AMG 2008 Annual Report


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2008 annual report for Advanced Metallurgical Group (AMS: AMG)

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AMG 2008 Annual Report

  1. 1. AMG Advanced Metallurgical Group N.V. Annual Report 2008
  2. 2. innovative metallurgy AMG develops innovative metallurgical solutions for the following four markets focused on the reduction of CO2 emissions: Solar is the fastest growing energy technology—highly desireable as a clean, renewable energy source that will never run out. Recycling enables the production of high-technology materials from secondary sources, conserving primary raw materials. The need to reduce CO2 emissions and achieve greater Fuel Efficiency has led to fierce competition among manufacturers to produce lighter aircraft. Aerospace has seen explosive growth in the use of titanium alloys as a result. A global resurgence of Nuclear power will encourage the growth of nuclear technologies. RECYCLING VANADIUM, CAMBRIDGE CRYSTALLIZATION FURNACE, BÉCANCOUR
  3. 3. Highlights At a Glance 2 Financial Highlights 4 Operational Highlights 6 CEO Letter to Shareholders 8 Report of the Management Board 14 Business Reviews Advanced Materials Division 16 Engineering Systems Division 20 Timminco 24 Graphit Kropfmühl 26 Risk Management and Internal Control 28 Market Focus Reports Solar 34 Recycling 36 Fuel Efficiency 38 Nuclear 40 Report of the Supervisory Board 42 Corporate Governance 56 Sustainable Development 62 Financial Review 69 Financial Statements 75 Consolidated Income Statement 76 Consolidated Balance Sheet 77 Consolidated Changes in Equity 78 Consolidated Statement of Cash Flows 79 Notes to the Consolidated Financial Statements 80 Parent Company Financial Statements 143 Other Information 151 Auditors’ Report 152 Shareholder Information 153 TITANIUM PROCESSING, NUREMBERG VACUUM FURNACE, HANAU 1
  4. 4. At a Glance Advanced Materials Engineering Systems The Advanced Materials Division develops and The Engineering Systems Division designs produces specialty metals and complex metal and produces advanced vacuum furnace products, many of which are used in demanding, systems for high-purity metals and operates high stress environments. vacuum heat treatment facilities. Global market presence AMG applies its metallurgical engineering expertise and production know-how in facilities and sales offices spread across 12 countries on fi ve continents. Advanced Materials operates globally with production facilities in Germany, the United Kingdom, France, the United States and Brazil and operates sales offices in these countries as well as in Belgium, China and Mexico. Engineering Systems operates two furnace production facilities in Germany. It also has four heat treatment services facilities, one in Germany, two in the United States and one in Mexico. Additionally, Engineering Systems operates sales offices in these countries, as well as in Russia, China, and Japan. Timminco operates production and sales facilities in Canada. Graphit Kropfmühl’s silicon metal operations are in Germany and its graphite operations are in Asia, Africa and Europe. 2 At a Glance
  5. 5. AMG is a leader in advanced metallurgy. Its proprietary know-how derived from the production of specialty metals and metallurgical engineering creates a technology portfolio which helps mitigate the effects of global warming. Timminco Graphit Kropfmühl Timminco Limited is a majority-controlled, GK is an 80% owned publicly-listed subsidiary publicly-listed subsidiary of AMG. Timminco of AMG. GK produces silicon metal and is a is a leader in the production of silicon metal vertically integrated producer of natural graphite. and upgraded metallurgical silicon (UMSi) for the solar industry. At a Glance 3
  6. 6. Financial Highlights Revenue Adjusted EBITDA 31.3% 55.2% Revenue by Business Unit Advanced Engineering Graphit Timminco Kropfmühl Materials Systems 756.7 435.5 237.8 87.9 $ in millions Gross Margin $ in millions Gross Margin % 4 Financial Highlights
  7. 7. AMG’s financial results for 2008 exhibited significant growth and margin improvement compared to 2007. AMG’s success is a result of continuing operational initiatives and new product and systems innovations. Key financial highlights are summarized below. Revenue by End Markets other 452.4 167.1 410.4 2.8 485.2 $ in millions Margin $ in millions Margin % Financial Highlights 5
  8. 8. Operational Highlights Advanced • Expanded coating materials line of products for thin film solar applications Materials • Achieved record ferrovanadium production and secured long term contract for supply of spent refinery catalysts to support vanadium expansion project • Substantially completed expansion of tantalum mining production in Brazil and associated hydroelectric power plant Timminco • Shipped 1,045 mt of upgraded metallurgical solar silicon (UMSi), up from (Majority-owned 89 mt in 2007 public subsidiary) • Completed construction of first solar silicon facility in Bécancour, Canada and added three additional production lines by year-end 6 Operational Highlights
  9. 9. New innovative technologies are created by developing new furnace designs and through the learning process of furnace operators. The intensive dialogue between operators and engineers provides a unique source of learning and innovation. Engineering • Increased in-house production of DSS furnaces from four in 2007 to 200 in Systems 2008 and continued expansion of Berlin facility • Completed the fourth heat treatment services facility on-time and on-budget • Acquired full ownership of FNAG joint venture for the development and engineering of nuclear process technologies Graphit • Completed first phase of expansion of silicon metal operations Kropfmühl • Restructured the graphite business, moving operation to lower cost (Majority-owned public subsidiary) production sites in the Czech Republic Operational Highlights 7
  10. 10. 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. 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 During 2008 AMG achieved record performance, cell efficiency. growing revenues 31% and EBITDA 55% over 2007. This followed 24% revenue growth in In June 2008 AMG closed on the acquisition of 2007 over 2006 and EBITDA growth of 65%. an 80% equity stake in Graphit Kropfmühl AG, The two year average growth for revenues and (“GK”), a publicly traded specialty materials EBITDA was 28% and 60%, respectively. AMG company with mining and refining activities in achieved a 26% return on capital employed natural graphite and silicon metal production. (“ROCE”)1. We achieved these results despite GK has the capacity to produce over 30,000 mt the sudden and dramatic downturn in specialty of silicon metal annually. GK also mines and metals prices and volumes during the fourth processes natural graphite for a wide range of quarter as the global economic crisis accelerated. applications including special expertise in its use in the nuclear fuel cycle. The Advanced Materials Division’s perfor- mance was severely affected by the worldwide 2008 Financial Results economic shocks which continue to adversely AMG’s total consolidated sales in 2008 were impact its business. We initiated and continue to $1.5 billion, a 31% increase over 2007. Adjusted intensify various countermeasures. In Decem- EBITDA increased 55% over 2007 to $185 million. ber, we also adjusted the value of our inventory The two year average growth for revenues and in line with the reduced metals price levels, EBITDA was 28% and 60%, respectively. This which primarily affected our ferrovanadium increase would have been higher except for recycling business. the write down of specialty metals inventories After a record year in 2008, the Engineering as a consequence of the fall in metals prices, Systems Division continues to operate from a in particular the price of ferrovanadium, in the platform of a large order book. Looking ahead, fourth quarter of 2008. Our consolidated EBITDA we are cautiously preparing for the scenario of margin increased to 12% from 10% in 2007; a prolonged downturn beyond the visibility of 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
