thyssenkrupp AG (TKA) Earnings Call Transcript & Summary

Hello, and welcome to thyssenkrupp Conference Call for today's Adhoc Announcement. I will now hand you over to the Head of IR, Andreas Trosch.

Thank you, operator, and welcome, everyone, to our conference call for today's announcement regarding the acquisition of a stake in thyssenkrupp's steel business by EP Corporate Group. Together with me, I have next to me, our CEO, Miguel Lopez, we want to spend the next 30 minutes with you by starting with an opening statement followed by a brief Q&A. And now I hand over to our CEO, Miguel Lopez.

Thank you very much, Andreas. Good afternoon, ladies and gentlemen. Thank you for your interest, and a warm welcome from me. thyssenkrupp AG and EP Corporate Group in short, EPCG today agreed on PCG's acquisition of a stake in thyssenkrupp's steel business. This strategic partnership is a historic and significant step toward ensuring a resilient and climate-friendly steel production at thyssenkrupp Steel and thus, also a major contribution to securing the future of the steel industry in Germany. We have always emphasized that we are engaged in intensive talks with EPCG and now we are presenting concrete results. EPCG will initially acquire a 20% of the shares in thyssenkrupp's steel business. The transaction is expected to be closed in the current fiscal year. Before that milestone is reached the responsible authorities and the Supervisory Board of thyssenkrupp AG still have to give their approval. However, the current constellation is not intended to stay as it is. We are still aiming to establish a 50-50 joint venture. We are, therefore, already talking to our new partner about it's acquiring a further 30% of the shares in the steel business. As you can see, we are moving forward. Our partnership will bring together thyssenkrupp Steel Europe's leading material know-how and EPCG's energy expertise. EPCG's decision to come on board shows that we and our partner have great confidence in the successful future of our steel business. Together, we intend to create a powerful, profitable and future-oriented steel company, reduce the cost of decarbonization to a more competitive level, and thus accelerate the green transformation of the steel industry on the path to carbon neutrality. A strong energy partner like EPCG is vital in that. EPCG is deliberately acquiring the shares in the steel business at this time and under the current market conditions because it wants to play an active role in shaping and realigning thyssenkrupp Steel. Work began on construction of the first hydrogen capable direct reduction plant at the Duisburg site in March. The project is regarded as a blueprint for decarbonization of industry, and it is set to become the driving force behind the European hydrogen economy. thyssenkrupp Steel Europe is investing around EUR 3 billion in construction of the plant. The federal government and the state of North Rhine-Westphalia are supporting the total investment in the project with around EUR 2 billion. The switch to hydrogen as a primary energy source will significantly increase demand for green electricity and steel production in the coming years. Around 10 terawatt hours of green electricity a year are required solely for powering the first direct reduction plant with hydrogen. The successful transformation of the steel industry depends to a major extent on whether green electricity can be produced and/or procured in sufficient quantities and at competitive terms. The energy cost for producing a slab of crude steel have accounted for around 10% of total cost to date. With hydrogen-based processes, that figure will rise to 50% in the future. As an energy trader, supplier and distributor, EPCG boast extensive industry knowledge. EPCG intends to expand its installed generation capacity for renewable energies in Germany to over 8 gigawatts by 2030. If required, EPCG will, therefore, be able to provide additional quantities of green electricity, hydrogen, and initially also natural gas for steel production in Duisburg through its energy trading activities. There are also useful interfaces for both companies and project management, and in the implementation of major green transformation projects. For example, EPCG is both operating and developing large energy storage solutions as well as hydrogen-ready, gas-fired power plants in Germany to mitigate peak loads and maintain security of supply in the event of insufficient electricity production from wind and solar energy. Ladies and gentlemen, let me conclude by giving you a brief outlook. thyssenkrupp Steel Europe is at the beginning of a transitional phase with the goal of achieving full entrepreneurial independence. This process will take place gradually over a period of several years. The joint venture with EPCG is an important milestone for us in securing the supply of affordable green energy, because the energy question is the key to the green transformation of steel. Equally essential is a viable concept for the future that is widely accepted because it will lead thyssenkrupp Steel to economic independence and commercial success. Meet the requirements of climate protection and avoid compulsory redundancies. We are working on that. One of the main pillars of the spin-off is the business plan currently being drawn up which will include investment planning and a solid capital base. The aim of that is not only to enable construction of a hydrogen capable direct reduction plan, but also to take into account additional measures for climate-friendly transformation. Thank you. I now look forward to your questions.

