was -- yes, that was an industry -- there was an industry shortage across the board in areas -- probably in regional areas, as I called out earlier, where we had to fly in, fly out workers with -- we had some restrictions.

There was a -- well publicized in all industries that labor shortages and skill shortages are an issue. I think us as a company, with our employee value propositions, we deal better with it than most, but it was still an issue that we faced. And we're strengthening that as we go into 2023 with different programs and training programs which we've been quite successful in back into 2022.

[Reinhardt van der Walt, analyst]

All right. And maybe just one last question. Could you maybe just give us a little update on the -- at least your take on the industrial real estate market as it relates to Moorebank. It looks like vacancies are still quite stubbornly low. Maybe just any updates on how LOGOS is progressing with their leasing campaign?

[Paul Digney, executive]

LOGOS has gone fairly well. We've got a number of -- I won't speak entirely for them, but they've got a number of proposed tenants that we've been working in our partnership with them to get to Moorebank. And obviously, they've got to build the warehouses at the same rate as getting this interest in, so it's quite healthy.

[Operator]

Your next question comes from Owen Birrell with RBC.

[Owen Birrell, analyst]

Just a quick question on the -- I guess, the underlying sort of performance of the operating business. You had very, very strong revenue growth. I mean like sort of 25% to 30% across the Logistics and the Ports & Bulk businesses. Obviously, there's a combination of volume plus some price and some new contracts coming in.

I'm just wondering if you can give us a sense of the mix of those 3 drivers during the period? And I guess what I'm trying to get at there is that, obviously, new contracts will continue to grow into FY '23. Price will move around, but your margins are probably whole, relatively steady. But I'm also just a bit concerned about the volume and the sensitivity of the earnings to the volume. So I'm just wondering if you can give us a bit of a mix of those 3 drivers across the operating businesses.

[Paul Digney, executive]

It's probably a good spread. I mean, we saw good volume mix from most of our customers and commodities. I mean obviously calling out some of those agri and the mining customer base and our energy sector, we saw good uplift from those existing customers. And we actually got more work and new services from some of those sectors and some of those customers.

We picked up -- I mean it's such a diversified business. So it's hard to quantify this just off the top of my head, but there's a lot of new business [ lines ] as well, in small bits and pieces or pockets where we've got healthy sales teams out there and people wanting the Qube product.

And as I said before in the call, where we had to and where we can, we've got the mechanisms to do, we've sat down with customers and we've adjusted pricing accordingly or we've done something a little bit different around some productivity improvements to offset the inflationary factors as the year grew out, as those things become more -- as they rose, probably did that better in the logistics and Infrastructure space more than Ports & Bulk. But Ports & Bulk, in some areas, it took a little bit more time to sort of do some pricing adjustments, which we've done some of that heading into 2023. So...

[Owen Birrell, analyst]

Well, I guess -- I mean maybe if I ask the question slightly differently, I mean, if we move through FY '23 and we go into a bit of a global recessionary environment, and you do see some pullback in your volumes. How comfortable are you that the portfolio itself is going to continue to, I guess, deliver a positive earnings trajectory to that sort of environment?

[Paul Digney, executive]

Yes. I think if we're heading to a recession, I think a well-diversified platform, in some areas, we don't think some things will change. I think if you look at some of the export markets, I think that they'll continue to some extent, agri and energy side, where things might pull back. I think we've got mechanisms to adjust to that if we have to pull cost back or flex down a little bit. But we're seeing pretty healthy in those areas that still want our service and our products compared to others.

[Owen Birrell, analyst]

Okay. And just in terms of the, I guess, the new contract wins that you've been able to achieve, I mean, you guys have been in this game for a long time, and I'm just curious to get a sense as to, is it becoming more or less difficult to secure new contracts? I mean, obviously, you've got a very established platform and quality of service now. So theoretically, it makes it easier. But we do know there's a lot more bigger players that are playing around in this space. Just wanted to get a sense of the competitive landscape.

[Paul Digney, executive]

Yes. I think customers are looking -- I mean, is that a just-in-time element going to just in case, and that they're wanting a company like ourselves to be able to do the whole supply chain. I think we're seeing more of that. And also seeing companies -- a company that's well versed in governance safety, sustainability aspects as well and be able to give a mix between road and rail and a range of things.

