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Global Reach

Interview with Company CEO Petr Baskakov

Petr Baskakov

 

Operating and financial results

The economic situation remained challenging last year: Russia’s economy shrank by 3.7 percent, the rail Transportation equipment for shipping cargo via various means of transport. Containers are durable enough for repeated use and can be stacked. Containers are divided into medium-duty (three- and five-tonne), which conform to former Soviet Union standards and are still used for shipments in Russia and the CIS, and ISO (20- and 40-foot) containers, which are used for Russian and international shipments. The universal standard unit TEU (twenty-foot equivalent unit) was introduced to measure transport flow volumes.
Transportation equipment for shipping cargo via various means of transport. Containers are durable enough for repeated use and can be stacked. Containers are divided into medium-duty (three- and five-tonne), which conform to former Soviet Union standards and are still used for shipments in Russia and the CIS, and ISO (20- and 40-foot) containers, which are used for Russian and international shipments. The universal standard unit TEU (twenty-foot equivalent unit) was introduced to measure transport flow volumes.
container
market shrank by 8.0 percent, and inflation increased by 12.9 percent. What reserves did the Company activate to overcome the negative trends? What are the real advantages of the Company’s business system? Client base, infrastructure, staff engagement?

First of all, I’d like to say a few kind words to my team. In my opinion, people unfairly leave expressing their thanks for a responsible approach to business until the end of an interview. I’d rather begin with it. In a shrinking market, we were able to increase our share from 45.6 percent to 47 percent, while in containerised imports, the most competitive segment of the market, the volume of shipping by the Company’s Cars for carrying cargo or passengers designated for railway transportation.
Cars for carrying cargo or passengers designated for railway transportation.
rolling stock
increased by 2.5 percent, while containerised imports as a whole decreased by 18.5 percent in 2015. We have already earned RUB 2.8 billion in net profit for shareholders. In contrast to raw materials companies, exchange rate gains last year didn’t add anything to our financial result.

The advantages of the Company’s business model, which has been in place since we were founded, manifested themselves again in 2015: the network-wide scale of the business, making it possible to service tens of thousands of clients in Russia and abroad; the presence of an integrated base of key assets –flatcars, containers and terminals – enabling us to respond quickly to client requests and guarantee the quality of our service, and a wide sales network. This enables us to ensure the stability of the business and creates additional possibilities for expansion. For example, the number of sea line containers on the Russian market decreased significantly in 2015, and as a result there was a shortage of shipping containers in a number of regions. As we were the largest Transportation equipment for shipping cargo via various means of transport. Containers are durable enough for repeated use and can be stacked. Containers are divided into medium-duty (three- and five-tonne), which conform to former Soviet Union standards and are still used for shipments in Russia and the CIS, and ISO (20- and 40-foot) containers, which are used for Russian and international shipments. The universal standard unit TEU (twenty-foot equivalent unit) was introduced to measure transport flow volumes.
container
fleet owner in the country, we offered our capacity to our partners. This enabled us to attract new clients and guarantee transport availability in the containerised shipping sector as a whole.

TransContainer’s share of the Russian rail transportation market increased by 1.4 percent. What influenced this?

Above all, amid the uncertain economic and market environment  the Company gains invaluable support from the high levels of client trust we have earned over the years. Throughout the 10 years of our existence, the Company has expanded its geographic presence, updated its fleet of flatcars and containers and developed client service technologies.

Our iSales client service is web-based and aimed primarily at retail clients, entrepreneurs and small and medium-sized businesses. I am confident that the quality of the service we offer and its convenience for our clients bring a significant competitive advantage even while A form of payment for sea transportation of cargo, or the use of a ship for a certain period of time. Freight payment is determined by the volume of cargo delivered to the destination
or by the volume of cargo loaded onto the ship.
A form of payment for sea transportation of cargo, or the use of a ship for a certain period of time. Freight payment is determined by the volume of cargo delivered to the destination
or by the volume of cargo loaded onto the ship.
freight
volume shrinks overall.

