Subsequent events, opportunities and outlook
Now that the world economy seems to have passed the worst of the recession, the new fiscal year 2009/2010 will be characterized by at best slow economic recovery. As a result, there will be only moderate growth in order intake and sales at ThyssenKrupp. The Group's new organizational structure will make us leaner and more efficient. Together with the optimization programs we have introduced, this will have a positive effect on earnings.
Subsequent events
Subsequent events occurring between the balance sheet date (September 30, 2009) and the date of authorization for issue (November 09, 2009) are presented in Note 34 to the consolidated financial statements.
Economic outlook
No sustained global economic upturn in sight
Following the deep recession, the overall economic situation stabilized in the 2nd half of 2009. For 2010 we forecast only slight growth in world GDP of 2.7%, compared with a 1.4% decrease a year earlier. That means there is no sustained global economic upturn in sight, and the risk of economic setbacks remains.
We do not expect a radical recovery of the US economy in 2010. The financial latitude for private consumption – the most important component of the American economy – will continue to be restricted by the difficult situation on the labor market and the fall in household wealth. In addition, business investment will remain at a low level. Similarly in Japan, no radical improvement is expected before the end of the year.
The prospects for growth are more favorable in many of the emerging economies. In 2010 China will continue to counter weaker global demand with government stimulus packages and an expansive monetary policy. In India the pace of expansion is expected to increase slightly. As the raw materials markets recover in 2010, Brazil and Russia should return to growth.
Gross domestic product 2010* real change versus previous year in %
The economy in the euro zone will stabilize at a low level in 2010. Germany is also not expected to achieve sustained growth. Indeed, there is a risk that the recovery in the 2nd half of 2009 may be followed next year by a temporary period of weakness as the stimulus programs come to an end. Rising unemployment in particular weighs against a self-sustaining upturn.
Prospects on important sales markets
With economic prospects subdued, we do not yet expect any major recovery on the markets of importance to us. We anticipate the following developments: Prospects on the global steel market remain subdued given the only slight improvement in the economic situation. In Europe, the NAFTA region and Japan demand in the coming year will be higher than in 2009 mainly due to restocking but there will not yet be any return to the production and demand levels of previous years. As things stand, we do not expect any significant increase in real consumption. China will remain a key determinant of the global steel market. However, the inventory overhangs accumulated in China in 2009 could significantly dampen demand growth there next year.
In the other emerging countries we expect steel consumption to increase again slightly. According to the fall forecast issued by the World Steel Association, global steel demand will expand by 9% in 2010; that corresponds to crude steel output of around 1.3 billion metric tons. Compared with 2008, the costs of steel production are being positively impacted by lower raw material costs, but there are negative effects from underutilization of production capacities.
Towards the end of the reporting year, rising raw material prices and low inventory levels buoyed the market for stainless steel flat products. The worst of the demand weakness seems to be over. 2010 could see the onset of a sustained recovery in real demand from end users. We therefore expect global demand to grow by almost 10% to 13.5 million tons in 2010, though this will not be enough to compensate for the severe downturn in 2009. Demand for the high-performance nickel alloy and titanium materials should also rise again in the coming year.
The international auto market will recover only slightly from the low level of 2009. In 2010 we expect production growth of almost 6% to 62.6 million vehicles worldwide. This growth will be focused on those countries that suffered the sharpest declines in 2009, especially Japan and the USA. Vehicle output in China will no longer increase at the same rate as in 2009 if the tax incentives expire as planned. In Germany, production is expected to decline. The scrapping bonus in 2009 brought forward new car purchases, and this will lead to a drop in domestic demand in 2010. The losses in Germany will not be fully offset by rising exports, so German vehicle production is set to fall by around 1% to 4.9 million units.
The crisis in the global shipbuilding industry will continue in 2010. Overcapacities in the world trading fleet are pushing down freight rates; further cancellations of new-build orders are likely. Given the dramatic fall in orders to date, production by the German shipyards in 2010 will be substantially lower than in 2009.
Low production expectations worldwide and the resultant weak level of investment continue to impact the international machinery sector. Following the slump in 2009, many countries are only expected to see a very moderate recovery in 2010. We anticipate that machinery output in the USA and Germany will expand by only 3% and 2% respectively. Only China will achieve double-digit growth.
