Benchmarking Report 2011 - Wood Metal Sectors in Bosnia

8/13/2019 Benchmarking Report 2011 - Wood Metal Sectors in Bosnia

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BENCHMARKING REPORT 2011BiH Wood & Metal Processing Sectors

April 2011

This document was produced for review by the United States Agency for International Development

and the Swedish International Development Cooperation Agency. It was prepared by:

Cardno Emerging Markets USA, Ltd., implementer of

IRM Project USAID-SidaBosnia & Herzegovina

DISCLAIMER: The views expressed in this publication do not necessarily

reflect the views of the United States Agency for International

Development, the Swedish International Development Cooperation

Agency, or their respective governments.

FIRMA Supports the FIRMA Consortium, its

Local implementing Partner Network


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Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

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USAID-Sida FIRMA Project Overview

The Bosnia & Herzegovina Fostering Interventions for Rapid Market Advancement

(FIRMA) project is a 5-year, $20 million activity co-financed by the United States

Agency for International Development (USAID) and the Swedish International

Development Cooperation Agency (Sida). The projects goals are substantialincreases in sales, exports, employment, and finance of its three focus sectors:

wood processing, fabricated metal products, and tourism. These three sectors

represent over one-quarter of BiH manufacturing GDP, and nearly 40% of the

countrys export earnings.

FIRMA supports the FIRMA Consortium, an implementation partnershipbetween the FIRMA project and a network of local economic development

agencies that support private sector development across the entire country.

With and through the Consortium, FIRMA develops action plans for assistance to

the FIRMA focus sectors, and manages activities with local organizations and

businesses that address key obstacles to competitiveness.

FIRMA collaborates closely with BiH government state, entity, cantonal, and

municipal government agencies, associations, and other donors supporting

economic developmment.

FIRMA has principal offices in Sarajevo and Banja Luka. www.firmaproject.ba
http://www.firmaproject.ba/http://www.firmaproject.ba/http://www.firmaproject.ba/


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Contents

1. INTRODUCTION .......................................................................................................1

2. GENERAL MARKET OUTLOOK ...................................................................................1

3. FINANCIAL INDICATORS BENCHMARKING OVERVIEW ................................................3

4. WOOD PROCESSING SECTOR ....................................................................................5

4.1 Wood Products & Capacities in BiH ..................................................................................................5

4.2 Wood Products Market Outlook .......................................................................................................6

4.3 Financial Benchmarks for the BiH Wood Processing Sector .............................................................7

5. FABRICATED METAL PRODUCTS SECTOR ...................................................................8

5.1 Metal Products & Capacities in BiH ..................................................................................................9

5.1.1 Automotive value chain..............................................................................................................9

5.1.2 Aluminum Joinery Value Chain...................................................................................................9

5.1.3 Construction Elements Value Chain ........................................................................................ 10

5.1.4 Primary producers ................................................................................................................... 10

5.1.5 Automotive Subsector ............................................................................................................. 10

5.1.6 Construction-related Subsectors: Aluminum Joinery & Construction Elements .................... 11

5.2 Financial Benchmarks for the BiH Metal Products Sector ............................................................. 11

Tables and FiguresTable 1:Economic Shares of Light Manufacturing Subsectors ......................................................................1

Table 7: BiH Trade Growth and Trade Balance .............................................................................................2

Table 8: BiH Trade with Key Partners - 2010 ................................................................................................2

Table 2: Summary DataAll Surveyed Companies ......................................................................................3Table 3: Business Size Ranges - 2008 ............................................................................................................3

Table 6: Summary of Overall Benchmarks for Profitable Light Manufacturing Companies in BiH ...............4

Table 9: Summary Survey RatiosProfitable Wood Sector Companies .......................................................7Table 10: Summary of Overall Benchmarks for Profitable Wood Processing Companies in BiH .................8

Table 11:FIRMA Baseline Survey Data ..........................................................................................................9

Table 12: Summary Survey RatiosProfitable Metal Sector Companies .................................................. 11Table 13: Summary of Overall Benchmarks for Profitable Fabricated Metal Products Companies in BiH 12

Figure 1: BiH Goods Exports ..........................................................................................................................2

Figure 2: Growth of Value-Added Wood Products Exports ..........................................................................5

Figure 3: Furniture Exports and Imports .......................................................................................................6


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1. INTRODUCTIONThis research memorandum is prepared primarily for the use of financial institutions in Bosnia &

Herzegovina. FIRMA seeks to increase access to business finance for enterprises in its focus sectors.

