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Editorial by the Chairman

Peter Untersperger

The 2010 business year ended as an outstanding record year with the best result in the company’s history. We significantly accelerated the dynamic expansion of our company, boosted sales by 45 percent and doubled the result from operations. The foundation was laid for deriving optimum benefit from the widening gap between cellulose supply and demand over the next few years.

When the recovery of the global fiber market gained momentum at the beginning of the year, some were of the opinion that the development of global demand in our industry might slow down again in the course of the year. On the basis of fundamental market research and the feedback from our customers, we always maintained that the upturn perceptible from the middle of 2009 on was most likely not a flash in the pan but the beginning of a sustainable upward trend in the man-made cellulose fiber industry. The dynamic development of 2010 has exceeded even our optimistic expectations.

In our opinion, the 2010 business year is the starting point of a long-term upward development in our industry which is based on a structural transformation of the global demand for fibers. Rising prosperity – above all in the emerging markets – is stimulating global fiber consumption even further. The current per capita figures for fiber consumption are 25 kg for Europe, 12 kg for China and just 5 kg for India. This pent-up demand in itself already indicates the catch-up potential for our industry. Population growth is another long-term growth driver, particularly in the emerging markets.

Cotton can only meet rising demand to a limited extent, due to structural causes. This is particularly relevant to the man-made fiber industry. Man-made cellulose fibers, such as our Lenzing Viscose®, Lenzing Modal® and TENCEL® products, are increasingly becoming the preferred choice for high-quality applications in textiles and nonwovens because of their properties (above all absorbency and ease-of-wear). More and more retail chains and mail order companies offer a comprehensive range of Lenzing Modal® and TENCEL® products. Market analysts have already pointed out the existence of a cellulose gap which is expected to widen over the coming years.

Moreover, consumer awareness of the ecological advantages of man-made cellulose fibers is increasing. These are made from the renewable resource wood and the production process burdens the environment considerably less than the cultivation of cotton with its extremely high consumption rates for water, arable land and agrochemicals.

We assume that this structural change has only just started and that its development will accelerate over the coming years. Special factors in 2010 were the weather-related catastrophes and flooding in the cotton growing areas of Pakistan and India, which clearly demonstrated the danger of an actual physical cotton shortage to the market players.

There are no man-made fibers but Lenzing Viscose®, Lenzing Modal® and TENCEL® which ideally combine great ease-of-wear with an optimal ecological balance sheet and cost-effectiveness.

For Lenzing as a market leader in man-made cellulose fibers, this development has far-reaching consequences: To meet expected customer demand we must accelerate our capacity expansion efforts with determination. We started this process some years ago, but the market expects continued acceleration of growth from a market leader. In consultation with the supervisory board and based on the insights gained in 2010, we have adapted our corporate strategy and defined the steps that need to be taken.

We have decided to implement the biggest investment program in our corporate history over the next four years. We plan to increase our fiber production capacity to more than one million metric tons by the middle of the decade based on investments in expansion and refurbishment to further boost the share of specialty fibers in our portfolio. Taking the current annual production capacity of about 710,000 metric tons at the turn of the year 2010/11, this expansion corresponds to a targeted growth rate of more than 40 percent over a comparatively short period. On balance, we have budgeted investments of up to EUR 1.5 billion by 2014, including maintenance programs.

We know that this goal is ambitious, but we also know that it is attainable. Lenzing’s staff has impressively demonstrated its capabilities and competencies in the past business year.

The fourth fiber production line in Indonesia was completed and started up efficiently, and the additional quantity produced was very well received by the market. In 2010 we also successfully launched expansion and optimization projects at several productions sites and in part already completed them in record time.

A further milestone in the history of our company was the acquisition of the Czech pulp factory Biocel Paskov in April 2010. It brings us a significant step closer towards our goal of keeping the supply of pulp from our own production in line with the expansion of our fiber production capacity. In this case further additions and higher investments will also be required.

Of similar strategic importance as a sustainable supply of the raw material pulp is a secure and long-term financial basis. The first milestone in this respect was a EUR 120 mill. bond issue in September. It was favorably received, above all by Austrian private investors, and we consider this to be an important vote of confidence in our company.

The second milestone was set by the shareholders of Lenzing AG in December with their resolution on authorized and conditional capital, as well as on a share split which was implemented in December. These measures are intended to increase the attractiveness of the Lenzing share as well as to provide the company with increased financing flexibility via the capital market. Our core and majority shareholder, B & C, has pledged its support for implementing our expansion strategy as well as for making the Lenzing share more attractive.

Absolute focus on the expansion of our core business cellulose fibers was the reason behind Lenzing’s carefully considered decision to divest its Filaments business. The companies in this segment performed well again in 2010, and a new ownership structure will provide them with better long-term development potential.

We are looking forward to business year 2011 with confidence: The decisions taken in 2010 have laid the groundwork for Lenzing to be able to continue and even accelerate the expansion process of the past few years. But for us growth is not just about adding production quantity, it is also about quality and sustainability. Lenzing does not pay mere lip service to its responsibility for the environment.

Moreover, Lenzing further enhanced its global reputation as a leader in quality and innovation. The expansion of our production capacity for high-quality fibers will go hand in hand with even better customer service and intensive research and development to continually expand our innovation pipeline. We will also focus a great deal of attention on maintaining the superior quality of our standard fiber types. We not only want to set standards in our industry, as we have shown in the past, but to develop them further as well.

In closing, I want to thank our customers for their good cooperation in the past business year. And my sincere thanks go out to all our employees who laid the foundations for this special record year. I would also like to express my appreciation to our shareholders and creditors for their trust in our company. Trust has been and will remain the basis of our working together.

 

Yours,

Peter Untersperger

Peter Untersperger