Final Transcript	

	

Conference Call Transcript

QRNNF.PK - Interim 2011 QR NATIONAL LTD BRISBANE QLD Earnings Presentation and Webcast

Event Date/Time: Feb 28, 2011 / 12:00AM  GMT 

CORPORATE PARTICIPANTS
 Lindsay Woodland
 QR National Limited - SVP, Head of IR
 Lance Hockridge
 QR National Limited - Managing Director, CEO
 Deborah O'Toole
 QR National Limited - EVP, CFO

CONFERENCE CALL PARTICIPANTS
 Simon Mitchell
 UBS - Analyst
 Cameron McDonald
 Deutsche Bank - Analyst
 Anthony Moulder
 Credit Suisse - Analyst
 Matthew Spence
 Merrill Lynch - Analyst
 Scott Kelly
 Morgan Stanley - Analyst
 Scott Carroll
 JP Morgan - Analyst
 Matthew Crowe
 CBA - Analyst
 Jonathan Collett
 Goldman Sachs - Analyst
 Scott Ryall
 CLSA - Analyst
 Ian Myles
 Macquarie Securities - Analyst

 PRESENTATION

Operator 

 Ladies and gentlemen, thank you for standing by and welcome to the half year results analyst briefing. (Operator instructions). I must advise you that this conference is being recorded today, Monday 28 February 2011. I'd now like to hand the conference over to your speaker today, Mr. Lindsay Woodland. Please go ahead.

 Lindsay Woodland  - QR National Limited - SVP, Head of IR 

 Welcome ladies and gentlemen to QR's inaugural results presentation of the half year ended 31 December 2010. And thanks very much for your attendance today. Today we've allocated up to an hour for the presentation itself and a Q&A. We have here, giving the presentation, our Managing Director and CEO Mr. Lance Hockridge and also our Chief Financial Officer, Miss Deborah O'Toole. They'll be running through the presentation with you. Once we go through that then we'll open it up for questions. I'd like to now welcome Lance to provide the presentation to you.

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 Thanks Lindsay. What we propose to do is I'll make some broad overview comments. And then we won't go slavishly through the presentation, but we'll step through the presentation which I think a lot of you will have in front of you. And then as Lindsay indicated, open it up to questions. So overall, we as this is our inaugural result of course, believe that it's a very solid performance for the first half of 2011. Both from a financial and an operating perspective. And we'll talk to the numbers obviously here in a moment, but you will already have seen the nature of those numbers and the extent of the improvement.

Key amongst all of the things that we've had to face of course in recent months is the impact of the wet weather. In the first instance, in the half that we're talking about, the extraordinarily wet November followed by a record wet December. And including in that period the PN derailment in the Goonyella system. And you would have seen that our assessment is that altogether that represented a seven million tonne loss and 3.4 is in that first half. So against that, we believe that the numbers - and we'll talk as I say in more detail to that - represents a solid outcome for us.

The results should also of course be viewed in the context of what's been an extraordinary period organizationally. It seems like ancient history going from now, but from separation of the two companies on 1 July, all of the work that went into the lead up, the privatization, the distractions that were involved around all of that. Successfully getting the privatization away. And from my point of view, key amongst all of that has been the complete lack of any disruption that our customers would have seen through that period. And I believe it's a tribute to the people in the organization that they've been able to deal with all of those changes, deal with the weather and nonetheless be able to deliver a quality service to our customers.

It has been a seamless transition from that point of view. The combination seems to me of all of those things, speaks far more eloquently to the quality of our business, the quality of the asset, the capability of the people in this business than anything that I might otherwise have been able to see. We have clearly over the last couple of months had the most dramatic impact. A one in 100 year impact around flooding, of Cyclone Yasi et cetera. But we have seen the recovery of the system to the point where all of our system - with the exception of the Roleystone branch is open. Indeed it was all open by about the third week of January. We had some limited speed restrictions. We can talk about that. Again that speaks to the quality of the assets and the people. We certainly have more capability in terms of coal supply than there is demand at the moment.

Beyond all of that, through the first half and as we go into the second half, we continue to focus on the things that we said that we would do. First and foremost around the safety performance in the Company. And that - an LTIFR of 4.2 at the end of the period. That represents a very substantial improvement, though we still clearly have a long way to go. You can see already the impact of the improvement in our returns around the revenue quality in that period. We've spoken publicly about the BR program and no doubt you'll have some questions around that. We continue to implement our operating model and the transformation elements associated with that. Which again I remind people, any benefit of any change in productivity, efficiency et cetera, was certainly not built into the offer document financials. So notwithstanding the degrees of difficulty that we've faced during all of that period, I think that this underlines the importance and the sense of the privatization of this company.

