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Annual Report 2008 - AMG Advanced Metallurgical Group NV

Annual Report 2008 - AMG Advanced Metallurgical Group NV

this backlog. In any

this backlog. In any case, given the extremely high degree of uncertainty in the economy, it is prudent to operate with several scenarios ranging from a recovery beginning at the end of 2009 to a prolonged and severe recession. During 2008 AMG achieved record performance, growing revenues 31% and EBITDA 55% over 2007. This followed 24% revenue growth in 2007 over 2006 and EBITDA growth of 65%. The two year average growth for revenues and EBITDA was 28% and 60%, respectively. AMG achieved a 26% return on capital employed (“ROCE”) 1 . We achieved these results despite the sudden and dramatic downturn in specialty metals prices and volumes during the fourth quarter as the global economic crisis accelerated. The Advanced Materials Division’s performance was severely affected by the worldwide economic shocks which continue to adversely impact its business. We initiated and continue to intensify various countermeasures. In December, we also adjusted the value of our inventory in line with the reduced metals price levels, which primarily affected our ferrovanadium recycling business. After a record year in 2008, the Engineering Systems Division continues to operate from a platform of a large order book. Looking ahead, we are cautiously preparing for the scenario of a prolonged downturn beyond the visibility of Our silicon related activities at Timminco have been focused on the ramp up of capacity to produce upgraded metallurgical silicon (UMSi). This, however, must be consistent with actual shipments and demand interruptions which occurred in the first quarter of 2009. We also continue trials to further improve the quality of our products, and focus on interaction with customers to standardize the way UMSi is processed in vacuum furnaces to secure high cell efficiency. In June 2008 AMG closed on the acquisition of an 80% equity stake in Graphit Kropfmühl AG, (“GK”), a publicly traded specialty materials company with mining and refining activities in natural graphite and silicon metal production. GK has the capacity to produce over 30,000 mt of silicon metal annually. GK also mines and processes natural graphite for a wide range of applications including special expertise in its use in the nuclear fuel cycle. 2008 Financial Results AMG’s total consolidated sales in 2008 were $1.5 billion, a 31% increase over 2007. Adjusted EBITDA increased 55% over 2007 to $185 million. The two year average growth for revenues and EBITDA was 28% and 60%, respectively. This increase would have been higher except for the write down of specialty metals inventories as a consequence of the fall in metals prices, in particular the price of ferrovanadium, in the fourth quarter of 2008. Our consolidated EBITDA margin increased to 12% from 10% in 2007; our ROCE was practically unchanged at 26%. 1 EBITDA growth, along with ROCE are important components of AMG’s executive compensation structure. 8 Letter to Shareholders

Revenue $ in millions Adjusted EBITDA $ in millions Return on Capital Employed Percent Overall, given the adverse economic climate experienced during the fourth quarter and the associated risks, the operational and financial performance of AMG in 2008 was very strong. We benefited from our strategic initiatives to concentrate on engineering services and equipment for solar, titanium and high performance steel, primarily for applications in the power generation sector. We also benefited from the contributions of our niche specialty metals products including recycled vanadium, and from high-value-added metal alloys and coatings, including applications in the thin film solar industry sector such as rotatable targets. We benefited from our continuous efforts to be a low cost producer and to enhance our positions in the various specialty metals value chains in order to increase margins and to reduce volatility. We are intensifying activities to counterbalance the negative impact of the global economic crisis. Management of Risk in a Global Economic Crisis In the unfolding economic crisis, Risk Management has acquired a new meaning as the traditional ways to handle uncertainty and specific risks are no longer sufficient. This relates, for example, to the systemic risk of customer default caused by the default of the customers of customers. Macroeconomic and Sector Uncertainty Over the years we have become accustomed to managing company-specific risks in a macroeconomic environment consistent with future Gross National Product (GNP) growth rates within a narrow band representing a relatively stable consensus. Today, the global economy is in a confused state and all bets are off as to when the current situation will stabilize and when an upturn will eventually begin. Until then, most companies have to use visual flight rules and be extremely nimble in dealing with changes in current market conditions. Another macroeconomic activity that deserves monitoring is the enormous expansion of the Monetary Base, especially in the United States during the fourth quarter of 2008. On a global basis, this could result in a sudden inflationary outbreak while the economy still retracts. Some economists are already predicting this could happen as early as late 2009. Such a development would likely lead to a commodity price surge. Recently, the fundamental capacity of many specialty metals operations has been decreasing and only a portion of that eliminated capacity is likely to come back into service if prices return to a satisfactory level. In the past, there was a certain sequence by which industry sectors went through cycles. This “norm” appears not to exist anymore as the severity of the downturn has compressed this sequence into one broad movement. In 2008, the industrial economy, such as the steel industry, has been hit even harder than the banking sector, with the U.S. steel industry operating at below 40% capacity utilization at year end 2008. AMG’s management is operating under the assumption that an economic turnaround will not occur in the near or medium term and that, therefore, all efforts have to be on productivity, on reducing costs, on product mix optimization and on a highly selective process for expenditure and capital investment authorization. Accounts Receivable and Customer Default Risks We were also accustomed to managing accounts receivable risks as a secondary risk with minimal impact on financial affairs. That also has changed profoundly. It is now possible that presumably sound companies fail on short notice because of a lack of financing Letter to Shareholders 9

PDF 3.89 MB - AMG Advanced Metallurgical Group NV
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