Dear ladies and gentlemen, welcome to the Webcast of Thyssenkrupp. At our customer's request, this conference will be recorded. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Claus Ehrenbeck, who will lead you through this conference. Please go ahead.
Yeah, thank you very much, operator. Yeah, hello to everybody. This is Claus Ehrenbeck, and also on behalf of the entire team, I wish you a very warm welcome to our conference call on Q2, Q3, and nine-month numbers. This call will be recorded and a replay of this call will be available in the course of the afternoon. All the documents for this call are available on the IR section of our website. They are already available since this morning at 7:00 A.M., as always. With that, I can hand over to Klaus Keysberg, who will lead you through the slides. Afterwards, there will be a Q&A session. Klaus, please go ahead.
Yeah, thank you very much, and a warm welcome also from my side to today's conference call on tk's Q3 and nine-month figures. First of all, I'm pleased to report that our performance is significantly up year-on-year on the back of strong earnings, particularly from Materials Services and Steel Europe. The strong operational performance in nine months is reflected in a plus of order intake of 34% and 237% of EBIT respectively. These major performance increases stemming from top-line effects such as Materials Services and Steel Europe benefiting from favorable price environments. Industrial Components and Automotive Technology being able to pass on higher factor costs and regarding order intake, a big ticket order at Marine Systems of roughly EUR 3 billion in Q2, confirming our leading technology position, particularly in conventional submarines.
On the bottom line, the step up in performance is reflected in margin expansion at Materials Services and Steel Europe. That was further continued in Q3. Additionally, underpinned by performance and FTE reduction programs. After nine months, we already reduced over 1,700 FTEs. Furthermore, tk is well on track with its transformational progress, including its green transformation. Let me give you some recent proof points from Q3. Our Green Hydrogen business, thyssenkrupp nucera, has achieved a letter of intent with Unigel, Brazil, for an industrial scale hydrogen plant with an initial capacity of 60 MW. Marine Systems acquired shipbuilding capacities recently, MV Werften Wismar in Germany, in preparation for more orders from its expanding naval ships funnel, driven by rising governmental defense budgets. Automotive Technology is currently exploring a joint venture with NSK from Japan for steering businesses to potentially drive synergies and the regional footprint.
Let us briefly take a look at some key financial highlights at a glance, reflecting our strong operational progress and year-over-year upswing. Our top line improved year to date with a significant order intake and sales increase by EUR 8.6 billion and EUR 6 billion respectively year-over-year. Consequently, we recorded a nine-month order intake of EUR 33.9 billion and sales totaling EUR 30.6 billion. Simultaneously, we have been able to generate an adjusted EBIT of EUR 2.6 billion in the first nine months, and an adjusted EBIT of EUR 1.9 billion with a 6.2% margin.
This positive development is also reflected in the net income, which has improved substantially by EUR 0.9 billion year-on-year to EUR 0.8 billion thus far in fiscal year 2021/2022, with the latter figure including impairments of EUR 0.5 billion, mainly at our steel operations and caused by the recent interest rate increase. It goes without saying that this charge is a non-cash item. Free Cash Flow before M&A is significantly below the previous year and still negative, primarily driven by the temporary increase in Net Working Capital of about EUR 3.3 billion. This is mainly due to higher raw material and material prices, and to some extent also by delayed customer quotas in auto components businesses due to supply chain bottlenecks.
Positively to highlight is that Free Cash Flow before M&A in Q3 is showing significant improvements compared to the previous year, to the previous quarter. On the back of significant Net Working Capital release, Q4 will show a very positive number leading to an improvement for the financial year. Let us now jointly take a look at the performance in Q3, more specifically. Across all segments, order intake has grown overall by 30% year-on-year, mainly driven by MX and Steel Europe. Simultaneously, we have been able to lift Adjusted EBITA by EUR 456 million year-on-year to EUR 951 million, mainly by strong margin expansion at our Materials segments, Materials Services and Steel Europe. More precisely at Steel Europe with an Adjusted EBITDA of EUR 451 million, a plus of EUR 363 million.
At Materials Services with a record Adjusted EBITDA of EUR 420 million, which is an increase of EUR 155 million year-on-year. These positive performance effects are partly offset by ongoing supply chain constraints and rising factor costs affecting our components businesses. With regards to Free Cash Flow before M&A for the group, we recorded a year-on-year decrease of EUR 177 million, resulting in -EUR 412 million for Q3. This is mainly or purely due to the temporary negative price-driven effects Net Working Capital, particularly inventories and receivables. As mentioned before, we expect a strong conversion Net Working Capital into cash flow by lower receivables and inventories, and also by prepayments at Marine Systems, thus the strong positive Free Cash Flow in Q4.
Let me now walk you through each of the business segments and briefly highlight some major developments regarding adjusted EBIT in Q3. As evidenced by the graphs and figures, we see a significantly improved performance year-on-year, with all segments contributing with a positive adjusted EBIT, Multi Tracks being the sole exception. At Material Services, with EUR 386 million, the performance increases primarily due to record margin levels through favorable prices despite overall decline in volumes. Furthermore, Material Services achieved continued progress with structural improvements. For example, network optimization with the closure of thyssenkrupp Materials Vietnam and the development of Materials as a Service. Industrial Components came in with EUR 49 million. This is EUR 19 million lower year-on-year, with a decline at bearings, but an increase at Forged Technologies.
