thyssenkrupp AG (TYEKF) Q1 2023 Earnings Call Transcript

thyssenkrupp AG (OTCPK:TYEKF) Q1 2023 Earnings Conference Call February 14, 2023 5:00 AM ET

Company Participants

Claus Ehrenbeck – Investor Relations

Klaus Keysberg – Chief Financial Officer

Conference Call Participants

Ingo Schachel – Exane BNP Paribas

Jason Fairclough – Bank of America

Bastian Synagowitz – Deutsche Bank

Alain Gabriel – Morgan Stanley

Tom Zhang – Barclays

Rochus Brauneiser – Kepler Cheuvreux

Operator

Ladies and gentlemen, welcome to the thyssenkrupp Conference Call Interim Report First Quarter 2022/2023. [Operator Instructions] I will now hand over to Claus Ehrenbeck. Please go ahead.

Claus Ehrenbeck

Yes. Thank you very much, operator. Yes. Hello, everyone. Also on behalf of the entire team, I would like to wish you a very warm welcome to our conference call this morning and not in the afternoon, as you are used to. We decided to host the conference call in the morning in order to help to save time for everyone. If we have feedback on that, we would really be happy to receive it.

This conference call, as always, will be recorded. A replay will be available shortly afterwards in the course of the day and all the documents for this call are available on the Investor Relations section on our website. I think that’s it from my side. As always, there will be a Q&A session after the presentation of Klaus Keysberg to whom I would like to hand over now. Klaus, please.

Klaus Keysberg

Yes. Thank you. Also a very warm welcome from my side to our conference call here on TK’s Q1 figures. And I am pleased to state that thyssenkrupp has made a good start into the new fiscal year ‘22/23. EBIT adjusted for our business is in line with our forecast and free cash flow before M&A is even ahead of our forecast.

Overall, the business performance confirms our full year expectations of the group. Nevertheless, the fiscal year is still subject to uncertainties with regard to further macroeconomic development, even though a major economic downturn is expected to be more unlikely. Let us have a look now on the key financial performance highlights for Q1. Overall, sales were at €9 billion and basically at the same level year-on-year. Declines at Multi Tracks and Materials Services were compensated by increases in other segments.

EBITDA adjusted and EBIT adjusted were significantly lower year-on-year, mainly by as expected and already anticipated the normalization of material prices or margins at Materials Services. This effect has driven EBIT adjusted development year-on-year and outweighed higher earnings contributions from Steel Europe, Automotive Technology and Marine Systems. We were able to increase our free cash flow before M&A by €494 million year-on-year due to lower seasonal buildup of net working capital. The cash flow number was even better than our forecast given earlier, customer payments at most segments, including also some prepayments at Marine Systems that were initially anticipated for Q2.

Looking at our balance sheet, I can state that it remains rock solid. Year-on-year, we gained €0.6 billion in net cash. We further improved our equity ratio by 8.3% points to a very comfortable 40% and pension liabilities came down by €2 billion. And I would like to highlight again our valuable assets such as, for example, our stake in TK Elevator and the growth companies with nucera as well as the ammonia and methanol plants businesses. For this chemical industry, experts predict a key role in the upcoming hydrogen economy.

Let us continue with further key highlights on the next slide. First of all, I would like to give you an update on our restructuring program. As of now, we have already reduced more than 10,000 FTEs. It goes without saying that this is the largest restructuring program ever. Moreover, I would like to outline that the performance initiatives of our businesses with defined top and bottom line levers are well on track. In Q1, we have already generated a low 3-digit million euro amount, which, for sure, support our financial targets. In the Multi Tracks segment, next portfolio actions are progressing with two businesses currently being in the M&A process. For the Automation Engineering business unit, we are in talks with potentially interested buyers and we have started the M&A process for the Springs & Stabilizer business unit.

