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Company News, 2013-11-30, 12:02 AM

Sustainable solution found for Steel Americas – ThyssenKrupp to end shareholding links with Outokumpu – capital increase of up to 10 percent planned

Despite once again reporting a loss of €1.5 billion, ThyssenKrupp AG made important progress on its way to becoming a diversified industrial group in fiscal 2012/13. The operating targets for the continuing operations with regard to efficiency enhancement, earnings and cash flow were achieved or exceeded. Net financial debt at the reporting date (September 30) was significantly reduced. At the same time ThyssenKrupp achieved a sustainable solution for the Steel Americas business area.

Sustainable solution for Steel Americas
The ThyssenKrupp Steel USA rolling and coating plant in Calvert/Alabama is being sold to a consortium of ArcelorMittal and Nippon Steel & Sumitomo Metal Corporation (the consortium). At the same a long-term slab supply contract has been agreed that will secure the value of ThyssenKrupp CSA in Brazil. Upon closing, ThyssenKrupp will receive a purchase price of 1.55 billion US dollars from the consortium. In addition, the consortium will purchase two million tons of slabs per year from ThyssenKrupp CSA up to 2019. The plant in Brazil has an annual production capacity of around five million tons of slabs. The agreement now reached will reliably secure at least 40 percent capacity utilization of the plant for several years. In addition, stronger penetration of the slab markets in South and North America will further increase the plant's capacity utilization. The transaction is subject to the approval of regulatory authorities in the USA and a number of other countries.

Dr. Heinrich Hiesinger, Chief Executive of ThyssenKrupp AG, said: “We have found a sustainable solution for Steel Americas. The slab supply contract is a first important step in the decoupling of the two steel plants.” He continued: “The supply contract reduces our risks and creates the conditions to move CSA into profit in the medium term. This is the best available solution for Steel Americas at present. All other options were not financially viable.”

ThyssenKrupp will now concentrate on operating improvements at the Brazilian plant. Over the past fiscal year technical performance has been further optimized and plant efficiency improved. The combination of the sale of ThyssenKrupp Steel USA and the slab supply contract for ThyssenKrupp CSA in Brazil will help ThyssenKrupp improve its cash flow profile and key financials in the future.

Against this background the Steel Americas business area has been re-included in the Group as a continuing operation at the end of fiscal year 2012/13. Until the closing of the transaction, the North American portion will be reported separately as a disposal group. At the reporting date (September 30) the carrying value of Steel Americas was €3.1 billion, reflecting depreciation and amortization over the year, a revaluation in connection with the sale of the plant in the USA, and the re-inclusion of ThyssenKrupp CSA.

Settlement of financial receivable from Outokumpu - transfer of VDM and AST planned
From the sale of Inoxum ThyssenKrupp holds a 29.9 percent share in Outokumpu and a financial receivable which was written down to around €1 billion at September 30, 2013. In the context of the restructuring of Outokumpu's financing, ThyssenKrupp signed an agreement with Outokumpu on November 29, 2013 transferring 100 percent of the shares of VDM and AST as well as other smaller stainless steel service center activities to ThyssenKrupp. In return, the financial receivable created in connection with the Inoxum transaction will be transferred to Outokumpu.

In addition, ThyssenKrupp will fully divest its 29.9 percent shareholding in Outokumpu and terminate all other financial links with Outokumpu. In expectation of a capital increase at Outokumpu, the sale of the shares will probably result in a significant loss on our investment book value of 305 million euros. This will be offset by the elimination of balance sheet risks. Guido Kerkhoff will step down from the supervisory board of Outokumpu. The transfer will enable Outokumpu to fulfill the EU Commission's conditions for the Inoxum transaction in a way that preserves value. At the same time ThyssenKrupp is taking its responsibility to the employees seriously by creating the conditions for a sustainable refinancing of Outokumpu. The transaction is subject to the approval of the competent regulatory authorities and the cooperation and approval of shareholders, banks and creditors for the overall plan for a sustainable refinancing of Outokumpu. ThyssenKrupp will initially further develop the companies VDM and AST and take the necessary time to find a good solution.

