Jefferies: ThyssenKrupp, sold Q2 earning but FY18 guidance disappoints

Key Takeaway
TKA today reported in-line Q2 results with adj. EBIT of €500m, +2% vs JEFe, and Net Debt of €3.5b, -6% vs JEFe, as FCF positively surprised. However, FY18 guidance was unchanged at €1.8-2.0b (JEFe €2.13b) with tailwinds in materials offset by Fx/cost headwinds in cap goods, which led to downward revisions to guidance across industrial businesses. TKA-Tata JV remains on track for H1 approval. While earnings/FCF will be taken positively, guidance disappoints.

F2Q earnings in-line, Net Debt beats. TKA today reported in-line Q2 results with adj. EBIT of €500m, +2%/+1% vs JEFe/cons. Net Debt of €3.5b came -6%/-14% below JEFe/cons supported by positive FCF of €168m, which beat JEFe/cons of -€116m/-€39m. Further details enclosed in Exhibit 1.
Segmental performance mixed. By division, adj. EBIT in Steel Europe of €198m beat JEFe by 3% as slightly disappointing shipments (-2% vs JEFe) were offset by stronger realised prices (+4%). Materials Services adj. EBIT of €100m also beat JEFe by 4%. Elevator Technology adj. EBIT of €204m and Components Technology adj. EBIT of €93m both missed JEFe modestly by 2% while Industrial Solutions adj. EBIT of -€23m missed meaningfully despite hopes for a swing to positive territory. Corporate & Consolidation charges at -€72m also came meaningfully lower than JEFe of -€113m and contributed to the beat (though a pick-up in H2 is expected).
FY18 guidance unchanged, but expectations by division shift as cap goods headwinds grow. Looking forward, TKA confirmed previous guidance for adj. EBIT of €1.8-2.0b, but noted a mix shift in contribution by division given strength in materials offset by cap goods headwinds from input costs and Fx. For Elevator Technology, FY18 guidance has been revised to sales flat YoY and margins at least at prior-year levels (from prior low-to-mid single digit sales growth and margins +50-70bp YoY). For Components Technology, guidance has been revised to sales growth of mid single digit and margin at prior-year level (from prior mid-to-high single digit sales growth and margin expansion YoY). For Industrial Solutions, guidance has been revised to sales at prior-year level (from prior almost double-digit growth), though margins are still expected to improve H2>H1.
TKA-Tata Steel JV on track. Management notes that negotiations for the planned TKA-Tata steel JV are proceeding well. Due diligence is almost complete with previously announced €400-600m synergies recently reconfirmed, though the consultation process with employee representatives at Tata Steel Europe remains ongoing. Board decision on the JV is possible within H1 with signing thereafter. A TKA strategy update should be expected thereafter.

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