Risk management, as it has been practiced in the voestalpine Group since the business year 2000/01, serves to ensure both the continued long-term existence of the Group and an increase in its value, thus representing a key factor in its success.
This risk management system, which has undergone numerous updates and regular expansions, has been set forth in a general procedural directive that is valid Group-wide. The systematic risk management process aids in recognizing potential risks early on and initiating appropriate action to avert dangers.
In accordance with the Austrian Company Law Amendment Act of 2008 (Unternehmensrechts-Änderungsgesetz) and the associated increased importance of an internal control system (ICS) and a risk management system, an Audit Committee has been set up within the scope of the Supervisory Board of voestalpine AG, which addresses questions related to risk management and the internal control system (ICS) and the monitoring thereof on an ongoing basis.
Both the risk management and the internal control systems are integral components of the existing management systems within the voestalpine Group. The Internal Audit department independently monitors operational and business processes and the ICS and has full discretion when reporting and assessing audit results.
Risk management covers both the strategic and the operational levels and is therefore a major element in the sustainable success of the Group.
Strategic risk management serves to evaluate and safeguard strategic planning for the future. Strategies are reviewed to ensure conformity with the Group’s system of objectives in order to ensure value-adding growth by way of an optimum allocation of resources.
Operational risk management is based on a revolving procedure that is run at least once a year throughout the entire Group. The evaluation of identified risks is implemented using an evaluation matrix that assesses possible losses and the probability of occurrence. All operational, environmental, market, procurement, technological, financial, and IT risks are documented. This process is aided by a special web-based IT system.
The preventive measures in the main risk areas presented in the Annual Report 2010/11 are still valid. They are:
Availability of raw materials
In order to ensure the supply of the required quantity and quality of raw materials and energy, the voestalpine Group has for years maintained a diversified procurement strategy that reflects the increased risks. Long-term, close relationships with suppliers, the expansion of our supplier portfolio, and the controlled expansion of the Group’s self-sufficiency are the core elements of this strategy that is becoming increasingly important in view of the trend toward higher volatility on the raw materials markets (for more details, please refer to the “Raw Materials” chapter of this Annual Report).
Guidelines for hedging raw materials price risk
Within the scope of raw materials price risk management, the effects of fluctuations in the raw materials market on the operating result are being continuously monitored. Based on the acquired information and taking the individual distinctive characteristics of each raw material into consideration, price risks for the raw materials are hedged by executing delivery contracts containing fixed price agreements or by utilizing derivative financial instruments. An internal guideline regulates the details of the relevant procedure Group-wide.
Failure of IT systems
The servicing of business and production processes that are largely based on complex IT systems is handled by voestalpine group-IT GmbH, a company that specializes in IT and that is wholly owned by the Group holding company voestalpine AG.
Due to the importance of IT security and the minimization of possible IT security risks, minimum security standards for IT have been developed, and compliance with these standards is reviewed annually by way of an external audit. In order to reduce the risk of unauthorized access to IT systems and IT applications even further, additional periodic penetration tests are carried out.
Failure of production facilities
In order to minimize the risk of breakdowns of critical production facilities, we have undertaken ongoing targeted and comprehensive investments in the technical optimization of sensitive units. Consistent preventive maintenance, risk-oriented storage of spare parts, and comprehensive employee training are additional core measures that are being taken to reduce risk in plants and installations.
For many years, we have been undertaking projects to sustainably secure knowledge and especially to prevent the loss of know-how. Further development of these projects is being consistently pursued. Available knowledge is documented on an ongoing basis, while new findings from key processes or projects as well as lessons learned as the result of unplanned events are incorporated accordingly. Detailed, IT-supported process documentation represents a central element of knowledge retention.
Risks in the financial sector
Policy-making responsibility, strategy decision-making, and definition of targets are centrally organized with regard to financial risk management. The existing rules and regulations include targets, principles, tasks, and responsibilities for both the Group Treasury and the financial department of each Group company. Financial risks are continuously monitored, quantified and—where this is feasible—hedged. The strategy aims to reduce fluctuations in cash flow and income.
Market risks are largely secured through the use of derivative financial instruments that are used exclusively in connection with an underlying transaction.
Financing risks are hedged using the following measures:
Liquidity risks generally consist of a company being potentially unable to raise the funds necessary to meet liabilities incurred in connection with financial instruments. Existing liquidity reserves enable the company to meet its obligations within the prescribed period. The primary instrument for managing liquidity risk is a precise financial plan drawn up quarterly on a revolving basis. Required financing and bank credit lines are determined by the central Group Treasury based on the consolidated operating results.
Credit risk refers to financial losses that may occur through non-fulfillment of contractual obligations by business partners. The credit risk of the underlying transactions is minimized to the greatest degree possible through credit insurance and bankable securities (guarantees, letters of credit). Based primarily on our experience during the crises in recent years, the risk of default for our own remaining risk is reduced due to monitoring and close contact with our customers and is assessed as comparatively low. A high percentage of delivery transactions is covered by credit insurance. Bankable types of security, such as guarantees and letters of credit, are also provided. As of March 31, 2012, 77% of our trade receivables were covered by credit insurance.
The Group implements an initial hedge centrally by means of derivative hedging instruments through the Group Treasury. voestalpine AG hedges budgeted (net) foreign currency payment flows for the next twelve months. Longer-term hedging is only carried out for contracted projects. The hedging ratios are between 50% and 100% of the budgeted payment flows for the next twelve months.
Interest rate risk
voestalpine AG conducts the interest rate risk assessment centrally for the entire Group. This assessment differentiates basically between cash flow risk (the risk that interest expenses or interest income will undergo a detrimental change) for variable-interest financial instruments and present value risk for fixed-interest financial instruments. While taking the interest expense into consideration, this strategy aims to minimize the effects of interest rate volatility through the simultaneous management of interest rate risk and interest rate sensitivity. On the basis of the reporting date of March 31, 2012, an increase of the interest rate by 1% would result in net interest expense in the next business year that is higher by EUR 2.8 million.
voestalpine AG also assesses price risk, primarily using scenario analyses to quantify interest and currency risk but also the value-at-risk concept. The maximum potential loss within the next business day and within a year is determined with 95% certainty. This process takes the correlations between the individual currencies into account. The present value basis point method is also applied in the interest management process.
Economic and financial crisis
Based on the knowledge gained as a result of the global economic and financial crisis of 2008 and 2009 and its effect on the voestalpine Group, additional—primarily corporate—measures were taken during the past several years to minimize risk, and these measures will continue to be consistently implemented in the coming years.
These measures are in particular targeted at
Minimizing the negative effects that a recessionary economic trend would have on the Company by means of relevant planning precautions (scenario planning)
Maintaining high product quality that distinguishes our products from the competition with a concurrent increase in efficiency and ongoing cost optimization
Having sufficient financial liquidity available even in the event of constricted financial markets, and
Securing in-house expertise with a view to continuing the long-term expansion of our quality and technology leadership even more efficiently than before
Concrete measures are being developed and implemented on an ongoing basis in order to minimize or eliminate risks identified within the voestalpine Group in the past; these measures aim at reducing the extent of potential loss and/or minimizing the likelihood of losses occurring.
It can be stated that, from today’s perspective, the voestalpine Group is exposed to limited, manageable risks that do not threaten the continuation of the Group as a going concern. There is no indication of any risks that endanger the future survival of the Group.