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Group review

ThyssenKrupp – profitable growth continued

The ThyssenKrupp success trend continues unabated. The favorable market environment and above all our good strategic positioning are paying off. All segments produced a very pleasing performance in the 3rd quarter 2006/2007. We recorded double-digit growth rates in order intake and sales. The Group's earnings before taxes increased to €1,219 million from €806 million in the prior-year quarter. In the first nine months of the current fiscal year the Group has thus achieved earnings before taxes of €2,853 million

The highlights for the 3rd quarter 2006/2007 were as follows:

• Compared with the prior-year quarter, order intake increased by 25% to €15.6 billion.
• Sales rose by 11% to €13.4 billion.
• EBITDA improved from €1,290 million in the prior year to €1,728 million, an increase of 34%.
• Earnings before taxes increased by 51% to €1,219 million from €806 million in the prior-year quarter.
• Earnings per share increased by 71% to €1.49 from €0.87 in the prior-year quarter.
• Net financial liabilities at June 30, 2007 were €806 million. This represents an increase of €1,553 million compared with September 30, 2006, when we reported net financial receivables of €747 million. On June 30, 2006 net financial receivables stood at €496 million.

Earnings target for 2006/2007 raised

We expect the overall positive performance to continue in the further course of the year. For fiscal year 2006/2007 we anticipate an increase in sales to over €50 billion. Based on our better-than-expected earnings performance in the first three quarters of fiscal 2006/2007, we currently forecast full-year earnings before taxes and major nonrecurring items of around €3.6 billion, including nonrecurring items €3.2 billion.

Our mid-term and longer-term targets remain unchanged. By 2010 the aim is to achieve sustainable earnings before taxes and major nonrecurring items 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 items of €4.5 to 5.0 billion.

Favorable economic environment

The strong expansion of the world economy continued as expected in the 1st half of 2007. Prices increased further on the international energy and raw material markets but despite this the pace of global growth remained robust.

In the euro zone, growth in the first half of 2007 will likely turn out stronger than previously expected. Particularly pleasing was the improvement in Germany, where above all dynamic investment activity contributed to a positive economic picture. The US economy slowed appreciably in the first months of the year as a result of a weak housing market and declining private spending. However, growth in the 2nd quarter was much stronger again. Japan remained on a moderate growth track due to continuing solid foreign and domestic demand.

The developing countries of Asia, Latin America and Central and Eastern Europe again posted strong economic growth. The high pace of expansion in China and India continues unabated, and the majority of the Central and Eastern European countries are growing extremely strongly.

