The Salzgitter Group records pre-tax profit again in the second quarter of 2010

First half-year of 2010

The positive earnings trend of the Salzgitter Group continued in the second quarter of the financial year 2010 in the form of a pre-tax profit. Contributing factors included the satisfactory capacity utilization situation of most product segments and the sharp increase in selling prices in steel trading operations. Particularly when compared with the crisis-ridden previous year's period, the business of the Group has clearly stabilized. The majority of leading indicators support a more confident assessment of the outlook for business in the second half-year.

The consolidated external sales of the Group, which came to € 4,034.2 million (first half of 2009: € 4,125.7 million), fell marginally short of the year-earlier level mainly due to selling price effects. In the second quarter of 2010, the Salzgitter Group generated an operating pre-tax profit of € 18.6 million (second quarter of 2009: € -96.9 million), bringing the first half of 2010 to a close with an operating profit before tax of € 21.2 million (first half of 2009: € -158.6 million). This half-yearly operating result already includes € 13.2 million in provisions for onerous contracts in connection with project orders booked and confirmed where the costs of production are presumably no longer covered due to the exorbitant increases in the price of raw materials. The reported pre-tax result of the first half-year came to €-5.1 million (first half of 2009: € 195.2 million) and includes an additional € 26.3 million in provisions for streamlining measures. Profit after tax stood at € -3.5 million (first half of 2009: € -165.0 million), and earnings per share posted € -0.11 (first half of 2009: € -3.07). Return on capital employed (ROCE) of an annualized 0.4 % was in the black again (first half of 2009: € -8.1 %).

The production capacities of the Steel Division were generally sufficiently utilized in the first six months of the current financial year. The situation varied across the individual product segments: Whereas capacity utilization of flat steel was good and plate production showed a satisfactory level, sections production was again weak due to the volatile situation in the construction industry. Accordingly, the division's external sales rose by 35 % to € 1,081.6 million (first half of 2009: € 799.9 million) against the backdrop of weaker average selling prices in comparison with the previous year and considerable growth in shipment tonnage. The operating result before tax stood at € -58.6 million which was mainly attributable to the unsatisfactory selling price level measured against the raw materials price trend. Including provisions of € 17.6 million for restructuring measures at Peiner Träger GmbH, the division disclosed a pre-tax loss of € -76.2 million (first half of 2009: €-190.2 million).

The destocking process meanwhile completed in almost all industry sectors and the rapid uptrend in steel prices from the second quarter onwards in the spot market were factors exerting a positive influence on the business environment of the Trading Division. Shipment volumes recorded in the first six months of 2009 were almost matched in the first half of the current financial year. Owing to the extremely low level from which selling prices staged their recovery and weaker international trading in terms of volume, external sales came in at € 1,409.2 million, which is lower than the year-earlier figure (first half of 2009: € 1,683.7 million). Pre-tax profit of a very gratifying € 43.4 million was substantially higher than a year ago (first half of 2009: € -57.7 million).

The product segments of the Tubes Division recorded partly considerable declines in selling prices accompanied by generally steady volumes, bringing external sales to € 892.0 million, which is lower than the still flourishing business of the previous year’s period (first half of 2009: € 1,107.9 million). The division generated a positive operating profit of € 21.8 million in the first half of the year. This result was achieved exclusively by the large-diameter tubes segment and includes provisions for onerous contracts of € 13.2 million. Taking account of € 8.7 million in restructuring expenses, the pre-tax result comes to € 13.1 million (first half of 2009: € 96.0 million).

The results of the Services Division are first and foremost a reflection of the Steel Division’s brisker production activities. With segment sales of € 520.0 million (first half of 2009: € 340.9 million) and a profit before tax of € 11.4 million (first half of 2009: € -5.4 million), the division achieved a result which was much higher than the previous year’s figure. External sales climbed to € 195.3 million (first half of 2009: € 146.4 million).

