THOMSON REUTERS STREETEVENTS	
EDITED TRANSCRIPT	
AZJ.AX - Interim 2014 Aurizon Holdings Limited Earnings Presentation	
	
EVENT DATE/TIME: FEBRUARY 16, 2014 / 11:30PM  GMT 	

	

CORPORATE PARTICIPANTS
 John Knowles Aurizon - SVP Investor Relations
 Keith Neate Aurizon - EVP and CFO
 Lance Hockridge Aurizon Holdings Limited - Managing Director and CEO

CONFERENCE CALL PARTICIPANTS
 Anthony Moulder Citigroup - Analyst
 Matt Spence Bank of America Merrill Lynch - Analyst
 Simon Mitchell UBS - Analyst
 Scott Kelly Morgan Stanley - Analyst
 Cameron McDonald Deutsche Bank - Analyst
 Andrew Gibson Goldman Sachs - Analyst
 Matt Crowe JP Morgan Chase - Analyst
 Scott Ryall CLSA - Analyst
 Nicholas Markiewicz Credit Suisse - Analyst
 Paul Ryan Evens and Partners - Analyst

 PRESENTATION

 John Knowles  - Aurizon - SVP Investor Relations 

 Good morning ladies and gentlemen in the room. My name is John Knowles from the Investor Relations team and welcome to our first half results presentation. Before we handover to Lance and to Keith to take you through the results, I'd just like to call Helena to provide a safety overview. Thank you. (Conference instructions.)

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Thank you for that. Can I add my welcome both to those of you who are here and those of you who are listening to us this morning? In particular, I'd like to introduce or acknowledge that we have the full executive team from Aurizon here this morning, so I guess especially around the opportunity to be able to ask questions in the informal bit afterwards. But particularly acknowledge [Mara], Mara Nellis is here for the first time and will have the opportunity to interact with you along with the rest of the team.

Certainly we're pleased to report on what I think is another solid result, another result that demonstrates the momentum and the focus that we have in the company across all of the aspects of the business.

So Keith and I will run through the presentation at a reasonable rate and make sure that we do allow plenty of time for your questions this morning. We've certainly tried as we've put together the presentation, and as well as generally the information that we provide to you, to respond to the kind of comments that you've made to us about the information that you would like. We've tried to increase the level of detail and transparency around that. But we'd be happy to receive your further feedback around those elements as well.

As I say, I think this is a solid year. Indeed, it's a half in which, in particular given the nature of the market that we've been serving, we've been able to make particular progress across all dimensions of the business. That's got to be the mark, seems to me, of the confidence that certainly we have and that I would hope you have about our ability to be able to maintain that momentum. There is no, in other words single, one silver bullet or mini silver bullet in this period, rather it is, as I say, the representation of the planning and the discipline that goes in right across the full sweep of the business, as you can see from the highlights on this chart. So, we'll go to talk to each of those elements in turn.

Firstly, as always around safety. Once again, great progress. When I was here talking about the full year '13 result, we observed that the level of progress had taken us into at least borderline world-class territory. I'm delighted in its own right, and indeed because of what it means around that continuing business transformation, to be able to say that we've not, as it were, rested on our laurels. To be able to achieve in a half year a further 56% improvement in our lost time injury rate at 26% improvement in MTIFR, pretty well all of the other indicators with respect to safety, both leading and lagging, are showing similar sorts of improvements. Again, as I always say, that is critically important because of the values of the company.

But it is also, I think, a very substantial representation of what transformation in our company is all about and what this level of operating discipline and capability in our company is all about. The financial highlights -- by now, I know you've had a chance to have a look at and many of you have already written about. It's been a half which, as we'll discuss, has seen stronger volumes -- and indeed we've seen those volumes continue beyond the end of the half that we're reflecting on -- but it's also been a half in which the broad transformation initiatives have distilled themselves into a range of improvements at a detailed level in our business. So let me turn quickly then to talk to a range of those.

The continuing focus as I've said already a couple of times this morning is about improving every aspect of this business. of taking it into the kind of discipline space that we've been describing to you as being our goal. The top right of this chart, in so many respects, says it all. We were able to deliver the 12% volume growth that we saw in this half on essentially a flat cost base. Again, there on the right, you can see a number of the elements that go into all of that. Let me turn though to some then of the detail.

Firstly with respect to the 75% operating ratio. You would have seen by now that at the end of the half we were at 75% -- I beg your pardon, I wish -- 78.4%. Again, 2.6 (sic - see Slide 5 press release "2.6ppt") compared to the equivalent period last year, improvement. That momentum is there. The momentum is demonstrably, as you can see from these charts, taking us not only toward the 75%, but as you would appreciate, so much of the work that we're doing, so much of the planning that's going in, as I talk about improvement of every element of our business, is going to take us well beyond the 75% as we look to the 73% goal in 2016 and our confidence levels about ultimately being in the same space as the class ones for example, continues to improve.

You can see here some of the examples of the things that we have been working on during the year. The centralised support cost improvement, taking 121 people out of that part of the business. I'll talk more here in a moment around operations productivity improvement and the very breadth and depth of change in that space. Again, 141 people out of there. To note, AUD25 million worth of VR costs in the half, but with a full year clean benefit that we expect to be AUD42 million.

In terms of that operations transformation program then, again particularly the takeaway, the so what, is represented by the box at the top right of this chart. Our operating expenses as represented by cents per net tonne kilometre, have improved by 14% in the period. On the back of those broad transformation programs that Mike Franczak has been talking with us about -- the integrated operating plan, the longer, denser trains, energy, et cetera -- to give you representation about our progress in a little more granular detail around some of those things. As I observed a moment ago, our operations cost base per net tonne kilometre has improved by 14%. We are now running the highest ever Average Coal Payloads in both Goonyella and Blackwater in Queensland.

In the half as you would have seen, to give you a little more granularity, we carried 109.7 million tonnes. That was done with 15,061 train starts. The difference is that this equates to 10 million tonnes more than the previous record period, with only 431 additional train starts. Put differently, perhaps in a way that's more easily digestible, the train starts per one million tonnes has decreased by 6.5%.

Our turnaround time improved in the half by about 7%. Our fuel consumption in the half decreased by 3.6%. The transformation program as represented even by those snippets therefore continues to be well underway. The kind of initiatives that as I say, Mike has spoken to you about, are already getting substantial traction in our business.

As we look forward, we continue to be optimistic that we're far from seeing any kind of diminution in that opportunity, whether it is about cycle time, continued energy efficiency, the continued ability to be able to load our trains. Importantly for example, we commenced only last week a consultation program around the substantial changes that we intend to make in the operations of the north-west corridor between Townsville and Mt Isa. Again, I think Mike alluded to this in the observations that we made to you in December. But this will see very substantial change in the way that we operate. It will see further redundancies in that part of the world, but importantly, it will see a dramatic improvement, I believe, in the level of consistency and performance to our customers in that part of the world.

