July 25, 2007
SGL Group: Successful First Half 2007
Sales in H1/2007 +14 %, EBIT +54% compared to H1/2006
Return on sales further improved to 19 % from 14 %
Pre-tax profit of 71.7 million more than tripled compared to H1/2006
Earnings per share at 0.78 compared to 0.02 in H1/2006
Equity ratio further improved to 40.5 %
New Convertible and Corporate Bond placed successfully
Increased guidance for 2007
Wiesbaden, July 25, 2007. Consolidated sales of SGL Group The Carbon Company - grew by 14 % to 647.5 million supported by all three business units. Excluding currency effects, sales grew by 18 %. Positive selling price and sales volume effects, continued high capacity utilization and further savings of 13 million compensated for the increases in the key raw material prices of SGL. Consequently the gross profit margin on sales increased from 31.9 % in H1/2006 to 35.8 % in H1/2007. Selling, administrative, research and other income/expense increased by 7.6 million and thus at a slower pace than sales and now represent 16.9 % of sales revenue (H1/2006: 17.9%). EBIT reached a record level of 122.0 million, an increase of 54 % compared to H1/2006 (before antitrust expense). When including the antitrust expense impact, EBIT increased by 119 %.
Net financing costs
New convertible bond and corporate bond placed successfully
On May 16, 2007, SGL Carbon AG issued a convertible bond of 200 million. This security has a denomination of 50,000 per bond, a maturity of 6 years, an initial conversion price of 36.52 and a coupon of 0.75 % p.a.
Also on May 16, 2007, a 200 million floating rate corporate bond with an 8 year maturity was issued. The corporate bond has a coupon of EURIBOR plus a margin of 1.25 %, which corresponds to an initial interest coupon of 5.313 %. The proceeds from the placement of the convertible bond and the corporate bond were used to repay the 2004 syndicated loan facility and to discharge the 8.5 % coupon and 270 million high yield bond issued by SGL Carbon Luxembourg S.A. in February 2004 and guaranteed by SGL.
On June 12, 2007, SGL received an upgrade from the rating agency Standard & Poors for the new 200 million senior secured notes. The rating for the senior secured notes was raised by one notch from BB+ to BBB-. This is the first time that SGL Group received an Investment Grade status for one of its financial instruments. The rating of the SGL Carbon AG Corporate Family remains at BB with a stable outlook.
The Company has satisfied and discharged its obligations under the 2004 high yield bond, which are no longer reported on SGLs balance sheet and income statement, by depositing German government bonds for payment of aggregate interest, principal and early repayment costs until the first possible repayment date on February 1, 2008. The costs associated with the early repayment of the high yield bond resulted in a 20.1 million cash charge in Q2/2007. In addition, around 10.7 million non cash charges for the 2004 refinancing which has now been replaced were incurred in Q2/2007.
In addition to the two bonds, SGL has secured an undrawn credit line for working capital and acquisitions ranking pari passu with the new corporate bond in the form of a new syndicated loan totaling 200 million with the SGL Groups core banks.
The new financing package will halve the cash interest costs as of the fiscal year 2008 onwards based on existing financial debt. This will result in net financing costs of approximately 40 million per annum from 2008 onwards.
Net financing costs
The issue of the new convertible bond resulted in an initial interest expense of 1.1 million in the second quarter of 2007. This expense includes the interest relating to the coupon of 0.75 % of around 0.2 million, which will initially be paid on May 16, 2008 plus a non-cash imputed interest component of 0.9 million, which is calculated in accordance with IFRS.
The new corporate bond resulted in an interest expense of 1.3 million in the reported period; the interest is paid quarterly starting August 15, 2007.
While interest income in H1/2007 was at a similar level compared to H1/2006, SGL was able to reduce the interest expense on loans by 2.4 million in H1/2007 to 13.3 million. The imputed interest on the new convertible bond amounted to 0.9 million. To separate this non-cash element from normal cash interest charges on loans SGL will report this element as a special line item in the presentation of net financing costs. Interest expense on antitrust in H1/2006 includes the 12.8 million interest portion related to the ECJ decision from June last year. Total interest expense (net) amounts to 18.7 million in H1/2007 (H1/2006: 33.5 million).
Other financing expenses increased due to the one-off costs in Q2/2007 associated with the early repayment of the old high yield bond with an amount of 20.1 million and due to the non-cash charges of the old refinancing costs with 10.7 million.
