State Company “Electrovazhmash”
Prepared by: Nazar Vanyushin
Current financial state of the Company Having analyzed financial results for the years 2014 and 2015 (9 months) the only conclusion that can be made is that the situation inside the Company is getting worse. 1.Net income for 2014 was 22 447 thousand UAH, while for 9 months of 2015 the net loss was 53 038 thousand UAH. 2.Net operating income on 2014 was 1 865 429 thousand UAH while for 9 months of 2015 it was 1 232 011 thousand UAH which means forecasted decrease in 2015 sales volume in compare to the total figures achieved in 2014 in local currency. The forecast for net operating income in 2015 is about 1 650 000 thousand UAH. The decrease is approximately 11.5 % in UAH. Taking into consideration USD / UAH exchange rates fluctuations (NBU USD / UAH exchange rate on 31.12.2014 was 15.76 UAH for 1 USD, while on 30.09.2015 it was 21.52 UAH for 1 USD) the overall sales volume in 2014 was 118 000 thousand USD versus 76 000 thousand USD in 2015 (forecasted). This means that the decrease will make about 35 %.
2014 UAH (000)
USD (000)
2015 UAH (000)
USD (000)
Net operating income
1 865 429
118 000
1 650 000
76 000
Net income (loss)
22 447
1 424
- 70 000
-3 252
Current financial state of the Company 3. Gross profit decreased accordingly. In 2014 it was 313 774 thousand UAH while for 9 months of 2015 it was 216 736 thousand UAH which will give 289 000 thousand UAH forecasted for the whole 2015. The difference makes 24 774 thousand UAH. 4. Having analyzed the expenses of the Company we can make a conclusion that the Company’s management is working on cutting down the expenses on several budget items: -For instance the administrative expenses in 2014 were 149 963 thousand UAH while the forecast for 2015 is 132 000 thousand UAH which will give approximately 10 % budget saving on this line. -Distribution expenses in 2014 were 43 206 thousand UAH, the forecast for 2015 – 33 000 thousand UAH. The saving will be about 25 % for this line. 5. But at the same time there is a significant growth in other budget items of expenses. For instance – budget item “other operating expenses” in 2014 was 437 968 thousand UAH while the forecast for 2015 is 660 000 thousand UAH. This means 34 % increase, or 222 000 thousand UAH. Financial expenses increased from 37 544 thousand UAH in 2014 to almost 60 000 thousand UAH in 2015.
Current financial state of the Company 6. So, taking into account all the factors and indicators mentioned above, and also profits and losses, net income in 2014 made 22 447 thousand UAH versus net loss in the amount of 70 000 thousand UAH forecasted for 2015. Having analyzed financial results for the years 2014 and 2015 and also looking at the figures for 2013 (in comparison) we can make the following comparison: 2013 (000) Net operating income % of decrease from the previous period FG production cost Gross profit % of decrease from the previous period Other operating income % of increase from the previous period Administrative expenses Distribution expenses Other operating expenses % of increase from the previous period Financial expenses % of increase from the previous period Net financial result (Income / loss) % of decrease from the previous period * forecast
2 205 428,00 -1 827 132,00 378 296,00 62 024,00 -153 267,00 -47 814,00 -116 143,00 -22 742,00 79 073,00
2014 (000) 2015 * (000) 1 865 429,00 15,42 -1 551 655,00 313 774,00 17,06 380 321,00 513,18 -149 963,00 -43 206,00 -437 968,00 277,09 -37 544,00 65,09 22 447,00 71,61
1 650 000,00 11,55 -1 353 700,00 289 000,00 7,90 526 720,00 38,49 -132 000,00 -33 000,00 -660 000,00 50,70 -60 000,00 59,81 -70 000,00 411,85
Conclusions Conclusions on the Company’s state: 1.The Company significantly decreased FG sales volumes which resulted in net operating income decrease. At the same time the fixed expenses remained almost on the same level and this caused negative liquidity. 2.The Company’s management puts efforts to decrease administrative and distribution expenses but this decrease was not significant and did not influence the final financial result. 3.There are no clear reasons for 6 times growth of other operating expenses comparing to 2013 (116 143 thousand UAH in 2013 against 660 000 thousand UAH in 2015 (forecast)). At the same time if this budget item would have been on the level of at least 2014, namely 437 968 thousand UAH the Company would have positive financial result, even more that in 2014. 4.There is almost 3 times growth of finance expenses from 22 472 thousand UAH in 2013 to 60 000 thousand UAH in 2015 (forecast), which is extremely negative factor with regards to Company’s liquidity, especially under the condition of sales volumes decrease. 5.Looking at budget item “Salaries expenses” we see that the number of employees is decreasing or employees work less that 40 hours week. Namely the figures are the following: 377 138 thousand UAH, 322 573 thousand UAH and approximately 278 000 thousand UAH for 2013, 2014 and forecast for 2015 accordingly.
Conclusions Conclusions on the Company’s state: 6. The Company significantly increased other operating income in 2015, which in return decreased the overall loss which can be considered a positive factor. Situation in machinery construction industry: The situation with FG sales in the Company is not unique. If we take a look at statistics data from the table below we will see that the decrease is taking place practically in all sectors of machinery construction industry (with some exceptions) starting from 2013. If in 2014 some sectors showed slight growth in 2015 almost all directions showed decrease. This is caused by the following factors: -Loosing of eastern markets. -Devaluation of eastern countries local currencies (RF, Kazakhstan, Azerbaijan). -Falling down of oil and gas prices on global market, and also significant decrease of the raw materials prices.
