Subsequent events, opportunities and outlook

Subsequent events

Subsequent events between the end of the 1st half reporting period (March 31, 2009) and the date of authorization for issue (May 12, 2009) are presented in Note 13 to the interim financial statements.

Recession in the global economy continues initially in 2009

The full impact of the global economic crisis is reflected in the growth rates for 2009. This year the global economy will experience negative growth. In particular the industrialized countries will see marked negative growth for the first time in the post-war period. Growth in the emerging economies is expected to be at the lowest level since the early 1990s. Global trade will contract in 2009 and could record the sharpest downturn for more than 30 years.

The US economy will shrink significantly in 2009 as a result of a severe decline in capital spending and extremely weak private consumption. The new US government is significantly increasing the budget deficit to make up for the absence of private demand. Japan's economy is expected to shrink even more than that of the USA due to the slump in exports.

Falling exports will also slow growth in the emerging markets. China will fail to achieve the high growth rates of previous years in 2009, while some other Asian countries are anticipating a substantial fall in GDP. Growth will also slow significantly in Latin America and Central and Eastern Europe.

The short-term outlook for the euro zone remains extremely gloomy. Due to its high dependency on exports, the German economy will be disproportionately affected by the negative performance of its main trading partners. A sharp contraction in GDP is expected.

There is hope of some stabilization in the global economy towards the end of 2009. This is based mainly on the economic stimulus packages planned or already adopted by governments worldwide, but also on falling raw material and energy prices, lower inflation and the low interest rate policy being pursued by all the main central banks. However, a self-sustaining recovery is not expected in the coming year.

We anticipate the following developments on the markets of importance for ThyssenKrupp:

There are no signs yet of any recovery on the global steel market. According to the latest Worldsteel forecast, global consumption of rolled steel will shrink by around 15% in 2009. This would correspond to global crude steel production of 1.1 - 1.2 billion tons – the output level of 2005. In the Nafta region, the EU, the CIS and Japan a disproportionate fall in demand is expected. However, the other countries of Asia, the Middle East and Latin America are also likely to report significant declines in 2009. In particular in Europe, where real steel consumption will drop sharply, demand will be further dampened by high inventories. Based on the assumption that the crisis will bottom out in the course of 2009, we expect no more than a slight recovery next year, with volumes in most regions not yet returning to the level of 2008. In Europe any recovery in volumes will mainly be due to stock building because as things stand at present steel consumption is not expected to grow significantly.
Against the background of the global recession, demand for stainless flat products and highperformance materials, which plummeted further in the 1st half-year, is not expected to pick up significantly in the near future. Raw material prices appear to have stabilized at a low level, which could favor a slight demand recovery.
On the international auto market, the decline in demand and production of passenger cars and commercial vehicles will continue. In many countries various sales-boosting measures are being introduced or prepared to support the markets, but global production is expected to fall to 60 million units in 2009. In the USA output could slump by more than 20%. The German auto sector, which exports more than two thirds of its production of mostly higher-priced cars, has succeeded in slowing the decline slightly with various measures, but output is nevertheless expected to drop by almost 18%.
The mechanical engineering sector profited for a long time from a high order backlog built up in previous years. However, the global economic crisis and the resultant weak level of investment worldwide have now caused a dramatic slide in order intake. This will lead to a decline in mechanical engineering output in all the major industrialized countries in 2009. In the USA and Germany the fall in output is expected to reach double-digit rates. In China, slower investment activity will be reflected in a massive drop in growth rates.
The construction industry will expand in only a few countries of Asia and Central and Eastern Europe in 2009, though the pace of growth will be distinctly slower. In the USA the recession in the private housing market will continue and other areas of the construction market are also showing weaknesses. The German construction industry is expected to shrink in 2009. A decline is likely above all in commercial construction, while impetus could be generated by public-sector projects.

Outlook

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.

For the 2nd half of the fiscal year we expect weak consumption and continued destocking along the entire industrial value chain to continue to weigh on demand for our materials and materials services:

At Steel we expect further price pressure, inadequate volumes and capacity underutilization. Due to the valuation of inventories according to the average cost method, lower raw material costs will only bring any significant relief at the beginning of the new fiscal year. This may give rise to the need for inventory valuation adjustments. From the current perspective, a noticeable recovery in demand cannot be expected until the start of the fiscal year 2009/2010.
With volumes remaining inadequate, we anticipate a further loss at Stainless in the 2nd half, though this should be smaller than in the 1st half of the fiscal year.
At Services a reduction in the volume and price pressure, which will allow our margins to recover, is not expected until the end of the fiscal year.

