Group review

ThyssenKrupp – Business down due to recession

The overall economic environment deteriorated further in the reporting period. The global recession is affecting our company in all areas. The worldwide slump in demand – coupled with in part hefty price falls – was particularly dramatic in our carbon and stainless steel and international materials services activities. The capital goods business was also increasingly sucked into the global downturn. Our plant technology, elevator and escalator businesses remained relatively robust. Against this background, sales and earnings in the first 9 months of 2008/2009 slipped significantly. The Group's sales fell by 23%.

From a profit in the prior year the Group's earnings before taxes decreased to a loss of €987 million. This negative result was significantly influenced by falling material prices, which resulted in inventory writedowns of €204 million and lower revenues. Earnings were also significantly impacted by nonrecurring restructuring costs, impairment charges and project costs totaling €540 million. To manage the crisis we have launched an extensive package of cost reduction measures in the current fiscal year and freed up significant funds as part of a net working capital initiative. In addition we will be restructuring the Group to sustainably reduce administrative costs and make ThyssenKrupp leaner and more efficient in the future.

The highlights for the first 9 months 2008/2009:

• Order intake decreased by 31% to €28.5 billion compared with the first 9 months of the previous fiscal year.
• Sales fell by 23% to €30.7 billion.
• EBITDA came to €726 million, compared with €3,646 million in the prior year.
• Earnings before taxes declined from €2,297 million in the prior year to €(987) million.
• Earnings per share dropped from €3.06 to €(1.73).
• Net financial debt at June 30, 2009 was €3,122 million, an increase of €1,538 million compared with September 30, 2008, when we reported net financial debt of €1,584 million. On June 30, 2008, net financial debt stood at €2,127 million. Compared with March 31, 2009 net financial debt decreased by €565 million.

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 sustained efforts to enhance efficiency. In addition, targeted steps are being taken to significantly reduce net working capital. We are also carrying out measures to reduce or postpone our investment program and implementing portfolio optimizations.

ThyssenKrupp expects to end the current fiscal year with a loss before taxes and major nonrecurring items – restructuring costs, impairment charges and project costs – in the upper three-digit million euro range.

Earnings before taxes will be considerably impacted by restructuring expense for our cost reduction programs and the reorganization. However, these measures will play a decisive role in significantly strengthening the future earning power of the Group. Impairment charges and project costs for the new steel plants will also have a major impact on earnings before taxes.

World economy: Recession continuing

The global economic downturn continued in the first half of 2009. Important economic indicators such as indexes of new orders and industrial production were down significantly from the prior year. International trade in goods and services experienced large falls. The extensive government measures to stabilize the finance sector and stimulate demand have had only a limited effect so far.

In the USA, gross domestic product in the 1st quarter 2009 shrank by 1.6% quarter-on-quarter after a similar drop in the final quarter of 2008. The downturn slowed perceptibly in the 2nd quarter with a 0.3% quarter-on-quarter drop; consumer spending and construction and equipment investment had a moderating effect. In Japan, economic output in the 1st half of 2009 fell even more sharply than in the USA; in the 1st quarter alone, gross domestic product declined quarter-on-quarter by 4.0%. A key factor in the slump was the drastic fall in exports.

In the euro zone, too, the slide continued. Economic output in the 1st quarter was down 2.5% from the prior quarter, although the decline in the 2nd quarter is expected to be slightly smaller. The downturn is mainly due to falling exports and lower business spending. The German economy in particular recorded a massive slump as a result of its strong dependence on global demand. Gross domestic product in the 1st quarter 2009 was down 3.8% from the prior quarter, the largest fall since statistical records began in 1970. Foreign trade and capital spending delivered a negative growth contribution, while private and public consumption increased slightly. According to estimates, the downturn continued in the 2nd quarter 2009 but at a slower pace.

The global recession also impacted growth in the emerging and developing economies. The slump in world trade made itself felt particularly in the Asian emerging countries. The previous high pace of growth in China slowed. Without the USD580 billion government stimulus program, the slowdown would have been even more severe. In Brazil, too, declining demand on important sales markets had a negative impact. In Russia, gross domestic product has decreased significantly since the start of the year, due among other things to lower demand for raw materials and falling energy prices. The economic situation in the rest of Central and Eastern Europe also deteriorated in the 1st half of 2009.

