THOMSON REUTERS STREETEVENTS	
EDITED TRANSCRIPT	
QRN.AX - Interim 2012 QR National Earnings Presentation	
	
EVENT DATE/TIME: FEBRUARY 16, 2012 / 12:45AM  GMT 	

	

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

CONFERENCE CALL PARTICIPANTS
 Scott Ryall CLSA - Analyst
 Ian Myles Macquarie - Analyst
 Matt Crowe Commonwealth Bank of Australia - Analyst
 Simon Mitchell UBS - Analyst
 Matt Spence Merrill Lynch - Analyst
 Paul Ryan Evans and Partners - Analyst
 Cameron McDonald Deutsche Bank - Analyst
 Anthony Moulder Credit Suisse - Analyst
 Simon Fitzgerald Moelis & Company - Analyst
 Jonathan Collett Goldman Sachs - Analyst
 Scott Carroll JP Morgan - Analyst
 Deborah Tonnes

 PRESENTATION

 Lindsay Woodland  - QR National Limited - Head of IR 

 Well good morning, ladies and gentlemen and welcome to QR National's Financial Year 2012 Interim Results Presentation. My name is Lindsay Woodland, I'm QR National's Head of Investor Relations. Today we have our Managing Director and CEO, Lance Hockridge and our CFO, Deb O'Toole here to present the interim results to you. The format for today is very straightforward. Lance and Deb will run through the presentation, which should take approximately 30 minutes. We will be deferring all questions until after the presentation. However we've allowed adequate time for Q&A. Without further ado I'd like to welcome, Lance Hockridge.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Thanks, Lindsay, good morning everybody I know it's a busy morning for all of you so let's get right down to it. You will have seen the material and essentially what I'm doing is a page turn around our presentation. Hopefully we will be able to anticipate a number of the key areas in which you're most interested as well as some overarching observations that we would like to make about the continuing solid progress, quality outcomes, confidence in the future that we have for our Company. But as Lindsay says plenty of time also for your questions.

So I'll certainly go through the initial parts, Deb will then talk about the updated financial summary including some commentary around our full year guidance, having regard to what ahs been an interesting year. Turning then to page 4, as I observed a moment ago this really is from our point of view a quality result in difficult, challenging, changing circumstances both from a financial and an operational performance point of view.

But again it is about the things we've been able to do. It's about the things we've been able to focus on within the Company that has seen the improvements in so many dimensions right across the Company half year to half year. Indeed as we look at the summary on page 5, we select there a range of the initiatives, a range of the changes that have been made across this period that go to those observations. Again, Deb will talk a lot more about this, but the headline of course is that by way of the circumstances with which we've dealt we've spoken a lot of course about the floods of 12 months ago. The continuing impact of the floods in half that we're talking about, which as you can now see saw a 7% reduction in our coal tonnages in Queensland.

On the other hand a 34% uplift in our coal tonnages in New South Wales together with a range of other demonstrations of having achieved the things that we said that we would achieve and more. We can talk to you about some of the detail around all of that. From a headline EBIT point of view AUD251 million, an uplift of 11% notwithstanding those changes in tonnages. Transformation I'll talk a good deal about but the momentum certainly continues there. Albeit at an immediate level we readily acknowledge that there are many of the things that have occurred in this half year that aren't readily apparent in the numbers.

But we can talk hopefully through the course of the morning and in our question and answer sessions with you about underlining the confidence that we have and that hopefully we can transmit to you about the things that we are doing. Whether that is driving the improvement in the quality of revenue in the Company, which as you can see, we now have 35% of our coal contracts under the new-form contracts. That in turn is reflecting itself in the revenue per NTK numbers. A wide range of the operational metrics in the Company, the things that we're doing. But on the other hand we have clearly had a half in which there were fewer NTKs than we imagined that there would be.

We have clearly had a half in which we have quite deliberately done things which are about positioning our Company for the future, both the immediate future and the long term future. So whether that is about doing the things necessarily around our fleet, around our track, to ensure that as the tonnages come back we are readily able to respond to those things. Or whether it is the capital growth projects, the changes in the locomotive utilisation rates in our maintenance regimes et cetera that will underpin some of the observations that we'll make about our financial outcomes.

Then finally of course it is about growth and we, as I'll return to you later in the presentation, remain as optimistic as ever about the future of the business. We have been investing but more importantly we've been delivering, whether it is Northern Missing Link, Wiggins, those 9 million tonnes of additional contracts et cetera.

On the next page of the financial highlights, I will certainly leave Deb to deal with the detail around this. The most obvious thing that will draw our attention on this page though is the statutory NPAT. Simply a reminder that the essence of the change half to half is around the taxation uplift that we had in the prior period. Now other than that all of our numbers are moving in the right direction.

Indeed from my point of view I'd like to move onto page 7, where again we provide for you, as we promised that we would each half year, key metrics around the business. That as well as the commentary about what we're doing and how we're doing will continue to demonstrate the progress, or indeed otherwise, that we've been making. As we do grow this business as we do transform this business.

I note there the improvement in the vast bulk of the numbers on that page. Again even given the tonnage observations that I made earlier on. Let me go immediately though to the one which on paper has not moved in the direction that we would like, and of course that's the operating expenses per NTK. That in turn though reflects the high level of fixed costs and the investment in the growth what we have that didn't transpire in the period. In fact many of you will recall, if I can go back even 12 months before when we were going through the process of education around the IPO, the extent to which we have to invest ahead of growth.

We were talking then for example about the numbers of drivers that we had on the books, learning their way so to speak, ahead of the growth in the Hunter Valley. In this period a good example of what's going on here is that Ken Lewsey has been heavily recruiting in Western Australia ahead of the growth in the iron ore business, which is now materialising. And will give you, as you will see an extra layer of transparency around our confidence around that growth.

So my takeaway comments around this would be again that we continue to deliver around the full range of initiatives that we have in the Company under this banner of transformation. Again about which we'll say more. But on the next page, with respect to the strategy in the business again this is an overarching set of comments meant to give you a degree of specificity around what it is that's driving the kind of change that I've just been speaking about. We'll touch on a number of these more specifically over the next couple of pages. But we cannot overstate the continuing importance of the change in the safety performance of our Company.

