Can this man save Tranz Rail?

Sunday 1st July 2001

Shareholders abandon him, company growth eludes him, some of his trains don't work and others run over his workers. But a year after his appointment, Tranz Rail boss Michael Beard is far from giving up. Nikki Mandow goes trainspotting.

Want a challenging job? Try this one. Turning around a company whose share price is 40% what it was four years ago, where analysts expect earnings growth this year to be a desperate minus 29%, where the two main shareholders want out, and the company's product regularly injures members of the public and staff.

If this isn't your job description, be thankful. Instead it falls to Michael Beard, a soft-talking 53-year-old Australian, with a straight bearing that betrays his naval background. On Beard's shoulders rests the fate of Tranz Rail's 4000 or so shareholders, many of whom bought Tranz Rail shares for $6.19 at listing, and now hold stock worth little more than half that.

Still, if there is a man to do it, it is probably Beard. With a background in successful shipping company ANZDL (Australia-New Zealand Direct Line), Beard comes with some enviable peer reviews. "Michael is someone who initiates change and gets things done," says Jon Mayson, chief executive of the Port of Tauranga, who has had a long-term working relationship with Beard. "Some people are excited by the impossible and inspired to make change when other people shy away - Michael is one of those people. The moment someone said to him [transforming Tranz Rail] was impossible - that's what would have made him take on the job."

In other words, if the question is whether shareholders throw themselves on the tracks or at Beard's feet, early signs are that investors can hold off on the suicide note. A year after Beard took control of a lumbering, failing, 130-year-old icon of an organisation, positive signs are trickling through. Beard has replaced eight senior managers out of fourteen and has announced a radical restructuring, including selling passenger services, closing unprofitable lines, and outsourcing peripheral functions like mechanical engineering, track and telecommunications infrastructure and freight handling at terminals. (Tranz Rail is talking to about 80 possible outsourcing companies and is about to start detailed negotiations, with the aim of tying up deals by the end of the year.) The company is carrying record amounts of cargo. In March it signed deals with the Ports of Tauranga and Auckland, both of which involved the port company sharing ownership of rolling stock. This is a cunning plan - as well as being a way for cash-strapped Tranz Rail to fund new locomotives and wagons, part-owning trains provides the ultimate incentive for the port companies to use the railways.

A deal to sell Tranz Scenic (the company that runs all the long distance passenger services), thereby raising some very necessary capital, is said to be close, even imminent, if local press reports are correct. (On the other hand, as Unlimited went to press a sale had been "close" for several months - bids closed last December.) The time frame is still "soon". Other possible sales are moving even more slowly. Market changes mean Tranz Rail's refrigeration services are no longer on the market, and sale of Tranz Metro is still some way off, with Finance Minister Michael Cullen stymieing any hopes for a $112 million price for the Auckland rail corridor.

On a more positive note, before the end of the year Tranz Rail will complete a $1 million investment in technology for its retail (freight forwarding) division, Tranz Link. This will include state-of-the-art GPRS systems in its trucks (yep, Tranz Rail's $160 million turnover distribution arm includes trucks and ships as well as trains) and upgrading the decade-old, semi-dysfunctional technology in its main distribution system. Moves are also underway to drastically simplify the rail freight system. The aim, says Beard, is to improve wagon utilisation levels from the abysmal current 12% to nearer 60%, and to double locomotive efficiency.

All of which makes Beard a busy man - an effort worthy of Thomas the tank engine. But can he make Tranz Rail a really useful company? Useful to shareholders, useful to workers, useful to freight customers just wanting to get their stuff from A to B?

In Beard's favour

The fact is that Tranz Rail has been, at least from a shareholder's point of view, absolutely, positively useless. It traded as high as $9 in 1997, but is now down to around $3.60. It's almost five years to the day since Tranz Rail first listed on Nasdaq; then it was trading over $US14. It hovered over $US18 in early 1997 before beginning an inexorable slide, to $US4.70 as this story was written. On February 1, Tranz Rail reported a $6.7 million loss for the six months to December 31 2000. US analysts are predicting earnings will fall 29.4% this year, against average railroad earnings growth of 5.1%, and are tipping that its price:earning ratio will be 6.8, against an industry average of 15. And there's more uncertainty in the equation: both 14% shareholder Fay Richwhite and new 24% shareholder Canadian National are very keen to sell their stakes.

Shareholders stuck with the turkey have looked on with amazement as its largest investors have emerged with huge profits, while individual investors have seen diddlysquat. As investment commentator Brian Gaynor notes, the combined profit of the five original investors - a Wisconsin railroad company, Fay Richwhite, US investment group Berkshire Partners, Huka Lodge owner Alex van Heeren and Richwhite family interests - has so far been $381 million, or 256%. And this doesn't include dividends, or the $15 million paid to Fay Richwhite for fees or financial advice.

