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Brunswick Rail Bringing Railcar Operating Leasing to Russia March 2014 Moscow
We are the #1 operating leasing company in Russia
#1 freight railcar operating lessor in Russia(1) with 24,229 railcars(2) and USD 1.2 bln asset value(3)
(1) Based on INFOLine data for Dec’2012 (by number of railcars) (2) As of 30 September 2013 (3) As of 30 September 2013 NAV based on asset Fair Market Value
2
One of the best performing companies in the industry with strong financial and operational track record, high profitability and cash flow generation
Track record of consistent growth and profitability
Recognised international leasing business model successfully imported into Russia
Martin Andersson
15,8%
Gerard De Geer
8,6%
MRIF 15,1%
IFC 13,2%Sumitomo 9,1%
VTB Capital
7,0%
UGF 5,6%
Andre
Hoffmann 5,2%
Other Investors
(30) 20,4%
Brunswick Rail founding
shareholders
Source: Company information
Source: Company IFRS financial statements
Shareholder structure as of 30 September 2013
Diversified and high-quality international shareholder base and high corporate governance standards
16 27 42
81 85 92
184
306
197
8 16 27 61 67 71
140
241
150
49.9%
59.7% 63.3%
75.5% 79.0% 77.3% 75.9% 78.7% 75.9%
0%
30%
60%
90%
0
50
100
150
200
250
300
350
2005 2006 2007 2008 2009 2010 2011 2012 9m 2013
Gross revenue (USD mln) Adjusted EBITDA (USD mln)Adjusted EBITDA margin, %
Bringing Railcar Operating Leasing to Russia
2004 2005 2006 2007 2008 2009 2010 2011 2012
3.1 3.7 7.4
10.4 10.7 12.6
21.8 24.2
2005 2006 2007 2008 2009 2010 2011 2012
Leveraging first mover advantage: from pioneer to market leader
3
Source: Company IFRS financial statements (1) End of period data (2) Repaid in full
Implant the concept Build scale Demonstrate resilience Deliver sustainable growth
New Shareholder
New Shareholder
$200m Syndicated Loan(2)
$385m Syndicated Loan(2)
$50m Rights Issue
MRIF
$172.5m Private Placement
$300m A/B Loan(2) (upsized to $420m in 2011)
$250m IFC A/B Loan(2)
$600m inaugural Eurobond, rated BB- by S&P and Ba3 by
Moody’s
$156m Acquisition Facility(2)
4 M&A Deals Completed Founded
Equity Financing Debt Financing M&A
Fleet size (ths railcars)(1)
Adjusted EBITDA
$8m $16m $27m $61m $67m $71m $140m $241m
Bringing Railcar Operating Leasing to Russia
1 283
1 209
664
229
184
73
USA
Russia
China
India
Ukraine
Canada
1 775
1 364
914
735
646
521
Russia
USA
Canada
China
India
Ukraine
(3)
2 900
2 525
2 196
626
254
244
China
USA
Russia
India
Canada
UkraineMoscow
Yekaterinburg
Omsk Novosibirsk Krasnoyarsk Omsk Novosibirsk
Moscow
Krasnoyarsk
Murmansk
Kaliningrad St. Petersburg
Vorkuta
Khabarovsk
Vladivostok
Volgograd
Yekaterinburg
Rail industry is the backbone of the growing Russian economy
• Nature of freight
• Geography
• Climate
The Russian economy is heavily dependent on rail transportation
(1) Management estimates based on current railcar prices (2) Excluding pipeline transportation (3) 2013 data (4) Management estimates based on 11 months 2013 actuals (5) 2012 data
4
Source: Rosstat, U.S. Department of Transportation, National Bureau of Statistics of China, Eurostat
Source: INFOLine, Rosstat, U.S. Department of Transportation, National Bureau of Statistics of China, Indian Railways, Statistics Canada, State statistic service of Ukraine
One of the largest railcar markets worldwide
Freight turnover (bln t*km, 2011)
Freight rolling stock (ths railcars, 2011)
Average transportation distance (km, 2011)
Share of rail in total freight turnover(2)
(3)
(3)
The main drivers of demand for new railcars
• Over the next 10 years ca. 350 ths new railcars will be required with up to USD 25 bln estimated investment(1)
(3)
Bringing Railcar Operating Leasing to Russia
85%
16% 49%
21%
15%
84% 51%
79%
Russia (2013) China (2013) USA (2011) Germany (2011)
(3)
(4)
(5)
Railcar market overview
5
Rail transportation volumes have started to recover in the end of 2013
