RNS Number:5728A
Eurotunnel PLC/Eurotunnel S.A.
07 July 2004
EMBARGO: Not be released before 0730 hours (UK time) on Wednesday 7 July 2004
EUROTUNNEL'S RECOVERY BECOMES POSSIBLE
Today (Wednesday 7 July), after 90 days in charge of Eurotunnel, the Board of
Directors and the new management team has informed shareholders of the analysis
they have made of the company and outlined the conditions for its recovery:
(1) Increase turnover
In order to halt the decline in turnover from its Shuttle Services, Eurotunnel
is reorganising its pricing policy, whether for the strategic freight sector,
cars or coaches. Eurotunnel is also ready to put forward a new framework
governing its relations with other train operators. Finally, the Europorte 2
rail freight project has been reconsidered and re-launched on a more solid
basis.
(2) Reduce costs and increase operating margins
The new Eurotunnel management puts the potential for cost savings at Euro40 million
per year, at least. In order to achieve these savings, two plans have already
been launched and will bear fruit within a year at the outside. The company
reorganisation that has already been announced should contribute to these
savings.
(3) Reach a sustainable level of debt
Eurotunnel is actively working on a refinancing plan; the new management team
has surrounded itself with the best possible legal and financial advisers and
has established initial contacts with its creditors.
As this letter to shareholders is published (see attached), Jean-Louis Raymond,
Group Chief Executive, states:
"Eurotunnel's recovery is becoming possible; we have identified the conditions
that need to be met, but time is short. A long-term plan will be finalised at
the end of October. It will set out Eurotunnel's new financial and operational
strategy, the broad outlines of which will be made known at that time."
Eurotunnel's interim results will be published on 26 July 2004.
Note to editors:
A copy of the letter to shareholders is attached.
Media enquiries:
Kevin Charles: + 44 (0) 1303 288728
Investor enquiries:
Xavier Clement: + 33 1 55 27 36 27
News release no. 903
Eurotunnel manages the infrastructure of the Channel Tunnel and operates
accompanied truck shuttle and passenger shuttle (car and coach) services between
Folkestone, UK and Calais/Coquelles, France. It is market leader for
cross-Channel travel. Eurotunnel also earns toll revenue from other train
operators (Eurostar for rail passengers, and EWS and SNCF for rail freight)
which use the Tunnel. Eurotunnel is quoted in London, Paris and Brussels.
LETTER TO SHAREHOLDERS (7 July 2004)
EUROTUNNEL RECOVERY BECOMES POSSIBLE
Sir, Madam,
Dear Shareholder,
Just three months ago, during the Annual General Meeting on 7th April, we made a
promise to get back to you within 90 days to review this first stage.
We would not be so bold at present to say we have come up with the solution to a
problem as complex as the one our Group has faced over the past decade. However,
we owe it to you to provide an open assessment of the current state of affairs.
We would also, and above all, like to share our conviction with you:
Eurotunnel's recovery becomes possible.
As you are aware, Eurotunnel is a unique company. We, for our part, are aware of
its shareholders' determination; we recognize the potential of its
infrastructure, the quality of its customer service, the wealth of its
Franco-British culture and the pride and commitment of its employees.
Unfortunately, in focussing on the single problem of its debt, Eurotunnel has
lost sight of its main mission: to provide the most efficient services in the
market to the greatest number of customers at the best possible price.
Three months down the track, we are in a position to present to you a certain
number of elements of our corporate project. As we anticipated on 7th April
last, it is based on the following three complementary objectives:
* Stimulate our growth in turnover by radically transforming our commercial
policy.
* Significantly increase our operating margin by reducing our costs.
* Reach a sustainable level of debt by putting our finances on a far healthier
footing.
We can increase our turnover!
Our analysis
* For the second consecutive year shuttle services revenue continue to decline.
* This trend cannot be solely attributed to the market.
* We therefore need to radically transform our commercial policy.
Truck Shuttles
Our truck Shuttles provide an unparalleled level of service in terms of
frequency, speed, punctuality, reliability and safety. These strengths should
have made it possible to build a pricing policy factoring in the specific needs
of each business sector; Eurotunnel's margins would have been protected and the
disorganisation of the cross-Channel market avoided. In fact, Eurotunnel's cost
structure means it is in a position to ensure compliance with this policy and
meet its customers' expectations.
Yet, the contrary was done: the arrival of Eurotunnel, the newcomer on the
cross-Channel market, locked into its rivals' pricing policy and triggered a
price war over the ensuing decade, the consequences of which today are:
* The collapse of yields: down 20% since 1995, at constant exchange rates;
* destabilisation of the operators which, year in year out, have seen their
market share fluctuate, without managing to globally increase it;
* incoherent price conditions contributing to their high volatility;
* extremely unstable prices have prevented road hauliers from building
long-term operations.
Eurotunnel's 2002 initiative to create a sales system for customers other than
major contracts has not contributed to growing or stabilising its market share.
We are looking at reorienting this form of distribution for the years ahead.
Passenger Shuttles
Passenger Shuttles are a practical way of crossing the Channel (57 kilometres in
35 minutes): faster, more comfortable and reliable than the rival options.
Eurotunnel should have emphasised, and not just in Great Britain, the
exceptional quality of its product in its advertising, and applied a pricing
structure reflecting fluctuations in demand in order to promote greater income
from the shuttle service.
But Eurotunnel has done little to promote its offering, has abandoned the "Le
Shuttle" brand, and, locked into its rivals' fare policy, has applied a similar
pricing policy to that of its rivals: a structured rate that does not adapt to
demand. Consequently, today:
* awareness of the passenger shuttles outside the United Kingdom is low and
their specific features are often unknown;
* the pricing grid has become difficult to understand, and the pricing image
is very negative;
* Eurotunnel has lost part of its customer base, mainly to low cost
airlines;
* the passenger Shuttle load factor is falling.
Eurostar
Eurostar's growth is well behind the forecasts of 20 years ago. The full effect
of this will only be felt at the end of the current phase of the contract with
the rail operators and which, during this period, guaranteed us a minimum
revenue.
Eurostar's current commercial policy is not to blame for Eurotunnel's current
level of revenue: the growth in traffic and its market share are logical given
the length of the high-speed rail network.
The cause can be attributed to the initial forecasts, unfortunately used as the
basis for our revenues.
Rail freight
Freight trains through the Tunnel are operated jointly by EWS International and
SNCF Fret, its French equivalent.
While traffic grew rapidly when the Tunnel was opened, reaching 3.1 million
tonnes in 1998, it then declined until it collapsed in 2002, notably following
attempted incursions by asylum seekers at SNCF Fret's Calais site.
These incursions have now stopped but freight traffic has not really taken off
again, stagnating at 1.8 million tonnes over the past 12 months.
It should also be said that rail operators have not thus far demonstrated great
interest in developing cross-Channel freight.
The attempt to boost this activity was a good initiative by our Group. The
Europorte 2 project, hastily put together before our arrival, was rejected by
some of our creditors, but it did enable us to build an excellent base from
which to revive the project when the time is right (rail freight licence, sales
relations, train path availability and, soon we hope, a safety certificate).
First directions and steps taken
* The truck Shuttles have considerable potential to generate income in the
short and medium term; our immediate priority is to develop this traffic.
* The repositioning of passenger Shuttles will also generate revenue growth,
albeit at more modest levels and only within 12 to 18 months.
* It is certain that income from Eurostar will not exceed the guaranteed income
under the contract signed with the French and British rail operators. We are
ready to make mutually interesting proposals to take effect as of 2006 if our
partners are willing to come to the negotiating table.
* There is real revenue potential with rail freight beyond the next 24 months.
Truck Shuttles
Our immediate action, validated by surveys of our major current and prospective
customers, is based on the following:
* rebuild the pricing policy for major accounts: rationalise pricing
conditions and a rate charter taking into account the different types of
freight traffic. This policy should enable us not only to build durable
relations with our major customers but also to acquire significant freight
volume with some of these customers;
* reformat the pricing policy for other customers;
* make the Truck Shuttle Sales Division a real trade marketing organisation;
and
* assert and protect our position as the market leader.
Passenger shuttles
Our action is based on the following:
* new pricing policy for cars, based on demand; three different models of
rate management are currently being evaluated;
* rationalisation of our reservation system;
* complete reworking of our customer advertising, emphasising the quality of
our services and our new price offering;
* improve the offering for coach operators, made competitive in terms of
service and pricing; and
* reorganise the Passenger Shuttle Sales Department into two business units
including sales operations and support functions.
Eurostar
There is remarkable potential for traffic growth within a 300 to 400 kilometre
radius around the Tunnel. This radius includes London, Paris and Brussels, as
well as Amsterdam, Antwerp and Cologne.
In the coming years, the traffic contributed by Eurostar will increase with the
entry into service of new high-speed sections of line, if the income remains
less than that guaranteed by the rail operators through to November 2006. An
across-the-board and unilateral drop in tolls will have little impact on the
traffic, but will have an immediate negative impact on Eurotunnel's revenue. On
the other hand, if the Eurostar operators accept, a new rate could be negotiated
that would be profitable for both.
Rail freight
The growth potential for rail freight traffic is immense; indeed, rail transport
only accounts for around 3% of the freight market between the United Kingdom and
the Continent.
Our action, which should start to pay off within 18 to 24 months, is based on:
* maintaining the inroads made with the Europorte 2 project;
* building a business plan with the operators and the main potential
customers; and
* prospection, equally committed, of the main potential customers.
It is essential to reduce our costs and strongly increase our operating margin!
Our analysis
* The potential for cost cutting is huge (over Euro40 m/year), but it entails
far-reaching change in our organisation and our way of working.
* The teams are of excellent quality and keen to have new reasons for
motivation.
The Group is organised into entities that are largely autonomous, reflecting the
complexity of a group that is split between two sites, two States, two languages
and two cultures. Unfortunately, this organisation leads to a duplication of
tasks, a multiplication of coordination and control structures and the
difficulty of obtaining a global vision and direction.
The way we operate is based on strict compliance with procedures, rarely
questioned, rather than being objective and result-orientated. The latter are
insufficiently assessed and rarely given recognition. The simple budgetary
approach still dominates over any real cost containment.
Fortunately the teams are of excellent quality and highly committed to what we
have always called "the finest project of the end of the 20th century". They are
keen to have new reasons for motivation in their support of a clear corporate
project shared by all.
Cost reduction can be achieved rapidly in the following areas: rationalised
procurements and sub-contracting, eradicating exceptional non-recurring
expenses, obvious overlaps and prestige spending.
Other reductions, yet to be examined, cover significant areas: IT, expenses
relating to other parties but imposed on Eurotunnel, investments, maintenance,
optimising organisation and procedures.
Finally, there are areas in which an in-depth analysis of costs and expenses
needs to be made in order to establish perfectly reliable data for the future.
Initial findings and steps taken
* Our prime priority is to reorganise the Group and motivate the operational
teams that will head the recovery.
* Two cost-cutting plans have already been implemented and will begin to pay off
within 12 months at the most.
* The assessment of potential cost cutting is ongoing; it will be completed
before the end of 2004 and, as it progresses, will lead to specific action
plans.
Reorganisation of the Group
The Eurotunnel Strategy Committee has been working since mid-April on
establishing and costing plans; it will continue through to the end of 2004 to
complete this stage in the planning. However, it is already necessary to
structure the business around a smaller and tightly knit team:
* technical functions will be split up and reorganised in two
cross-sectorial blocks: infrastructure, on the one hand; rolling stock and
terminals, on the other;
* commercial functions will be organised into three sections: truck
Shuttles, passenger Shuttles and Rail Networks;
* support functions, until now dispersed throughout the organisation, will
be grouped together in a single division; and
* the Financial Division will include accounting, administration control and
cash management.
