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Edited Transcript of PKP.WA earnings conference call or presentation 17-Mar-17 10:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 PKP Cargo SA Earnings Call

Warsaw Mar 17, 2017 (Thomson StreetEvents) -- Edited Transcript of PKP Cargo SA earnings conference call or presentation Friday, March 17, 2017 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Agnieszka Bareja

PKP Cargo SA - IR

* Maciej Libiszewski

PKP Cargo SA - President

* Arkadiusz Olewnik

PKP Cargo SA - Management Board Member, Finance

* Jaroslaw Klasa

PKP Cargo SA - Management Board Member, Operations

* Grzegorz Fingas

PKP Cargo SA - Member of the Board, Commercial

* Zenon Kozendra

PKP Cargo SA - Management Board Member, Employees

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Conference Call Participants

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* Cezary Bernatek

Haitong Bank - Analyst

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Presentation

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Agnieszka Bareja, PKP Cargo SA - IR [1]

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Good morning, ladies and gentlemen. It's a pleasure for me to welcome you to the conference, presenting PKP Cargo's Group results for 2016. My name's Agnieszka Bareja.

And today's conference will be run by the CEO, Maciej Libiszewski; with Arkadiusz Olewnik, who is the member of the Board for finance, responsible for finance; Grzegorz Fingas, responsible for commerce; Zenon Kozendra, responsible for staff affairs; and Jaroslaw Klasa, responsible for operations. Thank you so much.

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Maciej Libiszewski, PKP Cargo SA - President [2]

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Thank you. It is a pleasure for me to welcome you today, to today's conference. Thank you for joining us today. I am so happy to see so many of you joining us today.

I don't know it was -- if it was worse to come here, because, well, it's such a weak Company, right? Only 10% growth, right? But maybe it was still worth it.

Today, we'll be summing-up the whole 2016. So what we've already said, we are trying to implement what we say. And the share price has grew by nearly 100%.

And almost one year ago we've mentioned our efforts dedicated to the restructurization of our Company, changing actually the structure and coming closer to our customers. But since the time we've actually appointed the whole Board, which was April last year, we've been working on that very hard.

And because we are dealing with a concrete situation, in order to become member of the Board you need to -- you needed to have at least five years of professional experience in the field. Therefore, we were able to appoint people who are professionals, who know what to do. And they do: they implement what they should do. And we can see the results. We can see the sales, also finances that are changing.

And a very important thing has happened with our employees, with the dialog with the employees; that is the cooperation, our cooperation with the employees. And we will be talking about that in a moment.

But, firstly, I'd like to present you some corrected results of the PKP Cargo. It will be presented by Mr. Olewnik.

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Arkadiusz Olewnik, PKP Cargo SA - Management Board Member, Finance [3]

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Good morning, ladies and gentlemen. Thank you.

With regard to 2016 results, they were corrected by PLN34 million, because of the assets dropped in value. That was connected with the AWT situation; and also, connected with OKD, Czech company. Well, it went bankrupt last year. I'd like to remind you of that. And that was the time when our shares, the shares of our Company, reached their minimum.

With regard to write-offs, we had 10. -- [PLN0.5 million] that was connected with VAT write-off, connected with OKD. The situation as at now, OKD is being restructurized. This has been ordered by the court, and, therefore, we needed to do the write-off.

With regard to our market share, on yearly basis that was 51.6% in terms of the operations, but in the fourth quarter it was 52%. So the minimum share in the market was reached between the first quarter and the second quarter; and since that time, our share grew by over 1%.

With regard to EBITDA, as you can see here, that covered the whole CapEx, 2016 CapEx, and all -- including the fourth quarter. And the corrected result was minus PLN41 million. But the fourth quarter ended with PLN75 million in plus.

What is behind this good result? Less smaller cost of energy and materials; less external services cost; and less employee payroll cost. And here, most of the cost is -- expenditures is connected with updating the reserves. So, thank you.

Now, the next slide, and the next slide will tell you about our key achievements in 2016 and what -- well, we've listed some key achievements here.

Firstly, we've improved our leading position. And, as we've mentioned that last year, as of August 1, 2016, our Board implemented new rules and regulations.

And we've changed the structure that were the central, the headquarters, was the most important part of that. It was really similar to the bank structure, and that works really well because they are working using some spreadsheets, and so on.

But in the logistical company the decisions are taken with the customer, and this solution will not work well. And this is what we've seen in the fourth quarter of 2015, and the first quarter of 2016. And, well, we've past that stage, and in the mid of 2016 we've introduced new executive structures and sections.

We've had sections before, but we've changed them a bit. Those that were implemented before, we've changed them in such a way that we've implemented some structure to the structures that were connected with the operations, so transportation and overhaul, for instance.

And we have the directors and deputy directors of the facilities, and they are responsible for that, and that gives us more flexibility in order to actually maintain our Company closer to the customer and to answer to the situation better.

As I've said, we are implementing what we have been promising to you, and this is the most important message of 2016.

And in addition to improving our leading position, we need to mention also our dialog with the employees. In autumn 2016, we've closed the case that we had with our employees. Did I do myself alone? No, not really. I've been hugely, immensely supported by our new member of the Board, who was representing the employees; and 10 years ago, he was also a member of the Board with me.

So, Zenon Kozenka, I'd like to thank him for his work. And since the mid-2016 he was participating in the negotiations. We had several rounds of negotiations. But we need to say that our employees were very mature, and without their approach we wouldn't be able to close the case and sign the agreement.

We have also introduced a new sales model, and this model is setting forth a new directions, new, therefore, the salesmen. And they know what they have to do. They are actually being held up to what they do, and the whole system backs that up. And this what Mr. Fingas and his department introduced.

