Final Transcript	

       	

Conference Call Transcript

QRN.AX - Preliminary 2011 Qr National Ltd Earnings Presentation and Webcast

Event Date/Time: Aug 29, 2011 / 12:00AM  GMT  	

CORPORATE PARTICIPANTS
 Lindsay Woodland
 QR National Limited - Senior VP and Head of IR
 Lance Hockridge
 QR National Limited - MD & CEO
 Deborah O'Toole
 QR National Limited - Executive Vice President and CFO

CONFERENCE CALL PARTICIPANTS
 Anthony Moulder
 Credit Suisse - Analyst
 Matt Spence
 Merrill Lynch - Analyst
 Andrew Chambers
 Austock Securities - Analyst
 Ian Myles
 Macquarie - Analyst
 Cameron McDonald
 Deutsche Bank - Analyst
 Paul Ryan
 Evans & Partners - Analyst
 Simon Mitchell
 UBS - Analyst
 Scott Kelly
 Morgan Stanley - Analyst
 Matt Crowe
 Commonwealth Bank - Analyst
 Scott Carroll
 JP Morgan - Analyst
 Jonathan Collett
 Goldman Sachs - Analyst
 Scott Ryall
 CLSA - Analyst

 PRESENTATION

 Lindsay Woodland  - QR National Limited - Senior VP and Head of IR 

 Good morning everyone and a very warm welcome to you this morning for what is QR National's Inaugural Full Year Result for the Financial Year '11.

Today we have our Managing Director and CEO Mr Lance Hockridge who'll be providing an overview of the Company's results, and followed by Lance we'll have our Executive Vice President and Chief Financial Officer Deb O'Toole, who will then go through the results in detail around the financials and to provide clarity around the financials.

Following that, Lance will just return to the podium to give some update on guidance - to provide some update on the outlook, I should say. Then of course, we'll allow adequate time for you all to ask questions and provide responses to those.

So without further ado, I'll ask Lance to the podium.

 Lance Hockridge  - QR National Limited - MD & CEO 

 Thanks Lindsay. Can I add my welcome to everybody for our Inaugural Results Presentation. Can I also acknowledge that we have here with us today a number of the QRN executives - John Stephens, Mike Carter, Ken Lewsey, Ruth Coulson, Curtis Davies, [James Byrne] and Marcus McAuliffe. So they're here to answer the difficult questions.

This has been an interesting year for us, to say the least. Twelve months ago we were post-separation from the passenger business, getting ready for the IPO. The IPO, we believe, was successful on a range of fronts but most notably, in my view, from the point of view of having been able to execute on that IPO with no disruption whatsoever to our customers.

Since then of course, though, the story has been about weather, frankly. The wet was already upon us at that time. We then had the floods, the impact of two cyclones in Queensland. So it's been a pretty tough year. It's certainly been a challenging year.

It is against that backdrop that I'm proud to be able to present the results that we have today, which most notably I think speaks to the capability and the resilience of our Company, the fact that we have been able to deliver on all of the commitments that we made in the Offer Document and that we remain optimistic and confident about the future of our business.

If we go then to the fourth page of your presentation, I don't propose to go in detail through these as these are the headline issues and we'll come back across a range of these things. But of course, the headline number is, notwithstanding everything that I've spoken about, an underlying EBIT which is up 35% year on year on revenues that are up 11%.

We certainly have had a major impact from those floods, as we'll speak about in more detail. We've been able to quantify the impact of that wet weather at AUD187 million. Let me highlight the fact that of that number some AUD65 million remains recoverable and will be recovered in the current financial year and in next financial year under the various take or pay and revenue capped mechanisms that we have.

As against that story, of course, the underlying story is the progress around privatization and around the transformation generally in our business. We will talk this morning about a raft of examples of what we have been up to. We can quantify, though, that the benefit of all of that in our Company in this financial was some AUD94 million. Again, a tribute to the capability of the people in the organization, an indication though of what this Company is really capable of going forward, especially when you think that one of the key things that we did during this year was that major voluntary redundancy program where 660 people have left our organization, the full year benefit of which will only flow through this year and in future years, and which we've previously quantified at some AUD50 million a year.

In and through all of this, of course, we have not neglected the future of our Company. We spent AUD1.4 billion of capital during FY11, even with all of those changes. We are continuing, as we will speak, to build and to invest for the future of the business.

A little more detail then about the transformation program. Again, without going through in great detail, the point that I would make is that we have delivered. We've delivered on each of the promises that we made in the IPO and more. Whether it's around safety, whether it is around that VR, whether it is the fact that we are two points ahead of what we said in the offer document would be the tonnages that we have under contract in these new style contracts by the end of the year.

We're concentrating of course a great deal around the voluntary redundancy program, in terms of reform, but equally we should highlight the fact that at the same time we have been recruiting. We've been recruiting apprentices. We've been recruiting trainees. We've been recruiting train drivers. We've been recruiting the kind of capability, fundamentally, which will underpin that drive around the future growth and profitability and returns in our Company.

There's no denying that the impact of the floods has been severe; some 37 million tonnes less throughput than we anticipated in the assumptions in the Offer Document. As I say, with the cost impact of some AUD187 million.

That has inevitably had its impact on a range of the ratios that we first showed you in March, that we intend to show at each half year to demonstrate the quality of the progress that we're making around the transformation and, more particularly, how that's translating into the quality of business outcomes in your Company.

I would point out though that, notwithstanding that volume impact and all of the challenges that we've faced around those key, key metrics of revenue quality, the revenue per net tonne kilometer, that has substantially increased.

We've been able to increase our EBITDA margin. We've been able to increase the operating ratios, improve the operating ratio by two points in this Company, even through FY11.

