10 Years of Crisis

10 years of crisis

Smaller but unreformed corporate economy

April 2019 Executive summary

• The onslaught of the crisis in 2008 • The investment process has been increased sovereign and consequently dislodged creating a huge gap between corporate risk to levels inhibiting corporate investment needs, in order to investment and trading. Firms became maintain and enhance market position and smaller and weaker in capital terms. The competitiveness, and the ability and production base of the economy shifted willingness to fund them away from services towards industry and • A disproportionate number of Zombies towards lower value added continue to trade undermining market • Despite the strengthening of the funding equilibrium. The targeted elimination of all capacity of the firms, the institutional Zombies would result in a 13% increase in funding of the corporate economy the revenue of all other companies weakened and was partly substituted by • Nonetheless, coming out of the crisis there trade funding are about 2,100 investible companies, with total annual revenues of about € 110bn, with their own growth strategies

PwC The longest and the deepest crisis in recent history in the western world left its marks on Greece…

Greek vs U.S. GDP evolution during crisis years (normalised)

Greece United States In 2018 Greece officially exited 105 102 100 100 the longest and deepest crisis 96 that has been recorded in the 90 89 Western world. Eight years of 91 82 82 constant drop of economic Start of Crisis 86 76 activity, one could imagine that 2008 for Greece the productive fabric of the 1929 for U.S. 75 74 74 74 74 74 75 country has been destroyed.

1933: New Deal There was a huge value loss in 2013: Inflexion year of the Greek economy the corporate economy, as company valuations recorded a 72% decline, but after 2012 0 1 2 3 4 5 6 7 8 9 recovered

Source: Ameco, U.S. Bureau of Economic Analysis

Value loss in € bn

Equity Equity value** Market Cap

72 63 62 58 58 58 57 60 61 55 50 58 58 40 36 32 34 28 € 41bn 30 25 27 17 33 21 21 19 16

2008 2009 2010 2011 2012 2013 2014 2015 2016 Crisis years Source: Reuters *Equity value=EBITDA* sectoral multiple – Net Debt Market capitalisation (ASE) excluding financial institutions

PwC 3 … however, nothing much has changed in the corporate economy

The Top 10 in terms of revenue non financial sector companies remained almost the same during the crisis

2009 2016 Rank Company name Revenues Company name Revenues 2009 Rank (in € bn) (in € bn) 1 HELPE 6,76 HELPE 6,61 1 2 CCHBC Group 6,54 Motor Oil Group 6,36 6 3 PPC Group 6,03 CCHBC Group 6,22 2 4 OTE Group 5,96 PPC Group 5,17 3 5 OPAP Group 5,44 OPAP Group 4,23 5 6 Motor Oil Group 3,94 OTE Group 3,91 4 7 Viohalco Group 2,30 Viohalco Group 3,11 7 8 Ellaktor Group 2,27 Alfa-Beta Vassilopoulos S.A. 2,18 10 9 Marinopoulos S.A. 1,93 Ellaktor Group 1,94 8 10 Alfa-Beta Vassilopoulos S.A. 1,39 Titan Group 1,51 11 Entry Exit

Few things changed in the structure of the economy as a result of the crisis. Even though the top companies in all sectors shrank in size, most of them remained in the same position while there were no new market share contenders.

4 The impact of the crisis on firms

swift cost a marked change less complexity lack of adjustment in funding and value added investment

Debt decreased by Revenue value Costs swiftly €10bn added shrunk by No replacement of reduced by 11% The cost of funding 7pps assets and average increased and Exports rose during No new technologies EBIDTA margin remained at high the crisis, but their No R&D returned to pre- levels relative value added crisis levels (9.7%) dropped (-11pps) Productivity Overall funding continued to go became shorter term down

The economic model of Greece, the way it has been developed during the crisis, is incompatible with systematic growth. It is not driven by consumption, as exports cannot be financed. Not driven by investment either, with companies not willing to invest or unable to integrate innovation. Not supported by the state, which does not invest, does not facilitate private economy and consumes more resources than it should. The economy did not transform as a result of the economic shock. Instead, it mostly retained its structure, resisted change, drained from investment, its technological base weakened and lost value added.

