CORPORATES
CREDIT OPINION
12 April 2017
thyssenkrupp AG
Credit opinion update
Update
Summary Rating Rationale
RATINGS
thyssenkrupp AG
Domicile
Germany
Long Term Rating
Ba2
Type
LT Corporate Family
Ratings
Outlook
Stable
Please see the ratings section at the end of this report
for more information. The ratings and outlook shown
reflect information as of the publication date.
Contacts
Hubert Allemani
44-20-7772-1785
VP-Senior Analyst
[email protected]
Anke N. Richter, CFA
44-20-7772-1433
Associate Managing
Director
[email protected]
thyssenkrupp's (tk) Ba2 CFR is supported by the improved pricing environment in Europe
for steel finished products since H2 2016 and our expectation of growing steel end markets
this year in Europe, particularly automotive, which is a core sector for thyssenkrupp.
Capital goods activities' trading environment should also remain supportive this year, with
expectations of revenues growth supported by strong order intake of approximately €9.9
billion in the first quarter ending December 2016, up 1% compared to the previous year. The
recent announcement from the company that it has signed an agreement with Ternium to
sell its Brazilian slab manufacturing plant (CSA Brazil) is positive for the credit as it will reduce
negative pressure on cash flow and EBIT.
Also supporting the current rating are (1) thyssenkrupp's solid business profile, with a wellpositioned and diversified global revenue streams; (2) progress made to reduce costs,
supported by the gains from the efficiency and restructuring programme 'impact'; (3) the
company's consistently high level of cash on the balance sheet of approximately €4.2 billion
on average over the last three years; (4) solid liquidity profile; and (5) low reported financial
debt level of approximately €8.0 billion at December,31 2016 resulting in a non adjusted
leverage of 3.1x.
thyssenkrupp's Ba2 rating is constrained by (1) a Moody's adjusted gross leverage of 5.2x
at the end of tk's FY 2015/2016, which is high for the current rating category but which
Moody's expects to decrease towards 4.5x this year; (2) the low profitability at group level
with Moody's adjusted EBIT margin of 3.3% at the end of 2016 and (3) the company being
consistently free cash flow negative since 2013 on a Moody’s adjusted basis.and (4) on going
restructuring at the Italian stainless steel plant of Acciai Speciali Terni (AST).
Credit Strengths
»
Diversified product portfolio in steel products and capital goods;
»
Divestment of the Brazilian slab manufacturing plant, which was loss making and cash
flow negative;
»
High amount of cash on balance sheet of approximately €4.1 billion at end of fiscal year
2015/2016 that mitigates the low equity position.
Credit Challenges
»
Low profitability with Moody's adjusted EBIT margin of 3.3% at the end of FY 2016, and
negative free cash flow;
CORPORATES
MOODY'S INVESTORS SERVICE
»
Moody's adjusted leverage should remain high this year at a level expected between 4.5x and 4.8x, albeit because of high pension
liabilities;
»
Exposure to cyclical industries like automotive and construction in Europe for its steel operations.
Rating Outlook
The stable outlook takes into account the expected growing steel demand in Europe driven by the automotive, capital goods and
construction sectors; the company's strong order book in its capital goods businesses; solid liquidity profile as evidenced by the large
amount of cash held at thyssenkrupp AG level and continued operational improvements.
Factors that Could Lead to an Upgrade
(1) Moody's adjusted EBIT margin reaching and staying above 5%;
(2) Liquidity remains strong and thyssenkrupp is able to maintain its considerable cash cushion;
(3) Moody's adjusted gross debt/EBITDA decreases towards 4x; and
(4) Cash Flow from Operation (CFO) - dividend / debt is trending towards 15%.
Factors that Could Lead to a Downgrade
(1) Moody's adjusted gross debt/EBITDA is greater than 5.5x on a sustained basis;
(2) CFO - dividend / debt is less than 10% on a consistent basis, and
(3) Moody's adjusted EBIT to interest is less than 2x.
We also give weight to net leverage in our calculations considering thyssenkrupp's sizeable unencumbered cash balances and the
expectation that thyssenkrupp could use this cash to pay down debt if necessary.
