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2016/2017 forecast

Overall assessment by the Executive Board

Overall we expect that further progress on our Strategic Way Forward will be reflected in our key performance indicators in the 2016 / 2017 fiscal year. However, it must be kept in mind that the economic climate is marked by great uncertainty and as a result sales and earnings in large parts of our materials and components businesses may be subject to short-term fluctuations. Uncertainties arise from geopolitical flashpoints and also concern in particular

  • the future political course of the USA and the extent of the expected weakening of the Chinese economy as key factors for global growth and as important sales markets
  • the negative impacts of the Brexit referendum on economic growth in Europe and on exports to Britain by our automotive customers
  • the volatility and amount of raw material prices as a key factor for our customers in plant engineering in the award of major projects and as an important cost factor in our materials businesses
  • the overcapacities in the global steel industry, the corresponding competitive and import pressure on the European market, and the effectiveness of current and possible follow-up trade measures.

Nevertheless on the whole we take a cautiously optimistic view of developments in the 2016 / 2017 fiscal year and expect a significant improvement in earnings and value added and slightly positive free cash flow before M & A.

A key driver for meeting our targets in the current fiscal year will again be the efficiency measures under “impact”: For 2016 / 2017 we once more aim to achieve EBIT effects of €850 million under “impact”, which will counter the risks and market effects described above, create the basis for profitable structural growth, and open up scope for necessary measures to make our IT infrastructure and process landscape fit for purpose moving forward.

Key assumptions

The expected improvement in our key performance indicators is predicated on the assumption that there will be no further escalation of the geopolitical crises and that the economic effects of the future course of the USA, the weakening of growth in China and the impacts of the Brexit referendum will remain manageable. For the current fiscal year we assume moderate growth in the euro zone, a slight increase in economic momentum in the USA, slightly weaker growth in China, and an improvement in the economies of many emerging countries.

We expect only a slight rise in global demand for steel, with moderate low single-digit percent growth in both Europe and the USA. Demand is expected to bottom out at a low level in Brazil, and decline further in China. Import pressure on the European market will likely remain high. We assume there will be no further dislocations on the raw materials markets, that the recent significant price increases for coking coal will be passed onto the market, and that competition will remain intense.

Against a background of high uncertainties, a very mixed regional picture, and generally slowing momentum, global automotive output should increase again moderately. After very strong growth in 2016, a further slight increase in output in China is forecast for 2017. Production in the NAFTA region will probably also increase moderately; a steep decline in the USA will be offset by very dynamic growth in Mexico. In Western Europe as a whole production is expected to stagnate – with a decline in Germany and growth in France. After a further steep decline in 2016, auto production in Brazil should stabilize at a low level in the forecast period.

The high order backlog with good earnings quality and high volume of service contracts at Elevator Technology already ensure that planned sales are secured well into the new fiscal year.

The high order backlog at Industrial Solutions already secures a large part of planned sales. Our workload in cement plant construction and production systems for the auto industry is very good. However, some of our chemical plant, mining equipment and naval shipbuilding operations are starting to experience capacity underutilization, the further course of which will depend to a great extent on decisions by our customers to award major orders.

More information on expected future economic developments can be found in the section “Macro and sector environment” in the report on the economic position.

2016/2017 forecast: Clear increase in earnings and value added with slightly positive FCF before M & A

On a comparable basis the Group’s sales and all capital goods businesses are expected to grow at a single-digit percentage rate.

The Group’s adjusted EBIT is expected to be around €1.7 billion (prior year: €1,469 million). €850 million planned EBIT effects under “impact” will counter the market effects described above, create the basis for profitable growth, and open up scope for necessary measures to secure the future of the Group.

Capital goods businesses

  • At Components Technology we expect an improvement in adjusted EBIT (prior year: €335 million) from a slight increase in sales and margin (prior year: 4.9%) and also as a result of further progress with the ramp-up of the new plants and efficiency programs.
  • At Elevator Technology we expect an improvement in adjusted EBIT (prior year: €860 million) from slight sales growth and an increase in adjusted EBIT margin by 0.5 to 0.7 percentage points from restructuring and efficiency measures (prior year: 11.5%).
  • At Industrial Solutions the short-term focus is on reversing the trend in orders and cash flow. We expect a decline in adjusted EBIT (prior year: €355 million) and based on the previous year’s weak order intake a slight decline in sales. In plant construction we will safeguard margin at the bottom end of the target range of 6% to 7% through extensive efficiency measures. However, at Marine Systems we anticipate a temporary sharp decline in margins and earnings with the expiry of high-earning projects and as a result of capacity underutilization. Across the mix of project milestones to be billed, our overall margin will therefore temporarily drop noticeably below the target range.

Materials businesses

  • At Materials Services, in a slightly more favorable market environment we forecast a clear year-on-year increase in adjusted EBIT (prior year: €128 million) due to the absence of windfall losses and in particular through progress with our restructuring and efficiency programs and sales initiatives and the continued implementation of the business plan at AST.
  • At Materials Services, in a slightly more favorable market environment we forecast a clear year-on-year increase in adjusted EBIT (prior year: €128 million) due to the absence of windfall losses and in particular through progress with our restructuring and efficiency programs and sales initiatives and the continued implementation of the business plan at AST.
  • At Steel Americas, in a volatile price environment with rising raw material costs we expect adjusted EBIT to come in level with the year before (prior year: €(33) million). Our efficiency programs and operating progress will counter negative cost effects from a stronger Brazilian real. Our long-term contract for the supply of slabs to the USA will secure a base workload in a solid market environment; in addition we predict growth in shipments to the stabilizing Brazilian market.

Our goal is to strengthen equity with clearly positive net income; for fiscal 2016 / 2017 despite continued restructuring expenses we expect a significant year-on-year improvement (prior year: €261 million).

The Group’s tkVA is therefore also expected to show a clear improvement (prior year: €(85) million).

Capital spending in the Group is expected to come to around €1.5 billion in the current fiscal year (prior year: €1,387 million).

With an increase in net working capital at our materials businesses due to higher volumes and prices, we expect slightly positive FCF before M & A overall (prior year: €198 million).

We will take into account the development of our key performance indicators and progress with the implementation of the Strategic Way Forward – also keeping in mind economic justifiability – in our dividend proposal to the Annual General Meeting.

Source: Annual Report 2015/2016, p. 98-100

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