As an effect, intermodal has improved. But also, the specialized operations have improved, and a good cooperation between our international and sales offices in terms of cooperation, connected with our operations in Europe, so in Europe, but also in Far East.

After many years, we were able to launch a steam locomotive shed. This is the [Bunbedtroliepsberg], Wolsztyn. That was quite a lot of money that was invested in it. And we've cooperated with the local authorities. They were really interested in the agreement. It took several years to sign this agreement.

And our employees, PKP Cargo's employees, are working there. And one year ago they were working for PKP Cargo and today they are representing this [Bunbedtroliepsberg], the steam locomotive shed, and so they are actually running this cultural operation. Because we have a lot of interested parties the cost is spread, and differently shared, and this is a way of promotion for us.

And it all comes down to the central focal point: this is the growth of value for the shareholders. That was the most important goal for us since the very beginning. So the Board understood that this element should be the most important element for us also in the future. And this is what we are planning to follow.

On the next slide, we'll show the potential of our Group, and this will be highlighted by Mr. Klasa.

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Jaroslaw Klasa, PKP Cargo SA - Management Board Member, Operations [4]

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Welcome, ladies and gentlemen. Ladies and gentlemen, PKP Cargo has a great potential. This is more than 2,000 locomotives, 12 Vectron locomotives, multi-system locomotives. And today, they are actually fulfilling all the needs that PKP Cargo has in terms of operation. Well, this is a fact already. So we are applying this potential in intermodal market, for instance.

Notice, PKP Cargo has also several thousands of carriages; it's 60,000 carriages that are running our operations.

PKP Cargo is focusing on servicing the end points; therefore, we are present at over 60 sidings. Some of them we own, some of them we co-own. And they are located in Poland and in Europe. So this is where we are. And we are able to deliver all the services on time and reliably.

And because the intermodal operations are growing in our Company, thanks to the sales department run by Mr. Fingas, we are working on 17 terminals across the countries. This is a great potential for the whole segment. However, we are focusing mostly on the borders with the European Union and with Belarus and Ukraine.

And that all translates into the operations. And in 2016, we have transported 467,000 containers; this is 50% of the whole intermodal containers that were carried, transported. 51.6% of share in Polish market in 2016 in terms of operations.

In addition to intermodal, I believe then another positive aspect is the fact that 71.6% covers the hard coal market, nine months; and this is what was transported by PKP Cargo.

This is greatest proof to show you that we are the biggest, the best transport company in Poland. Thank you.

Ladies and gentlemen, let's move on to the next slide. This is the international potential of PKP Cargo, and that shows you also the key transport corridors.

I'm talking about things that are obvious for everyone, that we are actually applying our potential; that we are new partner for the new Silk route that we are operating in Czech Republic, Slovakia, and Hungary; that we are offering operations in Italian peninsula, together with our company, Pol-Rail, that we share those shares with Trenitalia.

We offer very logistical services, and our customers can use our intermodal terminals and other terminals.

And we are operating in nine EU countries. We have one of the biggest [expedition] company that is dedicated to international operations, this is PKP Cargo Connect; and the [expedition] company in Germany, PKP Cargo Connect GmbH, that was launched by PKP Cargo Connect.

So this is what we have been implementing, and we've implemented already. But, in addition, we've started to transport rape from Hungary, together with a Hungarian company. We are actually transporting (technical difficulty). We started some [carbotage] operations.

And another example would be some metals that are transported between Slovakia and Czech Republic. Hard coal is transported in Germany section. And we've attracted new customers.

And in conventional operations, we've been actually transporting chemicals to Serbia. We've been working for JETCO Deutschland and transporting commodities from the eastern part of -- from east to Czech Republic and Germany.

Our sales and security departments are cooperating tightly in terms of also military and special transports. Last year, you've probably seen the Anaconda operation in Poland. PKP Cargo has transported the ally forces, as ordered for by the military staff.

And we've also transported some commodities from Germany to Poland. We know that some American troops have landed in Poland already. And we've actually completed the transport-related operations also in parts of German section.

We haven't been mentioning that, because these were quite confidential operations. We've decided that this is our customer. We've respected, and we did it, and we will be providing the information after the operations are completed.

We are also doing some transportation for NATO forces connected with the new Polish operations, Americans. And we are a very reliable partner. And, as you could see, there were no failures here in this field, so we are a very reliable partner.

I am trying always to say good things about our competitors, but I need to say that we were just better than our competitors. And we don't really have any real competitors in Poland, so that was one of our greatest successes.

With regards to our cooperation with China, that is shown to you on the next slide, here, we've been observing constant development, constant improvement. We've undertook the actions a few years ago, but last year the growth was really huge. We've transported nearly 44,000 UTIs; 60% of that were trains to Poland and Germany.

We've started new sections in Germany, Norimberga and [Van Ikle] and though -- well, you can actually see the destinations here by the circle. But we need to mention that our Chinese partners are really willing to cooperate with us. I've mentioned that several times, but maybe some of you haven't had the chance to hear it, so I need to recapitulate it.

That wasn't really exactly our initiative that -- what I mean is the fact that the Chinese want to cooperate with us. And on nearly every rail-connected conference our German partner, with all the partners, new Silk Road partners, including Japan, Spain, and other countries, all the countries want to cooperate. But the German partner is showing that they would be nearly able to actually do the transportation, the operation alone, because they have companies in all the countries.

But the Chinese keep highlighting the fact that for the Chinese partner Poland is very important partner. And why do they do it? Well, nearly all Chinese people who talk with us, they realize that Poland was the first country who recognized their state, and they remember that Poland was the first international joint venture partner. This is the Chipolbrok, the famous contract.

And they also remember that in the mid-1950s China had a serious food problem and the ships that transported food were the Polish ships. And the Chinese really remember that; and they highlight the fact that for them to take the decision they actually look back 100 years.

