BENCHMARKING REPORT 2011

BiH Wood & Metal Processing Sectors

April 2011 This document was produced for review by the United States Agency for International Development and the Swedish International Development Cooperation Agency. It was prepared by: Cardno Emerging Markets USA, Ltd., implementer of

FIRMA Project USAID-Sida Bosnia & Herzegovina

DISCLAIMER: The views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development, the Swedish International Development Cooperation Agency, or their respective governments. FIRMA Supports the FIRMA Consortium, its Local implementing Partner Network

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

USAID-Sida FIRMA Project Overview The Bosnia & Herzegovina Fostering Interventions for Rapid Market Advancement (FIRMA) project is a 5-year, $20 million activity co-financed by the United States Agency for International Development (USAID) and the Swedish International Development Cooperation Agency (Sida). The projects goals are substantial increases in sales, exports, employment, and finance of its three focus sectors: wood processing, fabricated metal products, and tourism. These three sectors represent over one-quarter of BiH manufacturing GDP, and nearly 40% of the countrys export earnings. FIRMA supports the FIRMA Consortium, an implementation partnership between the FIRMA project and a network of local economic development agencies that support private sector development across the entire country. With and through the Consortium, FIRMA develops action plans for assistance to the FIRMA focus sectors, and manages activities with local organizations and businesses that address key obstacles to competitiveness. FIRMA collaborates closely with BiH government state, entity, cantonal, and municipal government agencies, associations, and other donors supporting economic developmment. FIRMA has principal offices in Sarajevo and Banja Luka. www.firmaproject.ba

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

Contents
1. 2. 3. 4.
4.1 4.2 4.3

INTRODUCTION .......................................................................................................1 GENERAL MARKET OUTLOOK ...................................................................................1 FINANCIAL INDICATORS BENCHMARKING OVERVIEW ................................................3 WOOD PROCESSING SECTOR ....................................................................................5
Wood Products & Capacities in BiH ..................................................................................................5 Wood Products Market Outlook .......................................................................................................6 Financial Benchmarks for the BiH Wood Processing Sector .............................................................7

5.
5.1

FABRICATED METAL PRODUCTS SECTOR ...................................................................8

Metal Products & Capacities in BiH ..................................................................................................9 5.1.1 Automotive value chain..............................................................................................................9 5.1.2 Aluminum Joinery Value Chain...................................................................................................9 5.1.3 Construction Elements Value Chain ........................................................................................ 10 5.1.4 Primary producers ................................................................................................................... 10 5.1.5 Automotive Subsector ............................................................................................................. 10 5.1.6 Construction-related Subsectors: Aluminum Joinery & Construction Elements .................... 11 5.2 Financial Benchmarks for the BiH Metal Products Sector ............................................................. 11

Tables and Figures

Table 1: Economic Shares of Light Manufacturing Subsectors ......................................................................1 Table 7: BiH Trade Growth and Trade Balance .............................................................................................2 Table 8: BiH Trade with Key Partners - 2010 ................................................................................................2 Table 2: Summary Data All Surveyed Companies ......................................................................................3 Table 3: Business Size Ranges - 2008 ............................................................................................................3 Table 6: Summary of Overall Benchmarks for Profitable Light Manufacturing Companies in BiH...............4 Table 9: Summary Survey Ratios Profitable Wood Sector Companies .......................................................7 Table 10: Summary of Overall Benchmarks for Profitable Wood Processing Companies in BiH .................8 Table 11: FIRMA Baseline Survey Data ..........................................................................................................9 Table 12: Summary Survey Ratios Profitable Metal Sector Companies .................................................. 11 Table 13: Summary of Overall Benchmarks for Profitable Fabricated Metal Products Companies in BiH 12 Figure 1: BiH Goods Exports ..........................................................................................................................2 Figure 2: Growth of Value-Added Wood Products Exports ..........................................................................5 Figure 3: Furniture Exports and Imports .......................................................................................................6

