PKP CARGO

INTEGRATED REPORT 2018

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The Group’s activity covers a wide range of services connected with rail freight transport. The Group’s revenue from rail transportation and freight forwarding services makes up 84 % of the Group’s total operating revenue. The services provided by the Group allow it to participate in the entire logistic value chain, including railway shipping, siding services, freight transport, transshipment and storage services, using the Group's terminals and reclamation services.

PKP CARGO Group Value creation process

Mission

MISSION

Offering comprehensive logistics services on the rail freight and intermodal services market in a way to make it the supplier of first choice.

Vision

VISION

Become the Central European leader in rail freight transport by taking the dominant position in the area of the ‘Three Seas Initiative’ and on the ‘New Silk Road’.

Strategic goals

STRATEGIC GOALS

1. Become number 1 in the area of the "Three Seas Initiative" and on the New Silk Road routes in the European Union measured by freight turnover and freight volume by 2023 and strengthen this position in 2023-2038.

2. Gain 65% of the Polish rail freight market by 2023 measured by freight turnover.

Short-term goals

SHORT-TERM GOALS

1. Devise the most competitive offer for business partners on the New Silk Road in the European Union and in the area of the Three Seas Initiative.

2. Grow operational efficiency measured by KPIs on an annual basis.

3. Maintain a pace of growth in the share price that is higher than the WIG30’s growth.

4. Generate annual net profit equal to at least 5% of revenue starting from 2019 and at least 8% of revenue starting from 2023.

CAPITALS

Financial capital

  • PLN 5,1 bn revenues;
  • funding sources of up to PLN 800 m;
  • stable debt structure;
  • PLN 894 m investment expenditures.

CAPITALS

Production capital

  • modernized rolling stock:
    Over 2 300 locomotives and ca 64 ths train cars
  • comprehensive railway infrastructure:
    sidings, terminals, railway cranes, customs agencies, warehouses, rolling stock repair plants

CAPITALS

Human capital

  • qualified staff - over 23,000 employees in the Group;
  • stable employment - over 96% of employees under a contract of employment;
  • numerous awards confirming the quality of services provided.

CAPITALS

Natural capital

  • implemented and monitored environmental policy;
  • monitoring the emission of substances into the air;
  • PLN 176 m of expenditures on environmental protection;
  • reducing waste emissions;
  • stable electricity consumption;
  • monitoring of the transport of hazardous materials with the use of drones;
  • land reclamation activities.

CAPITALS

Intellectual capital

  • innovations in the area of rolling stock modernization - locomotives and car trains;
  • modern security systems implemented;
  • participation in 30 international industry organizations;

CAPITALS

Social capital

  • numerous social initiatives, supporting cultural and sports events.

VALUE FOR STAKEHOLDERS

Investors

  • PLN 907 m EBITDA;
  • recommendation of dividend payout to shareholders;
  • guidance for investors, EBITDA result at the level of PLN 1,035 billion (excluding the impact of IFRS 16);
  • PKP CARGO quoted among companies in the mWIG40TR, WIG30TR, WIG30, WIG-Poland, InvestorMS, mWIG40 and WIG indices;
  • current coverage by financial institution analysts;
  • PKP CARGO S.A. with the title of Transparent company of the year.

VALUE FOR STAKEHOLDERS

Stock

  • „Leader of intermodal transport” Award;
  • title „Gazele biznesu” for PKP CARGO SERVICE;
  • Certificate „Solidna firma” for PKP CARGO SERVICE;
  • PKP CARGO Group partner to important TSL industry events:
    • Intermodal Transport Forum Fracht 2018;
    • Targi InnoTrans 2018;
    • 6th International Marine Congress in Szczecin;
    • Scientific and Technical Conference “Open Rail Market in Poland – 15 Years of the Open Rail Market in Poland”;
    • Rail Freight Forward amd Noah’s Train - with train cars painted by artists.

VALUE FOR STAKEHOLDERS

Employees

  • over 95 thousand hours of training for employees;
  • launching an e-learning platform;
  • an adaptation program for new employees and the development of an internship program;
  • Signer of the Diversity Charter;
  • numerous programs and benefits for employees, eg co-financing of holidays, train tickets;
  • Implementation of the Code of Ethics.

VALUE FOR STAKEHOLDERS

Environment

  • purchase of new rolling stock that meets environmental requirements;
  • investments in maintenance and repair facilities, equipment for rolling stock diagnostics;
  • rail transport is an ecological alternative to road transport;
  • overhauls and decommissioning of solid fuel boiler houses to adapt to anti-fog regulations;
  • implementation of own program of construction of container filling stations;
  • activities for the protection of bees, two beehives on the roof of the headquarters building in Warsaw;
  • investments in the new generation of rolling stock.