We can't overstate the importance of what we describe here as the reliability-centered maintenance program and what the benefits are. The nature and the extent of the benefits that that's delivering. Around the success of our ramp up in the Hunter Valley, around the success of our ramp up in Western Australia, the fact that we are on track, on time, and on budget to deliver a Central Queensland Coal Network with the capacity to move 300 million tonnes by 2015.

So let me talk to a couple of those individual examples. With respect to safety you've all heard me talk about this before but it is again an important message that for us safety is a core value in this Company. It's the first thing that we talk about. It's the overwhelming thing that we concentrate on in the business. It is important in its own right as a result of those values that we have in the Company. But as you've heard me observe before far more than that, it is also representative in so many ways of the nature of the cultural change that we're driving in the Company.

Of the discipline that we're driving in the Company and the business improvement outputs that we're driving in the Company. There are many specific examples of the nature of the improvement that we've been able to achieve and I'm delighted to say as well the external recognition that many parts of our organisation have had during this half year. That's it, this for us does not represent world class performance and the challenge for us is as far as we've come as you can see from these graphs, we still have a long way to go and we still maintain the focus.

If I turn then to productivity and service improvement. Again we are showing here the further change in a number of the dimensions with which we have been talking to you over the last year or two. As time goes by of course we will be delighted to be able to give you further examples, different representations of where our transformation program is indeed having the kind of traction that is demonstrated here. But you can see for example the continuing improvement in the payloads in both Blackwater and Goonyella to the point where we're approaching technical limits around those payloads.

As I've started to observe the next challenge for us is having ensured that the trains are optimally loaded every single time that of course we make them go round the loop faster and faster. That goes, for example, to the graph on the bottom right of that page. If we're going to do that, of course important that we dispatch the trains and have them arrive at the time that is planned. Just from that graph you can see the nature of the change.

Similarly, to my observation about the effective speed of the [consys] that we have, you can see in the top right the evidence around the average turnaround times. Again, that in a period most recently where we've certainly not had an optimal circumstance from the point of view of the loadings on the total system.

In the bottom left, overwhelmingly important of course is this whole question of the coal revenue and the quality of our coal revenue and the improvement, half year by half year, the consistency of all of that, I think, is full measure of the nature of the change that we've been driving, the nature of the focus and frankly, also, the nature of the opportunity, when you see those numbers, but that represents skill, 65% of our contracts that are yet to be transformed into these new style contracts.

As we've gotten further away from the IPO as we've been working on these things, we've also been concentrating, as you know, on the optimal structure and focus within the Company to be able to deliver this kind of change. I believe that it's critically important that we have best in type structure. I believe that it's important that we have the best in type people and a huge amount of effort has gone into putting in place both the best structure and the best management team in the business in order to be able to drive the change that I'm talking about, particularly the drive in change to being a customer-focused organisation, as opposed to the more traditional type of company that you know and understand and love of us so well.

Having made those changes around the structure, having made all of those next generation changes around the people, I can assure you that the key work that is in front of us at the moment is the so what. How are we bringing together all of these initiatives that are under the transformation banner that will and do give us the confidence to be able to say that we're going to continue to demonstrate to you the transformation benefits that lie ahead for the Company.

That of course is in the context of a company which is also a growth company and we've spoken often enough about the nature of that growth but of course every time we talk it takes on further and different dimensions. But importantly, at the risk of being repetitive about this, when you think about the representation of this Company as recently as five or six years ago, now with the not just announced investments but the things that we are in the process of delivering, we will have a network capability, as I said a little while ago, of some 300 million tonnes by 2015. We believe that is well ahead of the demand curve that our customers have. It's certainly, however, by no means the end of the story and I'll return to that in a moment.

Critical in talking about this though, is the fact that we have continued to develop this theme of delivering on the promises that we make. So as we think about the Northern Missing Link, the GAP project, ahead of time, on budget, delivering for our customers first and foremost, but in so doing, affording that next level of growth and opportunity for our Company and its owners. This means there is now, today, an additional 33 million tonnes of capacity in the network opening up this entire new corridor to the north of the state, to Abbot Point.

This of course, importantly from our point of view, is a critical and an important first step, but it is perhaps even more interesting to think about what the opportunity is. As we've observed for you before, our view, our network view, is that we can readily grow the capacity of that corridor to 200 million tonnes and indeed beyond, a theme to which I'll return again in a moment.

In the half year that we're talking about, we announced the Wiggins Island development, an additional 27 million tonnes of capacity into the port of Gladstone to Wiggins Island. We spoke about this at the back end of last year. The important next step, though, is that I'm delighted to be able to say that as we're here over the last couple of weeks, the yellow machines and the orange shirt brigade are on the ground, literally getting on with the construction of this important project.

I mentioned on the way through the importance of iron ore, the extent to which we are delivering on the promises that we made as early as the IPO, but during the course of last year. Here then is more detail behind the confidence that we have with respect to the ramp up of this business and giving you that next level of transparency about the timing of the tonnage ramp up and where it's coming from. We continue to work, of course, on what the next stage of opportunity is with respect to iron ore, both in the south west and the south, but also in the Pilbara. But I'll return to that momentarily.

Meantime, though, Deb, if you would talk a little more about the financial performance.

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

 Thanks Lance. Welcome everybody and we look forward to engaging with you all in the next few days to delve into the detail of this, but I'll run through the highlights around the financial performance of the Group.

Looking at this first slide, as Lance has highlighted, this financial performance really does reflect a strong growth trajectory for the Company. The underlying EBIT is a quality result. It's 11% up on the previous period. It is, against the background of 33 million tonnes down on what the offer document forecast for the year, was expected to be. So in an environment of reduced coal volumes, half on half, as well as against that challenging background, this result stacks up.

Breaking down into some parts of the business, I will come to those individually in a few moments, but broadly speaking, you can see that networks underlying EBIT was down AUD13.2 million on the previous half. That is due to lower volumes, but also to some cost issues and some timing issues in Services that I'll go through. The coal underlying EBIT is up AUD38 million, or 38% on the half, which is a strong result. The freight underlying EBIT is also up on the half.