So we -- all the things that we've been building up are really marketable. And I think the market's -- the customer market out there is sort of wanting to use Qube. So we've seen a lot of activity and some parts -- in some parts of the business, we just haven't taken on that work. And in [ down ] industries, we just don't want [ digitization ].

[Operator]

Your next question comes from Matt Ryan with Barrenjoey.

[Matthew Ryan, analyst]

Just hoping if you could talk a little bit about Patrick and the operating environment and specifically what you're seeing on quayside revenue for the moment?

[Paul Digney, executive]

Yes. Our quayside revenue is still obviously reasonably flat. There are small increases here and there. Obviously, the uplift is on the land side, land side ancillary charges in regards to revenue mix. Yes, that's probably the balance of it, probably won't change too much in the next 12 months. But market is pretty stable in regards to -- from a Patrick's point of view, with most of the customers have walked away, as just mentioned on the call. So that 2024, there's minimal customers that they -- the management team there needs to renew this year, so haven't got a big work load to do.

[Matthew Ryan, analyst]

No worries. And Ports & Bulk margin was another area of interest. And just trying to get a sense of whether you think there's sort of anything structural stopping you from getting back to those higher margins. And I appreciate that you sort of pointed out on that Slide 11, there are probably a number of issues facing that business, some of which might have passed, but some of them are ongoing.

So if you could comment on that? And also just some disclosure on the bottom of that slide suggesting that, I guess, the total hit was about $15 million to the group. Are we to sort of presume that majority of that was in the Ports & Bulk division?

[Paul Digney, executive]

Yes, majority would have been there, but there was just elements across the business -- I mean, the magnitude of amount of headwinds we had -- I mean, the costs we'd probably associate were much higher than that, but obviously, we mitigated a lot of it, but just because there's so many of it to deal with during the period that there was obviously something -- some cost -- extra cost or some revenue missed on -- we left on the table throughout the year.

In regards to Ports & Bulk, I mean, a big one there was the labor shortages and the skilled labor shortages in Western Australian region, in some of our remote areas and some of our long-haul operations. And just operating sort of suboptimal in that space cost us a fair bit of money. That's being rectified or getting rectified throughout 2023 so that should be healthier.

The rise in fuel costs in some of our contractual mechanisms where we didn't recover, we recovered fuel, there's a lag. There was no margin on that. Impacted margins too, especially in the bulk space, so those areas that we've addressed and we've rectified or adjusted some of those elements going forward.

[Mark Wratten, executive]

And I think, Matt, in addition to that, in New Zealand, as we [ know ], and in parts of our various releases that their log volumes were down significantly, and they had incremental cost to operate as well at a difficult environment with labor, incremental travel, other things.

So that had quite a dampening impact on Ports & Bulk margins overall. And so should we see that start to get back to normal, you can answer your question, we should see Ports & Bulk margins getting back to their historical levels.

[Operator]

Your next question comes from Ian Munro with Ord Minnett.

[Ian Munro, analyst]

Just in relation to the growth CapEx in FY '23, looks about $150 million in growth CapEx. Can you maybe give us a steer as to which subsegment you're targeting with the growth CapEx? Perhaps how much of those is cost of mind share? Then keen to understand how the return criteria is working now versus how it has historically just given some of the favorable moves in pricing and cost allocation?

[Paul Digney, executive]

A number of those items are the sort of known projects around some warehouse build expansions, some storage sheds. There's still some locomotives that we've got approved that are coming in to add to the locomotive fleet into the rail fleet with new work. And there's new contracts in bulk. So it's a combination then of those things that are known CapEx, which will have revenue when they ramp up.

[Mark Wratten, executive]

Obviously, there's a timing impact too, Ian, in terms of when that CapEx will get spent and versus when we'll start to see the earnings associated with that. As I said in my presentation, once the CapEx or the asset comes through and the project starts, it's commissioned, you'll see earnings come through. But that CapEx that you spoke about is going to be throughout the course of FY '23. So we'll get a full year impact of that next year.