• In Dec’13 rail transportation volumes are above 2012 levels for the first time in this year: +1.8% vs Dec’12
• According to RZD, this positive trend will continue in Jan’14: transportation volumes are estimated to be +1.0% vs Jan’13
Source: Industrial Cargoes
Rail transportation volume in Russia, m tons
Source: Rosstat, RZD
90
95
100
105
110
115
J F M A M J J A S O N D
2011 2012 2013
-6.3%
Railcar production is still above sustainable level of demand
• Average monthly railcar production in CIS in Q4’13 is stable at 7.1 ths railcars, which results in annual production of ca. 85 ths railcars
• According to our estimates, sustainable level of demand is ca. 50-60 ths new railcars per year
• Excessive production is absorbed by decreased efficiency of the system and increased competition (in particular from leasing companies affiliated with railcar producers - UVZ-Logistics and Rail1520)
• The final decision on limitation of railcar lifetime extension is postponed to 2014
2,5 3,0 3,3
3,2
2,9
2,8
3,0
3,0
2,9 3,2 3,7 4,
6
4,0 4,
6
4,3
4,2
3,4
4,3
4,6
5,9
6,0
6,7
7,4
6,3
6,7
7,7
7,1
4,6
3,1
2,9
3,1
2,8
5,9
7,3
7,9
9,1
9,0
9,5
10,4
9,3
9,6
10,9
10
,8
9,2
7,1
7,4
7,4
7,1
0
2
4
6
8
10
12
I-10
II-1
0
III-1
0
IV-1
0
I-11
II-1
1
III-1
1
IV-1
1
I-12
II-1
2
III-1
2
IV-1
2
I-13
II-1
3
III-1
3
IV-1
3
Specialized railcars Gondola
Average monthly railcar production in CIS, ths units
Bringing Railcar Operating Leasing to Russia
+1.8%
Forecast for 2014: stabilization of the transportation volumes
• In 2013 transportation volumes have reached 1 237 mln tons (-2.8% vs FY’12), cargo turnover is 2 196 bln t*km (-1.2% vs FY’12)
• RZD forecast for FY’14 is +1,1% vs FY’13:
— Main growth drivers are oil (+3.1%) and grain (+16.3%)
— Gondola cargos are expected to decrease in 2014 by 0.5-1.0%
1 242 1 272 1 237 1 250
3,0% 2,4%
-2,8%
1,1%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
1 210
1 220
1 230
1 240
1 250
1 260
1 270
1 280
2011 2012 2013 2014
Transportation volume YoY, %
Source: Rosstat, RZD
Annual railcar production in CIS, ths units
115 122 85 50
26%
6,1%
-30% -41%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
0
20
40
60
80
100
120
140
2011 2012 2013 2014
Railcar production YoY, %
Source: Industrial Cargoes
45 53 58 64 72 80 79 74 73 72 67 59 55 52 50 51 50 50
29 31 34
43 44 48
52 50 50 43
36
27 18 21 20 20 18 17
0
25
50
75
0
25
50
75
100
125
150
I-1
0
II-1
0
III-1
0
IV-1
0
I-1
1
II-1
1
III-1
1
IV-1
1
I-1
2
II-1
2
III-1
2
IV-1
2
I-1
3
II-1
3
III-1
3
Oct
'13
No
v'1
3
Dec
'13
Gondola price, ths USD Gondola spot rental rate, USD / day
Leasing market overview
6
Gondola spot market daily rate and average new gondola price
Oil tank spot market daily rate and average new oil tank price
Source: Industrial Cargoes, INFOLine
Source: Industrial Cargoes
Gondola rental rates have seasonally declined, but expected to level-off by mid-2014
• As expected by the Management, gondola spot market daily rates have started to decline in Nov-Dec’13 from RUR 600-650 (USD 18-20) per day to RUR 550-600 (USD 17-18) per day driven by seasonal factors
• Further decline of gondola rates in Q1’14 is expected due to:
— on-going gondola overproduction
— decrease in transportation of gondola cargos
• Gondola daily rates are expected to stabilize at about USD 20 by 2H’14
Rates for specialized cars have stabilized
• Oil tank spot market daily rates have stabilized at RUR 850-900 (USD 26-27) during the last 2 months
• Oil tank prices have reached a level close to the cost of production and are stable over the last 3 months at USD 55 ths
• No significant changes are expected in the oil tank segment in 2014
• Rental rates on other specialized railcars have also stabilized
USD/day ths USD
51 61 66 69 74 80 80 75 74 74 72 68 68 60 56 55 55 55
26 32 33 36 38
42 43 41 42 42 41 40 40 35
29 27 26 26
0
25
50
75
0
25
50
75
100
125
150
I-10
II-1
0
III-1
0
IV-1
0
I-11
II-1
1
III-1
1
IV-1
1
I-12
II-1
2
III-1
2
IV-1
2
I-13
II-1
3
III-1
3
Oct
'13
No
v'13
Dec
'13