Capital increase planned
The Executive Board has always stressed that a decision on capital measures can only be made when a solution has been found for Steel Americas and a better assessment can be made of the compliance risks. The Group had already reported in the past fiscal year that the German Federal Cartel Office had imposed a final fine on ThyssenKrupp in the rail cartel case and that the amnesty program at ThyssenKrupp had been completed. In this connection talks have been held with Deutsche Bahn for some time about compensation and a settlement. The negotiations are complete. ThyssenKrupp and Deutsche Bahn reached agreement in principle in mid-November. For both parties the settlement is subject to approval by the responsible bodies/funding providers.

The investigations by the Federal Cartel Office into possible price fixing in the delivery of certain steel products to the German automotive industry and its suppliers are still ongoing. The internal investigations launched in response to the investigations by the Federal Cartel Office are at an advanced stage but not yet completed. Based on the facts currently known to us, significant adverse consequences with regard to the Group's asset, financial and earnings situation cannot be ruled out.

As clarity has now been achieved for Steel Americas and the Group can better assess the compliance risks, ThyssenKrupp is planning a capital increase, the timing of which will be decided depending on capital market conditions. The Executive Board is convinced that a capital increase excluding subscription rights of up to 10 percent will achieve an appropriate balance between shareholder interests and the requirements of other strategically important stakeholders.

Special audit completed
The report on the voluntary special audit provides confirmation that ThyssenKrupp is moving in the right direction in the area of compliance. Taking into account the dynamic change process at ThyssenKrupp, the special auditors conclude that the systems and processes examined have been intensively enhanced, and the concepts and planned measures are constructive. Overall the auditors find the compliance function at ThyssenKrupp to be professionally organized and appropriately staffed. The auditors submitted proposals for further improvement which have already been taken into account or will be included in the further development of the compliance organization. As agreed, we will publish the full report with the convening of the Annual General Meeting.

Performance in fiscal year 2012/13: Operating targets achieved
ThyssenKrupp AG made important progress on its way to becoming a diversified industrial group in fiscal 2012/13. The operating targets for the continuing operations with regard to efficiency enhancement, earnings and cash flow were achieved or exceeded. Savings of €600 million were made under the efficiency program “impact 2015”, meaning that ThyssenKrupp exceeded its own ambitious target by 20 percent. Adjusted EBIT in the structure of the prior year was €1.1 billion. Adjusted EBIT in the new structure came to €599 million. For the first time in six years the full Group reported positive free cash flow of €600 million (prior year €(1.7) billion). As a result, net financial debt at the reporting date was down from €5.8 billion to €5.0 billion.

Despite the positive operating performance in the past fiscal year, the Group’s financials were weighed down by the problems in the Steel Americas business area. The operating losses and impairment charges at Steel Americas, expenses in connection with the shareholding in Outokumpu, the fine and provisions for compliance violations in the rail cartel case, and restructuring measures in connection with the reorganization of the Group again impacted the balance sheet of ThyssenKrupp and resulted in a net loss of around €1.5 billion (prior year €(5) billion). For this reason the Executive Board and Supervisory Board will again propose to the Annual General Meeting this year that no dividend be paid. “The significant problems at Steel Americas are still weighing heavily on the Group. Yet despite this we achieved measurable success in improving our efficiency, earnings and cash flow,” said Dr. Heinrich Hiesinger.

The operating figures are clear evidence that the measures under the Group’s Strategic Way Forward are taking effect. Dr. Heinrich Hiesinger: “The transformation process will take some time yet. We will need perseverance. It is important that we have a clear goal and are moving forward on our path with confidence, courage and determination – without allowing ourselves to be pressured.”

Operating performance of the Group in fiscal year 2012/13
Order intake from continuing operations (including Steel Americas) came to €38.6 billion, down 12 percent year-on-year. On a comparable basis, excluding disposals, the decrease was only 8 percent. Sales from continuing operations (including Steel Americas) decreased by 7 percent to €38.6 billion. On a comparable basis sales were 3 percent lower. The main reasons for this were disposals and declines in the materials business. There were solid gains in the plant engineering business of the Industrial Solutions business area. The Elevator Technology business area set new records for orders and sales.