Very much as a segue going through the presentation, importantly this is about the future. We're focused on the future from a transformation point of view. We're focused on the future from a demand point of view. We're focused on the future from the point of view of continued capital investment. And even in this first half, AUD700 million of CapEx importantly GAPE which I guess is the most visible of all of these projects, remains on schedule and on cost.

With those introductory remarks, can we go then perhaps just quickly to the presentation. On page four I think I've covered those points. Page five, the underlying EBIT improvement in particular up 31% I think is - whilst there are some particular issues associated with that, that no doubt we'll talk to. We managed to haul inline coal volumes, notwithstanding the impact of the wet. On page six, as I say the importance of a smooth transition especially thinking about it from the perspective of our customers. The importance of the improvement in the safety performance. The importance of the traction that we're receiving around the transformation initiatives in this business.

As we turn to page seven, we've continued to put in place the new contracts that we referred to at the time of the offer document, with all of the underlying benefits associated with those new contracts. Both with respect to the revenue quality associated with those contracts. And also with certainties, especially as it relates to past (inaudible) et cetera. Where we said that we would be around iron ore - and I expect that we will have more to say with respect to some individual elements of our iron ore strategy in the coming days and weeks. But my overarching comment would be that we are doing the things that we said that we would do in the iron ore space. And again the continued importance of the capital spend in our business.

Perhaps if we jump to page nine. Again I think I've probably touched on most of this. But we've not put ourselves in a position of being a victim as it were around the wet in the first half and the floods and cyclone over the last month or two. We've very much taken those initiatives that we believe are available to us around the mitigation of the impact. And you can see some of that reflecting itself in the guidance that we've given today. But again, all of our systems are operational. We have far more capacity than there is demand at the moment. All of our assets above as well as below rail were fully protected through the weather event. And we believe that we're now well positioned. Especially as we think that in the fourth quarter the customers have a very heavy incentive to be able to rail heavily.

We've brought forward as much maintenance for example as we can into the current period while we do have that surplus capacity. So that overall, we believe that we will be well positioned to be able to meet whatever demand comes of us during that fourth quarter.

With those introductory remarks then Deb, perhaps if you talk to the financial overview.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Sure. We're presenting the financials as normal with half on half comparisons. We presented the underlying results for the Company, given the background of the quite recent offer documents and the large number of one off items that were associated with the privatization. You will have seen in the additional information for analysts that this reconciles the statutory and underlying numbers. And there's some differences in offer document treatment of timing related events. Remembering that no half year guidance was given in the offer document.

As Lance noted, 446 underlying EBITDA, up 17% on the previous period. The difference between the statutory and the underlying here is effectively the transaction costs that were incurred. You'll see the improvements in freight and network services. And as Lance mentioned the coal earnings are generally in line with the prior period. Notwithstanding the very heavy rainfall we had, especially through November and December. The result also shows the continued focus on revenue quality as new market based contracts are coming in. But also we have the one off impact of the weather on the volume, seven million tonnes as indicated.

From a cash perspective, we did receive the UT3 catch up payment as forecast. Our underlying net operating cash flow of AUD162 million for the first half. And we have no cash tax payable. The AUD3 billion facility was undrawn at December to AUD2.7 billion. And notwithstanding the flood events, the impact as far as the investment grade credit rating remained unchanged.

Going to the numbers. Looking at the EBIT and net profit after tax figures. Again these are adjusted for the one off. At the EBIT level the movement reflects improvements in the freight private service contract. And also in network services performance, as well as the higher revenue quality in the coal mines. Which was in part offsetting the lost tonnes in the half. The net profit after tax level, note the interest cost we have recorded which was a five month interest cost for our GLC balance sheet. There may be a difference from the way that you have looked to draw numbers.

Looking at the cash flows. I'd highlight here the continued growth investment and the capital investment. A little slower than had been expected, but pretty strong during the half. That's almost AUD700 million of which AUD284 million was above ground coal and AUD300 million in network on the large infrastructure projects.

The capital projects that are on schedule. The GAPE X50 project is now at the half way point and in scope and within budget and on time. Blackwater electrification remains on schedule. Hunter Valley Coal is progressing extremely well. As you'll recall, AUD360 million of rolling stock capital has been invested there to support the NSW contracts. And we now have 11 consists operational in the Hunter Valley. In Western Australian iron ore, as Lance mentioned we've progressed our iron ore strategy and locomotives and wagons are under order for those new projects.