  11. 11. Return on Capital Revenue Adjusted EBITDA Employed $ in millions $ in millions Percent Overall, given the adverse economic climate rules and be extremely nimble in dealing with experienced during the fourth quarter and the changes in current market conditions. associated risks, the operational and financial Another macroeconomic activity that deserves performance of AMG in 2008 was very strong. monitoring is the enormous expansion of the We benefited from our strategic initiatives Monetary Base, especially in the United States to concentrate on engineering services and during the fourth quarter of 2008. On a global equipment for solar, titanium and high perfor- basis, this could result in a sudden infl ationary mance steel, primarily for applications in the outbreak while the economy still retracts. power generation sector. We also benefited from the contributions of our niche specialty Some economists are already predicting this metals products including recycled vanadium, could happen as early as late 2009. Such a and from high-value-added metal alloys and development would likely lead to a commod- coatings, including applications in the thin film ity price surge. Recently, the fundamental solar industry sector such as rotatable targets. capacity of many specialty metals operations We benefited from our continuous efforts to has been decreasing and only a portion of that be a low cost producer and to enhance our eliminated capacity is likely to come back into positions in the various specialty metals value service if prices return to a satisfactory level. chains in order to increase margins and to In the past, there was a certain sequence by reduce volatility. We are intensifying activities which industry sectors went through cycles. to counterbalance the negative impact of the This “norm” appears not to exist anymore as global economic crisis. the severity of the downturn has compressed Management of Risk in a Global this sequence into one broad movement. In Economic Crisis 2008, the industrial economy, such as the steel industry, has been hit even harder than the In the unfolding economic crisis, Risk Manage- banking sector, with the U.S. steel industry ment has acquired a new meaning as the operating at below 40% capacity utilization at traditional ways to handle uncertainty and year end 2008. AMG’s management is operating specific risks are no longer sufficient. This under the assumption that an economic turn- relates, for example, to the systemic risk of around will not occur in the near or medium customer default caused by the default of the term and that, therefore, all efforts have to be customers of customers. on productivity, on reducing costs, on product Macroeconomic and Sector Uncertainty mix optimization and on a highly selective process for expenditure and capital investment Over the years we have become accustomed to authorization. managing company-specific risks in a macro- economic environment consistent with future Accounts Receivable and Gross National Product (GNP) growth rates Customer Default Risks within a narrow band representing a relatively We were also accustomed to managing stable consensus. Today, the global economy accounts receivable risks as a secondary risk is in a confused state and all bets are off as to with minimal impact on financial affairs. That when the current situation will stabilize and also has changed profoundly. It is now pos- when an upturn will eventually begin. Until sible that presumably sound companies fail then, most companies have to use visual flight on short notice because of a lack of financing Letter to Shareholders 9
  12. 12. 50% The risk of failure to innovate requires even more intense attention and a carefully planned resolution of the conflict between cash conservation and managing the future viability of the company. As an innovation-driven organization, we are acutely aware of this. In broad strokes, about 50% of our EBITDA in 2008 was derived from activities not existing 5 years ago. options, especially in the event of defaults by It has to be noted that our volatility derived their customers. It is not unrealistic to expect from those price movements is substantially massive and systemic risks of “accounts re- less since we have (a) positioned ourselves ceivable” turning into “uncollectible accounts”. primarily as “converters” — the customer pays The risk of having to write off particular for the conversion and the cost of underlying accounts receivable is further compounded metal flows through, i.e. is being invoiced by the fundamental risk of customers going and (b) established low-cost long positions in out of business, defaulting under longer term tantalum, niobium, graphite, quartz (by way purchase agreements and/or attempting to of AMG mines) and partially in ferrovanadium re-negotiate contracts, delay shipments, et and ferronickel-molybdenum (by way of spe- cetera. We are facing such risks, especially in cially structured long-term supply contracts). the Advanced Materials Division, at Timminco We are working hard to further improve and at Graphit Kropfmühl. this position. Price Collapse in Specialty Metals Currency Shifts and Volatility In regard to the short term price risk of The volatility of currencies has substantially specialty metals, we cannot take comfort in a increased with currency swings in the fourth commodity exchange with forward pricing like quarter 2008, showing an erratic pattern not the London Metal Exchange. Theoretically, the experienced in modern times: the US$/CA$ only hedge contracts available for a number rate going from 1.04 to 1.22; the £/$ rate from of our specialty metals are between a supplier 1.82 to 1.45; the £/1 rate from 1.26 to 1.03; the and a customer. In order to escape such tre- US$/1 rate from 0.69 to 0.71; the BRL/US$ mendous volatility, we are attempting step by rate from 0.53 to 0.43. For a global company step to optimize our position in the value chain producing in the US, Canada, the Euro zone, of each metal in such a way that we end up with the UK and Brazil, this has massive operating a low-cost long position. This, and only this, and profitability implications. AMG has been will enable AMG to offer customers volatility- navigating through these volatilities aided by reducing formulas for long term prices. “natural” short positions in the BRL, the GBP and the CA$. We also have further refined our A review of AMG’s portfolio of metals that short term currency hedging policies which are normally quoted in tons — chrome metal, aim to improve the probability of achieving ferro-titanium, magnesium, silicon metal yearly budgets. and aluminum — indicates an extraordinarily high level of price volatility. In addition, AMG’s Capacity Under-Utilization specialty materials that are normally quoted in In past economic cycles, during periods of pounds — nickel, molybdenum, ferrovanadium falling prices, we generally did not experience and tantalum — also have high levels of difficulties maintaining capacity production volatility. Over a 10 year period, ferro-titanium, levels. In the fourth quarter, several of our ferrovanadium, nickel, molybdenum and end markets, including steel, aluminum and tantalum have volatilities exceeding 70%. silicon products, radically reduced production. 10 Letter to Shareholders
