Group review

ThyssenKrupp – profit higher again

ThyssenKrupp's performance has improved noticeably in the reporting year, with order intake and sales increasing quarter by quarter. Cumulative orders and sales in the first 9 months 2009/2010 were up from the prior-year period. In particular the higher rate of increase in orders reflects the effects of the economic recovery on ThyssenKrupp's operations.

The earnings situation also improved. A profit was generated in all three quarters, with the past quarter's result the best for seven quarters. Altogether ThyssenKrupp achieved earnings before taxes of €918 million in the first 9 months 2009/2010 – an increase of €1,905 million from the pre-tax loss of €987 million in the prior-year period. Adjusted EBT at €923 million was also considerably higher than the prior-year figure of €(506) 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 first 9 months 2009/2010:

• Compared with the first 9 months of the previous fiscal year, order intake increased by 8% to €30.6 billion.
• Sales were 1% higher at €31.1 billion.
• EBITDA improved to €2,443 million from €726 million in the prior year.
• EBIT came to €1,418 million, compared with €(466) million in the prior year.
• Adjusted EBIT increased from €15 million in the prior year to €1,423 million.
• EBT at €918 million exceeded the prior-year figure of €(987) million.
• Adjusted EBT amounted to €923 million, compared with €(506) million in the prior year.
• Earnings per share improved year-on-year from €(1.73) to €1.38.
• Net financial debt at June 30, 2010 was €3,753 million, an increase of €1,694 million compared with September 30, 2009, when we reported net financial debt of €2,059 million. On June 30, 2009 net financial debt stood at €3,122 million.

Economic upturn stabilized

The global economic upturn has stabilized since the beginning of the year. In particular in the emerging countries of Asia the dynamic economic growth continued. However, the recovery in North America and above all in Europe slowed noticeably. Following a 1% decrease in the previous year, world gross domestic product is estimated to have grown by 4.5% in the 1st half 2010. Impetus continued to be generated by the in part very expansive monetary and fiscal policies of some countries and the strong growth in world trade.

The economic situation in the euro zone remained subdued due to the debt problems of individual countries. In both the euro zone and Germany, economic growth in the 1st quarter 2010 was only very moderate at 0.2% quarter-on-quarter. Positive effects came from capital spending, exports, government spending and stock building. However, negative factors were consumer spending and construction investment, which suffered in the cold weather. In the 2nd quarter 2010 the upturn in the euro zone gathered momentum, with the German economy showing the fastest growth thanks to higher exports, strong industrial activity and catch-up effects in the construction sector.

The US economy picked up a little at the beginning of the year. Economic output in the 1st quarter 2010 was 0.9% higher than in the previous quarter. The growth was based mainly on consumer spending, with business spending slowing slightly. However, the pace of growth slowed noticeably in the 2nd quarter 2010.

Most of the emerging economies expanded strongly. In the 1st quarter 2010 China's gross domestic product advanced almost 3% from the previous quarter due to high public-sector investment and rising consumer spending; this corresponds to year-on-year growth of almost 12%. The positive trend continued in the 2nd quarter – albeit at a slower pace. The other major emerging economies such as Brazil, Russia and India also reported pleasing growth rates.

