TKAMY - thyssenkrupp AG (TYEKF) Q2 2023 Earnings Call Transcript

2023-05-14 00:03:08 ET

thyssenkrupp AG (TYEKF)

Q2 2023 Earnings Conference Call

May 11, 2023, 05:00 AM ET

Company Participants

Claus Ehrenbeck - IR

Martina Merz - CEO

Klaus Keysberg - CFO

Conference Call Participants

Alain Gabriel - Morgan Stanley

Jason Fairclough - Bank of America

Bastian Synagowitz - DB

Dominic O'Kane - JPMorgan

Christian Obst - Baader Bank

Krishan Agarwal - Citi

Presentation

Operator

Ladies and gentlemen, welcome to the thyssenkrupp Conference Call Interim Report First Half Year 2022/2023. [Operator Instructions]

I will now hand over to Claus Ehrenbeck. Please go ahead.

Claus Ehrenbeck

Yes. Thank you very much, operator. Yes. Hello, everyone. Also on behalf of the entire team, I wish you a very warm welcome to our conference call.

All the documents for this call are available on the IR section of our website. In addition, there is a comprehensive document that contains all the numbers, the figures that you need also when you want to take a look at the segments.

Here with me in the room are our CEO, Martina Merz; our CFO, Klaus Keysberg, and from Investor Relations, my colleague, Chuck. As always, the presentation of our board members will be followed by a Q&A session.

And first, for the presentation, I would now like to hand over to our management and please, Martina, go ahead. The ball is in your court.

Martina Merz

Thank you, Claus. Good morning, everyone. Martina speaking. Thanks for joining our call today. And we're going to start with the first slide, progress along the transformation part of thyssenkrupp.

As you know, the two quarterly results are the last ones for which I'm responsible in my role as CEO of thyssenkrupp. That's why I would like to take this opportunity to classify the figures published this morning for you together with Klaus. This is not just about the past three months. We also want to take a brief look back at what we have achieved together over the last three years. But above all, we want to look ahead, of course, because thyssenkrupp can look to the future with optimism.

And as you know, after the Elevator transaction, we have embarked on a structured transformation path, a longer framework involving focus, improve and scale. And we have achieved a great deal along this path in three steps. First, we clearly structured our portfolio to make performance and potential for all segments visible. We increased value focused on challenges and opportunities in the business. And second, we improved our financial figures. Today, we forecast the mid- to high 3-digit million euro number in adjusted EBIT and a slightly positive figure for free cash flow before M&A.

So we are on track. And third, in addition to improving our balance sheet, we have created development plans for all businesses to create sustainable value. thyssenkrupp is now a group of largely independent high-performance technology companies that are in a good starting position to take advantage of their opportunities, enabling the green transformation.

On the next slide, it's visible that progress becomes especially visible in our improved balance sheet and our expanded footprint in green transformation. Not only have we significantly improved our financial KPIs through performance and restructuring initiatives, today, we also have a very solid balance sheet and return the net debt into a net cash position, also supported by accretive portfolio actions at Multi Tracks. And we boosted our equity ratio to approximately 40%.

Compared with '19/'20, thyssenkrupp group is now in a much better shape also for capturing opportunities that might come our way. This brings me to the right part of the chart, the green transformation. In all areas, we have focused on the opportunity that present themselves for our technologies. And this applies particularly to the hydrogen economy.

At Steel Europe, our decarbonization journey continues. In market, the contract for the construction of our first hydrogen power pilot production plant and two innovative smelters. And regarding offer in the triangle. At nucera, we recently signed an MOU for capacity expansion for an H2 electrolysis plant. The customer, Unigel, plans to significantly expand its Brazilian plant to 240 megawatts. With that, nucera now holds a large contracted capacity of more than 2.5 gigawatt H2.

On the infrastructure side of the triangle, our planned engineering businesses Uhde signed an MOU with ADNOC for a joint project development of a large-scale ammonia cracking plant. The business is developing very well, and the breakeven result is inside.

On the next slide, it shows that we continue on the path of transformation. thyssenkrupp has achieved a lot in its transformation. It is now a matter of holding the cost we have taken and further increasing the pace. The change in the CEO position will not hold back the company in this phase of implementing the transformation. The strategic lines that have been set will systematically continue.

And in terms of performance, all our businesses have the clear objective of achieving benchmark performance. Their midterm targets are important, immediate step on this path. Looking at the green transformation, we, as an industrial ecosystem player, want to leverage our technological experience expertise and intellectual property to seize the opportunities that will arise in this disruptive process.

For our portfolio, our top priority is to maximize the value and development of our businesses, even this means adjusting our ownership structure. And finally, our whole active owner is to enable innovation and to empower the management team to realize the full potential for their businesses and their people.