That discussion is for another article, some other time. For remaining Tranz Rail shareholders, the question is about the future. Is this, in Thomas the Tank Engine parlance, the little company that couldn't?

Beard says no. Okay, so the third-quarter results announced at the end of April weren't great (net profit was $6.4 million, compared to $38.5 million the year before), which augurs badly for the full year. But Beard says poor short-term performance is the result of restructuring and investing, and better results will come sooner rather than later. He's aiming at getting back to the levels of profitability last seen in the mid-1990s (somewhere around the $100 million mark), within three years.

Beard isn't alone in his optimism. US analysts expect Tranz Rail to create average earnings growth of 11.5% over the next five years; of the three US analysts watching the stock for the Nasdaq website, two have "strong buys" on Tranz Rail, one a "buy".

Moreover, at $3.60 Tranz Rail's stock price is very cheap. It would be hard for it to go much lower. And Beard - plus several members of the new management team who followed him from shipping company ANZDL - have a good track record. Never heard of ANZDL? The company is a little-known story of how privatisation of New Zealand assets can create a really successful company, albeit not for New Zealand shareholders.

ANZDL (or its predecessor ANZCL) was founded in 1988 when the assets of New Zealand's Shipping Corporation were sold for $2.5 million. Beard, then planning manager, was part of the team who transitioned it to private ownership. Shareholders changed over the years (Brierleys was one, for a while) but between 1987 and early 2000 when he took up his Tranz Rail post, Beard was ANZDL's chief executive, based in Los Angeles. He built up one of the most successful shipping operations in the world. In Beard's 12 years at the top, ANZDL produced over $700 million in cash returned to original shareholders. He was also innovative. "His use of technology was way ahead of other shipping companies," says a transport source. "ANZDL has always been very proactive in using technology to improve customer service, making the customer aware of what was happening with their goods."

It's hard to get financial data for the unlisted company, but media sources report that in 1996 the company turned over more than $A325 million and made profits of $A25 million. All Beard's right hand man Jeff Heisler will say about ANZDL financials is that "in an industry where, in the 1990s, profits were on average 1-3% of turnover, ANZDL produced a consistent 8-10% return. And between 1991 and 1998 the company grew 300%".

Another measure of Beard's management expertise comes with awards. As well as being a two-time finalist in the US's most prestigious quality awards, the Baldridge Awards, ANZDL won four Australian Quality Council "business excellence" awards between 1996 and 2000. Just one of these accolades, according to the Australian Financial Review, means a company can "count itself as one of the best run in the country".

Perhaps the most startling aspect of Beard's time at ANZDL was turning the company from a bog-standard shipping line into a virtual shipping company, moving 150,000 container-loads per year between North America, Australasia and the Pacific Islands, without owning so much as a thing. "When we started at ANZDL we had 18 offices across the US. We got that down to one. By the end, we didn't own any ships or containers. My aim was to get out of assets and focus on the softer sides of the business - people, customer service - and let asset companies focus on owning assets ... In transport, half is the physical movement of freight, but the other half is IT and customer service," Beard says. "That's applicable to Tranz Rail too."

Michael Beard No, he's not talking virtual trains, but about reducing fixed assets and turning fixed costs into variable costs. The heavy outsourcing programme - including reducing staff numbers from 4000 to 600 - is part of the plan for Tranz Rail to relinquish all but core tasks. Moreover, Beard stresses that one of his first priorities has been to radically improve customer service (one insider commented that Tranz Rail was traditionally "an engineering company involved in transport and moving freight, that sometimes satisfies customer needs"). One of Beard's first major capital expenditure programmes has been the $16 million spent in moving headquarters from a Wellington rabbit warren to new "customer-friendly" Warren and Mahoney-designed offices on Auckland's North Shore (though this expensive move has raised a few eyebrows in the cash-strapped organisation). Another has been putting state-of-the-art technology into the freight forwarding division.

Bad gear, low morale

Where there's a will, there's a way, they say. Certainly, at the very top there's a will to see Tranz Rail become an efficient, customer service-centred organisation. But not everyone is convinced there's a way through the mess that is Tranz Rail. For a start, privately owned rail is faced with a basic inequality: who pays for infrastructure, compared with publicly owned road? If a freak earthquake knocks out a piece of road and a piece of railway track, taxpayers will fund repairs on the former, Tranz Rail shareholders will fund repairs on the latter. Also, say front-line staff, no amount of great customer service can alter the fact that Tranz Rail's rolling stock is run-down and unreliable. On one side of the business, marketing staff are successfully wooing clients with promises of better, cleaner trains, running on time to more practical schedules. Nearly 75% of Tranz Rail's revenue comes from freight, and the company carried a record 14.7 million tonnes of the stuff last year (up from 10.3 million in 1996). Now Beard wants to carry more profitable freight. By working with customers to improve efficiency, and therefore supply chain costs, Beard aims to increase the company's share of the most profitable freight routes (Auckland to Christchurch, for example) by 20% within three years.

