2017: Growing purchasing power brings in record-high sales to SEE companies

By Nevena Krasteva

Robust domestic demand backed by growing disposable incomes, a steady investment flow and a benign international environment put the economies in Southeast Europe (SEE) on a faster-growth track in 2017. Companies in the region cashed in on the positive consumer sentiment on both domestic and global markets, as investments made in capacity raised their productivity, while expenditures remained low. The aggregate revenues of the SEE TOP 100 entrants and their profits both hit record highs. The economic upsurge reached companies across all sectors, giving the strongest impetus to export-oriented majors in the metals industry and manufacturers of cars and car parts. Oil and gas companies, which traditionally dominate the SEE TOP 100 ranking, regained ground, too, after going through a rough patch in the past years due to the slump in global prices. Vibrant sectors such as agriculture, however, are still underrepresented in the ranking, while others, such as IT, are conspicuously absent.

Expanding private consumption underpinned by growing disposable incomes pushed economic growth in SEE to 4.0% in 2017 from 3.5% a year earlier, outpacing the European Union (EU) average. A favourable external environment, including healthy performance of the economies in the EU, the region’s main trade partner, and a global pickup in commodity prices provided a further boost to the economies in the region. Banks remained solid and the financial markets, with the exception of Romania, stayed calm. Unemployment was on a downward trajectory as managers remained upbeat in their hiring plans.

Improved business confidence and widely available cheap financing fuelled a rise in corporate investments, while EU funds continued to support public investment. Foreign direct investments increased in most countries in SEE, too, as evidenced by growing activity on the M&A market.

China emerged as a key investor and continues to pour billions of euro in the region. Most of the money goes into key infrastructure projects in Serbia but the corporate sector also attracted a serious chunk of the total. In 2018, the government in Belgrade picked Zijin Mining Group as buyer of a 65% stake in state-run copper miner and smelter RTB Bor for $350 million. Earlier this yе ar, Hisense Group became the owner of 95.42% of household goods manufacturer Gorenje, one of the top ten companies in Slovenia. Another Chinese company, CEFC China Energy Company Limited, was about to sign a deal for a majority stake in KazMunayGas Inter-national, the owner of Romania’s Rom-petrol Rafinare – the seventh biggest company in the region, according to our ranking. The deal, however, fell apart. In Bulgaria, the China National Nuclear Corporation declared its interest in the potential construction of a second nu-clear power plant in the country.

With a population of 19.6 million and impressive gross domestic product (GDP) growth of 7% in 2017, Romania stands out as the showcase market in the region and home to most of its biggest companies, including the SEE TOP 100 ranking leader, car manufacturer Dacia. It serves as a test ground for most major foreign investors scanning the region for expansion opportunities and leads the way on the M&A scene.

Romania’s economy, however, also displays most of the weaknesses that annoy investors across the region – inefficient institutions, unpredictable policy -making and wavering progress in the fight against corruption. Political turmoil at times spills on to the stock market and hits the local currency, frequent amendments to the tax code force businesses to revise their long-term plans, and attempts by the government to meddle with the judiciary raise concerns about the independence of the institutions.

Furthermore, quick economic expansion has fuelled concerns about overheating, prompting the IMF to repeatedly urge for fiscal moderation and increased central bank vigilance. According to IMF projections, Romania’s fiscal gap will widen to 3.6% in 2018 from 2.8% in 2017, whereas consumer price inflation is seen accelerating to 4.7% from 1.3%.

Despite its strong growth, Romania’s GDP per capita was equal to just 63% of the EU average in 2017. Other countries in the region, Slovenia excluded, have even lower wealth levels, as they do not enjoy Romania’s advantage of scale. At the same time, they feel just as acutely the same problems stemming from the weak rule of law, corruption and unpredictable regulations. Infrastructure across the region is obsolete and declining unemployment is accompanied by shortages of skilled labour.

Add to these a bunch of large state-owned companies in urgent need of restructuring in Serbia, a thriving grey sector in Albania and Macedonia, the collapse of the biggest privately-owned concern in Croatia, and unresolved problems with neighbouring countries in Serbia, Kosovo and Macedonia. Against this backdrop, the strong performance of the companies in SEE TOP 100 is even more notable.