  13. 13. In those instances we were and we continue to given the state of share price levels and the be negatively affected not only through falling reduced universe of investors seeking equity prices, but also by lower demand and therefore investments. AMG’s net debt levels are 0.5x higher unit costs due to decreased production 2008 EBITDA and we are targeting to improve rates. The decrease in demand coupled with this further. We are taking comfort from the the decline in prices make implementing fact that our bank debt facilities do not expire countermeasures against falling profitability until August 2012. difficult. We are aware that the metal industry is characterized by a high rate of fixed costs and Solar a percentage of total costs. In 2008 AMG’s activities in solar energy were the largest driver of our growth. AMG is active Temptation to Abandon Innovation in the solar market through silicon metal pro- One could be tempted, in times like these, to duction at Graphit Kropfmühl and Timminco, postpone innovation initiatives and reposition UMSi production at Timminco, engineering of and wait for an “all clear” signal. That is the directional solidification systems for crystal- worst response to the current crisis. By doing line solar silicon in the Engineering Systems this, the very future of the company is called Division and production of rotatable targets into question once the storm is over. The risk of for thin film solar applications in the Advanced failing to innovate requires even more intense Materials Division. This diverse portfolio attention and a carefully planned resolution enabled AMG to participate in multiple stages of the conflict between cash conservation and in the solar value chain. AMG generated managing the future viability of the company. $452.4 million in revenues from these activities As an innovation-driven organization, we are during 2008. acutely aware of this. In broad strokes, about Our Engineering Systems Division increased 50% of our EBITDA in 2008 was derived from production of directional solidification sys- activities that did not exist fi ve years ago. We tems for the crystalline solar industry in our have to stabilize this trend to maintain our Berlin plant from four furnaces in 2007 to profitability in the long term. 200 furnaces in 2008. This ramp up is a major Radically Reduced Financing Options operational achievement and has been attained despite a number of critical hurdles. We had also become accustomed to versatile capital markets with a vast capacity to obtain The Advanced Materials Division made signifi- senior debt, subordinated debt and equity. cant progress in its targets for thin film coatings. Those markets appear to be closed — or avail- AMG’s rotatable zinc oxide targets are used able only at very high cost — for the time being. to coat thin film solar cells and improve the One has to assume that the debt currently in sunlight-to-electricity conversions of those cells. place is the total debt available and that equity We are currently focusing on expansion of target is either unavailable or prohibitively expensive materials for CiGS thin film cells. Letter to Shareholders 11
  14. 14. Timminco ramped up its UMSi production and sales increased by 5% over 2007, despite the shipments to 1,214 mt and 1,045 mt, respec- sharp down-turn in price and volume during tively. We are making significant progress in the fourth quarter. We are working to comple- learning how to meet the many challenges ment our position in the titanium value chain which occur in the large scale commercializa- through efficiency improvements in production tion of a completely new process with a new of high-purity titanium alloys and new process workforce in a new plant. While these chal- technologies aimed at eliminating expensive lenges will continue, we are confident in our conversion steps through a combination of ability to meet our customers’ expectations in furnace designs and tailor-made alloys. 2009 and beyond. Given the current weakness in the aerospace and transportation sectors, the fuel efficiency Timminco UMSi end markets will face challenges in 2009. Shipments (mt) As such, AMG has taken steps to better align its position in the value chain, especially for titanium, through reducing head count and streamlining operations. In January 2009, AMG announced a significant reduction in its workforce. While this process entails difficult decisions, it is ultimately in the best interest in the long term viability of the business. The solar industry is working though a dra- In December 2008, AMG announced the forma- matic market slowdown which is leading to tion of a joint venture with Norsk Hydro ASA, inventory reductions along the value chain. It Norway, for the development of an innovative is currently difficult to predict the extent and magnesium metal process and its implementa- the duration of the slowdown and the impact tion in Norway. that slowdown will have on the multitude of participants in the solar industry. In the near Recycling term, this slowdown will adversely impact Recycling is a key component of AMG’s strat- our solar furnace business and Timminco’s egy to access low cost and low volatility raw UMSi shipments. The reduction in worldwide material sources. During 2008 AMG signed a solar silicon production has also reduced the multi-year agreement with a major operator in demand for silicon metal which, in turn, has the Alberta Oil Sands to process and recycle resulted in Timminco’s decision to temporarily additional quantities of spent catalysts. AMG’s shut down its silicon metal smelters. Despite Advanced Materials Division produces fer- this, we believe that the secular trend support- rovanadium and ferronickel-molybdenum from ing the solar industry remains fundamentally these spent catalysts as well as from North and sound; however, the question of when signifi- Central American power plants. While the con- cant growth will resume cannot be stated with tract with a major operator in the Alberta Oil any degree of certainty. Sands provides AMG with a volatility-reducing Fuel Efficiency long position, AMG is currently working to further reduce volatility associated with Several of our titanium alloy products are its other more traditional raw material critical components of energy saving solutions supply contracts. such as in aerospace and stationary natural gas turbines. The titanium alloys product line AMG’s recycling business delivered solid developed satisfactorily in 2008. Titanium performance in 2008, generating $167.1 million furnace deliveries for aerospace and industrial in revenues, despite a rapidly deteriorating gas turbines in our Engineering Systems macroeconomic environment during the fourth Division increased approximately 15% over the quarter. This represented 46% growth over already high level of 2007. Titanium master alloy 2007. This growth was the result of increasing 12 Letter to Shareholders
  15. 15. Selected Market Prices for Ferrovanadium, Molybdenum and Nickel demand and strong prices during the first three participate in providing the essential tools quarters of 2008 for ferrovanadium, which is necessary to support this growth. used primarily in structural steel to increase the strength-to-weight ratio. Outlook 2009 will be a challenging year. Our visibility Selected Market Prices for Ferrovanadium, in Advanced Materials, Timminco and Graphit Molybdenum and Nickel Kropfmühl is limited. In these business units, The market softened dramatically in the fourth the management team is focused on preserving quarter of 2008 and although AMG is uniquely free cash flow by reducing costs, streamlining positioned as the largest low cost secondary operations, limiting all non-essential capital producer globally, performance of this unit investments and adjusting production levels will depend upon an upturn in the global to meet reduced demand perspectives. We are infrastructure markets. also positioning these businesses for long term growth when the current economic cycle ends. Nuclear On the other hand, the Engineering Systems 2008 was a year of substantial progress Division’s backlog provides reasonable vis- for AMG in its nuclear end markets. AMG’s ibility for 2009 and we expect relatively stable Engineering Systems Division