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Edited Transcript of TKA.DE earnings conference call or presentation 14-May-19 12:00pm GMT

Half Year 2019 Thyssenkrupp AG Earnings Call

Dusseldorf May 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Thyssenkrupp AG earnings conference call or presentation Tuesday, May 14, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Claus Ehrenbeck

thyssenkrupp AG - Head of Corporate IR

* Guido Kerkhoff

thyssenkrupp AG - Chairman of the Executive Board & CEO

* Johannes M. Dietsch

thyssenkrupp AG - CFO & Member of Executive Board

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Conference Call Participants

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* Alain Gabriel

Morgan Stanley, Research Division - Equity Analyst

* Alan Henri Spence

Jefferies LLC, Research Division - Equity Analyst

* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Bastian Synagowitz

Deutsche Bank AG, Research Division - Research Analyst

* Christian Eric Andre Georges

Societe Generale Cross Asset Research - Equity Analyst

* Ingo-Martin Schachel

Commerzbank AG, Research Division - Analyst

* Ioannis Masvoulas

Macquarie Research - Analyst

* Luke Nelson

JP Morgan Chase & Co, Research Division - Research Analyst

* Rochus Brauneiser

Kepler Cheuvreux, Research Division - Head of Steel Research

* Sylvain Brunet

Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the conference call of thyssenkrupp. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Claus Ehrenbeck, who will start the meeting today. Please go ahead, sir.

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Claus Ehrenbeck, thyssenkrupp AG - Head of Corporate IR [2]

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Yes. Thank you very much, operator, and welcome everybody out there to our today's conference call. This is Claus Ehrenbeck. Also on behalf of the entire team, I would like to wish you a very warm welcome. And as always, the documents for this conference call are available on our website on the IR section. And I think with that, I can immediately hand over to Guido Kerkhoff, who will run through the presentation. And afterwards, Guido Kerkhoff and Johannes Dietsch will be available for your questions.

Guido, please go ahead.

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [3]

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Yes. Thanks, Claus. Last week, we informed you about our new strategy as the split is no longer the best option for the group. With new tk, we introduced this new strategic concept that is more than ever focused on performance, but also a flexible portfolio approach, including the IPO of our Elevator business. But before we get into these details, let us first have a look at the financials.

Order intake of our industrial businesses continues to be strong and promising, even pushing Elevator Technology to a new record high in order backlog. However, many of our end markets, especially automotive remained weak in the first half, weighing on adjusted EBIT, especially in our more cyclical businesses, Components Technology as well as the Material. Good news is, free cash before M&A came in positive, driven by net working capital release of Material Services and an increased contribution from Elevator. Year-over-year, we also see significant improvement in the cash profile at Industrial Solutions in line with our full year expectation. On the back of higher prepayment received on a number of big tickets, nevertheless, Industrial Solutions still slightly negative in the current quarter.

Given the uncertain macro environment leading to slower operating progress, especially pronounced in the first half and the reintegration of Steel Europe as of Q3, we revised our full year outlook for the group. More about this later in the call. The order intake profile, our industrial businesses remains encouraging, while our Materials business was broadly on prior levels. Orders at Elevator Technology also supported by ForEx are at a high level with the book-to-bill well above 1, and order backlog, excluding service, marking a new record at EUR 5.6 billion. Overall, growth was driven by modernization and service across all regions and new installation growth from China. New installations in units as well as in value in China are also encouraging, up year-over-year. However, price pressure persists in the market.

Orders at Components Tech are also significantly up year-on-year mainly due to growth at industrial components, on the back of continued strong demand from the wind energy sector as well as for construction equipment and heavy components. Growth in the steering and camshafts business with new plants in ramp-up was overcompensated by weak underlying order demand, particularly demand slowdown in China and Western Europe, the latter one influenced in part by new test procedures for fuel and electricity consumption and vehicle emission, WLTP and Brexit uncertainty noticeable with customers.

