Group review
ThyssenKrupp – course maintained
Against the background of slowing global economic growth, ThyssenKrupp maintained its course in the 1st half of 2007/2008. As expected, order intake and sales matched the strong prior-year levels, while profits were higher than anticipated. The Group's earnings before taxes reached €1,388 million. They were impacted in particular by pre-operating costs of €128 million for the construction of the new steel mills and restructuring expense of €10 million in the Steel segment as well as gains on disposals of €27 million. The Group's earnings were lower than a year earlier, mainly due to the drastic decline in stainless steel prices.
The highlights for the 1st half of 2007/2008 were as follows:
- Order intake was level with the previous year at €27.4 billion.
- 1st half sales were virtually unchanged against the prior-year period at €25.5 billion.
- EBITDA was €2,280 million, compared with €2,538 million a year earlier.
- 1st half earnings before taxes decreased from €1,634 million in the prior year to €1,388 million.
- Earnings per share rose from €1.76 to €1.85.
- Net financial liabilities at March 31, 2008 were €1,988 million, an increase of €2,211 million compared with September 30, 2007, when we reported net financial receivables of €223 million. On March 31, 2007, net financial liabilities stood at €897 million.
Global growth slower
Global growth has slowed perceptibly in recent months, impacted in particular by turbulence on the international financial markets and the signs of a recession in the USA. Increasing raw material and oil prices also had a negative effect.
The economic picture in the USA has clouded recently. Gross domestic product in the final quarter of 2007 was only slightly higher than in the preceding quarter. Though private consumption continued to improve, investment slowed due to the negative developments in the housing sector. The downturn in the US economy accelerated in the 1st quarter of 2008. The slowdown in the euro zone was less severe. In Germany, the pace of growth slowed toward the end of the year due to declining private consumption. By contrast, business investment and foreign trade continued to improve. The moderate growth continued at the beginning of 2008.
In the developing countries of Asia, Latin America, and Central and Eastern Europe, economic growth showed little sign of slowing. China's economy has been expanding at double-digit rates. Brazil also recorded strong growth. In Russia and particularly in the new EU member states, economic activity remained robust thanks to solid domestic demand.
In the sectors of importance to ThyssenKrupp the picture was as follows:
- Despite the slowing of the world economy, the international steel market expanded further. Crude steel output in the first three months of this year was 5.6% higher than in the corresponding prioryear period. Around half of the absolute growth was attributable to China. In the European Union, output was slightly lower than a year earlier. German steel producers continued to operate at full capacity. With workloads at steel processors remaining good, shipments of flat-rolled carbon steel from European suppliers reached an exceptionally high level. Orders also recovered strongly. In view of increasing steel prices, some steel users ordered beyond their actual needs. The demand overhang was reinforced by declining imports from third countries. The soaring level of global spot prices for steel in the 1st quarter 2008 was mainly due to increased costs and strong demand for iron ore. As import pressure eased and the stock situation returned largely to normal, European steel producers were able to pass on some of the costs to the market. Prices were increased significantly for quarterly deals at April 01, 2008.
- Demand on the European market for stainless steel flat products recovered. Following a phase of very weak orders and deliveries in the summer months of 2007, order intake has improved significantly since the 4th calendar quarter 2007. As a result, deliveries by European producers have also risen recently, and in the 1st quarter 2008 once again reached the high prior-year level. Stock-holding distributors in particular made increasing purchases to replenish their heavily depleted stocks. The nickel price, which has stabilized at a relatively high level, also encouraged longer-term ordering. With order intake improving continuously and alloy surcharges stable or slightly lower, European producers were able to raise base prices appreciably at year end and in the 1st quarter 2008. By contrast, demand for stainless steel in the NAFTA region was subdued, and base prices decreased continuously. In China and the other Asian markets, end customers also adopted a wait-and-see approach. As a result, stock levels in the region remain at a high level. Although some Chinese producers attempted to improve market demand and the conditions for price increases by temporarily cutting back production, order intake remained subdued. The market for nickel alloys and titanium was comparatively stable.
