Consolidated profits stabilize in second quarter of 2003 despite poor general economic conditions

The Salzgitter Group once again achieved a positive result in the second quarter of the financial year 2003, in spite of the continued absence of a general economic recovery.

Increased revenues for rolled steel products and additions to the consolidated entity in the first six months of the financial year 2003 saw the Group’s consolidated external sales for the period increase by 6 % to € 2.5 billion (first half-year 2002: € 2.4 billion).

Pre-tax profits (EBT) of € 10.4 million in the second quarter of 2003 represented a continuation of the stabilizing trend; this figure was slightly up on the results attained in the two previous quarters (fourth quarter 2002: € 4.6 million EBT; first quarter 2003: € 6.2 million EBT). Due to the absence of momentum on the Group’s crucial selling markets, the pre-tax profits of € 16.6 million generated in the first half of 2003 failed to emulate the highly positive half-yearly result that the Group achieved in 2002 (€ 49.9 million EBT), which was based on high capacity utilization and adequate revenues for pipes. In comparing the half-yearly results, however, consideration should also be given to the fact that the financial statements for 2002 benefited from around € 7 million in non-operational earnings components. In the first half of 2003, on the other hand, the Group had to absorb almost € 9 million in non-recurring expenses that resulted from a production stoppage of several weeks’ duration for modernization purposes, as well as the sale of a smaller subsidiary (Salzgitter Antriebstechnik GmbH & Co. KG).

Consolidated ROCE (return on invested capital) increased from 3.4 % in the first quarter to 4.8 % in the second quarter, reaching 4.2 % at the mid-year point (first half-year 2002: 9.1 %).

The contribution of the Steel Division to the Group’s external sales increased by 2 % to € 764 million in the first six months of 2003 (first half-year 2002: € 748 million). Total sales amounted to € 1.044 billion, 6 % higher than in the previous year. This trend can be attributed to the increased use of the Group’s own distribution channels. The Group generated pre-tax profits of € 7.4 million. In the first half of 2002, due mainly to very low product revenues, the Group had posted a pre-tax loss of € -26.4 million. The positive trend in the plate segment and the considerably improved revenue situation in the flat rolled products segment were the crucial factors that led to this striking increase of € 33.8 million in earnings.

Having been brought to a standstill for 17 days to permit the installation of essential machine components, Salzgitter Flachstahl GmbH’s hot strip rolling mill was put back into operation successfully and without any major difficulties. Drawing on leading edge technologies, this key plant will be in an excellent position to fulfill even the most demanding and sophisticated customer requirements. The loss of production caused by the standstill, however, burdened results to the tune of almost € 6 million. In the beam segment, the lack of demand from the construction sector and the highest-ever level of scrap prices at the mid-year point made noticeable losses unavoidable.

In the first six months of 2003, consolidated external sales in the Tubes Division decreased by 19 % to € 474 million, compared with the extraordinarily high figure of € 583 million in the corresponding period last year. This decline can be attributed to the overall hesitancy of demand for oil and pipeline tubulars as a result of the crises in the Middle East, the general economic weakness in almost all of the sales regions and the strength of the euro. The Tubes Division nevertheless ended the first six months of the financial year with a positive pre-tax result amounting to € 1.6 million (first half-year 2002: € 60.8 million EBT).

Increases in volume, particularly in the international trading segment, and the addition of Salzgitter International Inc., Houston (USA) to the consolidated entity caused external sales in the Trading Division to increase to € 1.0 billion – 18 % up on the first half of 2002. Pre-tax profits remained comparatively constant at € 5.6 million (first half-year 2002: € 6.6 million EBT), despite depressed demand on the domestic market and in the EU.

External sales in the Services Division increased by 9 % to € 129 million in the first half of 2003 (first half-year 2002: € 118 million). Pre-tax profits, at € 6.7 million, barely deviated from those of the corresponding period last year (€ 6.9 million EBT).

The Processing Division closed the period under review with external sales of € 119 million and a pre-tax loss of € -7.4 million. The divergent earnings positions of automobile industry suppliers and construction suppliers persisted in the second quarter.

Although the mood of consumers and industry in both the domestic market and the EU has improved somewhat, an economic recovery has still failed to materialize. Growth rates remain either negative or, at best, stagnant. In view of the seasonal factors affecting the third quarter, the fundamental overall conditions cannot be expected to show any improvement until the last quarter of this year at the earliest.

The focus of the Steel Division will therefore be on maintaining the existing revenue level for flat steel products, if necessary also by reducing planned production quantities. Such a reduction in output is unlikely to leave the previously satisfactory results unaffected. The “price before quantity” strategy should nevertheless prove to be advantageous by the time the expected recovery phase takes hold in 2004.

Since further increases in the price of plate products are regarded as attainable, the gratifying earnings trend should continue. Particular attention is being paid to improving the current unsatisfactory margin and revenue situation in the beam and sheet piling segments and the area of structural members made from coated flat steel, all of which are dependent on the construction industry.

While significant indicators point to a more buoyant tendency in the area of oil tubulars and pipeline projects, momentum from the trading, mechanical engineering and energy generation sectors has so far failed to emerge. The export earnings of the Tubes Division from deliveries from the Euro zone will depend on whether the recent strengthening of the US dollar will prove to be durable. The position of the companies with production facilities in North America and Brazil can be regarded as far more favorable.

More than 200 projects that make up the Group-wide earnings improvement program are being consistently implemented with the goal of increasing quality and productivity and reducing the commitment of funds.

In the second half of 2003, Salzgitter AG expects to generate pre-tax earnings – before extraordinary effects – that roughly match those of the first six months of this financial year; this can be attributed primarily to the still unsatisfactory short-term overall economic outlook in several relevant sectors and regions. Although this corresponds to the pre-tax results in a medium, double-digit million range that was forecast in April, it takes account of the general economic and exchange rate developments. Most of the positive impact from the improved influxes of orders in the fourth quarter will be reflected in the earnings situation in 2004.

Disclaimer:

Some of the statements made in this document 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 further deterioration occurs in the economy or in the specific market situation pertaining to the Division companies, but rather that the underlying bases of plans and outlooks prove to be accurate in terms of their scope and timing.