5 Companies swiftly compressed operating costs to adjust to the drop of demand

Demand shrunk, profits dropped and then recovered by suppressing their operating costs

148.6 144.8 144.5 139.7 135.0 135.0 135.8 What has really happened? 133.0 131.0 132.9 128.8 130.5 126.0 Revenue 124.0 118.0 118.0 The crisis caused losses in the Operating costs demand within the Greek economy, reaching a 12% decline compared to 2009. Under this pressure, Greek companies contained their operating costs by 11% and focused on

15.4 operating profitability to 10.9 12.7 9.2 8.7 8.9 8.6 9.7 EBITDA counterbalance the loss

As a result, their profitability, in terms 2009 2010 2011 2012 2013 2014 2015 2016 of Return on Equity and Capital Employed, crumbled in the first years of crisis, but later recovered to almost before-crisis levels Profitability initially collapsed, but rebounded as a result of cost cutting

9.7%

6.8% ROE 6.8% ROCE 4.8% 6.1% 3.6% 4.3% 2.4% 1.8% 1.5% 0.6% 2.0% -0.6% 2009 -20101.5% 2011 2012 2013 2014 2015 2016

-2.3%

-4.5% 6 The production base of the economy shifted away from services towards industry and towards lower value added

Revenues dropped by 12%, but value added recorded a decline of 21% Revenues and value added (in € bn)

148.6 VAR** VAR 130.5 2009 2016 Δ(%) 126.1 Δ(%) Δ ‘09-‘16 ‘09-‘16 85% 78% ‘09-‘16 64.2 101.3 -2pps 50.7 -21% -23% 90% 88% Commerce 57.8 7% -14% 74% 60% -14pps Industry 44.4 Infrastructure -16% -19% -3pps 88% 85% Services 41.2 43.9 -22% -2pps Construction -20% 30.6 86% 84% 26.3 Tourism -35% -39% 82% 76% -6pps 20.6 Investment Companies 17.3 18.1 42% 14.7 39% 90% 89% -1pps ** Value Added 17.5 Ratio 14.0 15.1 11.8 0.9 0.7 -18% 0.9 0.7 -19% 99% 98% -1pps (Value Added/ 1.6 2.7 2.2 1.8 1.4 2.2 2.0 1.3 Revenue) 2009 2016 2009 2016 Revenues Revenues Value Value Added Added* Source: OECD, PwC Analysis *2015 added value coefficients used

Economic activity moved from services and construction towards industry and tourism, and thus to lower added value and less embedded technology Export volumes rose during the crisis by €12bn, trying to balance the loss of domestic demand, but value added, as a proportion of exports declined by 11pps. The expansion to new markets was largely based on low-value products

7 Systematic deleveraging and the elimination of working capital led gradually to the accumulation of cash

Systematic deleveraging Gross Debt (in € bn)

-14% 65 -2% 7 (12%) 56 54 12 12 10 (19%) (22%) (18%) 10 11 (18%) (19%) How did business respond to the 45 (69%) 33 34 (59%) (63%) crisis?

2009 2013 2016 Corporates cut down their credit Trapped Debt Refinanceable Debt Debt exposure, contained their working capital needs, and accumulated cash Working Capital evaporated by € 3bn during the crisis. Working Capital (in € bn) Corporate debt has been reduced by -78% € 11bn since the beginning of the 13.4 crisis (€ 54mn in 2016), of which 30% was unsustainable. Despite this deleveraging, unsustainable debt -220% 2.9 remained almost stable.

