Thyssenkrupp Ag S/Adr

Ladies and gentlemen, welcome to the ThyssenKrupp Conference Call Interim Report First Quarter 2023-2024. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. I will now hand you over to Andreas Trosch. Please go ahead.

Thank you very much, Operator. Hello, everyone. This is Andreas Trosch from Investor Relations. Also on behalf of of my entire team, I wish you a very warm welcome to our conference call on the Q1 results. With me in the room are our CEO, Miguel Lopez, and our CFO, Klaus Kalsberg, and also my colleagues, Jacques and Annika, from my team. Before I hand over to the CEO and Klaus for their presentation, some housekeeping. All the documents, as usual for this call, are available in the IR section on the website. The call will be recorded and the replay will be available shortly after the call. After the presentations, there will be a Q&A session. Please only ask two, maximum three questions at a time so that everyone has a chance to ask the questions. And with that, I would like to hand over to our CEO, Miguel Lopez.

Thank you, Andreas. And since this is your first conference call with ThyssenKrupp, welcome on board officially. Also a warm welcome from my side to all of you in today's Q1 conference call. It's a real pleasure. And at the beginning of our new fiscal year, we have to continue to cope with the still challenging and volatile macro environment. Yet we were able to clearly deliver on our management priorities that you are well aware of. Let's get to portfolio first. By the end of the last fiscal year, we simplified our group structure and now only report five segments, which leads to less complexity. This includes, as part of our transformation journey, that we created the segment decarbon technologies for which we will present first actuals today. And at decarbon technologies, there is one transaction I want to highlight. At the end of January, we signed the agreement to sell our remaining 55% share in our Polyseus business ThyssenKrupp Industries India to the core shareholders. With Polyseus now being part of the carbon technologies, they are focusing on services and green technologies in the cement and lime business. Whereas ThyssenKrupp Industries India is involved in the mining business amongst others, a direction that we do not want to pursue any further. Closing is expected in fiscal Q3 after fulfillment of the necessary closing conditions, in particular after approval of the transaction by the Indian Merger Control Authority. Of course, we will continue the transformation at the other segments as well and relentlessly strive for standalone solutions for steel Europe and marine systems. Our second priority, as you all know, is performance and here I'm happy to state that our Q1 results are in line with our expectations and that I can confirm our full year guidance for EBIT adjusted and free cash flow before M&A. Regardless of this, we all are aware that our performance is not where it should be, therefore we decided to anchor that performance ambition even more into our DNA and into our management board by now having two additional board members, each being responsible for a segment. Ilse Henne being responsible for material services and Volkmar Dienststuhl taking over responsibility for automotive technology from 1st of January 2024. If we look at our new performance program, APEX, I'm happy to report that the program is well on track and already showed first effects stabilizing our Q1 earnings. Our third item on our priority list is green transformation. Last but not least, with the formation of decarbonized technologies, we are leveraging business opportunities by positioning ourselves as an enabler of green technologies and decarbonization. I had the great pleasure to participate in many extensive and fruitful discussions at the COP28 in Dubai last December, a very important platform to exchange ideas that will actually change our climate. Here, we are able to sign contracts for two projects that will drive forward decarbonization of emission-intensive industries, both based in the United Arab Emirates. Polysius and Fujarat Cement Industries will cooperate to replace fossil fuel in cement production. Our cement business, Polysius, has developed a new combustion chamber technology that allows fossil fuels to be completely replaced by green alternatives, thereby reducing emissions and operating costs. Ude will build a large biopolymer plant for gulf biopolymers the biopolymer from that plant will be derived from renewable biomass sources is biodegradable and has a substantially lower carbon footprint compared to synthetic polymers made from fossil fuels let me assure you this group wants to play a proactive role in the green transformation and this will pay off for all our stakeholders. Coming back to our second priority, I would like to provide you with some more color and give you some examples on actual apex measures. At DeCalm Technologies, or to be more precise, at Polysios, we have launched a large-scale service transformation program. The aim is to enable Polysios to evolve its original business model as a mechanical engineering and construction company even further in the direction of services in order to generate high margin and stable sales growth. The second example comes from Steel Europe. Here we have identified further potential in marketing by products from steel production, such as granulated blast furnace slag. It is a byproduct from blast furnaces and is used in the construction materials industry, especially in cement and concrete production. At Marine Systems, leasehold contracts for shipyard capacities that are not permanently utilized in full due to the order situation have been renegotiated. Initially, until the beginning of 2025, this flexibilization will deliver significant savings. Materials Services is expanding its business with value added services in the areas of supply chain management and optimization. materials procurement and raw materials supply as part of the extension of a long-term contract with a leading aerospace company. These four examples alone will generate a total effect of over €50 million. Now you might ask, is that really a lot? However, please keep in mind that these are only four examples of the more than 2,500 measures we have identified so far. With that having said, I would like to hand over to Klaus for the Q1 financial highlights.