Negative effects at bearings are primarily driven by the higher competition in conjunction with a temporary decline in demand in China and increased factor costs, partially offset by restructuring and performance efforts. Forged Technologies could pass on higher factor costs and continued cost-cutting measures, leading to positive performance effects. Automotive Technology, with EUR 65 million, significantly lower year-on-year by EUR 45 million , mainly due to substantially higher factor costs, volatile customer demand, and capacity utilization as a result of supply chain bottlenecks, mainly affecting customers. This is partly compensated by further negotiations on new price conditions. Steel Europe generated an adjusted EBIT of EUR 376 million with a plus of EUR 357 million, significantly higher year-on-year, mainly due to higher spreads. Effects from higher contract prices are partially offset by lower shipments and higher raw material and energy costs.
Ongoing restructuring and the performance program support the top and bottom line development. Marine Systems, with an increase of EUR 12 million to EUR 3 million, higher year-over-year due to focused performance improvements through stability in existing orders as well as ramp up of new orders. Multi Tracks came in with a - EUR 62 million in EBIT adjusted. Losses are higher year-over-year, mainly by the deconsolidation of the positive stainless business already in Q2. In total, this could not be offset by positive effects from the closure of heavy plate. The next slide depicts and summarizes where we stand with the restructuring plans of our businesses. As you know, we extended our restructuring initiatives to a total reduction of more than 12,700 FTEs, which marks the largest restructuring program in thyssenkrupp history.
As of today, we already accomplished roughly 75% of our target, which means, in absolute terms, a reduction of roughly 9,500 FTEs, the majority thereof with 60% in Germany. In the current fiscal year, we already reduced more than 1,700 FTEs, which leaves us with a remaining number of roughly 3,000 FTEs to be reduced until midterm. Looking at the respective restructuring expenses and cash outs, we expect a full financial year cash out figure on a broadly similar level to the previous years. As the vast majority of the provisions has already been made with a total amount of roughly EUR 900 million, we will no longer see sizable negative impacts on our P&L figures in the next years.
Based on these restructuring efforts, we have already realized sustainable savings in a low to mid three-digit million euro range during the past fiscal years, and expect that figure to rise to a substantial, a sustainable high three-digit million figure in the midterm. Moving on, let me briefly give you a status update on current external factors for our businesses. Now this slide contains quite a bit of information. I would like to pick out just a few specific examples and show how we act upon the risks and opportunities we face. First and foremost, and as a direct impact of the war, we also are confronted with uncertainty for natural gas supply. Though only accounting for 10% of the energy consumed in the group, gas is clearly a crucial topic also for our steel segment.
Here, we took early action and defined action plans for different scenarios of potential gas shortage and ensure that operations can be maintained most efficiently and damages of our aggregates avoided. Moreover, we keep close contact to federal and state governments to raise awareness that an ongoing and sufficient supply of natural gas is mission-critical for us. As another example, we have to deal with an inflationary development across all businesses. Therefore, it is of great importance for us to pass those cost increases on. I'm happy to state that the salespeople in the businesses are doing a great job, especially at our components business, Industrial Components and Automotive Technology, where we can see these effects in the Q3 numbers. At Materials Services and Steel Europe, the margins are clearly going strongly in the right direction, of course, also thanks to the very favorable trading conditions.
However, we all are aware of economic uncertainties going forward. In order to mitigate potential financial impact, we prepare for counteractions such as temporary short-term work, cost savings, and of course, vigorous CapEx management before more severe restructuring and headcount restructuring would have to be introduced. Regarding the longer term consequences of the geopolitical situation on economic conditions in Europe and on a global scale, it is today by far too early to make an assessment. However, it has become obvious already that the push for a renewable energy supply besides the multiple market transformation trends is arising, providing significant opportunity for our businesses going forward, as our segment CEO has already outlined at our capital market day in last December. That is including the green trends, where we are well positioned to have a meaningful stake and capture additional demand or respectively growth potential.
In renewable energy, the tk Group is standing out in the technologies that enable the green transformation, such as hydrogen electrolysis, green ammonia, and also renewable energy. Nucera is a market leader in industrial scale plants for alkaline water electrolysis, while our chemical plants business, Uhde, is market and technology leader for ammonia production in large scale. Besides being essential for fertilizer production and thus global nutrition, ammonia will be a carrier in transportation of hydrogen. The bearings business of Industrial Components has a leading position in its field, as you know, for instance, in wind turbines. In advanced mobility, we are at the forefront of topics such as e-mobility and automated driving, where tk takes leading positions within the segments at Automotive Technology and Steel Europe in important areas such as electric power steering and materials for EV engines, namely non-grain-oriented electrical steel.
For lightweight solutions, particularly high-strength steel, our colleagues in Duisburg build up capacities for steel that is making car bodies more energy efficient while not compromising on safety. For decarbonization, Steel Europe is currently underway with the largest transformation in its history to a green steelmaker and has a clear roadmap to become climate neutral by 2045. In conclusion, we all know that steel does not have any meaningful substitute and plays a vital role in the transition to a decarbonized and circular economy. We also see the longer-term outlook for steel quite positive. This is also due to actions taken by China in the course of its increased focus on decarbonization and the removal of sales tax rebates on exported steel. Steel Europe is not alone.