The course of business of the Technology Division resulted in an increase of more than 40 % in new orders booked in the first six months of the financial year, but was also dominated by still unsatisfactory selling price levels for beverage filling and packaging plants. With the extensive streamlining and cost-cutting program increasingly taking effect, the KHS Group nonetheless delivered a positive pre-tax result in the second quarter. In comparison with the weak year-earlier figure, the external sales of the Technology Division rose by 17 % to € 429.7 million (first half of 2009: € 367.5 million), and the pre-tax result climbed to € -15.7 million (first half of 2009: € -43.7 million).

The external sales of the Others/Consolidation segment, generated through business in semi-finished products with external parties, advanced to € 26.4 million in the first six months (first half of 2009: € 20.5 million). The pre-tax result came in at € 18.9 million (first half of 2009: € 5.8 million). The stake in Aurubis AG, a company included at equity since 2009, contributed a pleasing € 22.0 million in profit after tax.

Intragroup sales of the Salzgitter Group increased by 4 % to € 1,017.7 million (first half of 2009: € 980.4 million).

As sectors lagging the economic cycle also recently reported rising order intake, most steel processing sectors are meanwhile manufacturing at a relatively good level again. The overall situation is, however, very disparate and many market participants still plan from a primarily short-term standpoint and exercise caution. The main cause of this behavior is the high volatility of raw materials and material costs, which considerably raises the risk inherent in large-volume transactions. Moreover, as the redefinition of long-term supplier relationships and the respective price fixing models have not yet been finalized with a number of steel processors, the course steel business will take in the coming months is likely to remain beset with uncertainty. This may, however, also take a positive turn. All in all, we are relatively confident as to the outlook for the second half year given the current situation with regard to order intake and capacity utilization in our plants. As partly discernible from today's standpoint, the current, seasonally-induced lull in demand should generally come to an end towards the end of the summer break.

We therefore assume that capacity utilization of the Steel Division will remain satisfactory, accompanied by relatively stable sales figures, in the months ahead, with the flat steel and plate product segments likely to perform better on the back of selling prices than the sections segment. However, it is highly unlikely that the result of the second half year will be able to fully compensate for the loss sustained in the first six months.

Thanks to its broad-based position in the relevant markets, the Trading Division expects business is to develop steadily. Gross earnings in the stockholding steel trade, which rose sharply for a short period, will return to normal again due to a more moderate selling price trend. We anticipate that business in international trading will develop well, albeit notably below the level recorded in recent boom years. A profit in the upper double-digit million range should be achievable in the financial year 2010.

Despite the clearly discernible uptrend in order intake, the Tubes Division is expecting results to fall considerably short of the previous year owing to the hesitant recovery in selling prices. This is attributable to input material price hikes resulting in margins narrowing, especially in the case of major projects already booked. We nonetheless believe it possible for the division to achieve breakeven provided that the positive economic development continues.

Revenues and the pre-tax result of the Services Division are likely to settle at the level achieved, also in the months ahead, as a result of the higher production volumes of the steel companies.

In connection with recovering markets and boosted by the increasingly positive effect of measures implemented in 2009 geared to improving processes and enhancing efficiency, the earnings situation of the Technology Division will recover significantly in comparison with the year ended. Although the impact of adverse seasonal effects will be felt in the second half of the year, the improvement in the pre-tax loss in the financial year 2010 is expected to be most considerable.

The short-lived fluctuations in the price of raw materials are a hindrance to any planning certainty. For this reason alone, it is currently not possible to arrive at an accurate, quantitative forecast for sales and profit of the Salzgitter Group. In consideration of the currently discernible risks and potential, we nonetheless believe that a pre-tax result above breakeven is achievable in the current financial year.

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 2010. The resulting fluctuation in the consolidated pre-tax result may, as events in the first half year have shown, 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 4 million tons of steel products to be sold by the end of this year by the Steel, Trading and Tubes divisions, an average difference of € 30 in the margin per ton is sufficient to cause a variation in the annual result of more than € 120 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.