Group review

ThyssenKrupp in the 1st half 2009/2010 – higher profit despite lower sales

The difficult economic environment continued to have a major impact on the performance of ThyssenKrupp in the 1st half 2009/2010. Order intake and sales were well down from the prior-year period. However, compared with the prior quarter, orders and sales in the 2nd quarter were higher again.

The earnings situation also improved, mainly thanks to realized cost savings. Following a pre-tax loss in the prior-year period ThyssenKrupp achieved earnings before taxes (EBT) of €504 million in the 1st half 2009/2010 – an increase of €719 million from the pre-tax loss of €215 million in the prior-year period. Adjusted EBT at €443 million was also considerably higher than the prior-year figure of €(42) million.

As from the beginning of fiscal year 2009/2010, certain defined nonrecurring items are excluded from EBT and EBIT. Specifically, these are gains and losses on disposals, restructuring costs, impairment of non-current assets, 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 startup 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 highlights for the 1st half 2009/2010:

• Order intake decreased year-on-year by 4% to €19.7 billion.
• Sales fell by 9% to €19.5 billion.
• EBITDA reached €1,508 million, compared with €906 million in the prior year.
• EBIT came to €831 million, compared with €131 million in the prior year.
• Adjusted EBIT increased from €304 million in the prior year to €770 million.
• Earnings before taxes improved in the same period from €(215) million to €504 million.
• Adjusted earnings before taxes at €443 million exceeded the prior-year figure of €(42) million.
• Earnings per share increased from €(0.35) in the prior year to €0.80.
• Net financial debt at March 31, 2010 was €2,652 million, an increase of €593 million compared with September 30, 2009, when we reported net financial debt of €2,059 million. On March 31, 2009 net financial debt stood at €3,687 million.

Economic slide halted

Thanks not least to massive economic policy stimulus, global economic activity has stabilized recently, albeit at a low level. In the industrialized countries, leading indicators such as the Ifo expectations index showed in part marked signs of recovery in the 2nd half 2009, but the momentum weakened at the beginning of the current year. World GDP decreased overall by 1.0% in 2009. According to current estimates the improvement in the 2nd half 2009 continued in the 1st quarter 2010, with the pace of growth in the emerging economies much stronger than in the industrialized countries.

The economy in the euro zone shrank by 4.1% in 2009. After pleasing growth in summer 2009, GDP stagnated in the 4th quarter 2009. While consumer spending was flat and business investment fell, exports made a positive contribution to growth. In the 1st quarter 2010 growth was again only very moderate. GDP in Germany declined by 5.0% in 2009. Economic activity picked up strongly in the 2nd and 3rd quarters before stagnating due to weather conditions and the ending of the scrappage scheme.

The US economy improved appreciably in the final quarter 2009 with growth of 1.4%; despite this, full-year economic output was down 2.4% year-on-year. The growth momentum slowed again in the 1st quarter 2010 as the positive effects of inventory rebuilding faded.

Most of the Asian emerging economies were able to absorb the impact of the global recession thanks to continuing dynamic growth in China. China’s GDP expanded by 8.7% in 2009 and by as much as 10.7% in the final quarter of the year. Aided by government stimulus programs this growth continued in the 1st quarter 2010, reaching 11.9%.