Our MX segment also takes part in decarbonization, being a first mover for the supply of CO₂ reduced materials and CO₂ optimized supply chains. Digitalization takes obviously place in all of our businesses. Particularly emphasized should be the digital services with the state-of-the-art digital offerings for resilient supply chain solutions and the in-house expertise at Automotive Technologies, since software-assisted mechanical functions are becoming increasingly important. Here to mention the electric power steering and the fully active damper for vehicle motion control. Overall, this shows that our businesses keep up at the forefront of the development in some of the most promising transformational trends. This also reflects our heritage on a relentless ambition to capitalize on our long-standing expertise in engineering and technology.
With that having said, I would like to briefly comment on our key assumptions for the last quarter and thus give you an updated view for the current fiscal year 2021/2022. Quarter on quarter, we expect some normalization of pricing still on a high level, and we see effects from seasonality in materials environment for MX and Steel. Besides price normalization, we expect effects on our shipments from destocking at customers. At the same time, we are getting positive indications from our customers from the auto industry, hinting toward higher production after the summer break. We will have a clearer picture once we will have gone through September. Furthermore, we anticipate a continued strong pass-through of higher factor costs for our components businesses, Industrial Components and Automotive Technologies, the latter leading to a sequential upside for earnings at Automotive Technologies and a stabilization at Industrial Components.
With regards to Net Working Capital, we expect a price and volume-driven release that will result in a significant positive Free Cash Flow Before M&A, as mentioned earlier. Please keep in mind that our view on Q4 is based particularly on the assumption that necessary fossil fuels, especially natural gas and raw material, will continue to be available without restrictions. Leaving the quarterly perspective and looking at expected full-year figures for 2021/2022, the most important statement for me as a group CFO is by year-end, we will see significant improvements across all KPIs compared to last year, and that being despite the challenging market conditions we currently face. For the P&L statement, this means an adjusted EBIT in the range of at least EUR 2 billion. This means more than EUR 2 billion, which will carry through to a net income in the high three-digit million range number.
Taking into account the interest rate-driven non-cash charges from impairment. Our typical value added will also be significantly positive in comparison to -EUR 622 million in the last year. This shows we do not only generate significant earnings, but also manage to earn our cost of capital and earn value to the shareholders. Concerning Free Cash Flow Before M&A, with the foreseeable strong Q4, we maintain our guidance as of Q2 for a negative mid-three-digit billion euro figure for the full year, still a significant improvement compared to last year's figures of -EUR 1.3 billion. Looking at the balance sheet, and particularly our net cash position for the year-end, we expect a value of more than EUR 3 billion.
Of course, also due to positive effects from M&A transaction at Multi Tracks that will have an effect in the high three-digit billion range. Of course, with increasing interest rates, our pension liabilities will also be significantly lower. Before I come to the last slide of today's conference call, let me shortly provide you with some granularity for our outlook of Free Cash Flow before M&A for the year-end. As mentioned on the last slide and evidenced here by the figures on the bridge, we experienced our best nine months in over 10 years regarding EBIT adjusted. In the transition to Free Cash Flow, we expect a significant release Net Working Capital of around EUR 1 billion in Q4, mainly price and volume-driven in inventories and receivables, especially at Materials Services Steel Europe.
In addition to Net Working Capital will benefit from prepayment at Marine Systems for the submarines order that we recorded in Q2. The before mentioned EUR 1 billion release will be allocated across the three main buckets. Inventories will be the main driver with a mid- to high three-digit million positive effect. Receivables are expected at a positive effect in the low- to mid three-digit million euro range, and payables roughly broadly unchanged. Looking ahead, we forecast already today that in the next fiscal year, there will be Net Working Capital release in terms of value. Of course, it will be depending on the then prevailing price and volume conditions. At the end of today's presentation, I would like to quickly summarize the key aspects regarding our financial and our transformational path along the five buckets. First, strong balance sheet.
As previously mentioned, by quarter end, we had a net cash position of around EUR 2 billion and our total liquidity stood at EUR 7.5 billion. Both positions will improve at the end of the fiscal year. Our pension liability significantly declined year-on-year due to rising interest rates and thus a higher discount rate, contributing also to increased equity rate, improved equity ratio of now 39%. Next, our value options from continuation of portfolio management. For our thyssenkrupp nucera green hydrogen unit, we continue to see an IPO as a preferred option in order to crystallize the business value. Going forward, we will further enhance the structural fundamentals of our portfolio. Coming to performance portfolio management and restructuring.
On the backdrop of existing geo-economic uncertainties, the management teams of the segments have prepared comprehensive contingency plans that can quickly be taken into action if conditions would require so. At the Multi Tracks segment, we can report further progress in the streamlining of the operations and important to mention for the mining business, where we strive for finalizing the sale before the quarter end, we are pleased to report that the required closing conditions were accomplished at the beginning of this week. Last but not least, our largest restructuring program in tk history is well on track with 9,500 FTEs already reduced. Now, leading technologies and ESG engineering tomorrow together, we are proud of our claim, underlining more than 200 years of engineering excellence and allowing us to capitalize on the transformational trends as we outlined earlier.
With that expertise, it is fair if we say that we are a key enabler for the green transformation. Finally, we have a clear commitment to sustainability, which will continue to be a management priority moving forward. We have defined a clear roadmap leading to SBTi's approved climate targets and our decarbonization from SE, representing over 90% of tk's CO2 emissions, is in place and will be driven continuously forward. Having said that, first of all, let me thank you for your attention, but before we jump into the Q&A, I will hand over to Claus Ehrenbeck.