And, of course, client managers play a key role. The issue of how to motivate them, train them and focus them on a proactive approach to client needs is at the forefront.

The Company demonstrated a commendable profitability level, with net profit of 14 percent. What expense items had to be reduced?

Almost all of them. Payrolls  were cut by 2.2 percent, repair and maintenance costs went down by 6.0 percent, and other operating expenses (primarily administrative and management) were reduced by 3.0 percent. The total reduction in expenditure on these items was nearly RUB 300 million in comparison with 2014.

The debt burden was reduced by 14.8 percent. What tools did the Company use to achieve this result?

We have always been pursuing a fairly conservative debt policy, and the existing repayment A schedule is the basis of a smooth train journey. It unites the operations of all railway
departments on which freight and passenger deliveries depend. Schedules are used in all countries of the world in which freight trains operate and are created with the help of computers, which are used to control schedule fulfilment.
A schedule is the basis of a smooth train journey. It unites the operations of all railway
departments on which freight and passenger deliveries depend. Schedules are used in all countries of the world in which freight trains operate and are created with the help of computers, which are used to control schedule fulfilment.
schedule
enables us to service the debt from our internally generated cash flows, even in an adverse economic  environment. It wasn’t cost effective to refinance debt at the interest rates we saw last year.

Does the Company plan to cut its investment programme? What projects is the Company directing resources to?

Investment decisions are made exclusively on the basis of cost effectiveness considerations. Thus, last year we didn’t purchase any flatcars, because this was not necessary in a shrinking market. However, due to the high client demand for containers, we more than tripled Transportation equipment for shipping cargo via various means of transport. Containers are durable enough for repeated use and can be stacked. Containers are divided into medium-duty (three- and five-tonne), which conform to former Soviet Union standards and are still used for shipments in Russia and the CIS, and ISO (20- and 40-foot) containers, which are used for Russian and international shipments. The universal standard unit TEU (twenty-foot equivalent unit) was introduced to measure transport flow volumes.
container
purchases: 3,233 large-tonnage containers were purchased in 2015 as opposed to 913 the year before. We are also carrying out, as planned, our programme to modernise key container terminals.

Strategy

The Company’s development strategy was approved in 2013. The geopolitical environment, the economy and the market have undergone significant transformations since then. Do you think the key indicators adopted in 2013 are still relevant?

From the viewpoint of our development trajectory, there haven’t been any fundamental changes since 2013. The Company’s mission, target business model and strategic objective, to increase the value of the business through scale and efficiency, remain as relevant as ever.

However, the scale of the changes in the economy and the market over the past three years are forcing us to re-examine our methods for achieving our strategic objectives and the shape that they might take given the new economic realities. In this sense, the time has come to update the existing strategy.

Are medium- and long-term strategic planning really possible under current conditions?

Not only are they possible, they are necessary. We can only make decisions in a rapidly changing environment by keeping our eye on clear strategic milestones. And the rate and extent of the changes, both economic and technological, only continues to increase.

By contrast, financial and process planning must be as flexible as possible and account for various scenarios to enable us to respond quickly to changes in the situation.

What priorities must be changed, and what must be rejected? Could you describe the strategic objectives for the next two or three years?

In the current situation, the main focus of our operations is shifting from rather extensive expansion through increasing the rail car fleet and sales outlets, to increasing the efficiency of the assets we already own.

The increasing rates of The use of containers for cargo transportation, supply and storage.
The use of containers for cargo transportation, supply and storage.
containerisation
, i.e., the growing share of goods transported in containers by rail , will be the main driver of growth for the next few years.