About € 8.7bn of debt is trapped in -3.5 Zombie companies 2009 2013 2016 Working capital turned negative as Corporates during the crisis accumulated receivables and stocks followed the cash in their balance sheet drop in demand, but payables did not Cash (in € bn) decline +21% -1% 16.3 13.6 13.5

2009 2013 2016 8 The survival of the Zombies has contributed to the maintenance of high capital costs and has distorted the market due to unfair competition

Revenues (in € bn) 80 70 Persisting Zombies 60

30 There were in total 905 Zombies/Almost

20 Zombies in 2009 and 745 in 2016. Out of them 312 companies were Zombies/Almost 10 Zombies in 2009 and in 2016 0 2009 2010 2011 2012 2013 2014 2015 2016 Zombie & Almost Zombie companies account for 26% of the total and "survived" Gross Debt (in € bn) with around € 15bn of loans trapped in their 35 balance sheet and an additional € 10bn 30 owed to third parties

25 Receivables and payables reflected difficult 20 trading conditions, as well as the resilience 15 of Zombies

10 Since the beginning of the crisis 312 5 companies, deemed to be Zombies, 0 remained in the same position. “Persisting 2009 2010 2011 2012 2013 2014 2015 2016 Zombies” generated roughly the same revenues and owed the same amount of Payables (in € bn) debt and payables to their suppliers. Their 22 presence distorts the market due to the 20 unfair competition and drains liquidity 18 16 14 12 10 8 6 4 Stars and Almost Stars Zombies and Almost Zombies 2 Greys Persisting Zombies 0 2009 2010 2011 2012 2013 2014 2015 2016

9 The crisis led to a substantial and permanent increase in the cost of capital for the firms…

Cost of Capital

40% Cost of Equity (%) Cost of Debt (%) 35% Risk-Free Rate (%) RoE (%) RoCE (%) WACC (%)* 30%

25%

20%

15%

10%

0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 -5%

-10%

Source: Thomson Reuters, Damodaran Database (NYU), OECD, PwC Analysis * Weighted Average Cost of Capital

Liquidity plays an important role for a The return on capital employed is company to grow and to implement its systematically and considerably below the strategic plans. During the crisis in corresponding cost of capital creating a Greece, corporates faced a climate of huge obstacle for companies to make increased cost of funding. large and long term investments Τhe state’s inefficiency to finance itself and the banks’ inadequacies pushed capital costs to unsustainable levels

10 ... leading to low investment, despite the fact that the funding capacity of the companies seems to have recovered

Investment collapsed Investment (in € bn)

5.3 5.1 -81%

3.6 +25% Investment loop 2.4 2.0 1.9 The reduction in investment 1.0 during the crisis has been 0.4 dramatic with a direct negative impact on technology 2009 2010 2011 2012 2013 2014 2015 2016 integration and undermining the potential for expansion with Investment loop new products and new markets Funding/Borrowing capacity (in € bn) Cash Corporate R&D expenditure It is estimated that around Investment Total funding capacity** €45bn of extra investments Borrowing capacity* 42 could have been funded by the 40 Greek companies in the period 2013-2016, but they did not 32 materialise 26 26 23 This distortion is now systemic

15 16 16 and while 74% of the 14 13 13 12 12 14 companies can attract capital, 9 7 8 having increased their debt 5 4 Investment lost service capabilities at pre-crisis 5 2 2 2 1 1 0 0 1 0 1 1 levels, the investment rate is at 1 0 1 2009 2010 2011 2012 2013 2014 2015 2016 -4 45% of the 2009 levels -6 -9 Source: Eurostat, PwC analysis *Borrowing capacity=5*EBITDA – Net Debt **Total funding capacity=Cash + Borrowing capacity

11 There are two value creation strategies for companies coming out of the crisis

Improve Accelerate Operating 1 Growth | 2 Margins

Improve Debt sustainability

What matters most and for whom?

The crisis prompted many corporates to restrain their long term plans to accumulate cash, trim costs, and become cautious to large investments. Coming out of the crisis, Greek corporates should decide which strategy to follow, in order to increase value for their shareholders.