Moving to the operating metrics comparison. These metrics will become more meaningful going forward when the comparative figures are not post privatization. At group level, the revenue for NTK improved, contributed by improved revenue quality and the improvements in regional freight. Other measures are largely flatter in the case of OPEX being flat. But that is due to the investment that we're making ahead of production, which we had previously filled in additional train drivers and additional maintenance. If we focus on the coal metrics on this slide, while the revenue for NTK has improved, the EBIT margin has declined half on half. And again, that's as a result of this increased investment ahead of the volumes coming through. This will start to lift as volumes increase, cost down programs start to bit and the contortion of legacy contracts in our legacy clients.

Turning to the individual businesses, for the QR National network. The network revenues were in line with the UT3 expectations, taking account of the volume change. There was a pre IPO restructure of the network business which incorporates services, which explains the difference between the first half - the FY10 half and the current period. It was also characterized by quite a lot of additional activity in the rolling stock services business. And the margin impact there really does relate to the incorporation of infrastructure services which operates on their internal margin.

Moving to coal. Again the above ground revenue uplift is coming from the new performance GAPE contracts. The NSW expansion tonnes were also up in some parts, offsetting the reduced tonnages in Queensland as a result of the wet weather. This also includes a net AUD13 million that you'll see in the back of the material which was not able to be passed through to customers in the network table page.

And in the freight business, the uplift for the UT3, improvement in intermodal contracts. The other feature is the start of the lift in growth in iron ore. There's been some reduction in grain volumes and the business is working to a customer efficiency focus.

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 If we just spend a very quick moment, this is probably more for detailed questioning further along, but I observed at the start the importance of the transformation program. Our key message here is two-fold. Firstly, as we indicated the offer document did not include any assumption of change in productivity efficiency cost base of the Company across the forecast period. Two, that we recognize that the translation from a Government owned corporation into a privatized company of this nature involved a very substantial change in those productivity efficiency capability generally metrics within the organization. Already in the first half you can see some evidence of both the work that we've been putting into this and secondly some of the tractional be it a lot of it's caused as Deb said as a result of the diminished tonnages as a result of the wet weather disguising some of that. But at this point we are happy with the progress that we're making around transformation.

Here you have set out for example the key major items of our transformation, safety of course number one. There is little point in having detailed programs in a company unless you've got the leadership capability within the organization to be able to make the difference. So as you would know from the work that we've been doing here over the last couple of years and that we continue to do change out the leadership in the organization, the commercial focus in our business, which is reflected across a range of dimensions, our aspiration and goal is around world class capital productivity and I'll talk a little more about that in a moment. Our procurement capability and particularly given the scale of the importance of procurement in this organization and it is one of the areas in my view that represents a greater level of opportunity, as we do translate from Government ownership to private ownership. What we describe here is end to end maintenance, in other words being able to run the entirety of our company as a system to be able to achieve the kind of effectiveness of outcomes that we would want.

The next page is the high level model that we're using, what we call our operating model. There are a range of examples of where as I say we're already not just putting in place these arrangements but starting to see the outcomes. One of the silver linings if you will I might say from the weather and the floods of recent times has been a greater degree of focus, a greater degree of intensity of effort around focusing on these things, but also focusing on these instrument or of company output point of view. So we have a range of taskforce outcomes in place. We have an overall flood recovery taskforce. We've put in place already for example an internal maintenance demand planning system, the like of which has never been seen in the Company before.

Deb made the observation when talking about the operating metrics that this is the level of process and this is the level of rigor which will underpin the change in those metrics, but we will continue to report to you as and when we bring our reports.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 In terms of the outlook, you'll have seen the guidance that we're providing for the full year at 25 million tonnes impact. That is subject to customers returning to normal volumes and any further weather events that may occur between now and the full year. So the underlying EBIT range we've indicated as being between AUD380 million and AUD410 million and that's a statutory equivalent of AUD280 million to AUD310 million. As Lance noted in his opening remarks, the global demand for Australian coal is expected to remain in a strong trajectory. The short term one-off impact of the floods you will see in this financial year as we've indicated. We have given a best view at the moment based on the tonnage that we understand will be impacted, but as I said that will be subject to any changes in customer outlook. Moving forward into the growth phase, our existing projects are continuing on time and on budget and our iron ore strategy is also on schedule. We'll continue to focus on the transformation projects that Lance has outlined and the cost of our reduction program.

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 That brings us to the end of the run through of the presentational pack. Thank you, and I think we've now got time for questions. So, who have we got.

 QUESTION AND ANSWER

Operator 

 Your first question comes from Simon Mitchell from UBS. Please ask your question.