Putting the pedal to the metal

2017 will go down as the year companies in SEE boosted their earnings to all-time highs. As the region settled into a steady growth mode, the total revenue of the entrants of the SEE TOP 100 ranking reached 113.9 billion euro, up by 12.5% as compared to the turnover recorded by the companies in the previous year’s ranking. Their total profit grew even more steeply, by 22%, to 4.9 billion euro. The threshold for entry into the ranking soared as well – to 515.5 million euro from 464.7 million euro a year earlier.

The upturn is largely due to a recovery of the oil and gas sector and strong performance by the metal companies, following a rise in global commodity prices.

Oil and gas companies account for about a quarter of all entrants in the ranking. At the same time their combined revenue makes up almost a third of the total 36.5 billion euro, as compared to 30.3 billion euro booked by the entrants in the ranking a year earlier. Furthermore, their combined profit nearly doubled to 2.2 billion euro.

At number 2 in the ranking on 3.8 billion euro turnover, Slovenia’s Petrol is the sector’s top performer in SEE TOP 100. It is followed by Romania’s OMV Petrom which reported the highest profit among all SEE TOP 100 entrants, of 515 million euro.

Six of the top ten companies in the ranking come from the oil and gas sector.

However, the sector to post the sharpest year-on-year increase in aggregate turnover, of 46% to 5.7 billion euro, is metal processing. Metal companies also saw their profits leap to a combined 256 million euro, from 71.0 million euro posted by the entrants in the ranking a year earlier. Apart from rising global prices, the sector’s expansion is directly fuelled by increased demand by other industries as economic growth gains momentum. “Manufacturing a conventional auto-mobile takes some 20-25 kg of copper, while for hybrid and electric vehicles this amount exceeds 100 kg. A wind generator and its infrastructure need over 20 t of copper,” Tim Kurth, CEO of Aurubis Bulgaria, a unit of Hamburg-based copper producer Aurubis, says. (Read the full text of the interview with Kurth on p. 31.)

Aurubis Bulgaria is the biggest metals producer in the ranking and a newcomer among the top ten. The company’s 2017 financial results reflect a sharp increase in output after a major shutdown of its plant for capacity upgrades a year earlier.

Car makers continue good run

Automobile Dacia, a unit of France’s Renault, is the biggest company in SEE for a fourth year running as its revenue rose by 11.62% to 5.0 billion euro. Dacia’s profit increased, too – to 115.7 million from 100.5 million euro – but by this indicator, the company ranks a distant 15th in the region. “Sales of cars and parts grew as compared to 2016, because of the excellent mix of models and versions. To this result contributed also the completely knock down international sales,” the company told SeeNews. The higher operating profit shows the profitability of current operations and that the company’s resources have been used efficiently, it added.

Car manufacturing remained the fourth biggest industry in the region, generating a combined revenue of 14.2 billion euro and a net profit of 351.9 million euro. When taking into consideration the results of the tire makers, which in our ranking fall under the rubber and rubber products industrial category, the figures show an industry that is the third biggest in terms of turnover and generates the second big-gest aggregate profit in the region.

The automotive sector’s strong financial performance comes on the back of a remarkable rise in production. Vehicle production in SEE in 2017 showed a14% annual growth rate against a European average of 3.7% and 1.9% globally, while passenger car sales increased by 9.7%, as compared to Europe’s 3.1% and global 2.4% annual growth rates, according to data by the International Organization of Motor Vehicle Manufacturers. This upward trend is observed in all SEE markets except Macedonia.

Since 2007, when SeeNews started compiling its SEE TOP 100 ranking, the combined annual revenues of all car and car parts makers entering the ranking have increased 140%, a result unmatched by any other industry in the region. The automotive sector is among the most rapidly expanding industries in all countries in the region in terms of contribution to the GDP, production capacity increase, volume of investments and job creation. The sector, which benefits directly from growing demand both on domestic and global markets, attracts investors with low cost of construction, land and services, significant state subsidies and the region’s proximity to key markets. Last but not least, SEE, in particular the countries with traditions in car manufacturing such as Romania, Serbia and Slovenia, boast a wide base of high-qualified workers. In Romania, for example, 15 universities offer automotive-related curricula.

Retailers take back seat as Agrokor crsis hits bottom lines

Another sector that enjoys the tailwinds of rising consumption is wholesale and retail. Yet, it is the only industry to report a combined loss, of 8.3 million euro, as five of all seven loss-makers in SEE TOP 100 come from its ranks. The sector’s lackluster performance is due to the collapse of Croatia’s largest privately-held concern Agrokor, represented in the ranking with three of its units – Croatian retailer Konzum, Slovenia’s Poslovni Sistem Mercator and Serbia’s Mercator-S. The three companies reported a combined loss of 786.9 million euro. Excluding their results, the sector’s combined profit would have been the second biggest in the region.

