Globaltrans Investment PLC

MOEX:GLTR

[Interpreted] Ladies and gentlemen, thank you for the interest demonstrated to our company. So today, we are this telephone conference is devoted to the publication of Globaltrans' interim results for the first half of 2021. As usual, the event today is hosted by Valery Shpakov, the CEO of the Globaltrans Group; and Alexander Shenets, its CFO. So we will start by presenting the results and then we'll be happy to answer your questions. Now I would like to pass the floor to Valery Shpakov.

[Interpreted] Thank you. Hello, dear colleagues, thank you for the interest in our results. Traditionally, we'll start with the presentation, and then we will be happy to answer your questions. I hope you can see our presentation. I will start with Slide 5. Here, I'm going to briefly explain the results of our operation in the first half of 2021. As you know, throughout almost the whole of this period, we saw weak pricing in the gondola segment. And in this context, quite expectedly, our financial results got under pressure. Our adjusted revenue declined by 14% year-on-year to RUB 24.8 billion, and our adjusted EBITDA went 29% down to RUB 10.4 billion. But despite the difficult market situation, our free cash flow remained at a solid level of RUB 4.2 billion. And that was certainly supported by our low expansion CapEx. As for the leverage, the leverage remains at a comfortable level and our net debt to last 12 months adjusted EBITDA, it reached the level of 1.2x. So it has just insignificantly grown. Now talking about the current situation in the market. We can currently observe some positive trends in the bulk cargoes segment. Volumes continue to recover and they exceeded the level achieved in the first half of 2019. And certainly, this is driving a substantial recovery of rates of pricing in the gondola segment, which started in late Q2 2021. So -- and thus, we have seen opportunities associated with these improving market conditions. So we decided to use more lease in gondola fleet. And we hope that we are going to continue working in the same direction in terms of this lease in gondolas. I'd also like to point out corporate events that I'm presenting today. So we have reached an agreement to sell a 60% stake in our noncore asset called SyntezRail for RUB 1.1 billion. This is a sale of a small niche business at an attractive price, and it supports our financial position, and it also supports our dividend capacity. A little bit later in my presentation, in my report, I will give you more details on this matter. I would now like to say a few words about our projections and decisions on dividends. So I must point it out that our dividend capacity is improving and it exceeds our expectations, the expectations we had at the beginning of the year. Our Board of Directors has approved the payout of interim 2021, dividends in the amount of RUB 4 billion, which is above the previously announced target of RUB 3 billion. We have also set the target level for final dividend for the second half of 2021, and it's going to be 25% higher than interim payouts and the amount will be RUB 5 billion. That is around RUB 27.97 per share or GDR. Next, let's go to Slide 7 of our presentation. And here, I will give you an overview of the market. So as I have already noted, the recovery of the railroad transportation market continued, driven by some positive trends in the bulk cargo segment. In the first half of 2021, the overall Russian freight rail turnover increased by 5.2% and almost reached the level of half 1 2019. In July and August, the recovery continued and the overall freight rail turnover went 3.6% up. So -- and the growth compared to July 2019 was plus 1.9%. In the bulk cargo segment, volumes went 5% up, and this is above the pre COVID level in half 1 2019. This is plus 1.4% as compared to that number. Net additions of gondolas went down significantly by 35% year-on-year and amounted to about plus 1% as compared to the end of 2020. Throughout much of the first half of 2021, rates in the gondola segment remained weak. But I must note that starting from the end of Q2 2021 and then through July and August, we saw a substantial recovery of the rates. As for the oil products and oil segment, well here, this segment is still lagging behind in terms of demand recovery due to the impact of COVID and also the continued OPEC+ limitations. Volumes in this market slipped 0.4% down year-on-year and this is still below -- this is almost 7.4% below the level back in first half of 2019. As for the tank cars net additions, while net additions were 2% as compared to the end of 2020. Pricing in this segment remains solid.Now let's go to Slide 9. It's about our operating results. The freight rail turnover retreated to the pre COVID level and back to achieve -- back in the first half of 2019, but the year-on-year decline has been 4%. At this point, I would like to note that these operating indicators in the gondola segment were certainly driven by the unfavorable weather conditions and the associated delays in ports and also some congestion at key customer facilities. So those were the key factors that affected our freight rail turnover. As a result of that, the average number of loaded trips per gondola cars went 6% down. And I think I've already mentioned that in the tank car segment, we see some pretty slow demand recovery. So in response to the improving market situation and the bulk cargo segment, we took a decision to expand our leased-in gondola fleet. Over the past 6 months, our leased-in gondola fleet increased to almost 1.5000 units. And currently, it accounts for 3% of the total gondola fleet of our group. And we hope that this situation will continue to evolve further. However, the number of leased-in tank cars halved to 1.3000 units because of sluggish demand recovery. Slide 10 now. Here, well, let's talk about our commercial terms and contracts. As you can see in the upper graph on this slide, the average price per trip -- loaded trip in the first half of 2021 went 12% down. And the average price per trip that's it. And yes, this number went 7% down as compared to the whole of the year 2020. And this was certainly driven by weak pricing in the gondola segment. The stable situation in the tank car segment allowed us to partially compensate for that pressure in gondolas. After this weakish first half of 2021, the gondola segment, however, started to recover. So the rates started to recover and starting from May and through August, we can observe some growth. So the recovery of the bulk market will support pricing in this segment. I would like to also point out that all commercial terms are less volatile because we have major service contracts. For instance, in the first half of 2021, we expanded the portfolio of our service contracts. Certainly, we extended the terms of our key contracts. For instance, with Rosneft, we prolonged our contracts for 5 years until the end of March 2026. The contract with MMK Magnitogorsk was extended for further 2 years until the end of September 2024, and our contract with Metalloinvest till the end of this year. So we've been developing relations with other clients as well. And in these terms, for instance, we increased our business volumes with EVRAZ and we also expanded relations with clients like NefteKhimService; Kuzbasskaya Toplivnaya Company, that's Kuzbasskaya co-company and National Non-Metallic Company. If we look at net revenue from operation of rolling stock, the contracts with these superior clients more than 60% of our net revenue from operation of rolling stock. Let's move on that Slide 12, probably 11. I'd like to point out a few matters. So first of all, despite anything we maintain leading operational efficiency indicators. Our empty ratio for gondolas is still one of the lowest in the industry. Well, -- so far, it remains a bit elevated, but the level is stable at 46%. This primarily reflects the continuing adjustments to cargo and client basis due to the impact of the pandemic. If we look at the total empty run ratio for all types of rolling stock, it's unchanged, that still stands at 52%. The share of empty run kilometers paid by Globaltrans is about 100%. In the first half of 2020, it was 99. So it's virtually unchanged. And now I would like to pass the floor to Alexander Shenets, the CFO, who will give you more details on our financial performance, and then we'll continue. Alexander, the floor is yours.