Oil tank price, ths USD Oil tank spot rental rate, USD / day
USD/day ths USD
Bringing Railcar Operating Leasing to Russia
Brunswick Rail: straightforward and robust pure play operating leasing business model…
• Organic growth
• Disciplined acquisitions
• Operating lease contracts
– Tenor up to 7 years
– Take-or-pay
– Full service or triple net
• Blue chip customers
7
Raise capital with efficient capital structure
Build up high quality fleet
Sign long-term contracts with quality customers
Reinvest / distribute profit
• Efficient capital structure
• Low cost of capital
• Prudent leverage
Bringing Railcar Operating Leasing to Russia
Operating lessors Railcar operators
Examples
Operations leasing out railcars contracting volumes with freight owners
Railcar ownership owned fleet owned / leased-in fleet
Customers railcar operators / freight owners freight owners
Tenure of contracts multi-year short-term / multi-year
Overheads lower higher
Cash flow stability higher lower
Financial leverage higher lower
… proven in international markets
8
Source: Company analysis based on publicly available information
Bringing Railcar Operating Leasing to Russia
Railcar operating leasing: fundamentally attractive with significant growth in Russia
9
Railcar operating leasing penetration(1) in Russia and the USA
7% 17%
57%
93% 83%
43%
Russia 2009 Russia 2012 NorthAmerica 2012
992 1,152 1,283
Railroads, freight owners and transportation companies
Operating lessors
Source: Company analysis, GATX (for the USA), Industrial Cargoes
• Allows to focus on core business
• Allows to outsource maintenance and fleet management
• Provides for greater operational flexibility
• Allows to maximize returns where WACC is higher than the lessor’s IRR
• Supports asset-light business models focused on higher return on capital
Operational drivers Financial drivers
Growth drivers Decreasing railcar price volatility will make financial drivers more relevant (gondola market price dynamics, ths USD)
• Up to 2012 operational drivers played a greater role in driving demand for operating leasing services
• As railcar price volatility decreases, financial drivers will play an increasingly important role in client decision making
Attractive customer proposition
Strong growth and potential in the Russian market
97
38
80
50
0
20
40
60
80
100
120
I-0
8
II-0
8
III-
08
IV-0
8
I-0
9
II-0
9
III-
09
IV-0
9
I-1
0
II-1
0
III-
10
IV-1
0
I-1
1
II-1
1
III-
11
IV-1
1
I-1
2
II-1
2
III-
12
IV-1
2
I-1
3
II-1
3
III-
13
Bringing Railcar Operating Leasing to Russia
(1) As % of total fleet
22,3
12,7
10,3 9,8
7,6 7,5 7,3
4,9
Bru
nsw
ick
Rai
l
OTE
KO
GLT
R
Rai
l 15
20
Frei
ght
On
e
TFC
Eu
rotr
ans
Ru
stra
nsc
om
UV
Z-Lo
gist
ic
Source: INFOLine as of Dec’13, Globaltrans as of Jun’13, Company analysis
Russia’s leading dedicated freight railcar operating lessor
• Well positioned to capture opportunities in the unfolding Russian railcar operating leasing market
#1 dedicated freight railcar operating lessor and one of the leading fleet owners in Russia
10
#1 dedicated freight railcar operating lessor in Russia (by fleet leased-out)
Operator Operating lessor % of total fleet leased out
89%
Strong position vis-à-vis competition
89%
17%
97%
76% 22%
25%
• Benefits of scale and fleet quality
• Non-core business for operators: limited number of cars leased out and only short- term lease
• More efficient capital and cost structure
• Long standing client and supplier relationships
• Sticky customers due to high switching costs
Bringing Railcar Operating Leasing to Russia
4,3%
5,3
14,8
28,1
15,1
Brunswick Rail Private companies Russian Railways Total Russian fleet
Modern and high quality asset base
Fleet size of 24,229(1) railcars
11
Fleet age in context (average fleet age as of 30 September 2013)
Average technical life: 26 years
Source: Company information as of 30/09/2013, INFOLine and RZD as of 30/06/2013
One of the youngest fleets in the market — average age of 5.3 years vs. market average of 15 years