Furthermore, our order funnel in our hydrogen and renewables-related business keeps expanding. For example, nucera was able to turn a Memorandum of Understanding with Unigel in Brazil for a 60 megawatt hydrogen electrolyzed plant into a firm contract. And Uhde is selected by Adnoc for the exploration of a large-scale ammonia cracking plant. And bearings, we call it rising order intake by wind turbine OEMs in Europe and Germany. And last but not least, building up upon our continuous improvement in ESG in the last fiscal year, our efforts become, once again noticeable, thyssenkrupp is on the CDP “Climate A List” in the seventh time in a row.

Moving on, let us now jointly take a brief look at the group performance in Q1, more specifically. We see a robust top line development despite the sale of AST and price-related declines at machine Material Services. Due to higher sales of almost all other businesses, sales are basically on the same level as the prior year with a total of €9 billion. Let’s continue with EBITDA adjusted that came in with €477 million, a decrease of 21%, similar for EBIT adjusted, which is down by 33% to €254 million, both driven by the price normalization of Material Services.

Moreover, effects from destocking alongside falling spot prices at customers, especially auto, also affected Steel Europe group where shipments were lower year-on-year. Nevertheless, performance and restructuring measures supported all businesses. Free cash flow before M&A has significantly improved by €494 million year-on-year besides the early customer payments at most segments. This is mainly driven by seasonally planned but year-on-year lower net working capital buildup. And looking through Q2, we expect a strong cash conversion due to the planned net working capital release on the top of progressing earnings in the second half of the fiscal year.

Let us now jointly take a look at the earnings in Q1, namely EBIT adjusted at the glance and by segment. By the way, please note that all corresponding EBITDA adjusted figures are available for you in our more detailed Investor Relations handout. Materials Services, as mentioned earlier, with lower prices and volumes in the distribution business, mainly in Europe on the back of destocking at our customers. This resulted in a significant decline of €199 million year-on-year as positive windfall effects were absent. But more important for us, they improved considerably quarter-on-quarter also on the back of starting price increases in the spot market and closed the quarter with an EBIT adjusted of €20 million.

Industrial Components recorded an overall decline in earnings of €18 million year-on-year. The bearings business lower year-on-year, mainly driven by increased competition in China and rising factor costs. The forging business is also down year-on-year, mainly due to temporary forging line maintenance stoppages. Automotive technology is up by €5 million year-on-year. Search cost base could be compensated by higher customer demand, operational improvements and price measures. When looking at the Q1 numbers, you have to consider that the prior year includes a positive onetime effect. At Steel Europe, newly concluded contracts led to higher average revenues per ton, but shipments were at a record low of below 2 million tons, while cost of raw materials – for raw materials and energy went up year-on-year.

EBIT adjusted increased by €52 million year-on-year to €177 million, which equals an EBITDA adjusted per ton of 127. And you have to consider in the Steel Europe results also this includes an effect from our CO2 emission wise hedging activities. These effects are dependent on the market price on the reporting date. And in Q1, this was approximately €80 million.

Marine Systems maintained a positive trend with a significant increase of €14 billion year-on-year mainly through improvement in margins by execution of higher-quality orders from its order backlog that stood at €13.1 billion at the end of the quarter. Multi Tracks reported a loss in EBIT adjusted a decrease of €16 million year-on-year, mainly due to the sale of AST and thus a lower earnings contribution while almost all remaining businesses could improve their earnings. Our headquarters and others improved by €38 million year-on-year.

With that said, I would like to provide you with our view on the quarters to come. Q2 will be dominated by the development of Steel Europe, where we expect a challenging quarter, not unexpected. This is in particular – this, in particular, will come from partly renewed contract prices and still a high but, of course, only temporarily high cost level driven by effects from moving average at our accounting for inventory.

On the positive side, we noticed in January ongoing restocking by our customers that will most likely gain momentum going forward. On a group level, the therefore anticipated earnings decline in Steel Europe might not be compensated by offsetting FX, for instance, arising from top line growth at Industrial Components or strong order backlog execution at Marine Systems. For Q3 and Q4, we clearly see a substantial step-up in earnings as well as a positive free cash flow before M&A for both quarters. This view on the quarters to come is essentially based on the trading conditions that we currently see or expect going forward.

