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Tranz Rail Announces Financial Result

7 November 2001


Auckland, New Zealand - - Tranz Rail Holdings Limited [NZSE: TRH] [NASDAQ: TNZR] today reported its financial result for the first quarter to 30 September 2001.


Tranz Rail Announces Financial Result for the
First Quarter Ended 30 September 2001

Summary Commentary

Tranz Rail Holdings Limited today reported a net loss for the quarter ended 30 September 2001 of NZ$7.5 million or 6 cents per ordinary share (diluted). The result compares to a net loss of NZ$16.4 million or 13 cents per ordinary share (diluted) for the same quarter last year.

Tranz Rail Chief Financial Officer Mark Bloomer said the first quarter is seasonally the weakest trading period for the Company, and the result continued to reflect the costs associated with the Company’s major restructuring programme. Mr Bloomer said the end of the first quarter of the 2002 financial year represented completion of a full twelve months since the Company announced its radical Strategic Plan in October 2000.

The Plan involves selling certain non-core businesses and assets and rationalising the focus of the remaining core freight operations through three distinct businesses:

- Rail Services, concentrating on long haul fixed capacity, point to point, scheduled services;
- Distribution Services, providing mode-neutral supply chain management; and
- The Interisland Line, offering passenger and freight transport across Cook Strait.

These three businesses now have their management teams in place and have developed their own business plans.

Tranz Rail’s total revenue of NZ$143.3m declined NZ$0.1m (0.1%) compared to the same quarter in the prior year.

Total freight revenue for the quarter of NZ$107.4m was down NZ$1.9m (1.7%) compared to the same period last year mainly in the Forestry and Manufactured Products sectors.

Passenger revenue of NZ$29.7m increased by NZ$3.2m (12.1%) compared to last year. Increases were mainly due to volumes on the Interisland Line following introduction of a full year fast ferry service in December 2000.

Costs of NZ$145.6m decreased by NZ$8.3m (5.4%). Excluding restructuring, costs were NZ$142.1m and increased by NZ$4.7m (3.4%). The latter cost increase was due to the introduction of the full year fast ferry and is off set by associated increased revenues.

“While good progress has been made on our restructuring, the benefits will not be reflected in our results until each initiative completes. We are now approaching the point where several initiatives are close to completion. This will both improve profitability and reduce the costs of change,” Mr Bloomer said. “However, the full annualised impact of the restructuring will not be seen until the 2003 financial year.”

In line with its strategy, Tranz Rail is now close to finalising the sale of the long distance passenger business Tranz Scenic. This transaction has proven to be more complex than initially anticipated, however, good progress was made during the quarter and the transaction documentation and other details are now complete and settlement is imminent.

The Company also reached agreement with the Government to sell the Auckland rail corridor for $81 million and contract documentation and details are being progressed to enable this transaction to complete by December 2001. Preliminary work has now commenced with regard to the sale of the Wellington Tranz Metro business.

Mr Bloomer said the company was also making good progress on the outsourcing of its engineering activities. Shortlisted parties are now in the due diligence process and detailed contract negotiations are in progress. Preferred Suppliers for maintenance of infrastructure and locomotives should be confirmed by December 2001. In October, the company completed outsourcing of the call center used by The Interisland Line business.

Mr Bloomer said the company’s rail freight business was undergoing a major transformation. A move towards standardised wagons and train configurations was simplifying operations and would improve the utilisation of assets. As part of this, most freight activity would be handled through 14 container transfer sites throughout the country. These terminals would be loading and unloading trains on a “lift on, lift off” basis, reducing the need for shunting of wagons. This would improve efficiency and workplace safety. The new terminals will be supported by further IT investment to allow on-line freight booking and better tracking of consignments. The first of the new container transfer sites has been opened at Te Rapa, with the finishing touches being made to Auckland, Tauranga, Stratford, Palmerston North, Wellington Blenheim, Christchurch, Timaru and Dunedin.

