Prospects for development of ELEKTROBUDOWA SA Group, significant hazards and risks
In order to strengthen its position as a leader setting new quality of conducting business, ELEKTROBUDOWA Group is ensuring for:
As a transparent organisation, the Group performs each activity with conformance to the principles of corporate governance and social responsibility, caring for the natural environment and striving after highest standards of quality.
Specializing in the supply of modern, comprehensive and complete technical solutions for power industry and other industries, the Group is focused on:
It is a priority for the ELEKTROBUDOWA SA Group to be responsive to the needs and requirements of the stakeholders, particularly Shareholders, Customers and Employees, and also to be governed by the key values of the Group.
ELEKTROBUDOWA SA Group thoroughly analyses the market on which it operates and identifies such growing segments which offer perspective for employment of its assets for business development. New markets for products and services are actively looked for, and attempts are made to increase the turnover in the markets where the Group entities have already been present. Sales departments recognize the needs of new markets through participation in symposia and conferences and promote their goods and services on fairs and exhibitions. Domestic sales destinations were principally based on customers from power industry, mining, and chemical industry. The Group’s offer is targeted at the companies executing turnkey projects in foreign markets whose product portfolio does not include MV, LV and HV switchgear or busducts.
Products and services offered by ELEKTROBUDOWA Group:
The division of the Production Division into four production plants is based on distinctiveness of the offered products and enables concentration of manufacturing activities of different types and specifications in separated centres.
The Low and Medium Voltage Switchgear Factory in Konin is the producer of switchgear panels for primary distribution, in the whole range of voltages: from low voltage up to 145kV, and for secondary distribution in the voltage levels of LV to MV.
Having the high-voltage gas-insulated switchgear type OPTIMA 145 and OPTIMA 24 in the offer substantially increases the Group’s chances to win new orders in the power sector - orders for construction of main substations, end-user substations, high voltage grid substations, particularly the substations in urban development where, because of the reduced building volumes, relatively small, compact design of MV / LV switchgear gains in equal importance as its technical parameters.
Gas-insulated switchgear usually is the main or substantial cost component of a station. It is a technically much more advanced product than traditional air insulated switchgear. Development trends in high voltage switchgear are dictated by global leaders, and the increasing requirements of customers enforce constant work on optimization of OPTIMA 145 and OPTIMA 24 in respect of technology and cost.
The strategic goal of the Busduct Factory in Tychy for 2016 was to maintain its position among the European leading manufacturers of medium voltage busducts, through constant improvement of the products and by extending its product range with auxiliary equipment and devices compatible with the main product.The Mechanical Processing Plant has the task of ensuring the preparation and supply of particularly complicated components of equipment of OPTIMA 145 and OPTIMA 24 switchgear, requiring very high accuracy. The Plant specializes in the production of busbar systems, circuit-breaker drives and current contacts of various kinds, and small elements of the high voltage switchgear. Owing to the modern machine park which includes numerically controlled lathes and vertical machining centres, the Plant can provide turned parts used in the manufacture of low voltage and medium voltage switchgear, so far bought from external producers. Furthermore, the Mechanical Processing Plant renders services for other companies, contributing in this way to the reduction of costs of manufacturing small parts for internal needs. Owing to the equipment with specialist measuring instruments, the manufactured details are of highest quality level, providing the possibility to cooperate with global leaders, for example in delivery of pumps or manufacture of agricultural machines.
Plans for the current year include increasing the share of external orders and, consequently, a steady increase of the capacity.
In the Project Execution segment the existing structure of offered services has not changed, neither in domestic nor foreign markets. The segment is focused on improvement of quality of performed services. In the last quarter of 2016 the Project Execution Segment successfully completed a stage of work on the new CRM system being implemented in ELEKTROBUDOWA SA. Also, the valid procedures and their compatibility with the new software were reviewed which is particularly important for monitoring of tendering processes and observing the directions of business development.