- The international auto markets continued to show strong regional differences. The highest growth at the beginning of the year was once again in the emerging markets. By contrast, demand in North America – which was already low – fell further. In the USA, sales of passenger cars and in particular light trucks were down in the 1st quarter 2008; vehicle production also declined significantly. The Brazilian auto industry recorded further high growth rates. In the European Union, new car registrations were slightly lower than a year earlier. While changes in taxation impacted demand in some Western European countries, there was a substantial increase in registrations in the new EU member states. In Germany, the domestic market recovered somewhat following the weak prior-year figures. With exports remaining high, car production was slightly down on the previous year.
- Following a positive performance last year, growth on the global machinery market slowed at the beginning of 2008. In the USA, the economic downturn is impacting demand for capital goods. By contrast, there are no signs of cooling to date in China. The German mechanical engineering sector started the new year with a good order backlog. Orders grew by 16% in 2007 and improved further at the beginning of 2008 thanks to continued strong demand for capital goods.
- Global construction activity continues to be driven by the countries of Asia and Central and Eastern Europe. In the USA, falling demand for housing construction is having a negative impact. In the German construction industry, especially commercial construction, the order situation has improved again in recent months.
| 1st half ended March 31, 2007 | 1st half ended March 31, 2008 | 2nd quarter ended March 31, 2007 | 2nd quarter ended March 31, 2008 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Order intake | million € | 27,263 | 27,354 | 13,962 | 14,084 | ||||
| Sales | million € | 25,446 | 25,469 | 13,114 | 13,199 | ||||
| EBITDA | million € | 2,538 | 2,280 | 1,031 | 1,197 | ||||
| Earnings before taxes (EBT) | million € | 1,634 | 1,388 | 572 | 742 | ||||
| Employees (March 31) | 187,919 | 195,828 | 187,919 | 195,828 |
Order intake and sales remain stable
Order intake and sales were in line with expectations in the 1st half 2007/2008. Against the background of a global economic slowdown, orders were level with the prior year at €27.4 billion. New orders were lower at the Technologies and Services segments, virtually stable at Stainless and significantly higher at Steel and Elevator.
Group sales were also unchanged at €25.5 billion. With volumes stable, Steel achieved higher sales for price reasons. Shipments at Stainless were also unchanged, but lower stainless steel prices resulted in a sharp drop in sales. Despite negative exchange rate influences, Technologies expanded its business thanks to its good order situation. Elevator also achieved higher sales as a result of its successful expansion in Southern Europe. Although Services was impacted above all by weaker materials business in North America, sales were virtually unchanged from a year earlier.
Group earnings ahead of plan
ThyssenKrupp achieved earnings before taxes (EBT) of €742 million in the 2nd quarter 2007/2008, compared with €646 million in the 1st quarter 2007/2008. 1st half earnings reached €1,388 million, compared with €1,634 million a year earlier, when the comparable period included a nonrecurring antitrust fine of around €480 million imposed by the EU Commission on ThyssenKrupp Elevator. Our profits in the 1st half 2007/2008 were ahead of plan.
As expected, earnings were lower than in the 1st half 2006/2007. The Stainless segment in particular suffered a sharp decrease in income due to the dramatic decline in stainless steel prices. The Steel segment delivered the biggest contribution to earnings, but its profits were down due among other things to pre-operating expense for the new steel mill in Brazil and increased raw material costs. By contrast, Technologies improved on its prior-year income. Elevator achieved higher profits, even when the previous year's EU antitrust fine is taken into account. At Services, the fall in earnings compared with the high prior-year figure was mainly due to weaker material prices.
At €25.5 billion, net sales in the reporting period showed virtually no change from the year-earlier figure. At the same time, the cost of sales increased by €424 million, mainly as a consequence of higher material expense due to rising costs for raw materials and energy. Overall, this resulted in a decrease in gross margin from 19% to 17%.
The increase in administrative expenses by €131 million was mainly connected with the construction of the steel mill in Brazil. The decrease in other operating expense by €472 million related in the amount of around €480 million to the EU antitrust fine against ThyssenKrupp Elevator included in the 1st half of the previous year. The decrease in other operating income by €200 million is mainly due to a fire insurance recovery of €119 million recognized in the comparative prior-year period.