Please let me give some examples. I don’t want to go through each point here on this slide. But first, economies, of course, and the industry experts predict that the macro environment will be stabilizing in spring, followed by a gradual upswing towards the rest of the fiscal year. Moreover, we see indications for the auto sector to work on its order backlog and supply chain pressures continue to lease. In light of this, we expect improving demand and hence increasing shipments for our steel products and car components. Now let’s look how these trading conditions translate into drivers for our business for the second half. First of all, we see opportunities for top line and margin expansions for Materials Services and Steel Europe.

Moreover, we see ongoing growth in our components business also driving bottom line performance. Marine Systems will benefit from the execution of higher quality order backlog, while at the same time, the ongoing performance and restructuring initiatives across all segments will additionally support the earnings and cash flow performance. And last but not least, as you might have expected this, there will be a significant net working capital release in the second half of the fiscal year. All these indications make me confident that we will reach our outlook for fiscal year ‘22, ‘23 that I will show you now on the next slide.

For our sales, we expect a significant decrease mainly due to a normalized price development at Materials Services and Steel Europe, we saw early effects at Material Services in Q1 already. On the earnings side, we project EBIT adjusted in a range of mid- to high 3-digit million euro figure. This is in particular driven by the absence of the dynamic price effects, which provided strong tailwind in the prior year and which are the main reason for the declines in Materials Services and Steel Europe as well as still high factor costs such as energy, improvements in earnings among others, that Automotive Technologies and Multi Tracks counteractive development. Overall, if you just consider expected depreciation of approximately €1 billion, you can conclude a sizable EBITDA adjusted figure for ‘22, ‘23.

For free cash flow before M&A, we are striving for an increase at the last breakeven. Nonetheless, looking at the next quarter, we expect lower earnings, but a broadly stable free cash flow before M&A in Q2, while sales are expected to increase quarter-on-quarter. With regards to the quarter-on-quarter development for free cash flow before M&A, please consider the Q1, Q2 shift in prepayments, which are, however, of course, reflected in our guidance. Let me shortly provide you with some rationality of our outlook for free cash flow before M&A.

We expect an EBIT adjusted, as said before, in the mid- to high 3-digit million range, as we see progress in performance and transformation across all segments. Coming from EBIT adjusted guidance, we plan with higher investments year-on-year, mainly related to the Steel Strategy 20-30, adverse investments into green transformation, but also into other business areas. In addition, extraordinary and mainly non-cash IFRS 16 effects, in particular in connection with the long-term service contract at Materials Services, which are referring to long-term leasing liabilities that will increase the value of capital spending and this also reflected in the free cash flow before M&A.

Investments are also planned for targeted growth initiatives in our businesses, of course, the release of investments or the approval of the investments will be restrictive overall and dependent on the development of the businesses and the group. So it is active management steering with potentially flexibility. Furthermore, we expect continuous and significant release in net working capital. Payments for restructuring will have an impact on the low 3-digit million range.

Other positions include taxes, interest and pensions overall, we are aiming for an increase to at least breakeven in free cash flow before including the extraordinary IFRS 16 effects. Going forward, we see clearly further upside potential, for example, through progress in our transformation of thyssenkrupp, leading to a much better operational performance across our segments, also supported by a more streamlined portfolio. This also implies the fixing of cash losses at Multi Tracks over time and the reduction of restructuring cash out due to continuous progress we have made here so far.

In the longer term, also normalized but still above depreciation invest levels will support our cash flow generation. Having said that please let me remind you of our mid-term target, which includes, of course, a significantly positive free cash flow before M&A. As you can see on the chart on the bottom right, we have continuously made progress in the last year, and I’m confident that we will continue to do so and deliver as promised. This is – this has highest priority for me and the overall management team.

Now let me conclude, as a result of our restructuring efforts and measures to improve performance. Our businesses are now in a much better position to cope with challenges in their environment and take advantage of a wide range of opportunities. We strive to further improve performance and productivity and are continuing to press ahead with the transformation of thyssenkrupp into a group of largely independent high-performing companies.