Yes, thank you, Miguel, and also a warm welcome from my side to today's Q1 conference call. Overall, looking at the financials, I'm happy to state that we made a rather straightforward quarter in an ongoing challenging market environment. The solid set of numbers that I will present to you met our expectations for the quarter. It is a confirming start for our full year goals and supports our guidance. at least for our two most important KPIs, EBIT adjusted and free cash flow before M&A. And I'm happy to state, as Michael already mentioned, that first positive effects from the APEX performance program made their way already into our profit and loss. Now, let us have a closer look at our financial highlights for Q1. Sales came in at 8.2 billion euros with 9% below last year's level. This development is primarily driven by the materials business. Here, mainly the lower spot market prices resulted in lower sales, whereas shipments at Steel Europe and the stockholding business at FNX came in stable year-on-year. With regard to earnings, EBIT adjusted of 84 million euros in Q1 came in as expected and met our guidance. In line with sales, the year-on-year earnings development was also affected by lower spot market prices, mainly at our materials businesses, but also driven by a momentary decline in decarbon technologies. On the positive side, the first positive effects resulting from AFEX had an offsetting effect and stabilized group earnings. On the back of typical seasonality at the beginning of our fiscal year, free cash flow before M&A was in a negative territory at minus 531 million euros. This, of course, will be reversed during the fiscal year, and we are striving for an again positive free cash flow before M&A with a figure in the low three-digit million euro range. But let us continue now with some further balance sheet highlights, which you can see on the next slide. So overall, our balance sheet continues to show a very solid picture and provides resilience while navigating through a really challenging market environment. Moreover, our balance sheet enables us to tackle strategic opportunities whenever possible. Looking at the details, year-to-date, driven by the free cash flow before M&A, our net cash decreased by 0.4%. of 3.8 billion euros for the group. Pension liabilities increased by 0.6 billion euros to 6.1 billion euros from end of September. Here, the recent decline in relevant interest rates became noticeable, as we have to use the pricing and yield data from long-term AA corporate bonds as of 31st of December 2023. In light of increased pensions, as well as further impairments that resulted in a net loss for the quarter, our equity ratio decreased to 36.2%, still a very comfortable level. These impairments represent mainly technical effects at the Europe included by an increased risk-free rate for valuation purpose that seems to currently decrease again. Let us now jointly take a more detailed look on the financials and start with the Q1 performance of the group. On the top line, we saw a decrease in sales, as mentioned before, by minus 9% yearly, mainly driven by softer spot market prices at our materials businesses, namely materials services and cereal. Partially weaker demand with somewhat muted market dynamics, for instance, for the direct-to-customer business at materials services. In light of a persistent challenging market environment, EBIT adjusted was down to 84 million euros. Here, the spot market price levels also weighed on the performance of our materials businesses, even though materials services was able to more than compensate those effects, mainly due to positive effects from cost-casting measures. Efficiency measures counteracted top-line price decline to a large extent, not only at materials services, but throughout the group. The implementation of APEX is very well progressing and already supported the performance of all businesses in Q1. Free cash flow before M&A came in, as expected, at minus 531 million euros, with typical seasonality on the back of net working capital build-up at the beginning of our fiscal year, but fully in line with our