Companies improve results after crisis

Each year we look at the results of the biggest companies in Central Europe as one of the indicators of the economic situation in our region. We can see the economic changes in the region and how the biggest businesses respond to long-term trends or short-term turbulences in the market. This is particularly interesting in the context of recent happenings in the financial markets and the latest macroeconomic data which, regrettably, fell below expectations.

Different countries in the region cope differently in this volatile time. The Polish, Czech and Slovak GDPs were higher than those of Croatia, Romania or Bulgaria. It is clear that the recently announced macroeconomic data, indicating a decline in the growth rates of the European Union's two key economies, Germany and France, will have a negative impact on the overall economic situation in 19 CE states, as well as the composition of the CE TOP 500 list next year.

More optimism

Nevertheless, last year saw a positive mood shift among the businesses across the region as indicated by growing economic ratios and improving sentiments, demonstrated by the Deloitte Business Sentiment Index or Private Equity Confidence Survey. The Index and the Survey monitor the sentiments and opinions of business leaders in the key countries of the region, showing that overall the attitudes are improving.

The data on the rise in export figures of key Central European countries and Poland's Western neighbours, an increase in revenue and an improvement in the results of West European and US companies in 2010 are further reasons for optimism.

A thorough examination of the top 500 businesses in Central Europe confirms to a large extent the macroeconomic analysis results, indicating the following:

> A general increase in revenue in 2010 and Q1 2011, in spite of the lingering sense of economic uncertainty and only moderate optimism among entrepreneurs;

> An improvement in the standing of Czech and Romanian companies, mainly as a result of a better economic situation in the sector;

> Strong dependence of Central European companies' results on the prices of the key raw materials;

> A rise in the number of consolidation processes in the energy sector;

> A moderate growth of the financial sector – both banks and insurance businesses.

Revenue growth

In 2010 the size of sales revenues of the companies from the CE TOP 500 list, which is the key criterion in the ranking, went up by an average 11% in Euro and 7% in local currency. In 2009, compared with 2008, the average change to revenues was negative and amounted to -12% in Euro and 0% in the local currency. Q1 2010 saw an increase in revenues of the biggest companies in the region (an approximate 11% in Euro and 3% in local currency); the increase continued throughout 2010 and Q1 2011 when the median revenue growth amounted to 17% and 15%, in Euro and the local currency respectively. The increment was higher than recorded in Q1 2010, indicating an overall improvement in the regional economy in Q1 2011.

The increase in sales revenues of the biggest companies is reflected in the number of businesses that recorded an increase of revenues: 394 in 2010 compared with a mere 81 in 2009.

Companies in Central and Eastern Europe have not yet managed to recover the revenue lost during the first wave of the economic crisis. The combined revenue of the Top 500 companies in the region in 2010 amounted to an approximate EUR 612 billion, a little over 16% more than in 2009, although still almost 4% less than before the 2008 crisis. The median revenue in the CEE companies is 12% higher compared to 2009, but still 2% lower than in 2008. Similarly, the revenue of the last company in the ranking (EUR 405 million), albeit a significant 13% higher compared to year 2009, was still lower than the revenue of the smallest company in the 2008 Top 500 ranking (EUR 462 million) by a whole 12%.

The stability of the growth depends on many factors. However, a closer look at the revenue sources of the biggest companies in 2010 is a cause for moderate optimism with regard to the perpetuation of the positive trend.

Manufacturing performing well

On the one hand, we have witnessed a dynamic growth in the manufacturing industry where companies generated a 23% increase in revenues in 2010. This increase was the result of many factors, including higher demand for manufactured goods, especially in the size of exports, particularly in Germany. On the other hand, we can see that the manufacturing industry has grown as a result of a price increase in raw materials. The region's sales volumes also went up, but this, was to a large extent merely a result of an increase in metal prices. The growth recorded in the energy and natural resources sector was mostly the result of a significant rise in oil prices.

In a broad sense included in the manufacturing sector are all machinery manufacturers, and metallurgical and chemical manufacturing companies. In 2009 this branch was hit by the effects of the economic crisis the most, recording a slump in sales of approximately one fourth. In 2010 sales were up by an approximate 23%, allowing the industry to fall only slightly short of its results in 2008.

Another manufacturing segment, the automotive, which has a strong presence in the TOP 500 CE companies ranking, reported a median growth of 16% compared with a 15% drop in 2009. An important accomplishment within the automotive sector was the promotion of Central Europe's leading car manufacturer Skoda from the fourth to the third place in the ranking. In the previous year, Skoda's third position in the ranking was taken by another Czech company CEZ, while 2010 saw Skoda reclaim the earlier rank.

Unsurprisingly, the good performance of the manufacturing sector resulted in a higher proportion of companies from that branch in the TOP 500. The share of the companies from the consumer goods and transportation sectors, whose relative resilience to the economic crisis improved their rankings in the TOP 500 of the previous year, has now gone down.

