Dalekovod Group Future strategy, restructuring process and financing Diclamer
These materials and the oral presentation do not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any securities of the Dalekovod Plc. (“Company”) nor should they or any part of them or the fact of their distribution form the basis of, or be relied on in connection with, any contract or investment decision in relation thereto.
This presentation includes certain forward-looking statements. Actual results could differ materially from those included in the forward- looking statements due to various risks and uncertainties, including but not limited to changes in business, economic and competitive conditions, regulatory reforms, foreign exchange rate fluctuations, uncertainties in litigation or investigative proceedings and availability of financing. These forward-looking statements represent the Company's expectations or beliefs concerning future events and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. None of the Company, their advisers or any other person accepts any liability for any loss howsoever arising, directly or indirectly, from the issue of this document or its contents. Additional detailed information concerning important factors that could cause actual results to differ materially is available in the Group's Annual Report.
The third party information contained herein has been obtained from sources believed by the Company to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated herein are complete and accurate and that the opinions and expectations contained herein are fair and reasonable, no representation or warranty, expressed or implied, is made by the Group or its advisors, with respect to the completeness or accuracy of any information and opinions contained herein.
These materials include non-IFRS measures, such as EBITDA. The Company believes that such measures serve as an additional indicators of the Group's operating performance. However such measures are not replacements for measures defined by and required under IFRS. In addition, some key performance indicators utilized by the Company may be calculated differently by other companies operating in the sector. Therefore the non-IFRS measures and key performance indicators used in these materials may not be directly comparable to those of the Group's competitors.
This document may not be distributed and may not be reproduced in any manner whatsoever any distribution or reproduction of the attached document in whole or in part is unauthorized.
2 Table of Contents
. Introducing the Dalekovod Group
. Business Performance in 2010
. Restructuring Process and results for Q1/2011
. Future outlook
. Appendix An overview of the Dalekovod Group
. Dalekovod is vertically integrated company combining engineering, design, manufacturing Dalekovod Group and construction services in the following areas: • Power transmission and distribution projects, esp. transmission lines ranging from 0.4 kV to 1000 kV • Substations of all types and voltage levels up to 500 kV • Underground and underwater cables up to 220 kV • Telecommunication facilities for all types of networks and antennas • Production of suspension and jointing equipment for all types of transmission lines and substations from 0.4 kV to 1000 kV • Manufacturing and installation of all metal segments for roadways, esp. for road lighting, guard rails and traffic signalization, tunnel lights and traffic management • Electrification of railway and tram lines in cities • Infrastructure projects in the energy , rail and road transportation and telecommunication sectors offering : Engineering, Design, Production and Construction services . Insisting on world-renowned quality and environment protection standards along with continuous development of new products Dalekovod has established its basic goal - continuous improvement of customers' satisfaction . The company currently employs 1.994 people of which 600 work internationally . In 2009 the company entered into new line of business – renewable energy
Mission . Providing complete services to infrastructure sectors in electric power industry, road and railway traffic, telecommunications, gas pipelines, construction industry and renewable energy industry.
Vision . Becoming a leading company in its line of business in Europe!
4 Legal Structure of the Dalekovod Group
Parent Dalekovod d.d. company
Dalekovod Dalekovod TIM Dalekovod Unidal Ltd. Dalekovod Cindal Ltd. Cinčaonica Ltd. Inc, Topusko EMU Ltd. Vinkovci TKS Ltd. Doboj Doboj Production 100% 95.7% 100% 49.0% 92.9% 95.1% companies Anti-corrosion protection Works of expanded metal Production, sales and Manufacturing of hot Manufacturing of TL Galvanizing, anti- of steel by galvanizing made of steel, copper, services related to forgings (transmission structures and other corrosion protection, aluminum electricity meters lines, railway tracks, etc.) structures Bosnia and Herzegovina
Construction Dalekovod Dalekovod Dalekovod Dalekovod companies Ukraine Ltd. Greenland Ltd. Ljubljana Ltd. Mostar Ltd.
Dalekovod Dalekovod EKO Dalekovod 100% Projekt Ltd. 100% Professio Ltd. EKO 100% Ltd. 50% Project companies Design of transmission lines, Holding company for investments into Velika OIE substations, etc. renewable energy sources Popina Ltd. 50% Macedonia 50%
Dalekovod DALCOM GmbH, Dalekovod Dalekovod Dalekovod Dalekovod Nigeria Freilassing Namibia Polska SA Kosovo Libya Subsidiaries & Albania Montenegro Macedonia Ukraine Rep. offices Sweden Norway Germany Kazakhstan
Dalekovod Dalekovod Sportski grad 100% 100% 15% Adria Ltd. Ulaganja Ltd. TPN Ltd. SPV’s SPV for investments in TLM (factory for SPV for investments in the Sky Office Project (50% Consortium with Konstuktor and IGH (large aluminium processing) project ownership) domestic construction companies) for International investment in Spaladium Arena (Split, Croatia) Croatia
5 History of the Dalekovod Group
Recent key developments
. Managed to sign EUR 125,6 mn of international deals over the past 7 months . Continuously generating a higher share of revenues from foreign markets . Begun corporate restructuring in order to optimize 2010 operations and sustain competitive advantage ► First renewable energy project completed . Invested in renewable energy sources in order to lower the riskiness of the business and high reliance on the tendering 2009 process ► Listing on the 1st quotation of ZSE 2009 ► First investments into renewable energy
2009 ► Key international reference in Kazakhstan as an entry point to CIS markets 2005/2006 ► Key international reference in Iceland (230 km, 420 kV TL) as entrance point to Scandinavian markets (esp. Norway)
2004 ► First International acquisition of TKS Doboj, manufacturing plant for TL structures
2001 ► Listing on Zagreb Stock Exchange Revenues 2010: EUR 226,8 mn (2nd quotation, mandatory by the law) 350 2000/2001 300 ► Introduction of the ESOP Program (60% of employees participated) 250
1993 200 ► Transformed into the joint stock company 150 1962 ► 1st International reference – Transmission Line in Togo 100
1949 50 ► Foundation of Dalekovod 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
6 International Presence and Recent Key References
EUR 21.9 mn
Norway- STATNETT – 103 km transmission line TL 420 kV
EUR 80.5 mn
Kazakhstan – KEGOC - 385,5 km transmission line TL 500 kV
EUR 24.5 mn
Island – Lansnet - 230 km transmission line 420 kV
Projects Product orders (metal structures, suspension and jointing equipment) and other orders
7 Production Facilities
Key Highlights Location of production facilities . The company owns four production facilities and has one JV (Unidal) with large number of different cataloguing codes: Factory Velika Gorica (metal Dugo Selo . Metal structures - Production of lattice and other steel structures, (Galvanization plant) structures (TL towers, masts and lighting poles, road suspension and equipment, railway equipment, halls, telecommunication etc.) jointing equipment) . Suspension and jointing equipment UNIDAL (Forged steel factory, JV . After completion of CINDAL plant (Bosnia and Herzegovina), company’s with Slovenian capacity for galvanizing services will significantly increase UNIOR) . The company plans to modernize targeted production segments and position itself as a niche player to ensure and increase product ZD6 (9,2 MW competitiveness WPP, JV) . Company considers JV’s in other segments of production TIM TOPUSKO . Company participates in 9,2 MW wind farm through a JV (Expended metal TKS Doboj (Metal factory) structures)
Metal structures Suspension and jointing equipment 45 80% 5,0 90% 40 4,5 80% 73% 80% 70% 70% 4,6 4,6 4,6 74% 4,6 4,0 35 37 62% 37 37 37 60% 70% 56% 3,5 30 56% 60% 50% 3,7 3,0 3,3 3,4 25 50% 26 40% 2,5 in 000 tons 000 in 20 23 2,6 40% 21 32% 30% tons 000 in 2,0 15 30% 1,5 10 20% 12 1,0 20% 10% 5 0,5 10% 0 0% 0,0 0% 2007 2008 2009 2010 2007 2008 2009 2010
Production capacity Output Capacity Utilization Production capacity Output Capacity Utilization * Galvanization plant capacities and hot forgings capacities are not included
8 Management Team
Key personnel Organizacijska struktura
Branimir Alujević, B.Sc.E.E. Director of Engineering Business Unit Management Board
mr.sc. Luka Miličić, M.E. President of the Management board Zdenko Milas, M.Sc.Econ Krešimir Kraljevć, B.E. Tomislav Belamarić, B.E. Director of Production Business Unit Deputy of CEO and Member of Member of the Board Management Board
Krešimir Anušić, B.Sc.E.E. Director of Construction Business Unit Dalekovod Plc.