In the Automation Segment, sales are generated by the subsidiary ENERGOTEST sp. z o.o. The company operates in three business sectors: power generation (power plants and heat & power plants), power transmission and distribution (distribution companies of electric power corporations) and some other industries which have their own electricity generating plants (mining, metallurgy, chemical and petrochemical industries, paper & pulp).
To ensure competitive advantage and high quality of offered products and services, the Group earmarks some of its financial resources to research and development. The development works focused on the domestic market include extension and modernization of the present product range, in order to respond to the customers’ needs to the largest possible extent. The developments dedicated to the domestic market principally concern application of new equipment, to boost competitiveness of the Group’s products, and also application of internally manufactured equipment. Developments focused on foreign markets concern new products and include also adaptation of the existing products to the requirements of customers, what involves the required testing and certifications. Further certifications and new implementations are planned for the first half of 2017. Capital expenditure on R&D carried in the 12 months ended 31 December 2016 amounted to 3 461 thousand PLN (in the same period of 2015: 3 331 thousand PLN).
Beside its strong existence in Poland’s market, ELEKTROBUDOWA Group is also present in foreign markets. Sales in the foreign markets in the 12 months ended 31 December 2016 had a 19.2% share in total sales generated by the Group, compared to 9.1% in the same period of the previous year. Details of export destinations and sales structure are presented in chapter 3.1 of this report.
As at 31 December 2016 the parent company, ELEKTROBUDOWA SA had a branch (permanent establishment) registered in Finland, through which it has provided services in that country. Through its related entities, the company introduces its products in the markets of Russia and Ukraine.
The parent company, ELEKTROBUDOWA SA has exported its finished products to the Russian market for many years, through its associate, Power Equipment Production Plant VECTOR Ltd. Mobile substations provided with MV switchgear as well as medium voltage switchgear for indoor operation will remain the basic products exported to Russia. Facing the growing competitiveness of domestic products in the Russia market, VECTOR Ltd. has significantly increased its share of sales in that market. Products offered by VECTOR Ltd. are not under embargo of either country. At present, investments are made to increase the production capacity of the Russian company in order to manage the potential and expectations of that market. Actions have been taken to launch news products of ELEKTROBUDOWA SA in the Russian market.
In Ukraine, business operations have been conducted by the subsidiary, ELEKTROBUDOWA UKRAINE Ltd. for five years. The company supplies the local market with products manufactured by the parent entity. By the end of 2016 reorganising of the company had been completed, new management appointed and active promotion and marketing in Ukraine started.
The parent company ELEKTROBUDOWA SA has been making efforts to establish cooperation with Iran companies to be given an opportunity to supply for projects relating to extension of the distribution network. Also, in 2017 the first supplies of switchgear panels to Peru, South America will be provided; efforts to build up the relations and winning new orders from the market of Peru and the neighbouring countries will be continued. Continued are the works relating to certification of new products manufactured by the parent company for conformity with GOST standards, which should enable extension of the market offer in the Eastern markets in 2017 and later. The Group takes actions targeted at identification of new directions of market development in Poland in the area of construction of railway and urban traction. The Divisions are conducting the activity, both in the product area and in the construction of turnkey traction substations.
Plans for 2017 include participation in a number of trade fairs, seminars and meetings with customers, with the objective of introducing the offer to the broadest possible group of foreign customers.
In the years to come the main driving force of the power sector will be extension and modernization of main substations and, on the generation side, modernization and construction of power units. Investments in renewable sources of energy seem prospective as well. A boom is expected in the construction industry in next years, as the new EU financial perspective has been launched. Many investments included in the new European budget for 2014 – 2020 enter their execution stage. This funding will also cover new transport infrastructure projects, concerning both road and railway systems, and overall modernizations of power substations and lines. The years 2018 - 2020 will bring implementation of projects relating to modernization of the existing facilities and construction of new ones for urban and railway traction, while the Investment Project called MUZA2 will direct the attention of building companies to this area.
