PKP GROUP A CASE FOR SUCCESSFUL RESTRUCTURING OF A RAILWAY COMPANY IN CENTRAL AND EASTERN EUROPE
21 September 2015 www.pkpsa.pl Contents 2
PKP Group introduction
Condition of PKP Group in 2012
PKP Group restructuring after 2012
Key success factors PKP Group introduction 3 Current structure
Parent Company Infrastructure Management Ancillary Services (100% State owned)
38% 100% IT services National railway infrastructure manager 100% Real estate (12 430 miles of railroads) developer
Passenger Transport Freight Transport
100% 33% Passenger carrier Rail freight operator
65% 100%
SKM railway line and Broad gauge rail freight regional passenger operator transport
% Voting Rights PKP Group introduction 4 Railway market in Poland*
Passenger carriers market Rail freight market
PKP Intercity is a long distance passenger carrier and PKP CARGO is the market leader in Poland in terms of market PKP SKM is a suburban railway operator. The remaining carriers share, despite strong competition (66 registered operators). It is are primarily regional operators owned and operated by local also the 2nd largest rail freight operator in the European Union governments
MARKET SHARE BY PASSENGER-DISTANCE MARKET SHARE BY PAYLOAD-DISTANCE
PKP Intercity PKP Cargo 8% 12% PKP LHS 4% Przewozy Regionalne 2% 5% 3% DB Schenker Rail Polska Koleje Mazowieckie 39% 5% Lotos Kolej 14% 44.3% 63.8% PKP SKM PKP Group 9% PKP Group CTL Logistics companies companies 57% Freightliner PL Koleje Śląskie 5% Pol-Miedź Trans 7% 30% Other Other
*As of 2015 Contents 5
PKP Group introduction
Condition of PKP Group in 2012
PKP Group restructuring after 2012
Key success factors Major problems in 2012 6
• Insufficient readiness to provide services for increased demand during EURO 2012 football tournament – only USD 45 m spent on railway stations’ modernization in 2000-2011 EURO 2012 TOURNAMENT • Threat of trade unions collective strike during EURO 2012
• Inefficient use of EU funding – USD 1.6 b worth of subsidies utilized in 2007 – 2011 for infrastructure DELAYED (12% of available grants utilized, 50% of the given time passed) from the total budget of USD 8.8 b PROJECTS • Lack of secure investment project financing – 22 Financing Agreements with Operational Programme: Infrastructure and Environment in 2007 – 2012
• No coordination within the Group: some subsidaries competed with each other, which led to LACK OF waste of resources – Group did not have unified procedures and common structures SUPERVISION • Not satisfacotry safety level; train crash near Szczekociny (16 people killed, 57 injured) as a tragic example of not implemented safety initiatives
• No Group-wide procurement – missing the benefits of the Group’s bargaining power; costs of ticket discounts for to the Group’s employees (c. USD 25 m per year) EXCESS COSTS • Debt up from USD 767 m to USD 1.3 b in 2001 – 2011 - no active debt management strategy, despite big cost of servicing and FX risk (USD 820 m denominated in FX)
• Internal structure was not tailored to the needs – lack of competencies in the field of finance, strategic LOW management etc. – company was not hiring specialists from the market COMPETENCIES • Very low level of IT penetration at PKP SA facilities – old equipment, insufficient number of computers and servers Contents 7
PKP Group introduction
Condition of PKP Group in 2012
PKP Group restructuring after 2012
Key success factors Strategy 2012 – 2015 execution timeline 8
Introduction of first high- speed rail service in Central Europe - Pendolino New Management PKP CARGO IPO Introduction of 2012/2013 Establishing real estate Privatization of Board and on Warsaw Stock timetable – punctuality developer company within PKP Energetyka adoption of a new Exchange improved by 93% the Group – Xcity (USD 375 m) strategy (USD 450 m) Investment Jul May Jan Jun 2012 2013 2014 2015
