Transnet Annual Results

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Transnet Annual Results
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Contents of presentation

• M RAMOS OVERVIEW OF PERFORMANCE OF COMPANY
• Strategy, structure, vision and values
• Strategy implementation Achievements to date
• CF WELLS OVERVIEW OF FINANCIAL RESULTS
• Financial results, divisional review and funding
• M RAMOS WAY FORWARD
• Future challenges
• Conclusion and questions

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Strategy, structure, vision and values
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Transnet vision and mission

• Transnet is a focused freight transport company
  delivering
• Integrated, efficient, safe, reliable and cost
  effective services which help promote economic
  growth in South Africa

INCREASED
Market share
IMPROVED
Productivity and profitability
PROVIDING
Capacity for customers ahead of demand
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Transnet values
TRANSNETS CUSTOMERS PREFER US BECAUSE

• We are
• Reliable
• Trustworthy
• Responsive
• Safe service provider

OUR EMPLOYEES ARE

• Ethical
• Committed
• Safety conscious
• Accountable

• Thinking
• Disciplined
• Results orientated

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Four-point turnaround plan
Enabling economic growth
Delivering efficient competitive services
Focused freight transport company
Strategic intent
Four-point Turnaround Strategy
Redirecting and Re-engineering the Business
Strategic Balance Sheet Management
Ensure Corporate Governance Risk Management
Develop Human Capital
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Structure to support strategy
TRANSNET COMPANY
Operational divisions(continued businesses)
Discontinued Businesses

Discontinued businesses

• SA Express
• Transtel Telecoms
• Viamax
• Autopax
• freightdynamics
• Housing Loan Book
• Shosholoza Meyl
• Arivia.kom

PORTS
PIPELINE
National Ports Authority
SA Port Operations
Petronet
Supporting businesses Property, Capital Projects
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Strategy implementation achievements to date
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Strategy implementation achievements to date

• Investment
• On target with 2007 (R11,7 billion) roll out of
  five-year investment plan
• Replacement of assets (R8,2 billion)
• Expansion investments (R3,5 billion)
• Major projects commenced and spending next five
  years per Corporate Plan
• New Multi Product Pipeline (NMPP) from Durban to
  Johannesburg (R9,3 billion)
• Widening and deepening of the entrance channel at
  the Port of Durban
• (R2,6 billion)
• Ngqura Container terminal (capacity from 2010
  onwards) (R6,1 billion)
• Coal line capacity expansion to 86 mtpa (R3,3
  billion)
• Ore line expansion to 47 mtpa (R3,8 billion)
• Acquisition of 404 new locomotives (R4,9 billion)
• Project management Establishment of Capital
  Projects
• Focus on Co-ordination, implementation, skills,
  planning and delivery

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Strategy implementation achievements to date

• Disposal of non-core assets

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Disposal of non-core assets Subsequent events
Strategy implementation achievements to date
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Strategy implementation achievements to date
Human capital development
Additional capacity building 175 additional
engineering bursaries 173 students at
institutions of technology (to be increased to
300) 1 261 additional apprentices in different
trades 20 Thuthuka bursaries through SA Institute
of Chartered Accountants
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Strategy implementation achievements to date

• Re-engineering the business Vulindlela projects
• Second year of implementation
• Improve productivity levels and operational
  efficiencies
• Orientate businesses towards customers
• Address safety
• Culture of planned maintenance
• Increase in market share volume growth
  (especially GFB in Spoornet)
• Savings of more than R2 billion have been
  achieved since inception
• Success/achievements in 2007
• Improved GFB freight flows (3 mt)
• Capacity created on Iron Ore and Coal Line that
  exceeds current demand
• from clients
• Increase in monthly port handling capacity at DCT
  (TEUs 186 000 vs 158 000)
• Procurement savings of R500 million p.a. and
  reduction in safety incidents
• (R200 million)

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Strategy implementation achievements to date