Damir Skansi, M.Sc.Econ MB Assistant President for strategy and corporate management, Construction Business Business Process Engineering Business Production Business Director of Business Process Support Unit Unit Support Unit Unit
Headcount: 610 Headcount : 158 Headcount : 184 Headcount : 459 Jurica Prižmić, M.Sc.Econ Director of Strategic development
Other companies within the Dalekovod Group
Engineering and Viktor Horvatinović, B.Sc.Econ Design Production Finance Director/Head of Accounting Construction Headcount : 98 Headcount : 21 Headcount: 472
9 SWOT Analysis
STRENGHTS WEAKNESSES . references in various business programs which serve as a key . organization burdened with fixed costs inherited from times competitive advantages in project tendering when company predominantly operated on smaller markets with . managed to compete in most demanding worldwide tenders diverse products and services (such as Norway, Iceland, EBRD sponsored in CIS, CEE) in terms of . expensive access to strategic raw materials and products references, knowledge, quality, deadlines and financial strength . large concentration of the customers and historical large . ability to implement “turnkey” projects - synergy of vertical dependence on domestic market integration (own development, engineering, manufacturing and . assembly) due to expensive products and labor tendering is profitable with integral proposition (design-production-assembly) only in . knowledge and experience of employees Scandinavia, WE and Croatia . dislocation of production
OPPORTUNITIES THREATS . new investment cycles in energy, road and rail infrastructure in . further reduction of infrastructure investments in company’s Europe –need to renovate and increase capacity of existing core market (Croatia) power grids + development of completely new grid network . difficult and expensive access to financial resources, liquidity . core region of the company (SEE) requires significant problems in the sector in Croatia investments in energy infrastructure (due to envisaged growth in . foreign competition that uses export subsidies and incentives electricity consumption per capita) on the path to EU to compete on the Croatian market (convergence story) . domestic “cheaper” competition which operates in a “grey . streamlining operations and divesting non-core operations in economy” without paying taxes order to lower fixed costs and free up the B/S . investments in renewable energy sources
10 Strategy of the Dalekovod Group
. Group’s strategy has become focused on further internalization of its businesses operations with the plan to generate about Generating growth on 80% of total revenue in the foreign markets international markets . In 2010-2013 period the Group plans to achieve revenue CAGR of at least 15% . Primary focus is set on the countries of the region, Scandinavia, CIS and possibly EU
. Optimizing the unit productions cost, primarily by reducing the number of employees (around 300 employees - 15% of total labor force) and abandoning low profitable lines in order to ensure competitiveness of its products and services in the Increasing profitability forthcoming period . Improving W/C management
. With strong focus on its core business, the Company has taken decisive action to divest all of its non-core assets Deleveraging and FCF . Proceeds from the disposal will be used for deleveraging and for investing in new projects (renewable energy) which will generation significantly improve Group’s FCF generation
. Company has recognized a renewable energy sector as a one where it possesses key competences and it intends to become a regional leader in this line of business (wind power plants, biomass, thermal water, etc.) through strategic partnerships or Improving the business by its own development model . The company shall invest funds in projects that ensure stable and continuous FCF, primarily by relying on investments in renewable energy projects in the Region, thus reducing the riskiness of the business (less dependent on tendering) . The Group is aiming to generate about 15% of Group EBIDTA from continuous operations by 2013 and around 25% by 2015
Access to international . The Company believes it provides an interesting play for investments in energy infrastructure sector in the SEE Region, CIS, capital market and and WE and thus intends to utilize both domestic and international capital market in order to broaden its investors base and widening the investor raise a new capital in the next two years base
11 Table of Contents
. Introducing the Dalekovod Group
. Business Performance in 2010
. Restructuring Process and results for Q1/2011
. Future outlook
. Appendix 2010 Business Results
. In 2010 the Group achieved revenues of EUR 226,6 mn (32 % drop and 2% greater than planned). The Company managed to increase its revenue share generated in foreign markets according to the plan to 33 % (28% in 2009) . Although the top line fared better than planned, the bottom line was hit severely primarily due to: . negative macro-economic trends (low number of contracts in Croatia) and liquidity shocks (extending the collection period and increase of input prices) . acceptance and realization of projects with low profit margins . implementation of a more conservative cost accounting policies . significant underutilization of Company’s production capacities along with and higher prices of material and other inputs . In order to reduce the fixed costs and accommodate to market situation company lowered cost of labor (from EUR 52mn to EUR 41mn, without pursuing any lay-offs) as well as managed to decrease marginally direct costs in 2010 . Since this off-set was not enough to protect profit margins, the EBITDA declined from EUR 33,2 mn in 2009 to EUR 16,5 mn in 2010 and thus caused Management to further engage in significant restructuring processes of the Group
as % of as % of as % of Income statement (in EUR mn) 2007 2008 2009 2010 Balance sheet (in EUR mn) 2007 2008 2009 2010 sales sales sales
Long term assets 77,9 94,3 110,7 123,3 Total revenues 254,1 319,7 100,0% 334,0 100,0% 226,6 100,0% Tangible assets 68,1 80,9 97,0 97,0 Sales revenues 252,0 317,0 99,2% 330,0 98,8% 213,6 94,2% Other revenues 2,1 2,7 0,8% 4,0 1,2% 13,1 5,8% Intangible assets 3,1 3,0 3,1 3,6 Financial assets 3,8 7,0 8,5 16,6 Material expenses and other direct LT receivables 3,0 3,4 2,0 6,1 164,4 259,4 81,1% 205,7 61,6% 135,0 59,6% costs Short term assets 173,9 269,3 208,6 204,4 Staff costs 49,3 56,1 17,6% 52,3 15,7% 41,2 18,2% Inventory 36,4 101,8 66,1 48,0 Other expenses 20,0 24,5 7,7% 25,4 7,6% 19,5 8,6% Accounts receivable 112,0 151,3 135,8 142,9 Change in work in progress and -2,1 -49,4 -15,5% 17,3 5,2% 14,5 6,4% Financial assets 0,1 0,1 0,1 0,1 finished goods Cash and equivalents 25,4 16,1 6,7 13,5
