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Group review

ThyssenKrupp – still firmly on growth track

ThyssenKrupp maintained its successful performance in the 2nd quarter 2006/2007. In a continuing favorable operating environment, order intake and sales showed pleasing growth rates. The Group's earnings before taxes reached €572 million, compared with €773 million in the prior-year quarter.

The earnings decrease is due solely to the EU fine of just under €480 million imposed for alleged anti-competitive behavior in the market for elevators and escalators. Excluding this exceptional charge we reported a pleasing earnings increase of €279 million to €1,052 million.

The highlights for the 2nd quarter 2006/2007 were as follows:

• Order intake increased by 9% from the prior-year quarter to €14.0 billion.
• Sales rose by 11% to €13.1 billion.
• EBITDA was €1,031 million, compared with €1,278 million a year earlier; excluding the nonrecurring charge of the EU fine EBITDA in the reporting quarter would have been €1,511 million.
• Earnings before taxes reached €572 million compared with €773 million in the prior-year quarter; excluding the EU fine, earnings before taxes improved by €279 million to €1,052 million.
• Earnings per share decreased as a result of the EU fine from €0.84 in the prior-year quarter to €0.45.
• Net financial liabilities at March 31, 2007 were €897 million. This represents an increase of €1,644 million compared with September 30, 2006, when we reported net financial receivables of €747 million. On March 31, 2006 net financial liabilities stood at €191 million.

The portfolio optimization was systematically continued in all segments.

Earnings target raised

We expect the Group's positive performance to continue in the further course of fiscal 2006/2007.

Based on the very good results in the first two quarters and improved growth prospects we now expect to increase sales to around €50 billion and generate earnings before taxes and major nonrecurring effects of around €3.5 billion.

As a result of the significantly increased earnings strength of the Group as well as anticipated earnings effects from the investment program, the Executive Board has raised its mid-term target up to 2010. The aim is to achieve sustainable earnings before taxes and major nonrecurring effects of €4 billion on sales of around €60 billion. In the longer term, particularly after the completion of our major investment projects in North America, we expect sales in the region of €65 billion and earnings before taxes and major nonrecurring effects of €4.5 to 5.0 billion.

Economic environment

The world economy showed further strong growth at the beginning of 2007, although the pace of expansion slowed slightly in some regions. Despite the recent oil price increases, the situation on the international oil markets has eased in the last months. However, prices of some important industrial raw materials increased significantly.

Economic growth slowed in the USA. The main factors in this were weaker demand in private housing construction and in the auto sector. In addition, business spending was lower. In Japan, increased foreign demand and rising investment resulted in a continuing economic improvement.

The euro zone recorded robust growth at the beginning of 2007 due to positive investment and higher exports. The German economy was exceptionally strong. Exports as well as capital investment continued to grow, while private consumption weakened at the beginning of the year due to the increase in value added tax.

The pace of growth in the developing countries of Asia, Latin America and Central and Eastern Europe remained high on the whole. In China, growth in the 1st quarter 2007 again exceeded the 10% mark. India's industrial sector grew strongly.

In the sectors of importance to ThyssenKrupp the picture was as follows:

• In a favorable economic framework, the international steel markets remained very robust. Following record production of 1.24 billion metric tons in the previous year, the world steel industry increased its output in the first three months of 2007 by 10% compared with the corresponding prior-year period. China remained the strongest growth driver with an increase of 22%. Outside China, production increased by 4.4%. North America produced less crude steel in the reporting period than a year earlier. The German steel industry recorded a significant 9.5% increase in production in the 1st quarter. The mills continued to operate close to their capacity limits and order books remain full. Steel processors in Germany and the rest of the EU increased their output compared with the prior year, with continuing good operating levels. Demand for carbon steel flat products in the core market of Western Europe therefore remained high. The main reason was robust steel consumption, with further purchases for inventory also being made. EU steel imports from third countries remained extremely high. However, import pressure could ease slightly in the short term as the price advantage of imports seems to be decreasing; in addition, there has been a strong rise in demand in many third-country markets also outside China. Against this background, and also because of the further increase in raw material costs to the steel industry, it was possible to raise prices slightly on a broad front at the beginning of the 2nd quarter 2007.
• End-user demand for stainless steel flat products remained strong in the 1st quarter 2007. However, order intake at the beginning of the year was significantly lower than the extremely high prior-year level due to increased inventory levels at distributors and service centers since mid-2006. This resulted in a marked decrease in base prices. As price levels in Asia in particular are still considerably lower than in Europe, pressure from third-country imports of stainless cold-rolled into Europe has not yet eased. In Europe, deliveries remained at the high level of the prior-year quarter due to relatively strong orders in hand. The situation on the international commodity markets deteriorated further for the raw materials used in stainless steel production. The nickel price recorded several all-time highs. In North America, demand for stainless cold-rolled weakened slightly. As a result, the base price level, which had been increasing continuously since the end of 2005, also dropped in the middle of the 1st quarter 2007. In Asia, demand for stainless cold-rolled grew further compared with the corresponding prior-year period. Despite the price rise towards the end of the 1st quarter, prices were still at an unsatisfactory level. Due to the absence of the alloy surcharge in Asia/China, local producers are having difficulty in passing on raw material price increases to the market quickly. The positive demand situation for nickel alloys and titanium continued in the reporting quarter.
• The international auto industry showed regional differences. In North America, the auto sector weakened noticeably in the 1st quarter 2007. In the USA, new car sales were down from a year earlier and vehicle production was cut back significantly. The traditional US manufacturers lost further market share to Asian and European producers. The Brazilian auto market reported increasing production figures and above all increasing new car registrations in the 1st quarter 2007. In the enlarged European Union, car sales at the beginning of the year were almost unchanged from a year earlier. Demand in Italy was particularly positive. In Germany, however, new car registrations were lower, also as a result of the increase in value added tax. Despite this, vehicle production increased thanks to a rise in exports.
• The global mechanical engineering industry profited from continuing high investment. Production growth continued in important countries at the beginning of the year. The German mechanical engineering sector reported high domestic and foreign orders in the first months of 2007. The German plant engineering industry also began the year 2007 with high orders in hand.
• International construction activity continues to be driven by the countries of Asia and Central and Eastern Europe. In the USA, by contrast, construction output weakened significantly at the beginning of the year. Housing construction in particular was lower due to increased interest rates. The situation on the German construction market improved further. Order intake and output showed a pleasing increase at the beginning of 2007. The trend in commercial building was particularly positive.