First, though, Beard has to work out a solution to a critical problem: a severely run-down system. Customers and crew are faced with an acute shortage of rolling stock, run-down trains may or may not get to their destination, there's been no money to spend on repairs and refurbishments, and staff constantly have to work number eight wire-style repairs to keep trains in service.

"In evidence presented to a ministerial inquiry in August 2000, Tranz Rail stated that it needed $150 million in annual capital expenditure to maintain Tranz Rail's infrastructure, or $350 million to improve it," says Wayne Butson, general secretary of the Rail and Maritime Transport Union. "In the past four years, they've been spending $50 million a year."

"It's a nice company, with no wagons," comments one customer. "The rates are there, sometimes they are very competitive. But when it comes to moving the freight, there's no wagons available." In general, Butson is supportive of the new management's efforts to turn the company around ("It's preferable to what Qantas New Zealand has done," he notes sardonically). But any appreciation from the workforce is being undone by the reality of the situation - broken down trains, for example.

Morale is low, confirms Kingston-based area manager Russell Glendenning, a Tranz Rail employee for 48 years and an outspoken grass roots advocate. "I believe they are doing the right thing the wrong way," Glendenning says. Some measures brought in without consultation with staff, ostensibly to improve efficiency, have actually backfired, he says. For example, strict scheduling (telling freight customers you will deliver goods at a particular time) only works if the rolling stock doesn't break down in the meantime. "It's hard to defend policies you know aren't working," he says.

Glendenning says staff are faced with a triple-whammy of uncertainty about jobs (sales and outsourcing will reduce the direct Tranz Rail workforce from 4000 to 600 over the next 12 months), disillusionment about restructuring (another staff member recalled three restructurings in the previous three years alone), but most importantly frustration at not being given the resources to do their jobs properly. Most of us don't have much experience driving worn-out trains. But imagine a scenario where every day there was a 30% chance that your computer wouldn't work, where your company didn't have enough money to order the parts needed to get it fixed, and where you regularly had to go home without doing the job you're being paid for. Insert locomotives and rolling stock for computers, engine parts for computer bits and you've got the situation facing Tranz Rail's staff every day, workers say.

We aren't talking stroppy unions making unrealistic demands. When Tranz Rail management, after union prompting, conducted an audit of the company's DC locomotives earlier this year, it discovered a massive 43% weren't safe and had to be taken out of service, says Butson at the union. And while the company's new STS (shuttle train services) freight time-tabling system (which is broadly supported by the union), requires 142 main line locomotives to work properly, "the best I've ever seen," says Butson, "is 87 available". Exaggerated? Maybe, but even Tranz Rail's internal newsletter notes that "only around 130 [locomotives] are available in full running order each day."

"Anecdotally, a good 30% of trains do not get to their next destination with the same locomotive up front they started with," Butson says. "They break down en route, or there are two locomotives and they struggle in using just one." That's hugely demoralising for staff who are extremely committed to their jobs. From top to bottom of Tranz Rail, Unlimited heard the same story: staff love rail - not necessarily Tranz Rail, but employees mostly want a healthy, efficient train system that can compete with trucks and shipping.

Michael Beard sits in Tranz Rail's shiny new Auckland-based offices, his hands folded in his lap, a neatly knotted tie on a pristine shirt, his voice soft, full of humour and an occasional slight stutter. He brims with ideas and intelligence, but Beard isn't the kind of forceful, charismatic leader that easily unites a big, geographically disparate workforce. Not that Beard's working alone. He has built a loyal top management team. Three ANZDL staffers - American-born Jeff Heisler, officially called "group manager, change"; Noel Coom, the straight-talking Kiwi heading up marketing; and Michael Thomas, brought over to deal with IT, human resources and quality issues - have followed him from the US. All agree on Beard's strengths as a visionary and team leader.

"He's very future-focused," says Heisler. "You agree on a direction, and he'll leave you to your own devices to get there." Getting the vision across, and getting cynical employees to buy in, may be one of the team's chief problems. The layout of Tranz Rail's operations - 4000 employees working a variety of shifts, spread over dozens of sites - is also against them, making it a logistic nightmare to meet with all staff on a regular basis. Beard and other senior management have been "on the road", visiting all sites, and Beard is in the middle of another "one day a week for as long as it takes" site tour. He's also set up a "managing director's forum" on the company's intranet, where he answers questions from staff, and a newsletter to update employees on the progress of the changes. The company is installing computers at a number of the more remote terminals so staff have access to company news.