An overall improvement in the economy and increase in revenues of the companies in the smanufacturing and natural resources sectors also led to a growth in the number of companies from the Czech Republic (+ 7 companies) and Romania (+ 6 companies). In the same period, the number of Polish businesses on the list dropped by seven, mainly as a result of consolidations in the energy sector.

A growing share of Czech companies in the ranking has been recorded for a number of years. There were 70 Czech companies on the list in 2007 and 80 in 2010. This trend is a good indication of the strength and sturdiness of the Czech economy's foundations and of Czech companies.

We also notice a higher number of Ukrainian businesses in the classification. Their results depend heavily on the fluctuations in the prices of raw materials.

Oil prices boost results

The significant impact of the fluctuating price of raw materials on the revenues of the biggest companies in the region can also be confirmed by an analysis of revenues in the energy and natural resources industries. Average revenues of the companies from said industries went up by 14% in Euro and 10% in local currency. The key driver in this respect was the price of oil which led to a dynamic growth in the revenues of fuel producers. Throughout the whole of 2010 and in Q1 of 2011 PKN and MOL, the biggest players in the region, recorded respective revenue growth of 33% and 34%. PKN has been the biggest oil company in the region for many years. In 2010, due to similar growth rates to MOL and a larger scale of operations, PKN widened the gap between themselves and MOL by approximately EUR 1.3 billion.

The second biggest Polish fuel producer, Lotos Group, went up by eight notches, all the way up to the 11th place, due to the investments made in recent years to increase capacity. The standings of the companies Petrom and Orlen Lietuva went up by 11 and 9 positions to, respectively, the 14th and 15th places in the ranking.

The technology, media and telecommunication industry remained relatively indifferent to the overall economic revival. In 2010, the median revenue change of the technology companies was a little more than 1% in Euro and -2% in local currency. Out of 39 companies from that industry included in the ranking, 20 recorded an increase while 19 suffered from a drop in revenue.

PKO BP still the largest bank

In 2010, PKO BP upheld its leading position in Central Europe in terms of assets and its advantage over Hungarian OTP Bank, which was the second best bank in the ranking, and grew from about EUR 2 billion to over EUR 7 billion. PKO BP recorded a 12.5% increase in the value of its assets in Euro in 2010, whereas the balance sheet amount of OTP Bank dropped by 2.6% during the same period. The Czech banks CSOB and Ceska Sporitelna followed OTP in the ranking. The Q1 data indicates a significant change in the 2nd and 3rd places of the biggest banks: Ceska Sporitelna recorded a 9.2% increase in assets, allowing the bank to overtake CSOB and OTP.

In 2009, 26 out of 50 financial institutions covered by the ranking recorded a median increase in assets that amounted to 0.5%. In 2010, this number increased to 34 banks with a median growth above 3%. The drop in assets affected mainly banks in Hungary, Slovakia and Baltic States. An analysis of the Q1 2011 data shows that the trend continues.

PKO BP earned the highest net profit out of all the banks in Central Europe. In 2009, CSOB, ranked third in the list in terms of assets and earned the highest total net profit. In 2010 however, the net profit of PKO BP surpassed CSOB's profit level by over 50% and totalled over EUR 800 million. Out of the 50 biggest banks in the region, 34 recorded an increase in the 2010 profit levels. Poland continued its strongest presence among the top 50 banks (14 Polish banks, one position up compared with the previous year). The Czech and Hungarian banks came second and third with, respectively, 8 and 7 institutions included in the ranking. It is also worthwhile to note that the number of Ukrainian banks went up to four (two places up).

Lower profit of insurance sector

In 2010, the insurance sector saw an average increase in the gross written premium denominated in Euro of approximately 6%, i. e. a little less than the average loss suffered by the top 50 insurance companies in 2009 (around 8%).

PZU remains the leader among insurance companies with an increase in the gross written premium of almost 10% in Euro and 1.3% in Polish zloty. Ceska pojistovna, ranked second (the same as in the previous year), recorded a very small growth in the gross written premium in Euro and a decline in the local currency. The Czech insurer Kooperativa pojistovna overtook Warta in 2009 and held its position in 2010.

Only 11 out of the top 50 insurance companies suffered a loss in 2010, this is 4 more compared to the year 2009. In addition, 18 insurance companies earned a lower net profit compared to 2009.

The ranking of the top insurance businesses is still dominated by Polish (16) and Czech (11) companies.

Stock market leaders

CEZ is the region's most valuable company by market capitalisation, as it has been in every edition of the CE Top 500 ranking and, as of the end of July 2011, continues to keep a safe distance of approx. 50% to the next rival – Polish bank PKO BP. The biggest riser in this category was Polish metals company KGHM, whose 55% year-on-year earnings increase significantly exceeded analyst expectations to make it a stock market darling and increase its capitalisation by over 80% from the end of 2009 to the end of July 2011.