Conclusions % to the previous period
Construction industry, except for repair and installation of machinery and equipment Production of electric equipment Production of electric engines, generators, transformers, electric distribution and control equipment Production of electric engines, generators, transformers Production of batteries and accumulators Production of wires, cables and electric mounting equipment
2013
2014
2015
86,4 91,1
79,4 100,9
85,9 89,8
98,9
116,5
91
107,6 93
114,2 55,8
85 72,6
74,1
86,5
92,2
97,4 91
87,8 84,4
83,3 77,5
93,5
88,7
87,5
109,6
87,6
89,3
86,3
97
91,1
84,3
86,6
76,8
84,9
93,2
71,6
81,8
82
66,7
Production of electric lighting equipment Production of household appliances Production of machinery and equipment not mentioned in other groups Production of general use machinery and equipment Production of other general use machinery and equipment Production of other special use machinery and equipment Production of machinery and equipment for metal production industry Production of machinery and equipment for mining industry and construction
Action plan Crisis in the industry sector and loosing of some markets is a very good motivation to start executing profound reforms in the industry sector. The crisis, if this time is used wisely can enable the companies become stronger, more effective and modern after the crisis is over. What to do: Financial condition and liquidity. 1.Cutting down of expenses. This can be done by executing the following actions: -Decrease of the production cost by performing transparent biddings for purchasing of goods and services. The rule should be to buy only from the producers and not from the dealers or agents. To start using Prozorro system – get connected to it. Introducing MRP practices in the Company in order to optimize the warehouse stocks and make it impossible for obsoletes to appear at the warehouse. -Optimization of the headcount with increase of labor productivity and salaries. Personnel attestation. -Finance obligations restructuring with banks and contracting companies. With this action we can facilitate and lighten the tension on daily, monthly and quarterly budget of the Company. -Decrease the expenses not directly related to production process to maximum possible extent.
Action plan -Implement monthly cash flow budget with its daily control. The monthly plan is prepared based on the sales data on cash flow with regards to income budget item. Accordingly, the expenses are budgeted in such a way that they can not exceed the income in daily cash flow budget. The daily cash flow budget should be executed and make the liquidity breaches impossible. 2. Diversifying sales markets. In my opinion the Company should take more aggressive steps aimed at penetration into EU, North American, Arabic states and Middle East markets. 3. Upgrade and modernization. Without upgrade and modernization it is impossible to succeed in execution of p. 2 above especially when we talk about competition on highly developed and self-sufficient markets. We have to have a competitive advantage. We have to buy not only the equipment but also the Know-how and technology. I think that the modernization philosophy should be the following – to select several companies – world leaders in the field of manufacturing of equipment for production of other equipment. There are not so many such countries in the world – for instance Germany, USA, UK. Then depending on our strategy we should work out the Scope Of Supply for the purchase of equipment with the following main criteria: -Minimum human participation in the production process (preferably its absence (only the operator); - The most modern and up-to-date technologies in the world from the point of view of energy consumption, quality assurance and human interference in the technological process.
Action plan -
Supply of technology and know-how and also joint start up of the equipment with quality parameters guarantee, energy consumption, production capacity; The main criterion for equipment and technology supplier selection will be its Company’s experience on the market and its Company’s undisputable leadership positions in its segment which should be confirmed by the successfully working equipment produced and installed by Supplier’s Company worldwide.
4. Increase of labor productivity on 1 employee based on sales volumes. Currently the labor productivity in sales prices equals approximately 1 650 000 thousand UAH / 5 300 employees = 311 thousand UAH per 1 employee per year, which is extremely low indicator and makes about 12.4 thousand USD per 1 employee per year.
For instance: GDP per person per countries (data for 2015 from IMF): Slovakia – 44th place, GDP – 15.893 thousand USD per person per year; Poland – 54th place, GDP – 12.662 thousand USD per person per year. This figures include also not working people, disabled people, elderly people, children – the whole population, while in Poland in average in the economy sector for working people this figure equals approximately 30.00 thousand USD per person per year. The difference is 3 times while this directly influences competitive ability of the product, employees’ salaries and taxes to the budget.
Competitive advantages 1. My management experience in western companies and experience on management positions on the current working place will help me to cope with the problems which the Company is currently facing, namely those, which concern cutting down the expenses and keeping positive liquidity. 2. I have a big experience in participation in technical upgrades and modernization of the factories, also with the help of foreign partners (not only as with equipment and materials suppliers but also as with the suppliers of complete solutions for different industry sectors). 3. My level of English is fluent which will enable me as a head of the Company to participate directly in the negotiations with top managers of foreign companies which will make this process more effective and transparent. 4. I am deeply persuaded that the main problem in deep modernization of the Company and implementation of correct business processes (according to Best Manufacturing Practices) is personnel, namely its readiness for quick changes and adjust itself to new requirements which are set by the globalized world. We can buy equipment, technology, know-how but its our employees who will be on it and correct and responsible policy in recruiting both management and workers is a key to success. I have an experience in working with personnel in several companies which were or which are currently in the process of upgrade and modernization and system changes so I think that I will be able to unite a good team of like-minded persons from the point of view of general goal and Company’s development strategy. 5. Taking into account my working experience I have high level of the following competencies – risk management, stress management, project management.