Salzgitter Group delivers an operating profit in the first quarter of 2010

In the first quarter of the financial year 2010, the ongoing economic recovery supported both the current order and capacity utilization situation as well as the further business outlook of the Salzgitter Group. The selling price trend for rolled steel and tubes products, however, failed to keep pace with the swift increase in the price of commodities. Moreover, the sale of products destined for the construction sector was hampered by the protracted wintry weather conditions. Given these generally favorable conditions, which were not without their limitations, the Group achieved an operating profit, thereby concluding the first quarter with a result much improved in comparison with a year ago.

The only slow recovery in selling prices in the Steel, Trading and Tubes divisions seen in the first months of 2010 from their lowest levels in the previous year resulted in Group external sales of € 1,924.8 million, which is still below the year-earlier figure (first quarter of 2009: € 2,194.7). The Salzgitter Group closed the first quarter with an operating pre-tax profit of € 2.6 million. This figure factors in accounting-related measures of € 27.7 million for project orders which have been booked and where the costs are no longer likely to be covered due to soaring commodity prices. The Group’s pre-tax loss of € –17.1 million (first quarter of 2009: € –98.3 million) includes € 19.7 million worth of provisions formed for streamlining measures. The after-tax loss stood at € –13.3 million (first quarter 2009: € –74.1 million), bringing earnings per share to € –0.27. Return on capital employed (ROCE) was still marginally negative (–1.0 %; first quarter of 2009: –7.7 %).

The comparatively good capacity utilization situation of the Steel Division is a reflection of the sustained recovery in the global steel markets. External sales rose by 21 % to € 516.1 million in a year-on-year comparison (first quarter of 2009: € 427.7 million) on the back of a considerable increase in shipments tonnage, accompanied by an only hesitant and disparate improvement in selling prices across the whole product range. The operating pre-tax result came to € –20.0 million. Whereas the flat steel products segment generated a presentable profit, the plate product segment and, in particular, the beams segment, which is oriented to the construction sector, sustained losses. The consolidated financial statements for the quarter also include additional provisions for restructuring measures of € 11.0 million at Peiner Träger GmbH (PTG), bringing the overall pre-tax loss to € –31.0 million (first quarter of 2009: € –129.7 million).

The improved economic environment, the process of destocking by steel consumers, concluded in 2009, and signs of rising steel prices led to a recovery in the business activity of the Trading Division. However, the still notably lower selling prices as compared with a year ago were the reason behind the decline in external sales by around a third to € 657.7 million (first quarter of 2009: € 926.9 million). A pre-tax profit of € 4.0 million was recorded which, compared with the first quarter of 2009, is a gratifying trend reversal of € 24.6 million (first quarter of 2009: € –20.6 million).

As in the preceding quarters, the results of the Tubes Division received positive impetus from the delivery of major orders for large-diameter tubes booked before the advent of the crisis with comfortable margins. Nonetheless, the otherwise notably lower selling price level resulted in external sales falling considerably short of the year-earlier figure (€ 449.4 million; first quarter of 2009: € 552.0 million). After deduction of € 27.7 million in provisions for contingent losses for project orders mainly acquired in the previous year, pre-tax earnings from operations came to € 11.3 million in the first quarter of 2010. Taking account of restructuring expenses of € 8.7 million, pre-tax profit posted € 2.6 million (first quarter of 2009: € 50.8 million).

The Services Division benefited from the return of production activities to normal levels in the other Group companies, above all in the Steel Division. Segment sales climbed by 30 % to € 230.5 million (first quarter of 2009: € 177.8 million). External sales also grew slightly (+6 %). The division achieved a pleasing pre-tax profit of € 5.1 million (first quarter of 2009: € –3.2 million).

Despite notably brisker activities in the beverages filling and packaging plant business since the fall of 2009 and an order intake which recently rose by more than 50 %, orders placed in the previous year, when competition was fierce and margins therefore low, left their mark on the results of the Technology Division. External sales rose by 4 % to € 199.8 million (first quarter of 2009: € 192.5 million). With the extensive restructuring program clearly taking effect, the first quarter closed with a pre-tax loss of € –13.3 million which had virtually halved in comparison with the year-earlier figure (first quarter of 2009: € –23.3 million).