So as we see a return of tonnes, as we see the quality of the benefit of those transformation programs continuing to kick in, I remain confident that we will be able to demonstrate to you that continuing level of improvement toward our goal of being world class on all of these dimensions.

When we think about the key dimensions in the Company, the first and most important, of course, is safety. You've heard me talk about this before. I'm delighted to be able to say that during this challenging year of FY11 we were able to further reduce our lost time injury frequency rate by more than 50%. You can see there some of the other key dimensions and how they have improved as well.

These are important numbers in their own right, as I've said many, many times. Equally though, I repeat the point that this demonstrates the level of operating discipline that we are bringing to the Company. You do not make that quality of change, not in one year, as you can see here, but over the last couple of years consistently, without having a rigor of operating discipline.

As I say, I believe that that is demonstrably carrying over into the broader quality of the operations in our Company.

Let's think then about a couple of examples of the productivity, the service levels, in the Company, especially all of this - again I make the point - in the context that given that a lot of denominator in those ratios has gone away, I'd like to demonstrate to you in addition to that overarching number of AUD94 million of total benefit, that there are just a raft of issues that we are working diligently on and around which we can demonstrate progress.

You've all heard me talk, for example, in the past about the payloads in the Goonyella and Blackwater system. This is a great example, it seems to me, of the way that the myriad of initiatives that Marcus and his team have had going on, comes together at the end of the day in a tangible outcome. And you can see there the extent to which, even again, through this difficult year we've been able to continue to lift our payloads.

To quantify that for you, that has added up in this year to the equivalent of an additional of 3.5 million tonnes a year of throughput capability. To put that in slightly different terms, that's the equivalent of one to one-and-a-half train sets that we would otherwise have needed to buy to be able to lift the same amount of tonnage.

So, for example as I jump forward a little bit and we think about the reduction in the capital load in this business, part of it is because through these transformation initiatives, we are reducing the capital in our business. We are reducing the need to be able to spend as much money as would otherwise have been the case on capital in our business.

Similarly, here with respect to locomotive availability, this is key, of course, because it represents, again, the use of capital; the effective use of capital in our business. It also is important in terms of our ability to be able to deliver every day to customer expectations. So you can see for yourself there, the quality of the improvement that we've been able to make in our company.

Turning then to a couple of the growth projects and how we're travelling against what we said that we would do. Firstly with respect to the Hunter Valley; here is a real success story. From a standing start, a little more than a handful of years ago, you can see the extent of the growth that we've been able to put in place. This is all stuff that is done and dusted and is on the way. It is not stuff that is the subject of a promise of maybe we will do it in the future.

The important issues are that throughout this period, indeed for the last five years, we have been able to grow this business at this rate without one lost time injury in this business. Equally, from an external point of view, you can see on this chart the extent which we have been able to grow this business whilst maintaining what, in my view, is a superb level of customer service. It is that quality of customer service indeed, which is the very foundation upon which we are building that business and which we're confident about being able to continue to build that business.

Indeed, as we continue to ramp through the remainder of this financial year, our expectation is that, subject of course to what the total denominator is, what the total throughput is in the Hunter Valley this year, by the end of this year, we will be at about 30% market share in the Hunter Valley. Not bad, as I say, from a standing start those few years ago without any safety incidents and whilst maintaining that superb level of customer service.

Similarly then in Western Australia, one of our key indications to you at the time with the IPO was the opportunity for growth in Western Australia particularly in our iron ore business albeit, of course, of a relatively low base. So from a 2010 base of 8.5 million tonnes throughput, we indicated that we expected that we would be able to deliver a trebling in our volumes. That's exactly what we've done. We have signed those contracts, we have spent that money, we are in the process of executing against those contracts and over the next couple of years, we will indeed, treble our volumes and build this iron ore business into a scale business in our operations.

That, of course, is the beginning. Whilst there are difficulties around the future growth that have to do with the availability of port capacity for example, we remain very optimistic about our ability to be able to deliver and deliver in a very effective way from the point of view of the customer and to continue to grow the business thereafter.

With respect to the future of the business, we have spent AUD1.4 billion as I say on capital this year. Our signature project is the Goonyella Abbot Point Expansion project. The headline here is on time, on budget. I would ask you how many billion dollar plus infrastructure projects in Australia today, can make that claim. Indeed, with the impact of the weather during this year, how credible therefore is our ability to be able to deliver these major projects; on time and on budget? We look forward to first railings across the link in January of next year.

In summary therefore as I hand over to Deb, we're talking about a 35% year on year uplift even in what would have to be the most extraordinarily difficult of circumstances. AUD187 million of flood impact albeit with AUD65 million recoverable in the next couple of years, AUD94 million on the bottom line as a result of the transformation program that we've had underway in this business. We're in great shape but I'd now invite Deb to talk a little more about the detail of those numbers.

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Thank you Lance and Lance will come back in a few moments to go through the outlook for the Company going forward.

I will go through the year-on-year numbers, movements from the prior year as well as show a reconciliation from the Offer Document, provide a breakdown on a business unit basis and discuss the capital program and the balance sheet.

In terms of the final outcome, the underlying results represent an uplift on 2010 and demonstrate a number of improvements which offset the impact of the floods in Queensland. Lance spoke to the trends in the key metrics and I will come back to those on a business unit basis shortly.

The company has a very strong balance sheet and it's positioned to take advantage of the many growth opportunities ahead. Net debt after CapEx of just under AUD1.4 billion, sits at a low of AUD686 million which translates to a gearing of less than 10% on a debt-to-debt plus equity basis. On acceleration of growth, growth in the business has been driven by increasing coal volumes over the last four years, interrupted only this year by the extreme weather. Volume growth, revenue quality and traction on transformation are translating through to the earnings line.

