Annual Report Press Conference 2015

Capacity adjustments in core business of metallurgical plant and machinery construction - Expansion of growth areas digitization, modernization, service, electrics and automation, plus energy and environmental technology - Opportunities in Iran

Order intake by SMS group in business year 2015 dropped to EUR 2.758 billion (2014: EUR 3.167 billion). Meanwhile sales, at EUR 3.310 billion, approached the level of the previous year (2014: EUR 3.406 billion).

The net operating result of SMS group contracted to EUR 7 million (2014: EUR 31 million). Apart from the generally weak market, costs for restructuring also depressed the result for 2015.

The company generated orders for metallurgical plant and machinery construction totaling EUR 2.476 billion (2014: EUR 2.921 billion). While plant business decreased to EUR 1.882 billion (2014: EUR 2.406 billion), service business grew to EUR 594 million (2014: EUR 515 million).

The elexis group including Elotherm booked a small increase in order intake amounting to EUR 295 million compared to EUR 260 million in 2014.

Currently, SMS GmbH holds 95.52 percent of the shares in Elexis AG. The next move is to resolve the squeeze-out of the minority shareholders during the General Shareholders Meeting on June 28, 2016. This full takeover by SMS group of the shares in Elexis AG boosts flexibility and cuts costs.

This is how sales, totaling EUR 3.310 billion, broke down according to regions: Europe 33 percent (2014: 30 percent), Russia 3 percent (2014: 2 percent), Asia 33 percent (2014: 45 percent), North and South America 29 percent (2014: 22 percent), Africa 2 percent (2014: 1 percent).

Due to the lower order intake, the order backlog, at EUR 4.018 billion, was also down on the previous year (2014: EUR 4.613 billion).

In 2015, the average number of employees including apprentices in SMS group totaled 14,342 (2014: 14,003). Primarily, the increase results from the expansion of service business and more jobs abroad. This is in contrast to the declining number of employees in Germany.

SMS group remains a supplier for the entire metallurgical process chain

To retain the expertise of experienced employees taking part-retirement, there is an organized transition process. It ensures know-how transfer to younger employees so that the company remains strong for the future. There are two effects. First, SMS group GmbH adjusts its capacities to declining order intake in its core field of plant construction. Second, it retains its status as a globally and efficiently operating supplier covering all products and services over the entire metallurgical process chain.

Entry into new business fields

Just one year after signing a licensing contract with Kobe Steel, Ltd., Japan, for the construction of Midrex direct reduction plants, Paul Wurth landed its first order for a reference plant in Algeria. Then, in mid-June, Algerian Qatari Steel (AQS) awarded another order to Midrex Technologies, Inc. and Paul Wurth. Included in the contract are engineering, delivery, and technical service for one of the world's largest direct reduction plants so far.

The two logistics subsidiaries CTI Systems S.A. in Luxembourg and SMS Logistiksysteme GmbH in Germany are to merge to form one larger business unit. The objective here is to expand business on the growing market of cargo logistics - for instance in the air cargo industry.

SMS group GmbH, Germany, and Mettop GmbH, Austria, founded the joint venture PolyMet Solutions GmbH. This expands the SMS group product and service portfolio to include the planning and supply of equipment and plants for copper, lead, zinc, tin, and other nonferrous metals. PolyMet Solutions is going to offer innovative processes and systems for concentrate primary smelters, converters (e.g. Peirce Smith converters), and anode furnaces. That gives it the scope to supply entire process chains right up to electrolysis and semi-finished products processing.

Grasping the opportunities of digitization

SMS group offers customers added value beyond the scope of classic web companies. What makes this possible is its many years of cooperation with customers. Consequently, it can react more flexibly and quickly to industry-specific requirements. Here are the elements of digital transformation that are crucial to success in industry: the Internet of Things in the industrial value creation chain, new business opportunities from digital platforms and services, plus extensive use of Big Data for advance analysis.

Foundation and acquisition of startups

Recently, the company established SMS digital GmbH. It is an independently operating subsidiary of SMS Holding GmbH responsible for its own business and management. The startup will build on the work already done to develop and market further digital products in direct contact with customers.

Furthermore, SMS group has acquired the majority share in QuinLogic GmbH in Aachen, Germany. This young company creates software solutions for perfect quality management in the steel, aluminum, and paper industries. Included here are quality assurance systems for flat steel, stainless steel, special steel, and nonferrous metals.

SMS group has been successfully using QuinLogic products in customer projects such as Big River Steel, USA, or Shandong Iron & Steel, China. It's a collaboration that makes perfect sense, because QuinLogic software solutions benefit from SMS group production know-how. That leads to high-value final products at consistent quality and process stability.

Personnel reductions largely in line with social responsibility

Faced with a sustained global crisis in the steel, copper, and aluminum industry plus an associated decline in orders, the management of SMS group GmbH in 2014 announced plans for a two-stage capacity reduction in its core business of plant and machinery construction in Germany.

Compared to 5,250 jobs at the beginning of 2014, the workforce in Germany will be cut by 1,200 to some 4,050 by 2017.

Cooperating constructively and in a spirit of partnership, the Managing Board and the Works Council have agreed on a plan to implement most of the job cuts as painlessly as possible. This involves part-time work for older employees, retirement at 63 for long-term contributors to the insurance system, a recruitment stop, and transfers to the continually growing service business. That will in most cases avoid forced redundancies.

Despite its cost-cutting programs, SMS group will maintain its unusually high commitment to training young talents. This is how the company is responding to demographic change and ensuring it can draw on a pool of adequately qualified personnel in the future.

Future prospects

Burkhard Dahmen, Chairman of the Managing Board: "Due to worldwide overcapacities, our customers remain unwilling to invest in new plants. What's more, ongoing political uncertainty in our important sales markets Russia and Ukraine is also damaging business. Looking on the brighter side, the gradual opening up of Iran offers opportunities for us to support the modernization and rebuilding of the country's steel industry in the near future. In fact, we've already signed letters of intent for projects collectively worth more than EUR 1 billion. Plus, we've just founded a joint venture with an Iranian company in the field of technical service and repairs.

We're confident there's unbroken potential in modernizations to make plants greener and more energy efficient. Other growth areas are digitization and the whole spectrum of services. However, overall the market situation demands that we consolidate and reduce our capacities.

That's why we're expecting order intake in 2016 to remain at the same level as last year. Because of declining orders in hand, sales will be lower.

We anticipate a moderate improvement in our net result due to lower restructuring costs."