Adjusted for special items, EBIT from continuing operations (including Steel Americas) came to €599 million in fiscal year 2012/2013, up from the prior-year figure of €399 million. Adjusted EBIT from continuing operations in the structure of the prior year (excluding Steel Americas) was €1.1 billion, fully in line with the target for the fiscal year. EBIT from continuing operations (including Steel Americas) improved from €(3.7) billion in the prior year to €(595) million but was once again significantly impacted by special items. These decreased from €4.1 billion in the prior year to €1.2 billion and mainly related to impairment charges at Steel Americas, the fine and provisions for compliance violations in the rail cartel case, and restructuring measures in connection with the reorganization of the Group.

Outlook 2013/2014 (including Steel Americas, excluding VDM and AST): Significant improvement in adjusted EBIT to €1 billion
Even though the economic outlook remains subdued from today’s perspective, ThyssenKrupp expects the Group’s sales to grow year-on-year by a mid single-digit percentage rate. The Executive Board believes that adjusted EBIT will improve significantly from €599 million in the past fiscal year to around €1 billion. There are two main drivers for this: firstly the expected growth in the Group’s strong capital goods businesses, and secondly performance improvements from the efficiency program “impact 2015”. ThyssenKrupp expects a significant improvement towards break-even earnings for fiscal 2013/2014.

Performance of the business areas in fiscal 2012/13
With the exception of Steel Americas, all continuing business areas contributed positive adjusted EBIT to the Group’s earnings from continuing operations, both cumulatively for the full fiscal year and in each fiscal quarter. The €1.6 billion adjusted EBIT of the capital goods businesses offset the overall negative adjusted EBIT of the materials businesses (€(116) million) resulting from the charges at Steel Americas.・ At Components Technology the volume of business was lower for structural reasons due to the disposal of the Waupaca forging group in the previous year. Excluding the disposal, order intake fell slightly by 3 percent and sales were down by 4 percent to €5.7 billion. Adjusted EBIT was also lower year-on-year at €244 million.
・ Elevator Technology continued to set new records in fiscal year 2012/2013. Order intake was up by around 6 percent from the prior year to more than €6.5 billion, boosted among other things by pleasing developments in the new installations business in China. Sales were around 8 percent higher at €6.2 billion. This positive performance was also reflected in an improvement in adjusted EBIT, which rose by 15 percent to €675 million.
・ The newly created Industrial Solutions business area combines the Plant Technology and Marine Systems businesses. Order intake was lower year-on-year at €5.3 billion. The high order backlog of €14.6 billion at September 30, 2013 continues to secure a good workload, provides planning certainty and contributes to the prospects for growth. Sales at Industrial Solutions were 7 percent higher than a year earlier at €5.6 billion. Adjusted EBIT at €640 million matched the high prior-year level.
・ With demand very weak and materials prices down significantly from the prior year, Materials Services held up well in the reporting year – also compared with many other market players. Order intake and sales fell by 11 percent to €11.7 billion. Despite all the efficiency measures, the general market weakness still impacted earnings. Adjusted EBIT was down by 24 percent year-on-year to €236 million.
・ Steel Europe recorded a drop in business in the past fiscal year, mainly due to lower prices. The market weakness in Europe with the existing supply surplus put extreme pressure on steel prices. As a result, order intake was 9 percent lower year-on-year at €9.5 billion; sales decreased by 12 percent to €9.6 billion. The market weakness also impacted adjusted EBIT, which came to €143 million, compared with €247 million a year earlier. With positive adjusted EBIT again in all four quarters, Steel Europe demonstrated the quality of its business model, also compared with international competitors.
・ In a generally difficult business environment order intake at Steel Americas was level with the year before at €2.1 billion in the reporting year, though order volumes were higher. Despite increasing production and shipments, sales were down by 7 percent at €1.9 billion as a result of low selling prices. Operating losses were halved: Adjusted EBIT improved from €(1.0) billion the year before to €(495) million. Key reasons for this significant improvement included cost reductions, efficiency gains, and a stronger focus on customer segments with higher margin potential.

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