Key Indicators
Exhibit 1
KEY INDICATORS [1]
thyssenkrupp AG
12/31/2016 (LTM)
9/30/2016
9/30/2015
9/30/2014
9/30/2013
Revenue (USD Billion)
$44.0
$43.6
$49.1
$55.9
$50.6
EBIT Margin
3.6%
3.3%
3.4%
2.4%
1.1%
Return on Average Tangible Assets
4.5%
4.1%
4.5%
3.0%
1.3%
EBIT / Interest
2.0x
1.8x
1.8x
1.2x
0.5x
Debt / EBITDA
5.1x
5.2x
4.8x
5.6x
7.8x
69.5%
71.3%
69.5%
69.2%
74.0%
5.0%
10.9%
10.9%
7.0%
8.4%
Debt / Total Capital (most recent)
(CFO - Div) / Debt
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations
Source: Moody's Financial Metrics™
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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thyssenkrupp AG: Credit opinion update
CORPORATES
MOODY'S INVESTORS SERVICE
Detailed Rating Considerations
LOW PROFITABILITY AND CASH FLOW GENERATION
thyssenkrupp (tk) is a diversified industrial group engaged in steel and capital goods manufacturing. At the end of its fiscal year
September 2016, tk reported sales of €39.3 billion and a company adjusted EBIT of approximately €1.47 billion and reported adjusted
EBIT margin of 3.7%. The company operates through six business areas of Components Technology; Elevator Technology, Industrial
Solutions, Materials Services, Steel Europe and Steel Americas (divestment signed in February 2017). Exhibit 2 below details the sales
and EBIT split by business areas at fiscal year end September 2016.
Exhibit 2
Exhibit 3
Group sales breakdown by business area
Steel Americas
3%
Corporate
1%
tk's adjusted EBIT by business area, before eliminations
Consolidation
-5%
Components
Technology
16%
Steel Europe
18%
Elevator
Technology
17%
Materials
Services
27%
Source: thyssenkupp's annual report
Industrial
Solutions
13%
Steel Europe
16%
Steel Americas
-2%
Components
Technology
17%
Materials
Services
6%
Industrial
Solutions
17%
Elevator
Technology
42%
Source: thyssenkrupp's annual report
For its fiscal year ending September 2016, thyssenkrupp reported total net sales 7% lower than in 2015 because of lower sales in
its steel and steel related operations of: Materials Services, with sales down 11% year on year; Steel Europe, down 12%; and Steel
Americas, down 18%, where product prices where at a low point. Sales of Materials Services decreased also due to divestments of
stainless steel producer VDM, completed during 2015.
The performance of the company's capital goods divisions were mixed with growth of 4% in Elevator Technology and 1% in
Components Technology. However, Industrial Solutions net sales declined by 8% year on year due to difficult mining and chemical
sectors that translated into lower order intake of 29% for the business area. However, capital goods activities remain the largest
contributor to EBIT to the group, representing approximately 79% of the reported EBIT for FY 2015/2016.
Despite another strong performance from the Impact cost reduction program of €1 billion of savings achieved during 2016, tk's
reported adjusted EBIT was 12% lower than in 2015 at approximately €1.47 billion. The year on year decline in EBIT is mainly
attributable to the steel and steel related business areas' underperformance. The deterioration in the steel related business
areas' profitability was due to the sharp and rapid decline of steel prices that happened at the end of 2015 and early 2016, which
corresponded to the company's first half of trading in its fiscal year 2015/2016. The recovery of prices materialised during the
company's third quarter 2016 and was not enough to compensate for the lost ground. However, the market situation in the steel sector
has turned and we expect the company to grow its EBIT this year. Strong recovery in steel prices in Europe, tk's main market, should
support 2017 profitability and we expect the company to achieve a Moody's adjusted EBIT in the range of €1.5 billion to €1.6 billion and
increase its Moody's adjusted EBIT margin towards 3.5%.
Sales and profitability should be further supported by the European Commission's decision to impose anti-dumping duties on cold
rolled coils, on hot rolled coil (HRC) and heavy plates, three core products for thyssenkrupp. We also think that the continuation of
thyssenkrupp's cost reduction programme Impact and the growth from its capital goods businesses should support the company's EBIT
growth and cash generation in 2017.
On a Moody's adjusted basis, funds from operations (FFO) was at €1.67 billion for the company's FY 2015/2016. However, adjusted free
cash flow (FCF) was negative in 2016 at a level of approximately €85 million driven by capex of €1.6 billion and dividend payment of
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thyssenkrupp AG: Credit opinion update
CORPORATES
MOODY'S INVESTORS SERVICE
€120 million. Working capital was slightly positive at around €23 million and not enough to mitigated the cash outflow. Based on our
assumption of higher Moody's adjusted EBITDA of approximately €3 billion in 2017, we expect that tk will be able to reduce its cash
outflow and present a slightly positive FCF of approximately €10 million.
