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Global Reach

Interview with Company CEO Petr Baskakov


OPERATING AND FINANCIAL RESULTS

In early 2016, the majority of analysts expected the L-shaped crisis, which means quite a long-lasting stagnation period at the bottom. Did you see it happen in 2016?

We were lucky not to. Albeit the macroeconomic environment was really close to that pattern, the 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
transportation market proved better than expected. Though the Russian economy shrank by 0.2% in 2016, the railway container transportation market grew by 10.2% and reached a record high of 3,261 thousand TEUs. That was mainly driven by domestic routes, which gained 12.0%, and international routes, which also went up in the second half of the year.

In 2016, two trends were specifically strong: switching Cargo fit for transportation by container, or cargo for which containers are the best or only possible means of transportation.
Cargo fit for transportation by container, or cargo for which containers are the best or only possible means of transportation.
containerisable cargo
from road to railway, while the rail transportation industry saw redistribution of volumes in favour 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.
container
transportation. Thus, we may consider the market trends in 2016 as a sign of increasingly competitive positioning of railway container operators, including TransContainer.

In a strong competitive environment, operating performance metrics gain primary importance. What are the main competitive advantages of the Company?

We have three key advantages – unique business model, unrivalled skills of our staff and commitment to strong performance. Good operating results merely derive from the combination of these factors. All advantages of the Company are driven by the involvement of our personnel, that is why, first of all, I would like to express my sincere gratitude to TransContainer’s team. In a rapidly changing market environment, our employees showed highly professional performance, responsibility and ability to promptly adjust to changes.

However, our clients need an A legal entity or individual entrepreneur owning wagons and containers, or possessing them on any other basis, that participates, pursuant to a contract with a carrier, in the carriage process using the aforementioned cars and containers.
A legal entity or individual entrepreneur owning wagons and containers, or possessing them on any other basis, that participates, pursuant to a contract with a carrier, in the carriage process using the aforementioned cars and containers.
operator
, which offers services with the best value for money, rather than high performance per se. That is where we shine. Despite the decline in our A specialised type of rolling stock designed to carry ISO containers.
A specialised type of rolling stock designed to carry ISO containers.
flatcar
fleet, we managed to meet the surge in demand with Cars for carrying cargo or passengers designated for railway transportation.
Cars for carrying cargo or passengers designated for railway transportation.
rolling stock
in full and significantly reduce transportation volumes of empty containers, also thanks to a flexible tariff policy. These measures combined helped us to create a comfort zone for the clients and attract more cargo to railway routes.

In a deep recession, one could clearly see the advantages of the Company’s business model. While in 2015 the scale of the business and vertical integration helped secure safety and availability of the 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
transportation, in a recovering market these advantages boosted the Company’s efficiency. With our extensive geography, we optimised 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
and cut empty runs, while integrated transportation and terminal business enabled us to track orders, reduce car downtime and develop popular intermodal transportation.

Safety and reliability of delivery are traditionally perceived as the key competitive strength of railway transportation business. What initiatives does the Company undertake to bring its services in line with the market expectations?

I have already mentioned, that the combination of terminal and transportation services enables us to optimise delivery and to reduce the cargo processing period at the terminal. Another major initiative is set to increase the share of transportation

by block-trains, including those covered by the project “Trans-Siberian route in 7 Days” ran by Russian Railways. In 2016, the volume of cargo transported by block- trains increased by 6.5%. The share of block-trains grew up to 49.2% compared to 43.3% in 2015, and almost reached the target of 50%

The growth of revenue and earnings per share is driven by the higher transportation volumes. How far does the actual financial performance go in line with your expectations?

In 2016, revenue-generating transportation provided by TransContainer’s flatcars and containers increased by 12.8% compared to 2015, indeed. Our revenue under the IFRS adjusted for third-party charges, grew by 8.3%, while adjusted operating expenses grew by 5.3%. As a result, net income increased by 14.6% to RUB 3,244 mln. I would like to underline the fact that the key income growth driver was not pricing, but rather extra transportation volumes and tight cost control.

Our financial results for the reporting period not only exceeded the actual results of 2015, but our targets as well. That was one of the factors supporting the record high dividend payout in 2016.

STRATEGY

Client acquisition and retention are traditionally key objectives for any business. Does the Company plan to expand its sales network or will it rely on e-commerce?

Today, one cannot boost sales without investing heavily in online channels. This is exactly what we are going to do: to enhance our competitive edge, we will leverage the ample opportunities offered by online sales. Notably, we are the pioneer in the Russian rail 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 industry to launch an online ordering service. Today, our customers (both corporate and retail) can use our website isales.trcont.ru to place orders for railway or intermodal 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
transportation almost anywhere in Russia, make payments with a bank card and track the route without leaving their home or office. This makes the service really user-friendly and popular. In 2016, the share of online orders increased more than two and a half times.