This information is intended to help financial institutions will better understand these sectors and their

financial status, so as to reduce uncertainty and risk in lending to firms in them.

The report focuses on two major sectors of the BiH economywood processing and fabricated metalproducts. As seen in the table below, these two sectors together account for some 60% of the total

value added of light manufacturing industries in BiH, and almost one-fifth of total BiH exports of goods,

which grew very strongly over the expansion years prior to the global crisis.

Table 1:Economic Shares of Light Manufacturing Subsectors

Product Sector

Share of Light

Manufactur-

ing GDP

Share of Total

Manufactured

Goods Sales

Share of

Exports of

Goods

Export Growth

2005-08

Apparel 7.7% 1.8% 4.9% 111%

Footwear 7.7% 2.0% 5.5% 208%

Wood Processing 26.6% 11.0% 7.4% 40%

Plastic & Rubber Products 7.9% 3.4% 2.1% 124%

Fabricated Metal Products* 33.6% 15.0% 11.0% 128%

Machinery 16.5% 6.8% 11.8% 46%

Light Manufacturing Total 100.0% 40.0% 42.7% 81%

Source (this and following table): BiH Agency for Statistics, National Accounts 2008

* Includes vehicles & transport equipmentabout 15% of the total

This is a current report, focused on present financial status and near-term business outlook. FIRMA

intends that this report will be updated and distributed annually to financial institutions and other

interested parties.

We begin with a review of our financial benchmarking methodology and overall indicators, then, for

each of the two sectors sector, we discuss product range and market outlook, and financial

benchmarking data for a representative sample of surveyed firms.

2. GENERAL MARKET OUTLOOKThe global economy gradually gathered strength through 2010. A rebound in inventory and fixed

investment accounted for a strong rise in manufacturing and global trade. This should continue in 2011,even though low consumer confidence and reduced household incomes and wealth are holding back

consumption in many advanced economies.

BiH exports recovered very strongly in 2010, as shown in the following chart and table.


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Figure 1: BiH Goods Exports

Rising almost 30% in 2010, BiH exports more than offset their drop in 2009, so that at KM 7.3 billion they

exceeded their peak at the end of the late 2000s expansion. Exports rose almost three times faster than

imports, so that the BiH trade deficit declined, and indeed was KM 3 billion (one-third) smaller than in

2008. As a share of GDP of fell sharply, from 40% in the middle of the 00s decade to 25%, by far the

lowest it has been since the war. This large improvement in the net export position is translating into

stronger growth in BiH domestic markets in 2011.

Table 2: BiH Trade Growth and Trade Balance

YearExports Imports Balance Share of

GDPKM MM Growth KM MM Growth KM MM

2003 2.313 22.5% 8.275 20.3% -5.144 -41%

2004 2.994 29.4% 9.371 13.2% -4.757 -40%

2005 3.826 27.8% 11.08 18.2% -4.993 -42%

2006 5.271 37.8% 11.235 1.4% -5.962 -31%

2007 6.080 15.3% 13.625 21.3% -6.377 -35%

2008 6.847 12.6% 15.933 16.9% -7.254 -37%

2009 5.634 -17.7% 12.032 -24.5% -5.964 -27%

2010 7.293 29.4% 13.329 10.8% -7.545 -25%

Looking at the breakdown of exports by major markets in 2010:

Table 3: BiH Trade with Key Partners - 2010

Growth of: Croatia Serbia Germany Slovenia Italy

Exports to: 13% 20% 37% 33% 23%

Imports from: 8% 10% 8% 8% 0%

Net Exports to: +5% +10% +29% +25% +23%

BiH is fortunate to have good export markets in Germany, Slovenia, and Italy, but is also doing quite well

in trade with its regional neighbors.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

KMB

illion


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Overall, then, growth prospects for BiH light manufacturing sectors are positive for the foreseeable

future, in both export and domestic markets.