formed a joint performance and cash flow generation. venture, Furnaces Nuclear Applications Grenoble S.A., to design and produce sintering Despite this, we will not reduce, but rather we systems for a number of nuclear applications. will reinforce our dedication to clean energy Subsequently, AMG acquired the balance of and energy savings trends that dominate our the joint venture that it did not own, bringing business model. AMG’s portfolio approach crucial engineering experience and expertise will provide some insulation from the current fully under the AMG name. This unit won a global crisis and we will continue to adjust our high profile contract with Shaw Areva MOX value chain positions to reduce the volatility of Services LLC for the detailed engineering of our cost positions. While 2009 will be difficult, sintering furnace systems for the production we believe that the CO2 reduction end markets of mixed oxide nuclear fuels. AMG now has the which we serve — Solar, Recycling, Fuel Effi- world’s leading vacuum furnace engineering ciency and Nuclear — will provide opportunities team specializing in nuclear technologies. In for long term growth. addition, the acquisition of Graphit Kropfmühl provides a vertically integrated source of natural graphite, an important material for use in modern nuclear applications. We believe that nuclear energy will be a key component of the global strategy to provide secure, low emission power to a growing planet. AMG’s engineering Dr. Heinz C. Schimmelbusch technologies and niche specialty metals will Chief Executive Officer Letter to Shareholders 13
  16. 16. Report of the Management Board Dr. Heinz Schimmelbusch Chairman & Chief Executive Officer 64 Arthur Spector Deputy Chairman 68 William Levy Chief Financial Officer 49 Eric Jackson President, Advanced Materials 56 Dr. Reinhard Walter President, Engineering Systems 57 14 Report of the Management Board
  17. 17. Dr. Schimmelbusch was appointed Chief Executive Officer and Chairman of the Management Board on November 21, 2006. He has served in a similar capacity for businesses comprising AMG since 1998. Dr. Schimmelbusch also serves as nonexecutive chairman of the board of various companies, including Allied Resource Corporation, in the United States and Chairman of the Supervisory Board of PFW Aerospace, Speyer, Germany. Dr. Schimmelbusch is also Chairman and CEO of Timminco Limited and a Managing Director and a founder of Safeguard International Fund, L.P. Dr. Schimmelbusch served as Chairman of Metallgesellschaft AG from 1989 until he resigned in 1993. His directorships have included Allianz Versicherung AG, Mobil Oil AG, Teck Corporation, and Methanex Corporation. Dr. Schimmelbusch received his graduate degree (with distinction) and his doctorate (magna cum laude) from the University of Tübingen, Germany. Mr. Spector was appointed Deputy Chairman of the Management Board on November 21, 2006, the date of incorporation of the Company. Since 1998, Mr. Spector has served in a similar capacity for the businesses currently owned and operated by AMG. Mr. Spector is also Vice Chairman and Director of Timminco Limited and is a Managing Director and a founder of Safeguard International Fund, L.P. From January 1997 to March 1998, Mr. Spector served as Managing Director of TL Ventures LLC, a venture capital company. Mr. Spector has significant executive experience, having served as chairman and chief executive officer for a number of public companies including State National Bank of Maryland and Neoware, Inc. Mr. Spector received a BS degree (with honors) in economics from the Wharton School at the University of Pennsylvania and a JD (magna cum laude) from the University of Pennsylvania Law School, United States. Mr. Levy was appointed Chief Financial Officer and member of the Management Board on April 1, 2007. Mr. Levy has been employed by a subsidiary of AMG since 2005. Previously, he was CFO of PQ Corporation, a leading global chemicals and engineered glass materials company. He was appointed Vice-President and Chief Financial Officer of PQ Corporation in 2002. From 1984 to 1996, Mr. Levy held various senior positions in finance and marketing with Imperial Chemical Industries plc in the United Kingdom and the United States. In 1984, Mr. Levy qualifi ed as a certified public accountant with PricewaterhouseCoopers LLP, in the United States. Mr. Levy received a BS degree in accountancy (magna cum laude) from Villanova University, United States. Mr. Jackson was appointed President of the Advanced Materials Division and member of the Management Board on April 1, 2007. Mr. Jackson has served in various senior capacities for businesses now owned by AMG since 1998. He previously acted as Director at Phibro, a division of Salomon, Inc, and as Vice-President at Louis Dreyfus Corporation. In addition, from 1979 to 1989 Mr. Jackson acted in various roles for Cargill Incorporated in Canada and the United States. Mr. Jackson received a BS degree in economics and an MBA, both from the University of Saskatchewan, Canada. Dr. Reinhard Walter was appointed President of the Engineering Systems Division and member of the Management Board on April 1, 2007. He has served on the management board of directors of companies in the Division since December 2001, and has served as chairman of the management board of ALD since September 2004. From 1997 to 2001, Dr. Walter acted as Chief Financial Officer and Deputy Chairman of VBH Holding AG, Germany. He was a member of the management board in Berzelius Umwelt-Service AG, a recycler of industrial residues. From 1983 to 1988 he was Managing Director of Uraphos Chemie GmbH, a company operating engineering and recycling services for industrial waste. Dr. Walter received a business administration degree and a doctorate in economics from the University of Saarbrücken, Germany. Report of the Management Board 15
  18. 18. Advanced Materials Division $756.7M $62.1M Revenue increased 10% over 2007 EBITDA grew by 13% from the comparable period in 2007 Revenue by market 2008 The Division had record operating results for 2008, increasing sales by more than 10% to $756.7 million and expanding EBITDA by 13% to $62.1 million. Although record results were achieved for the year, the global economic crisis and the resulting collapse in demand and prices led to margin compression, inventory write-downs and a fourth quarter operating loss. Entering 2009, the Division faces uncertain demand in many of its end markets, specifically infrastructure, energy and fuel efficiency. The year 2009 will be challenging and aggressive actions are being taken to reposition the businesses for a dramatically changed environment. The Division is reducing staffing by more than 15% from the end of the third quarter and has deferred almost all discretion- ary capital spending. The Division’s objective in 2009 is to deliver increased cash flow stemming not only from operations but also a reduction in working capital and reduced capital spending. Metals Prices Market prices have dropped across all metals markets. Although in certain markets AMG is a converter which passes through metals costs to its customers, in other businesses it purchases metals for its own account and, accordingly, has metals price risk. An example of the latter is ferrovanadium, where the price has decreased from $29.50/lb to $13.13/lb during the fourth quarter 2008. $ Antimony Cr Metal Vanadium1 Mo Oxide Nickel Dec 31, 2007 5,608/mt 4.70/lb 18.50/lb 32.38/lb 12.46/lb Sep 30, 2008 6,750/mt 5.83/lb 29.50/lb 32.25/lb 8.00/lb Dec 31, 2008 4,462/mt 4.25/lb 13.13/lb 9.50/lb 4.89/lb Q4 Decrease -33.9% -27.1% -55.5% -70.5% -38.9% 1 Price is Ferrovanadium North America. AMG also produces vanadium pentoxide. 16 Report of the Management Board | Business Review: Advanced Materials Division