 Simon Mitchell  - UBS - Analyst 

 Hi Lance, hi Deb. Just a question regarding - a few questions regarding the guidance. I just notice you've mentioned the changes you've made to timing adjustments for deficit tonnage and revenue cap adjustments, which I think benefited the first half by AUD23 million for EBIT. What do we take as being the change in the second half from what was originally included in the offer document target?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 The amount that was in the first half Simon was AUD16.5 million for deficit tonnage (inaudible) revenue cap, but the guidance of AUD33 million for the full year that was in the original forecast. In terms of deficit tonnages for the full year, we outlined that we're not going to know absolutely what the number was going to be until we complete the financial year. This is going to be very much dependent on which tonnes are moved and which customers are able to complete their volumes (inaudible).

 Simon Mitchell  - UBS - Analyst 

 Okay. So just to make sure that I understand this, so the AUD33 million will now be additional EBIT in this year versus prospective targets and plus another AUD5 million as well for deficit tonnage charges, because I don't think they would have been in the prospectus.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 That's right.

 Simon Mitchell  - UBS - Analyst 

 In terms of the flood impact in the second half, I think part of the impact which we would extrapolate from the sensitivities is about AUD12 million per 5% drop in volumes, which is the time and difference relating to network division. Do we still think about this being the same or is that impacted at all by these accounting adjustments?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 I'm not really sure what the question is. I'll just make a general comment that it might answer what you're looking at. The sensitivity guidance that was in the offer document, which covered both the above ground and the below rail impact, can change (inaudible) it's an averaging across the portfolio. We can get change depending on which contracts end up being impacted, so if we have a majority for example of legacy contracting that would have a different impact on the final result, than if we have impacts on new contract tonnage itself. We've taken a view in relation to that in the guidance that we've given.

 Simon Mitchell  - UBS - Analyst 

 Okay. Sorry, just one final question if I could. The depreciation and CapEx look quite low in the first half versus full year numbers in the offer document. Are you incorporating any differences in those lines in your guidance?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 It's just the weight of CapEx between the first half and second half.

 Simon Mitchell  - UBS - Analyst 

 Okay. Then it changed to depreciation?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 No.

 Simon Mitchell  - UBS - Analyst 

 Alright thank you.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Not significantly.

Operator 

 Your next question comes from Cameron McDonald from Deutsche Bank. Please ask your question.

 Cameron McDonald  - Deutsche Bank - Analyst 

 Hi Lance, hi Deb. Just a follow on question from the guidance. If we exclude the AUD95 million in the IPO sort of cost and we go back to the underlying result, your current guidance is AUD380 million to AUD410 million. The PDS looked to be AUD427 million and then you've said that you're going to have an impact of about 25 million tonnes, which is roughly 11%. The sensitivity in the PDS is that it's about a AUD48 million impact on the EBIT for a 5% variance, so that looks to be about AUD110 million plus the AUD7 million in freight, so how do you then get back to AUD380 million?

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 Let me start with an observation or two and then let Deb answer more specifically. Your question assumes that we were running to the offer document number. There are a couple of observations about all of that. You will recall that we said at the time that IPO, that we were very confident about the numbers in the offer document. You'll recall that we've always indicated about the - what we believe is the impact of the revenue quality, the tonnages in the business, but particularly that the offer document includes no allowance for any improvement in what for want of a better term we call our transformation activity. In other words our productivity and effusion, consolidation or collapse were all assumed to continue through the offer document period at 2010 FY levels. So it should be no surprise that the management team of this business has been focused on our performance. We've been focused on every element of what it is that we'll build to out performance. We as you might imagine have of course been substantially impacted by the one off issues of wet weather and floods, but bottom line we were and continue to be focused on what I've just described as out performance.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 I won't really add to that Cameron because that really is essentially the difference that we were running ahead.

 Cameron McDonald  - Deutsche Bank - Analyst 

 So the read through is effectively at the bottom end of the range? You are running something in - well something in the order of AUD70 million to AUD90 million productivity improvements across the business?

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 (technical difficulty) agree with the broad number, but the number is made up of a wide range of factors and our guidance for example talks about the impact of the revenue quality in the business and refer back to the guidance that Deb gave Simon for example, about there's an element of all this that depends on where the tonnages are coming from and which contracts underwrite those charges.

 Cameron McDonald  - Deutsche Bank - Analyst 

 Just a final second question if I can. Can you quantify the interest charges associated with the QTC debt?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 AUD111 million.

 Cameron McDonald  - Deutsche Bank - Analyst 

 Okay, thank you.

Operator 

 Your next question comes from Anthony Moulder from Credit Suisse. Please ask your question.

 Anthony Moulder  - Credit Suisse - Analyst 

 Good morning all. Just if I can touch on that revenue quality, it looks like the revenue per NTK once you adjust timing differences was up sort of in the order of 10% against obviously the prospectus talking more flat for FY11. How much of that was due to - what was that primarily due to and was there any impact of weather related impacts that would see that figure come back closer to the prospectus forecast for the full year?

