Michael Beard – Remarks to Tranz Rail Result

Michael Beard – Opening Remarks to Tranz Rail Result Announcement

Speech Notes: Good afternoon and thanks for joining us to discuss our 2002 Annual Result.

It’s a result that contains no surprises. We flagged much of the content of today’s briefing on July 23 – indeed today’s numbers are at the more favourable end of the predictions provided at that time.

As we said in July, don’t judge us on today’s results. Judge us on our results going forward and on meeting our targets.

We are on target for our 2003 first quarter financial result. We have provided the market with ongoing quarterly targets that we expect to meet. Only when this time has passed can you effectively give a verdict on our restructured operation.

Why? Because we have said repeatedly that the full pay-off from our radical re-engineering would not come into effect until the 2003 financial year and we clear the balance sheet of the costs associated with the change process.

It is significant change. We are moving away from an unsustainable, old model.

That was a model that: Failed to generate positive cash flow Had a very poor safety record Had a run to failure maintenance philosophy Ran trains at less than 40% on-time performance Had IT systems that couldn’t even track our customers’ freight Had financial systems that couldn’t track train/customer profitability

Clearly that model was not sustainable for Tranz Rail or customers and is in marked contrast to our current position where we are: Focusing on preventative maintenance Running trains at 80% plus on-time performance Building IT and financial systems that fit Tranz Rail and customer needs Improving our safety record Generating positive cash flows

Clearly we are not yet where we need to be. But those simple changes I have just outlined is evidence of our improving performance.

That message could not be any clearer. Yet in the past few weeks Tranz Rail has been subjected to a series of hasty, ill-informed judgements about our company.

These are judgements based on self-interest. Let’s be perfectly clear on where they are coming from.

First there are the ideologues that still cannot accept a 10-year old decision to sell rail into private ownership. The facts are that it is, and our operations need to be conducted accordingly. Then there are the local politicians in Wellington. They’re faced with a decision they don’t all agree with to buy the Tranz Metro network. Their main concern is a ratepayer backlash and their intent is to minimise the purchase price.

Our message to them is that our responsibility is to our shareholders, not to their ratepayers. Tranz Rail will negotiate a fair price for the sale of Tranz Metro.

Then we have two or three significant customers who are dressing up discussions about price and service as an issue about track ownership and access.

Our message to them is clear. They are paying 30% to 50% less for our services than they were five years ago. Regardless of track ownership these prices do not cover the cost of operation. We need to work with them to find an economically sustainable basis for ongoing service.

Price negotiations are always a rigorous affair. They are not resolved by mounting lobbies. They are resolved in one-to-one negotiations. And one of the points we’re making is that rail is a cheaper, environmentally cleaner and safer option than roading alternatives.

Government has recognised that and we are working with it to make sure those advantages for rail play a greater role in New Zealand’s future land transport policy.

As a company we face a number of challenges.

Some are the result of history. Some are the result of our restructure and the associated tidying up of our balance sheet.

Some challenges we were aware of and we have solutions in place. Some have been precipitated by events that occur in the normal course of business.

For example our five-year $250 million debt facility is up for renewal and we are currently negotiating with the lenders on a new arrangement.

We also have a ratings review due and we believe S&P will make an announcement in that regard tomorrow. That review may trigger other events and we have plans to cover the various scenarios that may arise.

The Board will consider all available measures including realignment of its debt facilities both in the short and long term and raising of new equity if appropriate. At this point the Board has made no firm decisions as to which avenue provides the best solution as it needs to know the outcome of certain contingent events.

In reaching that decision the Board will take into account the following:

The need for financial flexibility particularly in the short term The current negotiations in regard to Tranz Metro The company’s negotiations as to terms and conditions with its lenders in regard to renewal of its facilities The position of the Aratere Lease Letter of Credit requirements

We have just completed a restructuring on a scale that few New Zealand companies would contemplate or attempt.

It’s taking somewhat longer than expected but it is bringing results.

Our on-time statistics, service failure statistics and lost time injury and safety statistics have all made significant and in some cases dramatic improvements in the past 12-18 months.

Our reliability and quality of service is encouraging significant freight onto the network. In the last monht, two major shipping lines recently committed to large-scale freight movements with Tranz Rail.

Our network efficiency is improving. In the past year we carried record amounts of dairy products, and record numbers of containers to the Port of Tauranga. We have also set record coal tonnage marks in two of the past five months.

These are no mean achievements. They gave us the courage to stand before the financial community at the end of July and present an unprecedented level of transparency about our operations and forward forecasts.

We are prepared to be judged on our ability to meet those targets.

But we must have time to meet those targets.

As I stated earlier we are right on target to meet our first quarter predictions.

More important to judging our success will be our performance in quarters two and three, traditionally our highest performing periods.

Those quarters are some time away. But if you want to accurately judge Tranz Rail by basing that judgement on fact rather than speculation, time must be given.

Hasty conclusions and analysis is futile, as is speculation about what we will do, or won’t do.

We have plans for the various issues that we are facing. They will be actioned as each scenario becomes clear – that is the prudent and appropriate response. Tranz Rail is a vital part of the New Zealand land transport network.

But the historical model of Tranz Rail was one that was headed for the scrap heap - it was not sustainable.

We have a new model that given time to perform and time to be judged will bring a successful, sustainable future.

That future will see Tranz Rail remain as a New Zealand icon company.

Thank you.

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