thyssenkrupp AG (TKA) Earnings Call Transcript

[Technical Difficulty] EUR 311 million, mainly on the back of the preceding restructuring provisions in Q1 that you're all aware of. Talking about free cash flow before M&A, that was minus EUR 140 million in the quarter, improving by EUR 140 million year-on-year. That leads to a accumulated 9-month figure of minus EUR 1.9 billion. Overall, important to note that reflects our usual cash flow pattern that will reverse in the running quarter. Miguel has already mentioned that we do confirm our full year guidance for free cash flow before M&A. With regard to our balance sheet, we maintained a solid net cash position at around EUR 2.6 billion. And in order to conclude the financial overview for the group, the key message is quite straightforward. We are executing strongly on performance management and at the same time, preserving balance sheet strength, while staying realistic about the macro and demand environment. Turning to the next slide. This provides a high-level view of sales and EBIT adjusted development in the third quarter. On sales, overall message is that top line development shows a promising momentum. Improvement was especially supported by Material Services, now tk accelis, with positive effects from prices and volumes, while other segments such as Automotive Technology and Decarbon Technologies still faced pretty low demand. Let's get to EBIT adjusted. Overall increase was mainly driven by steel on the back of restructuring efforts and more favorable raw material costs. In addition, Material Services and Marine Systems also posted pleasant year-over-year increases. These developments more than offset the declines in Automotive and Decarbon Technologies. In short, the quarter demonstrates that our performance measures are becoming increasingly visible in the numbers, even though we are not yet seeing a broad-based market recovery across all segments. Let's turn to our segments. First, Automotive Technology. The key message for Q3 is that we are continuing to manage through a soft market environment, while staying focused on restructuring and internal countermeasures. Sales remain under pressure year-over-year, mainly reflecting softer demand in the serial business. At the same time, continue to see growth in the aftermarket group and Forged Technologies. Please also keep in mind the M&A effect from Automation Engineering with closing of the transaction at the end of March 2026. Hence, from an organic perspective, sales were rather flat. On profitability, EBIT adjusted declined in the quarter. Restructuring benefits and our internal countermeasures are visible, but they could not fully compensate the lower volumes and higher special freight costs. On BCF business cash flow, the development was quite encouraging. Lower investments, improved net working capital, both more than offset the earnings decline and restructuring cash outs. As a result, business cash flow improved year-over-year. So, in summary, demand in Automotive remains challenging, but the operational measures are gaining more and more traction. Let's move on to Decarbon Technologies. At Decarbon Technologies, we're still facing a pretty hesitant project environment, mainly in the chemical plant business. Customers continue to postpone project, which, together with the usual volatility in the project business leads to weak order intake and therefore, decreasing sales. The main driver of the sales decline was plant engineering, and these deteriorating sales negatively impacted our EBIT adjusted in the third quarter. That was also affected by project-related additional costs in the cement business coming from past legacy projects. Performance measures and efficiency gains resulting from our ongoing restructuring and purchasing optimization could support earnings. However, we were not able to fully compensate for the decrease. Positive news on the last KPI on this slide, DT was able to raise business cash flow, mainly on the back of temporarily favorable payment profiles. Let's move on to Materials Services, now known as tk accelis. tk accelis delivered a clear earnings improvement, supported by a favorable market environment, especially in North America, but also in Europe. We saw strong growth in sales that was driven by materials and processing business in Europe and North America with significantly higher shipments, particularly in direct-to-customer businesses and on the back of distribution and processing volumes. Let's take a look at earnings. EBIT adjusted significantly increased due to supportive market conditions and a very strong operational performance with the North American operations delivering the strongest earnings uplift. In addition, our processing business, as well as the European Materials business also performed positively. Talking about cash flow, our business cash flow benefited here from higher earnings, partly offset by price increase net working capital buildout. Moving on to Steel, Steel Europe. There sales increased in the third quarter, driven by higher shipments, particularly from automotive and industrial customers. However, pricing there remained under pressure, especially in packaging and electrical steel. Moving on to EBIT adjusted that improved significantly in the third quarter and more than doubled year-to-date. That was mainly driven by restructuring measures, our hiring freeze, operational excellence initiatives and lower raw material costs. Cash flow, our business cash flow also improved year-over-year, supported also by government funding for the direct reduction plan that is progressing. Overall, self-help measures continue to deliver tangible results and help offset the challenging market environment. Last but not least, Marine Systems, TKMS. As usual, only a couple of brief comments on Marine Systems as all operational details have already been presented yesterday. But it's without saying that we, as a majority shareholder, are more than happy with the development of our segment. Marine Systems continues to build a strong foundation for future growth, supported by an order backlog of more than EUR 20 billion. Let's move on to our EBIT adjusted bridge to net income. Looking at the special items, we saw a slight net positive effect that was mainly driven by the HKM exit from early July and its implications and most notably, write-ups at Steel Europe of around about EUR 400 million in light of a more profitable business outlook of the remaining segment without HKM. As well as the respective impairment losses of EUR 276 million by classifying HKM as a disposal group discontinued operations. Please note that the actual deconsolidation of HKM with a negative low 3-digit million euro impact will be included in our fourth quarter accounts. The remaining positions are rather straightforward after the financial results and taxes, net income for the third quarter came in at EUR 34 million positive. Next chart. Our third quarter reconciliation to free cash flow before M&A. As you can see, in the third quarter, we did not face any material net reconciliation items. Investments are net positive in the quarter, mainly on the back of funding for the direct reduction plant at Steel Europe with an amount of EUR 252 million. The M&A adjustment includes the proceeds for the sale of the remaining stake in AST in the range of a high double-digit million euro figure. Overall, that led to a free cash flow before M&A of minus EUR 114 million. While the quarterly figure remains negative, it improved year-on-year and continues to reflect the typical seasonal cash flow pattern. So, let's have a closer look at our outlook for the remaining year. As Miguel already mentioned, for the full year, we are lowering our group guidance for sales and narrowing for EBIT adjusted, while confirming for free cash flow before M&A. So, let's have a look at the details. For the group, sales are now expected to be between minus 3% and minus 1% versus the prior year. EBIT adjusted is now expected in the range of EUR 600 million to EUR 900 million compared with our previous range of EUR 500 million to EUR 900 million. Free cash flow before M&A is confirmed at minus EUR 600 million to minus EUR 300 million, including lower restructuring cash outs of up to EUR 250 million, as well as a somewhat lower CapEx guidance of EUR 2 billion to EUR 1.3 billion. Net income is expected to be between minus EUR 700 million and minus EUR 40 million including restructuring provisions mainly at Steel Europe. At a segment level, there are several adjustments that led to the updated group guidance. Let me highlight a couple of them. We raised our guidance for sales and EBIT adjusted at Materials Services and Marine Systems. We also raised our EBIT adjusted guidance for Steel Europe, while becoming a bit more cautious in terms of sales expectations. Overall, the guidance reflects improved operational execution, while maintaining appropriate caution on market visibility. And with that, Miguel, up to you again.