Earnings lifted again over the prior year period. The EBIT of AUD367 million compares to AUD272 million in 2010 on an underlying basis. Highlights are AUD110 million movement attributable to volume impacts offset by the AUD93 million which Lance mentioned which related to improvement in revenue quality. We spent AUD43 million in additional capacity ahead of growth. That includes extra resources from a human capital perspective, extra depreciation on investments ahead of growth and maintenance.

You can see the earlier impact of the intermodal turnaround coming through in those numbers as well and note the recovery of take or pay for access revenue movement for year on year. Here is the reconciliation of the Offer Document numbers on an underlying basis. The EBIT movement of AUD460 million to the actual of AUD367 million, represents AUD187 million lost from the weather events.

Breaking that down a bit; AUD66 million of that was in network volumes, AUD117 million in coal volumes and AUD7 million in lost freight volumes. Note there is AUD47 million recoverable in the revenue cap in 2013 and between AUD18 million and AUD22 million in deficit tonnage charge which will come through in the 2012 financial year. Also note the offsetting items in 2011; revenue quality uplift of AUD45 million, intermodal improvements and corporate savings.

This slide is just a reminder of the one-off items in the year of the IPO; AUD162 million in total. This is compared with the one offs in 2010, many of which were also IPO related or separation related. As we previously advised, those IPO costs in 2011 amounted to AUD99 million and the voluntary redundancy costs for the whole year at AUD63 million.

On the capital breakdown, around AUD3.6 billion in growth capital has been spent over the last four years with AUD1.6 billion expected to be spent in 2012. This is over AUD5 billion of investment in the five-year period to drive returns for shareholders. The largest project is the Goonyella to Abbott Point Project and the building of the northern missing link. The other major projects are new rolling stock in coal, new rolling stock for the iron ore growth tons in Western Australia.

We signaled at the half year to expect lower CapEx in the year, due in part to some project delays, Wiggins Island in particular and Karara Mining also. But, we have also seen the benefit of our capital productivity project, which is a substantial part of that lower CapEx, over AUD400 million. This means we are working the balance sheet harder. Maintenance spend is down due to better availability and reliability in our maintenance and deferred overhauls.

On cashflows, we have continued to invest operating cashflows to fund growth. With EBITDA at AUD813 million and noting the higher interest cost of AUD213 million with the previously structured balance sheet under government ownership which applied for part of the year. This is a strong cashflow business. The dividend paid by directors is AUD0.37 representing a 54% payout ratio.

Moving to the balance sheet, AUD2.2 billion of available debt facilities support the multiple growth options the Company has with its scalable network in Queensland, growth outlook in New South Wales and opportunities in iron ore in Western Australia. There is also solid growth options in other mineral commodities and general freight. Notwithstanding a capital spend of almost AUD1.4 billion, the year ended with net debt of AUD686 million and gearing at 9%.

In the final analysis the one off tax benefit on listing was AUD290 million. The next phase of large growth projects such as the Wiggins Island Project as well as expansions at Abbot Point, Hay Point and coupled with New South Wales and Western Australian growth, will see balance sheet efficiency lift more quickly.

To the business reviews, the performance metrics in large parts still trend upwards. Though not as significantly as they would have done without the weather impacts. This breaks down those metrics by business unit. Revenue per NTK has improved in each and every business.

In QR National Coal, the major feature of volumes down we have spoken about at length. Notwithstanding that, revenue held versus the previous year. Performance based contracts kicked in and 29% of contracted volumes were carried under new contract terms which was ahead of the offer document predictions as well as a boost from New South Wales expansion tonnes.

In QR National Network Services, the major features were reduced tonnages again, the protection of the take or pay, plus the revenue cap mechanism. The rapid recovery of the network at around AUD6 million cost which came in under the guidance we gave and CapEx more than doubling reflecting the growth projects.

In QR National Freight, the earnings turnaround year or year is due to service contracts with Queensland Government and improvement in the Intermodal business with deployment of new logos, new management, cost control and contracts starting to impact. Freight also lost tonnage in Queensland due to the floods, while at the same time had reduced grain volumes in the west due to the drought there.

Before handing back to Lance, in summary, flood costs at AUD187 million underlies the scale of the event. On the positive side, this was partly offset by transformation benefits. There is some recovery in future years, AUD65 million revenue cap in 2013 and in deficit tonnage charge this year. There is strong cash flow and a strong balance sheet with low gearing well positioned for growth.

 Lance Hockridge  - QR National Limited - MD & CEO 

 Thank Deb. Then if I can turn briefly to the current year and just make one or two observations. Of course there is a forecast for QR National with respect to FY12 which is the offer document forecast. As we think about that forecast and we think about the circumstance that we face at the moment of where are at the moment, then there are on the one hand this and on the other hand that.

Firstly with respect to the potential downsides. Firstly it is the continuing softness in our throughput, especially in Queensland, where our coal volumes year on year to date through until the end of last week at least is down 18%. That of course is mitigated by the increase in volumes that we are experiencing with the growth of our businesses in New South Wales and in Western Australia. Nonetheless, it demonstrates that continuing slow recovery by our customers.

You will all be more than familiar with the announcements that the customers have themselves made in their announcements over the last week or so that most typically I guess are talking about a continuing impact at some level through toward the end of this year. The other key variable this year will again be the weather. It will again be what does the wet look like in that January to March period of next year.

On the other hand then, we certainly as I indicated before intend to continue and to continue at an even faster rate around our transformation. The full year benefit of the VR program will flow through in FY12. We expect to continue to see the flow through of the benefit of the re-pricing of those legacy contracts generally, as I say, the improvement on the back of the transformation activities in the business.

