2020/2021 forecast

Statements on the 2020 / 2021 forecast

In connection with the strategic realignment, on which the following forecast is based, the independent segment Multi Tracks was established effective October 1, 2020. Multi Tracks includes Plant Technology, the AST stainless steel mill in Terni (Italy) including its sales organization, Powertrain & Battery Solutions, Springs & Stabilizers, the Infrastructure and Heavy Plate units, Carbon Components and the investment in our former elevator business. More information on this is provided in the “Strategy” section.

Overall assessment

We are pushing ahead with the strategic realignment and structural improvement of our businesses. With the definition of our target portfolio at the end of May a clear focus was placed on the industrial portfolio and business models, competitive profitability and cash flow of our businesses. Part of the proceeds from the Elevator transaction are to be used selectively to develop and restructure businesses where attractive target returns can be achieved. In addition, financial liabilities are to be repaid in line with their maturity profile. However, in view of the uncertain economic situation due to the pandemic we will continue to retain the greatest possible flexibility in the precise allocation of funds.

The economic conditions for our businesses are currently marked by uncertainties arising from:

• uncertainty over the progression of the coronavirus pandemic, the possibility of tighter lockdown measures, and a “new normal” after the pandemic

• the future economic policy of the USA – in particular after the decision in the presidential election

• the possible slowing growth of the Chinese economy as a key factor for global growth and as an important sales market

• the outcome of the Brexit transition negotiations on economic growth in Europe, on exports and on future investment – above all in the UK itself but also in the other countries of Europe

• the high overall indebtedness in some EU states, not least due to numerous government aid measures to mitigate the effects of the pandemic, which could cause significant uncertainty on the financial markets; this could restrict lending to businesses and households

• the continuing structural overcapacities in the steel industry, the corresponding competitive and import pressure on the European market and increasing dislocations in international steel trade flows, among other things as a result of the US tariffs on steel imports

• the volatility – including sudden fluctuations in some cases almost impossible to predict – and level of raw material prices as an important cost factor in our materials businesses and as a key factor for our plant engineering customers when awarding major projects

• the structural transformation in the auto industry (changing mobility patterns, shift in powertrain technologies, digitization) which could be slower than expected if there is a sharper global downturn

Key assumptions

For 2021 we currently assume significant growth at a global level. Depending on the course of the pandemic, a few countries (e.g. China) may already return to pre-crisis levels, but in most other countries, which have been hit hard by the infection rates and also due to their economic structure, this will probably not be the case before 2023.

Against this background we will focus in fiscal 2020 / 2021 on the restructuring and structural improvement of our businesses and Corporate Headquarters as well as continuing targeted growth initiatives. All targets are to be backed systematically with concrete action plans. In addition we will develop the “best owner” plans for Multi Tracks launched last year towards a conclusion and bring the Dual Tracks into a long-term target structure where this improves value. We will also counter the effects of the coronavirus pandemic with short-term measures such as short-time working.

The key assumptions for our markets forming the basis of our forecast can be found in the section “Macro and sector environment” in the Report on the economic position. The corresponding opportunities and risks are set out in the “Opportunity and risk report” that follows this section. We have the following expectations for our businesses:

Materials Services will continue to drive the digitization of its business processes and distribution channels in order to increase productivity and efficiency throughout the value chain and systematically pursue our omnichannel approach. This will include increased use of our AI platform “alfred” to optimize 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. As part of our “Materials as a service” strategy we will also develop new digital business models and services. In addition, structural adjustments to the organization and site network will help optimize capacity utilization and thus reduce costs.

Despite the ending of government incentive programs in China that caused pull-forward effects in the prior fiscal year, demand for bearings from the energy and wind sector is expected to remain at the prior-year level. This will be supported by structural measures aimed at improving our competitiveness and securing our leading market position. Following a cyclical market downturn and a pandemic-related significant fall in demand in 2020, we expect a moderate recovery in demand for our global forgings business and construction machinery components in fiscal 2020/2021. We expect a moderate normalization of demand from a very low level for trucks >6t, and a slight increase for industrial components. This will be supported by systematic measures to reduce costs and improve productivity in all regions.