Thank you very much, Axel. Let me wrap up today's call with 5 key messages. First, we are changing the setup of thyssenkrupp AG into a lean financial holding company. That transformation is in execution. Second, the tk accelis spin-off will be the next visible proof point in delivering on ACES 2030. Third, on the Steel Europe Capital Markets Day at the end of September, we will provide transparency on the recent progress and milestones that we have reached. Fourth, we will continue to take an individual approach for each business, including the necessary restructuring to secure sustainable success. And finally, we will leverage the opportunities arising from the green transformation and with that, we are at the end of today's presentation. Thank you all for your continued interest and trust. Axel and I are now happy to take your questions. Andreas, back to you.

Thank you very much. We are now coming to the Q&A session. [Operator Instructions] So, the first question is coming from Ephrem Ravi from Citi.

Three quick questions. Firstly, should we see the Steel Capital Markets Day as sort of a prelude for what you kind of have done for Marine Systems and accelis, i.e., kind of a spin-off with holding and then 1:20 shares? Or is this not kind of a signal to the market that that's the current preferred route of how to kind of unlock value in that business? Second question on sort of Steel Europe again, the reduction in sales guidance but upgrade in EBIT guidance, should we kind of take that as more lower volumes, but obviously higher prices and profitability that you're expecting for the last quarter of the fiscal year? And third and final question, sorry to ask this, I know this is a boring and standard question, but Rhine River levels in terms of impact on raw material cost and finished product logistics cost. Could you give us a sense as to how much potentially volume impact or cost impact could be because of that development?