As you would appreciate, these kinds of changes are not easy because they do impact on the communities, the do impact on our customers, they impact on our people. But it's representative of the kind of change that we continue to drive through the business.

If I turn brief then to Network and the network optimisation that's seen the record volumes of throughput during the year. As you can see again from the chart -- the take away -- highest ever tonnes in Newlands, Goonyella and Blackwater. On a calendar year basis, the biggest year that we have ever had with 6% more tonnes delivered by 2% fewer train starts during the period. It is representative, if I can be allowed something of a soapbox comment for a moment, of why an integrated railroad is so important. That wheel-rail interface is so much a part, so much a critical part of the ability that Mike, in terms of our Above Rail operations, but it's not restricted to our Above Rail operators. These are benefits that are being driven to the benefit of all of the operators in the system. The quality of the work that's gone on in improving in particular the resilience of the system, so that we've seen all-time record low speed restrictions in the system, for example, all important for us.

All of that of course translates into the dollars and cents and Keith will canvass that with us just now.

 Keith Neate  - Aurizon - EVP and CFO 

 Thank you Lance. Good morning everybody. The first slide here is included for reference only. Lance has already touched on it, so I don't propose to go through in any more detail than what's shown here. Turning to the asset impairment, a brief update.

The outcome of the asset impairment review is consistent very much with the briefing back in December. A total of AUD197 million with about AUD147 million in respect of rolling stock and AUD50 million on the strategic projects. In terms of the fleet, we continue to make progress in exiting the surplus fleet that's been identified. Two locos, 350-odd wagons have already gone, and there is a plan to exit approximately 50% of both by the end of June. The balance of that excess fleet as advised back in December, will be removed over the following three years.

In terms of strategic projects, again pretty straight forward. The one comment I would make is that from the 1st of July we have implemented a tighter internal policy regarding classification and capitalisation of project costs and put some significantly higher hurdles in. Such that in the prior period and the last half, we've seen an increase in the amounts that are being expensed to the P&L account of AUD13 million and AUD18 million respectively. Finally, the last point there is included for the avoidance of any doubt. All of the significant items will be included in the results in determining remuneration targets.

Turning to the bridge. Look, there's a lot of detail on this slide and in the 4D. I won't step through all of it. Lance has already spoken to the operational performance improvements that we've seen. A consequence of those operational improvements is that we have seen a 12% increase in volume growth on essentially a flat cost base, which is driving on a Group basis, a 16% reduction in cents per NTK.

What the bridge doesn't highlight is the revenue quality. In that regard, I'll go through that in detail in each of the segment reviews. But at a high level, we've had a 12% increase in volume delivered over the period, but only a 5% increase in the revenue line. In other words, we have about an 8% decrease in revenue per NTK. Three key drivers there; transitional tariffs have cost us about AUD37 million, DTC is AUD 26 million that relates both to triggering targets and also contractual realignment, and the TSC where again we've seen a contractual realignment of AUD18 million.

First half '14 versus second half '13, again a very similar story to the first half on first half comparison. Strong revenue against even stronger volume growth. So again, an impact on the revenue per NTK numbers. In terms of the OpEx, we've seen an 8.5% improvement in the unit cost performance and that reflects a number of one-off items coming through in the cost base. Period on period, we've seen an AUD11 million reduction in asset sales. We've seen a AUD10 million reduction in recovery of maintenance costs as one of our external customers, Queensland Rail, has reduced its requirements. We've seen an increase of AUD18 million in project costs as I mentioned earlier.

Underlying EBIT by segment, we will go through each of these in a little more detail. The only one I'll touch on here is unallocated, and in terms of second half '13 over first half '14, in order to address the continuing trend of cost improvements, again mentioned just now, an AUD11 million decrease in asset sales between the periods, AUD18 million increase in project costs, that's offset by the transformation savings in the corporate sector. Those project costs, we do not expect to continue at the current rate going forward. So the reality is the unallocated costs will reduce significantly in the next half.

Turning to Network briefly, a 20% increase in tonnes, a 23% in NTK should be a godsend for any regulated business. Our EBIT has gone back 2% or AUD4 million and this is where we are seeing the impact of the transitional tariffs. As you know, the tariffs are pre-agreed. We have capped the full year '14 access revenues at AUD739 million. The impact of that is in the first half. We have a AUD24 million reduction in access revenues and we have also seen an increase in the maintenance charges of AUD13 million.

That reflects the fact that the original forecast was for volumes of 186 million tonnes and we are currently tracking much closer to 200 million plus tonnes on the network. We will seek to reduce this spend in the second half of '14, or otherwise that recovery will come through as part of settlement on the UT4 determination. Interestingly, if you add back the access revenue shortfall, the operating margins are in line with the previous period.

Turning to coal, in terms of the coal business, a strong performance in the coal business with a 4.2 percentage point reduction in operating ratio, driven predominantly by the improvement in the operating performance of the business. As you can see, cents per NTK down 16%. I will not go through those metrics again. They are the ones Lance addressed earlier on.

Turning to the next page, though, we will address the revenue per NTK, which is where we have seen a significant fall period-for-period. Turning first to the Above Rail business, revenues up 11%, revenue per NTK down 5%. The detail is on the right-hand side of the slide there, but the two key drivers are DTC and customer mix. In terms of DTC, two impacts -- the higher volumes in the second half of '13. The consequence of that was that a number of our contracts did not reach the trigger point for DTC, so that fell away. Secondly, post year end one of our legacy customers elected to swap his DTC charge for an 8.5 million tonne reduction in contracted capacity, which obviously had a very material impact on earnings.

Interestingly again, if you adjust the DTC in both periods, revenue per NTK is flat at AUD23.40.

The other factor I mentioned was customer mix. Again, volume growth in the half -- 50% of it has come from one legacy customer where the yield is some 35% below the portfolio average, so obviously that mix is impacting on the Above Rail revenue. That impact of the change in the customer mix is actually further highlighted as we've seen the new form contracts increase from 41% in the prior corresponding period to 52% in the current period. At the same time as we see contract utilisation lift significantly from 74% -- sorry, from 79% to 94%.

As you know, under the new form contracts there is a much higher fixed revenue component, so naturally in an environment of higher volumes we have an automatic degradation of the revenue for NTK. Above Rail Revenue down 20%, entirely down to the movement in transitional excess revenues, as mentioned earlier.

Turning now to the Iron Ore business, again, the benefit, but also the consequence, of the revenue protection mechanisms in place are highlighted here. 42% increase in volume. Revenue increase of 13%, but an EBIT up only 5%. The protection there is the impact of the capacity charge in the first half '13, for tonnes that were contracted but not railed, now being railed, so we are seeing the revenue and the NTKs come through, which sees a degradation in the revenue per NTK.