• Efficiency improvement Transnet Business
  Intelligence projects (TBI)
• Implementation of TBI projects
• Effective use of technology, world class systems
  and processes
• Financial management and reporting
• Improving processes and systems that enable
  information management
• Identified KPIs across businesses to measure
  key value drivers
• Benchmarking against international companies to
  ensure world class performance
• Implemented Key Performance Indicator project to
  measure
• Key volume drivers
• KPI performance weekly/monthly
• Performance vs benchmarks all areas of business

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Strategy implementation achievements to date

• Transnet Second Defined Benefit Fund (TSDBF)
• Active management and leadership from Transnet
• Currently in surplus of R1,9 billion as opposed
  to being in deficit in 2006 ofR1,6 billion
  (aided by the sale of MTN shares-M Cell and VA
  Waterfront)
• Rule amendments submitted to the Minister for
  approval
• Generally to enable bonus amounts to be paid to
  pensioners to exceed 2 pension increase (subject
  to affordability)
• Transnet to pay ex-gratia bonuses of R125 million
  to pensioners
• All to receive an additional 1
• Previously disadvantaged widows and members with
  gt15 years service who receive low pensions and/or
  also over 65 years old receive additional amounts

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Strategy implementation achievements to date

• Transnet Pension Fund
• Act changes to enable non-Transnet employees of
  businesses transferredto Government to remain
  members awaiting Presidential approval
• Rule amendments submitted to the Minister for
  approval
• Generally to enable bonus amounts to be paid to
  pensioners to exceed 2
• pension increase (subject to affordability)
• Fund will become multi-employer with new employer
  guaranteeingobligations of its employees
• Fund now in substantial surplus (R1,1 billion)

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Strategy implementation achievements to date

• Economic Regulation
• National Ports Act
• Act in place from November 2006
• Places responsibility on NPA to ensure safe,
  efficient and effective functioning of ports
  system
• Independent Regulator oversees NPAs functions,
  approves tariffs, hears complaints and appeals
  from port users
• Transnet is investing in systems and capacities
  to perform additional functions prescribed by
  legislation
• Interacting with shareholder in certain aspects
  of Act
• Pipelines
• NERSA (energy regulator), declined Petronets
  application for 5,6 increase
• Methodology for pipeline tariffs not yet approved
  by NERSA
• Transnet engaging with relevant authorities
  important that tariff methodology enables
  Transnet to earn a fair return on invested
  capital (gt WACC)

Put in place a special committee to manage
Regulation
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Strategy implementation achievements to date

• Risk Management
• Operational Risk
• Established a Risk Committee of the Board and
  appointed a Chief Risk Officer that serves on
  EXCO
• Appointed GE Human Resources and HR Sub-Committee
  dealing with human capital in sustaining the
  turnaround
• Improved safety measures and roll out safety
  awareness and training programmes
• Reviewed safety procedures and strengthened
  capacity in problematic areas
• Improved controls and campaign against fraud

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Strategy implementation achievements to date

• Risk Management
• Financial Risk
• Financial Risk Framework in place covering all
  risks (interest, currency, market)
• Asset and Liability Committee ensures that
  financial risks are effectively managed
• Stringent financial objectives are set to ensure
  that targeted financial ratios are
  achieved/maintained
• Improved internal financial and system controls

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Capex spending five-year plan R78 billion
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• RAIL
• Spoornet R34,8 bn
• Coal Line R4,9 bn
• Ore Line R3,8 bn
• General Freight R15,3 bn
• Maintenance Capitalisation R10,8 bn

• PIPELINE
• Petronet R10 bn
• Multi-product pipeline R9,3 bn
• Gas line upgrading R0,2 bn

Petronet
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SAPO

• PORTS
• SAPO R9,5 bn
• Durban R0,9 bn
• Richards Bay R0,7 bn
• Ngqura R1,5 bn
• Cape Town R0,4 bn
• Saldanha R2,9 bn

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Spoornet
45
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• PORTS
• NPA R18,5 bn
• Richards Bay R0,8 bn
• Ngqura R4,7 bn
• Cape Town R3,8 bn
• Durban R7,6 bn
• Floating craft R0,7 bn

