We successfully steered the business through 2009, precisely because we were quick to adapt to the new business environment, taking advantage of our universal fleet of gondola cars, by migrating from affected market sectors and developing new transportation patterns more suitable for the new business climate. Our acquisition of LLC BaltTransServis (“BTS”) increased our exposure to the stable oil products and oil transportation sector, increased the stability of the business and provided a platform for growth in gondola cars. And we capitalised fully on the depressed state of the freight railcars production market, by entering into contracts for 6,000 new gondola cars and 500 new rail tank cars on very attractive terms.
Market conditions over 2009 proved to be every bit as challenging and volatile as we had expected. As the fall out of the global financial crisis spread, more and more parts of the world economy were affected, including Russia’s main industrial sectors. This inevitably had a knock on effect on Russia’s dominant freight rail sector, which transports much of the country’s output. The story of 2009 was one of sharp falls in freight volumes in the first part of the year, followed by steady recovery over the rest of the year. By December, overall monthly Freight Rail Turnover had recovered sufficiently strongly to show an 11% year on year improvement; though it was still some 12% below the levels recorded in 2007.
Against this volatile backdrop, Globaltrans produced a pleasing operational performance, outperforming the overall market both in the downturn and, again, as markets moved into the recovery phase. For the full year our Freight Rail Turnover increased by 3% against an overall market decline of 12%.
We also expanded our presence in those sectors where we have been historically strong: in the shipment of ferrous metals where our market share exceeded 14%, and in the oil products and oil sector where we achieved a 13% share of the overall volume of related cargoes transported by rail in Russia in 2009.
Although both revenues and profits fell in US Dollar terms, they both improved in Rouble terms, the Company’s functional currency, pointing to a good underlying operational performance over the period. Our key financial performance highlights are set out below:
The past year has, we believe, shown that our strategy, of maintaining a balanced railcar fleet consisting of rail tank cars and universal gondola cars, is the right one. Whilst in 2009 the oil products and oil transportation market proved to be remarkably stable, the other segments of the market experienced a severe downturn. By operating universal gondola cars rather than specialised rolling stock bound to one cargo or a single customer, we could switch capacity away from distressed segments and allocate it to healthier sectors quickly and with minimal disruption.
Our ability to switch our fleet in this way was one of the key reasons for our market outperformance in 2009. This, in turn, was only possible because of our longstanding customer relationships, our outstanding service offerings and our expertise in route management that enabled us to reconfigure our routing schemes at short notice.
In 2009 we were also focused on tight cost control. Whilst our Empty Run Costs increased because of the changes in operating and marketing environment, nevertheless we were still able to reduce Operating Cash Costs net of Empty Run Costs by USD 50.7* million. Increased Empty Runs of our fleet in 2009 were mainly a consequence of the changed macroeconomic picture in Russia. The three main factors that accounted for the change were: a drop-off in construction activity, falling imports, and the deteriorating financial position of some of our small and medium enterprise customers. Consequently, the Empty Run Ratio for gondola cars rose in the first half of 2009 to 54%, but improved significantly in the third quarter of 2009 to 40%, and averaged out over the full year at 46%. We remain committed to improving Empty Runs, both to reduce our Empty Run Costs and generate additional revenue (as railcars could spend more time travelling loaded). However we recognise that matters are not entirely in our hands, and much depends on the overall macroeconomic situation. In a further effort to cut costs we also froze the base salaries at year end 2008 levels, and continued the introduction of a mileage-based rolling stock repair and maintenance system.
Another area where we took action was to adjust the profile of borrowings in our credit portfolio. We increased the share of Rouble-denominated borrowings within the portfolio in order to mitigate the currency risk. Accordingly, the share of Rouble-denominated borrowings increased from 12% at the end of 2008 to 36% at the end of 2009, without major impact on maturity of our loan book, while the weighted average effective interest rate even decreased.
As the market stabilised and volumes began to grow in the second half of 2009, we decided the time was right to take advantage of our strong financial position and access to international capital markets, and start to identify expansion opportunities. In line with our strategy of a balanced fleet, we began to look for acquisitions in the oil products and oil transportation segment whilst, at the same time, launching negotiations to contract new railcars.
In December 2009 we completed the all-share acquisition of BTS. The acquisition was strategically important for a number of reasons. First, it added significant scale to our existing business, making Globaltrans the largest1 private owner of rail tank cars in Russia. Second, it gave us more exposure to the stable oil products transportation market which, along with low leverage of BTS, is expected to improve our capacity to finance future growth. Finally, we acquired a company whose operating model is already largely integrated into customers’ logistics processes and which has extensive experience operating “block trains2”.
To fund the acquisition of new railcars, we launched a follow-on offering on the London Stock Exchange in December 2009, successfully raising approximately USD 100 million in gross proceeds.
Utilising the momentum, we contracted 6,000 new gondola cars and 500 new rail tank cars on very favorable terms, completing the last deals in the final days of 2009. The total value of the contracted railcars amounted to around USD 260* million (excluding VAT), representing an attractive price per unit. We believe the long term outlook for the bulk cargo transportation market is excellent and it will be one of the first sectors to benefit from an economic revival. Furthermore, the major investments we made at the very beginning of the cycle should enable us to perform well when growth returns to the economy.
We have made significant progress over 2009 in a challenging environment. Although economic prospects for 2010 remain uncertain, we believe that Globaltrans is well placed to expand and take advantage of new opportunities as markets recover. We will continue to manage our business to create sustainable shareholder value, identifying and executing prospects for opportunistic growth, while at the same time focusing on our operating efficiency.
Source: extracted from Globaltrans Annual Report and Accounts for 2009. For the full version of Annual Report, please click here.
*derived from the management accounts.
1. Based on the publicly available sources.
2. Block train means a train comprising of only rolling stock operated by a single company which is bound for the same destination.
