Annual Report 2009

Home > Group Management Report and Management Report on Salzgitter AG > Goals and Key Factors for Success > Management and Control of the Company, Goals and Strategy

Management and Control of the Company, Goals and Strategy

As we operate in an environment characterized by its fast pace and uncertainty, we place pivotal emphasis on securing the company’s sustainable successful performance to the benefit of all its stakeholders. This focus is reflected in how we formulate our strategic goals, and it has been consistently implemented through the respective development measures carried out in past years. We view the stability and consistency of our business policy as a fundamental and proven key factor for the success of the company. The alignment of Salzgitter AG towards its overriding goals – namely preserving its entrepreneurial independence through profitability and growth – therefore remains unchanged.

As successfully accomplished in past years, we strive to secure the further development of the Group through selective, profit-oriented growth. In our view, expanding our activities is not an end in itself but is always subject to the proviso of achieving above-average profitability for our company in a peer comparison, now and in future, a process that we measure by the return on capital employed. Within the context of containing entrepreneurial risk, our continued financial stability and sound balance sheet are indispensable preconditions.

The strategic development of the Salzgitter Group through growth is focused on the Steel, Tubes, Trading and Technology divisions. Along with current and planned projects aimed at promoting our organic growth, we also fundamentally review expansion potential in terms of suitability.

At the same time, we always pay special attention to the cost and technological aspects of our competitive position and work steadily on opening up and developing new potential in all areas of the Group.

To achieve a top-down/bottom-up synthesis between our corporate goals and the goals and preconditions of our operating units and to safeguard a systematic method of procedure, we use a range of tried-and-tested management tools (see Section 1.1).

We are aware that the valuable contributions of our employees throughout the Group are a cornerstone for the realization of our goals. This is why we view the future-oriented professional development and the systematic fostering of the qualifications of our workforce as a crucial strategic task.

The environmental compatibility of our products and production processes, combined with the prudent use of the resources deployed, form a natural and cardinal platform for all our activities.

Management and Control Instruments

Our aim is to ensure that the competitive edge of all Group companies is enhanced in a sustainable and continuous manner. To this end, we systematically deploy a range of management and control instruments, alongside the coordination of goals at regular intervals, flanked by the respective reporting to the supervisory and control executive bodies of the Group:

5P Management,
Profit Improvement Program (PIP), as well as
agreeing individual goals for executives and non-tariff employees.

We have meanwhile implemented a ”5P” balanced scorecard system, geared to the level of objectives under the ”5P-Management” corporate guidelines, in most of the Group companies. This tool enables operational goals and measures to be derived for the individual organization units from the respective sub-strategy of each individual Group company and measurable criteria to be set in place in order to assess the degree to which goals are achieved. In this process, goals, the impact of which is difficult to ascertain in financial terms but which nonetheless exert a positive impact on the company’s performance, are formulated. These goals include, for instance:

supplying our customers on schedule and with a high quality,
ensuring smooth production processes with the lowest possible number of unscheduled disruptions and
professional development of our employees.

The goals and measures formulated are also anchored in agreements on goals with executives and non-tariff employees.

Profit Improvement Program (PIP)

We view the ongoing optimization of value-added processes as an important management task that makes a major contribution to preserving and enhancing our Group’s competitiveness on a sustainable basis. It entails the systematic and consistent leverage of the existing potential in all our divisions.

To this end, we introduced the concept of our Profit Improvement Program as a groupwide, uniform management instrument into the Salzgitter Group in 1996. PIP combines all the explicitly defined performance and results optimizing measures of the Group companies, the impacts of which are assessable and measurable based on a set of financial ratios. All projects are subject to binding and identical assessment criteria, and a stringently systematic procedure for measuring success has been set in place.

Employees and PIP

In contrast to pure top-down approaches, the commitment of all participants involved under the PIP concept ensures the successful implementation of the steps agreed. Our employees’ suggestions for improvement are also incorporated into the PIP. The acceptance of the program and the willingness of our employees to use the structures and mechanisms established to consistently add to the profitability with their own projects therefore remains very high. Accordingly, we regard PIP as an ongoing task that permeates all levels of management.

Internal benchmark

During the financial year ended, we consistently pursued the Profit Improvement Program (PIP 3), the third successor version launched in 2007. Moreover, profit improvement programs had already been set in place in the individual companies belonging to the Technology Division which joined the Group in the same year. ”KHS2010plus”, which is a package of measures of the KHS Group, the division’s largest unit, has now been successfully integrated into our groupwide PIP.

Current status of PIP 3

Over the past year 2009, we integrated a large number of new ideas and sustainably effective measures that stood the stringent test of the PIP criteria into the project catalogue. We were successful in raising the number of active projects to 241 and ideas to 85, and a full-year effect (FYE) of € 176 million, a figure slightly above that of the previous year, was ascertained.