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

• The recovery on the international steel markets that began in fall 2009 continued in the 1st quarter 2010. Global crude steel production exceeded the very low prior-year figure by 29%. China and India, which increased their output by 25% and 13% respectively, carried on their growth trend of the previous year. In the rest of the world, there were in part significant increases after the enormous declines in the previous year. The EU, for example, recorded a rise of 37%, and the NAFTA region produced 53% more crude steel. Utilization rates here were gradually raised, but without yet reaching full capacity. The German steel mills increased their production by 49% in the first three months of 2010; their rolled-steel orders were almost twice as high as in the comparable prior-year period.
  The situation on the European carbon steel flat-rolled market also improved. Orders received by steel suppliers increased steadily. Steel mill shipments in the first three months of 2010 were significantly higher than the low prior-year figure. Specific demand gaps were filled, but end user demand as a whole was still down from the prior year despite higher auto industry output. The US steel market showed a very similar pattern in the reporting period. Spot prices on the European and US carbon steel flat-rolled markets picked up appreciably in the course of the 1st quarter 2010. The reasons for this, in addition to a rise in steel demand driven primarily by restocking, were drastically increased steelmaking costs. The move from annual supply contracts for iron ore and coking coal to quarterly contracts based on spot prices, which have risen strongly, is leading to massive cost increases and major uncertainty on the steel markets. These cost increases are leading to massive price increases for steel products.
• World demand for stainless steel flat products declined by 3% in 2009, with very pronounced regional differences. Strong growth in China moderated the demand slump in the rest of the world. Orders received by European stainless producers stagnated slightly at the beginning of the 4th quarter 2009 but recovered significantly afterwards, aided by distributor restocking and a slight increase in demand in various end user segments. After the sharp slump in the middle of last year, demand in North America also improved. The stainless steel market in China was buoyant, mainly due to large government infrastructure projects.
  Base prices in Germany and Europe decreased slightly in the 4th quarter 2009 but have risen again since the beginning of the year. Similarly, alloy surcharges fell slightly initially but increased again subsequently due to rising nickel prices. Overall, nickel prices have been trending upwards since the beginning of the year and at the end of March reached their highest level since June 2008. Stainless steel prices in North America also increased. In China, prices recovered after the temporary slump in the in the 4th quarter 2009 but were well below European levels.
  In the area of nickel and titanium alloys the situation was again difficult. Price levels worldwide remained depressed.
• The auto industry suffered a decline in demand in 2009. Worldwide, only around 59 million cars and light trucks were produced, 12% fewer than a year earlier. Only in China was there a substantial increase in demand and production, partly due to tax relief. More recently, however, the rest of the world’s markets have recovered slightly. In the USA, sales of cars and light trucks increased year-on-year by 6% in the 4th quarter 2009 and 16% in the 1st quarter 2010. In the European Union, new car registrations rose in the same periods by 18% and 9%, respectively.
  In Germany, demand for new vehicles was weak at the beginning of the year after the expiration of the eco rebate program. New car registrations slipped by 23% in the 1st quarter 2010 after having increased by 14% in the quarter before. Rising exports had a positive effect. Thanks to a 47% increase in foreign demand, car production in the 1st quarter 2010 climbed by 32%.
• The machinery sector was again characterized by a reluctance to invest, low capacity utilization and low order books. Only China achieved single-digit growth in 2009, thanks to massive stimulus programs, while other countries showed high double-digit rates of decrease. In Germany, the worst of the recession in the machinery sector is now over. While orders in the 4th quarter 2009 were 12% down from the prior-year period, in the 1st quarter 2010 they were 14% higher. In Germany’s plant engineering sector, too, new business decreased significantly in 2009. Orders dropped by 33%; however, there have been signs of a slight recovery recently.
• Despite the stimulus programs, construction activity slowed in many countries in 2009. The situation on the US construction market remained difficult, even though the downward momentum is slowing gradually. The continuing growth of the Chinese construction sector is largely due to government stimulus programs. In Germany, the cold weather had a negative impact on construction activity recently. Thanks to government funding programs, public construction investment and housing modernization projects were stable, while commercial housing construction experienced a significant decline.

Order intake and sales lower due to recession

The effects of the deep economic and financial crisis were still clearly visible in the performance of ThyssenKrupp in the 1st half 2009/2010. Sales and order intake decreased significantly year-on-year. However, the isolated signs of recovery discernible in the 1st quarter 2009/2010 strengthened in the 2nd quarter.

Orders received by ThyssenKrupp in the 1st half 2009/2010 fell year-on-year by 4% to €19.7 billion. There were declines in particular in the shipyards business and to a lesser extent in the materials services operations and in elevators and escalators. Demand for flat-rolled carbon steel and stainless steel increased sharply year-on-year. In the 2nd fiscal quarter the order situation improved in almost all business areas. Groupwide, new orders rose quarter-on-quarter by 11%.

