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Segment review

Steel: Unabated demand for carbon steel flat products

The pleasing performance of the Steel segment continued in the 2nd quarter 2006/2007. Compared with the same quarter a year earlier, order intake increased by 8% to €3.5 billion. This was due to significantly improved average prices both in quarterly and long-term contracts, with order quantities slightly lower but still solid. Sales increased by 11% to €3.4 billion, also due to the higher prices.

Shipments remained steady with production running close to capacity and low inventories of finished products.

In order to focus our steel processing capabilities for the auto industry and meet rising customer demand for wider services, the auto chassis and body component business of the Technologies segment was transferred to the Steel segment in the 2nd quarter 2006/2007. These activities are now run by the Auto business unit as the Metal Forming operating group. The reference data for the 1st quarter and the prior year have been adjusted accordingly.

The Steelmaking business unit increased its crude steel production by 12% to 3.8 million metric tons in the reporting period. This strong increase mainly reflects the fact that the prior-year figure was unusually low due to a loss of production at our subsidiary Hüttenwerke Krupp Mannesmann. As a result of the higher output and the passing on of raw material and energy cost increases, sales of the business unit were higher than a year earlier. To better utilize our hot-rolled capacities, we additionally purchased slabs from third parties.

The Industry business unit recorded distinctly higher sales in the reporting period. Shipments were lower than the prior-year level, which was marked by a drawdown of finished product inventories. However, this decrease was outweighed by the improved prices. Industrial customers showed continuing strong demand; in some cases the quantities required by end-users and steel service centers were higher than our production capacities. Our European steel service centers also benefited from the pleasing market situation, recording higher volumes and prices than in the corresponding prior-year period. The healthy economic situation also resulted in improved sales of construction elements.

Sales of the Auto business unit increased significantly from a year earlier. This was due both to higher volumes and to price increases secured in contract business with the automobile industry. As a result of limited capacities and low inventories certain difficulties were encountered in supplying our European customers. Sales of tailored blanks were considerably higher than a year earlier, partly due to the ramp-up of our new production sites in China and Sweden. The steel service business in North America recorded major volume losses which were only partly offset by positive price effects. In Metal Forming, lower tooling sales were not fully compensated by improved sales of components.

The Processing business unit expanded its sales. Shipments of tinplate showed a further rise, while price pressure increased in a difficult European market. Medium-wide strip also recorded a strong expansion in sales due to higher volumes and prices. Continuing high worldwide demand for grain-oriented electrical steel made it possible to secure a further significant rise in prices for these products.

Income

The Steel segment increased its profit in the reporting quarter by €47 million to €471 million. The quarterly earnings include a loss of €8 million for the Metal Forming operating group. The comparative figures have been adjusted accordingly.

The Steelmaking business unit reported a loss, having returned positive earnings a year earlier. The main factors were the start-up costs for the steel mill in Brazil and increased electricity costs.

The Industry business unit recorded substantial growth in income. This was possible despite declining overall shipments and higher starting material costs because the business unit improved its product portfolio, raised prices and continuously implemented measures to enhance efficiency. The European steel service centers achieved significantly higher profits in a good market environment.

The Auto business unit reported lower profits. However, the income figure for the comparable prior-year quarter contained an insurance recovery in connection with a fire. Excluding this effect, profits improved significantly in the reporting period, mainly as a result of volume and price increases and the ongoing implementation of performance enhancement programs. Running counter to this were higher costs for the procurement of energy and raw materials. Tailored Blanks considerably increased its profits – thanks partly to the profitable ramp-up of its locations in China and Sweden. With shipments declining, the North American steel service activities reported a loss, having returned a profit the year before. The loss was due to impairment charges on property, plant and equipment. After positive earnings a year earlier, the Metal Forming business recorded a loss due to start-up costs for new products.

The Processing business unit achieved considerably higher profits mainly on the back of increased prices for electrical steel. The medium-wide strip business also benefited from a positive trend in volumes and prices and significantly improved its profits. Income in the tinplate operating group was slightly higher than the previous year despite the impact of higher starting material prices, especially for tin.

Stainless: Considerable growth in earnings

With order volumes significantly lower than in the strong prior-year quarter, the value of orders received by the Stainless segment in the 2nd quarter 2006/2007 increased by 4% to €2.2 billion. The situation in high-performance materials was positive. Demand remained high in the chemical, plant construction, energy, gas and oil sectors. At the same time prices for alloying elements climbed sharply. Both these factors resulted in encouraging growth in the value of orders received for nickel alloys.