Yeah. Thank you very much, Klaus. What I would like to briefly do here is to draw your attention on this slide here on the screen. It's about Save the Date. The Save the Date for our next capital market event that we will host in November, on exactly the November 25th. One week after we will have released our fiscal year number and the guidance for 2022, 2023. We will host this event in a meet-the-management format. That means there will only be very brief presentations and the majority of time will be spent on Q&A. You have the opportunity to ask as many questions as you want to the management teams of our segments and of course to AG management.
With that, I would like to now hand over to the operator for the Q&A session.
Ladies and gentlemen, if you have a question for our speakers, please dial zero and one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your questions. Please only ask a maximum of two questions. If you find your question is answered before it is your turn to speak, you can dial zero and two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. Remembrance, please, for the first question. The first question is from Seth Rosenfeld, BNP Paribas. Your line is now open.
Good afternoon. Thanks for taking our questions. Starting out, I have a few questions with regards to Steel Europe, please. Thyssen saw a sharper sequential margin contraction than most of your peers last quarter. Can you give a bit more color on what drove that, relative performance versus the sector? Some of your peers have proven a bit more able to find, let's say, a new home for steel, even in a time of weak auto demand, improving volumes. Why has that been a bigger challenge for Thyssen? Looking ahead to Q4, obviously, spot prices have fallen significantly, but Thyssen does have leading exposure to long-term contracts. How do you think about the scale of margin normalization expected? Is there any benefit to margins from contract exposure versus declining raw material costs?
Thank you.
Yeah. Thank you for your question. A few questions. If the first question I guess was regarding our margin development, quarter-on-quarter compared to competitors. Well, let me say it this way. When we look at our margin development, of course our margin is much better than the previous year. This is very clear, but of course, we know also our margin of our competitors. What we see in our self-reflection here is, first of all, you know that we are in a restructuring program. We are very much on plan, but we have still a way to go. This is the first one. If we look at prices per ton, I think we are in a good position.
I think that we are here, at least in a position our competitors are also. Prices are, from our opinion, okay. You know that we are dealing with long-term contracts here, so this position we assume to maintain at least for the rest of the year. This is the first comment on this. If we come to costs. Raw material costs, I mean, you know that with the beginning of the war, raw material costs increased a lot. At that point of time, we have to say we purchased raw materials. We purchased raw materials at higher prices, yes. We purchased raw materials also to maintain the production.
What we also did after the beginning of the war, we changed our suppliers from Russian suppliers to other suppliers, and this was not for free. So of course, there were some cost effects on this. And coming also to energy costs. Yes, of course, we also have energy cost increases. In Germany, maybe more than in other countries. I don't know so yet. Looking at all of this, if I sum it up from the prices per ton, I think we are in a good position. Regarding raw materials, energy, I just wanted to describe to you what we are feeling here. We are not able to really make a comparison to the competitors.
Competitors should have been in a similar situation, but it's also a question, let's say, these cost burdens, at what point of time will this become through in the balance sheet? We have to, let's say, see the rest of the year, the rest of the quarters, whether we see some developments here. This is more or less what I can say to the benchmark here. Much better than before. We have, of course, some issues with raw materials and also energy. Regarding volumes. Yeah, you know that regarding volumes, we in our Q3 were a bit behind previous year. If you look at the coming quarter.
I mean, you know that if you make a guess what is going to happen in the next quarter, what we see is that from the normal industrial business, we do not see so much, let's say, improvements. We see it more in a flattish way. What we see is, and this is also due to our automotive business, we see potentially higher volumes if you look at our automotive business. I can tell if you know that the OEs, the big OEs, not only the big OEs, they do have still big order backlog. Since the supply chain situation is going to increase, the volumes in this sector are supposed to going up. This is what we are estimating.
This should be more or less the answers to your question. Question mark?
That's very clear. Maybe if I can push this one last time. When we think about going into fiscal Q4, is there any way you can give us a sense of the scale of margin compression that you think would be reasonable? Is there any benefit from lower raw material costs now helping offset any price weakness realized in Q4?
I think this is, I mean, we are in a very volatile environment. If you look at the raw materials, we should have a bit of a better situation, but not necessarily at energy. This is in the mixture we will have to see then, yeah, compared to Q2.
Okay. Thank you.
I mean, it's also depending on the volumes. This is very clear.
Great. Thank you very much.
The next question is from Carsten Evers. thyssenkrupp Steel, your line is now open.
Thank you very much for taking my question. The first one is on the steel impairment, which we have seen, the EUR 390 million. Could you give a bit more detail why the impairment happened in the current quarter? As far as I learned, and you mentioned it, Klaus, the impairment became necessary due to the recent rate increases. Does that automatically mean we could see further impairment should interest rates rise further? That's the first one. The second question I have is on your natural gas dependency. Could you reduce your dependency on natural gas in the reheating process in steel by changing the way you reheat means, the introduction of induction furnaces? Thank you.
First question, regarding the impairment. I mean, you know that, at least once in a year, you have to do this impairment test. If you have some triggering events, then, you also have, in some quarters, impairment tests. The way, of course, an impairment test is done, I think I do not have to explain you, but there is of course a certain planning scenario what you are underlying with some cash flows. And this cash flows you are going to going to.
Discount.