The Distribution business is in the process of installing a new operating and financial system, which should be fully operational during the second quarter.

Work has commenced with port companies to upgrade terminal facilities and loading areas used by The Interisland Line in Picton and Wellington. The upgrades should be completed prior to the summer season and will improve service for customers.


Detailed Commentary

The company recorded a net loss for the quarter ended 30 September 2001 of NZ$7.5 million or 6 cents per ordinary share (diluted), compared to a net loss of NZ$16.4 million (13 cents per ordinary share - diluted) from the quarter ended 30 September 2000.

Revenue

Total revenue for the quarter of NZ$143.3 million decreased by $0.1 million (0.1%) compared with the corresponding quarter in the 2001 financial year.

Freight revenue of NZ$107.4 million decreased NZ$1.9 million (2%) compared to the corresponding quarter in the prior year. The decrease was volume related as overall freight tonnage decreased 3% and revenue tonne kilometres decreased 8%. A number of factors influenced the volume reductions as explained in the commodity group analysis below. However, the lower freight volumes were offset by an increase in average rates as a result of general freight rate increases introduced during the second quarter of the 2001 financial year to recover increased fuel costs. Freight revenue was favourably impacted by an increase in revenue from commercial vehicles on the interisland ferries following the withdrawal of a competitor from the market in November 2000.

Freight revenues for the quarter in the key product sectors were as follows:

Quarter Ended 30 September 2001
2001
(NZ$m) 2000
(NZ$m) Change
(NZ$m) Change
(%)
Agricultural and food products 37.7 34.3 3.4 9.9
Manufactured products 16.8 19.2 (2.4) (12.5)
Forestry products 16.2 19.1 (2.9) (15.2)
Coal 9.1 8.5 0.6 7.1
Fertiliser, minerals & aggregates 3.1 4.3 (1.2) (27.9)
Other freight 24.5 23.9 0.6 2.5
Total 107.4 109.3 (1.9) (1.7)

Agricultural and food products revenue increased although volumes decreased compared to the corresponding quarter in the 2001 financial year. Reduced freight volumes were in part due to a slower start to the 2001/02 season. These volume reductions were offset by an increase in the average rate following the rate increases implemented during the second quarter of the previous financial year.

Forestry revenue decreased as volumes were adversely affected by lower export demand and an associated slowing of production at customers’ plants. Also, there was some disruption due to a fire at a major customer’s processing facility. The period also saw some rationalisation of low margin traffic where adequate returns were not being achieved.

Manufactured products revenue decreased due to reduced volumes that resulted from an unscheduled closure of a customer’s plant. The adverse volume variances were partly offset by an improvement in average rates.

Coal revenue increased mainly due to improved export coal volumes.

Fertiliser, minerals and aggregates revenue decreased as a result of reduced volumes following a change in distribution patterns of a major customer. The decline in volumes was partly offset by an improvement in average rates.

Other freight revenue includes commercial vehicle movements on the interisland ferries, Tranz Link International freight forwarding revenue, operations at Metroport and other miscellaneous freight activities. Revenue increased primarily due to the increase in The Interisland Line commercial vehicle revenue, and the expansion of the Metroport operation from a weekend to a seven-day operation.

Passenger revenue of NZ$29.7 million increased by NZ$3.2 million (12.1%) compared to the corresponding quarter in the 2001 financial year.

The Interisland Line revenue increased as a result of higher passenger numbers, due to the extension of The Lynx to a year round fast ferry service, and the withdrawal of a competitor from the market during November 2000.

Tranz Scenic and Tranz Metro rail passenger services recorded revenues consistent with the comparative quarter in the 2001 financial year. As part of the Company’s Strategic Plan to focus on its core freight operations and in anticipation of selling the Tranz Scenic business, the Company closed four services, namely: The Geyserland Express, The Kaimai Express, The Bay Express and The Waikato Connection, effective from 7 October 2001. A fifth service, The Southerner is also under review for closure but will remain in operation until February 2002 following financial subsidy received from the Government and Local Authorities.

