PKP Cargo SA

WSE:PKP

Earnings Call Transcript

[Operator]

Good morning, I would like to welcome you to the conference presenting the results of PKP CARGO for the first quarter 2018. Today's conference will be presided over by the President, Czeslaw Warsewicz. Over to you, sir.

[Czeslaw Warsewicz, executive]

Ladies and gentlemen, let me first introduce the agenda. I will first try to present briefly our results, and then there will be a Q&A session and all the members of the board, including myself, will be available for questions.

Great welcome to all the people present, especially shareholders, dear to us for whom we work and perform. I would like to show you the progress this year.

The results have been one of the best in history, especially over the last 3 years. Our performance is consistent with -- in terms of EBITDA with the forecast that we publicized a few weeks ago. For the first 3 months, EBITDA was approximately PLN 200 million, which is 36% better than the year before, 70% profitability in net results, PLN 36 million last year. And 2 years ago, there was a loss. It was PLN 1 million last year and PLN 66 million 2 years ago. So the progress is indeed excellent. It's a record quarter in the history of PKP CARGO Group.

We want to maintain this performance and perhaps increase the success.

Now when it comes to the main segment, the cargo segments that we operate in, we should pay special attention to the very significant increase, which is linked to the market situation and the peak transportation period for aggregates and construction materials and the quantity of transported merchandise was twice as big as the year before. That was quite a significant challenge, but we managed, thanks to the professional character of our organization. We were able to double our transportation capacity in the areas where the market sees a need.

Of course, on intermodal transportation, which is important to our strategy, is present, too. The values were very good, around 23% higher than last year. We've also achieved almost 10% market share and 12% market share.

Our intermodal transportation group, let me -- I will tell you later which areas we want to grow first. Now coal has traditionally been an important area for us. This is, however, not a growing market. We transported less coal than last year, quite simply because there was decreased export and mining. But in terms of share, it's an important market for us, and we've got a lot of advantages. And we will be transporting that we have recently signed with -- a contract with Veolia and with ENEA, so the quantities that are written in those contracts are higher than before. So we've got a stable, strong position. Metals and ores are more or less on the same level as before, so we've maintained our market share.

Now let's move on to the details of specific groups. My colleagues are available, and we will be able to answer all your queries later on.

I have already told you in our main financial areas that due to the fact that revenues have increased, but what's also important is that we've maintained the cost discipline. So revenues have grown by 11% year-by-year. But if we compare to 2016, we're looking at PLN 200 million increase, that's almost 20%. And operational costs have only grown by 5% year-by-year. So the growth dynamic, our offering and the cost discipline have contributed to a significantly faster increase of revenues over cost, which has triggered this very positive result, PLN 200 million EBITDA, PLN 81 million 2 years ago, and PLN 36 million is the net result versus the loss of PLN 1 million last year and PLN 66 million 2 years ago. So over these 3 years, that's the first result which is so good. That's 3% profitability in terms of net result versus revenue. So that's quite important.

And when we are demonstrating this cost discipline to you, we see also that seeing the increased transportation volume that obviously triggers some variable costs as well, which has to increase due to increased quantity. But if we calculate it per ton kilometer, then we see that both the remuneration and access to infrastructure has, in fact, not increased vis-à-vis the ton kilometer, while revenues have grown by approximately 5%. And this cost discipline and increased effectiveness has triggered this result.

Even the variables that are directly linked to the number of routing, number of transports, they had to grow, but the increase was lower than the increase of revenues. That was by 4%, whereas the revenues grew by 5%. So that is well. We have it all under control, and we have been optimizing and increasing the effectiveness of our organization.

We were able to achieve these results by matching our offering and the sources of financing of our activity to the existing situation. And despite executing some investments that will match our resources to the needs of the market, still the nominal value of indebtedness fell by approximately PLN 70 million, which has increased the debt ratio from 0.5 to 0.49.

I've also mentioned profitability. The EBITDA margin was 5.2%, which was much better than the year before, that was about 0.3%. So positive financial flows in operational -- operations. We have a very good liquidity, stable foundations and good growth perspective.