At Steel Europe, we are evaluating standalone options and are in promising talks with possible partners to address the diverse economic and ecological challenges of these businesses. We are also working on an independent solution for Marine Systems. The Supervisory Board gave the green light for this at the end of March. In addition to this, we will streamline our portfolio to reduce risk and improve performance, which also will be reflected in the next measure in -- at Multi Tracks.

For thyssenkrupp nucera, an IPO remains our preferred option to unlock the full potential of our hydrogen business. However, the decision on a possible timing will depend on the situation in the capital markets. I can assure you that thyssenkrupp has grown very close to my heart over the past few years, and I will follow the company's further development with great interest and great passion, by the way, not -- in this document, but I say this great interest and with passion. It wish -- I wish the company and all its employees and its investors, all the very best. I'm sure that the transformation we have powerfully embarked on will also succeed.

And having said that, I would now like to hand over to Klaus, to give you more details on our Q2 figures.

Klaus Keysberg

Yes. Thank you very much, Martina, and also a warm welcome from my side to today's call.

First of all, I'm pleased to say that thyssenkrupp has continued its solid performance in the recent quarter. Overall, I would like to state that the year-to-date performance is fully in line with and strongly supports our fiscal year '22, '23 financial targets. Now let us have a closer look at our financial highlights. In the first half year, sales were at €19.1 billion, slightly below last year. However, looking at quarter 2, quarter-on-quarter sales significantly picked up again by 12%.

Before coming to earnings, I would like to emphasize that we have adjusted our special items guideline. Also, based on your feedback from the capital market after Q1 reporting. From now on, effect from the valuation of CO2 certificates are treated as a special item and are thus not included in EBITDA adjusted and EBIT adjusted anymore. This also implies that the respective Q1 figure is on a restated basis.

Overall, and as expected, EBITDA adjusted and EBIT adjusted were considerably lower year-on-year, mainly by, as already visible well in Q1, the ongoing normalization of material prices at Materials Services. Also, at Steel Europe, normalized prices at customer contracts in addition to cost moving average effects impacted earnings. On the positive side, we saw improved contributions from Automotive Technology, Multi Tracks and Marine Systems.

With regards to cash flow, we were able to significantly improve our free cash flow before M&A by more than €500 million also on the back of net working capital improvement. Looking at H1, we even increased free cash flow before M&A by more than €1 billion year-on-year. This clearly confirms our ambition for the fiscal year to drive free cash flow before M&A into positive territory.

Let us continue with some further highlights on the next slide here. Looking at our balance sheet, I can state that it again showed a rock solid picture. Year-on-year, we gained €0.5 billion in net cash, resulting in a net cash position of €2.9 billion. We further improved our equity ratio by 4.7 percent points to a very comfortable 39.8%. At the same time, pension liabilities came down by €1.4 billion to €5.7 billion.

And please, let me remind you, we own some valuable assets such as our stake in TK Elevator or our growth company, nucera, which I'm sure you are already very familiar with. And also, our chemical plants business for ammonia production, Uhde, with convincing growth perspectives because ammonia is not only key for organic fertilizers production, but it can also be a carrier for hydrogen in long-distance transportation. Moreover, our strong balance sheet strongly backs our transformation journey as it provides resilience with navigating our group through the current macro environment and enables us to grasp strategic opportunities going forward.

Let us now jointly take a brief look in the group's Q2 performance. We experienced a slightly decreasing top line year-on-year with sales at €10.1 billion, more a function of lower prices at our materials businesses than demand as well as the sale of AST in the previous year.

Nonetheless, quarter-on-quarter, sales significantly picked up, especially driven by Materials Services and Steel Europe on the back of increased spot prices and higher volumes. Automotive Technology and Industrial Components grew, both enhance their top line performance quarter-on-quarter and year-on-year. EBITDA adjusted came in at €430 million, while with EBIT adjusted came in at €205 million.

Although price normalization from high levels again dominated earnings this quarter, let's not forget to appreciate the positive development at Automotive Technology, Marine Systems and also Multi Tracks. In addition, the continuation of performance and restructuring initiatives supported the performance of all our business. So far, FTE reduction is more than 10,500.

Please let me remind you that the adjusted earnings figures, EBITDA adjusted and EBIT adjusted, as I said before, do not include any effects from the valuation of CO2 certificates anymore, and Q1 figures are shown on a restated basis.

Free cash flow. Free cash flow before M&A has significantly improved and was at minus €216 million. This encouraging development was supported by net working capital improvements, mainly driven by release of inventories at Materials Services and Steel Europe.