Discount with a special discount rate. I can tell you, we did this impairment test, of course, also last quarter because there was a triggering event, this Ukraine war, and we did this, or I had to do this impairment test again this year. The triggering event was the increase of capital costs. I can tell you, there are of course two things which could, let's say, influence the value and use of the business. This is the amount of cash flow, and this is the discount rate. I can tell you that the cash flows we applied in this quarter's impairment test were not worse than the previous one. No, they are more or less the same. The operational performance has not changed in our assumption of this impairment test.
Just the discount rates were the trigger and also the reason why we had this impairment here. Second question is, if there would be an additional increase in capital costs, could that mean that there will be further impairments? In principle, yes. But of course, if we do the impairment test next time, we will also have maybe another picture on our cash flows going forward. If they would increase in our, let's say, estimation, then not necessarily. By the way, if capital costs are going down, then there could also be the theoretical option that we are going to.
Have a reversal.
Have a reversal or Zuschreibung. I don't know the English word. Is it clear now? Yeah. That's very clear. Thank you. The second question was?
On the technology, whether we could replace existing technology for heating the air that we are blowing into the blast furnaces by another technology.
No, not the blast furnaces. It's actually blast furnaces especially in the reheating process of the slabs. Yeah. That's where most of the natural gas is used. What we are doing or what we are considering, you know, you can imagine that every kind of business has so-called Notfallplan, so emergency plans for this. What we are especially doing in steel, you know that we have gas consumption in the cokery. We have some gas consumption in the heating of the blast furnace, and we have, of course, gas consumption in the downstream aggregates. What we are actually doing in so-called emergency plans is, of course, you know that there are Kuppelgas. I think these are process-
Top gases.
Sorry.
Top gases.
Top gases, which we normally use also to produce power energy. This is something we could reuse and then purchase power externally and use this top gases or process gases to use this for the production of the downstream aggregates. This is something that is a very clear and straightforward option to reduce dependency. Of course, what we are also looking at is that we can use Liquefied Natural Gas. At the moment, we cannot do it without some adjustments on the infrastructure. We have a clear plan, and we know how to do this, and this is something we are looking at. This could also reduce our dependency.
Perfect. Thank you very much. Yeah.
The next question is from Jason Fairclough, Bank of America. Your line is now open.
Yep. Good afternoon. Thanks for the opportunity to ask questions, Klaus. Really appreciate it. Two questions from me, one on working capital and then one on Nucera. You're guiding to about EUR 1 billion working capital release in the next quarter. I guess beyond this, how do you see surplus working capital in the business? Is it EUR 2 billionor EUR 3 billion or EUR 4 billion, or is it more? Secondly, just on Nucera, how should we think about revisiting the timing of the IPO of Nucera? Is there a watching brief, or is this something you're gonna look at quarterly or semi-annually? Thank you.
Hello?
Yeah. I hear you. We have a problem in the line, obviously. Can you hear us?
Now I can hear you. Did you hear my questions okay?
Yeah.
Do you want me to repeat them, Klaus?
I think the first question was, I guess regarding working capital, so that we are going to release some
It was-
Some EUR 1 billion in this.
Yeah. EUR 1 billion and then how much surplus do we have beyond the EUR 1 billion? Yep.
Yeah. I mean, this is of course something which is difficult to answer precisely, but I don't really comment on this too much. We see of course further potential because we saw an increase in this fiscal year, which was really mainly most purely price driven. Of course, this is going to come back. The first number we saw is we have an increase of EUR 3.3 billion. If we now come back with EUR 1 billion, I will not say the EUR 2 billion come back, but some of this will come back definitely. I cannot be more precise on this. And the question on Nucera was, we look at it.
At the moment, of course, we are watching the development on the capital market very closely. We, by the way, think that our asset is going to be more interesting and increased because we generated more order intake. Yes, we are looking at it very closely. It could come quickly, but it also could come later. We do not have, let's say, we do not give you an indication of the timeline also. This is something we constantly look at the market now.
Just to come back on the working capital, if I could. Again, if we look at EUR 1 billion in the next quarter, and then if I pick a number, say EUR 2 billion, I mean, you're almost returning your market cap in working capital. I mean, that's not crazy math, right?
EUR 3.6 billion-EUR 3.8 billion.
It's at the moment, if you look at the market cap at the moment, yeah, we are not far away from this. Yeah. Yeah.
Okay. Thank you very much.
The next question is from Bastian Synagowitz, Deutsche Bank. Your line is now open.
Yes. Good afternoon all. My first question is, again, another follow-up on free cash and working capital as well, and thanks for the color you already provided here. I'm just wondering, I guess, what we see now is just across the whole steel space is that most of your peers have actually started to basically prepare the market for a slightly structurally higher working capital level, which may actually be also carried into the next year. I'm just wondering, as you feel very confident on the Free Cash Flow you're planning to deliver in the fourth quarter, do you still see that there is a risk that you may drag on some of that working capital, maybe a larger number into the next year?
I don't know whether I got your question right. I don't know what you mean. I heard what you said that our competitors are guiding for higher working capital numbers.
I guess the question is there a risk to your Free Cash Flow guidance as it stands, or would you feel basically like 100% confident on it? Is it sacrosanct, you're really feeling very confident to deliver?
For this year, we are very comfortable with this.