EBITDA 22,5 29,1 9,1% 33,2 9,9% 16,5 7,3% Total Assets 251,8 363,6 319,3 327,7 0,0% Shareholders Equity 75,3 82,2 94,0 95,3 Depreciation 5,7 6,9 2,2% 8,1 2,4% 7,7 3,4% Long term liabilities 27,5 37,2 36,2 58,9 Operating profit (EBIT) 16,7 22,2 6,9% 25,2 7,5% 8,8 3,9% LT financial liabilities 26,7 25,7 25,3 57,8 Long term provisions 0,9 0,9 1,1 1,0 Financial revenues 0,6 0,2 0,1% 0,1 0,0% 0,3 0,1% Deffered revenues 0,0 10,6 9,7 0,0 Financial expense 3,4 7,0 2,2% 10,1 3,0% 8,5 3,7% Short term liabilities 149,0 244,1 189,1 173,5 Accounts and other payables 102,4 140,7 115,4 90,7 4,8% 4,5% 0,3% Profit before tax 13,9 15,3 15,1 0,6 ST Financial liabilities 46,4 103,0 73,3 82,7 Tax 3,0 3,3 1,0% 3,2 1,0% 0,5 0,2% Reserves and tax payables 0,2 0,5 0,4 0,1
Net Income 10,9 12,0 3,7% 11,9 3,6% 0,1 0,1% Total liabilities and SE 251,8 363,6 319,3 327,7
13 Internationalization of Business Operations
. The Company continued further internalization of its business operations thus the share of foreign revenues in 2010 increased to 33% (28% in 2009) with a tendency of further growth in the forthcoming periods . Despite the aggravated business operations, the Dalekovod Group managed over the past 7-month period to conclude EUR 125.6 mn worth contracts in the foreign markets which will be realized in 2011 and 2012 . The Group strategy is to further focus on internalization of its business operations, esp. Norway and Sweden, countries which are planning to invest over € 10 billion in the energy infrastructure in the next 5-year period, as well as Ukraine and Kazakhstan
Completed or almost completed projects in 2010 Country Investor Project description Contracted (EUR) Total revenue (in EUR million) Operatori Sistemit Transmetimit Albania/ Montegero (OST) / CRNOGORSKI 156 km TL 400 kV Tirana Podgorica 41,9 mn 350 ELEKTROPRENOSNI SISTEM A.D. 300 Norway STATNETT 30 km TL 420 kV Sauda - Liastolen (70% completed) 12,0 mn VATTENFALL SERVICES NORDIC 250 Sweden Construction of 500 kV transmission line Dannebo Finnbole 2,1 mn AB 200 Construction of transmission lines TE-TO Skopje - TL 110 kV Skopje1 - Macedonia TE-TO AD-SKOPLJE 5,8 mn Skopje2 150 Bosnia and Herzegovina J.P. ELEKTROPRIVREDA HZ HB D.D. ECSEE ALP3-BiH Schedule No.2 2,6 mn Different projects (TL 400 kV Divača-Redipuglia,TL reconstruction, 100 Slovenia Elektro-Slovenija d.o.o. 2,6 mn delivery of suspension and jointing equipment ) 50 Slovenia Elektro-Slovenija d.o.o. instalation with the delivery of safe climbing equipment (70% 3,6 mn completed) 0 Other larger foreign projects in progress CGES AD Podgorica Enlargement of substation Ribarevina, construction od substation 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Montenegro 7,0 mn EPCG AD Nikšid Podgorica 5, 12 km 110kV TL, and different other works Substation Mojkovac, Substation Andrijevica - enlargement, constraction, Croatia International Montenegro CGES AD Podgorica 1,7 mn connection to the network, project docummentation Macedonia AD MEPSO Substation 400/110 kV Bitola 2 1,6 mn Revenue from international markets Bosnia and Herzegovina J.P. ELEKTROPRIVREDA HZ HB D.D. An electronic electricity meters 9,9 mn 100 35% J.P. ELEKTROPRIVREDA HZ HB 33% Bosnia and Herzegovina Suspension and medium voltage equipment 6,8 mn D.D. 28% 30% 25% Contracted projects for 2011/2012 80 25% Country Investor Project description Contracted (EUR) 22% Norway STATNETT Construction of 90 km 420 kV transmission lines Sima Samnanger 23,4 mn 60 20% Greenland Grenlandska vlada / ISTAK Ilulissat hydroelectric p. - 45 km 60 kV TL 6,3 mn Ukraine NEK-UKRENERGO TL 330 kV Dniester - Bar 10,8 mn 15% 40 Ukraine NEK-UKRENERGO expansion and modernization of 330kv substation Bar 10.3 mn 9% Ukraine NEK-UKRENERGO 135 km 750 kV TL Rivne- Kiev 59,2 mn 10% Delivery of suspension, jointing and other equipment on different Foreign markets 8,6 mn 20 international markets 5% Norway STATNETT delivery of steel tower construction for construction of TL Sima Samnanger 7,0 mn* 0 0% TOTAL 125,6 mn 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 * The exact value of the contract will know when all construction documentation and BOM will be designed in details and approved
14 Profitability Margins
EBITDA and EBITDA margin EBIT and EBIT margin 260 12% 200 12% 240 180 220 10% 10% 160 200 10% 140 180 9% 8% 8% 160 120 140 9% 8% 6% 100 7% 6% 120 100 7% 80 7% 4% 4% 80 60 60 40 40 2% 2% 20 20 4% 0 0% 0 0% 2007 2008 2009 2010 2007 2008 2009 2010
Net Profit and Net Profit margin Return on Equity (ROE) and Capital Employed (ROCE) 100 5% 21% 90 4% 18% 80 4% 70 4% 15% 60 12% 50 3% 40 9% 30 6% 20 10 3% 0 0% 0% 0% 2007 2008 2009 2010 2007 2008 2009 2010
ROE ROCE
15 Liquidity and Working Capital
. Contraction of demand on the domestic market had an adverse impact on the liquidity of the Group and due to the long receivable collection period of 228 days the Company was forced to finance its working capital through ST debt . The Company managed to transfer a portion of the burden onto its suppliers, whose payment period increased compared to 2009 from 148 to 169 days. However, prolongation of the days payable had an negative impact on input prices of raw material which caused downward pressures on operating margins . By the end of 2010 the net working capital amounted to EUR 31 mn equaling to 15% of the total current assets, which makes the Company vulnerable to inventory accumulation risks and further prolongation of days receivable . According to the long-term Company’s Plan, the share of net working capital shall be increased to 30 percent in order to decrease the liquidity risks caused by specificity of the business, including, among others: long-term projects, long payment periods and business dependent on tendering processes
Working capital analysis Structure of due account receivables Structure of due account payables
350 5% 15% 5% 300 89 34% 250 138 20% 40% 19% 200 61 85 150
100 196 8% 171 169 148 24% 30% 50 0-60 days 60-90 days 90-180 days 161 175 148 233 0-60 days 60-90 days 90-180 days 0 180-360 days more than 360 180-360 days more than 360 2007 2008 2009 2010
Days payable Days receivable Inventory days
16 Indebtedness
