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GER - Difficult economic situation at Salzgitter

Salzgitter - In the first quarter of the financial year, the Salzgitter Group was exposed to the pressure exerted by recessionary trends, especially in the businesses of the Steel, Trading and Technology divisions. By contrast, the sustained positive result of the Tubes Division, coupled with income from the shareholding in Aurubis AG and financial investments, had a considerably stabilizing effect. In order to take account of selling price trends in the rolled steel markets, as well as declines in the price of raw materials, both actual and foreseeable, further valuation adjustments were carried out on inventories in the reporting period. As a result, the Group is free from hidden encumbrances accruing from inventory valuation.

Consolidated external sales fell by 24 % to € 2,194.7 million (first quarter 2008: € 2,901.1 million), which is indicative of the substantial decline in the business activities of all divisions, to the exception of the Tubes Division. The Salzgitter Group closed the first quarter with a pre-tax loss of € 98.3 million (first quarter 2008: € +291.9 million). This result includes around € 100 million for accounting measures relating to inventory valuation in the Steel Division. Moreover, a very gratifying first-time amount of € 23.7 million in after-tax earnings of Aurubis AG, the leading European copper manufacturer in which the Group holds a 23 % stake consolidated at equity, was recorded. The after-tax result stood at € -74.1 million (first quarter 2008: € +194.9 million), bringing earnings per share to € -1.38. Return on capital employed (ROCE) from industrial operations was negative (-11.3 %; first quarter 2008: 37.9 %) and, including € 1.3 billion in cash and cash equivalents, result in -7.7 % (first quarter 2008: 22.4 %).

It was the Steel Division which was hardest hit by the global recession in the reporting period. Capacity utilization of the Salzgitter and Peine mills came to only around 50 % of the capacity available. The situation in the plate segment, which was initially satisfactory, also deteriorated visibly, with the result that capacity utilization in March was no longer at a comfortable level. At the same time, the spot market prices of a large part of steel products tumbled. External sales declined accordingly to € 427.7 million (-45 %; first quarter 2008: € 782.1 million). The current downtrend in the price of raw materials was only reflected to a minor extent in the current results owing to the high level of inventories purchased at prices prevailing a year ago, but nonetheless induced us to adjust inventories downwards by € 100 million. These measures should therefore have factored in all negative influences from inventory-related valuations in the Steel Division as far as the currently available information is concerned. In consideration of these measures, the pre-tax result came to € -129.7 million (first quarter 2008: € +172.5 million).

The difficult business situation was also reflected in the external sales of the Trading Division where the result of € 926.9 million fell considerably short of the previous year's figure (first quarter 2008: € 1,154.3 million). Many steel processors and downstream traders focused on scaling down inventories. Above all, weak demand from the domestic market caused the result before tax to decline to € -20.6 million (first quarter 2008: € +48.6 million).

In the first quarter of 2009, the business in the Tubes Division was consistently robust as the large-diameter tubes, HFI-welded tubes and seamless stainless steel tubes product segments generated positive contributions which more than compensated for the unsatisfactory level of capacity utilization in the precision tubes business. External sales, which stood at € 552.0 million, even rose slightly as against the previous year's figure (first quarter 2008: € 543.0 million). Pre-tax profit came in at € 50.8 million, thus again achieving an extremely satisfactory level (first quarter 2008: € +66.0 million).

Segment sales of the Services Division declined to € 177.8 million (the first quarter 2008: € 299.0 million) in tandem with the sharp downturn in production activities of the steel companies. External sales, mainly generated by trading in raw materials of DEUMU Deutsche Erz- and Metall-Union GmbH, also dropped to € 83.4 million (first quarter 2008: € 128.6 million), first and foremost impacted by lower scrap prices. The division recorded a pre-tax loss of € 3.2 million (first quarter of 2008: € 4.9 million).

Similarly, the Technology Division, with its core businesses in filling and packaging technology and special machinery engineering, was severely affected by the recessionary trends in its global sales markets. External sales contracted by 23 % to € 192.5 million (first quarter 2008: € 248.5 million). Significantly lower levels of capacity utilization in many production segments and risk provisioning for legacy orders resulted in a negative pre-tax result of € 23.3 million (first quarter 2008: € +4.2 million).

The external sales of the Others/Consolidation segment, which are generated through business in semi-finished products with external parties, suffered a primarily volume-induced decline to € 12.1 million in the first three months (first quarter 2008: € 44.6 million). Since the start of the financial year, the 23 % participation in Aurubis AG has been consolidated at equity here. The company contributed to stabilizing the consolidated result through its pro-rata after-tax result of € 23.7 million in the period under review. Furthermore, income from financial investments, positive effects of currency hedging and write-downs on goodwill were netted. The result of Others/Consolidation therefore came to € 27.7 million (first quarter 2008: € -4.3 million).

The internal sales of the Salzgitter Group declined 31 % to € 576.0 million (first quarter 2008: € 837.8 million), impacted by considerably lower shipment volumes conducted via intra-Group sales channels.

With regard to the economic environment, there is no notable improvement in sight in the second quarter for the business activities of the Salzgitter Group. For this reason, our activities continue to be focused on measures to secure our company as a healthy going concern in the medium and long term. To this end, projects to effectively cut costs have been initiated in all companies at short notice. Parts of the investment program currently under way have been postponed and, wherever necessary, the option of reducing working hours has been used. Fundamentally speaking, the Salzgitter Group’s broad-based business and its high degree of financial stability and sound balance sheet are proving to be extremely advantageous in the current situation.

No discernible improvements have yet been identified in the order intake of the steel companies. Instead there are meanwhile considerable capacity utilization problems also for plate, a product which lags economic cycles. In the case of a number of products, selling price trends appear to be close to bottoming out. At the same time, however, the average level to be invoiced across all products will be considerably lower than in the first quarter. A general brightening of the situation can in all probability be expected after the summer break at the earliest.

The Trading Division is expecting demand to remain weak in the second quarter, a trend which will be particularly reflected in domestic steel stockholding trading. An unabated downturn in international business will cause sales and the result to remain around the level of the first quarter.

The outlook for the Tubes Division is set to remain good overall, mainly owing to orders in hand. Sales will remain stable for the most part and, although the result is likely to be lower than the previous year's figures, it will still be comparatively positive.

Sales and the pre-tax result of the Services Division will stagnate in the months ahead as a consequence of the low production volume of the steel companies.

Lackluster demand in the Technology Division is likely to persist, which means that no driving stimulus can be expected for sales and profit.
Owing to the ailing global economy, we consider our original forecast of not achieving breakeven for the Group in the first half of the year to be affirmed. We currently do not have any reliable indications that there will be a recovery in the second half year. We nonetheless believe it possible that order activity for steel products will settle at a normal level once the steel processors and traders have completed the process of reducing their inventories.

As from the third quarter, the reduction in the price of raw materials will be felt to a greater extent in terms of in the manufacturing costs. Accordingly, we still believe, even taking account of valuation adjustment measures carried out on inventories, that, given a notable recovery in the rolled steel market and in demand from the automotive industry, achieving breakeven in the pre-tax result in 2009 should still be possible. This is, however, contingent upon a strong and sustained turnaround of the situation in the steel market.

As in recent years, we make reference to the fact that opportunities and risks from currently unforeseeable trends in selling prices, input materials and capacity level developments, as well as changes in the currency parity, may considerably affect performance in the course of the financial year 2009. The resulting fluctuation in the consolidated pre-tax result may, as current events show, be within a considerable range, either to the positive or to the negative. The dimensions of this range become clear if one considers that, with around 10 million tons of steel products sold by the Steel, Trading and Tubes divisions, an average contraction of just € 50 in the margin per ton is sufficient to cause annual profit to diverge by more than € 500 million.

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