Orders at Industrial Solutions came in higher year-on-year, mainly driven by an ongoing positive order trend at mining and chemical plant engineering. At mining, we won, amongst others, an extension for conveyor, stacker and reclaimer in Central Asia and a power plant construction in India. For chemical plants, we still see an improving market environment and customers are coming back to the table. In the last month, we could win 2 fertilizer orders, 1 from Egypt and 1 from Poland, all in all, well above EUR 500 million. Both orders will become effective in Q3. So overall, the order intake for Industrial Solutions looks already quite good.

System engineering order intake for auto assembly lines increased year-over-year, driven by Europe, Asia and Africa. However, looking forward, uncertainties surrounding Brexit as well as sector-specific economic risks. Cement was weaker year-on-year, reflecting the current market situation with capacities built up in recent years, which the market has not yet digested. As expected, Marine Systems did not book any big tickets in the second quarter, however, Q2 included smaller maintenance and service contracts.

Looking ahead, the order intake situation looks promising. Together with Embraer defense-and-security as well as Atech, we were selected as preferred bidder for the Brazilian Navy for the construction of 4 defense ships in the Tamandaré Corvettes Class Program, CCT. On top of that, as already announced previously, we are in final negotiations for 4 frigates for Egypt. Moreover, on the submarine side, we're still expecting the 6 submarines for Norway and Germany to come, however, the probability seems higher that we will book order intake in the next fiscal year.

EBIT adjusted, especially at Components Technology and our Materials businesses was squeezed by the weakening macro environment, despite counterbalancing extensive management initiatives. Earnings at Components Tech were down year-on-year due to lower demand for automotive components, especially in China and Western Europe, customer-induced slower ramp-up with higher cost for new plants in China and a continued negative performance at Springs & Stabilizers in the low double-digit million range, while conditions for heavy vehicles and construction equipment components further improved.

Elevator Technology adjusted EBIT and margins contracted as expected in the second quarter, mainly due to material and selling prices in the Americas owing to tariffs on material imports and internal inefficiencies. Despite the consequent execution of performance measures and G&A cost reduction programs in the first half, amongst others, separating the Americas in delayering operations in U.S., we have to speed up our restructuring efforts especially in Europe, in particular, the optimization of the operations and manufacturing network. For the second half, we are optimistic to improve quarter-on-quarter and year-on-year to our guided EBIT adjusted margin on the back of existing measures in Europe and the Americas, improving prices and costs particularly in China and last, but not least, our business visibility by existing strong order backlog. However, recently announced tariff increases in the U.S. has to be monitored. Going forward, our new strategy supported by all stakeholders will enable us to force our restructuring assets and drive performance further.

Adjusted EBIT at Industrial Solutions came in negative and down year-over-year, mainly due to a lower margin on projects billed and planned engineering. Nevertheless, with the recently started comprehensive turnaround program, we still expect an improvement in adjusted EBIT over the course of the year. Amongst others, positive effects will stem from further reduction of SG&A costs, where we will bring down personnel to a competitive level, improved project execution and optimization of distribution costs. Earnings at Marine Systems improved slightly year-over-year due to higher sales, nevertheless, continued low margin on billed projects. Current trading conditions put pressure on Materials Services' adjusted EBIT, coming in significantly below the high prior year level. Margin pressure from declining prices, particularly in warehousing and distribution compared to dynamic price increases in the prior year quarter. Real estate disposal as well as partial transfer of direct-to-customer business to BA Steel Europe had some positive effects on earnings. AST came in negative year-over-year, mainly due to price trends in stainless steel, also caused by continuing import pressure. In order to counterbalance the weak macro environment, Materials Services continues to commit to measures, amongst others, reduce working capital, targeted improvement for EU, streamlined administrative structures and site consolidation in Germany as well as utilization of opportunities on growing U.S. markets, including expansion of supply chain business. Corporate continued its positive trend from the previous quarters, further improving its EBIT adjusted year-on-year next to the continued focus on G&A cost reductions in the headquarter as well as in the region. Results benefited from positive effects from real estate sales in the low single-digit million number. Our steel operations, including mainly Steel Europe and thyssenkrupp MillServices from Materials Services business area came in significantly lower year-on-year on the back of effects from lost volumes reflecting a shift in demand by OEMs, amongst others, due to new emission standards in the auto industry. Higher raw material costs as well as higher personnel costs resulting from the negotiation of the new collective agreement.

