Divisions

As the management holding company, Salzgitter AG heads up the four divisions Steel, Tubes, Trading and Services.

The following section is dedicated to outlining the performance of these divisions in 2005 on the basis of the financial statements prepared in accordance with International Financial Reporting Standards (IFRS).

All key data reflect the new structure of the segments. The data of 2004 have been adjusted accordingly.

Steel Division

The operating companies Salzgitter Flachstahl GmbH (SZFG), Peiner Träger GmbH (PTG) and Ilsenburger Grobblech GmbH (ILG) are concentrated under the umbrella company Salzgitter Stahl GmbH (SZS). The latter functions merely as an intermediate holding company without its own operations. As part of the restructuring of the corporate divisions, HSP Hoesch Spundwand und Profil GmbH (HSP), Salzgitter Bauelemente GmbH (SZBE) and Salzgitter Europlatinen GmbH (SZEP) have been assigned to the Steel Division. At the same time, Salzgitter Großrohre GmbH (SZGR) was integrated into to the Tubes Division.

The extraordinary development of 2004 in the procurement and sales markets persisted at the start of the financial year 2005 as well. However, the sharp increase in inventories as from spring 2005 led to a detectable slowing of orders in the European steel market. In the third quarter, an overall stable level of steel consumption as well as the cutting of production volumes led to inventories largely normalizing, with an ensuing brisker demand.

For the aforementioned reasons, but also owing to a margin-oriented sales policy, order intake of 4,725 kton in the Steel Division fell short of the previous year's level of 5,043 kton (−318 kton, −6%). Lower volumes at SZFG under HSP were not offset by the higher order intake at PTG. ILG, SZBE and SZEP recorded orders on the same level as the previous year.

Orders on hand at the end of the year were down 15%, from 1,199 kton to 1,016 kton, in comparison with the year-earlier period.

Steel Division Orders received

Crude steel production totaling 5,077 kton was just above the previous year's level (5,059 kton), with the LD steelworks of SZFG achieving a higher output than in 2004, despite the relining of Blast Furnace A. This was made possible by the first-time full utilization of the capacity of Blast Furnace C. PTG's electric steel plants limited production to stabilize the market.

Crude Steel Production

The production of rolled steel, which was particularly affected by production cuts to tailor supply to demand, fell compared with the previous year from 5,352 kton to 4,987 kton (−7%).

The volume of processed products was raised from 189 kton in the previous year to 212 kton (+12%).

”Rolled steel” in this case comprises hot-rolled strip, cold-rolled steel and coated products of SZFG, sections, beams and mine arches of PTG, plate of ILG, as well as all steel products of HSP (sheet piling, mine arches, bulb flats).

The ”processed products” category includes sheet piling, pre-processed sections and track systems/Y-steel sleepers made by PTG, processed and oxygen-cut plate made by ILG, elements for roofing and cladding (sandwich elements, cassette and trapezoidal profiles) made by SZBE as well as stamped parts, patchwork blanks and tailored blanks made by SZEP.

Steel Division Production

Shipments of rolled steel to external customers and Group companies outside of the Steel Division amounted to 4,697 kton, thus falling 466 kton (−9%) short of the year-earlier figure of 5,163 kton.

Shipments of processed products, which came to 211 kton, were 23 kton (+12%) up on the previous year's volume (188 kton). Overall, shipments fell 443 kton, from 5,351 kton to 4,908 kton (−8%).

This result takes account of lower shipment volumes at SZFG (−290 kton), PTG (−143 kton) and HSP (−20 kton). ILG was the only company which raised volumes, while SZBE and SZEP shipped almost unchanged tonnages.

Steel Division Sales Volume

Sales of rolled steel and processed products to external customers and other Group divisions climbed € 373 million (+14%) to € 2,993 million as compared with 2004 (€ 2,620 million).

With shipments down 9% but significantly higher net revenues for rolled steel products, the sales of SZFG were lifted to € 1,640 million, which represents an increase of 11%. At PTG, shipments slipped by 12% but average revenues were higher, which had the combined effect of reducing sales by 5% to € 504 million. With revenues from heavy plate at a much healthier level and larger volumes of shipments, ILG improved on the previous year's sales, which rose by € 207 million (+51%) to € 609 million. At HSP, the price increases led to sales revenues advancing 10% to € 150 million, despite lower shipments. In the face of weak demand in the construction industry, SZBE nonetheless boosted sales to € 35 million. SZEP raised sales to € 55 million (+10%). Though shipments were lower year-on-year, SZEP benefited from selling price adjustments triggered by steel prices hikes.