Our ability to be able to ramp up. We have certainly brought forward as much as is sensible with respect to both maintenance and capital so that in the confident expectation that our customers, once they do get through this remaining overhang of the events of earlier this year, will want to run hard and fast. We have that capability. We are ready, willing and able.

In summary therefore, we continue to have out there the offer document and I believe that it would be premature for us to make any change in what was in that document in terms of an outlook. More generally going forward, we remained very confident with respect to the future of our business, very optimistic about the future of our business.

The fundamentals remain those that we spoke about at the time of the IPO, that we are essentially 80% leveraged to the resource sector in Australia which of course is a combination of thermal coal, metallurgical coal and iron ore. Here then is the most recent data from ABARE, of course you are all familiar with that. Again, the strength of the continuing compound growth in the demand for those products is well and truly demonstrated in this growth. I'll get that right.

Some even more recent data. So much of our business can ultimately be traced to the strength of the steel business in China, both in terms of its own right and in terms of what it means given the predominance these days of China in the world steel industry. Here you can see the most recent data right through until last month of steel production in the world and steel production in China.

I would make the particular point for example that July 2011, compared to July 2010, saw a 15.5% increase in steel production in China. There is no doubt that we are facing uncertain times. There is no doubt that even here in Australia we continue to see the impact of the so called dual speed economy, if not multi speed economy. The point I am making is the fundamentals of this business as it is reflected in the prospects for our customers and their end markets remain extraordinarily sound. On that basis, we continue to invest for the future. Deb has covered this. To reiterate, AUD1.4 billion of capital spend in the year under review, AUD1.6 billion of capital spend in the current financial year all of which speaks volumes, if I might say to that view that we have about the future of our business.

An important part of that is to, as I have said on a number of occasions this morning, continue and enhance the rate at which we are moving through our transformation program. At the time that we announced VR in February, we foreshadowed that there would be a further restructure. Our goal of course is to be world class. Our goal is to be spoken about in the same breath as those world class railroads. In particular, the North American class one railroads.

We've looked as we've thought about what does world class really look like and feel like? What really is going to underpin the quality and the nature and the rate of change that we want to achieve? Every one of those class one railroads for example is organized along functional lines. We have therefore made a decision to move away from the purely business unit structure that we have at the moment more towards that best in class functional structure.

This is a continuation of the work that we started in the early part of the year. We have a wide range of work going on starting at the top and working down through our organization. This change I believe will fundamentally underpin our ability to be able to continue at an increased rate our transformation activity. It will fundamentally allow us to be even better in terms of our service quality and focus on our customers and on the cost productivity etcetera in our business. We will be working through this over the next few months and I would expect to give you more detail a little later in the year with respect to what this actually looks like.

Finally then to summarize before taking your questions. There is no doubt that the one off impacts of the flood and cyclone events this year have been dramatic in the way that we have spoken about for our company. Some key points though. Notwithstanding that, we would say to you that we have delivered in full or more on every key promise that we made at the time of the IPO.

Further to that, we have demonstrated our ability to be able to run hard to change and reform our company. That remains our intention every day going forward from here. In driving up what is the key outcome, that is to get to acceptable returns out of this business, we continue to focus on five key areas.

Firstly of course with respect to safety. Secondly it is with respect to revenue, the contracts, the improvement in the quality of revenue in your company. Thirdly it is about the cost efficiency productivity dimensions in our company. Fourth it is about the capital intensity in our business. Finally of course it is about the extraordinary growth opportunity that we believe is there to be captured in exactly the way that we can demonstrate. For example, whilst others are talking about what might happen, we are in the process today of delivering an additional 44 million tonnes of capacity in that key and critical Central Queensland coal network.

We are in a robust financial position as Deb has described with such a strong balance sheet, low gearing and all of these opportunities to be able to go forward. In closing therefore, I would reiterate I am very confident about the future of our business. I am very optimistic about the future of our business and about our ability to be able to deliver and to continue to deliver on all of those key promises in our business. With that, thanks for your attention. We would be delighted to take your questions.

 QUESTION AND ANSWER

 Anthony Moulder  - Credit Suisse - Analyst 

 Good morning. Anthony Moulder, Credit Suisse. Just a couple of questions starting with revenue. Revenue per NTK in the second half was stronger than that which you delivered in the first half. Can you break that down into the impacts of the contract benefits or the renegotiation of those contracts at higher rates, as well as bonus tonnes?

 Lance Hockridge  - QR National Limited - MD & CEO 

 Anthony, I'll start and then Deb might want to give you a layer of detail. You recall off the documents said 27%, by the end of the year we had 29% on contracted tonnes in new form contracts. To your point, the diminution in the throughput gave us greater flexibility as to where we were able to concentrate. Of course part of that depended on which particular customers with which sort of contracts were most impacted. What that means in summary was that of tonnes railed through FY11, in fact 35% was under new form contracts which I think is the point that you are driving at.

 Anthony Moulder  - Credit Suisse - Analyst 

 Yes. Secondly as you move to a more functional structure in the transformation, what costs do you expect as far as - is there another redundancy program around the corner and how are the unions reacting to that at this early point?

 Lance Hockridge  - QR National Limited - MD & CEO 

 Good question Anthony. We've been through, during August, an extensive consultation program with our employees and the unions around the proposal to change in the way that I've described. Overwhelmingly, the response has been positive. The kind of sentiment from the guy in the street is, we love the idea of getting rid of the silos in the business. People understand the strength of the model that the class ones for example have.