guidance. Please also note that Marine Systems had some significant milestone payments in the previous year, as well as also some earlier than expected customer payments in Q4 that resulted in a respective rebound in Q1. Even adjusted on the next page, let us have a closer look on the composition, namely EBIT adjusted by segment in our new structure, and let us start with automotive technology that improved year-on-year earnings slightly in an overall robust market environment. EBIT adjusted increased by 3 million euros to 48 million euros. Our colleagues could benefit from lower material costs, especially electronic products, however, had to process inflationary-driven higher personal expenses. At DECAM Technologies, EBIT adjusted temporarily, came down by 36 million euros year-on-year to a minus 17 million euros. Despite good contribution from performance and efficiency measures, all businesses were pulled down by various, partially non-persistent reasons. At Roter Erda, our bearings business, competition, especially in the wind industry in China, keeps going on. UDA had to deal with non-conformity costs and Polybius with higher cost base. ThyssenKrupp Nussera invested in growth initiatives with currently higher costs that will bear fruits of course later on. This recorded an EBIT adjusted of 26 million euros, an increase of 6 million euros year-on-year. The satisfying year-on-year development was supported by ongoing efficiency measures, for instance further network optimization, but also tailwind from freight costs. On the opposite, market demand, especially in Europe, remains weak year-on-year. At Steel Europe, EBIT adjusted came down by 21 million euros year-on-year to 69 million euros. Again, the ongoing normalization of spot market prices compared to last year drove earnings development and overshadowed a favorable cost development, for instance, for energy and raw materials. Chipments, on the other hand, were almost stable year-on-year. Consequently, EBITDA per ton also decreased to 50 euros per ton. Marine Systems is almost stable with earnings down 2 million euros year-on-year to 17 million euros. The focus remains on performance improvements and project execution. In addition, we strive to further stabilize the older and less profitable orders and thus benefit from the higher margin orders in the pipeline. Please also note that our order backlog stood at 12.7 billion at the end of Q1. Last but not least, our headquarters and others came in lower by 33 million euros year-on-year due to higher administrative costs and mainly due to a positive one-timer, including the others, meaning a one-time reconciliation effect in the prior year. Having talked about that past quarter, let us now have a look at the full year outlook on the next slide. Let us start with our most important KPIs, EBIT adjusted and free cash flow before M1A. To sum it up, our guidance for these KPIs is confirmed and thus unchanged. Let me shortly remind you, on the earnings side, we projected EBIT adjusted to increase to a figure in the high three-digit million euro range. This projection includes an earnings contribution of steel rope in the mid three-digit million range and which is expected to be higher year on year. Overall, we also increased earnings at automotive technology, material services and marine systems. For free cash flow before M&A, we are again striving to end up in a positive territory. That means that we expect free cash flow before M&A with a figure in the low three-digit million euro range. Please note that the market environment and the payment profile in our project businesses, especially in marine systems, both have an essential impact on that development. Let us now look at the top line here. We now expect sales at a prior year level compared to slightly up as expected before, mainly driven by lower shipments expectations that our materials businesses given the ongoing challenging market environment. But that also implies that we have effective countermeasures in place to tackle those macro and top-line headwinds. Having said that, I would like to hand over to Miguel again.