In most industrialized countries there is unlikely to be any recovery in the construction sector in 2010. Further declines in construction output are expected in Western Europe and North America. Despite the government stimulus packages to support public-sector building, the German construction sector will do little more than stagnate. By contrast, there could be moderate growth in some Central and Eastern European countries, while the Chinese and Indian construction sectors are expected to pick up more strongly.
Opportunities: Growth after the crisis
A high-quality product range, substantial rationalization at all Group companies and faster decision-making paths will open up global growth opportunities for ThyssenKrupp once the economy starts to pick up again. New and modernized production equipment as well as efficient and motivated employees will once again boost productivity at our plants. Our network of branches, service offices and production facilities keeps us close to our customers and markets all over the world. This gives our business areas good prospects of achieving or maintaining leading positions on even hard-fought markets.
Opportunity management system expanded
We assess and exploit the business opportunities that present themselves to us at all levels of the Group. Our opportunity management system is based on our Group architecture: The companies operating on the market observe the trends and developments in their product areas and identify operating opportunities. If the potential rewards of an opportunity outweigh the costs of its implementation, we realize the project as long as it fits in with the general strategy of the respective business area and the Group as a whole. The business areas are also expected to exploit strategic opportunities on their markets. At Group level, corporate headquarters sets out the strategic framework for this, secures financing and liquidity, and provides key services for the operating company units. Headquarters also coordinates and assumes responsibility for projects based on opportunities relating to several business areas or the entire Group.
Our opportunity management system, which specifically identifies and develops promising market changes and technology trends, is jointly steered by project officers with market responsibility, company managements, business area management boards and the Executive Board of ThyssenKrupp AG. More detailed information on the key areas and development lines of our corporate strategy can be found in the section "Business management – goals and strategy". The risks to the Group from its business operations are presented in detail in the risk report.
Reorganization opens up strategic opportunities
New business opportunities will also be opened up by the new organizational structure of the Group implemented at October 01, 2009. Short decision-making paths will enable us to respond more quickly to customer wishes and market developments. Thanks to our streamlined structures, the individual activities will be better positioned on the market. In addition, our rationalization and value-enhancement measures will further increase the efficiency of the Group in all areas. The two divisions Materials and Technologies – each combining four business areas with related business activities – will allow a wide range of synergies from joint marketing activities to optimized logistics.
Opportunities in the business areas
Our business areas have considerable operating opportunities on their respective markets.
Steel Europe: We see good opportunities on the Western European flat carbon steel market. Our state-of-the-art production facilities and premium-quality products offer competitive advantages which we can translate into lucrative contracts with strong earnings contributions once the economy starts to pick up. High-quality body panels, tailored blanks and high-strength steel grades help all design engineers working with steel to realize their ideas cost-efficiently and with reduced environmental impact. By expanding our capabilities as a system partner to our customers and optimizing our cost position, we will strengthen our competitiveness beyond the current economic downturn.
Steel Americas: With its new plants in Brazil and the USA, the business area should be able to establish itself relatively quickly as a quality leader in steel production on the American double continent. The steel mill complex under construction in Brazil will start production in mid 2010, and the new processing plant in the USA in spring 2010. Steel Americas will focus on the production, processing and distribution of high-quality steel grades. Based on successful discussions with future strategic customers we see good opportunities in the premium segment of the NAFTA flat steel markets. The increase in the shareholding held by our Brazilian partner Vale in the Brazilian steel mill will also help us develop new sales channels in Latin America.
Stainless Global: The systematic internationalization of our Stainless business should allow the business area to reap above-average benefits from a global economic upturn. New product developments will also help expand the areas of application for stainless steel in combination with other materials. The same applies to the business area's high-performance materials: Its nickel and titanium alloys are in ever increasing demand for parts and components which have to withstand extreme stresses and corrosion conditions.
Materials Services: With 500 branches in 40 countries, the Materials Services business area is focused on the global distribution of materials and the provision of technical services. In addition to carbon and stainless steel, tubes and pipes, nonferrous metals and plastics, we also offer services from processing and logistics to warehouse and inventory management through to supply chain management. A sophisticated warehouse, logistics and information logistics system with central and branch warehouses provides the basis for rapid delivery with lowest-possible inventories. We see further opportunities to expand our business in our extensive project management expertise, global connections and specific market knowledge. We offer technical and infrastructure services in the areas of railway and construction equipment, industrial plants and steel mills.