Order intake and sales

Following the good start in the 1st quarter, ThyssenKrupp continued its course of sustainable profitable growth in the 2nd quarter 2006/2007. Order intake at €14.0 billion was 9% higher than a year earlier.

The Group's sales improved by 11% to €13.1 billion. In the Steel and Stainless segments the sales increase was due to strong demand on the international markets and higher prices; at Stainless, the alloy surcharge also played a major role, rising due to increases in raw material prices. In the Technologies segment, sales decreased as a result of exchange rates, business disposals and weaker automotive business. Elevator reported higher sales of new installations and maintenance services.

At Services, demand improved distinctly as a result of the general economic situation.

An important part in the Group's growth was played by the projects to strengthen the sales and service activities, which have now been combined and expanded in a Sales & Service Initiative as part of the ThyssenKrupp best value enhancement program. These projects in all segments are being carried out internally and are building on the successes of the previous sales initiative and service offensive.

Further acquisitions to round out the portfolio or improve market access were made in the 2nd quarter 2006/2007, particularly in the Technologies, Services and Elevator segments. They included the acquisition of additional capacities for the manufacture of large-diameter bearings by the Technologies segment and the setting up of a joint venture for the distribution of materials in Vietnam by the Services segment.

In addition, the Technologies segment disposed of marginal activities which were no longer part of its core business. These included the manufacture of PCB assemblies and the production of car jacks as well as the sale in April of the defense engineering business of Blohm + Voss Industries.

Since the merger, ThyssenKrupp has divested businesses representing sales of €9.0 billion and acquired businesses with sales of €8.0 billion.

Sales billion €

Income

ThyssenKrupp achieved earnings before taxes of €572 million in the 2nd quarter 2006/2007, compared with €773 million in the same quarter a year earlier. Earnings were heavily impacted by an antitrust fine imposed on ThyssenKrupp Elevator by the EU commission as a result of investigations into several European elevator manufacturers. Without this expense, earnings before taxes would have been €1,052 million, similar to the level of the 1st fiscal quarter. The roughly €480 million fine for ThyssenKrupp was recognized fully in the 2nd quarter as expense in the Elevator segment.

The Stainless segment achieved a major profit jump due to significantly higher price levels compared with the prior-year quarter. Services also increased its profits considerably due to the continuing good price and volume situation for materials and the expansion in industrial services. The Steel segment further increased its profits at a high level. Excluding the antitrust fine, Elevator came close to equaling its prior-year profit. Profits at Technologies were lower, with increased earnings at Plant Technology unable to offset higher order costs for some shipbuilding projects.

Net sales increased significantly and more than the cost of sales, with the result that gross margin improved from 17% to 18%. Administrative and selling expenses were virtually unchanged. The decrease in other operating income is due to the fact that the prior-year figure included the break fee from the terminated acquisition of Dofasco. The sharp rise in other operating expense is due to the roughly €480 million fine imposed on ThyssenKrupp by the EU Commission for antitrust violations in the elevator and escalator market.

After deducting tax expense, net income for the period was €244 million. Deducting from this the minority interest in profits of €25 million, earnings per share is €0.45, compared with €0.84 in the same quarter a year earlier.

Income million €

* before taxes

Net financial liabilities/receivables and capital expenditures

At March 31, 2007 net financial liabilities stood at €897 million. On September 30, 2006 we reported net financial receivables of €747 million. The €1,644 million increase in net financial liabilities mainly reflects the rise in working capital due to business expansion, increased capital expenditures, for example for the new steel mill in Brazil, and the dividend payment.

Compared with March 31, 2006 net financial liabilities increased by €706 million.

Capital expenditure in the 2nd quarter 2006/2007 totaled €551 million, 12% more than in the prior-year quarter. €528 million was invested in property, plant and equipment and intangible assets and €23 million in the acquisition of businesses, shareholdings and other financial assets.

Net financial liabilities/(receivables) million €