2019 Annual Report 2019 Annual Report 2019 Salzgitter AG ranks as one of Germany’s companies rooted in a long tradition. Our business activities are concentrated on steel and technology. Through its sustainable organic and external growth, our company has advanced to take its place as one of Europe’s leading steel and technology groups – with external sales of around € 9 billion in 2019, a crude steel capacity of 7 million tons and a workforce of more than 25,000 employees. The primary objective of our company – now and in the future – is the preservation of our independence through profitability and growth. Our Group comprises more than 150 domestic and international subsidiaries and holdings and has been structured into the business units of Strip Steel, Plate / Section Steel, Mannesmann, Trading and Technology. Group Management Overview of Report and Management consolidated financial Report, combined statements 2 The Salzgitter Group in Figures 12 Company and Organization 82 Consolidated Income Statement 3 Preface by the Executive Board 35 Financial Control System 83 Statement of 6 Report of the Supervisory Board 37 Performance Report Comprehensive Income 51 Profitability, Financial 84 Consolidated Position and Net Assets Balance Sheet 65 Opportunities and 86 Cash Flow Statement Risk Report, Guidance 88 Statement of Changes in Equity 90 Notes 169 Audit certificate Annual Report 2019 of Salzgitter AG 2 The Salzgitter Group in Figures The Salzgitter Group in Figures 2019 2018 Crude steel production kt 6,613 7,039 External sales € m 8,547 9,278 Strip Steel Business Unit € m 2,209 2,341 Plate / Section Steel Business Unit € m 805 1,026 Mannesmann Business Unit € m 1,120 1,119 Trading Business Unit € m 2,846 3,268 Technology Business Unit € m 1,390 1,338 Industrial Participations / Consolidation € m 178 186 EBIT before depreciation and amortization (EBITDA) € m 354 797 Earnings before interest and taxes (EBIT) € m – 188 413 Earnings before taxes (EBT) € m – 253 347 Strip Steel Business Unit € m – 43 206 Plate / Section Steel Business Unit € m – 124 25 Mannesmann Business Unit € m – 42 – 5 Trading Business Unit € m – 31 51 Technology Business Unit € m 33 43 Industrial Participations / Consolidation € m – 47 28 Consolidated net income/loss € m – 237 278 Earnings per share – basic € – 4.46 5.06 1) Return on capital employed (ROCE) % – 5.8 10.3 Cash flow from operating activities € m 251 528 Investments2) € m 593 338 2)3) Depreciation/amortization € m – 541 – 384 Total assets € m 8,618 8,757 Non-current assets € m 4,099 3,836 Current assets € m 4,519 4,921 Inventories € m 2,248 2,327 Cash and cash equivalents € m 701 556 Equity € m 2,939 3,332 Liabilities € m 5,679 5,425 Non-current liabilities € m 3,454 3,036 Current liabilities € m 2,225 2,389 of which due to banks4) € m 783 519 5) Net financial position on the reporting date € m – 140 192 Employees Personnel expenses € m – 1,816 – 1,739 Core workforce on the reporting date6) empl. 23,354 23,523 Total workforce on the reporting date7) empl. 25,227 25,363 Disclosure of financial data in compliance with IFRS 1) ROCE = EBIT I (= EBT + interest expenses excl. interest portion in transfers to pension provisions) divided by the sum of shareholders’ equity (excl. calculation of deferred tax), tax provisions, interest-bearing liabilities (excl. pension provision) as well as liabilities from finance leasing and forfaiting 2) Excluding financial assets; as from the financial year 2019, including non-cash additions from the initial application of IFRS 16 Leases 3) Scheduled and unscheduled write-downs 4) Current and non-current bank liabilities 5) Including investments, e.g. securities and structured investments 6) Excl. trainee contracts and excl. non-active age-related part-time work 7) Incl. trainee contracts and incl. non-active age-related part-time work Annual Report 2019 of Salzgitter AG Preface by the Executive Board 3 Preface by the Executive Board Dear Shareholders, Ladies and Gentlemen: There can be little doubt that the climate debate took center stage in 2019. Starting with a youth movement epicentered in Germany, issues concerning the environment and emissions were finally transported away from expert committees and out to the public at large, triggering controversial and generally emotionally-charged discussions. Going forward, the topic of CO2 reduction will foreseeably become one of this country’s defining issues in the coming decade. The associated demand for the decarbonization of industry is not, however, taking place at the same speed on an international scale. The process is being driven forward in Europe, and particularly rigorous- ly in Germany, with the result that our domestic economy is hugely disadvantaged. The unilateral burdens from energy and climate policies that already exist today, and to which our competitors outside the EU are not exposed, are set to increase substantially. Investments in the billion range