Group review
ThyssenKrupp – earnings higher than expected
ThyssenKrupp held up well in a more difficult market environment in the first 9 months of fiscal 2007/2008. The Group performed largely in line with our expectations, in some areas a little better. Order intake was slightly lower, sales slightly higher than a year earlier. The Group's earnings before taxes have improved from quarter to quarter in the current fiscal year and amounted to €2,297 million in the first 9 months; this was higher than planned but, as expected, lower than the prior-year level. This is mainly attributable to the slump in stainless steel prices; other factors include pre-operating expense for the new steel mills in Brazil and the USA as well as restructuring expenditures in the Steel segment.
The highlights for the first 9 months of 2007/2008 were as follows:
- Order intake was 3% lower than a year earlier at €41.5 billion.
- Sales rose by 2% to €39.7 billion.
- EBITDA was €3,646 million, compared with €4,266 million in the prior year.
- Earnings before taxes decreased to €2,297 million from €2,853 million in the previous year.
- Earnings per share fell from €3.25 to €3.06.
- Net financial debt at June 30, 2008 was €2,127 million, an increase of €2,350 million compared with September 30, 2007, when we reported net financial receivables of €223 million. On June 30, 2007, net financial debt stood at €806 million.
Stable outlook
For the 2007/2008 fiscal year we forecast earnings before taxes and major nonrecurring items, including pre-operating expense for the steel mills in Brazil and the USA, of over €3.2 billion. As things stand at present, we expect sales of altogether €53 billion. Some areas of individual business units in the USA – Mechanical Components, Materials Services North America – are feeling the effects of the economic downturn. At the same time, increased raw material prices are having an impact.
Our earnings expectations take into account the fact that our Steel segment will not be able to pass on the sharp rises in raw material prices - in particular for iron ore and coking coal - in full to customers in the current fiscal year due to our contract structure. Demand for our steel products remains very pleasing, as reflected in continued price increases, fully confirming our expectations of another good steel year.
In the Stainless segment, base prices are improving more slowly than expected. Demand from end customers is stable, while service centers are being cautious in view of the nickel price trend. Due to the weakness of the US dollar there are signs of further imports from the US dollar zone, which could slow prices in the second half of the year. Nevertheless, we expect the segment to deliver a positive earnings contribution.
Technologies continues to profit in particular from infrastructure development and urbanization in the world's growth regions. Our high order backlog, stretching several years into the future with increasing earnings quality, gives us a high degree of planning certainty.
Thanks to its high service share, our Elevator segment continues to deliver a very stable earnings contribution.
The Services segment is profiting from rising demand for materials in the growth regions. With material prices continuing to rise sharply, we expect very encouraging growth in earnings to continue in the further course of the year.
We expect sales to continue to grow in 2008/2009 provided no unforeseen economic downturns impact our business. Growing sales will also be reflected in earnings.
The mid-term sales target for ThyssenKrupp is €60 billion, while our mid-term goal for sustainable earnings before taxes and nonrecurring items is €4 billion. In the longer term, especially after the startup of the Steel segment's new slab mill in Brazil, the Steel and Stainless segments' new steelmaking and processing plant in the USA and the investments of the other segments in other regions, we expect to achieve sales of around €65 billion and earnings before taxes and nonrecurring items of €4.5 to 5.0 billion.
Economic growth slower
The strong expansion of the world economy in 2007 did not continue in the 1st half of 2008. The uncertainties on the international financial markets caused by the US mortgage market together with sharply increasing prices for energy and agricultural and industrial raw materials severely impacted economic growth in particular in the developed economies.
Economic growth in the USA weakened markedly in the 1st quarter of 2008. Slow growth in private consumption, reduced business spending and the sustained crisis on the housing market caused domestic demand to stagnate. In the 2nd quarter the US economy picked up slightly thanks to higher exports caused by the exchange rate. The performance of the economy in the euro zone in the 1st quarter of 2008 was comparatively favorable, especially in Germany. The main impetus came from investment, with private consumption increasing only slowly. However, in the further course of the year the situation deteriorated. Private consumption is being impacted by higher inflation and business spending is more subdued.
In Asia and Central and Eastern Europe, the rapid pace of growth was virtually unbroken, though here, too, the upsurge in prices gathered considerable momentum. China's economy continued to expand at double-digit rates at the beginning of the year thanks to strong domestic demand; foreign demand proved relatively robust despite the weakness of the US economy.
In the sectors of importance to ThyssenKrupp the picture was as follows:
Despite the slowing of the world economy, the international steel markets continue to be characterized by expansion. Crude steel output in the 1st half of 2008 was almost 6% higher than in the corresponding prior-year period. The growth was again driven mainly by China, with an increase of almost 10%. In the European Union, output was at the prior-year level. Production in Germany fell only just short of the high year-earlier volume, mainly as a result of reduced output at ThyssenKrupp Steel due to the relining of a blast furnace. The available steel production capacities in Germany remained fully utilized. With steel processors continuing to report good workloads and full order books, shipments of flat-rolled carbon steel from European suppliers in the first five months of this year were again higher than in the corresponding prior-year period. With imports from third countries markedly lower, European producers were able to win back market share. Exports to third countries also increased from a rather weak prior-year level. Driven mainly by the drastic rise in raw material costs and energy prices, steel prices have risen significantly in the year so far.
