Thyssenkrupp Cautious on Profit

German steel-to-elevators group Thyssenkrupp forecast a smaller-than-expected rise in operating profit for its current fiscal year and said on Thursday cost cuts would again be key to meeting its targets amid volatile raw material prices.

Thyssenkrupp is known for its conservative forecasts, but its prediction of adjusted earnings before interest and tax (EBIT) of around 1.7 billion euros ($1.8 billion) was well below the average estimate of 1.89 billion euros in a Reuters poll.

It broadly met expectations and easily met its own target for adjusted EBIT for the year to end-September, due to accelerated cost savings, despite sales declines at all its businesses except automotive components and elevators.

Adjusted EBIT fell 12 percent to 1.47 billion euros, compared with the company's target of at least 1.4 billion euros and Reuters analyst consensus of 1.48 billion euros.

Thyssenkrupp blamed a slower-than-expected recovery in prices for raw materials as well as problems at its submarines-to-plant-engineering Industrial Solutions unit, whose chief executive was forced to resign over a bribery scandal this month amid a restructuring he had been leading.

"The Industrial Solutions business area also registered a weakening of the markets for chemical plants and mining equipment as well as an absence of major naval shipbuilding projects," Thyssenkrupp said in a statement.

“The volatility on the materials markets shows that we must continue with Thyssenkrupp’s transformation into a strong industrial group,” said Dr Heinrich Hiesinger, CEO of Thyssenkrupp. “We aim to increase our share of capital goods and service businesses and achieve profitable growth.”

Hiesinger stressed that programs to increase earning power are under way in all business areas. “We’re not waiting around, we’re concentrating on the things that are in our own hands,” said the CEO. In parallel with this, Thyssenkrupp continues to invest systematically in research and development and building new production facilities. Hiesinger said: “Innovations are the key to our company’s future. That’s why we have now increased our spending on them for five years in a row.”

In July, Thyssenkrupp announced a further shakeup of its Industrial Solutions unit, which it is restructuring in the face of weak demand for plant engineering and challenges in its naval business.

The unit is Thyssenkrupp's main heavy manufacturing business whose activities range from shipbuilding to mining technology to automotive engineering systems. But it has been hit as customers have been reluctant to invest in large projects because of weak oil and raw material prices, and its naval business lost out on a $40 billion Australian defense contract to French rival DCNS in April.

Industrial Solutions' services business is more profitable than construction and Thyssenkrupp, said in a statement that Industrial Solutions would aim to increase sales from services to around a third of its total sales from 13 percent now, but did not give a timeframe.

To that end, Industrial Solutions will redistribute its Germany-heavy workforce more evenly around the world, establishing three or four project management hubs globally to be nearer to customers.

The group said it stuck to its long-term target of at least two billion euros in adjusted EBIT, which it has said will be necessary to pay a meaningful dividend. For 2015/16, it proposed an unchanged dividend of 0.15 euros, below expectations.

Free cash flow before mergers and acquisitions came in at 198 million euros for the year, compared with a negative 115 million euros a year ago and its own forecast for up to breakeven.