TKAMY - thyssenkrupp AG (TYEKF) Management on Q3 2022 Results - Earnings Call Transcript
thyssenkrupp AG (TYEKF)
Q3 2022 Earnings Conference Call
August 11, 2022, 08:00 AM ET
Company Participants
Claus Ehrenbeck - Investor Relations
Klaus Keysberg - Chief Financial Officer
Conference Call Participants
Seth Rosenfeld - BNB Paribas
Carsten Riek - Credit Suisse
Jason Fairclough - Bank of from America
Bastian Synagowitz - Deutsche Bank
Christian Georges - Societe Generale
Rochus Brauneiser - Kepler Cheuvreux
Presentation
Operator
Dear ladies and gentlemen. Welcome to the Webcast of thyssenkrupp. At our customers' request, this conference will be recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] May I now hand you over to Claus Ehrenbeck, who will lead you through this conference. Please go ahead.
Claus Ehrenbeck
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 Q3 and 9-month numbers. And 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. And they are already available since this morning at 7 a.m. as always.
And with that, I can hand over to Klaus Keysberg, who will lead you through the slides. And afterwards, there will be a Q&A session. So Klaus, please go ahead.
Klaus Keysberg
Yes. Thank you very much and a warm welcome also from my side to today's conference call on TK's Q3 and 9-month figures. And first of all, I'm pleased to report that our performance is significantly up year-on-year. On the back of strong earnings, particularly raw material services and steel. The strong operational performance in 9 months is reflected in a plus of order intake of 34% and 237% of EBIT, respectively. This major performance increases stemming from top line sales such as material services and steel benefiting from favorable price environment.
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 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 that was further continued in Q3. Additionally, underpinned by performance and FTE reduction programs after 9 months we already reduced over 1,700 FTEs.
Furthermore, TK well on track with this transformational progress, including its green transformation. Let me give you some recent proof points from Q3. Our green hydrogen business, Nucera has achieved letter of intent with Unigel, Brazil for industrial scale hydrogen plant with an initial capacity of 16 megawatts.
Marine Systems acquired shipbuilding capacities recently and for Werften Wismar in Germany in preparation for more orders from its expanding naval funnel driven by rising governmental defense budgets. And Automotive Technologies is currently exploring a joint venture with NSK from Japan for steeling businesses to potentially drive synergies and the regional footprint.
Let us briefly take a look at some key financial highlights at the glance, reflecting our strong operational progress and year-on-year. Our top line improved year-to-date with a significant order intake and sales increased by€8.6 billion and US$6 billion, respectively, year-on-year. Consequently, we recorded a 9-month order intake of €33.9 million and sales totaling €30.6 billion.
Simultaneously, we have been able to generate an EBITDA adjusted of €2.6 billion in the first 9 months at an EBIT adjusted of €1.9 billion with a 6.2% margin. This positive development is also reflected in the net income which has improved substantially by €0.9 billion year-on-year to € 0.8 billion thus far in fiscal year '21, '22, with a latter figure including impairments of €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 €3.3 billion. This is mainly due to higher raw material and material prices. And to some extent, also by delayed customer call loss [ph] in auto components businesses due to supply chain bottlenecks.
Positively, to highlight is that free cash flow before M&A in Q3 is showing a significant improvements compared to the previous year - to previous quarter. And 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 the EBITDA adjusted by €456 million year-on-year to €951 billion, mainly by strong margin expansion at our Materials segments, Materials Services and Steel Europe more precisely at Steel Europe with an EBITDA adjusted €451 million, a plus of €363 million and Material Services with a record EBITDA adjusted of €420 million which is an increase of €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 €177 million, resulting in a minus €412 million for Q3. This is mainly or purely due to the temporary negative price-driven effects on net working capital, particularly inventories and receivables. As mentioned before, we expect a strong conversion of net working capital into cash flow by lower receivables and inventories and also by prepayment at Marine Systems, thus a 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 EBIT adjusted in Q3. As evidenced by the graph and figures, we see a significantly improved performance year-on-year with all segments contributing with a positive EBIT adjusted, Multi Tracks being the sole expect - exception.
T Materials Services with €386 million, the performance increases primarily due to record margin levels from favorable prices despite overall decline in volumes. Furthermore, Materials Services achieved continued progress with structural improvements. For example, network optimization with the closure of TK Materials Vietnam and the development of the Approach Materials as a services.
