Salzgitter Group sets a new record figure with its profit for the first half of 2005

In the first six months of the financial year 2005, Salzgitter AG achieved an outstanding increase in both sales and profit. Whereas the rolled steel business still benefited from orders on hand placed during the boom phase of the market, the demand for tubes remained at a persistently high level.

With external sales of € 3.63 billion, the Salzgitter Group generated a significant increase over the previous year's period (first half of 2004: € 2.77 billion). Group profit before taxes of € 463.4 million marks a new record figure for a half-year result, also in a long-term comparison (first half of 2004: € 81.7 million). After-tax profit stood at € 332.7 million (first half of 2004: € 57.7 million) and return on capital employed (ROCE) came to 45.0 % (first half of 2004: € 13.2 %). Along with an adequate quantity and margin situation, the pleasing increase in profitability was also attributable to the rigorous implementation of the meanwhile 302 measures which are part of the group-wide profitability improvement program. Changes in the valuation of inventory in the Steel Division to comply with the new IFRS rules had a positive effect of € 38 million in comparison with the LIFO method applied up until 2004.

At the beginning of the second quarter, the Processing Division was closed down and the companies formerly belonging to it were assigned to the Steel and Services Divisions with commercial effect as from January 1. At the same time, Salzgitter Großrohre GmbH switched to the Tubes Division. To facilitate comparison of the results, the year-earlier figures are shown pro forma below as per the new structure.

Over the course of the first six months, the situation on the steel market, which was previous characterized by a genuine shortage and occasionally by speculation, normalized. Orders placed towards the end of the previous year – often driven by shortfalls – were above the level of short-term demand and had the effect of causing imports from non EU countries to surge in the first half of 2005. This led to an excess in the inventories of traders and customers and a decline in the order volume and in the spot market prices, although the actual consumption of steel remained unchanged at a high level. Salzgitter AG resolved to curtail production volumes of flat steel and beams in order to normalize steel inventories, particularly in the European market.

Against this backdrop, the shipments of the Steel Division, which three companies from the former Processing Division have since joined, fell by 14 % year on year. Nonetheless, total sales climbed 26 % as against the year-earlier period to € 1.55 billion (first half of 2004: € 1.24 billion) owing to the very positive sales price trend seen over the course of the previous quarters and at the start of the year. Accordingly, external sales increased by 24 % to € 1.13 billion (first half of 2004: € 912 million). The pre-tax result rose exceptionally sharply to € 282.3 million (first half of 2004: € 16.2 million). The result was almost exclusively generated from the production of flat steel and plates.

The boom in the tubes business held steady in 2005 as well. In comparison with the year-earlier figure of € 459 million, the Tubes Division boosted its external sales to a laudable € 705 million which is an increase of 54 % in the first six months of 2005. The increase in shipments in conjunction with perceptibly better revenues in all product groups enabled sales to grow and delivered outstanding first-half earnings before tax of € 157.7 million (first half of 2004: € 25.5 million). This result includes the contribution from Vallourec & Mannesmann Tubes SA, which was sold at the end of June.

In the first six months of 2005, the Trading Division succeeded in more than compensating for the decline in sales in the European warehousing and trading segment business through an expansion in international trading; accordingly, shipments rose by 13 %. Owing to the higher price level in a year-on-year comparison, external sales of € 1.63 billion were generated which is 32 % up on the previous year’s figure (first half year of 2004: € 1.23 billion). Pre-tax earnings of € 44.1 million again settled at an outstanding level (€ 43.0 million).

External sales of € 161 million generated by the extended Services Division remained more or less unchanged from the previous year's level (first half of 2004: € 163 million). The pre-tax result stood at € 3.7 million (first half year of 2004: € 4.5 million).

The result from consolidation and other sources was negative at € -24.4 million also due to the elimination of the release of badwill (first half of 2004: € -7.5 million).

Strong expansion in China and robust growth in the USA continue to be the engines of the global economy. Although a downturn in global growth is discernable in the meantime in the wake of climbing interest rates in the USA and the rising price of raw materials, in particular crude oil, the export sector remains the mainstay of the economy in Europe and Germany. Owing to the depreciation of the euro there are a number of different indicators which point to a sentiment reversal in domestic industry which could trigger brisker investment activities.

In the Steel Division, the relining of Blast furnace A, commenced at the beginning of July, is expected to be completed by the end of September. The purchase of bought-in slabs to compensate for the lower production of crude steel is, however, at a much lower level than planned, as the production of rolled steel will be adjusted to take account of reticent demand in the second half of the year. After the plant holidays of key steel consumers, order intake activity should start to rise given that inventories have normalized by then. Spot market prices for flat steel are meanwhile showing the first signs of stabilizing. In the beams segment, stronger order booking activity and rising costs for scrap have led to the first price increases. In the second half of the year, the results of the Steel Division will be impacted by the anticipated lower level of flat steel placed on the market coupled with the sustainably high purchasing costs of coking coal, iron ore and alloys. By contrast, the healthy demand situation for high-grade plates and the recovery of the beams market should have a stabilizing effect.

The signs which point to the future development of the steel tubes market are positive again as the high price of energy will drive the dynamic development of the energy generating and producing industries. In the capital goods sector as well, the demand for construction and precision tubes is likely to pick up momentum in the months ahead. Given the high level of orders on hand, it can be assumed that the capacity utilization of plants in the tubes segment will again be good.

Similar to the steel segment, the Trading Division is likely to see business return to normal levels following an end to the global steel boom. The further development of the Services Division is expected to proceed in a satisfactory manner in future.

On the basis of the information currently available and estimates concerning the trends in the procurement and sales markets, as well as the general framework conditions, and taking account of the effects of the Profitability Improvement Program, the Salzgitter Group expects to post a pre-tax result of around € 600 million in the current year. We expressly point out that opportunities and risks arising from currently unforeseeable trends in sales prices, input material costs and plant utilization, as well as changes in the currency parity, may significantly affect performance in the second half of the year. Additional positive or negative effects may come about owing to inventory valuation pursuant to revised IFRS standards or the way they are applied. The resulting fluctuation margin in the consolidated result caused by all factors of influence is in the three-digit million range.

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.