2008 off to a great start with new record sales and excellent earnings in the first quarter
15.05.2008 | Salzgitter AG
2008 off to a great start with new record sales and excellent earnings in the first quarter
In the first quarter of 2008, the Salzgitter Group benefited from the marked upswing in demand in the European steel market, the expansion of business activities in the precision tubes segment, as well as from the contribution of the new Technology Division.
Consolidated external sales rose 22 % to € 2.90 billion (first quarter of 2007: € 2.38 billion). Klöckner-Werke AG, acquired at the start of the second half-year of 2007 and integrated into the new Technology Division, and other companies in the Tubes Division contributed € 314.2 million to this result.
Pre-tax profit of € 291.9 million remained at an excellent level (first quarter of 2007: € 325.4 million) thanks to very good results delivered especially by the Steel, Tubes and Trading divisions. What makes this outcome even more remarkable is that not only higher current expenses for raw materials and energy, but also € 49.1 million in additional materials expenses were considered in view of the further price increases that largely became effective from January 1, 2008. Due to a reduction in the corporate tax rate, the Group’s after-tax profit, which stood at € 194.9 million, almost attained the previous year’s level (first quarter of 2007: € 196.6 million). Earnings per share posted € 3.40 (first quarter of 2007: € 3.41). Return on capital employed (ROCE) from industrial business reached a remarkable 37.9 % in the first three months of 2008; including income from the investment of funds of more than € 2 billion, ROCE came to 22.4 % (first quarter of 2007: 30.8 %).
The high levels of capacity utilization in the steel processing sectors brought the incoming orders of the Steel Division to a new record high and ensured rising prices for all rolled steel products. As a result, the volume of shipments grew 5 % as against the previous year's period, and total sales rose by even as much as 10 % to € 1.11 billion (first quarter of 2007: € 1.01 billion). The increase in the cost of raw materials, above all for iron ore and alloys, affected the results of the flat steel and plate product segments. Higher contributions to profit from the beam and sheet pile business were unable to fully compensate for this effect. All in all, the Steel Division again generated an extremely presentable pre-tax profit of € 172.5 million (first quarter of 2007: € 181.5 million).
The Trading Division showed a disparate picture in the first quarter of 2008: Whereas steel stockholding companies in Germany and Europe were able to raise shipment volumes and sales owing to sound demand and rising selling prices, both in a quarter-on-quarter comparison and as against the first quarter of 2007, the shipment volumes and sales of international trading failed to match the results of the very good first quarter of 2007, mainly due to the weak North American market. Despite a decline of 13 % in shipments, the Trading Division’s sales climbed 3 % to € 1.31 billion on the back of rising spot market prices for rolled steel products (first quarter of 2007: € 1.27 billion). This lifted pre-tax profit to a pleasing € 48.6 million as against the preceding quarter (fourth quarter of 2007: € 36.0 million). The peak value of the first quarter of 2007 (€ 64.8 million) was not repeated.
Persistently strong demand for tubes by the oil and gas industries and international power plant construction gave the companies of the Tubes Division an outstanding start to the new financial year: The sales of the Tubes Division soared 23 % to € 726.5 million (first quarter of 2007: € 591.2 million), a result boosted by the new precision tube companies in conjunction with the large-diameter tubes and stainless steel tubes activities which contributed € 73.9 million. Another excellent result was achieved in pre-tax profit, which came to € 66.0 million, despite the considerably higher prices of input materials (first quarter of 2007: € 65.5 million).
The sales of the Services Division expanded 2 % to € 303.5 million, which was primarily attributable to the increase in the sales of automotive engineering activities. With this turnaround, a contribution to operating profit has now once again been generated. By contrast, the result was burdened by SZST Salzgitter Service und Technik GmbH owing to non-recurrent personnel-related provisions. Consequently, pre-tax profit came to € 4.9 million, thereby falling short of the previous-year’s level (first quarter of 2007: € 8.1 million).
The sales of the new Technology Division, which mainly comprises a majority holding in the Klöckner-Werke Group, posted a gratifying € 264.8 million in the first quarter of 2008. The filling and packaging technology segment contributed the major share to this result. Operating profit came to € 5.1 million before tax. After deduction of the € 0.9 million effect from the purchase price allocation, the remaining pre-tax profit stood at € 4.2 million.
