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Trading update for the twelve month period ended December 31, 2013

31 March 2014
FESCO Transportation Group (MOEX: FESH) provides a trading update with the operational and audited consolidated financial results for the twelve month period ended December 31, 2013.

Highlights:

  • Strong container business growth across Group's divisions and service lines with intermodal transportation volumes up 17% YoY, import container handling at Vladivostok port up 10% YoY and number of block trains up 34% YoY
  • Non-container business remained under pressure due to overall weakness in the rail transportation market and unfavorable situation for metallurgical export from Russian Far East ports
  • Top line performance of the Group and Group EBITDA were negatively affected by the inherent volatility of the rail transportation market. Group EBITDA declined by 25% to $186m due to a significant drop in the Rail Division’s EBITDA which was only partially offset by growth of the Port Division’s EBITDA
  • Pro-forma net debt decreased from $976m as of 31-Dec-2012 to $927m as of 31-Dec-2013

Group Operational Results

Group performance in FY2013 was affected by mixed results of Group' business divisions. Sustainable improvement in the Port Division’s performance was offset by volatility and weak results of the Rail Division driven by overall weakness of general cargo rail market and the sharp decrease in gondola rates. In 2013, consolidated revenue of the Group declined by 4.8% YoY to $1,140m and consolidated EBITDA decreased by 24.7% YoY to $186m. Group EBITDA excluding one-off expenses1 amounted to $197m. EBITDA margin decreased by 4.3 pt to 16.3%.

1One-off expenses include acquisition-related consulting and compensation expenses and marketing expenses

$ millions 1Q 2013 2Q 2013 3Q 2013 4Q 2013 2013 2012 2013 vs 2012
Revenue(1) 275.3 282.3 292.0 290.4 1,140 1,197 -4.8%
EBITDA(1) 48.1 51.3 53.0 33.6 186 247 -24.7%
   EBITDA margin(1) 17.5% 18.2% 18.2% 11.6% 16.3% 20.6% -4.3 pt
Capital Expenditures 10.0 15.2 14 8.3 47.5 65.8 -27.8%

(1) On adjusted basis for consolidation of Vladivostok port in 1Q2012, disposal of vessels and non-recurring expenses 2013adj. revenue decreased by 3% and adj.EBITDA decreased by 33% y-o-y.

Divisional Financial Performance

Port Division

  • EBITDA increased by 4% YoY to $89m driven by growth of container handling volumes and by consolidation of the Vladivostok Port (VMTP) starting from April 1, 2012. Port Division’s EBITDA excluding one-offs amounted to $94m.

Rail Division

  • FESCO outperformed the market due to an increased number of block trains operated by the Group (up 34% YoY to 1,136) and an increased fleet of fitting platforms of Russkaya Troyka and Transgarant in operation (up 9% YoY) in line with the Group’s strategy to shift the focus in rail business towards containers
  • However, the growth in container rail transportation volumes was not enough to offset the significant decline in gondola rates and the overall weakness of general cargo rail market. As a result, Rail Division’s EBITDA decreased by 46% YoY to $90m and EBITDA margin declined by 12.1pt to 36.0%

Liner and Logistics Division

  • EBITDA decreased by 17.5% YoY to $35.8m as a result of decreasing freight rates

Shipping Division

  • EBITDA remained negative at $5.6m in 2013. Optimization of the fleet provided positive effect on the Division’s EBITDA, which increased from negative $4.1m in 2Q2013 to negative $0.2m in 4Q2013
  • In 2013, FESCO added four ice class general cargo vessels to its shipping fleet –Pevek, Posyet, Pioneer and Primor’ye. The first two vessels started servicing FESCO cabotage lines in 3Q2013. The remaining two vessels were deployed in 1Q2014
  • As of December 31, 2013 the Group operated a fleet of 24 vessels deployed through the FESCO sea service lines and 4 ice-breakers leased-in under long-term contracts.