VALUE FOR STAKEHOLDERS

Innovation

  • cooperation with business partners on modern solutions: dual-mode autonomous locomotive and hydrogen fuel;
  • a modern production and repair line of wheeled car sets;
  • modern painting facility.

VALUE FOR STAKEHOLDERS

Society

  • supporting the "Szlaban na ryzyko" and "Bezpiecznie - chce się żyć" safety enhancement campaign;
  • organization of a cultural events: Parowozjada, Lato z Parowozami;
  • protection of railway monuments: Open-air museum in Chabówka
  • Małopolska Tourist Routes;
  • numerous sports initiatives with the participation of employees, for example: Biegamy-Pomagamy.

The Group’s key customers include steel mills, coking plants, power plants, mines, steel works and shipping companies. The PKP CARGO Group collaborates with the largest Polish and global groups, including the ArcelorMittal Group, the PKN Orlen Group, PGNiG, the Lafarge Group, the Azoty Group, Jastrzębska Spółka Węglowa, Węglokoks, the Enea Group, the PGE Group, the Tauron Group, Polska Grupa Górnicza and International Paper. The contracts with these business partners are regularly renewed, which confirms the high quality of the transport services provided by the PKP CARGO Group.

The services provided by the Group allow it to participate in the entire logistic value chain, including railway shipping, siding services, freight transport, transshipment and storage services, using the Group's terminals and reclamation services. The above services offer a natural competitive advantage in terms of customer acquisition and service.

The Group’s operations are based on relations with key suppliers, in particular contracts for access to rail infrastructure, traction power supply, property leasing, diesel fuel sales and rolling stock repair and modernization.

PKP CARGO Group employs competent employees with extensive experience, who ensure the highest quality of services and form the foundation of the Group's operations. As at 31 December 2018, the Group employed over 23 thousand employees.

Value chain

Value chain – key activities

PKP CARGO’s key value-building processes include sales, preparation and execution of transport services. Value chain encompassing subsidiaries serving as suppliers and purchasers of PKP CARGO’s services.

Value chain – logistic chains

The key logistics chains served by members of the Group include domestic rail transport of bulk cargo and transshipment. The Group's development is focused on international rail transport, relations between distinct types of transport, in particular intermodal and forwarding services.

Description of the organization's supply chain

The PKP CARGO Group’s business activity is rooted in relations with its key suppliers, especially on contracts that secure access to rail infrastructure, supply of traction electricity and diesel fuel, on real party lease contracts and on modernization and repairs of rolling stock.

As it operates on the freight transport market, the Group is dependent on PKP PLK as the largest supplier of access services to rail infrastructure in Poland. This company is a domestic supplier that provides access to the prevalent portion of rail infrastructure in Poland in accordance with the price list approved annually by the President of the Office of Rail Transport. Such infrastructure is made available for a fee based on conditions that apply across the board to all carriers providing both freight and passenger rail transport services. The AWT Group also purchases the services provided by PKP PLK for its transport operations performed in Poland. For the AWT Group, key suppliers of rail infrastructure are local suppliers in the Czech Republic where the AWT Group renders the majority of its transport services. These local suppliers include SŽDC s.o., a state-owned company and the owner of the majority of rail lines in the Czech Republic, and ČD a.s., the leader of the Czech passenger and freight rail transport market. PKP PLK’s percentage of procurement costs in 2017 (meaning the sum of the costs of external services and of the consumption of raw materials and supplies) was 27.3% in the PKP CARGO Group.

PKP Energetyka S.A. is a monopolist in the provision of traction electricity distribution services in Poland and as such supplies electricity to the PKP CARGO Group for its transport operations carried out using electric traction. PKP PLK’s contact system is supplied with electricity from substations operated by PKP Energetyka S.A. In addition to the business of electricity sales and distribution, PKP Energetyka S.A. is also the operator of fuel stations for rail carriers and a supplier of traction fuel to PKP CARGO Group companies, except for the AWT Group which purchases the fuel and traction electricity it needs from domestic suppliers in the Czech Republic. PKP Energetyka S.A.’s total share in procurement costs in 2017 (meaning the sum of the costs of external services and of the consumption of raw materials and supplies) was 17.9% in the PKP CARGO Group.

Procurement in the other key categories, such as traction fuel and rolling stock upgrade and repair services, is performed pursuant to Procurement Bylaws and the Procurement Instructions in place both at PKP CARGO S.A. and in most subsidiaries. The Bylaws, published on the so-called procurement platform of each such company’s website, lay down the general rules of procurement and serve as a set of guidelines for both the purchaser and the contractor. The Procurement Instructions are intended for the exclusive use by the purchaser and as such describe in detail all phases of the procurement process from planning and needs analysis to market intelligence, preparation and execution of the purchase procedure, selection of the contractor, signing of the contract and evaluation of the contractor. Procurement procedures executed within the PKP CARGO Group are conducted on an as-needed basis separately by each company or by what is called the Procurement Group as a whole.

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