Group review

ThyssenKrupp – back in profit in the 1st quarter 2009/2010

The overall economic environment stabilized somewhat in the final quarter of 2009 but the effects of the deep economic and financial crisis still predominated. Order intake and sales were well down year-on- year. However, quarter-on-quarter, orders showed a noticeable improvement.

The earnings situation was better than expected. After three quarters of losses ThyssenKrupp achieved earnings before taxes (EBT) of €313 million in the 1st quarter 2009/2010 – up €73 million from the prior-year figure of €240 million. Adjusted EBT at €237 million was only slightly down from the prior-year figure of €249 million.

As from the beginning of fiscal year 2009/2010, certain defined nonrecurring items are excluded from EBT and EBIT. These include gains and losses on disposals, restructuring costs, impairment charges, other non-operating expense, and other non-operating income. These items are only excluded if the event is of material importance to the consolidated financial statements. The start-up losses in the Steel Americas business area that were excluded in the prior year are no longer classified as nonrecurring items as they are no longer of a project nature due to the commissioning of the steel making and processing plants in the current fiscal year. The prior-year comparative has been adjusted accordingly.

The majority of the business areas generated a profit in the 1st quarter 2009/2010. We believe this shows we are on track to achieving our earnings goals – also thanks to the rigorous implementation of our cost-reduction and restructuring programs.

The highlights for the 1st quarter 2009/2010:

• Order intake dropped year-on-year by 28% to €9.3 billion.
• Sales fell by 19% to €9.4 billion.
• EBITDA came to €808 million, compared with €764 million in the prior year.
• Earnings before taxes increased year-on-year from €240 million to €313 million.
• Adjusted earnings before taxes at €237 million almost reached the prior-year figure of €249 million.
• Earnings per share came to €0.35, compared with €0.36 in the prior year.
• Net financial debt at December 31, 2009 was €2,130 million, an increase of €71 million compared with September 30, 2009, when we reported net financial debt of €2,059 million. On December 31, 2008 net financial debt stood at €3,514 million.

Economic slide halted

Following the deepest recession of the post-war period the global economic environment stabilized in the latter part of 2009. World trade, in decline at the beginning of the year, increased again. Leading indicators such as the Ifo expectations index and the purchasing manager index showed some marked signs of recovery in the second half of 2009. According to current assessments world GDP shrank overall by 1.4% in 2009.

The economy in the euro zone grew again slightly in the second half of 2009, thanks to expansive government spending policies and higher exports. Overall, however, economic output in 2009 was around 4% lower than a year earlier. The decline in Germany was even larger, mainly due to the deep slump at the beginning of the year. The German economy grew slightly in the further course of the year but the recovery in investment and exports was very tentative.

The US economy began to grow again in the 3rd and 4th quarters of 2009, lifted by higher private and public spending due to the government stimulus program. Despite the increase in activity in the 2nd half of the year, US economic output in 2009 was 2.5% lower than a year earlier. The slump in economic output in Japan was even more pronounced, but there too the worst of the recession seems to be over.

The Asian emerging economies came through the slump in world trade relatively well, profiting from continuing dynamic growth in China, whose domestic economy was lifted by massive stimulus programs. India, too, remained on growth track thanks to strong domestic demand. The Brazilian economy remained relatively stable. Russia's economic output declined sharply but improved slightly towards the end of the year.