Demand on the European market for stainless steel flat products remained stable. Following a phase of very weak orders and deliveries in the previous year as a result of massive imports from Asia, high inventory levels at distributors and severe nickel price fluctuations, the situation improved continuously from the 4th quarter of 2007. The primary reason for this was improved demand from distributors as they replenished their depleted stocks. This development was underpinned by the stabilization of the nickel price at a lower level than in the prior-year period. Following a continuous improvement in order intake, European producers succeeded in increasing base prices again into the 2nd quarter of 2008. In the NAFTA region, subdued demand for stainless steel caused a continuous decrease in base prices. Although demand for stainless steel products in China and other Asian markets remains buoyant, prices began to fall on account of high inventories and surplus capacities at producers. By contrast, the market for nickel alloys and titanium remained comparatively stable, though the low US dollar exchange rate placed producers based in the euro zone at a disadvantage.
The auto market also showed weaknesses. In North America sales of new vehicles, i.e. cars and in particular light trucks, fell by a total of 10% in the 1st half of 2008. An even larger cutback in production was necessary. In the European Union new car registrations in the period January to June 2008 were down by 2.1% from the corresponding year-earlier period. Demand for vehicles in Germany, on the other hand, showed a slight recovery. New car registrations in the first six months of 2008 increased by 3.6% compared with an albeit weak prior-year period. Output and exports likewise improved. The auto sector in the emerging markets continued to show a positive trend. In Brazil high double-digit growth rates were reported for demand and production. In China, too, the growth of the auto industry continued.
The economic slowdown in key countries impacted growth on the global machinery market. In the USA there are signs of a marked downturn in demand for capital goods in the 1st half of 2008. By contrast, the German mechanical engineering sector started the year with a good order backlog. Orders in the first six months of 2008 were up 4% from the high prior-year level. However, the pace of growth now appears to be slowing. On the other hand, the expansion in the Chinese machinery market continued unbroken.
Global construction activity continues to be driven by Asian countries like China, but strong growth rates are also reported in Central and Eastern Europe as a result of public-sector infrastructure projects. Following a slight rise at the beginning of the year thanks to the weather and strong demand in commercial construction, the level of orders in the German construction industry recently fell back again.
| 9 months ended June 30, 2007 |
9 months ended June 30, 2008 |
3rd quarter ended June 30, 2007 |
3rd quarter ended June 30, 2008 |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Order intake | million € | 42,815 | 41,535 | 15,552 | 14,181 | ||||
| Sales | million € | 38,890 | 39,650 | 13,444 | 14,181 | ||||
| EBITDA | million € | 4,266 | 3,646 | 1,728 | 1,366 | ||||
| Earnings before taxes (EBT) | million € | 2,853 | 2,297 | 1,219 | 909 | ||||
| Employees (June 30) | 189,260 | 198,033 | 189,260 | 198,033 |
Stable performance
Demand for ThyssenKrupp's products and services was generally in line with our expectations in the first 9 months of fiscal 2007/2008. Against the background of a global economic slowdown, order intake fell 3% against the prior-year period to €41.5 billion. New orders in the Stainless segment were lower for market-related reasons. Technologies was unable to match the exceptionally high prior-year level which was boosted by major projects. At Services order intake was level with the prior year, while demand at Steel and Elevator was significantly higher.
The Group's sales increased by 2% to €39.7 billion. With the exception of Stainless, all segments reported higher sales. Steel profited in particular from improved prices. However, lower stainless steel prices resulted in a sharp drop in sales at Stainless despite higher shipments. Technologies achieved encouraging sales growth thanks to the good project situation in the plant technology sector. By strengthening its position on numerous European markets, Elevator more than offset the severely negative exchange-rate effects caused by the depreciation of the US dollar. Despite weaker business in North America, Services expanded sales of materials and industrial services.
Group earnings remain ahead of plan
ThyssenKrupp's income has improved continuously in fiscal year 2007/2008. ThyssenKrupp achieved earnings before taxes (EBT) of €909 million in the 3rd quarter, compared with €646 million in the 1st quarter and €742 million in the 2nd quarter. The Group's earnings in the first 9 months of 2007/2008 remained ahead of plan at €2,297 million.
However, compared with the previous year the Group's earnings were lower: This is mainly attributable to the dramatic decline in stainless steel prices, which led to a sharp decrease in income in the Stainless segment. The Steel segment was impacted by high raw material costs as well as pre-operating expense for the new steel mills and restructuring expenditures. Technologies returned a significantly higher profit, reflecting its strong performance in particular in plant technology as well as slewing bearings and rings. Elevator also expanded its profits. Services was not quite able to match its record prior-year income.
