PKP Cargo SA

WSE:PKP

Earnings Call Transcript

[Andrzej Banucha, executive]

Good morning, ladies and gentlemen. It's very wonderful to welcome you to our PKP CARGO conference, our earnings report for Q1 2019. Now I'd like to introduce the Management Board of PKP CARGO. We have Mr. Czeslaw Warsewicz, the CEO. We have Leszek Borowiec, who is the CFO. We also have Mr. Fingas, who is responsible for our commercial matters. We have also Mr. Bawor, who is responsible for operations. We also have Mr. Kozendra, who is responsible for employee affairs.

So I'd like to encourage you to ask any questions you may have after the presentation is delivered. And questions will be posted, of course, to the management team. And then I'll have the opportunity to ask you to [indiscernible]. After the presentation, we'll have time to talk with some refreshments. So I'd like to ask the CEO, Mr. Czeslaw Warsewicz, to go ahead and take the floor and run today's meeting.

[Czeslaw Warsewicz, executive]

Thank you very much. I'd like to welcome you very cordially. I hope that I'm going to be able to walk you quickly through this presentation as I see you prefer to talk behind the scenes because it's a little bit more effective and you can pose more questions and learn a bit more. Perhaps I'll allow myself to introduce a recap of Q1. And after that, I'll walk through the presentation rather quickly while focusing on the main themes. Any detailed questions or doubts, we'll try to field together, having in mind the areas that we're managing.

First off, I'd like to tell you -- I'd like to emphasize in fact that our activity in terms of communicating better and transparently about the things that we're doing. And this is something that I've said to you when I took over the position of being the CEO of the company by publishing and presenting the fundamental results that we're achieving, so giving you forecasts for 2019. And this is something we've already done.

We publish our forecasts and then we also report the results prior to the final closure, so you can have an understanding of our position. And so I can confirm that the forecast we gave to you for the first quarter, we've been able to achieve. We're going to deliver them.

And so in terms of the profit we've generated, it doesn't deviate from the beginning of May of this year. So when we talk about the summary of Q1 2019, what I'd like to do is focus on 3 key areas. So I'd like to focus on finance, I'd like the finance on the market, commercial matters as well as strategic matters.

This was a period of rather intensive work and there was a lot of positive change that we've been able to bring into existence in terms of our financials. You've seen the record-breaking results we posted. In terms of the revenue, the revenue is up by a notable percentage by -- over the last year. You've seen the -- you had the opportunity to see that, but we'll talk about it in just a couple of moments.

We've also got a record EBITDA level. If you look at the comparable figures, it's some 14% up over the corresponding period of last year of Q1 2018 and our net profit was nearly 50% up. We were at PLN 53 million, up some nearly 50%. So that's in terms of the finance.

In terms of the market, we've been able to grow quite strongly. Our expansion is rock-solid in terms of what's happening in intermodal. We continue to grow our share in this market segment from -- to 52% while the market has grown by 14% overall, the size of the market. We also have freight mass volume compared to Q1 of 2018. We've been able to get 15% growth, so 14.8%. So this confirms that our decisions were correct in the strategy that we adopted last year, so to focus on intermodal growth.

If we look at the market, we've also been able to post very strong growth in terms of market share and the overall growth of intermodal transport through our subsidiary, AWT. And so I can say with satisfaction that it's refocused its business from a sidings business to basically intermodal business. And through our subsidiary, AWT, in Q1 2019, we've been able to launch the first transport through Primol, which we've acquired recently.

And this is, we can say, a fulfillment of the strategy we adopted last year where we're focusing on intermodal transport along the North-South corridor as well as along the New Silk Road, where we want to become the leader in these 2 corridors. And this confirms the activity we have, the growth we have as well as the place we have, the role we have to play on this market.

So strategically speaking in Q1 of this year, we've been able to complete the optimization process in terms of the operation of the AWT Group. And I'm speaking about this with great satisfaction. So for the moment in time it's joined the group, it's generating profit delivery level. So when we look at intermodal transport, it's giving a big value expansion and it's actually giving the strategy.

So in Q1, as we stated through our strategy, we began the process of consolidating the operations of terminals. So terminal operations, so in April, an entity called PKP TERMINALE, so all of the terminals we have in the group will be consolidated around that complete -- we're putting the 9 terminals for intermodal as well as conventional purposes. So this should increase our competitive edge in terms of offering a better product to our customers, utilizing the synergies we have.

And we'll have a better-matched offer to what the market demands. And we would specialize thereby in this focus. So this company, PKP CARGO TERMINALE, would be the largest entity, the largest terminal operator in Europe, certainly in Poland. And so this consolidation effect will improve the cost-effectiveness overall while at the same time, it will make it easier to manage this distributed structure.

