Earnings soar in an exceptional market for steel

Key data for financial year 2004 Against the background of demand for rolled steel products and tubes booming worldwide, the Salzgitter Group achieved in its financial year 2004 results which were far above the average.

Reflecting the gratifying trend in business, consolidated sales climbed to € 5.9 billion, up by 23 % on the year before (2003: € 4.8 billion). Group pre-tax profits at € 322.8 million (2003: € 42.5 million) also set a new record in comparison with past years. In contrast to previous economic cycles, the highly satisfactory development in business at the Steel Division was met by a simultaneous upswing of the tubes activities, which, together with the record earnings of the Trading Division, contributed to these exceptional results. The 297 projects which meanwhile comprise the Group-wide profitability improvement program also delivered notable contributions to earnings. After taxes the Group made a profit of € 246.7 million (2003: € 28.1 million).

The financial statements for 2004 contain a series of on-balance sheet measures: On the one hand the change in inventory valuations at the Steel Division in line with current IFRS accounting rules yielded a positive contribution of € 35.0 million to the bottom line. While on the other hand the balance sheet also reflects a precautionary total of € 108.4 million in extraordinary writedowns on fixed assets at some Group subsidiaries. For the last time, the reversal of negative goodwill originating mainly from the acquisition of Mannesmannröhren-Werke in the year 2000 boosted income by a further € 60.4 million.

The return on capital employed (ROCE) amounted to 24.4 % (2003: 4.6 %), allowing the company to meet its own target of an average 12 % ROCE over the ongoing steel cycle, which has begun in 2001.

External sales at the Steel Division rose 23 % to € 1.76 billion (2003: € 1.43 billion). Total sales including those sourced via the Group’s own distribution channels climbed 24 % to € 2.49 billion (2003: € 2.00 billion). Flat rolled products, heavy plate and sections contributed in equal measure to the growth in revenues with sales price rises at the beginning of each quarter. Thanks primarily to the exceptional market and the strong earnings development in flat products and plate, as well as to a lesser extent also to the operating profit turnaround in the sections business, the Steel Division posted a gratifying pre-tax profit of € 164.0 million (2003: € 46.9 million). This includes a positive effect of € 35.0 million from the revaluation of inventories in line with current IFRS rules, as well as precautionary measures amounting to € 38.5 millions in the beams segment. In addition the Division booked a profit of € 8.7 million from the sale of shares in US steel company Steel Dynamics Inc. and reported comparable one-off operating expenses in association with the relining of a blast furnace in Q2 2004.

In the course of last year there was also an increasingly strong revival in demand for tubes, both in Europe and overseas. As a result, the sharp rise in input material costs and the negative exchange rate effects in some important markets were gradually compensated by sales price increases. In this environment, consolidated external sales booked by the Tubes Division rose by 9 % to € 1.00 billion (2003: € 0.92 billion). As a result of the effects of consolidation, this figure does not reflect the excellent progress in sales of seamless tubes. In contrast to its crisis-hit performance in 2003 (€ 2.6 million), the pre-tax profit of € 120.5 million posted by this Division for 2004 marks its best result since it became part of the Salzgitter Group. The financial statements contain precautionary measures amounting to some € 17.9 million.

The Trading Division profited most strongly of all from the exceptional situation in the steel markets over the course of the financial year 2004. In the early quarters of the year, stocks which had been purchased at low cost in the previous year were carried at proportionately low values were sold at sharply rising market prices. And while this boost to profits slowly faded, the momentum was maintained by increasingly buoyant international trading in the second half. External sales surged by 30 % to € 2.64 billion (2003: € 2.03 billion) and pre-tax profits soared to an exceptional € 98.9 million (2003: € 13.1 million). There were no changes in inventory valuation methods at the Trading Division.

The Services Division recorded external sales of € 313 million, representing a 30 % improvement over the year before (2003: € 241 million). The bulk of this increase was accounted for by the rising value of sales to non-Group customers at trading company DEUMU, due in turn to the high price of scrap and alloying elements. Pre-tax profits rose to € 20.4 million (2003: € 13.7 million).

Once again in 2004 the companies which comprise the Processing Division labored under the economic weakness of the sectors they serve. The restructuring and intensified sales activities by the companies concerned were insufficient to compensate for the sustained and critical weakness of the construction industry. Likewise the cost cutting measures enacted by automobile manufacturers had a sustained effect on business with suppliers and precluded any let-up in the competitive pressure. As a result rising input material prices could only be passed on to a limited extent and with time delays. The initial signs of a constrained improvement became evident only in the second half. External sales at € 222 million were on a par with the year before (2003: € 221 million), while the pre-tax result came in at € -0.2 million (2003: € 0.1 million). This figure results from offsetting operating losses accrued up to the end of the year and precautionary measures totaling € 52.0 million through the waiver of receivables totaling some € 80.5 million by the holding company. These measures will relieve the burden on earnings in future periods, as well as substantially widening the operational and strategic room for maneuver available to the Group in its more difficult areas of business.

Due in particular to the waiver of receivables, ‘Consolidation and others’ amounted to a negative figure of € -80.8 million (2003: € -34.0 million).

The annual financial statements will be presented to the Supervisory Board for approval at its next meeting and the full version will be published on March 31, 2005.

The outlook for the coming months of the present financial year is predominantly confident. Even though the overall volume of orders booked by the Steel Division in recent weeks has fallen short of last year’s outstanding figures, capacity utilization in the fields of flat rolled products and plate remains highly satisfactory. Similarly after a period of seasonal weakness at the end of the year there is currently a slight upturn in orders for sections. The in some cases exorbitant increases expected for 2005 in the cost of some raw materials for steel production will have to be compensated for by price rises in the coming quarters. Some adjustments in the prices for flat rolled products and plate have already been made in the first quarter of the new year. As a result of the scheduled shutdown of Blast Furnace A for repairs, production of crude steel will be temporarily restricted in the third quarter. However the new Blast Furnace C and the No. 3 continuous casting line have meanwhile been smoothly commissioned and will significantly contribute to the compensation of any shortfall quantity.

In the Tubes business, too, demand remains at a comfortable level. With order books well filled at the start of the year, all indicators show capacity utilization remaining high at production locations both in Germany and abroad. The restricted availability of input material is the major limiting factor, along with the weak dollar, which is hampering exports by European manufacturers.

Having signed a non-binding memorandum of understanding at the end of January, Salzgitter AG and Vallourec SA are currently engaged in negotiations regarding the proposed concentration of seamless tubes activities at Vallourec.

The Trading Division is generally expected to benefit from the continuing strength of the market, with both the stockholding business in Germany and international trading remaining buoyant. The lingering weakness in demand from the German construction industry should be offset by more favorable movements in other sectors of consumption with the result that trading volumes and price structures of the Group’s own steel trading business are likely to remain stable.

The positive trend in business at the Services Division is also expected to continue, whereas the Processing Division companies can look forward to only slight momentum as the difficult situation in the building industry persists and the automotive sector experiences a moderate recovery.

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.