Look, that's not to in any sense underestimate the degrees of difficulty that we've got going forward. We are working really very diligently and professionally around all of this. I foreshadowed in February that that redundancy program may well not be the last, if I can put it that way. What we're doing of course and it flows from some of the comments that I made, is focusing on, in terms of headcount, where we ought to be focusing. We are focusing on the capability to be able to run and grow the business, so we're on the way to trebling the number of apprentices and trainees in the business, we've recruited train drivers and network controllers, these kind of folks that do indeed underpin the growth of the business.

On the other hand, the majority of the people that left the Company in the earlier part of this year were in what might be described as overhead and administrative areas and we all know that part of the legacy of government ownership has been an over manning in that area. We have worked both from a top down and a bottom up process around what we think the optimal structure and what we think the optimal numbers are in the business.

Right now we're in the process of working that through with our people. We of course expect to have a further round, if not more of consultation and that's why I say I'd expect to be able to give more detail about that a little later on in the year.

 Matt Spence  - Merrill Lynch - Analyst 

 Hi, Matt Spence from Merrills. Deb, can I just take you to slide 18, the maintenance CapEx is come in significantly below expectations and I note your comments earlier about deferring maintenance. Is AUD200 million what we should be thinking going forward?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Pretty much Matt. I mean that really is the availability and reliability programs that I think Lance spoke quite a bit about in the half year, really starting to kick in, in the business. The functional structure is only going to help us drive those efficiencies better.

 Matt Spence  - Merrill Lynch - Analyst 

 When you're saying you're deferring maintenance from what it's been in the past, that's a result of you having a newer fleet or what's really driving?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Some of it is new fleet and some of it is just that more reliable. The payload data that Lance outlined in his example is a very good example of that where you get another 3.5 million tonnes for actually absolutely no more investment.

 Lance Hockridge  - QR National Limited - MD & CEO 

 So just to pick up on that, we've said before, order of magnitude, a comm syst is worth AUD45 million. Depending obviously on haul distances and so forth, the average annual lift per train set is 2.8, 3 million tonnes, something of that nature. So you can see right there, even with respect to the benefit of that bit of, important bit I might say, of transformation activity, how that flows through in terms of avoiding capital in the future.

 Matt Spence  - Merrill Lynch - Analyst 

 Just two quicker ones, Lance can you just make some comments on the coal haulage borrowings down 18% versus last year, is that improving on a week to week basis? Secondly, Deb, can you just tell us how much -- what was the result in the intermodal business and EBITDA or EBIT like?

 Lance Hockridge  - QR National Limited - MD & CEO 

 So with respect to the first and I might make an observation if I can about the second as well, the 18% I guess, to be honest, is best described as patchy. So we have days and weeks that are better and days and weeks that are less better. What we do see is evidence though of what our customers are saying in their own releases about firstly a shallower recovery, if I can put it that way, given that the thing that is really driving this of course is the continuing water in pits. But our own forward visibility of that is not hugely greater than is publically said.

With respect to intermodal, the observation that I would make is that we indicated that our goal was to be run rate break even by the end of FY12. I remind you that the overarching strategy with respect to intermodal has been to recapitalize the business, to change indeed the strategy of the business and importantly to bring new management into that business which his familiar with that environment. What I can say is that all of those things in combination are getting excellent traction and if you draw a line of best fit, if you will, through what I've described as from where we were which you recall was, order of magnitude, AUD30 million or AUD40 million of losses to break even, we continue to be ahead of that line.

Indeed we've had one month already where we're break even, which is pretty notable given, as you well know, the current state of interstate general freight volumes.

 Matt Spence  - Merrill Lynch - Analyst 

 Thanks.

 Andrew Chambers  - Austock Securities - Analyst 

 G'day, Andrew Chambers from Austock Securities. Just on that slide 18 again, the comments on the capital optimization where it says optimization and deferral AUD430 million, how much of that is optimization and how much is deferral? I mean would we expect some of that to come in to 2013 and '14 or is that effectively an overestimated of the PDS and will never occur?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 I think you would expect not much of it to come, but some, in '13 and '14.

 Andrew Chambers  - Austock Securities - Analyst 

 Okay, if that's the case, I guess your balance sheet gearing is even more conservative than perhaps previously alluded to. Where does capital management then start to fit into the equation?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Well as I mentioned, we've got a lot of very large projects coming up. Wiggins Island is a good example of that further growth in Western Australia. New contracts that will be coming on both in Queensland and New South Wales that will require new rolling stock. Then beyond that, there's a tender out with the Queensland Government at the moment for expansions of the Abbot Point terminal which will require capital going forward. So we would expect to be lifting that leverage in the balance sheet quite quickly through those projects.

 Andrew Chambers  - Austock Securities - Analyst 

 Great, thanks.

 Ian Myles  - Macquarie - Analyst 

 Hi, Ian Myles from Macquarie. A couple of questions, just in the network business, I think you made a comment during the presentation that you'd lost, due to weather, it cost about AUD66 million and you're getting a recovery of AUD46 million and I'm sort of wondering what that difference was. It was in your commentary as such. Secondly, when you look at that networks business, is it actually achieving the regulated EBITDA of which you're allowed or are you undershooting it still because your cost base is too high against that regulatory outcome?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 In relation to the first question, there is the AUD46.5 million I think it is that comes back in 2013, what won't be recovered is some maintenance cost, so that is in part the shortfall there. We haven't allowed to recover the repair costs of the network, because that's got to go through a separate QCA process and that's underway.

I think your second question, Ian, just remind me.

 Ian Myles  - Macquarie - Analyst 

 Are you achieving the regulated return in the track element of the business?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 The regulatory structure is set up to ensure that we do over time and we get compensated for that time value of money, so you won't see it on a year on year basis. But the revenue cap mechanism does ensure that that regulated return is achieved. The cost efficiencies that come through the business, together with the above regulated projects such as GAPE for example and any new large projects that come in, will lift that further.