  19. 19. AMG’s Advanced Materials Division is a global leader in the production of specialty metals, alloys and high performance materials. RECYCLING VANADIUM Key achievements Recycling The Division’s vanadium recycling operations Attained record revenue and EBITDA of $756.7 million and delivered record annual production of 4.6 million $62.1 million pounds of ferrovanadium and 1.3 million pounds of vanadium pentoxide. Strong results for the Achieved record production levels for ferrovanadium and first three quarters of the year were offset by ferronickel-molybdenum lower demand in the fourth quarter as a result of the dramatic downturn in steel production Expanded capacity, increased sales of thin film solar and lower demand for ferroalloys. In our primary ferrovanadium market, the North coating materials by 35% over 2007 and continued to expand American steel industry, capacity utilization product line of proprietary coating materials and processes rates fell from 90% for much of 2008 to 35% at for thin film photovoltaic market year-end. This collapse in demand resulted in substantially lower prices for ferrovanadium Doubled tantalum mining capacity to 300,000 pounds and ferronickel-molybdenum as prices fell tantalum oxide per annum with contract for sale of more than 50% in the last three months of the 2009 production year. This resulted in a substantial increase in inventory and significant margin compres- sion during the fourth quarter and required Entered into 50/50 joint venture with Norsk Hydro ASA year-end inventory write-downs. In order to to further develop technology for low cost production of maximize liquidity, the timetable for the unit’s magnesium and precipitated silica in Norway expansion has been extended to better match demand and reduce 2009 capital expenditures. Expanded Brazilian hydroelectric power plant capacity Report of the Management Board | Business Review: Advanced Materials Division 17
  20. 20. The Advanced Materials Division’s objective is to deliver increased cash flow in 2009 despite a difficult and challenging environment. Fuel Efficiency external coatings, applied by vapor deposition in layers as thin as 1 micron, to enhance the Titanium has the highest strength-to-weight efficiency of thin film solar cells. ratio of any metal. Its use reduces weight which drives fuel efficiency. New aircraft models Other use increasing amounts of titanium thereby Aluminum powders and aluminum master driving industry growth. The Division’s titanium alloys delivered disappointing full year results master alloys and titanium aluminide busi- on essentially unchanged volumes but weaker nesses reported excellent full year results. margins. This segment suffers from excess Although sales improved year-over-year, global capacity and weak end markets. The fourth quarter results were weaker than aluminum powders business was downsized the first three quarters on reduced demand midyear as one of the three production lines from the aerospace sector. This business was closed to focus on higher value-added alloy continues important development projects powders. This resulted in a 25% reduction of such as developing titanium aluminide products staffing. The two aluminum master alloy pro- for aerospace applications, among others. duction units continue to consolidate activities Chromium metal products are used in alloys and streamline management. for jet engines and gas turbines. These prod- Tantalum products had a difficult 2008 as the ucts delivered strong 2008 full year results strong Brazilian Real and weak demand on slightly higher volume, higher prices and resulted in higher costs and increased invento- improved margins. Margins were expanded ry levels. The Division substantially completed based on well-positioned raw material the doubling of its low cost tantalum ore mining supplies, improved product mix and strong end capacity and has contracted to sell the plant’s market demand. This market also weakened full capacity for 2009. The closure of the world’s significantly in the fourth quarter of the year largest supplier of tantalum concentrates and a resulting in year-end inventory levels being weaker Brazilian Real positions the company to higher than planned. improve on its 2008 performance. The comple- Solar tion of the hydroelectric power plant in 2009 will contribute to lower operating costs in the Coating materials sales to thin film solar end second half of 2009. markets increased by 35% as AMG gained market share. In particular, AMG’s leadership The Division’s antimony operation is the largest in coating materials for thin film solar panels is European producer of antimony trioxide. driven by its production of rotatable sputtering The unit was able to maintain strong margins target materials for transparent conductive with year-over-year sales increasing by 10%. oxides. These oxides are performance-critical 18 Report of the Management Board | Business Review: Advanced Materials Division
  21. 21. VANADIUM ALUMINUM – A TITANIUM MASTER ALLOY Outlook The near term outlook for the Advanced Materials Division is challenging. Demand for many of its key products has weakened with the global recession and prices have fallen precipitously. These effects will continue to be felt at least through the first half of 2009 as margins are compressed and operations run at less than full capacity. AMG continues, however, to believe in the competitive position of its products and the value that they deliver to customers. The Division’s current focus is to aggressively reduce costs, selectively invest in high opportunity projects and position the businesses for successful operations even if present conditions persist. Report of the Management Board | Business Review: Advanced Materials Division 19
  22. 22. Engineering Systems Division $435.5M $95.6M Revenue increased 40% over 2007 EBITDA grew by 38% from the comparable period in 2007 Revenue by market 2008 The Division achieved record operating results The Division requires its customers to secure in 2008, increasing sales by more than 40% to orders by advance payments. To date, the $435.5 million and increasing EBITDA by 38% Division has been only modestly impacted by to $95.6 million. The growth was driven by the current economic crisis. Nevertheless, the increased sales of directional solidification Division maintains a significant percentage of systems (DSS furnaces) to the solar industry temporary employees and subcontractors and and vacuum remelting systems to the is able to adjust workforce levels. The Division fuel economy market, primarily for titanium is prepared to further reduce costs in 2009 applications. The Division entered 2009 with should there be a decline in demand. a strong backlog of over $332 million, 32% After a strong start, the Division’s tolling-based above the backlog at December 31, 2007. heat treatment services had a challenging Operations second half of 2008. As many customers are in the automotive industry, this business unit Order intake for 2008 increased by 21% over has been significantly affected by the current 2007 to $514 million. Furnace orders from the downturn. More than 20% of capacity was idled solar industry and titanium producers account- during the second half of 2008. This business ed for the majority of the Division’s growth. In unit is prepared for a prolonged downturn and particular, order intake from the solar industry has reduced payroll costs by 22%. reached $292.8 million in 2008, an increase of 51% over 2007. In the fourth quarter, demand Markets for remelting systems for the production of The demand for high-tech alloys and metals components of industrial gas turbines was in the markets served by the Division, particu- remarkably strong, reflecting the replacement larly aerospace and energy, remained strong of obsolete turbines worldwide. through the first three quarters of 2008 and declined in the fourth quarter. 20 Report of the Management Board | Business Review: Engineering Systems Division