Industrial components came in with €49 million. This is €19 million lower year-on-year with a decline at bearings, but an increase in Forged Technologies. Negative effects at bearings are primarily driven by the higher competition in conjunction with a temporary decline in demand in China and decreased facto costs, partially offset by restructuring and performance efforts.
Forged Technologies could pass on higher factor costs and continued cost-cutting measures, leading to a positive performance effect. Automotive Technologies with €65 million, significantly lower year-on-year by €45 million, mainly due to substantially higher factor costs, volatile customer demand and capacity utilization as a result of supply chain bottlenecks, mainly effect customers. This is partly compensated by further negotiations or new price conditions.
Steel Europe generated an EBIT adjusted of €376 million with a plus of €357 million, significantly higher year-on-year, mainly due to higher spreads. FX from higher contract prices are partially offset by lower shipments and higher raw material and energy costs. Additionally, ongoing restructuring and the performance programs support the top and bottom line development.
arine Systems with an increase of €12 million to €3 million higher year-on-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 negative €62 million in EBIT adjusted versus a higher year-on-year, mainly by the deconsolidation of the positive stainless business already in Q2. In total, this cannot be offset by positive FX from the closure of Heavy Plate.
The next slide depicts and summarizes where we stand with the restructuring plans of our business. As you know, we extended our restructuring initiatives to a total reduction of more than 12,700 FTEs, which marks the largest restructuring program into the group 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 the remaining number of roughly 3,000 FTEs to be reduced until the midterm.
ooking 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. And as the vast majority of the provisions has already been made with a total amount of roughly €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 3-digit million euro range during the past fiscal years and expect that figure to rise to a substantial – a sustainable high [indiscernible] million figure in the midterm.
Moving on, let me briefly give you a status update on the current external factors for our businesses. As 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 risk and opportunities we face.
So 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 of our steel segment.
Here, we took early action, defined action plan for different scenarios of potential gas assorted and ensure that operations can be maintained most efficiently and damages of our aggregates avoided. Moreover, we keep close contact to federal and state governance to raise awareness with 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 a great importance for us to pass those processing on. And I'm happy to state that the salespeople in the businesses are doing a great job, especially in our Components business, Industrial Components and Automotive Technology where we can see these effects in the Q3 numbers.
In 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 counter actions such as temporary short-term work, cost savings. And of course, with risk CapEx management before more severe restructuring and headcount restructuring would have to be introduced.
Regarding the longer-term consequences of the geopolitical situation and economic conditions in Europe and on a global again, it is today far too early to make an assessment. However, it has become obvious already that the push for renewable energy supply besides the multiple market transformation trends is arising, providing significant opportunity for businesses going forward,. as our segment CEOs already outlined at our Capital Markets Day in last December.
That is including the green trend 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 wood [ph] is market and technology leader for ammonia production in last year besides being essential for fertilizer production and as global nutrition ammonia will be a carrier in transportation of hydrogen.
And 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, Automotive Technologies in Steel Europe in important areas such as electric power steering and materials for E-engines, namely non-grant oriented electrical steel.
For Lightweight Solutions, particularly high strength steel, our colleagues in Desberg [ph] built up capacities for steel that is making cardboard is more energy efficient, while not compromising on safety.
For decommonization, Steel Europe is currently underway with the largest transformation in its history to green steel maker 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 decarbonize in circular economy. We also see the longer-term outlook for steel quite positive. This is also due to excess taken by China in the course of its increased focus on decarbonization and the removal of sales tax rebate on exported steel.
But 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 plays 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 business has keep up at the forefront of the development in some of the most promising transformational trends. This also reflects our heritage on our 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 '21-'22. Quarter-on-quarter, we expect some normalization of pricing still on a high level, and we see effects from seasonality and materials environment for mix in steel.
Beside price normalization, we expected - effects on our shipments from destocking and customers. At the same time, we are getting positive indications from our customers from the auto industry, hinting towards 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 net Automotive Technologies and the stabilization at Industrial Components.
With regards to net working capital, we expect a price and volume-driven lease 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, in particular, on the assumption that necessary fossil fuels, especially natural gas and raw materials will continue to be available without restriction.
Given the quarterly perspective and looking at the expected full year figures for '21, '22, the most important statement for me as the Group CFO is by year-end, we will see significant improvement 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 EBIT adjusted in the range of at least €2 billion. This means more than €2 billion which will carry through to a net income in the high 3-digit million range. Taking into account the interest rate driven non-cash charges from impairments.
