- General economic conditions
- Economic conditions in the sectors
- ThyssenKrupp – business decline due to recession
- Sales markets and marketing
- Capital expenditures
- Procurement: Sharp fall in volumes
- Energy: Secure supply
- Summarized assessment by the Executive Board of business performance and target achievement
Group review
The global recession severely impacted ThyssenKrupp's performance in 2008/2009. Order intake and sales slipped significantly. From a profit in the prior year the Group's earnings before taxes dropped to a loss of €2,364 million. Earnings were significantly influenced by falling material prices, which resulted in inventory writedowns of €317 million, and by nonrecurring restructuring costs, impairment charges and project costs for the new steelmaking and processing plants totaling €1,620 million.
General economic conditions
At the end of 2008 and well into 2009 the world economy experienced its deepest recession since the end of World War II. Following on from the international financial crisis, economic activity slumped almost synchronously in the industrialized countries. The previously fast-growing emerging countries also had to contend with in part considerable economic setbacks. There are increasing signs of bottoming in the 2nd half of 2009. According to current estimates, world GDP shrank by 1.4% in 2009, compared with growth of 3.2% in the prior year, and was therefore well below our growth expectations of a year ago.
Deep economic slump
International trade in goods and services decreased to an even larger extent than world GDP, mainly due to the deep economic slump in the USA since fall 2008. The downturn of the US economy only began to slow in the 2nd quarter of 2009; the 3rd quarter showed slight growth of 0.9%. Even after a revival in the 2nd half of the year, US economic output in 2009 was well down from the prior year. In Japan, GDP shrank due to weak domestic demand and above all declining exports.
In the euro zone the economic slide continued in the 1st half of 2009 initially but then slowed significantly in the 2nd quarter. With capital investment in decline, private consumption and government spending prevented an even sharper downturn. Nevertheless, GDP is estimated to have decreased by 4% as a whole in 2009. After previous sharp declines, the German economy recorded slight quarter-on-quarter growth again in the 2nd quarter of 2009, with support coming from private and public consumption as well as construction investment. The downturn in exports and business spending also slowed noticeably. Although the economy bottomed out in mid-year, overall output in 2009 declined significantly.
The global recession also impacted growth in the emerging and developing countries. The slump in world trade had a particular effect on the smaller Asian emerging countries. By contrast, China continued to record relatively strong growth in 2009, supported by monetary and fiscal measures. The pace of growth in India receded. The Brazilian economy was still quite robust by international standards. Russia suffered from lower raw material exports and prices, recording a very sharp fall in overall economic output in 2009.
Gross domestic product 2009* real change versus previous year in %
Economic conditions in the sectors
The global economic slump had a severe impact in our main markets, with many customers reviewing their investment plans. Demand for carbon and stainless steel slumped worldwide. The auto and machinery sectors had to scale back their output significantly. There was an almost complete absence of new ship orders. The global recession also hit the construction industry.
Declining demand for carbon steel flat products
Against the background of the recession, demand for steel fell across the world in 2009. This was particularly true in the industrialized countries, where slumps of more than 30% were recorded in many cases. The sharp consumption-related declines were reinforced by destocking. After steel producers had already scaled back their output sharply in the final quarter of 2008, 2009 was also characterized by massive production cuts through to the fall. It is estimated that global production decreased by 9% to 1.2 billion metric tons, with the EU, the NAFTA region and Japan recording declines of more than 30% in some cases. Some emerging countries were also disproportionately affected. Against this trend, China and India again increased their production. Steel industry capacity utilization in most other regions dropped sharply in the first half of the year, leading to a series of temporary shutdowns and plant closures.
For crude steel, average utilization rates in the first months of 2009 were only around 60% worldwide, and at times less than 50% in the EU and the USA. From late summer there were signs of this slide coming to an end as many producers ramped up their production again to meet demand for restocking. The German steel industry saw its output decline by 30% to around 32 million tons in 2009, but here too utilization rates recovered from their low in the course of the year.
The sharp fall in steel demand was accompanied by a massive drop in international steel spot prices. In Europe and North America they almost halved from their all-time high in mid-2008. It was only towards the middle of 2009 that a revival in volumes led to a bottoming of prices. The fact that many producers were unable to respond immediately to the demand increase with higher output supported the price rise.
An opposite situation was observed on the Chinese steel market. Under the influence of government stimulus programs domestic steel demand grew markedly in 2009. This, together with low demand on the world markets due to the recession, caused Chinese steel exports to decline significantly, and China again became a net importer. From August however the market showed clear signs of overheating, as the demand growth was exaggerated by speculation and accompanied by significant restocking. A market correction began, demand dropped, prices receded, and the Chinese steel industry resumed its export activities, which had previously been severely restricted.
The European carbon steel flat-rolled market was also sucked into the global recession from the 4th quarter of 2008. Shipments by European steel producers fell sharply due to the recession and customer destocking. The severe demand and price weakness on the European market also reduced the competitiveness of imports from third countries. After dropping slowly at first, stock levels at distributors and end users had fallen so far by mid-2009 that steel industry orders subsequently improved, allowing prices to be increased. Actual consumption however remained weak.
