Positive trend holds steady in the second quarter, delivering an increase in profit

First Half of 2011

The business activities of the Salzgitter Group developed well overall in the first half of 2011, benefiting from the favourable economic environment and the consistent implementation of measures to improve profit and streamline operations. Consolidated pre-tax profit was therefore considerably higher than the year-earlier result. Following the now virtual completion of the extensive investment program, the financial basis of the Group - with an equity ratio of 44 % and a net cash position of € 951 million - is exceptionally sound.

All divisions contributed to raising consolidated external sales by 18 % to € 4,773.5 million (first half of 2010: € 4,034.2 million), especially Steel and Trading. The pre-tax profit achieved was again presentable at € 130.0 million (first half of 2010: € -5.1 million). This result includes a contribution of € 46.5 million from the stake in Aurubis AG, a company included at equity (first half of 2010: € 22.0 million). Profit after tax came to € 93.7 million (first half of 2010: € -3.5 million). Basic earnings per share stood at € 1.70 (first half of 2010: € -0.11) and return on capital employed at 6.6 % (first half of 2010: 0.4 %).

In the Steel Division, robust demand from the automotive and mechanical engineering industries ensured good capacity utilization and sufficient profit for the companies producing flat steel and plate. However, the persistent weakness in steel construction throughout Europe and constraints on public-sector investments in infrastructure still burden the section product segment which remains in deficit. Owing mainly to the higher level of selling prices compared with a year ago, the Steel Division’s external sales climbed by 26 % to € 1,367.0 million (first half of 2010: € 1,081.6 million), with shipments recording a slight increase. Pre-tax profit posted € 30.4 million, which represents a growth of more than € 100 million compared with the year-earlier figure (first half of 2010: € -76.2 million).

The Trading Division benefited from the healthy economy in the first half of 2011 and the resulting demand for steel in most customer sectors. The uptrend in steel prices, initiated at the start of the year, resulted in external sales climbing by 23 % to € 1,737.3 million (first half of 2010: € 1,409.2 million). Bearing in mind the exceptionally large windfall effect booked in the second quarter of 2010, the very presentable pre-tax profit of € 38.2 million fell only marginally short of the year-earlier figure (first half of 2010: € 43.4 million).

The Tubes Division performed well on the back of demand accelerating in market segments which lag the economic cycle and the growing impact of the profit improvement measures initiated. External sales remained virtually unchanged in comparison with the previous year's period (€ 903.2 million; first half of 2010: € 892.0 million) whereas the pre-tax result more than trebled to € 46.7 million owing to the successful turnaround of the precision tubes and the stainless tubes businesses (first half of 2010: € 13.1 million).

The Services Division raised its external sales by more than 20 % to € 238.7 million in the first six months of 2011 (first half of 2010: € 195.3 million). This development was primarily attributable to DEUMU, a company trading in raw materials that benefited from firmer scrap prices. The pre-tax profit of € 8.3 million was only slightly below the year-earlier level (first half of 2010: € 11.4 million).

The Technology Division’s external sales were up by 13 % to € 485.7 million (first half of 2010: € 429.7 million) in the first six months of 2011, buoyed by a healthier order book in the beverage filling plants business and ongoing brisk demand for services and replacement parts. Despite the positive developments in a number of regional markets and contributions to profit by the companies specialized in plastics injection moulding machinery, the pre-tax result remained unsatisfactory (€ -17.7 million; first half of 2010: € -15.7 million). The main reason was the selling price level in KHS’s core business which - despite an uptrend - remained unsatisfactory.

The external sales of the Other/Consolidation segment, generated through business in semi-finished products with external parties, grew by almost two thirds in the period under review (€ 41.8 million; first half of 2010: € 26.4 million). Pre-tax profit was reported at € 24.1 million (first half of 2010: € 18.9 million). After taking account of the purchase price allocation (€ -4.8 million) obligatory under IFRS, this figure includes the very pleasing contribution to profit after tax of € 46.5 million by the Aurubis AG shareholding (first half of 2010: € 22.0 million net of € 2.4 million in purchase price allocation).

The inter-company sales of the Salzgitter Group stood at € 1,317.6 million, which is around 30 % higher than the previous year's figure (first half of 2010: € 1,017.7 million).

The global economic environment has deteriorated in recent months. Although the order situation in the majority of steel processing sub-sectors remains excellent, many business sentiment indicators have fallen in the wake of discussions about sovereign debt in the US and the EU. In addition, a marked slowdown in demand typical of the summer months season is currently notable.

The fundamental trend in the European steel market, reflecting the disparate development of bulk steel business, on the one hand, and the high quality segment, on the other, will in all probability persist in the second half of the year, as import pressure on commodities is likely to ease only slightly. By contrast, high-grade products are in demand. The booking patterns of the large majority of customers remain extremely cautious. As a result, inventories in trading and with customers are still at a normal level. Given the prospect of the good capacity utilization of many steel processors, there is a distinct possibility of a market recovery in the early fall. Especially considering the currently weaker market dynamics, the Steel Division anticipates a somewhat lower pre-tax result in the second half of 2011 compared with the first six months.

The Trading Division assumes that business will continue to be sound. The margins in stock holding steel trading, however, have returned to a normal level due to ground made up in purchase prices. The division’s shipment volumes and revenues are likely to remain at a higher level in the second half of the year as well, and we expect another gratifying pre-tax profit.

The customary seasonal effects in the steel market will also have an impact on the activities of the Tubes Division. The intensive debate on the future energy supply of Germany and Europe has, by its nature, slowed decision-making on projects in this sector. In contrast, the demand for precision tubes from the automotive and mechanical engineering industries remains very robust. The Tubes Division therefore expects to achieve a good result in the second half of the year which will probably be slightly below the high profit generated in the first six months.

The Services Division anticipates that business will also remain stable in the coming months, underpinned by the ongoing high capacity utilization of the steel companies.

The framework conditions of projects in the beverage filling plants business are likely to improve only gradually in the foreseeable future. With orders at an acceptable level, the Technology Division expects to generate annual revenues that are significantly higher than in 2010. However, due to margins that remain unsatisfactory, the second half of 2011 will also close at a loss. This result pertains only to the KHS Group; the plastics injection moulding machinery companies are set to perform well, as before.

The short contractual cycle, the persistently high volatility of procurement and selling prices and the uncertainty surrounding economic framework conditions continue to hamper planning accuracy, both in the individual divisions and at the level of the entire Group. Against the backdrop of the acceptable constitution in the flat steel and plate markets, coupled with the turnaround achieved in the precision tubes segment, we anticipate that, from today's standpoint, the pre-tax profit of the Salzgitter Group will come to around € 200 million in the financial year 2011 as a whole.

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, given the sale of around 6 million tons of steel products by the Steel, Trading and Tubes divisions in the second half 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 € 150 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.