Bunkering

  • In 2013, bunkering business generated $84m of revenue and $3m of EBITDA
$ millions 1Q 2013 2Q 2013 3Q 2013 4Q 2013 2013 2012 2013 vs 2012
Port
   Revenue(3) 46.8 51.6 51.3 50.4 200.1 177.9 +12.5%
   EBITDA(3) 17.9 26.1 29.6 15.8 89.4 85.7 +4.3%
   EBITDA margin(3) 38.2% 50.6% 57.7% 31.3% 44.7% 48.2% -3.5 pt
Rail
   Revenue 74.6 66.3 57.4 52.4 250.7 347.0 -27.8%
   EBITDA 28.4 24.6 20.4 16.9 90.3 167.8 -46.2%
    EBITDA margin 38.1% 37.1% 35.5% 32.3% 36.0% 48.1% -12.1 pt
Liner & Logistics

   Revenue 158.2 169.3 168.7 175.6 671.8 623 +7.8%
   EBITDA 8.8 8.7 8.8 9.5 35.8 43.4 -17.5%
   EBITDA margin 5.6% 5.1% 5.2% 5.4% 5.3% 6.9% -1.6 pt
Shipping

   Revenue(4) 17.7 11.0 14.6 22.0 65.3 141.0 -53.7%
   EBITDA(4) 0.2 -4.1 -1.5 -0.2 -5.6 -6.7 -
Bunkering

   Revenue - 12.1 34.5 37.0 83.6 - -
   EBITDA - 0.9 1.6 0.7 3.2 - -
   EBITDA margin - 7.4% 4.6% 1.9% 3.8% - -

(3) On adjusted basis for consolidation of Vladivostok port in 1Q2012 and non-recurring expenses 2013 Port Division’s adj.EBITDA decreased by 4.5% y-o-y

(4) On adjusted basis for disposal of vessels and non-recurring expenses 2013 Shipping Division’s adj.EBITDA decreased by$1.9m

FESCO Consolidated Group Financial Performance

Pro-forma net debt decreased from $976m as of 31-Dec-2012 to $927m as of 31-Dec-2013:

  • Consolidated debt includes $550m of 8.00% Senior Secured Notes due 2018 and $325m of 8.75% Senior Secured Notes due 2020, as well as RUB 5bn of bonds, the proceeds from which were used to refinance the Group’s acquisition-related and pre-existing debt
  • As of December 31, 2013, Pro-forma Net Debt / LTM adjusted EBITDA ratio was 4.7x
$ millions At 31 December, 2013
Pro-forma total Debt(2) 1,118
Cash 191
Pro-forma net Debt 927
Pro-forma net Debt/ LTM Adj. EBITDA 4.7

(2) Total borrowings include USD 550m 8.00% Senior Secured Notes due 2018 and USD 325m 8.75% Senior Secured Notes due 2020; RUB 5bln ruble bonds and exclude the $150m REPO loan secured by shares of TransContainer

Ruslan Alikhanov, FESCO President and CEO commented:

“In 2013, we continued progress to achieving our strategic objectives to improve our position as a leading player on the Russian transportation market. The new management team, which joined the company during this year, together with experienced FESCO staff, is now creating sound foundation for further development of the Group despite the challenging economic environment. In 2013, the Port Division became the core business of the Group and we also launched bunkering services in order to diversify our business and bring more stability”.

FESCO operational results for 2013

1Q2013 2Q2013 3Q2013 4Q2013 2013 2012 2013 vs 2012
Intermodal freight transportation (TEU)* 57,195 59,992 62,405 63,978 243,564 208,294 +16.9%
Export-import sea container trade (TEU) 85,318 95,885 92,671 92,721 367,251 341,685 +7.5%
Domestic sea container trade (TEU) 12,861 16,010 17,393 17,689 63,953 67,994 -5.9%
Reefer transportation (TEU) 11,033 11,173 10,743 11,213 44,162 48,806 -9.5%
VMTP container throughput (TEU)
— Import
— Export
— Cabotage
106,745
45,987
39,367
21,391
117,057
51,576
39,131
26,350
125,507
54,995
39,985
30,527
127,449
51,839
44,521
31,089
476,75
204,397
163,004
109,357
456,146
185,721
158,391
112,034
+4.5%
+10.1%
+2.9%
-2.4%
VMTP non-container cargo throughput (excluding vehicles) (thousand tons) 611 450 461 446 1,968 2,953 -33.3%
Automobiles and transportation vehicles throughput (units) 21,543 26,379 22,347 22,670 92,939 85,107 +9.2%
Rail container transportation («Russkaya Troyka» and «Transgarant») (TEU) 64,139 72,230 73,420 76,143 285,932 264,725 +8.0%
Rail cargo load (million tons) 5.1 5.1 5.1 5.0 20.3 23.6 -14.0%
Rail cargo turnover (billion ton-kilometers) 7.7 8.4 8.4 7.8 32.3 29.7 +8.8%

* - excluding transportation of empty carrier owned containers (COC)

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