www.castingitaly.com - Intervento di Chiara Valduga presidente Gruppo Cividale

Thank you, buon pomeriggio. I'll briefly present the group and then get to answering the question. Gruppo Cividale has its origins in the late 1960s, when my father, who had never been involved in businesses, first became an employee and then a reference partner of a foundry in Cividale del Friuli that was in very difficult conditions. From there began a whole series of acquisitions following a growth strategy that led him to buy a new foundry every year, every two years, in a very difficult market where companies in the sector were generally struggling. So he arrives after the first foundries, but then adds more. I won't list them all, but the group gradually took on the configuration we can see in this slide, where essentially there's a parent company, Cividale S.p.A., headquartered in Stavagnacco in the province of Udine, which besides managing services for all group companies directly manages some hydroelectric plants in Tarvisio and controls a forge, five steel foundries — Cividale, Magnago, Santa Maria di Savona, and Silea in the province of Venice — as well as four mechanical processing companies, Lec 1, 2, 3, and 4, plus various subsidiary companies. This is essentially the historic group structure.

In 2006, we took a very important step in terms of dimensional growth with the acquisition of ex Metallurgica, which is the current ZML Industries, which itself has three divisions: gray iron foundry, aluminum die casting, and copper drawing. So this was an important step both in terms of growth and diversification, because we moved beyond the traditional sectors of steel foundry with manual forming, forging, and mechanical processing to address completely different sectors and markets.

To briefly summarize with some numbers: the group, looking only at the Italian part, today has 1,500 employees, a revenue oscillating between 350 and 380 million euros, occupies approximately 600,000 square meters, of which 200,000 are buildings. Our production capacity is 27,000 tons of steel, 3,000 tons of manually formed iron, 880,000 tons of automatically formed iron, 15,000 tons of forgings, and 25,000 tons of ingots.

Looking at the historic group, which relates to the subsequent experience in Russia, let's look at the market sectors. We can see that the main sector is oil and gas with 45% of revenue, excluding ZML. Then energy at 20%, and then with decreasing but still important weight: general engineering, drilling, naval, and very marginally automotive. ZML instead operates primarily in the automotive and home appliance sectors. Over time, oil and gas has gained more importance relative to energy — in other periods the proportions were somewhat reversed — due to current difficulties in the energy sector. This brings us to another strategic directive of the group, alongside dimensional growth: diversification. We have always targeted products for different markets, so diversification in terms of types of steels, market sectors, and types of products.

Historically, the group was entirely localized between Friuli Venezia Giulia and eastern Veneto. Currently, however, the experiences we're going to discuss are from recent years in Russia and Bosnia. This is another characteristic: alongside dimensional growth and diversification, the group has always had a strong vocation for internationalization. Initially it was diversification more in terms of market outlets, which has been very intense and concentrated in recent years. If we think that not many years ago, in the early 2000s, the market was almost completely Italian with a minimal foreign share reserved almost exclusively for Germany, we now find a group that directly invoices approximately 60% abroad and indirectly exports — through mechanical processing or assembly — the remaining 40%. So currently, very few of our products stay in Italy.

In 2013 we undertook the Russian adventure; in 2014, Bosnia. I'll speak about two very different internationalization experiences. I'll start with the second because we'll then focus on the first. The experience in Bosnia was much smaller both in terms of investment and personal commitment. It was an experience we did alone, without foreign partners. We simply followed our employees and noted that, as always happens in Italy, contracts are first authorized and then contested. Essentially, we moved where we found a pool of competent labor that we had trained ourselves, so we ended up in Zavidovici, about an hour's drive from Sarajevo and an hour from Banja Luka. We made the investment personally, alone, with local authorities, and I must say the timeline was extremely fast. The investment was ready and operational very quickly without any problems. Whatever was missing was provided quickly — a piece of road, energy connections. So, in our small way, this experience may be very different from others that report many difficulties and hostile countries. In Bosnia we truly found no problems, but great availability from the local authorities.

Let's move on to the Russia discussion. The investment in Russia had a very different perspective. In Bosnia we essentially followed the workforce — the need to use the workers we had trained and the concept of lower personnel costs. In Russia, the investment was completely different and followed a real internationalization strategy. We wanted to establish ourselves in what we considered — and what has become in recent years, proving our choice right — a strategic market for our production, particularly for the oil and gas sector. In Russia, the operation was done with three other partners, all three of our clients: two Russian valve manufacturers, Konar and GUSAR, and one Kazakh, UZTM. Essentially it was a joint venture where the Russian partners would bring the market, in a sense, for the foundry, while we would contribute the technological know-how. I must say that the most complicated phase was the beginning, because there were four partners initially, all inexperienced. Another characteristic was that all the companies involved were more or less the same size, none with great internationalization experience.

