Thyssenkrupp Drops on Disappointing Negative Free Cash Flow

  • First-quarter negative free cash flow before M&A doubled
  • Steelmaker said profit rose 40% after steel prices recovered

ThyssenKrupp CFO: We Have a Large Value Creation in U.S.

Thyssenkrupp AG, the German steelmaker in the midst of a corporate transformation, dropped the most in three months after reporting negative free cash flow widened in the first quarter.

While the company posted better-than-expected fiscal first-quarter profit as steel prices recovered, negative free cash flow before mergers and acquisitions doubled to 1.74 billion euros ($1.86 billion) due to a temporary increase in net working capital, it said in a statement Thursday.

The “alarming” free cash flow figure is worse than expected, Christian Obst, an analyst at Baader-Helvea Equity Research, said by phone from Unterschleissheim, near Munich. “It shows that the company’s structure is hardly able to generate a positive free cash flow.”

The shares fell as much as 4.8 percent and were down 3.6 percent at 22.425 euros by 10:51 a.m. in Frankfurt, the biggest decline in Germany’s benchmark DAX Index. The drop cut the stock’s gain to 74 percent over the past year.

The free cash flow figure “disappointed,” Seth Rosenfeld, an analyst at Jefferies International Ltd. in London, said in a note.

Thyssenkrupp said it still sees “slightly positive” annual free cash flow before M&A this fiscal year. Earnings before interest and taxes, excluding one-time items, rose 40 percent to 329 million euros in the three months to Dec. 31 from a year earlier, the Essen-based company said. That beat the 318.1 million euro average of seven analysts’ estimates compiled by Bloomberg.

Steel Rebound

Steel prices rebounded in 2016 as stimulus in China, the biggest consumer of the alloy, helped stabilize the country’s economy. While Chief Financial Officer Guido Kerkhoff said that the increase will be reflected in second and third quarter profit, the company reiterated its forecast for full-year Ebit, excluding one-time items, to reach about 1.7 billion euros.

Chief Executive Officer Heinrich Hiesinger is trying to transform Germany’s largest steelmaker, which gets more than half its profit from its elevator unit, into a more diversified industrial group and raise annual earnings to at least 2 billion euros. Adjusted Ebit in the elevator business rose 5.9 percent to 215 million euros in the latest quarter.

Higher steel prices helped the Steel Americas unit swing to a 37 million euro profit and the Materials Services trading unit boost adjusted Ebit 17-fold. Profit at the European steel division fell by almost half to 28 million euros and higher prices probably won’t aid profit there until later in the year because the firm is tied into long-term contracts, it said.

Thyssenkrupp has been in talks with Tata Steel Ltd. to combine their European steel businesses. Hiesinger, who believes industry consolidation in the region is necessary, has said Tata needs to find a viable solution for its high pension obligations in the U.K. for a deal to happen.

“The question rises whether a merger with Tata Steel makes sense at all in face of Brexit,” Obst said.

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