Taxes on income decreased by €278 million in conjunction with a reduction in the tax rate from 45% to 32%. The significant decrease in the tax rate was influenced by the tax rate reduction in Germany and the non-tax-deductible EU antitrust fine against ThyssenKrupp Elevator included in the pre-tax earnings of the prior-year period. After deducting tax expense, net income for the period was up €32 million at €937 million. Deducting from this the minority interest in profits of €37 million, earnings per share is €1.85, compared with €1.76 in the comparable prior-year period.
Net financial liabilities/receivables and capital expenditures
At March 31, 2008, the Group had net financial liabilities of €1,988 million, compared with net financial receivables of €223 million at September 30, 2007. The €2,211 million increase in net financial liabilities is mainly due to increased capital expenditures – in particular for the new steel mill in Brazil –, the dividend payment and the acquisition of treasury stock. The financial crisis had little impact on ThyssenKrupp's financing in the reporting period.
Capital expenditure in the 1st half 2007/2008 totaled €1,957 million, 41% more than in the first six months of the previous year. €1,761 million was invested in property, plant and equipment and intangible assets, and €196 million in the acquisition of businesses, shareholdings and other financial assets.
Construction of new mills in Brazil and the USA progressing
The Steel and Stainless segments are working with great determination to implement their transatlantic growth strategies. In Brazil, Steel is building a new slab mill. Progress on major works including port, coke plant, raw materials handling, sinter plant, power plant, media supply and infrastructure is in line with the highly ambitious timetable. The minor delays which have occurred can be made up. The delays which have occurred with the blast furnaces and melt shop cannot be fully made up by additional acceleration measures. For this reason, start of production – which was planned for March 2009 – will be postponed by four to six months. The delays are mainly due to booming global demand for capital goods, which has caused delays from our suppliers, delivery bottlenecks on the tight Brazilian construction materials market, and to unusually heavy and prolonged rainfall in the 2nd quarter 2007/2008, which led to delays in erection and welding work on site.
There will be an increase of €500 to €700 million in the investment budget for this project. This is mainly due to additional expenditure for ancillary works. Further reasons for the budget overrun included substantial price increases both on the Brazilian market for construction and erection services and on the international equipment markets, as well as technical optimization work. The project's good ratio of return will not be significantly reduced by these events.
New employees are being recruited as planned; the training program for the first engineers and technicians with experience of iron and steelmaking is already underway. To date, 138 people have received or are currently receiving training in Duisburg.
The investments to expand processing and coating capacities at our German plants are in full swing. The slab storage area at Walsum port has now been completed. A new walking beam furnace started operation at the Bochum hot strip mill at the end of February. The hot strip mill in Beeckerwerth will be modernized in the further course of the year. Investments to increase the output of two hot-dip coating lines in Duisburg have been completed, and they are being ramped up successfully. The new blast furnace 8 to modernize the hot metal base in Germany has been in operation since December 08, 2007 and has now almost achieved its full capacity of 5,600 metric tons of pig iron per day.
Construction of the new steelmaking and processing plant for Steel and Stainless near Mobile in Alabama/USA is also on schedule. Steel has now concluded several contracts with suppliers. Orders have been placed for the key hot strip mill, cold strip mill and four hot-dip coating lines, for which detail engineering is currently being drawn up. Good progress has been made on preparing the site. Building work has been completed in some areas, and work has started on driving the foundation piles. The concrete sales plan, aimed at acquiring a greater share of the NAFTA market for premium flat-rolled carbon steel, has already been drawn up, and a new sales team is currently being formed with employees from Germany and the USA.
Work on driving the foundation piles for Stainless's production lines and plant shops started in early March. ThyssenKrupp Stainless USA has now awarded most of the contracts for the production equipment, including one hot strip and one cold strip annealing and pickling line, three cold rolling mills, a skin pass mill and several finishing lines as well as the majority of the required cranes. Orders have also been placed for structural steel work for the cold mill shops including finishing lines and shipping areas. The order for the melt shop is in the final stages of negotiation; engineering work is currently being carried out.
Almost 17,000 applications have been received by ThyssenKrupp Steel and ThyssenKrupp Stainless in response to job advertisements. The selection process has started, and initial training measures will commence in June.