The global recession had a severe impact in all sectors important to ThyssenKrupp. The picture in the individual sectors was as follows:

• World steel demand fell dramatically – in most regions to levels that are cancelling out the entire growth of recent years. In the first six months of this year world crude steel output was 21% lower than in the same period a year earlier. The EU, the NAFTA region and Japan suffered falls of more than 40%. Against this negative trend, China and India again increased their output slightly. Steel industry capacity utilization in most other regions dropped considerably, resulting in increased temporary shutdowns and closures. Since June however there have been signs of an end to this slide, with some producers ramping up their production again or announcing plans to do so in response to gradually rising demand. Orders for rolled steel received by the German steel industry in June neared the 3 million ton mark for the first time in eleven months. The average for the first five months of 2009 was below 2 million tons. A sustainable turnaround cannot yet be read into this as the increased demand was mainly due to stock-building and in some cases speculative purchasing. However, the worldwide slump in steel spot prices has been halted.
  There are also signs of volumes and prices on the European carbon steel flat-rolled market bottoming at the middle of the year. However, EU shipments by European steel producers in the first five months were still on average around 50% down from the prior year, due to extremely weak activity in all main customer industries and the accompanying reduction in inventory levels. But even though inventories have decreased in recent months, they are still generally regarded as too high measured against low consumption levels. Orders received by European flat-rolled producers have been showing a slight upward trend since April but are still significantly lower than the corresponding prior-year volumes. Extremely weak demand and low prices on the European market have slowed imports from third countries; imports of carbon steel flat products in the first five months of 2009 were substantially lower than a year earlier.
• World demand for stainless steel flat products fell sharply but there has been a marked recovery recently due to restocking. Inventories at distributors and service centers in Europe were at high levels at the beginning of 2009 but since then have been progressively drawn down. Towards the end of the 2nd quarter 2009 many distributors increased their purchases in view of low inventory levels but also in response to rising nickel prices and the expectation of higher alloy surcharges. In North America, destocking by distributors and service centers has slowed as stocks approach minimum levels. New orders and shipments at local producers have increased slightly in recent weeks, also to fill the gap left by lower imports. In addition, purchases have been brought forward due to rising alloy surcharges. In Asia, inventories are still at a very high level, although purchases by distributors have increased due to the rising nickel price. In China, demand has increased thanks in part to major government infrastructure projects. Reviving demand in Europe, the USA and Asia has pushed production up in recent weeks, resulting in better capacity utilization.
  The decline in stainless steel prices came to a halt in Europe and North America. Base prices have been raised again in recent months, albeit at a low level. The rising nickel price pushed up alloy surcharges. In Asia, stainless steel prices recovered noticeably and are now almost at European levels. This in turn reduced the incentive for Asian producers to export. Their exports to Europe were very low.
  The order situation for nickel alloys was again characterized by project postponements and short-term purchasing at inadequate levels. Orders for titanium decreased considerably, mainly due to delays in the production of the new aircraft generations. Continuing high inventory levels and low consumption are additionally exacerbating the demand weakness.
• The global economic crisis has also had a severe impact on the auto industry. Demand for new vehicles in the industrialized countries slumped dramatically in the 1st half of 2009; two large US manufacturers were forced to file for bankruptcy. In the USA, 1st-half sales of cars and light trucks were down 35% from the prior year. In the European Union, new car registrations in the first six months of 2009 were 11% down year-on-year. In some EU countries demand was boosted by government measures.
  In Germany, for example, the scrappage scheme pushed up domestic sales significantly. In the period January to June 2009 new car registrations increased by 26% from the prior year. However, at the same time exports slumped by 35%. As a result, car production fell by 24%. The truck sector showed a particularly sharp decline; production decreased by 61%. New car sales also dropped significantly in the previously fast-growing countries of Central and Eastern Europe. However, China continued to grow thanks to considerable new demand and government support measures.
• The shipping markets are characterized by growing overcapacity as a result of the global recession and the accompanying slump in world trade. Orders for new ships have come to an almost complete standstill. Full order books 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 did not receive any new orders in the first months of 2009. In addition, several orders were cancelled, with the result that orders in hand dropped significantly compared with the end of 2008.
• The engineering sector is particularly affected by the fact that many businesses have reviewed their investment decisions in light of the global recession and either cancelled or postponed numerous modernization or capacity expansion projects. In the major industrialized countries, machinery orders fell significantly and output decreased. In China, sector growth slowed appreciably. In Germany, orders declined at an unprecedented pace after years of high growth. In the first six months of 2009 orders were down 46% from the prior-year period. As output decreased, capacity utilization fell drastically. Order intake in the German plant engineering sector in the 1st half of 2009 was also well down from a year earlier.
• Construction activity slowed appreciably in almost all countries in the 1st half 2009. Growth rates in China and India were lower year-on-year. In the USA, the downward trend on the real estate market continued. The construction sector in most of Central and Eastern Europe also stagnated or shrank. The German construction industry suffered a drop in orders from the prior year, with commercial construction particularly affected. The stimulus packages have generated only little impetus so far.