Beard has set himself a tough goal: 75% staff satisfaction up from, umm, "well below the national average", in terms of motivation, morale and levels of trust in management. The last (and only second-ever) staff survey was conducted just before Beard took over, says Butson, but little has changed. "If they ran the survey again now, there would probably be no improvement." Heisler agrees it's a challenge. "We need to shift the culture so we emerge having changed not only the business, but how we do the business. If we don't shift the culture, all we've done is bought ourselves two more years, and we will quickly eat up our savings. We haven't been effective at communicating the minutiae of the change, but I've set myself the task of getting communication right by October."

There's one high point in terms of management-staff relations: safety. Tranz Rail's safety record has been bad in recent years. A 2000 ministerial inquiry into workplace safety at Tranz Rail, prompted by five workers' deaths in two years, found the company's fatality rate compared poorly with international standards. A New Zealand Herald article earlier this year listed eight crashes or derailments between the beginning of December 2000 and mid-March 2001, with 25 people injured. Beard is determined to change that. The decision to move as much as possible to "unit" or fixed configuration trains will not only increase efficiency, but will dramatically reduce the frequency of shunting, coupling and decoupling wagons from trains - the most dangerous operations for staff. Tranz Rail has headhunted Jeff Weber from Fletcher Challenge to head up the safety programme and (for the first time ever, Butson says) there's significant investment going into safety. Though it's too early to tell what the impact will be on injuries, "the trend is downwards in terms of lost-time stoppages."

Will Beard be able to turn Tranz Rail around? "There's an argument that nothing will get Tranz Rail out of deep shit," says one industry source, "but I'd put money on him having a fair go." A lot will depend on the price Tranz Rail gets for its passenger assets, says UBS Warburg analyst Wade Gardner. It needs the money to fund further restructuring, and a good sale would be a confidence boost for the market. If this doesn't happen, Tranz Rail may face a downgrade from ratings agency Standard & Poors, according to a report dated February 2001. "Until Tranz Rail has completed its rationalisation and divestment programme, the company expects its operating results to remain unsatisfactory," says S&P analyst Jeanette Ward. "The ratings outlook remains negative."

When and if Trans Scenic and other sales go ahead, however, Beard may be able to turn to the task of making money - decent money, hopefully. "Obviously, transportation in New Zealand is a challenging affair. There's a small population and thousands of miles of rocky terrain. But you can make money, absolutely."

If it doesn't work? "There's a point in the future - and it would be sooner than we want it to be - that if we don't arrest some of these [financial] trends and improve services, the situation will become dire," Heisler says. If he were a betting man, what would the odds be? "I would say there's a 60-70% chance of total success. That is getting all the pieces right, things like strong financials, good staff morale, efficient networks and better safety."

It may be some comfort to depressed Tranz Rail shareholders that Beard's savings are on the line, alongside their own. "By Kiwi standards, I have a moderate block of Tranz Rail shares," Beard says. "And yes, I bought them with my own money."

Make 'em laugh

What would help

A nice hefty capital injection from an asset sale. Tranz Rail could spend it on upgrading stock (which would keep staff and customers happy) or on debt, which would please rating agencies.
Government taking more of an interest in rail. Tranz Rail would benefit from a level playing field with road transport. This might come from government ownership (and maintenance) of the tracks, or an increase in road user charges to cover capital investment, as well as operating costs.
Better safety statistics. Not only would it improve staff morale, get government inquiries and the union off Tranz Rail's back, but getting "loss time injury" rates down to more acceptable international levels would impact on efficiency and profitability.
An efficient train system. Sounds basic, but Tranz Rail hasn't got it. If the company can get its trains from A to B on time, with an information system in place so customers know where their goods are and when they will get them, all might be well.

Make 'em cry

What wouldn't help

Tranz Rail must keep capital expenditure under control. Group manager Noel Coom says they have to cap spending at $50 million a year. Given the state of their trains, Tranz Rail needs to get rid of assets so someone else pays to upgrade them.
A protracted and unsettling sale process by major shareholders Canadian National (24%) and Fay Richwhite (14%) wouldn't help board level stability. A new shareholder with a radically different vision might not be helpful either.
A slump in international commodity prices and New Zealand exports arising from a downturn in our trading partners would hit Tranz Rail hard. Tranz Rail's top 10 customers account for about 45% of total freight revenues.
Fuel prices at recent high levels make life difficult.

Nikki Mandow
nikki@unlimited.net.nz

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