Thank you, Klaus. Please let me take this opportunity to also confirm our view beyond the current fiscal year. Here you can see our mid-term targets on group level. until fiscal year 2024-25 that we confirmed with our annual report in November last year. As the AGM is just behind us, I would also like to highlight that we again paid a dividend of 50 cents per share and thus underline our clear ambition to pay a reliable dividend going forward. Please also consider that the mid-term targets are just the milestone on our journey. Beyond the mid-term, there are upside potentials, for instance, through the progress in our transformation, also leading to much better operational performance, leveraging the potential of our leading technology positions, further reducing restructuring cash out, and normalized, but still above a DA, invest levels will support our cash flow generation

the longer term and with that we are at the end of our presentation thank you and now we are ready for your questions thank you ladies and gentlemen if you have a question for the speakers please press star 1 1 on your telephone keypad once again that is a star 1 1 on your telephone keypad to register for a question And one moment for our first question, please. And our first question does come from the line of Jason Fairclough from Bank of America. Please go ahead. Your line is now open.

Good morning, gentlemen. Thanks for the presentation today. Look, a couple questions for me are both on steel. So the first one, you've taken another write-down. I guess my question is, could this be a prelude to a disposal, and could you give us some color on the – the timing of the steel disposal. So that's first. Second question on steel. Slide 43 in your presentation, I'm confused by a couple things. Capital spend is normally a few hundred million per quarter. This quarter, you're saying positive eight. Also, the capital employed in this business was most recently reported as 5.4 billion, and it's dropped to 3.6. So I'm just wondering what's driving that.

Maybe I can start with the questions regarding capital employed. The 5.4 million euros you referred to, this was the capital employed before the impairment of the last fiscal year. You might recall that in Q4 of the last fiscal year we had an impairment. And with this impairment we reduced capital employed from 5.4 to 3.6 billion euros. And then you were referring regarding the capital expenditure. Here you see the positive 8. This is the net number because we received funds from the government. And then you see the net number. The net number is positive because we received more funds than our capex number.

And sorry, Klaus, is that related to decarbonization?

Yes, of course. Sorry, of course. You know that we told you that we get funds or subsidies of roughly 2 billion euros to the end of the erection of the direct adaption plant. And of course, we already receive payments. And this is one payment we received in this Q1. This is 193 million euros which we received.

Okay, thank you. Then the write-down and disposal timing.

The write-down, which we see now, which we saw in the Q1, was just a technical one. You know, when we are calculating the wax, we know that we do quarterly and impairment testing on the acid base. And what we saw in the first quarter, the end of September to the end of December, rate, which was increasing. And this increasing effect led to the phase that also the WEC increased. And just this technical effect led to the situation that we had to impair the asset value of the steel. Just for information, this risk-free interest rate, meanwhile, is decreasing again. So we cannot exclude that we see the opposite. Yeah, this is something which we might see in the next quarters coming. So in terms of the disposal.

So it's clearly adjacent. It's clearly not a prelim of a disposal. It's the effect that Klaus just mentioned in the calculation of the WAC.

Okay, and so just so that I'm clear, so what is the carrying value of the steel business today? Is it 3563, or is it something close to that, or is it 3563 minus 200 for the write downs?

It is meanwhile 3.6 billion, so including the write downs, it is roughly 3.6 billion.

Okay, and so to the extent that you made a disposal tomorrow, If it were above that, you'd make a profit. If it were below that, you'd take further loss on it, yeah? Oh, it is the way it is. Okay. Thank you. Appreciate the call. Thank you.

Thank you. And one moment for our next question, please. And our next question comes from the line of Ellen Gabriel from Morgan Stanley. Please go ahead. Your line is now open.

Yes, thank you for taking my question. Just to follow up on Jason's question on the Steel Europe division. Do you have a self-imposed deadline or timeline for your ongoing discussions with respect to the future of that business with the other party you're negotiating with? Or is it an open-ended discussion? That's my first question.

Well, the current status of the conversation is we are building a new business plan and with this new business plan then we will continue the discussions with our partners, potential partners. There is no limit that we have imposed because we want to be going for a good agreement.

Thank you. And then my second question is on your EBIT guidance for the full year. You will need to lift your quarterly EBIT run rate by threefold and keep it there for the next three quarters to meet your full year guidance or to meet where consensus sits today. What are the biggest moving parts that will boost your profits at the group level if you were to think in the next nine months ahead? Thanks.

I mean, if you look at our development here, normally in a seasonal pattern, you normally see, in spite of any, let's say, overall economic development, you see the first quarter is always weak. We definitely see an improvement in EBIT development in our e-card technologies and also in most every of the segments here. because still just a function of the sales numbers, which is going to increase during the year. You know that starting from January or February, volumes are always going up. And of course, this is what the market perspective is. And of course, you know that we have this APEX program. And with the APEX program, we are really contributing to this development also.

