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VSŽ's low profits spur further promises

The March 26 announcement by VSŽ Holding that its 1997 net profits were less than half of those for 1996 did not surprise analysts, although most said they hadn't expected so deep a plunge. An in-depth analysis won't be possible until after VSŽ Holding, which is listed on the Bratislava Stock Exchange (BSE), publishes its balance sheet and supporting documents as required by BSE rules. But the results do indicate that the eastern Slovak steel giant's iron foundations are beginning to melt, while repeated promises of management changes are neither reducing the heat nor recasting the company in a profitable mold.


Worried. VSŽ main shareholder Alexander Rezeš reacted to falling profits by nominating his son Július as the new director
Vladimír Hák

The March 26 announcement by VSŽ Holding that its 1997 net profits were less than half of those for 1996 did not surprise analysts, although most said they hadn't expected so deep a plunge. An in-depth analysis won't be possible until after VSŽ Holding, which is listed on the Bratislava Stock Exchange (BSE), publishes its balance sheet and supporting documents as required by BSE rules. But the results do indicate that the eastern Slovak steel giant's iron foundations are beginning to melt, while repeated promises of management changes are neither reducing the heat nor recasting the company in a profitable mold.

Stock excuses

Signs that VSŽ is heading into a low-profit period have been surfacing since August 1997, when the results for the first half of 1997 were published. But the audited final-year figure of 595 million Sk in net profits, compared to 1.348 billion in 1996, left the company searching for excuses.

In a terse press release, Jozef Marko, the spokesman of VSŽ Holding, wrote that there were three principal reasons for the abysmal drop: lower world prices of steel products in the first half of 1997, unfavorable exchange rate developments and higher domestic interest and service expenses.

According to Juraj Kováčik, an analyst with the brokerage firm P67 value, the first reason was somewhat specious. "No true price recession occurred in Europe at that time," he said.

Kováčik agreed that the second assertion was more plausible. VSŽ has reiterated that it pays for most of its Russian ore supplies in U.S. dollars, while selling its products mostly for Deutschemarks. "It is true that there was a substantial rise in the value of the dollar vis-á-vis the D-mark," Kováčik said. "However, it is surprising that such a large company has not hedged its currency risks. Relevant instruments are available in Slovakia," he added.

Cash-strapped

Since VSŽ Holding prefers to communicate with the media almost exclusively via infrequent and uninformative press releases, The Slovak Spectator was unable to discover whether hedging is finally being implemented. On the other hand, the company does try to tap cheaper foreign sources and escape the trap of domestic interest rates, which are currently running above 20 percent.

This latter tactic is not always successful. ING Barings and Chase Manhattan had been appointed to manage another company bond issue worth $200 million last month, but on March 26 the issue was postponed until June or July. Marko cited the 'Asian flu' that still gripped financial markets as the reason for the delay.

In the meantime, the two banks have extended a $30-million bridging loan to the company. But according to the business weekly Trend, the money resembles more a lifesaver than a bridge. The company's debt is currently reaching 70 percent of its stock equity, Trend claims, while most of its short-term loans come due in the near future.

So, Kováčik said, this bond issue will be important not only for the money it may bring in to the company. "The success of the issue is going to be an important indicator of how the company is perceived," he said.

Same old story

In response to the company's plunging profits, VSŽ Holding leadership plans both organizational and personnel changes. A newly-announced organizational structure will divide VSŽ Holding into seven groups according to the principal business activities of the company. On the personnel front, according to Marko, some managers "who became satisfied with the results of previous years too quickly and were not able and willing to manage and work efficiently " will be leaving their positions, both in top and middle management.

After the results for the first half of 1997 were published eight months ago, Ján Smerek, CEO of VSŽ at the time, said in an interview for the company newspaper Oceľ Východu: "VSŽ doesn't need to make an impression that it is strong, that it doesn't have any problems and that it can get away with anything. This spirit then influences the companyÉand the reaction is self-satisfaction, megalomania and waste."

At the February 27 extraordinary general meeting, VSŽ finally began to act on Smerek's words and fired him, along with two vice-presidents. Smerek was replaced with 28-year old Július Rezeš, son of the company's largest shareholder, Alexander Rezeš. Most of the board was also replaced with peers of the new CEO, inspiring journalists to dub the new leadership "kiddie management".

But the market, unlike journalists, found little cause for amusement in VSŽ's situation. During the first two weeks after the shake-up, VSŽ Holding stock lost a third of its value, a development that was widely interpreted as a no-confidence vote from the market.

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