3. FINANCIAL INDICATORS BENCHMARKING OVERVIEWFor this report, we collected financial data from a representative sample of 55 companies in the BiHwood and metal sectors30 in the wood sector and 25 in the metal sector. We focused the survey onthe growth period from 2006-2008, in order to be able to see financial indicators during a period of

normal business, plus the recession year 2009. We adjusted and consolidated this data, and analyzed

the companies in various subgroups. We calculated totals, averages, and key financial indicators.

The following table presents summary data for all surveyed companies. Sales for these 55 companies

reached a total of KM 267 million prior to the recession that began in 2009about 6% of total lightmanufacturing sales in BiH in that year, and 14% of the combined sales of the wood and light metal

sectors. Their employment exceeded 3,100 people. Both sales and employment growth were very

strong over the late 00s before the recession.

The average company among those surveyed had annual sales in the range of KM 4 million over theperiod as a whole, and approximately 50 employees. With changes in employment as is typical lagging

changes in sales, sales per employee rose strongly through 2008, then fell off.

Table 4: Summary DataAll Surveyed Companies

Dec-06 Dec-07 Dec-08 Dec-09

Total Sales KM MM 170.5 237.3 267.2 193.3

Total Employment 2,200 2,890 3,180 2,840

Average Sales KM 3,343,800 4,314,200 4,857,700 3,647,100

Average Employment 43 53 58 54

Sales / Employee 77,450 82,080 84,070 68,110

# Companies Reporting 51 55 55 53

There was a very broad range of business size covered by the survey:

Table 5: Business Size Ranges - 2008

Minimum Average Maximum

Sales KM MM 0.237 4.86 76.8

Employment 5 58 301

Assets KM MM 0.096 5.58 61.6

The purpose of this report is to help financial institutions better understand the business prospects of

the FIRMA target sectors, and to provide them a guide as to what a typical successful company in these

sectors looks like. Therefore, we separated out the profitable from the unprofitable companies in our

sample. Of the 55 companies, 34 were consistently profitable through the survey period, at least up to

2009 when the recession hit. The remaining 21 companies showed losses in one or more of the pre-

recession years. While there were differences between the two sectors in some key ratios, as will be

presented below, the following overall points relevant for financial benchmarking stand out in

comparing the profitable and unprofitable companies in our sample:

Profitable and unprofitable companies have roughly the same average sales sizearound KM 4million per year. However, unprofitable companies have 75-100% more employees on average.


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Consequently, annual sales per employee in unprofitable companies averages around KM50,000less than half the average for profitable companies. It appears that an overallbenchmark for success in light manufacturing in BiH should be least KM 100,000 in sales per

employee.

Gross margin in profitable companies averages around 20%, versus around 10% in unprofitablecompanies.

After-tax profit margin in profitable companies averages at 5% or more, versus zero or negativein unprofitable companies.

Average cash balances of profitable companies are roughly similar on average. However, theaverage cash balances of profitable companies trended higher, and those of unprofitable

companies trended lower, over the four-year period covered by the survey.

Profitable and unprofitable companies seem to have about the same current ratio (currentassets divided by current liabilities)around 1.2 on average, and if anything the current ratio ofunprofitable companies looks somewhat higher. However, this is seriously misleadingcloserexamination shows that profitable companies do a much better job of managing their working

capital:

o Profitable companies receivables days average around 60, versus 70 or more forunprofitable companies.

o Inventory days of profitable companies are 85-90, versus over 130 in unprofitablecompanies.

o Profitable companies payables days average around 75, versus 90-100 for unprofitablecompanies.