Now let's go on one step further and take a look at the earnings in Q2, namely EBIT adjusted at a glance and by segment. By the way, please note that all corresponding EBITDA adjusted figures are available for you in our more detailed and well-known Investor Relations handout.

Material Services, as mentioned earlier, was affected by lower prices and warehousing shipments, especially in the European distribution business, although total shipments increased mainly driven by volume expansion in our direct-to-customer business. However, even more important for us, EBIT adjusted again improved considerably quarter-on-quarter, also on the back of recent spot prices development, demand recovery and our internal efforts to increase efficiency.

Industrial Components was broadly stable year-on-year, supported by better performance at Forged Technologies, even though this could not completely compensate the softening at bearings. Bearings is still impacted by ongoing competition, especially in China, whereas Forged Technologies benefited from continued strong demand from the trucks and industry customers. Both businesses units faced a higher cost base, which they counteractive to a large extent with respect to pass on efficiency measures and cost selling.

Automotive Technology experienced a substantial increase of €86 million year-on-year. The pleasant year-on-year development reflects a step-up in customer demand as well as operational improvements and price measures to tackle the surged cost base. In addition, the EBIT adjusted figure includes a positive onetime effect in the range of a mid-2-digit million amount from the settlement with a supplier on quality issues in previous years.

At Steel Europe, EBIT adjusted came down by €493 million year-on-year. This equals to an EBITDA per tonne of €22. Recent customers restocking led to increasing volumes while earnings development was overcompensated by lower market prices basis year-on-year as well as cost moving average effects from semi-finished goods on stock produced in Q1 and earlier. The good news, this is very important to note, it clearly is a temporary effect, which will disperse in the coming quarters. By the way, in the running quarter, we already see that cost basis is coming down.

So good news on this. Marine Systems, again, could continue its positive trend with a solid increase of €11 million year-on-year. Here, we continue to focus on performance improvements. And we could further stabilize the older and less profitable orders as well as benefit from the higher margin orders in the pipeline. By the way, our order backlog stood at €12.8 billion at the end of Q2.

Multi Tracks reported a profit of €7 million in EBIT adjusted for the first time with all remaining businesses showing clear improvements. This upbeat development was also supported by our ongoing restructuring and cost-cutting measures. And last, but not least, our headquarter and others improved by €14 million year-on-year.

Having talked about the past quarter, let's now have a look on the quarter to come and our full year guidance. Looking at the overall economic situation, it seems that things might get better than assumed at the beginning of the year. For instance, fears on recession slowed down and GDP predictions for our main regions are going in the right direction.

In light of this, we expect, let's say, improving market conditions, a step-up for our industrial application components, for instance, from our auto customers and at least stable shipment for our steel products. Hence, for Q3, we see a step-up in earnings on a like-for-like basis. On a relevant note, please consider the positive onetime effects at Automotive Technologies in Q2. And we see positive free cash flow before M&A actually ready -- already for Q3 and, of course, then for Q4.

Let's now look at the full year guidance that is basically unchanged, except for the free cash flow before M&A. For sales, we expect a significant decrease. On the earnings side, we project, as you know, EBIT adjusted to end in the range of a mid- to high 3-digit million euro number. Overall, if you consider an expected depreciation of approximately €1 billion, you can conclude a sizable EBIT adjusted figure for '22, '23.

For free cash flow before M&A, we are now striving for an increase to a slightly positive figure. The adjusted wording underpins our confidence to deliver as promised. Please let me emphasize, this target has and will have our highest priority, and I'm very confident that we will make our way into black territory this year. And we will be there to stay.

Having said that, I would like to provide you more details on our earnings to cash flow bridge on the next slide. Many of you might know this picture, which provides some granularity. For our outlook, we have discussed it in our Q1 call already and then on several meetings and conversations along the way. We, as we said, before, expect an EBIT adjusted in the range of the mid- to high 3-digit million euro number as we see progress in performance and transformation across all businesses.

We plan higher investments year-on-year, including mainly noncash IFRS 16 effects. Investments will be above depreciation as there are also further strategic growth investment planned at all businesses. These trends include investments for the direct production equipment plant at Steel Europe, but not only. Overall, we are closely monitoring our CapEx spending and are steering with flexibility. This is important to know.

Furthermore, we expect releases on net working capital, especially in our second half year. Then there are payments for restructuring, which will have an impact in the low 3-digit million euro range, and other positions include taxes, interest and pensions. All in all, this leads us to our target of an increase to a slightly positive figure in free cash flow before M&A.

With this slide, I would like to remind you where we are coming from when looking at our financial performance in the past years. And I also would like to highlight the further upside potential going forward. As Martina already said, our financial KPIs substantially improved through performance and restructuring initiatives.