And now moving on to the investments that I have mentioned. They were -- they have been executed to match capacity to the volumes that have been seen on the market in terms of demand. So the 20% increase in the quantity of transport vis-à-vis last year have meant that our rolling stock needed to be adjusted. So some investments needed to be made to flexibly adapt to the needs of the market and to introduce some flexibility, bearing in mind that the transportation peak would take place in next 3 or 4 years to come. Then we base our funding principles on a flexible element, that is rental or lease. Depending on the tenancies of the market, we will be able to alter, terminate or continue these contracts so as to be able to generate profit which is as good as reasonably possible.

Now moving on and summing up what we have done over the last month. We have been wanting to increase our optimization of the entire organization within the group. What's very important -- what's most important for me is to draw on the synergy effect that's present in the group. In my view, this was not previously fully tapped on, so therefore we appointed the Board of Presidents to coordinate the activities. We can see the effect of increased transportation while maintaining good effectiveness.

Today, this element of team involvement, the 23,000 employees that work for us, will allow us to fully transport and earn as much as possible for our shareholders. So hence, we believe that this using -- fully using this potential is one of our main goals for the weeks and months to come. This will, I believe, have a positive impact on our financial and transportation results.

So we professionalize our activity as a logistics operator. We're interested in the needs of the customers and delivery -- door-to-door delivery within the shortest possible time at the best possible price to mutual satisfaction. So that's why we are growth-oriented in the upstream transporting. We are prepared to seek customers that are owners of cargo, also taking into account the intermodality. We are seeing the development of the New Silk Road and the Three Seas initiative. We want to use the potential. In the last quarter, the transportation via the New Silk Road, as demonstrated by our logistics center in Malaszewicze. This transportation has grown by 50%, so there's huge potential here. We're working on it, and we want to integrate the group and try to fully use, take advantage of the market tendencies and the inflows of commodities that are transported from north to south and from east to west. So we are integrating our group to make sure that the international development is quick, is appropriate and corresponds to the needs of Europe's and the world's economic development. Consequently, this will translate to our increased market share, which is a goal of ours. We have already mentioned the integration processes and optimization operations. This will cause increased organic growth, but also acquisitions. We are analyzing potential projects following the completion of our strategy update that we want to finalize by the end of next -- this year. In short, look medium and long term. We're actually hoping to even complete it even sooner. We want to react dynamically to the market. And first acquire strategies -- adopt strategies and then put in place a consistent policy of organic growth and acquisitions in international and domestic markets.

In general, our idea is to adapt the resources to the needs of the market that we see nowadays. This is all on my side in terms of general information about what happened in the past 3 months. But I think that after 2 quarters, there is now a need to analyze the forecasts from a positive point of view because the market and the needs we see in the market are very good, and we believe this is going to be a very good year, but also a very good few years to come.

This is all for me. Thank you very much.

[Unknown Executive]

Thank you, Mr. President. I encourage you now to ask questions.

[Unknown Executive]

Unless everything is clear, and then informally, we will be at your disposal after the conference.

[Operator]

We are very sorry, but the questions that are not asked to the mic will not be interpreted, not be translated.

[Unknown Executive]

Synergies, yes, we have 2 fields. We have the cost and transportation field because synergies are supposed to reduce so-called overhead and managerial costs. So in the first place, we calculated the synergies that will be translated into concrete figures that we will present -- while presenting the updated strategy in the short, medium and long term. And then the second step is in the market, to increase our competitive advantage, the competitive advantage of our offer and the usage of the main corridors, north, south, as well as within specializations in the different business areas. I don't want to delve into the details because this is going to be placed in the updated strategy that is almost done now, and we hope to present it before the end of this year. Because we really want to show you the changes we plan to do. So 2 fields, costs, operations and business-wise, integrating the operations and coordinating our commercial policy.

[Cezary Bernatek, analyst]

Cezary Bernatek, Haitong Bank. I wanted to ask you, in the context of the capital expenditures in the first quarter, how do you foresee the forecast for the whole year that has recently been published?