. Total Company’s net debt as of 31 Dec 2010 amounted to EUR 127,1 mn which represents an increase of 38,3% compared to the same period last year. The main reasons for Groups indebtedness include: . Project financing of the Sky Office (development of the real estate project in Zagreb) . W/C financing . CAPEX financing (wind power plants, TKS Doboj, Cindal) . The company recently utilized anti crises measures provided by the Government and restructured part of its ST debt with LT loan through CBRD in the amount of EUR 32 mn (lengthening of debt duration and halving the financing costs)
Total indebtedness 160 140 Net debt: 127,1 mn 120 26 58 Debt on the Sky office project is of a temporary nature since the 100 Project financing 25 company plans to divest the project by YE 2012. The company 80 of Sky Office entered into this project in 2007 with secured financing provided by 60 27 EUR 16,1 mn 103 Unicredit 40 73 83 46 20 Due to unfavorable financing conditions in Croatia in 2009 company 0 LT debt relied on ST financing and waited on the improvement of market 2007 2008 2009 2010 Long-term debt and conditions in order to arrange more favorable LT financing. The Short term debt Long term debt EUR 46,3 mn leasing growth of LT vs. ST debt ratio started in 2010 and will further Financial expenses continue in 2011 12
10 Net ST debt Although company’s indebtedness increased by 43% compared to 8 EUR 64,7 mn 2009, the company managed to increase its LT vs. ST debt ratio from 6 26:74 in 2009 to 41:59 in 2010. With anticipated more favorable 10,1 (Debt 78,2mn) financing condition the company plans to further improve the above- 4 8,5 mentioned ratio in order to prolong the debt maturity profile and 7,0 (Cash 13,5 mn) thus reduce the refinancing risk 2 3,4
0 2007 2008 2009 2010
17 Dalekovod Share Price Development
. Dalekovod share price underperformed the market in recent three year period due to the perception that Company's business is primarily dependent on the Croatian construction sector which was severely hit by the crisis . Dalekovod share is one of the most liquid on Zagreb Stock Exchange
DLKV-R-A share information DLKV vs. CROBEX
15%
DLKV –R-A -5% Share price Price (20/05/11) EUR 33.1
-25% 52 week high EUR 52.7
-45% 52 week low EUR 29.3
Volatility 60 days 28.9% -65% Dalekovod Analyst consensus buy 1 -85% under review 2 20-May-08 20-May-09 20-May-10 20-May-11 Number of shares 2.293.812 Dalekovod CROBEX Market capitalization EUR 74.4 mn DLKV price and trade volume
Capital Freefloat (%) 85.07% structure Freefloat (shares) 1.95 mn 180 5.000 160 4.500 Average daily volume 12 months EUR 138 k 140 4.000 6 months EUR 164 k 120 3.500 3.000 3 months EUR 76 k 100 2.500 80 Daily volume as % 2.000 0.22% of market capitalization 60 1.500 40
Liquidity Liquidity 1.000 Daily trade as % 0.26% 20 500 of free float 0 0 Freefloat turnover 387 days 20.05.08. 20.05.09. 20.05.10. 20.05.11.
Turnover (000 EUR) Share price (EUR)
18 Table of Contents
. Introducing the Dalekovod Group
. Business Performance in 2010
. Restructuring Process and results for Q1/2011
. Future outlook
. Appendix Restructuring of the Group and Capital Increase
. As the company continues its focus on international markets from which it constantly generates a larger share of revenues the Management realized that the Dalekovod needs to undertake a process of corporate restructuring in order to prepare the company for more aggressive international expansion . The company led by history of experience and references from the most challenging markets wants to use the forthcoming period to strengthen its position on international level. The company is also committed to tap an international capital market in the medium term in order to obtain a new investor base, enhance company profile and image, remove the perception on a Croatian construction company and raise new funds for further business development and expansion . In order to succeed in the abovementioned strategy the company and its Management are fully aware that the year 2011 needs to be used for corporate restructuring in order to ensure long term stability and competitiveness . The company realizes that future growth and profitable operations are subject to the following: 1) Reorganization of the Group and its business processes 2) Optimization of fixed costs 3) Strategic focus on core activities and disposal of non core assets 4) Reduction of short term indebtedness and optimization of working capital 5) Investments in projects with stable and continuous FCF generation (renewable energy)
In accordance with the Acts of Association the Management Board is considering a capital increase by issuing up to 25% of new shares with the exclusion of pre-emptive rights of the existing shareholders. Use the proceeds from the capitalization shall be following:
1 30% of proceeds Increasing the productivity of business units and reducing fixed costs 2 40% of proceeds Balance sheet strengthening through reduction of ST liabilities 3 30% of proceeds Investments in projects with stable and continuous CF in order to reduce dependence on tendering
20 Reorganization of the Group and Business Processes Due date: end of 2011
. Dalekovod Group is currently made up of four business units: Engineering, Production, Construction and Business Process Support . The current organizational problems are primarily reflected in the following: . Organization primarily oriented towards the domestic market, . Inadequate number of employees in particular departments/divisions . Undefined areas of responsibility of individual business units . Underdeveloped reporting system . Inadequate planning and budgeting of individual business units and projects . High fixed costs for competing in international markets . Employment structure for the increased volume of business in foreign markets . Lack of competitiveness in foreign markets for a satisfactory volume of business in the Production business unit . With the goal to improve business processes and ensure future profitability and viability of each project the Company has decided to put emphasis on the engineering and production business units as profit centers . By this measure the Engineering Business Unit shall only focus on tendering, contracting and project management and this will enable greater orientation to targeted international markets and allow greater flexibility to adapt to changing market conditions . Production will be removed from the Holding company and function as an independent Ltd. and thus both offer its products to Engineering and Construction business unit and operate under market principles targeting all interested third party companies
Current structure New structure
Dalekovod Plc. Board Board Dalekovod d.d.