Thyssenkrupp stands for strong materials engineering expertise as well as digital competence as base for more profitable growth going forward. At the same time, with our long-standing engineering expertise and the technologies in our portfolio, we are an enabler of and profiteer from the global energy transition, and we are in a position to really move the needle when it comes to decarbonization and green transformation. We made ESG as CEO priority and an integrated part in all our businesses. Last but not least, rewarding the trust of our shareholders is of high importance to us. This commitment is already reflected in our recently renewed dividend payment of €0.15 per share.

Thank you for your attention, we are now ready to take your questions.

Claus Ehrenbeck

Yes. Operator, yes, please. Take over.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] First question is coming from Ingo Schachel at Exane BNP Paribas.

Ingo Schachel

On the Multi Track side…

Operator

Please, Schachel, there was a small delay. Please start again?

Ingo Schachel

Okay. Sure. Thanks for taking my question. And first one would be on Multi Tracks. I think Q1 was better than expected, but then you are guiding for lower Q2 earnings. Can you give us a bit more color on which business unit also, which factor – what would drive the sequential redeterioration of the Multi Tracks profitability? Is it that execution was unsustainably strong in Q1 in certain areas or rather emerging cost inflations and margin pressure in certain areas? What’s really the swing factor here?

Klaus Keysberg

Yes. I mean, what you can see here, of course, is a mixture of many businesses here. So if we guide Multi Tracks a bit lower, you can see that the cost advantage we see in our Automotive business and the Multi Tracks business will be as not as good as in the Q1, and we made a good performance at nucera. And in the first quarter, we will still have good performance in the second, but not as good as in the first quarter. So these are, alongside with some other things in the chemical plant industry. These are the major explanations for this development.

Ingo Schachel

Okay. Thank you. And maybe following up on nucera. I think at the Annual General Meeting, you – Martina Merz was saying that you’re very closely following the progress of the first IPO attempts in Germany. And I think the first larger IPO has been completed successfully. So when it comes to waiting for the right capital market environment on nucera, anything else you are waiting for? Any other milestones we should watch out for now that the IPO pipeline has succeeded so far or is that probably with the asset being ready and capital markets being fairly ready now a good time to also think more specifically about nucera listing in the first half of this year?

Klaus Keysberg

Yes, as I said also before in some other occasions here. So if you look back of the development of nucera, I mean what we see so far that I think the performance of nucera showed all proof points so far. And although order intakes increased a lot, so we think that the value of the business increased between the last year and this year. So this is going very well. And as we said before, it is of course our – still our strategy to do a minority IPO for this business. So we want to keep 15%. And this is a strategy we will also pursue. The only thing which was, let’s say, in question was the capital market environment. And this was last year show, and this is what we are – of course, we carved out our business, so we are clearly ready to do so. And we are closely looking at the market conditions. We see – if you look at the last couple of months or weeks, we have not seen so much IPO so far. So I think last 2 weeks ago, there was the first one. But the question is, do you really consider this now as a good one? So, if we consider it as a good one, we will start with this process, but we cannot give you a timeline whether it’s in the first half or not.

Ingo Schachel

Okay, understood. Thanks very much.

Claus Ehrenbeck

And the growth is not dependent on an IPO.

Ingo Schachel

Yes. Of course. Thank you.

Operator

The next question is coming from Jason Fairclough at the Bank of America.

Jason Fairclough

Yes. Can you her me folks? Good morning.

Klaus Keysberg

Yes. Hi, Jason.

Jason Fairclough

Yes. Hello. Look, just a couple of questions on the working capital. If I look at some of the other steel companies, say, ArcelorMittal, they are actually in a situation where they are releasing working capital right now, right? And similarly, if you look at the outlook that we’re hearing from some of the other steel companies, it seems to be much more positive than maybe the outlook that you’re communicating today. So I’m just wondering, is their business so different to yours?