[Operator Instructions] And our first question comes from the line of Krishan Agarwal from Citigroup.

Congratulations on the transaction. My first question is on the role existing is going to play in terms of the green transition. Is it fair to assume that EPCG being introduced as an energy partner, thyssenkrupp, primarily going to restrict its role in terms of building the DRI and the whole of the energy supply mechanics actually get transferred to the EPCG on a merchant basis to the site to JV?

Well, thank you very much for the question. So the basic question is, what is EPCG contributing to the JV? And to what extent we as thyssenkrupp benefit steel for sure, benefit from its participation. So first of all, we will unite thyssenkrupp Steel Europe's leading materials know-how and EPCG's energy expertise. I emphasize that EPCG currently has an installed generation capacity of around 22 gigawatts in Europe. And in Germany alone, the company intends to expand its installed generation capacity for renewable energies to over 8 gigawatts by 2030. And here, the focus will be on wind, solar and biomass. In 2023, the EPCG energy assets, together generated 72.5 terawatt hours of net electricity. And if required, EPCG will be able to provide additional quantities of green electricity, hydrogen and initially also natural gas for steel production in the spoke through its energy trading activities in the future. And of course, there are also experience interfaces between the 2 companies in the fields of project management. I was talking about this implementation of large green transformation projects. So that's the main areas of collaboration between our partner EPCG and us.

I understand. The second question is more on the valuation. So you have decided not to disclose the valuation. Is it fair to assume that this is because you are into negotiation for the further 30% sale of the stake? Or does it mean that 30% sale of the state is more or less coming into in the near future rather than the distant future?

Well, we have agreed that we will not disclose the economic aspects of the transaction. So that's it. Thank you.

And our next question comes from the line of Bastian Synagowitz from Deutsche Bank.

My first question is also just on the structure. So I'm wondering why has this been designed as a 2-stage process where we obviously have that 20% stake first and then a 30% stake later? And then also, is there any time frame which you have in mind for the 50% ownership level of EPCG. And is this more a matter of months? Or could this be more a multiyear process? That's my first question.

Thank you, Bastian. So a general remark is the steel industry, as you know, in Germany and Europe is right now undergoing radical structural transformation. And you know because we have been reporting around it that TK, so the Steel Europe unit is responding to this structural transformation by formulating a new business plan which will result in realignment and restructuring of the company. As this is the current situation, so we are in the elaboration of a plan by the Managing Board of Steel Europe. In this highly dynamic environment, it is not feasible to establish a 50-50 joint venture in one go. This step shows clearly that both partners believe in the transformation that has been initiated. And very consciously, we want to support it in this early phase. And that's the reason why EPCG is now taking a 20% stake. And of course, we believe that this will accelerate the transformation at TKSE on the path to greater competitiveness and carbon neutrality.

And just to follow up on that. You said it's not possible to go to 50% right away. Is this something on this more on, I would say, on the thyssenkrupp side? Or is this more on the EPCG side, basically, where they first want to see the outcome of what the business plan is before then they really go up to the full commitment.

Well, I think it's very wise to elaborate the plan together. And as a firm commitment to elaborate this partnership a clear starting point.

Okay. And then maybe taking the side of a little bit from a different angle. Maybe could you confirm the recent equity value or even the capital structure in the EUR 3.6 billion book value. I think there's EUR 2.8 billion of pensions in there, if I'm not mistaken. So I assume the rest is probably the equity value. And should we expect any additional impairments as a consequence of the transaction? And then also, is this a lock box agreement or could these NPD changes, which are now flowing through your quarterly numbers, still change the price and terms.

Yes. Let me answer this. So you're right. Roughly half of the pension obligation of the total group is allocated in thyssenkrupp Steel Europe. And then the latest number that you can find in the annual report of the total value, book value is EUR 3.6 billion, EUR 3.7 billion. So this is what we can confirm. And there is currently no need to write off.

From a triggering event point of view. Okay. Understood. And then is just again on like the forward-looking angle. Has EPCG committed to contribute any cash needs -- to any cash of the business when it comes to both the development of the restructuring plan and also the CapEx needs for the asset revitalization and the transition plans, which I had. Is there any commitment already, which has been made?

Well, Bastian, we have agreed not to disclose the economic aspects of the transaction.