Sales of the Others segment, which were based on the semi-finished product business with subsidiaries and customers outside the Group, grew to € 130.1 million (first quarter of 2007: € 90.5 million), driven by higher volumes and selling prices during the reporting period. The pre-tax result was impacted by reporting date-related changes in the value of derivatives and posted € -4.3 million in the period under review (first quarter of 2007: € 5.6 million).
Finally, the increase of the Salzgitter Group’s internal sales requiring consolidation to € 941.7 million (first quarter of 2007: € 871.2 million) is noteworthy, and was due to the intensified use of sales channels within the Group.
All in all, the results of the first quarter of the new financial year 2008 are more than satisfactory. Based on the current situation, we anticipate that the divisions will develop as follows over the remaining course of the year:
The vigorous recovery in order intake will result in high shipments in the Steel Division, also in the months ahead. In conjunction with the successful price increases in the second quarter, this will have a positive impact on sales. The cost of iron ore and coking coal in particular, as well as of other raw materials and energy are, however, set to reach new record levels over the remaining course of 2008. As the price increases of long-term contracts, which were mostly implemented in 2007, do not entirely compensate for these surging costs, the additional price hikes at the start of the third quarter will take on particular significance. All in all, the Steel Division anticipates another outstanding profit in the year 2008, albeit somewhat lower than the 2007 level.
It appears that the disparate picture in the Trading Division is set to persist, at least initially: Steel stockholding traders will probably benefit from the sound demand in Germany and Europe and from the rising spot market prices for rolled steel products, whereas international trading is likely to settle at the level of the first quarter owing to the economic slowdown in North America and other regions of the world. While the trend in margins is likely to be favorable in the second quarter due to the high volatility in prices, it is hardly possible to make forecasts for the rest of the year. Overall, the Trading Division continues, as before, to expect a decline in the 2008 result, which will nonetheless remain significantly higher than the long-term average.
In 2008, the Tubes Division anticipates strong development in the respective markets. Well filled order books will ensure a high degree of capacity utilization in virtually all plants in the next three quarters. This should bring the result close to the previous year’s level.
Without taking account of special effects, the sales and pre-tax profit of the Services Division in 2008 are likely to remain virtually unchanged from the year-earlier level.
The Technology Division will probably repeat its gratifying performance in the first quarter. Based on the foreseeable market development and the implementation of internal measures, the repeated attainment of last year's high level of sales is likely to go hand in hand with enhanced profitability, with pre-tax profit rising as against the previous year’s figure.
The environment in which the Salzgitter Group operates can currently be described as very satisfactory overall. For this reason, business as a whole should generally hold the level achieved. The prerequisite is, however, that economic growth in Germany and Europe remains stable on a long-term basis. New turmoil in the international financial markets or continued strength of the euro might well put a damper on the economy. As before, we are striving to achieve significant growth within the Group in the financial year 2008. More than 50 % of this growth is to be generated from the first-time full-year inclusion of the companies of the Klöckner Group in our new Technology Division. Associated with this growth, we anticipate operating profit before tax in excess of € 900 million.
Express reference is made to the fact that opportunities and risks arising from currently unforeseeable trends in sales prices, input materials and capacity level developments, as well as changes in the currency parity, may considerably affect performance in the course of the remaining financial year 2008. The resulting fluctuation in the consolidated pre-tax result may, as experience has shown, be within a considerable range, either to the positive or to the negative. The dimensions of this range become clear if one considers that, with around 6 million tons of steel products to be sold in the second half year by the Steel, Trading and Tubes divisions, a fluctuation in the margin of € 25 per ton is already sufficient to cause profit to vary by more than € 150 million either way.
Disclaimer:
Some of the statements made in this document possess the character of forecasts or may be interpreted as such. They are made upon the best of information and belief and by their nature are subject to the proviso that no unforeseeable deterioration occurs in the economy or in the specific market situation pertaining to the Division companies, but rather that the underlying bases of plans and outlooks prove to be accurate as expected in terms of their scope and timing. The company undertakes no obligation to update any forward-looking statements. This document is a translation of the original German-language press release. In case of ambiguity between this document and the German-language press release, the information provided in the latter shall prevail.