Statements on the 2019 / 2020 forecast
The following forward-looking statements relate to continuing operations, i.e. the group as a whole excluding the discontinued elevator operations; the latter include Elevator Technology and individual units from Corporate Headquarters. We also make statements on the discontinued operations, which are fully consolidated until the closing of the Elevator transaction on July 31, 2020.
Sales and earnings in large parts of our materials and components businesses are generally subject to rapid fluctuations, partly driven by raw material prices. We have described our assumptions regarding the economic parameters for our businesses and the existing uncertainties in the section “Macro and sector environment” of this report and in the “Forecast” section of the 2018 / 2019 Annual Report. In addition, there are the effects and risks of the coronavirus pandemic.
As the pandemic has progressed, we saw temporary plant closures at our customers in China from the 2nd quarter of the fiscal year and almost all over the world from mid-March, as a result of which production activity temporarily came almost to a halt. With the easing of coronavirus measures, we are now seeing a cautious resumption of production in key industrial nations such as the USA, UK, Germany and the euro zone as a whole since May, and in China since March. But infection rates remain high in many key regions (USA, South America, Asia, Europe) and there is a continued risk of further waves of infection in the course of the year. For this reason and due to the continuing disruptions to economic and public life, forecasts for global economic growth and the economic impact on our businesses, particularly materials and components for cars and trucks, are still subject to major uncertainties.
In the current situation our priority is to protect the health of our employees and mitigate the economic impact of the pandemic through measures. We have significantly widened the possibilities for remote working in order to keep the risk of infection among employees as low as possible. In addition to short-time working in the plants and administrative units affected by plant closures and production cutbacks at our customers, we are using ways to flex working hours such as using up overtime and leave and reducing the use of temporary workers. We are also implementing cost-saving measures, and scaling back or delaying planned investment projects.
Despite the current challenges we are pushing ahead with the implementation of “newtk”. The definition of the target portfolio at the end of May provided a clear focus on industrial prospects, competitive profitability and cash flow of the businesses. Part of the proceeds from the Elevator transaction will be used selectively to develop and restructure businesses where attractive target returns can be achieved. In addition, fluctuations in net working capital at the respective reporting dates will be reduced significantly in the current fiscal year toward continuous optimization. That will also provide greater transparency and help make forecasts more dependable. Furthermore, financial liabilities will be repaid in line with their maturity profile. However, in view of the uncertain economic situation caused by the coronavirus, we will continue to retain the greatest possible flexibility in the precise allocation of funds.
For the global production of passenger cars and light trucks, the slight decline already expected in 2020 will be significantly exacerbated by production stoppages and distribution constraints resulting from lockdown measures. The Western European and North American markets will not stabilize at a lower level in 2020, as anticipated, but are likely to collapse significantly due to the pandemic. In China, the world’s largest market, despite a positive trend in the 2nd calendar quarter 2020 following the impact of the pandemic on the 1st calendar quarter 2020, we expect car sales to be significantly down from the prior year. For our businesses we see growth opportunities through the ramp-up of new plants and projects, including increasing deliveries of our electromechanical steering systems.
Demand for our bearings from the energy and wind sectors should remain at a high level in 2020, especially in China and North America, also due to pull-forward effects resulting from the foreseeable end of subsidies. However, the industrial markets are showing signs of cooling, mainly due to political uncertainties. We therefore expect a sideways movement in demand for our bearings in 2020. In addition to weaker demand across our entire forgings business as a result of the pandemic, demand for construction equipment components, after peaking in 2018, will continue to decline cyclically in 2020. The global market for trucks over 6t is expected to decline overall due to continuing normalization after the recent very high market level in China and the cyclical downturn in class 8 trucks in the NAFTA region. In the industrial components business too,measures are being continuously implemented to reduce costs and increase efficiency.
At Plant Technology, business up to the 2nd quarter was not significantly impacted by the pandemic and with a few exceptions operations were maintained for orders in process. From the 3rd quarter the spread of the pandemic has had significant negative impacts on business and earnings. Contract awards are being postponed, progress on ongoing projects delayed, costs for project logistics and quality assurance for current orders are increasing while utilization of available engineering capacities is decreasing. By contrast, the service business is performing robustly. The cost-saving program continues to be implemented systematically and is therefore expected to partially offset the negative impacts of the pandemic.
