War and soaring prices take toll on Southeast Europe's listed companies

War and soaring prices take toll on Southeast Europe's listed companies
By Clare Nuttall in Glasgow June 4, 2022

The war in Ukraine, rising prices and supply chain disruptions are taking their toll on listed companies from Croatia, North Macedonia and Slovenia, company executives and stock market officials from the three countries told a two-day investor conference at the end of May. 

Companies from sectors including food, pharmaceuticals, automotive components production, tourism and IT are affected by the crisis, as outlined at the CEE Investment Opportunities conference organised by the Zagreb and Ljubljana stock exchanges on May 26 and 27. While only some have direct exposure to the combatants such as Croatian IT company Span’s Ukrainian subsidiary or auto components producer AD Plastik’s business in Russia all are affected by the hikes in food and energy prices. 

The Zagreb Stock Exchange’s (ZSE’s) main index Crobex is now trading around pre-coronavirus (COVID-19) levels, and is “performing nicely” compared to Western Europe and the US, according to Danijel Delač, board member of InterCapital Securities. However, as the impact of the war makes itself felt, Delač warned at the conference that “profit margins [of listed companies will] be affected by commodity price explosion and it remains to be seen what the effect will be on dividend payouts”.

Delač listed the headwinds facing companies. "Energy prices exploded, all kinds of inputs are exploding. It's hard to project trends in next years, at the moment that is really a challenge,” he said.  

Filip Petrushevski, CEO of Investbroker AD, the co-founder of the Macedonian Stock Exchange, has seen a similar recovery on the exchange in North Macedonia, which started last year when it achieved the biggest turnover in more than 10 years. The exchange’s main index, the MSE-MBI10, was up by 30% in 2021. 

However, Petrushevski said that while the recovery had begun last year, there was not a full recovery when the war started. He also noted that the impact of international events tends to hit the Macedonian Stock Exchange later than the Slovenian and Croatian exchanges, meaning more pain most likely lies ahead. 

“2021 was the year of recovery, [with] GDP growth in Q2 [the] highest in recent history but also coming after highest decline in Q2 2020. With the coming of vaccines things stated reopening and GDP growth ended the year at 4.1%, but reopening had its own issues the deterioration of supply chains and upward pressure on energy prices made the process of getting back to normal more challenging,” Petrushevski told the conference. 

“While there were favourable expectations about 2022, escalated geopolitical tensions, disruptions of supply chains and growth of prices of primary commodities on the intentional market make the assessment for the economy pretty much unfavourable.” He warned that the situation could still worsen if there is a further escalation of the war, more sanctions, further tightening of monetary policy in developed countries, as well as citing risks related to the pandemic, such as the emergence of new variants of coronavirus.

Span’s Ukrainian business 

One of the companies from the region that has been directly affected by the war in Ukraine is Croatian IT company Span. Span held a successful IPO in 2021, using some of the proceeds to fund its international expansion. Today it has more than 1,200 clients on six continents, including major international companies Starbucks, McDonald’s and Tate & Lyle. While relatively small, its Ukrainian subsidiary had been growing strongly.

“Our activities in the war-ravaged areas have not stopped, so we are still providing support to our users in Ukraine,” its presentation said. 

“About 60% of businesses are still working, especially in western Ukraine,” said Petra Keča Vidović, Span’s investor relations manager. Span moved the female members of its Ukrainian team to Zagreb after war broke out, but only a few of the men left Ukraine. Among Span’s biggest customers in Ukraine are metals company Azovstal, whose steel plant was almost completely destroyed in a months-long seige, and Metinvest. 

Keča Vidović says Span was growing in Ukraine until the end of February. “We will stay there to help them as much as possible and be one of the significant partners in the reconstruction of Ukraine on the software side if possible,” she added.  

Auto-making halted in Russia 

Experiencing the war on the other side is AD Plastik, a Croatian supplier to the automotive industry that pre-war generated just over a quarter of its revenues (27%) in Russia. 

“In Q1 22, unfortunately we are impacted like most companies by the Russia-Ukrainian crisis. On top of that, still we are facing this issue of lack of semi-conductors,” said Josip Boban, president of the board of AD Plastik. 

Commenting on the challenges the company is facing this year, Boban listed the war, shortages of semi-conductors and increasing prices of materials and energy. The company’s responses include working on cost adjustment and efficiency improvement, as it focuses on financial stability and profitability. 