Net financing costs reached 50.3 million in H1/2007 compared to 35.3 million in H1/2006. Adjusting for one-off effects in both reporting periods (charges of 10.7 million and early repayment costs of old high yield bond of 20.1 million in H1/2007; interest expense on antitrust related to the ECJ decision of 12.8 million in H1/2006) the comparable net financing costs amount to 19.5 million in the first six months of 2007 versus 22.5 million in the respective period in 2006.
Profit before and after taxes
Profit before tax improved to 71.7 million in H1/2007 after 20.4 million in H1/2006. The H1/2007 tax expense amounted to 22.3 million and corresponds to a tax ratio of 31 % (H1/2006: 34 % adjusted for ECJ effect). Cash taxes paid in H1/2007 amounted to 11.7 million (H1/2006: 10.2 million). Net profit after minority interests reached 49.4 million in H1/2007 after 1.0 million in H1/2006. With an average number of 63.3 million shares, earnings per share (basic) in H1/2007 improved to 0.78.
Net debt
SGL added the remaining IFRS equity portion of the convertible bond into the net debt calculation by end of June 2007 to reflect the full future nominal obligation of 200.0 million. Due to the payments related to the refinancing, the net debt has increased by 52.7 million to 281.8 million by end of H1/2007 compared to the year-end 2006.
Segment Reporting
Performance Products (PP)
In H1/2007, sales revenue grew by 15 % (adjusted for foreign currency changes by 19 %) to 387.1 million (H1/2006: 337.1 million) due to the continuing strong demand from the steel and the growing demand from the aluminium industry being reflected in selling price increases across all business lines and positive volume effects especially in Cathodes. Volumes contributed 5 %, prices 14 % to the sales development in Performance Products.
Despite higher raw material and electricity costs as well as negative currency translation effects, EBIT in H1/2007 increased by 49 % to 113.6 million due to above mentioned price and volume effects as well as savings of 6 million. Capacity utilization level remains high at all facilities with the 2007 order book full for all business lines.
On May 24, 2007, SGL announced an expansion of its graphitized cathode capacity anticipating the expected quantum leap in aluminum growth from the historical average of 2 % to an expected mid-term growth of at least 5 % per year. The SGL Group will support its customers growth requirements in two phases. Phase one consists of an investment to optimize the existing infrastructure yielding a 50 % increase in graphitized cathode production. Initial product will be available as early as the first half of 2008. Phase two will be the construction of a state of the art grass roots cathode plant at a location to be determined in 2007. This plant will be on stream by 2011/2012 and its capacity will be defined by customer requirements which are currently under discussion.
Graphite Materials & Systems (GMS)
Sales revenue rose by 7 % (adjusted for foreign currency changes by 11 %) to 177.3 million in H1/2007. All three Business Lines Graphite Specialties, Process Technology and Expanded Graphite contributed to this sales growth with strong demand coming especially from the semiconductor, solar, LED, lithium-ion battery and chemical industries. EBIT increased by 36 % to 25.4 million in the reporting period due to positive price and volume developments as well as savings from the SGL Excellence Initiative that more than compensated for factor cost increases. Both order intake and order backlog developments remain at high levels and reflect healthy global economic conditions in the SGL customer industries.
On June 4, 2007, SGL Group signed a joint venture contract with the Chinese graphite producer, Shanxi Quanhai Graphite Co. Ltd. in Shanxi/Central China, for the production of specialty graphite in China. The agreement is pending requiring final approval by the appropriate government bodies in China.
SGL Group will have 75 % ownership of the joint venture. The aim of this strategic joint venture is to further strengthen the production base and market presence for specialty graphite in the Advanced Materials division of the SGL Group in Asia. The joint venture will considerably increase SGL Groups specialty graphite material production capacity, in order to supply the rapidly growing demand in industry sectors such as semi-conductors and solar technology.
Furthermore, the SGL Group has approved additional planned investment projects in China. The capabilities of the existing Shanghai machine shop will be enlarged for purifying specialty graphite for the semiconductor and other related industries. The enhancement of the machine shop in Shanghai together with the backward integration of the new joint venture in Shanxi is an important strategic step to satisfy the growing demand of regional customers as well as the increase in production of isostatic graphite in the SGL Group from 3,000 to 5,000 metric tons. The development of the new joint venture in China is a further step of the SGL Groups Asian strategy which remains the main focus of the Company.