Other revenue of NZ$6.2 million decreased by NZ$1.2 million compared to the corresponding quarter in the 2001 financial year. By its nature miscellaneous revenue includes a number of items which are irregular in occurrence.

Operating Costs

Operating costs for the quarter of NZ$145.6 million, decreased by NZ$8.3 million (5.4%) compared to the corresponding quarter in the 2001 financial year. Operating costs before restructuring costs of NZ$142.1 million increased by NZ$4.7 million compared to the corresponding period last year. The latter cost increase was impacted mainly by costs of the year round fast ferry service, which has been compensated for by increased revenues.

Operating costs for the quarter are analysed as follows:

Quarter Ended 30 September 2001
2001
(NZ$M) 2000
(NZ$M) Change
(NZ$M) Change
(%)
Labour and related costs 49.9 51.3 1.4 2.7
Lease and rental costs 17.7 12.0 (5.7) (47.5)
Fuel and traction electricity 17.0 16.1 (0.9) (5.6)
Contractor costs 14.3 15.5 1.2 7.7
Depreciation 13.1 12.5 (0.6) (4.8)
Purchased services 12.8 11.9 (0.9) (7.6)
Materials and supplies 7.4 6.4 (1.0) (15.6)
Casualties and insurance 1.1 2.8 1.7 60.7
Other expenses 8.8 8.9 0.1 1.1
Operating costs before reorganisation costs
142.1
137.4
(4.7)
(3.4)
Reorganisation costs 3.5 16.5 13.0 78.8
Total 145.6 153.9 8.3 5.4

Labour and related costs reduced by NZ$1.4 million (2.7%) compared to the same quarter in the previous financial year. Average full time equivalent staff number for the quarter ended 30 September 2001 was 4,132 which included 246 staff employed in capital programmes, compared to 4,065 including 222 capital programme staff for the quarter ended 30 September 2000, the net effect being an increase in average operating staff of 43.

Staffing levels have increased temporarily as a result of the change process. The relocation of operational and corporate functions to Auckland has resulted in a temporary increase in staff numbers due to the need to operate in both locations during the transition phase, while the establishment of business units as standalone operations has required the transfer of certain corporate and management functions to the individual lines of business. This is a necessary and temporary consequence of the restructuring.

Despite the increase in average full time equivalent staff numbers, costs have reduced due to improved management of labour on-costs (mainly as a result of increased utilisation of leave entitlements) during this quarter which historically has the Company’s lowest freight volumes.

Lease and rental costs increased by NZ$5.7 million compared to the same quarter in the prior year, due to the increased cost of the new fast ferry service which is now a year round service. The Lynx did not operate in the comparative quarter last year. These costs have been offset by increased revenue from the service.

Fuel and traction electricity costs increased by NZ$0.9 million compared to the same quarter in the comparative period. Average fuel prices for rail diesel and light fuel for the quarter were 11% higher and 1% lower respectively, than in the corresponding quarter in the 2000 financial year. Also, following the electricity shortage experienced in New Zealand during the winter, electricity costs increased substantially during the quarter; this was a temporary increase and electricity prices are now returning to more normal levels.

Contractor costs reduced by NZ$1.2 million compared to the same quarter in the previous financial year as the Company improved the efficiency of its trucking fleet.

Depreciation increased by NZ$0.6 million as a result of a higher depreciable asset base this year compared to last year.

Purchased services costs increased by NZ$0.9 million compared with the same quarter in the previous financial year. These costs have been adversely impacted by consultancy costs.

Materials and supplies costs increased, primarily due to the weaker exchange rate that has increased the cost of imported materials.

Casualties and insurance costs decreased by NZ$1.7 million compared to the same quarter last year when a number of major incidents were experienced.

Other expenses are comparable with the same quarter in the previous financial year.

