FINANCIAL POSITION

The amounts taken into consideration in the cash flow statement correspond to the balance sheet item "Cash and cash equivalents".

There was a cash outflow of €0.6 billion from operating activities compared with an inflow of €0.1 billion in the prior-year quarter. The €0.7 billion decrease in operating cash flows was mainly due to the €1.1 billion increase in inventories compared with the year-earlier period. This was partly offset by a €0.4 billion rise in 1st quarter 2006/2007 net income before depreciation, amortization and impairment.

Cash outflow from investing activities increased by €0.2 billion in the reporting period to €0.6 billion due to an increase of €0.4 billion to €0.8 billion in capital expenditure on property, plant and equipment. This was partly offset by a €0.2 billion increase in proceeds from disposals of non-current assets in the 1st quarter 2006/2007.

Free cash flow, i.e. the sum of operating cash flows and cash flows from investing activities, decreased by € 0.8 billion in the reporting period to €(1.2) billion; this was mainly due to the rise in inventories and as well as increased capital expenditure on property, plant and equipment. The negative free cash flow generated in the reporting period is responsible for the increase in net financial liabilities.

The following balance sheet analysis includes assets and liabilities held for sale which are reported separately in the Group's consolidated balance sheets.

The balance sheet total remained virtually unchanged compared with September 30, 2006 at €35,810 million.

The disposal of the North American body and chassis business led to a reduction in trade accounts receivable and payable and in accrued pension and similar obligations.

The €1,110 million increase in inventories to €8,520 million, mainly in the Stainless and Services segments, was primarily due to higher raw material prices, especially for nickel, and increased inventory levels caused by sales expansion.

The increase in inventories resulted in a cash outflow from operating activities; investment in property, plant and equipment also led to a cash outflow for capital expenditure. The net result of this was a decrease of €1,130 million in cash and cash equivalents to €3,317 million.

Total equity increased by €499 million to €9,426 million, mainly due to the positive earnings in the reporting quarter.