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PKP CARGO
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explore Annual Report 2016

Maciej Libiszewski

Maciej Libiszewski

CEO

Letter to Stakeholder

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Dear Investors!
It is my honor to convey to you the PKP Cargo Group’s 2016 Annual Report. I am particularly pleased because our market share has been steadily rising since April, namely from the time when the new Management Board took over the helm in the Company. Our value and competitiveness at home and internationally have also been growing.

PKP CARGO is a dynamic brand with extensive growth potential. You will find the undeniable proof of that statement in this Annual Report and our results presented in it. As the saying goes: Getting to know others and getting to know yourself is tantamount to victory without risk. Getting to know the environment and getting to know the situation at hand leads to total victory. I am convinced that the Annual Report we present to you here will serve as the best confirmation of the fact that we know not just ourselves but also our business environment and the market context.

Therefore, we can say that the success we have achieved is in fact total victory. The publication we are conveying to you also forms the best record of the hard work done with integrity by the more than 23 thousand employees of our group. They are the ones who on a daily basis are building our position as the unchallenged leader among domestic freight operators and as one of the largest in Europe.

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Last year the PKP CARGO Group transported more than 111,5 million tons of freight and handled freight turnover to the tune of 28.5 billion tkm. At the same time, our market share measured by freight turnover was 51.6%. Five entities in our group handled that freight: PKP CARGO, PKP CARGO SERVICE and three operators in the AWT Group owned by PKP CARGO and operating in the Czech Republic, Slovakia and Hungary. The PKP CARGO Cargo’s sales revenues were PLN 4,411 million while our EBITDA was PLN 562 million.

Our return to area management was an undoubtable success achieved in the most recent months. We cut out the level of managing directors from our organizational structure and we empowered our unit directors to a greater extent, thereby conferring greater powers to them in the measures they take. At the same time, we extended their accountability for results. Material changes have transpired in the Group and they have contributed to enhancing our collaboration with clients. We introduced a new sales model and we continue to expand our commercial structures aligned to the top standards for rendering comprehensive freight services. We are doing all this to be closer to our clients and to react to their needs and expectations more rapidly. Because of these efforts, we have been able to energize our commercial departments and we have won several important contracts.

The fact that despite the extremely challenging market environment we have stemmed the decline in the number of transports and we have reversed this adverse trend is something that deserves mention. „A person who gives up – never wins, while a winner – never gives up”. We want to win, and we are capable of winning. That is precisely why the PKP Cargo Group’s market share is steadily growing from month to month and I am convinced that we have not yet said the last word. Challenging macroeconomic conditions indubitably affected our results, though the circumstances in various cargo categories vary. The company diversified its sources of revenue by expanding, among others, intermodal and international transport. This business segment has gained strength recently with an additional growth impulse being generated by the New Silk Road and rail container transport from China to Europe. The PKP CARGO Group understands this trend and is taking great advantage of it, thereby becoming the unchallenged leader in this type of transport in Poland while becoming an ever more important player in Europe. The PKP CARGO Group’s freight turnover outside Poland increased by 55% yoy and intermodal transport measured by weight increased by 25% yoy. Here I would like to highlight that the visit paid to PKP CARGO Group’s intermodal terminal in Warsaw by the Presidents of Poland and China was an extraordinarily important event last year. During this meeting, the rail connection on the route from China to Europe under the brand of China Railway Express was opened symbolically and we are playing one of the leading roles in this project. We are presently already handling tens of train pairs per week on the New Silk Road and we hope that thanks to the agreements we signed and the contracts we executed with our Chinese partners this number will steadily grow in short order. I am convinced that this collaboration has great prospects, not just for our Company but for the overall Polish economy. We are also counting on Polish food exports to China to grow soon, thereby significantly driving up the amount of transport we handle.

