SALZGITTER AG 
By 14.08.2013
In the first half of 2013, the performance of the Salzgitter Group was largely determined by the structural crisis in the European steel industry. Severe competition resulting from the ongoing capacity underutilization of numerous producers in southern Europe pushed the selling prices achievable for most rolled steel products below the manufacturing costs. The sectional steel products processed by the construction industry were the hardest hit. Against this backdrop, the Steel Division reported a high loss owing primarily to impairment of the assets of Peiner Träger GmbH (PTG). This impairment had become necessary due to the persistently unsatisfactory earnings outlook of the section business. Additional profit burdens emanated from the dramatic lack of orders in the Tubes Division's large-diameter pipes business.
Consolidated external sales fell by 7 % to € 4,977.3 million (first half of 2012: € 5,378.5 million), which was mainly attributable to the unfavorable selling price trend for rolled steel products. The pre-tax result of € -298.7 million (first half of 2012: € -17.9 million) comprises impairment of € 185.0 million on the assets of PTG, as well as € 54.2 million in negative after-tax contribution by the 25% holding in Aurubis AG, a participation included at equity (first half of 2012: € +34.6 million). The after-tax result stood at € -315.2 million (first half of 2012: € -22.5 million), which brings basic earnings per share to € -5.87 (first half of 2012: € -0.46) and return on capital employed to -13.3 % (first half of 2012: 0.4 %).
As before, an equity ratio of 39% and net financial position of € 375 million continues to form a thoroughly sound financial basis for mastering the current challenges.
"Salzgitter AG 2015" program
In order to achieve an acceptable level of performance also under difficult general conditions in the markets and competitive arena, a restructuring program under the name of "Salzgitter AG 2015" was initiated in the fall of 2012. Numerous specific measures geared toward improving the process and organization structures have meanwhile been defined and are now on the verge of implementation or already under way. For instance, Salzgitter Flachstahl GmbH is investing € 70 million in building a coal injection plant to reduce metallurgy costs. Under the current circumstances, the amortization period will be a mere two years. The overall profit improvement potential identified and backed by projects within the Group amounts to more than € 200 million p.a. More than half of this amount is attributable to the further development of technical processes and initiatives in the areas of logistics, procurement and data processing, along with reducing personnel through downsizing more than 1,500 positions. For the purpose of personnel-related measures, a "Pact for the Future" (Zukunftsvertrag) between the company, the Group Works Council and IG Metall has been negotiated as a framework agreement and is due for formal signing in the near future. Along with the necessary adjustments to capacity and streamlining of largely administrative processes, the reorganization is aimed at significantly strengthening the innovation and customer orientation of the Group and its companies.
Performance of the divisions
In the period under review, the Steel Division's companies came under fierce competitive pressure and reported unsatisfactory and partially declining sales prices in spite of stable volume-related demand for flat steel and even improvements with regard to plate. In the section business, the level of new orders was lower and extremely volatile. Rolled steel shipments slightly exceeded the year-earlier figure. The external sales of the Steel Division decreased by 5 % to € 1,334.4 million (first half of 2012: € 1,406.8 million). Of the pre-tax operating loss amounting to € 75.5 million, around 60 % alone is attributable to section steel producer PTG. Salzgitter Flachstahl GmbH and HSP Hoesch Spundwand und Profil GmbH also reported negative results. Including impairment of € 185.0 million of PTG's assets, the Steel Division's pre-tax result stood at € -260.5 million (first half of 2012: € -97.8 million).
The shipments of the Trading Division remained around the year-earlier level thanks to the still healthy volumes of international trading. By contrast, external sales fell substantially short of the figures posted in the first six months of 2012 owing to the lower price level (€ 2,031.5 million; first half of 2012: € 2,398.4 million). The division delivered a presentable pre-tax profit of € 19.6 million (first half of 2012: € 27.6 million).
After a difficult start to the year, the Tubes Division's order intake saw no improvement. Short-time work was introduced in both the large-diameter pipes business as well as at the Salzgitter Mannesmann Precision Group. Shipments in the first half of 2013 fell marginally below the prior-year level, as higher volumes of large-diameter pipes were unable to compensate for the lower shipments of precision and HFI welded tubes. At € 820.7 million, external sales were slightly higher year on year (first half of 2012: € 790.5 million). The unsatisfactory order and capacity utilization situation of European large-diameter pipe mills were the primary cause of the Tubes Division's pre-tax loss of € 25.0 million (first half of 2012: pre-tax profit of € 8.3 million).
