Annual Report Presentation 2004/2005

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Annual Report Presentation 2004/2005

• Portfolio Committee Presentation October 2005

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Transnet team

• Ms Maria Ramos group chief executive
• Mr Christopher Wells group chief financial
  officer
• Mr Pradeep Maharaj group executive strategy
  transformation
• Ms Swazi Tshabalala group treasurer

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Contents of presentation

1. Strategy overview
2. Financial results 2004/2005
3. Divisional reports (including SAA)
4. Post-balance sheet events
5. Pension Fund liability
6. SAA unbundling
7. Non-core investments
8. Prospects
9. Conclusion and questions

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Strategy overview
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Strategy overview continued
Implementation of the Transnet Strategy 4-Point
Turnaround Plan
(1) Redirect the business
1
(4) Human capital
(2) Balance sheet restructuring
4-Point Turnaround Plan
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(Incorporated into plan 2005)
2
3
(3) Corporate governance and risk management
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Strategy overview continued

• Progress from last year against 4-point
  turnaround plan
• 1. Redirecting the business
• Investment plan of R40 billion approved Focus on
  project management
• Restructuring of corporate office will be
  completed by September 2005
• Re-engineering core business processes underway
  Efficiency, cost reduction, service delivery,
  market share increase
• Top management team now in place

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Strategy overview continued

• Progress from last year against 4-point
  turnaround plan
• 2. Restructuring the balance sheet
• Exit of all non-core assets PFMA approval
  obtained subsequent to year-end and process
  underway
• Closure of SAA hedge book and removal of embedded
  derivatives have been completed
• Unwinding of MTN share transaction structure in
  progress Suspensive conditions
• SAA recapitalisation agreed at R2,4 billion
• Unfunded liability of Second Defined Benefit Fund
  fully provided
• Funding solution required

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Strategy overview continued

• Progress from last year against 4-point
  turnaround plan
• Corporate governance and risk management
• Board committees now functioning
• Governance
• Remuneration
• Audit
• Executive committee fully functional with
  sub-committees
• Risk Capital Investment
• ALCO Operations
• Risk committees established at business units
• Enterprise Wide Risk Management Framework in
  progress
• Fraud Prevention Plan and Ethics Program
  established
• Financial management and control strengthened
• Internal Audit outsourced

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Strategy overview continued

• Progress from last year against 4-point
  turnaround plan
• Human capital strategy
• Executive to be appointed
• Organisational design and development
• Talent management
• Employment Equity
• Training and Development
• Performance management and reward

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Salient Features 2005
Results 2005 2005 R million change
Turnover 46 259 6,0
Operating profit (after impairments) 5 818 gt100
Operating margin (after impairments) 12,6 gt100
Capital and reserves 16 959 71,0
Cash flows from operating activities before cash effects of derivative transactions 7 536 52,2
Gearing 67 - 19,3
PLATFORM FOR THE FUTURE ESTABLISHED
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Financial results 2005
Consolidated income statement for the year ended 31 March 2005 change 2005 R million 2004 R million
Turnover 6,0 46 259 43 637
Net operating expenses excluding impairments 2,7 (40 288) (39 229)
Profit from operations before net finance costs and impairments 35,5 5 971 4 408
Impairment of assets (153) (4 221)
Profit from operations before net finance costs 5 818 187
Net finance costs 17,1 (2 588) (2 211)
Profit/(loss) before items below 3 230 (2 024)
Other income and fair value adjustments 4 926 (4 187)
Taxation (1 629) (204)
Income from associates and minority interest 283 83
Profit/(loss) for the year attributable to shareholder 6 810 (6 332)

Ratios
Operating margin before impairment 27,7 12,9 10,1
Operating margin after impairment gt100 12,6 0,4
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Transnet operating profit margin (after
impairment)
HIGHEST MARGIN IN LAST SIX YEARS
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Spoornets transformation is key to Transnets
success

• Re-engineering Spoornets business processes is
  key
• Africas leading railway company with 20,000km of
  rail
• Spoornet lost R21m in FY2005 (excluding the
  embedded derivative)
• Operational problems are being addressed
• Target is to reduce cost and grow volumes
• Key operational challenge is to address
  investment backlog
• Impact of a turnaround on Transnets financials
  would be very positive
• Largest of Transnets divisions
• Only core business that is underperforming
• R9bn of assets and 20 target return

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Spoornet recent performance
Turnover (Rm)
Profit before tax (Rm)