Within those past 100 years, Poland was actually a very positive country, because whenever they needed help, assistance Poland was delivering that to them. And that's why they want to cooperate with Poland, and we really want to cooperate with the Chinese.

This is how we answer this demand. And we've seen it in December, last year, when we've signed yet another letter of intent and cooperation. We've signed it with the Xinjiang Province, with Urumqui, the capital city; this is the biggest province. Xinjiang is the biggest province in China. And there is also a border pass which carries 80% of commodities that are sent by train to Europe, so we hope that our role there will be more and more important.

And we need to realize what is our goal here. Do we want to be the biggest transport company in China? No, not in China, not in Kazakhstan. No, we want to actually pick up the transport at our border in Malaszewice.

So, actually, having good relations with the Chinese, we are fighting for our market and for the European market. We don't want to transport more commodities in China. But having good relations with the Chinese, we can actually pick up more commodities at our border, so this is what we are doing. So, thank you so much.

Now, in terms of the position of PKP Cargo Group, the market share in Poland and abroad, this will be presented by Mr. Grzegorz Fingas.

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Grzegorz Fingas, PKP Cargo SA - Member of the Board, Commercial [5]

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Ladies and gentlemen, in 2016, PKP Cargo, as a Group, has been a leader, has been leading in the rail market. 51.6% is our market share by operation; and 42%, that was the weight that was transported.

I'd like to highlight here that we've been systematically, continuously working on improving our position, and, as an effect, the weight and the operations grew. The market share grew by 2%: in the fourth quarter it ended with 52% market share, and in terms of operations, and 44% in terms of weight. We've transported over 111,000 tons of weight that was transported.

The market, as we've already informed you during the previous conferences, as you can actually see, the transportation in Poland, this isn't a new thing. Transport in Poland, transportation in Poland is connected with the economy, with the economical situation in Poland.

You know what was the situation in, for example, mining market, industry, and so on. In mining, for instance, the situation deteriorated, therefore, the mass, the weight was lower than as compared to previous year.

The mining has been doing worse, so the construction was also doing worse, so we had less aggregates, construction materials, to carry. And for the first six months of 2016, the situation was bad in terms of hard coal transportation.

In addition to that, the rail market, the total rail market, has been dropping by 2% year by year. And the weight is also declining; the weight that is to be carried, transported. But, on a positive side, we have this, the fourth quarter of 2016.

And before [Jaroslaw] will tell you about the fourth quarter, we could actually see the results of the operations. This sort of difficult time may seem a bad time, but quite often it turns out to be really good in terms of consequences.

Several years ago, I had a very difficult time professionally, but at that time I worked on my health and you know that I've lost over 40 kilograms since that time.

And now, referring that to our Company, we didn't lose that time. We've worked during the time and the sales department and exploitation department proposed new solutions, so adjusting sales policy to the market, to the customers; building new sales structures that are able to offer complex logistical service. We've built a specialized department for sales support, and this is what I am checking now.

Currently, we are very fine. We had the verification, in cooperation with the exploitation departments, of the parameters for the operations that take place during this very important stops of some sections that will be happening next year.

And we've also worked for cost calculations. That was a very important thing for us to do. So this is just one example to give you.

Our employment is dropping. And in order to prepare offers for the customers we are -- we were basing on the historical data. It was really a strange thing: why should we actually offer our price based on the employment that was applicable two years ago? So we've actually did implement hundreds of changes of that sort.

We've indicated some options for optimization in terms of maximization of the improvement of our capabilities; and, as a result, at the end of the year we've seen some consequences, positive consequences of that.

As I've already said, an optimistic, positive thing that happened at the end of 2016, which can be directly translated into our results, and we can bravely say that, I need to be straightforward here: less CapEx, less investment, less use application of EU funds. All those factors, it seems that they stopped in the fourth quarter of 2016.

And the situation in those bigger segments, in intermodal and aggregates, hard coals and ores, the fourth quarter turned out to perform really much better. But if we compare it, the quarters, we performed much better in terms of operations and weight that was transported.

And the fourth quarter results have not stopped at the end of the year, they've been continued in January and February. The January results prove that the operations have grew by another 1%, and now it's 53.46%.

And I also need to mention the fact that in hard coal 54% of our transport is hard coal.

And with having in mind the situation connected with the [restructurization] of the Polish coal group, and all the external and objective factors that happened on the market, restructurization, volatility in prices, it was not -- it was only at the end of the year that the prices have stopped this volatility. Therefore, there were some turbulence in terms of importing tax and exporting.

And -- but we need to actually mention that year on year we had decline in production of coal, and this is about 2 million tons of coal less to be transported on the market.

And in the structure of in the hard coal segment, we are talking about hard coal and coal-related products, actually, the operations grew here at the end of the year.

I'd like to add one thing concerning the Czech direction, the Czech direction, destination. We know what is happening in OKD. We've been talking about it several times last year. But the situation has been progressing there faster than we've expected.

We've expected that the operations will be running, for five years or six years, 4 million tons to 5 million tons yearly. But we need to verify those objectives, because the Czech mines have progressed much faster than we've expected. So this is a quite unfavorable situation in terms of --

This unfavorable situation in Polish mines, we can see the green line at the end of this corridor, because we know that the Czech Government and OKD, and all the companies that were picking up the coal from OKD, they are interested in cooperating with our mines; and they are interested in bringing coal from Poland to Czech Republic.

That does not concern only Czech Republic, but also the neighboring countries, because the Czech coal has been used by Austria, and Hungary, and Slovakia. So that, as a result, we are more optimistic about the hard coal market.

Aggregates and construction materials, this is 16% of our weight that was transported by the Group. And some delays in EU funds implementation and preparation of the infrastructural investment, so the low level of expenditures on investments, public investments, so the drop was quite significant there. Some investments were moved in time because the formula has changed in new EU perspective.

