Earnings

Following the winding down of the Processing Division with effect from April 1, 2005, HSP Hoesch Spundwand und Profil GmbH, Salzgitter Bauelemente GmbH and Salzgitter Europlatinen GmbH were assigned to the Steel Division. In the process of this restructuring, Salzgitter Großrohre GmbH was reallocated from the Steel Division to the Tubes Division.

Salzgitter Automotive Engineering GmbH & Co. KG as well as the non-consolidated Oswald Hydroforming GmbH & Co. KG and Salzgitter Magnesium-Technologie GmbH were assigned to the Services Division.

All data cited and annotated reflect the new structure.

In the year under review, the Salzgitter Group generated sales of € 7,152 million which exceeded the previous year's figure (€ 5,942 million) by € 1,210 million (+20%).

All divisions, with the exception of the Services Division which, as against 2004, recorded virtually unchanged earnings, profited from the high price level of rolled steel and steel tubes induced by a drastic increase in the cost of raw materials and energy.

As in 2004, the Trading Division contributed the major part of 45% (2004: 44%) to the Group's external sales. Sales of this division which posted € 3,244 million were some 23% higher than in 2004. With revenues of € 2,177 million (+12%), the Steel Division's share of 30% (2004: 33%) was slightly down in a year-on-year comparison. Of this share, the Steel Division delivered supplies worth € 817 million to other Group companies, especially those belonging to Trading. The Tubes Division raised its sales revenues notably to € 1,407 million (+38%) which corresponds to a share of 20% (2004: 17%). With a slight decline in third party sales (− 4%), the share generated by the Services Division remained virtually unchanged at 5% (2004: 6%).

Consolidated Sales by Divisions¹⁾

As before, the major portion of sales was generated in the EU, which accounted for 68% (2004: 72%). Sales of € 3.2 billion were concentrated in Germany. Foreign sales came in at € 3.9 billion and contributed a higher share of 55% (2004: 53%) to total sales.

Consolidated Sales by Regions

The Salzgitter Group closed the financial year 2005 with a pre-tax profit of € 940.9 million, thus outperforming the extremely good result of 2004 (€ 322.8 million) and generating a profit which marked a historical high for the Group. Instead of cyclical trends which generally occur with a time lag, trends for flat carbon steel, plate and tubes converged to make the market environment favorable both in 2004 and in 2005 as well. Along with positive market conditions, the Profitability Improvement Program also helped to enhance profitability.

Thanks to extremely gratifying results, primarily for flat carbon steel and plate, as well as improvements in the sections business, the Steel Division raised its earnings by € 256.4 million and contributed € 430.7 million to the Group's earnings.

In these product segments, the dramatic increases in the cost of raw materials and energy, with a virtually unchanged average USD/EUR exchange rate, were compensated successfully by gradually introducing higher selling prices for steel. In this context, weaker demand, discernable from the second quarter of 2005 onwards, was counteracted by cutting the production volume and maximizing the share of higher quality plate. Following a downturn in the revenues generated by flat carbon steel in the third quarter, a stable level was achieved in the fourth quarter. The outstanding result in this segment is mainly due to the excellent trend in the first half of the year.

As a result of the revised provision under IAS 2 (inventories) that took effect on January 1, 2005, the Lifo method for the valuation of inventory was abolished, which was the reason for the Steel Division's contribution to profit of € 80 million. The relining of Blast Furnace A had a negative impact.

The steel tubes market is still buoyant. Considerable price hikes for input materials were overcompensated by rising revenues. As a further € 162.6 million was realized from the sale of shares in Vallourec S. A., the result of the Tubes Division, which recorded profit improvements in all market segments, came to € 440.5 million, thus way exceeding the year-earlier figure (€ 117.1 million).

Impacted by the increase in the volume of lower specific gross profit, the pre-tax earnings of € 88.1 million generated by the Trading Division was unable to match the outstanding year-earlier figure (€ 98.9 million) but was nonetheless very satisfactory.

The Services Division, which achieved an otherwise healthy profit, fell short of the year-earlier result, mainly due to the unfavorable performance of Salzgitter Automotive Engineering GmbH & Co. KG, newly assigned to this division.

Divisional Results and Consolidated Net Income for the Year¹⁾

Development of substantive Income Statement Items

Explanations on the consolidated income statement disclosed in the section on ”Consolidated Financial Statements/Notes” are as follows.

Changes in the item ”Increase/decrease in finished work or work in progress/own work capitalized” were mainly due to the abolition of the Lifo method as well as to higher inventories in the largediameter pipe segment where invoicing was still to be done. The proceeds from the sale of the Vallourec shares (€ 163 million) have raised other operating earnings substantially. This was offset by the pro rata reversal of badwill being no longer applicable in the year under review. The rise in the cost of materials reflects in part the drastic price increases of raw materials and energy. Personnel expenses rose due to age-related part-time agreements, adjustments made in profit participation and higher remuneration. When comparing depreciation, it should be taken into account that the year-earlier figure includes unscheduled write-downs of € 110 million. The increase in the cost of maintenance services in particular, coupled with the loss from disposal (€ 24 million) after offsetting of exchange losses of − € 103 million from the sale of V&M shares, already taken account of in consolidated equity, caused other operating expenses to rise. The profit trend of associated companies reflects, on the one hand, the considerably improved earnings position of the seamless tubes segment and, on the other, the change in the Group's stake in these activities resulting from the sale of the V&M shares, which took place in June, and the sale of the Vallourec shares. Higher funds from operations, from the sale of the V&M participation and the Vallourec shares generated high interest income. Moreover, as a lower interest portion of the transfers to pension provisions was capitalized, interest income advanced by € 12 million.

The comparatively moderate increase in income tax expenses results from the fact that the projected change to the Group structure was intended to enable the use of loss carryforwards in the tubes segment. Under IFRS, deferred tax income of € 137 million was capitalized in the year under review.

The calculation of income tax for the current financial year takes account not only of this changed basis but also of the minimum taxation prevailing in Germany since 2004 which only provides for a limited offsetting of corporate and business tax loss carryforwards.

After deduction of tax, consolidated net income for the year comes to € 842 million.

Value Added in the Salzgitter Group

The operational value added of the Group stood at € 2,041 million (+€ 688 million, or +50.8% higher as against 2004). The main portion of the use of value added, which came to 52.5%, was accounted for by the employees (2004: 74.4%). At 4.8% (2004: 5.6%), the tax share was down marginally. In this financial year, the shareholders (including own shares) will receive 3.1% (2004: 1.9%) of the value added in the form of dividend. Another 38.2% (2004: 16.4%) will be used to raise the value of the Group and strengthen its equity base. The portion accounted for by lenders came to 1.4%, slightly down on the previous year's figure of 1.7%.

Value Added

Five-year Overview of the Earnings Position