Download TRANSNET WEATHERS THE RECESSION STORM

TRANSNET WEATHERS THE RECESSION STORM
October 27 2009
Embargo: none
Highlights
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Revenue up 3% to R17,3 billion
EBITDA up 1,4% to R6,6 billion
Headline earnings down 28% to R1,3 billion
Cash generated from operations up 19,5% to R7,5 billion
About 90% of required funding for the year already raised – R13 billion
Capital expenditure up 5,4% to R8,7 billion
Shareholder’s equity up 5,7% to R61,7 billion
Gearing increased from 36% to 37%
Although volumes have been negatively impacted by the recession, the Company is
weathering the storm and is maintaining financial stability during these uncertain
times
Transnet Limited today unveiled its results for the six months ended September 30 2009,
showing that the Company had posted a marginal growth in profits to R6,6 billion on the
back of a 3% increase in revenue to R17,3 billion. This credible performance has occurred
despite the sharp fall on commodity and container volumes occasioned by the ongoing
recession.
Figures released by the Company, which were reviewed by its external auditors, show that
profits, as measured through earnings before interest, taxation, depreciation and
amortisation (EBITDA), rose by 1,4% to R6,6 billion, resulting in an EBITDA margin of
38,3% (2008: 38,9%).
The economic recession and its negative impact on commodity volumes generally restricted
revenue growth to 3%, amounting to R17,3 billion, during the period. It should be noted
that in the prior period commodity and container volume growth was relatively strong.
Owing to the acceleration of the capital investment programme, which increased by 5,4% to
R8,7 billion this year on prior year’s comparable numbers, depreciation and amortisation of
assets increased by 27% to R2,9 billion in the reporting period – a trend which the Company
expects to continue during the investment period. Headline earnings fell 28% to R1.3 billion
as a result of higher depreciation and interest charges, flowing from the rollout of the capital
expenditure programme.
As part of its response to the impact of the recession, the Company has launched a series of
measures to cut variable costs and take advantage of some volume and revenue
opportunities. These measures, which are still in place, saw operating costs growing only by
3,8% to R10,7 billion notwithstanding higher increases in input costs such as electricity.
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Reflecting optimism in the resilience of the economy and its ability to overcome the
recession, the Company is proceeding, as planned, with its R80 billion investment
programme. Transnet’s confidence is also shared by its investors who have backed the
Company’s funding strategy: at half-year stage, the Company had raised nearly 90% or R13
billion of its required funding for the full year.
The Company’s cash generating capacity remains strong. In the review period, cash
generated from operations before working capital changes rose by 19,5% to R7,5 billion.
The focus on better management of working capital resulted in an inflow of R3,2 billion since
March 31 2009. This saw cash generated from operations, after working capital changes,
increasing by 56% to R8 billion.
The cash interest cover at 4,2 times is well above the 3 times target and demonstrates
Transnet’s spare capacity to raise funding at competitive rates.
Gearing increased to 37% (2008: 36%) in line with expectations. At these levels, the
Company is still well within its target of 50% gearing and has significant capacity to fund the
capital investment programme.
During the period, shareholder’s equity grew 5,7% to R61,7 billion.
Commenting on the results, Mr Chris Wells, the Acting Group Chief Executive at Transnet,
said the results were in line with expectations given the fact that Transnet, as a commodity
and container business, was a barometer of economic activity in the country.
“The effects of the global economic crisis, which was felt by Transnet in October 2008, have
continued to adversely impact the volumes of freight and key commodities transported by
Transnet during the first six months of our financial year. We are seeing some green shoots;
for example, the general freight business (GFB), which makes up 65% of Transnet Freight
Rail (TFR)’s revenues, experienced its best month in September (2009). Still, we think it is
too soon to be confident of steady volume growth. It is early days for these to come through
in volume growth. This is certainly no time nor cause for taking our eyes off the ball of cost
control and careful management of our investment. We will continue to pursue our growth
ambitions in a measured and responsible manner, focusing on productivity and operational
improvements to better service levels”, says Mr Wells, who has been at the helm of the
state-owned freight transport and logistics business since March 2009.
Prof Geoff Everingham, Transnet’s acting Chairman, has commended executive management
for managing the business through the recession. “The results reflect the calibre of
leadership we have in this executive team. The Board welcomes the sound financial
performance, and signs of progress in safety as well as efficiency and productivity
improvements. These achievements have been recorded during an extremely challenging
time for the Company especially for the senior management team. It is essential that we
focus on improving productivity and customer service while investing in infrastructure that
assists us in doing so”, he says.
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“It is pleasing that we have once again been able to issue results within a month of the end
of the reporting period. This is important in ensuring that stakeholders are kept informed of
our finances timeously, particularly in the current difficult economic conditions', says Prof
Everingham.
The recession’s impact is evident in the volumes railed and handled by the Company’s rail
and port networks. Worst hit has been TFR’s GFB, including containers on rail. GFB volumes
fell to 35,6 mt (2008: 43,2 mt) and container volumes declined by 12,9%. The declines are
in line with international trends and Transnet’s estimates for the period.
Iron ore export tons increased by 32,7% to 21,1mt in line with contractual commitments to
the channel’s main customers and export coal volumes increased slightly by 1% to 30,2 mt,
but these were still well below planned tonnages. The responsibility for the disappointing
export coal volumes is split between customers and TFR. TFR’s operational issues include
cable theft, rolling stock availability and derailments.
“Specialist interventions are being made on the coal line to ramp up throughput to desired
levels and we are optimistic an improvement will be realised over the next 12-18 month
period”, says Mr Wells.