Got you. And then maybe lastly, I suspect that there is also -- there are no pre-agreed terms basically for the residual 30% stake. So I guess that will be negotiated on a blank sheet of paper. Is that a fair assumption?

Well, we need to think that we start now with the 20 and all the other things will come after this.

Okay. I've got a few more, but I'll make room for the others.

[Operator Instructions] And our next question comes from the line of Paul Kirjanovs from Bank of America.

This is Paul Kirjanovs from Bank of America in place of Jason Fairclough. Two questions for us, please. Just following up on pensions within steel, what is the annual cash flow associated with the pension payments for the steel business only? And then another one is on how should we think about the appropriate capital structure for the steel business going forward?

Let me answer the pension question. So out of the EUR 6 billion total group, the yearly cash needs is roughly EUR 250 million, EUR 300 million. And if you take the half of it, you can also take roughly half of it then for the steel side. And then the capital structure stays as it is currently because a 20% stake is a minority stake. So for the total balance sheet of the TKAG, nothing is basically changing and as well as for the P&L because the steel business is still at this stage, fully consolidated.

And our follow-up question from Bastian Synagowitz from Deutsche Bank.

So my last question is just on your vision for the stand-alone scenario for the steel unit. So I'm wondering, do you actually aim for a full and clean stand-alone setup when you and EPCG will basically equip the unit with a starting balance sheet at some point and then they basically have to go and run with it? Or would you still basically expect the thyssenkrupp Group to be ultimately the capital backstop for at least a couple of years before we really get to that situation, i.e., like do you really aim to fully separate the unit, create a starting balance sheet with a certain degree of capitalization. And then you basically at your target of full separation because I guess you really always clearly stated you do want a very clear cut between your parent company and the different business units? Or do you think this is still actually a process which may potentially be dragging on for a longer period of time?

The next important milestone is the finalization of the business plan at TKSE by the Managing Board of TKSE. And this, of course, is essential for the realization of the 50-50 GV and obviously, also, at the same time, the basis for the long-term industrial concept for TKSE. So we take it from there.

[Operator Instructions] And our next question comes from the line of Tom Zhang from Barclays.

Just one for me. There is some headlines that the withdraw clause within the next 6 months for EPCG depending on sort of developments on the first steel business. I'm not asking you to sort of confirm or deny. The question is really more with the strategic planning on potentially taking out capacity in similar. Is the EPCG already in the room with you guys when you're making that plan? Or is it still completely separate? You need to wait for regulatory supervisory approvals before that sort of allowed to have that same.

Yes. Well, as soon as we start -- so the first thing, of course, is that the responsibility for the business plan lies, as I've mentioned before, completely with the Steel's Executive Board. And the Steel Executive Board has already presented the initial conceptual outline of a planned realignment of the Steel division. And as soon we have the closing, EPCG will be able to contribute its energy expertise to Steel Europe and closing of the transaction is planned in the course of the current fiscal year.

And our next question comes from the line of Moses Ola from JPMorgan.

Just 2 from me. The first one is on the ongoing restructuring plans for Steel Europe. You talked about plans for reducing internal capacity, but any thoughts on the capacity that you procure via your HKM JV?

Well, here, the plans are right now elaborated by the steel Executive Board and we will see what they present to us as soon as they are ready.

Would you -- do you currently view that capacity is core towards the steel decarbonization profile that you envision for Steel Europe?

Well, I believe that we should give the Steel Executive Board the opportunity to elaborate in detail and then to present to the Steel Europe Supervisory Board, and then we will then finalize their discussions. For the time being, we are we are waiting for the plan to be presented to us.

Okay. And then finally, just -- I know, of course, the focus today is on Steel Europe, any meaningful updates that you could provide on the ongoing process as well within the Marine Systems business?

Well, there is nothing new to report. So you have the actual status as per our last communications. Nothing more, nothing new to say about this. You have been listening to basically 2 parts that are possible. One is the collaboration with Carlyle. They are doing right now to due diligence. The second is spin-off path that currently is also one thing that we look at. And as soon as time come, we will take a decision.

Okay. But no expected time line that you can communicate at this point?

We -- as soon as we have something to communicate, we will inform you.

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

Thank you very much for participating to this call on such a short notice. The Investor Relations department is, of course, available if you have further questions. Thanks, everyone, and have a nice day. Bye-bye.

This now concludes our presentation. Thank you all for attending. You may now disconnect.