Operating costs conversely up only 14%, reflecting the incremental cost of servicing that additional tonnage. The majority of the fixed cost in terms of rolling stock and facilities obviously already built into the cost base last year in anticipation of the volume increase.

Going forward for Iron Ore the focus is going to be very much on volume. As we previously noted, the Tallering Peak contract ends at the end of this financial year, or rather 31 July, so we will see a degradation of three million tonnes from that. But in addition we expect Mineral Resources will shortly elect to operate their own rail haulage going forward and we will see a four million tonne reduction from 1 September.

As the majority -- or rather, as all of the wagon fleet is leased and we have five locos operating that service which can be redeployed into the rest of the fleet as part of the integrated operating plan, we are not expecting a material impact on the operating margin going forward.

The freight business, a 300% improvement in underlying EBIT, albeit only to AUD20 million. The story here, again a mix of revenue and operating costs. Volumes are down 5%, with Bulk down 7% as we have seen the reduction in the TSC contract I noted earlier. The comparative periods include the CBH grain contract which was some 0.6 million tonnes and a weakness in the general grain environment. That contributed to a AUD35 million fall in revenue, offset to a large extent by the Intermodal business where we see a 14% increase in volumes as we have driven a strategy of being a niche player in that market. The principal new contracts there are with Woolworths and Coles, where we are seeing some strong revenue quality come through.

Operating costs down 6% in total on the reduced volumes. The cost out program is also contributing there, although the OpEx per NTK measure is only down 3% and that highlights the significant start-up costs that were incurred for the new Intermodal contracts which commenced late in the half year last year. Those costs are not expected to roll forward into the future periods.

Again, the focus for the freight business going forward will be cascading the operational improvements that we have seen in the coal business and driving the savings through both the Iron Ore business and also, more importantly, the freight business.

Look, nothing really to say on the balance sheet. We have completed the debt restructuring in calendar year '13 and we have driven some improved capital management, such that we have seen a significant reduction in working capital in the period. Otherwise pretty straight-forward.

Again, included more for reference than for raising any specific points, the structure, as we have advised previously, continues to be a focus for the business going forward, as does disciplined capital management. Lance will comment on the investment framework later on.

Turning to cash flow, a key point to raise here is the cash from operations is up almost AUD270 million, driven by the underlying improvements in EBITDA and working capital. Free cash flow, as you can see in the final bullet point there, if we go back to financial year '11, free cash flow was negative AUD760 million against a dividend payment of AUD86 million. Roll forward to the current half year, free cash flow is now AUD103 million with AUD175 million dividend payment, a very strong and substantial improvement in free cash flow of the business as we have driven the changes predominantly through EBITDA.

Finally, CapEx, we have included here the profile for the next three years to highlight very much the reducing committed CapEx profile of the business. We are forecasting some AUD900 million spend this year, reducing to around about AUD500 million in FY16. Sustaining CapEx will remain around the AUD350 million mark, although there are some additional spends in FY15, rather, in terms of Network track maintenance equipment. With that, I will hand it back to Lance. Thank you.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Turning then perhaps to a couple of issues that are alive at the moment and then thinking a little about the future and outlook. Firstly, with respect to what is going on with enterprise agreements, John Stephens updated us toward the back end of last year. By way of reminder, post the end of the calendar year all of the enterprise agreements in both Queensland and New South Wales have expired. As you know, we have been actively negotiating in both of those geographies for many months.

If I can go to Queensland firstly, it is frankly slow. One hesitates to say painful. We do, with the intervention and support, however, of Fair Work, have a bargaining timetable of three days a week that will take us through until next month. The reality, though, is that the unions continue to maintain the status quo, particularly around those iconic issues. So whilst there has been a reasonably wide range of the issues that have been effectively dealt with, we all know that the core matters remain at large. So we continue to put a great deal of effort, focus, attention to all of that. We continue to liaise, as you would expect, very carefully with our customers around how we are progressing.

New South Wales is a little different. We have trundled somewhat further from a process point of view. Indeed, under the auspices of Fair Work the unions were able to take a ballot to get approval to take protected industrial action. That ballot -- to update you from the words on the slide -- was concluded and the results posted on Friday, which does indeed give those eligible employees in the Hunter Valley the ability to be able to take protected action. They, by way of reminder, need to give us three days' notice in order to be able to do that. That certainly has not occurred at this stage. The numbers, whilst you can see the enterprise agreement represents some 200 -- or covers some 200 of our staff in the Hunter Valley, the numbers that are eligible to take protected action are much less than the 200.

Let me pause to give you, though, a little bit of context and our view in this space. We have built a business in the Hunter Valley, as you all know, essentially from scratch within 10 years to being a very significant, a very important and a very opportune, from a growth point of view, part of our business. We would say very much that the success that we have enjoyed in being able to build such a business has obviously been attributed to a wide range of factors. But at its core it is around our ability to be able to provide a consistent high level of performance to our customers. We have, and have had, some really terrific arrangements with our staff in the Valley that has underpinned that kind of performance.

As we have come to the bargaining table then, quite frankly we have been very conscious of the role that our employees have played in the establishment of the business. But equally, of course, we are very focussed on what we need to do for our customers and how it is that we are going to underpin the continued growth of our business. On the one hand, therefore, we have made an offer to our employees which we would regard as being fair. Indeed, if anything, on the generous side of fair when you think about the broader context of what is going on in our part of the world, in the transport sector and in manufacturing generally in Australia at the moment.

So, for example, we have offered a 12% over three year wage increase. We have offered a AUD2000 sign-on -- effectively sign-on bonus for the new agreement. We have offered some modifications to long service leave to bring it into line with other operators and our own operations elsewhere. We have offered some changes in the rostering arrangements that would see less hours rostered on a weekly basis. All told, as I say, on any reasonable analysis, fair, bordering on generous.

As recently as two weeks ago, the counter that was put to us by those that represent our employees would have seen, for example, a north of 20% increase in wages over the same period, retrospectivity around a whole host of these changes. Far from the maintenance of the kind of flexibility that we have got, the introduction of what I would describe as outdated, outmoded, legacy, restrictive practices that altogether simply would be unacceptable in terms of our ability to be able to continue the hallmark quality service that I have described for our customers.

Frankly, we would hope that -- and we will continue to be diligent in pursuing this in discussions with our employees -- there will be a return to the bargaining table and a return, or indeed, more than a return, the application of some common sense in all of this. We are simply not, however, relying on hope, as Mike and John have said to you in the past. We have a range of mitigations that we can put in place with our CNM folks. We are maintaining very close relationships and information exchange with our customers, so that if there were to be, heaven forbid, protected industrial action, that we would minimize the impact of such action on our clients. But we have reached line-in-the-sand territory, to tell you the truth, and we are simply not going to prejudice the future of our business through such outlandish claims.