Naturally, in the wake of such a boost, we will consider optimising our sales network. However, I do not see much sense in going fully online as we deal with very big customers, as well as non-standard and complex orders. Overall, a successful business is underpinned by strong client relationships, which always build on personal interaction. For us, the best option would probably be to handle around 75% of incoming orders online, and the remaining portion – via sales offices.

Will the Company be investing in new business segments (e.g. specialized container services)? Is there any upside there?

Of course there is. This segment is outpacing the market in general: for the last five years, A container that consists of two basic elements: one or more tanks and a frame manufactured to ISO 1496-3.
A container that consists of two basic elements: one or more tanks and a frame manufactured to ISO 1496-3.
tank container
transportation has almost doubled. We have already built a small fleet of specialised containers, which helped us acquire the necessary experience and test new technologies. Going forward, we plan to spin-off this business as a subsidiary, subject to the approval of the Board of Directors in 2017.

You operate in Russia, as well as in Europe and Asia. What steps will you take in the near term to develop integrated 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 and overall transportation volume?

Indeed, we operate mostly in Russia, but we have also expanded across the entire 1520 gauge railway network. Jointly with Kazakhstan Temir Zholy, we have set up a successful JV, which operates nearly 5,000 flatcars and 19 rail terminals in Kazakhstan. We also consider tapping into key markets for inbound and outbound 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 going through Russia. These include Europe where we set up three subsidiaries (TransContainer Europe, ContainerTrans Scandinavia and TransContainer Slovakia), and Asia where we have TransContainer Asia Pacific, our 100% subsidiary in South Korea,

and RailContainer, our Chinese JV.

In 2017, we plan to establish a 100% subsidiary in Shanghai to consolidate our positions in intermodal transportation between Russia and China, including via sea routes. Besides, we seek to build closer long-term ties with our regional partners through joint projects, which are key to our geographical expansion.

Please tell us more about your plans to develop partnership ties, if you can.

There is no secret here. Customer requests indicate that there is a strong demand for intermodal transportation. In order to meet this demand, we must put more emphasis on long-term partnership with key participants across the logistics chain. In 2016, we kept developing our cooperation with the Dalian seaport, whose infrastructure we used to offer all-in-one container transportation services from various parts of China and South Korea to Russia via the cross border terminal in Zabaikalsk. In November 2016, thanks to our strong track-record, we became a strategic partner of Dalian Port Corporation Limited in developing the Dalian-Zabaikalsk-Russia-Europe logistics corridor (by signing the respective memorandum).

Another promising project is a 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
route across Mongolia. In 2016, we piloted 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
transportation via Mongolia to the Vorsino station in the Kaluga Region, which we intend to develop in 2017.

We are also looking into the opportunities offered by the North-South Transportation Corridor. In November 2016, TransContainer and Azerbaijan Railways signed a cooperation memorandum to develop intermodal transportation along the route.

SUSTAINABLE DEVELOPMENT

The concept of sustainable development revolves around assessing possible longterm impact of management decisions. Does the Company view sustainable development as one of its strategic priorities?

While we do not have a mature concept at the moment, the Company does stick to the fundamental principles of sustainable development in its strategy and consistently integrates them into its business model. In 2015, we focused on developing a unified value platform, and now we are going to gradually implement the new principles into the system of communications with clients, partners, employees, shareholders and investors. The scale of our operations means we need to interact with a wide range of stakeholders, so operating and financial growth alone will not be enough to secure long-term sustainability. Professional development of our staff, strict adherence to the highest ethical and environmental standards, and a focus on social responsibility are all integral components of long-term strategic planning.

Which aspects of sustainable development do you consider the most significant for the Company and stakeholders?

Most importantly – corporate culture and a common set of values for TransContainer’s employees. These are the essential building blocks of trust both within the team and between us and our clients and partners. In 2016, the Board of Directors adopted the Code of Business Ethics, which sets forth the basic ethical standards and rules of conduct that our Company follows in working towards the targets set by the shareholders. Another important factor that wins the trust of partners and employees alike is the Company’s compliance with its Anti-Corruption Policy, which was unanimously adopted by the Board of Directors in 2016.

TransContainer is consistent in fully adhering to environmental and labour safety standards. We are proud to report that for a second year running the Company has had no workplace injuries. In 2016, the Company’s savings amounted to 214 thousand kWh of electricity, 119 tons of diesel fuel and 1.5 tons of petrol for an aggregate amount RUB 4.2 mln. We also implemented a system for remote terminal monitoring that optimises motor vehicle routing and allows us to significantly reduce energy and fuel consumption.

As always, TransContainer takes a proactive approach to its social initiatives, supporting sports programmes and promoting healthy lifestyle. In addition to holding regular sports events for its employees, the Company develops children’s sports via its charity programme, having allocated RUB 138 m for these purposes in 2016. In the reporting year, charity expenses almost tripled and stood at RUB 254 m.