Our priorities are changing accordingly: to improve pricing flexibility; improve the quality of transportation and The process of organising a chain of delivery, and managing that chain in the broadest sense. This chain may encompass both deliveries of raw materials needed for production and management of material resources at an enterprise, delivery to warehouses and distribution centres, sorting, handling, and final distribution at the points of consumption. In the context of transportation services, the main service is that of delivering cargo across a delivery route.
The process of organising a chain of delivery, and managing that chain in the broadest sense. This chain may encompass both deliveries of raw materials needed for production and management of material resources at an enterprise, delivery to warehouses and distribution centres, sorting, handling, and final distribution at the points of consumption. In the context of transportation services, the main service is that of delivering cargo across a delivery route.
logistics
services; develop new routes and services; and expand the proactive sales system.

Any movement forward involves a process of constant improvement. In your view, which is the primary area requiring investment: staffing, infrastructure, supply chain, client service?

The primary focus of our work is to increase competitiveness. This is a complex concept, which includes both technological improvements and improvements in the quality of service, and corresponding changes in how we motivate and train personnel.

In the long term, we anticipate that sales of transport services will be more and more moving online, as is occurring in other industries. The Company is striving to be at the forefront of this process. We predict rising investment in information technologies in the client service sphere, optimisation of logistics systems and the increasingly efficient use of assets.

Creation of a unified value platform

The concept of management by values (MBV) has become very popular among Western managers over the last decade. What do you think of this approach? Is it applicable to TransContainer?

I agree that common corporate values are becoming ever more important under current conditions. We have already had much discussion about how quickly changes are occurring in the economy, the market and in technological development. The standard management methods to which we are all accustomed, such as instructions, by-laws and KPIs, are therefore already becoming not completely adequate for a quick, appropriate response to the changes in the economy and the challenges facing our team daily.

Today, Company employees need not only to be loyal and follow official instructions, but they must also be involved in the working process on an emotional level that can be achieved only if the Company and its employees hold common values.

Our Company strives to ensure that all employees share in our success, are conscious of their involvement in corporate values and proud that they are part of a large team.

Does the Company have a corporate culture? How would you describe it? How does TransContainer’s corporate culture differ from that of other, similar companies? What unique qualities can you point to?

I assume that a corporate culture exists in some form or another in any company. TransContainer has now been in business for ten years, and in that time, it seems to me that a healthy and proper corporate culture has been created in this Company, which can be described as a comfortable psychological environment, where many employees value one another not only professionally, but also personally. Our culture is distinguished by its great flexibility, the possibility for big breakthroughs and great achievements, a high level of engagement in the work process, a high degree of responsibility, respect and comprehensive personal development.

Can you really compare the company and employees in terms of values? 

Probably in the same way that individuals and legal entities can be compared. I believe that the similarity consists in the fact that it is very important for both the employee and the company to make key decisions guided by core values and not short-term circumstances.  Of course, the employee and the Company have common values, such as honesty, trust, involvement, and responsibility. But if an employee believes that the values are inherently important, then the Company's values affect a much wider range of stakeholders, including employees, customers, partners, shareholders, and investors, in other words the social environment in the broadest sense of the word. Thus, the focus on values has much greater significance for the Company.  And, of course, it is very important that the Company's employees share company-wide values, i.e., the individual values of employees should coincide with the Company's values. In this case, each employee and the company as a whole will be able to be much more effective.

When we speak of values, can a comparison be drawn between a company and an individual?

Certainly, to the extent that an individual and a legal entity can be compared at all. I would say that the similarity lies in the fact that it is extremely important both for individuals and for companies to make key decisions by relying on deeply held values rather than on transitory circumstances. Undoubtedly, both individuals and companies have common values, such as honesty, trust, engagement and responsibility. However, while an individual’s values are primarily important to himself, the values of a company, including ours, impact a vastly wider range of interested parties – employees, clients, partners, shareholders and investors – the social sphere in the broad sense of the phrase. Therefore, it is much more important for a company to focus on values. And, of course, it is very important for a company’s employees to share common corporate values, so that the individual values of the employees coincide with the values of the company. The performance of each employee and the company as a whole will be vastly better as a result.

Sustainable development

How would you assess the Company’s impact on the environment in areas where you operate?

