Letter of the Management Board

The voestalpine Group has the toughest, most difficult business year in many decades behind it. This was the case for many other corporations as well. Right from the start of the economic crisis, we were confronted with a situation, where we could not predict how the next weeks or even days would be developing. Now, 12 months later, we are rich in experience and happy that, together with our employees, customers, and shareholders, we have successfully met this challenge.

Looking back at the fall of 2008 from a distance of 18 months, when the industry’s safe and cozy world with its six-year boom phase broke apart practically over night, the following insights can be drawn from our Group’s perspective: After that first moment of shock that it took to just comprehend what was happening, by the end of 2008, all of those steps had been initiated and implemented with absolute consistency that would enable us to successfully overcome this crisis in the course of the business year 2009/10.

First of all, there were comprehensive measures on the cost side: in the human resources sector, elimination of overtime, consumption of vacation days and compensatory time credit, and finally—unfortunately unavoidable in view of the severity of the crisis—reduction of both leasing and core employees by a total of about 10%; with regard to new investments, cancellation of almost half of all projects so that for the first time in decades, investment expenditure was below the amount of depreciation; and finally, a reduction of overheads and maintenance expense by about 30%.

In times of capital and financial market crises, the Company’s adequate level of available liquidity is of existential importance: using its highly developed working capital management system, the Group optimized its receivables and liabilities on a large scale, in particular, comprehensively redefining its inventories and reducing them sustainably (!) by about 35%.

Moreover, the crisis prompted us to not only examine the costs in all the divisions, but also to scrutinize the structures, the organization, and the processes and to subsequently—where necessary—reorient them.

The business year 2009/10 was thus characterized by the comprehensive and consistent implementation of all of these measures that had been initiated at the end of the previous business year. The results of this implementation, which are presented in detail in this Annual Report, can be summarized as follows: Primarily as a result of the reduction of working capital by almost EUR 900 million, cutting investment expenditure in half compared to the previous year, and comprehensive austerity measures in the segments of human resources, maintenance, and overheads, despite the worst recession of the last 60 years, we were able to achieve a free cash flow of more than EUR 1 billion, the highest figure in the history of our Company. With equity capital remaining constant, this made it possible for us to reduce the level of debt by more than EUR 700 million and to slash the gearing ratio from almost 90% to just over 70%.

While our reaction to the crisis was far-reaching in all sectors of the Group, nevertheless, there were three segments where the measures taken were limited in the interest of assuring our quality and technology leadership in the long term. On one hand, no strategically important projects were cut back in research and development and in investments and, on the other, the number of apprentices and skilled workers in training remained largely unchanged.

As a consequence of the massive cost saving measures in all other segments and at all levels of the Group, the EBITDA and EBIT breakeven points were shifted down significantly. Thus, despite the extremely difficult economic environment in the business year 2009/10, voestalpine AG was able to close out the year with a clearly positive operating result, recording an EBITDA margin of 11.7% and an EBIT margin of 4.1% respectively.

Considering the comprehensive reorientation of the two largest divisions—Steel and Special Steel—as well as the fact that we are continuing to press forward with cost savings programs in the other three divisions, we can assume that the Group will again substantially improve its competitive position in the two coming business years. By 2012/13, the cost position should have improved sustainably by about EUR 600 million as compared to 2008/09; only EUR 150 million of this amount have taken effect in the past business year 2009/10. Ultimately, the goal is the achievement of cost leadership in Europe in all of the product sectors that are important for the Group. Furthermore, we are continuing to consistently pursue an expansion of our leadership role, both in technology and quality, in keeping with our Group’s claim “one step ahead.” It is part of our strategy not only to remain successful in the long term in a competitive arena that is becoming more and more aggressive, but to effectively meet the growing challenge posed by other materials. Although we are taking this challenge very seriously, we are anticipating it with a certain degree of equanimity, as steel will not only remain the most important material worldwide in the future, but, due to its versatile applications and the opportunities that it can provide, its potential has not been exhausted by any means, nor will it be exhausted in the foreseeable future. Another crucial aspect is that any serious life-cycle study shows that steel is also not only more environmentally friendly and energy efficient than all other metal materials but plastics as well. In its competition with other base materials, the steel industry will have to emphasize these attributes with greater vigor than has been the case up to now.

In this context, we would like to say a few words about European policies regarding climate protection. Despite mounting doubts by an increasing number of serious scientists regarding the constant repetition of the story that CO₂ is largely the sole cause of global warming and despite growing criticism of the scientific professionalism of the IPCC (Intergovernmental Panel on Climate Change), European political circles still believe that they have to continue in their leading role regarding the containment of CO₂ emissions regardless of rising doubts about the wisdom of this position. Should the European Union again take a more radical position without a binding global consensus regarding climate policy and associated measures, the most energy-intensive industry will be forced to leave Europe for less “climate-sensitive” regions due to a lack of competitiveness.

This will then subsequently also apply to downstream industry and service sectors that depend on it. The closure of many European industrial sites, which in a worldwide comparison are recognized as the most environmentally friendly anywhere, would represent a loss of decades of progress for global climate protection, and, for Europe, it would mean the loss of the basis of its prosperity, along with millions of jobs.

voestalpine AG and its management have proven in the past two years that they react quickly and consistently to changes in the Group’s environment. This will not change in the future. Together with our employees, customers, and shareholders, we will view new developments—whenever and wherever they appear—as an opportunity to make our Company even stronger, in the spirit of being “one step ahead.”

Linz, May 2010

The Management Board