We have statistically analysed 2,817 companies in 17 sectors to examine the sensitivity of equity value:  an increase of 1% in revenue leads to 0.7-1.1% increase in equity value. Revenue growth drives equity value consistently, across sectors  long term EBITDA margin increases of 1% generate between 0% and 13.5% more equity value. The effect of operating profitability on equity value changed during the crisis in a non homogeneous manner with some sectors being highly driven by profitability  a reduction in Net Debt/EBITDA ratio of 1%, adds no equity value when the company can service debt but it can provide an extra 0.1-0.2% if it is stretched

The cost of capital plays an important role in deciding a strategy.When capital costs are high, strategies that expand margins outweigh those that accelerate growth. Debt sustainability adds little or no value to the company according to our findings. Each company faces a different trade- off between growth and profitability. Ιn some industries, like Food & Beverage and Constructions, focusing on boosting growth will generate higher returns than improving margins. Other industries, like Tourism or health, should mainly focus on cutting costs before adopting growth strategies To set in motion and fund growth, corporates need to identify projects with returns in excess of the long term cost of equity

Percentage change in equity value to: Growth Borrowing Capacity (Stars & Greys) 1.25% Average 4.74% New Markets/Products Re-configuration 1.20%

1.15% Transport Pharmaceuticals 1.10%

Energy 1.05% Food & Beverage Utilities Entertainment Telecoms 1.00% Heavy Industry Fuel Retail 0.95% Average 0.94% Investment Companies Light Industry 0.90% Logistics Other Retail 0.85% Construction Health 0.80% Tourism 0.75%

0.70% Professional Services

0.65% Low Responsiveness Cost Cutting 0.60% 0% 2% 4% 6% 8% 10% 12% 14%

Percentage change in equity value to: Strategies Profitability

21% of the companies, Could keep tightening costs, improving processes and Cost cutting the smaller ones re-optimising operations making very little investment €16.9bn / 423 / €40mn/ €11.1bn May focus on expanding market share in existing market New markets/ 26% of the companies, or turning into new ones with a sizeable investment products the largest in size €47.8bn / 533 / €90mn/ € 27.2bn potential Could expand by acquiring less strong competitors and Re- 13% of the companies, by reconfiguring themselves, depending on external configuration large ones € 13.1bn / 222 / € 59mn/ €5.3bn funding, but this amounts to little investment 39% of the companies Low Slow to respond, particularly if they have no access to typically of medium responsiveness funding, with no significant investment in sight €30.1bn / 739 / €41mn/ €13.8bn size

Total Revenue / No. of Stars & Greys / Average Firm Size/ Funding Capacity 13 Without a policy shock, the dynamics of the economy will not change

Unaided individual corporate strategies are unlikely to set in motion high and sustainable growth across the economy Three broad policies must be implemented simultaneously aiming at reinstituting conditions which are conducive to longer term planning and investment and to the mobilization of resources across economy  First, the corporate landscape must be cleared of Zombies at a fast pace. Comprehensive liquidation processes are instrumental to transferring demand to Star and Grey companies, to releasing assets back to the productive economy, whilst improving trading liquidity. At the same time, the banking system must be cleared from NPLs, which absorb regulatory capital, so as to resume lending to the economy  Second, a well orchestrated trust building effort with a clear and convincing plan for the future has to be initiated. This will help reduce sovereign risk and will bring in international strategic investors to consider Greek corporates, which not only survived the worst crisis, but also improved their own competitiveness  Third, as a result of investment, the economy will be rebalanced to higher value added services and products and expand into new markets. Coherent sectoral public policies promoting size, concessionary funding towards last stage R&D, demand and supply aggregation and clustering are necessary in facilitating this shift The legacy of the crisis is heavy, but well hidden, and gradually is forming Greece into a more primitive physical production base with less services output, fed with little investment and starved of innovation www.pwc.com

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