The steel market in North America in 2009 was also characterized by heavy destocking activity, which put an additional brake on steel demand already low due to the recession. Domestic shipments by the American steel industry and imports from overseas fell sharply. The associated price decline was even larger than in Europe. However, here too steel demand revived again in the summer months – driven mainly by restocking. As in Europe there was a delay before supply could meet the rise in demand, which supported a price recovery.
ThyssenKrupp sales by customer group in %
Worldwide slump in stainless steel demand
World demand for stainless steel flat products slumped sharply at the beginning of the reporting year in the wake of the global recession and falling raw material prices for alloy metals. Raw material prices picked up again from the spring, especially for nickel, and had a positive effect on demand in the further course of the year. Nevertheless, demand for stainless steel products was again in decline in 2009, falling by around 14% worldwide and by almost 30% on the Western European and North American markets.
In Germany and Europe stocks at distributors and service centers were at a high level at the beginning of the year but were then progressively reduced. Towards the end of the 1st half of 2009 many distributors increased their orders in view of low stock levels but mainly because of rising nickel prices and an expected increase in alloy surcharges. Imports to Germany and the rest of Europe were low.
In North America, destocking by distributors and service centers also continued for a long time before order activity picked up again slightly at the beginning of the 2nd half of the year, also in expectation of rising prices. Imports fell sharply due to the relatively low price level.
In Asia, stock levels remained very high, with distributors increasing their purchases mainly due to the rising nickel price. In China, demand increased, also thanks to major government infrastructure projects.
Stainless steel prices in Europe and North America were influenced for a long time by reduced alloy surcharges and low base prices. However, increases in base prices were possible in the final months of the period – albeit at a low level. The rising nickel price pushed up alloy surcharges. In Asia, stainless steel prices also declined sharply at the beginning of the reporting period. However they recovered as the year progressed and at times were almost at European levels.
The order situation for nickel alloys was characterized by project postponements and short-term purchasing at low levels. Prices worldwide slumped in the face of falling demand. Orders for titanium decreased sharply, mainly due to delays in the production of the new aircraft generations. The demand weakness was exacerbated by continuing high inventory levels and low consumption.
Auto market in reverse gear
The auto market slumped sharply almost worldwide in 2009. According to initial estimates, production fell by 15% to around 59 million cars and trucks. Even the previously fast-growing emerging markets of Central and Eastern Europe and Asia produced fewer vehicles for the most part. Production in India stagnated. The only country to record strong production growth, also thanks to tax incentives, was China. With almost 12 million vehicles – an increase of over 30% – China became the world's biggest auto producer in 2009.
The North American auto market declined sharply. Particularly in the 1st half of the year vehicle sales in the USA slumped significantly against the background of the difficult economic situation. The decline slowed from June 2009 as a result of the Cash for Clunkers program, but this has now ended. Overall it is estimated that US production in 2009 fell by almost a third to less than 6 million cars and light trucks. The decline of the auto market was less pronounced in Brazil, also thanks to tax incentives. Production there fell only slightly to just under 3 million vehicles.
In Western Europe, auto production was roughly 20% down from the prior year at an estimated 12.8 million units. The decline was particularly pronounced in the UK and France. In Germany the 'Umweltprämie' rebate program produced a temporary sharp rise in new car registrations. However, as exports were collapsing at the same time, production still had to be cut back by roughly 16%. The situation for trucks was particularly difficult, with output falling by more than half. Overall, German vehicle production decreased by an estimated 18% to less than 5 million cars and trucks in 2009.
Lack of new orders for shipyards
The shipping markets are characterized by growing overcapacities as a result of the global recession and the accompanying slump in world trade. Orders for new ships came to an almost complete standstill in 2009. High orders in hand are still being reported around the world but in some cases they cannot be regarded as guaranteed due to lack of financing.
Germany's shipyards received only five orders for new ships in the 1st half of 2009. In addition, no fewer than 25 existing orders were cancelled, resulting in a significant decrease in capacity utilization. Orders in hand dropped sharply compared with the end of 2008.
Slump in machinery sector
The engineering sector was hit particularly severely by the global economic weakness, with many companies cancelling or postponing modernization or capacity expansion projects in light of worsening production expectations. Orders in the major industrialized countries deteriorated significantly. Output decreased by between 20% and 40% depending on region. Only China still managed to record singledigit growth, thanks to massive stimulus programs.
In Germany, orders declined at an unprecedented rate after years of high growth. In the first nine months of 2009 orders were down 44% from the prior-year period. Capacity utilization fell drastically to below 70%. Machinery output in 2009 decreased by an estimated 25%. Order intake in the German plant engineering sector in the 1st half of 2009 was well down from a year earlier.
Construction activity slower
Construction activity weakened in many countries despite the economic stimulus programs. Only China and India recorded higher growth rates. In the USA the downturn on the housing market continued, with signs of stabilization at a low level only appearing towards the middle of the year. Demand also declined in the non-housing sector. Overall, US construction output in 2009 fell by an estimated 15%. The construction industry stagnated or shrank in most Central and Eastern European countries as well.
The German construction industry suffered a year-on-year drop in orders in the 1st half of 2009, with commercial construction particularly affected. The economic stimulus programs only began to have an effect in the 2nd half. However the positive impetus from public-sector construction was not enough to offset the declines in other areas. Construction output fell by an estimated 3% in 2009.
