GR released 9M16 unaudited results and Management Discussion and Analysis. Top line declined 28.5% y/y to US$ 139.0mn, largely due to lower oil products volumes. Operating expenses, mostly fixed in GEL, declined 8.7% y/y to US$ 116.5mn. Adjusted EBITDA declined 44.5% y/y to US$ 62.0mn, while the adjusted EBITDA margin shrank from 57.4% in 9M15 to 44.6% in 9M16. Appreciation of GEL vs. US$ between end-15 and 9M16 led to a non-cash FX gain, which propped up net income at US$ 56.0mn. The modernization project is underway, to be completed by late 2019. The bypass project is under review, with the final decision expected in Dec-16.
In 9M16, freight traffic and logistic service revenues declined 30.6% y/y to US$ 110.4mn and 24.7% y/y to US$ 15.0mn, respectively. GR reclassified the revenue generated by its freight forwarding subsidiaries under logistic service, a new revenue line. Freight car rental revenue fell 39.9% y/y to US$ 4.7mn, while passenger traffic revenue increased 9.5% y/y to US$ 6.2mn.
The main driver of the decrease in freight traffic was oil products transportation, down 42.1% y/y to US$ 33.1mn, due to lower volumes of heavy fuel from Kazakhstan and gasoil from Azerbaijan. Crude oil transportation revenue increased 20.2% y/y to US$ 9.1mn on the back of higher shipments from Turkmenistan. With the exception of sugar, all dry cargo categories posted significant declines. Ferrous metals and scrap dropped 36.4% y/y to US$ 7.4mn due to decreased transportation of pipes to Azerbaijan. Grain was down 46.7% y/y to US$ 4.4mn on the back of lower volumes of wheat transportation from Russia to Armenia. Sugar transportation revenue grew 14.2% y/y to US$ 7.3mn, thanks to increased shipments of cane sugar from Brazil to Azerbaijan and Armenia.
9M16 operating expenses, mostly fixed and GEL-denominated, declined 8.7% y/y to US$ 116.5mn. Electricity, materials, fuel and repair expense posted the largest decline, in both absolute and percentage terms, down 21.3% y/y to US$ 14.9mn. Materials expense was down 26.9% y/y due to decreased rail car utilization level, while electricity expense increased 7.2% y/y on the back of a 40.0% higher electricity tariff set by the regulator in August 2015. Repair and maintenance dropped 51.0% y/y to US$ 2.1mn. The other expenses category declined 10.5% y/y to US$ 21.3mn, largely due to the elimination of wagon rent expense (US$ 1.5mn in 9M15). Employee benefits expense, the largest operating expense with a 40.3% share, declined 3.9% y/y to US$ 47.0mn.
9M16 adjusted EBITDA decreased 44.5% y/y to US$ 62.0mn (excluding a US$ 33.4mn one-off, non-cash gain on sale of land to the state). The adjusted EBITDA margin shrank from 57.4% in 9M15 to 44.6% in 9M16. Strengthening of GEL against US$ between end-15 and 9M16 led to a non-cash FX gain of US$ 12.1mn, which propped up net income at US$ 56.0mn.
Operating cash declined 41.1% y/y to US$ 57.0mn on the back of lower cash receipts (-24.3% y/y) in 9M16. Investing outflows on long-term assets, mostly related to the modernization project and new passenger trains, were at US$ 66.2mn (+36.4% y/y). On the financing side, in May-16, GR granted a new, 7-year, US$ 6.0mn loan to the Partnership Fund (a Georgian state-owned investment fund and 100% owner of GR), while the US$ 16.0mn loan granted to Georgian Energy Development Fund (a state-owned entity promoting the development of renewable energy sources) in Dec-15 was repaid in full over Jun-16 and Jul-16. In Jul-16, GR borrowed US$ 23.0mn from Credit Suisse for the purchase of new passenger trains. In 3Q16, a US$ 8.5mn loan was granted to a liquid cargo terminal operator on the Black Sea, which GR took under management.
The adjusted EBITDA coverage ratio deteriorated from 3.6x in 9M15 to 2.1x in 9M16. Notably, interest expense was down 4.2% y/y in 9M16, as in Aug-15, GR redeemed the outstanding portion (US$ 27.5mn) of the Eurobond maturing in 2015.
GR has recently published its 2015 annual report. A report with our detailed projections will follow shortly.