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 I guess we honestly don't know the answer to the second part of your question Anthony. The very thing that drives as you would have seen the guidance at the moment or the range in the guidance rather, is that with the best will in the world we just don't know what the customer demand profile is going to look like over this next three, four, five months. If we did, then we'd be able to answer your question because by definition of course we'd know which contracts are impacted. Michael Roche apparently this morning as I did this morning, has said that the take in overall for Queensland coal industry is still only running at about 60%. So we've got to see firstly in other words how that falls out in reality, before we would have a level of confidence around all of that. More generally though I guess the observation that I would make is that we are beginning to see with a greater level of precision and insight what the real benefit is of the new contracts versus the legacy contracts. That's both with respect to some of the attributes of the new contract and with respect in this sort of a circumstance to some of the attributes frankly of the older contract. But there's nothing in any of that which other than dimension if you will or quality, would change the advice or the view that we've given around those marks.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 I think just to add that, importantly we're well positioned. We're not in a situation where we've lost assets or we have issues around our track. We've been able to bring forward some activity during the period of low customer volume so that we can maximize railings when a customer is due to come back on stream. So to the extent that what we're describing here is something that maybe outside of our control and we were made to mine production issues rather than there being somewhat inherent inability of the customer to be able to respond that.

 Anthony Moulder  - Credit Suisse - Analyst 

 I understand that. Following on from that, you've quantified the impact in tonnage. Why won't you give an impact in EBIT terms of the wet or the flooding in Queensland?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Well, I think we have in the guidance that we've given you, given the amount of potential uncertainties around customer movements--

 Anthony Moulder  - Credit Suisse - Analyst 

 Just for the first half.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 We've given you - oh for the first half. We said 7 million tonnes and I think the guidance that we gave a little bit earlier would suggest that sensitivity in the offer document was pretty accurate to those sorts of levels of tonnages.

 Anthony Moulder  - Credit Suisse - Analyst 

 Okay.

Operator 

 Your next question comes from Matt Spence from Merrill Lynch. Please ask your question.

 Matthew Spence  - Merrill Lynch - Analyst 

 Hi guys. So with the floods and transformational change benefits, the PDS numbers obviously aren't as relevant. With the revised guidance range, can we get it on a segmental basis? Have you got that that we can just recalibrate?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 No Matt I think that's a bridge too far given - I mean you can see where the impacts were not just in Coal. But the big impact is in Coal.

 Matthew Spence  - Merrill Lynch - Analyst 

 Yes.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Remembering in the network business, both the cost of the repair of the flood impact is in a process to be recovered and actually was relatively low cost. The lost revenue in terms of the revenue CapEx will be recovered in subsequent years. Again, we've given an indication of AUD7 million around the Freight business and the balance is Coal above Rail impact.

 Matthew Spence  - Merrill Lynch - Analyst 

 Okay. But with the transformational change - or let's just call it cost out - that has to be focused on the Coal business and Corporate costs, doesn't it, rather than the Network's business?

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 Well except, of course, Matt to the extent that what you're referring to as Network, is Network --

 Matthew Spence  - Merrill Lynch - Analyst 

 Yes, it's the unregulated side.

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 Yes. So I would only add the qualitative observation that in the RACS business in the infrastructure services business et cetera, then those areas are equally part of the focus.

 Matthew Spence  - Merrill Lynch - Analyst 

 Okay and just one final one. Can you give us an update on voluntary redundancy and how that's progressing, the negotiations progressing with employees? (multiple speakers)

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 Yes, happy to do that Matt. It is only today that the full part of that process opens. We've spent - as you might be aware - the last couple of weeks in consultation with employees and the unions around the process. That's been important in defining what the offer is; the offer is. It hasn't materially changed, however. The essence of what is on offer, in other words, the 3500 population of employees who are in scope around all of this and the quantification of the benefit per employee.

As I said a moment ago, Matt, the offer formally opens today. Given that there has been a lot of consultation and publicity in the lead up, all of this now is going to move ahead quite quickly. We would expect that by the end of March, early April we will be in a position where we understand with a greater level of precision about all of this.

But on the one hand, we really can't offer much greater guidance than that at the moment because by its very definition, it is a voluntary program. We can talk about what the in-scope population is, et cetera, et cetera. But until people formally indicate their interest, we won't know what the ultimate level of outcome is going to be. It's for that reason that we've deliberately not included anything in the guidance that we've given today.

Anecdotally, what I can tell you is that we've had a high level of interest as you might expect. Given that it's been some time since there's been any such program in this company, given the demographics and given the strength of the employment market especially in Queensland. But beyond that, we're really going to have to wait and see what the precision is of numbers and what the demographics are of those numbers.