In the first half year, our performance initiatives accounted for a positive effect in the range of low to mid-3-digit million euro amount. In addition, the largest headcount restructuring program even at TKA is further progressing, showing a fulfillment level of more than 80% already. This all helped us to enhance both EBIT adjusted and free cash flow before M&A, as you can see on the left-hand side.

Things are strongly moving into the right direction. In this context, please let me remind you of our midterm targets, which include an EBIT adjusted margin in the range of 4% to 6% as well as a significantly positive free cash flow before M&A for the group. And this, again, has highest priorities.

And going forward, there are various upside potentials, for example, through progress in our transformation, leading to much better operational performance also supported by a more streamlined portfolio, fixing of cash losses at Multi Tracks over time, further reducing restructuring cash out and normalized but still above depreciation invest level will support our cash flow generation in the longer term.

Now let me conclude the last slide here. I hope I was able to give you some details about the status of our transformation and our financial performance targets, including longer-term commitments. Let me conclude this call with a bigger picture, our investment highlights. I know that many of you are familiar with this chart, and this is why I will keep it short and not going too much detail.

As a result of our structuring initiatives and measures to improve performance, our businesses are now in a much better position to cope with challenges in the environment and take advantage of a wide range of opportunities. Our transformation also resulted in a rock solid balance sheet.

Please let me remind you, in the last years, we turned the net debt into a net cash position, and we boosted our equity ratio to approximately 40%. We are fully committed to further improve performance to benchmark level and generate sustainable positive free cash flows going forward.

thyssenkrupp stands for strong materials and engineering expertise as well as digital competence as based for more profitable growth going forward. And at the same time, with our long-standing engineering expertise and the technologies in our portfolio, we are an enabler and a profiter, as Martina said, the global energy transition. Last, but not least, rewarding the trust of our shareholders is of highest importance to us. This commitment is clearly reflected also in our recent dividend payment.

With this, I want to thank you for the attention. I hand over to Claus again.

Claus Ehrenbeck

Thank you very much, Klaus, and also Martina. With that, we can go over to the Q&A session. And for that, I would like to ask the operator to take over.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Alain Gabriel from Morgan Stanley. Please go ahead. Your line is open.

Alain Gabriel

Thank you for taking my question. I have two questions from my side. Firstly, on Steel Europe, you stated that you are in discussions with third parties. What do you look for in potential partners? Or in other words, what value can the third party bring to the table? Is it more about sharing the risk of the business? Is it more capital? Is it more technology or anything else? That's my first question.

Martina Merz

Thank you very much for the question. This is Martina speaking. First, I think it's important to know that in a scenario going forward, 40% of a green slab in steel production, energy-related costs, 40%, 4-0. This is our current scenario for -- at the end of this transformation. Considering that, anything which is energy intense as a kind of free product or material is relevant.

And there are three most important ones. One is hydrogen. The other one is a hot bricked iron and possibly, together with hydrogen, ammonia. That means that partners who have access to those materials can bring a synergy potential to the steel business because they either produce it or we would help them to scale up their businesses.

So that means energy partnerships on a win-win -- with a win-win approach would focus on partners who are somewhat active in these areas because they could create synergies based on our demand. This is the logic behind. And this is why we feel it goes beyond, of course, an investment rationale. It is also a synergy case for partners active in these areas.

Alain Gabriel

Thank you. That's very clear. And related -- I guess my second question relates to the first one is this is not the first time that you engage with third parties. In your opinion, what has been -- or continues to be the key focus point in these discussions? Obviously, you can't really talk specifics, but in general terms, is it more the pension? Is it the scale the investments needed to decarbonize? Or is it the size of the workforce that you have in place that is not adequate to the future of the business?

Martina Merz

Yes, thanks for the second question. I have to -- being very open, of course, we have always investigated in the past cases logic and part of the industrial logic was, of course, the question always, are there synergies in the industrial base, means is it a concept where we consolidate the industry. I would say this time, it is less a consolidation approach because we believe in our capabilities in the steel unit and mainly on the competitiveness of the downstream processes. On the upstream processes, this is where the energy intense part of the process is, this is where we focus in the current talks on. Is this clear, like I...

Alain Gabriel

Yes, absolutely. Thank you.

Martina Merz

Thank you.

Operator

[Operator Instructions] And the next question comes from the line of Jason Fairclough from Bank of America. Please go ahead. Your line is open.