Apr Dec Oct Dec Q3 2015 2012 2012 2013 2014 Client Touch Points Program kick-off – Increase of 3 m Sale of PKP PKL for First time fully utilized the first research passengers yoy USD 70 m to Mid granted EU funding project on custmer after 8M 2015 – first Europa Partners for a given year satisfaction increase increase in 4 years Strategy 2012 – 2015 achievements: Summary 9
BEFORE 2012 2012 – 2015 Net debt (USD b) EU funds absorption (USD m) SPEED: lowered on 12k km SPEED: raised on 4k km railway lines railway lines between 2001 – between 2012 – 2014 1,78 1,75 1773 2011 +260% 1656 1,5 PASSENGER: low satisfaction PASSENGER: 63% passeneger -100% level, low punctuality, no satisfied with service vs 42% in 2012 1,16 quality standards 1,05
DEBT: outstanding net debt DEBT: positive net cash position as of 843 equaled to USD 1.05 bln Q4 2015 0,46 0,24 0,21 512 491 REAL ESTATE: rate of rented REAL ESTATE: rental rate grew to area on major railway stations 93%, maximazing commercial 164 below 40%, no RE strategy potential of RE portfolio – Xcity 85 86 Investment -0,18 4 2008 2009 2010 2011 2012 2013 2014 Q1 Q2 2007 2008 2009 2010 2011 2012 2013 2014 2015 SAFETY: 829 railway SAFETY: 625 railway accidents 2015 2015 E accidents
USD 9.5 b Investment expenditure of PKP Group (2012 – 2015) as compared to USD 8.9 b in 2001 – 2011 (realized & planned)
Infrastructure Rolling stock Railway stations
2012- 2014 USD 5.2 b USD 620 m USD 205 m
2015 USD 2.7 b USD 715 m USD 110 m 2018 Strategy structure 10
2011 2015
1. CUSTOMER 2. INVESTMENTS
4. VALUE 3. SAFETY CREATION Achievements 2012 – 2015: Customer 11
KEY ACHIEVEMENTS FIRST Y/Y GROWTH OF PASSENGERS SINCE 2011 OPTIMIZATION OF CUSTOMER TOUCH POINTS
▲ THE FIRST PROJECT ON QUALITY MANAGEMENT AND CUSTOMER SATISFACTION TRACKING IN 24,7% THE HISTORY OF PKP GROUP
DIVERSIFICATION OF NEW APPROACH TO 5,3% SALES CHANNELS COACHES CLEANING 0,3%
-1,9% -0,9% -2,5% -2,6% QUEUE MANAGEMENT STANDARDIZATION OF -3,2% -4,1% -4,9% SYSTEM ON STATIONS INFORMATION DISPLAYS -10,7% -10,3% -14,3% -13,5% -16,1% -14,7% -19,6%-20,0% CLEANING STANDARDS ON MONITORING OF CLEANING Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 STATIONS STANDARDS 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015
FIRST REGULAR TRAIN SERVICE WITH KEY RESULT SPEED OF 120 MPH IN CEE CUSTOMER SATISFACTION SURVEYS – PKP INTERCITY
▲ TRAININGS ON CUSTOMER SERVICE FOR 70% +21 p.p. 63% 1700 CONDUCTORS 60%
▲ USD 12 M MEDIA CAMPAIGN – FIRST TIME IN 50% 42% THE HISTORY OF PKP 40% DISSATISFIED SATISFIED ▲ LAUNCHED MOBILE APP FOR TRAVEL 30% PLANNING AND TICKET PURCHASING 20% 9% ▲ 230 RAILWAY STATIONS UNDER SECURITY 10% 4% (OUT OF 600 OPERATIONAL) 0% APRIL 2013 APRIL 2015 Achievements 2012 – 2015: Investments 12
KEY ACHIEVEMENTS SIGNIFICANT INCREASE IN RAILWAY SIGNIFICANT INCREASE IN EU FUNDING STATIONS INVESTMENTS UTILIZATION IN PKP GROUP (USD m) 99% Σ = 84 29 60% 21 21 14 13 79 87 ACCUMULATED EU FUNDING 1 66 54 UTILIZATION 34% 28 1 773 23 1 656 3 20% 12% 3% 2007 - 2009 2010 2011 2012 2013 2014 2015E 2% 3% 5% 843 164 512 491 85 4 86 RAILWAY STATION # OF MODERNIZED INVESTMENT RAILWAY STATIONS 2007 2008 2009 2010 2011 2012 2013 2014 2015E EXPENDITURE (USD m)
THE LARGEST PROGRAM ON ROLLING STOCK KEY RESULT MODERNIZATION (USD m) 615 UNPRECEDENTED IMPROVEMENT IN RAILWAY LINES QUALITY – SYSTEMATIC GROWTH OF KM. WITH 413 INCREASED MAX. SPEED* Σ = 4684 2114 200 118 1064 58 69 87 842 40 17 664
