Thyssenkrupp’s redesigned logo unveiled last November, three rings under an arch against a bright blue background, is intended to herald a new beginning for the industrial group after its ill-fated expansion in the Americas plunged it into a crisis five years ago.
In 2010, the steelmaker from Essen almost went bankrupt and Heinrich Hiesinger was installed at the helm of Germany’s largest steel group in January 2011 to revive the company.
Mr. Hiesinger, a 55-year-old engineer, has succeeded in reorganizing the company, whose roots date back to 1811. But the former Siemens manager knows it will take more than a new logo to banish the shadows of the past.
“We’re still a long way off completing the transformation,” he told Handelsblatt. “Even though we’ve been doing a massive amount of work on it for four years.”
We have the strategy to develop our industrial goods businesses and to make the company more stable this way. Why should we sell businesses of the future? Heinrich Hiesinger, CEO, Thyssenkrupp
In fact, a plunge in steel prices could jeopardize his forecast of an adjusted operating profit between €1.6 billion and €1.9 billion, or between $1.75 billion and $2.07 billion, in fiscal 2016.
The forecast, which Mr. Hiesinger first made in November 2015, will only hold if “the raw materials business will recover significantly during the second half of the fiscal year,” Mr. Hiesinger said ahead of the technology and steel group’s annual general meeting Friday.
However, analyst Marc Gabriel of Düsseldorf-based Bankhaus Lampe expects Thyssenkrupp’s annual adjusted operating profit to fall back to €1.3 billion. Some could even start questioning Mr. Hiesinger’s strategy of a diversified industrial group, Handelsblatt learned.
“If he does not reach his goals, the discussion about a separation of business divisions will resurface,” a person familiar with Thyssenkrupp shareholders told Handelsblatt.
Mr. Hiesinger denied speculation that Thyssenkrupp might divest itself of certain divisions such as elevators or auto components. “We have the strategy to develop our industrial goods businesses and to make the company more stable this way. Why should we sell businesses of the future?”
The strategy was bearing fruit in Thyssenkrupp’s components and elevator businesses, but it took years to develop the right products and win big clients, he said. “The reality of industry has nothing to do with short-term trends in the capital markets.”
One such development strongly affects steelmakers, including Thyssenkrupp. Prices for hot-rolled wide strip steel, the most important type, have been falling since April 2015. At the start last year, the price of a ton of it cost just under €400. Now it’s only €300. With margins like that, even efficient steelmakers like Thyssenkrupp are having trouble working profitably. The Chinese steel industry is driving prices down, and no one’s daring to predict where prices will end up.
Thyssenkrupp was not immune to such developments, Mr. Hiesinger said. “Our raw materials businesses can’t escape from this at the moment. Whatever effort we make to save money, it’s catching up with us in no time," he said.
To deal with such short-term volatility, Mr. Hiesinger’s strategy has been to build a diversified industrial group and he believes the steel market crisis has proven him right. The fiscal year 2015-16, which started on Oct. 1, the industrial divisions should contribute to stability in sales and earnings.
To be sure, the company remains strongly dependent on its steel division. In the fiscal year to end-September, that dependence still worked in Thyssenkrupp’s favor, generating strong growth in cash flow that enabled the group to reach its main financial goals.
Annual group sales rose 4 percent to €42.8 billion thanks only to the weakness of the euro. Without the favorable exchange rate, the new order intake of €41.3 billion would have fallen 5 percent.
Operating profit rose by over a quarter to just under €1.7 billion, which was at the upper end of the company’s forecast. Net profit at €309 million was up almost 50 percent. And for the third year in a row, the company reported a positive free cash flow, at €662 million. But the bulk of that, or €597 million, stemmed from the sale of subsidiaries, like in previous years.
Only half of Thyssenkrupp’s divisions managed to recoup their own capital costs in 2014/2015. At a group level, those costs exceeded earnings by €399 million. A year before the gap was €117 million smaller. Special writedowns and restructuring costs totaling €615 million ate into earnings.
Particularly hard hit was trading unit Material Services, which was forced to make high writedowns on the sale of special steel manufacturer VDM Metals. The restructuring of Italian steel subsidiary AST also weighed on earnings.
On the plus side, Thyssenkrupp increased its adjusted earnings before interest and tax (Ebit) to almost €1.7 billion thanks to its “Impact” efficiency program which cut costs by some €1.1 billion.
Savings enabled the steel division to contribute €700 million to cash flow, almost as much as the traditionally strong elevator division with €719 million, offsetting a loss of €599 million in the “Industrial Solutions” plant construction business which was hit by weakening global growth.
Thyssenkrupp’s Brazilian operations suffered an operating loss of €140 million due to the weak exchange rate and production problems.
A look at Thyssenkrupp’s competitors shows how far it still has to go to catch up in terms of profitability. The management has increased margins slightly year by year but in the industrial divisions in particular, there’s plenty of room for improvement. That also applies to the jewel in Thyssenkrupp’s crown, elevators, which achieved an adjusted Ebit margin of just over 11 percent — the best competitors are generating 15 percent and more.
The group is solidly financed with free liquidity of €8.3 billion. But with equity capital of €3.3 billion, its financial cushion remains thin. And it doesn’t have many more non-core assets to sell if it runs into trouble again. It wants to sell the steel plant in Brazil, but who’s going to buy a plant that is making heavy losses in an industry beset by tumbling prices?
Thyssenkrupp learned how difficult asset sales are right now when it tried to sell special steel maker VDM last summer. In order to whet the appetite of financial investor Lindsay Goldberg for the unit which had substantial net financial debt, Thyssenkrupp had to accept a significant discount from its target price of half a billion euros. In the end the group wrote €170 million off the book value.
But its elevator division is doing well. It contributed some €800 million or almost half the group’s operating profit of €1.7 billion in 2014/2015 and is benefiting from buoyant construction in many parts of the world. Across Asia, the U.S. and the Middle East, investors are building high-rise blocks to create living space for people in attractive cities. The unit’s new order intake rose 13 percent to a new record of €7.7 billion. The weak euro helped, however: without the positive exchange rate effect, that growth would have been just 3 percent.
The group has high hopes for its magnetic elevator system, a direct drive that abandons the rope system used ever since the invention of the elevator in 1854. This means cabins will be able to circulate around a building, sideways as well as vertically, with major implications for the shape of high-rises in the future.
To reduce Thyssenkrupp’s dependence on its steel unit, Mr. Hiesinger has long been calling for consolidation in the sector. Company officials and stock market players keep on playing through scenarios such as a Thyssenkrupp merger with India’s Tata or with Salzgitter.
Mr. Hiesinger did not name specific candidates, but said mergers between competitors were more likely than a hostile takeover at the moment. Because consolidation reduces capacities, it would improve the situation for the European steel industry as a whole, he added.
He declined to be drawn on a timeframe, though. “That can happen in one year, five years or not at all.”
Analysts like Marc Gabriel of Bankhaus Lampe are more skeptical: “Given the market environment who’s going to invest there? I don’t know anyone who’d have the courage.”
Martin Wocher is an editor with Handelsblatt, focusing on the mechanical engineering and steel industries. To contact the author: [email protected]