Business management - goals and strategy

ThyssenKrupp is facing up to the challenges of its markets and customers with strategic perspective and entrepreneurial dynamism. The reorganization makes us more flexible; our value-based management approach, the success of our cost-cutting measures and our value-enhancement program give us additional impetus.

Capabilities and strategic perspectives

As an integrated materials and technology group, ThyssenKrupp offers intelligent and innovative products for sustainable progress worldwide. From the start of the new fiscal year, the Group's activities and know-how are focused in eight business areas and combined in the Materials and Technologies divisions, replacing the previous segments. We report in detail on our new organizational structure in section "New Group structure"

Strategic strengths of the business areas

The Materials division focuses the Group's worldwide materials activities:

• The Steel Europe business area will drive forward our activities in premium carbon steel flat products, which extend from intelligent material solutions to finished parts. The product range includes custom tailored products made from steel sheets of different thickness, grade and finish. The ongoing development of new steel grades and products in joint R&D activities secures our strong position in this premium market
• The Steel Americas business area is developing the American market for high-quality steel products. It includes the steelmaking and processing plants currently under construction in Brazil and the USA.
• As a world leading supplier of stainless steel, the Stainless Global business area specializes in stainless steel flat products and high-performance materials such as nickel alloys and titanium. The business area also includes the new stainless steel mill in Alabama, which is being built in close cooperation with Steel Americas. With an extensive network of production and sales companies and service centers, Stainless Global operates close to its customers around the world.
• Materials-related services, especially in Europe and the NAFTA region, are the core business of the Materials Services business area. We see good opportunities in integrated supply chain management: Carbon and stainless steel products as well as titanium, aluminum and plastics are delivered to customers on schedule, pre-processed as required.

The Technologies division brings together ThyssenKrupp's technological capabilities:

• With elevators, escalators, moving walks, passenger boarding bridges and stair lifts, the Elevator Technology business area keeps the world in motion. High quality, technological competencies and services such as maintenance and modernization secure the business area's market position and provide new opportunities for growth.
• The Plant Technology business area is a leading international supplier of chemical plants, refineries, cement plants and innovative solutions for the mining and handling of raw materials and minerals. The business area's plants and processes open up new possibilities for environmental protection and sustainable development.
• Specializing in innovative components for the automotive, construction and engineering sectors, the Components Technology business area has a broad and successful product range.
• The Marine Systems business area offers expertise, outstanding products and strong innovative capabilities in shipbuilding – from submarines with fuel cell technology to sophisticated research vessels.

Major projects continuing flexibly

We remain committed to implementing our strategic investments for the production and processing of flat carbon steel and stainless steel in Brazil and the USA. But we are responding flexibly to the changes in the economic framework conditions. The new plants for flat carbon steel are part of the Steel Americas business area, while the stainless production facility in the USA is part of Stainless Global.

Brazil: Vale increases shareholding

The ramp-up of the iron and steel mill in Brazil, which will produce 5 million metric tons of carbon steel slabs per year, has been rescheduled in line with falling demand expectations. The first production line with one blast furnace and one converter will start operation in mid 2010; as things stand today, the ramp-up of the second production line with the second blast furnace and the second converter is scheduled for 2011. We remain flexible in our planning to enable us to respond quickly to possible market changes.

The Brazilian iron ore producer Vale S.A. has increased its shareholding in ThyssenKrupp CSA Siderúrgica do Atlântico Ltda. – our Brazilian steel mill subsidiary – from around 10% to just under 27% at a price of €965 million. This step confirms the value of our investment and our industrial strategy. At the same time it further strengthens the basis for a long-term strategic partnership between Vale and ThyssenKrupp.

Construction work in Santa Cruz in the Brazilian state of Rio de Janeiro is in full swing. At the end of the fiscal year some 21,000 people were working on the site. The port terminal, materials handling facilities and sinter plant are almost complete. The power plant and blast furnaces will be technically complete at the beginning of 2010. The same applies to the ancillary facilities such as power distribution and water treatment and to other infrastructure facilities. Due to problems with supplier quality, reworking is necessary on the structural steel work in some areas. This is affecting the coke plant and the melt shop in particular.

