Since the business year 2000/01, the voestalpine Group has had a comprehensive risk management system in place that was established based on a general, Group-wide policy; in the meantime, it has been updated and expanded on an ongoing basis.
Risk management, as it has been understood and practiced in the voestalpine Group, 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.
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 at voestalpine AG, which addresses questions related to risk management and the internal control system (ICS) on an ongoing basis as well as the monitoring thereof. 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.
The systematic risk management process is an integral part of the business processes within the Group; it serves to recognize potential risks early on and initiate appropriate action to avert them. 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 (“identify and analyze, assess, manage, document, and monitor”) that is run at least once a year uniformly across the entire Group. The evaluation of identified risks is implemented using an evaluation matrix comprising nine fields that assesses possible losses and the probability of occurrence. The main risks being documented are operational, environmental, market, procurement, technological, financial, and IT risks. This process is aided by a special web-based IT system.
The preventive measures for the main risk areas presented in last year’s Annual Report are still valid:
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 some years maintained a diversified procurement strategy that minimizes the risks. Long-term relationships with suppliers, the expansion of the Group’s supplier portfolio, and the development of its 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
Management of raw materials price risk determines the effects that fluctuations on the raw materials market have on EBIT. 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 defines objectives, principles, and responsibilities, in addition to methodology, processes, and decision-making processes, for how raw materials risks are handled.
CO2 issues
Risks associated with CO2 are covered separately in the “Environment” chapter of this Annual Report.
Failure of IT systems
At the majority of the Group’s sites, business and production processes that are largely based on complex IT systems are serviced 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 in order to minimize possible IT breakdown and security risks, minimum security standards for IT have been developed, and compliance with these standards is reviewed annually by way of an audit. In order to reduce the risk of unauthorized access to IT systems and applications even further, additional periodic penetration tests are carried out. In the past business year, an online campaign was conducted to raise employees’ awareness with regard to issues relating to IT security.
Failure of production facilities
In order to minimize the risk of breakdowns of critical facilities, ongoing targeted and comprehensive investments have been made in the technical optimization of sensitive units. Consistent preventive maintenance, risk-oriented storage of spare parts, and comprehensive employee training are additional measures that are being taken.
Knowledge management
In order to sustainably secure knowledge and especially to prevent the loss of know-how; sophisticated projects have already been initiated, and they are consistently maintained. Available knowledge is permanently documented on an ongoing basis, while new findings from key projects as well as lessons learned as the result of unplanned events are incorporated accordingly. Detailed process documentation, especially in IT-supported areas, also contributes to secure knowledge management.
Risks in the financial sector
Financial risk management is organized centrally with respect to policy-making powers, strategy determination, and target definition. 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 risk
Liquidity risks generally consist of a company being potentially unable to raise the funds necessary to meet its financial obligations. 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
Credit risk refers to financial losses that may occur through non-fulfillment of contractual obligations by individual 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). The default risk for the Group’s own remaining risk is kept manageable by way of monitoring and close contact with customers—and based on prior experience during the crises in recent years—is considered to be low. A high percentage of delivery transactions is covered by credit insurance. As of March 31, 2015, 78% of voestalpine’s trade receivables were covered by credit insurance. Counterparty credit risk in financial contracts is managed by way of daily monitoring of ratings and any changes in the CDS levels (credit default swap) of the Group’s counterparties.
Currency risk
The Group implements hedges 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 specifically manages cash flow risk (the risk that interest expenses or interest income will undergo an adverse change). As of the reporting date of March 31, 2015, an increase of the interest rate by 1% will result in an increase of the net interest expense amounting to EUR 2.95 million in the next business year. This is, however, an assessment of risk potential on the reporting date, and it can be subject to significant fluctuations over time. As voestalpine AG maintains a liquidity reserve to ensure availability of liquidity, it has interest-bearing investments. In order to avoid interest rate risk stemming from these investments, interest rate exposure on the asset side, expressed by way of the modified duration, is coupled with interest rate exposure on the liability side (asset-liability management).
Price risk
voestalpine AG also assesses price risk, primarily using scenario analyses to quantify interest and currency risk.
Uncertainties stemming from legislation
Goodwill amortization under Austrian tax law
With its decision of January 30, 2014, the Higher Administrative Court (Verwaltungsgerichtshof) directed a request for a preliminary ruling to the ECJ (Higher Administrative Court 30/1/2014, EU 2014/0001-1 (2013/15/0186)). Among other issues, this request contained the question of whether, when acquiring a domestic equity interest, goodwill amortization constitutes State aid within the framework of group taxation in Austria as defined by Art. 107 (1) of the Treaty on the Functioning of the European Union [TFEU]. The result of the ECJ preliminary ruling proceeding is still open. If goodwill amortization qualifies as “State aid,” a reversal could become necessary for a period of up to ten years from the date of granting of State aid. A reversal of the prior tax abatement effect amounting to EUR 194 million and a reversal of deferred tax assets amounting to EUR 108.4 million depends on the result of the preliminary ruling proceeding. At this time, the risk of a reversal is viewed as unlikely.
Energy tax rebate in Austria
With regard to the Austrian energy tax rebate, the Federal Tax Court (Bundesfinanzgericht) has submitted a request for a preliminary ruling to the ECJ (Federal Tax Court 10/31/2014, RE/5100001/2014). As a result of the amendment of the Energy Tax Rebate Act (Energieabgabenvergütungsgesetz) with the Budget Accompanying Act 2011 (Budgetbegleitgesetz), which applies to periods after December 31, 2010, the energy tax rebate was restricted to manufacturing companies. The questions submitted concern the violation of obligations under the General Block Exemption Regulation (Allgemeine Gruppenfreistellungsverordnung, AGVO), absent environmental protection measures in the rebate regulation, and the absent temporal restriction of the exemption. If the energy tax rebate is qualified as “State aid,” a reversal could become necessary for periods after December 31, 2010. At this time, the risk of a reversal is viewed as unlikely.
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