Recorded at € 204.4 million, the external sales of the Services Division were lower than in the first six months of 2012 (€ 212.2 million). The Services Division's pre-tax profit amounted to € 4.3 million, thereby posting a notable decline in comparison with the prior-year period (first half of 2012: € 10.2 million), which was mainly attributable to the lower capacity utilization of steel production service providers.
The Technology Division continued to perform well due to sustained improvements from the "Fit4Future" restructuring program. The booking of exceptional major projects exceeded the year-earlier order intake appreciably. External sales also rose (€ 568.4 million; first half of 2012: € 548.5 million). The division generated earnings before tax of € 5.6 million, thereby more than doubling its result compared with the first half of 2012 (€ 2.6 million).
External sales generated in the Other/Consolidation segment through business in semi-finished products with external parties dropped to € 18.0 million in the first six months of 2013 (first half of 2012: € 22.0 million). After-tax profit stood at € -42.7 million (first half of 2012: € 31.1 million). This figure includes the after-tax result of € -54.2 million (first half of 2012: € 34.6 million) contributed by Aurubis AG, a participation included at equity. Aurubis AG's result as per June 30, 2013 reflects reporting-date related negative effects from the market valuation of metal price hedging transactions and the valuation of inventories. The prices of copper and other metals declined substantially in the second quarter.
Salzgitter intra-group sales grew to € 1,521.9 million in the reporting period (first half of 2012: € 1,472.6 million).
Guidance
There is still no sign of a major economic recovery in the Eurozone. Accordingly, the general environment in which the Salzgitter Group conducts its business is unlikely to improve in the months ahead. For this reason, we have given priority to focusing on implementing the projects that are geared to safeguarding the medium- to long-term competitiveness of the Group under the "Salzgitter AG 2015" program.
Over the short to medium term, a recovery of building activities in southern Europe or an upswing of any note in the EU's automotive markets are not anticipated. Consequently, the divide between the northern and southern European steel markets in terms of market supply and demand is likely to persist, meaning that fierce competition and the resulting price pressure are set to continue unabated. As raw material costs are unlikely to ease the situation to any great extent, the Steel Division anticipates a downturn in sales and a clearly negative result before tax in 2013 as a whole.
The Trading Division predicts a return to normal levels of the recently very brisk project business in international trading in the coming months, as opposed to the stockholding steel trade where earnings opportunities arising from a possible cyclical recovery in demand, accompanied by more stable prices are perceived. With sales in a slight downtrend, profit in the double-digit million range continues to appear achievable.
The considerable capacity underutilization prevailing in the European large-diameter pipe business of the Tubes Division since the beginning of the second quarter will continue throughout the remainder of the year. Consequently, short-time work is likely to extend until the end of the year. A significant increase in the order volume for HFI-welded tubes and in the precision tubes segment is also unlikely. By contrast, the seamless stainless steel tubes business is expected to perform well, as before. Stable sales at best and a pre-tax loss in the mid to upper double-digit million euro range are anticipated overall for the financial year 2013.
The Services Division expects sales to remain at the year-earlier level, accompanied by lower earnings before tax compared with 2012.
In view of the continued good capacity utilization, the Technology Division expects the positive sales and profit trend to hold steady. The KHS Group's "Fit4Future" program, initiated in 2011 and systematically implemented since then, will provide support here.
The reporting-date related negative valuation effects in the result of Aurubis AG as per June 30, 2013 harbor the risk that the company's contribution to the Salzgitter Group's result may not be in the range originally anticipated for the financial year as a whole. The market price trends for copper and other metals will be the determining factor.
Negative influences on the result in the accounts of the first half of 2013 and the development of operations anticipated necessitated an adjustment of guidance for the results. With regard to the 2013 financial year, the Salzgitter Group now anticipates slightly lower sales in a year-on-year comparison and a negative pre-tax result of around € 400 million. As already announced, additional special, initially burdening, non-recurrent effects may still arise as a consequence of implementing the "Salzgitter AG 2015" Group project.
We make reference to the fact that opportunities and risks from currently unforeseeable trends in selling prices, input material prices and capacity level developments, as well as changes in the currency parity, may considerably affect performance in the second half of the financial year 2013. The resulting fluctuation in the consolidated pre-tax result may 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 6 million tons of steel products sold by the Steel, Trading and Tubes divisions over the remainder of the financial year, an average € 20 contraction in the margin per ton is sufficient to cause a variation in the annual result of more than € 120 million. Moreover, the accuracy of the company's planning is restricted by the volatilities and shorter contractual durations, both on the procurement and on the sales side.
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. Notwithstanding prevailing statutory provisions and capital market law in particular, the company undertakes no obligation to continuously update any forward-looking statements that are made solely in connection with circumstances prevailing on the day of their publication.
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