As a result of all those events, the weight that was available for all rail transportation companies dropped; and, as a result, you can see the graph here.

And also, on the key events in 2016 connected with ores and metals, the steel production dropped down to 8.9 million tons, so import tariffs, growth of iron price, modernization of some furnaces, overhaul in other important companies that are our partners. Therefore, the drop in this segment, ores are at 12% of all operations of PKP Cargo.

Ladies and gentlemen, we know that this is history now. We know that this year aggregates should perform much better, and just as ores and metals. But the question is will we be able to transport that? This question, we've asked ourselves this question at the beginning of the year. So we had to deal with the decisions that were taken in our Company between 2010 and 2012.

And the overhaul, the modernization periods, has been extended. Therefore, in the nearest future, we will have the accumulation of modernization processes.

And our carriages have less thick steel sheets than before. Before, it was 3.4 millimeters thick; and by the decisions taken of the previous Board, the thickness has been decreased. At that time, that was probably the decision that had to be taken in order to save the Company.

But today, the Board needs to face a higher volume of modernization of overhauls, and the fact that the rolling stock has grown older, I don't know how that happened, throughout all those past years. Therefore, I believe that this year we've secured, we've covered all the cost of the resources funds and the capabilities of our facilities.

But we are working on the situation next year, and the year after that. And this will be the investment peak. At that time, everyone will be actually pointing at us. And the investment peak will not happen, probably, if PKP Cargo is not able to transport all the materials, so this is the important objective for us, and a challenge.

PKP Cargo is following this strategy, the development strategy. And we are still the leading company here.

And the cooperation with the seaports, the containers that are brought to seaports, that translates to higher operations here, so the dynamic development of the new Silk Road, also the international transport, and the connection between seaports and terminal in Poznan.

As a result, in 2016, in this segment we had a significant growth: 22% by operations, and 25% by weight year on year. This is a very optimistic information for us, and optimistic indicator for the future. And we will maintain our leading position. So, thank you.

Surely, the sales department has implemented really a lot of efforts here, and, hence, the improved situation.

We are also transporting other products, other commodities: timber, chemicals, and agri products. But in those -- with regard to those commodities, AWT company is specializing in that, particularly. And PKP Cargo is trying to reach that, so increased our potential here.

As PKP Cargo, we transport some elements of the Fiat production, motorization company, between Poland and Czech Republic; and for that we need to thank the sales department.

And now, corrected financial result; and, again, Arkadiusz Olewnik.

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Arkadiusz Olewnik, PKP Cargo SA - Management Board Member, Finance [6]

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Thank you. As it was already mentioned, the economic situation has deteriorated in 2016. Some key contracts were lost in the fourth quarter of 2015, and, again, the unit price has dropped. So that was also an important element.

The operational revenues in 2016 were PLN4.411 billion, so they remained nearly the same as compared to 2015. But comparing 2015 with 2016 is not really a good idea, because it wasn't until May of 2016 that we were able to take over the AWT Group, and the results have been started to be reported at that time.

But with regard to operational revenues, we've had some correction concerning PLN138 million connected with the purchase of AWT.

The fourth quarter of 2016, the operational revenues, this declining trend has been continued, unfortunately.

But with regard to the operational expenses, that grew by -- and that was connected by some write-offs, also, external services; PLN28 million, was connected with the payroll cost. However, energy and materials cost has declined.

Now, with regard to the fourth quarter, we can actually clearly see that the cost discipline has been maintained. And we wanted to show you that we have our costs under control. So the drop year by year is 14%, this is PLN1.134 billion; and this is much higher than the drop connected with the operational revenues.

EBITDA. 2016 EBITDA was PLN562 million, minus 12% year on year. And in the fourth quarter, the EBITDA was [PLN216 million], and that is 129% more as compared to 2015 year.

I've already presented to you the results, yearly and quarterly results.

Operational cost dropped down by PLN103 million. Additional revenues were recorded. It was connected with the updated calculation of the shares in AWT company.

Ladies and gentlemen, with regard to the cost optimization, we've been announcing that since the beginning of the year. At the beginning of the year, we've appointed a team, headed by Jaroslaw Klasa. And the highest cost was available in his department, so maintenance and [exploitation] department. They cooperated tightly with the finance department.

And with regard to the finance department, headed by Arkadiusz Olewnik, we've rebuilt our -- the market's trust by a very transparent communication.

Last year, we had regular meetings with our investors, both in Poland and international investors, and the share price has grew, so the value for the shareholders grew. And cost optimization included also expanded analysis of the debt, very rigorous control of all costs. And, as an effect of the optimization, we've improved our result that we've projected.

I don't know if you remember, but in May we've been projecting a result that would be PLN100 million less than we actually have earned. The finance and sales department have actually produced a new calculation system, and we have a better effect in terms of the offers that we prepare.

With regard to accounting, purely accounting, we've signed a contract to create a tax capital group that would cover the coming three years. All companies of our Group are part of this contract, PKP Cargo Group. PKP Cargo is a dominating entity here. So, thank you.

Yet another slide, AWT contribution. In order to clear the situation, in order to actually move away to clear the situation, the second and third group, first, the EBITDA for PKP Cargo excluding AWT, so AWT was on positive side. But this is connected with the price of the optional shares.

But the fourth quarter is showing you what is happening in the Group, what's the impact of AWT on PKP Cargo, and just the PKP Cargo. EBITDA Cargo, this is PLN195 million, this is PLN100 million more than 2015; and PLN44 million result. This is the net result. This is higher as compared to the previous year as well.