Klaus Keysberg

Yes. I’m not too much commenting on the development of the other. But what we are saying is so – what we achieved in the first quarter, I think you know. What is the aim for the rest of the year? So if you look at the volumes. In the first quarter, volumes were weak because of everybody of you know this, we saw this destocking effect alongside with decreasing prices. What we see so far now is spot pricing coming up a bit again and volumes are also coming up a bit again. So for the whole of the fiscal year, for the whole of the fiscal year, what we guided so far, was that we, of course, see for the rest of the year, and let’s say, an increase in volumes compared, of course, to the beginning of the year. So we, all in all, will come with numbers which are not lower than the previous year. So let’s say it this way. So we do see, of course, a certain dynamic in the rest of the year. It is, at the moment, very difficult to say whether this dynamic is going to be that way that we will come to a level which will be before crisis or before war. This is something we have to see. But we see dynamic for the rest of the year. This is very clear. The rest is with the net working capital here. I can assure you that we have quite ambitious targets to release net working capital for the steel business till the end of our fiscal year. And then we are still in the progress – we are really in the progress to do so. So we will see at the end of the fiscal year very much lower working capital numbers – business, as you can see now.

Jason Fairclough

If I could just follow up on the working capital, if you don’t mind, Klaus. The – how do we think about the working capital in the non-steel businesses, right? I think for a while you were carrying working capital on behalf of some of your customers and some of the capital goods businesses, is that now largely reversed? Or do you still have excess inventory there as well?

Klaus Keysberg

Not so much. So I mean, we will have a destocking over the year of – net working capital release over the year, mainly in the steel business in the Materials Services business also and also a bit in the Automotive Technologies business. The rest of the businesses, of course, we do have, let’s say, targets to increase working capital position. But the first three was with the major improvements we plan so far.

Jason Fairclough

Okay, thank you very much.

Operator

The next question is coming from Bastian Synagowitz.

Bastian Synagowitz

Hi. Yes. Good morning, all. Thanks for taking my question. My first question is actually on one of your current each business, which is Uhde, I think we’ve been winning a large project. And I think there also have been a couple of pretty bullish comments from your CEO of the business when it comes to the growth ambitions for Uhde. So I’m wondering do you now aim to sharpen the profile of that business a little? It’s obviously still within Multi Track one of that in each business you still own, which is somewhere hidden in there. So what is the situation here?

Klaus Keysberg

So the line was not too good, but the question was whether we want to – plan to sharpen the Uhde business because there are some things we are, let’s say, promoting. Is this something is your question?

Bastian Synagowitz

Correct. I mean, ultimately, it’s a business which has clearly pretty good growth outlook with the exposure to ammonia and hydrogen related end markets. And I think you picked that up also in some of the comments in the – at the AGM and I think in other occasions, I think there has been the public comments from your CEO to basically double the top line. I’m wondering what’s your aim to do with this, whether you still aim to leave it within Multi Tracks? Whether you aim to sharpen the profile? What is your plan with that business?

Klaus Keysberg

So if you look especially for the ammonia business and I just also – I think it was mentioned in the speaker notes and things like this, we do see this ammonia business with a very high potential to grow. And this is also what we see in the order intake. Why is it so? I mean I can – I think you know this because ammonia gets more and more importance also in the light of the retransformation because ammonia will most likely be a major part of the carrier for hydrogen. And we have several order intakes here. And that’s – I mean, we have not taken so much on the decisions, which you would like to hear now, but it is very clear that this ammonia business, we want to drive and we want to bring further. And therefore, this ammonia business and all the methanol business will play a more important role in the Uhde business. And what we are doing with this at what point of time we have to let open.

Bastian Synagowitz

Okay. Thanks. Thank you. Then just a second question actually on the CO2 item, which I think has been at least surprising in the sense that we are one of the first companies, which basically has been carving out a big effect, which is basically within the operation numbers. And it’s pretty clear that CO2 obviously has an impact on your operational results here. But unfortunately, it also obviously adds volatility when you’re probably also really aiming to demonstrate stability and a little bit of earnings defensiveness of your business versus others. So I’m wondering, wouldn’t it make sense to somehow even find a way to neutralize that and shift it into the other efforts rather than having its adding volatility in your operational number?