ThyssenKrupp – business decline due to recession
| 2007/2008 | 2008/2009 | |||||
|---|---|---|---|---|---|---|
| Order intake | million € | 55,205 | 35,970 | |||
| Sales | million € | 53,426 | 40,563 | |||
| EBITDA | million € | 4,976 | 192 | |||
| Earnings before taxes (EBT) | million € | 3,128 | (2,364) | |||
| Investments | million € | 4,282 | 4,238 | |||
| Employees (Sept. 30) | 199,374 | 187,495 |
The global demand slump severely impacted ThyssenKrupp's business in the reporting year. Order intake and sales dropped substantially. Following a profit in the prior year the Group suffered a heavy loss in 2008/2009. Earnings were significantly affected by inventory writedowns and nonrecurring items – restructuring costs, impairment charges and project costs. Nevertheless, within reasonable limits we intend to maintain continuity in our dividend policy; the Executive Board and Supervisory Board will propose the payment of a reduced dividend of €0.30 per share to the Annual General Meeting in January.
Orders and sales in decline
Order intake and sales failed to meet the expectations we had at the beginning of the fiscal year. Due to the severe economic slump order intake decreased year-on-year by 35% to €36.0 billion. All segments were affected, most of all the Steel, Stainless and Services segments, which are dependent on demand for materials.
| 2007/2008 | 2008/2009 | |||
|---|---|---|---|---|
| Steel | 14,199 | 8,414 | ||
| Stainless | 7,460 | 4,147 | ||
| Technologies | 13,490 | 8,580 | ||
| Elevator | 5,535 | 5,038 | ||
| Services | 17,453 | 11,166 | ||
| Corporate | 124 | 127 | ||
| Segment order intake | 58,261 | 37,472 | ||
| Inter-segment orders | (3,056) | (1,502) | ||
| Group order intake | 55,205 | 35,970 |
The Group's sales decreased by 24% to €40.6 billion. With the exception of Elevator, sales in all segments were noticeably weaker. Sales at Steel were impacted by lower shipments, although average steel selling prices had a stabilizing effect due to the high proportion of long-term contracts. Price and demand falls resulted in declining sales at Stainless and Services. At Technologies, higher sales in plant engineering failed to offset declines in the automotive, construction equipment and shipbuilding areas. Elevator remained on growth track, expanding its business in almost all regions.
| 2007/2008 | 2008/2009 | |||
|---|---|---|---|---|
| Steel | 14,358 | 9,945 | ||
| Stainless | 7,420 | 4,486 | ||
| Technologies | 12,412 | 10,640 | ||
| Elevator | 4,930 | 5,308 | ||
| Services | 17,336 | 11,896 | ||
| Corporate | 124 | 127 | ||
| Segment sales | 56,580 | 42,402 | ||
| Inter-segment sales | (3,154) | (1,839) | ||
| Group sales | 53,426 | 40,563 |
Significant decline in earnings
The Group's earnings before taxes decreased year-on-year by €5,492 million to €(2,364) million. Earnings deteriorated progressively in the course of the reporting year. A profit of €240 million in the 1st quarter was followed by a loss of €455 million in the 2nd quarter, a loss of €772 million in the 3rd quarter and a loss of €1,377 million in the 4th quarter. The earnings figures for fiscal 2008/2009 include inventory writedowns totaling €317 million. Earnings were also impacted by nonrecurring restructuring costs – particularly for personnel adjustments – of €868 million, impairment charges of €519 million, and project costs of €233 million for the new plants in Brazil and the USA.
The main reason for the earnings decline in the Steel segment was the slump in shipments; in addition, significant restructuring costs were incurred. The large loss at Stainless was caused by a dramatic fall in demand combined with a significant drop in base prices. Necessary restructuring costs, impairment charges and inventory writedowns also weighed on earnings. Inventory writedowns and massive earnings falls in the materials business also resulted in negative earnings at Services, where restructuring costs were also incurred. At Technologies, profits in plant engineering were unable to offset lower earnings in the automotive and construction equipment businesses and heavy losses in civil shipbuilding. The shipyards had to absorb substantial restructuring costs, impairment charges and negative nonrecurring effects from cancellations of container ship and yacht orders, plus possible liability risks in civil shipbuilding and higher project costs in the yacht business. Elevator remained successful: The segment achieved record earnings.
| 2007/2008 | 2008/2009 | |||
|---|---|---|---|---|
| Steel | 1,540 | (486) | ||
| Stainless | 126 | (946) | ||
| Technologies | 741 | (868) | ||
| Elevator | 434 | 558 | ||
| Services | 750 | (271) | ||
| Corporate | (417) | (344) | ||
| Consolidation | (46) | (7) | ||
| Earnings before taxes (EBT) | 3,128 | (2,364) |
Components of Group earnings
Net sales in fiscal year 2008/2009 were down year-on-year by €12,863 million or 24%. The cost of sales decreased less sharply by €7,365 million or 17%. The main reasons for this were significant increases in 2008/2009 in inventory writedowns, impairment charges on intangible assets and property, plant and equipment, and restructuring costs, which partly offset the sales-related decline in other costs of sales. Overall, gross profit decreased by €5,498 million, combined with a decline in gross margin from 17% to 9%.
