Our results

Results and perspectives

GRI G4-EC1

Building the Group’s value

strong financial performance

Building the Group's value

OpERATING REVENUE

In the Company’s total operating revenue the biggest item was revenue from sales of services (98.6% in 2017 compared to 98.7% in 2016). Revenue on the sale of services comprises mainly: revenue from rail transportation and freight forwarding services, revenue from siding and traction services and other revenue, which chiefly includes revenue on the lease of assets, revenue on administrative support services, operational support services, rolling stock repair services and other repair services. The remaining part of PKP CARGO S.A.’s operating revenue comprises revenue from sales of goods and materials, which includes, among others, sales of steel and cast iron scrap and other materials. Included in the category of operating revenues other operating revenue comprising, among others, gains from sales of non-financial non-current assets, movement in impairment losses on receivables, interest on trade and other receivables, received fines and compensations, revenue from reversal of provisions and other items.

The increase in revenue from rail transportation and freight forwarding services by PLN 353.3 million, or 11.4% yoy, to PLN 3,449.3 million resulted from intensified sales activities which translated into higher transport volumes.

The growth in revenues from sales of materials by PLN 1.4 million, i.e. 12.7% yoy, was caused primarily by increased sales of other materials. At the same time, the Company continues the implementation of its program of decommissioning the extraneous, unused and obsolete rolling stock.

Other operating revenue increased by PLN 5.7 million, or 18.0% yoy, driven by higher fines and compensations received in the amount of PLN 10.7 million, or 74.3% yoy, mainly from the Company’s business partners for the provision of transport services in breach of the agreement, with a drop in foreign exchange differences by PLN 3.4 million as a result of fluctuations in exchange rates.

operaTING EXPENSES

In 2017, operating expenses increased by PLN 159.0 million, or 4.8% yoy, to PLN 3,440.6 million. Adjusted operating expenses in 2017 increased by PLN 186.4 million, or 5.7% yoy, driven mainly by an increase in external services, employee benefits and the consumption of materials and energy in 2017.

In 2017, amortization and depreciation expenses and impairment losses fell by PLN 34.2 million, or 7.2% yoy, to PLN 440.6 million, mainly because of the non-recurring event in 2017 (revaluation of the residual value of rolling stock and reversal of part of the impairment loss on rolling stock components in the amount of PLN -27.4 million). Adjusted amortization and depreciation expenses and impairment charges dropped by PLN 6.8 million, or 1.4% yoy.

In 2017, the consumption cost of materials and energy increased by PLN 32.6 million, or 6.1% yoy, mainly due to higher freight volumes. Fuel consumption costs increased by PLN 25.4 million, or 24.0% yoy, driven by the higher share of transport performed using the diesel traction as a result of difficulties in PLK lines and detours, in particular on the Bogdanka to the Kozienice Power Plant route. In addition, an increase in electricity, gas and water consumption was recorded, also as a result of increase in transport volumes, with lower unit variable cost and improved transport efficiency, as a result of improvement of the traction energy consumption measure in Poland.

The costs of external services increased by PLN 86.7 million, or 8.0% yoy, to PLN 1,165.2 million. The main reason for the hike in the above costs was the increase in the fees for access to the lines of infrastructure managers by PLN 56.3 million, or 8.6% yoy, caused by increasing freight transport. At the same time, in the category of external services, the costs of transport services increased by PLN 28.2 million, or 28.5% yoy, partly a result of higher freight forwarding costs.

In 2017, employee benefits increased to PLN 1,149.1 million, or 5.5% yoy, compared to PLN 1,089.1 million in 2016. This was caused by wage increases in the Company introduced on 1 September 2017 and a change in the value of employee provisions. At the same time, the Company recorded a decrease in the headcount by 521 FTEs yoy a result of natural employee departures.

In 2017, the remaining expenses by kind increased by PLN 1.3 million, i.e. 3.1% yoy, mainly due to an increase in the costs of insurance by PLN 1.1 million, or 14.0% yoy as a result of higher insurance premiums.