[Czeslaw Warsewicz, executive]

The forecast we have published in terms of EBITDA, PLN 778 million, I rather mean CapEx. Well, this is in the first place because the CapEx is a derivative of the needs we see on the market, the demand on the market. So the transportation and the results in terms of transportation, here, we believe they will rather be in the green, rather positive, and the demands from the market that we perceive allow us to both prepare our rolling stock, our resources. And what we are doing now is actually in terms of CapEx expenditures, slightly less than planned. But let's see how it evolves. What's important for us now is to earn as much as possible, bring profits to our shareholders. This is actually the motto that we follow. This is our paradigm. It's not about increasing transportation. It's about bringing profits for our shareholders. But also, we are very flexible in reacting to the needs we perceive on the market through leasing, through renting, by adapting to what happens. But in the basic field of transportation, we need to be sure that we have now the proper resources secured. And after 2 quarters, we are going to verify whether those assumptions were right. And then we will be able to answer more in details in terms of EBITDA and CapEx and the market share and other parameters.

[Cezary Bernatek, analyst]

In other words, it will be difficult to spend PLN 1 billion this year, as you had announced.

[Czeslaw Warsewicz, executive]

It's not about spending money. It's about making money. What I want to stress, this is a tool, a tool in realizing certain objectives defined by the management board, by the shareholders, strategic shareholders and other shareholders. This is what we are striving to achieve. After having worked so many years in many private sectors, the most important thing for me is when someone -- when I see a demand that I can make money on, it would be silly not to use it. So I would rather focus on maximizing profits and not on other parameters that enter into the scope. We also have a resource policy that is adapted to the demands of the market. Today, we have PLN 133 million in terms of CapEx, while the plan annually was PLN 1 billion, and you can calculate the average. But those investments are done according to the demands. We are not going to spend PLN 1 more or PLN 1 less without certainty, that it's going to bring us PLN 5 in revenue and PLN 1 in profit for our shareholders. Thank you very much.

[Piotr Lopaciuk, analyst]

Piotr Lopaciuk, PKO. I have a question about the current situation in terms of the transportation fees and how they changed and the volume of transportation. And the second issue that I have is, in many state companies, we see employees asking for raises. How does this situation in terms of remuneration look in PKP CARGO?

[Czeslaw Warsewicz, executive]

The transportation fees and volume, my colleague Grzegorz will complete what I'm going to say. Today, what we want to do is to implement some fees and rates that are profitable, that guarantee good results, and you also saw it when we made the presentation. The volumes are those that we see on the market. That's a lot in terms of volume. It's much more than we are able, actually, to carry. So we need to adapt the resources to the expectations on the market, especially aggregates. As you've seen, transportation of aggregates is connected to infrastructural investments, but we also have the Silk Road, intermodal, transportation, something that is growing rapidly in terms of transportation and have 53% more on the Silk Road route through Malaszewicze. So in both cases, the information is either positive or very positive for our company. Now the remuneration cost, the payroll, like every other cost item, they can go up, go down or remain at the same level, fluctuate. So depending on the situation, I would rather consider it as a cost per ton and per kilometer. Due to the increasing volume, and we have an increase in 20 -- of 20% in transportation, we need more people working than before. So the budget, let's call it, or the costs to employ the proper staff were higher. But if we compare it per ton and per kilometer, it was maintained. In terms of rates and the volumes, as you've seen during the presentation, this impacted very positively our results because the revenue per unit was 5% more, while we maintained actually the same payroll cost that only increased by 1%. But the most important for us is efficiency. Of course, we want to increase or we want to interconnect the increase of remuneration with higher productivity. If people work better, they should make more money, this is natural. They are involved, that's great. This is going to translate into transportation and into money flowing in. The key objective is to make money for us, to bring profits to our shareholders. We are going to adapt our operations adequately so that -- considering the trends on the market, as you know, in terms of energy, fuel, all of that. Of course, life is dynamic, everything is changing. In Poland, we have actually no unemployment. There's a lot of pressure in terms of remuneration in different sectors. This is all under control for us. I meet a lot of people, people understand. People want to follow our strategy. They want to work more, make more. But if we make more, if we bring more money to our shareholders, which is our key objective, I think that, together, since we are actually in the same wagon and the relations between the employer and the employees is good and effective, so certainly, this is something that we are following. This is something we are controlling and an increase in productivity may lead to better remuneration for our staff. Grzegorz, could you please complete the question of rates or whatever other topic I have mentioned?