Steel Division Sales

Pre-tax profits of € 430.7 million generated by the Steel Division, as against the already outstanding result of 2004 (€ 174.3 million), represent a striking increase to a new historic record. The result soared by € 256.4 million, to which ILG contributed € 116.2 million, SZFG € 90.3 million and PTG € 55.2 million, in a direct comparison based on the disclosed results.

Along with the predominantly buoyant market conditions, the upbeat development can also be attributed to realizing the benefits accruing from the Profitability Improvement Program, as scheduled. In addition, the overall trend also reflected the inclusion of positive effects from the revaluation of inventories (€ 80.2 million) in line with IFRS regulations on recognition and disclosure that are mandatory as from January 1, 2005.

SZFG's pre-tax profit of € 242.9 million is a benchmark for the company (2004: € 152.6 million). Besides the effect of revaluing inventories (+€ 64.8 million), this outstanding result was due primarily to an uptrend in revenues that persisted throughout the whole year. By contrast, however, price increases for the most important raw materials put significant pressure on costs that we were able to pass on to the market. Additional negative factors burdening profits were the purchase of slabs necessitated by the 89-day shutdown of a blast furnace and the low capacity utilization of the rolling mills and surface treatment facilities caused by slack order activity in the second and third quarters.

After deduction of € 9.8 million from the changed valuation of inventories, PTG's pre-tax profit (€ 21.0 million) outstripped the previous year's result by € 6.9 million, which was also net of special effects (unscheduled write-downs of € 38.5 million). The generally positive effect of lower scrap prices and the rise in base prices more than compensated for higher processing costs resulting from reduced volumes and higher prices for alloys.

At € 155.0 million, the profit achieved by ILG was by far the highest in the history of the company. As against the previous year (€ 38.8 million), profit soared to € 116.2 million and, besides the effect of inventories (+€ 5.6 million), is mainly the outcome of increased revenues and improved capacity utilization. The higher input material price had a negative effect on the result. However, this negative effect was more than compensated for by healthier revenues for plates.

In 2004, HSP reported a pre-tax result (€ 6.0 million) that was affected by financial restructuring (SZAG's debt waiver of € 60.0 million, unscheduled write-downs of € 39.7 million). This effect also had a positive impact on the results of the financial year 2005 (€ 1.1 million) through lower depreciation charges and interest expenses. The increase in revenues, which was higher than that of input material costs, played a decisive role in the improvement of the result as compared with the adjusted result of 2004. Profit disclosed, however, also contains special effects in the form of unscheduled write-downs and restructuring expenses (a combined negative effect of € 20.0 million) as well as an injection of funds (€ 19.0 million) from Salzgitter AG, which, in their effect on earnings, almost offset each other.

SZEP's significantly higher pre-tax result of € 6.5 million in 2005 as against the previous year (€ 5.2 million) is due not only to sales growth, including a positive product mix effect, but also to lower depreciation.

SZBE raised sales, thereby achieving a pre-tax profit (€ 0.7 million). This stands in contrast to 2004, when the company recorded an operating loss (− € 5.0 million) and the result disclosed (€ 1.0 million) was significantly impacted by special measures.

Steel Division EBT

As of December 31, 2005, the core workforce at the Steel Division had declined to a total of 7,034 (2004: 7,119). An increase in the number of employees at SZEP (+3) and SZBE (+9) was offset by lower employee numbers at HSP (−6), at PTG (−31) and SZFG (−60) in particular, primarily due to age-related part-time employment arrangements (transfer to SZST). ILG's core workforce was unchanged.

The key data of the Steel Division are shown in the following table:

Tubes Division

Through the sale of participation in V&M to Vallourec, the Tubes Division has reduced its stake in the seamless tubes business. A connection to this sector now exists exclusively in the form of the stake held in Vallourec. Excluded from this are seamless precision and stainless steel tubes.

The core activities of the Tubes Division are now concentrated in the following four product segments with the below-mentioned companies, including SZGR which was assigned to this division in 2005:

• Large-diameter pipes:
  • Europipe GmbH (EP)
  • Mannesmannröhren Mülheim GmbH (MRM)
  • Salzgitter Großrohre GmbH (SZGR)
• HFI¹⁾-welded tubes:
  • Mannesmann Line Pipe GmbH (MLP)
  • Röhrenwerk Gebr. Fuchs GmbH (RGF)
• Cold-finished tubes:
  • MHP Mannesmann Präzisrohr GmbH (MHP)
  • Mannesmann Robur B.V. (ROB)
• Seamless stainless steel tubes:
  • DMV Stainless B.V. (DMV)

Holdings in Hüttenwerke Krupp Mannesmann GmbH (HKM), Vallourec S.A. (VLR) and Borusan Mannesmann Boru Yatirim Holding A.S. (BMB), still belong to the Tubes Division as major participating interests, among others.