Turning then to the other matters, which are very much, of course, the subject of current and ongoing discussion, and that is this broader area of network regulatory update. To be honest, there is not an awful lot more to update you than was the case in December. The discussions have continued across all of these fronts. Certainly, with respect to the timeline for UT4, as you can see, a draft determination is expected around the middle of the year. We would see that that is most likely going to lead to conclusion around the end of the calendar year. In the meantime, QCA is expected to publish their pricing and revenue position in a month or two's time.

From a transitional tariff point of view, Keith has already referred to the arrangements that are in place for this year. Given what I have just said, we can all see that there is almost an inevitability about the need for further transitional arrangements for FY15, and hopefully, as the timeline plays out in the way that I have just described, then there will be the true up arrangements that typically take place, as you well appreciate, in the access environment.

SUFA is an important part of all of that. It has been a very, very long-running set of discussions, as those of you who are listening to me would know only too well, with the to and fro of submissions towards the back end of last year. QCA themselves have become more actively engaged in recent days around the resolution of this matter. We certainly see that it is important and I know our customers do as well. Alex and the team are spending a great deal of time, generally in the UT4 space and specifically in the SUFA space, because of the inter-relationship between the two things.

AT5, just by way of update as you can see there, you are all aware that QCA published a draft decision in November that did not approve our access undertaking. We have elected to withdraw and to focus on the matters that I have just been talking about then to return to AT5.

Let me change gear then, if I can, for just a minute or to here and to talk about the future, to talk about the context in which we see ourselves operating in the future, as a lead in to discussing briefly our strategy and our investment options, as we look to the next few years.

We've often said, as you well know, that we are certainly not at the bearish end of global views from an economic point of view and especially with respect to China. That certainly is, in my view, summed up on this chart. There is no doubt that the growth rates in China have come off. There is no doubt that the growth rates in China will continue to come off. What's often, in my view though, lost in translation is that the absolute size of the Chinese economy continues to grow. Even with the growth rates that we see today, the absolute level of growth continues to be greater than was the case a few years ago, when China was enjoying double digit growth.

Put another way, as the middle of this chart says, if China's economy were to grow at 7%, not even the 7.7%/7.8% that we're seeing at the moment, by 2022 it will have doubled, compared to 2012. The takeaway? In absolute terms there is still enormous growth in the Chinese economy and, of course, much the same could be said for India.

It is the consumption from these emerging economies which, as we all know, is going to underpin global energy growth. If I can just go to one brief observation arising out of this slide, on the right-hand side you see by way of kilowatt hours per capita, the consumption of electricity in three of the western world's most advanced economies and compare that with India and China. Again, if you look to the observation toward the top left of this chart, should China's per capita consumption reach Germany's, the lower of those three developed economies, China's national electricity consumption would be more than 2.5 times what it is today.

How is that additional demand going to be delivered? We all understand the debate about coal and about coal versus other forms of energy delivery. We simply make the point in this chart that based on the IEA data, in both China and India, coal remains and will remain, at least through 2020, as is put here, the most competitive way of delivering that demand for additional energy.

How does that then translate for coal? Once again, taking the data from the most recent of the IEA studies at the back end of last year, you can see the chart on the left demonstrates just how much juice there is left in this lemon, even given the views about coal, even given the views about the relative merits of coal versus other forms of the provision of energy. You can see that we're not talking about trivial tonnage increases that are going to lie in front of us in future years.

Again, I thought the snippet in terms of the drivers of demand on the top-right is instructive. There are almost as many people in India today who do not have access to electricity as is the total population of the United States of America, just to put that stark statistic into context. Are we getting carried away with all of this? Clearly not. Clearly global warming; clearly the debate about coal; clearly, all of these things are very important issues for society, for business, for Aurizon.

Nonetheless, the combination of the kinds of factors that I've briefly just described is what drives our confidence, that there remains a very, very substantial opportunity for growth in the markets, in the resource sector, which we serve.

Which takes us then to our strategy and there is nothing new here. First and foremost, it is about fixing the existing business. We've described that by way of goals as firstly the achievement of the 75% operating ratio in 2015. We've subsequently said that the target for '16 is 73%.

But the real target, the light on the hill in this area is to achieve world class levels. It seems to me that the importance of the data that we've put in front of you today, the momentum, the progress, the level of discipline, the level of planning and execution against those plans, that we're able to demonstrate or give confidence about our ability to be able to run through 75%, run through 73% and continue into that globally competitive space.

That then is very much the overwhelming focus of all of the men and women in this company on a day-to-day basis. Beyond that though, is all of the opportunity for growth I've just again described. As much as we do face the headwinds that we've seen over recent times, no doubt the continuing headwinds that we're going to see over the next couple of years, this is not, as I keep saying, a zero growth environment. We continue to work in what we would describe as an appropriate way around the achievement of those kinds of growth opportunities.

As we do so, by way of reminder, we are very focussed on what the investment criteria are. We're not, I explicitly say to you, chasing growth for the sake of growth. We are about chasing value. We are about creating value for the owners of the business. So again, as we think about those growth initiatives and opportunities, we measure them in these ways.

Firstly, of course, against the fit to our enterprise strategy, our objectives and importantly, of course, our capability. The one in the middle though, is the core, the guts of it. It is about returns. It is about measuring off what those opportunities are, about delivering for our owners the very best value, the very best returns out of this business. In so doing, of course, it is about risk. You would appreciate the amount of work that has gone in in our business since privatisation, to a much more sophisticated ability to be able to understand and identify risk and to mitigate risk on the other hand. But all of the growth that I'm talking about, of course, has to have appropriate and manageable exposure.

The opportunity on the back of the stuff that Keith has been talking to you about this morning and that I've been talking to you about is coming to an inflection point. Clearly with the degree of committed capital that we have as we finish those bigger projects that are in front of us and therefore those big project capital expenditure levels are diminishing. On the other hand, we have the increase in the free cash flow that Keith I think eloquently spoke to at the back end of his remarks this morning. Opening up, perhaps not quite as dramatically as if you would put a ruler across or a scale across this cone. But nonetheless, opening up for us very substantial opportunity in this growth space.

We see ourselves as being able to take advantage of that in the ways that are set out here, of course, to the extent that it does make sense in the way that I've just described growth per se. Secondly, it is about the opportunity to continue our capital management initiatives and self-evidently, there is the opportunity for a combination of both.

Finally then, let me come back to the more immediate term, firstly with respect to our outlook. We've spoken this morning about the momentum in the business at the moment and in particular the strength of the tonnages. You've seen the data for the half year. I can tell you that that has continued in to the New Year. We had record volumes in January. The current month is running equally strongly toward those same kinds of record volumes this month.