Yes. Thank you very much for the questions. I would like to start with how to frame the Steel Capital Market Day end of September. Actually, as explained, we have been concluding 3 major milestones in steel, which was in December, the agreement on the restructuring plan, then as mentioned, also the HKM agreement and deal. And third, obviously, very important as well, is the European Union tariffs and quota reduction -- tariff increase and quota reduction being in place since July 1. These 3 major events need to be, in our belief, better explained. And that's the reason why we are doing this Capital Market Day end of September in order that the impact from these 3 very important milestones can be interpreted in the right way by you. And that's the motivation for doing this Capital Market Day that we are driving also steel into independence. I think this has been communicated. This is very clear. But we should, first of all, inform about the 3 major things that happened, and we take it from there.

All right. Ephrem, maybe I'll start with your question on the Rhine River situation. That's something we are monitoring on a daily basis. Steel has set up a dedicated task force for that. We are slightly adapting logistics and also taking precautious measures at our production. I cannot yet tell you any potential impact. Let's see what the next weeks bring. But there is a laser focus on that topic and production is all on it. Second, with regard to your question, steel fourth quarter, exactly as you said, assuming lower volumes and somewhat better pricing.

Now the next in line is Dominic O'Kane, JPMorgan.

I have 2 questions. Again, going back to Steel Europe and the -- again, the guide that you've given for the full year. So, I guess my question is, to what extent is the guide overly conservative? Or is it signaling quite significant weakness for Q4? Obviously, if we look at your 9 months realized adjusted EBIT, you're at EUR 373 million. So, you're already comfortably at the midpoint of the range. Given what you're seeing at the moment in terms of the slowdown in Europe, is Steel Europe profitable adjusted EBIT for Q4. So again, I just want to get a sense of are you actually signaling a materially weaker Q4 at Steel Europe than I think ourselves and consensus might be expecting? My second question, again, just maybe going back to the group structure and the success that you've clearly had on TKMS and accelis coming up. How are you thinking about your -- again, whether you -- the 51% long term is the right ownership level? Again, we're at a situation where at the moment, we obviously have kind of peak demand for defense, very, very strong performance for that market. How are you thinking about maybe monetizing the opportunity and the strength that you see for both TKMS and accelis at the moment?

Should I start with your last question? I think it has been a very successful start that we did with Marine System and also we expect a good start with tk accelis with our 51% ownership. And there is no plans in the future to monetize that or to change that so far.

All right. Dominic, let me try to answer your question on our steel guidance. I'd say in your words, it's more caution than weakness. And caution is due to a couple of factors. First of all, uncertainty on energy prices, given the quite volatile situation in and around Iran. Then we've touched upon the Rhine River situation. That's also something we need to monitor. And there is some upcoming and planned maintenance. So that is probably the underlying reason for what we would call more caution than weakness.

Could you maybe just elaborate on the maintenance? How long will the maintenance be affecting the plants?

It's not an overall maintenance. And you're aware that, that plant consists of many huge aggregates. I'd say a major maintenance period is now upcoming for around about 2 quarters. That's something we -- it's a regular business, and that's something we need to manage.

So, that will be Q4 and Q1, just to be clear?

Yes, Q4, Q1 and also lingering into the second quarter.

And the next in line is Jason Fairclough, Bank of America.

Two for me, please. First one is on accelis and then just a follow-up on steel. So, first of all, in accelis, obviously, a big increase in profitability. And I'm just wondering if you could give us some color on how this might be helped by inventory effects for materials that were perhaps previously acquired at a lower price and are now being sold for higher prices versus how much is actual structural profit uplift from running the business better, perhaps in anticipation of the spin. So that's the first question. Second question is on the steel business. It's a bit of a turnaround here, right? So you previously effectively were looking at giving this away for free. So, you've now got the TRQ, you've got the announced restructuring. Are you willing to confirm a potential profit uplift in steel from the labor restructuring of, say, EUR 400 million to EUR 450 million?

Well, maybe let's start with Jason, this is Axel. Maybe let's start with accelis Material Services. The uplift that we are mentioning, it's -- the majority is based on volume, but it's also due to the effect you've been describing selling materials at higher prices. So, it's a mix of volume and price increases. For steel, can you specify your question maybe? What do you mean with EUR 400 million to EUR 500 million?

So, you're laying off -- you've got, I think, a total 11,000 people who are leaving the business, 5,500 are leaving, leaving, 5,500 being outsourced. If we think about 5,500 and the cost of a steel worker, if we think about the run rate profitability of this business, it could be several hundred millions of euros better than it has been historically. Is that the right way to think about it? I guess I'm just trying to think about the profit potential for the steel business and how it's evolving versus what it was 2 or 3 years ago.