The balance sheet is in a very healthy state, gearing at only 11% on a debt to debt plus equity basis. AUD2 billion of our credit facilities that were established at the time of the IPO are as yet undrawn and our credit ratings from S&P and Moody's maintained. Our cash flows are strong and net operating cash flow of AUD450 million is up against the previous year also.

So moving to the next slide, this slide expands the key metrics for the Group. This would look quite different with an extra 33 million tonnes apportioned. So some of -- this would look quite different in that environment. Some of the trending upwards is a positive indication against that background. As Lance has highlighted, the operating expenditure is not where we would like it to be, but against the background of those volumes, but also against the background of a substantial investing ahead of growth and against the background of investing in maintenance in the network in the half, ahead of the recovery of volumes, that is not a unexpected outcome against that background.

Again, Lance mentioned the apparent fall in the statutory NPAT and EPS is because of that large AUD281 million positive tax adjustment that was in last year's numbers, which relates to the reset of the asset base on the IPO, which we talked about a lot last year, but when we get to comparative periods, can sometimes get forgotten.

The increase in other EBIT, which is a loss to AUD73 million, is because we've included in that AUD20 million of voluntary redundancy and restructure costs. We've treated these conservatively. We've not treated them as a one-off, primarily on the basis that these are across the Board costs, they're not a part of a targeted program. So we've taken the view that we would be very transparent about that and include that in the corporate costs line.

Again, the Group OpEx per NTK reflects the high level of fixed costs as Lance has mentioned. If you look particularly at the coal result and we'll go to that in a few moments, you'll see the degree of offsetting efforts that the business has undertaken to deal with these particular circumstances.

Moving to the next slide, this graphically shows the increase in the underlying earnings before interest and tax compared to the previous year. The highlights include the net impact from the lower volumes, both coal and network, was AUD45 million and this relates to the Queensland tonnes being 7 million tonnes down on last year. But the trajectory is a strong upward trend; this was offset AUD47 million uplift in coal revenue quality and during the half, 35% of our tonnages were railed at higher rates.

The New South Wales investment is kicking in within this result with an AUD11 million uplift half on half. The AUD18 million benefit from our fleet planning is through an alignment of the useful lives of locomotives. This is a result of a re-look at our locomotive fleet, particularly from a maintenance perspective in that the maintenance overhaul program has been lowered, maintenance costs have been lowered and this has allowed us to take another look at depreciation. It has come through as a combination of maintenance savings and lower depreciation. This puts us into the practice of our peers, both domestically and overseas.

In the corporate line, corporate efficiencies combined both labour savings which are coming through from the voluntary redundancy program last year and other savings attributable to corporate, such as procurement savings in the corporate arena.

Turning to the next slide, is taking us to capital. The total CapEx of AUD609 million is lower than expectations. This is primarily due to deferrals of projects, or delays, mostly out of our control. The timeframes for the projects though, as Lance has indicated, are not affected by this slower CapEx. The GAP project is now, as we said, in an advanced stage with the Northern Missing Link open; AUD900 million of the AUD1.1 billion has already been invested and the full project cost will be incorporated into the regulated asset base when the whole project is completed and commissioned in June this year.

The work project, as Lance said, has already commenced. The early works are underway and the public -- the announced timeframes for those projects are expected to be met. Blackwater electrification is now almost 80% through its program. Hunter Valley Rollingstock which has been a significant investment for the Company in the last few years is virtually complete. In contrast, the iron ore investment is gathering momentum and has really come through in this half, with now more than AUD200 million invested ahead of those new iron ore contracts that we had previously announced.

We're forecasting CapEx of AUD1.1 billion for the rest of the year which is down on the offer document of AUD1.6 billion for those reasons. As we mentioned in the full year result last year, the improved capital discipline in the Company is also contributing. We're making prudent investment decisions in an environment where demand is running behind what our expectations were at offer document time.

Moving into the next slide, slide 21, in relation to the cash flows, we're continuing to invest operating cash flows to fund future growth, as I've said. The CapEx was substantially funded by operating cash flows in the half, leading us to a net debt position of only AUD919 million as at 31 December, giving us plenty of capacity and undrawn debt facilities against the future growth projects that Lance has talked about.

Turning to the business overview, as I said, Network Services, the decline in EBIT and network was driven primarily by a 7% fall in volumes, but we've also, as we've mentioned, we've had higher costs in Network, which is as a result of bringing that maintenance forward. That's been a very deliberate program of bringing maintenance forward, planned maintenance, but also longer term improvement around the network so that we minimise any disruptions to customers and to our ability to move volumes in the second half of the year.

In addition, in Services, you can see the impact of the lower coal volumes in that savings in the coal business in terms of maintenance and overhauls are flowing through as a negative into the Services line. Also last year we had a much higher rate of external work, particularly for Queensland Rail, so that's reflecting that half on half of difference in network. Some of these are timing issues and across the full year we'll see some improvement around that, because of those timing issues.

Moving to the freight business -- sorry, coal's next. Moving to the coal business, this is a very good story in terms of the half year performance. The earnings performance for coal has been very strong against this very challenging background. Revenue quality contributed meaningfully to the bottom line in the half. As I said, 35% of our volumes were railed on new form contracts and this contributed to that performance. Revenue per NTK is up 9% and while the Queensland volumes were down 7%, New South Wales volumes were up 34%. So we have an overall 2% down in volumes half on half, but as I've previously said, a significant reduction in volumes across the year on offer document expectations.

Profitability has also been improved in coal, as I've mentioned previously, from the reliability centred maintenance program which has flowed through to both maintenance savings in coal and the lower depreciation that I've already mentioned.

You see in the capital expenditure in coal substantially reduced capital and that's reflecting that the capacity is now largely installed and that program over the last three years, including both in the Hunter Valley and in Queensland is now substantially complete and ready to meet the next wave of growth in both those markets.

Moving to the freight business, in the freight business an increase in earnings half on half is partly due to some higher costs that were in the half of financial year '11 which related to voluntary redundancies and some separation costs that were part of the separation with Queensland Rail. But notwithstanding that, revenue was up quite substantially in the freight business and the business is improving. Grain and sugar in Queensland performed very well, our iron ore business will kick in to a higher degree in the second half, but has started and is on track to deliver that 30 million tonnes of shipments by financial year '14.