Jason Fairclough

Thanks both for the presentation and for your time today. Two questions for me. One's on Multi Tracks. The other one is on the restructuring costs. So just on the Multi Tracks, I think we were a little bit surprised to see a positive result there this quarter. You're still guiding to quite a negative result for the full year. So could you maybe just give us a little bit more color around Multi Tracks. What drove the positive result? And why is it going to be a lot worse in the next two quarters?

And then secondly, just on restructuring. I think the guidance is that the restructuring costs this year should be a low 3-digit millions of euros in costs. What's the trajectory here? So if we go out to next year, should we expect similar costs still low 3-digit millions euro? Or could we actually get into sort of double-digit millions next year in terms of those restructuring costs? It does feel like those are an ongoing drag on the free cash flow.

Klaus Keysberg

Okay. So I think I'm going to take this question. So Jason, hello. Multi Tracks, yes, we saw a positive number in this quarter here. And you know that we have a lot of businesses in here. You know that all of the businesses actually are improving their operational performance. But of course, it is so that there are some kind of business where let's say some -- if you look at special orders, they are coming some positive effects in the P&L. This might not mean that if you look at some orders, which are not so good, that they will not also burden our EBIT in the coming quarters.

So let's say this way, this quarter was a good one. But because of the structure and of the orders and the businesses, this does not necessarily mean that there will be the same -- the direction, yes, but not the same amount in -- positive amount in the coming quarters. So we still keep on the guidance regarding Multi Tracks as we did before. Regarding the restructuring, it is so that we -- as you said before, we said there will be a cash out of a low 3-digit number in total. And for the next fiscal year, we are going to be, let's say, there will be, of course, a lower cash out for the restructuring and that could be also a 2-digit number at the end of the day.

Jason Fairclough

Okay. Thanks. That's really helpful. Just a follow-up on Multi Tracks, and could you remind us -- I understand that nucera preferred path here is still the IPO. What is stopping you from progressing that? Is it market conditions? Or is there something else that still needs to be approved or structured before you can go ahead with that IPO?

Klaus Keysberg

No, nothing is stopping us. As we said before, business is developing very good. So I think we achieved all our KPIs and all other plans we did so far. And the way we look at it, and I think we also communicated it, the only -- what hindered us so far was, let's say, the capital market environment. But we are looking very close to the development in this year, and I can clearly say that it is still our preferred option to do so.

And yes, we are encouraged to do so. And therefore, you can ensure that we, let's say, are ready, and we will look at the environment very closely and give you information when we are ready to give you information about this.

Martina Merz

Maybe allow me to add something, which I configure a bit -- this is, of course, our perspective on market development. But the market developments are very positive in the hydrogen area. I think this surprises nobody. But in addition, of course, at the end of the day, the release of orders has a lot to do with the framework in individual regions. And we do believe that we have to consider that time is working a bit in our favor.

You understand what I mean? So of course, we have -- we look, what Klaus, said for the best window but, at the same time, I do believe that time is working in our favor.

Jason Fairclough

Okay. Thanks for that color, Martina. And Klaus, thank you for your answers. I appreciate it.

Martina Merz

Yes, the regulation and the individual regional approaches with the different admin areas. I think they are slowing down processes for decision-making in regions, and this should not be to our disadvantage. So as I said, time is working in our favor.

Jason Fairclough

Understood. Yes. Thank you very much.

Operator

[Operator Instructions] And the next question comes from Bastian Synagowitz from DB. Please go ahead. Your line is open.

Bastian Synagowitz

Yes, good morning, all and thanks for taking my questions as well. I've got a couple of questions and Ms. Merz, my first one actually would be on your departure, if I may. So if we just took back, you obviously took over the seat on the Supervisory Board and the Management Board in probably one of the most difficult times at thyssenkrupp and you sold Elevators, you sold AST, you sold the mining business. It is probably the largest restructuring program in the company's history. And then last year, your contract has been extended until 2028, and now you're deciding to leave.

I guess if we just reconcile the stock price reaction on the day, it tells us that the market probably reads this as certain capitalization on your ability to further pursue maybe some of the changes you were aiming for. So maybe could you just again, talk about your rationale and what were the frictions and the reasons which were causing you to leave?

Martina Merz

Actually, there is -- I have to say, as you said, Bastian, thank you for your -- thank you very much for your kind comments. But first, it is a teamwork. It is a company as large as thyssenkrupp is, I think it's all about the team, let me say, developing and exercising strategy. But I do believe that I have to say after these four years, the major cornerstones have been achieved. So it's now up for execution, I have to say.

And allow me, this sounds a bit -- this might sound even arrogant but look, we have defined -- we have taken the three pillars now to a point that it is about execution now. We took the portfolio choices. So it's clearly identified that thyssenkrupp can achieve leadership positions versus maintaining marginal positions. So we have taken that decision. We are exercising on that.