Now, the CapEx in 2016. CapEx, on yearly basis, they are growing by 17%, and that spreads unevenly between the investment constructions and components. But at the purchase and modernization of locomotives and wagons this is 165% of the growth. This is the purchase of Vectron locomotives. The whole growth, 17% growth, that covers most of the investment; it was actually spent on the investment connected with the rolling stock.

Maciej has mentioned that our rolling [stone] is growing old, so we need investment there, maintenance. We need CapEx there. This involves direct purchases of new rolling stock, but also some modernization of the old carriages and locomotives.

Every rolling stock, upon the end of the period, is running very specialized service in terms of security, in terms of standards that are in force, and given rolling stock is qualified,-is verified in terms of being able to go on the tracks.

Everything is planned. We are talking about various cycles, for instance, six years long. But in terms of carriages and locomotives, four-to-eight years period. But in terms of modernization of locomotives and carriages, PLN475 million. But it is also about the purchases of commodities, of material servers, software, around PLN20 million, and others.

As the CEO has mentioned, we are facing really huge challenge in terms of CapEx, but it is also connected with the maintenance cycles, P3 to P5.

We also need to mention that Jaroslaw Klasa is a very humble man. But we need to actually highlight the fact that all the good sales moments wouldn't happen if not his employees, his department, the maintenance and exploitation department. The end stations in Germany has been launched, so Rheinhausen, Nuremberg, and Hamburg.

We need to mention new transport of the commodities, of the stone sent to the biggest power stations. We've developed EKL IT system that supports the process of transportation. This is a very important thing for Mr. Klasa.

The declining consumption of fuels, this is important to mention. We need to mention the service as well; but also, promotion and marketing. So the supporting additional trains, part of the [youth] days last year.

And, actually, the security additions in terms of protecting the rail tracks; this is the responsibility of PKP Cargo. Our locomotives are actually waiting for the trains that may actually breakdown somewhere in the middle of Poland and it is up to us to make sure that the tracks are still open, that can be driven on.

Last year, we signed a collaboration concerning the culture of security in the rail transport. PKP Cargo has been always promoting this field, has been always focusing on that.

Today, we've already had some discussions about what to do with the oldest rolling stock. We would like to utilize part of that rolling stock. And we are talking about this part of the rolling stock that fails to meet any security requests, security obligations.

Of course, we realize that there are some transport companies in Poland that are trying to use the equipment that is not available, that should not be on tracks, but we hope that PKP Cargo will never do that.

Now, back to the financials, back to the affairs connected with the finance department, there is quite a lot of good things to say here.

We are implementing new systems for calculating liabilities and debts, and we base on the international provisions, international loss. And in 95%, we've grown automatic, and we've used our office for that. It was quite well-known company, this is [CBR] in [Bedkosht]. Again, this office is under (inaudible) supervision.

With regard to corrected operational costs, they were over PLN4 billion; and it was higher by PLN187 million as compared to the previous year. Again, the AWT contribution is important here. But there were also some other factors: amortization, so higher amortization of CapEx, and lower consumption of energy and fuels by PLN27 million.

External services grew; again, AWT contribution.

Now, the cost payroll, in general, they are PLN22 million lower year on year.

Consolidated operational cost, fourth quarter, they are lower by PLN179 million (sic - see slide 20, "PLN178 million") year on year. The cost of amortization is higher, only by PLN19 million; materials and energy, PLN25 million; external services and payroll [PLN90 million].

Now, moving on to the financing structure, first of all, you can clearly see that the debt has grew. Why? We've been talking about the CapEx, about the modernization programs, repair programs, and a significant investment that will happen during the coming two or three years. We will definitely secure the funds for that. But also, for the general objectives of the Group, this will actually remain a mystery as for now.

You can see that we have new cash (technical difficulty). We've decided to use a loan that was available by the end of 2016. And the conditions here were really good, and the CEO has mentioned that already. So we've decided that the conditions were so much better in the previous period, as compared to the future situation, that we've decided to use that opportunity and draw up the loan.

At the moment, we have the three-to-six month long bank savings accounts, and this money will be used for the investment purposes.

And now, you need to notice that the debt structure has improved so that long-term debt is 79% of debt, as compared to 72% in 2015.

In 2016, in total, we've used PLN1,005 million loans. And in 2016, we've paid loans amounting to PLN351 million; in 2015, it was PLN305 million.

And now, the cash flow, this is plus PLN475 million; and the main factor behind that, PLN664 million.

The financial cash flows, some changes here, as compared to 2015. Well, the cash flow includes PDO of the second tranche, so this is the PLN48 million for the PDO, the first one and the second one. So the investment, minus PLN54 million. This is the change, PLN569 million minus in 2015.

And I'd like to highlight here that our flagship project, investment project that we've implemented last year, this is the purchase of Vectron. 12 locomotives were bought, and it cost us about PLN200 million. So, thank you.

And we still need to mention the fact that we've kept the good situation up to the contracts that we've signed, despite the difficult situation.

And some of the deteriorated results were connected with the fact that 1.5 years ago we've lost some tenders; so, Tauron, PLN2 million; also, Opole power plant, about PLN2 million; PGNiG Termika, again, about PLN2 million. And this is what we can actually win again this year, and this is our objective this year.

But despite that fact, I believe that we did quite well. We've introduced some special security accounting that was connected with the exchange rates, We've secured financials for -- finances for the key investments, now using the money from -- that came with the loans, 2016 loans. And with -- thanks to that, our financing costs will be lower by 50%, as compared to the loans that are offered this year. So the margin here can be 3%, 4% higher than in the previous ones. So, thank you.

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Grzegorz Fingas, PKP Cargo SA - Member of the Board, Commercial [7]

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Ladies and gentlemen, so our perspectives for -- outlook for 2017. We would like to highlight the fact that we've already started. In the fourth quarter of 2016, well, the situation has improved there. And to -- throughout the past year we've been observing the development of the infrastructural investments, and we've heard that in 2017 they will be -- the investments will be implemented.

