Business management - Goals and strategy
A forward strategy with sustainably high sales and earnings targets keeps ThyssenKrupp on growth course. Our value-based management approach, which systematically increases the value of our Company, and the more than 6,000 successful projects under our ThyssenKrupp best value enhancement program are paying dividends.
Strategic development: Growth in all segments
Following completion of the consolidation phase, ThyssenKrupp embarked on a course of sustainable and profitable growth. The numerous portfolio changes and process improvements implemented now form the basis for significant growth. As part of our value-based management system, which is aimed at sustainably increasing the value of the Company, we are pursuing ambitious targets. All the Group's segments will contribute to meeting these targets.
In the medium term we aim to achieve sustainable earnings before taxes and major nonrecurring items of €4 billion on sales of €60 billion. In the longer term, particularly after the completion of the major investment projects by Steel and Stainless in North America and by the other segments in other regions, we expect sales in the region of €65 billion and earnings before taxes and major nonrecurring items of €4.5 to 5.0 billion.
For our key performance indicator – ThyssenKrupp Value Added – we are looking to achieve a medium-term figure in the region of €2.5 billion, rising over the longer term to €3 billion. The comparable targets for return on capital employed (ROCE) are 21.4% and 22.0%.
Construction of new plants on schedule
The Steel segment is working with great determination to implement its transatlantic growth strategy. Construction of the new slab mill in Brazil is making good progress; site preparation has been completed and work on building the production units and infrastructure is now in full swing. When it starts production in 2009, the mill will supply 5 million metric tons of low-cost slabs per year to ThyssenKrupp Steel's European and North American production sites.
In Calvert, Alabama/USA, work on the construction of the new joint Steel/Stainless complex also started on schedule. The location on the Tombigbee River provides very good logistical links for the supply of raw materials. The new plant will include hot rolling, cold rolling and coating facilities and will process slabs from the Brazilian mill into high-quality flat products. On completion in 2010, it will have a hot rolling capacity of over 5 million tons per year. In the future, the Steel segment will serve the NAFTA markets from this plant.
Steel will strengthen its position on its home European market by extending and modernizing its existing facilities step by step.
The growth strategy of the Stainless segment also centers on expanding its presence on the NAFTA markets. To this end it is building an integrated mill for flat-rolled stainless steel products at the joint site in Calvert, including meltshop, cold rolling, processing and finishing facilities. The slabs produced in the meltshop will be rolled on Steel's hot strip mill. The planned capacity of the stainless steel facility is around 1 million tons per year. In the future, the Mexican stainless steel subsidiary ThyssenKrupp Mexinox will also be supplied with hot-rolled coil from this location.
In addition to expanding its market position in North America, the Stainless segment is also optimizing its European facilities. Following the closure of its Turin plant, Italian subsidiary ThyssenKrupp Acciai Speciali Terni is developing its Terni site into a world-class integrated stainless steel mill.
Growth through expansion of existing activities and strategic acquisitions
The growth strategy of the Technologies segment is focused on the mega-trends of climate, environment, infrastructure and mobility, for which its range of technologies offers intelligent products and solutions such as components for car and truck manufacture, slewing bearings for wind turbines and equipment for oil sands mining.
The Elevator segment is expanding its existing business, focusing in particular on Asia and Eastern Europe. To achieve this growth we intend to further intensify our service activities. In addition, product innovations such as the twin elevator, with two cabs running independently in one shaft, and the TurboTrack passenger transportation system – described in the innovations section – are also expected to bring in additional orders.
In the Services segment, we see future growth opportunities in the areas of material and industrial services, where existing activities will be expanded and supported by strategic acquisitions. Eastern Europe, NAFTA and Asia will be the key markets.
Under the Groupwide ThyssenKrupp best sales & service initiative, numerous projects have been realized in all segments to accelerate the growth of our sales and service activities.
Ground broken for new ThyssenKrupp Quarter
The plans announced last year to concentrate our head office functions in Essen and Duisburg are beginning to take concrete shape. Construction work on the new Quarter in Essen started with the symbolic ground-breaking on June 12, 2007. The first departments are scheduled to start work there in early 2009. In addition to the Group holding company, the Quarter will also accommodate the Technologies, Elevator and Services segment holding companies as well as the ThyssenKrupp Academy.