Our thyssenkrupp Value Added will also be significantly positive in comparison to minus €622 million in the last year. This shows we do not only generate significant earnings but also managed to earn our cash - cost of capital and around value to the shareowners.
Concerning free cash flow before M&A, with foresee was strong Q4, we maintain our guidance as of Q2 for a negative mid three digit revenue euro figure for the full year, still a significant improvement compared to last year's figure of minus €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 €3 billion of course, also due to positive effects from M&A transactions at Multi Tracks that will have an effect in the high 3-digit million range.
And 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 for free cash flow before M&A for the year-end. As mentioned on the last slide, and evidence here by the figures on which we experienced our best 9 months in over 10 years regarding EBIT adjusted.
In the transition to free cash flow, we expect a significant release in net working capital of around €1 billion in Q4, mainly price and volume driven in inventories and receivables, especially at Materials Services, In addition to this, net working capital will benefit from prepayment at Marine Systems for the submarines order that we recorded in Q2.
The before mentioned €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 its three digit million euro range and payables roughly broadly unchanged.
Looking ahead, we forecast already today that in the fiscal - in the next fiscal year, there will be another network of 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 aspect regarding our financial and our transformation. First, strong balance sheet. As previously mentioned, by quarter end, we had a net cash position of around €2 billion. And our total liquidity stood at €7.5 billion, both position will improve at the end of the fiscal year.
Our tangible liabilities significantly declined year-on-year due to rising interest rates and thus higher discount rate contributing also to increase equity rate, improved equity ratio of now 39%.
Next, our Value Added system up from continuation of portfolio management [indiscernible] our green agree hydrogen unit, we continue to see an IPO as a preferred option in order to crystallize the business value. And going forward, we will further enhance the structural fundamentals of our portfolio.
Coming to performance portfolio management and restructuring. On the backdrop of existing 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 Track segment, we can report further progress in the streamlining of the operations. It's important to mention for the mining business, where we strive for finalizing the sale for the quarter end. We are pleased to report that the required learning conditions were accomplished at the beginning of this week. And last but not least our largest restructuring program in TK history is well on track with 9500 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 I outlined earlier. With that expertise, it is fair if we say that we are a key enabler for the retransformation.
nd finally, e have a clear commitment to sustainability, which will continue to be a management priority moving forward, have defined a clear roadmap leading to SBTI's [ph] approved climate targets and our decarbonization from SE representing over 90% of TK 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.
Claus Ehrenbeck
Thank you very much, Klaus. And I would - what I would like to briefly do here is to draw your attention on this slide here on the screen. It's about to date, the safety [ph] date and the safety date for our next capital market event that we will host in November exactly to the 25th of November. So one week after we will have released our fiscal year number and the guidance for 2022, '23. And we will host this event in a meet management format, that means there will only be very brief presentations, and the majority of time will be spent on Q&A. So you have the opportunity to ask as many questions as you want to the management teams of our segments and course of 2 AG management. And with that, I would like to now hand over to the operator for the Q&A session.
Question-and-Answer Session
[Operator Instructions] And the first question is from Seth Rosenfeld, BNB Paribas. Your line is now open.
Q - Seth Rosenfeld
Good afternoon. Thanks for taking our questions. Starting off, 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 us a bit more color on what drove that relative performance versus the sector? Amd some of your peers have proven but more able to find, let's say, a new home for steel, even at a time of weak auto demand improving volumes. Why has that been a bigger challenge for thyssen?
And then looking ahead to Q4, obviously, spot price to fall significantly, but just doesn't have leading exposure to long term contracts. How do we think about the scale of margin normalization expected, is there any benefit to margins on contract exposure versus declining raw material costs? Thank you.
Klaus Keysberg
Yeah. Thank you for your questions. So a few questions. if the first question, I guess, was regarding our margin development quarter-on-quarter compared to competitors. Well, let me say this way, so 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 margin of our competitors.
What we see in our self reflection here. First of all, you know that we are in a restructuring program. We are very much on plan, but we are – we have still a way to go. This is the first one.
If we look at prices per ton, 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, surprises from our opinion, okay. And 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, raw material costs, I mean, - you know that with the beginning of the war, raw material costs increased a lot. And at that point of time, we have to say we purchased raw materials, we purchased raw materials at higher prices, yes. And we purchased raw materials also to maintain the production.
