With GR’s recent release of the 9M15 Management Discussion and Analysis, we offer a breakdown of 9M15 freight transportation. Both liquid and dry cargo categories posted decreases, down 2.6% y/y and 7.4% y/y, respectively. The weak performance comes against a backdrop of pressure from continued weak market fundamentals on freight transportation and regional currency weakness.
GR’s 9M15 freight transportation revenue decreased 4.8% y/y as its constituents, liquid and dry cargo categories, decreased 2.6% y/y and 7.4% y/y, respectively. The cargo mix continues to shift, as crude oil is being replaced by the more profitable oil products category. Increased volumes of heavy black oil from Kazakhstan drove revenue from oil products transportation up 9.5% y/y. Crude oil revenues, on the other hand, dropped 45.1% y/y, as pipelines continue to replace the railways for shipments stemming from Kazakhstan and Azerbaijan.
Most dry cargo categories posted y/y decreases in revenue. Exceptions were the ferrous metals and scrap and ‘other’ categories, expanding 27.2% y/y and 16.2% y/y, respectively. Notably, the increase in ferrous metals and scrap was due to higher average revenue per ton-km, as transportation volume decreased 9.8% y/y. Similarly, the ‘other’ category transportation volume only increased 2.3% y/y, meaning the freight transported generated much higher revenues per ton-km, in comparison to last year. Ores, grain, sugar, and construction freight revenues decreased 27.1% y/y, 12.5% y/y, 19.7% y/y, and 25.5% y/y, respectively. Even more dramatic were the decreases in industrial freight (61.5% y/y) and cement (65.9% y/y) categories, but their shares in total freight revenues are insignificant.
We believe the significant declines, particularly in 3Q15, were due to the regional turbulence, and to a lesser degree, weaker global demand for oil and related products. While we do not expect a rebound in freight in the short term, we believe GR has sufficient flexibility to remain stable and service its obligations without any major difficulties.
As reported in our previous update, GR’s 9M15 total revenue decreased 8.3% y/y to US$ 194.5mn. At the same time, operating expenses, which are mostly GEL-denominated, decreased 18.8% y/y to US$ 127.6mn, resulting in a 4.4% y/y increase in adjusted EBITDA to US$ 111.7mn. Similarly, 9M15 adjusted EBITDA and EBIT margins widened to 57.4% and 38.9% in 9M15 from 50.4% and 30.0% in 9M14, respectively.