In 2005, the companies of the Tubes Division were able to participate to a greater extent in the upbeat development of the market for steel tubes than in 2004. Demand for oil and gas line pipes continued to be extremely strong due to the persistently high level of energy prices. Heat exchanger and boiler tubes remained in great demand as a result of large investments in power stations, particularly in China. Demand for tubes, both in mechanical engineering and planned construction, as well as in the automotive industry, ran at a healthy level in 2005.

The consolidated order intake of the Tubes Division climbed by a further 13% to € 1,843 million in 2005, above the previous year's already high level. This is primarily attributable to significantly higher revenues in all segments. This outcome was particularly a reflection of the accelerated rates of growth in large-diameter tubes and HFI-welded tubes, as well as stainless steel tubes. After the extremely high order level seen in 2004, new orders in the precision tubes segment returned to normal in 2005.

Tubes Division Orders received

At year-end 2005, consolidated orders on hand of the Tubes Division had risen € 264 million to € 1,285 million year-on-year. This uptrend in the order intake was primarily due to price increases in 2005. Consequently, capacity utilization is already ensured for a majority of the companies until well into 2006.

In the year under review, the Tubes Division shipped 1,054 kton, 122 kton more than 2004 (932 kton). Of this volume, 65 kton were due to the fact that RGF was 100% consolidated for the reporting period (formerly 50%). EP, which continues to be 50% consolidated, raised its shipments (proportionally) by 21 kton, and SZGR contributed 24 kton to boosting sales. The other companies also had greater volumes of shipments.

Tubes Division Sales Volume

In 2005, the consolidated order intake of the Tubes Division soared 50% to € 1,972 million in comparison with 2004; a number of product segments recorded partly extraordinary increases, as a result of higher revenues in particular.

Tubes Division Sales

Of the sales growth (€ 670 million), € 44 million was attributable to MHP/ROB, € 102 million to the DMV Group and € 131 million to MLP/RGF. The EP Group contributed € 63 million and SZGR € 35 million. At € 179 million, sales of MRM expanded remarkably, driven by the sharp rise in demand for heavy plates, not only from EP but also from external customers. Other sales, consisting mainly deliveries of semi-finished products by SMG, rose € 116 million.

The Tubes Division companies were able to pass on the steep increase in the cost of input materials in full to customers through higher pricing. In addition, the consistently implemented cost cutting measures, compensated, among other things, for the rise in other costs. All in all, the Tubes Division outperformed the previous year's already sound earnings level (EBT) of € 117.1 million, lifting pre-tax profit by € 323.3 million to € 440.5 million in 2005. Apart from € 162.6 million in proceeds from the disposal of shares in Vallourec, as well as a € 24.4 million book loss (after netting against a foreign exchange loss of € 103.4 million, already taken into account under consolidated equity) treated as special effects, all operating companies attained a significantly higher level of profit before taxes.

Tubes Division EBT

EP also participated in the uptrend, generating a satisfactory pre-tax profit of € 24.5 million (proportionally; 2004: € 0.5 million).

As a result of a major order for heavy plates booked via SMID, MRM marked a new record level of shipments. This resulted in an additional contribution margin which was particularly instrumental in enabling the company to report an outstanding profit of € 19.5 million (2004: − € 11.3 million, including € 12.1 million in unscheduled write-downs).

In 2005, SZGR achieved a pre-tax profit of € 4.7 million (2004: − € 3.4 million) attributable to the healthy level of capacity utilization and despite price hikes for hot-strip that were partly passed on to customers.

MLP and RGF, both companies of the ”HFI-welded tubes” segment, profited from the boom in line pipes and generated significantly better results of € 15.5 million (2004: € 6.0 million) and € 20.2 million (2004: € 3.7 million, consolidated with 50 %) respectively.

In the cold-finished tubes segment, both companies benefited from a higher sales volume. In addition, MHP and ROB were able to overcompensate for higher input material costs by raising prices. Consequently, the result stood at € 19.0 million, thereby exceeding the previous year's result of € 5.9 million.

Boosted by the demand for energy, the market for stainless steel tubes developed most gratifyingly; in 2005, DMV posted a profit of € 23.0 million, € 17.8 million up on 2004 (€ 5.2 million).