At the end of September 2009 CSA in Brazil had around 1,400 employees. Further recruitment has been slowed in line with the later start-up date.

Market entry in the USA stretched out

Construction work on the new joint steel mill and processing plant of the Steel Americas and Stainless Global business areas near Mobile in Alabama/USA is also being adapted to the decline in steel demand. Construction of the carbon steel production lines is continuing as planned. The Mobile plant of Steel Americas will have hot rolling, cold rolling and coating facilities and will process slabs from the Brazilian mill into high-quality flat products. Hot-rolled capacity will be more than 5 million metric tons per year.

The project is largely on schedule, so we will be able to start production in the 2nd quarter of 2010. Until the Brazilian mill starts operations, the slabs will be imported from Germany. Given the fall in steel demand on the world market, we plan to extend the timetable for market entry, with production being ramped up over a longer period while retaining the flexibility to respond to changes in demand. At the end of the reporting year, around 4,500 people were working on the site.

In parallel with construction work we are preparing our market entry and sales plans for the ramp-up phase in line with the wishes of customers in the NAFTA region. For this, our sales experts are continuing to visit key customers in the target automotive and electrical sectors as well as steel service centers and the tube/pipe industry. Despite the changed situation on the world steel market, we are confident that our attractive product mix and our technological and logistical advantages over competitors will allow us to make a successful entry to the NAFTA markets.

Flexible startup also planned for stainless steel

As with the carbon steel operations, a flexible approach is being taken to our US stainless steel mill. Production will start in October 2010, initially with a reduced cold-rolled capacity of around 100,000 tons per year. The startup of the other units for stainless steel products will be spread out over a longer period, with flexible ramp-up possible at all times. That also applies to the startup of the melt shop, which was planned for early 2012 and may now be delayed by up to 24 months. Despite this, the scale of the overall project will be retained; once the US economy has recovered, the NAFTA market offers promising growth opportunities.

Stand-alone plan for Stainless

The Stainless Global business area will be developed strategically under a stand-alone plan. In the area of stainless steel we plan to consolidate and expand our position on our core European market. Our position as a global stainless producer will be strengthened by the gradual startup of our plant in the USA and the further development of the NAFTA market. In the area of nickel alloys and titanium, we will expand our capabilities in high-performance materials and build up a more customer-focused sales structure.

To achieve these objectives, Stainless Global is working intensively on programs and measures aimed at creating further flexibility in production processes, workflows and capital investments. This will enable the business area to respond swiftly to changes in demand and balance capacity utilization accordingly. Cost structures are also to be flexibilized further to make it easier to adjust to different market situations and enhance the business area's competitiveness.

New course set for shipbuilding

In the future, the Marine Systems business area will combine its sales activities for new-build submarines and surface vessels to better respond to customer needs and changing market conditions. We also aim to make our processes more efficient. To counter the overcapacities brought about by the fall in demand due to the financial crisis, Marine Systems and the wind turbine manufacturer SIAG Schaaf Industrie will pursue an innovative approach at the long-established Emden shipyard. This will focus on the manufacture of components for offshore wind turbines as a contribution to structural change in the region.

In October 2009, Marine Systems signed a memorandum of understanding with the Abu Dhabi MAR Group to establish a strategic partnership. 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.

Improved cost base increases competitiveness

At all levels of the Group we are working to implement our cost-reduction and restructuring programs efficiently. Together with the savings from the reorganization, the successes of the ThyssenKrupp PLuS program and the results of the restructurings, from 2010/2011 our cost base will be improved sustainably by €1.5 billion to €2 billion. This will strengthen the position of our Group on the world's markets.

Business management through value-based management

The Group is managed and controlled using a value-based management system. Our objective is to systematically and continuously increase the value of the enterprise – through profitable growth and a focus on businesses which offer the best development opportunities in terms of competitiveness and performance. Key elements of this management system are an integrated control system, value-based performance indicators as well as extensive measures to achieve value-enhancing growth, enhance efficiency and optimize capital employed.