That's not withstanding Cyclone Dylan, which saw the loss of 1.5 million tonnes of throughput and about AUD5 million of revenue. Behind, or as a consequence I guess, of all of that, as you can see today, we have lifted our guidance to 207 million tonnes to 12 million tonnes for the full year of coal haulage. That, of course, assumes that we don't have anything which is materially out of the norm, either with respect to the weather, given that we've still got more than six weeks to go of the wet season in Queensland., and frankly, we're all delighted to see what's going on with the rain at the moment. But we are suitably cautious in that space, particularly having regard to our recent experience. On the hand, of course, the possibility of industrial action.

In summary then, as I pause here in a moment to invite your questions, another strong year -- half year. More than that though, as I commented a moment or a two ago, I think the ability to be able to demonstrate the range of initiatives, the ability to execute against those things in a superior way, the fact that there is no one simple silver bullet, even mini silver bullet -- it is about running the kind of world class disciplined railroad that we've been discussing with you for all of these times.

We are on track to achieve the 75% operating ratio in 2015 and indeed, to be able to get beyond that. As you'd appreciate, doing the sort of things that I was just describing, around planning and execution, is not only going to get us to the 2015 objective, but those things put in place now are also going to be the things that underpin the momentum beyond 2015. We nonetheless have the headwinds of the global economic environment, the circumstances that our customers face, and within our own business, the industrial relations environment of which I've said enough.

It has been a good half and as I sit down, I certainly again acknowledge the wonderful work of all of our 7600 employees. The fact that there are 22% less of them now than there were at the time of privatisation, the fact that we talk about the range of initiatives, the nature of change, all of that has been not only taken on board, but embraced by our employees and it is their work every day that delivers that superior outcome for our customers.

Thanks and Keith and I would be happy to take your questions.

 QUESTION AND ANSWER

 Anthony Moulder  - Citigroup - Analyst 

 Good morning. Anthony Moulder from Citi. If I look at the transformation benefits delivered in the first half at AUD59 million -- that's obviously against what you previously suggested for the full year at AUD90 million -- can you talk to the profiling that you saw as far as the first half and the expectation for the second half? Because it looks like -- I would expect you to increase the velocity of those savings in the second half.

 Keith Neate  - Aurizon - EVP and CFO 

 Certainly and you're absolute right Anthony. Obviously in terms of absolute cost reductions across the corporate centre, they were affected pretty quickly in the first half after the announcement of the program. The redundancy program, both across the operations group and the corporate groups were effected later on in the period. So the majority of the corporate team left during November/December, 50 or so people are leaving during the course of January and February to ensure that we've got an orderly transition of the business and the same with the operation side. So you'd expect to see a ramp up in the second half of the year.

 Anthony Moulder  - Citigroup - Analyst 

 Thank you and secondly, to the EBA negotiations through Queensland. I guess while they're -- as far as this three days a week negotiations through Fair Work, does that give you some level of protection against the kind of industrial actions that could come through as far as New South Wales?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 At a technical level, yes it does. By that, I mean the ability to be able to go to ballot is governed by Fair Work Australia. The fact that we continue to work in that sense hand in glove with the Commission, Anthony, means that we're in exactly the space that you describe.

 Anthony Moulder  - Citigroup - Analyst 

 Lastly, if I could. If we think back to six months ago, we were talking as far as an announcement regarding the Galilee Basin, quite obviously one of the growth options. Can you talk to where that's at and where you see the growth option in the Pilbara as well, please?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Yes, sure. You'll -- beyond the discussions that we had at the full year, of course, we announced late in the year the progress to that next round of documents that we'd signed. That takes us, Anthony, to the point where the next stage is definitive documents. So we're at that advanced stage at this stage. That doesn't mean that we're over that line. There is still a good deal of work to do. But from that perspective, I'd be surprised if we're not at definitive document stage, assuming we get there at all, within the current half. So it's that sort of timeframe and we're that advanced.

The Pilbara is a bit different because, as discussed with you before, that's much more long dated. We all understand that the goal there is the establishment of open access railroads in that part of the world, with the objective of opening up the landlocked tonnes that so represent the Pilbara outside of the majors. It is therefore, long dated in that sense. It's not, as I've said a number of times, for the next five minutes. We do however continue to be very happy with the progress that we're making. Most of which is around those things that would facilitate the ability to go ahead, to be candid with you, as opposed to being in a position where we have contracts signed.

But for example, as you'd well appreciate, you need regulatory environment, you need State Act type environment to be settled and we've had very high levels of cooperation, particularly from the various arms of the WA Government. So, as I say, my summary would be still very long dated, but we are very happy with the progress that we're making.

 Matt Spence  - Bank of America Merrill Lynch - Analyst 

 Lance, Matt Spence from Merrill's, hi. Coal volumes have been great. But there is still a fair bit of pressure on coal prices. Can you talk about your clients in Queensland? Do you think they're all profitable at current prices? A lot of them have taken out costs pretty successfully. Have you had to have any conversations about price flexibility over the past three to six months with any of those miners?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Yes. There is a lot in that Matt, isn't there? But it is the guts, isn't it, of where we are? Do I think -- do we believe -- does our analysis that Mara's team does, not only on a customer basis, but on a mine basis, I might say to you, suggest that all of our customers are profitable? Clearly not.

The proportion who are unprofitable has reduced, however. That is on the back of the very kind of initiative that you describe in the way that you framed the question. But the -- certainly, the bigger of our customers who've made public presentations in recent times, of course are talking very large improvements in their cost and efficiency base. I think BHP have said AUD1 billion in 12 months with respect to BMA, for example.

That is a consistent theme across all of the discussions that we have with all of our customer base. The name of the game here is whatever that old joke is with respect to outrunning the bear or the crocodile or whatever. But it's a relative gain at the moment, and certainly the feedback that I get is that our Australia customers are very, very focussed on retaining, indeed improving, their market share of the available demand. That's all about a cost and efficiency game on the one hand and it's all about a consistency of supply game, which is where our contribution to that value chain comes in, that it is just extraordinarily important that we're able to deliver the tonnes as and when; that we're able to give our clients a confidence that they can sell against the available market even at the increased rates that we've been able to demonstrate in the last six months. I think there was an element of your question I missed.

 Matt Spence  - Bank of America Merrill Lynch - Analyst 

 Just the specifics around whether you've had any conversations around price flexibility with some of the smaller guys.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 I think your -- I think the addendum to your original question was in the last two or three months, to which the answer would have been no, but on a more open ended basis, yes. Look, we're very conscious of our position in all of this. It's been a very small proportion of our clients that have spoken to us in those terms. We have been prepared to be flexible, provided at the end of the day, it's a zero sum game, Matt. In other words, whether it has meant back end loading rates or back end loading volumes in order to provide relief up front. In other words, we're approaching it from very much a commercial basis.

Sorry, the third element that we have done is extend the life of a contract as part of a reaction to this kind of approach. Again though, it's been as I say a relatively small number of customers that have come to us in that way.

 Matt Spence  - Bank of America Merrill Lynch - Analyst 

 Just one last one. You mentioned in the presentation a bit of flexibility that you've given to one of your customers, relief on 8.5 million tonnes of contracted volume. Is that in Queensland? When does it apply from?

