First Quarter of 2012 - Uptrend follows on from a difficult start

In the first quarter of 2012, the Salzgitter Group reported notably expanded its business activities in virtually all of its operations. The first successful impact of implementing the profit improvement and restructuring program in the KHS Group was reflected in the profit generated by the Technology Division in the first quarter. The measures introduced at Peiner Träger GmbH also led to a substantial improvement in the results. This was nonetheless unable to compensate the effects of a sharp downturn in the average selling prices of many steel products at the end of 2011, as well as the temporary gap in capacity utilization in the large-diameter tubes segment. As a result, the Group closed the first quarter of 2012 with a slightly negative pre-tax result. As before, an equity ratio of 43 % and a net financial position of € 642 million constitute an extremely sound basis for the entrepreneurial activities of Salzgitter AG.

Consolidated external sales rose by more than € 300 million to € 2,614.8 million (first quarter of 2011: € 2,307.6 million), which was primarily attributable to the significant increase in the business volume of the Trading Division. Earnings before tax came to € –19.6 million in the first quarter of 2012 (first quarter of 2011: € 56.3 million). The result includes € 28.0 million (first quarter of 2011: € 29.0 million) in after-tax profit from Aurubis AG (NAAG), a shareholding included at equity. Based on this figure, the result after tax amounts to € –15.5 million (first quarter of 2011: € 44.0 million) and basic earnings per share to € –0.31 (first quarter of 2011: € 0.79). Return on capital employed (ROCE) posted –0.5 % (first quarter of 2011: 5.9 %).

The situation in the Steel Division showed a divergence in terms of capacity utilization and selling prices in the reporting period: the healthy order books of its customer sectors, combined with a supportive inventory cycle, enabled the majority of companies to achieve a high level of capacity utilization. Unsatisfactory flat steel selling prices in the fourth quarter of 2011 nonetheless dominated the results achieved in the reporting period due to the time lag between the placing of an order and its invoicing. The effect of streamlining measures at Peiner Träger GmbH represented a strong point; there was a notable increase and stabilization in steelworks production. Contrary to the slight increase in the Steel Division's rolled steel shipments and external sales (€ 724.8 million; first quarter of 2011: € 698.4 million), the pre-tax result fell short of the year-earlier figure for the aforementioned reasons (€ –51.6 million; first quarter of 2011: € 9.4 million).

On the back of the positive performance of international trading, the Trading Division reported an increase in shipments of more than 50 % and an appreciable growth in external sales (€ 1,103.9 million; first quarter of 2011: € 782.3 million) in comparison with a year ago. As, following a dynamic start to the current year, steel prices consolidated, earnings before tax (€ 11.5 million) did not match the year-earlier result (first quarter of 2011: € 23.3 million) which included windfall profits.

The Tubes Division reported two different developments: along with stable business in precision tubes, there was an increase in the shipment volumes and sales of the HFI-welded tubes and seamless stainless steel tubes segments which contrasted with the large-diameter tubes product segment, which experienced severe capacity underutilization. While the start to the production of more than 410 ktons worth of large-diameter pipes for an Australian natural gas pipeline put an end to this situation towards the closing date of the reporting period, the negative influence continued to dominate key figures in the first quarter. Consequently, the Tubes Division's external sales declined by 13 % to € 389.0 million in a year-on-year comparison (first quarter of 2011: € 445.2 million). The pre-tax result fell to € –9.6 million (first quarter of 2011: € 14.7 million).

The Service Division's business was determined by the healthy capacity utilization of the steel companies. External sales remained virtually unchanged from the previous year's level (€ 108.4 million; first quarter of 2011: € 119.5 million). The pre-tax result, which came in at € 6.2 million, exceeded the figure posted in the first quarter of 2011 (€ 5.0 million).

The order intake and capacity utilization situation improved in the Technology Division over the first three months of 2012. New orders received by the KHS Group (+18 %) reaped above-average benefit from the trend in the food and packaging machinery sector. The Technology Division's external sales advanced by nearly € 40 million to € 280.1 million (first quarter of 2011: € 242.9 million). Generally good capacity utilization, rising sales margins in project business, and the first signs of success under the “Fit4Future” program, combined with the steady and very satisfactory business of the companies in special machinery engineering, resulted in a notable increase in the pre-tax result to € 2.5 million (first quarter of 2011: € –8.3 million).

The external sales of the Other/Consolidation segment, generated mainly through business in semi-finished products with external parties, declined to € 8.6 million in the first quarter (first quarter of 2011: € 19.2 million). Earnings before tax stood at € 21.4 million (first quarter of 2011: 12.2 million). The result includes € 28.0 million (first quarter of 2011: € 29.0 million) in after-tax profit from Aurubis AG (NAAG), a participation included at equity along with interest income from Salzgitter Klöckner-Werke GmbH.

Intra-group sales of the Salzgitter Group rose to € 705.1 million in the reporting period (first quarter of 2011: € 654.5 million).

Expectations placed on the global economy are currently cautiously optimistic; the prospects for growth, however, remain mixed, especially in the eurozone. In its spring forecast, the European Commission predicted a decline in the GDP in eight of the seventeen countries in the euro area.

The market supply of steel in the EU is set to decline marginally this year, and the German steel market is expected to trend sideways. Real demand in 2012 is likely to remain unchanged from the year-earlier level, and no braking effects are expected to emanate from the inventory cycle. The recovery in European rolled steel selling prices nonetheless slowed from March onwards. The trend of raw material prices is not a reliable indicator of how they will develop over the remainder of the year. Based on a market environment which continues to stabilize, sales at minimum corresponding to the previous year’s level in the financial year 2012 and a marginally positive earnings before tax are still achievable for the Steel Division.

Backed by the comparatively stable demand in international markets in the coming months, the Trading Division anticipates a sustained uptrend in international trading and a stable situation in the stockholding steel trading business. The division's sales are expected to develop accordingly. From today's standpoint, another profit in the mid-double-digit range would appear to be feasible.

The return to capacity utilization in the large-diameter tubes companies of the Tubes Division should be reflected in the positive impact on the results of the coming quarters, thereby confirming the fundamentally positive outlook. The other product segments expect their capacity utilization and margins to remain generally satisfactory, which is the basis for us to anticipate a pre-tax profit for the Tubes Division.

The Services Division is set to benefit from the projected good capacity utilization of the Steel Division. Sales and profit are expected to achieve the levels posted in 2011.

The KHS Group as part of the Technology Division has delivered proof of progress made with the restructuring measures. The anticipated substantial improvement in the pre-tax result appears more likely, as the pleasing first quarter suggests. The positive trend in division's other companies is expected to hold steady.

The widely feared escalation in Europe's debt crisis has not materialized so far. This nonetheless poses a huge risk on a global scale, as do the sharp increase in the oil price and various political conflicts. Assuming, however, that no major economic slumps will occur in the period covered by guidance, we still anticipate that the Salzgitter Group's sales will remain stable at minimum, and that a positive earnings before tax can be delivered in 2012. Given the difficult first quarter, it will be a challenge to achieve the year-earlier result.

As in recent years, we make reference to the fact that opportunities and risks from currently unforeseeable trends in selling prices, input materials 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 9 million tons of steel products to be sold by the Steel, Trading and Tubes divisions over the remainder of the year, an average € 20 contraction in the margin per ton is sufficient to cause a variation in the annual result of more than € 180 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.