Source: Hospodářské noviny Date: 29.12.2022

Adam Šotek, the head of Jaroslav Strnad's large industrial holding CE Industries, talks about the threatened industry, the energy crisis, the railway business and entering new industries.

Unlike the experienced "production man" Jaroslav Strnad, he prefers numbers. However, both of them share a passion for rescuing and restructuring traditional industrial companies. Adam Šotek, a native of Opava, has extensive experience with crisis-ridden companies. For several years he worked with the well-known crisis manager Václav Novák at M.L. Moran. In 2019, however, he joined forces with former arms tycoon Jaroslav Strnad to help him build the civil industrial holding CE Industries.

Today, it consists of two dozen companies with a total turnover of nearly 13 billion crowns and a range of operations from the Czech Republic and Slovakia to countries in the Balkans. They both know that European industry is not facing easy times, but they want to use the crisis to their advantage.

HN: How much are your companies affected by high energy prices?

They do. It is not good when there are different ceilings on energy prices, different types of support within Europe. If I overstate it, it doesn't matter what the prices are, but they should be similar. Today, the Czech Republic is facing a real threat of an outflow of part of its production. In Serbia, we have four times lower gas costs. Even in Poland, energy costs half as much. For example, at our Ostrava forge, MRWheels, which produces hoops for rail transport, energy accounts for 25 per cent of costs. In that case, you are absolutely uncompetitive.

HN: So do you agree with the statement that European industry will struggle to survive because of costs and regulations?

There is something to that. We are looking much more at the energy intensity of companies today. With the exception of MRWheels, we do not have companies with an energy cost share of more than ten per cent. Then you can cope with rising energy prices. But when you have foundries, forges, smelters, it is difficult to respond to these conditions. There is certainly a risk of this type of industry moving out of the EU. That is why a serious debate must begin on reforming the energy market.

HN: Inflation of other inputs does not worry you?

From a global point of view, we can take it as an advantage. Although things are getting more expensive, this is also happening in the case of credit. This is not good news for our companies, but many assets that are available for purchase are decreasing in price. And we would like to take advantage of that in meeting our acquisition targets.

HN: But you're making acquisition financing more expensive, right?

Yes, but we are using a combination of sources. We are generating our own, there was a larger contribution from Jaroslav Strnad when he founded the group, and then we are financing ourselves under Euribor (the benchmark lending rate for banks in the eurozone, ed.). We have a surplus of income in euros in the group, so we finance ourselves as a group with euros. This is another advantage.

HN: You have recently completed the reorganisation of the MICo power engineering plant very quickly. What plans do you have for it?

Our group in 2018 was mainly composed of problematic assets that we were buying out of bankruptcy, for example. For example, the Žilina raw materials collection plant. We did a number of reorganisations, so we had a lot of experience in this respect. At the same time, MICo was more of a small or medium-sized reorganisation for us compared to what we were used to. And we went into it mainly because of our company Chemcomex. It's combining the engineering and assembly capability of Chemcomex with MICo's manufacturing capability in the core and other industries. Lenders and major players saw this as an opportunity to continue as part of a larger entity.

HN: So you knew the company? You were there quickly, in fact, before it actually went bankrupt.

We had a similar venture, Vítkovice Energy Engineering (VES), at the beginning of our group with Martin Ulčák's E-Invest. It was within that company that we were competing with MiC. So we knew the company from the market. VES fell to E-Invest during our break-up in 2020. However, we liked the industry, so MICo was a good opportunity to get back into it. Moreover, when MICo got into trouble, its then owner got in touch with the head of Chemcomex, with whom he was well acquainted. Both companies are based in Trebic. Now we plan to merge both companies into one entity that will offer comprehensive services in the field of specialised engineering.

HN: So the MICo brand will disappear?

I must say that despite the insolvency, the brand still has a very good sound on the market. Even in a difficult period, it has maintained long-term business relationships and important technological certifications. I think we will keep the brand in some form.

HN: The core of the group consists of manufacturing companies for the railways. With what vision do you operate within it?

A: Within three years we would like to be number three in the production of freight wagons in Europe. That is what we are currently working towards. Our strategy is vertical. This means that we do not intend to have dozens of customers. We are happy with fewer, but we want to be able to offer a comprehensive service to them. From design work and tailor-made solutions, through production in the Croatian Duro Dakovic engineering plants, to service and repair. Already in 2019 we have decided to build four medium-sized repair shops at four transport hubs. We now have two, with more coming soon.