The picture in the sectors of importance to ThyssenKrupp was as follows:

• The international steel markets strengthened again from fall 2009 as a result of stockbuilding. World steel output in the final quarter of 2009 clearly exceeded the very low prior-year figure. Despite higher overall capacity utilization rates in the final months of last year, global steel production in the whole of 2009 was 8% lower year-on-year at around 1.2 billion metric tons. China – boosted by government stimulus programs – recorded a 14% increase to around 570 million metric tons, while output in the rest of the world declined by roughly 21%. The German steel industry suffered a 29% decrease to just under 33 million metric tons. Here too, however, capacity utilization was back to almost normal levels in the 4th quarter of 2009. Reflecting the firmer volumes, steel prices showed first signs of stabilization and recovery from late summer 2009.
  The European carbon steel flat-rolled market took a turn for the better from fall 2009. Orders received by steel suppliers settled at a higher level in the final weeks of 2009. However this was more a case of gap-filling than a sign of a stronger stockbuilding trend. End-user demand remained slow on the whole, with steel customers still purchasing very cautiously. Imports into the EU from third countries started trending upwards from September but without yet reaching worrying levels. Volumes and prices on the US market for carbon steel flat products also stabilized in the 4th quarter of 2009.
• World demand for stainless steel flat products fell year-on-year by an estimated 8% in 2009. The European producers recorded increased orders and deliveries in the spring due to restocking, but demand stagnated again from the summer. Imports, especially from Asia, increased again significantly in the 4th quarter of 2009. In North America, too, low stock levels at distributors and service centers led to an increase in demand from early summer but this came to an end in the final quarter of 2009. In China, distributors' stock levels were at an all-time high in October 2009 but subsequently declined significantly due to production cuts by Chinese producers.
  Base prices in Europe were raised from the spring but have been in decline again since the start of the 4th quarter of 2009. In addition, the lower nickel price led to a decrease in the alloy surcharge for austenitic materials. In North America, base prices rose in the summer months and were steady from the beginning of the reporting quarter. Prices in China almost reached European levels in early summer but slumped in the further course of the year, only stabilizing towards the end of the year.
  In the area of nickel and titanium alloys, demand was weak in all customer groups. Price levels worldwide remained depressed.
• The auto industry had to scale back its output significantly in 2009. According to current estimates, less than 60 million cars and trucks rolled off the production lines worldwide, 14% fewer than a year earlier. Only in China was there a substantial increase in production – with the help of government support programs. In the USA, 21% fewer cars and light trucks were sold, although there were increases again in the 4th quarter of 2009. In the European Union, new car registrations in 2009 were 1.3% lower year-on-year; however new car sales in the final quarter of 2009 were significantly higher than the weak prior-year figures. Both in the USA and in some EU countries, demand was stimulated by government programs last year.
  In Germany, the eco premium for scrapped cars lifted domestic car sales. Overall, new car registrations in 2009 were 23% higher year-on-year. However, at the same time exports fell by 17%, so car production dropped by 10%. With the ending of the rebate program, growth in new car registrations slowed considerably in the 4th quarter and was negative in December 2009. Truck production fell year-on-year by 52%.
  As a result of the global recession and the attendant slump in world trade, sea freight volumes decreased significantly. Due to the lower demand and to financing difficulties, Germany's shipyards received hardly any new orders in 2009. The number of order cancellations increased massively, leading to a sharp drop in orders in hand.
• The economic crisis resulted in significantly lower capital investment in 2009. As a result, machinery production fell drastically, particularly in the industrialized countries. In Germany it dropped by around a quarter. The large fall in orders only slowed in the final months of the year. Germany's plant engineering sector also recorded significantly lower orders in 2009. In contrast to the global trend, China increased its machinery output thanks to government stimulus programs.
• The construction sector suffered serious setbacks in most countries last year. While China and India remained on growth track, the USA in particular recorded major losses. Signs of stabilization on the US real estate market only became visible from the middle of the year. In Europe, construction output dropped above all in the UK and Ireland but also in Spain. The German construction sector recorded fewer orders, particularly in commercial building.

Order intake and sales remain depressed

The overall economic environment continued to weigh heavily on the performance of ThyssenKrupp in the 1st quarter of 2009/2010. Sales and above all orders decreased significantly year-on-year. However, the quarter-on-quarter trend shows signs of stabilization, with orders in particular improving in some areas.