And what we also did after the beginning of the war, we changed our suppliers from Russian suppliers to other suppliers. And this was not to 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 – than in other countries. I don't know so yet. So looking at all of this if I sum it from 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 and we are not able to really make a comparison to the competitors. The competitors should have been in a similar situation, but it's also a question, let's say, this cost at what point of time will this come through in the balance sheet. So we have to, let's say, see the rest of the year, in the rest of the quarters, whether we see some development here.
So this is more or less what I can say to the benchmark here. So much better than before. We had, of course, some issues with raw materials, and also energy. Regarding volumes, and you know that regarding volumes, we in - in our Q3 we were a bit behind previous year. And if you look at coming quarter, I mean, you know that that if you make a guess what is going to happen in the next quarter, what we see is it from the normal industrial business, we do not see so much, let's say improvements, we see it more on a flattish rate.
But 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. So - and this is - I can tell you if you know that the OEs, the big OEs, not only the OEs, they do have still big order backlog and 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. Yes, this should be more or less the answers to your question. Question mark.
Seth Rosenfeld
That's very clear. Maybe if I can flesh just one last time. When you think about going into fiscal Q4, is there any way, little 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?
Klaus Keysberg
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 od energy. So this is in the mixture that we will have to see them compared to Q2.
Seth Rosenfeld
Okay. Thank you.
Klaus Keysberg
I mean it's also depending on the volumes, this is very clear. Thank you very much.
Operator
The next question is from Carsten Riek, Credit Suisse. Your line is now open.
Carsten Riek
Thank you very much for taking my question. The - first one is on the steel impairment, which we have seen, the €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 to choose a recent rate increases.
That said, automatically mean we could see further impairments should interest rates rise further. That's the first one.
And 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 question mark? Thank you.
Klaus Keysberg
So first question and regarding the impairment. I mean you know that at least once in a year, you have to do this impairment test. And if you have some triggering events, then you also have in some quarters, impairment test. So in 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 these cash flows you are going to - going to discount with a special discount rate.
So 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 what I had to do this, the impairment test began this year and the triggering event was the increase of capital cost.
And I can tell you that, of course, two things which could, let's say influence the value in use of the business. This is the amount of cash flow, and this is the discount rate. And I can tell you that the cash flows we applied in this – even this quarter's impairment test were not worse than in previous one, no, they are more or less the same.
So 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 cost, 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, and they would increase in our let's say, estimation that not necessarily - and by the way, if capital costs are going down, then there could also be the theoretical option that we are going as a reversal and a reversal or too fine, I don't the English word. Is it clear now?
Carsten Riek
Yes, yes. That's very clear. Thank you.
Klaus Keysberg
The second question was?
Claus Ehrenbeck
On the technology, whether we could replace existing technology for heating the air that we are blowing into the blast furnaces by another technology?
Carsten Riek
No, no, blast furnaces, it's actually on the - process of the slabs, where most of the natural gas is used?
Klaus Keysberg
And what we are doing and what we are considering, you can imagine that every kind – every of business has so-called vote for planners. So emergency plans for this. And what we especially in steel, you know that we have gas consumption in the cookery [ph] we have some gas consumption in the heating of the blast furnace, and we have, of course, gas consumption in the downstream aggregate.
What we're actually doing and doing it in a so-called emergency plan is, of course, you know that there are [indiscernible] gas, I think this is process gases…
Claus Ehrenbeck
Top gases.
Klaus Keysberg
Top gases, which we normally use also to produce power energy. This is something we could reduce and then purchase power externally and use this tio gases or process gases to use this to - for the production of the downstream mega gases. This is something that this is very clear and straightforward option to reduce the dependency. And of course, what we are also looking at is that we can use liquid natural gas. At the moment we cannot do it without some adjustments on the infrastructure, but we have a clear plan, and we know how to do this. And this is something we are looking at. So this could also reduce our dependency
Carsten Riek
Perfect. Thank you very much.
Klaus Keysberg
Yeah.
Operator
The next question is from Jason Fairclough, Bank of from America. Your line is now open.
Jason Fairclough
Good afternoon. Thanks for the opportunity to ask questions. Klaus, really appreciate it.
Two questions for me. One on working capital and then one on Nucera. So you're guiding to about a €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 €2 billion or €3 billion or € 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 for you? Is this something you're going to look at quarterly or semiannually? Question mark, thank you. Hello?