The following factors will undoubtedly have influence on the level of future revenue to be generated by the Group:
In H1 2017, ELEKTROBUDOWA SA Group will focus on upgrading its competitive advantage by:
Prospects for development will be based on maintained strong position in the electricity distribution and generation sectors and opening to new export markets, taking advantage of synergies among the Group entities to establish presence in the power sector of the emerging markets. For the Production Segment, it will be important to maintain its leading position as the supplier of switchgear of high current and short-circuit parameters for heavy industry. In the coming years the power distribution industry and projects for extension of 110/15kV stations in urban areas and industrial zones will remain the most prospective areas for soliciting and sales of its products. Extension of the existing electric power distribution and transmission stations also offer a potential, both for the Project Execution Segment in the scope of modernization works and for the Production Segment in the scope of supply of its products.
Activity of the Production Segment concentrates around winning new customers in the Poland’s market, particularly by co-operating with local design offices in respect of “promoting” the GIS 24kV / 110kV OPTIMA 24 / 145, which are generally located in big towns (urban areas). The Production Segment also cooperates with General Contractors in tendering for big projects which include LV and MV switchgear. The Mechanical Processing Plant has plans to increase the share of external orders in the first half of 2017 and increase its production capacity in this way.
In 2017, the Project Execution Segment intends to continue its actions initiated in 2016, simultaneously modelling the organizational structure of the Division able to ensure more efficient pursuit of the Company’s strategic goals. The Division intends to maintain its present share in the market of complete power facilities. The Division expects and has hopes for opening of the local market to new investments concerning construction of new sources (based on the amended Renewable Energy Sources Act), additional funding for pro-environmental projects in the electric power sector, heat generating sector and the industry.
Generally, the entire long-term activity of the Segment will be focused on:
In the Automation Segment, ENERGOTEST sp. z o.o. intends to make use of its export potential provided by control, recording and surveillance systems and its own products: DCTest and arc protection systems. For the company, its growth potential lies in selling devices constructed and produced in the company, process and power automation systems and services related to engineering, acceptance tests, commissioning and connecting to the grid of generating units. The PMU unit developed and implemented by the company and awarded with PSE Gold Medal in ENERGETAB Power Fair opens new opportunities for building applications for analyzing the causes of failures occurring in the National Power System, conducting large area tests (so far not possible to perform) of NPS system behavior in emergency situations, for maintenance of extra high voltage and high voltage networks using the dynamically admissible carrying capacity of lines established on the basis of measurements from Phasor Measurement Units, up to continuous on-line monitoring of some essential station equipment. Supervision and control of power flow is supported by PMU technology which enables the company to develop new possibilities of control and optimization for distribution system operators, such has:
Promotional actions are carried out to boost sales of “Smart Load” anti-blackout systems in the industrial facilities which have their own power generating sources.
Risk management is a process of identification, evaluation, management and control of potential occurrences or situations, which aims at providing reasonable assurance that organisation’s objectives will be accomplished. Risk management is focused on reducing the risks and protecting against their impact. Managements of the Group entities establish general rules for risk management and policies for specific risk areas.
In performing their business operations the Group entities are exposed to various risks, such as:
Market risk – understood as the possibility of negative impact on performance of the Group, resulting from changes in market prices of goods, foreign currency exchange rates or interest rates.
Price risk - ELEKTROBUDOWA Group is exposed to price risk which arises from current economic situation in the power industry, chemical, building and metallurgy sectors, mainly from prices of electrical materials and equipment and steel products. The Group entities do not enter into long-term contracts with sub-suppliers; the scopes of supplies and deliveries are individually agreed in accordance with the procedures in place. The price risk management strategy concerning goods and services assumes that efforts must be made to conclude such contracts with suppliers that would enable the Group entities to buy materials and services for the prices ensuring execution of a project within its budget and schedule. Adequate policy, organisational structure and procedures as well as actions related to risk management, support the process of negotiating and establishing prices at optimum level.