• Financial
• Turnover increased by 5.6 to R14.2bn
• Profit before tax of R3.5bn driven by fair value
  gain on embedded derivative
• R16bn to be spent upgrading infrastructure over
  next 5 years

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3

• Operational
• Freight volumes increased by 2.8 to 181mt
• Iron ore line 28m tons, growing to 41m tons in
  five years
• Coal line railed 67m tons, growing to 86m tons
• General Freight 86m tons (including containers),
  growing to 88m tons

(5)

Margin
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National Ports Authority recent performance

• The NPA is a landlord port authority that owns,
  manages and controls all seven commercial ports
  along South Africas coastline

• Financial
• Turnover improved by 9.8 to R5.0bn
• Profit before tax increased by 26.1 to R2.7bn
• Margins improved from 47 to 54
• Capital expenditure R1.1bn

Profit before tax (Rm)
Turnover (Rm)
54

• Operational
• NPAs financial performance has exceeded
  expectations
• The major spend on projects related to the
  construction of the Port of Ngqura, expansion of
  container and car terminal capacity at the Port
  of Durban in 2005.
• NPA is focused on delivering its capital
  expansion programme R1.7bn for FY 2006

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42

Margin
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South African Port Operations recent performance

• SAPO operates 14 cargo terminals at South
  Africas six largest seaports

• Financial
• Turnover increased by 15.5 to R3.4bn
• Profit before tax of R1.9bn
• Operating profit was positively impacted by the
  reversal of the embedded derivative

Profit before tax (Rm)
Turnover (Rm)
56

• Operational
• SAPOs 14 cargo terminals handled
• Containers (m) 12 2.8
• Break bulk (m tons) -3 12
• Bulk (m tons) 1 44
• Vehicles (000 units) 27 332
• R591m invested in infrastructure

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4

Margin
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Petronet recent performance

• Operates a liquid petroleum and gas pipeline
  network

• Financial
• Turnover increased by 10.9 to R1.0bn
• Profit before tax increased by 39.3 to R333m
• Return on assets of 15 in line with
  international benchmarks

Profit before tax (Rm)
Turnover (Rm)
33

• Operational
• Termination of the Sasol supply agreement in
  December 2003 resulted in volatility in demand
  for Petronets services and need for strict
  capacity management
• Introduced new systems and processes to manage
  this demand
• Coming regulation will have significant impact on
  Petronet
• Planning R3bn 16 New Multi-Product Pipeline
  (NMPP)

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Margin
-
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SAA key financials 2005 vs. 2004
Results 2004 Rm 2005 Rm change
Total airline income 16 339 17 442 6.8
EBITDAR 2 475 2 991 20.8
EBITDAR margin 15.1 17.1
Capital and reserves (2 697) 2 228
Cash generated from operations 741 1 911 gt100.0
Derivative liability (5 957) - (100.0)
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SAA recent performance

• Financial
• Turnover increased by 6.8 to R17.4bn
• Operating costs increased by only 1.9
• Gross profit increased from R134m to R935m
  despite 40 increase in oil price
• Net profit increased from a loss of R8.6bn to a
  profit of R966m

Total airline income (Rm)
Gross Profit (Rm)
5

• Operational
• Number of passengers increased by 5.2 to 6.8m
• Passenger load factors increased from 67 to 70
• Revenue per revenue passenger kilometer of 0.56

2
1

Margin
-
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Financial performance 2005 vs 2004 SAA
Turnover
Operating profit
gt100
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Fair value adjustment
2005 R million 2004R million
Embedded derivative 3 959 (1 213)
SAA hedge book 211 (4 485)
MTN structure 932 1 835
Other (452) (666)
Transnet total 4 650 (4 529)
(Negative) charge to income statement
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Financial results 2005
Consolidated balance sheet at 31 March 2005 2005 R million 2004 R million
ASSETS
Non-current assets 55 282 57 156
Current assets 17 351 15 544
Total assets 72 633 72 700
EQUITY AND LIABILITIES
Capital and reserves 16 959 9 917
Non-current liabilities 30 710 32 217
Derivative liability 559 6 797
Other 30 151 25 420
Current liabilities 24 964 30 566
Derivative liability 668 7 396
Other 24 296 23 170