[Interpreted] Thank you. Hello, ladies and gentlemen. So I'd like to ask you to go to Slide 13. Here, you can see the key financials of the group for the first half of this year. Well, of course, these got under the pressure of pretty weak pricing in the market, and which persisted throughout the first half of the year. And our revenue went 14% down. Our EBITDA was also adjusted by 29% down. But in this slide, what I'd like to point out in this slide is that we've been managing our cash costs very well and the total operating cash costs only grew by 1% very insignificantly. And our EBITDA and cash flow, yes, well, they went down, but they remained at good healthy levels. And what's also important to note that the leverage. Well, if we look at absolute net debt, it increased very insignificantly. And in relative terms, the leverage ratio remains pretty comfortable at just 1.2% in terms of the net debt-to-EBITDA ratio. Now next slide. Next Slide shows information on the company's adjusted revenue. As usual, the key components to our revenue is net revenue from operation of rolling stock. It went 15% down because of the weak pricing situations in the first half of 2021. And well, as you can see here, the average share price per loaded trip also went down -- 12% down. Although the fleet in operation was more or less stable, still the average number of loaded trip per car went down, 2% down. Our revenue from specialized container transplantation went 6% down. And here we observed certain volatility in terms of both the market rates and the volumes, in some of the cargo segments. And as a result of that, -- so we see these numbers, these financials. Our revenue from other operating lease of rolling stock went 3% down. So it's not very material, and this reflected a decline in average leasing rates in the tank car segment, which continued in the first half of 2021. But in principle, those trends as Valery has said so they are now kind of turning around. Next slide gives you information on the company's costs. So I will give you more details on key items of spend on the next slide. But at this point, I would like to note total operating cash costs. While we're restrained -- successfully restrained them and the growth has only been 1%. And if we talk about noncash costs, so while they even went down, they went 4% down. And this happened due to some decline in depreciation of property and also due to a substantial decline in amortization of intangible assets. Now on Slide 16, you can see our major operating cash cost items. So the greatest item of expenses here is empty run costs. These costs went 3% down. And they were driven by -- this was driven by the growth of regulated Russian railroad tariff and also some decline in the group's freight rail turnover in the first half of the year. But empty run ratio remained there so and the numbers are pretty stable. Employee benefit expenses grew substantially year-on-year. But at this point, I would like to make the following comment that in the first half of 2020, we had a very low base that we currently use for comparison because that was the peak of the crisis and many of the payouts to the personnel, including bonuses, were virtually frozen. And if we compare the current number with the first half of 2019, for instance, we will see that the growth has only been by 13%, and there are several factors related to this growth. Certainly, first of all, that inflation, inflation of salaries. The second driver, and that's quite an important factor is that is that we've been replacing the locomotive cruise of Russian railroads with our own in-house locomotive crews. And as a result of that process, we are facing an increase of the average headcount in the company by 4% and some growth of costs related to the relevant admin expenses. But at the same time, we can observe a very significant decline in another cost item, which is engagement of locomotive crews. And overall, as a result, we have savings for the company overall. Our repairs and maintenance expenses increased by just 2%. This is a good thing. That's good achievements. And we had a growth in the number of depot repairs, but it was offset with a substantial decline in prices for such repairs and also prices for other spare parts and other types of repair works. Our fuel and spare parts expenses related to locomotives. These went 4% up. But here, that's a simple consequence to inflation-driven rights in the cost of fuel and certain step-outs. Slide 17. Here, you can see information on our free cash flow. What's important to note here? The free cash flow remained at a pretty high level of around RUB 4.2 billion. And in principle, the key -- well, one of the key drivers, besides the changes in net cash from operating activities from operations are one of the key drivers to this change was the change in CapEx. As you can see, CapEx runs 19% up. But I must say why. First of all, our maintenance CapEx was 44% higher than last year, but that is mostly due to the fact that in the first half of this year, we did more of repair and maintenance work, and we expect that we will see a smaller number of repairs in the second half of this year. Besides one of the drivers, here was a decline in expansion CapEx. But still, we did have some of it. And it is probably important to note that in the second half of the year, we do not expect any expansion CapEx and investment into rolling stock purchase. And thus, our target total CapEx for the whole year 2021 remains unchanged at the level of around RUB 7 billion. Now let's go to next slide. Slide 18. It's about our leverage and debt. So consider the debt portfolio of the company here. So it's repeat what I've already said. The amount of our debt portfolio did not turn to go any significant changes and leverage net debt to company EBITDA remained at half level of 1.2x. And it's probably also important to note that despite the quite substantial growth of interest rates in the financial markets of Russia, we successfully kept the average weighted cost of our debt at a level of around 7%. So we have almost no change year-on-year. Our debt portfolio is still ruble denominated. So we don't face any foreign currency risks. And in the graph at the bottom of the slide, you can see that our debt still has a very good structure in terms of its maturity profile.And now I'd like to pass the floor back to Valery.

