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Edited Transcript of PKP.WA earnings conference call or presentation 22-Aug-19 9:30am GMT

Half Year 2019 PKP Cargo SA Earnings Call

Warszawa Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of PKP Cargo SA earnings conference call or presentation Thursday, August 22, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrzej Banucha

Pkp Cargo S.A. - Deputy Director of the Bureau for Promotion & IR

* Czeslaw Warsewicz

Pkp Cargo S.A. - President of the Management Board & CEO

* Grzegorz Fingas

Pkp Cargo S.A. - Management Board Member of Trade

* Leszek Borowiec

Pkp Cargo S.A. - Management Board Member of Finance

* Witold Bawor

Pkp Cargo S.A. - COO & Member of Management Board

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Presentation

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Andrzej Banucha, Pkp Cargo S.A. - Deputy Director of the Bureau for Promotion & IR [1]

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Good morning, ladies and gentlemen. And so I think everybody has had the opportunity to take a seat. It's very nice and pleasant to welcome you to the earnings conference of PKP CARGO at H1 2019.

Let me introduce the management team. We've got the CEO, Mr. Czeslaw Warsewicz. We have got our CFO. We've also got our Commercial Director and we also have our operations COO and we also have a representative of the management team, who is representative of the employees.

And so let me go ahead and ask Czeslaw Warsewicz to go ahead and run the presentation.

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [2]

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So thank you very much. I'd like to welcome you once again to our earnings conference, which sums up Q2 and H1 2019. I would like to walk through the presentation briefly and succinctly. I'll tell you a little bit about the main assumptions and the results that we've been able to deliver in the most recent period of the half year. If you have questions, we have the full management team at your disposal and we'll try to dispel any type of doubts you may have and reflect on any questions -- field any questions you may have. And so we'll try to walk through the first part of today's meeting as quickly and efficiently as possible.

And so if we look at the results that have been generated in H1 2019, they're in line with what we presented to you in the report for August that our revenues were PLN 2.447 billion, our EBITDA was PLN 450 million. So after you cleared for the impact exerted by IFRS 16, we had PLN 387 million, which gives us an 18% profitability ratio. And so the net result was PLN 48 million, giving us a 2% net profitability, so compared to nearly 3% on a gross basis.

And so if we look at the freight, so we've had 3.5 million tons -- 55.2 million tons. And so this is a bit higher than the average for the last 7 years, but this is down by nearly -- more than 7% compared to last year in the same period of last year. And so here, I would like to spend a little bit more attention in 2 areas.

And so if we look at the aggregates and construction materials -- and so closer to the end of the presentation, I'll share with you some of the drivers that led to this situation because this made a major impact on the fact that we had less freight volume in the company compared to the mid-year or the first half of last year. And so this was down by 1.8 million tons. And what else merits attention is the intermodal transport segment that has grown year-on-year. And so this has grown to 4.7 million tons in the period under analysis.

If we look at the financial results and starting again with revenue. So we had PLN 2.447 billion. And so this was down by 2.5% compared to last year but higher, as I said previously, than the average over the longer period. The same is true of EBITDA. So if we look at the total amount of profit in this period, so after the adjustment for IFRS 16, this was PLN 387 million. And so with the exception of last year, this was the highest result. We have a stable and high level of profitability measured by EBITDA, which, as I said at the beginning, was 18.4% profitability. And after you adjust for this change in IFRS 16, it's 15.8%.

And if we look at EBIT, well, we see that the results are similar in terms of the trends. I would draw your attention to one thing that I would like to emphasize if we talk about EBIT, which was PLN 102 million. So this is 4.2% profitability measured at the earnings before interest and tax level. So if we look at the period prior to this when we had a much smaller level of EBIT on higher amounts of trade volume -- freight volume, so we've been able to generate stable levels of profit even though the total amount of freight volume has fallen. Hence, this shows we have correlated our costs with revenues and we're flexibly reacting in terms of costs as we tried to move through the freight volumes in our organization.

So if we look at the net result, it's remained above the long-term average. The trends are quite similar, so we've had PLN 48 million. So this gives us around 2% net margin with a nearly 3% gross profit margin. If we look at the costs or OpEx, you can say that there were some changes because of IFRS 16, but the structure, the breakdown is more or less -- the composition is more or less the same. If you're going to have questions, we'll be able to field those questions a little bit later, we have a summary, a recap of our financials. You can see here on Slide 13 that our revenues and our costs have grown at similar paces. So they're correlated with one another, the paces of revenue growth, top line growth and OpEx growth.

So in a few minutes, I can talk about the greater demand for freight. So you can see that even if there's a small increase in the freight volume, we're going to be able to generate substantially higher profit volumes. And so as we've balanced top line and cost, this shows that we have a lot of flexibility in our approach and we're able to face the market challenges quite well.

Now a few words about our multiples. So you can see that they're at a quite safe level. Especially if you look at the cash flow or the key balance sheet items, they're quite stable. If we look at available funding sources, we have roughly PLN 1 billion that are available on a variety of sources. And then I would say a couple words to talk about our activities in the most recent half year period.

