Salzgitter Group reports a leap in profits in Q1 2005

Thanks to strong global demand and the generally satisfactory level of prices – achieved in stages since the beginning of last year – for rolled steel products and tubes, the Salzgitter Group recorded exceptional rises in sales and profits in the first quarter of 2005 over the same period in 2004 which had marked the start of the present favorable situation in the steel market.

Consolidated external Group sales rose by 36 % to € 1.76 billion (Q1 2004: € 1.30 billion). Approximately half the increase was accounted for by the Trading Division, with Steel and Tubes also making substantial contributions. Group pre-tax profits at € 253.5 million represented a new quarterly high (Q1 2004: € 26.2 million). The Steel Division was the main contributor to this result, followed by Tubes and Trading. In addition to the strong market, all of the Divisions experienced positive effects from the group-wide profitability improvement program, which by now comprises some 302 projects.

Profits after tax of € 173.5 million (Q1 2004: € 20.1 million) and an annualized return on capital employed (ROCE) of 56.5 % (Q1 2004: 9.3 %) clearly illustrate the exceptionally positive business situation in comparison with the same period last year. As a result of the revision made to the relevant IFRS standard, there has been a change in the valuation of inventories, with the primary effect being felt at the Steel Division. In comparison with the LIFO method applied in 2004, this led to an increase of € 35.6 million in pre-tax profits.

External sales by the Steel Division in the first quarter of 2005 at € 525 million were up by 31 % (Q1 2004: € 401 million). There was a similarly positive development in total sales which climbed 33 % to € 744 million (Q1 2004: € 561 million). Pre-tax profits reached € 167.7 million (Q1 2004: € 11.5 million). Additional improvements in prices for intra-quarter sales, especially plate, combined with higher revenues from long-term contracts effective from January were sufficient to produce these very gratifying results despite the decline in shipments of beams and flat rolled products in comparison with last year. The quarterly result for the Steel Division also includes profits of € 2.4 million on the sale of shares in US steel company Steel Dynamics Inc.

The Tubes Division posted external sales of € 309 million for the first three months of 2005, exceeding last year’s performance by a remarkable 50 % (Q1 2004: € 206 million). This increase followed on from the significant rise in sales prices in all product segments resulting from the buoyant worldwide demand for tubes, as well as from a marked rise in shipments of large-diameter pipes and stainless tubes. The non-consolidated seamless tube manufacturers also recorded strong demand and a similar rise in sales. Thanks to the prevailing beneficial environment, pre-tax profits climbed to € 77.0 million (Q1 2004: € 5.6 million), despite substantial hikes in input material costs.

As a result of significantly higher steel prices and a surge in shipments, external sales at the Trading Division in the first quarter of 2005 rose to € 797 million, up by 40 % in comparison with the same period last year (€ 569 million). Pre-tax profits doubled, reaching € 26.3 million (Q1 2004: € 11.2 million). However, the rises in profits and sales should be viewed against the background of a market which in the first quarter 2004 had yet to achieve entirely satisfactory status.

External sales at the Services Division in the first quarter of 2005 remained constant in comparison with Q1 2004, coming in at € 77 million. There was a further improvement in the pre-tax result which rose to € 5.7 million (Q1 2004: € 4.8 million).

In the new financial year, the Processing Division has continued to suffer from the effects of stagnation in the construction industry and the sustained competitive pressure on suppliers to the automobile industry. Sales price increases lifted external turnover by 20 % to € 57 million (Q1 2004: € 47 million). Thanks to the extensive action taken in preceding periods to reduce costs, as well as to last year’s financial restructuring, the pre-tax result improved to € -3.4 million (Q1 2004: € -10.7 million), although rises in input material costs could only be passed on with delays.

Income from consolidation and other sources amounted to a negative € -19.8 million (Q1 2004: € 3.8 million). This negative result was caused, among other factors, by the cessation of badwill amortization.

The positive regional development in the North American and East Asian regions remains the main motor powering the global economy. So far there is no end in sight to this situation; however, rising US interest rates and restrictive economic policies in China are generally expected to put a damper on growth.

Nevertheless it is likely that exports will continue to be the driving force behind the economies of Europe and of Germany, since internal domestic demand is not expected to contribute any substantial momentum, also in the further course of the year.

The leap in prices for coking coal and iron ore will push costs at the Steel Division substantially above last year’s level. For this reason the Salzgitter Group is responding to the restrained demand from individual consumer sectors – in particular the construction industry – by moderating production volumes. In the second quarter of 2005 production of hot-dip galvanized and strip-coated flat rolled products will be reduced by around 100,000 t. In Q3, the output of crude steel from the Steel Division will be temporarily restricted as a result of the scheduled shutdown of Blast Furnace A for repair work. However, the shortfall will be compensated for by the additional output from the new blast furnace C which is now operating smoothly and productively, as well as by adjusting the level of bought-in supplies of slabs. Despite these factors, business at the Steel Division is expected to develop satisfactorily.

The Tubes business is generally expected to continue at a brisk level. Thanks to the strong order book and lively demand from the project based business, a high level of capacity utilization is assured at plants both in Germany and abroad. While the availability of input material is anticipated to return to normal, the high euro exchange rate continues to hamper export prospects for European tube producers.

In the Trading segment the generally satisfactory pattern of business is expected to continue. The effects of reduced activity in the domestic construction sector are likely to be offset by more favorable developments in other industries and stable foreign demand for steel. Likewise, a positive overall trend can be anticipated for the Services Division.

With effect from April 1, 2005, the companies of the Processing Division have been assigned to the Steel and Services Divisions. Due to the improvement in the earnings situation at the affected processing companies, there will be no substantial change in prospects at the two mentioned divisions.

On the basis of current information and expectations regarding the development in the input and output markets and the situation in general, and taking into account the effects of the profitability improvement program, for the current year the Salzgitter Group should return a pre-tax result in the mid three-digit million range. We expressly point out that opportunities and risks resulting from at present unforeseeable variations in product revenues, input material prices and capacity utilization as well as exchange rate fluctuations may have a significant effect on developments in the financial year 2005, especially in the second half. Other positive or negative effects may derive from the valuation of inventories in accordance with modified IFRS standards or from the application of the latter. The resulting fluctuation margin in consolidated pre-tax earnings resulting from all mentioned factors likewise falls within a triple-digit million spread.

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.

Related Files

• Keydata Q1 2005 (ca.0,7 MB )