Tranz Rail: difficult year behind it

By PAM GRAHAM

A revived scheme to shift the Picton Cook Strait ferry terminal to Clifford Bay and talks with MPs about selling the national rail network are just two items in Michael Beard's new year in-tray.

His own future is another. The Tranz Rail chief executive is in the last year of a three-year contract.

The year just gone was "character forming," said Beard, who saw the bad press and record low share price as fallout from restructuring a corporate icon. When you run a network of interest to Government policymakers and the large exporters it goes with the territory.

Tranz Rail is now making a profit, has positive cashflow and is not planning any new investments unless they make an adequate return.

With that background, the plan to shift the Cook Strait ferry terminal from Picton to Clifford Bay in Marlborough would not involve Tranz Rail investing in a new port.

About four or five companies had approached Tranz Rail about the project, including three port companies and two infrastructure companies, Beard said.

Tranz Rail expects to "go public" about its plans in March. It would essentially be trying to substitute one set of port costs for another. The new site clips about two hours off a trip from Wellington to Christchurch.

"It would allow us to go from three ships to two ships because we get more turns on the ships so it has a huge efficiency and service quality factor for us."

Another "very significant line of discussion" this year will be with the Government.

The Government wants rail to have a larger role in the national transport network but Tranz Rail must consider its capital costs when investing in network. The same does not apply to road.

"So there is a level playing field discussion going on with Government."

Nationalisation of the rail network is one of about six options that also include selective subsidies, public private partnerships and other funding alternatives. Tranz Rail would pay an access fee if the Government bought the network and operated it like a highway. The debate is complex because Governments consider the social costs of issues such as pollution which are not items on private companies' profit and loss statements.

"We are open minded in terms of saying we have a set of financial objectives to achieve for our shareholders and we know there are national interests the Government has to pursue. Hopefully there is some common ground," Beard said.

Last year Tranz Rail had trouble finding common ground with anyone. It was in dispute with major customers, local councils, the media, Citibank and workers.

Beard said Tranz Rail was an icon company with a history of state ownership. It had always had some combative relationships and difficult discussions with customers because about half of its freight was captive. "I can understand that from the other side of the fence," he said.

He argued that while some charges had to rise they were lower than five years ago.

He conceded the company had not done as well at communicating with the broader public and political establishment as it had done with investors.

The story for investors was about change.

Beard has divided Tranz Rail into three units: rail services, distribution services and interisland. Passenger services were sold, engineering was outsourced and new computer systems developed to track freight.

Rail service moved to fixed capacity point-to-point services focused on higher-value containerised freight.

New curtain-sided 7.3m containers are improving packing speeds and "sprint" trains are running from Auckland to Wellington and Auckland to Christchurch.

Rail picked up business from P&O Nedlloyd's decision to reduce port calls from six to three for its European service.

Beard said the interisland group was profitable, distribution had just gone from highly unprofitable to just profitable and rail was not making its cost of capital but it was profitable.

The other change had been to cut back on capital spending, which Beard argued was unsustainable.

The message now is that very little of such spending can be justified.

Beard is not signalling further capital raising after last month's deeply discounted $66 million rights issue to help repay debt and back a sale and leaseback agreement for the Aratere ferry.

A credit rating downgrade to junk during the year triggered a clause in the Aratere lease requiring more security and ultimately a repurchase of the vessel.

The situation was resolved by the rights issue package which was finally signed off last month after a public spat with Citibank.

Negotiations with leaseholders went very smoothly, while the banks "negotiated very strongly", Beard said.

The company would continue to repay debt with sales of assets.

Is the company short of capital?

"You have to produce the returns on the capital invested," he said.

"We have laid out a model and we can produce the results on the current assets that we have."

He put the low stock price down to uncertainty.

The exit of Wisconsin Central and Fay Richwhite put 40 per cent of the stock on the market and anyone who wanted it bought it.

Then the company missed its third-quarter earnings target.

Beard said the company was not forced to make clear forecasts but it "was in our interests to lay out quarterly earnings profile in about July last year and we expect to get marked off on those earnings".

The $55.8 million forecast for earnings before interest and tax for this year was revised to $53.1 million in the rights issue prospectus.

Beard said first-quarter earnings were in line, second-quarter should come in okay and it looked pretty good for the third quarter.

He believes chief executives run companies and efficient markets look after the stock price.

The New Zealand market judged Tranz Rail as its second-worst performer last year, just above Baycorp Advantage. The stock declined 68 per cent.

He put that down to investor uncertainty about the payback from the restructuring but acknowledged low stock prices made the company vulnerable to takeover.

"I would imagine with the stock price we would be being looked over by a number of people."

He said it would be an "interesting period" if the company got traction in its second and third quarters and the stock prices stayed low.

Beard said he was at Tranz Rail to see the change process through and he would not speculate what would happen at the end of his contract. "These things are always a two-way conversation."