Exports will exceed domestic sales by the end of this year

From March 1, a new organization will come into effect, according to which the leading business unit in Dalekovod will be Engineering, and all others will function under it. The new central unit is expected to operationally lead the fast-growing company, while the Management will primarily oversee it.

Written by: Matilda Bačelić
[email protected]
Photo: Željko Jelenski

Achieving the annual goals set by the company is often unattainable. Sometimes the goals are merely empty wishes or a way to impress others with ambition, but rarely seen achievement of annual goals at the beginning of the year means that you were too modest or simply hit the jackpot. In recent days, Dalekovod’s shares have been the most traded commodity on the stock market. Although the domestic market is not lacking in speculative investments, in this case, the interest of investors is not surprising, as it is a company that can currently say it has a ‘closed year’ in terms of contracted jobs, and the strongest positive impulse in the story with Dalekovod is the growing export business.
– We completed a job in Iceland that no one believed we would get, now we are preparing for Norway, where we expect one of the more significant jobs. In a few days, I am going to Kazakhstan to sign a contract for 390 kilometers of 500 kV power line worth over 80 million dollars. There, we have expressed interest in building a zinc plant and street lighting in Astana, as well as equipment for 350 kilometers of highway, which we will also discuss – says the CEO of Dalekovod, Luka Miličić, adding that he is also expecting a call from Albania to sign a contract for the construction of a 156-kilometer power line from Tirana to Podgorica worth 43 million euros.

Exports soon larger than the domestic market

The ratio of domestic and export jobs a year or two ago, when Dalekovod’s revenue was around 100-120 million euros, was such that the share of exports was 15-20 percent. Today, Miličić says, they are close to having export revenue exceed that achieved in the country. – We thought this would happen in 2009, but now I am convinced it will be by the end of 2007 – emphasizes Miličić, adding that today they do not think about Dalekovod in this and next year, but in 2015. That it is not a random flash is evidenced by the fact that for the seventh or eighth consecutive year, Dalekovod is showing significant growth. This was a signal that internal organization must also be initiated to keep pace with such rapid growth. Thus, from March 1, a new organization will come into effect, according to which the leading business unit in Dalekovod will be Engineering, and all other units will function under it.

The new central unit is expected to operationally lead the fast-growing company, while the Management will primarily oversee them. Given the strong export orientation, one engineer in the new organization will be specifically responsible for monitoring all significant tenders worldwide and assessing Dalekovod’s chances. Preparations for this reorganization have been ongoing for several years, during which more than 200 young engineers of various profiles have been employed, who are now, after getting to know Dalekovod ‘inside out’, as Miličić says, ready to take on these functions. Dalekovod’s targeted markets are illustrated by another step within the company – learning (in addition to the essential English) French and Russian. – There is no great wisdom here – Japan, Australia, and America are far from us, the European Union protects itself, so we are left with Africa, Scandinavian countries that are not in the EU, and countries of the former USSR – explained Damir Skansi, assistant to the general director. In Africa, Dalekovod has already made significant progress in Ghana, where at the beginning of last year it contracted the delivery of 279 telecommunications poles, which was its largest single export job, and given the good references, they continue to stay there. Additionally, they are qualifying for a job to build a thousand-kilometer power line in Namibia. – Now the name Dalekovod in this job means something. Until yesterday, we were the ones calling and looking for jobs, and now customers are contacting us themselves – says Miličić.

New niche: Renewable energy sources

A prerequisite for such a breakthrough in foreign markets was ‘training’ on the home front. The golden age of road construction and large infrastructure projects in Croatia is definitely coming to an end, with only the bridge to Pelješac and smaller road works remaining. However, Dalekovod has secured a backing, primarily in energy, railways, and telecommunications. To start, this year they received a job to modify the electric traction system for HŽ in the Primorje-Gorski Kotar County in a consortium with Končar, with a total value of 500 million kuna. Furthermore, when HEP begins to implement its investment plan, Dalekovod can expect jobs in the domestic market until 2013. In line with changes in the domestic market and the completion of road construction, Dalekovod has timely oriented itself towards a new niche – renewable energy sources, specifically the construction of wind farms and small hydropower plants.

– In this activity, we are interested both as financiers and as contractors – says Miličić. In addition to newly contracted jobs, Dalekovod has recently successfully realized a new acquisition by purchasing a package of 88.65 percent of shares in the metal stretching factory Tim d.d. from Topusko, which thus joined its factories in Dugo Selo, Doboj, and its own zinc plant and forge. – As a small player with small tonnages of metal structures, one cannot play on the world market, and we realized that we need to gather similar companies around us into a cluster with which we can perform stronger in foreign markets – says Miličić. Although they could earn and invest capital more easily in some other way, by creating such a cluster of companies, Dalekovod can offer a ‘turnkey’ service – it has the know-how, equipment, and strong assemblers, which is a significant comparative advantage over the competition.