We are steadfastly growing our market share in international transport. In Germany we launched our own shipping company to enable us to tap into the potential offered by western European markets better. In addition, we are looking for partners abroad to utilize our rolling stock outside Poland and on longer hauls more effectively. We are engaged in talks to extend collaboration with countries along the Adriatic Sea, the Baltic Sea and the Black Sea. Through our strategic cooperation with the AWT Group, we have become one of the key operators in the Czech Republic.

2016 was also a year in which we won tenders. Among others, we signed a longterm agreement with the Azoty Group and a coal supply contract to Enea’s power plant in Kozienice. An important action we took was to announce the end of the price war that had brought operators to their knees. Freight rates in the most recent contracts are markedly higher than in previous corresponding contracts.

Renewing our rolling stock should also be appended to the list of objectives attained during the most recent twelve months. Whenever it is economically viable, we will continue to modernize our rolling stock as regular revitalization makes our offer more attractive. Additionally, we are taking receipt of the next multisystem locomotives we purchased to handle cross-border connections. We are also running proceedings to buy new specialist wagons.

I would also like to stress emphatically that a dynamic and successful company consists chiefly of people who every day, through their hard work, build its value and future. The success PKP CARGO can brag about would not have been possible without the staff’s hard work and enormous commitment. I am glad that in w 2016 the Management Board and employees demonstrated that they want to do their best together to ensure the company’s future. That is why I have no doubts that to this year’s most important achievements one should add the understanding reached with the trade unions. In that way, we have returned to the path of dialogue; this always makes it possible to strike a compromise and it leads to social rest. Employees expect that and that also lies in the interest of every company and its shareholders.

After having depicted the PKP Cargo Group’s most important events and accomplishments during the past year, there is nothing else left for me to do other than to assert boldly that we are a company with enormous growth potential. A company of which our shareholders, Management Board and employees can be proud. I am convinced that in 2017 we will once again manage to attain our ambitious objectives, and we have many of them before us. Keeping our Group on its growth path is merely one of them. I believe that we will raise our market share from month to month not only in terms of domestic transport but also across Europe. The projected economic growth is a grand opportunity for us. PKP CARGO is one of our national champions, a company of no small consequence for the Polish economy. We are strong because of its strength. For that reason, we may gaze into the future with optimism. The more vibrant the economy, the more large-scale infrastructural projects; the stronger industry is, the more freight there will be for us to transport. As PKP CARGO we are well-poised and ready to take advantage of that opportunity. I am glad that our shareholders appreciate that fact, with the best proof being our share price, which is constantly on the rise. Their trust and the trust given by investors in this challenging year served as an additional incentive to continue working hard. I am convinced that in a year from now our satisfaction will be even more pronounced. Henry Ford used to say: „Businesses that grow by development and improvement do not die. But when a business ceases to be creative, when it believes it has reached perfection and needs to do nothing but produce – it is done.” Today, I can assure you that PKP CARGO is a company that does not intend to be static; it wants to grow and it has an appetite to do more.

Respectfully,

Maciej Libiszewski

Engine of Polish growth

Mission

We strive to design optimum logistic solutions for business users by blending our unparalleled skills, heritage and focus on growth to create genuine synergy. By contributing to our clients’ success, we steadily grow PKP CARGO’s shareholder value in a socially and environmentally sustainable manner.

Business values

Responsibility
Responsibility

We generate economic value for our clients and we take responsibility for the outcomes of what we do. We respect our partners and shareholders, the environment and the local communities in which we operate.

Knowledge
Knowledge

We run our business with both feet on the ground while seeking to interconnect various industrial sectors. We are well-aware of the critical contribution we make in developing the economy. We fully leverage our experience and tradition, thereby offering certainty of execution in even the most complex logistic chains.

Development
Development

We relentlessly look for modern solutions. By tapping into the synergy inherent in our skills and resources, we open logistic gateways to Europe, thereby offering our clients more diverse market opportunities.

Flexibility
Flexibility

We are ubiquitous. Our unrivalled skills and resources give us the ability to react rapidly and suitably to changes in real time.

Energy
Energy

Energy is the driving force behind growth. By striving to excel, we are open to new opportunities while preserving harmony between balance and rapid growth.