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

• The positive economic environment benefited the international steel markets. Crude steel production in the 1st half was 652 million metric tons, 8.4% up from the corresponding prior-year period. A significant part of this growth was again attributable to China, which expanded its production by 17.8% to 237 million metric tons. Even excluding China, production increased by 3.6%. The European Union produced 2.7% more steel than in the comparable prior-year period. The German steel industry reported growth of 5.2% to 24.5 million metric tons, with its facilities operating at full capacity. There was a slight fall in production in the NAFTA region, where still high inventories dampened steel demand. After an outstanding start in the 1st calendar quarter, steel users in the EU also reported above-trend production growth in the 2nd quarter 2007. As a result, shipments of carbon steel flat products by Western European suppliers were again at the high level of the comparable prior-year quarter. However, at the beginning of the summer period demand settled at a slightly more moderate level. Not least as a result of further rising imports from third countries in the course of the year, inventory levels at end users and particularly at distributors showed a large in-crease. Despite the generally high level of supply, average steel prices in the 2nd quarter 2007 were higher than in the prior quarter; slight pressure on prices in Southern Europe remained largely confined to this region.
• The decline in orders for stainless steel flat products that began at the start of the 1st quarter 2007 continued, despite generally satisfactory demand from end users. The reason for this initially was the sharp increase in inventory levels at distributors and service centers that took place in the course of 2006 as a result of imports. This led to a significant drop in ordering activity. The situation was compounded by the collapse in the nickel price from the beginning of June. After reaching a new record level of US$54,100/t on May 21, 2007, the nickel price fell by almost US$20,000/t by the end of June 2007. The reason for this price erosion was the increasingly evident decrease in nickel demand from stainless producers due to weak orders from distributors. Added to this was the increasing product mix shift towards lower-nickel or nickel-free stainless grades. In addition, the London Metal Exchange announced it was changing the rules for nickel trading and eliminating a number of mechanisms which had previously kept available nickel positions artificially scarce and trading prices artificially high. Mirroring the previous decline in orders, deliveries of stainless cold-rolled products began to fall sharply in the middle of the 2nd quarter 2007. Base prices slipped in the course of the 1st half 2007, reflecting increased alloy surcharges, especially for nickel, and a sharp rise in third-country imports. In North America, the market environment for stainless flat products remained positive. However, the effects of the raw material cost trend on the ordering behavior of distributors were felt here too. In Asia, weaker market demand led to a decline in prices. Despite the production cutbacks announced and in some cases already implemented by the large Chinese producers, there is still significant oversupply and therefore continuing pressure to direct surplus capacities into exports. In the area of nickel alloys, customers are taking a wait-and-see approach in view of the still high raw material prices. The market environment for titanium remained generally positive.
• The main growth impetus on the international auto market came from the emerging nations. In China, now the world's third-largest auto manufacturer, production in the 1st half 2007 was up by around a fifth. Vehicle demand also rose strongly in Brazil. By contrast, production in North America was down from a year earlier. Sharply increased gasoline prices impacted sales of light trucks and cars. In the European Union, new car registrations were almost level with the comparable prior-year period. New car sales in Germany weakened considerably, also as a result of the VAT increase. However, strong export demand led to a large increase in production. The German truck market also remains positive.
• The global mechanical engineering industry remained on growth track thanks to the continuing robust world economy and increased capital spending. In Germany in particular, production of machinery and equipment remained at a high level. Both domestic and foreign orders increased sharply in the 1st half 2007. Export demand was particularly strong at manufacturers of elevators and escalators. The positive trend also continued in the German plant engineering sector.
• The growth in worldwide construction output continues to be driven by Asia and the countries of Central and Eastern Europe. In the USA, the housing market remained weak. The German construction industry recorded significant growth in orders and output in the first months of 2007. The main impetus came from commercial construction, thanks to continuing high investment.

Order intake and sales

ThyssenKrupp sustained its successful performance in the 3rd quarter 2006/2007. Demand for our products and services grew strongly in a generally favorable market environment. Order intake improved by 25% from the prior-year quarter to €15.6 billion.

The Group's sales increased by 11% to €13.4 billion. The Steel segment profited from higher steel prices. The higher sales at Stainless are due to sharply increased alloy surcharges, reflecting the trend in nickel prices. Despite business disposals and the depreciation of the US dollar, sales at Technologies remained more or less stable. Elevator further expanded its positions worldwide. Business at Services was boosted by continuing strong demand for materials and an expansion in sales activities.

Further acquisitions to round out the portfolio and improve market access were made in the 3rd quarter 2006/2007, especially in the Technologies, Elevator and Services segments. In the Technologies segment the main items were the acquisition of the US market leader in kiln servicing and repairs to strengthen cement plant manufacturer Polysius and the conclusion of agreements to purchase a construction equipment component manufacturer in Italy to strengthen Berco. Elevator further expanded its market position in Eastern Europe with the acquisition of a Croatian elevator company. As part of its Eastern Europe strategy, Services purchased one of Slovakia's biggest steel distributors. In moving to focus on industrial services the segment also disposed of a marginal activity operating in the temping sector.

