11. Impairment losses and reversal of impairment losses

As a rule, the discounted cash flow method is used to test the property, plant and equipment, the intangible assets, and the carrying amounts for impairment (generally based on the value-in-use approach). Impairment tests are conducted whenever impairment losses or a reversal of impairment losses are indicated. In addition, cash generating units (CGUs) and groups of CGUs containing goodwill as well as intangible assets with unlimited useful lives are tested for impairment at least once a year, specifically, in early March. The calculation is performed on the basis of the projected cash flows as per a five-year, medium-term business plan approved by management. This medium-term business plan is based on historical data as well as on assumptions regarding the expected future market performance. The Group’s planning assumptions are expanded by sectoral planning assumptions in this connection. Intra-Group evaluations are supplemented by external market studies.

The medium-term business plan was expanded by a rough planning stage (13 years) modeled on the appraisal and approval of the investment associated with greentec steel by the Supervisory Board in March 2023 for the CGUs affected by the technological transformation—particularly two key units: the Steel Division and Railway Systems. This extended planning period ensures that the determination of the perpetual annuity is based on a steady state. As regards the underlying assumptions, see the chapter, Uncertainties in accounting estimates and assumptions – Effects of sustainability strategy—decarbonization and green transformation.

The determination of the perpetual annuity is based on country-specific growth figures derived from external sources. The capital costs are calculated as the weighted average cost of equity and borrowings using the capital asset pricing model (weighted average cost of capital (WACC)). The parameters used in connection with the determination of WACC are established on an objective basis. To date, a five-year mean value analysis of the forecast inflation has been used to determine both expected inflation in connection with the determination of the WACC and the growth rate of the cash flows in the perpetual annuity. This approach was no longer deemed appropriate given the enormous increase in the expected inflation over the short and the medium term—subject to consistent forecasts of long-term inflation expectations. As of September 30, 2022, therefore, the procedure was shifted to both forecast inflation and the long-term inflation expectation in the fifth year.

IMPAIRMENT TESTS OF CGUS OR GROUPS OF CGUS CONTAINING GOODWILL

Goodwill is allocated to the following CGUs or groups of CGUs:

The following estimates and assumptions were used to measure the recoverable amounts of CGUs or groups of CGUs that account for a significant portion of the voestalpine Group’s total goodwill:

The Steel Division focuses on the production and processing of steel products for the automotive, white goods, electrical, processing as well as energy and engineering industries. The five-year, medium-term business plan for the Steel Division was prepared, for one, based on external economic forecasts for the eurozone, the United States, China, and Mexico (based on the World Economic Outlook of the International Monetary Fund (IMF)¹) and, for another, taking into account expected steel consumption.² The production plan reflects the sales forecasts. The CRU Index was considered in the revenue planning for the flat products. Additionally, minor positive, quality-related adjustments were made in individual customer segments. As regards procurement, the planning was based on assumptions concerning raw materials derived from global market forecasts (on the basis of Platts price assessments,³ among others). Based on these assumptions, a slight increase in the gross margin is expected in the medium-term business plan after the business year 2023/24, taking one further blast furnace lining work into account. The five-year medium-term business plan was supplemented by a rough planning stage. The latter includes the investments toward greentec steel—i.e., the substitution of two of the three blast furnaces by electric arc furnaces (EAFs) to be commissioned from calendar year 2027 and 2032—and investments in CO₂ capture technologies (CCUS). In addition, expected increases in emissions allowance prices and the incremental reduction in the number of no-cost allowances pursuant to European Union measures aimed at lowering CO₂ up until the complete elimination of the no-cost allowances in calendar year 2034 as well as a price premium for greentec steel and changes to the raw material mix are taken into account.

The last plan year was used to determine the perpetual annuity based on an expected growth rate of 1.34% (2022/23: 1.33%). The after-tax WACC is 8.10% (2022/23: 8.02%); the pre-tax WACC is 9.84% (2022/23: 9.96%).