Construction Production Engineering BPS BPS Engineering and Construction
Production becoming an independent Ltd. Other Other Design Production Production Design
21 Optimizing Business Processes Due date: mid 2012
Changes within business units after the implementation of the new organizational structures:
. Engineering business unit will be focused on managing predetermined market segments, offering, contracting and realization of projects, all in order to achieve higher performance in specific markets as well as provide greater flexibility and enable easier adaptation to the changing market conditions. Through the unification of the abovementioned processes Dalekovod will ensure better cost control an profitability of each project . The most qualified Project Managers from the Construction business unit will be transferred to the Engineering business unit Engineering and will be responsible for managing specific business programs and/or specific markets. Further, project Managers will be responsible for the profitability of their delegated program or market . Each project manager will be responsible for the entire cost structure of the project and have predefined profit margins. Project Managers will be incentivized based on performance which will be measured by both revenue generation and profitability of the contracted project
. Production business unit will be separated from the Dalekovod Plc. and function independently as a new Ltd. (in one of the existing Ltd.’s, Dalekovod Cinčaonica Ltd. or Tim Topusko Ltd.) . The newly formed Ltd. will optimize the product assortment and strictly focus on core products and shut down all unprofitable programs Production . Employees from the current Production Business Unit within Dalekovod Plc. will be relocated into the new Ltd. Management of the new Ltd. will employ and transfer an optimal number of workers from the Production business unit into the newly formed Ltd. while all remaining will workers will be declared redundant . Preparation for separating the new Ltd. are currently underway and the new structure will formally be implemented as soon as all necessary preconditions are satisfied, including, among others, the finalization of the construction hall and relocation of equipment
22 Workforce Optimization and Streamlining Operations Due date: mid 2011
. Due to business contraction on the domestic market and the planned reorganization of the Group, in which the main driver of revenue growth and profitability will come from the Engineering division, the company is determined in reducing fixed costs primarily through staff optimization and streamlining of the organizational structure . Along with the strategy of further internalization and larger share of revenues outside the domestic market the company believes that an optimal number of employees in Dalekovod Plc. should not surpass 1.100 which in turn represent a necessary headcount reduction by 22%. (307 employees) . In the process of reorganization and headcount reduction, employees which are declared redundant will be offered a simulative severance pay with some having necessary prerequisites for early retirement
Savings due to headcount reduction Headcount Average gross salary in EUR # of employees Annual savings reduction (yearly) Yearly savings due to headcount reduction Savings on salaries 1.421 307 20.270 6.222.973 Staff transport savings 92.930 will amount to EUR 6.4 million while savings Other employment benefits 107.865 in 2011 will be on the level of HRK 3.2 million
Total savings 6.423.768
One off severance pay expanses Headcount in EUR # of employees Severance pay One-off expense reduction The company plans to offer severance pay in the amount of yearly gross salary which will Dalekovod Plc. 300 20.270 6.081.081 1.421 represent a one off expense of EUR 6.2 Dalekovod Plc. (early retirement) 7 13.514 94.595 million in 2011 TOTAL 1.421 307 20.116 6.175.676
. Dalekovod Group currently employs 1.994 people and will in the abovementioned process of staff optimization further revise employment levels in all associated companies within the Dalekovod Group
23 Sale of Non-Core Assets and Strategic Partnerships Due date: end of 2013
. With a view of focusing on the core businesses of the Group and improving the liquidity, Dalekovod is planning in the forthcoming period to initiate the process of selling most of the Company’s non-core assets, including
Engaged capital as of Project name Project description 31.12.2010. Sky Office project relates to construction of the larges office building in Zagreb (70,000 m2). The total investment value Project Sky office is EUR 98 million and Dalekovod has a 50% ownership in the project. Upon completion of the project the total capital 27,1 employed by Dalekovod will reach EUR 50 million Dalekovod currently has a 92,9% ownership in TKS Doboj and intends to sell up to 50% of the company to a strategic Dalekovod TKS Doboj partner. Plant capacity is 20.000 tons and the company produces transmission lines, lighting and antenna grids and 2,7 * polygonal columns and various metal structures In 2007 Dalekovod completed an acquisition of 86,7 % stake in TIM Topusko (extended metal factory). The company is TIM Topusko currently in the process of tendering for large international contracts but in case the company misses on contracting the 4,9 stated projects Dalekovod will tend to divest TIM Topusko
Dalekovod has a 95% ownership of Cindal (galvanizing plant) and intends to sell up to 50% of the company to a Dalekovod Cindal 1,1 * strategic partner. Cindal is the largest galvanizing plant in the region with yearly capacity of over 24.000 tons
Consortium with the leading Croatian construction companies (Konstruktor and IGH) for the development of Spladium TPN Sportski grad Split 1,5 Arena and associated facilities (Split, Croatia). Dalekovod has a 15% stake in the project
Dalekovod Adria SPV used for investment in the company TLM (Tvornica Lakih Metala) 4,4
Joint venture with Unior-Treče as of January 2005. The principal activity of the company is manufacturing of forget steel Unidal d.o.o. 1,3 and Dalekovod intends to sell the remaining stake in the company (49%) Commercial real estate in Velika Gorica (near Zagreb). The property is currently in the manufacturing zone but the Velika Gorica 12,7 ** underlying location will soon obtain the license for commercial usage (planed to become an urban residence) Investments in Questus PE fund, property and halls on island Korčula, property in Zablade and shares of Croatian Other 7,5 companies Total (in EUR mn) 63,3 * Amount for 50% shareholding ** Real estate valuation performed by ZANE - Zagreb nekretnine d.o.o. (February 2011.)