The main reason, therefore, that unprofitable companies show positive current ratios is that

they are carrying excessive receivable and inventory levelsi.e., they are poorly managing theirworking capital. This shows that care must be used in interpreting typical balance sheet ratios,

and in using them as benchmarks.

There are other balance sheet indicators typically viewed by financial institutions that are not presented

in the above summary tables. Some of them, such as quick ratio and rates of return on assets and

equity, largely repeat information in the above tables. Others, including debt ratios, do not show

significant differences between profitable and unprofitable companies, and in any case are quite low,

indicating underleveraging.

Table 6: Summary of Overall Benchmarks for Profitable Light

Manufacturing Companies in BiH

Indicator Benchmark

Annual Sales per Employee KM 100,000

Gross Margin 20%

Profit Margin 5%

Receivables Days 60

Inventory Days 90

Payables Days 75

Again, these are overall averages for the two sectors, and there are differences between them, as shown

in the sector tables below.


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4. WOOD PROCESSING SECTORProcessed wood products are one of the most important manufacturing sectors in BiH, representing

over one-fourth of the countrys total light manufacturing value added, over one-tenth of totalmanufactured goods sales, and over 7% of BiH exports of goods. BiHs competitive advantage in wood

processing is based on its deep traditions in this industry, arising from its endowment of rich forests, itsadvanced design capacities, and its capacity to combine hand crafting with modern production

technologies.

Of all the natural resources of Bosnia and Herzegovina, its timber is best known; 50% of the country is

covered in forests that can serve both the furniture and the construction industries. These forests have

the potential to provide nearly 7 million m of roundwood per year on a sustainable basis. Beech, oak,ash, pine and fir as well as more specialised woods such as walnut, apple and cherry, are exported as

partly fabricated and finished products.

The gap between the performance and potential of the BiH wood processing sector, while still existing, is

shrinking. Over the past ten years a number of successful private firms have been established in the

furniture industry, adapting market design trends, investing in new equipment, and increasing productquality. With respect to design, for example, at the IMM Fair 2011 in Cologne, Germany, the largest

annual furniture show in Europe. BiH was the only country outside Western Europe that had furniture

products selected for the prestigious Avenue of Innovation design contest. Out of the thousands offurniture products presented at the show, BiH had four selected for special recognition, taking their

place alongside pieces from Italy, Denmark, Germany, and other leading centers of furniture design.

The BiH combination of handcraft tradition and modern technology is being competitively marketed.

Over 60% of BiH wood sector production is exported, and the value-added share of wood sector exports

is rising strongly. Indeed, furniture was the only major product area of BiH exports that managed to

continue to rise in 2009 when the recession hit.

Figure 2: Growth of Value-Added Wood Products Exports

4.1 Wood Products & Capacities in BiHThe wood sector in B&H currently employs some 16,600 people, about 2 percent of total employment,

out of which 5,100 are in forestry, 6,000 in sawmills, and 4,500 in value-added furniture production.

Smaller companies which employ up to 50 people are most commonly involved in production of

0.0

50.0100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

2007 2008 2009 2007 2008 2009

Import Export

BAMM

ilion

Sawmill products

Furniture


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construction joinery, solid wood furniture, or sawmill products. Larger companies produce furniture

elements, cabinetry, and sawmill products.

A breakdown of the principal wood product types manufactured in BiH is as follows:

Value Chain Product Type # Companies

Lumber Sawmills 1,500

Plywood / Composite 35

Furniture Cabinetry 25

Solid Wood Furniture

90Upholstered

Furniture

Furniture Parts

Construction & Joinery Products Doors and Windows

180Joinery Elements

Parquet

Total Companies 1,830

There is also production of other special types of wooden products, such as prefabricated wood houses.

4.2 Wood Products Market OutlookReal growth in furniture demand among all 70 countries covered in the World Furniture Outlook 2011

report is forecast at 3.3% for 2011, or approximately 75 billion. With advancing globalization andopening of national markets, cross-border trade in furniture is rising at a steady pace.