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Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

1. INTRODUCTION
This research memorandum is prepared primarily for the use of financial institutions in Bosnia & Herzegovina. FIRMA seeks to increase access to business finance for enterprises in its focus sectors. This information is intended to help financial institutions will better understand these sectors and their financial status, so as to reduce uncertainty and risk in lending to firms in them. The report focuses on two major sectors of the BiH economy wood processing and fabricated metal products. As seen in the table below, these two sectors together account for some 60% of the total value added of light manufacturing industries in BiH, and almost one-fifth of total BiH exports of goods, which grew very strongly over the expansion years prior to the global crisis.
Table 1: Economic Shares of Light Manufacturing Subsectors Product Sector Apparel Footwear Wood Processing Plastic & Rubber Products Fabricated Metal Products* Machinery Light Manufacturing Total Share of Light Manufacturing GDP 7.7% 7.7% 26.6% 7.9% 33.6% 16.5% 100.0% Share of Total Manufactured Goods Sales 1.8% 2.0% 11.0% 3.4% 15.0% 6.8% 40.0% Share of Exports of Goods 4.9% 5.5% 7.4% 2.1% 11.0% 11.8% 42.7% Export Growth 2005-08 111% 208% 40% 124% 128% 46% 81%

Source (this and following table): BiH Agency for Statistics, National Accounts 2008 * Includes vehicles & transport equipment about 15% of the total

This is a current report, focused on present financial status and near-term business outlook. FIRMA intends that this report will be updated and distributed annually to financial institutions and other interested parties. We begin with a review of our financial benchmarking methodology and overall indicators, then, for each of the two sectors sector, we discuss product range and market outlook, and financial benchmarking data for a representative sample of surveyed firms.

2. GENERAL MARKET OUTLOOK

The global economy gradually gathered strength through 2010. A rebound in inventory and fixed investment accounted for a strong rise in manufacturing and global trade. This should continue in 2011, even though low consumer confidence and reduced household incomes and wealth are holding back consumption in many advanced economies. BiH exports recovered very strongly in 2010, as shown in the following chart and table.

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

Figure 1: BiH Goods Exports

8.00 7.00 6.00 KM Billion 5.00 4.00 3.00 2.00 1.00 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Rising almost 30% in 2010, BiH exports more than offset their drop in 2009, so that at KM 7.3 billion they exceeded their peak at the end of the late 2000s expansion. Exports rose almost three times faster than imports, so that the BiH trade deficit declined, and indeed was KM 3 billion (one-third) smaller than in 2008. As a share of GDP of fell sharply, from 40% in the middle of the 00s decade to 25%, by far the lowest it has been since the war. This large improvement in the net export position is translating into stronger growth in BiH domestic markets in 2011.
Table 2: BiH Trade Growth and Trade Balance Year 2003 2004 2005 2006 2007 2008 2009 2010 Exports KM MM 2.313 2.994 3.826 5.271 6.080 6.847 5.634 7.293 Growth 22.5% 29.4% 27.8% 37.8% 15.3% 12.6% -17.7% 29.4% Imports KM MM 8.275 9.371 11.08 11.235 13.625 15.933 12.032 13.329 Growth 20.3% 13.2% 18.2% 1.4% 21.3% 16.9% -24.5% 10.8% Balance KM MM -5.144 -4.757 -4.993 -5.962 -6.377 -7.254 -5.964 -7.545 Share of GDP -41% -40% -42% -31% -35% -37% -27% -25%

Looking at the breakdown of exports by major markets in 2010:

Table 3: BiH Trade with Key Partners - 2010 Growth of: Exports to: Imports from: Net Exports to: Croatia 13% 8% +5% Serbia 20% 10% +10% Germany 37% 8% +29% Slovenia 33% 8% +25% Italy 23% 0% +23%

BiH is fortunate to have good export markets in Germany, Slovenia, and Italy, but is also doing quite well in trade with its regional neighbors.

