Salzgitter Group back in the profit zone

The wide-ranging business activities of the Salzgitter Group have reaped tangible benefit from the general economic recovery over the course of the first nine months of the financial year 2010.Although the Group had to absorb the surging costs of raw materials and burdens from currency-induced valuations, it closed the third quarter as well with a profit. The Steel, Trading, Tubes and Services divisions all made positive contributions to this result, along with the Technology Division which delivered a near-breakeven result. In line with expectations, the Group thus generated a pre-tax profit in the first nine months of the financial year 2010.

Consolidated external sales of the Group came in at € 6,192.6 million (first nine months of 2009: € 5,960.3 million), which is around 4 % above the previous year's figure. Pre-tax profit rose by € 267 million to € 5.7 million (first nine months of 2009: € -261.3 million). This figure already includes € 26.3 million for streamlining measures, € 30.0 million in negative effects from the reporting date-related valuation of the US dollar, and € 19.9 million in out-of-period income. Profit after tax stood at € 3.9 million (first nine months of 2009: € -232.1 million). Return on capital employed (ROCE) came to an annualized 0.8 % (first nine months of 2009: -7.3 %).

The development of the Steel Division was a general reflection of the brighter economic outlook. The uptrend in the individual product segments, however, varied greatly: Flat steel and plate reported satisfactory capacity utilization again and, since mid-year, a very positive selling price trend as opposed to the section product segment that was still burdened by the only hesitant recovery of the construction industry. The Steel Division’s external sales reported a volume-induced increase of 36 % to € 1,672.4 million (first nine months of 2009: € 1,231.1 million) despite average selling prices remaining below the year-earlier level. Pressured by the extreme uptrend in the price of raw materials, low capacity utilization in the beam and sheet piling product segment, and by € 17.6 million in provisions for restructuring measures at Peiner Träger GmbH, the result remained in the red. The pre-tax loss of € -67.6 million (first nine months of 2009: € -213.4 million) was nonetheless a considerable improvement over previous year’s period.

The Trading Division benefited from restocking in almost all customer sectors. The steep increase in selling prices in the second quarter benefited the European stockholding steel trade in particular. Whereas shipments remained generally stable, external sales dropped slightly to € 2,230.5 million (first nine months of 2009: € 2,397.3 million) due to the lower level of average prices in international trading. The division generated an extremely gratifying pretax profit of € 63.9 million (first nine months of 2009: € -90.5 million) which was attributable in the main to the pronounced turnaround in the warehousing business.

Despite the significant recovery in orders placed in almost all product segments, the companies belonging to the Tubes Division were unable to match the excellent results achieved in the year-earlier period which was hallmarked by project business acquired before the crisis. As a result, external sales declined by 15 % to € 1.304.0 million (first nine months of 2009: € 1,541.6 million). The amount of € 17.7 million in pre-tax profit (first nine months of 2009: € 121.7 million) was generated above all by the comparatively stable performance of the large-diameter tubes segment. Moreover, this figure includes € 8.7 million in expenses incurred by streamlining measures and € 9.1 million in out-of-period income from the sale of tubes input material subject to impairment in 2009.

In line with the higher output of the steel companies, the Services Division also reported improved results. Segment revenues climbed to € 792.7 million (first nine months of 2009: € 536.7 million) and pre-tax profit, which came to € 18.8 million (first nine months of 2009: € -1.7 million), was also notably higher year-on-year. External sales stood at € 301.7 million (first nine months of 2009: € 224.7 million).

The uptrend in the Technology Division continued. The division’s order book has climbed by almost 40 % in comparison with the first nine months of 2009. Whereas the selling price level of beverage filling and packaging facilities still remains unsatisfactory, the measures implemented under an extensive restructuring and cost-cutting program launched in 2009 in the KHS Group are taking effect. External sales increased to € 645.5 million (first nine months of 2009: € 531.6 million), and the pre-tax result grew by € 54.5 million to € -21.0 million (first nine months of 2009: € -75.5 million).

The external sales of the Others/Consolidation segment, generated through business in semifinished products with external parties, posted € 38.5 million in the first three quarters of 2010 (first nine months of 2009: € 33.9 million). The pre-tax result came in at € -6.1 million (first nine months of 2009: € -1.9 million) and, along with € -30.0 million in effects from the reporting date-related valuation of the US dollar, included a pleasing profit after tax of € 31.8 million from its stake in Aurubis AG, a participating interest included at equity since 2009. 3 Intragroup sales of the Salzgitter Group have climbed by 13 % to € 1,575.7 million (first nine months of 2009: € 1,391.3 million) in comparison with a year ago.

The capacity utilization situation of most steel processing industries in Europe should remain stable through to the end of the year as the general economic recovery and the good export situation are likely to hold steady. An important exception is Europe's construction industry where demand remains at a very low level. The producers supplying this industry are therefore still exposed to low capacity utilization and weak selling prices. Steel trading, for which the construction industry is also an important customer, has adopted a mainly short-term approach to business due to volatile raw materials and steel prices, and is keen to keep its inventory levels down as the end of the year approaches.

The development of the steel business will therefore remain subject to the influence of disparate trends in the coming months as well. The current slight downturn in demand is, in our opinion, primarily due to seasonal effects incurred by the imminent turn of the year and tactical reasons. In principle, the current level of new orders and the capacity utilization situation in our steel mills can be generally viewed as satisfactory.

We anticipate that sales will remain relatively stable in the Steel Division through to the end of the year, although the flat steel and plate product segments will deliver considerably better results than the beam and sheet piling segment. Particularly in view of the persistently weak capacity utilization in these product segments, we assume that the result of the Steel Division in the fourth quarter will not be able to compensate for the loss aggregated over the first nine months.

The Trading Division’s sound performance looks set to continue. Gross earnings in the warehousing business are likely to decline towards the end of the year owing to replacement prices which have meanwhile risen. In contrast, international trading will continue to develop at a stable level. The division will close the financial year 2010 with a presentable double-digit million profit.

Although new orders in the Tubes Division have boosted business in most product segments, improved selling prices were, however, only achievable in individual cases from the second half of the year onwards. Longer-term delivery contracts in the project and automotive business included in the order book are still having a discernibly braking effect on the division’s profit. All in all, the division is likely to deliver breakeven at minimum.

Revenues and the pre-tax result of the Services Division will settle at the level achieved, also in the months ahead, as a result of the steady and satisfactory production activities of the steel companies.

The recovery in the sales market and support from the positive effects of a program comprising measures to enhance efficiency will improve the Technology Division’s results, which should approach breakeven in the fourth quarter. As against the financial year 2009, a pre-tax loss is therefore anticipated for 2010 as a whole, but at a greatly reduced level. In summary, and having considered all currently discernible risks and potential, we believe that a pre-tax result in the lower double-digit million range is achievable in the current financial year.

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 and metal prices, may still affect the annual accounts of the financial year 2010. Additional positive or negative effects may emanate from changes of a structural and methodological nature, especially, for instance, measurement under IFRS standards and their treatment. The resulting fluctuation in the consolidated pre-tax result may be within a considerable range, either to the positive or to the negative.

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 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.