So we've also been able to sign -- so as we execute the strategy, we have cooperation, a strategic cooperation with a terminal in Duisburg, which is the final terminal for some 75% of the trains along the New Silk Road.

Another strategic element of this quarter that's passed was the signing of a letter of intent in establishing cooperation to set up an SPV, special purpose vehicle, with Greenbrier and the development agency for wagons. And so it's -- in terms of regulatory aspects as well as effectiveness aspects because we have to be aligned, of course, to the European Union regulations, so in terms of finance, commerce and strategy, this has improved our results and improved the value for our shareholders.

And now I'd like to walk through the presentation rather briefly. I've already touched upon the bulk of these things. But if you want to look at the specific subjects, so I already mentioned, our revenue and our EBITDA commercial results, so compared to -- so if you look at the freight turnover, it was down by 2.8% year-on-year even though it was at a high level, so we had aggregates and construction materials. There's little bit of stagnation or shifts in investments to the second half of the year. So the expectations of the construction industry are that the peak of investments, we still have in front of us. This will be 2020, 2021, that's when we'll see the summit or the peak.

So my colleagues, Grzegorz and others, can give you more detailed information if you like. If we look at the revenue, the revenue is the highest compared to all other years since the time the company went public. And despite having slightly smaller transport, we were able to generate higher revenue than in the corresponding period of last year by following the strategy of being a logistics partner where we also -- we offer additional services along the supply chain and not just transport services. In a moment, I'll dwell on this at greater length.

So as I've mentioned, our EBITDA was the highest from the time we've taken the company public. If we look at the comparable figures, IFRS 16, we can say that we were up by 14% over the previous year in terms of our EBITDA. As I said, our profit was up some 49% over last year. Costs are under control. So our costs are under control. And this means that optimization is generating positive results at the bottom line level.

And so as I've talked about offering new services within the group or within the overall organization, a few words of commentary here about revenue. Of course, the higher revenue we've been able to command in Q1 was a matter of the better prices we have achieved for our transport and forwarding services. But we should also mention here the more -- the rapidly growing portion, which is a matter of offering additional services, so the prices on one hand plus also new services.

Additional services becoming to a greater, greater extent an overall logistics partner. So as we offer additional services in the overall process means that we have a plus 20% increase in revenue. And that affected or contributed to the unit result and the overall result in revenue, so it's up by some 10% at the standalone level of PKP CARGO. And also this is something that's quite positive as we watch revenue grow and climb more rapidly, as we look at as being a logistics partner, the strategy we have here, we're able to utilize the economies of scale as well as the specialization we have in the supply chain.

One other thing that merits our attention here is the rapid growth in our product groups. And you can see that the company has been able to generate -- or the group has been able to generate operating and investing cash flow, which is up by some PLN 18 million whereas the cash flow was negative at minus PLN 40 million. So we can say that our cash flow ratios are satisfactory at a growing level. And so we'll react to any questions you might have here.

That's more or less here in terms of an introduction and a recap of Q1, which was a very good quarter in terms of how our companies operated. We've tried to drive up the value of the company in terms of shareholder value. So we've worked on that quite strenuously, and I think we've delivered some positive results here. And these positive processes and activities, we want to continue executing over the course of the year.

So I'd very much like to thank you for your attention, ladies and gentlemen. Now I would invite you to pose any questions you may have at this time.

[Unknown Analyst]

I'm from [indiscernible]. You said that freight turnover has fallen by 5% and volume by 3%. So that means the distance has fallen by 2%. Does that mean that your -- that the modernization of tracks has completed and that now the distance that you're traversing is falling? If you compare freight volume and freight turnover, if you look at volume, it has fallen a little bit by 2-point percent and so turnover by 5%. That means that we're able to do the freight turnover more effectively if the trend was the opposite. That would suggest that there's a problem with having higher expenses and that would -- so this means that the result is on a better level.

[Czeslaw Warsewicz, executive]

Maybe I'll ask my colleagues to give some additional comments.

[Witold Bawor, executive]

So the difference between freight volume and turnover is not only the outcome of infrastructure, real infrastructure work, it's also a matter of executing contracts, so performing contracts where we have longer distances or shorter distances to haul goods. If we look at the main transportation routes, where there's modernization work on routes 6 and 7, that work is still underway. One ratio, if we look at the intensity of work on the rail infrastructure, that's the average speed, which continues to be at a low level.

Nevertheless, it's in line with the expectations that we had and utilized when we were doing the work in Q1. If we look at the number of closings or closures, the duration of these closures have not deviated from what we had assumed. And this is a subject that we're managing. But I wouldn't draw conclusions that the disproportion between freight volume and freight turnover is a result of attenuation in the difficulties attached to rail infrastructure modernization.