The first slide here shows that we've been able to complete the restructuring process of the internal organization. So this relates to AWT, which is in our group since 2015. So this reorganization and the streamlining has been done successfully. And so the entity is generating profits at all levels of its operations. So that shows that we've been able to implement effectively oversights, corporate supervision, competences, which through the organizational changes, through the strategic changes, functional changes, we've been able to accomplish also product-related changes.

All of this has led to a situation in which the company generates a profit, the AWT. So we had -- the EBITDA margin was 14%. The EBIT margin was 2.2%. And the net result -- the net margin is 1.2%. This is a matter of the changes -- the organizational and structural changes that we made last year we're continuing this year. And they will -- we will be able to benefit from these measures this year and to a greater extent, in upcoming years. So you can say that now we have achieved balance and we're bouncing back, if you will, in terms of having the proper amount of supervision over this entity. And this gives us more opportunities for further acquisitions in the upcoming period.

And so here's a market recap showing the situation in terms of freight in this product area. If we look at aggregates and construction materials, I mentioned this at the beginning of the presentation. And so this has fallen compared to last year by 1.8 million tons in the outcome and is something we've communicated to you as well that 9 investments had their contracts terminated. So the general investments, our first, GDDKiA, severed a couple contracts. And so we can say that the National Rail Program continues. We've been able to solve this problem efficiently. And so after a few months of interruption, we can see that the entities doing road investments, these entities are coming on to the investment construction.

If you look at the circle -- the round -- ring road around (inaudible) a new contractor has signed a contract. And so this investment is underway. Then we have another 4 projects in S3, S5 and S9, those 3 motorways. So in upcoming weeks, these programs should be finalized. And so another 4 by the end of the year where the contracts were severed or where it was delayed. And so then you have also the PLK has couple other projects where this is being managed positively.

So the investment projections for 2019 are, as you can see, we should have some PLN 26 million. This data that has been updated according to our knowledge as of August. So this information that's up-to-date and has been confirmed by the contractors and by the general directorate of roads as well as the National Railway Program, so PLK. So this shows you what's going to happen in terms of transport of aggregates and construction materials as of Q4 this year. We should have basically an upswing in the amount of freight for the next couple of years, 2, 3 years. And this should flow on into 2022 and 2023.

This is a good harbinger because it portends good results. So I'm pretty sure that these investments will be completed by the PLK, so the railway authority, because this is being funded also by EU funds. And we'll be able to deliver it to the construction sites, the aggregates and construction materials.

And so moving on to a summary of what I've told you. I'd like to emphasize and highlight some of the needs and our capacity, our capabilities, if you will, to handle increased amounts of freight volume. So I can tell you that the group, PKP CARGO, is better prepared in terms of having resources to handle the increased quantities of aggregates and construction materials, where the market is going to need them. Having in mind the work that's underway on the various rail lines being done by PLK, we're well prepared for that. We've got the procedures in place. We know how to transport this cargo safely and efficiently. These are some of the challenges we face.

And one of the other elements of the summary that I want to share with you, and I've said this to you previously, is that we're now moving into a period in which we're going to have a higher level of freight volume. So one of the other things that's worthwhile that should be highlighted is that we continue to see strong growth in intermodal transport. This is part of how we're pursuing our strategy as embraced by the management team and the Supervisory Board, so the development we've done in the terminals which very much supports and acts as a boost to our intermodal activity. And you can see that we're gaining more and more skills and capabilities.

So another element, material element, the fourth you can say, where we've been able to acquire something, these are ownership competences in terms of managing and implementing or doing our M&A program. We've positively proven this, this year. We've demonstrated our capabilities with AWT. And we can look boldly into the future and think about doing more and more M&A activities now that we have the procedures and we have the skills in-house to do that and we have a strategy we want to follow here.

And so to sum up, we're through all of these activities streamlining our effectiveness, our efficiency. And so we're at the same time adjusting flexibly to the environment and the overall demand. So this second quarter, which was quite demanding, we were able to show that we were also able to adjust. So we didn't generate a loss at this more difficult and more demanding quarter.

That's more or less it in terms of my introductory remarks for today's conference. So I thank you for your attention. And I'll ask you now for any questions. If you have any more detailed questions or you'd like to get more detailed responses, we're ready to field those questions and then, of course, talk to you after conference in direct talks.

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Questions and Answers

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Unidentified Analyst, [1]

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I am from Trigon. My first question is about ArcelorMittal. Q2 versus Q1, we saw a large decline in revenue from that customer. What's going to happen in H2? I want to ask if you quit delivering iron ore to Košice and U.S. Steel because we can see the 2 companies are reducing their production in the second half of the year.

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [2]

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So I think Mr. Fingas should respond to that question because he's monitoring that market on an ongoing basis. So he can share some of his knowledge here.

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Grzegorz Fingas, Pkp Cargo S.A. - Management Board Member of Trade [3]

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If we think about this client, there's a decline in production and demand for raw materials is linked to the overall market conditions declining here in Europe. And also looking at the profile of their production (inaudible), so we can say that this influences how the customer behaves. So if we look at the decline in production of raw steel as roughly 8% down year-on-year, so this is a situation that affects, of course, our cargo transport -- freight transport. So one decision that's very well-known is to shut down the furnace of that client. And this decision was to be announced in September. So the decision to shut it down and have talks with the staff, with the environment have led the situation.