In terms of profile, sort of how we go about allocating CapEx, I mean, obviously, we've got a strong balance sheet. So that -- the depth of it isn't really an issue. It's the opportunities that each of the business leaders bring to us, and we evaluate those in a sort of similar way to acquisitions in terms of financial returns and, strategically, is that the right type of contract to take on board, does it fit well within your portfolio, et cetera? And -- but so again, from my perspective, outside coming in very, very strong disciplines around capital allocation on an organic basis.

[Ian Munro, analyst]

And just, I guess, on that, how does the return profile, financial teams shape versus perhaps [ what's ] historically? Are we seeing sort of improved returns now that some of the project economics and cost escalations are more favorable than what they were previously? Or are we still sort of operating off that sort of 12% pretax return level?

[Mark Wratten, executive]

It's probably that level. I obviously haven't been here long to sort of talk about historically. But yes, we sort of -- we obviously want to target return on our cost of capital. And that level that you spoke about is probably a minimum that we'd sort of look at.

[Ian Munro, analyst]

And just maybe switching over to Moorebank. Obviously, the volume growth has been there in FY '22. And then the first [ reworks ] share, I think, is completed mid-2023. How does that volume sort of shape from the ones where originally -- [ the units side ]? Are we sort of -- how quickly do we get up to that 150,000, 200,000 TEUs coming out of that particular customer through the first warehouse?

[Mark Wratten, executive]

I think what I mentioned before, Ian, is that we're on track with our business plan in regards to volume takeup. What I can say, I think we'll probably see more catchment area volume earlier than we thought. I think the market's got a bit -- has improved in regards to catchment volumes, in regards to rail versus road around the cost of road versus rail, given the inflationary factors and a few other factors. So we're online, and we may be ahead of that kind of next year or the year after is my forecast.

[Ian Munro, analyst]

And so does that change the breakeven point, which we've previously been thinking is around sort of 300,000 containers? Is there any change in that [ gross sale ]?

[Mark Wratten, executive]

No, I think, I mean, roughly, that's the breakeven point. I think the cost structures don't change a lot in regards to the terminal. The terminal is some capital at the end of the day. Doesn't have a lot of other costs, except for a bit of maintenance and some labor. So yes, pricing might come into it. We might bring it forward a little bit, but we'll see what the market -- how the market shapes over the next 2 years.

[Operator]

Your next question comes from Rob Koh with Morgan Stanley.

[Robert Koh, analyst]

Can I maybe just ask a question about the maintenance CapEx commentary of 85% to 95% of depreciation. I guess, should we just be thinking about that as like the result of your planned maintenance CapEx? Or is that kind of an ongoing target?

[Mark Wratten, executive]

Probably a bit of both. I mean, I've looked historically at what we've been spending, and we're looking sort of a little ahead of that as well, Rob. We think it's going to fall within that range.

Again, it's -- it can be a bit lumpy, maintenance CapEx, in terms of when we need to replace fleet and especially large items. Obviously, our guys are very focused on maintenance. And in the short time I've been here, I've seen that first hand. And so a big part of our operational expertise is around really sweating the assets as much as we possibly can.

So that's just -- we're trying to give you guys a bit of a guidance to at least sort of 1 number in your model, but it could be lumpy, but we feel it's going to land in that range over the coming periods.

[Robert Koh, analyst]

Okay, great. That's very helpful, yes. And we do appreciate the extra detail. Maybe in the same vein, you've highlighted the increase in the interest costs. And there's quite a lot of ins and outs in the debt numbers there. I wonder if maybe you could just give us a sense of, with your cash conversion catch-up, are you kind of thinking a lower average debt over the course of the year, maybe around 6-ish hundred? And maybe -- I don't know if there's a comment about a new bridge facility. So if you could talk us through maybe your thoughts at this point on hedging and gearing levels.

[Mark Wratten, executive]

Yes. Well, I think our net debt levels will probably be similar to where they are now during the course of FY '23. You look at some of the cash CapEx that we've guided to, and we've got that $200 million of Moorebank capital gains tax we've got to pay for.

So the interest that we've guided to is mostly based on the increase in base rates applied to our debt levels as they are now and expected to be as we go through FY '23. Coupled with, as we pointed out in our guidance, there's a reduction in the amount of capitalized interest that we are -- yes, that we are -- that we'll be applying in FY '23, and that's because IMEX is going to be complete in the -- towards the first half of this year.