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NPA

• RAIL
• Transwerk R4,1 bn
• Equipment - R2 bn
• Upgrade of facilities R1,1 bn

Transwerk
Continuing businesses
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Capex five-year plan R78 billion
12,8
Annual spending over five years
Cumulative
R78,0 bn
R21,5 bn
R17,5 bn
R16,9 bn
R12,7 bn
R9,4 bn
Continuing businesses
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Transnet performance highlights three-year
view
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Salient features 2007
ACHIEVING PERFORMANCE OBJECTIVES
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C F Wells Financial Results
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Financial results 2007
Consolidated income statement
Revenue contribution per operating division

• Revenue growth of 8,4.
• Strong volume growth from all divisions except
  Spoornet.

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Financial results 2007
Consolidated income statement
Operating costs

• Operating expenses increase by 6,3
• Operating expenses contain certain once-off
  costs, notably
• R125 million bonus payout to TSDBF members
• R100 million additional contribution to TPF
• R165 million in respect of provisions
• Adjusting for the above costs, operating expenses
  would have increased by only 3,8, well below the
  inflation rate

Continuing businesses
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Financial results 2007
Consolidated income statement
EBITDA increased by 12, margin increased to
40,7 (2006 39,6)
EBITDA (R million)
Revenue (R million)
SAA 768
SAA 16 339
SAA 953
SAA 17 342
10 301
28 214
23 936
27 298
25 260
26 034
8 269
6 489
7 333
11 488
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Financial results 2007
Five-year EBITDA Margin Growth
86 growth
41
40
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22
17
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Financial results 2007
Consolidated income statement

• Depreciation and amortisation for the year
  increased by 39,5.
• Acceleration of the capital expenditure programme
  and depreciation on capitalised maintenance in
  terms of IFRS

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Financial results 2007
Consolidated income statement

• The fair value adjustments
• C class preference share
• Increase in the carrying value of investment
  properties

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Financial results 2007
Consolidated income statement
Interest cover (times)

• Profit from operations before finance costs
  increased by 15 to R10,7 billion
• Finance costs remain at similar levels to the
  prior year and interest cover increased to 3,5
  times (2006 3,4 times)
• The Groups WACD of 11,9 is high due to legacy
  debt

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Financial results 2007
Consolidated income statement

• Current taxation charge of R0,9 billion and
  deferred taxation charge of R1,0 billion.
• The effective taxation rate for the group is 23
  (2006 31) for the year, which is below the
  corporate taxation rate of 29 due to fair value
  gains.

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Financial results 2007
Consolidated income statement
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Core operating division performance
Operating divisions

• 4 increase in revenue.
• Total volumes 176,6 mt (2006182,1 mt)
• - GFB 79,6 (2006 83,8)
• - Iron ore 30,0 (2006 29,6)
• - Coal 67,0 (2006 68,7)
• Volumes negatively impacted by
• - Customers production constraints,
• - Capacity constraints
• - Derailments
• 3 decrease in operating cost compared to
  prior year improvements from the reengineering
  programme
• Capital expenditure R7,4 billion

Spoornet contribution to Group EBITDA 33
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Core operating division performance

• Spoornet

Capitalised operating expenditure
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Core operating division performance
Operating divisions
Transwerk contribution to Group EBITDA 9

• Revenue increase mainly due to integration of
  Spoornet maintenance operation.
• Locomotive reliability and availability exceeded
  targets
• Annual number of wagon maintenance lifting
  increased from 12 000 to 20 000
• Record production of 1 022 new iron ore and coal
  wagons
• Capital expenditure R623 million

Mainly internal and eliminated on consolidation
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Core operating division performance
Operating divisions
NPA contribution to Group EBITDA 40

• Increase in revenue mainly due to volume
  increases
• - Containers 14
• - Vehicles 25
• Capital expenditure R1 026 million
• Berth occupancy 66 (2006 58,9)

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Core operating division performance
Operating divisions
SAPO contribution to Group EBITDA 14

• Revenue increase 14 vs 2006
• - Containers (13 in TEUs)
• - Automotive (18 in Units)
• - Bulk (2 in tons)
• Capital expenditure R1 740 million