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Unidentified Analyst, [4]

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Well, basically that shutdown has been pushed back in time. If we think about the other 2 customers, so they're strongly impacted by what's happening in the other 2 customers. What about the cost of energy? Because in Q2, you've posted an adjustment from the law on energy from December of last year. Will you have a reinvoice -- will you be reinvoiced by the distributor?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [5]

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Perhaps Mr. Borowiec could speak to this question.

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Leszek Borowiec, Pkp Cargo S.A. - Management Board Member of Finance [6]

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So this will be settled in H2. We're thinking about how to implement this. But if this will be in terms of cash, this will take place in the second half of the year.

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Unidentified Analyst, [7]

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And my question is about the forecast. So because of the one-offs, like with energy, I understand that you just continue to uphold your forecast, your guidance?

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Leszek Borowiec, Pkp Cargo S.A. - Management Board Member of Finance [8]

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So we've talked about the determinants for our freight over the upcoming months and the ability to deliver products to construction sites. And these investments are very critical if we think about the freight volume to be handled in the coming months. So we've been quite active. And the ministry, the minister have been involved with general directorate of roads authority as well as the rail authority, PLK. We can see that those investments were pushed back by just a few months. So contracts are being signed anew and the investments will be continued. So this gives us the grounds to say that we will provide this freight transport. And so we believe that the EBITDA parameter for this year is something that's doable. So we believe that's quite stable because it's PLN 450 million. So even if we take into consideration the fact that we had a 2- to 3-month period in which demand slackened, we still believe that this is something that we can achieve, a target we can attain.

At the same time, we are very well aware of the risks linked to that. So we'll communicate to you if other circumstances arise or transpire in the course of these investments, we will certainly notify you that. So the update that we're presenting to you is based on the information we've received in the middle of August about CapEx. But if we look at other product groups, we can talk about this in greater detail. We certainly see potential to continue growing our intermodal business. And that's something we're doing. So we believe that this is an opportunity to offset the lack of freight volume in other areas. And so if we look at the aggregates, we're ready to offset that in other product groups. And this is something we've been able to -- positively need to improve the operational strength of the group. And so all of this is generating positive results in terms of tens of millions of profits compared to the work that's done in previous years.

So the group of PKP CARGO, that's now synchronized. And this is generating effects in terms of its competitive strengths and market position vis-a-vis other players I have in mind here, the intermodal, the North-South corridor. And we can see much more activity from the ports in Koper, where we bought last year Primol. Then you also have the Three Seas Initiatives. So we see much more activity. We have much more freight volume. And so we believe that in the fall period, this is something that will become even more dynamic, serve a natural way for the cycle to operate. And this is consistent with what we've presented to you previously.

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Unidentified Analyst, [9]

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I'm from OFE Allianz. So based on what you said, in part your response to my question, you've talked about construction materials and aggregates and intermodal. But based on what I've seen in terms of the structure, you've got the decline across the board. Could you give a more detailed commentary about your forecast? It doesn't seem to me that it's possible to offset things through higher volumes in Q4 in construction materials and aggregates. So is this decline is a signal of the slowdown in the Polish economy? Or are there other reasons for this? And how in fact could you really compensate that or offset that in the second half of the year?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [10]

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In terms of the individual product groups, I'd ask Mr. Fingas to say a few words about this first and then I can talk about some of the macroeconomic indices and so we can talk about changes in offsetting things because I think a summary would be required. So if we look at the individual product groups, so my colleague said a few words about Mittal. But perhaps about coal and iron ore and metals, I'd ask Mr. Fingas to say a few more words.

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Grzegorz Fingas, Pkp Cargo S.A. - Management Board Member of Trade [11]

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So you're totally right in terms of the perception of the market. So if you look at the freight transport, rail freight transport market, the decline is roughly 9% year-on-year. What's the cause? Everybody sees this. It's hard to give a comment on that. But if we look at the individual product groups, so we can see fixed fuels like coal has some changes. This is because there's a lack of balance between supply and demand.

Last year, there was a large amount of imports of coal. The production of coal in terms of the period, we're talking about the first half of the year, domestic coal was produced at 4.7 million tons. They sold 4.4 million, where 4 million is roughly in inventories. This was what the mining sector has reported officially.

Then we have several other elements. There's the decline in the prices of coal in the ARA ports. 2 ratios that the Polish power sector utilizes in terms of prices in the commercial power sector. It's around PLN 260 per ton or -- and then you have the structure of coal that has a much higher calorific value, it's about PLN 300. So if you look at the ARA price, so we have lower imports. There is a very narrow range in which this is profitable to engage in the importing business of coal. And so we have a lower production of electricity from hard coal. And so we have higher production from renewable energy sources. These are factors that are contributing to the decline in rail transport of coal.

If we look at aggregates and construction materials, the situation we have, as was mentioned previously, shows some turmoil in terms of the investment execution process because of tenders or the actual execution of the investments. So we're talking about the execution investments where contracts were signed in 2015, 2016. So we see some of the prices moving up in terms of materials and all of the related costs. Some of the contractors were not able to sustain these cost increases and have basically vacated the investment sites. So these are factors linked to the investment process.