Integrated control system secures Groupwide transparency

With our integrated control system we steer and coordinate the activities of all areas of the Group. It supports the decentralization of operating responsibilities, guarantees Groupwide transparency and aims to increase the value of the Group by bridging operational and strategic gaps between the actual situation and a competitive target situation. High-quality systems for the reporting of actual and forecast figures link together strategic and operating elements; these reports are supplemented by regular action-based communications. All management processes are geared to the performance indicators of our value management system which are also used to calculate the variable components of management compensation.

ThyssenKrupp Value Added: central performance indicator

The central performance indicator for our value-based management system is ThyssenKrupp Value Added (TKVA), which measures the value added in a period at all levels of the Group. It is the difference between ROCE (return on capital employed) and WACC (weighted average cost of capital), multiplied by capital employed. Capital employed is defined as invested assets plus net working capital.

In addition to TKVA as a value-based performance indicator, free cash flow is taken into consideration as a cash-based performance indicator to ensure that, especially in growth phases, the Group portfolio comprises a balanced mix of value drivers and cash providers.

An alternative method of calculating TKVA using absolute figures is as follows: earnings before interest and taxes (EBIT) minus cost of capital. Cost of capital represents the expected return on equity and debt. It corresponds to the product of WACC and average capital employed.

The weighted average cost of capital (WACC) is the minimum return demanded by our investors and creditors. It is calculated on a pre-tax basis and comprises the weighted average cost of equity and debt as well as the interest rate for pension provisions:

• The cost of equity of our Group is based on the return from a risk-free alternative investment plus a market risk premium and taking into account the specific risk of ThyssenKrupp in relation to the overall market. The weighted average cost of equity calculated on this basis corresponds to a weighted average cost after operating taxes. Since the cost of capital at ThyssenKrupp is calculated on a pre-tax basis, a tax adjustment is carried out.
• The cost of debt (cost of financial debt) is the interest on an alternative investment defined as risk-free plus a company-specific risk premium.
• The interest rate for pension accruals is calculated on the basis of the weighted five-year average discount rate for internally financed pension plans and healthcare obligations.

On the basis of the above factors, the weighted average cost of capital for the Group was 8.5% in fiscal 2008/2009. Specific WACC figures were established for the segments which reflected their respective risk structures. In the reporting year, the segment WACC figures were:

We have defined the following WACC figures for the business areas introduced at October 01, 2009.

The WACC for the Group remains 8.5%.

Since the business environment is constantly changing, the weighted average cost of capital is regularly reviewed and adjusted if necessary.

Levers of the value management system: Growth, efficiency capital employed

Three levers can be used to increase TKVA: value-enhancing growth, increases in operating efficiency and optimization of capital employed. A major contribution to value-enhancing growth and thus to increasing the value of the enterprise is made by investment projects which generate returns higher than their cost of capital. A key element in increasing operating efficiency is the ThyssenKrupp best value enhancement program, which is described in more detail under "ThyssenKrupp best". Capital employed as the third lever to increase TKVA can be optimized by withdrawing from business activities in which, for example, the cost of capital cannot be earned. Alternatively, targeted programs can be implemented to release capital, e.g. programs to optimize net working capital, to reduce capital employed without reducing EBIT.

The following tables show how TKVA and its components developed over the last two fiscal years:

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Components of ThyssenKrupp Value Added (TKVA)

		2007/2008
		EBIT* (million €)		Capital employed (million €)		ROCE(%)		WACC (%)		Spread (% points)		TKVA (million €)
Group		3,572		19,478		18.3		8.5		9.8		1,916
Thereof:
Steel		1,700		7,697		22.1		9.0		13.1		1,007
Stainless		214		3,698		5.8		9.0		(3.2)		(119)
Technologies		678		2,693		27.6		9.0		18.6		502
Elevator		450		1,695		26.5		8.0		18.5		314
Services		834		3,834		21.7		8.5		13.2		508
		2008/2009
		EBIT* (million €)		Capital employed (million €)		ROCE (%)		WACC (%)		Spread (% points)		TKVA (million €)		Change TKVA (million €)
Group		(1,663)		20,662		(8.1)		8.5		(16.6)		(3,419)		(5,335)
Thereof:
Steel		(250)		9,763		(2.6)		9.0		(11.6)		(1,129)		(2,136)
Stainless		(864)		3,240		(26.7)		9.0		(35.7)		(1,156)		(1,037)
Technologies		(836)		2,623		(31.1)		9.0		(40.1)		(1,051)		(1,553)
Elevator		568		1,554		36.5		8.0		28.5		443		129
Services		(187)		3,554		(5.3)		8.5		(13.8)		(490)		(998)