And 5% to 10% growth in aggregates up to 2020; PLN107 million for structure -- infrastructural investments. It all translates to 1,700 kilometres of roads and motorways up to 2020. It gives us quite a lot of hope and optimism in terms of the future, yes, but especially with regard to 2017.

Our bigger segments, so hard coal, our intermodal, we will go back to the concept of energy security, based on the hard coal. That will give us quite a lot of optimism in terms of how we perceive our transport, our operations connected with that commodity.

The situation that was mentioned before, the bankruptcy of OKD, year on year, as a result, 1.5 million tons of coal in 2016. And in the future years, naturally, the production of the coal will decrease, so our partners are trying to find their own markets.

The intermodal, that is important for us, development of Polish seaports, terminals, EU regulations, projects connected with the fees for the road transportation that will be -- may be implemented in Polish market. I believe that this is a very positive outlook for development in this segment.

I'd like to highlight that, again, that in the fourth quarter we've seen some signals for the growing market, rail market in Poland. It hasn't ended in December 2016.

In January, as provided by the Central Statistical Office data, our share has grew in January, so 56% in terms of operations and 44% in terms of waste that was transported. This perspective seems to be quite friendly for the PKP Cargo.

So the operations have grew by 11%, so we are quite optimistic about the future. So, thank you.

Ladies and gentlemen, now, we need to ask ourself the question if we were able to achieve that without our employees. Of course not.

Our employees has been authorized to have their own member of the Board, and last year Zenon Kozendra has been appointed to represent staff affairs. I need to say that I was quite happy about it, simply because Zenon Kozendra has been working with me in the Board 10 years ago; and, at that time, that was the member of the Board that I could count on him completely.

Today, we have this rule that everyone on board, and this is how we work. And the answer from our employees was positive, from the trade unions was positive.

Despite the fact that the employers don't really like the trade unions, in our Company last year was quite successful. Our cooperation with the trade unions was very successful. Our employees, our trade unions were participating in the process of changes in the companies. They were actually strongly participating in that intensively and positively. They were cooperating with the department that are responsible for the cost success.

And now, the floor goes to Mr. Kozendra.

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Zenon Kozendra, PKP Cargo SA - Management Board Member, Employees [8]

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Thank you. I'd like to say that when the CEO became the CEO of our Company he said that he would like to run the Company responsibly, talking according to a dialog with the employees. And I'm very happy to be member of the Board, and support the Board and the CEO in implementing this role.

As the CEO has mentioned, that we've decided to follow this rule, d'Artagnan's full rule, one for all, all for one. So we support each other on a daily basis.

The CEO has mentioned the changes that were implemented by the employees' department, the payroll department that was connected with the management structure, that was quite an effort, or the change of the conflict that we had with the employees.

We've also changed the salaries for the key management personnel. We've changed the objectives of managing, according to goals; and we've implemented sub-HR, connected with the employee support. And this year, we will also follow the role of the partner dialog with our employees.

And I'd like to highlight the term partner, partnership, because this is the dialog that we want to have. And this sort of dialog, in this sort of dialog both parties are responsible for what they establish, what they set forth. And both parties to the dialog declare that the basis for the dialog is to ensure economical stability of the Company in a good perspective for development. And this is the dialog that we've decided to have with our trade unions, and this is what will happen in 2017 as well.

We have also implemented a socially responsible business role. And we want to be responsible company; responsible in terms of our stakeholders, our employees, our contractors, and also natural environment, nature.

PKP Cargo is meeting all the requirements connected with nature's protection. We will be implementing new things in this field, and we will be informing you about that.

We are fully aware of the fact that -- fully aware of how important it is to communicate with our employees. We are convinced that the employees who understand the Company's objectives, who are able to identify with the goals guarantee us success and development. So, as a Board, we focus on informing the employees about the direction of the Company in order to be able to face all the chances, but also challenges, that are ahead of us. Thank you.

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Unidentified Company Representative [9]

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I'd like to, once again, highlight that Zenon Kozendra is supporting today all of the members of the Board; and recently, we could see it in terms of trade. He is also working supporting the cost efforts, and so on.

With regard to the key development areas that we are showing you in 2017, of course, we will continue focusing on the new Silk Road and the preparation of the rolling stone -- stock for the intensification, for the peak period, so the ABC transport, so Baltic, Adriatic, and Black Sea, so the dialog with our employees, as we've mentioned.

The Board has appointed a team for preparing changes to the contract that we've signed with the employees, and, fingers crossed. But everything points out that we will have a chance to new agreements to be signed with the trade unions.

For the trade unions, it may not be really so nice. Because one of the leaders said that it is really difficult for them to leave with that, because the strike tools are getting rusted, because they are unable to actually check [how it] works, and strike, or whatever gathering, and in a moment it'll be looking for a pretext because they can't really go on without protesting at all. But, hopefully, up until now, we've been managing to do that.

In terms of the promotions that we've implemented last year, the most important thing was the organization of the meeting between the presidents of Poland and China in our terminal, in Warsaw Praga. And everybody realized that, that was the first of that sort of meeting organized in PKP Cargo.

And during that meeting, during which we've showed a new Chinese brand that is supposed to present new China Railway Express, we hosted two presidents, of course; but members of the Council of Ministers, Chinese and Polish, headed by our Minister, Andrzej Adamczyk, Minister of Infrastructure.

That was a very important event also, because of the faults, because everything has been worked out brilliantly. So everything was just set up by centimeter, by millimeter.

But a thing that happened, and the President of China has actually tried the Polish apple. And it wasn't supposed to happen. As you could see, we had several containers of apples and it was just seconds when they were distributed among the Chinese delegation. But, as an effect, the Chinese part was hugely interested in our apples. But we are talking about 20 or so provinces in China. They are not really big provinces, about roughly 100 million citizens each.