Klaus Keysberg
I see that we have a problem in the line of, can you hear us?
Jason Fairclough
Now I can hear you. Did you hear my questions okay? Do you want me to repeat them Klus?
Klaus Keysberg
Yes, I think the first question was, I guess, regarding neutral in capital so that we are going to release some, €1 billion at ;least €2…
Jason Fairclough
Yeah. So $1 billion and then how much surplus do we have beyond the $1 billion?
Klaus Keysberg
I mean this is, of course, something which is - which is difficult to answer precisely, but - or I don't really comment on this too much. So we see, of course, further potential because we saw an increase in this fiscal year, which was mainly - were most purely price driven. And of course, this is going to come back to the further number we saw an increase of €3.3 billion so if we now come back with €1 billion, I will not say the €2 billion come back, but some of this will come back definitely. So I cannot be more precise on this.
So and the question on Nucera was, how do we look at this? At the moment, of course, we are watching the development on the capital market very close. We, by the way, think that our asset is going to be more interesting - increased because we generated more order intake. And yes, we are looking at it very constantly. So it could come quick, but it also could come later. So we do not have, let's say, we do not give you an indication of the time line also this is how we constantly looking at the market now.
Jason Fairclough
So just to come back on the working capital, if I could. So again, if we look at €1 billion in the next quarter and then if I pick a number, say, €2 billion, I mean, you're almost returning your market cap in working capital? I mean, is that - that's not a crazy math, right?
Claus Ehrenbeck
Yes, €3.6 billion to €18 billion.
Klaus Keysberg
At the moment, if you look at the market cap, at the moment here, you are not far away from this, yeah.
Jason Fairclough
Okay Thank you very much.
Operator
The next question is from Bastian Synagowitz, Deutsche Bank. Your line is now open.
Bastian Synagowitz
Yes. Goof afternoon, all. My first question is, again, another follow-up on free cash flow on working capital as well. And thanks for the color you already provided here. I'm just wondering, I guess, what we've seen just across whole steel basis that most of your peers have actually started to basically prepare the market for slightly structurally higher working capital level, which may actually be also carried into the next year. So I'm just wondering as you feel very confident on the free cash flow you are planning to deliver in the fourth quarter. Do you still see that there is the risk that you may drag on some of that working capital, maybe a larger number into the next year?
Klaus Keysberg
I don't know whether I got your question right. So I don't know what you mean, although I heard you will hear what you see that our competitors are guiding for higher working capital numbers. So..
Bastian Synagowitz
I guess the question is, is there a risk to your free cash flow guidance as it stands. So you feel basically like 100% confident on it? Is it sacrosanct? You're really feeling very confident to deliver.
Klaus Keysberg
For this year e are very comfortable with this.
Bastian Synagowitz
Yes. Okay. Perfect. That answers my question. And then 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 obviously the low end of very conservative.
So if you look into your order books and also the market framework, which currently seeing today, do you still see the lower-end guidance as realistic at all? And just generally, how much - how comfortable do you feel with consensus numbers around 2.2, 2.3?
Klaus Keysberg
It's a good question. I mean got this question, by the way, also earlier. So our guidance to be at least €2.2 billion. If I would be more precise, in a volatile environment. It's very clear. And we see also some general - but if we talk about our guidance, we are not considering any specific risks. And if I look at the quarter-to-quarter, I mean, you know the spot prices are coming down. This will definitely bringing pressure on the margins of material services.
And on the other hand, we will see, let's say, better volumes in the automotive business. But taking all this into account, I think it's clear that we, quarter-on-quarter will reduce our earnings. But if we talk about the contents of the capital market exceptionally coming to 2.2% to 2.3%. I think it's fair if we would say that we are running in this direction.
Bastian Synagowitz
Okay. And then my last question is just on HKM. It seems like there may be some events coming up here. 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 €500 million number, which you -- and also, will you see any scope to monetize it just in case you're pulling out from it.
Klaus Keysberg
You know that HKM, I think if you talk about this impairment, if you make an impairment, you're going to an asset impairment, you are going to distribute this intends to all of the assets also to 10. This is, first of all, and this is more a technical issue and the other things that I don't know what you specifically mean. So it is our daughter company, and we have other minority shareholder here. So we, at the moment, do not see the necessity to talk about divesting this business or something like this. I think is, I don't know whether you meant that specifically. But maybe you can, let's say, rephrase your question.