Shift from gondolas to semi-specialized railcars to adapt to new market demand
• New purchases focus on tank cars and specialized railcars which provide better returns
• Reasonable maintenance costs and minimal number of days out of service
• Long remaining useful life for BR’s existing fleet. Russia’s average mandatory retirement age for railcars is 26 years
• Strong and sustainable demand for semi-specialized railcars
• Higher yield compared to other railcar types
(1) As of 30 September 2013
BR’s fleet structure by railcar type, as of 30 September 2013 (% of the fleet, based on number of cars)
Platform 3% wood, vehicles, containers and metal products
Gondola 63% coal, ore, crushed stone, woodchips and other bulk freight
Mineral Hopper 14% fertilizers, concentrate, grain, cement, pellets, agglomerate and other bulk freight
Tank car 18% oil, oil products, liquefied gas
Boxcar 2% food, finished goods, packaged freight
Bringing Railcar Operating Leasing to Russia
BR fleet: options for development
12
BR fleet dynamic, ths units Targeted fleet size – 40 ths railcars
Bringing Railcar Operating Leasing to Russia
Source: Company analysis
(1)
4 6 6
8
16 15 15
63%
17 43%
42%
1 3
3 13%
8 20%
20%
1
1 1 | 5%
2 | 4% 3%
3 | 8% 7%
3
3 3
4
3
3 3
14%
3 | 8% 3%
1 | 1%
3%
1 | 3%
3%
2 | 5% 6%
3 | 8%
6%
1 | 3% 7%
7
10 11
13
22
24 24
27
31
34
37
40
2007 2008 2009 2010 2011 2012 1H 2013 2014 2015 2016 2017 2018 RU 2018
Other
Containerplatforms
Open platforms
Hoppers grain
Hoppers cement
Hoppers mineral
Boxcars
Tanks gas
Tanks oil
Gondolas
Organic vs M&A
Fleet diversification
• Growing the fleet to 40 ths cars will create sufficient size demanded by:
— rating agencies for potential improvement of BR ratings
— investors to increase BR attractiveness and increase profitability through economies of scale, wider access to capital and reduced client concentration
• In the current market, M&A appears to offer superior returns, particularly if additional fleets come to market in the future at distressed levels
• Specialized cars and NGRs are prioritized for organic purchases
• Management targets 2018 BR fleet structure close to total Russian fleet structure in 2018 with possible deviation less than 20%
• Management proposes further diversification into specialized fleet
Targeted BR fleet structure in 2018
Estimated Russian fleet structure in
2018
Chemicals & mineral fertilizer:10%
Coal & coke: 14%
Ferrous metals: 5%
Oil, gas and petrochemicals:5%
Timber, pulp & paper:3%
Construction material:1%
Rail transportation operators: 62%
Diversified portfolio of blue chip clients
Solid, diversified client base
• A diversified portfolio of 28 leasing clients represented by leading Russian freight owners and transportation companies
• Very low historical default rate
Strong relations with core clients
• Average remaining lease tenor is 3.3 years
• Weighted average retention rate was 83.5% as of 30 September 2013
Long-term contracted revenue base
• 47% of the fleet contracted for 3 years or more
• Total contracted revenues of USD 698 mln
Ample room for development of relationships and further growth
• Existing demand from current and potential customers for additional fleet
13
Source: Company information
Main clients
UKAS-Holding
BR operating lease maturity profile by revenue (mln USD)
BR operating lease maturity profile by number of railcars
3 364
8 046
4 622 5 354
<1 1-3 4-5 >5
BR’s fleet structure by industry as of 30 September 2013 (% of fleet, based on number of leased railcars)
Bringing Railcar Operating Leasing to Russia
206
465
27
<1 year 1-5 years >5 years
91%
76%
7 20 31
79 77 88
166
242
136
2005 2006 2007 2008 2009 2010 2011 2012 9m 2013
Cash flow from operating activities (USD mln)
93 40
165 217
38 91
510
160
79
2005 2006 2007 2008 2009 2010 2011 2012 9m 2013
Cash used for Capital Expenditure (USD mln)
8 16 27
61 67 71
140
241
150
2005 2006 2007 2008 2009 2010 2011 2012 9m 2013
Adjusted EBITDA (USD mln)