Orders received by ThyssenKrupp in the 1st quarter 2009/2010 reached a value of €9.3 billion, 28% less than in the first three months of the prior fiscal year. While demand was lower in the elevator and escalator, plant technology and above all shipyard businesses, orders for carbon steel flat products increased significantly due to higher volumes. Compared with the prior quarter, when orders received totaled €7.5 billion, new orders increased by 24%.

The Group's sales in the 1st quarter 2009/2010 decreased year-on-year by 19% to €9.4 billion. There were falls in almost all business areas. In the flat-rolled carbon steel business, lower steel selling prices led to reduced sales, while at stainless steel the effects of higher shipment volumes outweighed the price decreases. Lower prices for materials also made themselves felt at Materials Services. Weaker demand for new elevators and escalators impacted business at Elevator Technology. Due to billing reasons, sales also decreased in the plant engineering business. Although demand for auto components was better than expected, sales at Components Technology were down from the prior year. At Marine Systems the poor order situation caused a sharp drop in business.

Earnings before taxes improved to €313 million

Earnings before taxes (EBT) in the 1st quarter 2009/2010 came to €313 million. ThyssenKrupp therefore exceeded the prior-year figure by €73 million and moved back into profit after three quarters of losses. The earnings figures include nonrecurring items of €76 million, mainly income from the sale of the Industrial Services units of the Materials Services business area. Excluding these, EBT in the reporting quarter was €237 million, just under 5% lower than the prior-year figure of €249 million.

Net sales in the 1st quarter 2009/2010 were €2,171 million or 19% lower than in the corresponding prior-year quarter. The cost of sales decreased by €1,857 million or 19% and therefore proportionately to sales. A major factor in this was a significant reduction in inventory writedowns, which reinforced the effect of the sales-related decline in other costs of sales. Gross profit decreased by €314 million or 18%, resulting in a slight increase in gross margin from 15.5% to 15.8%.

The decrease in selling expenses by €92 million was caused mainly by reduced personnel expense and lower expenses for sales-related freight and insurance charges. General and administrative expenses were €50 million lower than the corresponding prior-year figure, also as a result of the cost-reduction measures. The €93 million increase in income from the disposal of subsidiaries was due mainly to the disposals of ThyssenKrupp Industrieservice and ThyssenKrupp Safway in the Materials Services business area. Two main factors were responsible for the €104 million improvement in other financial income: a €73 million improvement in exchange rate gains on financial transactions and a €20 million year-on-year increase in capitalized interest costs, relating to the construction of the steel mills in Brazil and the USA.

The €41 million increase in income tax was mainly due to nonrecurring effects from the taxation of disposal gains and to charges due to the adjustment of interest carryforwards in Germany. As a result, the tax rate increased year-on-year by 6 percentage points to 38%. After taking into account income taxes, net income in the reporting period was €195 million, up €32 million from the prior year.

Including non-controlling interest in income, earnings per share in the 1st quarter 2009/2010 decreased year-on-year by €0.01 to €0.35.

Net financial debt and capital expenditures

On December 31, 2009, net financial debt stood at €2,130 million. The only slight increase of €71 million from September 30, 2009 was helped by one-time effects – including the capital contribution at ThyssenKrupp CSA Siderúrgica do Atlântico Ltda. by co-shareholder Vale S.A. and the disposals of ThyssenKrupp Industrieservice and ThyssenKrupp Safway – which generated around €900 million.

ThyssenKrupp invested a total of €777 million in the 1st quarter 2009/2010, 30% less than in the same period of the prior year. €710 million was spent on property, plant and equipment and intangible assets, and €67 million on the acquisition of businesses, shareholdings and other financial assets.

Current issuer ratings

The rating agency Standard & Poor’s lowered its rating on ThyssenKrupp to BB+ in the reporting quarter, meaning ThyssenKrupp lost investment grade status with Standard & Poor’s. At Moody’s and Fitch our rating remains investment grade. The creditworthiness of the Group is currently assessed by the rating agencies as follows: