Group review

ThyssenKrupp sucked into the global recession

The economic fundamentals have deteriorated more sharply than expected in recent months. The world economy is in a deep recession. The collapse in demand for carbon and stainless steel and in the international materials services business has impacted ThyssenKrupp significantly. Certain areas of our capital goods activities – especially our automotive and civil shipbuilding businesses – also showed a decline. Business with elevators and escalators remained pleasing and in line with expectations. In this economic environment sales and earnings at ThyssenKrupp declined. Sales in the 1st half of 2008/2009 decreased by 16% year-on-year. The Group's earnings before taxes fell year-on-year by €1,603 million to a loss of €215 million.

The highlights for the 1st half 2008/2009:

• Order intake decreased by 25% to €20.5 billion compared with the 1st half 2007/2008.
• Sales fell by 16% to €21.4 billion.
• EBITDA came to €906 million, compared with €2,280 million a year earlier.
• Earnings before taxes amounted to €(215) million, down from €1,388 million.
• Earnings per share dropped from €1.85 to €(0.35).
• Net financial debt at March 31, 2009 was €3,687 million, an increase of €2,103 million compared with September 30, 2008, when we reported net financial debt of €1,584 million. On March 31, 2008, net financial debt stood at €1,988 million.

We expect a significant drop in order intake and sales for full fiscal year 2008/2009. This will be reflected in earnings. Price and volume declines will be only partly offset by falling input material prices and an extensive additional action program to enhance efficiency. In addition, targeted steps are being taken to significantly reduce net working capital. Measures are being implemented to reduce or postpone the investment program.

ThyssenKrupp expects to end the current fiscal year with a loss before taxes and major nonrecurring items – restructuring expense, project costs and impairment charges. Depending on future economic developments, a loss before taxes and major nonrecurring items in the mid to high three-digit-million euro range is expected.

Earnings before taxes will be considerably impacted by restructuring charges for our cost reduction programs and the strategic reorganization. These measures will play a decisive role in significantly strengthening the future earning power of the Group. Project costs for the new steel plants and possible further impairment charges are also expected to have a major impact on earnings before taxes. The exact amount of the nonrecurring items cannot yet be reliably assessed.

World economic slide accelerating

The world economy is in its deepest recession since the end of the Second World War. The economic and financial crisis originating in the US real estate market intensified dramatically in the winter months, accelerating the slide. Economic output in the major industrialized countries decreased, and the emerging economies also saw their growth momentum decline significantly. Global demand weakness caused raw material prices to fall. However, the corresponding increase in purchasing power in the consuming countries failed to slow the downturn.

In the USA, the economic downturn intensified last year. The deterioration of the labor market, negative wealth effects and increased credit restrictions resulted in falling private consumption. The decline in capital spending and housing construction was even sharper. The Japanese economy also shrank significantly over the winter months, mainly due to a drastic decline in exports to the USA, Europe and Japan's Asian neighbors.

Europe is likewise deep in recession. The euro zone has recorded a sharp decline in gross domestic product in recent months. Industrial output has fallen significantly. On the demand side, the economic collapse has manifested itself above all in capital spending and exports. The German economy also slid into a deep recession in fall 2008. Manufacturing industry in particular had to cut back production significantly in response to the deterioration in orders; exports and capital investment fell substantially.

The emerging economies were unable to escape the effects of the global recession. A number of Asian countries recorded massive drops in exports. The Chinese economy has lost significant momentum, while the countries of Latin America have been particularly impacted by falling raw material prices and reduced deliveries. The developments on the raw materials and energy markets have also had a negative effect in Russia. The economic situation in the rest of Central and Eastern Europe has also worsened dramatically in recent months.

All sectors important to ThyssenKrupp are affected by the global recession. The picture in the individual sectors is as follows:

• Steel demand has fallen substantially. After steel producers worldwide cut back production considerably in the final quarter of last year, output again fell massively in the 1st quarter of this year. Worldwide, 23% less steel was produced in the first three months of this year. Excluding China, which again increased its steel production against the general trend, the decline was 37%. Output fell by 44% in the European Union and by 52% in the Nafta region. Capacity utilization throughout the industry has decreased dramatically, resulting in temporary shutdowns and closures. On the American market capacity utilization has been less than 50% since last fall, while in Germany it has averaged 60%. German crude steel production in the 1st quarter 2009 was only 7.3 million metric tons, down 39% year-on-year. Despite these massive sustained production cutbacks the worldwide fall in steel spot prices has not been halted but at best slowed. Prices slipped again in the 1st calendar quarter.
  On the European market for carbon steel flat products the drop in orders that began in September last year continued. Extremely weak activity in important customer industries, leading to massive production falls, and still substantial inventory overhangs at end users and distributors have brought demand to a complete standstill in some cases. Inventories have decreased in the course of recent months but are still very high due to a significant drop in inventory turnover. In the first three months of this year, orders received by European flat steel producers were down 59% yearon- year. In Germany, order intake for rolled steel fell by 57% in the 1st quarter 2009. Only essential requirements are being covered, also because buyers believe that prices have not yet bottomed out. Although third-country imports into the EU were lower than a year earlier in the first two months of 2009, their share of the total market supply has probably risen.
• Market demand for stainless steel flat products again fell significantly in Europe and worldwide. With shipments by European stainless producers already in decline due to rising imports from Asia, the global recession and falling prices for alloy metals caused a further drop in customer demand. This resulted in further stock-building at service centers and distributors in Germany into 2009. Since then, inventories have been reduced slightly as a result of lower replenishment orders. In North America, inventory levels at end users, distributors and service centers have been falling significantly for several months, but ordering has remained below-average. In Asia, inventories are still at a very high level but have recently shown signs of declining.
  The steep fall in prices of raw materials for stainless steel production, particularly nickel, molybdenum, chromium and steel scrap, was reflected in lower alloy surcharges. Due to the demand weakness, base prices in Europe and North America also fell. In Asia, too, the difficult economic situation was reflected in collapsing prices.
  In the nickel alloy business, the economic situation led to the postponement of projects across all consumer segments, resulting in fewer orders being placed. In the titanium sector, technical delays in the production of the new Airbus and Boeing aircraft caused a sharp drop in orders across the market. High inventory levels additionally exacerbated the demand weakness.
• The worldwide recession has left a deep impact on the international auto market. The established Â� markets in North America, Japan and Europe have experienced dramatic sales collapses, while the previously fast-growing emerging economies have lost significant momentum. In the USA, sales of new cars and light trucks dropped by around 35% in the 4th quarter 2008; the trend continued in the 1st quarter 2009 with a drop of 38%. In the European Union, too, demand has declined in recent months: new car registrations fell by 19% in the final quarter of 2008 and by 17% in the 1st quarter 2009. In Germany, the introduction of the scrappage scheme slowed the decline in new car registrations. After dropping by 11% in the 4th quarter 2008, new car sales increased by 18% in the 1st quarter 2009. However, due to a simultaneous collapse in German exports, production in the first three months of 2009 was still 33% down. The situation for trucks was even more dramatic; output in Germany slumped by 55% in the 1st quarter 2009, and there are now hardly any significant order backlogs.
• In the mechanical engineering sector, production slowed in many countries in the course of 2008, with numerous companies cutting their investment budgets due to the global recession. This caused a drop in orders received by machinery manufacturers. After years of high growth, new orders in Germany declined year-on-year by 29% in the 4th quarter 2008. Domestic and foreign business contributed equally to the sharpest fall in 50 years. In the 1st quarter of 2009 the decline in orders accelerated to 42%. In the German plant engineering sector, orders also decreased significantly in the 4th quarter 2008.
• The global economic crisis also left its mark on the construction industry. Construction activity slowed markedly in Asia and Central and Eastern Europe. Output in the USA fell significantly due to the real estate crisis. The German construction sector still had a relatively good workload in 2008, although orders slipped over the course of the year. New construction orders also declined markedly at the beginning of 2009.

Orders and sales in steep decline

ThyssenKrupp in figures

				1st half ended March 31, 2008		1st half ended March 31, 2009		2nd quarter ended March 31, 2008		2nd quarter ended March 31, 2009
Order intake		million €		27,354		20,529		14,084		7,642
Sales		million €		25,469		21,381		13,199		9,859
EBITDA		million €		2,280		906		1,197		142
Earnings before taxes (EBT)		million €		1,388		(215)		742		(455)
Employees (March 31)				195,828		192,521		195,828		192,521

The global recession left a deep mark on ThyssenKrupp's business. Sales and particularly orders were weaker in the 1st half of 2008/2009. The 2nd fiscal quarter especially was marked by heavy falls.