Klaus Keysberg

Yes. I mean what you’re saying is clear, Bastian. We have to show this because we had changed in the accounting procedures from our auditor here. And I mean, what we do is, I think it’s clear. I mean we do have a hedging strategy. So we are short. We would buy CO2 certificates. And of course, we get also three certificates. But in the past, we had access in certificates, which were not used. And as a part of a hedging strategy, we do forward hedging here. And this has an effect so far, it has – it was not reflected in the P&L only in the, let’s say, in the equity of the balance sheet. And now it has to be reflected in the P&L. I don’t know – to be honest, I don’t know how our competitors are doing this. If they have is on the balance sheet, they also would have to adjust for market prices at one point in time. And this is what’s happening now. Since this is a new item for us, we at least want to give you clearance what kind of part of the earnings for Steel Europe is reflected through this effect. So – and if we would – as you said, if we would have to bring this into, let’s say, if we would not adjust it any longer so if you would say it as an adjusted factor, if it would not be reflected in the EBIT adjusted, but in the EBIT reported, this is something which is, as a procedure which has to go through the supervisory things and frankly, [indiscernible] also discussed with the auditor. But we understand clearly that this is for you, a position which is new and which gives – maybe this for you, it is something like a problem to get really clarity on this. I can assure you that we want to make this effect for you very visible. And we want to, let’s say, have total clarity on this. And yes, this is the only thing I can tell you here. So we will always tell you how much effect is, and you know this effect can also be reversed. But in this first quarter, it was a positive one.

Bastian Synagowitz

I think you’re at least being very transparent about it. I guess what would be good and even if you are not giving us – here today, I think it would be – if you could at least give us maybe a bit of color on the net exposure and the sensitivity to the CO2 price so that we can mentally already do the net at our end and basically just wait of, what the effect would be. But that’s what we can maybe take offline as well. Those were my questions. Thanks so much.

Klaus Keysberg

Yes. Okay.

Operator

The next questions are coming from Alain Gabriel at Morgan Stanley.

Alain Gabriel

My question is on the comments you made at AGM, a couple of weeks ago around restructuring the portfolio, which remains a priority for you. What is the real bottleneck the Steel Europe spin-off? Is it funding? And what do you need to see or what are you waiting for to make progress on that front? That’s my first question. And my second question is on Steel Europe as well. One of your peers has received significant funding from the German government to help with their decarbonization plans. Where do you stand with securing funding and what are the timelines that we should be expecting? Thanks.

Klaus Keysberg

Yes. I mean if you talk about this spin-off of separation of the steel business, I mean we are talking about this since at least 1 year or a bit longer. So, we – at the beginning of last year, we told you that we will postpone this project. Why did we so, because if you look at the – especially at the transformation of the steel business to carbon neutral production, you have to have – I mean this is a process where you have uncertainties, but you have to have at least, let’s say, certainty about funding about CapEx, about some other issues. And last year, we did not have this very clear. And you have to have this to make a really bankable business plan or to make a spin-off or something like this. You have to have this security here. And now we are, of course, in a stage where we see clearer – clear about this. And you mentioned this subsidy for the, let’s say, direct reduction equipment. Where are we now, so we, of course, plan also to do direct to – to invest in a direct reduction equipment and it will come into work in ‘26. And this is also approved by us here. And now it is so that we have an application in the local government, in the German government and it is now, at the moment, lying in Brussels for approval. We don’t have any objections or doubt that we don’t get the approval. It’s also – it’s only a time or a process issue. So, we are, let’s say, thinking that we will get approval to this in the next couple of months. So, let’s say, in the first half year of this calendar year. And I mean this is of course – coming back to your first question, this is of course, to have this is of course, a major pre-recognition to make things like a spin-off and things like this. You have to have, let’s say, specific items, which you can do into the bankable business plan. This is more an issue than the funding issue.

Alain Gabriel

Thank you. Very clear.

Operator

The next question is coming from Tom Zhang at Barclays.