So the first step was to bring in legal firms, because one tends to rely on those who are prepared. After some months of stalemate, where ultimately if the only intention is to protect everyone's interests as much as possible, operations don't get done. We decided to acknowledge the risks but to evaluate, as we and our partners did, which risks we were willing to take, and so we moved forward with the operation. The company is located in Chelyabinsk, which is in the Urals region, fairly close to the Kazakh border. Why Chelyabinsk? On one side, one Russian partner has businesses in this city; on the other, it's an important metallurgical hub where the local government was predisposed to welcoming a foundry. Moreover, this was a foundry that was born with decidedly important prospects, first because it's the first foundry that produces quality steels in Russia — it seems incredible, but a market as enormous as Russia essentially didn't have and doesn't have quality steel foundries. So there was the will, on one hand, to be first with the production of quality steels, and on the other hand, to attack a market that, while we worked on it from Italy, remained marginal. And beyond that, having clients as partners eliminated a problem that is very important for foundries — having a market, because an investment without a market leaves you with fixed costs. This reassured us.

So the company is headquartered in Russia. Here too there was a big discussion with our partners. We sensed their typical Russian idea of investing in Cyprus, because given the tax agency issues we have in Italy, starting with a headquarters in Cyprus was already a bad calling card. We convinced them to establish the company's headquarters in Russia. From our side, we didn't see it as an insurmountable obstacle, also because I think even a headquarters in Italy wouldn't fully protect us given the system we find ourselves in. So we started.

Here we can see some numbers. Essentially, the investment was conceived and divided into two steps. The first, already completed, was an investment of 75 million euros, of which almost 20 million were provided by Italian suppliers, starting with the molding equipment supplied by Danieli. The second part of the investment, planned for 2015-2016, envisions another 15 million euros with the addition of two new lines for the production of smaller castings, from 50 to 500 kg, with integrated deburring.

I'd like to dwell a moment on the labor aspect. This operation has brought work to our Italian suppliers, not limited to the initial setup and the future investment. Internationalization operations often tend to be criminalized — condemned as delocalization, even though in certain cases it's the only way to also save Italian companies, reaching a cost structure that allows you to remain competitive in the market. On the other hand, we always maintained and were convinced that from this operation we would gain significant volumes of work for the Italian foundries as well, and this has indeed materialized. Because once you're part of a project, you're present locally, in a market that is rapidly expanding, very dynamic, with major projects — clearly you have an open road compared to proposing from Italy without knowing the details of projects. Having the foundry in Russia, we are part of the projects, and significant repercussions have arrived over the years for our Italian facilities, but also for all our suppliers, from foundries to mechanical processing to all suppliers who collaborate with us.

The types of castings produced: in the first phase, castings from 500 kg upward; in the second phase, smaller castings from 50 to 500 kg are planned. The reference market is exclusively the Russian market — this foundry produces for Russia, and the sector is mainly oil and gas.

I'll conclude by giving some numbers, because I'd like to leave a few minutes to show a video of the foundry, which I think could be interesting. Currently the UZTM — the name of the Russian foundry — has 350 employees. When we're at full capacity, we'll reach about 80-100, and after the second investment phase, around 2018-2019, we'll be at about 100 employees. Current production is still in a startup phase at 200,000 tons; when the first phase is at full capacity, we aim to reach 15,000, and after the second phase we should reach 30,000 tons. Current revenue is 25 million euros, which will rise to 70, and if programs are met, to approximately 120 million euros. What's curious to note is that when we evaluated the investment in Russia, we also very thoroughly assessed a similar investment in India with Indian partners. After extensive analysis, we ruled out the Indian investment and preferred to proceed with the Russian one. Primarily because the Russian market, in our view, offered much greater guarantees than the Indian one. The fact of having our clients as partners was already reassuring. In India, we found ourselves in a situation with very different partners — companies much larger than us, and although larger, we found them lacking in competence in the specific market. So we ultimately assessed an excessive risk. Here, with a perhaps more down-to-earth perspective, we evaluated that the additional margin we would receive from Russian clients just by participating in this operation — speaking of 3 years, one year of planning, one year of realization, one year of startup — with that margin alone we would essentially recoup the investment. And I must say this materialized even beyond our expectations. So at this point I'd play the video. I apologize because it's in Russian rather than English, but I think what matters most is the images of the foundry and the equipment.

From the ruble standpoint, honestly no, even though we also sell from Italy to Russia. So in terms of exports, there's no problem because the Russian market is buying from Italy — and I must say, lately we've seen something unprecedented: they're asking to stipulate contracts in rubles. So we're looking into it a bit, because it's something from just these days, the possibility of currency coverage with banks. As for the embargo, fortunately the codes related to valves are excluded, so we haven't had major setbacks there.