Total equity and liabilities 72 633 72 700
Gearing () 67 83
Return on average total assets managed () 8.3 0.3
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Financial results 2005
Abridged consolidated cash flow statement for the year ended 31 March 2005 2005 R million 2004 R million
Cash flows from operating activities before cash effects of derivative transactions 7 536 4 952
Cash generated from operations after working capital changes 10 192 7 497
Interest paid, investment income and other (2 656) (2 545)
Cash effects of derivative transactions (7 052) (1 839)
Cash flows from operating activities 484 3 113
Cash flows from investing activities (4 938) (5 468)
Cash flows from financing activities 2 437 5 696
Net (decrease)/increase in cash and cash equivalents (2 017) 3 341
Cash and cash equivalents at the beginning of the year 4 324 983
Cash and cash equivalents at the end of the year 2 307 4 324
Cash from operations
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CAPEX
Planned spending over next five years (Core
businesses) R40,8 bn

• Multipurpose product pipeline DJP

• Durban Port Investment
• Cape Town Container Terminal
• Expansion
• Port of Ngqura

12,5
10,3
39,5
37,7

• Iron-ore line Capacity Expansion
• Coal line Capacity Expansion
• Wagon fleet Renewal and Modernisation
• Upgrade of 200 18 E Locomotives

• Emphasis on
• Project management
• Returns gt cost of capital
• Funding More than 50 funded from operating
  cash flows
• Gearing to reduce over five years to between 50
  55 (target)

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Transnet funding requirement

• Funding strategy
• Minimise financial risks
• Reduce weighted average cost of capital
• Extend the duration of the debt portfolio
• Match asset and liability cash flows and
  maturities and
• Begin to re-establish a prudently diversified
  debt portfolio

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Post-balance sheet events

• SAA recapitalisation
• Continued support to SAA
• Amendment to terms of Compulsorily Convertible
  Subordinated
• Loan of R4 billion
• SAA capitalised at R2,4 billion
• R1,6 billion has been repaid to Transnet
• Renewal of credit facility of R1,5 billion and
  guarantee
• MTN structure
• Agreement to early unwind structure
• Subject to suspensive conditions
• Major cash inflow if implemented
• Umthunzi Telecoms Consortium
• PFMA non-compliances (page 64)

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Pension fund

• Second Defined Benefit Fund
• Actuarial net liability at 31 March 2005 R4,8
  billion (fully provided)
• Funding solution required
• Closed Fund
• Enhancement of benefits Substantial increase in
  liability
• Project underway finding a sustainable solution
  

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SAA Unbundling

• Transfer of SAA to Government
• Transfer requires separate parliamentary Bill,
  SAA Bill
• Joint team involved in project (valuation, HR,
  pensions, loans, joint assets, etc)
• Road shows to owners of capital
• Target date of transfer 31 March 2006

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Divestment/Transfer of non-core investments

• Purpose
• To enable strategic focus
• To focus scarce resources (human and capital) on
  core businesses
• Reduce borrowings
• Investments identified as non-core To be
  divested/transferred
• Freightdynamics V A Waterfront Holdings
  (26)
• Autopax Equity Aviation (49)
• Metrorail VAE Perway (35)
• Shosholoza Meyl Viamax
• Transnet Pension Fund Transnet Housing
• Administrators
• Reintegration to support the core
• Protekon, HSA, Esselen Park, Transtel and
  Transwerk
• Divestment/Transfer of non-core businesses has
  been approved by shareholder post year end

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New Transnet
Based on 31 March 2005
Financial TransnetGroup Aviationand other business New Transnet
Turnover (Rm) 46 259 18 559 27 700
EBIT (Rm) 5 818 1 182 4 636
Operating Margins () after impairment 12,6 6,4 16,7
After disposal of non-core for which approval
has been received
New Transnet
Reduced borrowings Increase in return on
assets Focused business Less volatility/risk
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Prospects
PLEASING RESULTS BUT MAJOR CHALLENGES GOING
FORWARD

• Turnaround a five year process
• Re-engineering of core business processes
  Improve efficiencies,
• cost levels, service delivery and market growth
• Implementation of the investment plan over the
  next five
• years effective project management
• Sustainable funding solution for Second Defined
  Benefit Fund
• Divestment from non-core businesses
• Sustainable value creation

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Conclusion

• While the progress of last year is pleasing, the
  road ahead is a challenging one
• The turnaround of Transnet can only be successful
  if we can improve on these results in a sustained
  way over the long term
• What we have achieved is a platform on which to
  build the future of the company

WE MOVE INTO THE FUTURE WITH CONFIDENCE
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Thank you

• Any questions??