Exhibit 4
Cash flow components
USD million
2,000
FFO
CFO
+/- WC
Dividend
Capex
FCF (RHS)
2,500
2,000
1,500
1,500
1,000
1,000
500
500
-
-
(500)
(500)
(1,000)
(1,000)
(1,500)
(1,500)
(2,000)
(2,000)
(2,500)
FYE Sept 2012
FYE Sept 2013
FYE Sept 2014
FYE Sept 2015
FYE Sept 2016
Source: Moody's Financial Metrics
WELL DIVERSIFIED PORTFOLIO OF VALUE-ADDED BUSINESSES TO COMPLEMENT STEEL
We view positively thyssenkrupp's increased focus on capital goods, which is benefiting the company in terms of profitability and cash
generation and counterbalance the margin weakness and volatility of the steel business. Capital goods businesses' reported adjusted EBIT
margin was of approximately 7.7% at the end of FY 2015/2016 and steel related businesses margin of 2%. The best performing capital
goods businesses remain Elevator Technology and Industrial Solutions, which display a 11.5% and 6.2% reported adjusted EBIT margin
before corporates elimination respectively in FY 2016. Capital goods businesses are also a positive cash contributor to the group's cash
flow. We expect that the company will continue to improve the overall performance of its capital goods profitability in 2017.
thyssenkrupp has a very strong European market position in its historical steel manufacturing business of flat carbon steel serving
primarily the automotive industry, which represented 29% of sales of Steel Europe in 2016. The company is one of the largest European
steel producers and the largest in northern Europe. The company's steel products mix of value-added products, including cold rolled,
galvanised, plate, high strength steel, electrical steel and tinplate, is good relative to its peer group. The ability to deliver industry
solutions makes thyssenkrupp a valued supplier of flat steel to the automotive, white goods, electrical power and packaging industries.
Despite the company's high market share in the European automotive industry its shipments went down by approximately 600 ktons
in 2016 to 11.1 ktons compared to 11.7 ktons in 2015 due to subdued demand and competition from lower priced imports. However,
the European pricing environment has much improved since the second quarter of 2016 and despite rise in input prices of iron ore
and coking coal, we expect the company to improve its steel business related businesses in its FY September 2017. Imports inflow into
Europe have reduced year on year helped by the anti dumping duties in place or provisional.
SLIGHT DELEVERAGING EXPECTED DURING FYE SEPTEMBER 2017
As of the end of December 2016 (company's Q1 FY 2016/2017), Moody's adjusted gross debt / EBITDA was high at 5.2x, increasing
from 4.8x at the end of FY Sept. 2015. While financial debt has not evolved much, the increase in Moody's adjusted leverage was
mainly due to lower EBITDA and higher pension adjustment. In 2017, we believe that thyssenkrupp's EBITDA will benefit from the
higher prices of steel products in Europe and we expect it to trend towards €3 billion on a Moody's adjusted basis. With no reduction
in gross debt expected despite that the company is due to receive the proceeds from the divestment of the Brazilian plant, we expect
thyssenkrupp's leverage to trend between 4.5x and 4.8x on a Moody's adjusted basis at the end of its FY 2017.
The high Moody's adjusted leverage is driven by the pension adjustment. thyssenkrupp has a relatively moderate balance sheet debt
of approximately €8 billion. This amount has been fairly stable over the last three years. This compares with a Moody's adjusted debt
of €14.4 billion. The biggest adjustment for thyssenkrupp relates to its underfunded pension obligation of €5.4 billion. The ongoing
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thyssenkrupp AG: Credit opinion update
MOODY'S INVESTORS SERVICE
CORPORATES
pension benefits payments by the company's defined benefit plans are around €0.6 billion annually with payments being long-term in
nature and therefore this accounting adjustment does not translate into significant near-term outlays.
While gross leverage on a Moody's adjusted basis remain high, we view as a positive factor the fact that thyssenkrupp maintains a
large amount of cash on its balance sheet. At the end of September 2016 cash and cash equivalents amounted to €4.1 billion, slightly
lower than the €4.5 billion held at the end of 2015. We also take comfort from the fact that most of the cash is freely available and
held at thyssenkrupp AG level. On a net debt basis, Moody's adjusted leverage amounted to 4.2x at the end of December 2016, which
is adequate for the rating category. We also anticipate that the company will keep most of the cash proceeds it will receive from the
divestment of CSA Brazil on the balance sheet to further support its liquidity profile.
LOW EQUITY POSITION BUT MITIGATED BY THE LARGE CASH BALANCE AT HOLDING COMPANY
thyssenkrupp's equity position has weakened significantly in 2012 mainly because of the impairments linked to Steel Americas and
cumulative losses booked during the 2011/2013 period. Total equity has reduced from €9.1 billion in June 2012 to €2.5 billion in
September 2013. However, the situation has stabilized since. The equity amount remains low for a company with this business profile
based on long term contracts, long construction time and deliveries of finished products and international footprint. This low equity
position is compensated by the company by keeping large amount of cash on its balance sheet (€4.1 billion at the end of September
2016) and most of it being fully available as kept at the holding company.