 Cameron McDonald  - Deutsche Bank - Analyst 

 Lance, Cameron McDonald from Deutsche, just interested in the tax position given that in the appendices you're about AUD100 million more on the deferred tax benefit than was in the PDS. How do we think about tax payable going forward with that additional benefit?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Yeah, it's not a lot different from what we've said at the offer document time in terms of no tax payable in this financial year and just starting in 2013. So the additional amount has really been as a result of more detailed analysis and crawling over the numbers to maximize that deferral for the business.

 Cameron McDonald  - Deutsche Bank - Analyst 

 So the impact would still only be in FY13.

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Yes.

 Cameron McDonald  - Deutsche Bank - Analyst 

 Full tax payable in FY14?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Yes, that's right.

 Cameron McDonald  - Deutsche Bank - Analyst 

 Then sorry Lance, just a follow on question, just wouldn't mind a comment on the press reports of BHP looking to build their own rail line up to Abbot Point and what sort of negotiations or discussions you've had with BHP about putting your own solution towards that?

 Lance Hockridge  - QR National Limited - MD & CEO 

 Yeah, nice try. Let me say what -- firstly of course what BHP has said is that they've submitted the initial applications and this is a long process as we can all imagine between now and actually being in a position where they would construct their own line. We've always said that we don't expect to do everything and we don't expect to do everything in this infrastructure space in Queensland. We believe in competition, we believe in competition above rail and we believe in competition below rail.

All of that said, to come to the specifics of your question, we have, would and expect to continue to work with what is after all our largest customer about their wishes and desires in this area. I believe what they're doing makes absolutely perfect sense. Given the scale of growth that we're talking about in this business, to have a mine through rail through port pipeline, if you will, in the way that Mario has described in his observations last week, as I said, makes perfect sense.

We, after all, are predominantly in the open access, multiuser environment. Notwithstanding all of that, as I said, it's a long way between now and actually having a project which is a go ahead project, one. Two, as we all know, they are not the only people who are proposing such an option and we will be as interested in you are in what the Queensland Government's view is about the potential for multiple new corridors in Queensland, given what we all understand to be the issues associated with that.

In our own case, of course, we have an in-place set of assets. We have an in-place range of corridors, every one of which is substantially scalable. The nature of the opportunity that we therefore offer to our existing and potential customer base is the ability to be able to take advantage of that in situ capability, that scalable capability to give the best possible economic advantage going forward.

 Paul Ryan  - Evans & Partners - Analyst 

 Paul Ryan from Evans & Partners. Lance and Deb, could you talk as to the offer document F'12 guidance and the half year we saw significant differences due to revenue recognition and timing; what do you understand that number to be as you present your results today? Second, just an update on GAPE, the track itself is on track to open, but what are you expecting in terms of ramp up given volumes everywhere else look to be soft and Wiggins Island rail project negotiations, where are they at?

 Lance Hockridge  - QR National Limited - MD & CEO 

 So let me deal with the latter two points and Deb can talk to the first. With respect to GAPE, the reality is that the ramp up we believe will be a little delayed from the originally intended numbers. That said, we do expect that there will be people ready, willing and able to run from day one across the link and indeed with respect to the upgraded Newlands system.

With respect to Wiggins Island, I've got to be a little bit cautious about all of that because we're the subject of some confidentiality agreements. What we've said though is that we are in the advanced stages of discussion, we don't think it's too far away that there will be an outcome with respect to what will be another very substantial project and then the order of magnitude capital that we're talking about is some AUD900 million. So - but more than that I'm really in a position to say just at the moment.

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 I think Lance captured the issue around the offer document for FY12 pretty well with the, on the one hand, on the other hand, because you'll recall the offer document projected Financial Year '10 costs forwards. So, no transformation effects and we've seen for this financial year the transformation effects that have come through this year and while we're volumes down for the first couple of months of this year, as Lance indicated, there is potential to catch that up.

But also, we're not going to know until some way into the year as to what the mix of tonnes will be and the mix in the current financial year of new contract, higher revenue, earning performance payments and flexible payments were a higher proportion than the offer document, also.

So, in terms of the sensitivities that were provided in the offer document, actually the 2011 held pretty well. We wouldn't indicate to change the 2012 sensitivities at the present time because we're really not to clear about where that mix of legacy contracts verses new form return contracts will be and, of course, we've got to ramp up in New South Wales that are all on new form contracts that will bring us better outcomes. So, it's a bit of some downsides, some upsides, leaving us about in that spot at this early stage.

 Lance Hockridge  - QR National Limited - MD & CEO 

 Sorry, for the sake of avoidance of doubt, can I just reinforce that with respect to the GAP question, with - in relation to the below rail, the infrastructure, that is fully contracted on a take all pay basis. So there is no impact of any delay in what was an above rail response to your question. But obviously, my response goes to the delay in contracting the above rail task.

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 And there will be timing delays on that.

 Lance Hockridge  - QR National Limited - MD & CEO 

 Have we got people on the teleconference?

Operator 

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

 Simon Mitchell  - UBS - Analyst 

 Morning, just a question on slide (technical difficulty). You're saying there than an extra AUD45 million of EBIT benefits, compared to the offer document for coal revenue quality. How much does it actually take to be accruing from customers' desire to increase throughput post the floods and therefore is not recurring into fiscal '12 or fiscal '13?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Okay. It's Deb here, Simon. Not much I think, because this goes back to the answer to the previous question on the mix of tonnes. I wouldn't say it's particularly been a running harder for those tonnes. It's more that the customers who were least affected by floods actually were on better performing contracts and so I think you can expect to see that continuing to come through.

