Group review
ThyssenKrupp – expectations confirmed
ThyssenKrupp performed in line with our expectations in the 1st quarter 2007/2008. Order intake and sales reached the high levels of the prior-year quarter. The Group's earnings before taxes amounted to €646 million. Before major nonrecurring items EBT was €715 million. Profits were therefore higher than planned but, as expected, lower than a year earlier. The prior-year quarter was boosted by exceptionally strong demand and very high base prices for stainless steel, which were both absent in the reporting quarter in the Stainless and Services segments.
The highlights for the 1st quarter 2007/2008 were as follows:
- Order intake, as in the prior-year quarter, was €13.3 billion.
- Sales were €12.3 billion, again as in the prior-year quarter.
- EBITDA was €1,083 million, compared with €1,507 million in the prior year.
- Earnings before taxes decreased from €1,062 million in the prior-year quarter to €646 million.
- Earnings per share fell from €1.31 in the prior-year quarter to €0.85.
- Net financial liabilities at December 31, 2007 were €859 million – an increase of €1,082 million compared with September 30, 2007, when we reported net financial receivables of €223 million. The increase in the 1st quarter is thus roughly the same as the change in the prior-year quarter, when there was an increase of €1,138 million.
Earnings outlook stable
For 2007/2008 we forecast earnings before taxes and major nonrecurring items, including project costs for the steel mills in Brazil and the USA, of over €3 billion. As things stand at present, we expect sales of €53 billion in the current fiscal year. We expect sales to continue to grow in 2008/2009 provided no unforeseen economic downturns impact our business. Growing sales will also be reflected in earnings.
The mid-term sales target for ThyssenKrupp is €60 billion, while our mid-term goal for sustainable earnings before taxes and major nonrecurring items is €4 billion. In the longer term, especially after the startup of the steel mills of Steel and Stainless in North America and the investments of the other segments in other regions, we aim to achieve sales of around €65 billion and earnings before taxes and major nonrecurring items of €4.5 to 5.0 billion.
Overall economic growth weaker
The strong global economic growth continued in 2007. However, the momentum slowed noticeably in some regions in the final quarter, mainly because of uncertainties due to the US mortgage crisis and increasing energy and raw material costs. Nevertheless, with growth of around 5%, world GDP remained at a high level in 2007.
In the USA, economic growth slowed markedly at the end of the year. The credit squeeze and uncertain economic prospects dampened business spending. In the euro zone, the performance of the economy was still mainly positive in the second half of 2007. The upturn in Germany was driven mainly by brisk business spending.
The pace of growth remained high in the developing countries of Asia, Latin America and Central and Eastern Europe, particularly so in China and India. Latin America benefited from the continuing raw material boom. Russia and the majority of the Central and Eastern European economies also recorded extremely dynamic growth.
In the sectors of importance to ThyssenKrupp the picture was as follows:
- Against the background of a slowing world economy, the international steel markets remained in a stable condition. World steel production in the final quarter of 2007 was higher than a year earlier. However, month-on-month production growth in China slowed markedly. This was partly the result of increased political pressure on China to stem exports; in addition, the drastic increases in raw material costs forced smaller steel producers to cut production. In the USA, the steel market returned to equilibrium following a drawdown of excess inventories. Demand picked up – mainly due to stock replenishment – and initial price increases were achieved. The European steel industry, which benefited from the strong performance of customer industries throughout 2007, also profited from increased output at steel users in the fourth quarter, though steel consumption growth was probably not quite as high as previously. Demand for carbon steel flat products improved compared with the low level of the summer months but was dampened towards the end of the period by inventory drawdowns. Import pressure decreased slightly after the very strong increase at the beginning of the fourth quarter 2007. Significantly higher freight, energy and raw material costs slowed imports from Asia.
- After a phase of very low orders in the previous quarters, order intake for stainless steel flat products increased appreciably in the 4th quarter 2007 as distributors replenished inventories and demand from industrial end users remained stable. The nickel price was relatively stable at around 32,000 US dollars per ton in the first half of the 4th quarter 2007, but decreased to levels of around 26,000 in the second half. As a result, alloy surcharges decreased significantly, while base prices in Europe stabilized, albeit at a low level. Due to the moderate price level, the attractiveness of the European market for third-country imports, particularly from Asia, decreased, easing the pressure on the European stainless market. In North America, the market was slightly weaker, with end customer demand subdued by the US housing crisis. In the Asian markets, which react more sensitively to raw material price fluctuations because of the lack of an alloy surcharge system, the easing of the nickel price resulted in a temporary stabilization. In the meantime however, mill utilization rates are falling due to production cutbacks by stainless producers, particularly in China. In the nickel alloy segment, customers continued to adopt a wait-and-see attitude. The market for titanium remained generally positive.
- The international auto markets showed a mixed picture. The largest growth rates were recorded in the emerging markets. In China, the strong growth continued in 2007. The Brazilian auto industry recorded significant production increases in the final quarter of 2007. Auto market activity in the major industrial countries was weaker. In the USA, demand and production in the fourth quarter 2007 were lower than a year earlier. Higher new car registrations were recorded in the European Union. In Germany, new car sales fell sharply but car production increased due to high exports. The situation on the truck market remained pleasing.