Bastian Synagowitz
So 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 yes, it seems very likely that you could be the party who may be over time and not in the next year or so, but we basically plan to withdraw from it. So I was wondering what is the current book value? And in case you're pulling out, I guess the question would have been like older you see a good chance to be monetizing that book value.
Klaus Keysberg
So we - first of all, I don't have it by hard the book value. I have to look at. But if I would have the book, I don't know whether I would disclose it at this point of time. And -- but I mean we are not thinking about at the moment at major strategic changes in our stake in HKM. So I don't know what Saket is referring to, but we, at the moment, are not
Bastian Synagowitz
Okay. Thank you. Thanks for clarifying.
Operator
The next question is from Christian Georges, Societe Generale. Your line is now open.
Christian Georges
Thank you. On your CapEx, you're guiding for CapEx this year at €1.4 billion. If you project to next year on the 2025and what kind of annual CapEx do you think we should be looking at given the investment you have to make to deliver green steel [ph]
Klaus Keysberg
Do you mean in the next fiscal year, ’23, ‘22, ’23. So..
Christian Georges
Yes. And then also in terms of recurrent assets, what's your perception of - are we looking at perhaps above € 2 billion in order to be able to invest in your furnaces?
Klaus Keysberg
I mean we are just preparing the class for next year. So if we look at the 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 retransformation. the green transformation will be will be in - will be view or will be ready in '25. So there will be not so much of this investment CapEx coming in the next fiscal year. So - this is all I can say here so. But at the moment, we are thinking that the number of CapEx in the next year will be higher than €1.4 million. But since we are not ready with the planning, I cannot give you, let's say, a precise number here.
Christian Georges
Okay. Second half?
Klaus Keysberg
Also too.
Christian Georges
Okay. Just wanted to get a feel for it. And on your pensions, the account rate at 3.2%, and you've gone down from about €8 billion liabilities to about €6. Looking at the current ongoing rate increases? Are we looking at below €5 billion, do you report sometime next year as far as your liability are concerned?
Klaus Keysberg
I mean you know that this is very technical here. So if the interest rates are going to in this direction, it could happen, but the question is whether the interest rates are really going there. So there's a simple mark behind. So at the moment in the position to give a focus on the interest rates, which could have an impact on this. So sorry,
Christian Georges
And my last question is on the Rhine water level. you've built up some alternative system with lower margins and with Deutsche Bank, if the rain continues to get lower and lower are you confident that there will be a limited impact on your flows in world and outwards. But do you think if you expect some higher costs
Klaus Keysberg
Yes. I mean if you look at the River Rhine in at the moment, there is low water. I think the level is 1.8 meters. So something like this. I don't know. It's very clear. I don't know with 2 details that I can tell you that we had the situation a few years ago. And of course, we have planned and we learned to this. And at the moment, we are also in execution some of issues. So we changed a bit the way the ships are going. And I can tell you that -- in that moment, we are speaking, we do not have, let's say, let's say, a problem in raw materials. So if we look at the forecast of the liver, there are forecasts available. forecasting and 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. So this would be very helpful. At the moment, we do not see problems with raw materials availability.
Christian Georges
Okay. Thank you.
Operator
Your next question is from [indiscernible] Your line is now open.
Unidentified Analyst
Good afternoon. I have two questions, of course. One is on the kind of a technical one is the free cash flow guidance. It's going down from €1.4 billion, €1.5 billion, €1 billion release that you end up with €400 million. And this is already including in your cash M&A of approximately €500 million, right? So we are not reaching some kind of a reported breakeven.
Klaus Keysberg
I don't know whether I got you. So we are guiding a free flow before M&A. And the mid-3-digit number is the free cash flow before M&A. So any cash we get in part M&A is not considered in this number.
Unidentified Analyst
But you had your 9 months figures, you have a cash in from M&A, but mainly of ASP of approximately €500 million rise.
Klaus Keysberg
Yes.
Claus Ehrenbeck
Not in the free cash flow before M&A.
Klaus Keysberg
Is not there. Do you mean cash flow after M&A, you mean this
Unidentified Analyst
No cash flow statement. So this is not before and after M&A, right?
Klaus Keysberg
I don't know what you are saying, we clearly distinguish between before M&A and
Unidentified Analyst
So in your cash flow from investments, you have proceeds from disposals of EUR€575 million.
Klaus Keysberg
Yes, yes.
Unidentified Analyst
And is this included in the guidance also? Or will this come on top of the current guidance because the 4 M&A? This is the question.
