Salzgitter : First quarter of 2016

Salzgitter Group delivers a pre-tax result at breakeven thanks to sound business model

• Flood of imports at dumping prices dominates market conditions in the strip steel and plate Business
  
• First quarter of 2016: Pre-tax profit of € 3.1 million exceeds capital market expectations
  
• Guidance for the financial year 2016 affirmed:
  
  • operating pre-tax result around breakeven and
    
  • marginally positive return on capital employed (ROCE)

The Salzgitter Group again delivered proof of its sound business model and the sustainable success of its restructuring projects in an extremely challenging European steel market environment. The company closed the first quarter of the financial year 2016 with a pre-tax result at breakeven that exceeded capital market expectations. Presentable performance by the Energy and Technology business units, Peiner Träger GmbH's gratifying profit trend, and the earnings contribution of the Aurubis investment offset the mid-range double-digit million euro loss of the strip steel and plate companies that were themselves unable to counteract the negative impact of dumping prices - above all for Chinese steel imports - and their competition-distorting effect.
Mainly owing to lower average selling prices for most steel products, the Salzgitter Group's external sales declined to € 1,868.8 million (first quarter of 2015: € 2,287.9 million). As a consequence of conditions in the European steel market due to massive imports, pre-tax profit dropped to € 3.1 million (first quarter of 2015: € 51.8 million). This amount includes a contribution of € 11.6 million from the Aurubis investment (first quarter of 2015: € 3.1 million). Earnings after taxes stood at € 1.0 million, bringing earnings per share to € -0.00 (first quarter of 2015: € 0.58) and return on capital employed to 1.3 % (ROCE: first quarter of 2015: 7.5 %). With an equity ratio of 33.3 %, Salzgitter AG enjoys a sound balance sheet, also after a reduction to only 1.75 % in the actuarial rate applicable to pension provisions. The net financial position declined to € 216 million on the back of brisk business activities, as well as a precautionary tax payment, but nevertheless still remains comfortably sufficient.
Chief Executive Officer Prof. Dr.-Ing. Heinz Jörg Fuhrmann commented as follows: 'The result of the first quarter of 2016 shows that Salzgitter AG can successfully hold its own, also in an extremely adverse environment, thanks to its diversified product portfolio, its sound balance sheet and financial structure, but above all, due to its self-help measures, successfully implemented since 2012. The most recent bookings of large-diameter pipes projects allow us to look to the future with confidence, particularly in the Energy Business Unit. It is currently not possible to predict how sustainable the recovery in the steel market that set in a few weeks back will be. For this reason alone, we will be unceasing in our rigorous implementation of the remaining tasks we need to implement in order to optimize our competitiveness. We are well equipped for this with our robust positioning.'
Development of the business Units

