Back to sustainable profitability
Lasting profitability enables Green Cargo to continue to develop sustainable logistics solutions for its customers. The results of the other target areas are reflected in the measurement figures. For the Finance target area, which is the only target area to encompass the entire Group, we measure profitability and productivity.
Green Cargo was hit hard by the downturn in the economy and volumes in our rail transports decreased in 2009 by 24 percent compared to the previous year. The need for transports fell as a direct result of weak demand among our largest customers, of which the companies in the steel, forestry and automobile industries were affected the most. The fall in volumes, which reached 30 percent, was primarily limited to the first half of the year and increased demand was observed in all market segments during the fall.
A decision was already made at the end of 2008 to implement a drastic savings program to counteract the effects of the recession by both by decreasing our costs and streamlining the organisation. Additional measures were decided on during the year and the total annual effect is estimated to be SEK 600 million as of 2012. The fact that we successfully implemented these measures is the most prominent explanation for why the Group posted a positive result for the second half of 2009. More than 300 employees left the company during the year and redundancies will continue until 2011.
Our strategic investments also continued according to plan. The majority of these investments were decided in previous years and are a necessity if we are to reach our long-term goals for profitability, customer quality and environmental impact. The investments required considerable funding at a time when the fall in profits had a negative effect on cash flow from own operations.
Financing was therefore a top priority during 2009 and at the end of the year we successfully secured funding for more than 90 percent of the investments that will be made over the next few years. At the start of 2009 Green Cargo faced a number of significant challenges. At that point in time, the development of its environment over the coming years was all but impossible to predict. Now that the financial year has been closed, we can conclude that the measures that were and still are being implemented are strengthening our competitive advantage. There is still a lot of hard work to be done if we are to reach our long-term goals, but given the burgeoning upturn in the economy, we are looking toward the future with confidence.
PROFIT/LOSS FOR 2009
Net sales for the Green Cargo Group totalled 5,889 (6,392) and profit after financial items -223 (27). The loss occurred during the first half of the year, during which the operating profit was -268. After implementing a comprehensive savings program, the situation improved and the operating profit during the second half of the year was 77. The operating margin for the year was -3.2 (2.2) percent, which was slightly above the target of -3.8 percent. Income for the Parent Company in the Rail and Road divisions decreased due to the negative development in freight transport volumes. The effect on income was offset thanks to a number of fixed customer commitments in several industries and a positive currency effect from the weakened krona. Despite the weak economy, growth in third-party logistics continued to grow in 2009 and the Logistics division reported both an increase in income and improved profit in comparison to the previous year. Our subsidiaries' contributions to the Group's operating profit were positive but lower than in 2008. Contributions from the associated companies decreased further during the year.
BUSINESS GOALS
Our owner's overall financial targets for the Group are long-term value creation, capital efficiency and a reasonable level of financial risk. The targets are return on equity of 10 percent and an equity/assets ratio of 30 percent. Return on equity for 2009 was negative (0 percent) and the equity/assets ratio fell to 28 (35) percent. It is recommended that no dividends (0) be paid for the 2009 fiscal year.
EVENTS IN 2009
Streamlining and cost savings
We have implemented a number of measures to streamline our operations and decrease costs for both production and administration. In addition to the personal redundancies decided at the end of 2008, other activities are being carried out to achieve a more efficient use of our resources. During the second half of the year, the decision was made to implement additional savings measures primarily targeted at the administration of divisions and staffs. The total annual effect of our savings program is estimated to reach SEK 600 million by 2012.
Green Cargo Intermodal
Work on our intermodal offer continued to be a high priority in 2009. We continued to develop both our products and our network throughout the year in order to improve our offer to our customers. Through a co-operation with the Port of Gothenburg and a terminal in Drammen, Norway is now a part of our extensive intermodal network.
Investments for the future
Despite the downturn in the economy, our prioritised investments continued according to plan and gross investments for the year totalled SEK 927 million. The modernisation project for our locomotives took a large step forward with the arrival of the first of the deliveries of the re-constructed diesel locomotives, named Td44, at the end of the year. The first modernised electric locomotives will be delivered in 2010.
New business via Rail and Logistics introduced the need for new investments. We continued the acquisition process for 16 cutting-edge, energy-efficient electric locomotives and the first of these will enter into operation in the first half of 2010. The decision to make this investment was taken in conjunction with the signing of a new 10-year agreement with SSAB for a total value of more than SEK 0.5 billion.
Logistics expanded the terminals at three of its locations during the year by a total of 50,000 square meters in order to support continued growth in third-party logistics. This led to a 25 percent increase in capacity, of which a large portion is already being used for new customer assignments.