Reorganisation costs of NZ$3.5 million were incurred in relation to organisational change programme during the quarter. In the comparative period, the Company recognised a provision for organisational change of NZ$16.5 million. Expenditure identified as reorganisation costs includes direct costs of change such as redundancy costs associated with management changes, relocation of functions from Wellington to Auckland, and business reengineering and outsourcing. Operating costs also continue to be adversely impacted by indirect costs of the change process such as labour, consultancy, training, travel and communication costs. Therefore, the real cost of reorganisation is greater than that specifically indicated.

Operating Profit, Interest, Taxation and Equity Earnings

The operating loss for the quarter was NZ$2.3 million compared to a loss of NZ$10.7 million for the corresponding quarter in the 2001 financial year. Excluding the impact of the reorganisation costs in each quarter, the operating profit for the quarter was NZ$1.2 million compared to NZ$5.8 million for the corresponding quarter in the 2001 financial year. The weaker result this quarter can be summarised as being due mainly to reduced freight revenues (particularly Forestry and Manufactured products) and indirect costs of the change process.

Net interest expense and deferred financing cost amortisation for the quarter was NZ$5.5 million, a decrease of NZ$0.2 million (3.5%) from the prior year quarter. The decrease was due to a decrease in average interest rates.

Tax expense for the quarter was nil due to allowable tax deductions in determining taxable income.

The Company’s investment in Australian Transport Network Limited (ATN) contributed NZ$0.3 million to equity earnings for the quarter compared to NZ$nil in the prior year.

Shares of Tranz Rail Holdings Limited are publicly traded on the New Zealand Stock Exchange under the symbol TRH and the US American Depositary Shares (ADS) of the Company are traded on the NASDAQ National Market System under the symbol TNZR (each ADS is equivalent to three (3) shares). The Company operates the only commercial railroad in New Zealand, offering an integrated network of rail, road, air and sea distribution and logistics management services that provides customers with transport solutions in the Australasian market place and passenger travel experiences in New Zealand. Freight and passenger services utilise 3,900 route kilometres (2,400 route miles) of track, approximately 280 locomotives, 5,300 wagons (freight cars), 160 carriages (passenger railcars), 160 self propelled passenger railcars, 3,500 shipping containers, and two roll-on roll-off ferries and one fast ferry between the North and South Islands. The Company holds a 27% equity interest in Australian Transport Network Limited which operates freight services in Tasmania, Australia, utilising 891 route kilometres (555 route miles) of track, approximately 50 locomotives and 700 wagons (freight cars).
(http://www.tranzrail.co.nz)

TRANZ RAIL HOLDINGS LIMITED
(TRH:NZSE)
(TNZR:NASDAQ)

Quarter Ended 30 September
2001 2000
NEW ZEALAND DOLLARS
(in millions except per share data) (unaudited; NZ GAAP)

Total Revenue 143.3 143.2
Total Operating Costs 145.6 153.9
Operating Profit/(Loss) (2.3) (10.7)
Net Profit/(Loss) (7.5) (16.4)
Average Ordinary Shares outstanding
(diluted) (in thousands)
129,533
126,638
Earnings per Ordinary Share (diluted) $(0.06) $(0.13)


Quarter Ended
30 September
2001 (b) 2000 (b)
UNITED STATES DOLLARS
(in millions except per ADS data) (unaudited; NZ GAAP)
Total Revenue 60.0 63.1
Total Operating Costs 61.0 67.8
Operating Profit (1.0) (4.7)
Net Profit (3.1) (7.2)
Average American Depository Share equivalents outstanding (diluted) (in thousands) (a)
43,178
42,213
Earnings per American Depository Share equivalent (diluted) (a)
$(0.07)
$(0.17)


(a) One American Depository Share (ADS) represents three ordinary shares.
(b) New Zealand dollar amounts have been translated into US dollars for convenience at the average daily rate of NZ$1.00 = US$0.4191 and NZ$1.00 = US$0.4409 for the quarter ended 30 September 2001 and 30 September 2000, respectively, based on the noon buying rate for New Zealand dollars as reported by the Federal Reserve Bank of New York.

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