Tom Zhang

Good morning. Thanks for taking my question. Maybe just to start on the Steel Europe guidance, you are guiding for lower earnings quarter-on-quarter. I mean if we assume the emission rates, costs stay fairly stable. I guess we should expect an €80 million reversal out of that number. And then you have also contracts resetting, I think you have some high-cost inventory sitting on your books that you are now selling into the market. I mean if I add all of that together, I get pretty close to sort of breakeven EBIT. And I guess you have some tailwinds in volumes, but maybe you can just help a bit with the bridge in terms of earnings, anything else I am missing. Thanks.

Klaus Keysberg

I mean it’s going to very much into detail. So, if we guide Q2, or if we give you indications, we of course, are not reflecting potential issues, which are coming out of CO2. So, this we are not reflecting it, but it’s true what you said. If you look at our inventories, we have this average – flattened average issue. Therefore, the cost base is – or the cost level of the inventories is still high, but it’s going to improve from quarter-to-quarter. I mean it is very clear. And if you look at the first quarter, our sales per ton was of course higher, then quarter-on-quarter, it was higher. But if you look now that we had renewed some contracts at the first of January. And if you look at the development of the spot prices, you can imagine that the sales per ton went down a bit in average. And having this still with high cost levels in the inventories, but the sales per ton came down, then of course, you get pressure on the margins. This is very clear. For us, this is – nothing of this is unexpected, and we reflect this in our guidance. This is nothing which is really coming to a surprise for us. And of course, we saw this also before the fiscal year started for us, it’s not a surprise. And we – if we look at our Q1 and the rest, we are anticipating, we are totally clear that our guidance is – it’s clear what we are saying is valid. And if you ask me what kind of issues we – if you make your pitch, indeed it is the sales per ton and is the cost of materials. This is more or less and you can say that the volumes are increasing a bit, yes. So, these are the three issues. Not getting too much in detail, but I cannot give you much more detail.

Tom Zhang

No, that’s helpful. Thank you. And then the second one, just sort of follow-up to Alain’s question on the steel standalone solution. I mean how important are just the steel markets themselves? I mean you sort of talked through the funding and the subsidies from governments. But previously, you have ruled out the standalone solution because of the disruption caused by Ukraine and volatility. Obviously, it looks like spot markets have picked up a little bit in Europe. But do you just need fuel markets to continue improving, or do you think you need something more structural like the end of conflict in Ukraine towards this standalone solution?

Klaus Keysberg

I mean if you look at the situation last year ago, so we were not even sure whether, for instance, electric power or gas would even be available without shortages, something like this. I mean this is of course, something you have to consider. How do we look at this now, I mean gas shortages for us are not an issue this year, most likely also not yet, although we are not quite sure, but most likely, also not next year. And of course, the normalization of markets, of course is also a prerequisite. But I think we are going – heading into this direction very much, very much. So, therefore this – if this is going on, we will come to the situation where we can say, yes, this is the right time to make an attempt for this spinoff here. But we do not need really something more structural as something – I don’t know what you mean with structural, but…

Tom Zhang

No, that’s clear. I just – by structural, I meant something like the end of conflicts in Ukraine. But that’s a clear answer. Thank you very much. I will turn it back.

Operator

[Operator Instructions] The next question is coming from Rochus Brauneiser at Kepler Cheuvreux.

Rochus Brauneiser

Questions from my side, the one is on the bearings business. I guess on the one hand side, the expectations on the current year sound quite constructive. But if I credit against some of the commentary from major windmill producers in the world, it looks a bit more different. And also you are referencing in your outlook statements on increased competition in the space, particularly in China. So, maybe can you share a bit of light what the bits and pieces are and how you see the business progressing from here in terms of top line, in terms of profitability? That would be my first question.