In light of a weakening macro environment with effect especially on our more cyclical businesses, especially in the first half, and the reintegration of the Steel Europe business area back into group as of Q3, we adjust our forecast for the full year 2018/'19, taking into account a lower demand for auto components at Components Technology, negative price and volume effects at our Materials businesses, difficult market environment for cement and automotive production systems at Industrial Solutions, but also further cost reductions at corporate. We now expect, including the Steel division, adjusted EBIT of EUR 1.1 billion to EUR 1.2 billion, leading to adjustments of the full year guidance at the individual business area levels. Group free cash flow before M&A is expected to be a high-3-million-digit negative reflecting the operational development and the net working capital buildup at Materials and Components Technology. Moreover, we have to take into account uncertainties from Marine Systems' cash profile being dependent on order intake and the respective milestone payments. Despite the fact that our performance is impacted by uncontrollable macro headwinds, we cannot be pleased with our performance. With new tk focused on performance and portfolio management, we have set the course to get back on track, and I'm happy to tell you, and especially the ones who could not participate on Friday's conference call, the 3 pillars that make up the new strategy and how we got there. So to come back to what we have given out in a short summary and just a short wrap up, what led us to the decision? As you can see, weaker economic fundamentals had effects on our current business development. Share price was heavily under pressure over the last month, and we could see that with -- that there was after -- in the beginning we had strong support for the split that was reflecting more doubts on the rationale for the separation. The tighter balance sheet again was burdened by payments to come for the cartel investigation settlement, which was not clear and we did not have on the books when we made the decision for the split. On top of that, the veto of the Steel JV and reintegration of Steel Europe leads to reassessment of the whole group portfolio. That all led us to a point where on Friday, we finally came to the decision that a fundamental revision and a new way of our strategy is needed, which we call the new tk. It consists of 3 pillars. One is very clear, performance first; second, is the flexible portfolio; and the third is that we will have an assessment of our organization to make it even more efficient. Let me clearly say what we have on the back -- in the back of our minds on the flexible portfolio. We have to reflect on one hand the decision on the joint venture; on the other hand, what we do with the new value-driven approach for the overall portfolio. And that's why we put thyssenkrupp in 3 buckets that we see where the value-driven approach is developed in a slightly different way in each. One is very clearly you see on the left-hand side, the value-driven exploitation of consolidation opportunities in the Steel and Materials Services sector. Now that we clearly have to face that the European Commission does not allow for big mergers in Europe, which we still think that would have been the best option to further drive the business. We now have to see how to reposition Steel and how to focus on consolidation within the sector, but possibly on smaller scale and we will have most likely majority stakes. In Materials Services, same is true, consolidation options can be there in the sector and we can value-driven exercise them or assess them whether they make sense. The second bucket we have is on the far right, which is Elevator Technologies. For Elevator, we will clearly go for an IPO. As you can see on our balance sheet, to drive performance in a stronger way to strengthen our balance sheet makes sense. So an IPO of Elevator is good for us and for Elevator as well. On one hand, it helps us to create financial headroom for stronger restructuring. On the other hand, for Elevator, it is a catalyst to drive their performance further and creates currency even for growth if it's doable in the sector of Elevator, where there could have been restrictions from our side given our balance sheet at thyssenkrupp. The third bucket is the value-driven development of our components, Industrial Solutions, Marine Systems, bearings and forge businesses. Here, we clearly have to say, what we started already with the split to focus components on auto, that's going to continue. We will develop organically, we will continue to develop a strong automotive business and in industrials we focus on the turnaround, which I already explained where we are. But new is, for all these business, we are open now for value-creating options, partnerships and combinations in the respective markets, also for respective business units. So if there are ways to further drive value by partnership or different ownership structures, we are open for that now. And therefore, going forward, we will have these 3 buckets of performance and value-driven performance development at thyssenkrupp.