Cost-cutting programmes
The action plans relative to savings already identified and costed are now being
implemented. A first team responsible for cutting procurement costs will also be
in charge of cutting sub-contractor, investment and maintenance costs, without
of course reducing the level of safety adhered to by our rail operators.
A second team has been assigned to calculate organisational costs, and plan
relevant cost-cutting measures.
Two additional teams are being set up to calculate and plan savings on IT costs
and reduce the working capital requirement.
Far from undermining the social cohesion of the Group, we are convinced that
this new approach will make our teams even prouder to work for Eurotunnel.
We must reach a sustainable level of debt. It is still possible!
Our analysis
We are all aware of the essential need to place our financial situation on a far
healthier footing. Our declining turnover and the end of the period of
stabilisation (December 2005) are leading Eurotunnel towards an impasse and so
require that your Board of Directors take drastic action.
Continuity of operation will be based on the Group's ability to implement not
just the measures to improve its cash flow from operations, but also a
refinancing plan within two years, without fail.
Initial findings and steps taken
Your Board is currently working on drawing up a refinancing plan that is truly
adapted to the Group's level of activity.
We need to find the best balance sheet structure given our activity and
environment, the economic context and the efforts the Group will have to make.
It is, of course, essential for our shareholders and our employees, but also for
our creditors, as the ultimate goal is to reimburse our loans and pay our
financial charges. We have contacted some of our creditors; this leads us to
believe that they are willing to talk.
We have set up a team reflecting the breadth of the Group's expertise. Financial
consultants have been selected. Given their experience in handling complex
financial cases, we felt that investment banks Lazard (overall coordinator) and
Lehman Brothers were the best placed to work with us. Dresdner Kleinwort
Wasserstein will provide continuity through its background knowledge of the
Eurotunnel project.
We have also strengthened our legal structure by bringing on board Weil, Gotshal
& Manges alongside Herbert Smith.
Finally, we have asked Deloitte, along with Toulouse and Associes, to draw up an
appraisal of the Group's operational and financial situations; it will serve as
a starting point for future negotiations.
The long-term plan that we have to finalise by the end of October, will factor
in the operational actions already undertaken, and will also make it possible to
validate the refinancing strategy currently being developed. The market will be
advised of its main lines at that time but the details will remain confidential
until it is implemented.
Our action will not be limited to these three goals, even if they are the basis
for Eurotunnel's recovery.
As we announced in April, we will be appointing British members to our Board of
Directors. This process is going well.
We would also like to re-establish a dialogue with all our partners: our
creditors, of course, but also our customers - passengers, road hauliers and
railway companies - and our suppliers. With each, we would like to find mutually
beneficial solutions and truly involve them in our growth.
Finally, we would like to establish a new level of dialogue with you, our
shareholders. We owe it to you to provide you with a regular flow of clear
information which alone will prevent both misunderstandings and excessively high
hopes.
Eurotunnel has one million shareholders!
This means we are going to have to adopt an innovative approach if we are to
reach a maximum number of you in as short a time as possible: shareholder
committees, associations, local meetings, communication via the Internet... Our
aim is to listen to you and to provide you with as much information as possible,
without this becoming a financial burden on your company, while of course also
respecting the legal requirements of a listed company.
In the meantime, we will continue our action to re-energise its sales dynamic,
motivate its teams in their support for a real corporate project and reopen the
communication lines with all its partners: in short, to clear the horizon for
Eurotunnel and give you confidence in its future.
Jacques Maillot
Chairman of the Joint Board, Eurotunnel Group
Jean-Louis Raymond
Chief Executive, Eurotunnel Group
This information is provided by RNS
The company news service from the London Stock Exchange
END
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