 Keith Neate  - Aurizon - EVP and CFO 

 That's not relief. That is simply a contractual term in terms of offsetting a DTC payment for a contractual reduction. It's a one off, and it's occurred.

 Matt Spence  - Bank of America Merrill Lynch - Analyst 

 Thanks very much.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Perhaps while we wait for another question here in the room we can go to the phones. Simon Mitchell from UBS, you're first up.

 Simon Mitchell  - UBS - Analyst 

 Good morning, Lance. Good morning, Keith. Just on the contract utilisation in the Above Rail business, clearly very high at 94%, and I think the number's above 100% in the Hunter Valley. Do you think you're getting to a point where customers are prepared to make this more permanent and actually contemplate raising the volume levels in some of the contracts? Or do you think the industry's going to continue to expect you and your competitor to provide spot capacity?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 It's a really interesting question. Some of my colleagues might opine on this. I don't see the kind of change that you're talking about as yet. We are, Mara's continuing to see -- if I can put it in those terms -- a reasonably substantial demand for spot tonnes. So I think everybody's in cautious mode at the moment, frankly, Simon. I think everybody would prefer to suck it and see for a while longer before putting stuff more in to that committed space.

 Simon Mitchell  - UBS - Analyst 

 Sure. On the Iron Ore business, the 7 million tonne per annum step down over the next year or so that you alluded to in the presentation -- I know you indicated that the margin, you wouldn't expect to be impacted. Are we to assume that there would be some proportional impact on the dollar value of EBIT?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Yes, yes, yes, it will.

 Simon Mitchell  - UBS - Analyst 

 Right, okay. Also, just a third question on the unions. I think you've indicated previously that the EBA discussions at the moment don't have a material bearing on the FY15 EBIT margin guidance. Is that correct?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Yes, yes, that's right. I mean the general observation that I would make is -- without going over the ground that I covered before -- everything that we've done to date has been done under the banner of the existing arrangements. We remain 100% confident that we can continue to deliver the kind of change, the momentum of change that we've been describing to you even under the existing arrangements.

Does that mean that the changes that we're seeking are a yawn? No, they're not, because they would allow us to reshape and reconfigure. We're not looking for anything which is beyond that which our competitors already have but, frankly speaking, we've got a track record of "we'll do it anyway".

 Simon Mitchell  - UBS - Analyst 

 So therefore productivity improvements achieved under this round of negotiations you would expect to contribute to EBIT up -- or margin uplifts beyond FY15?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Yes. Sorry, mate, yes, yes, because of that momentum.

 Simon Mitchell  - UBS - Analyst 

 Okay, right. Thank you.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 While we're on the phones let's go to Scott Kelly at Morgans.

 Scott Kelly  - Morgan Stanley - Analyst 

 Morning, Lance. Morning, Keith.

 Keith Neate  - Aurizon - EVP and CFO 

 Scott.

 Scott Kelly  - Morgan Stanley - Analyst 

 Just the first question, Keith, just on accounting. With the QCA due to put out their revenue and pricing in March, I'm just wondering how that impacts the way that you will account for the Network division if it is materially different to your expectations and/or the transitional arrangements.

 Keith Neate  - Aurizon - EVP and CFO 

 I think the pricing paper that's going to come out from the QCA in -- I think it was scheduled for March. It's probably slipped a little bit, but is only going to give us a steer in terms of which directions they're moving; it is not going to be a determination. So I think, in that regard, we'll need to wait until the UT4 determination is finalised before we can determine exactly how we're going to recognise any shortfall or any excess under the arrangements. I think in that regard, with UT4 not scheduled for determination until calendar year '15 we'll be looking at transitional tariffs for FY15.

 Scott Kelly  - Morgan Stanley - Analyst 

 My other question's in relation to the freight division, which your volume's down in Bulk. It looks like your revenue quality has improved. I'm just wondering if you can just give me a bit of insight as to what's happening there.

 Keith Neate  - Aurizon - EVP and CFO 

 That reflects the improvement we've seen in the Intermodal business, where we had a 14% lift in volumes, and the quality of the customer base and the quality of the revenue that we're achieving there is offsetting the reductions that we've seen in the Bulk business.

 Scott Kelly  - Morgan Stanley - Analyst 

 So you're seeing price increases in Intermodal?

 Keith Neate  - Aurizon - EVP and CFO 

 It's not simply price, but price is a part of it, yes. There's haul length. There's cost base in terms of margin that we can drive, but it is part of it, certainly.

 Scott Kelly  - Morgan Stanley - Analyst 

 The last question's just with regards to the capital management. Given your views on China and growth opportunities, and given the CapEx profile over the next 18 months, I imagine that capital management is not something that you're thinking about over the next 18 months?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 I don't know that there's a lot more that we can say than I said on the way through. The answer is no, it is. The mix is the mix that I showed on that slide.

 Scott Kelly  - Morgan Stanley - Analyst 

 Okay. Thank you.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Let's go to Cameron McDonald from Deutsche.

 Cameron McDonald  - Deutsche Bank - Analyst 

 Good morning, guys. A quick question. Twelve months ago, at the half year result, you took a reasonably large accrual -- I think the deficit tonnage charges and revenue cap. Can we just get some detail on what has happened this year and how much you have accrued, if any? Just noticing that in Network as well you've highlighted that your full year impact on the transitional revenue to be AUD60 million versus last year. So you're not actually accruing that though.

 Keith Neate  - Aurizon - EVP and CFO 

 The deficit, Cameron, is AUD60 million because that's the agreed access fee for the year, AUD739 million versus the prior period. The way we've recognised that is based on volumes that we've railed, plus a forecast for the remainder of the year. In terms of the comparison to last year, I think what you're referring to is the take-or-pay adjustment that we saw. Again, that was as at the 31st of December. We have to make a judgement call on the position with regard to take-or-pay.

The volume profile, as you know, changed dramatically in the second half of the year, and we saw a significant lift in volumes in the second half the year, which meant that the accrual at December had been overstated and we saw a swing in the second half. It's less obvious this year because we've seen a far more consistent growth in the revenue profile.

 Cameron McDonald  - Deutsche Bank - Analyst 

 So we shouldn't expect a big reversal for the full year if it continues at the current rate. The other question I had was just on the improvement in working capital, that positive AUD200 million impact on cash flow. Can you just give us a bit more detail around what's happened there?

 Keith Neate  - Aurizon - EVP and CFO 

 There's two points there, Cameron. Included in that AUD200 million is, obviously, the impairments, which is a non-cash movement, and also the improvement in working capital. The working capital improvement is simply around debtor and creditor management. We've extended credit terms and we're pulling the debtors in faster, nothing more than that. It's just more disciplined management.