Klaus Keysberg

Yes. I mean if you look at the business in bearings, you all know this business, we had a booming market in China 2 years ago, also with incentives into the market. We could anticipate quite a lot because we have a remarkable footprint there. We – in the past, we invested a lot in this year. And we have local production here. This is important to say, we have local production. What we see in China now, of course, there are Chinese OEMs and also some other foreign OEMs. And therefore, this is what we said, if the market is getting closer here, to say it this way. If you look at what you are saying regarding the OEMs, the OEMs are still in a difficult situation. I don’t want to comment on this, but this is something you can always read in the newspaper. Where do we see dynamic, we clearly see upcoming order intakes, increasing order intakes, which we have not seen, by the way, in the last 1.5 years. We are now seeing order intakes increase and not in China, but especially in Europe. And if you then look at further potential, if you, for instance, look at Inflation Reduction Act in U.S., and you would also know that we have a footprint in the U.S. It is also important to notice. We clearly see mid-term potential to grow very much on this business here. And if you ask me when margins and volumes coming, we do see this year, and this is also how we guided this, not as a remarkable growth year this year, but we clearly see in the years ‘24 and ahead, volumes to come with clearly dynamic in this case. And it’s also not only coming from China. It’s more coming then from Europe and U.S.

Rochus Brauneiser

Okay. That’s clear. The other question is on cash flow. I think Klaus, you mentioned the effect from the marine prepayment. Maybe you can give us a sense how much that was. And sequentially, what is your expectations on the positive free cash flow in the H2? Will it be more equally spread, or as in many occasions in the past, the free cash flow was very much down to the final quarter? Any add-on remarks would be great.

Klaus Keysberg

Yes. I mean – I think we guided the Q2 free cash flow development. And you clearly have in mind what kind of effects do we have? We had some prepayments of customers in the Marine business. It was a two digit one. We don’t – I think we don’t be too precise more, but it was not a low one, it was two digit one. We also saw some prepayments in other businesses, some OEMs prepayments. And if you look at the marine business, I mean you know all these discussions with prepayments. And I mean if we look at the Marine Systems, of course we have clear target for the free cash flow and the prepayments, of course you cannot steal this. There are some in the first quarter. There are some in the third quarter and fourth quarter, but you cannot make it really to say, hey, we want to have them in the second quarter. This is something which falls with the contract. So, we cannot steal this. And this is the first one. The second one is, I mean you all know that we have the seasonal pattern. And we have this, especially in the materials business. You have to bring up inventories a bit. And by the way, we did this in our first quarter, not so much as in the previous years. We have to bring on to be ready to deliver Q2, Q3 and so on. And this is something which has actually happened. We did – we had a small increase in working capital in the first quarter, not as much as so, but we have to prepare for and the release of the working capital and then starting with the Q2, Q3 and Q4. This is always the same. And that’s the reason why we, unfortunately, do have this effect that our cash flow in the last quarter is most likely the best as in the history always. So, we have an explanation for this. So, there are – from the marine side, there are these prepayment dates, which we cannot influence, and we have the structural issue that we have our working capital, that we have a seasonal pattern.

Rochus Brauneiser

Right. Got it. And then maybe a brief question on steel. Based on what you said on your volume dynamics, I just noticed that the crude steel production in the Q1 was significantly exceeding the shipment levels. So, what shall we read from there? Are you, in the end, preparing for higher growth than it maybe sounds like, or is – has production a little bit overshot shipment performance?

Klaus Keysberg

No. So, we know this, yes. This is clear. This is also something like a seasonal pattern. I don’t – if you look at the last first quarter, you would have seen it also. So, this is something how we are prepared to be prepared for the rest of the year, so nothing special more than this.

Rochus Brauneiser

Okay. Great. Thank you very much.

Operator

There are no further questions. At this time for closing remarks, I will give back to Claus Ehrenbeck.

Claus Ehrenbeck

Yes. Thank you very much, operator. And thanks again to everyone outside for being interested and for joining our conference call. We hope that this earlier scheduling of the conference call is helpful for you. As mentioned, happy to receive feedback on that. And as always, for the remainder of the day and going forward, the IR team is happy to receive your questions or information requests if you want to discuss things any further. Yes. Thank you very much for that and we look forward to staying in touch with you. Bye-bye.

Operator

This now concludes our conference. Thank you all for attending. You may now disconnect your lines.