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Annual Report Presentation 2004/2005

This presentation outlines Transnet's strategy overview and financial results for the year 2004/2005. It includes divisional reports, post-balance sheet events, pension fund liability, SAA unbundling, non-core investments, prospects, and conclusion. The presentation is led by Ms. Maria Ramos (Group Chief Executive) and Mr. Christopher Wells (Group Chief Financial Officer).

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Annual Report Presentation 2004/2005

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  1. Annual Report Presentation 2004/2005 Portfolio Committee Presentation October 2005

  2. 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

  3. Contents of presentation • Strategy overview • Financial results 2004/2005 • Divisional reports (including SAA) • Post-balance sheet events • Pension Fund liability • SAA unbundling • Non-core investments • Prospects • Conclusion and questions

  4. To be a focused freight transport company Strategy Holding company Rail Operations Port Operations Structure Investment Portfolio Pipeline Operations Aviation Transport Portfolio Rail Infrastructure Port Infrastructure Other Pipeline Network Service providers: – Transwerk– Protekon Strategy overview

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

  6. 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

  7. 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

  8. 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

  9. 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

  10. Salient Features: 2005 PLATFORM FOR THE FUTURE ESTABLISHED

  11. 2) 3) 1) Financial results 2005

  12. Transnet operating profit margin (after impairment) HIGHEST MARGIN IN LAST SIX YEARS

  13. Spoornet’s transformation is key to Transnet’s success • Re-engineering Spoornet’s business processes is key • Africa’s 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 Transnet’s financials would be very positive • Largest of Transnet’s divisions • Only core business that is underperforming • R9bn of assets and 20% target return

  14. Spoornet recent performance 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 Turnover (Rm) Profit before tax (Rm) 24% 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

  15. National Ports Authority recent performance • The NPA is a landlord port authority that owns, manages and controls all seven commercial ports along South Africa’s 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 • NPA’s 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 47% 42% % Margin

  16. South African Port Operations recent performance • SAPO operates 14 cargo terminals at South Africa’s 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 • SAPO’s 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 12% 4% % Margin

  17. 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 Petronet’s 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) 26% 17% % Margin -

  18. SAA key financials: 2005 vs. 2004

  19. 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 -

  20. (Rm) (Rm) Financial performance 2005 vs 2004: SAA Operating profit Turnover >100%

  21. Fair value adjustment (Negative) charge to income statement

  22. 2) 3) 1) Financial results 2005

  23. 10,2 7,5 R bn 36% Financial results 2005 Cash from operations

  24. CAPEX Planned spending over next five years (Core businesses): R40,8 bn • Durban Port Investment • Cape Town Container Terminal • Expansion • Port of Ngqura • Multipurpose product pipeline DJP 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 > cost of capital • Funding: More than 50% funded from operating cash flows • Gearing to reduce over five years to between 50% – 55% (target)

  25. 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

  26. 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)

  27. 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

  28. 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

  29. 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

  30. New Transnet Based on 31 March 2005 * 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

  31. Prospects • 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 PLEASING RESULTS – BUT MAJOR CHALLENGES GOING FORWARD

  32. 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

  33. Thank you Any questions??

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