The positive difference in the result is also attributable to the outstanding profit generated by the seamless tubes segment. The cooperation activities with Vallourec, which until the end of June 2005 consisted of the 45% V&M stake and the 23% Vallourec stake, but which, since July, consists solely of the Vallourec participation, generated an at-equity result of € 185.1 million.

Despite the disposal of the V&M shares and the small reduction of the stake in Vallourec, the result is still € 57.6 million higher year-on-year. Reasons for this are the significantly improved capacity utilization and a better revenue position for all companies.

Moreover, the overall result for the cooperation activities with Vallourec (€ 323.3 million) includes proceeds from the disposal of shares in Vallourec (€ 162.6 million) as well as the book loss on disposal for V & M (€ 24.4 million).

As of December 31, 2005, the core workforce of the Tubes Division stood at 4,235 employees which, compared with the end of 2004 (4,267), represents, on balance, only a small reduction in personnel (−32). The number of employees at MHP grew (+16) as a result of ramping up production and integrating the sales personnel of ThyssenKrupp Mannex, while the staffing in the international companies of the Europipe Group declined (consolidated: −44). The other companies saw insignificant changes in the relevant core workforce.

The key data for the Tubes Division are shown in the following table:

Trading Division

The Trading Division consists of the companies of the Salzgitter Mannesmann Handel Group (SMHD Group), Universal Eisen und Stahl GmbH (UES), Hövelmann & Lueg GmbH (HLG) and Ets. Robert et Cie. S.A.S. (RSA), which is proportionately consolidated at 50%.

The SMHD Group in turn comprises Salzgitter Mannesmann Handel GmbH (SMHD) as the interim holding company, Salzgitter Stahlhandel GmbH (SSH), Stahl-Center Baunatal GmbH (SCB), Salzgitter Handel B.V. (SHN) with two subsidiaries, Salzgitter Mannesmann International GmbH (SMID), Salzgitter Mannesmann International (USA) Inc. (SMIH), Salzgitter Mannesmann International (Canada) Inc., as well as other non-consolidated subsidiaries.

The market conditions of the previous year, which were very favorable for key segments of steel trading, persisted in the financial year 2005, although on a somewhat weaker basis. In this environment, international steel trading was affected during the first half of the year by a predominantly inventoryinduced weakness in demand. Brisk demand from China and North America and the ensuing rise in prices led to a significant speculative increase in inventories by year-end 2004, which failed to normalize until the second half of 2005. At the same time, procurement and sales prices fell to a level that was, however, still above that of the average in 2004.

In the steel trading activities in Western Europe, demand remained lackluster and prices fell throughout the year. In Germany, as a result of the economic situation, demand was also insufficient. In particular, the construction industry, which was still in the doldrums and which is of major importance to steel traders, once again had a negative effect. In contrast to the slack German economy, export demand developed satisfactorily and partly made up for dull prospects.

In the market environment described above, the Trading Division sold a total of 5,656 kton in steel products, 404 kton (+8%) more than in the previous year (5,252 kton).

The increase in sales was generated almost exclusively by the SMHD Group (+427 kton). In addition, HLG also raised shipments (+14 kton), while UES (−24 kton) and RSA (−13 kton) saw volumes decline.

The upbeat development of the SMHD Group is exclusively attributable to international trading (+547 kton), while stockholding companies in Germany and Benelux suffered lower sales volumes (− 120 kton). The greater business volume of the Trading Division can be mainly ascribed to the integration of the international sales activities for the Tubes Division's products, a few major projects, in particular in the Middle East, and to a higher level of input material procurement for the production companies of the Salzgitter Group.

Trading Division Sales Volume

Compared with the previous year (€ 2,834 million), the Trading Division boosted sales by 27% (+€ 770 million) to € 3,604 million, due to a price level, which, although in decline, was on average higher over the course of the year and to a favorable product mix.

Nearly all companies contributed to this outcome, albeit to differing degrees. The greatest portion was contributed by the SMHD Group with € 708 million (+29%). However, UES (+€ 37 million), as a result of better specific revenues, and HLG (+€ 26 million), as a result of higher volumes and prices, also showed positive developments. Despite lower shipments and, in the second half of the year, sliding prices, RSA matched the previous year's sales.

Sales growth at the SMHD Group was achieved primarily by the international trading companies (+ € 676 million). Here, the positive development in volumes was also supported by generally higher prices.

