P&L Check ThyssenKrupp counts the cost of exiting steel

Despite ThyssenKrupp's success in 2017, an activist investor wants to break up the company to boost its share price. But the CEO believes integration is the only way forward, and the shareholders agree.
ThyssenKrupp steel workers protested the spinoff, forcing the company to agree to long-term employment.

By most measures, ThyssenKrupp CEO Heinrich Hiesinger should be hailed as a hero for engineering the tricky spinoff of the company’s steel division into a joint venture with Tata Steel, creating the second-largest steel company in Europe.

In one stroke, Mr. Hiesinger extracted ThyssenKrupp from a China-dominated commodity business where profits are few and far between. He also secured an agreement with the company’s IG Metall labor unions that permitted the spinoff to take place, at a cost of guaranteeing jobs and factories for nearly a decade. ThyssenKrupp will own about 25 percent of the newly created joint venture, but could sell it in an IPO.

Swedish hedge fund Cevian Capital, the company’s second-largest shareholder after the Krupp Foundation, has been campaigning against Mr. Hiesinger’s turnaround strategy and wants to split the company up, like John Flannery says he plans to do with General Electric. Cevian co-founder Lars Förberg says ThyssenKrupp's stock, currently hovering around €24 ($29), would be closer to €50 after a breakup.

But the expected showdown at the annual general meeting didn't show, and shareholders expressed support for the CEO. When Mr. Hiesinger addressed the company's shareholders at the meeting Friday, he expressed surprise that Cevian made its criticisms so publicly. The majority of attendees showed similar distaste for the activist investor's accusations, backing up Mr. Hiesinger's plan to focus the business on more lucrative and less cyclical business sectors such as elevators, plant construction and car components now that the firm is largely out of the steel business.

Corporate governance expert Christian Strenger summed up the feeling of many shareholders: "ThyssenKrupp is a special company," he said, adding Cevian would be well-advised to reconsider a making quick changes and show some restraint.

Mr. Hiesinger has been dealing with one setback after another in his seven years at ThyssenKrupp, so this support is welcome. Be believes his plan of an integrated company is the only way forward, and the shareholders agreed.

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Getting out of steel was certainly the right strategy, as shown by the firm’s results published in November. Although the firm exceeded its own forecasts with adjusted earnings before interest and tax (EBIT) of €1.9 billion, there was a one-off impairment charge on the sale of the company’s steel business in Brazil that resulted in a net loss of €591 million.

Together with the money earned from the sale of the Brazilian operation and free cash flow in the fourth quarter, CFO Guido Kerkhoff was able to reduce net debt to €1.95 billion and the debt-equity ratio to 58 percent, the lowest level since Mr. Hiesinger embarked on his reform plan in early 2011.

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The company also reported that sales rose by 9 percent to €43 billion in the year ending in September. Ironically, it was the steel business that made a major contribution on this front. Thanks to higher prices, sales at the Steel Europe division surged by 17 percent, while materials services booked a 15 percent increase in orders.

The industrial sectors reported only modest growth except for the car parts business, where orders grew by 11 percent. The profitability of the industrial sectors left a lot to be desired. Components technology slightly improved its adjusted EBIT margin to 5 percent, but it is lagging behind competitors that generate 7 percent or more. Even the elevator business, the star of ThyssenKrupp’s portfolio with adjusted margins of 12 percent, was nonetheless behind competitors.

Only two divisions managed to earn their own cost of capital: elevators and, for the first time, the steel division. This is not enough for a company that needs to expand but has been restructuring for seven years. The cash flow situation was similar: Before mergers and acquisitions, the group as a whole generated just under €800 million. Operating cash flow was at €610 million. The significance of Mr. Hiesinger’s restructuring program became evident as €930 of the €1.9 billion in adjusted earnings was from savings.

Mr. Hiesinger is aware of the company’s structural weaknesses but appears to not have had time to correct them. Cevian's Mr. Förberg told Handelsblatt that Mr. Hiesinger’s strategy “has not yet delivered what was promised.”

But Mr. Hiesinger pushes back against the charges. “We met or exceeded our announced earnings targets every year, with the exception of 2015/2016 when the steel market collapsed,” he said.

Martin Wocher writes about industry for Handelsblatt. Charles Wallace, an editor for Handelsblatt Global in New York, adapted this article into English. To contact the author: [email protected]