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Business model

Clients
Power plants

Power plants

Coal mines

Coal mines

Steel mills

Steel mills

Oil industry

Oil industry

Aggregates producers

Aggregates producers

Resources
Rolling stock

Rolling stock

Terminals

Terminals

Human capital

Human capital

Key suppliers
Rail infrastructure

Rail infrastructure

Diesel fuel

Diesel fuel

Traction energy

Traction energy

Strategy for 2016-2020

Strategy for 2016-2020

Structure of the group

Structure of the group
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Companies controlled directly by PKP CARGO S.A.
Companies controlled indirectly by PKP CARGO S.A.
Companies jointly controlled by (i) companies controlled directly by PKP CARGO S.A. or (ii) by the PKP CARGO Group
Companies in which PKP CARGO S.A. or companies controlled directly by PKP CARGO S.A. hold a minority stake of less than 50% but not less than 20%
Companies in which PKP CARGO S.A. or companies controlled directly by PKP CARGO S.A. hold a minority stake of less than 20%
Companies registered only in RHB (and not transferred to KRS) in which companies controlled directly by PKP CARGO S.A. hold a minority stake of less than 20%
*both PKP CARGO S.A. and one of the companies controlled directly by PKP CARGO S.A. - PKP CARGO CONNECT sp. z o.o. hold shares in POL-RAIL s.r.l. with its registered office in Rome in such a manner that in total these two entities belonging to the PKP CARGO Group hold a 50% equity stake in the share capital of POL-RAIL s.r.l.

Management Board

Maciej Libiszewski

Maciej Libiszewski

President of the Management Board

Mr. Maciej Andrzej Libiszewski is a lawyer by education. He graduated from the Faculty of Law and Administration at the Gdańsk University and then completed Polish-German Finance, Management and Marketing Studies. He has experience in top executive positions with a good track record of managing interdisciplinary teams and running complex projects. Experienced negotiator who successfully signed agreements ending numerous disputes with trade unions. He has written restructuring and optimization programs for the financial area of commercial law companies. Ran his own business and subsequently worked for transport-related companies. He served on many supervisory boards and management boards of state, local government and privately-owned capital companies (also as a supervisory board member and a management board member of PKP CARGO S.A. from 2005 to 2008). His professional career from 2001 through 2015 was focused on the transport sector. He speaks English, French, German and Russian. He passed an examination for supervisory board member candidates in State Treasury-owned companies.

Grzegorz Fingas

Grzegorz Fingas

Management Board Member in charge of Commerce

Mr. Grzegorz Fingas is a manager with many years of experience in building trade strategy and managing sales teams, associated with the PKP CARGO Group since 2008.

From May 2008, he discharged the function of Director of the PKP CARGO S.A. Trade Department and in the period 2010 – 2013 he was a Member of the Management Board of PKP CARGO International a.s. with its registered office in Bratislava. From the beginning of his professional career in 1988, Mr. Grzegorz Fingas discharged, among others, the following functions: Director of the Marketing Department of BOT Górnictwo i Energetyka S.A. in Łódź (2005-2008) and sub-department manager in the Statistical Office in Katowice (2002-2006). In 2003, Mr. Grzegorz Fingas graduated from MA studies at the Economics and Philology Faculty of the School of Marketing Management and Foreign Languages in Katowice, specializing in Marketing Management and, in 2012, MBA studies at the Gdańsk Foundation for Management Development. In 2010 – 2014 he discharged the function of Member of the Supervisory Board of Zakład Przewozu i Spedycji “Spedkoks” Sp. z o.o. with its registered office in Dąbrowa Górnicza.

Arkadiusz Olewnik

Arkadiusz Olewnik

Management Board Member in charge of Finance

Mr. Arkadiusz Olewnik has been associated with PKP CARGO S.A. since March 2016. He discharged the function of Director of the Financial Controlling and Investor Relations Department.