 Matthew Spence  - Merrill Lynch - Analyst 

 Right, thank you.

Operator 

 Your next question comes from Scott Kelly from Morgan Stanley. Please ask you question.

 Scott Kelly  - Morgan Stanley - Analyst 

 I'm fine; my question's been answered, thanks.

Operator 

 Your next question comes from Scott Carroll from JPMorgan. Please ask your question.

 Scott Carroll  - JP Morgan - Analyst 

 Hi Lance. I was wondering if you talk about the impact of higher activity in rolling stock services and whether that's expected to be sustained to the second half and also longer term.

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 Deb can add to this as well, but the answer is yes. Part and parcel of our reaction to the flood has been some reconfiguration. But generally it reflects the growth story in the Company. So the short answer is yes. But attendant with that is the focus of the improvement in the operating metrics in that part of the business, as I indicated a moment or two ago, along with the rest of the business.

One of those key - if I can be permitted an editorial comment - one of those key leadership changes that I've been referring to is that post-privatization, (inaudible) has joined the Company as the Group General Manager of the RACS business after a lifetime, international career in the manufacturing state. This is the caliber of the leadership that I refer to when we talk about our ability to be able to make transformational change; generally in the business but specifically in RACS.

 Scott Carroll  - JP Morgan - Analyst 

 Thanks a lot.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 The only thing I'd add to that is that we also have Queensland Rail contract for RACS that was negotiated at commercial (inaudible) as well. But it is mainly around the additional coal wagons, that's part of the growth story.

 Scott Carroll  - JP Morgan - Analyst 

 Cheers.

Operator 

 Your next question comes from Matt Crowe from CBA. Please ask you question.

 Matthew Crowe  - CBA - Analyst 

 Thanks. Hi Lance and Deb.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Hi Matt.

 Matthew Crowe  - CBA - Analyst 

 Am I right in, I guess, assuming that the difference between the guidance now and the guidance in the IPO document, is basically three things. One is the flood obviously. Secondly the change in the treatment of timing of the AUD33 million and AUD5 million that you talked about earlier. Also a change in the, I guess, backing out the conservative elements of IPO guidance and approaching it more as a genuine, best guess guidance estimate. Is that broadly right?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 I think that the first two are right Matt. I think in relation to the third, that's been the - in terms of the half year performance, we were running ahead of the Offer Document guidance in the half year.

 Matthew Crowe  - CBA - Analyst 

 Right so the statement --

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 We've taken that into account in our go-forward look.

 Matthew Crowe  - CBA - Analyst 

 Okay so just to clarify that; for example, the statement that the IPO guidance didn't include any benefit from transformation or improving asset and productivity. Is that still the case in the latest guidance statement?

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 No. I guess the observation that I'd make about that is to your point we are factoring those things in increasingly. But it's still very early days and if you look at the half year, it was, to coin a phrase, a wash around the - as much as we're running hard on those transformation things, the extent of their volume dependent , that has been a negative for us. So the bottom line is, that's what we want to do but it's really too early to say that there's anything that we can point to in the numbers that are referable to that factor.

 Matthew Crowe  - CBA - Analyst 

 Okay and just as a follow up on the voluntary redundancy. When do you expect you'll get sort of your first indications of take up from staff?

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 Over the next two weeks. What we then need to do, of course, is to factor all of that. In other words, where, who those people are, where they are, what the ability for the Company to be able to accept or what part of those offers and that's what's going to take us through until the back end of March.

 Matthew Crowe  - CBA - Analyst 

 Okay thanks.

Operator 

 Your next question comes from Jonathan Collett from Goldman Sachs. Please ask your question.

 Jonathan Collett  - Goldman Sachs - Analyst 

 Hi guys. Are you able to give me any examples of changes you've made to the procurement in the last few months that will be in the next (inaudible) that may contribute to that improved guidance?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Generally the savings that we're making in procurement at the moment are really around getting much more, much stronger commercial focus in the negotiations and we actually (inaudible) to our suppliers. So as we roll through with new contracts and as we're examining the support contracts for growth projects that we're actually making an impact in those. So they'll come through in subsequent periods through those. But I think we've got about AUD6.5 million which really was as a result of better negotiation and better scoping of what our procurement requirements are.

 Jonathan Collett  - Goldman Sachs - Analyst 

 Okay. Just in terms of the VR scheme, so it sort of tidies up by the end of March. So does that mean from April onwards, you can actually see a discernible cost improvement as a result of it?