[Unknown Analyst]

IFM Dom Maklerski. I'd like to ask about ArcelorMittal because this company has some declines. What do you anticipate in subsequent quarters, Q3, 4, when they're planning to shut down the smelting works in Kraków? So maybe Grzegorz knows something about this.

[Grzegorz Fingas, executive]

So the information about closing the big furnace, this is media information. And if I were to react to that -- Mittal, as the business partner, has clearly stated and gave the reasons for closing the furnace. In his opinion, the slowdown in Western European economy has accelerated the decision to shut off the furnace, blast furnace in Kraków and that means there's a change in the production profile. Right now we have a situation where the nature, the nature of the production in Kraków, these are flat goods. So the slowdown in the automotive sector means there's less demand for these types of products but having less expensive sources for production capacity in Western Europe. So basically the 3 million tons between Spain and Poland, it's not really clear to what extent this will apply to Kraków and therefore to pick up the cargo.

So certainly in the half of -- second half of the year, this will lead to lower transport. So this was actually on their page, website of ArcelorMittal, it's not just media information. Well, ArcelorMittal communicated this during the European Business Congress. In that sense, it's media information. But of course, we can add that Mittal is diversifying sources of production, sources of supplying and delivering raw materials. It owns a big asset in Italy. There's also a decision there to shift some of the production outside. But there is some information that production will be lower than up until now. So we do see some initial symptoms of slowdown in this market segment and giving consideration to the buyers across the West, we're talking off-taker customers, especially flat goods. Well, they -- that steelwork represents some 20% of Mittal's production in Poland. Well, more or less that would be correct. We have to have in mind one thing last year, we saw in Dabrowa Górnicza that a blast furnace was shut down and then it was remodeled and it has a much bigger production capacity than up until now.

If we look at the production profile in Kraków, so let me put this differently. So by shutting down that steel mill, there will be a change in the production profile. And so we should anticipate that there will be transport between Dabrowa Górnicza and Kraków. And we're ready to service that. In any case, we're preparing ourselves to address a variety of scenarios. So in some areas, we see that demand is growing. In others, we see that demand is falling off, so across the economy. So this is something that's contributing to the growth of the cargo transport. We see that the overall economy is growing, so we have some 4% growth. So this is the largest amount of growth we see across the European countries, so there's more need for cargo transport.

And so we're going to be able to offset this problem by delivering other goods to some extent. And so we're also talking, of course, directly with Mittal. We've had meetings about our cooperation. And so I wouldn't briefly give the level or the quantum here because it might turn out that the decline will be substantially smaller than we could assume. And so we'll certainly know more in the second half of the year once the situation becomes more clear and we can think about the type of freight transport so that we would replace that with, if that would occur.

[Andrzej Banucha, executive]

So I encourage you to pose any other questions you may have at this time.

[Czeslaw Warsewicz, executive]

As I mentioned at the beginning, it's very important for us to talk behind the scenes so we're ready, of course, to provide responses to all of your questions for the upcoming 30, 45 minutes as needed. If we're not able to...

[Andrzej Banucha, executive]

Let me add, we have a question from the Internet from Citi. And we already have -- give the response given to the question. What level of decline should we expect in transport because of the shutdown of the steelworks in Kraków? So we see there's growth in CapEx of 88%. Should we anticipate similar growth in subsequent quarters?

[Czeslaw Warsewicz, executive]

So let me say a couple of words here. The response is no. This year, CapEx is evenly distributed across the quarters. Last year, Q1 2018 had a very low amount of CapEx where Q4 saw a major step-up. So the level of CapEx we anticipate would be more or less similar. But in -- for the full year, so we don't anticipate major differences between the quarter. So it will be evenly distributed. And this is a result of some of the contracts we signed previously and are now being performed across the year, so it's going to be more or less PLN 250 million, as I said in Q1.

[Unknown Analyst]

So one more follow-up question. If we look at cash flow on financing activity, there is some one-offs here in Q1. So the result would look a little worse had they not occurred. Why do you have such major change in working capital? Could you tell us a little bit more? Could you break that down for us, decompose that?

[Leszek Borowiec, executive]

The results come from liabilities and trade accountabilities or receivables. We -- because we've increased the scale of the business, we don't see any major threats coming from that. In Q1 2018, our working capital was improving the cash flow. Now we have a negative impact, so we can say that this has an impact on the operating cash flow. And this is a result of the normal processes that are taking place in the company. So we've done the analysis, so we're not concerned by that.

[Czeslaw Warsewicz, executive]

So I think it's a good time for us to move into the talks behind the scenes. So if there are no -- if there's no strong determination to pose your questions here as we sit in this room, as I said, we're at your disposal. So it's the last opportunity to pose a question in public. But I see there are no questions and no people coming forward, so let's go ahead and close the meeting.

[Andrzej Banucha, executive]

Okay. Then I'll invite you to join us for some refreshments. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]