I've said a few words about the metals. We have a downturn in market conditions. This is not just because of ArcelorMittal. We also have the bankruptcy of the Celsa Huta. Steel concern that you mentioned, of course, U.S. Steel and Košice constructing things. But intermodal is quite stable and strengthening. So we look at this quite possibly circa more than 6% year-on-year. This is not only because of the Silk Road, but also as the containerization of cargo continues, more and more cargo is being put into containers. And so then you have to transport between Polish ports.

And so if we look at chemicals and wood, wood or timber, after this period of turmoil on the situation in Belarus, we can say that the situation has returned to normal and there are no real concerns. So it seems that this will continue to flourish. But if we look at the impacts of the decline in liquid fuels, so the 2 entities that are now merging to utilize the impact of synergies, and so they're using rail companies from the group. We were a subcontractor like most of the rest of the market. And this is the result of that decline.

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [12]

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So we're talking about the interim results. So for the H1, so at the end of June, the question is if we're able to fill in some of the gaps from other segments, it's very difficult to field that question. Our customer relations show that people are waiting for a revival. More or less (inaudible) situations, we're waiting for this situation to reverse. That's more or less what I can say in terms of a commentary.

Maybe to add to the second part of the statement, if we look at the macroeconomic side of things and the ability to execute or achieve our targets. If we look at the quantity, the quantum of freight volume. When we talk about 55.2 million tons in the first half of the year, well, this is a little bit higher than the average for the last 7 years. Of course, if we compare it to last year, we're down by 7.5%. And so we've got a broader perspective, but we should also have in mind and have in mind that year-on-year, we have a decline in construction in terms of the freight volume.

And so I don't want to talk about the product groups themselves because this is already discussed. But let me add a couple words about GDP and the ability or the possibility that we'll see some economic slowdown because this will have an impact on cargo transport because freight transport is linked to the growth of the economy or perhaps opposite. It depends on the interpretation.

So in Poland, basically the assumptions are that we'll have 4.1%, 4.2% growth and next year, 3.7%, 3.8%. So this seems to be a pretty decent parameter, taken by the government compared to what's happening in other countries. And so GDP growth assumptions in Poland are amongst the most buoyant. And so it's the second-highest amount of growth seen in Europe, and we're top level amongst countries of our size. So there is a risk of deterioration, but the data do not suggest that we should see a sharp decline or a quick decline.

So if we look at our CapEx, which contributes to economic growth and has an impact on another industries. And so the CapEx for 2020, 2021, this will be one of the highest levels of investment since 1989. This shows that there's a lot of investment happening in Poland across the board. And so now if we try to translate that into our forecast, we've said -- we've referenced only the ability to achieve our EBITDA margin. That's the only parameter that we've given guidance on. We haven't talked about the other elements. So when my colleague mentioned about product groups -- well, certain changes can take place here. We see a lot of potential growth compared to previous periods or the averages of previous periods if we look at aggregates and construction materials. That's why we're talking about intermodal business.

While this will compensate to some extent what's happening in terms of iron ore and metals, we can see lower -- or some decline in demand for coal because of what's happening in the economy, power plants becoming more efficient, so on and so forth, so lower demand for coal. And we believe there will be more demand for, say, timber. So we can see different scenarios in which we'll see an uplift in freight volumes of other product groups as opposed to those that are going to decline. We can say that we're talking about millions of tons if we look at aggregates and construction materials to be shipped. So we can say that we have some moderate optimism in terms of our ability to continue growing the overall freight volume and utilizing this opportunity that we have, where for the next 4 to 5 years, we should have buoyant conditions in the aggregates and construction materials market.

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Unidentified Analyst, [13]

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So let me drill down on this. So I understand that if we assume that the growth in H2 takes place vis-a-vis of aggregates and construction materials, everything suggests that, that could be the case. So if we assume they will have continued growth in intermodal business. And here, we could make that assumption. If we make another assumption that in the other product groups, there will be no improvement, what would your guidance be on that point?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [14]

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I would add one thing to these product groups when we draw comparisons. We also have coal because the demand for coal H1-to-H1 -- or, well, in terms of 1 half of the year to the second half of the year, we should see some positive impacts. If we think about timber or lumber, we could also anticipate that there will be some growth. So as I said, the demand and the growth in demand was generated by aggregates. This gives us above all by aggregates. So that means that the EBITDA we've forecasted, we see some opportunities to achieve our EBITDA target.

But as I mentioned, everything will be determined by the pace of making tender decisions, so basically how quickly PLK, the rail authority and the roads authority will make their final decisions. And so Q4 could be the beginning of this uplift. So if things happen in line with the data and we'll have freight volume substantially higher than in H1, we're going to be able to achieve our EBITDA target, which has been given to you, has been announced -- published.

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Unidentified Analyst, [15]

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One more question about aggregates. You said that the tenders are underway. But basically, PLK and the roads authority or the company has discontinued their efforts where the contracts have been signed in 2015, 2016. The question is whether or not the anticipation is that they'll spend the same amount of money because then there's less opportunity for those investments to be completed.

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [16]

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Well, that's a question more to the rail authority. So based on the descriptions of these tenders, and this has been approved by the rail authority and the roads authority, it all depends about what's written in the contracts. I don't really want to talk about that because we have a revaluation clause. So the head of the ministry received some language in those contracts that were in place already previously. So this is a -- that's a situation where that's why some of the companies left the construction sites. And perhaps, this is something that in 2014, 2015 should have already been agreed upon. But if we look at the quantum of these investments, we can say that the overall quantity has been confirmed by the roads authority. And so it's not something -- it's not our internal assumption.