In 2013 – 2016 he discharged the function of infrastructure market expert, carrying out, among others, a financial audit in Koleje Śląskie Sp. z o.o. or rail infrastructure audit in Kopalnia Węgla Brunatnego Konin in Kleczew.

Mr. Arkadiusz Olewnik has many years of experience in management positions in companies from the railway industry. In 2005-2012 he discharged, among others, the following functions: Management Board Member – CFO in Koleje Mazowieckie Sp. z o.o. (2009-2012), Management Board Proxy for Investments in POC Dipservice (currently Polski Holding Nieruchomości S.A.) (2008 – 2009) and Management Board Member – Privatization and Corporate Governance Director in PKP S.A. (2005 – 2008). In the period 2005-2008, he also was the Chairman of the Supervisory Board of PKP CARGO S.A. and Member of the Trade Trans S.A. Supervisory Board. Earlier on, in 1994-2005, Mr. Olewnik discharged medium-level managerial functions. Mr. Arkadiusz Olewnik is a graduate of the Production Economics Faculty of the Warsaw School of Economics (SGH).

Jarosław Klasa

Jarosław Klasa

Management Board Member in charge of Operations

Mr. Jarosław Klasa has been associated with PKP CARGO S.A. since 1985 where, having completed the railway secondary school in Bydgoszcz, he started his work on lower levels of the Company’s operations division, exerting influence on optimization of the strategic areas of its activities. Then he discharged, among others, the functions of ICT Department Director (2010-2014 and 2016), Deputy ICT Department Director (2009-2010) and Manager of the Data Transmission Sub-Department (2008-2009).

In 2014-2015, Mr. Klasa was an Advisor to the Management Board of PKP Informatyka Sp. z o.o., and in 2015-2016 Director of the Systems Operations Department in PKP Informatyka Sp. z o.o. Mr. Jarosław Klasa graduated from the Mechanical Faculty of the Koszalin University of Technology. In 2013, he obtained the MBA title from the Gdańsk Foundation for Management Development.

Zenon Kozendra

Zenon Kozendra

Management Board Member – Employee Representative

Mr. Zenon Kozendra is a graduate of the Higher School of Public Administration in Kielce. He completed postgraduate studies in the organization of management at the Kozminski Academy. He has been associated with PKP since 1985.

From 2005 to 2008, Zenon Kozendra was the Management Board Member responsible for Employee and Administrative Affairs and from 2008 he was the Management Board’s Plenipotentiary responsible for Personnel Strategy. Zenon Kozendra was a member of the PKP CARGO Supervisory Board from 2001 to 2005 and a Management Board Member of the Trade Union of Rail Employers from 2006 to 2008. Moreover, Zenon Kozendra sat on the supervisory boards of the following companies: - PKP CARGO SERVICE – as Chairman of the Supervisory Board in 2006-2007, - PKP CARGO WAGON Kraków – as Chairman of the Supervisory Board in 2007-2008, - PKP CARGO TABOR Karsznice – as Member of the Supervisory Board in 2010-2014, - PKP S.A. – as Member of the Supervisory Board in 2014-2016.

Successes of the past year

Major achievements of 2016

Appointments to the PKP Cargo Management Board

Strengthening the Company’s Leading Position

Strengthening the Company’s Leading Position

Restoring a Partnership-Based Social Dialog

Restoring a Partnership-Based Social Dialog

Introducing a new Sales Model

Introducing a new Sales Model

Developing  international cooperation

Developing international cooperation

Growing  shareholder Value

Growing shareholder Value

Rapid Development of Intermodal Transport

Rapid Development of Intermodal Transport

Providing Specialized Freight Transport Services

Providing Specialized Freight Transport Services

Restoring a Proved Area-Based Management Model

Restoring a Proved Area-Based Management Model

Establishing the “Wolsztyn Roundhouse” Cultural Institution

Establishing the “Wolsztyn Roundhouse” Cultural Institution

PKP CARGO under solid management

2016 events

March

May

June

July

August

September

October

November

Social reliability matters to us

PKP CARGO
Social Involvement

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2016 CSR Pillars

Huge potential of PKP CARGO GROUP

Group's enormous potential

Fleet ready for Europe
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Fleet ready for Europe

Our technical infrastructure and know-how makes us a natural first choice partner for Poland’s largest companies and global corporations operating on the Polish market. The Vectron multi-system locomotives purchased by the Company enable problem-free international operations.