The ThyssenKrupp Group's earnings before interest and taxes decreased by €5,235 million to €(1,663) million in fiscal 2008/2009. The negative impact this had on ROCE was moderated slightly by the increase in capital employed. Average capital employed increased by €1,184 million to €20,662 million. The main reason for this was increased capital spending throughout the Group, especially on the major projects in Brazil and the USA; this was partly offset by a reduction in net working capital in the Steel, Stainless and Services segments. Consequently ROCE decreased to (8.1)% from 18.3% the year before. Due to the relevant WACC for the Group of 8.5%, TKVA fell by €5,335 million to €(3,419) million.

The Steel segment reported earnings before taxes and interest of €(250) million in fiscal 2008/2009, €1,950 million down from the year before. As capital employed increased in the same period, ROCE decreased from 22.1% to (2.6)%. As a result, the WACC of 9% was not met. In connection with a negative spread, TKVA decreased to €(1,129) million from €1,007 million in the prior year.

Earnings before interest and taxes in the Stainless segment decreased in the reporting year by €1,078 million to €(864) million. With capital employed €458 million lower at €3,240 million, ROCE fell from 5.8% a year earlier to (26.7)%. With the WACC of 9%, the spread was negative. As a result, TKVA decreased year-on-year by €1,037 million to €(1,156) million.

At Technologies, earnings before interest and taxes deteriorated by €1,514 million to €(836) million. With capital employed slightly lower, ROCE fell from 27.6% a year earlier to (31.1)%. With a negative spread, TKVA was €(1,051) million.

In the Elevator segment earnings before interest and taxes were €568 million, €118 million up from the previous year. Capital employed was down from €1,695 million a year earlier to €1,554 million. The growth in ROCE by 10 percentage points to 36.5% led to a rise in TKVA to €443 million, compared with €314 million the year before.

In the Services segment earnings before interest and taxes fell by €1,021 million to €(187) million. Capital employed decreased by €280 million to €3,554 million. As a result, ROCE was down from 21.7% to (5.3)%. At €(490) million, TKVA was significantly below the year-earlier figure of €508 million.

Portfolio management uses performance indicators

The results of the analysis of the performance indicators feed directly into our portfolio management. This involves structural measures with a primarily strategic character. The Group's management decides which businesses are to be expanded to realize our TKVA targets, and which activities we should withdraw from in a timely and value-conserving way. We also develop new businesses by entering efficiently into promising new markets. All these measures create the basic requirements for the ability to pay dividends and for sustainable, value-enhancing growth in our core businesses.

Value management training

A communication and training initiative launched in 2006 helps firmly anchor value management in the Group. To date, over 4,300 decision makers from all areas of the Group have attended training seminars. Most of them were held in Europe, but training has also been provided in China, the USA, Mexico, Brazil, Japan and South Korea.

ThyssenKrupp PLuS

Corporate program exceeded targets

While the reorganization will make the Group more competitive in the long term, our action program ThyssenKrupp PLuS has already achieved some notable short-term successes. The corporate program was launched at the beginning of the reporting year to provide a swift and firm response to the global recession. The focus was on improving earnings and liquidity in the short and medium term, reducing costs and financing requirements, and sustainably enhancing the Company's performance. The success of the program is already visible: We have met and even exceeded the targets we set for 2008/2009.

Overall, our measures reduced costs in the past fiscal year by over €1 billion – more than expected. We lowered production and administrative costs, optimized procurement and sales, reduced expense for outsourced services and systematically utilized opportunities for workforce flexibilization. Roughly half of these measures will have a sustainable effect; they not only reduced costs in fiscal 2008/2009 but will continue to make the Group more profitable in the years ahead.