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

Overall, then, growth prospects for BiH light manufacturing sectors are positive for the foreseeable future, in both export and domestic markets.

3. FINANCIAL INDICATORS BENCHMARKING OVERVIEW

For this report, we collected financial data from a representative sample of 55 companies in the BiH wood and metal sectors 30 in the wood sector and 25 in the metal sector. We focused the survey on the growth period from 2006-2008, in order to be able to see financial indicators during a period of normal business, plus the recession year 2009. We adjusted and consolidated this data, and analyzed the companies in various subgroups. We calculated totals, averages, and key financial indicators. The following table presents summary data for all surveyed companies. Sales for these 55 companies reached a total of KM 267 million prior to the recession that began in 2009 about 6% of total light manufacturing sales in BiH in that year, and 14% of the combined sales of the wood and light metal sectors. Their employment exceeded 3,100 people. Both sales and employment growth were very strong over the late 00s before the recession. The average company among those surveyed had annual sales in the range of KM 4 million over the period as a whole, and approximately 50 employees. With changes in employment as is typical lagging changes in sales, sales per employee rose strongly through 2008, then fell off.
Table 4: Summary Data All Surveyed Companies Total Sales KM MM Total Employment Average Sales KM Average Employment Sales / Employee # Companies Reporting Dec-06 170.5 2,200 3,343,800 43 77,450 51 Dec-07 237.3 2,890 4,314,200 53 82,080 55 Dec-08 267.2 3,180 4,857,700 58 84,070 55 Dec-09 193.3 2,840 3,647,100 54 68,110 53

There was a very broad range of business size covered by the survey:
Table 5: Business Size Ranges - 2008 Minimum Sales KM MM Employment Assets KM MM 0.237 5 0.096 Average 4.86 58 5.58 Maximum 76.8 301 61.6

The purpose of this report is to help financial institutions better understand the business prospects of the FIRMA target sectors, and to provide them a guide as to what a typical successful company in these sectors looks like. Therefore, we separated out the profitable from the unprofitable companies in our sample. Of the 55 companies, 34 were consistently profitable through the survey period, at least up to 2009 when the recession hit. The remaining 21 companies showed losses in one or more of the prerecession years. While there were differences between the two sectors in some key ratios, as will be presented below, the following overall points relevant for financial benchmarking stand out in comparing the profitable and unprofitable companies in our sample: Profitable and unprofitable companies have roughly the same average sales size around KM 4 million per year. However, unprofitable companies have 75-100% more employees on average.

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

Consequently, annual sales per employee in unprofitable companies averages around KM 50,000 less than half the average for profitable companies. It appears that an overall benchmark for success in light manufacturing in BiH should be least KM 100,000 in sales per employee. Gross margin in profitable companies averages around 20%, versus around 10% in unprofitable companies. After-tax profit margin in profitable companies averages at 5% or more, versus zero or negative in unprofitable companies. Average cash balances of profitable companies are roughly similar on average. However, the average cash balances of profitable companies trended higher, and those of unprofitable companies trended lower, over the four-year period covered by the survey. Profitable and unprofitable companies seem to have about the same current ratio (current assets divided by current liabilities) around 1.2 on average, and if anything the current ratio of unprofitable companies looks somewhat higher. However, this is seriously misleading closer examination shows that profitable companies do a much better job of managing their working capital: o Profitable companies receivables days average around 60, versus 70 or more for unprofitable companies. o Inventory days of profitable companies are 85-90, versus over 130 in unprofitable companies. o Profitable companies payables days average around 75, versus 90-100 for unprofitable companies. The main reason, therefore, that unprofitable companies show positive current ratios is that they are carrying excessive receivable and inventory levels i.e., they are poorly managing their working capital. This shows that care must be used in interpreting typical balance sheet ratios, and in using them as benchmarks.