[Interpreted] Yes, let me continue. Let's go to Slide 20. So at this point, I will give you more details on the sale of SyntezRail. So SyntezRail, it's our noncore niche business. It's not of specialized containers that transports petrochemicals and high-grade steel in containers. So I'd like to point out that this is a small asset. It accounts for less than 3% of our adjusted EBITDA. For the past 7 years, we have been successfully developing the stream of business. But now we can see that -- well, there are no significant synergies with our other businesses. And besides that, there are potential to create more value here quite limited. That is due to growing competition and growing cost of new containers. So we are setting the asset attractive price. The EV to EBITDA multiple is around 7%. We believe that this is a good and profitable investment for us because the return on our investment here is around 4%. The impact from deleveraging along with the transaction proceeds account for about 12% of the group's net debt. So I must point it out that this transaction was approved by all independent and non-interested members of the Board of Directors. And they opinion on this transaction, was prepared by Ernst & Young. Let's go to Slide 22 now. It's about our dividends. As I've already mentioned, our dividend capacity is improving, and it exceeds the expectations we had at the beginning of the year. We can see some positive trends in the bulk market as well as substantial recovery of rate in the gondola segment. This certainly supports our free cash flow. We also have moderate CapEx, and we have a robust financial profile. In view of all these factors, our Board of Directors has approved interim dividends for 2021 above the target level in the volume of RUB 4 billion, which is RUB 22.5 per share or GDR and the payout is expected in September 2021. So in terms of our plans for the future, we have set a target. Target on pretty strong final dividend for the second half of 2021 in the amount of RUB 5 billion. That makes RUB 29.7 per share. This is 25% higher than interim payouts and the interim dividend. The final dividends are due to be paid in April or May 2022. And now Slide 24. I would like to share our views on the current situation of the market here. As I've already said, in July and August, the recovery of demand continued and pricing in the gondola segment continues improving as well as this certainly supports the commercial trend, the pricing of global trends. I feel our pricing is less volatile as compared to the spot market. Demand for Globaltrans services is growing, and we believe that this once again confirms that we took a timely decision to expand our leased-in gondola fleet. As for the tank car segment, here the pricing situation remains stable. However, the recovery of volumes is pretty slow. We can also see that inflation-driven pressure is getting stronger in terms of the cost of spare parts and repairs. And this reflects higher steel prices as well. However, I must note that we expect total CapEx of Globaltrans in 2021 remains unchanged. Overall, we believe that the railroad industry still has very solid fundamentals. Railroads remain one of the greenest and most strategically important types of transport that link Russia to global markets. Strong export demand, along with the recovery of domestic demand will drive the volumes of railroad transportation. Addressing the issue of congested rail infrastructure in the Far East is currently a key focus area for the government and for RZD, the Russian railroads. And we can see some very good progress in this respect. Well, and at the end of my presentation, on Slide 25, I would like to just recap what I said. So Globaltrans is a robust business with an efficient business model and strong cash flows. Our dividend capacity is improving, which also makes it possible for us to increase dividend payout. We had a consistent approach to creating value for our shareholders. Thanks to secondary listing on Moscow exchange for instance, our total liquidity has improved significantly. Our GDRs are now included in a number of indexes and if there is any volatility in the market, we offer a share buyback mechanism. At this point, I would like to finish my presentation. Thank you for your attention. And now I'm ready to answer your questions.