The decrease in selling expenses by €125 million was caused mainly by lower expenses for sales-related freight and insurance charges in the Steel, Stainless and Services segments due to the decline in business. General administrative expenses, taking into account the €58 million increase in restructuring costs, were €102 million lower year-on-year. The increase in other operating income by €40 million was connected with the cancellation of qualifying foreign currency hedges for planned raw material purchases, since the volume of raw material purchases decreased to an unpredictably large extent due to the recession. The €85 million decrease in other operating expenses was mainly due to €45 million lower losses on the disposal of non-current assets. Lower disposal activity resulted in a €78 million decline in income from disposals of consolidated companies. The €129 million decrease in income from companies accounted for using the equity method was due mainly to the overall drop in earnings at the companies concerned compared with the prior year. The €257 million deterioration in net interest was due to the higher net financial debt. The €118 million improvement in net other financial income/(expense) was due to a €114 million year-on-year increase in capitalized interest cost, mainly relating to the construction of the steel mill in Brazil.
The posting of tax income of €491 million for the reporting year compared with tax expense of €852 million in the prior year was due in full to the loss situation. As a result of the losses, current income taxes decreased year-on-year by €670 million to €228 million. To the extent that it is likely that losses will reduce tax payments in the future, deferred tax assets were recognized. As a result, deferred tax income increased to €719 million in 2008/2009 from €46 million a year earlier. After taking into account taxes on income, the net loss for the year was €1,873 million; in the prior year a net income of €2,276 million was achieved.
Including minority interest in losses of €16 million, earnings per share in fiscal year 2008/2009 deteriorated to €(4.01).
Income of ThyssenKrupp AG
The net loss of ThyssenKrupp AG in the reporting year according to HGB (German GAAP) amounted to €882 million, compared with a net income of €1,175 million in the prior year.
Income from investments decreased by €1,263 million to €599 million. Income from profit transfer agreements dropped significantly by €673 million to €809 million. Income from the Steel and Stainless segment holding companies decreased in particular by €252 million to €772 million. In addition, the holding companies of the Services (prior year €252 million) and Technologies (prior year €186 million) segments reported losses in fiscal year 2008/2009 in contrast to the prior year. Mainly for these reasons loss transfers increased significantly year-on-year by €639 million. The loss transfers from the Services and Technologies holding companies came to €67 million and €516 million, respectively. Income from investments changed only slightly from the prior year and was positively influenced by the €246 million profit distribution of ThyssenKrupp USA Inc.
The €468 million reduction in other operating income was mainly the result of the €530 million decrease in intercompany tax allocations in connection with the transfer of income from subsidiaries and a €135 million increase in the carrying value of an affiliated company recorded in the prior year. A reimbursement claim of €210 million against a segment holding company had an income-increasing effect.
The reduction in personnel expense within general administrative costs is due to lower bonus expenses and special payments. Additions to provisions for future social plan costs and paid-out severance payments acted in the opposite direction. The €62 million decrease in other administrative costs was due to €26 million lower expense for special promotional measures, an €18 million reduction in service and data processing expenses, and lower donations for cultural and scientific purposes.
The interest expense of €265 million in the reporting year reflects the effects of capital reductions at subsidiaries, resulting in lower interest expense, and a decrease in interest rate levels on the relevant money and capital markets. The measures to secure liquidity acted in the opposite direction.
After the aforementioned effects, income from ordinary activities was €(906) million, compared with €1,364 million in the prior year.
The decrease in tax expense compared with the prior year was mainly due to tax refunds for prior years.
After income tax, a net loss of €882 million was recorded for the year. Taking into account a reversal of reserves for treasury shares of €532 million through the income statement and after withdrawal of €438 million from retained earnings and adding the income carried forward from the prior year of €66 million, unappropriated net income of €154 million is reported.
Unappropriated net income and dividend
The legal basis for the dividend payment is the HGB unappropriated net income of ThyssenKrupp AG in the amount of €154 million (prior year €669 million). It comprises the HGB net loss of ThyssenKrupp AG in the amount of €882 million plus withdrawals from retained earnings of €438 million (prior year €8 million transfer to retained earnings) and the withdrawals from reserves for treasury shares in the amount of €532 million, plus the income carried forward from the prior year of €66 million.
The Executive Board and Supervisory Board propose to the Annual General Meeting the payment of a dividend of €0.30 (prior year €1.30) per share – in total €139 million – and the carryforward of the balance of €15 million. Should the number of 463,473,492 shares eligible for dividend distribution change before the date of the Annual General Meeting, the proposed dividend distribution will be adjusted accordingly.