During the period under review, the Strip Steel Business Unit operated in an extremely unfavorable market environment impacted by unprecedentedly high volumes of imports at dumping prices. A marginal decline in shipments and selling prices in a steep downtrend resulted in markedly lower external sales (€ 470.2 million; first quarter of 2015: € 524.8 million). Lower procurement prices for raw materials had a countermanding effect on the cost front that was nevertheless unable to compensate for the dramatic erosion in selling prices, which resulted in a pre-tax loss of € 20.0 million (first quarter of 2015: € +16.6 million).
Huge competitive pressure also affected the activities of the Plate / Section Steel Business Unit. The decline in shipment volumes ultimately reflects the difficult market situation for plate, that was similar to the situation in the strip steel segment, as well as the discontinuation of sheet pile production at year-end 2015. In conjunction with the significant drop in the selling price level, particularly for plate, external sales contracted to € 184.8 million (first quarter of 2015: € 253.2 million). Earnings before taxes of € 0.5 million (first quarter of 2015: € -0.7 million) are based on the sustainable turnaround of Peiner Träger GmbH, as well as on the non-recurrence of losses from the sheet piling production. This performance offset the plate companies' pre-tax loss of € 23.6 million.
In the first quarter of 2016, the key financials of the Energy Business Unit mirrored the condition of the steel tubes markets that was suffering all over the world from the energy sector's reluctance to invest due to oil and gas prices. The volume of pipes delivered fell notably below the level posted in the previous year, and external sales decreased to € 243.6 million (first quarter of 2015: € 293.9 million). The Energy Business Unit, however, generated earnings before taxes of € 5.6 million, thereby returning to the profit zone and raising its result appreciably in a year-on-year comparison (first quarter of 2015: € -4.7 million). This performance is particularly attributable to the high earnings contribution of the EUROPIPE Group that is consolidated at equity.
The lack of international project business caused the shipments of the Trading Business Unit to decline. In conjunction with appreciably lower steel prices, external sales decreased by around one third to € 606.3 million (first quarter of 2015: € 851.9 million). Impacted by the price-induced weak earnings situation of the stockholding steel trade, the pre-tax result, accompanied by the positive performance of the international business, fell short of the first three months of 2015 (€ -2.2 million; first quarter of 2015: € 11.8 million).
The companies of the Technology Business Unit reported stable external sales in a year-on-year comparison (€ 316.1 million; first quarter of 2015: € 315.1 million). The business unit achieved presentable earnings before taxes of € 6.9 million that did not repeat the year-earlier level (€ 10.1 million), mainly due to the lower result of the KHS Group.
The external sales of Industrial Participations / Consolidation remained virtually unchanged at € 47.7 million (first quarter of 2015: € 49.0 million). Earnings before taxes fell short of the prior-year period (€ 12.3 million; first quarter of 2015: € 18.7 million). This figure includes € 11.6 million in income from the Aurubis investment (first quarter of 2015: € 3.1 million). The Group companies not directly allocated to a business unit made an overall positive contribution to profit that nevertheless fell below the year-earlier figures. Valuation effect from foreign currency transactions exerted a counter effect.
Outlook
Guidance on the development of the macroeconomic situation is already fundamentally subject to a great deal of uncertainty, particularly in the current political and financial environment. The forward-looking statements below on the individual business units assume the absence of renewed recessionary developments. Instead, we anticipate a relatively moderate economic recovery for our persistently contested main markets in the current financial year.
Against this backdrop, the business segments anticipate that business will develop as follows in the financial year 2016:
The activities of the companies of the Strip Steel Business Unit are subject to extremely challenging framework conditions in the current financial year. The sharp increase in the volumes of cheap imports from China since the second half of 2015 has exerted considerable pressure on prices. Spot market prices for rolled steel products in the European market were recently observed to be picking up, albeit starting from a very low level. At the same time, the procurement prices for iron ore, other raw materials and energy sources have increased notably. Salzgitter Flachstahl GmbH, the business unit's largest company, expects selling prices to stabilize over the course of the second half of 2016, depending on when further anti-dumping measures by the European Union (EU) enter into force. EU anti-dumping measures for cold-rolled strip have meanwhile already been decided, while a ruling on the respective measures against hot-rolled strip and plate imports at dumping prices is expected in the second half of the year. Assuming that demand remains satisfactory, we anticipate a slight price-induced overall decline in revenues. Despite further cost savings, we expect a marginally lower pre-tax result in comparison with 2015.
The Plate / Section Steel Business Unit is also exposed to a difficult market environment in the current financial year. Due to the flood of imports, the plate mills in particular are confronted with partly ruinous price declines that are currently stabilizing at a low level. At the same time, the awarding of the North Stream 2 project has ensured better capacity utilization. Nonetheless, given the significant deficit of the Group's two plate producers, intensive measures to reduce costs and enhance efficiency are unavoidable. With the scrap price trend returning to a normal level, Peiner Träger GmbH nevertheless anticipates another positive pre-tax result. Along with non-recurrent losses from HSP Hoesch Spundwand GmbH, whose operations were discontinued at year-end 2015, this is, however, unlikely to be sufficient to fully compensate for the plate mills' negative results. We nonetheless anticipate a significant reduction in the business unit's pre-tax loss. Owing above all to selling prices, coupled with the discontinuation of the sheet piling business, a notable downturn in sales is expected.
The markets for the companies of the Energy Business Unit remain fiercely contested. The booking of several contracts in the first few months of the year, especially the major Nord Stream 2 project, has secured good capacity utilization for EUROPIPE's German large-diameter pipe mill through to mid-2018. The US American large-diameter pipe companies where capacity has been booked through to the fourth quarter of 2016 and partial volumes have been acquired in subsequent years also present a pleasing picture. Capacities in the spiral-welded pipe mill in Salzgitter have also already been taken until the start of 2017. By contrast, bookings in the segment of medium-diameter line pipes remain unsatisfactory due to low energy prices, which is why endeavors on implementing capacity adjustment and cost reduction measures have been stepped up. The precision tubes companies expect stable demand from automotive manufacturers, as opposed to the markets of the energy and industry product segments that are likely to display a weaker trend. The stainless steel tubes business anticipates a market recovery in the second half of the year at the earliest following the initially weak order intake during the first months of 2016. The Energy Business Unit's sales are likely to settle around the level posted in 2015; earnings before taxes are expected to exceed the prior-year level on the back of an improved order and capacity utilization situation in the large-diameter pipes segment.
Over the course of the full-year 2016, the Trading Business Unit anticipates a stabilization of the price level and demand conditions. With an upturn in the project business, particularly in the tubes segment, an increase in shipments in international trading can be assumed in the coming months. Moreover, the stock holding steel trade anticipates a moderate increase in volumes, mainly due to the expansion of further processing capacities and from the innovative digitalization of business processes. Special items that boosted the result in 2015 will not repeat in 2016, which is likely to be reflected in a considerably lower pre-tax result. Adjusted for these effects, the segment anticipates a gratifying upturn in sales overall and an appreciable increase in the operating result. Profit improvements here are focused above all on optimization measures in the stockholding business of Salzgitter Mannesmann Stahlhandel GmbH and a strategic realignment of Universal Eisen und Stahl GmbH.
The Technology Business Unit expects a stable sales and profit trend supported by a high order backlog. Given ongoing competition in the global project business, growth in profitable product segments is to be generated, supported by a further expansion of the service business. Accordingly, the KHS Group expects a result around the year-earlier level at minimum. Further efficiency enhancements from the 'Fit4 Future 2.0' program will release their positive effects. The outlook for Klöckner Desma Schuhmaschinen GmbH and the KDE Group is similarly promising.
Against the backdrop of the current conditions, particularly in the rolled steel and pipe market, and taking account of further positive effects from the 'Salzgitter AG 2015' program, flanked by additional measures for the individual companies, we affirm our guidance and continue to assume the following for the Salzgitter Group in the year 2016:

• sales virtually stable at around € 8.6 billion,
  
• an operating pre-tax result around breakeven - depending on when anti-dumping measures take effect and net of non-recurrent expenses for specific measures aimed at structural improvements within the Group - as well as
  
• a marginally positive return on capital employed (ROCE).

As in recent years, please note 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 course of the financial year 2016. 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 12 million tons of steel products sold by the Strip Steel, Plate / Section Steel, Energy and Trading business units, an average € 10 change 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 volatile cost of raw materials and shorter contractual durations, on the procurement as well as on the sales side.