At around 650,700 metric tons, total deliveries by the Stainless segment were roughly 7% lower than the year before. In particular shipments of hot-rolled strip decreased. In contrast, deliveries of cold-rolled strip rose slightly from the prior-year period.

Stainless reported 2nd quarter sales of €2.4 billion, up 48% from the prior-year quarter. In addition to higher base prices, this increase was mainly due to the effect of the alloy surcharge, driven chiefly by the further rise in nickel prices.

In the ThyssenKrupp Nirosta business unit, demand fell sharply due to high inventory levels and increased nickel prices. However, as shipments remained at the prior-year level, sales increased significantly. The annealing and pickling line damaged by the fire at the Krefeld cold-rolling mill in June 2006 has now gone back into operation. The cold-rolled line which was also damaged is still being rebuilt; production is due to commence in fall 2007.

ThyssenKrupp Acciai Speciali Terni also registered a downturn in demand for stainless products from service centers, distributors and tube manufacturers. Despite this, the business unit achieved a further increase in shipments. The higher price level and the alloy surcharge led to substantial sales growth. The start-up of the expanded finishing shop had a positive effect; as a result the business unit is now even better placed to meet the requirements of its customers.

ThyssenKrupp Mexinox recorded higher order intake. Here, too, although shipments remained unchanged, sales increased on account of higher transaction prices. The business unit further expanded its strong position in the North American market for high-quality stainless steel products.

Shanghai Krupp Stainless reported a positive performance in order intake, shipments and sales – triggered primarily by increasing business with end customers. The business unit is continuing to support ThyssenKrupp Nirosta with material deliveries following the fire at the Nirosta plant in June 2006 and associated production restrictions.

The nickel alloys business of ThyssenKrupp VDM recorded a significant rise in order value due to the higher nickel price component. The business unit continued its comprehensive business process improvement program. Sales increased as a result of the higher raw materials costs which were passed on in prices.

The ThyssenKrupp Stainless International business unit profited from the strengthening of distribution capabilities through its new service centers in Poland and the United Kingdom. Order intake was up, and shipments and sales likewise increased considerably.

Income

Year on year, the Stainless segment's 2nd quarter profit increased by €239 million to €291 million.

The main factors here were a distinctly higher base price level – though there are signs that this is weakening – in conjunction with stable demand from end consumers. Prices in the prior-year quarter were still weak and only subsequently increased to today's level. Earnings were negatively impacted by a distinct rise in energy costs, mainly for electricity and gas.

Thanks to improved price levels and ongoing performance enhancement programs, the German stainless activities reported significantly higher profits. The measures to maintain supply readiness and minimize losses following the fire at the Krefeld plant, which negatively impacted income in previous periods, have largely been completed. The Italian activities achieved substantial growth in earnings. Here too, higher base prices and the implementation of efficiency programs had a positive impact. The high volume of titanium business and the improved results of the forging operation also made a contribution. In a generally positive market environment in the NAFTA region, the Mexican cold-rolling activities also reported a significant climb in income. Following a loss in the prior-year quarter, the Chinese cold-rolling activities generated a profit despite the continued difficult market environment. This is mainly the result of an improved product mix, increased export activities and hire work as well as the cost advantages achieved through the start-up of the hot-rolled annealing and pickling line. The price increases now realized by Chinese producers will still not be enough to offset the current cost increases for raw materials.

In a generally stable market environment, earnings in the nickel alloys business decreased from the prior-year quarter, due among other things to the temporary decline in demand in the aerospace sector.

Technologies: Order intake remains high

Order intake and sales

Order intake at Technologies remains high. Despite negative exchange-rate effects and company disposals, order intake in the 2nd quarter 2006/2007 reached €3.1 billion, a further improvement on the good level of the prior-year quarter. At €2.8 billion sales did not quite match the year-earlier level.

This mainly reflects the weak US dollar exchange rate, company disposals, weaker demand at the North American foundries and lower sales in the automotive systems business. With an order backlog of €13.5 billion at March 31, 2007, orders in hand currently cover more than one year's sales.

ThyssenKrupp Umformtechnik was transferred from the Technologies segment to the Steel segment in the 2nd quarter 2006/2007. The figures for the 1st quarter 2006/2007 and the prior-year period have been adjusted accordingly.

The order situation in the Plant Technology business unit remained encouraging. Orders exceeded the already high levels of the prior-year period – with a slight improvement in sales. High raw material and energy prices and strong worldwide demand for cement created a very good investment climate for the product groups of Plant Technology and a correspondingly strong project situation for the companies.