- The global engineering market continued to perform positively. In China, mechanical engineering output grew at high double-digit rates. German machinery and equipment manufacturers also increased their production strongly over the whole of the year thanks to high orders from home and abroad. Demand in the USA was less favorable.
- The construction industry again recorded high growth rates in Asia and Central and Eastern Europe last year. The German construction industry grew moderately thanks to strong demand for commercial construction. In the USA, construction output fell slightly due to the weakness in housing construction.
| 1st quarter ended Dec. 31, 2006 |
1st quarter ended Dec. 31 2007 |
||||
|---|---|---|---|---|---|
| Order intake | million € | 13,301 | 13,270 | ||
| Sales | million € | 12,332 | 12,270 | ||
| EBITDA | million € | 1,507 | 1,083 | ||
| Earnings before taxes (EBT) | million € | 1,062 | 646 | ||
| Employees (Dec. 31) | 184,240 | 193,137 |
Order intake and sales stable
Against the background of slightly weakening economic activity, demand for our products and services remained steady at the high level of the prior-year quarter. Order intake in the 1st quarter 2007/2008 was unchanged from the prior year at €13.3 billion.
Sales in billion €
Group sales were also unchanged from the prior-year quarter at €12.3 billion. Whereas sales increased in the Steel segment for price reasons, they decreased in the Stainless segment due to lower stainless steel prices. Despite negative US dollar effects, Technologies exceeded its prior-year-quarter sales. The higher level of sales at Elevator was mainly due to the successful expansion of business in southern Europe. Services felt the impact of weaker materials business in North America.
As expected, Group earnings down from prior-year quarter
ThyssenKrupp achieved earnings before taxes of €646 million in the 1st quarter 2007/2008, compared with €1,062 million in the prior-year quarter. The Group's earnings before major nonrecurring items were ahead of plan at €715 million.
As expected, earnings were lower than the prior-year quarter, which was boosted by exceptionally strong demand and very high base prices for stainless steel. These factors were absent in the Stainless and Services segments in the reporting quarter. Technologies and Elevator, on the other hand, significantly bettered their high prior-year earnings. The biggest contribution to earnings came from the Steel segment.
Earnings before taxes in million €
Net sales in the reporting period were level with the corresponding prior-year quarter. At the same time, increased personnel and material costs led to a higher cost of sales. Overall, this resulted in a decrease in gross margin from 19% to 17%.
The increase in administrative expenses by €80 million was mainly connected with the construction of the steel mill in Brazil. The decrease in other operating income by €107 million is mainly due to a fire insurance recovery of €119 million recognized in the comparable prior-year quarter.
After deducting tax expense, net income for the period was €435 million. Deducting from this the minority interest in profits of €21 million, earnings per share is €0.85, compared with €1.31 in the comparable prior-year quarter.
Net financial liabilities/receivables and capital expenditures
At December 31, 2007 the Group had net financial liabilities of €859 million. This represented an increase of €1,082 million from September 30, 2007 when we reported net financial receivables of €223 million. The change is due to increased capital expenditures, in particular for the new steel mills, and an increase in working capital.
Net financial liabilities/(receivables) in million €
Capital expenditure in the 1st quarter 2007/2008 totaled €931 million, 12% more than in the prior-year quarter. €898 million was invested in property, plant and equipment and intangible assets, and €33 million in the acquisition of businesses, shareholdings and other financial assets.
Good progress on new steel mills
The mills under construction in Brazil and the USA will open up new transatlantic growth opportunities for ThyssenKrupp. One central ThyssenKrupp Steel project is the construction of a steel plant in Brazil to produce 5 million tons of slabs per year. Implementation of this major investment is proceeding at a fast pace. Construction of all the major works, including port, coke plant, raw materials handling, sinter plant, blast furnaces, steelmaking shop, power plant and the entire infrastructure, is in full swing. Work has begun on erecting structural steelwork. At the end of 2007 contracts had been awarded for 86% of the total procurement volume. 12,000 people are currently employed on the construction site. All of ThyssenKrupp CSA's employees transferred to the site in October last year. Training programs for employees in Germany and Brazil are being carried out to schedule.
The processing and coating capacities at our German plants are being expanded to handle around 2 million tons of slabs from Brazil. All the investments planned to expand the hot strip mills in Bochum and Duisburg-Beeckerwerth and install the necessary infrastructure are being implemented. The ramp-up phase is scheduled to begin in mid-2008. Investments are being implemented in five existing hot dip coating lines to improve quality and increase capacity. Decisions on the award of further projects in the cold rolling and coating areas are planned in fiscal 2007/2008.
The construction of a joint ThyssenKrupp Steel/ThyssenKrupp Stainless plant complex in the USA is also making good progress. The groundbreaking took place in Calvert/Alabama on November 02, 2007 in the presence of high-ranking politicians and guests. Since then, work on the construction site has accelerated. Ground preparation work, which was begun shortly after the site decision was made, has been largely completed. Key environmental permits were granted by the authorities in record time. The contracts for the main production units – hot strip mill, cold rolling mill and hot-dip coating lines – were awarded in a global bidding process. Recruitment has been stepped up.