We make bold investments that define the industry's future project trajectory. We are major hydrogen player. We are major ammonia player. We have defined the steel going green. So the portfolio choices are for execution now.

On the financial choices, there, of course, all our focus was on find ways to pursue growth while preserving liquidity. I think things are also going on in the right direction. And you know that we focus our equity story on what I said before on leadership goals regarding the leadership positions in our portfolio. And last, but not least, with thyssenkrupp going green, we acquired now the strategic capabilities for long-term advantage of our individual businesses.

So Bastian, I definitely do believe that me, as an engineer, I love technology, I have to say. I do believe thyssenkrupp owns the necessary capabilities and IP to develop its path going forward based on our aim to develop standalone capabilities in the businesses. So all I can say, I do believe that somebody who has the capabilities and background to exercise and make the best of those choices taken already. I think this is the best path going forward.

And as I said before in the press conference, I really -- I can only say, and it sounds very emotional, I love this company. And I just changed from the Board to the fan club. It is not that I do not see the value of this company. I stay close. I love this team.

And I feel I'm with my will to make transformational changes that we now go better into a better way by simply harvesting by performance, by proceeding in this direction described. I think for the value -- for long-term value creation, it's all in place. It's now to execute.

Claus Ehrenbeck

And the company will surely not slowdown in terms of performance initiatives and restructuring.

Martina Merz

Yes. Yes. So I'm -- Bastian, I say this, I'm more type of a transformational leader. And I do believe that the team in place is best prepared to execute on what we, as a Board, have initiated. So I do feel -- I was a bit shocked, I have to say, to see the drop in the market cap at that day because I'm sure there is a team in place at thyssenkrupp. It's not only at the top, but this company has brought competencies very broadly distributed in our business areas.

Bastian Synagowitz

Okay. Thank you. Thanks for clarifying on that. And then my second question is just related to steel, which at least this quarter was clearly, I guess, disappointing given that you fell back to probably the bottom of the sector range despite the fact that you generally should have a more defensive business model. Can you maybe quantify the temporary cost headwinds for us, which you talked about? And are you still confident to get your EBITDA per tonne back up to the €100 EBITDA target in the course of this year? And then secondly, and related to that, also and related to the strategic questions, which have been asked already, it does seem like these discussions are firming up. Is there maybe a time frame until when we can expect more details on where you're heading with that business?

Klaus Keysberg

Yes. First of all, on the, let's say, more operational side of your question here. So we are not going to quantify any advancing you may understand this. But I mean, what is the rationale behind? You know that if we talk about higher energy costs and raw material costs, they are coming into our balance sheet when they are currently and then coming to our balance sheet, we are going to activate or going in the semifinished products and stocks, then we have the cash effect.

But the P&L effect is coming then when these goods are sold, when we are going to send them. And that's the reason why -- and you know that we also guided for a weaker Q2. We were very, very clear that this is going to happen. This was not a surprise for us. And this is now what happened here.

I can comment on honesty, components competence, how they treat this and what is the effect on that. But this is what we saw in the Q2. And if you say what is going to happen, as I said also in the presentation, if we look at the development in the current quarter, we clearly see that this, let's say, cost -- are vanished. So we clearly have a much better cost position. And therefore, we are, let's say, very optimistic that we are improving our results in the remaining quarters against what we saw in the Q2, very clear on this.

Bastian Synagowitz

Dr. Keysberg, and against your target of 3-digit EBITDA per tonne, do you think are you confident to get back to that in the course of this year?

Klaus Keysberg

I would never exclude something like this, let's say it this way.

Bastian Synagowitz

Okay. And then getting back to the strategic side of the question.

Klaus Keysberg

To extent there is the time frame regarding the discussions with the partnerships.

Martina Merz

I have to say, of course, first, the business itself, let's start with the business itself, the steel business. There are still a lot of uncertainties in the regulatory framework, you know that. And based on that, of course, we cannot -- we will not be able to close whatever deal in a short period of time. But I can say it's becoming clear day by day. And you see that not only in discussions between thyssenkrupp and these kind of energy partners.

It's around the world with the IRA and the ecosystems in development. I do believe that it's not that to hurry up is, of course, we do that, we speed up, and we are as quick as we can. But also, we see continuously new players showing up because on what I said before, ammonia H2, HPI, these are becoming world market commodities. And on this world market commodities, not only the present players are offering to partner. There are new ones showing up too, from regions we have not seen before because they are offering energy or HPI.

They are today not so known on the industrial, let me say, landscape. So what I would want to say is I think we have very, very good talks ongoing, but I would not expect a decision -- a final decision in the next month.