[Grzegorz Fingas, executive]

I believe that your answer is sufficient. However, I would like to simply add one point. The current situation in the market and the current tenders that are open allow us to suspect there will be an increase in prices. Big energy groups are -- have announced tenders that are in the pipeline, and this is a transportation volume that will also concern 2019 or it concerns only 2019 in terms of energy sector. So it's an increase, that is a double-digit. This is all I can say for now.

[Czeslaw Warsewicz, executive]

Thank you very much. Of course, in terms of price, the double-digit increase is for prices.

[Unknown Analyst]

After the first quarter, we have PLN 1.2 million. The consolidated forecast is PLN 750 million. This means that you are actually foreseeing worst quarters. Is it that the annual forecast is too high or the EBITDA is misplaced?

[Czeslaw Warsewicz, executive]

Well, EBITDA is PLN 200,000 for the first 3 months. The forecast is PLN 778 million. This is our forecast. And the execution after 3 months is 26%. This is actually better than foreseen slightly, but above forecast. And we have a seasonality trend, where we have the energy peak and the second half of the year is always better. Therefore, our objective after 2 quarters is to reassess rather going up, but we still need to analyze the data once we have it. The situation on the market is quite good. My colleagues already mentioned that in terms of rates in transportation, everything is going fine. So I'm quite calm and secure and serene. I think that the EBITDA is not threatened.

[Unknown Analyst]

And what about the hypothesis that the rates will go up, anticipating the costs, and we still have some vacancies in the railway sector? So would that make sense, this thesis?

[Czeslaw Warsewicz, executive]

No, I don't agree with your thesis. Actually, considering the market situation, we are now preparing to approach certain limitations on certain routes. That's why we are trying to secure the proper rolling stock for this transportation. The rates will not go up. They will be maintained at the same level as when we have no circulation there, no traffic. But we need more locomotives and more wagons because the transportation time is prolonged. So we accept the situation on the market. And we are acting accordingly to adapt the resources to the transportation we have at hand. As the main carrier, we consider the market situations and the rates we have. We want to implement according to the real situation that we see in the market. Of course, we try to anticipate certain costs that might go up. I mean, you have energy, you have fuel prices, et cetera, et cetera. But the agreements we signed now are for 2, 3 years, and I believe this is something that gives us a secure position. We are safe here. And the management's policy in terms of offering and negotiating with clients is about promoting our advantages, market advantages, competitive advantages. And also, we are becoming more and more professional in our operations. We have better communication flows, thanks to which we are able to put forward some offers that are far more professional than a few years ago.

[Unknown Analyst]

Now the fluid financing from leasing from CapEx is not -- there's no difference between leasing and CapEx apart from the books. So this quarter, leasing has not gone up and you haven't spent more than PLN 130 million. But I think, okay, maybe you won't have PLN 1 billion in the CapEx, but perhaps in leasing, you will have that amount. So the question is about the sum of the 2.

[Czeslaw Warsewicz, executive]

Generally speaking, we do not have the amounts prepared when I spoke about leasing, I meant that it was part of CapEx. But I'm talking about flexible tools of matching the offering to the market needs. We may use it later on or not, that's the nature of leasing. So these flexible elements are the ones I've listed. But this is from the point of view of adjusting this to the demands. Like I said, we analyze the market and we know that for the next 3 to 4 years, there will be a lot of demand and the transportation peak. After which, we're not sure of what the trends will be. We're hoping they will be positive, there are many indications. But when it comes to such classic elements as far as costs are concerned, we want to be able either to continue or to decrease them. So we're analyzing this on an ongoing basis, looking at both risks and the needs. So there's a certain mix of that. Now regarding specific amounts, perhaps Leszek will supplement what I said for the CapEx and leasing parts and expenditure. Otherwise the -- okay, another question.

[Unknown Analyst]

Rates for coal, are they correlated to coal prices in terms of a formula? Or is it not dependent on one another?