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Unidentified Analyst, [17]

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When will the aggregates transport start taking place for the ports because the contracts have been signed? So if -- when should you start delivering the aggregates?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [18]

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Perhaps Mr. Fingas could give you some more precise information here.

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Grzegorz Fingas, Pkp Cargo S.A. - Management Board Member of Trade [19]

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So after the tender proceeding is completed and the contracts are signed, right now the bidding process is underway. So it's hard to say when things will get started. So we were asked for a freight rate. And so we've been giving responses to that. So if this is realistically to take place, probably Q4. So this would be the beginning of the deliveries for that investment in the ports.

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Unidentified Analyst, [20]

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I have question about volumes. You've talked about intermodal briefly. But at the same time, if you look at the results, we have a decline. So was there something that will be continued or not? And what about your expenditure, expenditure rule that you shouldn't spend more on CapEx than revenues? But there's already a dichotomy. So basically, what's happening in terms of the guidance or the forecast?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [21]

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So perhaps I'll ask my colleagues to talk about that because this is about the commercial and financial areas. See if I could ask Mr. Fingas and Mr. Borowiec to respond to those questions.

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Grzegorz Fingas, Pkp Cargo S.A. - Management Board Member of Trade [22]

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So if you look at the results at H1 in intermodal, we can say Q1 was more the result, I would put it delicately, so there was a small problem of smaller imports. And this would cover Chinese New Year. This is a natural thing that happens in Q1. But if we compare the H1 results in terms of freight volume and freight turnover, we can say that this is not at risk.

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Unidentified Analyst, [23]

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But the changes took place in Q2. I was thinking more about Q2 because you had strong growth in Q1 and it was down in Q2. So you said that intermodal growth is something that will continue to drive your volumes and your results over time.

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Grzegorz Fingas, Pkp Cargo S.A. - Management Board Member of Trade [24]

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But if you look at the overall H1 period, so the data we have shows growth for intermodal transport. I'm not able to respond precisely which client could have led to this situation. We could analyze that. But if these trends took place, it was something that's independent of what we have observed up until now.

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Leszek Borowiec, Pkp Cargo S.A. - Management Board Member of Finance [25]

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If I could say a couple words about our spending rule. So in the medium and long term, it's just something that we continue to uphold. So current cash flow is something that's a temporary issue as a result of what's happened in Q2. But as a rule, we look long term over what's going to await us this year in H2 and in upcoming years. So we're thinking about the potential we can achieve, where we want to be prepared to do that.

[Interpreted] So I understand things. You don't want to decrease CapEx this year if you wouldn't be able to cover it with income?

Interpreted At this stage, this is a little premature in terms of how we'll complete the year. Today, we don't see any major reasons, which would tell us that we should reduce that potential to provide freight transport. So we believe that potential needs to be there and will be utilized based on the information that we've presented to you on Slide 17.

We -- one of the situation that happened to us in 2018 where there was a lot of freight volume out there but we didn't have the rolling stock to handle that. And so, as a result of that experience, we have changed our approach to react to this short-term situation.

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Unidentified Analyst, [26]

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If we have CapEx, do you want to buy 130 locomotives over 2019, 2023 for intermodal transport? So 1 locomotive is PLN 2 billion. How are you going to finance the rolling stock extension?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [27]

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[Interpreted] Perhaps we could ask [Witold] to give you some more information about that in terms of rolling stock and then I'll ask Mr. Borowiec to say a few words about financing. We're not talking about buying 130 new locomotives; we're talking about investments in our locomotives and rolling stock, but perhaps our colleagues would go ahead and say a few words about that.

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Unidentified Company Representative, [28]

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[Interpreted] So we've said many times about our investments for rolling stock. These investments are primarily for the sake of modernizing locomotives. And so we have contracts signed for SM48 and ST44. So these contracts are being executed.

So in 2019 and 2020, we'll complete this modernization work. On top of that, we have contracts to supply multisystem locomotives. So we have the Vectron, the Siemens locomotives and we're exercising an option that was in that contract. And in terms of locomotives, we're in the final phase of making a tender decision and then we would ask our corporate authorities to get consent to purchase 41 locomotives. So we have heavy locomotives. This would be 6-axle locomotives and basically, the idea would be to replace the SD42 locomotives and this would improve our operating capacity and the efficiency.

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Unidentified Analyst, [29]

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[Interpreted] So the 130, how many would be modernized and how many you would purchase?

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Leszek Borowiec, Pkp Cargo S.A. - Management Board Member of Finance [30]

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[Interpreted] So 100 locomotives would be modernized. The others would be purchased.

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Unidentified Analyst, [31]

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[Interpreted] So this PLN 6.5 million, this is modernization?

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Leszek Borowiec, Pkp Cargo S.A. - Management Board Member of Finance [32]

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[Interpreted] Yes. Basically, you will change the diesel engines in order to have more efficiency, and that means that the locomotives have better operating parameters and then you have higher availability factor, which is around 96% as opposed to 76% if the locomotive hasn't been modernized.