The parent company reviews, on a current basis, performance of budgets of the contracts in progress, both in the scope of variable and fixed costs, and prepares a forecast of costs and performance until the end of each project. ELEKTROBUDOWA SA has implemented actions in order to reduce price risk connected with contract performance and implemented internal procedures (Director’s Orders), regulating current monitoring of contracts, updating the forecasts and an obligation to report “project end costs”.
Foreign currency risk – The Group is exposed to foreign exchange risk arising from buying and selling transactions carried in other currencies than the valuation currency. Main currencies of export and import transactions were EUR and USD. In the case of the Group’s exports in EUR, there is natural hedging, as most of imports are also carried out in EUR.
Interest rate risk - the Group’s exposure to the risk of changes in interest rates relates primarily to its long-term financial obligations. The Group entered into overdraft agreements and working capital loan agreements which rates of interest are based on the fixed interest rate WIBOR plus the relevant bank’s margin. The impact of changes in interest rates on the Group’s results due to incurred financial obligations is deemed immaterial, because of the scale of its activity. The level and fluctuations of interest rates did not involve the necessity to use any instruments to hedge the interest rate risk.
Credit risk – understood as the risk that the debtors would not fulfil their financial obligations.
Credit risk associated with cash and bank deposits - in respect of the financial assets of the Group, such as cash and cash equivalents, credit risk occurs when a counterparty cannot meet its financial obligations, and the company’s maximum exposure to the risk equals the carrying amounts of those instruments. Considering the above and the short-term nature of the investment, credit risk of cash and bank deposits is low.
Credit risk associated with trade and other receivables - the risk that a counterparty will not meet its contractual obligation, which will lead to a financial loss. Some part of the Group’s products is sold against down payments. Credit quality of counterparties is also regularly monitored on the basis of the condition of receivables. The policy of current monitoring of customers consisting in assessment of their ability to settle financial obligations allows verifying the related credit exposure, both at the stage of quotations and during project execution.
Liquidity risk – The Group monitors its risk of a shortage of funds using a liquidity planning tool. The tool takes into account the due dates and maturities both of investments and financial assets (such as accounts of receivables, of other financial assets), as well as forecast cash flows from operating activity. Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed borrowing facilities and guarantee lines. The Group’s objective is to keep a balance between continuity and flexibility of funding through the use of various sources of funding. The use of trade credit allowed by suppliers, and thus settling the liabilities with extended payment terms is also important. Processes of investing free resources depend on due dates of liabilities, in order to reduce maximum liquidity risk. If the market conditions deteriorated and the necessity of additional financing of operations or refinancing of debt through borrowings from external sources appeared, liquidity risk might increase.
Liquidity risk management in the Group has the form of maintaining suitable reserve capital, reserve borrowing facilities, constant monitoring of predicted and actual cash flows and adjusting the assets maturity profiles with the financial liabilities maturities profiles.
Capital risk - the Group’s objective of capital risk management is to maintain the ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. Like other market players, ELEKTROBUDOWA SA Group monitors the capital on the basis of the gearing ratio.
One of major challenges that the Group has to face is posed by the maintaining difficult financial situation of investors, which causes frequent changes of investment plans and gives rise to considerable uncertainty of performed projects. Strong competition inside the branch is an essential barrier which restricts the activity and which directly translates into lower margins on projects. Winning orders in tender procedures where the most-favourable-price is the main criterion for selection keeps the profit margins on a low level. Further, execution of orders received in tender procedures involves the risk of change of prices of building materials and, consequently, may have an adverse impact on profitability of the contract.
Changes on key positions in the companies owned by the State Treasury and in the electricity distribution companies involve changes of the policy of contracting for purchases and therefore create difficulty in estimation of the level of sales to these market segments.
Principles of the financial risk management are presented in detail in Note 4 to the consolidated financial statements for the financial year covering the period from 1 January 2016 to 31 December 2016.
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