There are other balance sheet indicators typically viewed by financial institutions that are not presented in the above summary tables. Some of them, such as quick ratio and rates of return on assets and equity, largely repeat information in the above tables. Others, including debt ratios, do not show significant differences between profitable and unprofitable companies, and in any case are quite low, indicating underleveraging.
Table 6: Summary of Overall Benchmarks for Profitable Light Manufacturing Companies in BiH Indicator Annual Sales per Employee Gross Margin Profit Margin Receivables Days Inventory Days Payables Days Benchmark KM 100,000 20% 5% 60 90 75

Again, these are overall averages for the two sectors, and there are differences between them, as shown in the sector tables below.

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

4. WOOD PROCESSING SECTOR

Processed wood products are one of the most important manufacturing sectors in BiH, representing over one-fourth of the countrys total light manufacturing value added, over one-tenth of total manufactured goods sales, and over 7% of BiH exports of goods. BiHs competitive advantage in wood processing is based on its deep traditions in this industry, arising from its endowment of rich forests, its advanced design capacities, and its capacity to combine hand crafting with modern production technologies. Of all the natural resources of Bosnia and Herzegovina, its timber is best known; 50% of the country is covered in forests that can serve both the furniture and the construction industries. These forests have the potential to provide nearly 7 million m of roundwood per year on a sustainable basis. Beech, oak, ash, pine and fir as well as more specialised woods such as walnut, apple and cherry, are exported as partly fabricated and finished products. The gap between the performance and potential of the BiH wood processing sector, while still existing, is shrinking. Over the past ten years a number of successful private firms have been established in the furniture industry, adapting market design trends, investing in new equipment, and increasing product quality. With respect to design, for example, at the IMM Fair 2011 in Cologne, Germany, the largest annual furniture show in Europe. BiH was the only country outside Western Europe that had furniture products selected for the prestigious Avenue of Innovation design contest. Out of the thousands of furniture products presented at the show, BiH had four selected for special recognition, taking their place alongside pieces from Italy, Denmark, Germany, and other leading centers of furniture design. The BiH combination of handcraft tradition and modern technology is being competitively marketed. Over 60% of BiH wood sector production is exported, and the value-added share of wood sector exports is rising strongly. Indeed, furniture was the only major product area of BiH exports that managed to continue to rise in 2009 when the recession hit. Figure 2: Growth of Value-Added Wood Products Exports
500.0 450.0 400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 2007 2008 Import 2009 2007 2008 Export 2009

BAM Milion

Sawmill products Furniture

4.1 Wood Products & Capacities in BiH

The wood sector in B&H currently employs some 16,600 people, about 2 percent of total employment, out of which 5,100 are in forestry, 6,000 in sawmills, and 4,500 in value-added furniture production. Smaller companies which employ up to 50 people are most commonly involved in production of

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

construction joinery, solid wood furniture, or sawmill products. Larger companies produce furniture elements, cabinetry, and sawmill products. A breakdown of the principal wood product types manufactured in BiH is as follows:
Value Chain Lumber Furniture Product Type Sawmills Plywood / Composite Cabinetry Solid Wood Furniture Upholstered Furniture Furniture Parts Construction & Joinery Products Doors and Windows Joinery Elements Parquet Total Companies 1,830 180 90 # Companies 1,500 35 25

There is also production of other special types of wooden products, such as prefabricated wood houses.