In addition, following implementation of further site optimization in Morganton, USA, the SGL Group is in a position to supply up to 18,000 metric tons of extruded and pressed specialty graphite for the growing market demand particularly in nuclear technology and armoring.
Carbon Fibers & Composites (CFC)
Sales revenue increased by 26 % (adjusted for foreign currency changes by
28 %) to 79.9 million in H1/2007 (H1/2006: 63.4 million). A temporary interruption of carbon fiber production in Inverness (UK) in Q1/2007 caused some shipment delays, negatively impacting earnings in H1/2007. These delays are expected to be made up in the course of the year. Strong sales volumes in carbon fibers, composite materials and brake discs as well as savings from the SGL Excellence initiative partially compensated for the shortfall in carbon fiber production in Q1/2007.
On June 13, 2007, SGL announced the construction of a third major production line for carbon fibers at the location in Inverness as part of the SGL long-term growth strategy in the Business Unit "Carbon Fibers & Composites". With commissioning by the end of 2008, the annual production of carbon fibers will rise to a total of approximately 5,000 tons per annum. All capacity either under construction or currently in place is largely utilized due to long-term supply agreements with major customers until into the next decade. In order to meet strong customer demand from various industrial applications, the Company is also planning a carbon fiber location in Germany with a capacity of between 3,000 and 6,000 tons p.a. over the next five years. As a consequence, the SGL Group will become one of the world's leading suppliers of carbon fibers.
The supply of raw materials for all new capacity has been secured by the strategic cooperation with Mitsubishi Rayon Corp., Japan, and the joint venture agreed with Lenzing AG, Austria, in March 2007, which provides for the achieved strategic backward integration for the production of carbon fiber precursor material out of our German production in Kelheim.
Central T&I and corporate costs
In order to support the SGL innovation strategy the Company established the new corporate center for Technology and Innovation (T&I) by the end of 2005 and further enhanced this structure during 2006. Within corporate costs SGL will report all initiatives and start-up projects, which cannot be directly assigned to one of the existing businesses. This relates to basic research activities as well as to new product developments, which have not yet reached a commercial status. SGL decided to show such expenses at a corporate level in order to increase transparency and not to charge the businesses with expenses not directly related to their ongoing business. Central T&I costs in H1/2007 at 2.8 million reached expected normal semi-annual levels, whereas H1/2006 still reflects the implementation phase.
On April 16, 2007, SGL announced the construction of the new Group research center in Meitingen near Augsburg, Germany, with which the Company is strengthening its innovation power as one of the worlds largest producers of carbon and graphite. The new center of the Groups research, named Technology and Innovation (T&I) and located at the SGL Groups largest site worldwide, will combine all the Companys research and development activities. The Company is investing approx. 8 million in constructing the center to have a state-of-the-art infrastructure. In the medium term, the number of scientists is expected to rise from 80 at present to 120.
Corporate costs increased from 14.3 million in H1/2006 to 15.1 million in H1/2007. The increase is in part related to the management incentive plans, which are influenced by higher market valuation for share based programs.
On May 25, 2007, SGL Carbon AG announced its decision to voluntarily delist its American Depositary Receipts (ADRs) from the New York Stock Exchange effective June 22, 2007 and to terminate its ADR program effective June 25, 2007. Under the new SEC rules which became effective June 4, 2007, delisting is a prerequisite for deregistration from the reporting obligations under the US Securities Exchange Act of 1934.
Already on March 26, 2007, SGL Carbon AG announced its intention to deregister as soon as possible. Following the new SEC rules, after the termination of the ADR program and a 12 month waiting period, the deregistration will be effective on June 30, 2008, provided U.S. average daily trading volume in its shares and ADRs is 5 % or less of worldwide trading at that time.
SGL Group has considered the costs and benefits of continuing its Exchange Act registration and believes that delisting and deregistration is in the best interests of shareholders. The Company also does not believe that the relatively small proportion of trading that takes place in the form of ADRs economically justifies maintaining an ADR program. From 2007 onwards, SGL expects cost savings of around 3 million per annum compared to the 2006 expenses from delisting and deregistration.