Following an anticipated decline of 17% in 2020 due to the pandemic, global production of cars and light trucks is expected to remain well below pre-crisis levels in 2021. The markets in Western Europe and North America are expected to show signs of recovery in 2021, each growing by around 20% from a significantly reduced market level. In the world’s biggest market China, we expect car sales to be lower year-on-year despite a positive trend in the course of 2020 following pandemic effects in the first calendar quarter. The recovery trend will continue and is expected to result in slight growth on the Chinese market in 2021. The increasing trend towards e-mobility is also expected to have a positive effect on demand for our chassis components and high-quality steel grades.

Global steel demand is expected to grow by around 4% in 2021. The Chinese market, which grew by 8% in 2020 and prevented a more significant drop in global steel demand, is expected to stabilize. However, the overall positive outlook for 2021 is clouded by great uncertainty about the progression of the pandemic. In addition, global overcapacities and protectionism continue to represent a high risk. Imports also remain a challenge to the expected upward trend on the European steel market. At the same time we will push ahead with the transformation to “green steel”.

Following the pandemic-related slump in spring 2020, we expect the general economic recovery to result in a tentative improvement at Steel Europe from a low base over the course of the fiscal year 2020 / 2021. However, a return to pre-crisis levels is not expected until the following years.

At Marine Systems, the level of orders in hand for surface vessels is very pleasing. At the same time we are negotiating with Germany and Norway on a submarine program. As a sub-contractor to the Italian shipyard Fincantieri we are also part of a promising bidding process for an Italian submarine program. We expect to receive both orders in fiscal year 2020 / 2021. The performance program is continuing and is already showing good results.

The biggest unit in our Multi Tracks segment – Plant Technology – was impacted by the pandemic from the 2nd half of the past fiscal year, including delays in order awards and ongoing projects, higher costs for project logistics and quality assurance, and lower utilization of engineering capacities. These impacts are expected to decrease in the current fiscal year. The service business remains robust. In addition we expect the quality of project execution to improve in all business units and positive effects from the continued ramp-up of cost-saving measures.

Expectations for 2020 / 2021

Against the background of the economic and geopolitical uncertainties described above and the reduced planning reliability this creates particularly for our more cyclical businesses with materials and car and truck components, we feel it appropriate – despite the expected visible structural improvement of our businesses – to offer a cautious outlook overall for the 2020 / 2021 fiscal year and have formulated our forecast in corresponding ranges.

As of fiscal year 2020 / 2021 the definition of adjusted EBIT has been adjusted. Special items are defined more narrowly in stricter alignment with the treatment under IFRS. In the future earnings will be adjusted for restructuring expenses, impairment charges and disposal gains/losses.

To take account of the effects of this, as well as the new group structure with the Multi Tracks segment, the prior-year reference values for sales of the individual segments and adjusted EBIT of the group and the segments have been calculated pro forma.

The prior-year reference values for the group relate to the continuing operations.

The forecast assumes no effects from possible portfolio measures.

Our sales forecast is based on the market forecasts provided in the section “Macro and sector environment” of the Report on the economic position. GDP growth in 2021 for regions of importance to us – Germany, the USA and China – is expected to be 3.9%, 3.5% and 7.1% respectively. These market forecasts were made before potential impacts from the second wave of the coronavirus pandemic, which are not currently foreseeable.

Depending in particular on the recovery of the global automotive market, which will also be influenced by the further progression of the coronavirus pandemic and will affect our materials and automotive components businesses, sales are expected to grow in the low to mid single-digit percentage range but remain clearly below the level before the coronavirus pandemic (prior year: €28.9 billion).