We expect a mixed earnings picture for our various capital goods activities in the 2nd fiscal half:

In the Technologies segment we anticipate continued underutilization of capacities in automotive and construction machinery components and civil shipbuilding. The resultant impact on earnings before nonrecurring items should be offset by business in plant construction, slewing bearings for the energy sector, and submarine and frigate construction.
Earnings in the Elevator segment are expected to remain strong.

Looking ahead to fiscal 2009/2010, in view of the current forecasts for the global economy we expect a moderate stabilization in sales; effects from the restructuring and cost-reduction programs should improve earnings.

Initial results of Group program ThyssenKrupp PLuS

ThyssenKrupp launched the Groupwide program ThyssenKrupp PLuS in the 1st reporting quarter to respond swiftly and firmly to the global recession and counter its effects with an extensive package of measures. The aim of the program is to achieve positive earnings and liquidity effects before the end of the current fiscal year, using all available levers.

In the current fiscal year earnings-enhancing measures totaling well over €1 billion have been initiated. By reducing costs in production and administration, optimizing procurement and sales processes and, among other things, critically reviewing contracts with external service providers, we achieved the savings target set for the 1st fiscal half. The systematic cutback in temporary employees and introduction of short-time working also helped reduce personnel expense.

A further measure to improve our cash position is the systematic reduction of net working capital, for example by significantly reducing inventories and optimizing receivables management in all segments of the Group. Alongside short-term effects, the focus is on sustainable performance improvements aimed at making us even more competitive in the future.

In addition, we are analyzing all our capital investment projects for possible reductions or postponements. The aim is to balance the needs of the current economic situation on the one hand and our long-term strategic goals on the other, both in our major projects and in other investments.

Strategic reorganization of the Group

ThyssenKrupp is adapting to the changed economic environment and positioning itself more strongly as an integrated materials and technology Group. To this end the Supervisory Board resolved in an extraordinary meeting on March 27, 2009 to realign the Group and in this context to combine the present five segments into two divisions: the operations of Steel, Stainless and Services into "Materials", and the business activities of Technologies and Elevator into "Technologies". The reorganization of the Group, which is to be implemented by the start of the new fiscal year on October 01, 2009, is expected to yield additional sustainable cost savings of up to €500 million per year. The Supervisory Board instructed the Executive Board to draw up an overall plan before the Supervisory Board meeting on May 13 and to present this plan to the Supervisory Board for resolution.

Against the background of the further deterioration in the general economic situation, at the end of April the Executive Board of ThyssenKrupp AG resolved to further develop the plan presented:

In the future ThyssenKrupp is to be efficiently managed and steered by a strong corporate center. The eight new business areas Steel Europe, Steel Americas, Stainless Global, Materials Services, Elevator Technology, Plant Technology, Components Technology and Marine Systems are to be tied directly to ThyssenKrupp AG in the future. The divisions as interim holding companies will no longer be needed.
This new structure will bring the Group Executive Board closer to business operations. It will create greater transparency both internally and externally and permit faster and better decision-making. The current segment holding companies will be absorbed into the new structure. This consolidation will significantly reduce administrative expense and capacities.
"Materials" and "Technologies" describe the strategic focus of the business areas and mark out the Group's areas of competency.

Details of the further developed strategic reorganization plan will be presented to the Supervisory Board for discussion and resolution on May 13, 2009. Following the Supervisory Board meeting the public will be informed of the outcome.

Personnel changes

The resolved strategic reorganization involves personnel changes in the administrative areas and also in the Executive Board of ThyssenKrupp AG:

Jürgen H. Fechter and Dr. Karl-Ulrich Köhler stood down from the Executive Board by mutual agreement at March 31, 2009; they continue to be available to the Group in an advisory capacity.
No reappointment will be made for the position held by Dr. Wolfram Mörsdorf, whose term of office ended on April 14, 2009.
Dr. Ulrich Middelmann, Vice Chairman of the Executive Board, is concentrating from April 01, 2009 until his departure at the close of the Annual General Meeting on January 21, 2010 on the implementation of the new Group structure and on the corporate program ThyssenKrupp PLuS.
Dr. Alan Hippe was appointed Chief Financial Officer of ThyssenKrupp AG effective April 01, 2009.
Edwin Eichler is in charge of the Steel, Stainless and Services segments, in future "Materials".
Dr. Olaf Berlien leads the Technologies and Elevator segments, in future "Technologies".