4.2 Wood Products Market Outlook

Real growth in furniture demand among all 70 countries covered in the World Furniture Outlook 2011 report is forecast at 3.3% for 2011, or approximately 75 billion. With advancing globalization and opening of national markets, cross-border trade in furniture is rising at a steady pace. Furniture production is one of the most important and most developed industry sectors in BiH, with good potential for further expansion. Furniture is also one of the countrys most significant export products, at some KM 600 million in 2010, a substantial 27% increase over 2009. The largest export market for Bosnian furniture is Germany with 377 million KM exported in 2010, but BiH also increased furniture exports to all of its most important export partners, including Croatia, Italy, Slovenia and Serbia. Figure 3: Furniture Exports and Imports
500.0 450.0 400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 2007 2008 Furniture 2009

Import in million KM Export in million KM

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

BiH furniture producers are currently exempt from any tariffs on furniture and most other wood products in the EU. Non-tariff trade barriers are present, mostly in form of various quality and safety standards required by the EU legislation. Although the EU furniture market is difficult and demanding, there are some specific market trends that provide oportunities: BiH design and technology capacities have advanced significantly in recent years, allowing firms to move up the value chain and compete more on the basis of product quality BiH has reasonably low labor costs, making handcrafting and hand-finishing of its furniture exports feasible, enabling affordable price points for higher-quality markets BiH's close proximity to the EU market gives it a substantial advantage over Chinese and other Asian competitors in terms of shipping costs and quicker order-to-delivery turnaround times, allowing for repetitive smaller orders within the same sales season. Outsourcing for furniture parts from West European producers has been increasing for the past several years.

4.3 Financial Benchmarks for the BiH Wood Processing Sector

In our benchmarking survey, 30 companies from the wood processing sector provided detailed financial data. Most of these were furniture producers. Of these 30 companies, 20 were consistently profitable over the survey period. We are interested in providing information to financial institutions to help them identify companies likely to be profitable and thus to be good credit risks, so we summarize data on the profitable companies only in the following table.
Table 7: Summary Survey Ratios Profitable Wood Sector Companies Dec-06 Total Sales KM MM Total Employment Average Sales KM Avg Sales Growth Average Employment Avg Employment Growth Sales / Employee Gross Margin Cash Flow (EBITDA) Cash Flow / Sales Cash Flow / Interest Profit Margin Cash PPE Receivables Days Payables Days Inventory Days Debt to Sales Debt to Equity Current Ratio Quick Ratio 130,900 20.1% 299,200 5.9% 4.6 5.4% 63,330 2,080,200 44 66 92 0.2 0.7 1.3 0.5 102.2 780 5,109,700 39 Dec-07 120.1 950 6,004,600 17.5% 48 21.8% 126,300 18.5% 288,170 4.8% 2.6 5.1% 106,800 2,707,080 43 60 94 0.3 0.9 1.1 0.4 Dec-08 134.2 1,050 6,711,000 11.8% 52 9.9% 128,400 17.2% 256,260 3.8% 1.6 3.4% 99,450 3,114,260 53 73 95 0.3 1.1 1.0 0.4 Dec-09 98.4 930 5,469,300 -26.7% 49 -6.0% 105,500 16.5% (26,910) -0.5% (0.2) 1.4% 102,590 4,149,520 73 94 100 0.4 0.8 0.9 0.4

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

Table 7: Summary Survey Ratios Profitable Wood Sector Companies Dec-06 Return on Assets Return on Equity # Companies Reporting 7.0% 15.9% 20 Dec-07 5.9% 15.0% 20 Dec-08 3.8% 10.7% 20 Dec-09 1.0% 2.4% 18

The following points relevant for financial benchmarking for wood processors stand out: Profitable wood processors on average have sales per employee in excess of KM 125,000 per year. Gross margin in profitable wood processing companies when overall economic growth is strong is at or close to 20%, and after-tax profit margin in is around 5%. Average cash balances are in the range of KM 100,000. The current ratio of profitable wood processors is above 1.0. Receivables days are in the 40-50 range, payables days 60-70, and inventory days 90-95. The debt-to-sales ratio of these wood processors is not greater than 0.3, and debt to equity not greater than 1.0. However it would not be correct to say that this is a benchmark for evaluating creditworthiness, because these levels are in fact extremely low and if anything indicate suboptimal leveraging and/or systemic obstacles to accessing business finance.
Table 8: Summary of Overall Benchmarks for Profitable Wood Processing Companies in BiH Indicator Annual Sales per Employee Gross Margin Profit Margin Receivables Days Inventory Days Payables Days Benchmark KM 120,000 19% 5% 45 92 65