At the same time, we have built a mobile workshop in Vítkovice, which is used by our customers, especially leasing companies. Their share of the European market has grown from 12 percent to 45 percent in recent years. The speed of repairs that the mobile workshop offers for certain types of vehicles is important for their economy. We have that today in the Czech Republic, Slovakia and Hungary, and we have more countries coming up. In addition, at Vítkovická doprava we have 50 kilometres of railway sidings where we offer our clients car parking. This is also an important service for leasing companies. Moreover, Ostrava is an important railway junction.

HN: Why is rail your main field of expertise?

The EU cohesion policy set a target in 2018 to increase the share of goods transported by rail in Europe from 18 to 30 percent by 2030. If today we are talking about 700,000 freight wagons in operation in Europe, by 2030 the number will practically double. At the same time, we know that the lifetime of a wagon is about 30 years. The average age in the EU is over 30 years. So there will be a lot of pressure to renew and modernise them. The standards for special wagons for the transport of chemicals have also become stricter. At the same time, there is a severe shortage of truck drivers in Western Europe. And one wagon can replace up to 25 drivers. All this suggests that demand for transporting goods by rail will grow. Not to mention the ecology driving Europe, which also favours rail. It has nine times lower CO2 emissions than road transport.

HN: How many wagons are you producing today? And are you planning further acquisitions?

We are not currently in the top five in Europe, but we are getting there. Increased production at Duro Dakovic will help us a lot. Last year 264 wagons were produced there under the former owners, this year we will produce 580 and next year we plan to produce 803. So in just two years we will practically triple production there. We are definitely looking at other acquisitions, or at places where new greenfield production could be built.

HN: The game for Legios, or the production site in Louny, is not being reopened? Wouldn't it be up for grabs from the Ostrava businessmen, the Šušek brothers?

We never comment on upcoming acquisitions in advance.

HN: You said that you would like to have four large repair shops at important transport hubs. So where are you looking at?

We currently have one in Ostrava and another north of Zagreb, Croatia. We are looking at northern Bohemia to get closer to our customers in Germany, of which we have plenty. But there we would have to build it on greenfield sites. Then we're looking at possible acquisitions in Serbia.

HN: Duro Dakovic is the biggest acquisition of the group. Why didn't you go it alone, but rather in a proven tandem from Tatra with industrialist René Matera?

It was 2020 and we were dealing with Vítkovice Heavy Machinery. It was a lot of work. In addition, Mr Matera came up with the idea for Duro Dakovic. The whole project involved negotiations at the level of the European Commission, with the Croatian authorities, with the local stock exchange. I am not afraid to say that at that time CE Industries was not quite ready for it. It was shortly after its creation. The ideal solution was to team up with an experienced partner with whom we were well acquainted. We decide on the management of the company together and it is managed by Pavel Maroušek, who has proven himself at Vítkovice železniční opravny.

HN: How far can you grow with Duro Dakovic?

With relatively small investments of around CZK 100 million, we are able to produce 1,200 wagons a year there. In addition, we have large plots of land around the plant, where we could certainly build additional plants. You always have to find the optimum size of plant to be efficient enough. Our vision is rather to have two separate plants with a total production of 2500 wagons. That would make us a European number three. The number one is Tatravagonka, which produced 6,500 wagons this year.

It has to be said that costs may be a constraint. Croatia is similar to the Czech Republic in terms of energy and people costs. So we will be directing wagons there that have a higher added value. We are proposing to do part of the production in Serbia.

HN: In Serbia, you bought a producer of washing powders, Beohemija. At first glance, that doesn't fit into your scope. How did that happen?

Last year, some financing became available from a tolling company originally intended for Vítkovice Heavy Machinery, but there was nothing to buy in our strategic fields. Or the prices were so high that we couldn't accept them. So we looked elsewhere. Moreover, the Group was built on restructuring. That's what we like to do. No one has done as many crisis projects here in the last five years as Mr. Strnad. And we've decided to keep doing it.

HN: So Beohemija was a company in trouble?

It certainly was. We gave ourselves some criteria for troubled companies. First and foremost, they have to have a product that you can take to the next level. And Beohemija has a product that is number two in Serbia and other Balkan countries. We have solved its basically bankrupt balance sheet and now we can build on its product portfolio with other products that were missing. At the same time, and perhaps for the first time in the case of Mr Strnad, we have defined the investment horizon over which we will operate in the industry.

HN: And what is it?