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

• The improved economic environment led to a strong increase in demand for steel worldwide. In the first six months of 2010, global crude steel production exceeded the very low prior-year figure by 28%. China and India, which raised their output by 21% and 7%, respectively, carried on their growth trend of the previous year. In the rest of the world, there were in part even stronger increases as markets bounced back from the drastic declines in the previous year. Despite production growth of 45%, the European Union did not quite return to its pre-crisis levels. The German steel mills, which raised their output by 64% to almost 23 million metric tons in the 1st half, profited particularly from customers' strong export focus. Towards the end of the reporting period, the previously very high global demand for steel slowed slightly and pressure on prices increased in many regions. With the positive impetus from stock building receding and real steel consumption rising only moderately, the upward trend in steel prices in Europe came to a halt. The situation on the raw materials markets continued to cause major uncertainty.
• The European carbon steel flat-rolled market improved noticeably over long stretches of the reporting period. Orders received by steel suppliers showed a marked upturn from the 4th quarter 2009 but weakened slightly in the course of the 2nd quarter 2010. In the first six months 2010, the Eurofer producers’ shipments in the EU were up by 51% from an albeit very low level in the comparable prior-year period. The expansive demand was driven noticeably by restocking. In the course of the economic recovery, distributors and end consumers had to replenish stocks run down during the recession. By mid-year, inventory levels had largely returned to normal. End consumer demand improved only hesitantly in the 1st half 2010. However, in terms of volumes the overall situation was positive, to the benefit in particular of the European suppliers; imports from third countries remained at a moderate level in the first five months of this year.
• After demand for stainless steel flat products slackened worldwide last year, orders received by stainless producers in Europe, North America and China picked up significantly at the beginning of 2010, aided by distributor restocking and increasing demand in various end consumer segments. However, orders in all regions slipped back again in the further course of the 1st half 2010. The nickel price initially trended upwards at the start of the year and in April reached its highest level since May 2008; this was followed by a downwards correction.
  Base prices for stainless steel flat products in Germany, Europe and North America rallied again from the beginning of the year. At the same time alloy surcharges increased due to rising nickel prices. In China, prices climbed strongly initially before slipping again at the end of the 1st half 2010.
  In the area of nickel alloys, demand improved from the start of the year, though the volatility of metal prices meant that the recovery was slow, with very pronounced differences depending on sector and region. The titanium market appears to be through the worst of the recession, with signs of improvement in both the aviation and plant construction sectors.
• The international auto industry has recovered from last year’s severe slump. Since the 3rd quarter 2009 global vehicle demand has been trending upwards, driven mainly by the Asian and North American markets. Sales of cars and light trucks in the USA increased year-on-year by 17% in the 1st quarter 2010 to 5.6 million units. In China, now the world’s biggest single car market, almost 5.6 million cars were sold in the same period – representing year-on-year growth of 23%. In Europe, however, vehicle sales were impacted by the ending of rebate programs. With 7.3 million new car registrations in the 1st half 2010, sales in the European Union stagnated. New car registrations in Germany fell by as much as 29% to 1.5 million units. However, the German vehicle industry with its focus on higher-end cars was less affected. Thanks to a 44% rise in exports, production in Germany climbed 23% from the weak prior-year level to 2.8 million vehicles. The German manufacturers are therefore in a better position than many of their competitors.
• The international machinery sector was again characterized by low capacity utilization and a reluctance to invest in the year to date. A notable exception was the Chinese machinery sector, which benefited from government stimulus programs. In Germany the order situation improved significantly from the beginning of the year. Adjusted for prices, order intake in the first six months of 2010 exceeded the albeit low prior-year level by 32%. At around 83%, capacity utilization rose steeply, but remained below the long-term average. However, orders for elevators and escalators declined. In Germany’s plant engineering sector, too, new business was still slow in the first months of 2010.
• The construction markets remained very weak in most industrial countries in the first half 2010. In the USA construction activity declined further despite government stimulus programs. In Europe, too, construction output fell, in Germany partly as a result of the cold weather at the beginning of the year. However, order intake in the German construction sector showed a positive trend. In the emerging nations, construction activity was on the increase; the Chinese construction sector profited greatly from government stimulus programs.

Order intake and sales picking up again

ThyssenKrupp's business performance improved appreciably in the course of the current fiscal year. Although the levels of the years before the financial and economic crisis have not yet been reached, sales and order intake increased quarter by quarter. The more favorable economic environment was reflected in particular in the growth in orders.

Orders received by the Group in the first 9 months 2009/2010 climbed 8% year-on-year to €30.6 billion. In the 3rd quarter alone, year-on-year growth reached 38%. Most business areas reported higher orders in the reporting period, with demand for flat-rolled carbon steel, stainless steel and industrial components showing the strongest growth. By contrast, orders at Marine Systems fell sharply.