5. FABRICATED METAL PRODUCTS SECTOR

The BiH metal processing sector grew out of the countrys natural endowment of a variety of mineral resources, including iron ore, bauxite ore, and coal. Throughout the twentieth century, under Austrian and Yugoslavian governance, heavy and light metal industries were a development focus. Consequently, BiH has inherited deep human capital, technological, and natural resources for this sector. Overall, the metal sector accounts for about one-fourth of BiH manufacturing and over one-third of total BiH goods exports. These totals include both base metal products and fabricated metal products. The focus of the FIRMA project, and of the present benchmarking report, is on the value-added subsector fabricated metal products. These represent some 10% of BiH goods exports, and their exports more than tripled over the four years prior to the global recession that began in 2009. The following table reports data from a baseline survey done by FIRMA in early 2010, broken down by three principal value chains (product lines) in fabricated metal products: aluminum joinery, automotive parts, and metal construction elements.

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

Table 9: FIRMA Baseline Survey Data Indicator / MP VCs SALES Aluminum Joinery Automotive Parts Construction Elements EXPORTS Aluminum Joinery Automotive Parts Construction Elements Exports/Sales Aluminum Joinery Automotive Parts Construction Elements EMPLOYMENT Aluminum Joinery Automotive Parts Construction Elements Source: FIRMA Baseline Survey, 2010 2006 642.2 87.2 314.6 240.4 386.0 42.8 242.6 100.6 60% 49% 77% 42% 7568 821 2875 3872 2007 911.7 128.6 421.1 361.9 534.3 64.9 325.7 143.7 59% 50% 77% 40% 9085 1105 3285 4695 2008 973.4 163.4 339.1 470.9 559.4 69.7 308.5 181.2 57% 43% 91% 38% 12440 1187 6218 5035 64.4% 44.6% 116.3% 30.0% Growth 2009/06 51.6% 87.4% 7.8% 95.9% 44.9% 62.8% 27.2% 80.1% 2009 724.5 115.3 281.0 328.1 457.4 55.7 262.0 139.7 63% 48% 93% 43% 12144 1183 6362 4599 2010 expected 792.7 128.4 284.5 379.9 453.3 51.9 263.0 138.4 57% 40% 92% 36% 10951 1120 5982 3849 -9.8% -5.3% -6.0% -16.3% Growth 2010/09 9.4% 11.4% 1.2% 15.8% -0.9% -6.8% 0.4% -1.0%

At nearly KM 1 billion in sales in 2008, the FIRMA-surveyed companies in these three value chains represented one-fourth of the aggregate sales of BiH light manufacturing in that year. All three of the VCs experienced rapid growth in exports and employment prior to the crisis, and for aluminum joinery and construction elements, overall sales growth was even faster, evidencing strong domestic markets. Indeed, for these two subsectors, domestic sales account for the majority of their income. All three VCs saw sharp reductions in sales and exports in 2009 as the global recession hit. In the automotive sector, in fact, the peak was in 2007 and the impact of the recession began to be felt in 2008. Companies anticipated a recovery in sales of close to 10% in 2010.

5.1 Metal Products & Capacities in BiH

5.1.1 Automotive value chain Bosnia & Herzegovina has a long tradition of manufacturing components for the automotive industry. Most BiH companies are specialist component manufacturers exporting automotive components to automotive product integrators, who finalize the product into a functional part. Most are die casters, forging shops, injection molders, and metal stampers. A number of BiH companies also provide metal fabrication input technologies and value-added services, including tool design and galvanization. The automotive sector is driven by global demands, and BiH manufacturers have become reliant on its supply chains and their capability to deliver high quality goods on time, at competitive prices. BiH automotive producers have been introducing appropriate quality standards and installing flexible product design capacities which enable this sector to compete on the EU market. 5.1.2 Aluminum Joinery Value Chain