So this is what we are wishing, the greatest success to our producers. The fact that we are promoting Polish apples, that positively influences other industries in Poland, mainly the food industry.

Now, we know that in China the dairy industry is performing really well, and the Brie cheese, that [Turag], costs PLN5, but in China it costs EUR12. So I believe that this is a very interesting subject to work on.

In addition to that, the poultry producers in Poland are interested in cooperation. Those subjects are really interesting to them.

And, of course, our other producers are turning to us; for instance, [KGHM], they actually want to transport everything by trains. And there are quite a lot of opportunities there. For instance, Chinese one has to transport important luxury cars to us.

So things are happening, really. The rail companies are cooperating with each other. Poland was one of the founders of the rail organization in Paris, and all the rail companies in the various countries have been cooperating for years. Today, we have the head of our international operations who is cooperating really tightly with representatives of all rail companies. And this is a very safe transport way.

What else has happened? We've changed the visual identification of the Company; we've moved back to the traditional colors. We know that we were proposed a red color, that is a victory color, color associated with leaders and victories, but our employees identified as the colors of Deutsche Bahn [RED], our neighbors. We want to have our own colors, so we moved back to our original colors. That was welcomed really well by our staff.

With regard to some anniversary, we've had a lot of meetings during the third quarter last year with the staff. That helped us to integrate the staff, because most of our employees took part in those meetings. So we've used it for the purpose of the integration.

We've improved, also, the communication. In terms of social media, we were more effective in terms of communicating information. The negative publications about PKP Cargo dropped significantly, down to 1.3%, so that shows you that we were quite successful here.

These are the areas, the fields that we don't tend to remember about on daily basis. But we need to remember the fact that we've been working very hard to limit the number of cases that are run, processed. We've been successful there, and that translates directly to the costs connected with. For instance, we've started to give salaries for effect. So, for instance -- and we believe that it can be financially beneficial for the Company.

These are just some examples out of hundreds of those measures that we've implemented.

Thank you so much. And now, time for questions.

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Questions and Answers

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Unidentified Company Representative [1]

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Ladies and gentlemen, please ask your questions: one, two, three.

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Unidentified Audience Member [2]

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PKO BP. I'm talking about CapEx, because it was mentioned that CapEx will be higher this year, so what can we expect?

And the second question is about the salaries. Can we expect that the average salary will be maintained?

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Unidentified Company Representative [3]

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I'll start with the second question. With regard to our negotiations with the trade unions, I want Zenon Kozendra to actually talk about that. But Mr. Klasa will follow. Thank you.

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Unidentified Company Representative [4]

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Well, the rail has been a business that should be sorted out. So this is what is happening in PKP Cargo, everything has been sorted.

In the employee guarantee pact that was signed by PKP Cargo and trade unions, that pact covers the remuneration policy. It sets forth some rules, upon which the remuneration salaries can be increased. And it says that the growth and the roles will be negotiated with the trade unions.

The key sentence is what we've decided upon together. Yearly growth of remunerations will depend on the result, on the performance of the Company. And I believe that our negotiations with the trade unions will be carried in a very responsible way with that fundament in mind.

The fundamental thing is the economical stability of the Company, perspectives for the growth, for the development, and the stability of work and salaries, but always together. So this is what I can tell you today.

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Unidentified Audience Member [5]

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Are we talking about some levels?

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Unidentified Company Representative [6]

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Well, since I quoted it, this is how it says.

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Unidentified Audience Member [7]

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So there are now some quantified provisions, right?

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Unidentified Company Representative [8]

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Well, the pact is open, has been published. You can find it online. This is paragraph 5 of the pact, employee guarantees pact, so this is September 2, 2016.

Ladies and gentlemen, concerning the investment, this is a natural thing for the Company to invest in all aspects that help us, that assist us in our reliable business; that help us to deliver good services to the Company; meeting the needs of our customers.

Now, in terms of financials, shortly, we are not higher than 15%; we are not going beyond 15% of our revenue.

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Cezary Bernatek, Haitong Bank - Analyst [9]

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Cezary Bernatek, Haitong Bank, three questions. The first one is about the solution of the conflict that you had with the employees. Total cost, what was the total cost?

And now, a bit a commentary concerning the noise directive. Is there any problem there? Could you update us on that subject?

And the third subject, concerning the message about the annex, the loan contract with BGK. It was mentioning some potential takeover, so how does that work in terms of cost this year?

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Unidentified Company Representative [10]

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(With regard to the first subject, the conflict that we had, the agreement that we signed with our employees, there were no raises there. It was discussed with our employees and trade unions. They were aware of the fact that with this financial situation that was in the Company.

When I was leaving the Company I left PLN800 million in 2008, and when I came back they were billons of zloty in debt. So everyone was aware of that, since we were honest about it. So everyone was aware of what we -- if we are able to do -- give anything then it will be credited.

And the same was with the bonuses. When we've offered that we can actually give some bonuses out of credit, out of loan the trade unions asked us why give it at all. I've answered because we need to give our employees something, because it's been already 1.5 years that they haven't really received anything. But that was just a friendly gesture. We can't really account that as cost; it was just a symbol, a gesture.

Now, about BGK, can you help me here? Two words only. Can we actually hear the question again?

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Cezary Bernatek, Haitong Bank - Analyst [11]

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In this message that you have published, that the money that will be used from this opportunity, which was prolonged on to 2017, that they can be really used on some facilities. But there was a takeover mentioned.

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Unidentified Company Representative [12]

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Well, I've already said it, investment and general purposes. And I will not be explaining the general purposes as of yet.

Now, about the noise directive, you realize that it may be costly for us, and that we would be talking about billions, not millions. And this is a huge problem for us.