Order intake and sales down

ThyssenKrupp in figures

				9 months ended June 30, 2008		9 months ended June 30, 2009		3rd quarter ended June 30, 2008		3rd quarter ended June 30, 2009
Order intake		million €		41,535		28,455		14,181		7,926
Sales		million €		39,650		30,680		14,181		9,299
EBITDA		million €		3,646		726		1,366		(180)
Earnings before taxes (EBT)		million €		2,297		(987)		909		(772)
Employees (June 30)				198,033		188,501		198,033		188,501

The global demand slump significantly impacted ThyssenKrupp's business. Sales and above all orders dropped substantially. There were particularly sharp falls in the 2nd and 3rd fiscal quarters.

ThyssenKrupp's order intake in the first 9 months of 2008/2009 reached €28.5 billion, 31% down from the corresponding prior-year period. 3rd-quarter orders were slightly higher than the prior quarter but 44% lower year-on-year. All segments recorded lower new orders in the first three quarters of the current fiscal year. In addition to sharply falling material prices, business at Steel, Stainless and Services was particularly impacted by lower volumes. At Technologies, customer uncertainty over investment decisions had a negative impact. The drop in orders at Elevator was due to lower new equipment business.

The Group's sales decreased by 23% to €30.7 billion in the first 9 months of 2008/2009. 3rd-quarter sales were down 6% from the prior quarter and 34% from the prior year. Sales in the first 9 months of the reporting year were noticeably weaker in all segments with the exception of Elevator. Sales at Steel were impacted by a significant fall in shipments, although average steel selling prices had a stabilizing effect due to the high proportion of long-term contracts. Price and demand falls were the reasons for 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.

Significant decline in earnings

In the first 9 months of 2008/2009 ThyssenKrupp's earnings before taxes decreased year-on-year by €3,284 million to €(987) million. Earnings deteriorated progressively in the course of the year. A profit of €240 million in the 1st quarter was followed by a loss of €455 million in the 2nd quarter and a loss of €772 million in the 3rd. The earnings figures for the first 9 months of 2008/2009 include provisions for restructuring costs – including personnel adjustments – of €250 million, impairment of non-current assets of €159 million at Steel, Stainless and Technologies, and project costs of €131 million for the new plants in Brazil and the USA. Inventory writedowns accounted for €204 million.

The main reason for the earnings decline in the Steel segment was the slump in shipments; in addition, significant restructuring provisions were accrued. The large loss at Stainless was caused by a dramatic demand slump combined with a significant drop in base prices. Necessary impairment charges and inventory writedowns also weighed on earnings. Writedowns and massive earnings falls in the materials business also resulted in negative earnings at Services. At Technologies, higher profits in plant engineering were unable to offset lower earnings in the automotive and construction equipment businesses and heavy losses in civil shipbuilding. Elevator remained successful, achieving profits in all areas.

Net sales in the first 9 months of 2008/2009 were €8,970 million or 23% lower than in the corresponding prior-year period. The cost of sales decreased by €5,544 million or 17% and therefore to a lesser extent than sales. The main reasons for this were the significantly higher inventory writedowns this year as well as impairment charges for intangible assets and property, plant and equipment, which partly offset the sales-related decline in other costs of sales. Overall, gross profit decreased by €3,426 million, combined with a decline in gross margin from 17% to 11%.

The decrease in selling expenses by €180 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 €63 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 recession. The €41 million decrease in other operating expenses was mainly due to €34 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 €91 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 corresponding prior-year period. The €203 million deterioration in net interest was connected with the higher net financial debt. The €195 million improvement in net other financial income/(expense) was primarily due to a €112 million improvement in net exchange rate gains/(losses) on financial transactions and a €98 million year-on-year increase in capitalized interest cost, mainly relating to construction progress on the steel mill in Brazil.

The posting of tax income of €158 million for the reporting period compared with tax expense of €747 million in the comparative prior-year period was due in full to the loss situation. As a result of the losses, current income taxes decreased year-on-year by €430 million to €227 million. To the extent that losses will reduce tax payments in the future, deferred tax assets were recognized. This resulted in deferred tax income of €385 million in the reporting period compared with deferred tax expense of €90 million a year earlier. After taking into account taxes on income, the net loss for the period was €829 million; in the corresponding prior-year period a net income of €1,550 million was achieved.

Including minority interest in losses of €29 million, earnings per share for the period deteriorated to €(1.73).

Net financial debt and capital expenditures

On June 30, 2009, net financial debt stood at €3,122 million. The increase of €1,538 million from 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. Compared with March 31, 2009 net financial debt was reduced by €565 million.

ThyssenKrupp invested a total of €3,094 million in the first 9 months 2008/2009, 5% more than in the same period of the prior year. €2,875 million was spent on property, plant and equipment and intangible assets, and €219 million on the acquisition of businesses, shareholdings and other financial assets.

Current issuer ratings

The rating agencies Standard & Poor's, Moody's and Fitch lowered their ratings on ThyssenKrupp in the 3rd quarter. However, all three ratings remain investment-grade. The creditworthiness of ThyssenKrupp is currently assessed by the rating agencies as follows:

 

		Long-term rating		Short-term rating		Outlook
Standard & Poor’s		BBB-		A-3		watch negative
Moody’s		Baa3		Prime-3		negative
Fitch		BBB-		F3		negative

Construction of new plants in Brazil and the USA

The implementation of the strategic investments of the Steel and Stainless segments is making further progress. Of central importance for Steel is the steel mill complex under construction at Santa Cruz in the state of Rio de Janeiro/Brazil with an annual capacity of 5 million metric tons of crude steel. As at June 30, 2009 the value of contracts concluded stood at €4.3 billion.

On July 22, 2009 the Brazilian iron ore producer Vale S.A. and ThyssenKrupp Steel AG signed a Memorandum of Understanding under which Vale will increase its stake in ThyssenKrupp CSA Siderúrgica do Atlântico Ltda. from around 10% currently to 26.87% through a capital infusion of €965 million. This decision is subject among other things to approval by the boards of Vale and ThyssenKrupp.

Construction work on the site in Santa Cruz is in full swing. Structural steel erection and mechanical and electrical installation are proceeding in parallel in all areas. The port terminal, materials handling facilities and sinter plant are almost complete. The power plant and blast furnaces will be production-ready at the end of 2009. The same applies to the ancillary facilities such as power distribution and water treatment and to other infrastructure facilities. Due to quality problems, reworking is necessary on the structural steel work in some areas. In view of the current situation on the steel market, we are not taking any acceleration measures; production is currently expected to start in the 1st half of 2010. At the end of June 2009, 1,397 employees were working for ThyssenKrupp CSA in Brazil and a total of 19,000 people were working on the construction site.

To be able to process a large part of the slabs made in Brazil into finished products for the European market, investments have also been carried out at our German sites. A series of modernization measures to improve performance capabilities have now been completed at the hot-rolled plants in Duisburg-Beeckerwerth and Bochum and on four hot-dip coating lines.

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 Mobile plant and will process slabs produced 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, so start-up in spring 2010 remains possible. As at June 30, 2009 the value of contracts concluded totaled USD3.0 billion.

Around 3,500 workers are currently employed on the site. Concreting work for buildings and machine foundations is largely complete for the hot strip mill, cold rolling mill and hot-dip coating lines. Structural steel erection and electrical work for the production equipment is currently underway. The shipping buildings for cold-rolled and hot-dip galvanized products, which are needed for the intermediate storage of machine parts, are nearing completion.

Market analyses into prices, demand, imports and customer requirements in the NAFTA region are being systematically continued. Possible delivery volumes by product and customer for the ramp-up phase and subsequent production operation have been determined. The general economic situation is also being analyzed on an ongoing basis for potential risks. Customer visits are being continued in all target industries, with support from technical advisory teams.

The construction period for the stainless flat products plant in Mobile, Alabama, has been extended. At the beginning of the year it was decided to postpone the start-up of production by at least a year in light of the poor state of the stainless market. The business plan and ramp-up schedule are currently being reviewed. The Supervisory Board will decide on the further course of action in its meeting on September 04, 2009.