First Quarter of 2011 - Successful start to the financial year 2011

Backed by the continued favorable economic environment and the resulting recovery in the business activities of almost all subsidiaries, the Salzgitter Group was off to a good start to the new financial year in the first quarter of 2011. This is impressive proof and confirmation of the turnaround following the year of transition in 2010. The end of March saw the start to the parallel operation of the two electric arc furnaces in Peine. This marked the successful completion of the last major project of the extensive strategic investment program launched in 2007 that entailed a total volume of around € 2 billion. With an equity ratio of 43 % and a net cash position of EUR 1.1 billion, the Group continues to operate from an exceptionally sound financial basis.

The Group's external sales climbed by almost one fifth to € 2,307.6 million (first quarter of 2010: € 1,924.8 million). This performance was driven primarily by the substantial increase in the selling prices of products manufactured by the Steel and Trading divisions. Salzgitter AG generated a pleasing pre-tax profit of € 56.3 million in the first quarter (first quarter of 2010: -€ 17.1 million). This result includes a contribution of € 29.0 million made by the stake in Aurubis AG included at equity (first quarter of 2010: € 11.2 million). Profit after tax stood at € 44.0 million (first quarter of 2010: -€ 13.3 million). Basic earnings per share, calculated from this figure, stood at € 0.79. Return on capital employed (ROCE) came to 5.9 % (first quarter of 2010: -1.0 %).

In the first three months of 2011, the development of the Steel Division continued to show two sides: Whereas the flat steel and plate the segments enjoyed persistently high capacity utilization due to the healthy order situation in their customer industries, demand in the construction sector continued at modest levels which prevented a return to satisfactory capacity utilization in the sections product segment. Underpinned by growth in the shipments of rolled steel of 11 %, external sales soared by 35 % to € 698.4 million (first quarter of 2010: € 516.1 million) on the back of significantly higher selling prices in comparison with a year ago. Compensating for the hikes in the prices of raw materials again presented a considerable challenge. By delivering a pre-tax-profit of € 9.4 million, the Steel Division achieved a significant improvement in comparison with the first quarter of 2010 (€ -31.0 million).

The stable macroeconomic environment and the resulting demand for steel in most industrial sectors had a favorable impact on the activities of the Trading Division. As a result of the steady price uptrend, which set in back at the start of the year, external sales rose by almost 20 % to EUR 782.3 million (first quarter of 2010: € 657.7 million). Especially thanks to notably higher margins in the stockholding steel trade, the result of the year-earlier period was significantly outperformed (€ 23.3 million; first quarter of 2010: € 4.0 million).

The Tubes Division continued its gradual recovery in the first quarter of 2011: most product segments therefore reported a recovery in new orders. External sales came in at € 445.2 million and thus remained at the previous year’s level when major tubes contracts booked before the financial crisis determined business (first quarter of 2010: € 449.4 million). In contrast, profit before tax advanced to € 14.7 million (first quarter of 2010: € 2.6 million). The trend reversal in the result of the precision tubes business was a major factor contributing to this development.

In the first three months of 2011, the Services Division benefited from the high capacity utilization in the other Group companies, above all in the Steel Division. External customers also made stronger use of the products and services of the division. As a result, external sales soared by 36 % to EUR 119.5 million (first quarter of 2010: € 88.0 million). The division delivered another pleasing pre-tax profit of € 5.0 million (first quarter of 2010: € 5.1 million).

The steady improvement in the order book for filling and packaging machinery for the beverages industry and brisk business in services and replacement parts lifted the Technology Division’s external sales by more than one fifth to € 242.9 million in the first three months of 2011 (first quarter of 2010: € 199.8 million). The result before tax came in at -€ 8.3 million due to unsatisfactory selling prices in the project business (first quarter of 2010: -€ 13.3 million).

The external sales of the Other/Consolidation segment, generated through business in semi-finished products with external parties, climbed to € 19.2 million in the first quarter (first quarter of 2010: € 13.8 million). Pre-tax profit stood at € 12.2 million (first quarter of 2010: € 15.5 million). After the deduction of the purchase price allocation (-€ 4.8 million) obligatory under IFRS, the investment in Aurubis AG contributed a very presentable profit after tax of € 29 million (first quarter of 2010: € 11.2 million, net of € 1.2 million in purchase price allocation).

As before, the outlook for the capacity utilization of most steel processors can be deemed positive. As opposed to the previous year, steel requirements are supported by real demand – with the exception of the construction industry – rather than essentially by the inventory cycle. However, given the greater volatility in steel prices, many customers are likely to apply caution when placing orders. This will probably act as a brake on consumers and traders replenishing inventories and thus help to stabilize the market. The Steel Division’s production of crude steel is lightly to exceed the year-earlier figure due to the parallel operation of the two electric arc furnaces in Peine and the operations running fully in all three blast furnaces in Salzgitter. Shipments and sales are also set to rise. For the year as a whole, the division expects to achieve a pre-tax profit.

The Trading Division anticipates that, at minimum, shipments will settle at a stable level in the coming months. This is particularly applicable to the German stockholding steel trade and the international trading business. A hampering effect on margins will nonetheless emanate from the meanwhile incrementally higher level of procurement prices. Under these conditions, the Trading Division is likely to deliver another significant pre-tax profit.

The Tubes Division is experiencing a recovery in the demand for most product segments. Parts of its business continue to be affected by fierce competition. Of particular importance is whether changes in the prices of raw materials and input materials will remain within the scope anticipated and can be compensated by the selling prices implemented in the project business. The division anticipates a generally positive result for the coming quarters.

In view of the good capacity utilization of the steel companies, the sales and profit figures of the Services Division are expected to remain around the level of the previous year.

The Technology Division anticipates that business will gaining momentum in all of its subsidiaries and on a recovery in margins over the course of the year. Sales should therefore be higher than in 2010. In conjunction with the measures successfully implemented to optimize processes and enhance efficiency, approaching breakeven should be achievable in the financial year 2011.

As before, the accuracy of our planning is considerably restricted by shorter contractual cycles and greater price volatility on the procurement and on the sales side. For this reason, drawing up reliable and detailed guidance is extremely problematic, particularly considering the political unrest in a number of sales regions. Based on the information currently available in the divisions, we believe that it should be possible for the Salzgitter Group to achieve a pre-tax profit of up to € 150 million in the financial year 2011.

As in recent years, we make special reference to the fact that opportunities and risks from currently unforeseeable trends in selling prices, input materials and capacity utilization developments, as well as changes in the currency parity, may still affect performance considerably over the course of the financial year 2011. 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, assuming the sale of around 8 million tons of steel products by the Steel, Trading and Tubes divisions over the remainder of the financial year, an average € 25 contraction in the margin per ton is sufficient to cause a variation in the annual result of more than € 200 million.

Disclaimer:

Some of the statements made in this report possess the character of forecasts or may be interpreted as such. They are made to the best of knowledge and belief, and by their nature are subject to the proviso that no unforeseeable deterioration occurs in the economy or in the specific market conditions pertaining to the companies of the various divisions, 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.