 Simon Mitchell  - UBS - Analyst 

 Okay and just a second question on Wiggins Island and I know the comments to an earlier question. But can you say what you're assuming for CapEx in that fiscal '12 number? I know you've got uncommitted CapEx of about AUD700 million and you've said Wiggins Island makes up some of that. Can you comment on how much?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Yeah. It's around AUD200 million.

 Simon Mitchell  - UBS - Analyst 

 Okay. Thank you.

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 But that will be subject to change, depending on what the timing of the execution of the contracts are and how quickly we can get that project up and running.

 Simon Mitchell  - UBS - Analyst 

 Okay. Thanks.

Operator 

 The next question comes from Scott Kelly from Morgan Stanley. Please go ahead.

 Scott Kelly  - Morgan Stanley - Analyst 

 Good morning, just putting Simon's question in another way. You've got in the coal business revenue for NTK and FY11 of AUD41,000. Given the new coal contracts that have been signed this year and spot lines et cetera, is that something we could expect for 2012?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Well, the numbers won't be exactly the same.

 Scott Kelly  - Morgan Stanley - Analyst 

 No.

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 But you can expect the trend to continue, yes.

 Lance Hockridge  - QR National Limited - MD & CEO 

 And the two observations more specifically with respect to that, are the offer documents said that we would be at 37% of contracted volumes under new form contracts by the end of FY12, which remains our view.

The swing factor will be - going back to Anthony's question here earlier on - that in FY11, because of the flexibility as a result of the diminished tonnes, we actually railed 35% of tonnes under new form contracts. That of course, will be a question of how the cards fall during the course of this year.

 Scott Kelly  - Morgan Stanley - Analyst 

 Okay and can you just update us on the remaining GAPE contracts that are up for negotiation, please?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Well no, we can't actually, because that's a matter for our customers and there won't be announcements in relation to those contracts until those negotiations have been concluded. So I can't really help you any more than is in the public domain at the moment, other than to say that there's active processes underway by those customers.

 Scott Kelly  - Morgan Stanley - Analyst 

 Okay. Thank you.

Operator 

 The next question comes from Matt Crowe from Commonwealth Bank. Please go ahead.

 Matt Crowe  - Commonwealth Bank - Analyst 

 Good morning everyone. I'm interested to talk about the flood impact number of AUD197 million. Is that above what - well, what do you normally assume in a normal year as a weather related impact and secondly - well, firstly address that question.

 Lance Hockridge  - QR National Limited - MD & CEO 

 Tell me what a normal year is.

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Yeah, I was just going to go. Well, we haven't had a normal year for probably a decade. But what you can do is look back - this was a very extreme event in this year and we've never experienced anything like that. In the prior decade we only had one year with a very significant weather event, which was in 2009 and you can look back - those numbers are in the offer documents, so that you can see the impacts in 2009.

But other than that, we've had pretty dry years, probably for most of the last decade. Pretty difficult to extrapolate when the growth rate has been so high for Queensland coal in the last few years.

 Matt Crowe  - Commonwealth Bank - Analyst 

 I just - more specifically - when you put together these forecasts, did you make any allowance for any sort of weather related impact in the IPO document?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Yes we did.

 Lance Hockridge  - QR National Limited - MD & CEO 

 By definition yes, because its variation to the offer document.

 Matt Crowe  - Commonwealth Bank - Analyst 

 Okay.

 Lance Hockridge  - QR National Limited - MD & CEO 

 We also observe the - I don't think we mentioned on the way through - that those numbers have been the subject of independent review and assessment and sign-off by PWC.

 Matt Crowe  - Commonwealth Bank - Analyst 

 Okay. Thanks. Just - and one other thing, is do you think you - I guess add] back that 187 underlying number did appear to outperform the underlying IPO number by about AUD90 million. To what extent are they permanent, ongoing out-performance, or is there any of that that has been brought forward from FY12?

 Lance Hockridge  - QR National Limited - MD & CEO 

 That really goes to the observations that I made about the benefit of the transformation in the organization and if you rewind the clock to the discussion that we had at the time of the offer document, we made the point that the offer document, quite appropriately, was constructed on a very conservative basis, so that, for example, all of the forecasts, both for FY11 and FY12, were of an assumption of the continuing FY10 cost base in the organization.

Nothing could be further from the intention of this management team around what we intended to do with respect to the cost efficiency productivity in the Company. That's the message around that AUD94 million of benefit. We would expect that that is indeed a structural change in the business going forward, whether every year, year after year it is AUD94 of course. In fact, we would expect that over time we would be able to improve on that. I made the observation that our voluntary redundancy program benefits would be AUD50 million in a full year and this current year will be the first year that we take that full benefit.

 Matt Crowe  - Commonwealth Bank - Analyst 

 Okay. So just putting those two items together, that AUD94 million and the - now the AUD50 million odd, you're looking at improvements that weren't in the IPO document at around AUD145 million to FY12?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 No.

 Matt Crowe  - Commonwealth Bank - Analyst 

 To be (technical difficulty)?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Nice try. But really, this is a - it's a combination of two opuses. As Lance said, there's an ongoing cost focus in the organization and add to that the restructure of the business, which over time will start to add to that. On the other side, we have the renegotiation of legacy contracts, which is lifting revenue and revenue quality and we have the uptake of additional market share in New South Wales.

So it's a combination of all of those things that are not able to be determined with a great deal of precision and the mix will change going forward. Suffice it to say, that all are trending in the right direction and all are trending at or better than the offer document assumptions.

 Matt Crowe  - Commonwealth Bank - Analyst 

 Thanks.

Operator 

 The next question comes from Scott Carroll from JPM Morgan. Please go ahead.