Marine Systems recorded an improvement in orders from the previous year mainly due to the strong performance of the repair and service business and the integration of Blohm + Voss Industries. Sales, too, were substantially higher.

Overall the positive trend in demand in the Mechanical Components business unit continued in the 2nd quarter 2006/2007, with order intake higher than sales. However, sales did not reach the prior-year level. This reflects the increase in the value of the euro against the US dollar, the loss of sales due to the disposal of the Brazilian foundry, and lower demand at the North American foundries. However, sales of large-diameter antifriction bearings and rings remained strong.

The Automotive Solutions business unit achieved significant order growth, to which virtually all operating groups contributed. However, sales were lower than a year earlier due to lower billings for body shop equipment, tooling and assembly systems in Germany and the USA. By contrast, the unit generated strong business with axle modules.

Transrapid achieved higher sales than a year earlier.

Income

In the 2nd quarter 2006/2007, the Technologies segment returned a profit of €108 million compared with €133 million in the comparable prior-year quarter. A substantial earnings increase at Plant Technology and the first ever profit reported by Transrapid did not quite offset the decrease in income at Marine Systems due to higher order costs. Expenditure for restructuring and partial retirement measures in the 2nd quarter 2006/2007 was also higher than a year earlier, mainly due to the integration of the Automotive segment.

With a two-digit million profit, Plant Technology achieved another significant improvement. The main reasons were increased sales with high-margin orders and improved earnings from orders.

Despite further improvements in the submarine, repair and service businesses, earnings at Marine Systems were well down from the prior year due to higher costs for processing yacht orders.

Mechanical Components once again achieved a pleasing two-digit million profit. Continued strong demand for large-diameter antifriction bearings and rings had a particularly positive effect. However, weaker demand and a sharp rise in starting material prices at the North American foundries impacted negatively on earnings.

Automotive Solutions achieved a two-digit million profit which was higher than the year before. A disposal gain at Bilstein Suspension was set against restructuring expenditures and lower sales and project income in the body shop equipment, tooling and assembly systems activities in the USA.

Transrapid reported a profit for the first time in the 2nd quarter. Income contributions from license billings, higher interest income and cost reduction measures had a positive impact.

Elevator: Firmly on growth track

Order intake and sales

Elevator remained on growth track in the 2nd quarter 2006/2007. Despite negative exchange-rate effects the business volume was expanded in both new installations and the service business.

While the growth in new installations is mainly attributable to strong business in North America, we expanded our service activities in all regions. Overall, 2nd quarter order intake showed a year-on-year improvement of 9% to €1.3 billion. Sales were up by 3% at €1.1 billion.

The Central/Eastern/Northern Europe business unit significantly exceeded its year-earlier order intake and sales. This positive development was attributable in particular to the activities in France and the United Kingdom. While the French operations profited above all from very encouraging modernization business, the growth in the United Kingdom came from the new installations and service areas.

The Southern Europe/Africa/Middle East business unit likewise recorded higher order intake. A positive factor here was the first-time inclusion of companies in Italy and the Gulf States. In addition, increased orders were booked in Turkey. The business unit's sales were level with the previous year.

A slight fall in sales in the new installations business in Spain was offset by the new inclusions.

2nd quarter order intake and sales in the Americas business unit were slightly down from the high prior-year level due to negative exchange-rate effects. However, at operating level both order intake and sales increased. In the USA the sustained upswing in the non-residential areas of the construction sector had a positive effect. In addition, the service business was further expanded. The business situation in Canada and Brazil was also encouraging.

The Asia/Pacific business unit significantly expanded both order intake and sales. Orders and sales in Korea were slightly higher despite the continued difficult market environment. The Chinese activities again profited from persistently strong demand for new installations.

The Escalators/Passenger Boarding Bridges business unit reported slightly improved sales and significantly higher order intake. The escalator activity contributed to the growth despite continued price competition. In a stable market, the passenger boarding bridges business achieved a substantial improvement on its prior-year figures.

The Accessibility business unit continued its unbroken growth. Order intake and sales climbed further in both Europe and North America.

Income

The Elevator segment reported a loss of €390 million in the 2nd quarter 2006/2007. This was due to the roughly €480 million fine imposed by the EU Commission in an antitrust case. Without the fine, Elevator would have achieved a profit of €90 million, compared with €94 million in the prior-year quarter, the drop mainly being attributable to negative exchange-rate effects. To improve comparability, the operating performance of the business units is described in the following without the effect of the EU fine:

Operating income in the Central/Eastern/Northern Europe business unit fell short of the year-earlier level due to sustained price pressure. Only the activities in the United Kingdom generated significantly higher earnings. The companies in Lithuania and Croatia were consolidated for the first time.