Business management through value-based management
The Group is managed and controlled using a value-based management system. Our objective is to systematically and continuously increase the value of the enterprise – through profitable growth and a focus on businesses which offer the best development opportunities in terms of competitiveness and performance. An integrated control concept, value-based performance indicators as well as measures to enhance efficiency and optimize capital employed are key elements of our management system.
Control concept secures Groupwide transparency
Our integrated control concept guides and coordinates the activities of all segments, supports the decentralization of responsibilities and guarantees Groupwide transparency. It aims to increase the value of the Group by bridging operational and strategic gaps between the actual and target situation through the use of concrete measures. For this we have established high-quality systems for the up-to-date reporting of actual and forecast figures of both strategic and operating elements. This focus on value creation pervades all management processes. As measures of business success, the main performance indicators used in value management are also used to calculate the variable components of management compensation.
ThyssenKrupp Value Added as central performance indicator
The central performance indicator for value-based management in the Group is ThyssenKrupp Value Added (TKVA). TKVA measures the value added in a period at all levels of the Group. It is the difference between ROCE (return on capital employed) and WACC (weighted average cost of capital), multiplied by capital employed. Capital employed is defined as invested assets plus net working capital.
In addition to TKVA, cash flow is also taken into consideration to ensure that, especially in growth phases, the Group portfolio comprises a balanced mix of value drivers and cash providers.
An alternative method of calculating TKVA using absolute figures is as follows: earnings before interest and taxes (EBIT) minus cost of capital. Cost of capital represents the expected return on equity and debt. It corresponds to the product of WACC and average capital employed.
The weighted average cost of capital (WACC) is the minimum return demanded by investors and creditors. It is calculated on a pre-tax basis and comprises the weighted average cost of equity and debt as well as the interest rate for pension obligations:
- The cost of equity of our Group is based on the return from a risk-free alternative investment plus a market risk premium and taking into account the specific risk of ThyssenKrupp in relation to the overall market. The specific risk is expressed by the so-called beta factor. The weighted average cost of equity calculated on this basis corresponds to a weighted average cost after operating taxes. Since the cost of capital at ThyssenKrupp is calculated on a pre-tax basis, a tax adjustment is carried out.
- The cost of debt (cost of financial liabilities) is the interest on a risk-free alternative investment plus a company-specific risk premium. Based on the current market situation and subject to the condition that the current investment-grade status is maintained, we currently base our calculations on a premium of one percentage point.
- The interest rate for pension accruals is calculated on the basis of the weighted five-year average discount rate for internally financed pension plans and healthcare obligations.
On the basis of the above factors, the weighted average cost of capital for the Group was 9% in fiscal 2006/2007. Specific WACC figures are established for the segments which reflect their respective risk structures. In the reporting year, the segment WACC figures were:
Since the business environment is constantly changing, the weighted average cost of capital is regularly reviewed and adjusted if necessary. For fiscal year 2007/2008, WACC for the Group and the segments has been lowered by 0.5 percentage points mainly due to the impact of German tax reforms and the resultant lower tax adjustment for the cost of equity. The pre-tax weighted average cost of capital for the Group has thus been reduced to 8.5%.
Application of the value management system
Three levers can be used to increase TKVA: profitable growth, increases in operating efficiency, and optimization of capital employed. Value through profitable growth is created in particular by new investment projects, provided they generate returns higher than their cost of capital. A major contribution to increasing operating efficiency is made by the ThyssenKrupp best value enhancement program, which is described in more detail under the heading ThyssenKrupp best below. Capital employed as the third lever to increase TKVA can be optimized by withdrawing from business activities in which the cost of capital cannot be earned. Alternatively, targeted programs can be implemented to release capital, i.e. to reduce capital employed without reducing EBIT.
