Thyssenkrupp revises full-year forecast
by David Fleschen
The materials and capital goods group thyssenkrupp is proceeding with its fundamental strategic realignment according to plan. With the presentation of its figures for the first 9 months of the current fiscal year, the Group is announcing initial decisions and a timetable for the further development of the realignment resolved in May 2019. The aim is to significantly improve the Group’s performance and build a fundamentally new thyssenkrupp in which its businesses develop in the best possible way and hold leading market positions.
“In view of the increasing economic headwind, we changed direction in good time and are pressing ahead forcefully with the restructuring of thyssenkrupp,” says Guido Kerkhoff, CEO of thyssenkrupp AG. “The focus of the first phase is on the structural stabilization of the businesses, which will also require an efficient leadership and organizational model. With this we are preparing the groundwork so that in the second phase we can position our businesses for long-term profitable growth.”
The new thyssenkrupp (“newtk”) follows three basic principles: “performance first”, “flexible portfolio” and “efficient organization”:
Performance first: medium-term targets confirmed
Improving performance is the first priority in all business areas. The previously stated medium-term targets continue to apply. To achieve these, thyssenkrupp has initiated comprehensive performance programs in all business areas, including continuously monitoring the progress of measures already underway to determine whether additional programs are needed.
In addition thyssenkrupp has identified businesses which, despite intensive efforts, are currently not competitive or where their current market situation calls into question a competitive positioning from today’s perspective. These businesses have been placed under review by thyssenkrupp. Specifically this concerns:
• Springs and stabilizers: chassis components for the automotive industry in the Components Technology business area
• System Engineering: construction of production lines for the automotive industry in the Industrial Solutions business area
• Heavy plate: solid steel plate among other things for the construction industry, shipbuilding or pipelines in the Steel Europe business area
These three businesses represent four percent of the Group’s sales but a quarter of the negative cash flow expected in the current fiscal year. A team of experts will now develop restructuring plans for these businesses under review. If restructuring proves unsuccessful or impossible, the company will examine other strategic options.
Guido Kerkhoff: “We will assess the potential of the three businesses. We definitely see opportunities for their further development but not necessarily under the umbrella of thyssenkrupp. We will not allow a situation to continue where businesses with no clear prospects permanently burn money and destroy value that other areas have created.”
The steel business faces particular challenges. After the prohibition of the joint venture by the European Commission, the new business area board is working hard on a sustainable strategy for the future. The aim is to address the structural problems in the European steel industry and at the same time mitigate the impacts of the current market dislocations, characterized by weaker demand and extremely high ore prices.
Improving thyssenkrupp’s performance will also require cutting 6,000 jobs as announced in May, including up to 2,000 in the steel division. thyssenkrupp will decide the details of the job cuts in the course of the reorganization (see “flexible organization”).
thyssenkrupp will announce more details regarding the businesses under review, the future plan for steel, and the job reductions before the end of the calendar year.
Flexible portfolio: IPO of elevator business planned in fiscal 2019/2020
A set-up in which the businesses can develop in the best possible way it is essential to the success of newtk. To this end, as announced in May, thyssenkrupp is considering the right portfolio strategy for the businesses.
For the automotive businesses, size is key when it comes to the transition to electric vehicles and autonomous driving. In plant engineering, increasing competitive pressure, particularly from Asia, raises the question as to whether the businesses can perform better through partnerships or combinations. In the materials businesses the Group continues to consider consolidation options.
The most important portfolio measure is the planned partial IPO of Elevator Technology. This will allow thyssenkrupp to sustainably strengthen its capital base and make the value of its elevator business visible. By retaining a majority interest, the Group will also continue to profit from future value growth. With the expected proceeds, the Group will increase its financial leeway for necessary restructuring and securing the future of its businesses.
Preparations for the flotation of the elevator business are on schedule. The carve-out is to be completed by the end of 2019. Depending on the capital market environment, the Group aims to carry out the IPO in the 2019/2020 fiscal year. Guido Kerkhoff: “We are preparing the IPO for Elevator but are also examining the expressions of interest made by potential interested parties. This also applies to the other businesses.”
Efficient organization: significant and direct contribution to efficiency
To enable them to operate more successfully in the market, the businesses will be given more entrepreneurial freedom but also more accountability under the strategic realignment. The Group’s organizational set-up will be leaner, faster, simpler and more flexible. Joint teams from the Group headquarters, the business areas, and the operating units are currently developing the future organizational structure. The aim is to start operating in the new structure from the beginning of 2020. Employee representatives will be closely involved in the implementation process.