Intermodal also improved despite what's been a very tough domestic environment in the line haul business and we're on track improving the cost base and restoring the margins in that business also. The CapEx increase you see in the freight business here is reflecting the build up ahead of the iron ore contracts.

In terms of guidance going forward, I think it's useful to note where the business is in terms of the transformation that Lance outlined; the recovery from the flood events that we're all familiar with; but the business is carrying the cost of that very large reduction in coal volumes across this year and it's carrying it without altering the offer documents guidance.

At the same time we're restructuring the business and we're incurring costs in relation to restructuring the business, which is directed to the longer term sustainable improvement of the Company, and we're also gearing up for the next wave of growth. So we are carrying investment costs, both in iron ore, but also in our Queensland operations ahead of that growth.

So notwithstanding all of those elements, we're holding to the offer document FY12 forecast.

Our latest estimate for coal volumes is towards the low end of the range that we provided at the Annual General Meeting late last year of 200 million tonnes to 210 million tonnes. We have had a, I think we would describe as a relatively normal wet season to date, but as you're aware we're seeing industrial activity in relation to our customers and that's playing out as we speak.

We are also updating our capital spend guidance ,and as I said we have reduced that from AUD1.6 billion for the year to AUD1.1 billion, for the reasons I outlined previously, and as I said, primarily delays in projects that were not in our hands and some deferrals of capital ourselves.

Happy to take your questions at the end of the session, but pass back to Lance to talk to the medium to long-term outlook.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 So as we do think forward, firstly reflecting on the context of course of the last 12 months, no one would deny it's been a challenging period. Certainly I'm the last one who would say I wouldn't have preferred to have had the tonnes that we imagined in FY11 and 33 million additional tonnes in the current year.

That is what it is, and this is a management team which is focused on delivering results notwithstanding that. More particularly, as we think about the future we have no different view with respect to the fundamental optimism that we have both in relation to the markets that we serve and the way that this Company will continue to grow in order to serve those markets.

We are indeed very confident. We are as you know leveraged to global growth sectors, and this is not meant to be a sucking eggs type observation with respect to what commentators are saying, but notwithstanding the kind of discussion that understandably has been going on with respect to world markets and China and so forth, I would draw your attention particularly given the extent to which this Company is leveraged ultimately to the steel industry as well of course as to the international power industry, but with respect to steel in 2011 global steel production rose 6.8% and in China, notwithstanding all of that discussion that I just referred to, Chinese steel production rose by 8.9%.

These are by any analysis significant numbers, particularly the Chinese number being a compounding number; simply serves to underpin why we have the level of confidence that we have.

Looked at slightly differently and closer to home, we have reflected on what the range of things are that -- not so much we're working on directly, although of course we are part of this, but that our customers and others are working on with respect to the development of Australia's coal systems, particularly as it relates to port capacity.

When you look at this diagram on page 29, you can see that whilst we have our eyes on the future, so do our customers. You see notwithstanding the currency of present issues, our major customers still talking with the same level of confidence about the future; continuing to vote with their wallets with respect to the future.

We're not naive, when we look at a diagram like this we know that a significant portion of these aspirations are not going to come to pass, at least not in that timeframe. What that does mean though is that a significant portion of these projects are indeed going to come to pass and I can tell you that our infrastructure business, our above rail business continues to consult extensively with our customers and others about those growth options, and we continue to be focused very much on continuing to be ahead of the curve with respect to our investment and with respect to our ability to be able to satisfy those markets.

Even beyond that, as I turn to the page 30, we continue to be optimistic about the medium to longer term view of the business, both here in Queensland, in New South Wales, and in Western Australia.

I don't need to paint too detailed a picture for this Group about what those opportunities are. We do however see ourselves as being leveraged to the resource sector, to part of the growth of the resource sector, and as you would know and no doubt you will have some questions for us, we work extensively with respect to the growth opportunities in each of those red oblongs that we have set out on these two charts.

Importantly in that regard, as we think about the Galilee for example, we would underline the significance of being awarded a project of state significance by the Queensland Government in relation to our proposal for the development of the Galilee, which again we think is innovative, ahead of the curve, customer responsive, it allows us to be able to leverage the undoubted both quality and capacity of our existing network with Greenfield connections in a way which is going to be much more cost efficient, much more productive and bring forward the opportunity both for scaling up production and those early critical NPV benefits for our customers.

In summary then, yes, look it's been a tough environment, but our objective has been to deliver on our promises. Hopefully we have been able to demonstrate again today the extent to which we are focused on every single issue around which we can have influence over in our Company, notwithstanding external uncertainties.

We continue an unrelenting focus on execution in this business around those five areas that you know represent the key areas upon which we're focused -- our safety performance, the quality of the revenue in the Company, the continued reformation and transformation of this business, a continuation of the capital efficiency and capital productivity in this business, and a continued enormous opportunity for growth in the business.

Thank you for the opportunity to be able to give you an update through this half year, and Deb and I would now be more than happy to take your questions.

 QUESTION AND ANSWER

Operator 

 First question comes from Scott Ryall of CLSA. Please go ahead.

 Scott Ryall  - CLSA - Analyst 

 Thank you. (Inaudible - microphone inaccessible) I was wondering if you could give us a little bit more clarity on the updated volume guidance and whether the slightly weaker (inaudible) is due to Queensland and particularly the ongoing issues that BHP is having on the industrial relations front, or whether there's some impact on New South Wales as well due to the heavy rainfalls we've seen there.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Notwithstanding you're breaking up, I think we've got the gist of all of that. The preponderance of our view is Queensland-related, though the current state of our knowledge with respect to every part of our business is the short answer that we've built into the observation that Deb has made. So to be a little more explicit about it, we of course won't know until we know what the precise impact of the continuing industrial disruption is with our largest customer in Queensland, but we have built into the observations that we've made our current state of knowledge about that.

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

 I think Scott, the other thing I would just add is that there's probably, for the reason you have indicated, a bit less spot tonnes in New South Wales than we might have expected, and so both of those weigh on that lower end of the guidance.

 Scott Ryall  - CLSA - Analyst 

 Okay, and could you give us a timetable with respect to the management appointment or you've got the head of operations (inaudible)?

