The Salzgitter Group masters the challenges of the financial crisis with assuredness

Key data of the financial year 2009

2009 will go down as one of the most difficult financial years in the 150-year history of the Salzgitter Group. During the first nine months the Group had to absorb a dramatic slump in demand for rolled steel products, among other occurrences. Thanks, on the one hand, to the sound and broad business base and the healthy financial position of the company and, on the other, to a program of swiftly implemented immediate measures to stabilize performance, all the challenges posed by the crisis were mastered with aplomb. With the onset of economic recovery, the Group was again generating a positive operating profit in the fourth quarter. As part of the process of drawing up the annual financial statements, extensive impairments and precautionary accounting-related measures were carried out that will serve to ease the burden on future periods.

Almost all the business activities of the Salzgitter Group were affected by the global economic crisis in the financial year 2009. As a consequence, consolidated external sales came in at € 7,818.0 million, which is considerably lower than the previous year's figure (2008: € 12,499.2 million). The Salzgitter Group closed the financial year 2009 with an operating loss of –€ 160.3 million. This figure comprises the € 60.2 million contribution to profit by the Aurubis shareholding as well as positive valuation-related effects. The profit forecast released in November was therefore exceeded. As announced at the same time, the financial statements include accounting-related non-recurrent effects. For instance, they comprise impairments of € 262.7 million and funds of € 73.4 million for streamlining measures. These components which affect net income and accord fully with a conservative accounting policy will already be instrumental in easing the burden on the results of the current financial year. All in all, the pre-tax loss is –€ 496.5 million (2008: +€ 1,003.4 million). Taking into account the tax revenues of € 109.6 million the consolidated loss posts –€ 386.9 million. Earnings per share come to –€ 7.10.

The economic and financial crisis had an especially strong impact on the Steel Division: The first months of the financial year saw no end to the dramatic market conditions that had already set in at the end of 2008. The downturn in demand and selling prices was so severe that, despite first signs of a recovery as from the third quarter, production, shipment and sales figures fell way short of the previous year’s results. The division recorded external sales of € 1,673.6 million (2008: € 3,001.7 million) and an operating loss of –€ 230.1 million. Moreover, € 139.0 million in impairment write-downs and € 4.5 million in restructuring expenses were included in this figure. The segment pre-tax result came to –€ 373.5 million overall (2008: +€ 545.6 million).

The extremely hostile market conditions were also reflected in the Trading Division’s figures: A steep decline in shipments, combined with partly dramatic price erosions, almost halved external sales to € 3,038.7 million (2008: € 5,621.7 million). The division closed the financial year with an operating loss of –€ 119.7 million. An additional € 2.3 million in restructuring expenses and € 6.1 million in impairment write-downs resulted in a pre-tax loss of –€ 128.0 million (2008: +€ 150.8 million).

The Tubes Division benefited from a healthy order book which guaranteed comfortable capacity utilization in most of the steel works during the first half year and partly even beyond. Capacity in the precision tubes segment was nonetheless consistently underutilized. Owing to the sustained sound performance of the large-diameter tubes segment in particular, external sales fell only marginally to € 2,044.6 million (2008: +€ 2,172.5 million). The contribution to operating profit came to € 171.6 million. Following € 29.9 million in impairment write-downs and € 37.7 million in restructuring expenses, the pre-tax profit came to +€ 104.0 million, thereby falling short of the exceptionally good year-earlier result (2008: +€ 311.8 million).

External sales generated by the Services Division declined to € 302.9 million (2008: +€ 519.3 million). This development was mainly the result of lower volumes and selling prices in scrap steel trading. The segment generated an operating profit of +€ 8.9 million; including € 0.7 million in restructuring expenses, pre-tax profit came to +€ 8.2 million (2008: +€ 23.9 million).

The Technology Division achieved external sales of € 717.6 million (2008: € 1,037.9 million). Significant capacity underutilization and extremely fierce competition for new orders in mechanical engineering owing to the crisis led to an operating result of –€ 111.7 million. Moreover, € 28.2 million in restructuring expenses and € 67.2 million in impairments had to be absorbed. After deduction of the purchase price allocation of € 3.4 million obligatory under IFRS, the pre-tax loss came to –€ 210.4 million (2008:+€ 3.8 million).

The external sales of Others/Consolidation are generated mainly through business in semi-finished goods with customers external to the company which declined to € 40.6 million in the reporting year (2008: € 146.0 million). Since the start of the financial year, the 25.3 % stake in Aurubis AG has been included at equity here. That company contributed a pleasing € 65.0 million in profit after tax to the consolidated result. Under IFRS, the purchase price allocation of € 4.8 million must be deducted from this amount. Accounting-related effects from the annual financial statements also had an overall positive impact, bringing operating profit to € 124.0 million. Following impairment write-downs of € 20.6 million and restructuring expenses of € 0.1 million, pre-tax profit came to €103.3 million (2008: –€ 32.5 million).

The internal sales of the Salzgitter Group fell to € 1,836.6 million in the reporting year (2008: € 3,913.4 million) owing to the lower level of business activities between the divisions.

The annual financial statements for the financial year 2009 are to be submitted to the Supervisory Board for adoption at its next meeting and published in its full version on March 26, 2010.

The anticipated development of the Group and its divisions in the financial year to 2010 described in the following is based on the corporate planning, which was concluded at the end of 2009, and reflects current developments: As the prospects for capacity utilization in the key steel processing sectors has stabilized, the Steel Division anticipates improved order intake and higher shipments of rolled steel in the financial year 2010. In conjunction with the accompanying rise in selling prices, sales can be expected to recover. However, the cost of procuring ores and coal, which fell substantially in the previous year, is expected to rise again in 2010. From today's standpoint, breakeven should be achievable but on no account be considered certain.

The Trading Division expects to distribute more steel in 2010 than in the previous year, based primarily on higher shipment volumes in international trading. The growth of shipments and improved margins should deliver a positive result.

Given falling average selling price levels, which were counteracted in the previous year by orders still outstanding from the boom phase, the Tubes Division expects a substantial decline in results. A pre-tax result around breakeven should be achievable provided that raw material price hikes do not exert too much pressure on the profitability of major projects.

In 2010, the Services Division’s sales and pre-tax result will profit from a generally higher capacity utilization in the steel companies which is likely to lead to figures that are higher than those posted in recent periods.

In the wake of a sales market recovery, and boosted by measures implemented to improve processes and enhance efficiency taking increasing effect, the performance of the Technology Division should improve substantially in comparison with the year ended. A pre-tax loss is nonetheless expected in 2010 but at a much lower level.

As the tail-end effects of the financial crisis are still being felt in the current year and cause jitteriness in the relevant sales and procurement markets, providing a reliable, quantified outlook for sales and the result of the Salzgitter Group is naturally not possible. It is, however, foreseeable that there will be an improvement in the economic situation of most of the Group companies. The recovery of these steel companies, based on capacity utilization, should be able to partly compensate for a selling price-induced lower result in the Tubes Division. We therefore expect our Group to generate a positive pre-tax result in the double-digit million Euro range. There are nonetheless considerable risks, as before: alongside the foreseeable increase in the cost of raw materials, the recovery of the steel and mechanical engineering markets is still subject to uncertainties.

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 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 10 million tons of steel products sold by the Steel, Trading and Tubes divisions, an average € 50 contraction in the margin per ton is sufficient to cause a variation in the annual result of more than € 500 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.