"VSŽ doesn't need to make an impression that it's strong, that it doesn't have any problems and that it can get away with anything.This spirit then infiltrates the companyÉand the reaction is self-satisfaction, megalomania and waste."
Ján Smerek, VSŽ president
Disappointing first-half financial results of several of Slovakia's flagship companies are making their executives and market analysts nervous even though both insist no major trouble is in sight.
"These are relatively stable companies, and I would be against any disaster scenario," said a corporate analyst at ING Barings Securities, Vladimír Zlacký. "Their results for the whole year are either going to be the same or a little bit worse than last year."
Nevertheless, profits of VSŽ, the giant steel mill in Košice, and of Nafta Gbely, the gas and oil storage company, both cornerstones of the Slovak economy, went down by approximately 50 percent compared to the first half of last year (see graphs, page 6). Add to that news that profits of Slovenské Elektrárne, the monopoly electricity producer, also dropped though not as sharply as VSŽ's and Nafta's, along with other large companies, and there's cause for alarm.
"The days of 20-30 percent export growth into western Europe are over for the flagships," Zlacký said. "There is still room for growth, but it will be more modest."
Zlacký's colleague, Martin Barto, provided further analysis. "These companies did not have to go through any major crisis since the initial [post-revolutionary] changes and it's difficult to tell whether they can withstand it," he said. "They would be immune against disturbances only if they had diversified. Most of them haven't."
The list of turbulence grows longer every day: a newly-imposed 7 percent import surcharge, an electricity price increase and the depreciation of the Czech crown - the currency of Slovakia's most important trading partner. Moreover, decreasing corporate profits are creating an even bigger hole in the budget, forcing the government to borrow more and more, maintaining or even increasing already prohibitive interest rates (see story, page 7).
At these rates, companies can't borrow at home. "No company can pay 30 percent interest and turn a profit," said Dalibor Černička, the managing director of Money Market Brokers, a Bratislava-based brokerage company. "The options are corporations are either going to stop borrowing or they won't pay their debts."
Zlacký sees another solution - they can borrow abroad. "But this creates a dilemma - if we get a devaluation, they'll be hit [hard]," he said.
Despite what looms ahead, Zlacký insisted both VSŽ's and Nafta's drop can be explained by accounting rules. "Last year [for instance], Nafta had to book much higher income because of drill activation," he said. "This year, of course, net profits on their books went down [from Sk 409 million to Sk 220 million for the first half]." Nafta's representatives were not available for comment.
VSŽ's melting profits
VSŽ's decrease from 776 million Sk to 398 million Sk is more complicated. The company's vice-president for finance, Ján Seňo, told the economic weekly Trend that "the results were caused by appreciation of the US dollar with most of the inputs being purchased from Russia and Ukraine in this currency and by depreciation of the Deutsch mark, which is primarily used to pay for sales of steel products on European markets."
In published results mandated by the Bratislava Stock Exchange, VSŽ claimed that its profits were marginally higher than planned. If there was nothing more to it, it would have to mean that VSŽ was able to predict exchange rate movements and calculate them into their plan.
But Zlacký said there was more to it than that. "Steel prices in late 1996 were low," he said. "[VSŽ officials] concluded contracts with those prices which came back to haunt them. But they had strong sales growth which should offset the exchange rate losses, and I think they should achieve more than a 1 billion Sk net profit at the end of the year. They are not worried."
Ľudovít Černák, a former minister of the economy, disagreed. "VSŽ is enormously profitable, but it is losing steam," said Černák, now a deputy with the opposition Democratic Union. "The billions it makes are not being invested back into the company, but are used to buy football clubs, hotels and to pay enormous salaries."
In an interview for VSŽ's company paper Oceľ Východu (Steel of the East), the mill's president, Ján Smerek, indicated that overconfidence could lead to problems later on. "So far, VSŽ has been seen as a problem-free company that can afford to buy everything from football clubs to artists to politicians," he said. "[But] VSŽ doesn't need to make an impression that it's strong, that it doesn't have any problems and that it can get away with anything."
"This spirit then infiltrates the companyÉand the reaction is self-satisfaction, megalomania and waste," Smerek continued. "The reality within principal companies is different."
Slovnaft's misleading results
On the other hand, Slovnaft, an oil refinery and one of the largest Slovak companies (behind VSŽ) showed profits rising almost four-fold from 291 million Sk in the first half of 1996 to 1.456 billion Sk in the first half of 1997.
But Slovnaft's profit explosion is misleading, as the 1996 profits include a period when the company shut down for maintenance reasons. "We didn't work for two months altogether," Slovnaft's spokesman, Ľubomír Žitňan, said. The refiner has had no work stoppages so far this year to cut into its profit margin.
In other words, profits are rising just along the plan. "We are working according to our business plan," Žitňan said. "We achieved half of this year's [planned] profits, and we're happy."
The oil and gas refinery's future does looks like it will burn brighter, though, because, as Žitňan pointed out, Slovnaft is still paying for an enormous investment project that will increase the company's output by bringing in new technology into the refining process. "Just this year, we're putting 11 billion Sk into it," Žitňan said, "but when we're done, we'll be on top of the group of small and complex refineries in Europe."
For Barto, the flagships' first-half woes only increase the urgency not to depend on a select few companies.
"We should now make room for small and medium enterprises in the economy so that we are not dependent on 3 or 5 companies that, in turn, depend entirely on economic cycle," Barto said.
Černák advocates a fair playing field. "The government should take care of the [economic] system and prevent [personal] connections and politics from being more important than abilities. Then everything would take care of itself."
POSS ADDS Turbulent list
(DU), attributed the slow first-half profits to the method by which these companies were privatized. "Their new owners did not have the capital to pay for it," Černák said. "So they are being railroaded into making money to pay for their privatization."