Following a drop of 3% in the 1st quarter 2008/2009, order intake decreased by a further 46% in the 2nd quarter. In total, ThyssenKrupp received new orders worth €20.5 billion in the first half 2008/2009, 25% less than in the corresponding prior-year period. With the exception of Technologies, all segments recorded lower orders. At Steel, Stainless and Services, weaker demand for materials and falling prices resulted in a significant decrease. Orders at Elevator were only slightly lower year-on-year; elevator business in Southern Europe and the Middle East was positive, as was global demand for escalators and passenger boarding bridges. Technologies reported higher orders after receiving major contracts in the naval shipbuilding area.

Group sales fell by 6% in the 1st quarter and 25% in the 2nd quarter 2008/2009. Overall in the 1st half 2008/2009, sales decreased by 16% to €21.4 billion. Stainless in particular, but Steel and Services as well, recorded a significant drop in business. At Stainless, this was mainly due to a sharp fall in shipments and lower stainless steel prices. Sales volumes at Steel also decreased but the high proportion of long-term contracts had a stabilizing effect. At Services, falling prices and lower demand for materials had a negative effect. Technologies benefited from an improved performance in plant engineering but sales overall were slightly down from the prior year. Elevator continued its positive performance and significantly increased its sales.

Earnings down

ThyssenKrupp's earnings deteriorated significantly. Following a profit of €240 million in the 1st quarter, a loss of €455 million was recorded in the 2nd quarter. Earnings before taxes (EBT) in the 1st half 2008/2009 therefore decreased year-on-year by €1,603 million to €(215) million. This includes pre-operating costs for the new plants in Brazil and the USA of €109 million, additions to restructuring provisions of €39 million and impairment of property, plant and equipment at Stainless and Technologies of €76 million. In addition there were inventory writedowns of €239 million, mainly relating to the Stainless and Services segments.

The heavy loss in the Stainless segment was due to a collapse in demand and falling stainless steel prices; the decline in raw material prices also necessitated significant inventory writedowns. Writedowns and massive earnings falls in the materials business also resulted in negative earnings at Services. At Steel, profits decreased due to declining shipments and pre-operating costs for the new plants in Brazil and the USA. Technologies also reported a fall in profits, due to substantial charges at the shipyards and declining business in the automotive and construction equipment sectors. Elevator made a good earnings contribution; all business units recorded higher profits.

Net sales in the reporting period were €4,088 million or 16% lower than in the corresponding prior-year period. The cost of sales decreased by €2,411 million or 11% and therefore to a lesser extent than sales. A major reason for this was a significant year-on-year increase in inventory writedowns which partly offset the sales-related decline in other costs of sales. Overall, gross profit decreased by €1,677 million, combined with a decline in gross margin from 17% to 13%.

The decrease in selling expenses by €57 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. The increase in other operating income by €87 million was connected with the cancellation of qualifying foreign currency hedges for planned raw material purchases, since the volume of raw material purchases was lower due to the economic recession. €36 million higher provisions for restructuring in the personnel area, particularly in the Steel and Technologies segments, and €17 million lower losses on the disposal of non-current assets were major factors in the €11 million increase in other operating expenses. The €48 million decrease in income from companies accounted for using the equity method was due to the overall drop in earnings at the companies concerned compared with the corresponding prior-year period. The €137 million deterioration in net interest was connected with the higher net financial debt compared with the prior year. The €166 million improvement in other financial income was primarily due to a €78 million improvement in exchange gains on financial transactions and a €70 million year-on-year increase in capitalized interest cost, mainly relating to construction progress on the steel mill in Brazil.

After taking into account taxes on income, the net loss for the period was €199 million; in the corresponding prior-year period a net income of €937 million was achieved. Including minority interest in losses of €38 million, earnings per share for the period deteriorated to €(0.35).

Net financial debt and capital expenditures

On March 31, 2009, net financial debt stood at €3,687 million. The increase of €2,103 million compared with September 30, 2008 was influenced to a large degree by the global recession and the associated burdens on day-to-day operations, capital spending for our major projects and the dividend payment.

ThyssenKrupp invested a total of €2,196 million in the 1st half 2008/2009, 12% more than in the first six months of the prior year. €1,994 million was spent on property, plant and equipment and intangible assets, and €202 million on the acquisition of businesses, shareholdings and other financial assets.

Construction of new plants in Brazil and the USA

The Steel segment continues to work on its transatlantic growth strategy, with the three pillars of Brazil, NAFTA and Europe. The fundamental reasons for these strategic investments have not changed in light of the current economic crisis. Of central importance is the 5 million ton capacity steel mill currently under construction in Santa Cruz in the state of Rio de Janeiro/Brazil which will produce low-cost steel to the highest quality standards.