Elevator Technology: Innovative strength, service quality and closeness to customers make the Elevator Technology business area one of the leading names worldwide for passenger transportation systems. More than 800 locations in more than 60 countries provide a tight service network. Our broad range of products, from standard systems to customized solutions to service, maintenance and modernization packages, will allow us to unlock new market potential. Intensifying our sales activities in growth markets such as China, India and the Gulf region will provide further opportunities.
Plant Technology: The range of the Plant Technology business area takes in the full spectrum of specialized and large-scale plant construction. Our specialty is the mastery of complete process chains and our wealth of experience in dealing with process-related tasks. For this reason we see good strategic opportunities for further growth on the international market and for further strengthening our technology portfolio through constant innovation. Additional opportunities are provided by our support services: choice of location, financing, negotiations with authorities, technical management, maintenance, safety analyses and equipment, training for operating personnel and project management. In emerging countries in particular, these services frequently open the door to new customers.
Components Technology: With the high-quality components they manufacture, the companies in the Components Technology business area hold leading positions on the global markets. We see additional opportunities for our automotive components for example in the growing environmental awareness of motorists who attach increasing importance to owning vehicles with low CO2 emissions. This could boost sales of our weight-optimized components. The growing use of eco-friendly wind energy will also increase sales of our slewing bearings, which are used in wind turbines.
Marine Systems: Opportunities for our shipyards lie on the one hand in new naval contracts for surface vessels and submarines. On the other hand, Abu Dhabi MAR as a possible strategic investor for our Hamburg site will open up new opportunities on the markets in the Middle East and North Africa. The construction of mega yachts could profit in particular from this. The combination of German shipbuilding technology and the market knowledge of an Arab partner could deliver important impetus in this area. For the Emden shipyard we see opportunities in wind energy. Together with SIAG Schaaf Industrie, a leading manufacturer of wind turbine components, we plan to expand the current shipyard into a viable high-tech site for offshore technology and thus secure and sustain jobs. If large offshore wind farms are built in the North Sea, the components can in the future be supplied from Emden.
Performance-related opportunities in the value chain
We see promising opportunities to advance our business across the whole value chain – purchasing, production, distribution and marketing. Pooling similar contracts, concluding framework agreements on favorable terms, exploiting the advantages of electronic procurement methods even more systematically – all these factors can further increase our profitability.
Further rationalization and quality reserves can also be exploited in production. New production methods for innovative steel grades, new services and optimized component manufacture all represent important performance-related opportunities. Once our dynamic process control system for the various stages of steel production has become established in day-to-day operations, we will be able to secure the quality of our steel products at lower cost. In the field of marketing our aim is to maintain an international presence as close as possible to our customers so that we can meet their technical and commercial demands quickly and in full. To this end, our global branch network is being constantly optimized.
Numerous opportunities are opened up by newly developed products – such as materials, components and complete plants – and services. For example, under the InCar project – a Groupwide research initiative for automotive innovations – our engineers and technicians have developed more than 30 new solutions for body, powertrain and chassis. With the 'synergy' machine-room-less elevator, our Elevator Technology business area has developed a successful product which is in demand worldwide. The same business area also has products with energy-efficient, regenerative drives that convert the energy created during braking operations back into electricity, thus reducing energy consumption by over 30%.
Opportunities for companies and young talent
Despite declining business, in 2008/2009 we once again recruited highly qualified school and university graduates and gave them the chance to start their careers in our Group. We need young people to fill skilled and management positions, to bring the latest scientific standards from the universities into our Group and to acquire a fresh new view of our products and structures. Given the impending shortage of engineers, our aim is to attract sufficient numbers of people from key engineering disciplines to our Company at the earliest possible stage.
Value-enhancement potential through Groupwide initiatives
Following the success of our Groupwide ThyssenKrupp PLuS and ThyssenKrupp best initiatives to date, we see ample opportunity for further sustainable cost reductions and value enhancements in the next two fiscal years. So far, the initiatives have been successful in all areas of the Company. We aim to build on this and will implement further improvement measures in the future.
Expected earnings situation
With a view to the 2009/2010 fiscal year, we regard the currently emerging economic recovery as still fragile.
