Salzgitter Group posts record results in the first nine months of 2005

Against the backdrop of ongoing satisfactory development in the rolled steel and tubes businesses, Salzgitter AG has set new sales and profit records for the first nine months of a financial year thanks to the outstanding results of the first half year and a better-than-expected third quarter.

The 25 % increase in consolidated external sales to € 5.38 billion (9 months 2004: € 4.30 billion) and a pre-tax profit of € 595.2 million (9 months 2004: € 157.2 million) are sound proof of the current performance of the Salzgitter Group. Earnings in the third quarter of 2005 came to € 131.8 million before tax and were a significant improvement on the already most satisfactory figure of the year-earlier quarter which was € 75.6 million. Owing to the capitalization of € 130 million worth of future positive tax-related effects with the concurrent impact on cash, the after-tax result reached a level of € 556.3 million (9 months 2004: € 110.4 million). Return on capital employed (ROCE) stood at 38.2 %, which is significantly higher than the year-earlier figure (9 months 2004: 15.7 %). Along with the favorable market conditions, the group-wide Profitability Improvement Program, which meanwhile comprises 302 measures, also contributed to a pleasing increase in profitability.

To facilitate comparison of the results of the current financial year, the year-earlier figures are shown below pro forma as per the new structure of the Group which had been implemented with commercial effect as of January 1, 2005.

In the European steel market, the inventories of the steel traders, which have risen sharply since the start of the year, caused orders to flag significantly and, consequently, spot market prices to decline. Steel consumption, which remained stable overall across virtually all market segments, as well as cut backs in the production volumes finally had the effect of causing inventories to return to largely normal levels in the third quarter. As a result, the prices of product segments, such as flat steel, which had come under pressure began to firm up again.

Total sales of the Steel Division, which now includes three additional companies from the former Processing Division, rose 18 % to € 2.26 billion (9 months 2004: € 1.91 billion) despite the lower volume of shipment due to seasonal influences and cyclical reasons typical to the market in the third quarter and thanks to the above average business transacted in the first half year. At the same time, external sales grew 16 % to € 1.63 billion (9 months 2004: € 1.41 billion). Pre-tax earnings of the segment achieved an exceptional € 330.6 million (9 months 2004: € 60.2 million). In the third quarter, Salzgitter Flachstahl GmbH carried out a long planned overhaul of one of the two large blast furnaces, which caused a significant decline in crude steel production and placed a not insignificant burden on earnings. Changes in the valuation of inventory in the Steel Division to comply with the new IFRS rules had a positive effect of € 46 million in comparison with the LIFO method applied up until 2004.

As a result of the sustained boom in the tubes business, the Tubes Division increased shipments substantially and raised sales prices across all product groups. The latter was also positively affected by the appreciation of the US dollar against the euro. Accordingly, external sales in the first nine months of 2005 soared 43 % to € 1.04 billion (9 months 2004: € 0.73 billion). A pre-tax profit of € 216.2 million (9 months 2004: € 52.6 million) is the result of the excellent business situation. This result includes the pro rata amount of the stake held in the French company Vallourec SA, consolidated at equity for the whole of the first nine months 2005, as well as the pro rata half-year result of the participation in Vallourec & Mannesmann Tubes SA, which was sold at the end of June and which was also consolidated at equity until this date.

International trading as part of the Trading Division benefited from brisk global business in rolled steel products, semi-finished goods and tubes which enabled the Division to raise shipments by 10 % despite the cyclically-induced decline of shipments in the European stockholding and trading business. External sales were boosted 28 % to € 2.47 billion (9 months 2004: € 1.92 billion) by the generally favorable business environment and the larger share of tubes. As predicted, the declining tendency of steel prices in the international spot markets caused margins to return to a normal level. The still exceedingly satisfactory pre-tax earnings of € 59.9 million generated in the first nine months of 2005 were therefore unable to match the record earnings of the previous year’s period (9 months 2004: € 72.6 million) which benefited from the sale of favorably valued inventories.

With external sales worth € 240 million (9 months 2004: € 244 million) and pre-tax earnings of € 5.7 million (9 months 2004: € 8.5 million), the Services Division fell only marginally short of the year-earlier figures. Lower scrap prices in the current year, as well as the low level of crude steel production in the third quarter had the corresponding adverse effect on the raw materials and logistics businesses of the segment.

The result from consolidation and other sources was negative at € -17.2 million, also due to the elimination of the dissolution of badwill, but nonetheless improved as against the previous year’s period which was negatively impacted by special effects (9 months 2004: € -36.7 million).

Although Salzgitter AG forged ahead in buying back its own shares in the third quarter of 2005, consolidated equity rose 65 % to € 1.80 billion (September 30, 2004: € 1.09 billion) within the period of a year. As a result, the share of equity in the balance sheet total, which grew by 21 % (September 30, 2005: € 5.03 billion; September 30, 2004: € 4.15 billion), reached a sound 35.8 % (September 30, 2004: € 28.8 %). This opens up the option of pursuing internal and external growth without time pressure and with due consideration to all relevant, rational criteria.

As a result of the persistently strong economies of the USA, China and other Asian countries, 2006 should see the global economy expand by more than 4 %. Sentiment in both the European and German industries has meanwhile brightened, mainly due to brisk demand from abroad. There are still, however, no signs of a sustained recovery in domestic demand in the EU and Germany in particular. All in all, the economic situation in Europe and Germany is expected to improve marginally in the year ahead.

New orders for steel products recovered in September again, a trend which persisted during the last weeks and which is likely to encourage spot market prices to stabilize further. Whereas the sales volume of the Steel Division should rise in tandem with demand in the fourth quarter, the average revenue for flat steel products and lower quality plate is more likely to stagnate due to the shipment of orders taken in the previous quarter. Along with better conditions in the spot business, the results of ongoing negotiations on the purchase price of coking coal and iron ore, as well as long-term contracts on the sales side, will be decisive for the future profitability of the steel segment.

Based on the great demand for tubes in the energy sector and the rising volume of orders from the European capital goods sector, the general conditions for the Tubes Division can still be deemed favorable. The high level of orders on hand already guarantees an excellent capacity utilization of a number of plants well into the next financial year.

From today’s standpoint, the Trading Division is likely to see its business develop steadily. In the Services Division, however, there will probably be a slight recovery due, among other factors, to the increase in steel production.

On the basis of the information currently available and estimates concerning the trends in the procurements and sales markets as well as the general conditions, and taking account of the effects of the Profitability Improvement Program, the Salzgitter Group’s pretax result is expected to post at least € 700 million in the current year. Express reference is made to the fact that opportunities and risks from developments currently not foreseeable and distortions in currency parity may still affect performance in the financial year 2005. Additional positive or negative effects may arise owing to structural or methodological changes, for instance in inventory valuation pursuant to revised IFRS standards or the manner in which they are treated.

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 situation pertaining to the Division companies, 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. This document is a translation of the original German-language press release. In case of ambiguity between this document and the German-language press release, the information provided in the latter shall prevail.

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