The aluminum joinery value chain in BiH consists of over 400 small producers. The main products manufactured are light construction products including doors, windows, balconies, fences, and cable. These are supplied to construction companies and wholesalers. The domestic market is at least as

Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

important for this value chain as are European and regional markets. Aluminij Mostar, the key supplier at the base of the value chain, produces good quality primary aluminum at a good price, but does not have the capacities to fully supply the domestic market. There are successful aluminum profiles producers operating in the vicinity of Aluminij, including Presal and Fe-Al. These also reprocess waste material from joinery manufacturers. 5.1.3 Construction Elements Value Chain

Domestically-produced steel supplied by Arcelor Mittal (eljezara Zenica) supports production in construction elements and tools. At the same time numerous small metal processing companies have mushroomed around the eljezara Zenica industrial area. There is a wide range of products produced by the SMEs in this value chain for construction, from steel construction profiles and roofs to equipment such as furnaces, elevators, and pumps. Half of these products are sold in the BiH market, mainly to construction companies and wholesalers. This value chain is highly reliant on construction projects. Many of the smaller companies do not have large production premises and they do the majority of their work at the construction site, where they assemble their products. This product sector has seen a strong increase in production over the last decade. Metal Products Market Outlook BiH metal sector BiH business correlates strongly to regional and global market developments, because it is closely tied to the construction and automotive sectors, which were hit very hard by the crisis. Because of this, the decline in exports of this sector that began in the second half of 2008 was more severe than for any other light manufacturing sector. However, most companies are now on a recovery track. Those that are export-oriented have recovered more rapidly, since BiH export markets in the automotive and construction sectors in some major countries, especially Germany, started to bounce back by early 2010. 5.1.4 Primary producers

The main primary producers in BiH, Aluminij Mostar and Arcelor Mittal Zenica, are experiencing solid recovery from the drop of demand. Mittals production in 2010 was close to pre-crisis levels, and the majority was exported. Aluminij returned to full capacity by late 2010, with exports up 40% from 2009, and expects to produce a record volume of aluminum in 2011. 5.1.5 Automotive Subsector

Most of BiH the automotive parts industry is directly or indirectly exporting to EU automotive system integrators and automakers. Their business prospects therefore are directly dependent upon west European macroeconomic performance. The main export market is Germany, followed by France, Austria, Italy, and Sweden. The German auto industry made a tremendous recovery in 2010 which had an immediate effect on the BiH automotive parts producers. German car makers experienced a 20% increase in shipments for 2010, thanks to high demand in Asia and the United States. For BiH suppliers, Volkswagen (or its tier 1 suppliers) is the largest buyer, but BiH parts also enter a number of other major brands. BiH automotive sector companies also have good business in aftermarket car parts, which are sold through auto parts wholesalers and retailers in domestic and foreign markets. Overall, BiH industrial production of transport-related equipment rose some 30% in 2010, mostly offsetting a very sharp fall in 2009. For 2011, global industry analysts of the automotive industry, and the German Automotive Industry Association, expect growth of at least 10% in all three major geographic markets Asia, the U.S., and Europe. The competitiveness of the BiH automotive industry has been tested by some of the most demanding customers in the EU, both for quality and reliability, and has passed. Consequently, with the

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Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

expected growth in global demand, the sectors overall prospects for the medium term are quite positive. 5.1.6 Construction-related Subsectors: Aluminum Joinery & Construction Elements