Klaus Keysberg
Yes. Yes. So the free cash flow is we out this free flow before M&A is without that effect. And if we talk about the level of net financial position that then you have to consider this, of course, is positively influencing these numbers. So our net financial position is positively influenced by these numbers, but the free cash flow is without the free cash flow before M&A is without this number.
Unidentified Analyst
So if I would assume a free cash flow before M&A at the end of the year of, let's say, €500 million minus, then I have to add this €575 million and you come out with the reported free cash flow, let's say, approximately €70 million. That's the right
Klaus Keysberg
I don't follow the correct numbers. I mean, principally, you're right, if you're not talking about free cash flow before M&A, the figure this would be maybe neutral.
Unidentified Analyst
Okay. Yes. And then - and the second one is on the net financial results. So it was quite negative with €280 million, which is approximately €140 million minus the net interest and minus €140 million from negative effect from the equity so € 20 million negative. So what is the guidance for the full year? And is there any possibility that you will see some kind of massive improvement of that number in the years to come.
Klaus Keysberg
In the years to come. I mean, a
Unidentified Analyst
If I calculate the 9 months figure should say that for the full year, it will be minus € 350 million. This would be the reverse number I have seen in the net financial result over the last years.
Klaus Keysberg
I mean, I think to give an estimation of 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. So 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 incidence a team you can elaborate in more detail. But in principle, we do not see very major effects coming out of this position.
Unidentified Analyst
Okay. Then maybe get a little bit more into detail what is the main position from the minus €14 million from the result from ad equity?
Klaus Keysberg
Yes, 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 and a discount rate at high distorted to affect in this case.
Unidentified Analyst
Okay, then this €140 million should be some kind of a one-off if interest rates stay stable.
Klaus Keysberg
Yes. A major part of major part of it.
Unidentified Analyst
Okay. Thank you very much.
Operator
The next question is from Rochus Brauneiser at Kepler Cheuvreux. Your line is now open.
Rochus Brauneiser
Hi, good afternoon. Thanks for taking questions. Two actually. The one is concerning your energy position. And thanks for providing this slide with the energy purchases. Can you clarify whether this total bill of 71 terawatt hours your energy build, is that including HKM, -- and this is global. It's not Germany only. So it's the whole ThyssenKrupp Group.
Klaus Keysberg
Yes, Yes. Yes. That's true.
Claus Ehrenbeck
That's true.
Rochus Brauneiser
Okay. And I guess the largest chunk of this is Germany in any case because of the steel business and so on.
Claus Ehrenbeck
I really don't have to precise split out, but I wouldn't guess so, yes.
Rochus Brauneiser
So 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. So there will be a gradual increase in the cost. And I think you mentioned that a 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 only you tries to pass on energy costs to the customers. What do you think about the feasibility of 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?
Claus Ehrenbeck
If you look at the energy price in, if you look at the situation in Europe. So I would guess that maybe gas is there are some countries which are more expensive in gas and power energy. So this is -- this is how it is, but one thing is very clear. So prices are increasing.
And of course, we see increasing energy prices in the whole industry. and not only in our industry. And we assume that there will come more increases in the energy prices and 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 very successful with this in the Q3, starting with the work in Q2. And we think also that we would be even more successful in Q4. But 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. So -- and I mean this is never an easing game, but this is something we are clearly committed to do so. All right.
I mean this -- if you look at this whole history or what we saw now in the last couple of months. Every customer is used to get some materials surcharges and things like this. Now energy comes in place. Also the [indiscernible] comes in place. These were all new items for the customers in the industry.
And I would not say that it 100%, it was always successful, but it was very clear that also in this pattern, which are more unusual to pass through industry accepted to at least let some of this part through, but only some of this so being part of this. And this has to be the way. So this is the way how I think of it.
Rochus Brauneiser
Right. And then maybe can you give us an update about your steel strategy, more general. I think you made some conferences 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 your thoughts to 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 to what you expect in terms of subsidiaries?
Claus Ehrenbeck
Yes. First of all, I think we made it very clear that the 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're investing it. But we also clearly think that way to a separation or a strategic way forward to long-term value creation. The key necessity to transform this business into green production. This is very clear.
And but at the moment because of the geopolitical issues and also because the 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 of something like this. So we have to get more clearance in the business model. But we are ready to do.