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Core operating division performance
Operating divisions
Petronet contribution to Group EBITDA 8

• 15 increase in revenue vs 2006
• - Petroleum volumes (8,1)
• - Gas (14,6)
• - Tariff increase 2,5
• Capital expenditure R310 million
• Board approval to commence with the Multi Product
  Pipeline subject to certain governance issues
  being resolved

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Financial results 2007
Consolidated balance sheet
Gearing ()
Capital and Reserves (R billion)
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Financial results 2007
Consolidated balance sheet

• Restructuring and funding plan in progress
• Funding monthly including Transnet subsidy

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Financial results 2007
Consolidated balance sheet

• The deferred taxation liability increase in the
  year is due to increased temporary differences as
  a result of
• Capital expenditure programme
• Post retirement benefit obligation
• Taxation on increased carrying value of PPE
  recorded at fair values
• Depreciation changes announced in budget speech
  by the Minister of Finance to reduce the taxation
  deprecation periods
• New rolling stock from 14 years to 5 years,
• New quay wall and other port facilities to
  qualify for deductions over 20 years rather than
  non-depreciation for taxation purposes

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Financial results 2007
Consolidated balance sheet
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Financial results 2007
Consolidated balance sheet
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Summary Financial results 2007
Consolidated balance sheet
Return on average total assets ()
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FINANCIAL RESULTS 2007
Abridged consolidated cash flow statement

• Cash generated from operations before working
  capital changes increased by 20 to R13,5 billion
• Net cash generated from operating activities
  increased by 51 to R8,9 billion

Cash generated from operations (R million)
Cash interest cover (times)
4,3
3,5
4,8
4,5
5,4
7 178
7 040
10 089
11 244
13 488
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FINANCIAL RESULTS 2007
Abridged consolidated cash flow statement
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Funding requirements Next 5 years

• ECA umbrella facility
• DMTN program
• Raise cost effective borrowings at the
  appropriate tenors

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Investment ramp up 2003 - 2007
Capital Expenditure (Rm)
Increase of 192
11 674
6 601
5 641
3 996
3 805
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Key performance indicators Compact with
shareholder
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Financial strategy forthcoming years

• Focus will be on
• Strong control environment
• Reliable, timely and relevant information
• Improved operational efficiency
• Managing key performance drivers
• Margins improvement
• Capital investment roll out
• Returns exceeding WACC
• Funding plan
• Adequately address borrowing requirements
• Reduce the cost of debt

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Future challenges
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Challenges next 3 years

• Transnet future role in the economy
• Transnet bullish about growth in SA over next
  decades
• Enable effective and efficient freight services
• Customers to be competitive
• Eliminating bottlenecks in logistic chain
• Broad based economic expansion
• Enabling economic growth through creating
  capacity in advance and competitive services

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Challenges next 3 years

• Grow the business
• Volumes/activities
• Efficiencies and reliability improvements
• Customer satisfaction
• Providing safe services
• Roll out of investment plan
• Replace assets
• Capacity creation
• Roll out of Transnet Business Intelligence
  project (TBI)
• Improving systems and processes
• To enable growth and improve performance
  management in Group
• Risk Management and Corporate Governance
• Safety of people and freight
• Complying with environmental requirements
• Strengthening internal controls

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Conclusion
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Conclusion

• We are proud of the achievements to date and
  appreciate
• Support from the Board and the Minister,
• Extra effort from the staff in transforming
  Transnet,
• Support by customers and other stakeholders to
  grow the business
• Next 3 years will be more challenging than past
  years
• Challenge to maintain momentum to roll out the
  strategy
• Addressing bottlenecks in providing the required
  services and to play an eminent role in the
  transport sector

• WE ARE DEDICATED TO FULFILLING OUR VISION AND
  MISSION
• To deliver on our commitment to our customers and
  co-operation with all stakeholders
• To play a leading role in the transport and
  logistic sector to support economic growth in
  South Africa and fulfill the role required by the
  Shareholder