The five-year, medium-term business plan for the High Performance Metals Division and its two units to which goodwill has been allocated—i.e., High Performance Metals (HPM) Production and Value Added Services—was based on the general economic environment of the relevant industry segments (particularly the automotive, oil and natural gas, and aerospace industries) as well as on the growth forecasts⁴ for the regional sales markets of its core markets, especially the eurozone, the United States, China, and Brazil.

Seven production facilities around the world are combined in the HPM Production unit. Its manufacturing activities cover a highly complex and highly demanding range of production: tool steel, high-speed steel, valve steel, high-grade engineering steel, powder-metallurgical steel, powder for additive manufacturing, special steels, and nickel-based alloys. Product manufacturing ranges from smelting to transforming (rolling and forging, hot-rolled and cold-rolled strips) all the way to heat treatment and processing as well as fulfilment of the properties and specifications required by customers. The processing companies produce plates, profiles, and special forged parts made of titanium alloys, nickel-based alloys as well as high, medium, and low-grade alloyed steels.

The internal forecasts and estimates of HPM Production—particularly with respect to the business that targets sophisticated metallurgical applications in the aerospace, oil and natural gas as well as automotive industries—rely on external sources of information and are consistent with them. In the automotive industry, production is expected to increase worldwide in the coming years. Moderate growth is also expected in Germany this year and next (based on the current low level). The production level of 2018 will no longer be reached in the planning period.⁵ Electric mobility offers additional opportunities for growth. Demand in the oil and natural gas/CPI segment is expected to remain high in the long term. The decline in the demand for crude oil in the mobility segment (combustion engines) will be offset by greater demand for petrochemicals (CPI).⁶ The rebound in the aviation market continues unabated in the aerospace industry.⁷ Overall, this will lead to higher revenue and a positive gross margin trend in the planning period, not least due to the efficiency gains obtained through the new special steel plant in Kapfenberg, Austria, and the fixed cost digression.

Increases in the cost of input materials due to alloy prices can largely be passed on to customers. The last plan year was used to calculate the perpetual annuity. The perpetual annuity is determined based on a growth rate of 1.64% (2022/23: 1.62%). The after-tax WACC is 8.63% (2022/23: 8.35%); the pre-tax WACC is 11.03% (2022/23: 10.80%).

In the Value Added Services business segment, the continued systematic expansion of services in the planning period will lead to both greater customer loyalty and deeper value creation. Pre-processing, heat treatment, and coating will also be expanded in line with customer requirements. Moreover, an all-out effort is being undertaken in coordination with the powder strategy of the HPM Production unit to turn additive manufacturing into one of the division’s core competences. Ongoing activities will additionally focus on the consistent pursuit of tried and tested cost-savings and optimization programs as well as on new initiatives, especially with respect to the digitalization of processes and workflows, which will lead to higher revenue and a positive gross margin trend in the planning period.

Increases in the cost of input materials due to alloy prices can largely be passed on to customers. The last plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.57% (2022/23: 1.47%). The after-tax WACC is 8.63% (2022/23: 8.37%); the pre-tax WACC is 11.15% (2022/23: 10.83%).

The Group’s expertise as the leading provider of high-quality rails, high-tech turnouts, and digital monitoring systems as well as all associated services was combined in the Railway Systems business segment to further expand the Group’s global presence as a provider of complete railway infrastructure systems. The five-year, medium-term business plan for Railway Systems is based on market forecasts⁸ and project planning for railway infrastructure, taking into consideration the business segment’s strategic focus and the ongoing digital transformation of the rail segment. It also accounts for the different levels of economic development in individual regions.⁹ As regards the development of material factor costs, general forecasts of the development of personnel expenses and internal assumptions on the development of steel prices were integrated into the budgets. The planning assumes that the gross margin will be kept relatively constant over the planning period and that potential fluctuations in individual markets will balance each other out due to the business segment’s global reach. Likewise, the investments toward greentec steel are included in both the five-year, medium-term business plan and the rough planning stage for one electric arc furnace in the pre-production stage. In addition, expected increases in emissions allowance prices and the incremental reduction in the number of no-cost allowances pursuant to European Union measures aimed at lowering CO₂ up until the complete elimination of the no-cost allowances in calendar year 2034 as well as a price premium for greentec steel and changes to the raw material mix are taken into account.

