Tranz Rail shows parent's influence

Friday 16th November 2001

Ask most people to describe the core activities of a railway company and they probably would say something about trains.

Tranz Rail Holdings sees it differently. In its latest annual report it says it is divesting non-core assets and outsourcing "specialist activities." These include the supply and maintenance of locomotives, wagons, tracks, structures and signals.

It is less clear about what the company wants to become. It talks freely of "undergoing a transformation," of becoming "more competitive, more efficient, more reliable and more profitable" and of "creating an organisation that is sharper and makes the most efficient use of our resources" without resorting to specifics.

The closest thing to a clearly articulated vision of what Tranz Rail hopes to achieve from its restructuring comes amid a brief profile of managing director Michael Beard. "He is responsible for Tranz Rail 's strategic plan, which is to become the transport company customers, employees and shareholders choose first."

This will extend to such heresies as moving freight around without ever using a train.

From these comments, one can gather the company sees its core business as managing the movement of people and freight and not owning the vehicles that make the deliveries.

It seems even people within the company are not clear on the eventual makeup of Tranz Rail, with a management report stating "it is currently unclear as to the quantity or condition of assets that the company and its subsidiaries will continue to own."

Vision statement aside, there is little else to quibble about in terms of content. The report contains a very comprehensive eight-page letter to shareholders by chairman Robert Wheeler and Mr Beard, which gives a breakdown on each division, the changes it is undergoing and the reasons for them.

This is soon followed by an equally detailed "management's discussion and analysis of financial condition and results of operations." This contains all the information shareholders normally have to trawl through the fine print to find and more. Subjects covered range from revenue sources by industry to individual capital spending projects to giving reasons for numbers not being the same as the previous year. There is even a subsection entitled "relationship of inflation to cost and price trends."

The substantial changes resulting from the company's new direction don't come cheaply and the report shows Tranz Rail's net profit for the year to June 30 was slashed by nearly 90% to $5.6 million on revenue up 5.6% to $628 million.

The report is quick to highlight all the abnormal costs that contributed to this poor result, describing them as "the costs of change before reaping the benefits." These amounted to $21.3 million and included redundancy payments, relocation of the head office from Wellington to Auckland and the reconfiguration of its ferry fleet.

Fortunately, it doesn't spill over into putting a glossy overlay on the figures and pulls no punches when it says such costs will continue in the current financial year.

Despite the bottom dropping out of its net profit, Tranz Rail's net cash flows remained strongly positive at $57.8 million, down from $73 million last year, and shareholders' equity represented a comfortable 50%, down from 52%.

As well as the gratifyingly large amount of detail, the report also has some other nice features not normally found in New Zealand annual reports.

One is the use of three years' worth of figures in major tables rather than the traditional lineup of current and previous year's figures. This enables a casual reader to put individual numbers in context and look for short-term trends. This cannot be done with only two years' of figures as one often has no way of knowing whether the previous year's numbers were distorted by abnormal items.

Another is the display of quarterly figures going back three years.

While most New Zealand companies have yet to even consider reporting quarterly, Tranz Rail's report shows the influence of its American parents. The quality and quantity of information presented shows it has learned some useful lessons from the US' more rigorous disclosure regime.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Web: www.mcewen.co.nz Email: davidm@mcewen.co.nz

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