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Indeed, let me make the observation firstly Scott that that is in fact the only appointment which is outstanding. We have not only settled the structure, but we have made every other executive level appointment within the structure. Everybody is working full-time in their roles, in which regard I should have mentioned, that we're delighted for example to have Paul Scurrah onboard from the start of this month, and a number of you will have the opportunity to interact with Paul over the coming days.

We are at -- choosing my words carefully -- an advanced stage of recruitment with respect of the head of operations. I am not going to commit to a precise timetable, as there are particular reasons around how long that might take. My observations though are we are self-evidently focused on getting the right individual for that role on the one hand, and on the other hand to underpin just how important it is to have an executive of the experience and caliber of Lindsay Cooper who is acting in that role. And let me assure you that Lindsay is not keeping that seat warm; that we are moving ahead on every front in that part of the business.

 Scott Ryall  - CLSA - Analyst 

 Maybe the last one. Since there's been a provision being made for transformation, will that reoccur in the second half, and does that come into your full year EBIT Guidance, is it pre or post?

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

 Yes Scott, it is in the full year, its part of the full year guidance. It won't reoccur in that form. It's an actual expense that has been incurred in the half and so it's been reflected in the corporate costs for that reason.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Not to say that there won't be further transformation costs however in the second half, because of course our efforts haven't, by any stretch of the imagination, gone on the shelf.

 Scott Ryall  - CLSA - Analyst 

 What's been your thinking in the AUD578 million (inaudible) ?

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

 We have included in the AUD578 million, the AUD20 million, so that's part of -- we have already incurred that cost. It's been incurred in the half year, and therefore by definition is included in the guidance. We're not anticipating any particular increase in that or another recurrence in this second half of the year, but as Lance says, that's not to say that there may not be some further redundancy costs that are a normal part of business and that's not to say that there might not be in the future.

 Scott Ryall  - CLSA - Analyst 

 Given the last set of redundancy costs resulted in a pretty equivalent annualised savings going forward, is that fair to assume (inaudible) costs?

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Scott, we -- I think the broad observation that we've made is that -- it, of course, will vary upon the demographic of the Group that's impacted and the nature of the Group, but to assume that the payback for a redundancy in this organisation is of the order of 12 months is a fair assumption to make.

 Scott Ryall  - CLSA - Analyst 

 Okay. Thank you.

Operator 

 Your next question comes from Ian Myles of Macquarie. Please go ahead.

 Ian Myles  - Macquarie - Analyst 

 Good morning. A couple of questions. You talked about the maintenance -- extra maintenance costs for the Network business and I looked at your stats on the Network page. It doesn't look like the maintenance change has materially moved on a dollars per NTK on page 23. When you multiply it out on the NTK you've actually done, the maintenance charge would appear to be actually slightly down.

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

 Yeah, it's not a straight equation Ian, because it's -- because the volumes are down and because it's a measure per NTK the volume impact has a disproportionate outcome on that particular measure.

 Ian Myles  - Macquarie - Analyst 

 Either that or you get rid of the volume and you get a total maintenance cost--

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

 I'm sorry Ian, I can't hear you.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Sorry, Ian. We'll just pause for a moment. We're having a -- having difficulty hearing you.

 Ian Myles  - Macquarie - Analyst 

 Can you hear me?

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 And to make the observation whilst we're dealing with that technical issue that part of what we're talking about is also bringing forward capital. Because, as you would appreciate, a lot of the kind of things that we work on in the network are in the nature of capitalised maintenance.

 Ian Myles  - Macquarie - Analyst 

 Okay. Can you still hear me? Hello? Hello? Can you still hear me?

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

 Yes, we can hear you now.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Yes.

 Ian Myles  - Macquarie - Analyst 

 Oh, okay. If you looking at coal, you talk about New South Wales improvement of AUD11 million. You talked last year, that you had a AUD7 million sort of, restructure -- or initial start-up costs associated with New South Wales. Should we interpret that there's only been a net AUD4 million improvement in that business on half-on-half?

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

 No. No, the net improvement is AUD11 million half-on-half, and that's what this graph is showing.

 Ian Myles  - Macquarie - Analyst 

 Start-ups which you said went through the EBIT at the time?

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

 Yes.

 Ian Myles  - Macquarie - Analyst 

 So the gross improvement's AUD18 million, is that correct?

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

 From start-up? By definition yes.

 Ian Myles  - Macquarie - Analyst 

 Okay. Okay. In terms of the -- when we look at that overall coal business, you go through that chart as well, you get a net difference of AUD18 million from AUD203 million from last year, EBITDA up to this year's EBITDA. I was wondering what that other core improvement is, because if you add in the Queensland lost volume and the quality improvement, that New South Wales improvement, there's an AUD18 million difference.

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

 I'm not sure what the question is. Oh, yes. Yes. There's deficit tonnage charge in that, Ian.

 Ian Myles  - Macquarie - Analyst 

 That's the primary thing?

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

 From the -- yes. That's over, that's a AUD20 million order.

 Ian Myles  - Macquarie - Analyst 

 Yeah, I looked in your last result and you said AUD18 million to AUD22 million for FY12 for deficit tonnage charges.

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

 Yes.

 Ian Myles  - Macquarie - Analyst 

 Your contingent liability suggests another AUD7-odd million. Are we going to surprised again that it will be even larger or is it -- you're getting pretty comfortable that it's in that AUD27 million mark?

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

 We can't call that until the full year, until we know what the full volumes are going to be.

 Ian Myles  - Macquarie - Analyst 

 Even with your estimates as it is now?

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

 Yeah. The DTC that we recovered, we gave an estimate of AUD18 million to AUD22 million. We've recovered AUD21 million point something.

 Ian Myles  - Macquarie - Analyst 

 Yeah.

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

 So that's in there and that's done, and in relation to DTC for the current year, we won't be able to estimate that until we know what the actual volume is and where the -- and under which types of contracts the coal is railed in the balance of the year.

 Ian Myles  - Macquarie - Analyst 

 Okay. Okay. Can you also indicate which CapEx projects have been deferred, on some of the major ones?