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 Part of the answer to that will be, of course, dependent on what that population of people is that (a) are left and (b) we agree to take the redundancy and secondly when they go. So those things, obviously Jonathon, go to the answer to your question. But the philosophy is that we've very much been focused on this bringing this forward as quickly and putting it in place as quickly as possible for the very reason that lies behind your question. In other words, to make the change that needs to be made in this organization as quickly and as effectively as we can.

 Jonathan Collett  - Goldman Sachs - Analyst 

 Okay thank you.

Operator 

 Your next question comes from Scott Ryall from CLSA. Please ask your question.

 Scott Ryall  - CLSA - Analyst 

 Hi, thanks very much. I was just wondering if you could on seasonality on EBIT. So using - I imagine I'm right to use your pro forma numbers and compare them to the underlying numbers you've given today. So if I use that, your first half '10 was AUD173 million versus the actual pro forma number in the Prospectus of AUD204 million; so roughly 85% in the first half. But your guidance today if I use the midpoint of AUD395 million, implies 57% of EBIT in the first half. What changes?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Scott I'm having trouble finding where you got those numbers from.

 Scott Ryall  - CLSA - Analyst 

 Well if I look at the first page of your release --

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Yes.

 Scott Ryall  - CLSA - Analyst 

 You have underlying EBIT first half 2010 of AUD173 million.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Yes.

 Scott Ryall  - CLSA - Analyst 

 Right and then if I look at the PDS, the pro forma historical full year consolidated EBIT was AUD204 million.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 The underlying -- if you look at the FY10 year, that's the prior year. AUD173 million was the underlying EBIT. Then compare it to AUD226 million underlying EBIT for the half just gone.

 Scott Ryall  - CLSA - Analyst 

 Yes. But am I correct that your pro forma historical of AUD204 million should be comparable to the underlying numbers?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 AUD204 million is not a number that's familiar to me. I'll have to (inaudible) online and find out where you're going with that.

 Scott Ryall  - CLSA - Analyst 

 Sure. Page 107 and 108 of your Prospectus. Yeah I'm fine Deb if you want to come back at the analyst call this afternoon, that's fine.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Yes. I mean the big difference is the pickup in the Transport Service Contract for the Freight business.

 Scott Ryall  - CLSA - Analyst 

 Sure. Maybe we'll be revisit this afternoon. In terms of other questions, could you give me the split on tonnages and NTK in your Coal business between Queensland and New South Wales please?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 No I'm sorry we don't give that split.

 Scott Ryall  - CLSA - Analyst 

 Okay.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 For obvious competitive reasons.

 Scott Ryall  - CLSA - Analyst 

 Your competitor gives there's so --

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 Yes. Well we talk about 11 consists in New South Wales and 82 in Queensland and that's about as much of a comparison that we've given.

 Scott Ryall  - CLSA - Analyst 

 Alright, okay. Alright-y. The last one; insurance. Is there any insurance benefit from flood damage that you know and can quantify yet?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 We haven't taken up any insurance benefit unless it was an ongoing evaluation. I think you would know as well as the rest of us what sort of processes those are. In the final result, we didn't have a lot of asset damage. We didn't lose any locomotives or wagons from our Coal business. The repair cost for the Network - and the Network isn't insured. The repair costs for the Network that we took up in the half was only AUD4 million. So there's not a big insurance requirement out of this process. But we will go through the insurance process to the extent that we've had any asset damage and there's a little bit in the Freight business and we'll pursue that as under our insurance contracts. But they're not material.

 Scott Ryall  - CLSA - Analyst 

 Okay. That's all I had thank you.

Operator 

 Your next question comes from Ian Myles from Macquarie. Please ask your question.

 Ian Myles  - Macquarie Securities - Analyst 

 Hi guys. A couple of questions. Just firstly on the tonnage. How much tonnage did you roll over into your new contract this far?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 How much tonnage did we roll over? The release sort of sets out what new contracts have been entered into during the half. I'm not sure if that's your question though.

 Ian Myles  - Macquarie Securities - Analyst 

 Well it's sort of like if you've got -- you had a certain amount of tonnage left in the old (inaudible) of the contracts. I was just wondering how much --

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 I think that a high level of what we should say is the guidance that we gave at the time of the IPO has been pretty much 100% accurate. In other words, we were at the start of July at 18%, 27% by the end of the financial year going to 37% at the end of Offer Document period. It has -- in terms of negotiations of tonnages, Ian, it has rolled out that way.

I guess our reason that we pause here is goes back to the earlier part of the conversation as to in the circumstance where everybody's not flat out. There is some impact of whether the tonnages that we're shifting are in a less than full throughput environment are, shall we say, new contract tonnages versus legacy contract.

 Ian Myles  - Macquarie Securities - Analyst 

 Okay.

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 But save only for that, the answer to your question is no, it's rolling out exactly as we anticipated.