What has been the impact of the new system of values in respect of the dialogue with employees, clients and partners?

The five fundamental values have been chosen based on a collective decision, so my hope is that they will be gradually integrated into the working process. The Code of Business Ethics lays out the following values: responsibility, professionalism, trust, development and engagement. Looking at the Company’s performance in 2016, we can say that the new value platform does its job. The round tables with clients and partners that we held last year proved especially effective. We held meetings with representatives 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
companies, market experts, consignors, clients and partners representing various industries in Moscow, St Petersburg, Nizhny Novgorod, Yekaterinburg, Gelendzhik and Irkutsk. Thanks to a sincere and at times critical discussion, we were able to identify gaps in our operations, which in turn enabled us to offer improved and more competitive services to the market. We hope our clients appreciate the Company’s transparency and our willingness to evolve with the changing needs and wishes of market players.

What do you think are the main distinctive features and strengths of TransContainer’s corporate culture?

Our Company has always been a tightly knit team, with everybody sharing the same goal. A strong team spirit motivates employees to perform better, be more creative and enterprising, and makes them personally invested in the team’s success. On its end, the Company does everything to create the best conditions for professional and personal development of its personnel. I think our core strengths are respect for our colleagues and mutual trust.

INVESTMENT CASE

In 2016, the Company saw its share price rise. Can you comment on this performance?

In 2016, our market capitalisation on the Moscow Exchange surged by 69.6% from RUB 29.7 billion as at 1 January to RUB 50.3 billion as at 30 December. This brought an additional value of RUB 20.6 billion to the Company’s shareholders.

The overall improvements in the market environment did play a part, with the MICEX Index gaining 26.8% in 2016. Investors welcomed the 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 recovery prospects and the Company’s better financials, as well as record-high dividends paid by TransContainer in October 2016. The total dividend payout amounted to RUB 4.8 billion, or RUB 347.6 per share. The Company’s dividend yield reached 9.5% putting TransContainer ahead of all Russian issuers by this indicator in 2016.

The market is always on the move posing challenges to the Company, which are hard to gear up for in advance. What helps the Company to be resistant to market pressures?

As I said before, the Company’s sustainability to external shocks lies in our unique business model. It makes us more independent on decisions made by clients, industry dynamics and transportation routes. Apart from that, we have been historically pursuing a fairly conservative financial policy, maintaining low leverage and minimising open FX positions. All this makes us feel comfortable amid the financial market volatility, which has been rising over the recent years, while being capably to raise funds at a low price, if needed.

What risk did you face in 2016? What actions did you take?

The core risk we saw in 2016 was related to the strategy. The preconditions for changes in the macroeconomic and market environment we incorporated into the Company’s strategy in 2013, have changed dramatically and largely impede our delivery on long-term targets. As a result, in 2016, the Company’s management team initiated the revision of TransContainer’s strategy and strategic targets. The Company’s updated development priorities and financial and operating forecasts for 2017–2021 were approved by the Company’s Executive Board in October 2016 and submitted to the Company’s Strategy Committee in Q1 2017.

OUTLOOK

What are the Company’s key priorities going forward?

The 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
transportation market started to grow again, and the Company’s shareholders expect us to deliver further growth in key financials, with a primarily focus on profit.

Needless to say, our core priority is to leverage all opportunities available in the market. That means improving client experience, developing business with existing customers, entering into new market niches, such as the specialized container transportation business, and acquiring new clients.

We will keep increasing the turnover of Cars for carrying cargo or passengers designated for railway transportation.
Cars for carrying cargo or passengers designated for railway transportation.
rolling stock
. However, to satisfy the increasing demand for 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
transportation, we will need to make new investments in flatcars. It is already in progress. We also see potential for further streamlining production processes, particularly in the terminal business.

What actions should be taken to grow the Company’s market capitalisation?

Set by the Company’s revised strategy, higher volumes and business efficiency are key to increasing TransContainer’s value. As the Company’s securities are traded on the Moscow Exchange and the London Stock Exchange, we will take actions to comply with the listing requirements, including appropriate corporate governance and share liquidity, inter alia, by means of market making. At the same time, we see some headwinds related to the concentration of the share capital and a decrease in the free float.

Does the Company invest in new technologies and innovations?

We have talked about the strategic importance of e-commerce and will keep working on that. In 2017, we are planning to expand the iSales platform’s capabilities to cover orders not only domestic, but also international shipments. Development of the relevant applications for iOS and Android is also in the pipeline. The Company will continue automating the key business processes, including further development of the CRM systems and design of all-in-one IT solutions set to manage large terminals.

What is your view on the most likely market scenarios in 2017?

Our budget for 2017 is based on a moderate market growth scenario. However, a more optimistic scenario is really possible. Meanwhile, there are some risks left, mainly due to external shocks and geopolitical uncertainty.

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