This overall effect results from a number of different areas: Activities in sales markets based on products with a higher value added and extending the network of sales channels delivered an FYE of € 249 million. In the course of improving process workflows in production and administration and streamlining the use of materials and external services, we have identified a potential of € 33 million.

A precondition for achieving the goals set for the Group involves in part an increase in expenses such as those incurred for investments, for instance. Such investments were accounted for with an annual amount of € 106 million in depreciation and amortization, interest and other expenses.

From this year onwards, an integral part of PIP is the ”KHS2010plus” program which contributed profit potential of around € 16 million.

Current status of PIP 3

In € m	FYE
Increase in overall operating performance	249
Savings on expenses	33
Depreciation and amortization/interest/non-personnel expenses	–106
Profit-related effect before tax	176

Immediate action program for securing profit and liquidity in the short term

Against the backdrop of considerable capacity utilization reductions due to the circumstances prevailing in the financial year 2009, the continuity with which PIP was implemented naturally suffered interruptions in most parts of the Group. As a supplementary measure, we launched an immediate action program designed to secure profit and liquidity in the short term which resulted in realizing € 268 million envisaged for the profit-related effect and was therefore extremely successful. From today’s standpoint, around half of the measures under the program are likely to have a permanent effect. Our curtailment of our maintenance and repair budget, for example, is a measure which only makes sense for a limited period of time as, otherwise, the efficiency of our facilities would be endangered. All sustainable cost-cutting projects will be admitted and incorporated into the Group PIP.

Management and Control System Applied within the Salzgitter Group

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 at least 15 % over an economic cycle. We define an economic cycle as a period of five years.

ROCE shows the relationship of EBIT to capital employed and measures the return on capital employed:
ROCE (in %) = (EBIT/Capital employed) x 100 %

ROCE (in %) = (EBIT/Capital employed) x 100 %

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

Interest income remains part of EBIT as it is considered to be part of ordinary activities and contributes to the return on capital employed.

In € m	FY 2009	FY 2008
EBT	– 496.5	1,003
+ interest expense	118.7	160
– interest expenses for pension provisions	– 90.3	– 91
= EBIT	– 468.1	1,072

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 € m	FY 2009	FY 2008
Balance sheet total	8,052	8,701
– Pension provisions	– 1,858	– 1,787
– Other provisions excluding tax provisions	– 693	– 677
– Liabilities excluding bonds, bank liabilities and notes payable, liabilities from finance leasing and forfaiting and asset-backed securitization	– 915	– 1,335
– Deferred tax claims	– 129	– 16
= Capital employed	4,457	4,886

Pension provisions and related interest expenses are eliminated in the calculation of ROCE, as these components cannot be influenced by management’s decisions in the short to medium term.

Figures used for the calculation of the ratios are always taken from the financial statements as per the reporting date.

As the ROCE target (15 %) is to be achieved within the Group as an average over the economic cycle, it is more of a medium to long-term target.

Specific strategic objectives are derived from this target for each individual division and company. These objectives are taken account of in the medium-term plan – in their updated form whenever necessary.

In the financial years from 2005 up until and including 2009, we exceeded the profitability target, despite figures from the current year which are also comprised (– 10.5 %; 2008: 21.9 %) and elimination of extraordinary income and expenses, by delivering an ROCE of 18.3 %. The ROCE posted in the financial year ended reflects the disastrous economic framework conditions. Upon elimination of the net cash investments held at banks, ROCE from industrial operations comes to –17.3 % (2008: 26.9 %).

Growth Strategy

We formulated our growth objectives and our strategy for achieving these objectives in 2007. The internal and external components of these objectives are still valid:

Internal goals:

Optimizing quality
Raising productivity
Enhancing the product range
Eliminating bottlenecks
Reducing our dependency on external deliveries and services in sensitive areas

External goals:

Building up regional market positions on a selective basis
Supplementing and/or extending our product range
Closing the gaps in the value chain
Making attractive acquisitions in areas associated with steel
Industrial diversification

In successfully implementing these goals, we are striving to attain consolidated sales in the region of between € 13 and 15 billion in the medium term. Each individual project involved in these efforts must, however, be able to contribute sustainably to the Group’s ROCE target of 15 % achieved across the economic cycle typical of the steel industry.

Decisive measures to promote growth by companies always involve entrepreneurial risk, as far-reaching decisions for the future are made on the basis of historical data, insights and experience and the commitment of considerable financial resources. These decisions may later still prove to be advantageous due to major changes in the general environment or – despite the most careful and diligent preparation – turn out to be unfavorable.