| Sept. 30, 2008 | Sept. 30, 2009 | |||
|---|---|---|---|---|
| Intangible assets | 47 | 44 | ||
| Property, plant and equipment | 123 | 226 | ||
| Financial assets | 16,037 | 23,146 | ||
| Fixed assets | 16,207 | 23,416 | ||
| Receivables from affiliated companies | 8,842 | 5,913 | ||
| Other receivables and other assets | 321 | 90 | ||
| Securities | 1,073 | 0 | ||
| Cash and cash equivalents | 1,202 | 2,876 | ||
| Operating assets | 11,438 | 8,879 | ||
| Assets | 27,645 | 32,295 | ||
| Total equity | 6,715 | 5,231 | ||
| Special items with an equity portion | 157 | 162 | ||
| Provisions | 560 | 955 | ||
| Bonds | 1,500 | 2,500 | ||
| Liabilities to financial institutions | 948 | 1,743 | ||
| Liabilities to affiliated companies | 17,513 | 21,295 | ||
| Other liabilities | 252 | 409 | ||
| Liabilities | 20,213 | 25,947 | ||
| Total equity and liabilities | 27,645 | 32,295 |
| 2007/2008 | 2008/2009 | |||
|---|---|---|---|---|
| Income from investments | 1,862 | 599 | ||
| Other operating income | 863 | 395 | ||
| Other expenses and income | (980) | (1,635) | ||
| Net interest income/expense | (381) | (265) | ||
| Income from ordinary activities | 1,364 | (906) | ||
| Income taxes | (189) | 24 | ||
| Net income | 1,175 | (882) | ||
| Income carried forward | 34 | 66 | ||
| Withdrawal from reserves for treasury shares | 0 | 532 | ||
| Withdrawal from retained earnings | 0 | 438 | ||
| Transfer to reserves for treasury shares | (532) | 0 | ||
| Transfer to retained earnings | (8) | 0 | ||
| Unappropriated net income | 669 | 154 |
Portfolio further optimized
Following on from previous years ThyssenKrupp continued its active portfolio management strategy in the reporting period and carried out several transactions.
One of the main transactions in 2008/2009 in the Steel segment was the increase in the minority stake held by the Brazilian company Vale in ThyssenKrupp CSA Siderúrgica do Atlântico from around 10% to a total of just under 27%. This additional investment will further strengthen the existing strategic partnership between ThyssenKrupp and Vale.
Technologies further optimized its activities in the automotive area with various smaller portfolio measures. In addition, it acquired the still outstanding 25% minority stake in ThyssenKrupp Marine Systems AG, which is therefore now wholly owned by ThyssenKrupp.
To counter overcapacities in the shipyard area, ThyssenKrupp Marine Systems and SIAG Schaaf Industrie intend jointly to develop the Emden site of Blohm + Voss Nordseewerke into a viable high-tech location for offshore technology and so secure jobs on a sustainable basis. A corresponding purchase agreement was signed.
In October 2009 ThyssenKrupp Marine Systems and the Abu Dhabi MAR Group signed a memorandum of understanding to establish a close strategic partnership in the construction of naval surface ships. The aim of the planned collaboration is to boost marketing opportunities for Blohm + Voss's naval surface vessels – frigates and corvettes – while securing shipbuilding employment in Germany.
Elevator again strengthened its global market position in the elevator business with smaller acquisitions.
For strategic reasons the Services segment disposed of its Industrial Services business. The sale of ThyssenKrupp Industrieservice GmbH to WISAG, one of Germany's leading services groups, was initiated at the beginning of October 2009. The transaction is to be completed in the 1st quarter of fiscal 2009/2010. In addition, the disposal process began for the North American scaffold specialists Safway.
Since the merger of Thyssen and Krupp through to the end of the reporting year we have sold companies with sales of €9.5 billion and acquired others with sales of €8.8 billion.
Employee numbers down
The decline in our sales markets and businesses was also reflected in our employee numbers. On September 30, 2009 ThyssenKrupp employed 187,495 people worldwide, 11,879 or 6% fewer than at the end of the prior fiscal year. With the exception of Elevator, where the workforce was virtually unchanged, there were in part significant job cuts in all segments.
The decline was particularly sharp outside Germany, where the number of employees dropped by 7% to 106,266. The main areas affected were the foundries in Brazil, the service operations of the US elevator companies and the automotive business in France. In Germany the headcount decreased by 5% to 81,229, mainly in the industrial services and materials services businesses.
Details of the breakdown of the workforce in the various regions of the world are contained in the Employees section.
Due to lower workloads, short-time working had to be introduced at many Group companies in 2008/2009. On average, 12,500 employees were affected by this in Germany, plus another 7,300 abroad. The main area was the Steel segment, with almost 8,000 employees affected by a reduction in work hours. Short-time working in the Group was scaled back towards the end of the fiscal year as economic conditions improved.
Sales markets and marketing
The EU region was again the main sales market for ThyssenKrupp in 2008/2009: 62% of our products and services were sold to customers in the European Union, with Germany accounting for more than half this figure. 20% of our sales were generated with customers in America. The Asia/Pacific region grew in importance for our business, but still accounted for a low sales share of 10%. Thanks to our stable customer structures, the percentage breakdown remains relatively unchanged, although customers outside Germany have become increasingly important in the past five years. As the following graphic shows, their share of Group sales amounted to 68%.
| 2004/2005 | 2005/2006 | 2006/2007 | 2007/2008 | 2008/2009 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Germany | 14,166 | 15,837 | 18,545 | 19,161 | 13,031 | |||||
| Other EU | 12,106 | 13,293 | 16,198 | 16,677 | 12,142 | |||||
| Americas | 10,002 | 11,609 | 10,218 | 9,706 | 7,858 | |||||
| Asia/Pacific | 4,164 | 4,123 | 4,146 | 4,852 | 4,341 | |||||
| Other countries | 2,489 | 2,263 | 2,616 | 3,030 | 3,191 | |||||
| Total | 42,927 | 47,125 | 51,723 | 53,426 | 40,563 |
ThyssenKrupp sales by region 2008/2009 in %
ThyssenKrupp companies and their products hold leading positions on many international markets. Outstanding technology, cost efficiency and reliable service have proved convincing arguments for numerous customers. In many areas we have built up longstanding customer-supplier relationships under which our technicians have developed custom solutions for specific customer requirements.