Bastian Synagowitz

Okay. That is very helpful. Thanks for all the color. And all the best for you, Ms. Merz.

Martina Merz

Thank you very much, and thank you all, really. I can always -- it's been a pleasure, and thank you for your continuous challenge. I lost 5-kilo at thyssenkrupp since I've been occupied -- also coming, thanks to your challenge. So I look much better now than when I started at thyssenkrupp. Thank you.

Operator

[Operator Instructions] And our next question comes from the line of Dominic O'Kane from JPMorgan. Please go ahead. Your line is open.

Dominic O'Kane

I just wanted to maybe expand on the previous question a little bit. Could you maybe just help us with some real-time commentary on current markets? So I suppose specifically within Steel Europe, to what extent your contract structures will help insulate you from some of the weaker steel prices that we're seeing at the moment? And then also, just maybe some real-time commentary on automotive. That would be very helpful.

Klaus Keysberg

If I would start with the market in steel. If you look at the spot price development, we saw some upcoming spot prices during the last quarter. We saw also upcoming prices until April. What we see now is I'm not commenting too much on prices. You know that we do not it this way.

So do we see on volume and also price-wise? We are, let's say -- our opinion on this is that we would see at least more or less a stable development for the rest of the year, let's say it this way. And you know that our contract issue is so that we -- our main dates are for renegotiation of contracts is the 1st of January, and there's something going to happen in April and then the next one is -- the bigger one is also then be in July. And these contracts are more or less 12 or six months contracts we are going to renegotiate. So this is where we're at.

Our portion of spot price related business is a bit lower than 20%, something like this, so we can make up your mind on this. So since this -- I think this explains all. Regarding automotive, what we see so far is you know that we increased our sales and also our volumes in comparison to last year, very clear, also quite sizable. So what we see is that we -- the market in general, increased against the previous year in Europe. Yes, also in the U.S. In China, it's a bit, let's say, more flat. But it depends very much in what kind of cars you are.

So you know that we are working on a global footprint, and we are working, of course, in special cars, we are in. And therefore, the overall development in the market is, of course, for importance. But for us, it is more important in which kind of vehicles we are in.

And what we see in our prediction of this year is that we, all in all, as we saw it already in the Q2, that we compared to previous year, we increase our volumes against the volumes we saw last year.

And by the way, the market still suffers from supply chain issues here. So this is clearly the case. So the volumes would be higher if we would not have constraints regarding this. But as I said, instead of this, we saw increasing volumes.

Operator

[Operator Instructions] And our next question comes from the line of Christian Obst from Baader Bank. Please go ahead. Your line is open.

Christian Obst

Yes. Hello. And thank you for taking the question. So can you remind us what was it positive onetime effect on the Q2 results? And can you give us the status of the current negotiation about a possible joint venture with a Japanese partner, therefore the steering business? This is the first question.

Martina Merz

So it's Martina speaking. The discussions with our Japanese partners are still ongoing. So we are in a due diligence. It is a relatively complex item, I have to say, more complex than what we thought. So -- but for the time being, the due diligence is still ongoing.

Klaus Keysberg

And the onetime, there was a quality issue several years ago, which we faced that, I don't know, in 2017?

Claus Ehrenbeck

'17, '18.

Klaus Keysberg

'17, '18 or something like this. And there we had, of course, the negotiations with some of our -- one of our suppliers. And there, now we get to the position that we get the compensation regarding this quality issue and this is now build up in the quarter here, build into the figures. It's a mid- 2-digit number, but we are not going to give more precise information about the number...

Christian Obst

Then I have two questions regarding the balance sheet. And you said that rising interest rates resulted in a €350 million impairment for Steel Europe. Can you give us some kind of a closer idea of what part of steel was Steel Europe was affected?

Klaus Keysberg

You know that we do this impairment tests on a regular basis. This is very clear. What we see now is this is just normal. That the interest rates, especially in the impairment test, you have so-called WACC, which differ from business to business. So we have business-specific WACC.

And especially for the materials business, this WACC increased. And then you make these impairment tests and there we had, let's say, this impairment need of €350 million but it is nothing special. It is, let's say, an impairment for the whole cash generating unit. This is nothing special on, let's say, the upstream or downstream business for the whole cash-generating unit.

And this is nothing which is cash relevant. I don't have to tell you, and this is nothing which is -- just operationally, I think you know this. But you know that in the steel business, of course, the capital employed is higher. And then if you then have a higher WACC or interest effect, then this happens, unfortunately, it represents in this quarter.

Christian Obst

So you cannot directly link it to any kind of special plant or activity?