Our liquidity situation also improved further; at September 30, 2009 we had reduced our net working capital by well over €3 billion. Alongside a substantial reduction in inventories, we in particular optimized receivables management in all areas of the Group.

In addition, all the Group's investment projects were reviewed. The major projects in America as well as the other investments in all segments were analyzed for possible cuts or postponements. As a result, our capital expenditures in the reporting year were reduced by well over €1 billion compared with our original plans. In taking these measures we took into account both the significant deterioration in economic expectations and our long-term strategic objectives.

In view of this success, the program will be continued in the new fiscal year; we will further pursue the measures already initiated and launch new ones.

ThyssenKrupp best

Increasing the value of the Company for our stockholders, enhancing our performance for our customers, and making our operating structures even more efficient – these were the goals of the almost 1,300 new ThyssenKrupp best projects launched in the past fiscal year. The Groupwide value-enhancement program has been supporting the continuous improvement process for eight years. The following modules form the basis for the program's success: management commitment, establishment in the Group's organization, involvement of employees, standardized and overarching controlling, the provision of methodological knowledge and the transfer of know-how. All employees can get involved, take part in projects and share their new-found knowledge with colleagues.

Strong international participation

8,608 projects have been successfully initiated since the program was launched, plus another 1,630 projects at discontinued operations. During the reporting year, the 10,000th project was launched by a team in the Steel segment and added to the Groupwide best plaza database for knowledge transfer. The project addresses the insourcing of previously outsourced research and development services to reduce costs.

ThyssenKrupp best projects now exist at more than 400 locations in 51 countries. The majority – around 70% – were carried out in Europe, primarily Germany, France and Spain. Some 20% of projects took place on the American continent; ThyssenKrupp employees have now formed successful project teams in the USA, Canada, Mexico, Brazil and other South American countries. Value-enhancement projects were also launched in China, South Korea and other countries in the Asia-Pacific region (7%). The increase in the number of international projects was particularly encouraging. In 2008/2009 more than 50% of all projects were carried out by Group companies outside Germany.

The transfer of knowledge from one Group company to another is a key success factor of ThyssenKrupp best. Successful project ideas are taken up by teams in different segments and areas, revised and transferred to other companies. The direct sharing of information between companies is essential for this, so in addition to the program's central, internet-based platform best plaza, we also stage numerous events at which project participants can meet up. For example, we successfully continued the "Best Practice Fair" series in 2008/2009 with an event on the subject of "Continuous Improvement Process (CIP)/Kaizen".

Initiatives focused on key areas

Both the Sales & Service initiative launched in 2007 and the purchasing initiative in progress since 2005 are contributing substantially to the success of ThyssenKrupp best. While the Sales & Service initiative focuses on products, customers, services, internal processes and organizational structures, the purchasing initiative strengthens purchasing throughout the Group on a lasting basis.

The Net Working Capital initiative launched in 2008/2009 has also started to reap success. Over 150 projects were launched throughout the Group, significantly reducing our net working capital. In fiscal 2009/2010 we will continue this initiative to further optimize capital employed in receivables, payables and inventories; we also want to anchor the importance of keeping net working capital to a minimum in the minds of our employees. In addition to enhancing value, this also makes an important contribution to freeing up cash.

2009 ThyssenKrupp best Award

In the reporting year, the now traditional ThyssenKrupp best Award was presented to three projects from the Steel, Technologies and Services segments. Projects were judged on the basis of methodology, implementation, scope, transferability to other Group companies and overall potential. First prize was awarded to a company from the Steel segment. The project team developed a method to avoid defects in continuously cast slabs through the use of specially shaped molds. The new molds significantly increase caster efficiency. An optimized integrated logistics chain was the goal of the "Fit for Flow" program initiated by employees from the Services segment, which won second prize. Third prize went to a project team from the Technologies segment which achieved substantial cost savings by systematically analyzing loss-making parts and subsequently introducing improvements.

Further information on content in this section

• Speech of Chairman Dr.-Ing. Ekkehard D. Schulz from minute 11:00 (Recording Annual Press Conference on November 27, 2009, German only)