Annual Report 2009

REPORT BY THE BOARD OF DIRECTORS In its recent history, after the revitalisation period in 1993 and 1994, Železiarne Podbrezová a.s. (“Company”) achieved positive results of operations in 15 consecutive years. For the first time the Company reported a loss in the amount of EUR 6 313 648 for 2009 under International Financial Reporting Standards (IFRS). Nevertheless, the Board of Directors see 2009 as a successful year, even though the goals set in the business plan were not achieved. In the last months of 2008 and throughout 2009 the global economic and financial crisis gradually hit all manufacturing sectors and spread to all global markets, including Europe. The supply crisis of our customers resulted in less demand for steel tubes across the production range. In 2009, the total sales amounted to EUR 135 239 thousand, which means that the sale of steel products manufactured by Železiarne Podbrezová a.s. was less than 45% of the previous year. Nevertheless, under the new circumstances on the market we did not lose any major customers; almost all customers continued to require our products, albeit in reduced volumes. Moreover, we even attracted new customers, which chose us over their old suppliers. The Company’s Board of Directors reacted to the economic development with professional care in the last quarter of 2008. We adopted and implemented a comprehensive programme of measures to prevent losses caused by the drop in sale. The measures focused in particular on the significant and immediate cutting of various costs. By reducing the headcount and modifying the operation regimes of the technological facilities produced savings in personnel costs by 31.4%; however, the dismissed employees were paid severance payments amounting to EUR 2 071 thousand. Because of the drop in metallurgical production we also reduced production consumption by 58.6%. We achieved savings by decreasing the prices of input materials and raw materials, controlling their purchase and consumption, as well as by limiting the costs of repairs and purchased services. The decline in prices of input materials, however, also had a negative impact on the results of operations owing to the re-measurement of internally developed inventories by -EUR 5 378 thousand. We also significantly reduced the costs of investment development. The core production activities generated a loss of EUR 11 744 thousand; however, the total results of operations were positively affected by the dividends received from subsidiaries, which amounted to EUR 7 013 thousand. Implementing the cost-cutting measures and our practical experience in the metallurgical business below the 50% production capacity throughout 2009 assured us that we are able to manage the Company under such regime for a long period of time without suffering significant losses. This is also due to the fact that we always paid attention to and spent financial funds for continued maintenance and modernisation of the technological facilities. Decreased demand for finished goods, merchandise and services was also reflected to various extents in other group companies, which after all had a negative impact on the Company’s consolidated results. Crisis management was applied by command in all companies well in advance. Thanks to that decision we significantly eliminated other potential losses in our subsidiaries. The Company’s Board of Directors decided to suspend production of precision tubes and elbows in ŽP Tažírny trub Svinov, spol. s r.o., Czech Republic. The requirements of all its customers can be met by the parent company in Podbrezová. We also took crucial steps in dealing with non-profitable financial investments. ŽP PRAKO s.r.o. and ŽP-Invest a.s. were sold to other investors, HRON - AIR s.r.o. was dissolved, and Motor-Car Podbrezová s.r.o. entered into liquidation. After evaluating the period as a whole, we can now state that the global economic crises did not hit Železiarne Podbrezová unprepared. The reason is simple: we entered the difficult period as a financially strong entity. During successful years the shareholders approved dividends to be distributed annually from reported profit, but in reasonable amounts. Therefore, our company has sufficient equity. The loss reported in 2009 weakened the Company’s value by only 3.7%, which is a key reason thanks to which we did not lose the trust of banks. Throughout the year the financing of the Company was balanced and stable. The equity to total assets ratio amounted to 67.8%. The FX rate risks were considerably eliminated thanks to the adoption of euro as the national currency in the Slovak Republic. At present, under the conditions of 2010, we are witnessing positive signals of market recovery. We are fully aware that the financial and economic crisis has not yet reached its Ž E L E Z I A R N E P O D B R E Z O V Á 13 on Business Activities, Assets, and Financial Performance in 2009 and Information on the Business Strategy