 Scott Carroll  - JP Morgan - Analyst 

 Hi Deborah, Lance, just a quick question for Deb. On network services, I was just curious whether there was any additional maintenance costs associated with the floods, that were taken or expensed in '11 that will be recoverable in later years and if so, is that wound up within the AUD47 million revenue cap adjustment?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 No. It's not in the AUD47 million Revenue cap adjustment. In actual fact, counter-intuitively, it goes the other way in that we will get less allowance for maintenance because we've run less tonnes, because of the way that the formula works. It's more that the recovery cost that is potential upside to that number.

 Scott Carroll  - JP Morgan - Analyst 

 Okay and just a second question if I could. Was there any impact on the rolling stock and infrastructure services businesses as a result of the floods? I'm just trying to split it out from the network, the actual regulated network.

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Not much in a financial sense. A lot in a human endeavor sense, but not much in financial terms.

 Lance Hockridge  - QR National Limited - MD & CEO 

 There was some very minor impact on - not just in network, but in our freight business as well - on faculties, houses, workshops, these kinds of things. But it in the scheme of things was an asterisk.

 Scott Carroll  - JP Morgan - Analyst 

 Thank you.

Operator 

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

 Jonathan Collett  - Goldman Sachs - Analyst 

 Hi guys. I just wanted to clarify how much of the AUD94 million of transformation benefit in FY11 related to that small component of VR?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 Oh, not very much. Less than --

 Lance Hockridge  - QR National Limited - MD & CEO 

 Less than double digits.

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 I was going to say less than 10, yes.

 Scott Carroll  - JP Morgan - Analyst 

 Less than 10, okay and just another question is will you be engaging with the Government on their sort of their - for disposal of their state post escrow if and when they decide to dispose of it?

 Lance Hockridge  - QR National Limited - MD & CEO 

 Of course and, as you might know, I've had continuing discussions. The position of the Government is that they stand behind all of the arrangements that they put in place. In other words, as we all know, that shareholding has escrowed through until at least this time next year.

 Scott Carroll  - JP Morgan - Analyst 

 Okay. Thank you.

 Lance Hockridge  - QR National Limited - MD & CEO 

 Thank you.

Operator 

 There are no further questions at this time.

 Lance Hockridge  - QR National Limited - MD & CEO 

 Thank you very much for that. Ian, I think you had one more question?

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 No, it's over here, Lance.

 Scott Ryall  - CLSA - Analyst 

 Thank you, Scott Ryall from CLSA. I had one follow up from one of the questions just now was to page 16. So you've stepped through the five different areas of the AUD94 million that was talked about. The only one that I can see that should be non-recurring or at least doesn't set a new base would be the deficit tonnage charges but you've said above will be, you know in the order of the same magnitude for next year.

So in terms of Matt's question, that's the kind of starting point for next year, right? There's no one-offs in the course of 2011 that mean that those will go backwards?

 Lance Hockridge  - QR National Limited - MD & CEO 

 No, the short answer is no, no one-offs. But to your point of course DTC will re-occur until we are completely through that process of renegotiating the legacy contracts. That will be a function of what the, at its heart what the weather is year to year, therefore the scale of DTC year to year.

 Scott Ryall  - CLSA - Analyst 

 Okay great and then I'm just looking at pages 8 and 9. On nine on the bottom right-hand side you've given a measure of performance, days of operation losses, which is something that a customer would see. But on the Queensland metrics you've talked about payloads and locomotive availability which is more to your point on better utilization of capital not necessarily what a customer sees.

If I'm a customer in Queensland have I got demonstrable evidence that you guys have improved service over the last 12 months?

 Lance Hockridge  - QR National Limited - MD & CEO 

 Yes we do. Part of the reason that I stayed from that to be perfectly frank with you, Scott, is it was such an unusual year. Both in terms of the shifting around as a result of what went on and as a result of the diminished tonnages. So no one would suggest that we were under pressure so to speak around delivery. That said we do have a range of measures and as you might expect particularly in the new form contracts but equally in a number of the older form contracts there are a whole raft of performance KPIs. We can demonstrate that we have improved across the Board with respect to that service delivery performance.

 Scott Ryall  - CLSA - Analyst 

 Just to follow I mean the chart you put on page 9 also shows favorable comparison to your main competitor and most of your customers would say it's exactly inverted for Queensland. Are you guys bridging the gap? Have you got those sorts of metrics around?

 Lance Hockridge  - QR National Limited - MD & CEO 

 Those sort of metrics, no there is not the exactly comparable metric in Queensland. Bear in mind that we're talking about four systems versus one in the Hunter Valley of course. The general answer to your question -- well firstly I would challenge the notion that it's exactly the inverse. I think that the quality of the work that we've done over the last couple of years would say -- would have most of our customers saying that we have already narrowed that gap.

But I think that's your very question, Scott, and yes is the answer. We can demonstrate that we are closing that gap.

 Scott Ryall  - CLSA - Analyst 

 Just on that, what are Marcus' performance metrics that you look at?

 Lance Hockridge  - QR National Limited - MD & CEO 

 A combination of things around safety, the financial performance of the Company. The financial performance of the coal business and a series of metrics, which is what you're fishing for of course that go to exactly this item. The demonstrable improvement in what the customer's experience is of our business for them.

 Deborah O'Toole  - QR National Limited - Executive Vice President and CFO 

 So you do see in the numbers and then the statistic that Lance quoted n terms of 35% of revenues under contracts at higher rates, that is demonstrating performance under those new counteracts as well. So the performance under those new contracts has been over-performance, that's delivered additional revenue.

 Lance Hockridge  - QR National Limited - MD & CEO 

 Thank you ladies and gentlemen, that now concludes our full year results presentation. Thank you very much for your attendance and for your participation. Thank you.

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