Despite the poor performance of the three Agrokor members, the sector’s combined turnover increased to 22.9 billion euro in 2017 from 20.7 billion euro posted by the entrants in the ranking a year earlier, pointing to the healthy state of the other wholesalers and retailers.

It comes as little surprise that Romania has the biggest number of representatives of this sector on the SEE TOP 100 list.

Or, for that matter, that it is the country with the biggest number of entrants, 51, among the region’s top 100. Next comes Slovenia with 13 representatives, followed by Serbia with 12, Croatia with 11, Bulgaria with 10, Bosnia and Herzegovina with two and Macedonia with one. The other countries in the region did not manage to get in an entrant.

In terms of sectors, oil and gas, and wholesale and retail have 24 each, electricity has 14 and the automotive sector has 11, plus three tire makers which fall into the rubber and rubber products industry group. The metals sector is represented by five companies, while pharmaceuticals and agriculture have three entrants each. The sectors, whose number of representatives is slightly lower compared to the previous year, are drinks and tobacco, telecommunications, and transport. One industry that is conspicuously absent from the ranking is IT, even though it has emerged as a major driver of many economies in the region, creating thousands of jobs and generating some major M&A deals over the past years.

Export-oriented, integrated, investing heavily

Half of all entrants in this year’s edition of SEE TOP 100 are foreign-owned. Foreign ownership helps local companies avoid many of their domestic problems, while giving them access to international markets and supporting their investment plans. The capacity for exports is crucial for domestically owned companies, as well, in order to offset the limitations of the small local markets.

Sales of motor vehicles and car components outside Romania accounted for 93% of Dacia’s total sales in 2017. The other manufacturers of cars and car parts also sell the bulk of their output on foreign markets. Sales abroad are key for the operations of companies from the sectors of metals, chemicals and pharmaceuticals. Aurubis Bulgaria, the country’s biggest exporter, contributes 9% of Bulgaria’s exports, and Serbia’s HIP-Petrohemija, the most profitable company among the entrants in this year’s edition of SEE TOP 100, generates more than 80% of its revenue from exports.

Most of the top companies enjoy the economies of scale provided by the full integration of activities within their line of operation. Here again, we do not need to look further than the top of the ranking for evidence to support this conclusion. Groupe Renault Romani, Dacia’s parent company employing more than 17,700 people, integrates all activities specific for a car manufacturer. This has generated a steady economic performance and a wide range of job offers in different fields: market studies, design, engineering, technical research, manufacturing and supply chain, sales and aftersales, business services and financing.

Large-scale investments are another common feature of the operations of the top companies in the region – OMV Petrom’s investments, for example, exceeded 640 million euro in 2017. Apart from investing in capacity expansion, a growing number of companies are acknowledging the importance of spending on circular business models, as well as on research and development. To deal with the shortage of skilled labour, businesses are also investing in training programmes and dual education classes.

We asked some of the biggest companies in the region what are the main factors impacting their operations and how they see their business developing in the short term. Following are their answers:

“Since 2000, the investment made by Groupe Renault Romania amounts to 2.8 billion euro. These include new products development (cars, engines, gearboxes, etc.), as well as manufacturing process optimization (working conditions, automation, quality, cost reduction and integration of new technologies). […] Groupe Renault Romania has proved its high capacity to generate performance, having an essential contribution to the Romanian economy: 3% to the GDP, 7% to the national exports, 1,500 suppliers. We want to continue this success. And, let’s not forget that we operate in a competitive industry which evolves extremely rapidly and that we are challenged both externally and internally.”

Groupe Renault Romania

“Oil and gas has been and will continue to be a backbone of global energy supply also in 2019. OMV is investing in modern technologies for higher efficiency, process sustainability and product value. At the same time OMV is also shaping tomorrows mobility and preparing the alternative fuels needed for it. Being in a close contact with the automotive industry, research organisations and universities we are promoting future mobility technologies with the development of innovative fuels and building of required infrastructure. By doing this we are striving to accomplish EU environmental and energy efficiency targets. In Slovene environment, OMV will be focusing on new Government`s opinion on fuel price deregulation and excise duty policy as well as on new Slovene Energy Sector Strategy.”