Jason, this question energizes me a lot, to be honest. And I think this is exactly the reason why we are now doing the Capital Market Day end of September because we want to be transparent in what the different buckets will be impacting the bottom line. So, please stay tuned until end of September, and I would like to see you in London, and then we will get you and all the other market participants then informed about what the 3 big things that I mentioned before will be in terms of bottom line and also in the medium term. So, it's indeed something very important to communicate.

And just so that I understand, so historically, there was a dual track here, which was separate the steel business through an IPO like we've done already with Marine, like we're doing with accelis or potentially pursue a trade sale to a third party. Would you confirm that the focus today is very much on door #1?

Definitely.

Next in line is Boris Bourdet from Kepler.

Just as a follow-up on Jason question on the steel CMD and potential spin-off. Would that be a minority spin-off? Or would that be a majority spin-off? Because I remember in the past, you were really much looking to make that business independent. And given the 3 elements you've outlined like the TRQ, the restructuring and the deal on HKM, do you see now the lines moving in terms of potential buyers? That's the first question. And the second question would be on restructuring. I haven't seen provisions for restructuring moving so much quarter-on-quarter. Is it something pending that we should expect in Q4? And maybe a very last one on the DRI plant. I remember the total investment was a gross investments of EUR 3 billion financed up to EUR 2 billion with public funding. I've seen a press release this morning pointing to potential renegotiations. So, what could be the upside here?

All right. Boris, it's Axel. Maybe on the DRI, you're totally right. Overall volume of around about EUR 3 billion funding or public funding is EUR 2 billion. There is no re negotiation on the financial terms or fundings. There is talks around to what extent we need to, let's say, use hydrogen in the first instance. That is something we have been very successfully and very positively negotiating with both the EU on a EU level, but also on a national level. So, from a financing perspective, nothing is going to change, EUR 3 billion overall, let's say, CapEx. And of that EUR 3 billion, EUR 2 billion is publicly funded. So, that is with regard to DRI. Then your question with regard to restructuring provisions, there is not much more to expect in the remaining year. So, we've done our restructuring provisions mainly for steel in the first quarter. And we have now that is also important to realize in the first quarter, we have somehow anticipated restructuring provisions for HKM. However, as you know, we have now sold our shares to Salzgitter, and that is why there's not going to be any restructuring provisions on HKM anymore. And I guess, Miguel, you're going to take the, yes.

Yes. Regarding your question about a spin-off in steel, majority and minority, I would like to indicate, let's please do step by step. The next step, and that's the reason why we announced it the other day. The next step is to get the Capital Market Day for steel end of September. There, we will inform about, as mentioned before, the 3 major actions that we did put in place. So, the restructuring agreement, HKM and also the increase of tariffs and a reduction of import quota into the European Union and their respective bottom line impacts that we will see over time regarding these 3 impacts. And then with the CMD being done, we will then take one step after the other. So, no decisions are made. And as I said, we have been making a lot of good experience with getting really very organized step by step, and we will do so the same way for steel.

Next in line is Alain Gabriel from Morgan Stanley.

I have 3 short questions. The first is on HKM and the impact of that business that it had on the Steel Europe. So, now that you're stripping out HKM, can you give us an order of magnitude of the impact of that business upside or downside to your underlying Steel Europe EBITDA or EBIT in that sense? That's one. And then two on TK Elevator. If you were to hypothetically sell your stake today, would you be incurring any capital gains taxes? And then three is on your free cash flow guidance. You've lifted your EBITDA or EBIT, you've cut your CapEx and yet your free cash flow remains unchanged. Presumably, this is entirely a change in assumptions on the net working capital? Or is there anything else that you've changed?

All right. Thanks, Alain. Maybe let me start with HKM. We cannot quantify the EBIT impact, but I think I can give you a little bit of, let's say, of a calibration. We were able by selling HKM, we were able to write up our steel business at an amount of around EUR 400 million. That should give us -- that should give you an impression, let's say, what the impact has been over the past years. So, it's a positive impact on our steel business that we have sold our shares to Salzgitter. Yes, that hopefully, that put that into perspective, HKM. Then free cash flow, it's still -- I mean, we're expecting still restructuring cash out. We have confirmed our guidance, again, minus EUR 300 million to minus EUR 600 million, and we are quite optimistic in order to reach that guidance.

Can you specify your question with regard to TKMS? That wasn't so clear to me.

Yes, you do have it on your statement on your balance sheet at book value. If you were going to sell your stake, let's say, at market value today, would you be incurring any capital gains tax? Or do you have some tax losses that you can write off against it so that you can sell it at market value?