Marine Systems, acting in consortium with Embraer, signed a contract for a frigate program in Brazil in March this year. The contract is expected to take effect in the 4th quarter of the fiscal year. At the same time we are negotiating with Germany and Norway over a submarine program. The performance program is being continued and is already showing good results.
Global steel demand, which is relevant to our materials business, will decline in 2020. Visibility is extremely low. The outlook is clouded above all by pandemic-related production stoppages at relevant steel processors. The growth of the Chinese steel market will at least slow and may even decline slightly. In the industrialized countries, steel demand is expected to fall noticeably. Against the background of continuing global overcapacities and increasing protectionism, import pressure on the European steel market is likely to remain high. We expect the situation on the raw material markets to ease at least partially and at the same time anticipate intense competition on the oversupplied steel markets.
At Materials Services we intend to press ahead with the digitization of business processes and distribution channels to increase productivity and efficiency throughout the value chain and systematically continue our omnichannel approach. This includes the increased use of our “alfred” artificial intelligence system to better control transportation routes and logistics flows, the further rollout of a state-of-the-art ERP platform and the expansion of the e-commerce functionalities of our B2B portal. A further focus is on the optimization of operational processes and targeted measures to improve quality in the process chain. In addition, structural adjustments to the organization and methods of cooperation at headquarters are intended to accelerate decisionmaking processes, reduce complexity and cut costs.
At Steel Europe we expect a significant slowdown in business for the rest of the fiscal year due to the effects of the pandemic, which has already forced the automotive industry in particular to temporarily shut down plants.
Due to the reorganization of business units, the prior-year figures for Automotive Technology, Industrial Components, Plant Technology and Corporate Headquarters have been calculated on a simplified basis, i.e. without reconsolidation.
Sales from continuing operations down sharply, above all in the 2nd half of the year, mainly due to lower demand for our materials and components for cars and trucks as a result of pandemicrelated temporary plant closures and production cutbacks by our customers in the automotive industry (prior year, continuing operations: €34.0 billion)
Adjusted EBIT from continuing operations – depending on the speed at which production is restarted by our customers – almost all businesses, with the possible exception of Steel Europe, stable or with slight quarter-on quarter improvement in 4th quarter, resulting in an overall 4thquarter loss in the mid to high 3-digit million euro range; full-year loss between €1.7 billion and €1.9 billion is likely (prior year, continuing operations: loss of €110 million); year-on-year decline in earnings influenced heavily by high loss at Steel Europe of up to a good €1 billion, also as a result of structural disadvantages at Steel Europe and in the steel industry in general (prior year, Steel Europe: €31 million)
Until the closing of the Elevator transaction on July 31, 2020 we expect our discontinued elevator operations to make a significant positive contribution to the group’s adjusted EBIT (prior year: €907 million).
As part of the implementation of Performance First under “newtk”, continuation of our restructurings, with costs (special items) expected in a mid 3-digit million euro amount.
Free cash flow before M & A from continuing operations expected to be between €(5.0) billion and €(6.0) billion mainly due to operating performance and the normalization of net working capital toward further continuous optimization. This normalization will result in a charge on free cash flow of approx. €2.5 billion (prior year, continuing operations: €(1,756) million).
We expect the group’s FCF (prior year: €(1,263) million) to be significantly positive due to the cash inflow from the Elevator transaction.
In addition to the cash inflow, the closing of the Elevator transaction at the end of July will have a significant positive effect on the group’s net income and a corresponding positive effect on the group’s equity .
Net financial debt of the group taking into account the proceeds from the Elevator transaction with a significant improvement into net financial assets, offsetting effects from cash flow developments and the first-time application of IFRS 16 (prior year: €3,703 million).
tkVA of the group clearly positive due to the effects described above (prior year: €(1,068) million).
Source: Interim report 9 months 2019/2020, P. 25-28