 Ian Myles  - Macquarie Securities - Analyst 

 Okay. Just on your cost reductions, what's your run rate at the moment? Because obviously you made a comment at a couple of points in the presentation that you are actually are achieving cost reduction. How much have you actually taken out of your business?

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 We're not going to refer to it that way. What we will do is to repeat the slide that's in this pack each time so that you can get a picture of how on what we believe are the key metrics for the business we're travelling.

 Ian Myles  - Macquarie Securities - Analyst 

 Okay. If we look at the capital expenditure, you sort of say throughout you're on target. But we look at the mix in your CapEx, you guys have forecast something in the order of nearly AUD2 billion of CapEx pro forma. I was just wondering, there's a real - the big variances appear to be in your network services and also in freight. I was just wondering, can you give us a bit more color for what's actually been delayed, what's actually been permanently avoided?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Yeah, the distinction that we've made in the presentation has committed capital projects. Now the capital projects are committed and they're underway. We have allowed some expenditure on some uncommitted projects which until their mine and port commitments are announced for those, we're really not going to have a view.

As we indicated in the Offer Document, what we do is a little bit of design and scoping work with these projects, but until they're committed to by the customers, that CapEx won't pick up. That's the place at the moment where we may have some delays. I say may because it really does depend on the timing of those announcements and then obviously we can ramp up with that CapEx.

 Ian Myles  - Macquarie Securities - Analyst 

 With that in mind, Deb, what do you think variance will be for 2011? Because it's clear you're probably not going to hit AUD2 billion of CapEx unless you've gone mad this half.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Yeah, we're not going to hit AUD2 billion in that timeframe. But I'd really rather not try to speculate on how much lower that will be. It'll be some hundreds of millions less than that. As you know, once these projects get underway, you start to throw resources into them and they can pick up quite quickly.

But at the moment, some projects are unannounced, if they were to be announced very soon, then we could wrap that up quite quickly. If they're delayed by a month or two, we'll have a corresponding delay. It may not be a proportional one because, as you know, a lot of the infrastructure capital expenditure is seasonal, as well.

 Ian Myles  - Macquarie Securities - Analyst 

 Okay. Just with a final question, it goes back to I think what Scott was referring to, as well. In the back when you did the reconciliations, you talked about that you didn't include the AUD16.5 million charge in revenue recognition in your prospective forecast. I'm sort of interested, did you actually include it in your prospective forecast for 2010 or are all those numbers stripped out of those actually recovery numbers?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Sorry, just - oh yeah, I know what you're talking about. They were moved back into the year in which the activity occurred as opposed to the year in which we actually received the catch up revenue.

 Ian Myles  - Macquarie Securities - Analyst 

 So given that statement, what is actually 2010's EBITDA and EBIT based on the new accounting policies you're adopting?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 For 2010 I'd have to go back and reconcile it for you.

 Ian Myles  - Macquarie Securities - Analyst 

 Could you actually come back to us at the analyst call, because that - I think it's very important having the right base to sort of forecast from. The second thing is, based on your knowledge today, how much have you undercollected in revenues in QR networks which you'll now claim in 2013?

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 How much--

 Ian Myles  - Macquarie Securities - Analyst 

 Have you undercollected.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Well no, that will depend upon what the total volume lost for the full financial year is. Until we know what the total volume loss for the full financial year or network is, we won't be able to do that calculation.

 Ian Myles  - Macquarie Securities - Analyst 

 But I think you made a comment you'd lost 7 million tonnes and assuming you're--

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Well that's for the half.

 Ian Myles  - Macquarie Securities - Analyst 

 But that's assuming your forecast's accurate for the second half. I presume that's the 7 million tonne variance. What would that sort of equate to in revenue?

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 You want a rough one?

 Ian Myles  - Macquarie Securities - Analyst 

 That would be good.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 I'll come back to you in a minute on that. We'll just see if we can do a rough calc for you.

 Ian Myles  - Macquarie Securities - Analyst 

 Okay. They're my questions, thank you.

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 I think we're out of time now, folks.

 Deborah O'Toole  - QR National Limited - EVP, CFO 

 Yeah. Just going back on that last question, a rough calc would be around 30 million.

 Ian Myles  - Macquarie Securities - Analyst 

 Thank you.

 Lance Hockridge  - QR National Limited - Managing Director, CEO 

 Okay, well from our point of view, thank you everybody for the opportunity today. There are obviously chances for follow up with the call later on and we'll be seeing some of you elsewhere. But again, thank you very much for all your participation with us today.

 Ian Myles  - Macquarie Securities - Analyst 

 Thank you.

Operator 

 Ladies and gentlemen, that does conclude our conference for today. You may all disconnect.

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