[Interpreted] Question. So the speaker thanks to our colleagues and also thanking for the presentation and opportunity of questions and for the exclusive guidance because that's always pleasant. And there are 3 questions. The first question was about a dividend guidance. So last time you said it would be RUB 3 billion, but you also said that it would be not much less than RUB 3 billion and that will be materialized, you've increased the payout but the new dividend guidance for the second half of the year, RUB 5 billion, does not contain this kind of comment that it's a minimal level. So the question is, do you understand it's right that we shouldn't expect any increase in payout, even the situation in the market is good.The second question was about rates. So we can all see recovery in market rates that started in April, but -- for instance, Vice President of Russian rail said that there is still surplus of gondola cars in the market and another colleague and analysts from the industry said that Federal Freight company removed about 5% of its fleet of gondola from the market to support the rate. So the question is, what are your views? Is the rate recovery going to continue in a stable way or this year that the removed cars maybe back to the market. So what will happen to the rail? And the third question was about CapEx. So you have said that prices are growing, including prices of fuel and industrial inflation is pretty high. So do you have an understanding on your CapEx for 2022.

[Foreign Language] I'll probably start with question 2. So this is a kind of an essential question about the rates and the surplus of market. In market rate, gondola cars were at around RUB 700 per day at the beginning of the year. They started to recover in Q2. The current level is already above RUB 1,000. Yes, we have infused in the past, and we still see that there is a surplus of -- but let us note that this surplus has been declining since 2021. Because we see substantial growth in freight rail turnover by 5.2%. And in the summer [Indiscernible] said that there was some local deficit of railcars in the market. You also mentioned federal freight companies that we used some number of cars from the market to support the rate. Well, I think that this does may repeat from time to time. The point is that this is a state-owned company and there is no [Indiscernible] kind of load, social important services, which also went down over the past few years. Well -- and the overall fleet of such cars is increasing now. But locally, you can see some deficit of railcars. And we've been observing the situation since the end of Q2, and it continues until now. But it's difficult to make any comments on surplus because there are very many different methodologies and the projects with calculation. And despite the substantial recovery of demand, well, as we said, there is still surplus in the market, but the situation is improving. For your first question, well, indeed, we set the target of RUB 5 billion. But what is this associated with -- situation volume is improving. We believe that the situation is getting stable. And that is why we plan for such numbers in terms of dividend. Maybe Alexander can add something in terms of answering this question.