And the whole Board has been participating in this. We've introduced the subject to our members of the European Parliament, and also our embassy in Brussels. Everyone was working there, was sparing no effort there.

So we've talked with all the factions in the European Parliament. We've showed what is the [absurd] of this thinking about noise. And Brussels shows that as the ecological activity, but we showed that this will be beneficial to the road transport again.

Again, it seems that we've been understood. None of the clubs have been against our proposal. So we showed that the noise problem is a bigger problem in other countries than in Poland.

In Poland, we have 120 people per square meter. And the problem is completely different on the border between Belgium, the Netherlands, and Germany, where the density is about 400 people per square meter. And it's a fact that the trains there are traveling through the back yards and the noise is really important there, is a problem there.

However, PKP Cargo, one-fourth of the trains of PKP Cargo, we had the wheels that can be fitted with some special noise blockages. Will the situation improve? Well, I don't think so. The noise will still be there, and most of you would not really notice whether this is the iron or composite wheel.

Another problem is the fact that we are transporting commodities in winter, just as Scandinavian countries. And both us and Scandinavian countries highlight the fact that during the wintertime the composite is less safe.

And I've said it several times that, from our perspective, it would be much cheaper, even if PKP Cargo pays for it, to introduce some noise screens, for instance in Warsaw, in Gdansk, in Cieszyn, or in the south of Poland. Well, there are not too many places in Poland where the noise is really so annoying, but the cost of several billions can be quite significant.

But because of the fact that we are actually replacing one-fourth of our trains based on monoblock wheels, with time passing we can actually adjust to the situation. But the question is the time. What is the time we are talking about? Mid-2020s and mid-2030s. That could be quite okay.

But, of course, our strategy is to actually reject it completely and leave it up to the country. So if Germany has to do it, we will send the silent-wheel trains to Germany.

Again, how are the competitors fitting into the situation? We are supposed to introduce monoblock wheels, from the technical point of view, but it -- so it is also about the price about the technology that is used to produce it.

Should we use the monoblock wheels that are used by Germans, not by Scandinavians? They are 30% more expensive. But if we use the Scandinavian wheels then the Germans will not let us in. And this is to show you how the business is working, and how it can be used. And from other point of view, it is not good for anything, it is not useful at all.

The traditional wheels that are produced in Poland, in our opinion, that was not the main reason for the accident that happened in 1970s in Germany when they started to change the wheels. We have really good experience with our wheels. But it's not up to us exactly.

So, thank you so much. And now, again, another question.

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Unidentified Company Representative [13]

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Please don't tell me that we have explained everything. I have thirty pages of successes. Because if you fail to ask questions, I'll be really tormenting you with all the successes.

I'd like to mention one more thing, because we haven't talked about it; we have talked about it with the journalists. Now, this is the question how serious we are about the things that we say and about the fact that we are trying to implement everything that we say.

The example here would be our payroll, our salaries. You know how they are. You know that our Company is -- has a minority; is, in minority, controlled by the State. So we are not under the chimney bill. But you know that we are trying to limit the costs.

We've also cut the costs of the Board, this is half of what you can see, where we've adjusted to the chimney bill. We have done it without the Supervisory Board's request, without the General Meeting. So we've done it individually, independently. We've done it through two regulations, last year and this year.

We've adjusted the salary to the chimney bill, and this is how that works. This is an element of our co-operation with the employees, with that we are treating our agreement very seriously. So thank you. Thank you so much.

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Unidentified Audience Member [14]

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Just one question. I believe that, as of the beginning of 2017, AWT shareholder can execute the option. And if you have 100% of shares, is there any chance for [restructurization], for improving the performance of the business?

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Unidentified Company Representative [15]

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Of course, it is possible. But if the Cargo wants to be as effective as AWT we would have to employ 11,000, 12,000 people, not 17,000 people. And there is also -- it's always possible.

But they are immensely effective; we try to learn from them. And, well, we are sure of the fact that the business in Czech Republic should be done with the assistance of Czechs, of Czech people.

And the Czech people believe that Poland is a bit bigger country than their country, and it may be a bit overwhelming, but they prefer to do business with us than with even bigger countries. If they have a choice, they prefer us.

Even though they prefer to do business with us they still feel that we are much bigger than them, and that we can be a potential threat to them. Therefore, we need to be very cautious there. So our representatives in the Czech Republic are so few, so we are trying not to intervene too much with the business; but our representatives are there in order to get those Czech experience and, actually, translate it to Polish Company.

AWT is capitalistic company and everyone understands that if the revenues are dropping next day we are letting people go. And here in Poland, if we let people go at all it takes one year of negotiations. So we can't really compare our companies, the Polish and the Czech company.

But it's not only about the lay-offs, because maybe this is the worst example of the rationalization of the cost, but we are talking about everyday functioning.

In Czech Republic, as I say, normal thing to be multi-professional, which is proposed to be introduced in Poland. So nobody there is sticking to being only a, for instance, HR specialist, or accountant. If there is a need then they just move between offices, and they do the things that they are to do.

In Poland, this is a bigger problem, and we need to be much more convincing to actually convince people to do something else than they've done for the whole of their life. And sometimes the problem is sometimes for the employee to move from an office to office and do the same things, even without changing their desk. And it may be also a problem for such employee, because they've been in this office for 20 years and they don't really want to move.

And this is what we are trying to learn from AWT; and we hope that we are doing that successfully, although we still have a lot of work to do. So, thank you so much.

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Unidentified Company Representative [16]

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Since there are no further questions, thank you so much for joining us today.

And we would like to invite you to the results conference at the end of May, that will cover the first quarter of 2017. And now, a time for more discussions and conversations.

So, thank you. Thank you for joining us today.

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Editor [17]

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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.