The low level of equity also impacts the gearing covenant (net financial debt to equity) that the company has to comply with at each
Fiscal year end. Gearing as reported by the company was 134.2% at the end of September 2016, higher than at the end of its FYE
September 2015 of 103% due to negative effect of pension accruals in this low interest rate environment. While having increased year
on year, tk's gearing remains under the applicable limit which range between 150% and 200% depending on the discount rate used to
calculate the German pension obligations. We do not believe that the gearing covenant will be an issue at the end of FYE 2016/2017
based on the expected improvement of EBIT, cash flow generation and expected cash proceeds from the CSA Brazil divestment.
Liquidity Analysis
thyssenkrupp's liquidity is good and expected to remain solid over the next year. The company can rely on its cash on hands of €4.1 billion
and available external facilities of €3.9 billion at the end of FY September 2016. The company was slightly free cash flow negative on a
Moody's adjusted basis at FYE 2016 of approximately €85 million but is expected to be free cash flow neutral or slightly positive this year,
which will support the liquidity profile. The liquidity profile should also benefit from the net proceeds from the divestment of the Brazilian
plant. Maturities of €1.8 billion until FYE 2016/17 can in our view be met without putting excessive pressure on the company's cash flow.
Profile
Germany based thyssenkrupp AG (tk) is a diversified industrial conglomerate operating in about 78 countries. For FYE September 2016,
ThyssenKrupp reported revenue of EUR 39.3 billion and EBITDA of EUR 2.4 billion resulting in a 6.2% margin.
The company is engaged in steel manufacturing and steel related services through the operations of Steel Europe, Steel Americas
(divestment signed in February 2017) and Materials Services business areas, and in capital goods manufacturing through the operations
of Elevator Technology, Industrial Solutions and Components Technology business areas. Steel and steel related services represented
54% of total sales at the end of FY September 2016, while capital goods activities accounted for 51%. However, in terms of profitability
and EBIT contribution, the capital goods businesses represented the largest share of it with 79% of 2016 adjusted EBIT (excluding loss
in corporate segment) coming from these activities.
thyssenkrupp shareholding structure has been relatively stable over the last four years. As of 30 September 2016 the Alfried Krupp von
Bohlen und Halbach Foundation is holding 23.03% of the voting rights in thyssenkrupp AG, while Cevian Capital hold 15%.
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thyssenkrupp AG: Credit opinion update
CORPORATES
MOODY'S INVESTORS SERVICE
Rating Methodology and Scorecard Factors
Exhibit 5
Rating Factors
thyssenkrupp AG
Steel Industry Grid [1][2]
Factor 1 : Business Profile (20%)
Current
LTM 12/31/2016
Measure
Score
Moody's 12-18 Month
Forward View
As of 4/3/2017 [3]
Measure
Baa
Baa
Baa
Baa
$44.0
Aa
$47 - $48
Aa
a) Business Profile
Score
Factor 2 : Size (20%)
a) Revenue (USD Billion)
Factor 3 : Profitability (22.5%)
a) EBIT Margin (3 Year Avg)
3.2%
B
3.2% - 3.5%
B
b) Return on Average Tangible Assets (3 Year Avg)
4.1%
Ba
4.2% - 4.4%
Ba
c) EBIT / Interest (3 Year Avg)
1.7x
B
1.9x - 2.2x
B
Ba
Ba
Ba
Ba
Factor 4 : Financial Policies (10%)
a) Financial Policies
Factor 5 : Leverage and Cash Flow Coverage (27.5%)
a) Debt / EBITDA (3 Year Avg)
5.1x
B
4.6x - 4.8x
B
b) Debt / Total Capital (most recent)
69.5%
Ba
66% - 67%
Ba
c) (CFO - Div) / Debt (3-year Average)
6.0%
Caa
12.8% - 13%
B
Rating:
a) Indicated Rating from Grid
Ba1
Ba1
b) Actual Rating Assigned
Ba2
Ba2
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.
[2] As of 12/31/2016(LTM);
[3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.
Source: Moody’s Financial Metrics™
Ratings
Exhibit 6
Category
THYSSENKRUPP AG
Outlook
Corporate Family Rating
Senior Unsecured
Commercial Paper -Dom Curr
Other Short Term -Dom Curr
Moody's Rating
Stable
Ba2
Ba2/LGD4
NP
(P)NP
THYSSENKRUPP FINANCE NEDERLAND B.V.
Outlook
Bkd Commercial Paper -Dom Curr
Stable
NP
Source: Moody's Investors Service
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thyssenkrupp AG: Credit opinion update
CORPORATES
MOODY'S INVESTORS SERVICE
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REPORT NUMBER
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