In November 2008, the Supervisory Board approved an increase in the investment budget for the project to around €4.5 billion. The value creation of the project in combination with the construction project in Alabama and the expansion program in Europe is still assured even after the budget increase. As at March 31, 2009, the value of contracts concluded stood at €4 billion.

Some 22,000 workers are currently employed on the building site. Structural steel erection and mechanical and electrical installation work is proceeding in parallel in all areas. Due to the current situation on the steel market, it is being considered whether to delay the start-up of the plant. As well as adapting to the current world economic situation, this extension to the construction period would reduce the cost of acceleration measures.

Recruitment of personnel for the future production phase is at an advanced stage; at the end of March 2009, 1,355 employees were working for ThyssenKrupp CSA in Brazil.

In its home European market, Steel intends to strengthen its position by expanding and modernizing its processing and coating facilities in Germany. Around 40% of the slabsproduced in Brazil in the future are to be shipped to Germany to be processed into high-quality finished products for demanding customers. The investment projects to facilitate slab handling at Duisburg-Walsum port and increase capacity at four hot-dip coating lines have been completed. A number of modernization measures have been implemented at the hot strip mills in Bochum and Duisburg-Beeckerwerth. Further investments in the hot-rolled area have been scheduled.

Construction of the new joint steelmaking and processing plant of the Steel and Stainless segments began near Mobile in Alabama/USA in fall 2007. Work is being continued as scheduled for the production lines of the Steel segment, whereas the construction period for the Stainless facilities has been extended. Steel will operate hot- and cold-rolling as well as coating lines at the plant in Mobile and will process slabsproduced in Brazil into high-quality flat products. Total hot-rolling capacity will be over 5 million tons a year. Work on the project is running largely to schedule. Due to the current global economic situation it is being considered whether to delay start-up of the Alabama project, currently scheduled for spring 2010.

The Supervisory Board approved an increase in the investment budget for Steel to USD3.25 billion in November 2008. The value creation of the project remains assured. As at March 31, 2009, contracts worth more than USD2.8 billion have been concluded.

Around 3,000 workers are currently employed on the site. Concreting work for buildings and machine foundations is continuing for the hot strip mill, cold rolling mill and hot-dip coating lines. Structural steel erection for the shipping buildings for cold-rolled and hot-dip galvanized products has been completed or is at an advanced stage; roofing work has been begun.

Sales and marketing experts at Steel are systematically continuing their work on a sales strategy for the North American market, also taking into account the risks associated with the general economic situation. We have established numerous positive contacts with potential key customers; these are being intensified with the involvement of technical experts. Target groups include the auto industry, electrical goods manufacturers, steel service centers, appliance manufacturers and the tube industry, particularly for the energy sector.

Our customers in the USA for high-quality stainless steel flat products are currently mainly served from our cold rolling mill in Mexico. Due to limited capacities, high logistics costs and dumping duties on US imports from Mexico for many of these products, a decision was made in 2007 to build a modern integrated stainless mill alongside the carbon steel plant in Mobile, Alabama. In November 2008, the Supervisory Board also approved an increase in the investment budget for the stainless plant to USD1.4 billion.

Work on building the plant was ahead of schedule. However, Stainless is now to extend the time period for its investments against the background of the current demand weakness on the North American stainless steel market. The start-up of the cold rolling mill will be postponed by roughly a year. In particular, the start-up of the three mill stands and the ramp-up of the cold rolling mill to full capacity will be delayed. Cold-rolled production is now scheduled to begin in the 4th quarter 2010. As a result, it will also be necessary to delay the start of the ramp-up of the steelmaking shop until early 2012. Until then, the starting material for the cold rolling mill in Mexico and the new cold rolling mill in Alabama will continue to be supplied from Europe. The scale of the overall project remains unchanged, based on the belief that stainless demand on the North American market will return to growth in the course of 2010.

Due to the planned delay in the start-up of the steelmaking shop, the project team at ThyssenKrupp Stainless USA is currently renegotiating with suppliers to delay delivery of equipment and revising its planning. The construction of the buildings for the cold rolling mill will be continued and completed. After completion, these buildings will be used to store already supplied machinery and equipment. Actual installation of the equipment will begin later and will be stretched out.

In the shared-infrastructure area, the training center currently under construction will be completed on schedule in September this year. Construction of the marine terminal in Mobile by the Alabama State Port Authority is also making good progress.