One example is the auto industry, where we have developed numerous new lightweight materials and components to support the key objective of reducing vehicle weight.
Customer-focused marketing mix
As a producer and provider of materials, capital goods and services, we mainly sell to corporate customers. Only in exceptional cases do private customers buy from us directly, for example elevators or stair lifts for residential buildings. That makes our target groups manageable in terms of numbers but also very demanding in terms of communications. We maintain contacts with them through technical magazines, published several times a year and reporting on successful innovations in the Group and new trends. In addition, product documentation provides all the data required for customers to make an informed decision on using our products. We also attach importance to modern, attractive product design. Further marketing tools include international trade shows and presentations, country- and customer-related product design, efficient sales efforts and individual customer advice. The internet is becoming ever more important: On our website we showcase our capabilities to customers and business partners, inform stockholders and investors of the latest business developments, and present career opportunities in the Group.
Operating responsibility for marketing measures lies with the individual Group companies, which allows us to respond quickly to changing trends. Given the breadth of our product range, this approach has proved more successful than centralized marketing.
Key areas of corporate communications
In its communications work, ThyssenKrupp AG as Group holding company focuses primarily on the broad public, addressing issues of interest to the Group and public alike. Our initiative "Discovering future technology", which promoted understanding for technology in Germany in TV commercials, advertisements and newspaper publications, received several awards in the reporting year. The communicative concept of the Ideas Park was likewise honored with the renowned EFFIE Award, which recognizes in particular the efficiency and effectiveness of projects. More information on our awards and the Ideas Park is contained in the section "Responsibility and commitment".
Capital expenditures
ThyssenKrupp invested a total of €4,238 million in fiscal 2008/2009, €44 million less than in the prior year. Of this figure, €4,012 million was spent on property, plant and equipment and intangible assets, while the remaining €226 million was used for the acquisition of businesses and shareholdings as well as other financial assets. Capital expenditure exceeded depreciation, which came to €1,380 million, by €2,858 million.
| 2007/2008 | 2008/2009 | |||
|---|---|---|---|---|
| Steel | 2,596 | 2,593 | ||
| Stainless | 387 | 343 | ||
| Technologies | 763 | 814 | ||
| Elevator | 136 | 135 | ||
| Services | 369 | 210 | ||
| Corporate | 66 | 126 | ||
| Consolidation | (35) | 17 | ||
| Group | 4,282 | 4,238 |
The investment served mainly to maintain existing operations and implement our strategic growth projects. The main individual projects were the new steel and processing plants in Brazil and the USA.
Through stringent control of all investment projects we limited the rise in our net financial debt significantly in the course of the fiscal year. At the end of the fiscal year net financial debt at €2,059 million was €475 million higher than on September 30, 2008.
Further information can be found in the notes to the consolidated statement of cash flows in the section "Financial position".
Procurement: Sharp fall in volumes
Materials expense decreased by 22% to €26.8 billion – mainly because of the decline in business. However as a percentage of sales it remained virtually unchanged from the prior year at 66%, as prices for raw materials as well as the other material categories including services only decreased in the further course of the reporting year or changed in parallel with our own product prices. We achieved important savings through global purchasing, with the economic crisis in many cases restoring a normal balance of supply and demand for raw materials, goods and services. There were no delivery bottlenecks in the reporting year, and the supply of materials for our plants was secured at all times.
| 2007/2008 | 2008/2009 | |||
|---|---|---|---|---|
| Steel | 8,514 | 6,632 | ||
| Stainless | 6,096 | 4,256 | ||
| Technologies | 7,626 | 6,705 | ||
| Elevator | 1,657 | 1,768 | ||
| Services | 13,645 | 9,265 | ||
| Corporate | 51 | 40 | ||
| Materials expense of segments | 37,589 | 28,666 | ||
| Consolidation | (3,131) | (1,819) | ||
| Group | 34,458 | 26,847 |
Materials expense 2008/2009 in %
Large price reductions for iron ore
Although world steel production decreased due to the economic crisis and ore requirements were correspondingly lower, world demand for overseas iron ore in 2009 was unchanged from the prior year. The reason for this is that China significantly increased its ore imports while at the same time producing less ore at home. Despite this we succeeded in achieving a reduction in annual prices in 2009 – notwithstanding continuing high demand from China and rising spot prices from the beginning of the year. The decrease was between 28% and 48% depending on ore grade.
The Steel segment purchased 10.6 million tons of iron ore in the reporting year, around 37% less than a year earlier. Most of it, 5.1 million tons, came from Brazil, followed by Canada with 2.3 million tons and South Africa with 1.3 million tons. Smaller volumes were purchased in Australia, Mauretania and Sweden.
Following the dramatic rise in coking coal prices in 2008 – mainly caused by weather-related production restrictions – we were able to achieve a 57% price reduction for supplies of the reference grade in 2009/2010. We also achieved similar price reductions for PCI coal.
Falling worldwide demand for blast furnace coke led to a calming of prices in the course of the reporting year. Despite rallying slightly towards the end of the period in response to positive economic news, blast furnace coke prices at the end of the fiscal year were well down from the prior year at slightly more than 400 US dollars per ton.
