Morningstar | Thyssenkrupp Reports Weak Margins in Fiscal 2017-18
After issuing a profit warning, no-moat Thyssenkrupp reported full-year results with 2% and 5% underlying order and revenue increases, respectively, excluding the discontinued steel business. However, the group adjusted EBIT margin contracted 140 basis points on the back of raw material price increases and currency impacts, leading to a 39% decline in adjusted EBIT from continuing operations. The shares are under review, and we expect to update our model in the near term.In the company's largest division by EBIT, elevator technology, revenue grew 4%, but more notably, a margin contraction led to 6% decline in EBIT due to raw material price increases. Elevator supplier peers Kone and Schindler have posted similar margin pressures, but with the latter better able to offset the pressure from an ongoing restructuring program. Most elevator backlogs are months long, so price increases to offset raw material price inflation takes a few quarters to phase in and improve margins. Thyssenkrupp's elevator order book grew 5% organically during 2017-18, and the company expects improvement in 2018-19 margins, including from cost-cutting measures.
The components division also saw a sharp drop-off in EBIT due to raw material price pressures. Organic revenue grew 8%, but EBIT nearly halved to EUR 197 million. Management also expects margin improvements in this division.
On a group basis, management guidance is for revenue growth in the low single digits and adjusted EBIT from continuing operations of more than EUR 1 billion; while an improvement on the EUR 706 million reported this year, it is against a weak comp with this year down 39% from the EUR 1.2 billion reported in 2016-17. Next year's margin improvement is likely to be second-half weighted.
ThyssenKrupp is the parent company of the ThyssenKrupp Group. Co. has six business areas: Components Technology, which provides components for the automotive and machinery sectors; Elevator Technology, which supplies passenger and freight elevators, escalators and moving walks, passenger boarding bridges, stair and platform lifts; Industrial Solutions, which comprises the System Engineering and Marine Systems units; Materials Services, which focuses on materials distribution and technical services; Steel Europe, which develops, produces and markets flat carbon steel in the European market; and Steel Americas, which produces, processes and markets steel products in North and South America.
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