Hallsbergs Terminal AB also invested in a new logistics facility directly adjacent to the combi terminal and previous cold storage warehouse. Warehouse surface area increased by 17,000 square meters and the company can now meet the demand for warehousing at this important rail hub.
New agreements
Despite the faltering economy, there is still considerable interest in our services and we signed a number of new agreements in 2009. However, many of the new contracts are of a smaller scope and cannot fully compensate for the decreased volumes in traditional industries. In June, Green Cargo signed a new five-year agreement with Outokumpu Stainless to transport the company's basic volumes from production units in several locations around the country to the Port of Gothenburg. These transports previously were sent via a fully dedicated train, but the new production solution provides the customer instead with fixed capacity on our regular trains, which is both more flexible and cost-efficient. The agreement is worth approximately SEK 400 million. Volvo Logistics renewed its agreement with Green Cargo to deliver rail transports between its factories in Belgium and Sweden. The new agreement is in effect for three years and connects a total of seven units via a system that includes space on both mixed trains and own trains. High punctuality is a prerequisite for the transports and they are located in the "Green Corridor", which according to an EU initiative should promote transports with low environmental impact and high safety. Logistics also signed new agreements with both established segments and new industries. In 2009, the Books & Media segment expanded with a number of new customers, including Berling Media and Akademibokhandeln. Thanks to Green Cargo's strength as a supplier of efficient, high-quality logistics solutions, new agreements were signed with wine importers such as Domaine Wines and Berntson Brands. In both of these cases, transports will be sent by rail from suppliers in southern Europe to Green Cargo's logistics terminals and then distributed by truck to stores and other customers.
PRIORITIES FOR 2010
It is necessary to apply a long-term perspective to all of our decisions since the nature of our business is capital-intensive and requires a functional network of resources to operate efficiently. Our priorities in 2010 will to a large extent include measures and investments decided in 2009 and earlier.
On track in 2011
Using the savings program initiated to counteract the downturn of the economy in 2009 as a starting point, an action plan was developed to improve long-term profitability within the Rail operations. This will ensure our survival in the long run so we can implement necessary investments. The plan consists of six different change initiatives, all of which improve profitability, and is in effect until 2011. In order to build customer solutions that are sustainable in the long run, we are adapting our market strategy and creating a service offer that utilises Green Cargo's competitive advantages in a more advantageous manner. The new strategy affects both transport and handling and makes it possible to meet the differing needs of our customers more cost-efficiently. The plan will affect all central processes within sales and production and will focus on ensuring that individual initiatives within other areas, such as service offers, the ordering of capacity and production strategy, work together to achieve the profitability target.
Investment program continues into next phase
Green Cargo is now in its most investment-intensive period since the company was formed in 2001. Investments made during 2009 totalled just under SEK 1 billion and the same amount was posted as Ordered investments at year-end. The locomotive modernisation project has entered a new phase and deliveries of rebuilt diesel locomotives will be received throughout all of 2010. During the spring the first prototypes for the electric locomotives will be delivered and deliveries of the final product will begin later in the year.
At the same time, tough, extensive testing of the state-of-the-art TRAXX locomotives is underway. These locomotives were ordered following the signing of a 10-year agreement with SSAB. They will guarantee a high level of quality and decreased environmental impact when they enter into operation in 2010. Green Cargo has invested in a total of 16 straight-off-the-assembly-line locomotives that have a total value of more than SEK 0.5 billion.
Expansion of our international network
The investments made in the past few years and the restructuring of the associated company, DB Schenker Rail Scandinavia A/S, created an efficient production company for rail transports between Scandinavia and the Continent. However, a number of challenges remain, both for the cooperation within rail production and on the marketing side. Our long-term co-operation agreement with DB Schenker Rail in Germany should contribute to a greater utilisation of the "green corridor" toward the Continent. At the same time, Green Cargo is focusing on showing our own customers how production solutions and new products will allow them to enjoy the benefits of high-quality international transports.
Scorecard finance
| (Group) | Score 2008 | Score 2009 |
| Operating income, SEK million | 6 432 | 5 897 |
| Operating margin, % | 2.2 | neg |
| Profit/loss after net financial items, SEK million | 27 | -223 |
| Cash flow, SEK million | -154 | 257 |
| Return on equity, % | 0 | neg |
| Equity/assets ratio, % | 35 | 28 |
| Net investments, SEK million | 591 | 921 |
| Volume, billion gross tonnes | 31.48 | 23.9 |
| Full time equivalents | 3 156 | 3 017 |
Dividend policy
Green Cargo is targeting an ordinary dividend payout ratio of 50 percent of annual profit after tax, provided the equity/assets target is attained.
Green Cargo's national transports are an approved Good Environmental Choice