Thank you.

Thank you, and one moment for our next question. And our next question comes from the line of Bastian Sunakowicz from Deutsche Bank. Please go ahead, your line is open.

Yeah, thanks and good morning all. My first question is also coming back to your guidance piece. So if we look at your guidance framework, you've been cutting the sales part of your guidance, despite the fact that the price dynamics in steel are probably admittedly a little bit stronger than one could have expected back at November time. So I'm wondering, what are the moving parts here? And as this did not impact the EBIT part of your guidance, so would you say that you gained more conviction in achieving the target for improving EBIT versus the last year? That's my first question.

Yes, you got it. Absolutely. So this is, this is clearly what you said. We can confirm what, what your statement is.

Okay. So, so basically, uh, but just maybe coming back in on the thesis. So, um, where are you able, so what led you to cut the, um, to basically cut the sales guidance? Um, I guess if price are slightly better, uh, has it been lower volumes and if it's lower volumes, we have, we have been able to compensate the sales part of your guidance within the EBIT framework.

Yeah, as we said before, so of course we saw in the first quarter some sales effects, which were some driven by volumes, but also by prices. And then bringing up what the normal seasonal pattern is regarding volumes, regarding pricing, we don't see too much optimistic pricing. If you now say that we are too optimistic in the pricing in the material business, this is not the case. We don't see that too much dynamic. But if we calculate this in comparison with raw material costs, in comparison with energy costs, in comparison with the APEX things which we see, and also some development in other business areas, we are confident that with this slightly lower sales number, we will be able to deliver this EBIT guidance.

Okay, very clear. Thank you. Then maybe also going even a bit more into detail on the steel business, and I guess by now you should have pretty good visibility on your order book, but without talking about shipments where I guess the call-off rates can still be a little bit uncertain, do you expect to be able to keep your gross margins in steel at least flagged into the second quarter?

Well, you know that with the gross margin, we normally do not comment on the gross margin here. We know because it's a function of our sales, of our price, and also on raw material costs and things like this. We are only guiding, let's say, full year numbers. Sebastian, I think you know this.

Okay, fair enough. At least worth a try. But maybe then moving over to my last question on marines, where you entered the next phase, and I think you started negotiations with KFW. And from what I understand, that has been a very important step. But I guess there are also some articles suggesting that your two main competitors potentially aim to transfer the control to the German government as well. So can you maybe update us here what you're aiming to achieve and what is really the desired end game scenario for Marines you were looking for?

Yeah. So first of all, you just mentioned it. I believe we made a very, very important step in getting the next phase of analysis where the KfW have been asked to analyze a potential take of a stake in marine systems. So this is a very, very important step because, as you know, and we have been commenting in previous conversations, it is about to be on the same level of competitiveness as our European competitors because they have not the need for the same level of guarantees as we do have. So this is a very important step in order to now get a result in the next month around the decision to whether a stake is possible or not. And we are confident and positive about it. So, and then from as soon as we have this confirmation, we will then take the next steps and we will keep you then informed.

Okay. Thank you.

Thank you. And one moment for our next question, please. And our next question comes from the line of Moses Ola from JP Morgan. Please go ahead. Your line is open.

Hello, everyone. Thank you very much for taking my questions. I have three questions, but just a housekeeping question, firstly. So you've not provided quarterly guidance with this report. Should we assume that this will be the protocol now going forward? And why is this the case, please?

Yes, this is exactly what you said. This has nothing to do with a short-term decision or just for the next quarter. This is a principal decision we take that we do not guide for the next quarter any longer. First to say, this does not imply anything regarding our full-year guidance. convinced that we will achieve off-year guidance. It's just a principle decision to do that not any longer.

Why is that, please?

Because it makes, for us, it makes more sense and it makes really to be very clear to say that we just do the full year of guidance and not have so much discussions around what the next quarter is and what not.