  23. 23. The Engineering Systems Division produces advanced vacuum furnace systems, primarily for titanium applications and solar energy markets. VACUUM ELECTRO SLAG REMELTING FURNACE Key achievements As in 2007, Asia and Europe were the primary markets during 2008, with 34.4% and 50.4% of Achieved record revenue and EBITDA of $435.5 million and revenues, respectively. Within Asia, the Indian $95.6 million market is becoming much more important because of the change in the export control policy of the German Government. For the Increased furnace backlog to $332 million at year-end, first time, the Division was able to sell several despite slowing orders in the fourth quarter, exceeding systems to the Indian aviation and energy 2007 high by 32%. industries, a promising signal for the future. North America represented 15.0% of revenues. Increased production at Berlin plant to 200 DSS The growth in the North American market was furnaces in 2008, compared to four furnaces in 2007 driven by the aerospace and solar industries. Although the number of requests for quota- Established dedicated nuclear subsidiary and signed tions remains high, credit market problems contract with Shaw Areva MOX Services, LLC to engineer are causing significant delays in the decision nuclear sintering furnaces in the United States making process. Fuel Efficiency Started production on schedule at new heat treatment services facility in Mexico Reduced weight and improved strength of component parts are crucial for gains in fuel efficiency. Given that titanium has the highest strength-to-weight ratio of any metal, improve- ment in fuel efficiency is driven by the creation of titanium parts. The Engineering Systems Division offers a large spectrum of furnace Report of the Management Board | Business Review: Engineering Systems Division 21
  24. 24. DSS CRYSTALLIZATION FURNACE FOR SOLAR SILICON systems for the conversion of titanium sponge, Nuclear scrap or revert material into commercial grade The Division took full control of Furnaces or alloy grade titanium. Nuclear Application Grenoble S.A. (FNAG), a The Division continued its world-leading joint venture originally formed in 2007. In 2008, position in vacuum arc remelting furnaces for FNAG was awarded a detailed engineering con- processing titanium and titanium alloys. In par- tract for sintering furnaces for the Shaw Areva ticular, the Division’s electron beam furnaces Mox Fuel Fabrication Facility in South Carolina, utilize an energy efficient process for recycling USA. This facility will recycle weapons-grade titanium scrap and revert material. Although plutonium and mix it with uranium oxide to the delayed production of new aircraft such form mixed oxide fuel elements for light water as the Airbus A380 and Boeing 787 negatively reactors. This contract forms the basis for impacted the short term demand for titanium, further growth in the nuclear market. the growth of titanium sponge production and The Engineering Systems Division has also the large spectrum of applications for titanium commenced development of a graphite-glass should result in long term growth. Applications matrix technology to allow for the long term for titanium alloys include aircraft structural safe storage of radioactive waste. The technol- parts, heat exchangers and medical implants. ogy is based on proven processes used for the Fuel efficiency-related revenues grew from production of prismatic nuclear fuel elements $200 million in 2007 to $231 million in 2008, developed for high temperature reactors. although the percentage of total sales declined Although this technology is still in the develop- from 64.2% to 53.0%, reflecting the rapid ment stage, the Division has applied for several growth of the Division’s solar-related sales. international patents. According to initial tests, the graphite-glass blocks containing nuclear Solar waste allow for safe disposal for more than a The Division’s principal products are DSS million years, thus addressing recent concerns furnaces. These systems are used either to about the current vitrification technology. process polysilicon for the production of solar ingots (later sliced into photovoltaic wafers) or Production to purify metallurgical silicon for the production Traditionally, the Engineering Systems Division of UMSi. Incoming orders increased by 45%, as subcontracted the production of its vacuum compared to the record level reached a year furnace systems to a network of experienced before. Solar-related sales grew from 36% of suppliers. To support growth resulting from the Division’s total sales in 2007 to 46% in 2008. the significant increase in demand for its DSS and heat treatment furnaces, production was brought in-house during 2008. Production 22 Report of the Management Board | Business Review: Engineering Systems Division
  25. 25. MACHINING AT BERLIN PLANT capacity for DSS furnaces for solar silicon Furthermore, a new generation of electron was increased from two furnaces per week in beam guns for the production of refractory the first quarter of 2008 to seven furnaces per metals at temperatures above 2,000°C was week by the end of 2008. successfully tested and will now be installed in a pilot plant to analyze applications in Additionally, $7.2 million was invested in metal production in the electronics and property, plant and manufacturing equipment photovoltaic industry. to enable the manufacture of a broader range of products at the in-house facility. This The Research & Development program is investment has shortened delivery lead times, also focused on improving the performance making the company more responsive to the of its established furnace systems and to demands of the market. prepare access to new markets, such as heat treatment for aerospace and casting for New Product Development industrial gas turbines. The Engineering Systems Division continued to develop new products, especially for solar Outlook energy and the next generation of electron The Division’s order backlog provides a beam-based energy sources to process refrac- relatively high degree of visibility for 2009. tory metals at temperatures above 2,000°C Nonetheless, the economic crisis makes more efficiently. forecasts subject to significant uncertainty. In 2008, the focus was on the next generation The broad product range and the advanced DSS furnaces for solar silicon with a crucible technology standards of the Division’s vacuum capacity of about 600 kg. This new furnace type systems give AMG a significant competitive will reduce the cost of ownership and further edge in the markets addressed. The geographic contribute to the industry’s target of achieving diversification and the portfolio of end markets grid parity. which the Division serves will help mitigate some of the challenges resulting from the current economic crisis. Report of the Management Board | Business Review: Engineering Systems Division 23