. By divesting the above stated projects and forming JV’s in strategically important areas the Company will in the forthcoming 3-year period release around EUR 63 million of employed capital (liabilities and capital), which will further be used for deleveraging and new CAPEX
24 Divesting Non-Core Assets
Dalekovod TKS Doboj /Cindal . The construction project of the galvanizing plant Cindal includes completing the largest galvanizing plant in Bosnia and Herzegovina, with a 13.0m x 2.5 m x 2.0 m bath. The reason behind the investment was to realize synergies with the existing factory DTKS a.d. and achieve the most competitive price of its products . Total capacity of the galvanizing plant Cindal is 24,000 t/annually with . 95% of the Company’s is owned by Dalekovod, while total investment amounts to EUR 10, 7 mn . Due to the strategy of core focus on engineering and renewable energy businesses the Company decided to sell up to 50% stake to a strategic partner (negotiations underway)
Sky office . The Sky Office Project includes the construction of a commercial real estate with a total of 70,000 m2 in Zagreb, Croatia . Sky Office will be the largest commercial real estate property in Zagreb and the total project value amounts to EUR 98 mn . Dalekovod has a 50% shareholding in the project . The company decided to undertake this specific project due to the following: . Freeing up the location of Žitnjak (current headquarters) for further development (valuable real estate at Dalekovod’s current HQ location) . Utilization of own production capacities (metal facades) . Gaining a strong references in electrical and mechanical engineering as well as building automation . Increase of commercial real estate value in the future (EU convergence) . Upon completion of the project the Company is determined to sell its share in the Sky Office Project and already started discussion with potential buyer Velika Gorica . The Company owns valuable real estate in Velika Gorica (near Zagreb) with total area of 72.138 m2 (halls appx. 18.000 m2, offices appx. 3.500 m2) and is considering reallocation of the area . According to the Urban Plan, the area can be used for development of industrial or commercial real estate (attractive location next to Zagreb airport, rail station and highway A11 Zagreb-Sisak) . The real estate value is EUR 12.7 million (valuation performed in February 2011 by ZANE real estate, member of Unicredit Group)
25 Investments in Renewable Energy - Wind Power Plants
Investments in 2011 - Wind power plant ZD2 and ZD 3 of 36 MW – Bruška
. From the raised proceeds the company plans to complete the construction of wind power plants ZD 2&3 with total capacity of 36 MW . Dalekovod has a 50% ownership in the project while the total value of the investment is EUR 61 mn Existing investment – Wind power plant ZD6 of 9.2 MW - Velika Popina . During 2010 the Company completed its first renewable energy project by investing and constructing a wind power plant ZD6 with total capacity of 9.2 MW . The investment value totals EUR 15.8 mn and Dalekovod has a 50% ownership in the project
In order to generate 1/3 of Group EBITDA from continuous sources the Company plans to develop further 120 MW in wind PP by 2014 (subject to approvals and licenses) and capture cca. 30% of Croatian total wind power plant capacity
The Company considers expanding wind power plan business to neighboring countries as soon as they provide regulatory prerequisites
Income statement (50 % of wind power business) – expected IRR >15% in EUR million 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ZD 2 i 3 Revenues 0,0 2,8 5,8 5,9 6,1 6,2 6,4 6,6 6,7 6,9 EBITDA 0,0 2,4 4,9 5,0 5,2 5,3 5,4 5,6 5,7 5,9 Net income 0,0 0,2 1,7 1,9 2,1 2,3 2,5 2,7 2,9 3,1 ZD 6 Revenues 1,4 1,5 1,5 1,5 1,6 1,6 1,7 1,7 1,7 1,8 EBITDA 1,2 1,2 1,2 1,3 1,3 1,3 1,3 1,4 1,4 1,5 Net income 0,3 0,4 0,4 0,5 0,5 0,6 0,6 0,7 0,7 0,8
Total revenues 1,4 4,3 7,3 7,5 7,7 7,8 8,0 8,2 8,5 8,7 EBITDA 1,2 3,6 6,1 6,3 6,5 6,6 6,8 7,0 7,1 7,3 EBITDA margin 81,3% 83,7% 84,2% 84,2% 84,3% 84,3% 84,3% 84,4% 84,4% 84,4% Net income 0,3 0,6 2,1 2,3 2,6 2,8 3,1 3,3 3,6 3,9 Net margin 21,8% 13,3% 28,8% 31,4% 33,8% 36,1% 38,4% 40,5% 42,6% 44,5%
26 Business Results in Q1/2011 – First Results of Restructuring Measures
Fist results of restructuring effects and profitability growth EBITDA Q1/11 vs. Q4/10 (in EUR mn) 2,0
In Q1 2011 Dalekovod intensified its restructuring efforts which resulted in first positive 1,5 movements: 1,0
0,5 . Decreasing accounts payable by 8% and lowering levels of subcontracting resulted in 0,0 reduction of material costs as % of total revenue from 80,3% to 67,3% (Q4/2010 vs. -0,5 Q1/2011) -1,0 . Implemented cost savings resulted in reduction of other expenses from 11,2% to 10,0% -1,5 (Q4/2010 vs. Q1/2011 ) 4Q/2010 1Q/2011 . Contracted EUR 32 million LT arrangement with Croatian Bank for Reconstruction and Net income Q1/11 vs. Q4/10 (in EUR mn) Development with very favorable financing terms 0,0 . Repayment of commercial bills (EUR 16.5 million) at the end of Q1 in order to lower -1,0 financial expenses (first effects to be seen in Q2) -2,0
Implementation of announced measures positively effected the profitability of the Group -3,0 and Q1 EBITDA amounted to EUR 1.5 million, representing a significant growth in -4,0 comparison to a loss of EUR 1.3 million in Q4 2010 -5,0
Net income, although still in the negative territory (primarily due to high financial costs) -6,0 improved by 38% from a negative EUR 4.8 million in Q4 2010 4Q/2010 1Q/2011 Sales revenue Q1/11 vs Q4/10 (in EUR mn) The Group continued its efforts to capture new projects on international markets and 50,0 contracted EUR 125,6 million over the past 7 months. The project will be executed in the course of 2011 and 2012 40,0