For example, until now they have only supplied antenna poles to Ghana, and now they are also seeking assembly services. Dalekovod has also expanded its product range with the specific acquisition of Tim Topusko. Now the key step, where opportunities lie but also dangers lurk, is the restructuring of existing capacities. In the metal industry, profitability is low, so good organization is extremely important, especially since these companies have outdated technology and excess workers. – Dalekovod provides a market for companies in the cluster, and they provide us with specialization and thus more rational production. This is necessary given that the European and world markets are ruthless, and you must produce as cheaply as possible to be able to compete there. Therefore, production must be organized in one place without idle time – explained Miličić.

Next year in the first quotation

The expansion of the cluster will continue in the future, not only through acquisitions but also through mergers of companies. All these ambitious plans come at a cost. Miličić says that Dalekovod is rated very well by business banks, HBOR, and EBRD. The current indebtedness to banks related to guarantees for jobs in Dalekovod is planned to be soon replaced by promissory notes or bills of exchange. The recently issued second tranche of commercial papers, as well as the announced third, served to maintain current liquidity given such intense growth and disruptions in payments in the domestic market. For a longer-term form of financing, bonds are under consideration. Regarding the announced exit to the first quotation of the Zagreb Stock Exchange, Dalekovod says they are not in a hurry and that it will most likely happen in 2008.

Although in the last few months it has not recorded any significant growth rates, not even in response to new jobs, last year the share price jumped by about 100 percent, and since privatization by as much as eight and a half times. It is currently the most liquid stock on the exchange. Some speculations suggest that the significant increase in trading with Dalekovod was influenced by the release of shares from the ESOP program, which has so far been successfully implemented twice in Dalekovod. On the other hand, it is possible that the increased trading on the Zagreb Stock Exchange is the result of portfolio restructuring by the largest institutional investors in the company’s shares. Namely, more and more pension and investment funds are including this stock in their portfolios. Thus, although the sale of shares from ESOP has increased supply, the price in the market has not fallen. Following good nine-month business results, it is estimated that Dalekovod’s unconsolidated business revenues in 2006 amounted to more than 1.35 billion kuna, while the company’s operating profit should be around one hundred million kuna. In terms of achieved net profitability, it is considered realistic to expect a net profit at the level of around 80 million kuna, or about 35 kuna per share.

Estimate for this year growth of 17.6 percent

Although it cannot yet release final results for last year, Miličić announces an increase in revenue and profit. Dalekovod is expected to record 1.69 billion kuna in sales revenue this year, according to the latest estimate from Hypo Alpe-Adria Bank (HAAB), which would mean a 17.6 percent increase in revenue compared to last year. Dalekovod should reach this amount through a 15.5 percent higher sales in the domestic market and 24.8 percent higher revenues from sales abroad. In the longer term, analysts at Hypo Bank expect that Dalekovod’s sales revenues will grow by an average of about 11.8 percent per year by 2012, which should be the result of stronger export growth. Their estimates for this year’s operations of Dalekovod at HAAB are based on expected new jobs in Bosnia and Herzegovina and Croatia, as well as the continuation of power line construction in Macedonia and Slovenia. In addition to the growth of business results, Miličić believes that 2006 will be remembered in Dalekovod for a significant breakthrough in foreign markets, internal reorganization of the company, and the introduction of a completely new information system, which has recently been put into operation.

The introduction of a business intelligence system, such as the new Oracle system in Dalekovod, is an investment that is made once every ten years. They cannot specify the value of the investment in Dalekovod, but they emphasize that 30 key people who know the business well have worked on it for two years, not counting hardware and software. What Dalekovod will gain from such an integrated system is the automation of certain actions and complete transparency that allows for internal control by management and openness of the company to external control. In any case, it positively affects the image.

Challenge for Management – employee dissatisfaction

Further research and development, which will be particularly emphasized in Dalekovod in the future, will be done according to the Japanese model – not inventing the wheel, but picking what is good somewhere and then applying it. After listing all the strengths that Dalekovod can boast of at this moment, the main weaknesses are related to the introduction of a new project organization and dual responsibility, as well as the new information system in the company. It is assumed, namely, that given the announced modernization, there will be resistance from part of the approximately 1,500 employees that Dalekovod currently has. The challenge for Management will be how to cope with people in their own ranks. The next challenge is, given that it is difficult to raise prices of products and services, to find internal reserves and reduce costs to a minimum. As for external dangers and competition in foreign markets, strategic alliances of domestic companies are on the horizon. Thousands and thousands of kilometers await in Kazakhstan and Algeria, says Miličić, and there is work to be done, but for a strong exit abroad, one must go together.