Source: E15 Date: 10.10.2023 Author: Ondřej Souček

The new business of the former armourer Jaroslav Strnad is becoming increasingly clear. The business around railway freight wagons is becoming the clear focus of his three-year-old industrial holding CE Industries. And it is the railways that are the reason why CE Industries is trying to take over the operator of the Croatian port of Luka Rijeka. "The port is generally the place where train transports start and end, so trains are stationary here even for longer periods of time. So it makes sense for us to service and repair them here," says CE Industries boss Adam Šotek.

CE Industries has growing ambitions in the Balkans. You have made a bid to take over the Croatian port company Luka Rijeka, in which you already have a minority stake, and you also participated in the sale auction of the Uljanik Brodogradnja 1856 shipyard. What are the next steps?

In both cases, the companies have a fragmented ownership structure, so any negotiations are very complex. In any case, we have already withdrawn the bid from the shipyard. After a financial review of the company, we found that a takeover did not make sense for us. We are still interested in the wharf, but I don't expect us to make any major moves before the end of the year. However, we are pursuing a number of opportunities, our targeting is unchanged, we are looking exclusively at companies that are in trouble and where we are confident that we can heal them with our know-how.

What exactly is the situation today with your entry into the company that operates the port of Luka Rijeka?

In the spring, we acquired 34 percent and subsequently filed a proposal for a mandatory buyout of the remaining shares, which also expressed our interest in acquiring a larger stake in the company. The whole situation is very tricky in terms of information, given that the company is listed on the stock exchange. I can't really say more than that.

However, the mandatory buy-back offer for the remaining shares was compulsory under local law.

Yes. But I can put it another way. We have an interest and we have expressed it with this offer. In general, when our owner (Jaroslav Strnad - ed.) enters a new company as a shareholder, he likes to control the majority. The Port of Luka Rijeka is no exception. I can also say that the fragmentation of owners in the port entitles us to participate in the management of the company today, from the position of the largest, albeit minority shareholder. In August we gained two seats on the Supervisory Board and we hope to be much more involved in strategic and operational management in the future. 

What are your plans for the port? Where would you like to take it?

The company is profitable, so it may not seem to fit with our strategy as I described it at the beginning - namely that we are looking for companies in trouble. On the other hand, 2022 was a record year for most ports. However, after a deeper analysis, you will see that the port of Luka Rijeka is not using its potential as well as it could. Compared to similar ports, the company's profitability lags far behind. There is great potential, especially in expanding commercial activities and streamlining operations.

Can you be more specific?

This has several points. The port is generally the place where train transports begin and end, so trains are stationary here for longer periods of time. It therefore makes sense for us to service and repair them here. In addition, since our group is involved in railway engineering, we also have a large number of clients who use the port. These same customers also use containers that need to be stored and serviced somewhere. This is the other business that the port does not yet have that we could bring in.

Such plans will require large investments. Do you have an estimate of how much it would cost to expand the port business?

We don't have that yet. We are not yet deep enough in the internal processes to have enough information. 

You said you have two representatives on the supervisory board. Yet you have no information?

We do have representatives, but the new board will meet later this month.

Will you also propose representatives to the board of directors at the meeting?

The vast majority of company results depend on the people who run them. And if I say that Luka Rijeka has a lot of room to improve its performance, we will convince the other members of the Supervisory Board that the Board as a whole should look for experienced managers. Ones who have a track record of results, have an international overlap, preferably with experience in managing a similar business. I believe that our partners, particularly from the funds, will have a similar view of how to deal with the situation.

You said that the port is profitable. How did it perform last year?

In Czech crowns, it made about 223 million before taxes. This is the best result ever, but I would remind you again that during the war all ports were on record. Our analysis suggests that the profit could have been much higher. And we want to prove that we are not wrong.

In this regard, how satisfied are you with the recent acquisition of Croatian engineering company Đuro Đaković?

Very. That is just a beautifully illustrative example of how we can kick-start a company. In 2021, when we gradually took over the management of the company, the company produced 265 wagons. This year it will be 870, and for next year we expect 1,000. This means that in two and a half years we have increased production three and a half times. And we believe that by 2026, we can be at the two thousand wagon per year mark. But that will be more complicated and will require an investment of over a billion crowns. So far, everything is going well for us at Đuro Đaković Engineering Works, thanks to the fact that we went into this with our long-standing business partner, Promet Group. We have 65 percent and they have 35 percent, and I would say we complement each other well.

For what reason will further growth be more difficult?

We feel that there is a lack of know-how in Croatian engineering. There are few companies to cooperate with. Not only are there a lack of people, there is a lack of manufacturing companies in the engineering fields in particular. For us, this means that if we want to continue to grow, we need a subcontracting base to grow close to the company. It does not have to be Croatia directly, but the Czech Republic is far away for these purposes. Serbia, for example, is in play.

Do you have business partners in mind, or potential businesses to take over?

Both. For some components, which are scarce on the market, we can imagine capital entry. Precisely so that we can control the bottleneck. But for now this is just a line of thinking, I certainly don't want to say that we are in talks to take over a company. That's a long way off.

What components are you looking for?

I don't want to be specific. But chassis or other production with relatively lower added value makes sense for us.

Let's go back to the fact that wagon production is growing. Have you had to reduce your production portfolio because of it?