The last plan year was used to determine the perpetual annuity based on an expected growth rate of 1.51% (2022/23: 1.44%). The after-tax WACC is 8.39% (2022/23: 8.31%); the pre-tax WACC is 10.23% (2022/23: 9.94%).

The five-year, medium-term business plan for the Welding business unit, which is one of the leading manufacturers of products and implementers of complete solutions in the field of welding and joining technology, considers macroeconomic trends⁹ in each region as well as the specific forecasts for the relevant industry segments. The company’s own position in the respective market in relation to the competition and the overall market as well as its forecast development were taken into account with this. The expected development of specific cost components was taken into account for the production factors used in the value creation process. Expected cost trends and price trends based on these were derived for raw materials, energies, and alloys, based on current market prices and available forecasts. Implementation of the strategy introduced for the full-service provider of the “Perfect Weld Seam” will be continued consistently in the planning period. Optimization programs that have been initiated and are already being implemented as well as ongoing continuous optimization programs are being driven forward. In summary, the planning, which is derived from market expectations, assumes moderate volume growth with a slight improvement in gross margin. The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.43% (2022/23: 1.41%). The after-tax WACC is 8.45% (2022/23: 8.38%); the pre-tax WACC is 11.05% (2022/23: 10.92%).

The cash flow forecasts for Automotive Components are based on the medium-term market growth and production forecasts for the global automotive market based on the forecasts published by LMC Automotive,¹⁰ in this case particularly for the most important markets in Europe, the USMCA region, and Asia, as well as for the most important customers—the European premium manufacturers. Internal estimates reflect the business segment’s internationalization and growth strategy. External indicators and market dynamics were adjusted in line with the current model portfolio of Automotive Components customers. Furthermore, customer-specific information regarding medium-term outlooks and sales projections served as sources for the sales planning of Automotive Components. An assumption regarding the tendency towards lower sales levels in Europe was taken into account in the planning. This will lead to a rather flat revenue trend and more cautious margins in the five-year, medium-term business plan. The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.37% (2022/23: 1.33%). The after-tax WACC is 9.32% (2022/23: 9.20%); the pre-tax WACC is 12.14% (2022/23: 11.99%).

Precision Strip specializes in the production of globally available, technologically complex cold-rolled strip steel products with precise dimensional accuracy, excellent surface quality, and unique edge profiles for the highest customer requirements in the process industry. The five-year, medium-term business plan for Precision Strip was prepared considering the general regional parameters in the core markets and reflects the general economic environment of the industry segments that are key to the entities. Current market conditions are characterized by stiff competition and strong pressure on margins. The growth indicated in the planning is largely based on securing market leadership in niche markets, expanding market share, and developing new markets. External forecasts were taken into account in internal estimates and generally adjusted very slightly downward. These external forecasts are country-specific figures for expected economic growth (GDP forecasts)⁹ that were supplemented by industry-specific experience in the relevant markets for the respective product segments. Customer-specific information regarding medium-term outlooks and sales projections also served as sources for sales planning at Precision Strip. As a result, revenue is expected to increase, and the gross margin should be stable in the planning period. The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.34% (2022/23: 1.32%). The after-tax WACC is 9.14% (2022/23: 9.02%); the pre-tax WACC is 11.40% (2022/23: 11.35%).