So we won't be capitalizing any interest again -- about that. And then another element of our higher guidance and net interest is that Patrick, who we have shareholder loans to, have been successfully repaying those loans. So the amount of interest we received from Patrick is reducing slightly as well. So that's -- I don't think you should be thinking about a much lower net debt level.

[Robert Koh, analyst]

Okay, great. That is super helpful. Much appreciated. Okay. My last question, just an open question. You mentioned, Mr. Wratten, in assessing M&A, which is a core part of what Qube's been doing for many years that you are adding ESG considerations to the process. Could you maybe just talk a little bit to what kinds of things you're thinking about there?

[Mark Wratten, executive]

Yes, I don't know, Paul, if you wanted to talk to that. Happy to do as well, but...

[Paul Digney, executive]

Yes. In all our -- implemented last year in all our capital expenditure justification papers there needs to be a section on ESG. And just through the risk and what have we been considering if it's still with equipment in regards to our future carbon emissions and so forth. So we've strengthened that up, made it more mature going forward just internally so that they run through that full awareness across the group.

[Operator]

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

[Scott Ryall, analyst]

I was wondering if you could give me an update on the government rail works and the timing of the government rail works between [indiscernible] and Moorebank? When do you expect that to be done?

[Paul Digney, executive]

I don't have that update off the top of my head.

[Scott Ryall, analyst]

No problem. Then just with respect to some of the stuff you've mentioned on BlueScope and some of the rain that has impacted your ability to service that contract, am I correct that you would have to transfer the volumes to truck in the event that rail is not possible?

[Paul Digney, executive]

A combination of things occurred through the period, some went by coastal vessels. Some went by trucks where they could, where it still could move by trucks, the beam, the plate of it, had been the small end. So yes, it's a combination of redoing it. Was it here? There's other contractors that BlueScope used as well as us helping Bluescope at the time. So we all pitched in to make it work for BlueScope.

[Scott Ryall, analyst]

And do you incur the cost of changing the mode of transport for that? Just not get the volume that should go on rail?

[Paul Digney, executive]

Yes. So we missed a bit of volume. We have some protections there. Obviously, we won't -- we deliver more volume, that's more healthier for us, but there was protections in regards to fixed costs. And most of the stuff was converted to other modes, where Qube didn't do those services.

[Scott Ryall, analyst]

Okay. But equally, we don't pay for them to go -- like you don't have a financial impost on you to...

[Paul Digney, executive]

No, we didn't wear that cost.

[Scott Ryall, analyst]

Okay, great. And then on Ports & Bulk and the result there. I think this is kind of similar to an earlier question. But can you -- you've listed out, even called out some of the impacts that caused the margin softness there. So I guess my question is, can you get the margin back to historic levels without some of those factors going away, purely by growth of the business or acquisitions, if you'd see them as possible? Is it possible to revert to those margins without taking away those pressures?

[Paul Digney, executive]

Yes. I mean we've got to work with our customer first, but then we'll reset the situation for the current environment. And it will be a combination of pricing adjustments and productivity improvements. And the team is working through that. Obviously, there was a lot of things happening at all once last year. And you couldn't catch it all.

So the team is working through that. So the answer is yes, and we've got to work through that with our customers and picking up extra volume and doing other things and getting better economies of scale is another factor, as you mentioned. So it's a combination of all that.

[Scott Ryall, analyst]

Yes, okay. And just one last question. You mentioned a couple of times that the cost equation for customers on rail was improving versus road, which I think is particularly due to -- well, particularly a comment you're making on your import, export business in and out of Moorebank. Could you maybe comment just on the broader market? So leaving aside that Moorebank's side of the business on what you're seeing with respect to customers deciding between road and rail? And address 2 things if you can, the cost changes, relative cost competitiveness, but also how much customers are looking at greenhouse gas emissions in respect to those sort of decisions?