On top of that, as you can see on the next slide, which is giving you the top highlights of our program performance first. Clearly, our ambition is to leverage our business USPs into leading market positions and benchmark profitability, either organically or with a flexible portfolio approach. We confirm our target of free cash before M&A of above EUR 1 billion in '20/'21 and a reduction of 6,000 jobs. On top of that, we will review all our incentive schemes and see how much we can include more performance-driven culture into these schemes. On the portfolio, as already explained, the 3-bucket approach and in our organization, to further drive performance and be flexible on the portfolio. We clearly want to review throughout and holistically through the organization what delayering is on top possible. And clearly, we want to drive corporate center with costs down to below EUR 200 million last year with EUR 380 million, already coming down 30%, so this is another cut we want to achieve in the next 2 years to have stronger entrepreneurial spirit in our businesses to drive the value going forward.

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Claus Ehrenbeck, thyssenkrupp AG - Head of Corporate IR [4]

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Well, thank you very much, Guido. With that, we can come to our Q&A session for you. Operator, would you please take over.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Ingo Schachel, Commerzbank.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Analyst [2]

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My first question would be on profitability in your Elevator Technology segment. Obviously, to get to your new full year guidance for the Elevator segment, you will have to deliver a pretty sizable margin uplift in the second half of the year, probably higher than the margin uplift that your competitors are seeing and probably also higher than the normal 50 to 70 basis points that you've tried to achieve in good quarters. I was just wondering whether you could. I guess the big swing factors will be restructuring of sell site measures as well as China pricing, whether you could provide a bit more detail on what you're seeing there with regards to incremental cost savings and China pricing in the second half? And also if we are correct in interpreting your guidance in suggesting that the second half margin expansion will significantly exceed 70 or 100 basis points to reach your full year guidance. Whether this 50 to 70 that you've used in the past is a normal margin expansion run rate is still the right number or whether under a new management team, new ownership structures, we should forget about this number and whether also with the catch up potential Elevator should expand margins more strongly in the second half and also next year?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [3]

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Yes. Okay. You are correct in mentioning, though the -- for the second half, it's indeed a bit stronger margin expansion than we've seen in the last years. We've always had the third and fourth quarter in our business year are the stronger quarters in Elevator. So that's clear. The restructuring measures and the pricing increases are the main drivers of that, as you correctly outlined. It always takes some time till price increases in China or everywhere else in the world really come through. You have the delay of something like 9 to 12 months before they're really turning up in the P&L. So therefore, our first rounds of price increases that went through, and we've recently done 3 price increase rounds, will come through and that's going to help. And this is new. This is compared to what we did in the past. We're working on G&A, and you could see that the new management team did some restructuring still some delayering in the U.S. and splitting U.S. and South America. So there's less G&A for South America and North America. So this stuff is all going to come through so the new management team is addressing these issues, and therefore, we expect it to be a bit stronger than in the last year.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Analyst [4]

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Okay. My second question would be on Components Technology. I think the segment actually -- you have printed relatively good results and out of all the macroeconomic weakness on the passenger vehicle markets, but of course, the weak spot is still the Springs & Stabilizers part. Maybe 2 questions on that. I mean first of all, could you clarify by when you would expect Springs & Stabilizers to reach breakeven or get closer to breakeven again? And also, generally in terms of this repositioning as a sort of a more flexible portfolio approach and then also CT's auto business having the goal of becoming a strong automotive business. I mean how does this work, for example, with regards to Springs & Stabilizers? Could there be a point if it continues to underperform for a few quarters, where you say it has to be reconsidered or rather this part of our core portfolio might have to be divested? Or is it too early to think about this?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [5]

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Right, so it's a bit too early. But as you rightly mentioned, Springs & Stabilizers, we have on the back of the quality and the tight pricing on this market, we have some issues. So we try to bring them back towards a positive trend, but this will definitely not happen this year. So it's going to take some time and you have longer commitments with the customers. So we're working on it. But you can see there, and that's important for me as well, we are addressing all the issues. We're renegotiating contracts. We're doing everything that we stabilize that business and bring it back on track. We have exchanged management on the first levels not only in the top core but in the regional companies as well. So we've indeed taken a completely new approach there, driven by Carsten Spohr and his team to set it up newly. But if you keep in mind that the numbers -- and you rightly said that, Q2 looked a bit better than most people expected despite Springs & Stabilizers being part of it. Yes, we see slower ramp-ups in certain cases, but still we're sort of growing overall in the business. And the other businesses, we see weaker demand too. But if you take the numbers and would take out Springs & Stabilizers, overall the performance, given where the sector currently is, is not poor. Definitely not. It's well in line. It shows that the team is working with high commitment against these effects in the market.