The operation of our truck fleet and terminals has an adverse environmental impact, for the most part. Nevertheless, the Company pays close attention to all requirements of environmental protection laws. Expenditure on and investment in environmental protection amounted to RUB 34.8 million in 2015.

What is included in the Company’s environmental protection plan? What indicators can the Company monitor?

The Company conducts environmental protection activities on a systematic basis. From the very beginning of our business operations, we have developed and implemented environmental protection action plans on an annual basis. In particular, in 2015 TransContainer approved a plan for organisational and technical measures to achieve the target parameters for saving fuel and energy resources. As a result, we were able to reduce electricity consumption by 3.3 percent, petrol consumption by 5.2 percent and diesel fuel consumption by 8.0 percent that year.

The strategic planning process is conducted across five areas — Processes, Assets, Clients, Finances and Development — and KPIs for management are established for each. Does the Company consider social and environmental indicators in this process?

The most important KPI for us is the industrial injury level, which is also considered one of our critical risks. I am happy to stress that we were able to keep that figure at zero in 2015. There are also a number of KPIs related to compliance with employment law.

However, I must admit that the relative weight of KPIs relating to ensuring the social responsibility of our business is still insufficient within the overall system of indicators. We have much more work to do in this area.

Investment appeal

TransContainer shares are traded on the Moscow Exchange and their value declined steadily in 2015. What does the Company plan to do to increase its attractiveness to investors?

If you look at share prices for other companies in our industry, you can see a similar trend: the attractiveness of the Russian A form of payment for sea transportation of cargo, or the use of a ship for a certain period of time. Freight payment is determined by the volume of cargo delivered to the destination
or by the volume of cargo loaded onto the ship.
A form of payment for sea transportation of cargo, or the use of a ship for a certain period of time. Freight payment is determined by the volume of cargo delivered to the destination
or by the volume of cargo loaded onto the ship.
freight
transportation sector to investors has decreased as a result of the deteriorating macroeconomic situation. Furthermore, the decreasing free float  had an adverse impact on liquidity and, as a result, on the investment appeal of the Company’s shares.

Undoubtedly, this situation poses a challenge for us, and we need to work on it. The key driver  for an increase in share prices is an improvement in production and financial indicators – the task that shareholders require management to perform. But for this to be adequately reflected in the price of shares, the necessary liquidity must be ensured. For this purpose, last year we selected market makers on the London and Moscow stock exchanges, who began work in early 2016. In addition, we are in constant dialogue with our key financial investors.

What are the greatest risks for the Company when interacting with trading authorities?

The transitional period associated with listing reform on the Moscow Exchange that began in 2014 will end in 2016. Today, Company shares are included in the First Quotation List, which imposes the strictest requirements on the quality of corporate governance, liquidity of shares and so forth. In addition, these requirements are periodically revised and updated. Maintaining shares on the First Quotation List is an important factor in the investment appeal of a public company, and therefore we view any risks associated with a reduction of the level of the listing as critical risks.

Outlook

The Company made maximum use of its integrated business model in domestic transportation in 2015. How do you plan to expand routes and international lines?

Firstly, it was not just domestic transportation, which grew by 0.8 percent, that increased last year. Containerised imports by the Company’s Cars for carrying cargo or passengers designated for railway transportation.
Cars for carrying cargo or passengers designated for railway transportation.
rolling stock
demonstrated an even more impressive trend, increasing by 2.5 percent.

Secondly, the advantage of our business model is that we can rely not on individual routes, but on the entire railway network of the CIS and Baltic states, and thus respond as quickly as possible to changes in the external environment and the dynamics of Transportation equipment for shipping cargo via various means of transport. Containers are durable enough for repeated use and can be stacked. Containers are divided into medium-duty (three- and five-tonne), which conform to former Soviet Union standards and are still used for shipments in Russia and the CIS, and ISO (20- and 40-foot) containers, which are used for Russian and international shipments. The universal standard unit TEU (twenty-foot equivalent unit) was introduced to measure transport flow volumes.
Transportation equipment for shipping cargo via various means of transport. Containers are durable enough for repeated use and can be stacked. Containers are divided into medium-duty (three- and five-tonne), which conform to former Soviet Union standards and are still used for shipments in Russia and the CIS, and ISO (20- and 40-foot) containers, which are used for Russian and international shipments. The universal standard unit TEU (twenty-foot equivalent unit) was introduced to measure transport flow volumes.
container
traffic on various types of lines.