In addition, a commercial real estate portfolio of 25 properties, including office buildings and other commercially used properties, was sold to a consortium of buyers. In connection with the planned move of ThyssenKrupp AG to the new quarter in Essen this real estate package also includes the Dreischeibenhaus building in Düsseldorf, the current headquarters of ThyssenKrupp until the move to Essen.

Since the merger the Group has divested businesses representing sales of €9.1 billion and acquired businesses with sales of €8.2 billion.

Sales billion €

Income

ThyssenKrupp achieved earnings before taxes of €1,219 million in the 3rd quarter 2006/2007, compared with €806 million in the same quarter a year earlier. This represents another quarterly earnings record. Included in the figure is a profit of €115 million from the sale of a package of operating real estate and properties held as financial investments, in connection with the concentration of our head office locations. In addition, earnings were impacted among other things by impairment charges of €76 million for assets owned by the Auto business unit of the Steel segment.

The biggest profit increase was achieved by the Stainless segment, reflecting higher base prices and strong end user demand in the reporting period. Services and Steel also achieved significant profit hikes. The rise in earnings in the Services segment is due to high price and demand levels in Europe and a large increase in profits at Special Products. Steel expanded its profits due to price and performance improvements and steady high demand. Elevator increased its earnings mainly as a result of business expansion in the Iberian Peninsula and through higher sales and improved performance in North America. In the Technologies segment, higher profits at Plant Technology offset lower earnings at Mechanical Components, resulting in a small net increase.

Net sales increased more than the cost of sales, with the result that gross margin improved from 18% to 19%. Administrative and selling expenses also increased less than net sales. Other operating income increased in the reporting quarter due to the income from the sale of the real estate package, with the absence of insurance recoveries received in the prior-year quarter in connection with fire losses working in the opposite direction. The increase in other operating expense was due to goodwill impairment charges in the reporting quarter.

After deducting tax expense, net income for the period was €759 million. Deducting from this the minority interest in profits of €30 million, earnings per share is €1.49, compared with €0.87 in the comparable prior-year quarter.

Income million €

* before taxes

Net financial liabilities/receivables and capital expenditures

At June 30, 2007 the Group had net financial liabilities of €806 million. At September 30, 2006 we reported net financial receivables of €747 million. The €1,553 million increase in net financial liabilities mainly reflects the rise in working capital due to business expansion, increased capital expenditures, the dividend payment and the fine payment in the Elevator segment. The sale of various real estate assets resulted in a cash inflow. Compared with June 30, 2006 net financial liabilities increased by €1,302 million.

Capital expenditure in the 3rd quarter 2006/2007 totaled €719 million, 68% more than in the prior-year quarter. €689 million was invested in property, plant and equipment and intangible assets, and €30 million in the acquisition of businesses, shareholdings and other financial assets.

Net financial liabilities/(receivables) million €

New steel plants in the USA and Brazil

The Steel and Stainless segments plan to build a joint production and distribution location in Mount Vernon/Alabama in the southern USA to significantly strengthen ThyssenKrupp's position in North America. What tipped the scales in favor of Mount Vernon were the site's cost advantages.

The centerpiece of the new complex will be a hot strip mill which will primarily process slabs from the new CSA steel mill in Brazil. At the same location ThyssenKrupp Stainless will build a plant to manufacture stainless flat products. This will include in particular a complete stainless steel mill comprising electric arc furnace, AOD converter and continuous caster. The slabs it produces will be processed into hot-rolled coil on ThyssenKrupp Steel's hot strip mill. Following on from the hot strip mill the two segments will operate their own cold rolling and coating facilities.

To realize the project the project companies ThyssenKrupp Steel USA, LLC and ThyssenKrupp Stainless USA, LLC have already been established and directors appointed.

The construction of the new mill in Brazil is making good progress in all areas with ground and foundation work. The major contracts have been awarded, and work is proceeding to schedule and budget. In addition to the project team a start has been made on hiring personnel – with a great response from the Brazilian labor market – and on training operating staff.