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 /  /  / Overall Statement on Anticipated Group Performance

Overall Statement on Anticipated Group Performance

Planning Process

As a matter of principle, the corporate planning of Salzgitter AG (SZAG) takes account of the strategic goals and comprises a set of entrepreneurial measures with action embedded in the general economic environment. Consequently, it forms the basis for a realistic assessment of earnings, but, at the same time, includes the longterm aspects relating to investments and the securing of a sound balance sheet and financial stability. Market expectations prevailing at the time when planning takes place, as well as the entrepreneurial measures envisaged, are incorporated into this plan that is prepared in a process involving the entire Group: The individual goals of the subsidiaries are discussed and defined in a combination of a top-down and bottom-up approach between the respective management, the Group’s Executive Board and the heads of the business units. All individual plans are then aggregated to form a plan for the entire Group. This extremely sophisticated Group planning process is conducted once before the start of each new financial year, generally beginning in August and ending with the presentation of the insights gained that is delivered at the last meeting of the Group’s Supervisory Board in the respective financial year.

Expected Earnings

Compared with the previous year, the business units anticipate that business in the financial year 2017 will develop as follows:

Thanks mainly to selling prices rising in the EU steel market in response to the anti-dumping measures initiated in Europe, the Strip Steel Business Unit anticipates a more positive development of business. Assuming that robust demand holds steady, a notable increase in sales can be expected. Supported by ongoing cost reduction measures, a significant increase in the pre-tax result due to its return to the profit zone is envisaged despite the partly sharp rise in raw materials prices, particularly for iron ore and coking coal.

The Plate / Section Steel Business Unit will continue to be exposed to a difficult market environment in the current financial year. Satisfactory capacity utilization is nevertheless expected for the two heavy plate producers. Hence, the production of input materials for the Nord Stream II contract will contribute to a notable basic capacity utilization at the Mülheim mill. Moreover, the two companies will benefit from the extensive cost cutting and efficiency enhancement measures initiated in 2016. Passing on the full scope of hikes in raw material costs in a timely manner is, however, particularly challenging. Capacity utilization in the section steel business is expected to run at a satisfactory level. However, the volatile scrap price is likely to prompt speculative buying patterns on the part of customers. Drastic increases in grid usage fees for procuring electricity will pose an additional burden. All in all, the business unit anticipates a substantial volume- and selling price-induced increase in sales as well as a significant improvement in the result before taxes in the direction of breakeven.

The companies belonging to the Mannesmann Business Unit will again reflect very heterogeneous developments in 2017: While the German large-diameter pipe mills report good capacity utilization, also due to bookings in the previous year, the order situation in the North American market has deteriorated. The segments of medium-diameter line pipe, precision and stainless steel tubes are likely to stage a hesitant recovery at minimum. Rising shipment volumes supported by a higher selling price level should result in moderate sales growth in the segment. In conjunction with the profit improvement programs, both initiated and planned, a notably increased pre-tax result around breakeven is predicted.

In 2017, the Trading Business Unit anticipates marked sales growth on the back of the recovery in the international project business, as well as an increase in the sale of prefabricated products. Support should also emanate from expanding the customer base in the context of stepping up the digitalization of sales. As it cannot be assumed that the temporary widening of margins attributable to the steel price trend in 2016 will repeat in the financial year 2017, a very satisfactory pre-tax profit, albeit at a discernably lower level than in the previous year, is anticipated.

Based on a high order backlog, the Technology Business Unit anticipates that sales will remain stable. In view of the fierce price-led competition for the project business, the KHS Group will rely on growth in the profitable product segments as well as on expanding its service business. Moreover, above all the efficiency enhancing measures introduced under the new “Fit4Future 3.0” program are likely to develop their positive impact. In conjunction with the promising outlook for the other specialist mechanical engineering companies, a tangible increase in pre-tax profit is expected.

In Industrial Participations / Consolidation that is mainly influenced by the costs of the management holding company, reporting-date related valuation effects from foreign exchange and derivatives positions, the results of the services companies assigned to it, and other associated companies, including Aurubis AG (NAAG), we expected a significantly lower year-on-year pre-tax result due to the very high year-earlier level.

Against the backdrop of additional positive effects from measures and growth programs, we anticipate the following for the Salzgitter Group in 2017:

  • an increase in sales to around € 9 billion,
  • a pre-tax profit of between € 100 million and € 150 million, as well as
  • a return on capital employed (ROCE) that marginally exceeds the previous year’s figure.

The forward-looking statements on the individual business units assume the absence of renewed recessionary developments. Instead, we anticipate an ongoing economic recovery in our fiercely contested main markets in the current financial year. As in recent years, please note that opportunities and risks from currently unforeseeable trends in selling prices, input material prices and capacity level developments, as well as exchange rate fluctuations, may considerably affect performance in the course of the financial year 2017. 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, with around 12 million tons of steel products sold by the Strip Steel, Plate / Section Steel, Mannesmann and Trading business units, an average € 25 change in the margin per ton is sufficient to cause a variation in the annual result of more than € 300 million. Moreover, the accuracy of the company’s planning is restricted by the volatile cost of raw materials and shorter contractual durations, on the procurement as well as on the sales side.

Anticipated Financial Position

Our cash and cash equivalents are used partly for financing investments that are ongoing primarily in our steel and technology business. As before, we consider it essential to keep cash funds available in a mid-triple-digit million range to ensure that, in the event of a deterioration in the environment, we will not have to procure funds on the capital market at short notice.

An amount of € 456 million has been earmarked for our Group’s capital expenditure budget in 2017. Together with the follow-up amount of around € 150 million in investments approved in previous years, the cash effective portion of the 2017 budget should amount to approximately € 400 million (previous year: € 352 million). As previously, investments will be effectively triggered on a step-by-step basis and in accordance with the development of profit and liquidity.

The funds required in the financial year 2017 for foreseeable investment measures will exceed depreciation and amortization.

The financial position of our Group should be comparatively sound at the end of the year 2017 as well, particularly given the measures implemented in the capital markets in recent years. With a view to exploiting attractive placement conditions, external financing measures are subject to ongoing review.

The dividend amount will continue to be geared to the profit trend. The cyclical fluctuations typical of the sector are by nature reflected in the results of the Group, on the one hand, and in its share price, on the other. The separate financial statements of Salzgitter AG (SZAG) are decisive for the ability to pay dividend. The Salzgitter Group pursues a fundamental policy of paying out steady and attractive dividend – removed from volatile reporting-date related influences – based on the pre-requisite of achieving actual operating profit. Such payments do not necessarily have to fully reflect the cyclicality of the earnings performance. Against the backdrop of the market environment currently to be expected and the dependence of the earnings of SZAG on its subsidiaries we anticipate a result available for distribution for the financial year 2017 around the level of the previous year.

All in all, it can be concluded that, owing to its broad-based business and sound financial base, the Salzgitter Group is still comparatively well prepared to meet challenging phases. We will continue to attach great importance to this in the future as well.

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