The BiH construction-related metal products subsectors are closely tied to the domestic and global construction industry. As a result they too experienced a collapse in demand in 2009, followed by a rebound in 2010 though in both directions somewhat less pronounced than for the auto sector. The main aluminum joinery products manufactured in BiH are light construction units including doors, windows, balconies and fences, all supplied to construction companies and wholesalers, the majority in domestic markets. Similarly the main construction elements produced in BiH are steel construction profiles, roofs, furnaces, elevators and pumps, half sold on the BiH market and the rest in exported mainly to the region and to a lesser extent the EU. Domestic construction spending in BiH has fallen some 30% from its peak in 2008, with weakness continuing through much of 2010. Regionally, in Croatia and Serbia, construction activity has also been slow since 2009. However new orders for construction works in Western European markets started to recover strongly in 2010, and this benefitted the BiH industry. Also, in September 2010 the Serbian government passed a stimulus package for the construction industry worth nearly 300 million which is positive for the regional market. Generally speaking, the industry is recovering and the medium-term market outlook for BiH aluminum joinery and construction elements producers is reasonably positive.

5.2 Financial Benchmarks for the BiH Metal Products Sector

In our benchmarking survey, 25 companies from the fabricated metal products sector provided detailed financial data. Of these, 14 were consistently profitable over the survey period. Again, because we are interested in providing information to financial institutions to help them identify companies likely to be profitable and thus to be good credit risks, we summarize data on the profitable companies only in the following table.
Table 10: Summary Survey Ratios Profitable Metal Sector Companies Dec-06 Total Sales KM MM Total Employment Average Sales KM Avg Sales Growth Average Employment Avg Employment Growth Sales / Employee Gross Margin Cash Flow (EBITDA) Cash Flow / Sales Cash Flow / Interest Profit Margin Cash PPE Receivables Days Payables Days Inventory Days Debt to Sales 74,400 28.5% 238,410 16.6% 985.5 16.4% 61,470 348,150 139 131 64 0.1 19 17.2 230 1,562,900 Dec-07 31.6 360 2,255,700 83.7% 26 33.6% 87,700 17.1% 212,830 9.4% 84.7 9.6% 28,680 391,370 116 92 45 0.1 Dec-08 34.3 490 2,449,300 8.6% 35 37.2% 69,400 21.2% 193,930 7.9% 36.3 7.9% 139,530 529,930 124 122 75 0.1 Dec-09 31.9 550 2,280,800 -6.9% 39 10.7% 58,400 26.7% 175,600 7.7% 15.2 7.3% 123,280 629,160 148 178 94 0.1

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Benchmarking Report 2011 - Wood Metal Sectors - FIRMA F2

Table 10: Summary Survey Ratios Profitable Metal Sector Companies Dec-06 Debt to Equity Current Ratio Quick Ratio Return on Assets Return on Equity # Companies Reporting 0.2 1.3 1.0 16.2% 33.2% 11 Dec-07 0.2 1.6 1.2 12.8% 22.8% 14 Dec-08 0.1 1.5 1.1 8.9% 17.2% 14 Dec-09 0.2 1.4 1.0 6.6% 13.2% 14

The following points relevant for financial benchmarking for metal products fabricators stand out: Profitable metal products companies on average have sales per employee in the range of KM 75,000 per year. Gross margin over time in profitable metal companies should average significantly above 20%, and after-tax profit margin above 8%. Profitable companies built up fairly sizeable cash balances over this period. The current ratio of profitable metal processors is above 1.5. This reflects extended average receivables days of 120 or more that appear to be typical for the sector, with corresponding extended payables days. Inventory days are well-managed, averaging around 70 over the review period. Debt-to-sales and debt-to-equity ratios for metal processors are even lower than those of wood processors, again evidencing significant underleveraging and viable opportunity to take on additional finance for working capital and expansion.
Table 11: Summary of Overall Benchmarks for Profitable Fabricated Metal Products Companies in BiH Indicator Annual Sales per Employee Gross Margin Profit Margin Receivables Days Inventory Days Payables Days Benchmark KM 75,000 22% 8% 125 70 120

-----------------------This concludes our Financial Benchmarking Report for the BiH wood and metal sectors for 2011.

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