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Speech by Bob Wheeler, Chairman, Tranz Rail,To AGM

Speech by Bob Wheeler, Chairman

Chairman’s Address to Shareholders, 2000 Annual Meeting.

Parkroyal Hotel, Wellington, 10 October 2000, 3pm

Chairman's introduction

Fellow shareholders, ladies and gentlemen, welcome to the 2000 Annual Meeting of Tranz Rail Holdings.

Traditionally the chairman’s and the managing director’s AGM speeches are both reflective and forward looking. They examine the company’s performance in the past financial year and cast ahead into the future.

This latter aspect, when we point to where the company is going, makes this year’s Tranz Rail Annual Meeting the most important since the company listed in 1996.

The next year or so will see fundamental change at Tranz Rail. Our structure will be different, the way we do business will be different, and we will be seen as being different.

Most importantly there will be a revolution in culture involving everyone connected with Tranz Rail – especially staff, customers and investors - based on positive perceptions.

I would like to use a gardening analogy to explain what we want to achieve. What is needed is some judicious pruning of an overly large and tangled Tranz Rail tree. Some of its branches are healthy and productive and some would thrive given a chance.

Others are stunted and fruitless and these branches need to be pruned right back to focus the tree’s energy on its healthy branches and give them room to bloom.

As some of you may remember, Tranz Rail shares at listing had a final offer price of $6.19 and within a year were trading at around $9.

Since then the Tranz Rail share price has substantially under performed the New Zealand Stock Exchange top-40 index. This month our share price is about two thirds of the listing price.

This is not because investors have a misguided understanding of Tranz Rail. The market understands the company only too well and the current share price reflects the reality that our financial results have been mediocre.

For example, our 1996 operating profit has not been improved upon.

Behind these results are some fundamental problems concerning high capital expenditure needs, high fixed costs and low rail freight rates.

All these problems were present in Tranz Rail’s financial and operating performance during 1999-2000, though there was an improvement on the previous year.

Our operating profit (after adjustments for feasibility and redundancy costs) increased 3.4 percent to $70.8 million compared with the previous year.
Total revenue rose 4.4 percent to $594.5 million.
And our operating costs fell 2.6 percent to $523.7 million.
All positive developments. However, two events largely outside of our control held us back from reporting a much better result.

First, and most significantly, we were hit by unexpectedly large fuel price increases in the second half which effectively took $14 million off our operating profit.
Secondly, our sea and air competitors on Cook Strait made life markedly tougher for The Interislander and The Lynx. That was another $8 million off.
We carried record freight tonnages, generated by a strengthening New Zealand economy, particularly in exports, and increased market share.

The year saw us signing a 10-year contract with Solid Energy to carry coal from the West Coast to the Port of Lyttelton, removing some of the uncertainty concerning this business. Export coal volumes increased significantly during the year and tonnages are expected to grow further.

During the year, one passenger service was launched and another rebranded. In May, Tranz Scenic rebranded The TranzCoastal, the successor to the Coastal Pacific on the Picton to Christchurch journey. The Tranz Coastal features an open-air observation carriage similar to the one on its sister train, the world-rated The TranzAlpine.

A new Tranz Metro commuter service between Hamilton and Auckland, The Waikato Connection, was launched in June. The service is running on a six-month trial and is performing up to expectations.

Again, all positive developments. However, in March, and again in July, we were compelled to raise our freight rates to recover some, and only some, of the fuel price increases we have had to bear.

And from the first of this month the fuel adjustment factor in freight contracts has been increased and inter-island ferry, Tranz Scenic and Tranz Metro Auckland fares will increase later in the month.

In 1999-2000 there were five deaths in work-related accidents. This led to a Ministerial Inquiry into Tranz Rail’s workplace safety. The outcome reinforced the company’s own views on where we need to focus our safety programmes.

For example we are moving to reduce the number of people exposed to the risks of the shunting yards by introducing new technologies and operating practices.

These deaths, and all workplace injuries, are cause for deep regret. We are keenly aware of the loss suffered by families, friends, colleagues and communities and publicly express our sympathy. The losses and injuries are unacceptable.

We are motivated to further reduce the dangers in our workplaces.

I reiterate your company is committed to a zero tolerance policy on safety issues.

The improved 1999-2000 year financial result is not an invitation to have a "cup of tea". We must continue to critically evaluate our performance and ways of operating in all aspects.

Underlying problems, which I briefly mentioned earlier, remain and threaten the company’s future profitability.

Our current way of operating does not give an adequate return to meet long-term capital requirements.
We have poor asset utilisation. Even our trucks do not work as hard as those of our competitors.
Our high fixed costs don’t give us flexibility to quickly adjust to changing business circumstances, and
We don’t have the ability to increase, and in some cases maintain, our freight rates to recover costs.

We have tried to do too much at the expense of excellence in our strengths.
Despite significant re-engineering in the last seven years, we struggle to deal with the complexity of our organisation, and
Finally, our delivery performance falls short of commercial needs.
All this adds up to the fact that shareholder funds are not earning an adequate return and that we must markedly improve our profitability and share price.

During the course of the year, and especially since Michael Beard joined us in May, we have identified what has to be done:

We need to focus the business on profitable customers and routes.
We have to challenge our totally integrated transport system and aggressively outsource, where proper.
We must reduce our long-term capital requirements and rationalise our asset base.
We need to create a high-performance culture within the company.
Our service quality needs to improve to give us an ability to command higher rates.
Finally, we have to again become a growth story in New Zealand.
Three groups – employees, investors and customers – will drive the positive perceptions of the company. We want Tranz Rail to be a company you can be proud to work for, lucrative to invest in and productive to do business with.

The Tranz Rail of the future will be a transport services management company. It will be smaller, more focused, safer, less capital intensive, driven by service excellence and more profitable.

Before introducing Tranz Rail’s Managing Director, Michael Beard, I would like to thank Francis Small for his work during the year. At last year’s AGM we bid Francis farewell as managing director, though of course he remains on the board.

After that farewell, Francis stayed on for most of the rest of the 1999-2000 year performing invaluable work to ensure the smooth handover to his successor Michael Beard.

Finally, I’d like to give a quick introduction of Michael before he explains Tranz Rail’s new directions in detail.

Michael came to us with a great record of achievement in transport.

In 1984 he formed the California-based Australia-New Zealand Container Line, or ANZCL, which was a spin off from the New Zealand Shipping Corporation. Four years later ANZCL became ANZDL, the Australia-New Zealand Direct Line.

ANZDL started as a very small entrant in a very large, very competitive shipping market. It’s now a market leader in profitability, market share and customer perception.

This was achieved by focusing on a few key drivers: Attention to the customer, innovation, identifying profitable trade lanes and lines of business; and not being tied to assets to provide a flexible and responsive service to the market.

He believes the successful ANZDL formula can be applied at Tranz Rail with profitable results.

I would now like to pass you over to Michael.


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