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

 Hunter Valley is -- some expenditure in the Hunter Valley, the -- for example, the plan had expected a Maules Creek contract to be tendered during that period and we allowed some capital in the event that that eventuated. As you know, with the Aston Whitehaven situation, that whole situation has been delayed. Another example is Wiggins. As you know, Wiggins is the biggest one which is slower and that project start-up time was almost a whole year delayed from the offer document estimates. So there's a couple of examples.

 Ian Myles  - Macquarie - Analyst 

 Okay. Okay then. That's great.

Operator 

 Your next question comes from the line of Matt Crowe from Commonwealth Bank of Australia. Please go ahead.

 Matt Crowe  - Commonwealth Bank of Australia - Analyst 

 Good afternoon. Can you hear me okay?

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

 Just.

 Matt Crowe  - Commonwealth Bank of Australia - Analyst 

 Sorry.

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

 You're very slight, maybe --

 Matt Crowe  - Commonwealth Bank of Australia - Analyst 

 Okay, look, in relation --

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

 That's much better.

 Matt Crowe  - Commonwealth Bank of Australia - Analyst 

 Okay. In relation to Network Services, to what extent was the EBIT decline due to volume which you would expect to recover in revenue (inaudible) in the future, and to what extent was it responsible from the increased maintenance that is not covered by the regulatory cap?

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

 The volumes down in the half were 7% volumes down. The revenue cap mechanism is a revenue cap -- it's revenue capped, not earnings. We won't be able to make a judgement, again, in both revenue cap and DTC are full year calculations. So we won't be able to make a judgement about that, but whatever it is, the process is that it's recovered a full two years later, so that would come through in 2014.

 Matt Crowe  - Commonwealth Bank of Australia - Analyst 

 Okay. Just on the transformation costs. Those that weren't redundancy related, are they -- or can you tell us what they are and are they the type of costs that we can expect an ongoing benefit from in future years, or are they just costs you had to incur?

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

 No. They were one-off costs in terms of setting up the functional structure.

 Matt Crowe  - Commonwealth Bank of Australia - Analyst 

 Okay. Thanks. That's all.

Operator 

 The next question comes from Simon Mitchell of UBS. Please go ahead.

 Simon Mitchell  - UBS - Analyst 

 Good afternoon. Just a first question on CapEx. The AUD1.1 billion guidance for this year, could you just give us a breakdown on what of that is maintenance, and whether that you would expect that to be an appropriate level going forward?

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

 We haven't really provided that breakdown in these numbers, but it's -- I think what we've said previously is that the maintenance CapEx has flattened and so we're not expecting maintenance to increase or substantially reduce. If anything, maintenance in the Network business has been brought forward so that'll be a slight up.

 Simon Mitchell  - UBS - Analyst 

 Okay. Just on the volume guidance being at the lower end of the 200 million tonnes to 210 million tonnes. What does that imply for CQCN system volumes versus the -- I think you'd lowered the declared throughput forecast to about 200 million tonnes for CQCN back in April last year. What sort of a shortfall does your guidance apply to that?

 Deborah Tonnes 

 Yes. It'd be of the order of 20 million tonnes, based on the current expectation.

 Simon Mitchell  - UBS - Analyst 

 Right, and you would expect that the majority of the impact of that would be recovered two years later through the revenue caps?

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

 Yes.

 Simon Mitchell  - UBS - Analyst 

 Okay. Just one final thing. Just on the page 19, the waterfall chart. The AUD47 million of coal quality revenue -- or Queensland Coal revenue quality -- is there anything in there which is a temporary gain as a result of you carrying more spot tonnage or more tonnage?

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

 No. No.

 Simon Mitchell  - UBS - Analyst 

 Okay. So it's all--

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

 Sorry, maybe I haven't understood the question.

 Simon Mitchell  - UBS - Analyst 

 Last year there was an amount in EBIT that related to you carrying tonnage, more tonnage --

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

 Oh, yes.

 Simon Mitchell  - UBS - Analyst 

 --for higher yielding customers --

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

 Yes.

 Simon Mitchell  - UBS - Analyst 

 -- than the lower yielding customers.

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

 Yes. That's that mix of different style contracts and higher performing contracts. So again, that's going to be a full year issue to really get the precise sense of where the volumes fall versus -- legacy contracts versus new-formed contracts and where there are higher performance and incentive payments coming through depending on which hauls eventuate in the rest of the year.

 Simon Mitchell  - UBS - Analyst 

 Okay. So should we think that that AUD47 million is a carry-forward number or do you think there's some element of one-off benefit in there?

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

 It's not one-off to the extent that as we're lifting the quality of revenue, as we're increasing the percentage of contracts that are on higher form contracts, it's not one-off from that perspective. But it is not precisely predictable, because, particularly in an environment where we have had production impacted and flood impacted and industrial relations impacted customers, the variability in where we carry coal and under which contracts and under which circumstances for this year is going to be uncertain until we get to the full year result.

 Simon Mitchell  - UBS - Analyst 

 Right. Okay. Thank you.

Operator 

 The next question comes from Matt Spence of Merrill Lynch. Please go ahead.

 Matt Spence  - Merrill Lynch - Analyst 

 Thanks guys. Can you give us an idea, in tonnes, of the impact from the industrial disputes in the half?

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

 Well there wasn't any substantial impact in the previous half, but in the current half we don't know. There's a 7-day strike which, if it goes through to its full conclusion, will be in the region of a million tonnes, is our understanding. But you know as much as I do as to whether there will be an ongoing impact from that or not.

 Matt Spence  - Merrill Lynch - Analyst 

 Okay. But there was no impact from industrial disputes in the first half?

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

 Oh, there was some. There was some interruptions but they were not of a material nature.

 Matt Spence  - Merrill Lynch - Analyst 

 Okay. Thanks.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Largely, Matt, because in a circumstance where we weren't stressed around system performance, we were deliberately able to respond to our customers needs by backing and filling, moving capacity around, et cetera. There is -- to Deb's observation, we -- and why I said we won't know until we know, there's some observation to do that here. So, for example, we railed heavily ahead of the current stoppage--

 Matt Spence  - Merrill Lynch - Analyst 

 Yes.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 --given the lead time. We will have to wait and see how long it goes and what the opportunity is with respect to catch up afterwards. We've done everything that we can around the mitigation of the impact. So one anecdote, one example is in the Network business. The Network folks have done a fantastic job of being able to bring forward what would otherwise have been a five day stoppage around upgrading the Goonyella balloon loop. That will have the impact of mitigating what would otherwise have been about a 100,000 tonne a day impact, of taking that loop out at some other time. So -- but we're not other words trying in any sense to duck the question but just to give you the flavour of the extent to which this is a moving feast.