The Southern Europe/Africa/Middle East business unit exceeded its prior-year profit. The improvement was mainly due to the increasing share of service business in sales in Spain. In addition, in Portugal the business unit succeeded in focusing new installations business on orders with higher profit margins.

New activities in Italy and the Gulf region likewise contributed to the growth in earnings.

The Americas business unit achieved distinct growth in profits. Negative exchange-rate effects were more than offset by an improvement in operating income. A major role in this was played by the North American activities which not only continued to benefit from the good market situation but also achieved higher margins.

The Asia/Pacific business unit likewise reported significantly higher profits. However, the growth was the result of the sale of real estate which was no longer required for operating purposes following the combination of production locations. The Chinese activities also contributed, benefiting from sales growth in the new installations business.

The Escalators/Passenger Boarding Bridges business unit recorded a loss in the reporting period. In the passenger boarding bridges business, delays in the processing of orders negatively impacted income. The escalators business reported break-even operating earnings. The reduction compared with the prior year was caused by the continuing price competition.

Income in the Accessibility business unit fell slightly. While the earnings of the North American activities were level with the previous year, profits in Europe were down due to the discontinuation of platform lift production in the Netherlands.

Services: High sales growth

Order intake and sales

The Services segment achieved its highest ever quarterly sales of €4.3 billion in the 2nd quarter of the reporting year. This was a 28% improvement on the prior-year quarter. The main reason was the improved cyclical situation on the raw and industrial materials markets. The international expansion of the segment's distribution activities and the newly established and acquired companies additionally boosted sales.

The largest business unit, Materials Services International, recorded the strongest growth in sales.

The very good market situation with demand and prices at a high level continued in the reporting period. This was true not only of the growth region of Eastern Europe but also of Germany and almost all Western European countries as well as the activities in South America and Asia.

Although still generally high, the pace of growth in North America has slowed considerably. Nevertheless, the Materials Services North America business unit reported a significant improvement in sales against the very strong prior-year quarter.

The Industrial Services business unit also reported further growth. Beyond its traditional activities, business with the energy sector was expanded. The new activities in South America also made a substantial contribution to sales growth. Sales in North America only failed to increase on account of the unfavorable exchange rate situation.

The Special Products business unit achieved a significant increase in sales. Business with rolled steel and tubular products as well as the technical trading activities showed remarkable growth, due mainly to strong demand and very high prices for metallurgical raw materials. Nickel, for example, reached a price of 50,000 US dollars per metric ton.

Income

At €140 million, 2nd quarter 2006/2007 income at Services was up by more than 50% from the comparative prior-year period. The highest earnings were returned by the Materials Services International business unit, which more than doubled its profits as a result of higher prices, stronger demand and a significant expansion in its activities. By contrast, Materials Services North America was unable to repeat its very good prior-year earnings – despite the positive price and volume situation – due to high expense from the fair-value recognition of currency hedges. The Industrial Services business unit achieved an increase in profits with contributions from new orders and acquisitions, particularly in the area of process services for the energy and chemical sectors. Efficiency enhancement programs also played a significant part in the earnings improvement. The Special Products business unit matched its very high year-earlier profits, which were boosted by exchange-rate effects and nonrecurring income. The main contributions came from the technical trading and raw materials activities.

 

Corporate includes the Group's head office and internal service providers as well as inactive companies not assignable to individual segments. Also included here is the non-operating real estate, which is managed and utilized centrally by Corporate. The retained assets and liabilities and held-for-sale operations of ThyssenKrupp Budd are also assigned to Corporate. The disposal in the meantime of the held-for-sale operations is responsible for the decrease in Corporate's sales.

Corporate reported a loss of €43 million, a deterioration of €26 million compared with the prior-year quarter. A year earlier, income was boosted by the €142 million break fee from the terminated acquisition of Dofasco, but negatively impacted by restructuring charges for the now sold or closed North American automotive activities. In the reporting quarter, exchange rate gains and income in connection with the disposal of real estate were recognized as a result of the discontinuation of the automotive activities in Detroit. Net interest at Corporate also showed an improvement on the prior-year quarter due to adjustments to the internal financing system.

Consolidation mainly includes the results of intercompany profit elimination.