As to international routes, one of our key priorities is to expand our business with China and more widely with the Asia-Pacific nations, and this means all types of international transportation – import, export, Freight passing from one country to another through a third country. Whether cargo is permitted to transit a certain country and under what terms is subject to trade agreements and treaties between countries. Direct transit is when foreign goods are shipped under tariff protection, without holding at a customs warehouse; indirect transit is when goods arrive at customs warehouses and are then transported abroad.
Freight passing from one country to another through a third country. Whether cargo is permitted to transit a certain country and under what terms is subject to trade agreements and treaties between countries. Direct transit is when foreign goods are shipped under tariff protection, without holding at a customs warehouse; indirect transit is when goods arrive at customs warehouses and are then transported abroad.
transit
and various transport corridors through ports in the Far East, the Zabaykalsk land border crossing, and through Kazakhstan and Mongolia. We feel that we already have all the infrastructure we need – our Kedentransservice joint venture in Kazakhstan and RailContainer in China – and we have established a wide range of contacts with Chinese railways, ports and expediters. The successful launch of our project to consolidate shipping at the Port of Yingkou confirms that we are moving in the right direction.

In what areas do you expect to expand client services? Online trading, introduction of new The process of organising a chain of delivery, and managing that chain in the broadest sense. This chain may encompass both deliveries of raw materials needed for production and management of material resources at an enterprise, delivery to warehouses and distribution centres, sorting, handling, and final distribution at the points of consumption. In the context of transportation services, the main service is that of delivering cargo across a delivery route.
The process of organising a chain of delivery, and managing that chain in the broadest sense. This chain may encompass both deliveries of raw materials needed for production and management of material resources at an enterprise, delivery to warehouses and distribution centres, sorting, handling, and final distribution at the points of consumption. In the context of transportation services, the main service is that of delivering cargo across a delivery route.
logistics
services?

Client service must be expanded primarily by simplifying the process of organising transportation, and by improving the quality of service and price efficiency, so that clients can ship A form of payment for sea transportation of cargo, or the use of a ship for a certain period of time. Freight payment is determined by the volume of cargo delivered to the destination
or by the volume of cargo loaded onto the ship.
A form of payment for sea transportation of cargo, or the use of a ship for a certain period of time. Freight payment is determined by the volume of cargo delivered to the destination
or by the volume of cargo loaded onto the ship.
freight
easily, conveniently and profitably, at least in comparison with the alternatives available on the market.

We place great importance on developing information technologies that will not only enable us to radically simplify and speed up the ordering process, but that also may become an important factor in reducing the costs associated with maintaining and expanding our sales network in the future.

As to The process of organising a chain of delivery, and managing that chain in the broadest sense. This chain may encompass both deliveries of raw materials needed for production and management of material resources at an enterprise, delivery to warehouses and distribution centres, sorting, handling, and final distribution at the points of consumption. In the context of transportation services, the main service is that of delivering cargo across a delivery route.
logistics
, here we have significant potential for optimising logistics solutions and developing new services based on our Company’s unique network of routes. We are currently changing our organisational structure to realise this more fully, and we plan to complete this work in 2016.

What are your expectations for 2016?

In comparison with last year, we anticipate a certain stabilisation of the economic situation in 2016. In addition, we will continue measures to improve internal efficiency, perfect business processes and optimise expenditure. I have confidence in our team and, in the absence of any external shocks (economic or political), we hope to see a positive trend in earnings and profitability.

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