First half of 2012 - Breakeven in the second quarter despite difficult market environment

The Salzgitter Group's business activities in the first half of 2012 were influenced by an environment impacted by growing economic uncertainty. Following an upswing at the start of the year, the order activity of many steel product customers was extremely reticent in the second quarter. Economic sentiment appears to be poorer to date – at least in Germany – than is justified by the actual order situation of many steel processing sectors. Given the virtually overall satisfactory capacity utilization situation, accompanied, however, by an unsatisfactory selling price trend, the Group achieved another healthy breakeven in the pre-tax result in the second quarter of the financial year 2012, having closed the preceding quarter at a loss. Thanks to its broad-based positioning and an unchanged equity ratio of 43 %, as well as a net financial position of € 535 million, the situation of the Salzgitter Group remains decidedly sound.

Consolidated external sales climbed to € 5,378.5 million, an increase of around € 600 million (first half of 2011: € 4,773.5 million). The significant expansion in the Trading Division's business volume was a major influencing factor. In the first six months of 2012, the Salzgitter Group delivered a pre-tax result of € –17.9 million (first half of 2011: € 130.0 million) and, following a difficult start to the new financial year, is now reporting an uptrend. An amount totaling € 34.6 million in after-tax contribution by Aurubis AG, a participation included at equity, is included in the consolidated financial statements (first half of 2011: € 46.5 million). The consolidated after-tax result amounts to € –22.5 million (first half of 2011: € 93.7 million), bringing basic earnings per share to € –0.46 (first half of 2011: € 1.70). The return on capital employed (ROCE) posted 0.4 % (first half of 2011: 6.6 %).

The Steel Division reported generally satisfactory capacity utilization, buoyed by the relatively high consumption of steel by industrial customers in Germany and support from the distribution sector replenishing its inventories during the first quarter. Moreover, the changed parity of the euro against the US dollar allowed rolled steel exports to countries outside the EU. Shipment volumes exceeded the year-earlier period by almost 10 %, and external sales advanced to € 1,406.8 million (first half of 2011: € 1,367.0 million). The pre-tax result (€ –97.8 million; first half of 2011: € 30.4 million) was negative, burdened by the unsatisfactory selling price trend and the persistently high cost of raw materials, particularly in the flat steel product segment.

In the Trading Division, the still healthy order volumes of international trading generated shipments that were significantly higher than a year ago. Consequently, external sales rose by more than one third to € 2,398.4 million (first half of 2011: € 1,737.3 million). The Trading Division generated a pleasing pre-tax profit of € 27.6 million, a figure below its year-earlier counterpart that was impacted by windfall profits (first half year of 2011: € 38.2 million).

Growth in the Tubes Division's shipments of HFI-welded tubes and seamless stainless steel tubes was unable to fully compensate for the shortfall in the volumes of large-diameter tubes in the first three months of 2012 caused by the cancellation of an order. The severe lack of capacity utilization was rectified towards the end of the first quarter, which saw the start to the production of more than 410,000 tons of large-diameter pipes for an Australian natural gas pipeline. As a consequence of the project freeze, external sales dropped by some 10 % to € 790.5 million (first half of 2011: € 903.2 million). The pre-tax result, which came to € 8.3 million in the first six months of 2012 was positive although lower than the previous year's figure (first half of 2011: € 46.7 million).

The external sales of the Services Division (€ 212.2 million) declined slightly against the year earlier period (first half of 2011: € 238.7 million). The Division generated € 10.2 million in pretax profit, lifting it above the result posted a year ago (first half of 2011: € 8.3 million).

The Technology Division's order intake exceeded the year-earlier figure by almost a quarter in the first six months of 2012, which was mainly attributable to the pleasing growth of the KHS Group. External sales rose to € 548.5 million (first half of 2011: € 485.7 million). Pre-tax profit came in at € 2.6 million, which is a substantial improvement against the previous year's period (first half of 2011: € –17.7 million). The KHS Group's high capacity utilization held steady, and sales margins in the project business continued to widen. The success of the “Fit4 Future” program initiated in 2011 and the good performance sustained by the special machinery engineering companies were reflected in the result as well.

The external sales of Other, which are based mainly on business in semi-finished products with subsidiaries and external parties, dropped to € 22.0 million due to the economic environment (first half of 2011: € 41.8 million). Pre-tax profit stood at € 31.1 million, which is higher compared with a year ago (€ 24.1 million). This figure includes the very pleasing after-tax profit of € 34.6 million (first half of 2011: € 46.5 million) contributed by Aurubis AG, a participation included at equity.

Salzgitter intra-group sales grew to € 1,472.6 million in the reporting period (first half of 2011: € 1,317.4 million).

The economic outlook for the whole euro area is subdued due to the severe problems from the European sovereign debt and currency crisis. The comparatively robust situation of Germany is also coming increasingly under pressure of contagion. Against this backdrop, many steel processors and stockholding steel traders that replenished their inventories in the first quarter are currently adopting a wait-and-see stance. At the same time, the inventory coverage of the steel trade remains at a normal level. It therefore appears feasible that the fall may bring a recovery in demand and the implementation of urgently needed price increases. A prerequisite for this assumption is that international demand for German industrial goods remains strong. Breakeven can, however, no longer be expected for the Steel Division this year.

The Trading Division anticipates comparatively stable business overall in the coming months. The stockholding business will nonetheless be exposed to uninterrupted price pressure, despite steady business volumes. In contrast, international trading should continue to benefit from comfortable demand, especially for flat steel and tubes, thereby partly compensating for the moderate margin trend in the European stockholding steel trade. From today's standpoint, a mid-double-digit million profit would appear to be feasible.

In the Tubes Division, the resumption of the capacity utilization of the large-diameter tubes companies has already had a positive impact on the results of the second quarter. As before, the other product segments anticipate a generally satisfactory situation in respect of capacity utilization and margins, which prompts us to forecast a positive pre-tax result for the Tubes Division.

In the Services Division, sales and profit are expected to remain around the level of the previous year.

The KHS Group as part of the Technology Division anticipates a challenging third quarter due to seasonal influences. Thanks to the comparatively high order intake in the first half of the year, capacity utilization should hold steady at a good level over the remainder of the year. The other companies of the division are likely to maintain the positive trend shown to date. In terms of the year as a whole, we uphold our assumption that there will be a notable improvement in pre-tax result compared with the financial year 2011.

The uncertainty triggered by the sovereign debt crisis in a number of euro countries continues to exert massive pressure on the economic climate. Several key ratios in the industry, however, support the supposition that the outlook for a number of sub-sectors of the economy is still better than the current sentiment would suggest. We continue to anticipate stable sales at minimum and a positive pre-tax result for the Salzgitter Group. This is likely to be in the lower- to mid-double-digit million euro range.

As in recent years, we make reference to the fact that opportunities and risks from currently unforeseeable trends in selling prices, input material prices and capacity level developments, as well as changes in the currency parity, may considerably affect performance in the course of the financial year 2012. The resulting fluctuation in the consolidated pre-tax result may 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 sold by the Steel, Trading and Tubes divisions in the second half of the financial year, an average € 20 contraction in the margin per ton is sufficient to cause a variation in the annual result of more than € 120 million. Moreover, the accuracy of the company's planning is restricted by the volatilities and shorter contractual durations, both on the procurement and on the sales side.

Disclaimer:

Some of the statements made in this report 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.