Yeah. Okay. Perfect. That answers my question. Actually staying on the guidance side, obviously we all appreciate that a lot can happen between now and the end of the year still, given the uncertainties. Could be one-off impacts, but also the lower end of your guidance seems very conservative. If you look into your order books and also the market framework which you are currently seeing today, do you still see the lower end guidance as realistic at all? Just generally, how comfortable do you feel with consensus numbers around 2.2, 2.3?
That's a good question. I mean, I got this question by the way also for earlier. So, our guidance to be at least EUR 2.2 billion. If I would be more precise, you know, we are in a volatile environment. That's very clear. We see also some general risks. If we talk about our guidance, we are not considering any specific risks. Yeah. If I look at the quarter-on-quarter, I mean, you know that spot prices are coming down. This will definitely bring pressure on the margins of Materials Services. On the other hand, we will see, let's say, better volumes in the automotive business. By taking all this into account, I think it's clear that we quarter-on-quarter will reduce our earnings.
If we talk about the consensus or the capital market expectation here for coming to 2.2-2.3, I think it's fair if we would say that we are running in this direction.
Okay, thanks. Thanks for that. My last question is just on HKM. Seems like there may be some events coming up here. I'm wondering whether you could remind us just on the book value which the business is currently having, and whether there have been any impairments related to HKM on the EUR 500 million number which you reported. And also whether you see any scope to monetize it just in case you're pulling out from it.
Yeah. You know that HKM, I think if you talk about this impairment, if you make an impairment, you are going to an asset impairment, you are going to distribute these impairments to all of the assets, also to HKM. This is first of all. This is more technical issue. The other things, you know that, I don't know what you specifically mean. It is our daughter company and, we have two other minority shareholder here. We at the moment do not see the necessity to talk about here, divesting this business or something like this. I think it's I don't know whether you meant that specifically, but, maybe you can, let's say, rephrase your question.
Yeah. I guess we just talked to one of the other stakeholders, and he suggested that one party may be pulling out and it wasn't named your name, but I guess it seems very likely that you could be the party who may be over time and not in the next year or so, but with basically plan to withdraw from it. Hence I was wondering what is the current book value? In case you're pulling out, I guess the question would have been like, obviously, do you see a good chance to be monetizing that book value?
First of all, I don't have it by heart, the book value. I have to look up. Even if I would have the book value, I don't know whether I would disclose it at this point in time. I mean, we are not thinking about, at the moment, major strategic changes in our stake in HKM. I don't know what third quarter is referring to, but we at the moment are not thinking about this.
Okay. Got you. Thanks for clarifying that.
Yeah.
The next question is from Christian George, Société Générale. Your line is now open.
Thank you. On your CapEx, you're guiding for a select CapEx this year at EUR 1.4 billion. If you project to next year and to 2025, what kind of annual CapEx do you think we should be looking at, given the investment you have to make to deliver green steel?
You mean the next fiscal year, 2022-2023?
Yeah. Also in terms of recurrent after that, what's your perception of, you know, are we looking at perhaps, you know, above EUR 2 billion in order to be able to invest in your blast furnaces?
I mean, we are just preparing the plan for next year. If we look at next year's CapEx level, there will be most likely a higher number than we see this year. The question is how much of this is CapEx for the green transformation. You know that the green transformation will be due or will be ready in 2025. There will be not so much of this investment CapEx coming in the next fiscal year. This is all I can say here. At the moment, we are thinking that the number of CapEx in the next year will be higher than EUR 1.4 million. Since we are not ready with the planning, I cannot give you, let's say, a precise number here.
Of course.
Okay. That's what I was recommending.
Also to-
Okay. No.
This year.
Just feeling I wanted to get a feel for it. On your pensions, you know, the discount rate at 3.2, you've gone down from about EUR 8 billion liabilities to about EUR 6 billion. You know, looking at the current ongoing rate increases, you know, are we looking at below EUR 5 billion, do you reckon, sometime next year as far as your liabilities are concerned?
I mean, you know that this is very technical, yeah.
Mm-hmm.
If the interest rates are going in this direction, then it could happen. The question is whether the interest rates are really going there. There's the simple math behind. We are not at the moment in the position to give a focus on the interest rates, which could have an impact on this.
Okay.
Sorry.
No, fair enough. My last question is on the Rhine, you know, the water levels. You've built up some alternative system, you know, with lower barges and with the towboat. If the Rhine continues to get lower and lower, you know, are you confident that there will be a limited impact on your flows inwards and outwards? You know, do you think if you expect some higher costs?
Yeah. I mean, if you look at the river Rhine at the moment, there is low water. I think the level is 1.8 m or something like this. I don't know, it's very clear. I don't know if it's too detailed, but I can tell you that we had this situation a few years ago, and of course, we have plans and we learned ways. At the moment, we are also in execution some of the issues. We changed a bit the way the ships are going. I can tell you that in that moment we are speaking, we do not have, let's say, a problem in raw materials.
If you look at the forecast of the river Rhine, there are forecasts available. Some forecasts say that the situation is going to increase, but you never know. I can only tell you my wish is that it's going to come to rain in the next days. This would be very helpful. At the moment, we do not see problems with the raw materials availability.
Okay.
Yeah.
Great. Thank you.
The next question is from Chris Obst. Baader Bank, your line is now open.
Good afternoon. I have two questions, of course. One is on some kind of a technical one. Is the Free Cash Flow guidance going down from EUR 1.4 billion-EUR 1.5 billion, EUR 1 billion relief that you end up with EUR 400 million? This is already including your cash in from M&A of approximately EUR 500 million, right? You're not reaching some kind of a reported break even.