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Operator [6]

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The next question is from Sylvain Brunet, Exane BNP Paribas.

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [7]

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I've got 3 questions, but I'll start with the first one. On Industrial Solutions, could you help us get a better sense of what sort of prepayment and we should -- or sequence we should expect? And I don't know if you're in a position to give us at least a range on what sort of business cash flow you would expect second half and next year? I'll start with that one.

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [8]

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Yes. Well, as I said, the big fertilizer orders are going to come in, in the third quarter, so this is what we're going to see reflected. And as you correctly say, that this is always a bit difficult to assess even going forward when are the down payments and milestone payments really coming. So that's why, it's not so easy to predict it and that's why you sometimes have more volatility than you would love to see. Indeed, internally, you have to manage it on a way that you do it project by project and then see what happens. But it's not so easy to predict. But nevertheless, we have signed some big orders for fertilizers and that's going to be reflected in the prepayments that are going to come in Q3.

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [9]

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Okay. Second question on cash flow generation as well. In the first quarter, if I remember well, you commented that the bigger than usual working capital build was also a function to some degree of the preparation for the JV with Tata, the business had to be run separate. If that's correct, then when should we expect that number to unwind and contribute to working cap even if, I get it, conditions -- market conditions have changed in between?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [10]

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Yes. Absolutely correct. Some of that is going to come back because some was preparing for the JV, so this is what we can turn around. That's true. On the other hand, what we're seeing, if you take a look at the numbers in Steel, market headwinds are the toughest we are facing overall on our business areas and the performance in cash flow and on EBIT. Therefore -- and Steel is much below our expectations when we started the year. That's what we clearly have to see.

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [11]

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And my last one is more of a question on the new strategy. Perhaps to clarify a little bit on Elevators. You mentioned on Friday that you would start with the minority IPO. Could you consider IPO-ing or disposing the entire business? And could it be also a transaction with a third party or could there be a combination of all of the above? And if that's the case, if thyssenkrupp and supposing no expository Elevators in the future, I don't know about the timeline, what would this mean for thyssenkrupp's strategy going forward?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [12]

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Now first of all, why have we announced an IPO? If we want to further focus on restructuring, we need a strengthening of our balance sheet. An IPO is a way with Elevators that we have in our own hands and therefore, can control the timing to a certain degree, you always have to take into account what markets do. All other stuff you could do and you could think about always requires others and we rather, therefore, said we go for an IPO that we can be certain that we raise funds and can improve the balance sheet and therefore, can start to move on this flexible portfolio approach in other cases as well and on the stronger restructuring because, therefore, we need it. On the other hand, what we clearly made -- what we made very clear with that move is that we do not rely on 100% ownership of Elevator, which in the past, has always been a prerequisite, and whatever this announcement of an IPO, therefore, trigger, we will see.

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Operator [13]

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The next question is from Andre Kukhnin, Crédit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [14]

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I'll go one at a time as well. Just firstly, on China and Elevators, your commentary on stable market in terms of units and price seems to be a bit more cautious versus the peers who see market growing a little bit so far and pricing positive. Could you just help us reconciling this?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [15]

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I think what we've seen in China is indeed a good growth unit-wise and even in euros. So we do see some good trend than we had in Q1 even on order intake in Asia which was more than 30%, 3-0 percent, of our previous year. So good numbers, good infrastructure projects that are driving our business.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [16]

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And just a follow-up on pricing side. You said you've increased prices, you pushed it through third price increase. But you said market is stable in terms of pricing. Are you pushing prices further kind of in a stable pricing market or am I misreading that?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [17]