 Matt Spence  - Merrill Lynch - Analyst 

 Is there any impact at all across any of the systems still from the rains last year? I guess six months ago your thesis was that you wanted some rain to run off some of the remaining water that was in the mines -- has that happened?

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

 Yes it has and most of our customers have recovered from the worst of that. However, that doesn't mean that everybody is in full ramp up and full productive capacity because there's an impact around their planning. We've seen -- we certainly saw in the half varying impact system by system of really what is essentially a recovery mode, though not strictly the water in the pits issue that we had much more strongly last year.

 Matt Spence  - Merrill Lynch - Analyst 

 Okay, thanks. Then just one last one. Did Intermodal break even in first half of '12?

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

 The projection for Intermodal is to be in EBIT neutral by the end of this financial year and it's on track to that target.

 Matt Spence  - Merrill Lynch - Analyst 

 Yes -- so EBIT neutral for the full year?

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

 Yes.

 Matt Spence  - Merrill Lynch - Analyst 

 Yes, okay. Thank you.

Operator 

 Your next question comes from Paul Ryan of Evans and Partners. Please go ahead.

 Paul Ryan  - Evans and Partners - Analyst 

 Good afternoon. Can I just follow up on your comment around the coal division CapEx now substantially complete? Can you comment on what the actual capacity is in that business now, in terms of tonnage haulage both today and if there's still optimisation opportunities -- perhaps not payloads but in other areas -- what it could be if it was optimised?

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

 Well, probably a good guide to that was our offer document forecast of 233 million tonnes. I'd say we'd have some capacity and flexibility on top of that that might be in the order of another 5% to 10%.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Look, I think that's right. Again it's a little bit of -- a little like how long's a piece of string question. Our objective of course is to make it more or to cap it and have the impact of the reduction in the vested capital. So we're working on both parts of the equation. But just to give a little support to what Deb was saying, even in recent days and weeks we've had examples where we've had individual days or periods of time where on a daily run rate or a two, three day run rate sort of thing, we have been in fact running at those levels of annualised capacity.

 Paul Ryan  - Evans and Partners - Analyst 

 Just one follow-up if I may on the services business. You comment on improved profitability, is that in absolute dollar terms or margin terms? What are the key drivers of that, notwithstanding the lower levels of revenue?

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

 Sorry?

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Services business profitability.

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

 Yes. In terms of the Services business profitability in the half was down for two reasons, one I mentioned previously in that they had much less wagon overhauls. That was really a prudent decision in the coal business to pull back against the background of demand.

Also we had less work in the workshops than we'd had in the previous where -- which was actually quite a high half in terms of external work with Queensland Rail which hasn't been the case in the current half. So both of those impacted. Some of that is timing because we expect to see that overhaul program pick up now in the second half. So across the full year, you might not see as big an impact in that -- as you're seeing in this half.

 Paul Ryan  - Evans and Partners - Analyst 

 Okay. So dollar profitability was down but margins were up --

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

 Yes.

 Paul Ryan  - Evans and Partners - Analyst 

 -- is what you're referring to? Thank you.

Operator 

 The next question comes from Cameron McDonald from Deutsche Bank. Please go ahead.

 Cameron McDonald  - Deutsche Bank - Analyst 

 Good afternoon. Just a quick question on the network maintenance. You said that you've brought some forward. I'm just trying to get the dollar impact of that in the first half.

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

 It's -- I think we'll come back to you on that. I mean, as we said before, some of that is capital and some of it's been capitalised, some of its in maintenance. So to give you a specific breakdown Cameron we'll catch up with you later in the day.

 Cameron McDonald  - Deutsche Bank - Analyst 

 Okay, thanks.

Operator 

 The next question comes from Anthony Moulder of Credit Suisse. Please go ahead.

 Anthony Moulder  - Credit Suisse - Analyst 

 Good afternoon all. Just a couple of questions following on from that one. Can you talk to capitalised (inaudible) and when we'll start to see that from the GAP project?

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

 Yes, we're -- the process for capital in the network business is that it is capitalised up to the point of commissioning. So the commissioning point for the GAP project is not until June this year when the full project is completed. It then goes into the regulated asset base and so it moves out of that. The Wiggins Island project will be capitalised again up until that point in 2014 where it's commissioned.

 Anthony Moulder  - Credit Suisse - Analyst 

 So up to the point of full delivery?

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

 Yes.

 Anthony Moulder  - Credit Suisse - Analyst 

 A second question. On the QCA -- or there is a submission to the QCA to, I guess, change AT5 charges. What is the case or what happens do you think to pricing for AT5 if that doesn't get supported by the QCA?

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

 Really what we're doing there is we're ensuring that we have an appropriate pricing across the systems that encourages the most efficient traction mode for both those systems. So it's a process that the QCA will probably take some time to get to a decision on. But we think it's the right approach for the whole system and for the customers in both systems to spread that across.

 Anthony Moulder  - Credit Suisse - Analyst 

 It (inaudible) certainly make sense as far as you question the payload. The more I question this, if the QCA didn't support that, if there's likely to be some adjustments to the RAB as far as the electric network is concerned?

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

 I wouldn't say there'd be an adjustment to the RAB. It becomes an issue of what incentives and what encouragement there is for various modes of traction in the system. So we would prefer to have more electric traction in the system. We believe it will give much more system efficiency and so if that were to happen it would provide a -- maybe not a disincentive but not exactly an incentive to increase the electric proportion in the Blackwater system in particular.

 Anthony Moulder  - Credit Suisse - Analyst 

 Yes, I understand. But the question also from the prospectus document, what now is the average age of the loco fleets?

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

 Eight and a half years, something like that.