30,0 It is worth mentioning that the company begun prequalification for tendering on numerous Western European markets (with some already completed) as it plans to open 20,0 up new markets knowing the spurring demand for infrastructure project all over Europe 10,0
0,0 4Q/2010 1Q/2011
27 Table of Contents
. Introducing the Dalekovod Group
. Business Performance in 2010
. Restructuring Process and results for Q1/2011
. Future outlook
. Appendix Dalekovod Group Plan – Sales Revenue Structure
. Although the company expects first signs of domestic market revival in 2011 (infrastructure projects announced by the Government as well as expected completion of previously delayed projects in Croatia), the presented Plan is focused primarily on international markets which will account for 44% of total revenues in 2011 (33% in 2010) and grow to over 80% by 2013
. In accordance with the organizational changes within the Group, non-core asset disposals and expected growth of energy infrastructure related projects (especially in Scandinavian countries, Ukraine and Kazakhstan) Engineering business unit will over the years become the largest and fastest growing contributor of total revenue
. The presented Plan of the Dalekovod Group includes highly conservative expectations for tendering on the domestic market and the company is aware that the potential pick-up of domestic infrastructure projects cycle could lead to higher growth projections and significantly larger business volumes
Revenues by markets Revenue by product groups
100% 100% 6,5% 3.5% 11,8% 2,2% 90% 90% 7,9% 80% 26,4% 80% 43,5% 70% 70% 1,8% 60% 76,2% 60% 83,5% 20,9% 50% 50% 94,3% 40% 40% 80,0% 30% 56,5% 30% 20% 20% 44,4% 23,8% 10% 10% 16,5% 0% 0% 2011 2012 2013 2011 2012 2013
Power engineering Road infrastructure Croatia International markets Railways Constuction, telecommunication systems, etc. Product placement
29 Spurring Market Demand
Europe’s infrastructure investment needs¹ ² Drivers for new infrastructure investments . According to the EU Commission, EU will invest up to EUR 440 bn into new connections, asset replacements and Aging On average over 30 years old reinforcement of its transmission and distribution systems infrastructure Big investments cycle underway to support rising demand . Until 2015, the whole of Europe will need around EUR 30
bn of investments into new transmission lines (35.000 km of Europe cannot add additional capacity without significant new transmission lines and reconstruction of 7.000 km of investments Lack of Capacity is driven by higher energy demand and by renewable existing ones) capacity generation (the need to transport vast amounts of power for . Sweden and Norway (Dalekovod’s main export markets) places energy is harvested - rural areas - to where it is used - plan to invest up to EUR 10 bn into energy infrastructure by urban areas) 2015 Required Renewable energy Capital Expenditure 2010-2020 ³ Renewable energy ³
. In September 2010, the EU Commission published the EU 0,04 0,02 105 1,04 0,89 0,85 0,74 1,46 1,16 1,09 energy scenarios which expects renewables to generate 2,17 1,94 33% of electricity demand in 2020 9,23 2,90 22,13 . Wind energy will supply 494.7 TWh of electricity meeting 14% of Europe’s total electricity demand in 2020, up from 2.3% in 2005, and 5.3% in 2010 59,68 . The European Commission expects 333 GW of new electric generating capacity in EU from 2011-2020 while wind > EUR 100 bn investments into Emerging would account for 141 GW or 41% of all new installations Europe . Overall strategy is to enable wind energy to supply 20% of Europe’s electricity in 2020, 33% in 2030, and 50% in 2050 . As a long term strategy the EU Energy policies heavily emphasizes the investments in renewable energy as the policy as the policy goal is to achieve 80-95% emission reduction by 2050 Sources: 1. European Network of Transmission System Operators for Electricity (www.entsoe.eu) 2. Statnett (www.statnett.no) 3. European wind energy association (www.ewea.org) i EU Commission anc capital elements
30 Dalekovod Group – Foreign Market Tendering Plan
. Apart from the already contracted international projects in 2010 and Q1/2011, the following projects represent the tendering plan for the period between 2011 and 2013: Project time Market Category Country Project description Status plan International Sweden Substation 400 kV Barkeryd waiting to sign the contracts 2011/2012 International Norway 274 km 400 kv TL Orskog-Fardal (3 lots) not being tendered yet 2012-2014 International Norway Distribution of lighting towers not being tendered yet 2012 200 km 400 kV TL interconnection of souther Sweden International Sweden and Norway (50 km lot) expected tendering 2012-2013 International Bosnia and Herzegovina sive zone - continued project planned 2011/2012 International Montenegro 400 kV TL Tivat - Pljevlja not being tendered yet 2012 International Macedonia 400 kV TL Štip - Serbian boarder not being tendered yet 2012 International Slovenia 90km 2x400 kV TL Krško-Ljubljana tender in place 2011/2012 International Slovenia TL 2 x 110 kV Beričevo-Trbovlje waiting to sign the contracts 2011/2012 Construstion of substation of Alma and connection to prequalification completed, International Kazakhstan the transmission network with TL 220 kv and 500 kV - 2012/2013 waiting for tendering I. phase Construstion of substation of Alma and connection to International Kazakhstan the transmission network with TL 220 kv and 500 kV - not being tendered yet 2012/2013 II. phase International Ukraine 750 kV Zaporizhzhia-Kakhovska not being tendered yet 2012/2013 International Albania 150 km 400 kv TL Tirana Priština waiting on tendering outcome 2011/2012 International Albania južni prsten 110 kV (TL and substation) not being tendered yet 2011/2012 International Sweden 50 km 400 kv TL Stackbo-Harma (Svenska Kraftnat) tender in progress 2011/2012 International Slovenia TL 2x110kV Formin - Cirkovce not being tendered yet 2011 International Bosnia and Herzegovina EPHZHB annual purchasing 2011
Total: > EUR 650 mil.