2007 2008 2009 2010 2011 2012 2013 2014 2015E 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -306 -488 -703 -839 ~70% -1052 -1024 -1002 -1558 NEW OR MODERNIZED ROLLING STOCK AT THE END OF 2015, -1803 -1763 INCLUDING 20 PENDOLINO TRAINS, 40 NEW ELECTRICAL -2259 *BALANCE – DIFFERENCE BETWEEN KM. OF LINES WITH MULTIPLE UNITS AND 218 MODERNIZED WAGONS INCREASED AND DECREASED MAX. SPEED Achievements 2012 – 2015: Safety 13
KEY ACHIEVEMENTS DYNAMIC GROWTH OF THE REPLACED TRACK TURNOUTS USD 12 M Σ = 4373 EXPENDITURES ON STAFF TRAINING & 1629 EDUCATION 1474 Σ = 890 789 INCREASE IN THE NUMBER OF RENOVATED 481 341 LEVEL CROSSINGS 242 307
2009 2010 2011 2012 2013 2014 2015 Σ = 1876 806 Σ = 526 545 KEY RESULT 286 242 239 LESS INJURED 143 141 LESS ACCIDENTS 847 528 625 2009 2010 2011 2012 2013 2014 2015 294
DECREASE IN THE NUMBER OF UNSECURED LEVEL CROSSINGS
2011 2014 2011 2014 -998 +21 p.p. 67% 11476 11488 11456 CUSTOMER 11382 11161 SATISFACTION – 46% 10581 10384 SAFETY IN THE TRAIN DISSATISFIED 8% 3% SATISFIED
2009 2010 2011 2012 2013 2014 2015 APRIL 2013 APRIL 2014 Achievements 2012 – 2015: Value creation (1/2) 14
KEY ACHIEVEMENTS 1 2 3 INCREASE IN REVENUES FROM DIVIDENDS (USD M)
Σ = 158 ▲ COMPANIES SUPERVISED USING MBO Σ = 64 57 ▲ CENTRALIZED INTERNAL AUDIT LED BY PKP SA. 30 34 31 36 INCREASED USE OF OUTSOURCING TO ENSURE INDEPENDENCE OF AUDITORS 14 20 ▲ RESEARCH TEAM CREATED TO SUPPORT DECISION 2009 2010 2011 2012 2013 2014 2015E PROCESSES ▲ IMPLEMENTATION OF OECD CORPORATE 2013 2014 2015 GOVERNANCE PRINCIPLES
POLSKIE KOLEJE PKP CARGO, JSC TK TELEKOM, LLC KEY RESULT LINOWE, ▲ABB ▲USD 60 M JSC ▲USD 184 M ▲USD 70 M PKP ENERGETYKA, JSC TOTAL REDUCTION OF PKP SA HISTORICAL PKP CARGO, JSC ▲USD 375 M NET DEBT (USD B) ▲IPO ON WARSAW STOCK EXCHANGE ▲USD 450 M 1,78 1,75 1,5 1,16 USD 1.1 b 1,05 NET CASH RAISED FROM PRIVATIZATION POSITION 0,46 BETWEEN 2012-2015 0,24 0,21
BBB FITCH FX CREDIT RATING FOR -0,18 PKP SA AND PKP INTERCITY 2008 2009 2010 2011 2012 2013 2014 Q1 2015 Q2 2015 Achievements 2012 – 2015: Value creation (2/2) 15
KEY ACHIEVEMENTS IMPLEMENTATION OF LEAN MANAGEMENT PRACTICES VALUE OF REAL ESTATE USD 9.7 b PROJECTS PORTFOLIO IN JULY 2015 ▲ INTRODUCTION OF BUSINESS PROCESSES MAPPING AND BOOTLENECKS IDENTIFICATION
▲ ORGANIZATION OF WORK AREA ACCORDING TO 5S PRINCIPLES
▲ DESIGNING COMPETENCE MATRIX TO MANAGE STAFF ALLOCATION
▲ COMMITMENT OF THE COMPANY BOARD MEMBERS AS A POSITIVE EXAMPLE FOR THE STAFF (PKP INTERCITY) KEY RESULT +47% SIGNIFICANT MORE LOCOMOTIVES AVAILABLE EFFICIENCY BOOST IN THE WHOLE SERVICE SCHEME SERIVCE TIME
NO LEAN 8h I HALF 2015 -37%
LEAN 5h INCREASE IN 93% 2011 OCCUPANCY OF NLA LOCO STOPPAGE (PREMIUM RAILWAY NO LEAN 5.36h STATIONS) <40% -57% LEAN 2.30h Contents 16
PKP Group introduction
Condition of PKP Group in 2012
PKP Group restructuring after 2012
Key success factors Achievements 2012 – 2015: Key success factors 17
► PEOPLE
KEY TO SUCCESS EXPERIENCE + CHANCE FOR THE YOUNG „NEW DNA OF THE ENTIRE ► CHALLENGES NEW DNA OF THE ENTIRE PKP GROUP PKP GROUP” RESPONSIBILITY + AMBITIONS ► COMMON GOAL MOTIVATION FOR HARD WORK
CUSTOMER INVESTMENTS SAFETY VALUE CREATION
• FOCUS ON CUSTOMER • IMPLEMENTATION OF BOTTOM- • MODERNIZED LEVEL • NEW MANAGEMENT WITH AN SATISFACTION: NPV AND UP AND TOP-DOWN PROJECTS CROSSINGS INTERNATIONAL EXPERIENCE OTHER INDICATORS ARE NOT A WITH MBO SYSTEM IN FINANCE SINGLE CRITERION OF • STAFF TRAINING • EMPLOYMENT PROJECT SELECTION • USE OF EXTERNAL EXPERTS IN RESTRUCTURING AND ASSET KEY PROJECTS, ESTABLISHING • SOCIAL CAMPAIGN PORTFOLIO OPTIMIZATION • OPTIMIZATION OF MARKETING MIXED TEAMS IN ORDER TO CHANNELS SPUR CORPORATE LEARNING • MODERNIZED RAILWAY • EFFECTIVE SOCIAL DIALOGUE PROCESS STATIONS AND ETHICS POLICY • NEW QUALITY – PENDOLINO • EXTERNAL CREDIBILITY EIP THROUGH DELIVERED PROJECTS AND PROPER COMMUNICATION (EIP - PENDOLINO) • GOVERNMENTS SUPPORT FOR RESTRUCTURING PROGRAM • AUTOMATION AND DIGITALIZATION