The following tables show how TKVA and its components developed over the last two fiscal years:
| 2005/2006 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EBIT (million €) |
Capital employed (million €) |
ROCE (%) |
WACC (%) |
Spread (% points) |
TKVA (million €) |
|||||||||
| Group | 3,044 | 17,056 | 17.9 | 9.0 | 8.9 | 1,510 | ||||||||
| Thereof: | ||||||||||||||
| Steel | 1,482 | 6,380 | 23.2 | 9.5 | 13.7 | 876 | ||||||||
| Stainless | 489 | 3,048 | 16.0 | 9.5 | 6.5 | 199 | ||||||||
| Technologies | 408 | 2,295 | 18.9 | 9.5 | 9.4 | 215 | ||||||||
| Elevator | 423 | 1,876 | 22.6 | 8.5 | 14.1 | 264 | ||||||||
| Services | 553 | 2,884 | 19.2 | 9.0 | 10.2 | 294 | ||||||||
| 2006/2007 | ||||||||||||||
| EBIT (million €) |
Capital employed (million €) |
ROCE (%) |
WACC (%) |
Spread (% points) |
TKVA (million €) |
Change TKVA (million €) |
||||||||
| Group | 3,728 | 18,000 | 20.7 | 9.0 | 11.7 | 2,108 | 598 | |||||||
| Thereof: | ||||||||||||||
| Steel | 1,761 | 6,557 | 26.9 | 9.5 | 17.4 | 1,138 | 262 | |||||||
| Stainless | 871 | 3,827 | 22.7 | 9.5 | 13.2 | 507 | 308 | |||||||
| Technologies | 518 | 2,239 | 25.0 | 9.5 | 15.5 | 348 | 133 | |||||||
| Elevator | (75) | 1,776 | (4.2) | 8.5 | (12.7) | (226) | (490) | |||||||
| Services | 787 | 3,330 | 23.6 | 9.0 | 14.6 | 487 | 193 | |||||||
The ThyssenKrupp Group's earnings before interest and taxes (EBIT) increased by €684 million to €3,728 million in fiscal 2006/2007. The positive impact this had on ROCE was weakened by the increase in capital employed. Average capital employed increased by €944 million to €18,000 million in 2006/2007. ROCE increased in the reporting year to 20.7%, compared with 17.9% a year earlier; the Group's WACC of 9.0% was thus again significantly exceeded. TKVA increased by €598 million to €2,108 million. The improvement in profitability and TKVA is due to the large increase in operating earnings on the basis of a successfully optimized business portfolio. Without the influence of the EU fine imposed on ThyssenKrupp Elevator for alleged anti-competition behavior in Germany and the Benelux countries, the improvement in ThyssenKrupp's value indicators would have been even greater. ROCE would have been 23.2% and TKVA €2,577 million.
In the Steel segment, earnings before interest and taxes rose by €279 million to €1,761 million thanks to the positive operating situation. ROCE increased from 23.2% to 26.9%. TKVA was €1,138 million, an improvement of €262 million compared with the prior year.
The Stainless segment achieved a €382 million improvement in earnings before interest and taxes to €871 million. However, the resultant increase in ROCE was weakened by a €779 million increase in capital employed to €3,827 million. ROCE in the reporting year was 22.7%, compared with 16.0% a year earlier. TKVA was €507 million, up €308 million from the prior year.
Earnings before interest and taxes at Technologies grew by €110 million to €518 million. With capital employed virtually unchanged, ROCE increased from 18.9% to 25.0%. TKVA improved by €133 million to €348 million.
In the Elevator segment, earnings before interest and taxes decreased from €423 million in the prior year to €(75) million. This is mainly due to the fine imposed by the EU Commission. As a result, ROCE dropped from 22.6% to (4.2)%, and TKVA from €264 million to €(226) million. Without the impact of the fine, ThyssenKrupp Elevator would have almost equaled its prior-year ROCE and TKVA figures.
In the Services segment, earnings before interest and taxes increased by €234 million to €787 million in fiscal 2006/2007. With capital employed up by €446 million to €3,330 million, the segment achieved ROCE of 23.6%, compared with 19.2% a year earlier. TKVA improved by €193 million to €487 million.