Sales and earnings: We anticipate that sales will stabilize in fiscal 2009/2010. Earnings are expected to improve significantly and return to profit, thanks in no small part to the cost-cutting programs we have introduced. Adjusted earnings before interest and taxes (EBIT adjusted for nonrecurring items) will probably be in the high three-digit million euro range. Adjusted earnings before taxes (EBT adjusted for nonrecurring items) is expected to be in the low three-digit million euro range. Adjusted EBT will be significantly impacted by project costs and startup losses in the Steel Americas business area in the mid three-digit million euro range. We will no longer classify these costs as nonrecurring items as the startup of our steelmaking mill and processing plants will mean that they can no longer be regarded as projects.
Special items to be eliminated include disposal gains/losses, restructuring expense, impairment losses, other non-operating expense and other non-operating income. These special items are positive or negative effects that occur only once or infrequently, are of material importance due to their type or amount and thus affect the results of our operating activities.
Our expectations for the individual business areas are as follows:
- Steel Europe – Improvement in volumes and capacity utilization, average revenues below prior-year level
- Steel Americas – Negative EBT contribution in mid three-digit million euro range due to project costs and startup losses for the steelmaking and processing facilities in Brazil and the USA
- Stainless Global – Stabilization of volumes with improved base prices
- Materials Services – Stabilization of volumes and revenues
- Elevator Technology – Continued high earnings contributions thanks to strong order backlog and stable modernization and maintenance business
- Plant Technology – Good revenues and earnings expected from project business due to order backlog with good earnings quality
- Components Technology – Continued difficult environment for automotive and construction machinery supplies, positive earnings contribution from slewing bearings for the wind energy sector
- Marine Systems – Improved earnings quality through initiated consolidation of shipyard sites
In 2010/2011 we expect an improvement in the overall economic environment and further positive effects from our cost-cutting programs. This will have a corresponding influence on sales and earnings.
Dividend: In line with our policy of dividend continuity we will continue to pay an appropriate dividend.
Research and development: Even in difficult economic times, innovations remain of central importance to ThyssenKrupp. In fiscal 2009/2010 we plan to slightly increase our spending on innovations. A major part of this will be expenditure for basic R&D projects. In the following year we expect a moderate rise in spending. Our overall aim is to stabilize our R&D to sales ratio at the present level.
Our research and development efforts in the materials area will focus on new or improved grades combining cost-efficiency with higher strength, improved processing properties and improved surface quality. In plant construction our engineers and technicians will search for more efficient and resource-conserving process solutions. In other projects we will develop lightweight components which will enable automotive engineers to further reduce vehicle weight.
Procurement: Materials expense will develop largely in line with sales in 2009/2010. It is expected to amount to around 60% of sales. Thanks to our longstanding supply relationships and our international purchasing operations, we do not anticipate any bottlenecks in supplies of raw materials, operating materials, equipment, components or services.
We will improve our purchasing activities further in the future. A major contribution will be made by our Groupwide purchasing initiative, which will be continued in the coming years. In addition we intend to further expand our system of purchasing reporting and controlling so as to make purchasing processes more transparent and thus easier to manage.
Energy: Energy supplies to our worldwide plants are secured. We do not anticipate any supply bottlenecks. However, when the economy picks up we must expect higher prices for all energy sources. We have made provision for this: The volumes of electricity we have already procured will secure most of our expected electricity requirements in Germany for the 2009/2010 and 2010 / 2011 fiscal years. For the years thereafter we have in part also already purchased electricity at favorable prices.
The third period of EU emissions trading from 2013 to 2020 may give rise to higher costs for emission allowances. The same would apply if the USA was also to introduce emissions trading.
Environmental protection: We expect expenditure for ongoing environmental protection measures in 2009/2010 to amount to more than €470 million, slightly higher than a year earlier. The greater part of this will once again be spent on water protection and air pollution control. Recycling costs for production wastes remain low as all business areas intensively reuse residual materials to conserve natural resources. An important environmental protection project is the construction of a new fabric filter system at our Duisburg iron and steel making plant: This system will significantly improve the air quality in the northern part of the city.
Expected financial and liquidity situation
Despite the effects of the financial crisis and the resultant difficult conditions, the Group's financing and liquidity will remain on a solid basis in fiscal 2009/2010. Both private and institutional investors regard ThyssenKrupp as a solidly financed company. Due to major projects such as the new steel mill in Brazil, the new production and sales location in the USA and capacity optimization at the Duisburg site, our capital expenditure is currently higher than the average of the previous years.