3rd-quarter sales improved year-on-year by 26%; apart from Plant Technology all business areas succeeded in maintaining or bettering their prior-year performance. Overall sales in the first 9 months rose by 1% to €31.1 billion. Sales declined at the shipyards and for billing reasons in plant construction; in materials services and elevators and escalators, too, prior-year sales levels were not quite reached. However, business with flat-rolled carbon steel, stainless steel and components for the auto industry showed in part vigorous growth.

Earnings before taxes up to €918 million

In the first 9 months 2009/2010, ThyssenKrupp achieved EBT of €918 million, exceeding the prior-year figure by €1,905 million. The earnings figures include nonrecurring items of €5 million – income from the disposal of the Industrial Services units of the Materials Services business area and one-time charges in the Components Technology and Marine Systems business areas. 3rd-quarter EBT was €414 million; with the exception of Steel Americas and Marine Systems, all business areas returned a pre-tax profit.

The Group's adjusted EBT in the first 9 months 2009/2010 was €923 million, up €1,429 million from the prior-year figure of €(506) million.

At €31,137 million, net sales in the first 9 months of fiscal 2009/2010 were €457 million or 1% higher than in the corresponding prior-year period. Despite the increase in sales, the cost of sales decreased by €961 million or 4%. Alongside lower personnel and material expenses, other factors in this were significantly reduced inventory writedowns and a marked decrease in restructuring and impairment charges compared with the prior-year period. Gross profit improved by a substantial €1,418 million or 42% to €4,788 million, leading to a correspondingly large increase in gross margin from 11.0% to 15.4%.

The decrease in selling expenses by €63 million was caused mainly by reduced personnel expense. General and administrative expenses were €126 million lower than the corresponding prior-year figure, also as a result of the cost-reduction measures. The €80 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 €72 million decrease in other operating expenses included €10 million lower losses on the disposal of non-current assets and €17 million in effects from the translation of foreign currency items. The €97 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 €92 million increase in income from companies accounted for using the equity method was due to the significantly improved earnings of the companies in question compared with the prior year. The €96 million increase in other financial income was mainly due to a €25 million improvement in exchange rate gains on financial transactions and a €60 million year-on-year increase in capitalized interest costs relating to the construction of the steel mills in Brazil and the USA.

Income tax expense amounted to €191 million in the reporting period; this represents a tax rate of 21%. In the corresponding prior-year period there was an income tax benefit of €158 million mainly due to the negative earnings situation.

After taking into account income taxes, net income in the reporting period was €727 million, up €1,556 million from the prior-year period when a net loss of €829 million was posted.

Including non-controlling interest in income, earnings per share in the first 9 months 2009/2010 improved significantly to €1.38 from a negative value of €(1.73) in the prior-year period.

ThyssenKrupp PLuS successfully continued

With the Groupwide action program ThyssenKrupp PLuS we aim to achieve positive earnings effects on the cost and sales side and at the same time to stabilize and further improve liquidity to keep borrowing requirements to a minimum. The results achieved in the first 9 months 2009/2010 are promising: We remain on track and will achieve our targets at the end of the fiscal year.

The success of our action program is reflected alongside other factors in the significant improvement in the Group’s earnings. Compared with the previous fiscal year, net working capital increased only to the extent necessary for the improved level of business. Supporting measures such as more efficient inventory management and improved receivables management also played a part. By exercising restraint in allocating funds, we stayed within our spending targets on the investment side too.

Net financial debt and capital expenditures

On June 30, 2010, net financial debt stood at €3,753 million. The increase of €1,694 million from September 30, 2009 is mainly due to operating business – in particular the startup of the major projects in Brazil and the USA – investing activities 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 €2,460 million in the first 9 months 2009/2010, 20% less than in the same period of the prior year. €2,384 million was spent on property, plant and equipment and intangible assets, and €76 million on the acquisition of businesses, shareholdings and other financial assets. Excluding the major projects in Brazil and the USA, capital expenditures came to €752 million, compared with €1,509 million in the prior-year period.

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. On July 30, 2010 Fitch upgraded the outlook for the BBB- rating from negative to stable.