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Positive growth, with improvements to business capability

28th February, 2013

Positive growth continues improvements to business capability

KiwiRail is pleased to report an increase in both revenue and operating surplus over the last six months. This result is primarily due to the continued growth in the core freight business which achieved a revenue result of over $238 million, an improvement of almost eight percent from the previous half year. Overall business revenue increased by four percent to almost $363 million and the operating surplus result of almost $47 million was a 7.6 percent increase.

This result was achieved while also concurrently resolving a number of strategic issues that better position our overall business as we continue on the path to financial sustainability.

According to Chairman John Spencer, this result is due to a combination of many factors including a steadfast focus on improving performance and customer service levels, and a commitment to make the hard decisions for the benefit of the entire business.

“In the last six months we have sold the Hillside foundry, mothballed the Napier to Gisborne line, restructured the Infrastructure and Engineering business, and completed the Balance Sheet restructure,” said Mr Spencer.

“While acknowledging the impact some of these decisions have had on communities and our people, they had to be made for the benefit of the entire business. We can’t shy away from the fact that while we have made good progress over the last few years there is still a long way to go. If these hard decisions aren’t made we simply won’t achieve our objectives.”

“I also want to emphasise that our commitment to a safe, high performance culture has not, and won’t be, compromised by these decisions. Any serious incidents involving either members of the public or our staff will be fully investigated and if improvements need to be made they will be.”

The business is also seeing the benefits of improved rollingstock fleet reliability and on time performance, receiving positive feedback and increased business from customers.

“The new, much needed rollingstock is performing well and we have ordered a further 20 new locomotives and 300 container wagons to be delivered this year. The designs of these have been improved to incorporate the learnings from the commissioning programme for the first generation,” said Mr Spencer.

On the 31st of December KiwiRail was split into two entities – a new State Owned Enterprise named KiwiRail Holdings Limited, and New Zealand Rail Corporation (NZRC).

“This decision provides the business with a structure that better reflects commercial reality as it separates the commercial operations from the land assets. This delivers a more accurate basis for measuring our financial performance, which will be incorporated in our reporting of the full year results.”

Business unit results

As mentioned above the core freight business has continued to grow with the import-export business being the standout performer achieving an increase in revenue of almost 21 percent over the previous half year.

“This result is due to an increase in shipping and port movements, leading to higher volumes,” said Mr Spencer.

“We expect growth in this segment to continue as we add more rollingstock, attract more volume and continue to meet our customer service targets.”

“This result has helped offset less growth in the bulk and domestic freight businesses. The bulk result is due to less volume from coal and milk than forecast, and domestic was impacted by the threatened Interislander strike late last year and the continued flat domestic economy.”

The capability of Interislander has been improved due to all ships being available and the Aratere, the cornerstone of the fleet, performing well.

“But a reduction in the overall Cook Strait passenger market and the impact of the threatened industrial action has resulted in a flat profit result,” said Mr Spencer.

“We will continue to closely monitor the downturn in the passenger market and whether this is a long term trend. We are also conducting a review of the fleet strategy and freight transfer operations to consider what type of ships will be required to meet market requirements over the next 25 years.”

KiwiRail’s long distance passenger Scenic business has been re-invigorated by the introduction of new carriages on all three services. Initial feedback from passengers has been positive and there has been some growth in numbers.

“The Northern Explorer growth is in line with expectations, but still some way from being profitable. We also expect passenger numbers on the TranzAlpine to continue to grow alongside the Christchurch rebuild. Unfortunately, while the Coastal Pacific has achieved a small increase, this has not been enough to guarantee this service will continue in its current format. A decision on this is expected to be made shortly.”

Outlook

Mr Spencer said that while further import export freight growth is forecast, the recent news regarding Solid Energy’s situation and the concerns over whether ongoing dry conditions will have an impact on milk production, is expected to affect bulk freight growth.

“The issues facing Solid Energy will potentially result in significantly less coal being moved from their West Coast mines and would then negatively impact our freight revenue and earnings. Their difficulties also mean it is unlikely we will resolve the pricing component of our contract with them. This relates to our contract negotiations to ensure the returns we receive fairly reflect our costs of operating the West Coast coal services, as highlighted in our Statement of Corporate intent.”

"Also during January this year two major events have had an impact on revenue and costs. The first was the extensive damage to the West Coast line from a major storm and the second was a derailment on the Mission Bush line.”

“Due to these challenges, combined with the continued flat outlook for domestic freight and Cook Strait passenger numbers, we expect our operating surplus to be in the range of $104m to $110m against our Statement of Corporate Intent target of $119m.”

“Despite this, over the next six months we will remain focused on pursuing further opportunities to improve our performance and service to customers, while continuing to closely manage costs.”

Performance summary

UNAUDITEDUNAUDITED
31 December 2012 ($m)31 December 2011 ($m)Variance
Operating Revenue NZ$ 362.9NZ$ 349.04.0%
Operating ExpensesNZ$ (316.0)NZ$ (305.4)-3.5%
Operating SurplusNZ$ 46.9NZ$ 43.67.6%

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ENDS

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