The external sales of the Others/Consolidation segment, generated through business in semi-finished products with external parties, advanced to € 13.8 million in the first three months (first quarter of 2009: € –12.1 million). Pre-tax profit stood at € 15.5 million (first quarter of 2009: € 27.7 million). After the deduction of the purchase price allocation (€ –1.2 million) obligatory under IFRS, the 25 % stake in Aurubis AG contributed a gratifying profit after tax of € 11.2 million. The result also benefited from the positive effects from the reporting date-related valuation of derivatives and price gains realized on financial investments.

The internal sales of the Salzgitter Group declined by 17% to € 479.1 million in the first three months of 2010 (first quarter of 2009: € 576.0 million).

The sharp increase in new orders and the orders on hand of the steel companies are evidence of the ongoing recovery in the steel industry, which has held steady since mid-2009. There is, however, currently a special challenge to be mastered in the form of the consequences of suppliers of iron ore and coking coal turning their backs on the customary annual fixing of prices practiced for decades in favor of negotiating contracts on a quarterly basis. The fundamental shift in contractual structures on the purchasing side will of necessity lead to a redefining of long-term delivery relationships and a corresponding price fixing model with a majority of steel processors. This process of adaptation is likely to take several weeks. In the case of deliveries of rolled steel and tubes closed on the basis of the old conditions, there may well be quite considerable gaps in the coming months between the recent acceleration in commodity costs and selling prices. This may have an effect on results, especially in the second quarter, as well as beyond this period in the some cases.

Moreover, the question as to the sustainability of the recovery remains open, as order activities in the customer branches vary widely and as it must be partly assumed that orders have been placed upfront due to speculative influences. Nonetheless, we anticipate that capacity utilization in the Steel Division will remain good in the next few months, with rising sales figures. We consider that the division could achieve breakeven over the course of the current financial year but believe this to be rather unlikely.

Thanks to optimized inventories, appropriate cost structures and its presence in the global market, the Trading Division is expecting the situation to improve further. The strong uptrend in selling prices will ensure notably higher gross earnings in the stockholding business in the short term. With the exception of the weak North American market, international trading should also have scope for a recovery in margins owing to the most recent price increases. If the steel market remains firm, a profit in the upper double-digit million range will be possible in the financial year 2010.

The Tubes Division assumes a substantial downturn in the results versus the previous year despite the notable recovery that is also discernible here. It is, for instance, meanwhile foreseeable that the drastic increase in the price of input materials will have a substantial impact on the profitability of major projects booked on a fixed price basis. In our opinion, breakeven is only possible if there is sustained economic recovery.

Revenues and the pre-tax result of the Services Division will continue to rise in the months ahead thanks to the higher production volume of the steel companies. In the wake of a recovery in the markets and boosted by measures implemented in 2009 to improve processes and enhance efficiency becoming increasingly effective, the earnings situation of the Technology Division will also improve substantially in comparison with the year ended. A drastically reduced pre-tax loss is anticipated for the financial year 2010. The aim of KHS AG of closing the first individual months with a profit also appears to be possible at a point earlier than originally expected.

The immense and rapid fluctuations in the cost and price of commodities have reduced planning certainty to a minimum. Irrespective of the sustained global recovery in the steel markets, a reliably quantified outlook for sales and the results of the Salzgitter Group cannot therefore be given for the financial year 2010. In consideration of the currently discernible risks and potential, we nonetheless believe that achieving near breakeven may be possible in the current financial year.

As in recent years, we make special and explicit reference this time 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 2010. The resulting fluctuation in the consolidated pre-tax result may, as current events show, 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 left to be sold this year by the Steel, Trading and Tubes divisions, an average € 30 deviation in the margin per ton is sufficient to cause a variation in the annual result of more than € 180 million.

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.