Vanja Lombar, Managing Director, OMV Slovenija

“Business environment is improving in most our markets. This is reflected in the economic growth and increased consumption and, consequently, in the increased consumption of medicines. We at Krka know our company will also thrive in the future if we keep developing in order to provide new products, and by maintaining effective and flexible production and efficient marketing-and-sales network. Our strategic objectives until 2022 include the attainment of at least 5% average sales growth in terms of volume and value. In addition to maintaining the existing product portfolio […], we will enter new therapeutic areas and maintain the largest possible share of new products in total sales. We intend to introduce new innovative products, such as fixed – dose combinations of two or three active substances, new strengths, dosage forms, and delivery systems.Our growth depends especially on continuous increase in the range of products based on vertically integrated business model. We use it to control the entire development-and-production process, from raw ingredients to finished products. Currently, 700 experts are developing more than 170 new products. Our innovations result in modern pharmaceutical dosage forms that match products of the best pharmaceutical companies in the world. We intend to increase production capacities intended for the synthesis of active pharmaceutical ingredients and finished product manufacture, and laboratory capacities for quality assurance and control. Simultaneously with the organic growth of production capacities, we also plan to grow with acquisitions and long-term partnerships which will, in addition to new products, also allow us to enter new markets. Besides the development and production, marketing and sales are of key importance for achieving business objectives. The competition in international markets is harsh, and regulatory requirements are getting stricter. We respond to these challenges by strengthening our own marketing-and-sales network in all key markets, which enables us to get prompt feedback from individual markets and to effectively adapt to new circumstances in these markets.”

Krka, d. d.

“HEP Group’s business performance on the domestic market in 2019 will primarily be reflected in the quality of service provision and the overall relationship with our energy customers as well as in the delivery of investments in renewable energy sources and other business activities, both regulated and market- based. With that in mind, the key factors which might impact HEP’s business domestically in 2019 include the adoption of the Croatia’s energy strategy, the implementation of new regulations and the implementation of energy efficiency projects as well as the adoption of other regulatory regulations, most of which regard the implementation of the so-called EU Clean Energy Package. Other key external factors include international fuel price trends for electricity generation i.e. the price of electricity on Power Exchanges as well as the CO2 emission price trends. In view of HEP’s business development in the region i.e. the strengthening of HEP Group’s market -based business activities in the neighbouring countries, they will primarily depend on the market liberalization rate and the improvement of business and marked- focused processes in those countries, in particular in Bosnia and Herzegovina and Serbia.”

Hrvatska Elektroprivreda d.d.

“Daimler AG is committed to support its investments in Romania on a long-term basis, concerning both production units as well as developing the team and the communities. The constant engagement shown by public authorities towards conducting their business as well as the support of the community have also contributed greatly to create a success story of Star Assembly. […] We are well focused on our people, as they are the strongest link of the business. Based on the requirements of each job, our employees benefit from specific on-site trainings, as well as trainings provided by our Mercedes-Benz colleagues in Germany. Thanks to a close partnership with the authorities of Alba County, since 2013 we are proud partners and supporters of the German Dual Professional School located in Alba Iulia.”

Star Assembly SRL

 

METHODOLOGY

SEE TOP 100 ranks the biggest companies in Southeast Europe by total revenue for the fiscal year ended December 31, 2017. Both 2017 and 2016 comparative figures are sourced from 2017 annual non-consolidated reports. The SEE TOP 100 ranking covers non-financial companies registered

in Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Moldova, Montenegro, Romania, Serbia and Slovenia. Banks, investment intermediaries, insurers and real estate investment trusts (REITs) are excluded from the ranking as total revenue

is not an accurate indicator of their performance. Holding companies, on the other hand, are represented in the ranking by their subsidiaries. All data is sourced from national commercial registers, stock exchanges, government and corporate websites, industry regulators, local business information providers and companies themselves. The initial pool of companies exceeds 2,900. The ranking does not include companies that declined or failed to provide financial results by the time SEE TOP 100’s content was finalised.

To allow comparison, all local currencies in the rankings have been converted into euro, using the respective central bank’s official exchange rate on the last working day of 2017 and 2016. Year-on-year changes in the companies’ financial indicators have been calculated using the figures in the original currency. Elsewhere, local currency figures referencing past periods have been converted into euro using the respective central bank exchange rate as of the end of the relevant period while all other local currency figures have been converted using the exchange rate as of the date the relevant editorial content was finalised.`