Rail Freight
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Rail Freight

51,6%

Market share in Poland (freight turnover) in 2016

71,6%

Of all hard coal haulage in Poland after 9m of 2016 (freight turnover)

Top

Rail freight operator in Poland

Rolling stock resources
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Rolling stock resources

We can adapt to the situation on the market and increase the number of wagons we use by up to 15% within a short period of time; consequently, we are able to execute orders for our customers even in peak traffic. Our rolling stock allows us to operate several hundred trains every day.

Intermodal
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Intermodal

467

Thous. containers transported by PKP CARGO in 2016

5/10

Of the containers hauled by rail in the first 9 months of 2016 road with us

9%

Is the share of intermodal transport in our business (measured by PKP CARGO's freight turnover)

Terminals
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Terminals

17

transshipment terminals across the country

2

specialized logistics centers located on the border with Belarus and Ukraine

5

container terminals

Specialized logistics infrastructure
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Specialized logistics infrastructure

We have transshipment terminals in key locations of Poland: six of them are located in the vicinity of the Eastern border. Our customers have two specialized logistics centers at their disposal: Małaszewicze located near the border with Belarus and Medyka-Żurawica in the vicinity of the Ukrainian border.

Shipping
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Shipping

10

transshipment branches and terminals

8

customs agencies

Specialized transport
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Specialized transport

Our experience and rolling stock resources allow us to fulfill orders for international concerns. We are specialized transport experts: we can handle cargo of non-standard dimensions.

Security of transport
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Security of transport

The promising results and a successful track record of security of transported cargo suggest that the fleet of unmanned aerial vehicles should be enlarged. This could help in synchronizing the Company’s drones with the modern law enforcement IT systems and in using other modern technological solutions to ensure permanent monitoring of the most vulnerable railway routes.

Rail sidings
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Rail sidings

over 60 operated across the country and abroad

Rolling stock
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Rolling stock

2

Over 2 thous. locomotives

60

Over 60 thous. wagons

PKP CARGO
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PKP CARGO

We provide optimised logistics solutions for the largest companies on the Polish market. We drive the economy by the power of our potential and experience.

Building PKP CARGO Group value

Main Financial results

12 Months
Quarter 4th

Market Share

measured by freight turnover (-4.2 p.p. yoy)

51.6%

EBITDA

profitability of 12.7%

Million
PLN 562

CAPEX

Million
PLN 533

REVENUES

Million
PLN 4,411

Net profit

Million
PLN -41

OPEX

Million
PLN 4,437

Market Share

measured by freight turnover (-3.6 p.p. yoy)

52.0%

EBITDA

profitability of 18.0%

Million
PLN 216

CAPEX

Million
PLN 101

REVENUES

Million
PLN 1,197

NET PROFIT

Million
PLN 75

OPEX

Million
PLN 1,134

Ready for challenges

International operations

International operations
Pol-Rail
Pol-Rail
JV with Trenitalia
Logistics services using ferries
Logistics services using ferries
Cooperation with Swedish partners
PKP CARGO CONNECT GmbH
PKP CARGO CONNECT GmbH
Shipper dedicated to international cooperation
Terminals
Terminals
Network of intermodal and conventional terminals
New Silk Road Partner
New Silk Road Partner
Cooperation with Chinese contractors. Małaszewicze - Chinese gate to Europe
AWT rail carriers
AWT rail carriers
Rail transport in the Czech Republic, Slovakia and Hungary
Eastern railways
Eastern railways
Operational and border cooperation with eastern railways

Value growth for Stakeholders

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