COST CUTS TOP AURIZON'S AGENDA AFTER PROFIT SLUMP

AURIZON (ASX:AZJ) has swung into the red, with the rail operator recording a net loss of $108 million in the first half.

The loss represents a 135 per cent decline compared to a $308 million profit in the previous year, after the Brisbane-based business was hit with writedowns amid challenging trading conditions.

Impairment charges totalled $426 million, including $240 million announced to the market in December last year and $174 million relating to the proposed West Pilbara Iron Ore Project. The rail and port infrastructure project in Western Australia is unlikely to go ahead in the short to medium term.

A 5 per cent decrease in tonnages led to an 11 per cent decline in revenue to $1.76 billion compared to HY15. Aurizon's underlying earnings were also down 17 per cent to $403 million, in line with its guidance.

Aurizon managing director and CEO Lance Hockridge says the group will respond quickly as customers adapt to a difficult business environment in the resources sector.

"Cost reduction and transformation will remain the key drivers of margin growth and shareholder value creation, and we're determined to pull every cost and efficiency lever available to us," Hockridge says.

"Aurizon's transformation program since IPO has continued with strong momentum as we drive for benchmark performance across operational, customer service and safety metrics.

"However further reform is required in Aurizon's cost base to reflect the changed operating environment."

The program has delivered $308 million in benefits between mid-2013 and 2015, with the 2018 transformation target set at $380 million.

Aurizon managed to cut costs by $56 million in the first half of FY16, but will establish a dedicated transformation unit overseen by Hockridge to beat the FY18 target.

Further job cuts are expected, with the group's revised enterprise agreement allowing forced redundancies approved by the Fair Work Commission last year.

"Despite the short-term challenges, Aurizon is in a strong financial position with stable and long-term contractual arrangements with major customers and an ability to continue delivering strong returns to shareholders," Hockridge says.

"The regulated $5.6 billion network business generated nearly two thirds of group earnings this half and continues to demonstrate its value as a stable, defensive asset in a difficult environment."

Aurizon has forecast full-year earnings to be in the range of $845 million to $885 million, contingent on no material deterioration in trading and no major weather impacts.

The board has declared an interim dividend of 11.3 cents per share to be paid on March 29.