. The foreign market tendering plan shall additionally expand, especially for CIS, Norway and Sweden, which are planning to significantly increase their investments into infrastructure projects over the next 4 to 5 years
31 Investments into Renewable Energy
. Due to Group’s significant know-how and history of references in the field of power engineering Dalekovod is looking to form JV’s and PPP’s to invest into renewable energy projects in the region (wind farms, biomass, waste, geothermal etc.) . Primary focus is Croatia, B&H and Serbia which have thus far minimally invested in renewable energy projects and are expecting a surge in electricity consumption in forthcoming period . Croatia is currently underinvested in the area of wind renewable energy with only 89 MW of installed capacity. The countries strategy is to install up to 1.200 MW until 2020 . The Croatian Government has created a favorable investment environment for the construction of wind power plants by setting a goal of their share in total electricity consumption in Croatia between 9 and 10% in 2020 (vs. 0.34% in 2009) Source: EWEA (www.ewea.org) Dalekovod’s WPP pipeline for the period 2012-2014* . Through continuous investment into Instalment Total investment WPP (2012-2014) Country MW renewable energy sources Dalekovod will date value (in EUR mn) create a strong base for potential listing of the Renewable energy business or trade sale in WPP Kamensko - Voštane 2012. Croatia 60,0 90,0 WPP Mazin 2 2013. Croatia 20,0 30,0 order to raise capital for further expansion in WPP Otrid 2013. Croatia 20,0 30,0 the Region WPP Breza 2014. Croatia 20,0 30,0
TOTAL 120,0 180,0
* Dependent on obtaining all regulatory approvals and licenses
32 Key Targets for the Upcoming Period
. The company is aware that vast majority of international markets have extremely high infrastructure investment needs with total demand forecasted at EUR 30 billion Revenue CAGR > 15% . Due to significant know how and history of references on international markets Dalekovod expects to achieve revenue CAGR of at least 15%, which has been company’s historical growth rate (10y CAGR on international markets of 18%)
. With a successful implementation of announced restructuring measures and further internationalization of business operations the company targets its historical EBITDA margin of > 10% EBITDA margin > 10% . Investments into renewable energy sources, from which the company plans to achieve around 25% of EBITDA until 2015, will further boost Group’s EBITDA (EBITDA margin of wind power plants > 80%)
. Within the process of corporate restructuring the company announced its plans to tap international capital markets. In Sustainable net profit order to achieve attractive valuation and placement the Company targets bottom line margin between 4-5%, which is margin of 4-5% in line with international peers (peers average net profit margin set at around - 4.5%)
Deleveraging to 3x . Through the sale of non core assets and stronger free cash flow resulting form anticipated restructuring measures the EBITDA company plans to deleverage its operations to 3x EBITDA and restructure its debt ratio with a LT vs. ST target of 70:30
. With the strong revenue growth, improved profitably and positive effects resulting from planned restructuring Tageted ROE of ≈ 15% measures, the Company plans to achieve ROE of ≈ 15% as well as implement a stable dividend payout (historical yield of 3-4%)
33 Investment Considerations
. Company experienced severe drop in revenues and profitability with a slowdown primarily of Croatian infrastructure projects in 2010 and 2011. However, due to company’s ability to compete on international markets, it plans to substitute domestic demand with international one in 2011-2013 period where it expects significant revenue growth
. Dalekovod has undertaken serious restructuring efforts in 2010, which are expected to culminate in 2011 and continue even in 2012. By reducing labor costs and divesting all of its non-core business (reliant on Croatian market) the company tends to deleverage both operational and financial costs
. The clear growth areas are engineering, production and assembly of transmission lines on international markets where the company established a proven track record. Further, the company entered into highly profitable yet low risk renewable energy production business in Croatia and plans a possible extension to the Region. Project pipeline and tendering plan are indicating that the company positioned itself in a good direction for capturing the rapidly increasing demand. Since presented plan does not count on revival in Croatian infrastructure projects, its possible occurrence should further boost company’s performance
. Key objectives to succeed in the company’s strategy include: 1 The Company plans to use the year 2011 for optimizing business operation, mainly through the reduction of fixed costs, debt restructuring and investments in projects with stable cash flow
2 Preparation to participate in the new investment cycle in the regional markets, mainly in the energy sector and rail infrastructure, as well as new investments cycles in Scandinavia and CIS, and some WE countries where Dalekovod plans to establish its presence
3 Continue to invest its resources into renewable energy projects thus reducing the riskiness of its business model and exploiting first mover advantage, and possibly use this business to leverage itself though listing or a trade sale
4 In the following two years consider a capital increase through the combination of the following: a) Private placement to institutional investors on ZSE b) Equity Credit Line arrangement (ECL) with a reputable international fund c) Dual listing on ZSE and foreign capital market
34 Table of Contents
. Introducing the Dalekovod Group
. Business Performance in 2010
. Restructuring Process and results for Q1/2011
. Future outlook
. Appendix Macro Situation in Croatia
. Challenging macro environment, but measures taken by the Government, coupled with the external recovery and the growing momentum towards the EU membership should support the return to growth in 2011 Croatian GDP Monetary Indicators Croatia’s Economic Environment
(US$bn) (%) (HRK/USD) A number of significant challenges will be faced in 2011 to help 129% (%) 123% 126% Croatia recover from recession, stabilise the public finances and 96 117% 120% 100 90 10 115% Macro secure EU accession 81 85 120% Outlook 79 79 Real GDP contracted by 5.8% in 2009, and a further contraction 80 5% 8 6,3 6,4 6,4 100% of 1.3% is expected for 2010, before a growth of 2.0% in 2011 as 3,4% 3,4% 5,6 6,1 demand recovers 60 3,0% 80% 2,0% 0% 6 5,3 60% Total foreign debt for 2010 is expected to be of c. $60bn 40 (1,3%) 4 CCB forecasts that Croatia’s financing needs in 2011 will be HRK (5%) 40% Public 31.0bn, which is lower than in 2010 20 2 Debt 7,5% 20% (5,8%) 0,4% 1,8% 3,0% 3,1% 3,0% The credit rating for the Croatian Government bond- maturing in 0 (10%) 0 0% 2012 is BBB/Baa3/BBB- 2009A 2010E 2011E 2012E 2013E 2014E 2009A2010E2011E2012E2013E2014E Nominal GDP (US$) Real GDP growth HRK / USD, avg CPI, avg HRK The CCB rate is currently at a 9.0% level Money market IR Interest CCB cut the reserve ratio from 14% to 13% in February 2010, Annual average GDP growth of 3.3% in 2012-15 is Kuna is expected to depreciate, and it is a priority Rates further cuts are possible in 2011 to bring the reserve ratio down expected as demand recovers gradually for the Central Bank to stabilize the currency to 11% in order to release extra liquidity
FDI & FX Reserves Debt Indicators Inflation is likely to remain subdued Due to a significant contraction in domestic demand in 2010, (US$bn) (US$bn) (%) inflation remained low (average of 1.3% in 2010) despite an (%) Inflation 14,89 increase in world oil prices and domestic energy and food 5 13,79 15,00 13,23 13,15 13,51 13,54 80 99% 101% 102% 99% 110% prices 93% 88% Average inflation of 2.4% and 2.9% has been forecasted in 90% 4 70 2011 and 2012, assuming a gain in recovery momentum 3,3 62 10,00 60 58 70% 3 2,9 60 57 57 57 3,1 2,5 2,9 3,1 50% HRK/USD is currently at 5.73, while Bloomberg consensus 2 50 suggests HRK depreciation in early 2011 5,00 30% EUR/HRK The stability of the Kuna against the Euro will remain the priority 40 1 (5,1%) (3,9%) (4,5%) (5,1%) (5,2%) (5,2%) 10% for the Croatian National Bank, which will intervene in the foreign- currency market against appreciation or depreciation pressure 30 (10%) 0 0,00 2009A 2010E 2011E 2012E 2013E 2014E 2009A 2010E 2011E 2012E 2013E 2014E Total foreign debt Total debt / GDP Significant FX Reserve FDI Robust Return to CA balance / GDP macro measures growth challenges FDI’s are expected to be stable while further cuts in Current-account deficit is forecast to widen to 4.5% Conclusions taken by the expected in faced during reserve ratio are possible in order to release extra in 2011, while external debt is currently at 100% government 2011 liquidity GDP 2010 Source: EIU, EIZ, Bloomberg.
36