IMPAIRMENT LOSSES OF CGUS OR GROUPS OF CGUS CONTAINING GOODWILL

In the business year 2023/24, an impairment of goodwill in the amount of EUR 43.1 million was recognized in other operating expenses in the Metal Forming Division at the  Automotive Components unit, to which goodwill had been allocated and which supplies a broad product range from highly innovative structural parts to outer skin parts, high-strength hot-formed parts, laser-welded blanks, and complex assemblies with a focus on lightweight solutions made of steel and aluminum to customers in the automotive industry. Management is maintaining its internationalization and growth strategy in the Automotive Components unit but is making targeted adjustments in response to the structural shortfall in capacity utilization in the automotive supply industry in Germany. The Metal Forming Division is reorganizing its automotive supply business in Germany against this backdrop and has adjusted its planning assumptions accordingly. These significant reductions in planning assumptions lead to an analogous reduction in cash flows and therefore result in an impairment loss.

The recoverable amount (value in use) of this unit amounted to EUR 567.9 million as of March 31, 2024. The fifth plan year was used to calculate the perpetual annuity. The perpetual annuity is determined based on a growth rate of 1.37%. The after-tax WACC is 9.32%; the pre-tax WACC is 12.14%.

The discount rate and the cash flows are the most important forward-looking assumptions. There is the risk that any change in these assumptions will necessitate a material adjustment of the carrying amounts within the next business year. Any increase in the after-tax discount rate by one percentage point or any decrease in the cash flows by 10% or 20% would trigger the following reductions in the carrying amounts:

In mid-March 2024, an indicator of impairment was identified, and an impairment test was therefore carried out in the High Performance Metals Division due to the planned sale of two cash-generating units (Buderus Edelstahl) within the HPM Production unit, to which goodwill had been allocated and which produces high-quality stainless steels. The goodwill of the HPM Production unit to which goodwill had been allocated was impaired by EUR 178.9 million due to the high negative effect from the planned sale of Buderus Edelstahl. This was recognized in other operating expenses.

The recoverable amount (value in use) of this unit amounted to EUR 2,053.7 million within the scope of the impairment test prior to the reclassification of IFRS 5. The fifth plan year was used to determine the perpetual annuity, with the disposal group included in the impairment test with the estimated disposal result as of September 30, 2024. The perpetual annuity is determined based on a growth rate of 1.64%. The after-tax WACC is 8.63%; the pre-tax WACC is 11.23%.

In connection with the separation of the Buderus Edelstahl disposal group from the goodwill-bearing HPM Production unit, there was a total effect of EUR –359.6 million, which is made up of the impairment of goodwill in the amount of EUR –181.8 million, the impairment of non-current assets in the amount of EUR –86.2 million, and the impairment of current assets in the amount of EUR –91.6 million. See IFRS 5 reclassification Buderus Edelstahl also chapter C. Scope of consolidation – Discontinued operations and disposal groups.

The headroom as of March 31, 2024 amounts to EUR 144.4 million following elimination of the disposal group from the carrying amount and the cash flows of HPM Production (see the following presentation of the break-even and general sensitivity analysis).

In the first half of the previous business year (business year 2022/23), impairment of goodwill in the amount of EUR 119.3 million was recognized in the High Performance Metals Division at the HPM Production unit, to which the goodwill is allocated, and which produces sophisticated stainless steels. The impairment loss was recognized in other operating expenses. The impairment loss resulted from a planning update due to the significant increase in the discount rate (WACC), which was used as the basis for the impairment test as of September 30, 2022. The recoverable amount (value in use) of this unit was EUR 2,228.2 million as of September 30, 2022. The fifth plan year was used to calculate the perpetual annuity. As of September 30, 2022, the perpetual annuity was determined based on a growth rate of 1.63%. The after-tax WACC was 8.54%; the pre-tax WACC was 11.06% as of September 30, 2022..

The impairment tests confirmed the carrying amount of all other goodwill as of March 31, 2024. A sensitivity analysis of the aforementioned units to which goodwill has been allocated shows that the carrying amounts of the goodwill-bearing units—Steel Division, Value Added Services, Railway Systems, Welding, and Precision Strip—would still be covered if the discount rate were to rise by one percentage point and thus that there is no need to recognize an impairment loss. Furthermore, the cash flow sensitivity analysis has shown that, if the cash flows are reduced by 10%, the carrying amounts of the Steel Division, Value Added Services, Railway Systems, Welding, and Precision Strip would also still be covered. If the discount rate is raised by one percentage point and the cash flows are lowered by 10% as part of a combined sensitivity analysis, the carrying amounts of the aforementioned goodwill-bearing units (Steel Division, Welding, and Value Added Services) would still be covered.