The future of its business in Russia is highly uncertain. Automakers have halted production as a result of international sanctions and falling demand. French car maker Renault agreed in April to transfer its 68% stake in Russia’s largest carmaker AvtoVaz to the state for a symbolic price one ruble and a five-year option to get the asset back. Another of AD Plastik’s customers, Volkswagen, has also halted production but has not yet announced what its plans are. 

Mixed picture for pharma

Several companies from the region are suppliers of pharmaceuticals to Russia and Ukraine, and for this sector the picture is mixed. 

Slovenia’s Krka said in its presentation that the situation in Russia and Ukraine its first and third largest markets respectively did not significantly affect its Q1 sales. In fact, during the quarter the company made the highest first-quarter net profit in its history, as sales increased in all sales regions and all products and service groups. 

However, the company said that while it was among the first companies to reinstate logistics throughout the entire distribution chain in Ukraine, it faces a challenging environment in Russia and Ukraine, where the “duration and long-term consequences [are] hard to predict. We are performing all efforts to ensure business continuity in [the] region and fulfill social responsibility of uninterrupted supply,” the company’s presentation added. 

Croatian food and pharma group Podravka, meanwhile, said that its overall sales in Eastern Europe dropped by 30.4% in Q1, mainly driven by a 45.3% fall in pharmaceuticals sales. The group attributed this to “lower sales of prescription drugs and non-prescription programme due to the discontinued deliveries of drugs to the market of Russia”.

In “pharma we recorded lower sales of our own bands due to the situation between Russia and Ukraine because we cancelled all shipments to Russia since the war started ... you are all aware of the importance of the Russian market for our pharma segment,” said Irena Ivanković, head of investor relations at Podravka. 

Soaring prices 

Podravka is active in a wide range of food segments as well as pharmaceuticals. The group reported positive results for 2021 with 2.8% higher sales across the group, including 2.1% higher sales for food and 5.5% for pharma. 

However, as well as the disruption of sales to Russia, the company’s presentation said that “Negative trends in prices of raw materials and supplies were recorded in 2021 compared to 2020”, weighing on profitability. 

Ivanković pointed out that Podravka had already increased the prices of its products by between 7% and 10% at the beginning of 2022 without a negative effect on the volume of food sales and forecast that the trend of rising prices will continue throughout the year.

Another major Croatian food and beverage company, Atlantic Group, reported a significant increase in revenue and normalised Ebitda in Q1, despite the “challenging and unprecedented environment” and the fall in sales in Russia and the CIS during the quarter. 

The group’s presentation also noted a “significant increase in the prices of a large portion of our raw materials and packaging materials, logistics and other services and energy”. Among them is an anticipated increase of more than 60% in average prices of raw coffee on the global commodity markets. 

Beyond FMCG

The rising prices of food and other fast moving consumer goods (FMCGs) are having a knock-on effect on companies from the hospitality sector. 

Devansh Bakshi, CFO of Arena Hospitality Group, said the group is expecting strong orders this year, "coming pretty close to 2019”, in Croatia as well as other markets such as Germany. On the other hand, Bakshi warned about inflation and supply chain issues, with inflation in the range of 6-8% for most products, but as high as 20% for some.

Regarding the supply chain, he said: “we are working very closely with all our suppliers, talking on a weekly basis, especially for food, beverages, cleaning supplies, soap shampoo, etc, all the consumables and supplies. So far no suppliers told us there would be disruption except engineering suppliers.” 

Commenting on the long-term response, Bakhri said: “All businesses need to look at sustainability other ways of producing and reducing. We have a plan, we are working with specialists, we think sustainability is a very strategic topic that has shifted to a priority given the events of the last five months.”

Labour market 

Labour remains an issue for many countries in Central and Southeast Europe. Croatian companies have long struggled to find seasonal tourism and construction workers. Delač highlighted the workforce as another challenge especially for tourism, IT and construction companies in the country. 

Bakshi also singled out the labour market, saying it had shrunk further in recent years in terms of skilled workforce. The company responded wth a successful recruitment drive within Croatia, as well as seeking foreign workers, predominantly from the Philippines, Ukraine, North Macedonia, Serbia, Bosnia & Herzegovina and Indonesia. However, Bakshi added, international recruitment adds to the labour costs, for example through commissions, travel, housing and food.  

Another major tourism company Valamar Rivera, said in its presentation that retention of existing employees and attracting new ones are among its main needs. It warned of an increase of around 14% in the salaries for occupations such as chefs, waiters and receptionists. 

Span’s Keča Vidović said securing talent is the main obstacle to the company’s growth. “To grow more we have to employ more. We are importing people from Asia, employing as many as we can. Our growth would be much bigger if more resources were available,” Keča Vidović said.