 Anthony Moulder  - Credit Suisse - Analyst 

 Okay. The last question I had was, the 35% you now have on commercial terms as far as contracted volumes is concerned, that --

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

 Sorry Anthony, just to go back on that. I think I've overstated that. I think it's, given the gear that's come on, particularly in New South Wales in the last 12 months or so and in iron ore, I think that will have come down from the offer document rather than go up. So I've given you a mislead there. We'll get you a precise number. Can you just repeat that last question for me?

 Anthony Moulder  - Credit Suisse - Analyst 

 The 35% of contracts under new commercial terms, this is coal contracts -- in the offer document again -- harking back to that 37% by the end of June. Is that still the expectation or, I would imagine, we're likely to see that higher following things like the Anglo contact moving away as of 1 January et cetera?

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

 No, 37% is -- we're on track to 37%.

 Anthony Moulder  - Credit Suisse - Analyst 

 Okay, thank you.

Operator 

 Your next question comes from Simon Fitzgerald of Moelis & Company. Please go ahead.

 Simon Fitzgerald  - Moelis & Company - Analyst 

 Hi there all. Can you hear me okay?

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 That's much better. Thank you.

 Simon Fitzgerald  - Moelis & Company - Analyst 

 My first question is just around returns. Return on assets has improved on the half from 3% to 5.3% on an annualised basis. Just when I compare QR National against some of the international peers, the return on assets is still well below your peer set. I'm just wondering, do you have a target in mind or where you see that going over the longer term?

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 The way that I've answered that consistently in recent times is that in terms of the light on the hill objective for the Company, I describe it as operating ratio. That's over a five year period -- to have our operating ratio at 75 or better -- given that's a one line at EBIT, you can do the numbers and see that that translates when we're able to do that into the same kind of returns that our peers achieve in the business.

 Simon Fitzgerald  - Moelis & Company - Analyst 

 Okay. Also, I just wanted to know in terms of -- the Queensland coal projects are going to keep coming up. They're lumpy in terms of the CapEx requirements. It continues to push out the point at which this Company will hit free cash flow positive. I'm just wondering will you consider participation by capital partners or anything like that, or are you going to look to do all this yourselves?

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Clearly the overall capital structure of the Company and the optimisation of the capital structure is something which is squarely in front of us. We're not in a position where we would say what we would do or wouldn't do, other than to say that we are and will look at all of those options.

 Simon Fitzgerald  - Moelis & Company - Analyst 

 One final question just on the Government shareholding. If that was to come up and you could buy back some of it, what sort of things would you need from shareholders or in terms of that just to get a buyback of the selective fashion done in that way?

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

 Well, depending on what it is, we would need to go for shareholder approval for a significant buyback of stock. Obviously, if that was to be considered, it would be considered as -- is it a strong value driver for shareholders, depending on the circumstances of the time.

 Simon Fitzgerald  - Moelis & Company - Analyst 

 Okay. I've got no more questions. Thank you.

Operator 

 Your next question comes from Jonathan Collett of Goldman Sachs. Please go ahead.

 Jonathan Collett  - Goldman Sachs - Analyst 

 Hi guys. Just wondering if that revision upwards of the useful life of the coal locomotives, does that apply from 1 January?

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

 It applied from 1 July last year so it's -- that's come through for the half year at 15 million and will come through again in the half that we're currently in.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 We should also observe that this is part of an ongoing program, for the reason that Deb managed. In other words, it's not just something that we pulled out of the middle of the air. It's part and parcel of the reformation -- transformation program in the business and we are progressively working through every class, every locomotive, across the business.

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

 That's a reflection of some past conservative. When we actually do the analysis in the locomotive classes -- and we've only done that in coal -- we'll be working through the freight classes as we go through the balance of the year. But it's the improvement in the business in some of the dimensions that Lance was talking through, in terms of productivity, payload and improved maintenance that's reducing the overhaul requirements, changing the profile and flowing through to benefits that are both real savings but also flowing through in lower depreciation. So Lance is absolutely right, it's a systematic review across the fleet. In the half we were able to complete the coal fleet?

 Jonathan Collett  - Goldman Sachs - Analyst 

 (Inaudible) so does that include any of the other changes that are potentially going to come through as well? Sorry, did you get that question? I was just saying does the AUD578 million EBIT guidance include any of those other changes that may come through in the future, which you just talked to?

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

 Yes it does.

 Jonathan Collett  - Goldman Sachs - Analyst 

 Okay.

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

 We're giving the guidance in the context of all of the things that we're highlighting to you today.

 Jonathan Collett  - Goldman Sachs - Analyst 

 Okay thanks for that.

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

 You're welcome.

Operator 

 The final question comes from Scott Carroll of JP Morgan. Please go ahead.

 Scott Carroll  - JP Morgan - Analyst 

 Hi guys. I just had a quick question. I don't want to harp on it, but just on maintenance CapEx. From '08 to '10 it averaged about AUD300 million a year. I think you said it was around AUD200 million in '11 and you're talking about it flattening now, so if we assume it's around about that same level. With the business growing, what is driving that big step down in maintenance CapEx?

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

 Well it's just what I've been talking about. It's basically a complete re-look at our -- at the way we manage our fleet. It's going to that reliability-centered maintenance program is a very strong driver of that.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 And the fleet age overall. Over that period of time, as you'll recollect, we've made a material difference in the average age of the fleet given the re-capitalisation in the fleet that we've spoken about. So it's that virtual cycle if you will of renewal of the fleet together with the transformation activity, the maintenance activity, all of those kinds of things. Over time though we will need to give you guidance about this because once -- if you take the network for example once you get beyond installed then by definition that will increase.

But that of course is going to proportion-wise depend upon the level of the reinvestment in the network as well. So as I say I think the best thing we can do is to keep you apprised of that. But the kind of numbers that we spoke about at the end of last year I think are good guidance for the foreseeable future around those levels.

 Scott Carroll  - JP Morgan - Analyst 

 Cheers.

 Lance Hockridge  - QR National Limited - Managing Director and CEO 

 Okay well that takes us out from a time point of view. I know there will be lots of opportunity that we welcome to interact with you in the remainder of the day and indeed over the coming days. Thank you for your time with us today and key messages of course are around the continuing focus on execution delivery against promise and growth in our business. We're delighted to have the opportunity to continue to explain those things with you.

So thanks for our time everybody and look forward to catching up in the short term.

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