[Czeslaw Warsewicz, executive]

Grzegorz will perhaps take this question. From my own point of view, definitely, yes, the coal prices and transportation costs are linked. There is a percentage rate. Now this has to do with, of course, with mines or power plants. We need to secure our own interest and our own profits. So what we charge is depending on market situation. Now definitely, this is easier to proceed for our clients if they have liquidity and if they are doing well financially. I mean, the coal mines, then the price -- as the price is bigger, but that's perhaps indirect. What we do is we adjust our rates to the situations on the market, the needs, the volumes, the cost and lots of other elements. One of the elements of our offering is the price, but that's not the only one. There's also the issue of access, of volume, of secured character of the transport, there's just a number of factors. So our strategy is not just competing on price but ensuring a full offering for the customer and ensuring security of freights and delivery. So it is to that extent that we talk to our partners. They understand this. Our key customers, of course, coal mines, but other entities such as power plants, they are aware of that and we want to respond to their needs. And price is not just the single factor. Ensuring the security of cargo freight is important. So when we analyze what's happening on the market, we strive to compile the best possible offer for our customers and the best effect for ourselves. This involves a team of professionals who work on maintenance, commercial activity, and they also involve our board. So I would not really only speak about freights and competing on price. This is not the only thing. We take advantage of all of the links in the chain. We want to deliver the goods at the best possible price. Now of course the rates are one thing, but delivering just-in-time storage, et cetera. At the end of the day, if we make full -- if we see the full effect, then the effects for them is better because there are a number of other elements that are included. We do understand our customers, and we try to respond to their needs.

[Unknown Analyst]

Now would you gentlemen be able to make -- give us a breakdown of investment outlays to those that are purely investment and those that have been needed for maintenance, repairs? So how much was spent on repairs of all rolling stocks? And how much was spent on buying new machines?

[Czeslaw Warsewicz, executive]

Leszek could supplement this. Most of the amount of this PLN 133 million that was spent on rolling stock is mainly maintenance of the existing rolling stock because this is the most cost-effective way. And this is how we want to proceed for many reasons. Having both engines, locomotives and wagons, we get a better return on investment because the investments are under an expenditure regime. So all expenditures are publicized. There's a committee for investment and repairs presided over by Mr. Borowiec. For 2 weeks or so, every investment outlay needs to be approved in its financial component. He is the Chairman of that committee. The parameters that guarantee the approval of the expenditure would be an internal ROI and ROI unless the investment guarantees an NPV. Unless the investment guarantees profitability, then we will not proceed with an investment. And now when it comes to specific amounts, probably a very small proportion was spent on new rolling stock. Perhaps Leszek would like to supplement?

[Leszek Borowiec, executive]

Yes, I could add a few words. I fully confirm what President has said. Most of the funds are spent on the existing rolling stock. This is due to a number of factors. Let's remember that quantity to be transported is very large. And from any point of view, the availability time when we look at repairs of P3, P4 ,P5, all that -- that is the most time-effective way. So if we need to increase existing rolling stock in the shortest possible time to transport the quantities that we're expecting, then the quickest thing to do is to bring our own rollings down to 4 operational capacity. Now certainly, in the years to come, renewing rolling stock should be part of our strategy. This is due to a few factors: the age of the existing rolling stock, but also the fact that, every year, the condition of our network infrastructure will be improving. The improved infrastructure will enable higher speeds and, therefore, either new rolling stock or more advanced rolling stock will be required from what we have today. Because when we're looking at just over 40 kilometers per hour of technical speed, then sectional speeds can reach 80 or 100 kilometers per hour in cargo transportation and this is the plan. So outlays on new rolling stock will be part of our strategy. Right now, we are repairing or modernizing the existing rolling stock. But our financial outlays on new rolling stock account for about 10% of this year's CapEx. Those are mainly intermodal platforms.

[Unknown Analyst]

What about the monoblocks? And how is that included in the CapEx? And will this be done at all?

[Leszek Borowiec, executive]

Exchanging wheels into monoblock wheels will be carried out if we proceed with P5 modernization exercise. Now of course, we're looking at the negotiations with the European Commission on the final shape of the regulation. And here, we see now that there's an interim period that gives us time to make adjustments to the noise regulation until 2036, so we're looking at this. And in our today investment funds, we will be taking this into account. They are naturally being implemented, and it will be included in our annual or multi-annual investment plans. So this is the natural course of action, they will be replaced. We have 17 or 18 years to make the adjustments if the law comes forth as planned. Then to my view -- in my view, this is neutral because it will be preceded in a natural way. There is no timetable there, right? There is a date by which this needs to be done. The process of adjusting carriages to what is called the silent carriage standard is already coming into play. Right now, on level P4 and P5, such tasks are included and they are being performed. So as has already been said by the President when we exchange -- replace into composite components and monoblock wheels, this is done on a regular basis. So if we replace certain elements, we already use monoblock components. But our goal is for the existing solutions to reach their full capacity. So 2036 and the following years is the final date. We will be continued this issue and it will be part of our investment plan on the P4 and P5 maintenance.

