Corporate Strategy

As a listed company, Salzgitter AG depends on the acceptance of the capital market in the sourcing of the equity and debt financing needed for its long-term strategic development. This is also a dimension from which the primary goals of the Salzgitter Group are derived. Key objectives are to secure the company in its stand-alone position by selective, earnings-oriented growth, with an adequate rate of return on capital employed, as well to ensure a sound financial position.

Achieving these objectives entails making on-time quality deliveries of attractive products to customers at competitive conditions, securing jobs with adequate remuneration of our employees, and ensuring the compatibility of production and the environmental concerns, in connection with a prudent use of material resources.

The strategic further development of the Salzgitter Group, with its focus on the growth sectors of steel, tubes and trading, has made headway in the financial year 2005. As a part of this focus, the Processing Division was dissolved on March 31, 2005, and the companies formerly belonging to it were reassigned to the Steel and Services Divisions.

As a result of this realignment, the product range of the Steel Division was complemented by the integration of components for roofing and cladding (SZBE), blanks/tailored blanks (SZEP) and sheet piles (HSP). Including these companies in the Steel Division which, up until this point, was the supplier of input materials for some of them, is a sound basis for their sustained further development.

The Services Division now comprises not only Salzgitter Mannesmann Forschung GmbH (SZMF) but also the technology companies Salzgitter Automotive Engineering (SZAE), Salzgitter Magnesium-Technologie GmbH (SZMT) and Oswald Hydroforming GmbH & Co. KG (OHC). The measure of closely integrating these companies is expected to deliver a lasting improvement in their competitive ability.

There have been a series of changes in the Tubes Division which are aimed at sharpening the division's competitive edge and at focusing operations on the welded tubes product segment.

Since the start of 2005, for instance, Mannesmann Line Pipe GmbH and Röhrenwerk Gebr. Fuchs GmbH have operated in the market under the joint brand name of ”Mannesmann Fuchs Rohr”. At the same time, intensive preparations were initiated for a merger between the two companies which is planned for 2006. The combination of the two firms, which partly target the same markets with their products, is expected to result in considerable synergy effects.

On April 1, 2005, SZGR was transferred from the Steel Division to the Tubes Division. The company produces around 100,000 tons of spiral-welded pipes a year for the transport of oil and gas.

Moreover, the sale of the 45% stake in Vallourec & Mannesmann Tubes S.A. (V&M) to the French joint venture partner Vallourec S.A. was completed on June 23, 2005. Salzgitter participated in the capital increase of Vallourec S.A., which took place on July 13, 2005, in proportion to the amount of its participating interest of 22.6% at that time. As per December 31, 2005, the holding stood at 17.2% following the sale of shares. As a result of double voting rights, the proportion of voting rights came to 29.9%.

As part of the V&M transaction, MRW raised its stake in the steel producer Hüttenwerke Krupp Mannesmann GmbH (HKM) from 20% to 30%.

All in all, these measures represent a cautious reduction of engagement in the seamless tubes segment, while, at the same time, opening up potential for strengthening the welded pipes product segment.

In the past financial year, Salzgitter Mannesmann Handel took on the task of marketing tubes itself, in particular the sale of HFI-welded line and large-diameter pipes which was formerly conducted via the ThyssenKrupp Mannex trading organization. This move gives Salzgitter Mannesmann Handel and, under its auspices, international trading in particular, the option of selling these products under the ”Mannesmann” brand.

To invigorate the Mannesmann brand the companies of Salzgitter Mannesmann Handels Group incorporated the brand name into their own company names at the start of the year.

Shortly before the end of the year (December 22, 2005), Salzgitter AG and the Arcelor Group signed a non-binding Letter of Intent on the takeover of Schwerte-based Flachform Stahl GmbH by Hövelmann & Lueg GmbH (HLG), also based in Schwerte. The transaction will give HLG its own slitting capacities, thereby creating one of the most effective steel service centers in Germany.

In the financial year 2005, the Steel Division continued to pursue its policy, initiated in previous years, of promoting internal growth through investment, improving internal processes and organization as well as enhancing the quality of its products.

Salzgitter Flachstahl GmbH (SZFG) put its Blast Furnace C and its third continuous casting line successfully into operation. This facilitated the repair and relining of Blast Furnace A which was concluded in the fall of 2005 within a very short time frame, and adjusted to market conditions.

During the summer break, Peiner Träger GmbH (PTG) carried out full renovation of its continuous bloom casting line. Weak construction activity in Germany and in many countries of western Europe prompted PTG to change its production strategy. The company has supplemented its product range by adding special profiles which meet higher demands for dimensional accuracy and strength.

The newly constructed logistics building with plate cutting machines at Ilsenburger Grobblech GmbH (ILG) became operational at the start of 2005, which puts the Ilsenburg plant in a position to fulfill additional customer requirements. Another benefit is that the steady increase in truck loads is easier to handle.