So we can say our long-term goal is to make sure that through these investments, we should have linked to our operating income, so our cash flow. That's the basis for our planning. So this also depends on the freight we have to shift and the quantity of demand on the market. And so we'd like to be able to do that to the greatest extent possible and earn money on providing these transport services -- cargo transport services.

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Unidentified Analyst, [33]

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[Interpreted] Are you taking some measures to have sort of performance pay? Because you had nominal increase in salaries which was double digits, but you didn't really have the increase in the freight turnover?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [34]

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[Interpreted] So compared to last year -- or last year, we worked very intensively on employee compensation systems to improve profitability. You can follow different strategies here. Last year, as you remember, we implemented a pilot program, incentive program, and the result was positive because we had very good results, outstanding results. And we can say this is the benchmark for our operations activity.

So this year, having in mind our experience and the specific distinct nature of the company, we have certain scenarios that we have prepared, so we'd like to discuss this in order to implement this. And of course, we have the decide about the scope, and that's something we'll be ready to do by the end of this year.

So this month, we'll have somewhat sharp sessions in order to define more precisely the directions we'd like to embrace. So this is something that's quite important to us. We want to retain our good employees. We want to pay well for the work they do, for efficient work they do. And so we want to improve our results by doing that. So that's one of the important objectives we have, I have and for the whole management team is we want to be able to implement that.

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Unidentified Analyst, [35]

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[Interpreted] Could you give us a bit more details about the assumptions? I'm not sure if I remember correctly?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [36]

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[Interpreted] I think by the end of 2018, the master plan should have been prepared and I think the first stage of the program should already have been completed. So we're talking about increased salaries, but then later, there wasn't any arrangement with the trade unions, but then there was a salary increase given but there's no link to the performance of the company.

You've summarized what's happened over the last year, 1.5 years. So the one-time motivation system we implemented, that came to an end recently. The settlements were made in March and April of this year and this was the basis for preparing scenarios where we can actually implement solutions, having in mind the experience we had.

So we have 3 different scenarios prepared where we could implement them. We have a management Board session next week, where we can think about what will be the best aligned to what we'd like to achieve and to make a decision which one of the scenarios we'd like to implement, and they do take into consideration the distinct nature of our company, the outcomes we'd like to achieve and the value of the company and the value of employees who work well and do well for the company.

So I don't want to talk about the details yet because the model hasn't been selected. We've not made the internal decision yet. What I can assure you of is that we've done a lot of work to do the preparations. We've got the right materials prepared to do that. So we have a full day workshop session and we'd like to develop the best possible model and will deliver this to our corporate authorities.

And so after this has been implemented, then we would go through -- or accepted, then we can go into consultations with the employees and do it in the best model in the company. So let me quiet you that we're far along this path in terms of selecting the best scenario for our company.

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Unidentified Analyst, [37]

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[Interpreted] I'm from SocGen. I have several questions about the market if I could ask. I want to ask the first thing is about intermodal. So it fell (inaudible) with you. What were the variables?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [38]

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[Interpreted] We had a slowdown in Europe and, to some extent, here in Poland. Then you have the structural growth in...

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Unidentified Analyst, [39]

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[Interpreted] Should we anticipate single-digit or double-digit growth in intermodal over the next couple of years?

The next thing is your market share. Your market share is falling. What's happening?

And the third thing, some of the smaller players are growing. Their market shares are growing. So I'd like to understand what's the pace you see here. And what sort of impact, should what happened in first half of the year, have on prices in second half of the year? Have the negotiations have already started? So if we look at what's happened in coal and aggregates, will this affect the pricing? So could we see some sort of price war stemming from this discussion? You have a beautiful slide here that you've shown, so I think there's some reasons to believe that this scenario won't take place, that there might be a gap in 2020 that I'm not sure that the roads authorities can be able to contract so quickly. What's going to happen? So it turns out that 2019 is the new standard and in terms of what's going to happen with aggregates. How would you align yourself to that?

And then in terms of CapEx, what sort of level of CapEx are we talking about this year?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [40]

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[Interpreted] Thank you very much. So I'll ask Mr. Fingas to say a few words and then I'll try to respond to that and summarize his major amounts. And if we talk about the investments, can I ask Mr. Borowiec to say a few words?

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Grzegorz Fingas, Pkp Cargo S.A. - Management Board Member of Trade [41]

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[Interpreted] So briefly about intermodal. Perhaps the difference is between the Q1 and Q2. We're talking about percentages as opposed to the absolute values of freight volume or freight turnover. If we look at intermodal over the upcoming years, and what we're observing on the marketplace and what we've analyzed in our company, it's difficult for me to say that the growth will continue to be double-digit. Because right now, the base is much higher. If I would try to forecast, I would say that we're going to be closer to double-digit as opposed to single-digit. I would say, it's somewhere of the 8%, 9%.

So if we're thinking about what's going to happen in the course of 1 year, but let's say over a period of several years, we would anticipate that this could be a major change in the structure of rail freight. And so I think we're going to be closer to 10% as opposed to sort of -- the low double digits as opposed to single-digit numbers.