At €39.7 billion, net sales in the reporting period were €760 million or 2% higher than a year earlier. At the same time, the cost of sales increased by a disproportionate €1,185 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 €210 million was mainly connected with the construction of the steel mill in Brazil. Of the €369 million decrease in other operating expense, around €480 million related to the EU antitrust fine against ThyssenKrupp Elevator included in the prior-year period, and €60 million to the goodwill impairment losses, likewise included in the prior-year period. Running counter to this was a €129 million increase in restructuring expenditure, relating mainly to restructuring measures at Metal Forming in the Steel segment. The decrease in other operating income by €342 million related in the amount of €154 million to reduced insurance recoveries and in the amount of €110 million to reduced gains on disposals of non-current assets.
Taxes on income decreased by €442 million in connection with a reduction in the tax rate from 42% to 33%. The significant decrease in the tax rate was influenced by the tax rate reduction in Germany and the non-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 down €114 million at €1,550 million. Deducting from this the minority interest in profits of €77 million, earnings per share is €3.06, compared with €3.25 in the comparable year-earlier period.
Net financial debt/receivables and capital expenditures
At June 30, 2008, the Group had net financial debt of €2,127 million. The €2,350 million increase compared with September 30, 2007 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 international financial crisis has so far had little impact on ThyssenKrupp's financing.
Capital expenditure in the first 9 months of 2007/2008 totaled €2,933 million, 39% more than in the first 9 months of the year before. €2,708 million was invested in property, plant and equipment and intangible assets, and €225 million in the acquisition of businesses, shareholdings and other financial assets.
Construction of new mills in Brazil and the USA
To implement its transatlantic growth strategy, ThyssenKrupp Steel is building additional crude steel capacity in Brazil with a competitive cost base and outstanding quality (CSA project). 17,000 people are currently working on the building site of the new slab mill. Progress on seven of the total of nine major works including port, coke plant, raw materials handling, sinter plant, power plant, media supply and infrastructure is in line with the ambitious timetable. Despite the increasing complexity on site, delays which have occurred have been made up through acceleration measures. In view of the progress made, startup of the port, coke plant and power plant is expected to take place in the 1st quarter of 2009.
However, for the core blast furnace and melt shop units the schedule cannot be met. Despite ongoing initiatives to speed up construction work, the planned start of production is now not expected to take place until the end of 2009. The main reasons for this are booming global demand for capital goods, which has caused supply bottlenecks in some areas. Considerable delays have also been caused by the deficient performance of key suppliers and extremely bad weather conditions compared with the long-term average.
According to current estimates, the €3 billion investment budget approved in September 2006 will be increased to around € 4.5 billion. This increase is mainly the result of the insourcing of energy supply and slab logistics on economic grounds, optimization of the technical design for possible future capacity expansions, cost increases for construction supplies and services, and exchange-rate differences due to the continued strengthening of the Brazilian real. This increase will not jeopardize the profitability of the CSA project in combination with the newbuild project in Alabama and the expansion program in Europe at ThyssenKrupp Steel.
New employees for the forthcoming project and production phase are being recruited as planned. At the end of June ThyssenKrupp CSA employed around 870 people. The training programs in Brazil and Germany are also proceeding on schedule and have met with a positive response from all concerned.
The expansion of the processing and coating capacities in Germany, where roughly 40% of the slabs produced in Brazil are to be processed into high-quality products for demanding customers in Europe, is in full swing. The slab storage area now completed at Walsum port is being fitted with a crane for unloading slabs from barges. In the Bochum hot strip mill, the walking beam furnace is being ramped up very successfully. Capacity-increasing measures at the Beeckerwerth hot strip mill, the casting rolling line in Duisburg and the Hoesch Hohenlimburg narrow strip mill are proceeding apace. Investments to increase the output of four hot-dip coating lines - mainly in Duisburg - have been completed with the successful ramp-up of the facilities. Further measures are under way at other locations.
Construction of the new steelmaking and processing plant for Steel and Stainless near Mobile in Alabama/USA is on schedule, with startup planned for early 2010. Due to the tight situation in the global plant construction sector which has caused price increases for individual works, the planned investment volumes of 2.9 billion US dollars at Steel and 1.1 billion US dollars at Stainless is currently expected to be exceeded by around 10% (Steel) and 20 to 25% (Stainless). The impact on the projects' profitability is negligible.
The weakening of the US dollar since the resolution was passed has reduced the finance volume on a euro basis by altogether €340 million compared with the originally planned volume and therefore the budget is not negatively impacted by the current euro/US dollar exchange rate.
To date, contracts worth around 2.6 billion US dollars have been awarded to suppliers.
Steel has placed orders in particular for the hot strip mill, cold strip mill and hot-dip coating lines as well as inspection and finishing lines. After the ground had been graded for the core units, work began on excavation and driving the foundation piles. Construction roads, a substation for the supply of electricity and temporary offices are under construction.
Stainless has now awarded most of the contracts for the cold strip 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 orders for the electric arc furnace, the AOD converter and the continuous caster - the core facilities of the melt shop - were placed in May.
In parallel with the construction work, a sales plan for developing the North American market has been drawn up. Intensive customer contacts have taken place. Target groups are the auto and electrical industries, steel service centers as well as the pipe industry, specifically for the energy sector.
Recruitment is proceeding to schedule. Via the Alabama Industrial Development Training office, 13,000 applications have been received for the production area. A request for quotes has been issued for the construction of a training center.