Whereas, despite the downtrend in the sales volumes, the domestic steel trading companies still raised the sales level compared with the previous year (+€ 39 million), the Benelux companies experienced year-on-year declines (− € 7 million).

Trading Division Sales

The Trading Division generated pre-tax profits of € 88.1 million and, as a result, did not match the extraordinary result (€ 98.9 million) of the previous year (difference: − € 10.8 million).

In the SMHD Group (difference: − € 2.8 million), the lower result from stockholding companies was not fully offset by better results from the trading companies. UES recorded a marginal decline in profits of € 2.6 million compared with the outstanding result of the previous year, and HLG (− € 1.7 million) as well as RSA (− € 2.9 million, proportionately) also contributed to the slight weakening in the earnings of the division. It should be emphasized that both the individual results as well as the overall profits of the Trading Division represent an exceptionally good level also in 2005.

Trading Division EBT

As of December 31, 2005, there were 1,734 employees in the Trading Division (December 31, 2004: 1,712). The slight increase in the core workforce of 22 employees is split between the SMHD Group (+13), UES (+6) and HLG (+3).

The key data for the Trading Division are shown in the following table:

Services Division

The Services Division consists, as before, of the following companies: DEUMU Deutsche Erz- und Metall- Union GmbH (DMU), Salzgitter Service und Technik GmbH (SZST), Verkehrsbetriebe Peine-Salzgitter GmbH (VPS), Telcat Multicom GmbH (TMG) with its subsidiary Telcat Kommunikationstechnik GmbH (TCG), GESIS Gesellschaft für Informationssysteme mbH (GES) Hansaport Hafenbetriebsgesellschaft mbH (HAN), Salzgitter Mannesmann Forschung GmbH (SZMF), as well as ”Glückauf” Wohnungsgesellschaft mbH (GWG). Following the winding down of the Processing Division, the companies Salzgitter Automotive Engineering GmbH & Co. KG (SZAE), Oswald Hydroforming GmbH & Co. KG (OHC) and Salzgitter Magnesium-Technologie (SZMT) were allocated to the Services Division, whereby the two last mentioned companies, as well as some smaller minority holdings, were not consolidated.

In 2005, the Services Division generated sales of € 852 million, € 45 million less than in the previous year (€ 897 million; − 5%).

Services Division Sales

The downtrend in sales is mainly attributable to DMU (− € 42 million) and GES (− € 15 million).

DMU failed to reach the business volume of the previous year in the steel scrap business. Sales contracted in terms of volume and price, an effect which was not compensated for by expansion in other trading segments and plate processing.

Lower sales posted by GES are mainly attributable to the fact that, in the previous year, major projects, in particular the migration from SAP R/2 to R/3 at the steel companies, were charged to account.

The other companies of this division showed only minor changes in sales.

Almost 80% of sales of this segment were realized by three companies. Of these, DMU dominates with a 55% share, followed by SZST (15%) and VPS (8%).

The proportion of sales to companies outside the Group amounted to 38% and was mainly generated by DMU, TMG and SZAE. External sales correspond to the level of 2004 in the adapted division structure.

At € 9.4 million, the pre-tax profit recorded by the Division was some € 3.9 million lower than in the year before (€ 13.3 million). This decline was experienced mainly at SZST (− € 3.5 million), HAN (− € 1.9 million) and VPS (− € 0.9 million).

The change at SZST is due to additional age-related part-time employment contracts and, as such, largely not attributable to operational developments.

At VPS, higher material expenses, in particular higher diesel prices, coupled with unchanged freight tariffs, led to the deterioration.

As a result of the increased costs for third-party personnel and equipment as well as for repairs, HAN experienced a higher level of expenses.

Improved results were achieved particularly by DMU (+€ 0.9 million), Telcat Group (+€ 0.5 million) and GES (+€ 0.4 million).

The higher result at DMU was due primarily to plate processing.

As in the previous year, SZAE reported a loss of − € 7.1 million. Since the previous year contains special items (€ 4.5 million debt waiver with SZAG; € 2.3 million in unscheduled write-downs), there was an improvement in the operating result; this was achieved by way of stringent cost cutting in particular and against the backdrop of a continued difficult market and competitive environment for the company.

Services Division EBT

The core workforce at the Services Division as of December 31, 2005, was 3,918. The number of employees is 126 lower than on December 31, 2004 (4,044). The main reason for this lies in the departure of 51 employees under a social scheme and 240 as part of non-active age-related part-time employment. This was counteracted by offering positions in the company to 165 trainees who had successfully completed their training.

The key data for the Services Division are shown in the following table: