Comments by Dr. A. Stefan Kirsten

Member of the Executive Board of ThyssenKrupp AG on the Occasion of the Balance Sheet Press Conference on December 1, 2004

The Spoken Word is Valid.

Ladies and Gentlemen,

Please allow me to also welcome you to Essen this morning.

Professor Schulz's comments have made it absolutely clear that fiscal 2003/2004 was a very successful year in every respect; a fact that is also reflected by the figures of the consolidated financial statements. For the record, I would like to point out as follows:

  • ThyssenKrupp achieved a rate of return substantially above the cost of capital, thus adding value for the stockholders. This development was participated in by all industrial segments.
  • Generating nearly €1.6 billion (income from continuing operations before taxes), ThyssenKrupp attained the best result since the merger in 1999.
  • ThyssenKrupp realized this income even though restructuring efforts were continued in 2003/2004, costing some €125 million and poor economic conditions for us, particularly regarding the procurement of raw materials and certain currency influences. The income, therefore, must be viewed as a leap ahead, not only in terms of absolute figures, but also in terms of quality.
  • Income was matched by an equally high operating cash flow of €2.6 billion, which largely contributed to the reduction in financial payables to only €2.8 billion. Just to remind you: Net financial payables at the end of the previous year amounted to €4.2 billion, after reaching an all-time high of nearly €7.7 billion in fiscal 2000.
  • The disposal program clearly gained momentum towards the end of fiscal year 2003/2004, resulting not only in cash inflow. The disposal of significant loss-makers during the period also led to an improvement of the Group's earnings potential.

I would like to base my presentation of the financial key data on the documentation handed out to you. Before I do so, just allow me to point out one thing: Under US GAAP regulations and international reporting procedures, it is customary when there is a disposal of major Group activities, to present only those figures that were generated by continuing operations. This means that the Group is presented without the influence of operations that have been disposed of or that the disposal of which has been initiated and is about to be consummated. As we disposed of significant Group activities in the past fiscal year, my following comments relate only to continuing operations; neither ordinary income nor income or loss from the disposal of such companies are included. Therefore, what you see is the Group presented on the basis of its future Group structure. I shall deal with the disposed activities separately.

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Highlights

In page 3, I have listed the key figures of the consolidated financial statements as of September 30, 2004 along with those of the previous year, with both years adjusted, as explained, by discontinued operations. Posting sales of €39.3 billion, we recognized income before taxes of €1,580 million, an increase of €806 million on the comparable figure of the previous year.

Relating income after taxes from continuing and discontinued operations of €904 million to shares issued resulted in earnings per share of €1.81. Considering the continuing operations alone result in earnings per share of €1.77.

I have already referred to the positive development in our net financial payables, now standing at €2.8 billion. What I would like to add is that off-balance-sheet financing was not extended; obligation from operating leases and the sale of receivables remained overall unchanged.

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Consolidated Statements of Income

Page 4 represents the consolidated income statement. Sales as well as cost of sales rose nearly at the same rate. General and administrative expenses, selling expenses as well as other operating expenses and income remained constant, resulting in a considerable cost reduction. This positive development was further enhanced by the continued efforts to increase efficiency.

Income tax expense increased from €161 million to €636 million, partially due to the improved profit situation of those Group entities located in high-tax countries such as Germany, Italy and the USA.

The income generated through the significant discontinued operations is presented here net of taxes and amounted to a total of €20 million in 2003/2004, after a loss of €10 million the previous year. I will expand on this later.

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Net sales / Order intake

Page 5 provides you with details on the left as to our order intake and sales by segments. Sales further contain an allocation to customer groups and regions as shown on the right, the fiscal year again showing a broad and stable allocation to sales resources. Despite a markedly weaker US DOLLAR against the Euro, the allocation of sales by both region and customer groups hardly changed. The translation effect alone, resulting from the relation of the US dollar to the Euro, impacted sales and order intake to the amount of some €1 billion each. This implies that at the exchange rate of the previous year ThyssenKrupp would have generated some €1 billion more in terms of both sales and order intake.

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Income before taxes

Page 6 presents our income before taxes. The upper illustration on the left provides a breakdown by segments and the changes compared to the previous year.

The greatest increases were posted by Steel and Services.

Steel managed to increase its profits through the implemented efficiency improvement programs and significantly larger volumes, particularly for carbon. In general, price increases offset maximum rises in raw material costs.

Automotive increased its earnings through restructuring and cost reduction measures. The deteriorated relation of the US dollar to the Euro and a further increase in payroll expenses in North America had an adverse effect.

Elevator once again improved on the excellent performance it is known for. Both Europe and Asia experienced positive developments whereas North America had to cope with fiercer competition and an unfavorable US dollar exchange rate.

In Technologies, Plant Technology and Mechanical Engineering both posted a remarkable increase in profits. The income of the segment was negatively influenced by an uncollected receivable due to the disposal of two ocean liners.

Services realized a significant increase in profits due to strong economic activity in the materials and raw materials markets, further aided on by a successful restructuring of the materials business in Europe and North America.

Real Estate managed to overcome the deteriorated income situation of the previous year and matched its performance of past years.

The lower illustration on the left indicates restructuring expense and impairments in the 2003/2004 and previous fiscal years. Both types of expense are related to ongoing restructuring efforts in continuing operations. One short remark here: any losses sustained from the disposal or initiated disposal of discontinued operations are not taken into account. I will get back to this later. Income as posted by Automotive resulted from far better results than expected from the sale of the metal stamping plant that was closed in Philadelphia two years ago. Impairments at Real Estate primarily relate to real estate assets not required for operations and earmarked for utilization as part of real estate management, not to residential real estate.

The upper illustration on the right separately reflects income and external sales in Germany and abroad. It is notable that with allocation of sales remaining constant, income in Germany rose over-proportionally. This development may be largely attributable to the improved earnings quality within the Steel segment.

For your further reference, the lower illustration on the right states the EBIT earnings figures. The EBIT reflects the operating efficiency without consideration of interest expense. Totaling €840 million, the EBIT rose marginally more than the EBT. This implies that the improved earnings situation is not a consequence of the financial or the investment result but based on operations alone.

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Income after taxes

I would like to continue with income after taxes as shown in page 7. As you can see, it includes income from discontinued operations as a new earnings component. Some comments on this: In fiscal 2003/2004, we disposed of 11 units in total. Thereof, 4 units were significant enough both individually and collectively to have a material impact on the Group's results of operation or the financial position and, therefore, had to be treated as "Discontinued Operations". These units were Berkenhoff GmbH and Krupp Edelstahlprofile GmbH of the Steel segment, both long-product makers in the "Special Materials" business unit. Furthermore, Triaton, our IT service provider and the Facilities Services, unit both part of the Services segment, were disposed of. Hewlett Packard, who bought Triaton in the second quarter, will continue to provide us with IT services in the future. The details have already been reported extensively. While the disposal of the successful Triaton company with its comprehensive external business activities resulted in a considerable profit, the sale of Facility Services was not as rewarding. The disposal, which was initiated in the last quarter and has meanwhile been consummated, led to a noticeable loss, which, however, has already been fully recognized in the 2003/2004 net income.

The table in the lower section on the left of page 7 provides you with a breakdown of income from discontinued operations, both before and after taxes, and differentiated by ordinary income/loss and the contribution to income due to gain/loss on disposal. Please note that the comparable figures of the previous year were adjusted and, therefore, no longer match the figures published last year.

As can be seen in the upper illustration on the right, income tax expense rose sharply. In the reporting period a tax rate of 40% was calculated, compared to only 21% for the previous year. There are various explanations: First of all, we earned more in the fiscal year 2003/2004, and that always leads to higher tax expense. It should be noted in this context that significant increases in profit were primarily recorded in high-tax-rate countries, such as Germany, Italy and the USA. Moreover, any comparison with the previous year requires consideration of two special effects that lowered the tax expense of that period: The tax deductibility of the repurchase of treasury stock and the reversal of a tax accrual due to the positive outcome of tax-related proceedings heard by the BFH.

Net income, as shown in the upper picture on the left, after the deduction of minority interest and changes in accounting principles, resulted in €904 million, as compared to €552 million in the previous year, which means an improvement of €352 million. Relating this figure to the number of shares issued resulted – as already mentioned – in earnings per share of €1.81. Related to continuing operations, earnings per share, as indicated in the lower picture on the right, amounted to €1.77. This also influenced the dividend payment proposal, intended to be raised from 50 Cent to 60 Cent for the reporting period, which would imply a distribution ratio related to continued operations of 33.1%, as compared to 45.1% in the previous year and 95.7% in 2001/2002.

Professor Schulz has already commented on the distribution policy. I for my part would just like to point out once again that the distribution policy of ThyssenKrupp AG aims to annually distribute an adequate dividend, measured against Group income.

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Consolidated Balance Sheets

Page 8 presents the consolidated balance sheet. Assets and liabilities held for sale are presented separately as of September 30, 2004, in the amount of €219 million and €191 million, respectively, this being Krupp Edelstahlprofile GmbH and the Facilities Services unit, which have meanwhile been sold. Even though the disposal of these activities had already been initiated as of September 30, 2004 and has been consummated in both cases by now, the assets and liabilities of these units are still contained in our balance sheet.

The balance sheet total as well as any major balance sheet line items, in particular inventories, accounts receivable and accounts payable as well as stockholders' equity, increased significantly compared to September 30, 2003. This development is largely attributable to the economic activity in the steel sector and the rise in raw material prices, especially non-ferrous metals. Different exchange rate relations, mainly of the US dollar to the Euro, accounted for a decrease in the balance sheet total of €0.2 billion. Fixed assets declined by €0.3 billion to €15.1 billion, this decline being largely due to a restraint policy on capital expenditure, divestitures and exchange rate differences.

Stockholders' equity increased by €0.7 billion, to €8.3 billion, attributable to the positive income result of the fiscal year. The dividend payment for the previous year and exchange rate differences reduced the stockholders' equity by €0.3 billion in total.

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Fixed Assets / Capital Expenditures

In the left part of page 9, I have provided you once again with the recognized property, plant and equipment as well as goodwill by segments. On the right side, capital expenditure by segments is indicated. The lower illustration once again mirrors our regional breakdown of capital expenditure on property, plant and equipment, the development reflecting our restraint on capital expenditure. With 62.4%, the focus remains on Germany.

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Consolidated Statements of Cash Flow

Please allow me now to turn to the consolidated cash flow statement in page 10. The cash flow provided by operating activities increased from €2,027 million to €2,559 million compared to the previous year. This increase resulted from the improvement in the operating performance.

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Financial data

The upper left illustration in page 11 indicates the free cash flow generated by the individual segments. It is reflected by the free cash flow indicator resulting from the balance of cash flow from operating activities and the cash flow from investing activities. Steel in particular managed to increase its cash flow by €567 million due to an expansion in operations. Corporate improved its free cash flow as a result of the previous year requirement to repurchase treasury stock, which had affected the free cash flow in the amount of €406 million.

We were in a position to significantly reduce our net financial payables, i.e. gross financial payables less cash and cash equivalents, by €1.4 billion to €2.8 billion. The reduction is to be attributed to the aforementioned reduction in gross financial payables by €0.7 billion and a simultaneous increase in cash and cash equivalents by €0.7 billion. The development is reflected in the upper right illustration.

Due to the increase in the stockholders' equity, the stockholders' equity ratios improved compared to the previous year. We have presented this development in the lower left illustration.

The lower right illustration in page 11 once again indicates the major factors influencing the reduction in financial payables. The free cash flow significantly increased from €858 million the previous year to €1,580 million for the reporting period, with the major increase stemming from operating cash flow. The cash flow from investing activities improved by €190 million, largely due to an intensified disposal policy. The free cash flow amounting to €1,580 million helped to finance the previous year's dividend of €249 million. The exchange rate effect, that is the exchange-rate related lower valuation of US dollar debts, led to a reduction of only €38 million.

Our gearing ratio also developed quite favorably. Owing to an increase in stockholders' equity of €0.7 billion and a decline in net financial payables of €1.4 billion, gearing improved from 55.2% to 34.0%.

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Accrued pension and similar obligations

In the past, the public paid particular attention to the recognition of pensions. Therefore, we have provided some key data as to the recognition of pensions and similar obligations in page 12. As becomes obvious from the upper two pictures, pensions and similar obligations are funded differently. The majority is covered by accrued pension liabilities for employees in Germany and some other continental European countries. In case of accrued liabilities, the pension benefit obligations as recorded in the balance sheet are funded by the company's recognized operating assets, such as our plants in steel production or the investments in Elevator. This process we call internal funding. The projected benefit obligation out of accrued liabilities for pension obligations remained practically unchanged, amounting to €6.0 billion, taking into account the expected adjustment to the higher life expectancy of those drawing the pensions.

The funded benefit obligations are funded by means of securities kept separately as independent plan assets. This form of pension benefit we have traditionally chosen for the USA and Britain. The projected benefit obligation of those pensions totaled €2.1 billion (PBO), a slight increase compared to €1.9 billion the previous year. Plan assets in the same period, however, rose from €1.3 billion to €1.5 billion.

Down on the left, you can see the aforementioned adjustment to the longer life expectancy of pensioners, though, this adjustment only affects our German obligations. In Germany, pension obligations are calculated on the basis of standardized assumptions regarding the life expectancy of those drawing the pensions. The phenomenon of ever-increasing life expectancy is generally known. What is new is the fact that it is primarily men's life expectancy that is rising statistically. Although up-dated death records are not yet officially published, we were one of the first companies to take the expected effects into account in preparing the consolidated financial statements for fiscal 2003/2004.

In conclusion, I would like to point out that our pension benefits are accounted for fully and conservatively, as they were in the last year. In general, we do not foresee any rise in our burden of payments. We can cover the outgoing cash flow of some €400 million without any problems out of the operating cash flow. This goes for today as it did for the past.

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ROCE / Economic value added

Ladies and Gentlemen, let me now turn to our value-oriented management performance indicators in page 13. First of all, there is the ROCE or return on capital employed. In the reporting period, we reached 12.0% return on capital employed. As the Group's capital costs according to our unchanged definition amounted to 9%, a positive spread of 3.0 percentage points was calculated. The ROCE figures and capital costs per segment are also presented in this page.

Multiplying this spread by the interest-bearing capital employed resulted in the economic value added as also presented on this page. In the reporting period, this value, amounting to €572 million based on the cost of capital, was positive, exceeding the negative value of the previous year of €(352) million by €924 million. This constitutes an obvious success and a key indicator for the analysis of these figures. The segments performed as follows:

The Steel segment increased income before interest, including discontinued operations, by €449 million to €1,076 million. With a relatively insignificant decrease in the capital employed, the ROCE in 2003/2004 rose from 7.1% to 12.5%. On account of this improvement, capital costs of 10% were exceeded. The economic value added amounted to €212 million, an increase of €467 million against the previous year and a significant contribution to the economic value added.

The Automotive segment raised its income before interest, surpassing that of the previous year by €115 million, to amount to €397 million in fiscal 2003/2004. With a minor increase in capital employed, the ROCE rose from 9.6% to 13.1%, clearly exceeding capital costs of 9.5%. After a small economic value added in the previous year, a positive amount of €108 million was generated in 2003/2004, a clear improvement of €105 million.

The Elevator segment posted an ROCE of 23.7%, sustaining the previous year's high level of 23.6%. The slight increase in income compensated for the increase in capital employed. With capital costs of 9%, the economic value added rose by €9 million to €250 million. Thus, Elevator again earned its capital costs and surpassed its targeted rate of return.

Income before interest as posted by Technologies in fiscal 2003/2004 rose by €41 million to €90 million. This improvement in profitability is further enhanced by a significant reduction in capital employed of €479 million. With an increase from 4.2% to 13.0%, the ROCE clearly exceeded capital costs of 10%. The economic value added increased from €(68) million the previous year to €21 million in 2003/2004.

Income before interest as recorded by the Services segment increased by €249 million, largely on account of the strong economic activity in the steel sector. The capital employed was lowered by €422 million due to the implementation of programs to reduce tied-up capital. Accordingly, the ROCE in 2003/2004 increased considerably from 3.8% to 13.3%, thus exceeding capital costs of 9%. An economic value added of €120 million resulted for 2003/2004, €286 million higher then the previous year's.

Income before interest as posted by Real Estate rose from €70 million to €86 million. The increase in return on capital was aided on by a slight reduction in capital employed. The ROCE in 2003/2004 rose from 4.0% to 4.9%, giving Real Estate the only negative economic value added, which, nonetheless, improved by €17 million compared to the previous year, to amount to €(46) million.

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Employees

Page 14 shows the development of employment figures and division by segments and regions.

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Key figures

In page 15, we have provided you once again with the key data in a comparison of annual figures.

 

Ladies and Gentlemen,

So far the presentation of fiscal 2003/2004 of the ThyssenKrupp Group in figures.

Thank you very much for your attention.