 Cameron McDonald  - Deutsche Bank - Analyst 

 Okay. Thanks, guys.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Andrew Gibson from Goldmans.

 Andrew Gibson  - Goldman Sachs - Analyst 

 Sorry. Can you hear me now?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Yes.

 Andrew Gibson  - Goldman Sachs - Analyst 

 Sorry about that. Two quick questions. First of all, just a point of clarification, if I may, on the comments around the enterprise agreements. So you're saying that you don't require the flexibility being sought under those EAs to deliver the 75% operating ratio target?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Yes. Clear, unequivocal yes.

 Andrew Gibson  - Goldman Sachs - Analyst 

 Okay, thanks. Then the second question, just looking at the -- maybe one for Keith -- looking at the movement in provisions. It was about a AUD55 million reduction in the period. Just wondering what that relates to.

 Keith Neate  - Aurizon - EVP and CFO 

 That is a reduction predominantly in bonuses as the impairment charges I noted earlier and the VRP cost will be included determining in management bonuses this year.

 Andrew Gibson  - Goldman Sachs - Analyst 

 Okay. Thank you.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Finally, on the phones, Matt Crowe.

 Matt Crowe  - JP Morgan Chase - Analyst 

 Good morning, Lance and Keith.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Hey, Matt.

 Keith Neate  - Aurizon - EVP and CFO 

 Hi, Matt.

 Matt Crowe  - JP Morgan Chase - Analyst 

 Lance, can you just perhaps elaborate a bit on your comment that you said you'd been talking to customers and suppliers to potentially minimise any impact of industrial action should that happen? Can you just tell us a little bit about what some of those actions may be?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 I could, but then I'd have to shoot you, Matt.

 Matt Crowe  - JP Morgan Chase - Analyst 

 I thought you'd say that.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 It is probably the sort of thing that you're thinking about, but it's understanding, in particular, what the demand profile looks like and what the timing of that demand profile looks like, how we can work together to work to those things. Look, not to be facetious about it, my hope would be that we will continue to meet and resolve the -- particularly in the Hunter Valley -- these outstanding issues, for the reasons that I said in the presentation. To the extent that we can't do that, then we do have a series of mitigating plans that we would proceed to.

 Matt Crowe  - JP Morgan Chase - Analyst 

 Thanks.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Okay. There's a few more in the room here.

 Scott Ryall  - CLSA - Analyst 

 Thanks. Scott Ryall, CLSA. Lance, in the context of the Iron Ore comments that you've made, one of the things in the MD&A you've stated is you've got five extra locomotives which you'll redeploy throughout the business.

I was wondering if you could give us an idea of where exactly they can be redeployed and, in doing so, can you just comment on the payback periods that you're looking at for the Iron Ore business and, I guess, what is the residual in terms of the book values of these trains -- not so much for the contract you knew was coming to the end with mine life, but more the Mineral Resources side of things?

 Keith Neate  - Aurizon - EVP and CFO 

 In terms of the rolling stock, the wagons are obviously on lease, so they will return to the lessor. I think the -- looking at mine -- the lease runs out at approximately the same time as the contract. In terms of the locos, the redeployment will occur as part of the integrated operating plan. I don't have -- unless Mike has a specific as to where they'll go -- but they'll be amortised over expected use for life. So in terms of redeploying them we'll continue to earn a return.

 Scott Ryall  - CLSA - Analyst 

 What can you say though in terms of the Iron Ore contracts around payback periods and things like that?

 Keith Neate  - Aurizon - EVP and CFO 

 Sorry, I'm--

 Scott Ryall  - CLSA - Analyst 

 Is this something you would expect as part of signing an Iron Ore contract?

 Keith Neate  - Aurizon - EVP and CFO 

 Naturally, which is why many of the wagons were leased, because we knew the term of that contract. In terms of pricing a contract we look at the life of the asset, we look at its redeployment opportunities, we look at the opportunities, obviously, to extend existing contracts and redeploy them. We, with the integrated operating plan, are moving very much to a whole of fleet approach rather than an individual contract basis, optimising the utilisation of that fleet by moving them around and ensuring we get full utilisation, which is where a lot of the value is coming from in the productivity improvements we've talked about today.

 Scott Ryall  - CLSA - Analyst 

 All right. Acquisitions or growth initiatives -- your turn, Lance. Could you be a bit more specific about what you think Aurizon is uniquely placed to offer value on, in terms of some of the growth initiatives? I mean you've reported to be interested in Port of Gladstone sale. Obviously, there's some fairly large growth initiatives out of Galilee and Surat if they do ever come off, and the Pilbara is well reported and you've kept us well versed on that. Is there anything outside of that that you think are interesting opportunities, sectors or segments of the market that I haven't touched on just now?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 I think the answer to your question -- and you wouldn't expect me to go to any detail, is the guidance that we've given -- the small "g" guidance -- that we've given around the business as we see it. Clearly, we're predominantly in the heavy haul bulk rail business, and we've been very clear about our interest in extending that kind of engagement into the ports sector -- witness both Galilee and the Pilbara.

I'd be cautious about extrapolating, and I'd be cautious about believing too much of what you read in the newspapers. It is very much back to the criterion that I spoke about in the presentation -- what is our capability and our resource base in the bulk sector? It is in -- for example, in respect of integrated supply chains on the one hand and multi-user facilities on the other.

The final observation, I'd guess, is that whilst, for all the obvious reasons, the concentration is around the big bulk sector, equally, we have the expertise in the other parts of our business, and we've -- Keith's just answered a question with respect to Intermodal. For example, we're very focussed on where we do and don't want to play in those areas, but they're not there by accident. So it flows from that that -- in answering your question in that most general way, as opposed to any kind of specific way -- we're always interested in that space, Scott.

 Scott Ryall  - CLSA - Analyst 

 Okay. Can I maybe just push my luck with one further on that one? You've obviously got optionality around the port at Abbot Point. So do you consider -- when you talk about integrated supply chain opportunities, do you consider your expertise extends to operating a multi-user port?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 It does, as long as the qualification is that doesn't necessarily mean that -- it doesn't necessarily mean that there will be somebody there wearing an orange shirt with an Aurizon logo on it; that there are, as you well appreciate, multiple ways in which you can operate via subcontracting, consultancy or building the capability yourself. They are all options that we're actively looking at.

 Scott Ryall  - CLSA - Analyst 

 Okay, great. My last one -- I promise -- your stock price over three and a bit years has doubled, but--

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Sorry, I didn't hear that, Scott.

 Scott Ryall  - CLSA - Analyst 

 The stock price chart is in there. I guess what I'm -- it's a bit surprising, I guess, then that your Board sits it on a first strike. I was wondering if you could just talk to -- given you're the only -- we don't have John here or anyone else to comment -- but what are you looking for in terms of the Board and the interaction with shareholders, that perhaps they didn't do over the last 12 months? What's been the internal soul searching on the back of that, because it wouldn't be many companies that have doubled their stock price over three years, that come under the pressure on those sort of things?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Look, it's a good and appropriate question, Scott, and it is a matter for the Board, but so as not to give any sense of wanting to duck the question, the guts of the way that you frame the question is exactly what Board has been going through, particularly since those events in November. Board has determined on a way forward and I'm more than happy to say that the characterisation, overwhelming characterisation of that is greater engagement with the investor and stakeholder community around our business.