  26. 26. Timminco Limited $237.8M $20.0M Revenue increased 53% over 2007 EBITDA grew by $24.9 million from the comparable period in 2007 Revenue by market 2008 Timminco revenues and EBITDA for 2008 were Anticipating significant additional demand, the $237.8 million and $20.0 million, respectively, company began construction of an expanded compared to $155.5 million and a loss of $4.9 mil- facility in early 2008. By the end of the year, lion in 2007. The primary driver of these increases Timminco had achieved important milestones: was the core solar silicon business. Timminco six purification lines had been commissioned believes its gross margin per ton of UMSi will and additional long term contracts were signed. improve in 2009 as the Bécancour plant achieves Timminco’s customers have progressively operational efficiencies and as fixed costs are improved the efficiency of solar cells produced spread over increased production of UMSi. with Timminco’s solar raw material and a Although the company had EBITDA of number of those customers have launched $20.0 million in 2008, it suffered a net loss specific products using 100% Timminco UMSi stemming from write-offs relating to the as the base material of their solar cells. closure of its legacy magnesium business in The severe downturn of the solar products Canada and its minority investment in Fundo markets in the first quarter of 2009 has led Wheels. After adjusting for these non-recurring to the decision to delay the ramp up of UMSi items, Timminco generated net income production lines to adjust production to the of $1.2 million in 2008 compared to a loss of actual demand. $7.0 million in 2007. Silicon Metal Solar Grade Silicon Timminco’s operations in Bécancour produce Timminco’s solar silicon business achieved approximately 50,000 mt annually for the revenues of $59.4 million in 2008, an increase aluminum, chemical and polysilicon (semi- of $55.8 million over 2007. Timminco began conductor and solar) markets. The Bécancour commercial production of UMSi in 2007 and location gives the company an abundant supply signed four long term contracts with manufac- of competitively priced hydroelectric power and turers of solar silicon ingots in that year. a major transport link to Europe through the 24 Report of the Management Board | Business Review: Timminco Limited
  27. 27. 2008 was a transformational year for Timminco as it assumed world leadership in the production of upgraded metallurgical silicon, a raw material for solar silicon ingots. A SOLAR CELL MADE WITH TIMMINCO’S SOLAR GRADE SILICON St. Lawrence Seaway. The markets for silicon Key achievements metal have contracted in the first quarter of 2009 and Timminco will react with a temporary Generated $20.0 million of EBITDA in 2008 compared to shutdown of its smelters. a loss in 2007. Magnesium Completed installation of six purification lines for the The volatility of raw material prices and production of UMSi, planned to be the largest facility of its traditionally low margins has led to the kind upon completion magnesium business being a non-core activity. As part of its strategic plan, Timminco has begun winding down operations at its Aurora, Shipped 1,045 mt of UMSi with deliveries primarily to Colorado extrusion facility, having previously customers on long-term supply contracts. ceased activities at its Haley, Ontario plant in June, 2008. In early 2009, Timminco entered into a joint venture pursuant to which it the company’s balance sheet. Subsequent to ceded control of the magnesium business year-end, Fundo Wheels ceased operations. and retained a minority interest. Outlook Other Businesses Timminco believes it will become a low-cost During 2008, Timminco also had a minority producer of solar silicon feedstock for the pho- investment in Fundo Wheels, a Norwegian tovoltaic industry. Despite the economic crisis company manufacturing aluminum automobile that has affected the demand for solar energy, wheels. Production difficulties and the recent Timminco will continue to work on improving sharp drop in automobile sales contributed product quality and lowering production costs to continuing losses and a reduction of the to ensure a successful long-term future as carrying value of this investment to zero on conditions improve. Report of the Management Board | Business Review: Timminco Limited 25
  28. 28. Graphit Kropfmühl AG $87.9M $7.6M Revenue EBITDA Revenue by market 2008 GK’s results are not included in AMG’s financial as the chemical and aluminum industries. GK statements for 2007 and include only eight is investing in a more efficient transformer and months in 2008, reflecting the date that AMG’s a closed electrode system which will enable acquisition took place. GK had excellent GK to increase production by up to 10% while results in 2008, generating $7.6 million of reducing energy consumption. GK is taking EBITDA on $87.9 million of revenue in the eight steps to insure a base level of profitability months. Like the results of AMG’s Advanced and liquidity even if prices of silicon metal Materials Division, demand for GK’s products decrease. GK’s metallurgical silicon division fell rapidly in the fourth quarter although also produces a by-product of amorphous sili- EBITDA remained positive. GK’s recent capital con dioxide under the brand name RW-Füller. improvements will help reduce costs in 2009 but, nevertheless, current economic conditions Graphite present a challenge. GK’s graphite division refines natural graphite into high quality graphite with purities up to Metallurgical Silicon 99.99% carbon. GK has a worldwide production AMG added to its silicon metal production and sales network with mining, processing and capacity by acquiring control of GK. Together application expertise. GK owns mines, process- with Timminco’s 50,000 mt capacity, GK’s ing plants and extraction rights in Asia and production of over 30,000 mt makes AMG one of Africa with refining and processing plants in the world’s largest producers of silicon metal. Germany, the Czech Republic and China. Like Timminco, GK has a favorable geographic The graphite business had revenue of location – its plant in Pocking, Germany, is $29.0 million in the eight month period. After a close to most of its customers. strong start in 2008, the graphite business was The silicon metal division’s revenue for 2008 impacted by the worldwide economic slowdown was $58.9 million for the eight month period. during the fourth quarter. GK’s products go to the solar market as well 26 Report of the Management Board | Business Review: Graphit Kropfmühl AG
  29. 29. AMG’S majority-owned subsidiary, Graphit Kropfmühl AG, is a producer of silicon metal and natural graphite. NATURAL GRAPHITE Natural graphite’s heat resistance, electrical Key achievements and heat conductivity and resistance to chemi- cals enable it to be used in state-of-the-art AMG acquired 79.5% of GK’s publicly-listed stock in 2008. batteries, in refractories for the steel industry and as a component in lubricants. Attained revenue for 2008 of $87.9 million for the GK’s vertically integrated position in the eight months GK was controlled by AMG. graphite value chain, from mining to sales, has enabled it to develop high-purity graphite EBITDA was $7.6 million for the eight months in 2008 custom solutions. Several of these serve as that AMG controlled GK heat insulation in building materials, making a significant contribution to the environment. Expanded silicon metal production capacity and Due to the downturn in the transportation built a high efficiency milling facility to reduce costs markets, GK transitioned its focus to industrial in graphite production. energy efficiency applications. GK constructed a new facility in Germany with an annual capac- Outlook ity of approximately 1,500 mt of fine-milled graphite and employing a new, energy-efficient GK is expanding its production capacity of processing technology. Operations began in the silicon metal by approximately 10% to 33,000 mt third quarter of 2008. per annum. This expansion is expected to be complete by the end of the second quarter The business was affected by the steep rise of of 2009. raw material prices for grades of graphite not produced by its mines. As a response to the The graphite division expects to strengthen its increasing cost situation, in the third quarter network in 2009 through cooperation with AMG of 2008 GK transferred production from its using mutual infrastructure and resources to Great Britain facility to the lower cost Czech take advantage of long term growth forecasts Republic plant. for natural graphite. Report of the Management Board | Business Review: Graphit Kropfmühl AG 27
