Profitability Improvement Program

Our strategic orientation toward independence, growth and profitability require that all divisions exploit the available potential for optimization in a focused manner. This includes the targeted adaptation to changing general conditions, the active participation in developments on the market side, as well as the continuous optimization of the Group and its companies.

We keep ourselves prepared for the future by exercising sustained discipline in the identification and realization of success potential by targeted monitoring of the respective action measures. The Profitability Improvement Program 2 (PIP 2) encompasses both the systematic exploitation of opportunities for improvement and efficient monitoring with respect to its contribution to raising profitability.

PIP was established in the financial year 1995/1996. Relaunched as PIP 2 in 2001, it has proven to be a durably successful system over the past years.

Following the integration of different company-specific programs, particularly from the Tubes Division, the Basic Strategy, defined in the year 2003 for the Group as a whole, has added new momentum to PIP. Company-specific targets developed throughout the Group have been implemented in action plans and measures, and integrated into PIP 2, provided always that they meet the program's strict criteria. As a result of this integrative approach, the Profitability Improvement Program is more than simply a partially or temporarily implemented cost-reduction and quality improvement program; with PIP, the Salzgitter Group has a uniform groupwide management tool for raising earnings performance on a sustainable basis.

On the one hand, the outstanding Group result in the financial year 2005 was shaped and determined by the positive general economic environment. On the other hand, however, it is also the result of our efforts to use PIP to attain a continuous improvement in our processes in all functional areas of our Group companies.

In this context, it becomes apparent that measures and projects are being implemented independently of the economic situation and that PIP is effective as a permanent program.

By the end of 2005 the sustained annual improvement which we had envisaged in PIP 2, the so-called full year effect (FYE) amounting to € 170 million, had been newly defined.

in € mil.	FYE
Total earnings	+116
Savings on expenses	+112
Depreciation/interest/investment expenditure	−58
Full-year effect (FYE) before tax	+170

As a result, the targeted level we set ourselves with the Basic Strategy will have been achieved before PIP 2 is concluded. However, this should not be regarded as a conclusion; we will continue to identify and implement projects on a permanent basis.

There are currently 306 projects under way which are aimed at improving sales and costs. Activities focused on the marketing of products with higher value added and the expansion of sales channels in order to boost sales currently yield an FYE of € 116 million. In the course of optimizing not only production and administration processes, but also the consumption of materials and third-party services, we anticipate potential cost savings in the order of € 112 million. The cost of the implementation of these projects, including annual depreciation for investments, interest and materials, amounts to € 58 million.

The basis for the success of PIP has been a great willingness on the part of our workforce to make use of the structures of this program as a means by which to contribute their own ideas and suggestions on how to continuously improve results.

This tool is an established element of corporate management within the Group and will be carried forward and supplemented on a goal-driven basis in the coming years.

In this respect, our decentralized Group structures allow available knowledge to be applied directly, thereby increasing the competitiveness of Salzgitter AG, now and in the future.