In 2017, the cost of materials sold increased by PLN 0.7 million, or 9.0%, to PLN 8.4 million, following an increase in revenues from sales of materials.

Other operating expenses in 2017 increased by PLN 8.7 million, or 30.6% yoy, to PLN 37.0 million. This change was driven by movements in provisions, in particular those related to the provision established for onerous contracts of PLN 9.1 million.

EBITDA

In 2017, the result on operating activities increased by the line item “Depreciation and amortization and impairment losses” referred to as EBITDA, amounted to PLN 591.8 million, up by PLN 148.1 million, or 33.4% yoy. Adjustment of the revaluation of the residual value of rolling stock and reversal of part of the impairment loss on rolling stock components in 2017 does not impact the EBITDA result.

net RESULT

In 2017, the net profit/loss stood at PLN 94.0 million, up PLN 162.5 million yoy. Adjusted net profit/loss in 2017 stood at PLN 71.8 million, up PLN 140.3 million yoy as a result of the aforementioned changes in revenues, expenses and income tax paid.

  

OUTLOOK na 2018

2017 was a great period for the rail freight transport market in Poland, which consequently translated directly into the PKP CARGO Group’s transport results. The volume of cargo transported by all the players on the rail cargo freight market increased in this period by 7.8% yoy to 239.4 million tons, which simultaneously signifies a reversal in the downward trend in place since 2013. Since the rail freight market is strongly correlated with the overall market conditions prevailing in the economy as well as the circumstances on the various product markets, i.e. solid fuels (chiefly hard coal), aggregates and other construction materials, iron ore and metals as well as refined petroleum products, the rapid pace of GDP growth and the improving standing of various industries were conducive to further intensification in transport last year.

Solid fuels

The mining and transport of solid fuels (chiefly hard coal) whose share of the total freight volume carried by rail was 40.4% in 2017 continue to be the key area of the economy for rail cargo freight.1 The gradual upswing in the prices of steam coal and coking coal on the domestic and international markets exerted a positive contribution to the condition of the Polish hard coal mining sector last year. In turn, this translated into higher sales of this commodity. Additionally, faced with the sharp decline in the domestic volumes of coal mining and coal inventories, simultaneously coupled with the high demand for this commodity from the commercial power sector and private customers, hard coal supplies from abroad gained traction.

1. Central Statistical Office of Poland

In upcoming quarters, one may anticipate the continuation of the foregoing trends – according to market analysts, the demand for steam coal and coking coal will continue to be vibrant, and this will be fostered by greater demand for electricity on account of the rapid pace of economic growth and the projected stable growth in production in steel-intensive sectors (rising demand for coke). Faced with the insufficient supply of raw material from Polish mines (in which the level of investments into new longwalls will not, in the opinion of analysts, offset slacking production), this will lead to the necessity of covering domestic demand using more expensive imports from abroad. As a result, according to trade analysts, one should expect domestic steam coal prices to rise by approximately 15.0% yoy in 2018. Over the longer term, declining coal prices on global markets (as a result of demand growth being softer than in previous years) and the gradual curtailment of the role played by coal in the domestic energy mix may adversely affect the level of domestic production (and hence the volumes to be transported), as the “Program for the Hard Coal Mining Sector in Poland” adopted in January 2018 suggests.

Aggregates and construction materials

2017 also brought strong growth in the transport of aggregates and other construction materials whose share in the freight volume transported by rail was 21.3%. The main driver in the transport of construction materials was greater demand among clients encountering gradual intensification in the infrastructural investments financed in part with EU funds in the 2014-2020 financial perspective.  The growth in infrastructural spending was immediately visible in the rising volumes of construction and assembly production whose rate of growth was 12.1% year on year.

It is expected that, having in mind the horizon spanning the upcoming quarters, the favorable economic situation on the markets for construction materials will continue. This is rooted in the continuation of projects in progress but also due to planned large public investment projects to be executed under the “National Road Construction Program” and the “National Railway Program”, with prominent support from the European Union’s structural funds. According to the President of the Polish Association of Aggregates Producers, the market may develop dynamically until 2020 with a compound annual growth rate of 5-10%. According to the General Directorate for National Roads and Motorways (GDDKiA), nearly 450 km of new roads are slated to be commissioned for use in 2018 alone, including sections of the following roads: S3 (Zielona Góra-Bolków), S7 (Koszwały-Kazimierzowo), S8 (Wyszków-Prosienica) and of the ring roads around Radom, Koszalin, Wałcz, Olsztyn and Kłodzko. In turn, PKP PLK is planning to carry out investments in rail infrastructure in 2018 totaling PLN 10 billion compared to spending of PLN 5.4 billion last year. The possible accumulation of aggregates transport in subsequent quarters poses a risk to the pace of completing infrastructural investments (and thereby to the volumes of freight volume of aggregates and other construction materials available for transport). When coupled with the ongoing modernization work on the rail traction and operators’ limited rolling stock capabilities, this may precipitate difficulties in handling the freight volume presented for transport. The more pronounced shortages of labor signaled by construction businesses are another risk factor, thereby translating into wage hike pressure. As a result, the rising costs incurred by companies in the construction industry are contributing to their bids in tenders moving up, which may pose difficulties in the efficient process of awarding contracts in numerous tender proceedings.

Liquid fuels

The regulations introduced to curtail the illicit economy accompanied by the robust growth in GDP have contributed to rapid expansion in the liquid fuels market in Poland in 2017, with their share of the freight volume transported by rail coming in at 7.0%. In 2018 one may expect further stable growth in the demand for liquid fuels (though it will be lower than last year).

Favorable business conditions (the consumption of diesel fuel is strongly correlated with the pace of GDP growth) and the implementation of additional regulations to curtail the illicit fuel trade (among others, extending the system for monitoring the rail transport of freight) will continue to drive up the demand for fuel in Poland. Additionally, household income expansion is customarily linked to a rising number of registered vehicles, thereby leading to greater demand for liquid fuels. At the same time, the future path for global oil prices (analysts are anticipating slight price growth on this commodity in comparison with last year) and the behavior of the US dollar in which oil prices are denominated will exert an extensive impact on the fuel price level on the domestic market (and indirectly on the demand for fuel).  For the possible weakening of the Polish zloty in relation to the US dollar may be conducive to higher oil prices denominated in the domestic currency, and consequently, contribute to higher prices and lower demand for liquid fuels.

Ore and metals

In 2017 the market conditions in the industrial sector in Poland were at their best since 2011, which has indirectly translated into higher freight transport of ore and metals (their combined share of rail cargo transport was equal to 7.5%). Last year, total industrial production sold increased 6.5% yoy, compared to 3.1% yoy growth in 2016, while the industrial processing sector posted growth equal to 7.3% yoy. Rapid industrial growth translated into higher demand for metals. According to the estimates of the Metallurgical Chamber of Industry and Commerce, the domestic consumption of steel goods in 2017 was equal to nearly 13.5 million tons, compared to 13.1 million tons in 2016. As a result, the steel supply also expanded - last year, steel production in Poland shot up 15.1% yoy to 10.3 million tons, i.e. its highest level since 2007. The anti-dumping instruments introduced by the European Commission to protect the steel market and the improvement in the ratio of the cost of scrap to iron ore and coking coal favorably influenced the situation in the domestic metallurgical sector.

In 2018 steel demand should continue to be strong on account of the expected ongoing stable growth in steel consumption in the European Union and in Poland (including among other things the higher demand from the construction industry in connection with the acceleration of executing infrastructural projects). Price expansion should also tend to drive up the supply of steel and other metals; this should be supported by the rapid pace of global economic growth (including in particular the economy of China).