Annual report 2018

13 Železiarne Podbrezová a.s. ANNUAL REPORT 2018 European and global metallurgy has been struggling with low utilisation of its production capacities and uneven regional demand for its products. However, the last two years have seen a rise in global demand for steel and a moderate reduction in production capacity, resulting in an increase in utilisation and profitability of firms in the sector. According to the World Steel Association, the global production of steel increased for the second consecutive year (by 4.6% in 2018). The long-term problem is a significant imbalance between global steel production and consumption, especially in China, which produced 51% of global steel last year. In contrast, the EU saw a 0.3% drop in total steel production. The demand for almost all types of tubes recovered in 2017 and the capacity of OCTG producers decreased. This trend of strong demand for tubes from both warehouses and end consumers continued in 2018. Longer supply times, especially from large producers, caused a shortage of tubes on the market. As a result, Železiarne Podbrezová operated all shifts at most production plants last year to satisfy customer demand. Although we did not fill all our production positions, we were able to operate all shifts thanks to well-organised production and the commitment of our employees. Strong demand and the resulting growth of prices of input raw materials, and prices of steel and steel products, including the seamless tubes of Železiarne Podbrezová a.s. continued until stabilisation in Q4 2018. In 2018, Železiarne Podbrezová saw a significant increase in revenues from operating activities by over EUR 52 million (21%) compared to 2017. The economic boom also brought about a rapid growth of the Company’s operating costs, by almost EUR 41 million (17%), mainly due to higher prices of input raw materials and staff costs. Nevertheless, there was a significant growth in operating profit and the Company also increased its net profit. The Company’s operating results were also positively affected by the reduction of some material consumption standards, mainly due to the optimisation of technological equipment in our plants and a forward-looking plan for energy purchasing. Profit from financing activities, mainly dividends from subsidiaries, also contributed to the Company’s positive operational results. At the end of 2018, the Company’s assets amounted to EUR 290 million and were covered by own funds at 72%. The preparation of the business and financial plan for 2019 took into account the market situation at the end of 2018, and information about and estimates of prices of input raw materials, expected volumes and prices of final products. The preparation of the financial plan also took into account additional staff costs of extra pay due to legislative changes, which significantly increase costs of work during the night, at weekends and during holidays. The Board of Directors also took into account the labour market situation in our region, which impacts the increase of staff costs. This was one of the reasons why we prepared a programme for employing people from marginalised groups, including their intensive training at the Company, at the end of 2018 in cooperation with the Ministry of Labour, Social Affairs and Family of the Slovak Republic. The market for steel seamless tubes was positive during the first four months of 2019, but there has been a significant drop in orders, which is also reflected in the product portfolio. The situation on the market for steel products, in particular seamless steel tubes, remains unclear in the second half of 2019. It may be affected by the introduction of new trade barriers and customs on products on the international market. Such a situation would probably lead to lower industrial production, especially in the automotive sector, and to lower investments in infrastructure, as the automotive and infrastructure sectors are the key customers for steel products. Another important factor affecting the tube production industry is the price of crude oil and the volume of investment in its extraction and processing, as OCTGs are a major part of production. We believe that some of these potential risks, especially in international trade, will not occur and we will be able to produce and sell our products in the second half of the year and generate solid operating profit and consolidate our financial situation. BUSINESS ACTIVITY PRODUCTION AND SALES Železiarne Podbrezová a.s. has its own sales network, which is managed on a geographical basis via our subsidiaries, PIPEX ITALIA S.p.A., ŽP Trade Bohemia, a.s., SLOVRUR Sp. z o. o., Pipex Deutschland GmbH and TRANSMESA. After a significant economic recovery, which started in the first half of 2017, the last year was the most successful in the last decade in terms of financial results and sales. Strong demand for seamless rolled and precision cold-drawn tubes continued in 2018. High demand increased selling prices of products and, despite growing prices of input raw materials and staff costs, contributed to a significant increase in industry profitability. In 2018, the Company fully utilised its production capacity, and some products set new record production volumes, despite a lack of production staff. REPORT BY THE BOARD OF DIRECTORS ON BUSINESS ACTIVITIES, ASSETS, AND FINANCIAL PERFORMANCE IN 2018 AND INFORMATIONON THE BUSINESS PLAN