Okay, thank you. And then just on Steel Europe, please. What has been the evolution of your annual contract negotiations this year, calendar year versus last calendar year? And if you could also give any color on half-year contracts as well, please.

Can you repeat this? What is the...

The annual contract negotiations in terms of the pricing year-on-year, what you were able to see from negotiations, and then also give color on some of the half-year contracts as well.

You know that we do these contracts on the 1st of January, some half-year, some full-year, 12-month and 6-month contracts. We do this also in April and also in January. What we can say so far that we, of course, were able to fix the contracts regarding our estimation. And the estimation also is what the outcome is that we, of course, were able to fix prices above spot markets, but we are not commenting any further on pricing issues to understand.

That's clear. Could we assume maybe a step down year on year, given where we saw spot prices in 2023 versus 2022? We don't comment on prices. Sorry for that. Okay, no worries. And then just finally, could you please just give up-to-date value for current pension liabilities associated with just Steel Europe?

If you look at the pension liabilities in total, it's $6 billion, and you can consider 50% of them to Steel Europe.

Okay, thank you very much.

Thank you. And one moment, please, for our next question. In the meantime, to ask a question, it is star 11 on your telephone keypad. Once again, it is star 11 to register for a question. And our next question is a follow-up question from Jason Fairclough from Bank of America. Please go ahead. Your line is open.

Hi, guys. So just a quick follow-up. Apparently, I'm hearing from investors that there's somebody suggesting that you're not going to be in a position to repay the debt that you've got coming due this year. I think you've got a $1.5 billion debt maturity this year. I'm just giving the cash on the balance sheet. I'm surprised to hear that somebody's suggesting that. But could you confirm to us that there's no problem at all to repay the debt that's due this year?

Yeah, I could clearly confirm this. So there is a maturity from 1.5 billion, which will be due in February. And of course, we will repay. So clearly.

Yeah, so there's no issues at all with liquidity for the group, given that your cash balance is great. Your net cash balance is bigger than market capital. Absolutely. Clear confirmation. While we're at it, what do you think about buying back all the shares since you've got more cash in the market cap?

We discuss this sometimes. So as we said before, so we consider, you know that we have so many moving parts at the moment. We bring up performance. We will show you that our peak cash flow is on a positive, sustainable level. And then we have some portfolio issues. And when we fix all of them, then we can – Maybe make some decisions on some of their issues, but it's not the right time to do it at that point in time.

So look, joking aside, guys, I mean, the shares are trading down 10% today. I don't know if you're surprised by that. On top of that, the market cap is much less than the net cash balance. And then you've got your Apex program where you're talking about saving $2 billion a year in EBIT or generating $2 billion a year in EBIT. And meanwhile, the market cap is only $3 billion. So there's a giant valuation disconnect here, right, which to me suggests either that the market doesn't trust you or something else. What are your thoughts?

Well, you know, there is a clear position of ours that we will make our full year guidance. That's what we have been mentioning a couple of times already. And this is our clear way forward. You know, the Q1 was in line with our expectations. And of course, as mentioned before, in this call we will see Of course, then EBIT adjusted and free cash flow increasing over the next quarters. And that's our clear mission and clear path.

How do you think about surplus liquidity and why wouldn't you put some money to work in a buyback given the extreme discount on the equities?

Well, as Klaus mentioned before, this is not on our agenda right now. We are talking about our three priorities, which is to find solutions for our portfolio-initiated topics and, of course, also increase the performance and to drive the green transformation, as you know. So these are the priorities right now. As soon as we are at a more mature level of achievement of these priorities, then we will think about what you just mentioned. For us, the priority right now is again to be paying a dividend at the end of the fiscal year. and continue the path to be reliable on the dividend level.

Okay. All right. Thank you very much.

Thank you. And as a final reminder, it is Star 11 on your telephone keypad to register for any questions. And as there are no further questions registered, I now hand back to our speakers for any closing comments.

Thank you very much to everyone for participating in that call. If you have more questions, remarks, then the investor relations team is always available. Thanks, everyone, and have a nice day.

This now concludes our conference. Thank you all for attending. You may now disconnect.