The dramatic consequences of the global financial and economic crisis and the ensuing uncertainty about how the economy will develop in the future have caused us to place the primary emphasis on securing the future of our Group rather than on achieving our external growth objectives.

As soon as there are signs of a sustained recovery in the macroeconomic situation, we will once again pursue the more offensive components of our strategy with renewed momentum. As in the past, the careful weighing up of the opportunities and risks will form the basis when assessing potential projects.

It is our fundamental intention to reap the benefits from the consolidation processes taking place on a global scale as an opportunity to actively shape the developments in the steel, trading, tubes and technology sectors which represent our key operations, without being pressured into action. Furthermore, we will not be taking part in ”bidding wars” and will not pay unrealistic prices for acquisitions. The global swift decline in the value of companies in 2008 and 2009 has confirmed our decision to adopt a conservative stance.

Our foresighted financing structure and considerable liquidity reserves mean that we can forge ahead with our investment measures which were initiated some time ago and have now reached a well-advanced stage without being forced to curtail these activities. In as much, we have continued to implement the more defensive aspects of our growth strategy.

We always base our examination and assessment of all the Group’s investment measures on conservative assumptions and review them in a series of different scenarios across the economic cycle. We are confident that the undertakings expedited in our core businesses of steel, tubes, trading and technology have left us well equipped and able to achieve the internal goals envisaged, even if there is a delay in some instances. Once the macroeconomic situation has sustainably returned to normal levels, the large majority of our projects will also serve to promote our long-term growth objectives as well.

The investment volume of all projects currently being implemented or already completed within the Group comes to € 2.0 billion.

Groupwide Investment Volume 1996/1997 – 2012

You will find more detailed information in the section on ”Investments”, see page 64.

Strategy of the Divisions

The extensive investment program of the Steel Division, initiated back in 2007, progressed over the course of the financial year ended. The program comprised the following sub-projects in the three steel locations of Salzgitter, Peine and Ilsenburg:

Salzgitter and Ilsenburg

Ramping up of the capacity of the Salzgitter mill (metallurgy, 4th continuous casting line) by 350,000 tons a year,
extension of the rolling mill for hot-rolled strip and plate,
production of innovative HSD^® steels by means of continuous strip casting, investment volume: approximately € 350 million; tiered until 2012.

Peine

Construction of a second electric arc furnace with secondary metallurgy,
extension of the existing continuous casting lines,
optimization of the rolling mill for production of special profiles,
capacity effect: +950,000 tons of crude steel a year, investment volume: around € 400 million; commissioned in 2009 and 2010.

The aforementioned investments are geared towards extending our product range, lowering our costs through improved mill efficiency and reducing the volume of materials sourced externally, as well as reduced outsourced processing in the Steel and Tubes divisions.

In response to the current general economic environment, our efforts in the Trading Division are directed towards intensifying cooperation between our stockholding steel traders and the export business of our production companies, and leveraging the potential inherent in joint market development. In the strategic growth segment of higher quality grades, the Salzgitter Group’s stockholding steel trading intends to reinforce its position and extend its pre-processing capacities. The Group’s international trading will continue to foster its customer relationships, consistently raise the share of products from the Group itself and, in future, provide significant support in sourcing input materials for the production companies.

The Tubes Division reacts with a time lag to short-term economic fluctuations, as the main part of its business depends on infrastructure projects and therefore tends to lag economic cycles.

This is explained by its concentration on the oil, gas and energy businesses which, in turn, are geared towards long-term energy requirements. We assume that the companies specialized in the production of line pipes in particular are set to benefit from this trend owing to their extremely good competitive position. The Tubes Division will continue to generally sharpen its profile by rounding off its product range and optimizing current activities.

The Technology Division concentrates its activities on

development,
manufacturing and
installation, as well as providing services

covering turnkey plants for the potentially high-growth market of beverage bottling. In future, even greater emphasis will be placed on comprehensive solutions for customers encompassing the entire production cycle of plants and facilities, from planning through to operations and final decommissioning and recycling.

Owing to the considerable impact of the global economic crisis, the focus is currently on strengthening the competitiveness of existing structures, with the first major steps having already been taken in the previous financial year.

In future, the Services Division will continue to mainly focus on supporting its producing sister companies. The aim is to enhance the efficiency of its services on an ongoing basis and to optimize its own business performance in competition in the external market.

DEUMU Deutsche Erz- und Metall-Union GmbH (DMU), the Group’s service company which generates the lion’s share of sales, has created additional storage capacities options in Salzgitter and Peine in order to be able to take advantage of price fluctuations in the spot market: In future, the company will be able to build up stocks of scrap needed for the manufacturing of steel in excess of short-term needs.

deutsch |