Furniture production is one of the most important and most developed industry sectors in BiH, with

good potential for further expansion. Furniture is also one of the countrys most significant exportproducts, at some KM 600 million in 2010, a substantial 27% increase over 2009.

The largest export market for Bosnian furniture is Germany with 377 million KM exported in 2010, but

BiH also increased furniture exports to all of its most important export partners, including Croatia, Italy,

Slovenia and Serbia.

Figure 3: Furniture Exports and Imports

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

2007 2008 2009

Furniture

Import in million KM

Export in million KM


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BiH furniture producers are currently exempt from any tariffs on furniture and most other wood

products in the EU. Non-tariff trade barriers are present, mostly in form of various quality and safety

standards required by the EU legislation.

Although the EU furniture market is difficult and demanding, there are some specific market trends that

provide oportunities:

BiH design and technology capacities have advanced significantly in recent years, allowing firmsto move up the value chain and compete more on the basis of product quality

BiH has reasonably low labor costs, making handcrafting and hand-finishing of its furnitureexports feasible, enabling affordable price points for higher-quality markets

BiH's close proximity to the EU market gives it a substantial advantage over Chinese and otherAsian competitors in terms of shipping costs and quicker order-to-delivery turnaround times,

allowing for repetitive smaller orders within the same sales season.

Outsourcing for furniture parts from West European producers has been increasing for the pastseveral years.

4.3 Financial Benchmarks for the BiH Wood Processing SectorIn our benchmarking survey, 30 companies from the wood processing sector provided detailed financial

data. Most of these were furniture producers.

Of these 30 companies, 20 were consistently profitable over the survey period. We are interested in

providing information to financial institutions to help them identify companies likely to be profitable and

thus to be good credit risks, so we summarize data on the profitable companies only in the following

table.

Table 7: Summary Survey RatiosProfitable Wood Sector Companies


Total Sales KM MM 102.2 120.1 134.2 98.4

Total Employment 780 950 1,050 930

Average Sales KM 5,109,700 6,004,600 6,711,000 5,469,300

Avg Sales Growth 17.5% 11.8% -26.7%


Avg Employment Growth 21.8% 9.9% -6.0%

Sales / Employee 130,900 126,300 128,400 105,500

Gross Margin 20.1% 18.5% 17.2% 16.5%

Cash Flow (EBITDA) 299,200 288,170 256,260 (26,910)

Cash Flow / Sales 5.9% 4.8% 3.8% -0.5%Cash Flow / Interest 4.6 2.6 1.6 (0.2)

Profit Margin 5.4% 5.1% 3.4% 1.4%

Cash 63,330 106,800 99,450 102,590

PPE 2,080,200 2,707,080 3,114,260 4,149,520

Receivables Days 44 43 53 73

Payables Days 66 60 73 94

Inventory Days 92 94 95 100

Debt to Sales 0.2 0.3 0.3 0.4

Debt to Equity 0.7 0.9 1.1 0.8

Current Ratio 1.3 1.1 1.0 0.9

Quick Ratio 0.5 0.4 0.4 0.4


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Table 7: Summary Survey RatiosProfitable Wood Sector Companies


Return on Assets 7.0% 5.9% 3.8% 1.0%

Return on Equity 15.9% 15.0% 10.7% 2.4%


The following points relevant for financial benchmarking for wood processors stand out:

Profitable wood processors on average have sales per employee in excess of KM 125,000 peryear.

Gross margin in profitable wood processing companies when overall economic growth is strongis at or close to 20%, and after-tax profit margin in is around 5%.

Average cash balances are in the range of KM 100,000. The current ratio of profitable wood processors is above 1.0. Receivables days are in the 40-50

range, payables days 60-70, and inventory days 90-95.

The debt-to-sales ratio of these wood processors is not greater than 0.3, and debt to equity notgreater than 1.0. However it would not be correct to say that this is a benchmark for evaluating

creditworthiness, because these levels are in fact extremely low and if anything indicate

suboptimal leveraging and/or systemic obstacles to accessing business finance.

Table 8: Summary of Overall Benchmarks for Profitable Wood

Processing Companies in BiH

Indicator Benchmark


Gross Margin 19%

Profit Margin 5%

Receivables Days 45

Inventory Days 92

Payables Days 65

5. FABRICATED METAL PRODUCTS SECTORThe BiH metal processing sector grew out of the countrys natural endowment of a variety of mineralresources, including iron ore, bauxite ore, and coal. Throughout the twentieth century, under Austrian

and Yugoslavian governance, heavy and light metal industries were a development focus. Consequently,

BiH has inherited deep human capital, technological, and natural resources for this sector.Overall, the metal sector accounts for about one-fourth of BiH manufacturing and over one-third of total

BiH goods exports. These totals include both base metal products and fabricated metal products. The

focus of the FIRMA project, and of the present benchmarking report, is on the value-added subsectorfabricated metal products. These represent some 10% of BiH goods exports, and their exports more

than tripled over the four years prior to the global recession that began in 2009.

The following table reports data from a baseline survey done by FIRMA in early 2010, broken down by

three principal value chains (product lines) in fabricated metal products: aluminum joinery, automotive

parts, and metal construction elements.


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Table 9:FIRMA Baseline Survey Data

Indicator / MP VCs 2006 2007 2008Growth

2009/062009

2010

expected

Growth

2010/09

SALES 642.2 911.7 973.4 51.6% 724.5 792.7 9.4%

Aluminum Joinery 87.2 128.6 163.4 87.4% 115.3 128.4 11.4%Automotive Parts 314.6 421.1 339.1 7.8% 281.0 284.5 1.2%

Construction Elements 240.4 361.9 470.9 95.9% 328.1 379.9 15.8%

EXPORTS 386.0 534.3 559.4 44.9% 457.4 453.3 -0.9%

Aluminum Joinery 42.8 64.9 69.7 62.8% 55.7 51.9 -6.8%

Automotive Parts 242.6 325.7 308.5 27.2% 262.0 263.0 0.4%

Construction Elements 100.6 143.7 181.2 80.1% 139.7 138.4 -1.0%

Exports/Sales 60% 59% 57% 63% 57%

Aluminum Joinery 49% 50% 43% 48% 40%

Automotive Parts 77% 77% 91% 93% 92%

Construction Elements 42% 40% 38% 43% 36%

EMPLOYMENT 7568 9085 12440 64.4% 12144 10951 -9.8%

Aluminum Joinery 821 1105 1187 44.6% 1183 1120 -5.3%

Automotive Parts 2875 3285 6218 116.3% 6362 5982 -6.0%

Construction Elements 3872 4695 5035 30.0% 4599 3849 -16.3%

Source: FIRMA Baseline Survey, 2010

At nearly KM 1 billion in sales in 2008, the FIRMA-surveyed companies in these three value chains

represented one-fourth of the aggregate sales of BiH light manufacturing in that year. All three of the

VCs experienced rapid growth in exports and employment prior to the crisis, and for aluminum joineryand construction elements, overall sales growth was even faster, evidencing strong domestic markets.

Indeed, for these two subsectors, domestic sales account for the majority of their income.

All three VCs saw sharp reductions in sales and exports in 2009 as the global recession hit. In the

automotive sector, in fact, the peak was in 2007 and the impact of the recession began to be felt in

2008. Companies anticipated a recovery in sales of close to 10% in 2010.

5.1 Metal Products & Capacities in BiH5.1.1 Automotive value chainBosnia & Herzegovina has a long tradition of manufacturing components for the automotive industry.

Most BiH companies are specialist component manufacturers exporting automotive components toautomotive product integrators, who finalize the product into a functional part. Most are die casters,

forging shops, injection molders, and metal stampers. A number of BiH companies also provide metal

fabrication input technologies and value-added services, including tool design and galvanization.

The automotive sector is driven by global demands, and BiH manufacturers have become reliant on its

supply chains and their capability to deliver high quality goods on time, at competitive prices. BiH

automotive producers have been introducing appropriate quality standards and installing flexible

product design capacities which enable this sector to compete on the EU market.

5.1.2 Aluminum Joinery Value ChainThe aluminum joinery value chain in BiH consists of over 400 small producers. The main products

manufactured are light construction products including doors, windows, balconies, fences, and cable.These are supplied to construction companies and wholesalers. The domestic market is at least as


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important for this value chain as are European and regional markets. Aluminij Mostar, the key supplier

at the base of the value chain, produces good quality primary aluminum at a good price, but does not

have the capacities to fully supply the domestic market.

There are successful aluminum profiles producers operating in the vicinity of Aluminij, including Presal

and Fe-Al. These also reprocess waste material from joinery manufacturers.

5.1.3 Construction Elements Value ChainDomestically-produced steel supplied by Arcelor Mittal (eljezara Zenica) supports production inconstruction elements and tools. At the same time numerous small metal processing companies have

mushroomed around the eljezara Zenica industrial area.

There is a wide range of products produced by the SMEs in this value chain for construction, from steel

construction profiles and roofs to equipment such as furnaces, elevators, and pumps. Half of these

products are sold in the BiH market, mainly to construction companies and wholesalers. This value chain

is highly reliant on construction projects. Many of the smaller companies do not have large production

premises and they do the majority of their work at the construction site, where they assemble their

products. This product sector has seen a strong increase in production over the last decade.

Metal Products Market Outlook

BiH metal sector BiH business correlates strongly to regional and global market developments, because

it is closely tied to the construction and automotive sectors, which were hit very hard by the crisis.

Because of this, the decline in exports of this sector that began in the second half of 2008 was more

severe than for any other light manufacturing sector. However, most companies are now on a recovery

track. Those that are export-oriented have recovered more rapidly, since BiH export markets in the

automotive and construction sectors in some major countries, especially Germany, started to bounce

back by early 2010.

5.1.4 Primary producersThe main primary producers in BiH, Aluminij Mostar and Arcelor Mittal Zenica, are experiencing solidrecovery from the drop of demand. Mittals production in 2010 was close to pre-crisis levels, and themajority was exported. Aluminij returned to full capacity by late 2010, with exports up 40% from 2009,

and expects to produce a record volume of aluminum in 2011.

5.1.5 Automotive SubsectorMost of BiH the automotive parts industry is directly or indirectly exporting to EU automotive system

integrators and automakers. Their business prospects therefore are directly dependent upon west

European macroeconomic performance. The main export market is Germany, followed by France,

Austria, Italy, and Sweden.

The German auto industry made a tremendous recovery in 2010 which had an immediate effect on the

BiH automotive parts producers. German car makers experienced a 20% increase in shipments for

2010, thanks to high demand in Asia and the United States. For BiH suppliers, Volkswagen (or its tier 1

suppliers) is the largest buyer, but BiH parts also enter a number of other major brands.

BiH automotive sector companies also have good business in aftermarket car parts, which are sold

through auto parts wholesalers and retailers in domestic and foreign markets. Overall, BiH industrial

production of transport-related equipment rose some 30% in 2010, mostly offsetting a very sharp fall in

2009.

For 2011, global industry analysts of the automotive industry, and the German Automotive Industry

Association, expect growth of at least 10% in all three major geographic marketsAsia, the U.S., andEurope. The competitiveness of the BiH automotive industry has been tested by some of the most

demanding customers in the EU, both for quality and reliability, and has passed. Consequently, with the


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expected growth in global demand, the sectors overall prospects for the medium term are quitepositive.

5.1.6 Construction-related Subsectors: Aluminum Joinery & Construction ElementsThe BiH construction-related metal products subsectors are closely tied to the domestic and global

construction industry. As a result they too experienced a collapse in demand in 2009, followed by arebound in 2010though in both directions somewhat less pronounced than for the auto sector.

The main aluminum joinery products manufactured in BiH are light construction units including doors,

windows, balconies and fences, all supplied to construction companies and wholesalers, the majority in

domestic markets. Similarly the main construction elements produced in BiH are steel construction

profiles, roofs, furnaces, elevators and pumps, half sold on the BiH market and the rest in exported

mainly to the region and to a lesser extent the EU.

Domestic construction spending in BiH has fallen some 30% from its peak in 2008, with weakness

continuing through much of 2010. Regionally, in Croatia and Serbia, construction activity has also been

slow since 2009. However new orders for construction works in Western European markets started to

recover strongly in 2010, and this benefitted the BiH industry. Also, in September 2010 the Serbian

government passed a stimulus package for the construction industry worth nearly 300 million which ispositive for the regional market.

Generally speaking, the industry is recovering and the medium-term market outlook for BiH aluminum

joinery and construction elements producers is reasonably positive.

5.2 Financial Benchmarks for the BiH Metal Products SectorIn our benchmarking survey, 25 companies from the fabricated metal products sector provided detailed

financial data. Of these, 14 were consistently profitable over the survey period. Again, because we are

interested in providing information to financial institutions to help them identify companies likely to be

profitable and thus to be good credit risks, we summarize data on the profitable companies only in the

following table.

Table 10: Summary Survey RatiosProfitable Metal Sector Companies


Total Sales KM MM 17.2 31.6 34.3 31.9

Total Employment 230 360 490 550

Average Sales KM 1,562,900 2,255,700 2,449,300 2,280,800

Avg Sales Growth 83.7% 8.6% -6.9%


Avg Employment Growth 33.6% 37.2% 10.7%

Sales / Employee 74,400 87,700 69,400 58,400Gross Margin 28.5% 17.1% 21.2% 26.7%

Cash Flow (EBITDA) 238,410 212,830 193,930 175,600

Cash Flow / Sales 16.6% 9.4% 7.9% 7.7%

Cash Flow / Interest 985.5 84.7 36.3 15.2

Profit Margin 16.4% 9.6% 7.9% 7.3%

Cash 61,470 28,680 139,530 123,280

PPE 348,150 391,370 529,930 629,160

Receivables Days 139 116 124 148

Payables Days 131 92 122 178

Inventory Days 64 45 75 94

Debt to Sales 0.1 0.1 0.1 0.1


15/15


12

Table 10: Summary Survey RatiosProfitable Metal Sector Companies


Debt to Equity 0.2 0.2 0.1 0.2

Current Ratio 1.3 1.6 1.5 1.4

Quick Ratio 1.0 1.2 1.1 1.0

Return on Assets 16.2% 12.8% 8.9% 6.6%

Return on Equity 33.2% 22.8% 17.2% 13.2%


The following points relevant for financial benchmarking for metal products fabricators stand out:

Profitable metal products companies on average have sales per employee in the range of KM75,000 per year.

Gross margin over time in profitable metal companies should average significantly above 20%,and after-tax profit margin above 8%.

Profitable companies built up fairly sizeable cash balances over this period. The current ratio of profitable metal processors is above 1.5. This reflects extended average

receivables days of 120 or more that appear to be typical for the sector, with corresponding

extended payables days. Inventory days are well-managed, averaging around 70 over the

review period.

Debt-to-sales and debt-to-equity ratios for metal processors are even lower than those of woodprocessors, again evidencing significant underleveraging and viable opportunity to take on

additional finance for working capital and expansion.

Table 11: Summary of Overall Benchmarks for Profitable

Fabricated Metal Products Companies in BiH

Indicator Benchmark


Gross Margin 22%

Profit Margin 8%

Receivables Days 125

Inventory Days 70

Payables Days 120

------------------------

This concludes our Financial Benchmarking Report for the BiH wood and metal sectors for 2011.

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Benchmarking Report 2011 - Wood Metal Sectors in Bosnia

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