[Paul Digney, executive]

Yes. I think there's more awareness, and I think more customers, especially the top end customers are really focused on that shift, that modal shift and just weighing out their diligence on all of that. I think from a pricing perspective, it works -- from an environmental point of view, it works from -- probably the thing that maybe stopped a few this period was the weather and impacts the rail network. But given the -- if you have the reliability of the rail networks, I think that there'll be more shift.

[Scott Ryall, analyst]

Yes. And just on that reliability issue, are there any -- I mean we all know where the rain was. But is there any works that you see coming from government to improve the availability of rail in that respect?

[Paul Digney, executive]

Yes. I think -- I mean, I can't name them all, but I think there's a number of areas that the rail team have mentioned to me that is helpful. I mean, I guess with both rail and road operation at some -- but obviously, we push rail where we can. And our team are and our people involved with, talking to government would like to see more. We always like to see more, but there is some substantial stuff I mean.

Sorry, moderator, we're running overtime. Paul and I have got some commitments. Maybe we can end it here or if there's a quick last question.

[Operator]

We currently have 2 more questioners on the line. Your next question comes from Adrian Atkins with Morningstar.

[Adrian Atkins, analyst]

I guess that contracts allow the tariffs to rise to offset all the cost inflation, but I'm just wondering underlying conditions, is that indicative of how market rates are moving? Or would you be seeing downward pressure on pricing that contract on your flows?

[Mark Wratten, executive]

I'd say across the board there's not as much downward pressure as it would have been previously.

[Adrian Atkins, analyst]

Okay. And then just quickly one more. Just the higher cost of debt, is that changing your growth strategy, particularly around acquisitions?

[Mark Wratten, executive]

Not at this stage, Adrian. We've got a lot of capacity as we've spoken about. And -- but we'll continue to be disciplined. We'll acquire high return. But we're just -- I think the business is so disciplined in how they go about it anyway that it surpasses all the hurdles. We'll do it regardless of the base rates because we're very confident that we can deliver returns higher than those interest rate costs.

[Operator]

Your final question comes from Nathan Lead with Morgans.

[Nathan Lead, analyst]

Just if I could, just 3 quick questions. First up, the rem report section 6, it talks about the NPATA and the EBITA targets you were set for FY '22 for your FTIs. Could you talk about what your NPATA and EBITA FTI targets have been set for FY '23?

[Mark Wratten, executive]

I'm happy to talk about it. No, I mean, we'll include that in the FY '23 rem report. We're not going to get forward-looking. We'll share that at the equivalent rem report next year.

[Nathan Lead, analyst]

Yes, okay. Second one, just from a modeling perspective, can you care -- just with the depreciation expense. I'm assuming you've got some fair degree of insight into where that's going to be in FY '23?

[Mark Wratten, executive]

You want the number?

[Nathan Lead, analyst]

Ballpark? Is there a range that you can sort of throw out there at all?

[Mark Wratten, executive]

We haven't historically, but I think if you do some modeling and look at what the trend has been, you probably can take into account the $85 million to $95 million the CapEx that we spent this year. If you look at that, you probably can get pretty close to it. But other than that, annualized in the second half and out of it typically.

[Nathan Lead, analyst]

And just like for the response to the question Rob asked about debt and interest cost for the group, could you talk about the same sort of thing with Patrick as you mentioned about the higher interest cost coming through there? So what's Patrick's net debt could look like during the period? What its hedging profile, et cetera, looking like?

[Mark Wratten, executive]

Yes, they have debt similar levels to ours. It's actually in the -- in some of the financial statements that we've published today. So higher base rates will impact them as well. It's sort of similar level to us. They do have strong cash flows and lower CapEx requirements. So hence, that's why they're -- we expect to see good distributions coming through as well. So it will impact them, and -- but you'll have to sort of work your way through that. It will be sort of probably less of a level than us because of their stronger cash flows and versus us with our growth in terminals and other things.

Sorry, was there 2 parts to that? Hedging yes, Patrick has hedging. They have some hedging, but not across the whole debt level. Just similar to us, so they are somewhat protected through the hedging. But they have, similar to us as well, a bit of a natural hedging ability to adjust our pricing. As you've seen, they've been very successful at it, with over the past few years, particularly with the land side of it.

[Operator]

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

[Paul Digney, executive]

Thank you, everyone, for your time, and have a good day. Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.