16 27 42 81 85 92
184
306
3 4 7
10 11 13
22 24
2005 2006 2007 2008 2009 2010 2011 2012
Gross revenue (USD mln) Fleet size (ths railcars)
Strong track record of profitable growth
14
Track record of sustainable growth Strong EBITDA growth and consistently high EBITDA margin
Expansion driven, mostly discretionary capital expenditure(2) Operating cash conversion > 85%
Source: Company’s IFRS financial statements
(1) End of period data
(2) Including M&A
(3) The total amount of capital expenditure and M&A for 2011 equals US$683m, which includes US$510m as cash consideration and the remainder represented by (i) the VTB finance lease agreements in relation to the acquisition of Brunswick Trans and (ii) the non-cash consideration paid in the form of the Company’s shares and finance lease obligations in relation to ZAO Proftrans acquisition. For the period from 2005 to 2010 BR incurred only cash capital expenditure
(4) Defined as Cash flow from operating activities/ Adjusted EBITDA
Average utilisation ratio
Railcars purchased
100% 100% 100% 100% 100% 99.5% 100% 100%
2,461 640 3,686 3,018 300 1,899 9,958
50% 60% 63% 76% 79% 77% 76% 79%
Adjusted EBITDA Margin
3,295
(3)
(1)
88% 125% 115% 130% 115% 124% 119% 100%
Cash conversion (4)
Bringing Railcar Operating Leasing to Russia
2,082
9m 2013
197
24
100%
Capital structure profile
15
Highlights of post-Eurobond capital structure
• Existing debt is non-amortising, long-dated and unsecured, except for finance lease financing
• 84% of debt is USD-denominated with the remainder in RUR
• Free cash flows are available for reinvestment into the business
• Bulk of debt maturities has been moved out to 3-5 years
• Greatly reduced risks through the absence of maintenance covenants and reduced reliance on bank financing
Capital structure evolution (USD mln)
Source: Company’s IFRS financial statements
Debt maturity profile as of 30 September 2013 (USD mln)
• In October 2013 rating agencies reaffirmed Brunswick Rail corporate rating. Moody’s changed outlook to negative due to weakened market environment
Agency Rating Outlook
S&P BB- Stable
Moody’s Ba3 Negative
Brunswick Rail credit ratings
Stable credit ratings
* Book Equity restated based on historical cost
300 388 347
694
137 123
607 618
31.12.2011 31.12.2012 30.06.2013
Unsecured Debt
Secured Debt
Book Equity*
Bringing Railcar Operating Leasing to Russia
27
121
590
3
<1 year 1-3 years 3-5 years >5 years
30.09.2013
Strategy: positioned for sustainable long-term growth
16 16
• Maintain leadership in a fast growing Russian market
• Grow to a strategic fleet size of over 40,000 railcars to further benefit from economies of scale
• Continue delivering relevant solutions to customers in a changing environment
• Pioneer introduction of new generation railcars in the Russian market
• Maintain optimal capital structure to finance growth and maximise returns
• Continue to benefit from access to attractively priced capital
• Additional growth through accretive M&A and leaseback transactions
• Take advantage of Russian rail sector restructuring and consolidation
• Enter locomotive segment once it is liberalised
• Enter new attractive geographies (Kazakhstan, Ukraine)
• Acquisitions in maintenance and repair to control cost base
Maintain efficient capital structure
Deliver profitable growth
Pursue prudent M&A
Consider other expansion opportunities
Bringing Railcar Operating Leasing to Russia
Brunswick Rail: key company highlights
17
Fundamentally attractive market with strong growth
opportunities
Strong track record of profitable growth through the cycles
Leading market position supported by high quality asset and customer base
Strong organisational platform with proven
management execution track record and high corporate
governance standards
Differentiated and proven business model
Efficient capital structure supporting further
growth and attractive returns to shareholders
Bringing Railcar Operating Leasing to Russia