envisaged for achieving the CO2 reduction targets compound this scenario. Cheaper but more CO2-intensive steel imports would inevitably crowd out our domestic industry. This is where politicians must be called upon to assume responsibility and finally take action to create future-proof framework conditions. Without a legal and economic environment that enables the viable operation of new plants and bolsters the competitiveness of low CO2 products, the climate targets will not be met – or only at the price of deindustrialization with all its ensuing fallout. Salzgitter AG has done its homework: On the one hand, we have largely compensated for the predictable short- fall of allocations through to the end of the fourth trading period in 2030 by taking the precautionary measure of acquiring CO2 allowances. This has created scope for us in the European competitive arena – both financially speaking and in terms of time. On the other, we have assumed a pioneering role in decarbonizing the steel ® industry through the SALCOS (“Salzgitter Low CO2 Steelmaking”) concept developed in cooperation with the ® Fraunhofer Society. SALCOS will enable the CO2 emissions in the Salzgitter steelworks, which generate around 90 % of the Group’s CO2 emissions, to be reduced by at least 25 % within five years as from the starting point and by up to as much as 95 % by 2050, while still allowing the existing production facilities to be used for the most part. At the end of 2019, we took an important step in the direction of hydrogen-based steel production with the contract to build a 2.2 megawatt PEM electrolysis plant, thereby laying the foundations for our ambi- tions for harnessing hydrogen in the steel industry on an industrial scale in the not so distant future. These steps, along with other ecological and social aspects of what we do, are explained in the Salzgitter Group’s Non-financial Report that is published at the same time as the annual report. Alongside the upheavals emanating from society, the operating environment also placed extreme demands on us in 2019. Over the course of the year, the economy gradually deteriorated, specifically in the sectors that are important for the Salzgitter Group. The rare combination of declining steel prices and the leap in iron ore costs due to the dam breached in Brazil placed an additional burden on the steel business. Moreover, it transpired that the quotas under the European anti-dumping measures that are based on record import figures did not even come close to being exhausted due to the generally lackluster demand. Consequently, they have so far failed to deliver the desired effects. The higher imports are the direct consequence of growing trade conflicts and protectionist tendencies, translating directly into the customs duties and sanctions that also impact on Salzgitter AG. We were nevertheless able to take countermeasures: Thanks to our corporate optimization measures, which in 2019 alone produced a recurrent profit improvement potential of more than € 70 million, flanked by our diversi- fied corporate structure, we achieved the original performance forecast for pre-tax profit generated through operations, even in this adverse environment! With “FitStructure 2.0”, which consists of over 700 individual measures and results in more than € 240 million a year in sustainable profit improvement potential, we have ushered in the next step in our successful structural improvements programs. By 2023, all measures are to have come to fruition. Annual Report 2019 of Salzgitter AG 4 Preface by the Executive Board The annual accounts comprise around € 400 million in total in extraordinary burdens. The impairment and the restructuring expenses for “FitStructure 2.0” will serve to ease the burden on future periods, either directly or indirectly. In the past financial year, expenses of € 140 million for the mutually agreed end to the investigation conducted on the grounds of suspected cartel arrangements had to be absorbed. We took this process as an occasion to do everything in our power beyond the preventive measures already taken for years not to allow such incidents to happen in the first place. By contrast, the laudable performance of KHS in the Technology Business Unit gives us great satisfaction. The rigorous implementation of the optimization measures bucked the trend in the market for filling and packag- ing systems by delivering not only another increase in profit, but also the best result since joining the Salzgitter Group. The strategic decision to work toward achieving a balance between our steel-related activi- ties and areas not so closely related to steel has therefore once again proven to be correct. Valued Shareholders, the scenario dictated by the economy, trade and the climate policy in 2019 was also re- flected in the sharp downturn in the share price of companies in our sector, and we look back on the unsatis- factory price performance of our share.