HSP Hoesch Spundwand und Profil GmbH (HSP), newly assigned to this division, has continued to work on the development of newer and lighter sheet piling types and has already successfully placed part of these products in the market.

The primary objective of our company remains the preservation of our independence through profitability and growth. As a quantitative, performance-related target, the Group has set itself the goal of achieving a return on capital employed (ROCE) of more than 12% over an economic cycle. The company's medium-term growth target in the next 5 years is to generate sales worth € 10 billion.

ROCE shows the relationship of EBIT to capital employed and measures the return on capital employed.

”EBIT” (earnings before interest and tax) is the result before tax and interest expenses, adjusted for the interest portion on transfers to pension provisions.

Interest income remains part of EBIT as it is considered to be part of the result of ordinary activities and thus contributes to ROCE.

in € mil.	31/12/2005
EBT	941
+ Interest expenses	+ 107
− interest expense for pension provisions	− 78
= EBIT	= 970

Capital employed is interest-bearing equity and debt.

This ratio is calculated by deducting pension provisions and non-interest-bearing balance-sheet items from the balance sheet total.

in € mil.	31/12/2005
Balance sheet total	5,414
− Pension provisions	− 1,725
− Other provisions excluding tax provisions	− 373
Liabilities excluding bonds Bank liabilities and bills and notes payable and liabilities arising from finance leasing, forfaiting and asset-backed securitization	− 731
− Deferred tax on the assets side	− 89
= Capital employed	= 2,496

The pension provisions and related interest expenses are eliminated in the calculation of ROCE, as these are components which cannot be influenced by management's measures in the short- to medium-term.

The ratio is made up of figures taken from the Consolidated Financial Statements. In principle, figures from the financial statements as per the reporting date are used for calculations.

As the ROCE target (12%) is to be achieved within the Group as an average over an economic cycle, it is more of a medium- to long-term target.

Strategic objectives are derived from this target for each individual division and each company. These objectives and related measures were approved in the Basic Strategy and taken account of in the medium-term plan in their updated form.

In the financial year 2004, we had already achieved the profitability target for the average of the previous four years. Including this year, determined by the outstanding result which, along with demand running at an exceptionally high level, was also due to improvements in internal performance − we have succeeded in considerably outperforming this target.

Taking account of a sales volume of more than € 7 billion generated in the financial year 2005, the Group has seen sharp growth when compared with its point of departure. This growth was achieved externally through acquisitions and internally through investments in plants, equipment and processes. With an expansion of this magnitude we have reached the limit of our organic growth. Additional effective growth can therefore only be generated through acquisitions, especially in the Group's core segments of steel, tubes and trading.

Following a period of consolidation and realignment at some divisions, we are now investigating the option of external growth. We wish to use the consolidation taking place in steel, tubes and trading on a global scale in our most important areas of operation, as an opportunity to actively shape the process, without coming under pressure to act. The commercial prerequisites for more effectively realizing our corporate objectives, which are preserving our independence and promoting profitability and growth, must, however, be in place for us to follow this course of action.

The aim of refining our tools for management and control within the Group and in its operating companies is to enhance our competitiveness. The introduction of our ”5P Management” (Profit, Partners, Personnel, Processes and Products), initiated in 2004, has meanwhile been concluded and will undergo a trial phase with the necessary fine tuning over the course of this year. 5P Management is essentially based on the balanced scorecard approach adapted to the Salzgitter Group and is designed to implement the objectives set by the company in a series of operational, measurable steps. A stringent application of 5P Management enables strategic controlling to take place at the same time. Upon completion of the trial phase, the plan is to combine this management tool with the individual objectives agreed with the executive and non-tariff employees of the Group.

Whereas classical controlling defines the financial targets and tracks the path to their achievement, 5P Management includes targets which are not necessarily of a financial nature. The pursuit of the latter also contributes to the success of the company, even if the value of their contribution is not always measurable.

These targets cover both customers (timely deliveries in the right quality, inclusion in product development) and employees (future-oriented training, promoting junior employees and managers) and processes (environmental protection, prudent utilization of material resources).

With a view to supplementing and extending our Basic Strategy for delivering additional earnings potential, we introduced synergy management as an additional management tool in 2005.

Quantitative and qualitative results, in particular by consistently taking advantage of possibilities for cooperation between the individual divisions and companies of the Salzgitter Group, are expected to be achieved.

Synergy management will be instrumental in forging ahead with the identification and evaluation of synergies in close cooperation with the operating units of the Group.

The measures derived from all management tools converge, in as much as they are financially assessable, in the Profitability Improvement Program of the Group which, with its quarterly controlling, makes a successful contribution to discernibly enhancing the Group's competitive capabilities.