And we think this is also the right way even on a stand-alone basis or within the disencoup. This is the same it is. So we are heading to this. We are heading to this very clear. If we talk about the subsidies for the transformation year, as I said this morning also. So we are in talks with the German government the open government, and it's not only the whole industry is. And I mean, it's a costly way to invest in the direct reduction equipments on the one hand.
And of course, have in the first time, let's say, OpEx disadvantage because the OpEx will be a bit more expensive than the traditional way to produce steel. So there are ideas to certainly divest the CapEx, but also the OMX. And this is the process we are in good talks with the German government, but also European government. So we are very optimistic that we will see, let's say, special approvals regarding this.
So this is something which is valid the whole steel industry. This is not only to go issue and orator something like this is relative for the industry and therefore your question. do you have a link between a potential stake of the government into sukuk in connection with the subsidy of the transformation in principle, No. So this is the this subsidies and this is regulated by other things. So if you talk about government the stake of the government, as I said this morning, some of -- some people are talking about this. I'm not commenting on this. I can only tell you that we, at the moment, I'm not talking with the government in both the section.
Rochus Brauneiser
Okay.
Operator
The last question is from Christian Agarwal,[ph] Citigroup. Y\our line is now open.
Unidentified Analyst
Quick follow-up on the line Rhine water level impact. You mentioned that from the raw material side, the situation looks okay for now. Can you also comment on your outward kind of or 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 on the line. What the level driven lower steel shipments. So how is the situation looking like this time?
That's my first question.
Klaus Keysberg
Yes, so on an inbound at the moment we do not have -- at the moment, we do not have a problem then situation is going to get worse. You will never know. But at the moment, we don't have a inbound and outbound. And I'm not ready to -- I'm not able to say how the situation will look like in a few weeks, so I'm not able to do so. But I can say, we are -- in principle, we are more prepared than in 2018.
Unidentified Analyst
Understand there. And then on the material services, I mean, you have given a guidance of existed EBIT up to €1 billion. In the 9 months, you're already at €970 million, €980 million. So are you at the normalization in the Q4 is going to be significantly lower, just so that you have only €20 million, €30 million of it or there is a potential for kind of a normalized to be better than that run rate?
Klaus Keysberg
I mean we had some reasons to do so, yes. So as I said before, smaller prices are going down. margin pressures are going up. I know that you know the business model of material 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. So this is a very clear development here.
Unidentified Analyst
Okay.Okay. Understood. And then finally, on the marine. I mean, secondly, you have close to $14 billion of order intake or order backlog into that business, but the revenue run rate sort of happen being improving. I know you have a guidance of 6% to 7% EBIT margin, but would you be able to discuss the trajectory of those revenues or execution of the order in the next 12 to 18 months? How should we think about it?
Klaus Keysberg
I didn't know whether I got the question right. So maybe you can -- the last sentence you can
Unidentified Analyst
What are the expected time lines for the order execution? I mean you have €14 billion order backlog into the marine
Klaus Keysberg
Okay. Okay. I see what you mean. So at the moment, €14 billion order intake or order enhanced, yes, it's right. You know that we are talking which the government also for potential increase of this. So we are in good discussions about this. But if you talk about the order intake, the time line, Well, this is something which depends very much on it. But to be very clear, this is 10 years or longer. So this is a big orders, and some of them are going to be -- some of them are going to be then ended in mid 30 years, some of them also earlier. So -- but the reach of -- the timely reach of the order intakes are sometimes 10 years.
Unidentified Analyst
Okay. And 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. So I'm assuming these orders are benchmarked according to the spot pricing. So are you looking any kind of hedging in terms of your input cost or your purely relying on escalation clauses or those kind of concentration because historically, this business has been impacted by the cost inflation and the inability to pass on those costs into the orders?
Klaus Keysberg
Yes, you mean in the Marine business now, we have contractual let's say, particularly a contractual security that we have indexed prices and things like this. So we don't have a major risk in this.
Unidentified Analyst
Okay. Understand Okay, that’s it from my side
Claus Ehrenbeck
All right. And if this was the last question, then I'll take over again, just to say thank you for your participation, and thank you for your questions. As always, of these conference calls, the IR team is available in case you want to ask more questions or if when we can provide you with more information. Yes, that's it. Then I say goodbye and look forward to staying in contact with you. See you. Bye-bye.
Operato r
Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.+
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thyssenkrupp AG (TYEKF) Management on Q3 2022 Results - Earnings Call Transcript