[Interpreted] Yes, I would like to add that as for the number we gave for the first half of 2021 for the interim dividend, we initially wanted this to be our clients quite at -- safe level because of a lot of volatility in the market. But now let's say that the tone is probably changing because we are setting more ambitious targets. And as Valery has said, there is market recovery, and we are setting more ambitious targets. Well, we said that it's probably a bit premature to talk about an increase of sales now. Everything will be determined by the situation of the market. Well, as for the question about the CapEx for '22, what I'd like to point out is that we can currently observe some moderate growth of the cost of spare parts. But potentially, we cannot rule out a more intensive growth of prices that may prove be started earlier in the fourth quarter. So -- and our kind of projection for the ratio between like the second half of 2021 and the first half of 2021 is 5% to 10%. I think we've answered your question.

[Interpreted] We have spoken about that before and explained the position, and would ask Alexander to make some additional comments.

[Interpreted] So there are 2 points here. One is pretty general and the second is more specific. So first of all, we believe that as for the general matter, we believe that further growth of value in terms asset is limited. The growth is possible, but it will take a lot of investment. And so we don't see any further potential to get much more value here. So the timing for sale was selected now on purpose. So as for the market of rolling stock, well, I must say that the price of rolling stock have already grown. And we should also bear it in mind that we should consider not just the cost of car, but the cost of containers and the price of containers have already increased by 30%, and this was included in the price. So -- and I don't think that after 6 months, we could have more. So -- and besides the price of rolling stock is already pretty high and not many companies are ready to invest there.

[Interpreted] Yes, that understanding is right.

[Interpreted] The question is very interesting, and that would split it into several components. Well, first of all, I believe that the sale of SyntezRail is not connected to our dividend capacity and the key driver of dividend is certainly the growth of rate in the market. In terms of cash flow, this is not the But on the other hand, as you note that our balance sheet and our leverage have improved in connection with the sale. Well, another important thing of course, the process we get on the transaction are also important. But another important thing is what kind of debt we can remove from our balance sheet. And if you look at the overall group level effect from this transaction, it would be around 12%. And from this viewpoint, of course, the sales support our dividend capacity.

[Interpreted] Yes. Thank you for the question. In terms of our operating indicators, you're absolutely right. So we can see kind of a decline relative to the market. And there were some objective reasons for that. So first of all, if you look at the trends in terms of freight rail turnover, it went down as compared to a very high base of the third quarter 2020. So when in the first half of 2020, the market was shrinking, we were growing. And this is also due to the low base at which the market stood at that point in time. And of course, there, you can see more prominence. But if you look at the pre COVID level of turnover that was achieved in the first half of 2019, our freight rail turnover still remains at that level. But the market overall is still below that level. So that was kind of the first point. And the second point is that the clients, the service, they are primarily metallurgical clients. So our clients were affected by the weather conditions. There are favorable weather conditions and associated limitations in terms of railroad network in their destinations. And what happened was congestion on internal on on-site tracks of our customers, primarily with MMP and [ Metalloinvest ] And as a result, the number of loaded trips per car in the first half of 2021 went 6% down. But all our gondola cars were fully utilized. But since their turnaround time increased. Beside our freight rail turnover in the tank car segment, it went 4% down. The key reason here is changes in logistics. But during the current period, despite the current restrictions related to the repairs of tracks and also the increased passenger traffic due to the season. So we are doing everything to improve the situation. And we will do our best to make sure that our numbers are not behind the market or even go ahead of the market. And from our viewpoint, in fact, the key operational indicator is the turnover because this is a number that takes into account the distance as well. I hope this answers your question.

[Interpreted] So once again, thank you for the interest in the results of company our performance. And record of this call will certainly be available on our website along with other information on the company. We are going to run individual calls with investors in the coming few days. So if you are interested, you are welcome to contact us for that. Thank you. Thank you very much, and goodbye.