So again, it is a matter for the Chairman and the Chairman of the rem committee, but you will be hearing -- in fact in I think pretty near-term -- you'll be hearing about their desire to engage and indeed lift the level of engagement as the Board continues to reflect on what the appropriate response is.

 Scott Ryall  - CLSA - Analyst 

 A far more boring question. Keith, you mentioned one-offs in the freight or Intermodal. How much were there for the half? Because you say they're not going to reoccur.

 Keith Neate  - Aurizon - EVP and CFO 

 There's -- I'm just trying to think. There was AUD11 million in asset sales -- sorry you mean -- sorry in the freight business. It probably runs to just north of AUD10 million I would say. I don't have the specific number but that's the sort of framework.

 Scott Ryall  - CLSA - Analyst 

 The other thing is you made comment in your speech about you've changed your policy to expensing items versus capitalising items?

 Keith Neate  - Aurizon - EVP and CFO 

 No, I didn't. What I said was we have introduced new policy that has higher --

 Scott Ryall  - CLSA - Analyst 

 Okay, sorry for the poor wording --

 Keith Neate  - Aurizon - EVP and CFO 

 But we still capitalise and we still expense projects.

 Scott Ryall  - CLSA - Analyst 

 Can you just run through the numbers again and what the change has been, because it sounds like -- my interpretation was there's AUD18 million which would otherwise have been capitalised which is now being expensed through the P&L. What was the difference last year or have you restated last year's numbers?

 Keith Neate  - Aurizon - EVP and CFO 

 The half-on-half was AUD13 million. The second half to first half was AUD18 million, but we're also now seeing in this half a significant reduction in the run rate on those capital projects.

 Scott Ryall  - CLSA - Analyst 

 Which will be expensed.

 Keith Neate  - Aurizon - EVP and CFO 

 Not all of it, no, because obviously we're in development phase with Galilee, so there's opportunities to capitalise there, as long as that approach remains appropriate. As soon as there is no outlook for the definitive documents to reach a conclusion then we'll be looking at the retention of that on the balance sheet.

 Scott Ryall  - CLSA - Analyst 

 The final question on the accounting is you just run through your Network business because you've got a fixed revenue where the coal volumes are exceeding expectations, so it would seem like you've over-collected in the first half and you'll have to under-collect in the second. At the same time you're talking about you've got a maintenance cost which is now running above expectation because of the higher volumes itself. Is Network actually under- or over-collecting in effect in the current half, and how does that play out in the next six months?

 Keith Neate  - Aurizon - EVP and CFO 

 I'm not sure why you're saying it's over-collected in the first half.

 Scott Ryall  - CLSA - Analyst 

 Volumes are well above what would have been your estimated volumes for the period?

 Keith Neate  - Aurizon - EVP and CFO 

 They are, which is why we're recognising AUD24 million shortfall in the first half. The outlook for the second half, which is based on forecast, is based on the fact that January and December are much lower railings, sees the split [24-36] between the first half second half. It is though based on judgement and estimate at the time.

In terms of the maintenance cost that is simply a reflection of an increased maintenance cost to support the increased volumes in the first half. As I say, when the transitional tariffs were agreed, 186 million tonnes was the outlook. We're currently railing significantly stronger than that.

We've seen that increase come through in the maintenance cost. If we can manage that in the second half we will continue to do so. Otherwise it'll form part of the UT4 determination.

 Scott Ryall  - CLSA - Analyst 

 Okay.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Perhaps we can go to a last question from the phones and then a last question here, given the time, I think in the room. But Nicholas from Credit Suisse.

 Nicholas Markiewicz  - Credit Suisse - Analyst 

 Morning all. A quick question on the BMA contract. Given it's presumably ramping up to contractual volumes as we speak, can you give us some colour as to how the contract is performing currently relative to KPIs for the new form contract?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Yes, we're performing well. There's no doubt that -- I guess being a little cautious about being too much more specific than that -- but there's no doubt that the current level of performance that Mike and the team are exhibiting to BMA gives us overwhelming confidence about the ability to be able to meet the KPIs under the new form contracts.

 Nicholas Markiewicz  - Credit Suisse - Analyst 

 Sure. Then one more, further to Simon Mitchell's question what is your expectation for volumes with a lot of the smaller tier 2 miners in the next 12 to 18 months, specifically given, from what I understand, a lot of them are running down their low strip ratio reserves. Would you expect them to start tapering off coal volumes in the next six to 12 months?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 No, not necessarily. It's not that we're not alive to the kind of issue that you raise. Indeed, that's why, as I alluded to in the earlier response, Mara's team watches the market and watches the individual performance of customers and mines very, very closely.

But there's -- as we sit here today -- probably as much reason to believe that it would go the other way and that with the benefit of the kind of initiatives that all of the customers are taking in the cost efficiency productivity space that the imperative for chasing volumes increases.

 Nicholas Markiewicz  - Credit Suisse - Analyst 

 Okay, thanks guys.

 Paul Ryan  - Evens and Partners - Analyst 

 Paul Ryan, Evans and Partners. Just on the freight division, AUD1.1 billion in revenue, can you give us a sense of what proportion of that is on legacy versus new form contracts to use the analogy from coal? So how - what's the size of the prize there? I suspect the customers (inaudible) are paying. A big step-up in rate might not be as great but can you talk to those dynamics?

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 Keep note of that, specifically.

 Keith Neate  - Aurizon - EVP and CFO 

 Look, it's fair to say, Paul, that predominantly legacy form contracts, they're being worked through at the moment. They are shorter term in general. Obviously the Iron Ore ones are on the more standard coal style ten year contracts, but within the freight business, in particular Intermodal, they are on much shorter term contracts. So the ability to roll them over into more new form style will occur reasonably quickly.

 Paul Ryan  - Evens and Partners - Analyst 

 What's your flexibility around walking away from those contracts if you can't get an appropriate return when you renegotiate?

 Keith Neate  - Aurizon - EVP and CFO 

 We -- as Lance has mentioned -- we seek to achieve the appropriate returns on all of our contracts and in that regard if contracts are not strategic and failing to meet the returns we're looking for then absolutely, we'll make a decision to walk away.

 Lance Hockridge  - Aurizon Holdings Limited - Managing Director and CEO 

 I think we have indeed exhausted the questions. So it only remains to thank you for your attendance both here and online and we will see some of you I guess a little later in the day. Other than that, happy to follow up with any of your questions. Thanks very much everybody.

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