Container volumes handled by Transnet National Ports Authority (TNPA) and Transnet Port
Terminals (TPT) container volumes fell by some 12%, whilst vehicle volumes declined by
45%.
However, Transnet Pipelines (TPL) increased volumes it transported by 5% on the
comparable period last year, as the pipeline gained market share despite the prevailing
economic conditions.
Seven employee fatalities were reported during the period. “Although we are seeing an
improvement in this area, safety remains one of our key concerns. One fatality is one too
many! Safety has received significant management attention since March 2009”, says Mr
Wells. The executive has committed to a “quantum” improvement in the safety performance
of the business: the target is to reduce all safety-related incidents and costs by a third.
Initiatives, which are supported by organised labour at Transnet, will be continually
enhanced to achieve an improvement in the Company’s safety performance. The disabling
injury frequency rate (DIFR), an internationally accepted measure of safety in the workplace,
has improved by 30% to 0.88 since March 2009. Also, the number of derailments has
decreased, resulting in improvements in service delivery at TFR.
Alongside safety, the Company has prioritised compliance with applicable environmental
standards and legislation. To this effect, Transnet has commissioned environmental
compliance audits at all its key operations.
Mr Wells says: “The onset of the recession prompted us to respond proactively to defend the
Company’s financial strength. We instituted measures, including a focus on cost-
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containment, to maintain the key financial metrics and protect cash flows. These have clearly
paid off which is why we will continue with them whilst, simultaneously, pursuing revenue
and volume opportunities. More importantly, we will be focusing our efforts on improving, to
benchmark standards, the productivity and efficiency levels of all our operations”.
Mr Wells has made clear that he is not happy with productivity levels in several parts of the
business and these were part of the Company’s “Quantum Leap” strategy to achieve urgent
and significant improvement.
He has reiterated the Company’s commitment to proceed with its investment programme,
but emphasised that this is being done with caution given the current economic
environment. “We have reviewed our entire project portfolio. All the major and strategically
significant projects, required by our customers and the country, are being continued. We
have rephased, to a later stage, some projects to ensure key financial metrics are
maintained within target levels. It is vital that we continue investing in support of growth so
that when the green shoots we are seeing now turn into healthy and sustainable green
foliage in the future, there is requisite (port, rail and pipeline) infrastructure capacity”.
The highlight of the capital investment programme was on October 4 2009 when the first
commercial vessel, MSC Catania, sailed into the Port of Ngqura, the new deepwater port
outside Port Elizabeth. Transnet has invested more than R6,7 billion in the project which is
to anchor the hub port strategy and target transhipment cargo.
The Company is progressively rolling out its funding strategy to diversify sources of costeffective funding. The bulk of the funding is being raised from the domestic debt capital
market as part of the Company’s R30 billion Domestic Medium-Term Note (DMTN)
programme which is made up of long-term bonds and commercial paper.
Also, during the reporting period, Transnet began tapping international sources of funding:
for example, amounts of R600 million and R1,9 billion were raised from Finnvera, the Finnish
export credit agency, and the Japan Bank for International Co-operation, respectively.
The Company has cash on hand and deposits of R8,8 billion as well as adequate banking
facilities to meet its current commitments.
Mr Wells says that the launch of the Global Medium-Term Note programme, which is
designed to give the Company access to US and European Union bond markets, is likely to
take place shortly.
The company’s operating divisions performed as follows:
TFR: Revenue increased by 7,4% to R9,9 billion when compared to the prior period. The
increase in revenue is mainly attributable to increased iron ore volumes, higher coal prices in
accordance with the newly negotiated contracts and a better yield mix from the GFB. The
small increase in export coal volumes is due to continued TFR’s operational problems, supply
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issues at the mines and commissioning difficulties at the Richards Bay Coal Terminal for
expansion purposes.
TRE: TRE’s external revenue reflected an increase of 42,7% to R805 million mainly due to
the increased number of coach upgrades for the Passenger Rail Agency of South Africa. Still,
this upgrade number was lower than anticipated. TRE’s internal revenue decreased by 13%
to R3 billion compared to the prior period because of reduced backlog maintenance that is
being performed for TFR.
TNPA: Revenue reflected a decrease of 3,2% to R3,6 billion as a result of a drop in container
and vehicle volumes.
TPT: The continuing impact of the global economic crisis negatively affected container
volumes and, consequently, revenue for the period decreased by 8,5% to R2,5 billion.
TPL: Revenue decreased by 10,4% to R678 million for the six-month period following a
decision by the National Energy Regulator of South Africa to impose a 10,4% tariff decrease
for the current financial year. The regulator also did not allow any returns on capital invested
in the New Multi-Product Pipeline (NMPP) being built between Durban and Gauteng.
Notes for editors:
. The capital expenditure numbers used here include the capitalisation of borrowing costs
. Spending of R8,7 billion was made on a range of major projects including:
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the expansion of the iron ore and coal lines
the acquisition of locomotives for the coal, iron-ore and GFB lines of TFR
the upgrading of rolling stock and infrastructure
the widening and deepening of the Durban harbour entrance channel
the reengineering of the Durban Container Terminal
the construction of the Port of Ngqura in Port Elizabeth including the requisite rail infrastructure
the expansion of the Cape Town Container Terminal
the acquisition of port equipment for the Port of Cape Town and
the construction of the New Multi-Product Pipeline between Durban and Gauteng
Issued by:
John Dludlu
Spokesman
Transnet Ltd
(011) 308 2458
083 676 1881
083 277 4774
[email protected]
For a prompt and efficient response to media enquiries and request for media enquiries and
request for media interviews, please call:
6
Mboniso Sigonyela
083 463 7701
[email protected]
Visit us at: www.transnet.net