VR Group Business Review for January–March 2024: Challenging operating environment had a significant negative impact on operational result

VR Group Business Review for January–March 2024: Challenging operating environment had a significant negative impact on operational result

VR-Group Plc, Interim Report, 30 April 2024 at 11.30 am EET

The first quarter of 2024 was challenging for VR's business operations. Our profitability was affected by long-lasted strikes, fleet issues as well as increased costs caused by an unusually long period of freezing temperatures and significant track damage. Despite these challenges, we steadfastly continue to implement our strategy and accelerate the company’s turnaround with improved competitiveness.

January-March 2024 (Q1) in brief:

• Group net sales decreased by -4.0% to EUR  290.9 (302.9) million
• Comparable operating result (EBIT) was EUR -17.1 (-0.2) million or -5.9% (-0.1%) of net sales.
• Operating result (EBIT) was  EUR -15.0 (2.8) million, or -5.2% (0.9%) of net sales.
• Cash flow from operating activities was EUR 35.1 (28.2) million.
• The number of journeys on long-distance trains increased by 2.0% to 3.5 (3.4) million journeys.
• The railway transport volumes of VR Transpoint decreased by -19.6% and amounted to 4.7 (5.9) million tonnes.

Key figures	1-3/2024	1-3/2023	1-12/2023
Net sales, M€	290.9	302.9	1,224.1
Operating result (EBIT), MEUR	-15.0	2.8	81.5
% of net sales	-5.2	0.9	6.7
Comparable operating result (EBIT), MEUR*	-17.1	-0.2	59.9
% of net sales	-5.9	-0.1	4.9
Net profit/loss for the period, MEUR	-14.6	0.6	52.4
Cash flow from operating activities, MEUR	35.1	28.2	203.8
Investments, MEUR	53.7	36.6	186.9
Capital invested at the end of the period, MEUR	1,803.3	1,826.1	1,823.6
Return on capital employed (ROCE), %	-2.8	1.1	5.2
Comparable return on capital employed, %	-3.3	0.4	4.0
Return on equity (ROE), %	-4.6	0.2	4.2
Net interest-bearing debt at the end of the period, MEUR	350.7	391.5	330.8
Gearing, %	27.9	32.1	26.1
Headcount at end of period	9,183	8,926	9,110
Employees on average, FTE	8,175	7,858	7,765
* VR Group presents comparable operating result (EBIT) as an alternative performance indicators. The aim of comparable performance indicator is to improve comparability between reporting periods.
The calculation formulas for the figures are disclosed in VR Group’s Annual Report for 2023.
The figures are unaudited.
The comparative figures in brackets refer to the corresponding time period in the previous year, unless otherwise stated.

Elisa Markula, CEO:

“VR's comparable operating result remained negative in the first quarter, amounting to -17.1 million euros. The political strikes had a significant negative impact to the operating result, well over EUR 10 million. Additionally, significant costs were incurred due to fleet breakdowns caused by exceptional track damage and especially challenging winter conditions.

During the first quarter, political strikes halted VR’s passenger traffic for two days and our logistics transport for 23 days. In February, we had to suspend long-distance train services due to safety concerns arising from rail damage. Delayed detection and repair of the rail damage resulted in approximately 40% of our long-distance fleet being affected. VR faced substantial costs for fleet repairs, reduced traffic due to fleet shortages, and the need to reorganize the traffic. Moreover, an extended period of severe cold in the early months of the year posed significant challenges to operations, leading to the week-long cancellation of 10-15% of train services to facilitate intensified thawing and the maintenance of equipment.

Despite these challenges, long-distance traffic revenue increased by 5%, with 3.5 (3.4) million journeys made. This growth in passenger numbers drove increased revenue, supporting by the Easter holiday falling in the first quarter this year. However, due to temporary speed restrictions and fleet challenges our punctuality in long-distance traffic fell to an exceptionally low level of 69% (86%). This directly impacted customer satisfaction, measured by NPS, which stood at 32 (53) in the first quarter. Customer satisfaction quickly rebounded towards the end of the quarter, approaching the level of the previous year.

Freight volumes and results in freight transport were significantly affected by political strikes and harsh winter conditions. Railway transport volumes decreased by -15.6% to 6.2 (7.4) million tonnes.

Revenue in city traffic increased compared to the previous year. Exceptional weather conditions slowed revenue growth and significantly increased costs during the first quarter. Poor profitability of long-term contracts in the current conditions also weakened the result.

Our strategy focuses on profitability, growth and creating a work culture based on our values. We seek growth in other market areas outside of our traditional market as well. By acquiring the long-distance traffic operations of MTR Express (Sweden) AB (MTRX) on the Gothenburg-Stockholm route, we are strengthening our competitiveness. With this acquisition, our operations in Sweden expand from regional contract traffic to market-based long-distance traffic.

Increasing the share of emission-free rail transport requires continuous improvement in customer satisfaction. Approximately half of train delays are due to poor rail infrastructure, so targeted and sufficient state investments in rail infrastructure are essential for improving train punctuality. Functional internet connectivity is a significant part of the customer experience. New Wi-Fi networks that are up to five times faster have already been installed on 60% of our long-distance trains. However, improving connectivity aboard trains also requires investments by telecommunication operators in trackside network infrastructure.

VR supports the implementation of the government program's rail transport provisions aimed at increasing competition. According to the government program's stipulations, no public support is provided for routes operated on a market basis. VR supports the development of the rail market in Finland based on customer choice and market forces. Publicly supported, competitively tendered procurement traffic complements free competition. In several regions, there is a desire to develop regional procurement traffic in the coming years. It is possible to rapidly establish a procurement-traffic equipment company. This would support the emergence of competition in both procurement and market-based transport by lowering the market-entry threshold. To create a competition-neutral environment, VR will divest station properties, depots, and the remaining rail infrastructure owned by the company. We have also put diesel locomotives and passenger-train carriages up for sale.

In line with our revised strategy, we aim to achieve 250 million euros in profit improvement measures by the end of 2027, enabling financing of one billion euros in rolling-stock investments and ensuring our competitiveness in the future. We continuously invest in improving the customer experience while enhancing operational efficiency and critically examining fixed costs.

I want to thank all our employees for their excellent work and commitment in the challenging operating environment during the early part of the year. Together we are building a sustainable future for VR. We care, we work together, we drive improvement – with our values guiding us forward on this shared journey.”

Outlook for the current year

VR expects that comparable operating profit (EBIT) for 2024 will improve compared to 2023.

The popularity of train travel increased to record levels during 2023. The popularity of weekday business travel and overall leisure travel both increased. The popularity of train travel is expected to continue strongly, with travel volumes growing in 2024.

The weakened economic conditions in Finland’s heavy industry have led to a reduction in the volume of freight-rail transport since the second quarter of 2023. This trend is unfortunately expected to continue, resulting in lower-than-normal freight transportation volumes. VR estimates that the volumes of rail transport will rise compared to 2023, especially during the second half of 2024. The price level of rail transport is expected to increase in 2024 compared to the previous year.

In city traffic, the negative impact on the profitability of long-term contracts signed before the pandemic is expected to persist. Through efficiency measures and the renewal of contract portfolios, efforts are being made to improve the profitability of city traffic. However, profitability is expected to remain challenging.

This stock exchange release is a summary of VR Group’s Business Review January-March 2024. The complete report is attached to this release.

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