[Unknown Analyst]

Is there any timetable of talks concerning pay rises? And what are the dates?

[Czeslaw Warsewicz, executive]

I have mentioned this. We need to abide by the law and we need to conduct the talks as collective bargaining deals provide for it. It is also our goal to understand the social aspects, and we are looking at the effectiveness as the key element of our talks. The issue of impact is what we're looking at. We can talk mainly about increased effectiveness and better use of our resources. There is full understanding also in -- among the management board. So just like I said about the previous elements, the effect of increased remuneration did not really trigger any impact on the effectiveness of transportation per unit. And by better use of work, it remained neutral in terms of the cost impacts, which were under control. And also, here, I am sure that this will be under control, as it has been so far. So this is what's going to happen in the months to come. We are conducting the talks on a regular basis, regularly as foreseen in the timetable. I've been involved personally. We will be talking in June, probably July and September. So this corresponds to the arrangements made. But I don't think it will have any effect on cost per unit. There need to be some elements that will bring us closer to the market situation, but we need to look at enhancements and encouragements. We want to reward people who work well and effectively because they are the ones that bring profits. So this is what we need to emphasize in our talks and in our human resources management. We've got a new HR Director, and we've had -- that we've had for 2 months. And she is implementing that strategy together with Mr. Kozendra and so she'll be following up in the next weeks to come. Thank you very much.

[Dominik Czainski, analyst]

Dominik Czainski, Aviva. I have a question relating to the new MSF standard that we are going to enforce beginning of next year. Have you already done some tests about the reported net debt and EBITDA?

[Czeslaw Warsewicz, executive]

Yes, yes, indeed. We are now making some estimates, and we have some initial results. We are analyzing this. We are a professional entity, and therefore, we already do have some estimates ready. However, from the perspective of the company, we are undertaking action and also presenting some activities for the new standards in terms of assets and liabilities to be neutral. So we want the new standards not to impact the reporting too much. This change is rather in terms of presentation. This is another way of presenting the current financial model. Yes, I agree. I don't want to tackle the figures themselves, because I think that once we have finished the estimates and when we will be ready to present, then you will see the figures already. However, right now, we are trying to convince the financial sector. And I think I can tell you that we already have some provisions ready in the contracts with PEKAO SA with the bank that we signed yesterday. You already have that in your information. Some clauses has been inserted, stating that the potential impact of that MSF or International Accounting Standard will not impact the balance sheet and the basic indicators, especially the debt indicator, very important for the company, will not be taking into consideration the impact of these standard change because we see it as a change in presentation that only slightly modifies the way of reporting assets and liabilities.

[Dominik Czainski, analyst]

Let me rephrase my question in that case. What are -- what is the level of leasing payments, the leasing rates, related to long-term lease?

[Leszek Borowiec, executive]

This is actually the same question that you had just asked. You just are asking about figures, concrete figures. Well, it's hundreds of thousand of zlotys we have part of long-term contracts, long term, a very long term. And if you know the accounting standard, you know it has an impact on the estimate. Let's say it's hundreds of millions of zlotys, hundreds of millions of zlotys, but they will not have an impact on the perception or the standing of the group PKP CARGO and the covenants calculated on this data. But please be patient, you will get that data in due time.

[Michal Sztabler, analyst]

Michal Sztabler, Noble Securities. I have a question about increased rates for [ routes on ] transportation. I mean, although the routes are longer, the client will not incur the cost. Is that really so?

[Czeslaw Warsewicz, executive]

As far as I know, it's -- the primary route that is calculated, but perhaps my colleagues will complete it there, the negative impact is that we need to have the proper resources in terms of transportation. But during the negotiations with the PLK, this is fully understood and this is how it's done.

[Unknown Executive]

Any more questions? Since there are no more questions, I would like to thank you for your presence at our conference. I encourage you to now have some informal conversations and we would like to offer you some refreshments. Thank you very much.