Central administrative costs are to be reduced to below €200 million by fiscal year 2020/2021 (fiscal year 2017/2018: around €380 million). thyssenkrupp expects further savings from the streamlining of structures and cost reductions in the individual business areas, whose administrative costs currently add up to around €2 billion.
Key figures 9 months 2018/2019
In the first 9 months of fiscal year 2018/2019 thyssenkrupp continued to grow in a difficult economic environment. Order intake increased by 2 percent to €30.7 billion. Sales improved year-on-year by 1 percent to €31.2 billion. Growth was slowed by increasingly weaker global economic momentum, a marked downturn in the automotive sector and continued high import pressure for steel. Added to this was the massive increase in raw material prices, especially for iron ore. These factors are reflected in operating earnings, particularly in the auto components and materials businesses. 9-month adjusted EBIT  at €683 million was significantly down from the prior year (€1.3 billion).
“Overall we cannot be satisfied with our performance in the first 9 months,” says Kerkhoff. “In the capital goods businesses we are seeing a continued good order intake and a positive sales trend despite the headwind. This shows that our action plans are taking effect. However we were unable to offset the impacts of the current auto market weakness and the ore price trend. This makes it clear that with our corporate strategy clearly focused on improving performance we have set the right priorities at the right time.”
Growth in the capital goods businesses, materials under pressure
The growth in orders and sales in the first 9 months was due solely to the capital goods businesses. Elevator Technology again recorded a significant increase in orders thanks to several major projects in Asia-Pacific and Europe. In particular, the elevator business in the USA drove sales growth. Industrial Solutions increased its order intake and sales mainly in chemical plant construction, while Components Technology achieved growth particularly in industrial components. At Marine Systems, order intake was lower but sales were significantly higher than a year earlier. The Materials Services and Steel Europe businesses were affected by the overall slowdown in market momentum, in particular due to a noticeable drop in demand from the auto industry.
These factors also weighed on operating earnings. At Components Technology, adjusted EBIT decreased to €183 million (prior year: €267 million). China and Western Europe in particular, as well as business with springs and stabilizers, were weaker. Business with industrial components was higher year-on-year. Elevator Technology was able to offset adverse material and selling price developments with performance measures and maintain adjusted EBIT at €642 million, level with the prior year (€641 million). Industrial Solutions reported adjusted EBIT of €(112) million (prior year: €(107) million). This was due to lower margins on projects currently being implemented and delayed customer orders at System Engineering. Marine Systems improved its earnings and broke even (prior year: €(117) million), while Materials Services was unable to maintain its prior-year earnings level (€119 million compared with €235 million in the prior year), mainly due to declining prices and volumes.
At Steel Europe, significantly higher raw material costs (especially for iron ore), lower demand from the auto industry and the historically low Rhine water levels led to a drop in earnings to €77 million from €586 million a year earlier. thyssenkrupp is making significantly faster progress than planned in reducing central administrative costs. Expenses at Corporate were reduced in the first 9 months from €(237) million to €(219) million.
The development of operating earnings resulted in a net loss in the first 9 months of €(170) million (prior year: net income of €229 million). This includes the increase in the provision for risks from antitrust proceedings in the 2nd quarter. After deducting minority interest, net loss amounted to €(207) million (prior year: net profit of €189 million); earnings per share came to €(0.33) (prior year: €0.30).
Free cash flow before M&A improved in the 3rd quarter compared with the prior-year quarter but remained significantly negative in the first 9 months at €(2.5) billion (prior year €(1.6) billion). The main reason for the cash outflow was increased net working capital, in particular at the materials businesses.
Revised forecast 2018/2019: adjusted EBIT expected at around €0.8 billion
Against the background of weaker than expected economic growth and in particular higher raw material costs for iron ore, thyssenkrupp has adjusted its forecast for the current fiscal year 2018/2019. The negative volume and margin effects are having a particular impact on the auto components and materials businesses.
Adjusted EBIT is expected to be around €0.8 billion (previously: €1.1 to 1.2 billion; prior year: €1.4 billion). The revised adjusted EBIT outlook is also reflected in free cash flow before M&A. Here the Group expects cash outflows of more than €1 billion (previously: negative in the high 3-digit million euro range; prior year: €(134) million). thyssenkrupp continues to expect negative net income (prior year, before €107 million adjustment for catch-up depreciation and amortization: €60 million).
Source and Photo: Thyssenkrupp