The following table shows the excess of the carrying amount over the recoverable amount as well as the amount by which both major assumptions would have to change for the estimated recoverable amount to be equal to the carrying amount (break-even analysis); it also shows the reduction in the carrying amount resulting from an increase in the after-tax discount rate by one percentage point or a decrease in the cash flows by 10% or 20% (general sensitivity analysis):

SENSITIVITY REGARDING DECARBONIZATION AND TECHNOLOGICAL TRANSFORMATION

The impairment tests of the cash generating units affected by the technological transformation—particularly the key units, Steel Division and Railway Systems—were carried out pursuant to a baseline scenario regarding the price premium (see explanations in the foregoing), where the price premium melts away up to the last plan year; the numbers used for determining the perpetual annuity thus do not include a price premium. An alternative scenario that does not include an assumed price premium for greentec steel was developed for each unit over and above the aforementioned general sensitivity analysis. In this scenario, too, the carrying amount of the Steel Division and Railway Systems units would still substantially exceed the recoverable amount.

IMPAIRMENT TEST OF CASH GENERATING UNITS THAT HAVE NO GOODWILL AND OF OTHER ASSETS

In the business year 2023/24, an impairment loss of EUR 24.5 million was recognized in other operating expenses (specifically, in “Land, land rights, and buildings,” “Plant and equipment” and “Fixtures and fittings”) for the Schwäbisch Gmünd cash generating unit with the hot forming and large assemblies product portfolio. The impairment loss resulted from the structural shortfall in capacity utilization in the automotive supply industry in Germany. The planning assumptions for some quantity-critical models were reduced based on experience from recent years. The recoverable amount (value in use) amounted to EUR 82.3 million. The discount rate applied was 8.99% after tax and 12.45% before tax.

The discount rate and the cash flows are the most important forward-looking assumptions. There is a risk that any change in these assumptions will necessitate a material adjustment of the carrying amount within the next business year. Any increase in the after-tax discount rate by one percentage point or any decrease in the cash flows by 10% or 20% would trigger the following reduction in the carrying amount:

In the first half of the previous business year (business year 2022/23), impairment losses of EUR 54.1 million were recognized in other operating expenses in the High Performance Metals Division at the cash generating unit Buderus Edelstahl ohne Schmiede (consisting of the steel mill, rolling lines, and drop forge sub-divisions), which is devoted to the production of drop-forged parts, semi-finished products, and hot-rolled and cold-rolled steel. The impairment loss resulted primarily from the increase in the discount rate (WACC) as well as from high energy costs. Due to the products’ low competitive differentiation, these increases can be passed on to the market only to a limited extent, thus leading to the loss of market share. The recoverable amount (value in use) for this unit as of September 30, 2022, was EUR 148.5 million. As of September 30, 2022, the discount rate applied was 7.91% after tax and 10.85% before tax.

As the lower limit for any further impairment is the fair value less costs to sell (individual sale proceeds), adjustments if any of the key forward-looking assumptions such as discount rates and cash flows would not have led to any further material impairment. An additional impairment loss of EUR 2.2 million (2022/23: EUR 5.5 million) was recognized for individual assets due to the lack of subsequent use.

¹ World Economic Outlook, International Monetary Fund (IMF)

² The European Steel Association (EUROFER) regarding steel consumption in Europe; World Steel Association for non-European data

³ S&P Global Platts

⁴ OECD, Agenda Austria

⁵ LMC Automotive Q4/2022

⁶ IAE New World Outlook

⁷ IATA Global Outlook for Air Transportation, January 2024

⁸ UNIFE Annual Report

⁹ World Economic Outlook, International Monetary Fund (IMF)

¹⁰ LMCA GAPF Data