I don't know whether I got you. We are guiding a Free Cash Flow Before M&A. The mid three-digit number is the Free Cash Flow Before M&A. Any cash we get in after M&A is not considered in this number.
You had in your nine months figures, you have a cash in from M&A, so that's mainly of AST of approximately EUR 500 million, right?
Yeah. No.
Not in the Free Cash Flow Before M&A.
No. No, no.
Not there.
You mean, cash flow after M&A? You mean this?
No, in a cash flow statement. This is not before and after M&A, right?
I don't know what you're saying. We clearly distinguish between before M&A and after M&A.
In your cash flow from investments, you have proceeds from disposals of EUR 575 million.
Yes. Yes.
This is included in the guidance also? Or will this come on top then of the current guidance because it's for M&A? This is the question.
Yeah. The Free Cash Flow is without this. Free Cash Flow Before M&A, which is without that effect. If we talk about the level of net financial debt, then you have to consider this. Of course, this positively influencing these numbers. Our net financial debt is positively influenced by these numbers. The Free Cash Flow Before M&A is without this number.
If I would assume a Free Cash Flow before M&A at the end of the year of, let's say, EUR 500 million minus, then I have to add these EUR 575 million, and you come out with a reported Free Cash Flow, let's say, of approximately EUR 70 million.
Um.
That's the right.
In principle, I don't follow the correct numbers, but in principle you're right. If you're not talking about-
Okay.
the Free Cash Flow before M&A, but Free Cash Flow after M&A. This would be maybe neutral.
Okay. Yeah. This was
Yeah, yeah.
Thank you for clarifying.
Absolutely.
The second one is on the net financial results. It was quite negative with EUR 280 million, which is approximately EUR 140 million minus the net interest and - EUR 140 million from net negative effect from the at equity. EUR 280 million negative. What is the guidance for the full year? And is there any possibility that you will see some kind of a massive improvement of that number in the years to come?
In the years to come? I mean,
Because these-
I mean it's real.
If I calculate the nine months figures and say that for the full year it will be - EUR 350 million, this would be the worst numbers I have seen in the net financial result over the last years.
Yeah. I mean, I think to give an estimation on this is difficult on this. We have some extra effects on this and to give you an estimation about how this is going to develop. Of course we know what happened in this quarter. In the next quarter, it is difficult or we don't want to give you too much of insight as you can with the team, you can make to elaborate it in more detail. In principle, we do not see very major effects coming out of this position.
Yeah. Okay. Maybe getting a little bit more into detail, what is the main position from the - EUR 140 million, the result from at equity?
Yeah, this is, you know, that we have also an impairment on the elevator stake here, which is also only driven by the higher interest rates because we have here also an
Okay.
discount rate, a higher discount rate, which led to an effect in this case.
Okay. This EUR 140 million should be some kind of a one-off if interest rates stay stable.
Yeah. A major part of this. Yeah.
Okay. Thank you very much.
Welcome.
The next question is from.
Yes. Hi, good afternoon. Thanks for taking the questions. I have two, actually. The one is concerning your energy position, and I thanks for providing this slide with the energy purchases. Can you clarify whether this total bill of 71 TWh, your energy bill, is that including HKM? And this is global. It's not Germany only, so it's the whole thyssenkrupp group.
Yeah. That's true. Yeah. It's true.
Okay.
Continue.
I guess the largest chunk of this is Germany in any case, yeah, because of the steel business and so on.
I really don't have the precise split up, but I would guess so, yes.
Right.
I would guess so.
Yeah. When it comes to the cost escalation on both sides, power and gas, eventually you have some hedges in place, contract structures here and there. There will be a gradual increase in the cost. I think you mentioned that particularly sitting in Germany is not that much of help at the moment. How is that working towards your customers? I think the industry and all tries to pass on energy costs to the customers. What do you think about the feasibility of you know, surcharge mechanism? Or do you think this is just a short-term gain? Because in the end, we look at China, and they have a very different cost position when it comes to energy. What is your thinking about that?
If you look at the energy prices in mind, if you look at the situation in Europe, I would guess that maybe there are some countries which are more expensive in gas and/or power energy. This is how it is. One thing is very clear. Prices are increasing, and of course, we see increasing energy prices in the whole industry, and not only in our industry. We assume that there will come more increases in the energy prices. What we are clearly talking to our customers, not only in steel, but also in other businesses, that we have to pass it through to the customers. This is all inflationary things we have to pass through.
We were quite successful with this in the Q3, starting with the work in Q2. We think also that we would be even more successful in Q4. This is very clear of major importance to pass this through. This is not something where we can, let's say, have it on our account to dilute the margins. I mean, this is never an easy game, but this is something we are clearly committed to do so.
All right.
I mean, if you look at this whole history, what we saw now in the last couple of months, you know, every customer is used to get some materials surcharges and things like this. Now energy comes in place. Also logistical comes in place. These were all new items for the customers in the industry. I would not say that it 100% was always successful, but it was very clear that also in that pattern, which are more unusual to pass through, industry accepted to at least let some of this pass through, not only some of this, so big parts of this, and this has to be the way. This is the way how I think of it.