We expect adjusted EBIT to improve significantly but still show a loss in the mid 3-digit million euro range (prior year: pro forma €(1.8) billion). This improvement will be due mainly to clear structural progress in all businesses and is predicated on the development of sales, which will depend to a large degree on the market situation. A loss in the low to mid 3-digit million euro range (prior year: pro forma €(593) million) is expected at Multi Tracks and a loss in the low 3-digit million euro range (prior year: pro forma €(820) million) at Steel Europe.

• At Materials Services we expect a significant improvement in adjusted EBIT back to a positive figure (prior year: pro forma €(85) million). In addition to structural improvements and the absence of negative one-time effects this will be supported by a significant increase in volumes starting from a low level. However, a return to pre-crisis volume levels is not expected until the following years.

• At Industrial Components overall we expect a slight increase in sales in the low to mid single-digit percentage range and stable to slightly higher adjusted EBIT (prior year, sales: €2.1 billion, pro forma adjusted EBIT: €139 million). This will be supported in particular by the recovery in the market for forgings and continued robust demand for bearings.

• At Automotive Technology we expect robust sales (prior year: pro forma €4.1 billion) and a recovery in adjusted EBIT back to a positive figure in the mid to high 2-digit million euro range (prior year: pro forma €(166) million). This will result mainly from rising contributions from the new plants and projects, continuing efficiency measures and lower impairment losses.

• At Steel Europe we expect a significant improvement in adjusted EBIT, although still negative in the low 3-digit million euro range (prior year: pro forma €(820) million), reflecting structural improvements from the implementation of Strategy 20-30 addressing internal structural disadvantages and disadvantages in the steel industry in general, lower impairment losses as well as a significant volume recovery starting from a low level. However, a return to pre-crisis volume levels is not expected until the following years.

• At Marine Systems we expect a significant increase in sales and higher adjusted EBIT (prior year, sales: €1.8 billion, pro forma adjusted EBIT: €20 million). This will be supported by higher earnings contributions from the new projects and improvements in project execution.

• For the businesses combined in the Multi Tracks segment, overall we expect stable sales (prior year: €5.5 billion) and a significant improvement in adjusted EBIT to a loss in the low to mid 3-digit million euro range (prior year, pro forma adjusted EBIT €(593) million).

  – A key driver of the expected improvement in earnings will be Plant Technology, where adjusted EBIT will move towards break even. In addition to improved project execution and highermargin projects in billing, this will be supported by growth in the high-margin service business and continuing cost-reduction measures, including in administrative areas (prior year: pro forma €(250) million).

• We will continue to transform Corporate Headquarters into a lean holding company structure and expect lower costs in the fiscal year (prior year: pro forma adjusted EBIT €(221) million).

In connection with the implementation of the structural improvements we expect expenses from the necessary restructuring measures (special items) in the mid 3-digit million euro range.

Despite clear operating improvements and the absence of impairment charges on non-current assets from the prior year, we expect a significant net loss for the year of over €1 billion (prior year: €(5.5) billion).

Capital spending is expected to be higher than a year earlier (prior year: €1,440 million). There will be higher investments at Steel Europe in connection with Steel Strategy 20-30 and largely stable investments overall at the other businesses. Due in particular to the uncertain environment, investments will be approved on a restrictive basis.

As a result of operating improvements in all segments, the absence of charges from the normalization of net working capital, the absence of the fine in the cartel case at Steel Europe, continuing restructuring expenses in the low to mid 3-digit million euro range and depending on cash inflows from order intake and the payment profile of projects at Marine Systems and Plant Technology (Multi Tracks), we expect free cash flow before M & A (prior year: €(5.5) billion) to improve significantly but still remain negative in the region of €(1.5) billion.

We expect a loss in the low to mid 3-digit million euro range at Multi Tracks and a loss in the low 3-digit million euro range at Steel Europe.

tkVA, which profited substantially from the elevator transaction in the prior year, is expected to be lower year-on-year as a result of the effects described above (prior year, group: €9.1 billion).

We will take into account the development of our key performance indicators – also keeping in mind economic justifiability – in preparing our dividend proposal to the Annual General Meeting.

^{Source: Annual Report 2019/2020, P. 96-101}