Klaus Keysberg

No, no, no.

Christian Obst

Okay. So it would help for any partnership going forward and you have a lower book value. But last one is, again, on pensions. Do you have any kind of -- or do you see any kind of changes in your possible plans, externalized pensions or whatsoever due to the rise in interest rates at lower pensions on the balance sheet? Or is it still pending maybe or mostly linked to the future of Steel Europe?

What you will do going forward.

Klaus Keysberg

Well, first of all, it is pending. And of course, we are making up our mind on this issue from time to time or every quarter. But as you said, it is pending. And it also has something to do with the development of portfolio issues, yes, very clear. But we are looking at it very closely, but we have not taken a decision on that so far.

Christian Obst

Okay. What would be a major trigger for any kind of decision?

Klaus Keysberg

Well, it depends on -- not so much at the moment, not so much the interest development, which you were describing. It has also something to do with -- I mean, If you talk about separation of steel business, you know that 50% of our pension liabilities is linked to steel. And of course, this has -- let's say, this is a decision taken. This is very clear.

Christian Obst

Maybe an additional one on your -- you have stakes in Elevator in the ALC part and so on. Do you have any plans for any kind of divestment for that maybe to pay some kind of a higher dividend? No?

Klaus Keysberg

No. No.

Christian Obst

Are you able to do that if you want to?

Klaus Keysberg

Yes, we could. We are totally free to sell the stakes whenever we want. But there is no plan to do so.

Christian Obst

Okay. What is the return on these assets?

Klaus Keysberg

Well, this is you know that we are having some shares on this, and you know that we have a value development on this, but more we are not communicating about this.

Christian Obst

Okay. Thank you very much. And Ms. Merz, all the best for your future also. Thank you.

Martina Merz

Thank you very much.

Operator

[Operator Instructions] And our next question comes from the line of Krishan Agarwal from Citi. Please go ahead. Your line is open.

Krishan Agarwal

Hi. Thank you for taking my question. Quick question on the Materials Services, which has seen a significant pickup in the EBIT adjusted quarter-on-quarter. What has driven that increase? And then related to that, you're guiding for a working capital release into the H2. So is it more of a Q3 weighted or more like coming into Q4 of this fiscal?

Claus Ehrenbeck

It was about the earnings development in Q2 at Materials Services, what has driven that development, and it's about the working capital release going forward. How will this be distributed? I think it is fair to say that it will happen in both quarters.

Klaus Keysberg

Yes, yes, yes. So I mean you know that we have a seasonal pattern in the working capital. I mean if you look at the history or one year back, that we had increasing booking capital in the last fiscal year, mainly because of prices. And then we also have a seasonal issue. You know that in our first quarter, we are, let's say, bringing more inventories into our inventories because we want to be prepared to the more stronger quarters for our Q2 and Q3 and things like this.

And in the nature of this, of course, we see decreasing net working capital levels anyway through the years. And clearly, you can say it was in Q2 and Q3 and in Q4 also. So this is how it works every season.

And regarding the earnings, the EBIT development or performance into the -- yes, we are very, very much happy with this development here. I mean, we saw regarding -- what did we see in this quarter? We saw some restocking effects with our customers, some good price developments here. And therefore, I think our performance in Materials Services in this quarter was very satisfying. And this is how it is.

Claus Ehrenbeck

And a very good start also in the third quarter in terms of...

Klaus Keysberg

By the way, in the third quarter also.

Operator

Okay. Thank you. And as we have no more questions registered, I hand back to our speakers.

Claus Ehrenbeck

Yes. Thank you very much, operator, and thank you very much -- yes. Before I say something, of course, I would like now to hand over to Martina who wants to say something.

Martina Merz

Yes. Thank you. Thank you, Claus, and thank you, everyone, on the line. We are well aware, and I'm well aware, that you represent the owners of our company. And I can only express my deeper thanks for your support throughout this -- I would say, throughout this journey.

We focused on high-impact actions, yes, and the next phase is now to rebuild and execute with speed. And I know that this bumpy road we had so far is not easy for you to explain always what I said, our owners. I thank you very much for your support, for your trust, for your continuous challenge and wish you all the best also. Thank you very much for your trust to thyssenkrupp and for your support to my personal. Thank you very much and all the best.

Claus Ehrenbeck

All right. And with this, we can now conclude the call. And as always, for more questions and information, the Investor Relations team is there for you and we are happy to respond. And as always, we look forward to staying in dialogue. Thank you very much and bye-bye.

Operator

This now concludes our conference. Thank you all for attending. You may now disconnect your lines.

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thyssenkrupp AG (TYEKF) Q2 2023 Earnings Call Transcript