Right. Maybe can you give us an update about your steel strategy more general? I think you made some comments today that there is nothing around the corner, obviously. At the same time, we're hearing out of the state that there is obviously fresh political discussions about a state stake. Can you share in which way you see the provision of subsidies for the decarbonization process in a way interlinked with this discussion about the ownership structure of the steel business? Do you think there's any need that the state is getting involved to get what you expect in terms of subsidies?
Yeah. First of all, I think we made it very clear that separation of the steel business is still something we see as a good strategic development for the business. You know that we always said that we have to create value in the business and that we have to enable the business to create value. This is the reason why we are investing it. What we also clearly think that the way to a separation or a strategic way forward to long-term value creation, there's key and necessity to transform this business into green production. This is very clear.
At the moment, because of the geopolitical issues and also because of transformation, there are some uncertainties that we think at the moment it is not the right time really to give you indications or to say that this is the right time to make a spin-off something like this. We have to get more clearance in the business model. We are ready to do, and we think this is also the right way, even on a standalone basis or within the thyssenkrupp Group. This is the same it is. We are heading to this. We are heading to this very clear.
If we talk about the subsidies for the transformation here, as I said this morning also, we are in talks with the German government and also the European government, and not only we, the whole industry. I mean, you know, it's a costly way to invest in the direct reduction equipment on the one hand, and of course you will have, in the first time, let's say, an OpEx disadvantage, yeah. Because the OpEx will be a bit more expensive than the traditional way to produce steel. There are ideas to subsidize the CapEx, but also the OpEx. This is the process we are in. We are in good talks with the German government, but also European government.
We are very optimistic that we will see, let's say, special approvals regarding this. This is something which is valid for the whole steel industry. This is not only a thyssenkrupp issue and or a Salzgitter issue or something like this. This is all valid for the industry. Therefore, your question, do you have a link between a potential stake of the government in thyssenkrupp in connection with the subsidy of the transformation? In principle, no. This is these subsidies. This is regulated by other things. If you talk about government stake of the government, as I said this morning, some people are talking about this. I'm not commenting on this.
I can only tell you that we, at the moment, are not talking with the government about this issue.
Okay. Noted. Thank you very much. Thanks for clarifying this.
Okay.
The last question is from Krishan Agarwal, Citigroup. Your line is now open.
Hi, thanks a lot for taking my question. Quick follow-up on the, you know, Rhine water level impact. You mentioned that, from a raw material side, the situation looks okay for now. Can you also comment on your outward kind of, outward material position? Because last time in 2018, I remember you had some issues and then you have come out with a guidance of negative impact from the Rhine water level-driven lower steel shipments. How is the situation looking like this time? That's my first question.
As I said before, outbound and inbound at the moment, we do not have a problem. At the moment, we do not have a problem. If the situation is going to get worse, you will never know. At the moment, we don't have a problem inbound and outbound.
Um-
I'm not able to say how the situation will look like in a few weeks, so I'm not able to do so. I can say we are, in principle, more prepared than in 2018.
Understand that. On the Materials Services, I mean, you have, you know, given a guidance of adjusted EBIT up to EUR 1 billion, in the nine months you're already at EUR 970 million-EUR 980 million. Are you saying that the normalization in the Q4 is going to be significantly lower just so that you have only EUR 20 million-EUR 30 million of EBIT or, there is a potential for kind of a normalization to be better than that run rate?
As I said before, spot prices are going down and margin pressures are going up. I know that you know the business model of Materials Services. I'm not commenting it now too detailed on what kind of level we are expecting here, but of course, we will see lower EBIT in the Q4 than in the previous quarter. This is a very clear development here.
Okay.
Very clear.
Understood. That's clear. Then finally on the marine. I mean, effectively you have close to EUR 14 billion of, you know, order intake or order backlog into that business. But the revenues on that sort of haven't been improving. I know you have a guidance of 6%-7% EBIT margin, but would you be able to discuss the, you know, trajectory of those revenue or execution of the order in the next, you know, 12-18 months? How should we think about it?
I didn't know whether I got the question right, so maybe you can. The last sentence you can repeat again.
Yes. What are the expected timelines for the order execution? I mean, you have EUR 14 billion order backlog in the Marine Systems.
Okay. See what you mean. At the moment, EUR 14 billion order intake enhancement. Yes, that's alright. You know that we are talking with the government also for potential increase of this. We are in good discussions about this. If you talk about the order intake, the timeline, well, this is something which depends very much on it, but to be very clear, this is up to 10 years or longer. These are big orders and some of them are going to be ended in the mid-30s, some of them also earlier, but the timely reach of the order intakes are sometimes 10 years.
Okay. Then on these orders, I mean, you are getting these orders at a time when the steel prices or the general input prices are very, very high. I'm assuming these orders are benchmarked according to the spot pricing. Are you looking at any kind of a hedging in terms of your input cost or you're purely relying on escalation clauses or those kind of cost inflation? Because historically this business had been impacted by the cost inflation and then inability to pass on those costs into the orders.
Yeah. You mean in the marine business? No, we have contractual-
Yeah. Yeah.
Let's say security. We have contractual security that we have indexed prices and things like this, so we don't have a major risk in this. Yeah.
Okay. Understood. That's it from my side.
All right. If this was the last question, I take over again just to say thank you for your participation, and thank you for your questions. As always, after these conference calls, the IR team is available in case you want to ask more questions or when we can provide you with more information. Yeah, that's it, then I say goodbye and look forward to staying in contact with you. See you. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.