If we look at the smaller amount or supply of cargo, and does this affect prices, I would say that in contracts, in the baseline contracts, so we have multiyear tenders, we're thinking about trying to set the price level last year. And this year, tenders that had volumes for upcoming years, there was already the assumption that there would be an increase in the rate. If we look at the results of the company, we have an increase in revenues even though the volume has fallen. This was shown on one of the slides, so this suggests that the price level, I think it's this slide. No. Right. So you can see the operating revenue of the group that we've been able to generate substantially higher top line performance despite the freight volume being down.

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Unidentified Analyst, [42]

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[Interpreted] Will this lead to a price decline on the market?

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [43]

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[Interpreted] Probably yes. I would say yes. We're trying to defend ourselves against that, but the base we have now places the company in a positive light. It's difficult to say however. It's not even going to be a matter of one-off things. But if one carrier or another carrier will have resources that it wants to utilize and it will offer lower prices, we see this happening sometimes, and so sometimes we're offering spot market services so we can utilize our resources or we can try to optimize resource utilization in terms of our freight turnover and this is something that's taken place in previous periods as well. But I would be far away from saying that we're going to have a major correction in prices. Right now, we can say that the prices we have in the contracts are moving forward into the upcoming year because of the long-term contracting.

So without talking about the details. If we look at intermodal, it's been discussed and you understand that we're working hard to make sure that the intermodal market is continuing to grow. So we're setting up new connections in economic areas, vibrant areas in Northern Europe and Western Europe. So we have a new initiative, which we'll monetize in the near future where we're going to go through [qual things] but then we're going to have trains moving at least 3x a week. Then also (inaudible) Warsaw, (inaudible). So we want this -- we want to offer additional services, storage, train shipments on that and so we can watch and observe what's happening on the intermodal market because we see containerization, but on top of that, there's specialization in certain companies where a lot of assemblies and parts, thousands of them, subassemblies are basically being delivered here and there. So if we can look at the statistics in 1990, the number of subassemblies, some 20%, 30%. But now, we can say it's now 80% to 90%.

So we can see that production companies are becoming companies that basically assemble or put together subassemblies. And so this is a great opportunity for us.

And we see in Poland that more and more production facilities, more and more factories being built, and then you have more and more interest in Poland amongst investors, global investors because of the intersection at the major transport routes, North, South, East, West and this intersects here in Poland and so the ability to deliver more products.

Then if we look at Polish ports, which are a natural part of transportation corridors for all of Europe as Copenhagen, Hamburg and other ports are already crowded. So we have the ability to grow if we look at the increase in the containers moving transport moving through Polish ports. This is a great potential for us and the investments in ports were discussed previously will help us ramp up our transshipment routes. And so the integration of our terminal company should make sure that the offer for our customer is even better.

And so if you look at the European shippers' proposals and global shippers' proposals, we want this to be located in Poland and we want to be able to distribute that and handle the logistics.

And so if we look at the strategy, we're becoming a bigger and bigger logistics partner. So we already are but our offering in transshipments, in the terminal means that we're a much broader partner. We want to specialize in the services we provide. And so this is a skill we have in terms of logistics. So we don't necessarily have to have the resources in order to achieve that, but we want to provide the service, utilizing our own in-house resources as well as third-party resources.

So we should see some growth on a monthly basis over the next few years. We believe that these generators will come from what we create ourselves. And certainly, the Polish economy is quite vibrant and gives an opportunity to drive up the transport, and this is linked to the agreements we're signing today and we're investing further in that. Some moving from the corporate port, from our investment last year. So in Q1, Q2, we see more and more entities being activated and we're able to transport more along that transport route. And so we see that there's a lot of potential here.

Maybe there was then a comment about market share because the question was asked about market shares. So the decreased market share was a result of certain individual declines. We're talking here about products, so freight, where we didn't lose it to the competition. But if you have the suspension of the blast furnace in Kraków, so it was down by like 500,000, so we've lost by leaps and bounds some transport, not because the competition took it, but basically, we had served that customer and because of what happened to the customer, then we lost that. And if we have the aggregates moving into large products -- projects, most of that was done by us and not by small entities or smaller entities, while some of those competitors were working for smaller players. So we were under contracts with mines. And so this is something that had a major impact on us. And this is not a result because the market shares were lost because somebody won them away from us. But it was because of the unique nature of the transport services we're providing.

If we talk about [metals], it's hard to talk about regaining something. But if we talk about aggregates, then there's a question about our guidance, our projections. So the ability to have a bigger market share, it means that we're going to have more market share compared to others. Here, I feel confident.

So if we look at the forecast capital expenditures, this is the last slide that shows the amount we want to spend, PLN 26 billion, PLN 23 billion, PLN 25 billion up -- nearly PLN 27 billion up until the end of 2027. Of course, you can engage in some discussions about whether or not we can achieve it or not. But these figures are based on amounts stated in the financing program from E.U. funds between 2018 and 2022. So the ambition of the government and all the parties involved is to spend that money.

So today, we can say that some of the turmoil that took place in these quarters, that there is some shift in the timing. So we talked about investments or mistakes made by previous governments, which didn't include the right clauses in their contracts that should have been done. So it's not the case that we've lost that ability to give that transport. But today, our market cognizance is that this will be delayed by several months. It's my opinion. But it seems to me that we will -- the money will be spent on the marketplace because there is a certain deadline by which the money needs to be spent. There's a question about the permanence of a given project.