  30. 30. Risk Management and Internal Control Risk Management Approach on AMG’s Risk Assessment Package (“RAP”). The RAP is a comprehensive document The global economy is facing unprecedented requiring each business unit to (i) identify challenging times. A typical risk management potential risks and quantify the impact of such process identifies potential risks, monitors risks; (ii) prioritize the risks using a ranking those risks and develops mitigation planning. system to determine the impact, likelihood of Such a process works well when there is occurrence, and mitigation or avoidance proce- general stability and certainty in the underlying dures in place; (iii) identify adverse events that business and in macroeconomic conditions. presage the actual occurrence of an identified Its utility, while still valuable, is limited in the risk; and (iv) document the periodic monitoring environment in which we are operating. of the risks. The current economic crisis and global AMG is keenly aware that this thorough uncertainty is causing the simultaneous screening has its limitations. Customers, sup- occurrence of several significant risks. AMG’s pliers and competitors do not give you advance Management Board has identified the following notice of their confidential plans and actions. six risks as the most pertinent to the business: Economic conditions can deteriorate. Govern- accounts receivable and customer default, ments can change policies and acts of nature or performance, risk; metals price volatility; can disrupt even the best executed strategies. foreign currency volatility; capacity utilization; Intimate knowledge of AMG’s businesses and temptation to abandon innovation; and financing markets is critical in mitigating these risks. risks. During these challenging times, exten- AMG is also developing scenario planning to be sive focus throughout AMG is being given to better prepared for adverse events. managing and avoiding these, as well as other, risks. More detailed explanations of these Moving Beyond Best Practices risks, as well as actions AMG has implemented Information is an important element to manag- to mitigate the risks, are provided below. ing risk. Improved visibility to information for AMG’s strong focus on risk management, and all AMG management, whether market or traditional risk assessment processes, had company specific or operational or financial in previously identified most of the risks above nature, is the focus for moving AMG’s traditional as potential risks – albeit not necessarily risk assessment beyond best practices. In planning for the “perfect storm” of all the risks 2009, AMG will begin a project to migrate its occurring simultaneously or to the current RAPs to a web-based platform. The on-line level of severity. This preparation, while not platform will (i) improve the design and ease making AMG immune from the global crisis, of use of AMG’s enterprise risk management has benefited AMG is two main ways: (i) AMG tools allowing for more frequent updates; recognized the risks early and had plans in (ii) standardize risk categories and terms place to reduce the impact; and (ii) AMG was across all business units; and (iii) improve the building its business model, specifically as it ability to better connect monitoring risks into relates to metals price volatility, around the financial results and impact. avoidance of this risk. In addition to migrating the RAPs to a web- AMG employs a traditional approach to risk based platform, the database will enable data management including a ‘top-down’ and retrieval allowing mitigation plans, market data ‘bottom-up’ analysis and assessment of the and other documents to be viewed remotely and Company’s risks, together with a very strong shared across the Company. Improved informa- focus on ‘entrepreneurial risks’. tion flow should, in addition to other benefits, allow more timely management decisions using Traditional Risk Assessment more accurate data and allow the Company to In 2008, AMG implemented a comprehensive build and execute more robust mitigation plans. strategic risk management program, centered 28 Report of the Manaagement Board | Risk Management and Internal Control
  31. 31. The last phase of the project will be to combine AMG will continue to invest in innovation during the features of the database with key perfor- these times as the continued growth of AMG’s mance indicators. The use of key performance business requires the Management Board to indicators in the risk management process undertake innovations. will enable business unit managers to better Investments in innovation do come with risk, monitor risks and allow the Strategic Risk albeit measured risk. The most significant deci- Management Officer to better set goals to sions surround the careful planning of investing challenge business unit managers. in innovations versus cash conservation. Aiding Risk Reporting Procedure in this decision is a two-phase risk analysis conducted before a decision is made to invest Each business unit undertakes a full review in a project. The first phase is a traditional, of its RAP on a quarterly basis. The RAPs are thorough analysis of the proposed project, then reviewed in detail by AMG’s Strategic Risk including likelihood of success, to determine a Management Officer in coordination with projected internal rate of return (“IRR”) or net the operating managers of the business units. present value using discounted cash flows. The Key risks from all business units are then second phase analyzes the risks AMG faces if it summarized and presented to the Management does not innovate or proceed with the proposed Board on a quarterly basis. Individual risks of project. If there is a potential loss of business, special note will be discussed at the Manage- and subsequent loss of cash flows, in a ‘steady- ment Board’s bi-weekly meeting. state’ scenario, this outcome is included in the The Supervisory Board receives a report IRR and net present value calculations to get a from the Management Board at its quarterly true picture of the benefit of the project. meetings. In addition to looking at the inherent risk on a AMG’s Strategic Risk Management Officer project-by-project basis, AMG also evaluates reports directly to the Chief Executive Officer to the risk of the ‘portfolio’ of projects being provide assurances that the risk management undertaken or in the pipeline. Evaluating a process is respected and that risk identification project within a portfolio of opportunities and management are carried out effectively. allows AMG to better manage its liquidity and capital allocation. This portfolio evaluation The Management Board has the responsibility of projects is very important given current to inform the Supervisory Board of the most economic conditions. While certain projects significant risk exposures and the related risk may be beneficial and worthwhile in the long management plans in place. The Audit Com- run, timing of cash flows is critically important mittee of the Supervisory Board will carry out as AMG always seeks to maintain sufficient a semi-annual review of the company’s internal liquidity to operate its existing businesses. control and risk management systems. Managing entrepreneurial risk requires active Entrepreneurial Risk Assessment management. Some of the biggest risks in new AMG focuses on developing and producing projects are unknown, since a company is doing products to reflect growing global trends. something for the first time. On top of unknown Executing this strategy requires the devel- risks, competitive dynamics can change and opment of new products, processes and new technologies can become available forcing businesses that utilize proprietary production alternative plans to be implemented. Frequent methods and novel approaches. Management Board meetings enable the senior In an economic crisis, the temptation is to delay executives of AMG to stay informed of all the new innovative initiatives until more market latest information, allowing for quick action, clarity exists. This response risks the viability further reducing risk. of the company when the economic crisis ends. Report of the Management Board | Risk Management and Internal Control 29