Employees
Total number of employees increased by 89 to 5,338 by end of June 2007. This increase is mainly related to the initial consolidation of SGL Kümpers GmbH & Co. KG, Germany and SGL Tokai Process Technology Pte. Ltd., Singapore. Therefore the regional headcount slightly increased in Europe, whilst headcount in North America was rather stable. In addition to the initial consolidation of SGL Tokai Process Technology Pte. Ltd, SGL further increased headcount in Asia supporting the growth of its business.
Outlook
For Q3/2007, SGL Carbon is anticipating a double digit increase in consolidated sales and EBIT compared to Q3/2006.
At the annual press and analyst conference in March 2007, SGL guided for an increase in consolidated sales of 710 % and the consolidated EBIT to surpass historic record levels of 192 million in 2007. After the close of the first half-year and with the ability to reinstate full year guidance after the successful conclusion of the new financing structure, SGL now raises its guidance for the full year 2007. Consolidated sales will grow by 1015 %. Equally, the Company is increasing EBIT guidance to an improvement of around 45 % compared to the 2006 EBIT (before antitrust effect), representing an approximate doubling of the H1/2007 EBIT of 122 million. The financial result including one-off effects from the new financing structure should be around minus 70 million for 2007 excluding valuation effects of the interest and currency hedging instruments. As a consequence, SGL Carbon anticipates reported pre-tax and net profit to more than double against the previous year.
As a result of the growth strategy especially in the Business Area Advanced Materials as well as in Cathodes, SGL is expecting a capital expenditure level of around 120 million in 2007.
Key Figures of SGL Group
( unaudited / m )
1st Half
2007
2006
Sales revenue 647.5 568.9
Gross profit 231.6 181.2
EBITDA 1) 145.6 104.7
Operating Profit/EBIT 1) 122.0 79.2
Return on sales 2) 18.8% 13.9%
Net profit attributable to equity holders 49.4 1.0
Earnings per share, basic (in ) 0.78 0.02
Cash flow from operations activities 3) 48.2 42.7
June 30, 2007
Dec. 31,
2006
Total assets 1,372.6 1,260.8
Shareholders' equity 556.2 445.0
Net debt 281.8 229.1
Debt ratio (gearing)(4) 0.5 0.5
Equity ratio(5) 40.5% 35.3%
(1) Before effect from ECJ decision of 23.5 million in 2006
(2) Ratio of operating profit to sales revenue
(3) Before antitrust payments
(4) Net debt divided by shareholders' equity
(5) Shareholders' equity divided by total assets
About SGL Group The Carbon Company
The SGL Group is one of the worlds leading manufacturers of carbon-based products. It has a comprehensive portfolio ranging from carbon and graphite products to carbon fibers and composites. SGL Groups core competencies are its expertise in high-temperature technology as well as its applications and engineering know-how gained over many years. These competencies enable the Company to make full use of its broad material base. SGL Groups carbon-based materials combine several unique properties such as electrical and thermal conductivity, heat and corrosion resistance as well as high mechanical strength combined with low weight. Due to the paradigm shift in the use of materials as a result of the worldwide shortage of energy and raw materials, there is a growing demand for SGL Groups high-performance materials and products from an increasing number of industries. Carbon and graphite products are used whenever other materials such as steel, aluminum, copper, plastics, wood etc. fail due to their limited properties. Products from the SGL Group are used predominantly in the steel, aluminum, automotive, chemical and glass/ceramics industries. However, manufacturers in the semiconductor, battery, solar/wind energy, environmental protection, aerospace and defense industries as well as in the nuclear energy industry also figure among the Companys customers.
With around 30 production sites in Europe, North America and Asia as well as a service network covering more than 100 countries, the SGL Group is a company with a global presence. In 2006, the Companys workforce of 5,250 generated sales of 1.2 billion. The Companys head office is located in Wiesbaden/Germany.
Important note:
This press release contains statements on future developments that are based on currently available information and that involve risks and uncertainties that could lead to actual results deviating from these forward-looking statements. The statements on future developments are not to be understood as guarantees. The future developments and events are dependent on a number of factors, they include various risks and unanticipated circumstances and are based on assumptions that may not be correct. These risks and uncertainties include, for example, unforeseeable changes in political, economic and business conditions, particularly in the area of electrosteel production, the competitive situation, interest rate and currency developments, technological developments and other risks and unanticipated circumstances. We see other risks in price developments, unexpected developments relating to acquired and consolidated companies and in the ongoing cost optimization programs. SGL Carbon does not intend to update these forward-looking statements.