Let's say at least five years. We decided to add something to that. For example, in the Czech Republic, we bought Solira, a manufacturer of cleaners in Hodonín, now Beohemija CS, which was on the verge of bankruptcy. But we are looking at how to increase its value and then sell it to a global player. After all, in Serbia, we are number two behind Henkel, only behind P&G. There might be interest in buying us in the future. But first we have to do our homework.

HN: Is this the same discipline as saving the heat exchanger industry?

In terms of crisis management, yes. It's a universal discipline where you have some basic rules. When a company has a good product, the procedure for rescue is a given. The stage of further development is much harder. For that you need a strong team that has the competence. And we knew that we could build such a team, and that's why we are now confident in this area. This is also why we are creating a completely new FMCG division within CE Industries.

HN: How many companies do you have in this division?

Currently five. The sixth company will come in January. And this is the division that will bring us revenues of CZK 1.3 billion and EBITDA of CZK 135 million next year.

HN: In addition to consumer chemicals, you have also entered food companies. How does that work together?

Yes, we bought Heinz Food, a health food company, and Kaumy, which operates the e-shop, from the same owner. Kaumy is a platform for us to sell Beohemi products in other countries. In addition, a large producer of cocoa and other foodstuffs from Pardubice - the company Kávoviny - will be added in January.

HN: Is it true that CE Industries currently consists of 20 companies? Or is it more?

Valid. For the next year, we are expecting a further streamlining of the group, which today is divided into two holdings: CE Power Industries and CE Industries. In the future, there will be only one. And we are also dealing with the mergers of individual companies that have been rehabilitated and can be integrated into our operating businesses. We will see that in waste recycling, in the rail business and in FMCG. And also the aforementioned merger of Chemcomex and MIC.

HN: You list the total turnover of the group on your website as 8.3 billion. Is that the current figure with Duro Dakovic?

It's more. The sales of all companies in the CE Industries group, i.e. the unconsolidated results, are CZK 12.8 billion. For next year, we have projected sales of 15.7 billion.

HN: Can you give an indication of the total EBITDA profit of the group?

This year it will be less than 600 million, next year we are planning 907 million crowns.

HN: Which business accounts for the largest part of the revenue?

Currently it is the waste division. But on EBITDA, rail is the biggest. There will be a lot of growth in revenue next year as well. Our plants are booked 12 months ahead with orders. We are also starting to see interesting growth in the defence area at Duro Dakovic. FMCG, i.e. chemicals and food, will also grow a lot next year.

HN: What kind of debt are you working with at CE Industries? How much are you financing the expansion with borrowed capital?

We are below three times EBITDA in the long term. That's a safe level.

HN: In the Croatian press there was information that you are bidding for the oldest shipyard there, Uljanik Brodogradnja 1856. How would this relate to your group's activities?

The process is only at the beginning and I would not like to comment more at the moment. But it would make sense in the context of our activities on the railway.

HN: There is talk that industrial companies will slowly start to fall into trouble. Is this already showing up in the offers you are receiving?

It certainly does. There are more opportunities in our strategic areas than last year. But again - it has to make sense to us. Both in terms of the product and their energy intensity. We are looking particularly at opportunities in waste recycling and rail. In FMCG, I don't expect any further acquisitions next year. There we will play with our companies inwards. Likewise in the energy sector.

HN: How do you look for opportunities?

Offers usually come to us on their own. In our core businesses, we monitor the market closely, we know the companies there, and when we feel they might be available, we actively approach them ourselves. We work minimally with consultants.

HN: How much is Jaroslav Strnad involved in acquisitions or management of companies in the group?

Mr Strnad is most active in acquisitions. He enjoys it a lot. He is not as involved in the management of individual companies, which is due to the set-up of the group. Although we are an industrial holding, we manage companies more like a financial investor. The management in the individual companies has a lot of autonomy. We collaborate on strategy, cash flow, oversee the economics of the companies and cover HR policy. In the case of companies that are in the process of restructuring, the holding company's involvement is of course greater.

HN: You grew up alongside the well-known crisis manager Václav Novák at M.L. Moran. Do you consider yourself more of a production manager or a financial manager?

My first crisis project was before M.L. Moran, which was the successful rescue of the ZKL holding, where I joined as CFO. I liked crisis management and wanted to continue it. And the best opportunity was the cooperation with Václav Novák. I learned a lot from him. I went through production at Alfa Plastik (M.L. Moran project) as a director, but I am closer to numbers. My emphasis is not only on the numbers that companies achieve, but rather on trends. They show where the company and the industry is heading. I then adjust the company to that.