The results of the analysis of the performance indicators feed directly into portfolio management at ThyssenKrupp. This involves structural measures with a primarily strategic character. Specifically it involves selecting and growing businesses with which the targeted TKVA improvements are to be realized, and withdrawing in a timely and profitable way from activities which do not achieve adequate TKVA improvements. In addition, it involves developing new businesses by entering into promising new markets on favorable terms. In this way we create the basic requirements for the ability to pay dividends and for sustainable, profitable growth in our core businesses.
A communication and training initiative was launched in spring 2006 to help further anchor value management in the Group. To date, some 3,000 decision-makers from all segments have attended training seminars. Most of them were held in Europe, but training has also been provided in China, the USA, Mexico, Brazil and South Korea. Tailoring the seminars to specific segments and target groups ensured a high level of relevance and practicability.
Thyssenkrupp best
The goal of our value enhancement program ThyssenKrupp best is to improve the performance of the Group. For six years now, the program has been supporting the process of continuous improvement in the Group and providing the necessary guidance and tools. All employees can get involved, take part in projects and share their new-found knowledge. In the reporting year alone, 1,330 new projects were launched to make our Company even better.
Worldwide success
At September 30, 2007, ThyssenKrupp best comprised 6,300 projects with over 60,000 concrete measures and individual steps. A further 1,500 projects have been removed from the program because the Group has disposed of the corresponding operations. Since the program was launched in 2001, 3,700 projects have been successfully completed. The focus is on operating efficiency, purchasing, sales/services and performance quality. Further projects promote knowledge transfer within the Group.
One of ThyssenKrupp best's objectives is for successful projects to be transferred to other segments and areas. In addition to the program's internet-based platform best plaza, numerous events are held to encourage knowledge sharing among Group companies. One such event is the "Best Practice Fair", in which project teams present their experience and provide participants with ideas and impetus for new projects at their own companies.
ThyssenKrupp best is now firmly established worldwide. More than 50% of projects in 2006/2007 were based outside Germany, with teams working to enhance efficiency and value at more than 400 locations in 45 countries. Roughly 70% of the projects were conducted in Europe, mainly Germany, France, Italy, Spain and the United Kingdom. Almost 20% took place on the American continent – many project teams have been formed in the USA, Canada, Mexico, Brazil and Colombia. Value-enhancement projects were also launched in China, South Korea and other countries in the Asia/Pacific region, accounting for 6% of all best projects. The number of projects organized on a cross-country basis rose once again. In addition to increased involvement in Asia, African companies took part in ThyssenKrupp best for the first time.
In the reporting year, Executive Board members of ThyssenKrupp AG and the segment holding companies again visited projects and held discussions locally to keep abreast of progress and the successes achieved.
Sales & service initiative launched
Launched in March 2007, the aim of the sales & service initiative is to identify and exploit potential for improvement in sales and increase the share of services in the Group's sales. In addition to traditional areas of sales and services, this new initiative also addresses questions of sales processes and sales organization.
In the pilot phase, systematic examinations were carried out to identify potential starting points for improvement in the segments and at Group companies. Eight pilot projects were then launched to test various performance enhancement processes. Upon successful completion of these projects, so-called subject experts from all segments will secure the success of the initiative by supporting further projects in their areas, training project members in the use of tools and driving knowledge transfer in the Group. The program is rounded off by a training concept for employees in the separate project areas.
Award-winning projects in 2007
Every year, the ThyssenKrupp best Award honors the three best projects in the program as a reward for outstanding teamwork. Proposed projects from all areas of the Group were judged by a panel on the basis of set criteria such as financial or non-monetary results as well as complexity and methodology of project work. In 2007, first prize went to a company from the Stainless segment: a multi-site team developed and realized more than 1,300 measures to improve and sustainably secure product quality. A Brazilian team from the Technologies segment came second; they succeeded in significantly improving maintenance work for a crankshaft line. Third prize was awarded to a team from the Steel segment: through extensive cooperation both in-house and with customers, they identified new ways of improving the quality of molten steel.