Sales in the 1st half 2009/2010 reached a value of €19.5 billion, 9% less than in the first six months of the previous fiscal year. Sales of the shipyards business decreased sharply due to billing factors; there were smaller declines in the materials services and plant technology areas. Sales of stainless steel and auto components improved. The Group’s sales in the 2nd quarter 2009/2010 climbed quarter-on-quarter by 8%, with all business areas either holding or increasing their sales levels.

Earnings before taxes up to €504 million

In the 1st half 2009/2010 ThyssenKrupp achieved earnings before taxes (EBT) of €504 million, exceeding the prior-year figure by €719 million. The earnings figures include nonrecurring items of €61 million, mainly income from the sale of the Industrial Services units of the Materials Services business area. In the 2nd quarter 2009/2010 EBT was €191 million.

The Group’s adjusted EBT in the 1st half 2009/2010 was €443 million, up €485 million from the prior-year figure of €(42) million.

Net sales in the 1st half of fiscal 2009/2010 were €1,923 million or 9% lower than in the corresponding prior-year period; included in this is a decrease of €247 million due to the increase in the US dollar exchange rate compared with the prior-year period. The cost of sales decreased by €2,232 million or 12% and therefore to a greater extent than sales. One 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 increased by €309 million or 12% to €2,957 million, resulting in a significant increase in gross margin from 12.4% to 15.2%.

The decrease in selling expenses by €110 million was caused mainly by reduced personnel expense. General and administrative expenses were €78 million lower than the corresponding prior-year figure, also as a result of the cost-reduction measures. The €97 million decrease in other operating income was mainly due to the cancellation of foreign currency hedges for planned raw material purchases in the prior-year period as a result of the financial crisis. The €63 million decrease in other operating expenses included €7 million lower losses on the disposal of non-current assets and €23 million in effects from the translation of foreign currency items. The €93 million increase in income from the disposal of consolidated companies was due mainly to the disposals of ThyssenKrupp Industrieservice and ThyssenKrupp Safway in the Materials Services business area. The €50 million increase in income from companies accounted for using the equity method was due to the significantly improved earnings of these companies compared with the prior year. The €94 million increase in other financial income was mainly due to a €46 million improvement in exchange rate gains on financial transactions and a €37 million year-on-year increase in capitalized interest costs relating to the construction of the steel mills in Brazil and the USA.

After taking into account income taxes, net income in the reporting period was €429 million, up €628 million from the prior year.

Including non-controlling interest in income, earnings per share in the 1st half of fiscal 2009/2010 improved significantly to €0.80 from a negative value of €(0.35) in the prior-year period.

ThyssenKrupp PLuS improves earnings and liquidity

In the 1st half 2009/2010 we achieved positive earnings effects on the cost and sales side with the Groupwide action program ThyssenKrupp PLuS. Our aim is to stabilize and build on the improvements achieved in earnings and liquidity.

By optimizing net working capital (NWC), we aim to keep the liquidity required for our operations and the associated financing requirements at a low level. This includes elements such as improved inventory management and more efficient receivables management. In addition, all investment projects are examined in great detail and aligned more closely with the Group's return on capital targets.

Net financial debt and capital expenditures

On March 31, 2010, net financial debt stood at €2,652 million. The increase of €593 million from September 30, 2009 is mainly due to operating business and the dividend payment. Nonrecurring items – including the capital contribution at ThyssenKrupp CSA Siderúrgica do Atlântico Ltda. by the co-shareholder Vale S.A. and the disposals of ThyssenKrupp Industrieservice and ThyssenKrupp Safway – limited the increase.

ThyssenKrupp invested a total of €1,518 million in the 1st half 2009/2010, 31% less than in the same period of the prior year. €1,450 million was spent on property, plant and equipment and intangible assets, and €68 million on the acquisition of businesses, shareholdings and other financial assets.

Current issuer ratings

In the 1st quarter 2009/2010 the rating agency Standard & Poor's lowered its rating on ThyssenKrupp to BB+, meaning ThyssenKrupp lost investment grade status with Standard & Poor's. At Moody's and Fitch our rating remains investment grade.