RESTRUCTURING

Circumstances and decisions in the year 2006 are very evidently described in Managing director’s statement of Annual report 2006.

MANAGING DIRECTOR’S STATEMENT

Dear shareholders and business partners,

The main characteristics of the business year 2006 for the Tovarna sladkorja d.d. Ormož (TSO) are
undoubtedly linked to the search for the possibility of preserving the manufacture of sugar in Slovenia.

The reform of the sugar sector in the EU has placed insurmountable obstacles in front of our sugar beet production and sugar manufacture. The actual state of affairs, the business forecasts for the next few years and the great uncertainty relating to the provision of satisfactory quantities of sugar beet for the production of the quota of sugar we have been allocated (52,973 tons), the negative effects of the “Balkans Regulation” and high duties payable into the EU restructuring fund (in three years we are supposed to contribute over EUR 22 millions) meant that shareholders faced key strategic decisions.

Together with the state and the sugar beet growers we looked for long-term solutions for the preservation of the production of sugar beet and the manufacture of sugar, but the cruel and inexorable economic facts pushed us closer and closer to an unwanted decision.

The last such attempt ended in an agreement to carry out another campaign in the 2006/2007 marketing year, with which we wanted to enable the growers to gain better foundations and precedents for the payment of transitional non-production related payments for sugar for the period between 2007 and 2013, in line with the Council Regulation (EC) No. 310/2006 of 20 February 2006, and in the meantime we also gained some time for the search for a favorable resolution of the current position. We received certain assurances about sharing a part of the risk involved in yet another campaign.

Unjustified pressures on the factory and mudslinging in the media by some sugar beet growers due to the calculation of the payments for the purchased out-of-quota sugar beet (“C-sugar beet”) meant that endeavors for the preservation of production were even less likely to succeed. For any possible joint continuation of production a high degree of unity between the factory and sugar beet growers who understand the effects of the market regime not only when these suit them (2004), but also when they do not (2005). If we can understand why some growers sowed more sugar beet than was contractually agreed, we cannot understand them when they want to blame the factory for this. Sadly, the sugar market regime had a negative effect on the purchase price when there was a surplus of sugar beet and a positive one when there was a shortage. Trying to resolve the conflict by discrediting the TSO certainly did not contribute towards the sense of calm so badly needed for the adoption of important decisions, on the contrary, it caused unnecessary tensions between a group of growers and our factory, trying to negate in public the existence of the good cooperation that had existed in the past between most of the sugar beet growers and the factory.

Our joint successes and good cooperation were clearly visible and will not be reduced even by these instances, even if disputes have to be resolved by arbitration. Discussions at the European association of sugar manufacturers (CEFS) and at the European Commission showed the determination of European policy to bring the reform, in spite of opposition, to its final desired goals of sugar production reduced by 6 million tonnes, a 36 % lower price for sugar and a 39 % lower purchase price of sugar beet. The principle of competitiveness in the production of sugar beet and of sugar manufacturing factories required for the future is, in our opinion, unfair to the industry in the new EU Member States as they have not had sufficient time to achieve equal levels of competition as the old Member States; however, it is obvious that this was politically acceptable to the majority. Prior to the adoption of decisions, shareholders at their general meeting expressed concern for the fate of their assets. The manner of saving the industry by closing down smaller factories and increasing the processing capacities of larger ones could not be used in Slovenia as there is only one factory. In spite of it being technologically very well equipped, it is by European standards still a small factory, and even as things stood we were unable to produce enough raw materials for it at home. In spite of the wishes of the Slovenian Sugar Beet Growers Association, who actively participated in the search for a solution, we were unable to find or gain enough assurances for a sufficient long-term quantity of home-produced sugar beet, which would facilitate the competitive functioning of our factory.

On the basis of all these facts, after numerous talks with sugar beet growers, state representatives, employees and shareholders, a decision was adopted at the June assembly that in the 2007/2008 marketing year the production of sugar would be halted, the whole quota renounced and that all those involved should participate in the utilization of aid provided for restructuring in line with EU regulations.

This decision placed before the Company leadership the task of drawing up a restructuring programme and handing it over to the state by 31 January 2007 to be verified. The context and course of restructuring are defined by the Council Regulation (EC) No. 320/2006 of 20 February 2006 and the Council Regulation (EC) No. 968/2006 of 27 June 2006. In spite of the difficult circumstances, the restructuring programme was drawn up and handed over on time. It was very important that we reached an agreement with sugar beet growers with respect to compensations from the restructuring fund, and with our employees about the social programme. All the compensation and severance payments will only partially mitigate the generally negative effects of the cessation of such successful production, which had to end due exclusively to political decisions made in Brussels.

The first half of 2006 was full of uncertainty for all the employees with respect to the expectation of the final decision, and the second half of the year passed under the influence of the weight of the feelings following the shareholders’ decision on the cessation of production. Under such circumstances it was not easy to motivate workers, but we can say with pride and satisfaction that all our duties have been carried out professionally and according to our best abilities. The successful results of the campaign prove this. It is particularly worthy of mention that during 2006 the Company operated under what was in effect a crisis situation, during which many established rules of operation and decision making, and risk assessments acquired completely new dimensions. In my opinion, we have successfully completed our duties as business results are better than planned. The negative result is the consequence of the conditions imposed by the new EU market regime and, above all, high contributions paid into the restructuring fund for the sugar industry (EUR 6.6. million in 2006).

With the 2006/2007 marketing year the successful manufacture of sugar in Slovenia ended due to considerably worsened conditions imposed by European policy. These negative conditions are a consequence of the influences of globalization and the EU decision to sacrifice a part of the less competitive sugar sector to the “higher goals” of the economic development of the Union. Our factory is one of the “victims” of these higher goals. We have every reason to expect that both the Slovenian and European policies will give us sufficient attention in the restructuring process in order to at least cushion the negative consequences of the reform. If this should fail, the result will be that we in the not so well developed parts will be paying the price of preserving sugar manufacturing in the better developed areas.

Finally, I wish to thank the Supervisory Board for their excellent cooperation and efforts in our joint endeavors in the search for the decisions that would best benefit the Company; my co-workers for their patient and professional work in uncertain conditions; most of the sugar beet growers with whom we cooperated well for many years and who, together with us, kept improving the production process with every year and some of who achieved excellent results. I also wish to thank our customers who have trusted us all these years and remained loyal to us.

Moreover, I wish to thank the Workers’ Council and the Company trade union who, in line with their specific roles, both tried to carry out their missions to the best of their abilities. Together with our other business partners, we represented a well functioning business system, which has had to withdraw from the scene exclusively due to EU political decisions in which, prior to accession, at least we in the sugar sector had placed such high hopes. Ahead of all those involved, the shareholders and the Company management, the state and the local community, as well as our business partners, lies an important and responsible task of successfully restructuring the TSO, taking it towards activities with a more promising future that will utilize the very high quality human resources, the good infrastructural location of the factory and the natural characteristics of this not so well developed north-eastern part of Slovenia. We have ideas, plans and studies, we have informal assurances from the political sphere and we have potential investors, so all our efforts and knowledge have to be directed towards the realization of specific projects as soon as possible. Let us hope that we do not encounter the same kind of resistance as we did at the beginning of sugar manufacturing.

Jurij Dogša
Managing Director