Declining bulk ocean freight rates also lowered the purchasing costs of international raw materials.
Dramatic movements in alloying metals
Prices on the procurement markets for alloys and metals decreased significantly for the most part as a result of slumping world demand. Bulk alloy prices fell by up to 60%. Ferrosilicon – an alloying element used in the production of steel – fell by more than 50% at the height of the crisis. Prices rose slightly towards the end of the fiscal year but were still far removed from prior-year levels.
Molybdenum, which is needed in particular for the production of high-strength steels, lost 70% of its value in only six weeks in October and November 2008 before climbing to twice its low by mid-2009. However towards the end of the reporting year there was another slight downward correction.
The London Metal Exchange (LME) price of zinc – an important metal for corrosion protection of steel surfaces – was far less volatile in the reporting year than it had been earlier. Whereas the 1st half of the fiscal year was characterized by weaker demand and lower prices, the 2nd half saw prices rise again.
Nickel and chromium are particularly important alloying metals for the Stainless segment. The average LME price of nickel in October 2008 was comparatively weak at 12,140 US dollars per ton. It then fell in December 2008 and March 2009 to less than 9,700 US dollars per ton. From April 2009 an upward trend began – despite high inventories at the LME. In August 2009 the price reached more than 19,600 US dollars per ton, also as a result of Chinese purchases. Towards the end of the year there were signs of a price correction.
The quarterly price of chromium reached an all-time high of 2.05 US dollars per pound in mid-2008. At the beginning of 2009 it slumped by around 60% to 0.79 US dollars in the face of sluggish sales volumes. There followed further price drops to 0.69 US dollars, which brought production in the main supplier country South Africa almost to a standstill. After European inventories had been largely run down at the end of June 2009, the price rose to 0.89 US dollars in July.
The downturn on the steel markets also caused an unprecedented slump in scrap demand. The price of grade 2 scrap dropped to €157 per ton in June 2009. That is roughly a third of the all-time high of €426 per ton reached in June 2008. Scrap prices rose back to over €200 per ton at the end of the fiscal year as first signs emerged of a steel market recovery. Prices of alloyed steel scrap mirrored those of the alloying metals contained in the scrap.
The falling prices of raw materials in the course of the fiscal year led to lower prices for the products made from them, for example steel sheet, flat products, tubes and bar steel for forgings. Depending on product group and material content, procurement prices fell by 3% to 50%. Due to sharply declining demand for supplies, spare parts, services and capital goods, these markets eased markedly in comparison with the prior year. The market for construction and electrical products was also marked by overcapacities. The number of new construction projects in plant engineering decreased to less than half, which reduced the previously very high workload of suppliers. Delivery times were considerably shorter and the supply situation was good. Our global procurement efforts were continued further, particularly in Southeast Asia and Eastern Europe.
Professional performance management increases purchasing efficiency
Further progress was made in purchasing in the reporting year. More than 8,500 requests for quotes were posted on the ThyssenKrupp RFQ platform. Around the world our purchasers carried out over 1,200 assessments of suppliers using a method developed in-house for strategic supplier evaluation.
In addition, our catalog platform reduced the costs of individual order processes; 6,800 users can order the items they require directly from selected suppliers.
More than 1,000 employees have now been trained in the use of purchasing methods and electronic tools. With over 1,500 improvement projects completed we achieved savings in the three-digit million euro range. For more details of our efficiency program ThyssenKrupp best, turn to ThyssenKrupp best in section "Business management – goals and strategy".
We established a Groupwide purchasing reporting and controlling system in 2008/2009. With the purchasing controlling system our Group companies can define business-specific performance indicators and summarize them in a balanced score card. This card was developed at five pilot companies in Germany and Brazil. In parallel, we created a purchasing reporting system that facilitates purchasing and highlights consolidation opportunities. It makes purchasing more transparent and allows efficiency to be better measured.
Massive drop in freight costs
Demand for cargo space slumped worldwide on all shipping routes, with the result that spot market prices in particular decreased significantly. The fall in oil prices also led to a reduction in bunker surcharges. Rail and road freight volumes also decreased. In Germany alone, rail lost around 40% of its freight volume and road 12%. As a result we were able to reduce our freight costs by up to 10% in negotiations with suppliers. Additional cost advantages were gained from falling diesel prices, the use of RFQ platforms, and optimization of the complete procurement chain from supplier to end customer.
Air freight prices fell by up to 25% from the prior year due to overcapacities and lower oil prices. However, imports to Europe are still more expensive than exports, particularly to the Asia region.
The fleet management situation was impacted by the difficult economic environment. Falling vehicle residual values caused an increase in leasing rates; additional charges and fees also weighed on the fleet budget. Thanks to our own independent Carpool system, an optimized standard international process structure and further consolidation of volumes we were able to achieve savings of almost €2.0 million, against the general trend. Overall, our fleet management system has achieved synergies of €18.7 million in the past six years.
The financial and economic crisis has significantly changed our situation as a fleet operator. At the beginning of last year we were still able to negotiate our demands with the leasing companies, but now we find ourselves confronted by their demands. The situation on the leasing market deteriorated, particularly in the 2nd half of the year: Rising interest rates and refinancing problems, combined with large residual value corrections, caused leasing companies to struggle. Our multi-supplier strategy gave us the latitude to avoid a leap in leasing rates.
In the fuel area, measured total costs decreased by 13% despite an increase in the vehicle pool by 257 to 7,582 vehicles. The main causes were falling oil prices, slight improvements in terms with the oil companies, more fuel-efficient engines and consistent use of the fuel card.
Energy: Secure supply
Falling prices and lower consumption pushed ThyssenKrupp's energy costs down in the reporting year. We nevertheless had to contend with rising network charges for electricity and limited competition on the natural gas market. Energy supplies to our plants worldwide were secured.
Fluctuating oil and natural gas prices
Energy prices fluctuated in the reporting year as seldom before. The price of Brent crude oil dropped from 69.19 US dollars per barrel on October 01, 2008 to 36.01 US dollars on December 24, 2008, before almost doubling again to 69.07 US dollars by the end of the fiscal year on September 30, 2009. As natural gas prices in Germany are generally coupled to the oil price with a time lag, our natural gas costs also decreased. We also largely succeeded in avoiding costs due to minimum offtake requirements by renegotiating our natural gas contracts; we used less natural gas than planned due to the production cutbacks caused by the recession. One positive factor is the reduction in the number of market regions for natural gas in Germany from twelve to six, which will improve competition on the natural gas market in the future. Despite this, the competitive situation on the German natural gas market remains unsatisfactory; there is still a lack of alternative low-cost suppliers for large industrial users.
Electricity prices
From around €80 per megawatt-hour at the beginning of the reporting year, electricity prices in Germany almost halved up to spring 2009. By the end of the reporting year they had risen again slightly. As electricity requirements were unexpectedly low due to the economic crisis, some already purchased electricity volumes had to be sold back to the market – at times below procurement cost.
While electricity prices and requirements dropped, network charges for high-voltage lines increased by more than 30%. The surcharges to subsidize renewable energies likewise increased further and caused high additional costs. The electricity tax and the subsidization of heat-and-power cogeneration also made electricity more expensive. Unfortunately, no further progress was made in Germany in establishing favorable industrial electricity tariffs such as are possible in some other EU countries.
In Spain, we reduced our costs by 4% thanks to a successful bidding process for our electricity contract for the next two years and a change of supplier. We managed this even though the offtake structure was worse due to the general order situation.
In France, the government extended the special tariff for industrial electricity customers who switched early to the deregulated but now more expensive free market. Our Group companies will continue to benefit from this more favorable tariff until mid-2010.
Income from emissions trading
In accordance with the legal rules, ThyssenKrupp received emission allowances for 21,320,961 tons of CO2 in calendar year 2008; however, actual emissions were only 20,816,320 t. In view of the production cuts in our steelmaking plants in the reporting year the allocated CO2 emission allowances are expected to be enough for the second trading period of the EU emissions trading scheme (2008 – 2012). In part we will also be able to sell emission allowances or carry them forward and use them in the third trading period (2013 – 2020), where we expect a significant deficit.
Electricity producers include the full costs of CO2 emission allowances in their electricity prices. For this reason, electricity costs in Germany and Europe are substantially higher than in countries that do not have emissions trading, even when prices fall due to economic conditions. Any income from the emissions trading scheme is eaten up by the higher costs caused by the full inclusion of CO2 costs in electricity prices.
Emission reductions at the new steel mill in Brazil
In connection with the construction of the new steel mill in Brazil we continued three projects under the UN's Clean Development Mechanism to recover heat from the coke plant, utilize converter gas, and generate electricity from blast furnace gas and coke plant heat in a highly efficient combined-cycle power plant. Utilizing efficient gas and steam turbine technology, the power plant combines the principles of a gas turbine power plant with those of a steam power plant and achieves a very high level of efficiency. It will be the first power plant of its kind on the entire American continent.
The projects are currently going through the prescribed UN registration process. Based on updated forecasts they are expected to achieve emissions reductions of 5.3 million tons of CO2 during their ten-year term. Following registration we will receive tradable emissions credits in the amount of these reductions.
Summarized assessment by the Executive Board of business performance and target achievement
The global financial and economic crisis hit ThyssenKrupp hard. For the first time since the merger of Thyssen and Krupp we ended the fiscal year with a loss. In addition to the economic slump we were impacted by nonrecurring items in the form of restructuring expenses, impairment charges and project costs for the new plants in Brazil and the USA. As expected, our order intake and sales decreased considerably.
We responded early to the first signs of the crisis and initiated operational and structural measures. Our Groupwide program ThyssenKrupp PLuS improved earnings and liquidity while reducing costs and finance requirements. We continued the process of portfolio optimization and achieved restructuring progress in individual areas such as the shipyards and our automotive activities. At the same time we reorganized the Group to enable us to operate faster and more flexibly on the global market in the future.
Stabilization of sales planned
In our current plans for the new fiscal year 2009/2010 we expect a stabilization of sales, as the fledgling economic recovery is still fragile. Earnings on the other hand are expected to improve significantly: We currently expect a positive adjusted EBT in the low three-digit million euro range. The initiated cost-reduction programs will play a major role in this. In our longer-term plans we expect an improvement in the overall economic environment. The aim is to return to the successful growth of recent years as soon as the economy rebounds. We have created a solid platform for this.