So we can talk about a specific month or specific quarter in which this delay will take place but I wouldn't think that this will could be totally eliminated so the General Roads Authority signed a contract between modeling, adjusted, so I read newspapers every day and so this information is out there somewhere. This is just from the newspapers, it's not the case things aren't happening. You can look at some of the detailed information that the tender was approved.

So if it's going to be PLN 26 billion or PLN 25 billion or PLN 27 billion spending these [bridges], of course, it's something we can discuss, but I feel quite confident that investments in this period of 5 years will be completed.

That's a bit of a commentary based on what was said. And then in terms of the CapEx, perhaps I will ask Witold to say a couple of words.

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Witold Bawor, Pkp Cargo S.A. - COO & Member of Management Board [44]

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[Interpreted] If I can add a couple words about market share. You 2 gentlemen have challenged the decline quarter-on-quarter of intermodal transports. I've asked for this to be checked and it seems that in 2018, 2019, Q1, this is 300,000 year-on-year and Q2 is 300,000 in group, also growth year-on-year. Well, I have a difference in the base effect and we have the same amount of growth in absolute terms, but in percentage terms, it's only grown by 6%.

So if I could dwell a bit in terms of what the CEO said and how our market shares are morphing. We are a major volume player, so we can say that there's an impact on PKP CARGO because of our size. While smaller players are growing, according to you, but if we look at the data in individual months of 2019, the other smaller carriers, without naming anybody by name -- calling anybody by name, in March, it's a little bit more than PLN 4 million; in April, it's PLN 3.9 million; and then PLN 4 million in May and June shows a certain trend of decline amongst the smaller players.

So you can say that month-on-month, the difference in terms of the freight volume is around 100,000 tons, 150,000 tons, where we have a large amount of investments and large contracts. So if we have a decline in volume, then this changes our impact, our market share. So I will happily talk about this sort of behind the scenes with you in terms of what effects.

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Unidentified Analyst, [45]

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[Interpreted] And what about the CapEx in terms of -- what sort of CapEx do you plan to spend this year?

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Leszek Borowiec, Pkp Cargo S.A. - Management Board Member of Finance [46]

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[Interpreted] So our CapEx is being done according to our business plan for the year. So we have the maintenance plan. There are certain modernizations that we have to do for rolling stock, locomotives and wagons. And then we have the development portion of our CapEx. So we're investing in rolling stock to improve our efficiency, operating efficiency.

So the CapEx -- maintenance CapEx is strictly linked to the need we have for rolling stock, having in mind our long-term and medium-term plans for handling rail freight.

So if those things plan, then we would, of course, adjust it for the level of CapEx. So it's a little bit flexible depending on the demand reported by the markets. We're monitoring this and analyzing it. So we've got the historical results for the first 6 months of the year. We should also have in mind that these are certain assumptions that we could achieve in the near future. We'll see what happens in terms of what the market is going to demand and then we'll earmark money for that purpose. [He's not using the microphone, so I can't hear him at this time.]

This slide portrays that we update our capacity to handle freight. We contact our customers and they update their level of needs and then we look at the level of freight at the beginning of the year, middle of the year and throughout the year. So Mr. Fingas can say a couple of words about that.

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Grzegorz Fingas, Pkp Cargo S.A. - Management Board Member of Trade [47]

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[Interpreted] I'm not sure it should -- so at the beginning of the year, was there greater demand than now? I would say it's at a comparable level.

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Czeslaw Warsewicz, Pkp Cargo S.A. - President of the Management Board & CEO [48]

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[Interpreted] Any other questions at this time? Perhaps we should go to a behind-the-scenes sort of discussion.

We have one question from the Internet channel. Some of the responses were already given to the questions to the management team. It's about maybe doing a share buyback or how they're going to try to increase the value of the shares.

If I could, we do see and feel the trends in the marketplace, so looking at the Polish stock exchange and global exchanges, that's one thing; there's the things about -- well, the interest in our shares, this is one of our priorities. And so we try to provide information through conferences and reports. We present the potential we have, the current status we have. So I'm also a shareholder of the company, and it's something that I am happy to communicate. I've communicated it in the past, and I'm pleased that I could be a co-owner of such a good company like PKP CARGO.

So we meet investors frequently, so we meet investors here in Poland and abroad to show the actual value of the company. And so we're doing a lot to be well perceived by the markets and be a good long-term entity and we do this in all of the businesses.

Well, sometimes you have various types of growth. And so the company has to be flexible in how it responds to that, and we try to augment our flexibility in terms of when there's lesser demand or higher demand and we try to improve our financial results over the years.

So if you look at the moving averages at quarter-on-quarter, that sometimes distorts things. But if we look at the last 12 months, we can see things are stable. And so having in mind the uplift in transportation needs, we believe that we have an ability to generate profits for our shareholders in the future for the owners. That's in light of the decision to make investments, purchase locomotives, wagons. This is a matter of your participation also.

So basically, the investor individually makes that decision, and we want to show the actual ability to grow the value of the company. So I think that's more or less my full commentary to that question.

As there are no more questions, then I'd like to thank you very much for your attendance and we invite you to join us now for lunch.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]