No, the rest of the production is also growing. The main reason for the growth is our know-how. Interestingly, we originally came to Đuro Đaković Machine Works with the idea of expanding the company's production portfolio. But our first steps were paradoxically the opposite. First, we taught the workers the productivity of working on one type of wagon and reconfigured the internal logistics, organisation and other processes to increase the throughput of the order through the company.  With a bit of exaggeration, we can say that we operated like a factory in the socialist era - we produced one type of wagon for half a year and then another. But of course, such a setup cannot be sustained in the long term, let alone today. Because of the pandemic and the war in Ukraine, customers are changing their needs and requirements faster than ever before. That is why we are introducing three new types of wagons into production from the second half of this year.

Can you give a specific example?

Covid, for example, has caused the demand for container vehicles to grow. The war, on the other hand, increased demand for wagons for transporting grain from Ukraine or for tank wagons for transporting fuel in the opposite direction.

Đuro Đaković also manufactures armoured vehicles. Did the war start this part of production?

Not really. It is not a core business for us, we actually bought Đuro Đaković because of the railway. We did maintain the production of military vehicles, and its sales increased from about 100 to about 300 million crowns, but it is still a fraction of what it is for rail vehicles. Overall, the company made CZK 2.1 billion last year and had an operating profit of CZK 132 million. This year we expect a profit of CZK 230 million. I would like to remind you that before our entry, the company had been in the red for 22 years. To sum up: for me, Đuro Đaković is a prime example of crisis management, in which we have used years of experience in this field. Although the initial analyses pointed to overstaffing, we had to recruit 200 new workers to the plant and will need another 300 in the next two years, despite investments in automation and robotics.

What are your longer-term goals in railway engineering? It's obvious that this division is not only the flagship of CE Industries, but that it is also growing dramatically faster than the rest of the group.

By 2026, we would like to be the European number three in the production of rail freight wagons.

You are also developing your business in the Czech Republic. With your business partner Jiří Kabelka, you are now buying the Czech Precision Forge. Why this company?

It fits nicely into the business we are already in. This means that we want to solve some of our key deliveries with its help. But the majority will be held by Mr. Kabelka.

The Forge has a fairly broad portfolio. What do you want to use it for most?

It is for a certain type of forgings or metal hoops for engineering, mainly for Đuro Đaković. The smithy can also produce wheels for armoured vehicles, but this is definitely not the company's main business and the connection with the CE Industries group is minimal. 

At the same time, according to my sources, Czech Precision Forge is one of the few plants that can forge gun casings. Can you confirm this?

I also have that information.

Will you take advantage of that?

I'm sure it's available. It makes sense for Mr Strnad to use his contacts to help develop this business as well, but it's certainly not the main motivator for the transaction. It's the aforementioned wagon components. 

What role will Jiří Kabelka play in this company?

It has to be said that Mr Kabelka, who will have a majority stake, approached us with this opportunity. What his motive was, you have to ask him. We are counting on the fact that his DEL group specialises in automation and robotics in production, and we want to introduce that in this plant as well. Czech Precision Forge also falls into the category of distressed assets (companies with weaker financial health, ed.). Although it has relatively good economic results, it has not invested for a long time and is indebted. We will have to restart it.

How do we understand that you have accepted a minority stake in Czech Precision Forge when you have long preferred a majority?

DEL is one of the leading companies focusing on automation, so we believe that the cooperation will also be beneficial for other companies in our group.

I ask because DEL has no experience in this field, so it can act more as a financial than a strategic partner. Isn't another reason for your partnership the deteriorating conditions on the financial markets, simply put, expensive money?

First of all, it has to be said that we as CE Industries also have no experience in this field. So the ownership structure is the result of a negotiated balance of power. And in truth, we have not even addressed the ownership structure in any far-reaching way. The second thing is that CE Industries is actually very active in acquisition and investment. We've grown many times over the last four years. 

So it's not that you couldn't afford to buy the company yourself?

With every transaction we consider the best solution, the best possible partners, and this time we made that decision. The advantage is that we're known to know how to work with partners, we know how to set goals, we honor agreements, and I don't remember us not parting on good terms. Resources have not been a constraint for us.

Another area of CE Industries is fast moving consumer goods. What plans do you have for the FMCG division?

In the coming months, our three businesses Heinz Food, Kaumy and Coffee will be merged into one plant. At the same time, we want to launch new health food products, which are the result of combining the ranges of both Kávoviny and Heinz Food. We are looking for a suitable location for this project, with the main objective of significantly streamlining production. The merger will create a company whose revenues, when the existing three businesses are added together, will be just under 600 million and should be considerably more once the transformation is complete. We will then look for a buyer for it, and we see an expected investment horizon of around five years.

We have never made any secret of the fact that fast moving consumer goods is an opportunity business for us. This means that when interesting acquisition opportunities come up in this business, we consider them, but we don't completely seek them out. Then, when we acquire those businesses, we try to improve their management trend and get paid for that work. Ideally by someone who wants to be in this business for the long term. We see ourselves mainly in the rail industry, waste recycling and energy engineering. This is our core business, the rest are just occasional investments where we are already calculating sales from the start.

How did the whole CE Industries group perform last year and what results do you expect this year?

This year we expect sales of around nine billion crowns and consolidated gross operating profit is estimated at 720 million crowns. Last year, we made about seven billion and earned about 277 million. However, there are big one-off accounting fluctuations in both years, whether due to the consolidation of Đuro Đaković or the reorganisation of MiCo. Anyway, the trend is clear and next year will be even better in terms of economic results.