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No. No. We were positively surprised that we got the price increases through. We saw that there was still pressure on certain projects in the market. But nevertheless, we're rather optimistic that pricewise you can do something in China.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [18]

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And on the separation of Elevator business for the IPO. Do you anticipate any kind of meaningful dissynergies? And could you give us an idea of how much of the group central overheads you would expect to be allocated for that business finally? I mean shall we just pro rata it on sales or are there any caveats to that?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [19]

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So it's not pro rata on sales, certain departments who will definitely have to put there and you will have to see what parts, even in an IPO situation, you can run as a service of which -- for efficiency reasons or which part you would allocate directly to Elevator, but you could see in the steel organization where we did that. There was some dissynergies, but not such a big number. And definitely, it's not a pro rata that you would allocate to Elevator. That clearly is not the case. And otherwise, one clearly has to say that an IPO, as we plan it, has a much, much lower cost than anything else or the split of the company, where the cost for the split of the company was -- were rather high and perceived to be rather high compared to the benefit of the split. In this case, an IPO is much cheaper. It doesn't have the tax consequences as the other structure would have had.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [20]

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And the final one, just on Europe specifically, still on Elevator, sorry to belabor that one. You talk about cost cutting in Europe, and I just wanted to ask, is this the main issue, kind of, for the European part of the business is the kind of cost base? Or is it more on kind of installation execution is something that's been kind of flagged to us, is it tough spot in Europe as well?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [21]

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Both G&A and manufacturing. Manufacturing costs in Europe are compared to other country is higher, and the inefficiency because you don't have the big numbers in units you produce is higher. That's where you have to work on the efficiency. Some parts you need and some assembly, but we're producing by far too many parts still in Germany on our own. And therefore, you can reduce costs and you can have a cheaper structure there. And G&A in Germany is by far too high, still to be addressed.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [22]

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Right. If I -- just my last -- very last one. Would you envisage a reduction of number of plants in Europe as well on the back of that?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [23]

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Yes.

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Operator [24]

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The next question is from Alan Spence with Jefferies.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [25]

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Previously, when you were still considering the business separation, there was discussion around a book value equity write-up tied to Elevators. Would the IPO of minority stake of Elevators be a sufficient action allowing you to get a revaluation of that? And if so, what type of figures should we be thinking about? And then separately on corporate costs, with the guidance for fiscal Q3 to be flat year-on-year, it looks to imply a pretty large step up into fiscal Q4. Are there additional costs you are foreseeing coming through in that final quarter or perhaps you're just leaving some room around the guidance there?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [26]

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On the write-up, if you go for an IPO and a minority IPO, you will have a write-up just for that part that you sell off. So that means, you have some equity gains coming through the P&L than with doing the IPO. This is a different way of doing it, so you don't have a revaluation of the full asset. So therefore, it's less but -- and nevertheless, it's going to be book equity gain and a reduction in the total debt level. So technically, it's a different thing and doesn't lead you to these high values. The final quota on corporate cost is always the most extensive one, because some of the costs are incurred indeed in the last quarter, that is a typical seasonality you see at thyssenkrupp. So there's nothing special about that one. Yes. And you see that the run rate currently is below previous years, which we hopefully maintain. Yes. Still there might be some room.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [27]

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Okay. All right. Got it. And just in terms of reaching that EUR 200 million targeted run rate by FY '21, should we think about a linear improvement between now and that or is it likely the majority of that improvement might come in that 2021 year?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [28]

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I don't know whether it's going to be linear, but we're at least targeting to get there as soon as possible. A bit too early to say. But definitely, it shouldn't be just a hockey stick for the last year. And you see -- look, if you see last year, we went down from EUR 535 million to EUR 380 million, and this year probably we will go down further. So we know what we have to tackle.

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Operator [29]

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The next question is from Bastian Synagowitz, Deutsche Bank.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [30]

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My first question is on strategy. Mr. Kerkhoff, if we look back in time I probably just have to say that Thyssen has a certain history for selling assets reactively when they were underperforming, even because of the market was tough or the business was simply under pressure and not doing well. And in this sense, I guess, you're not doing something different with the IPO of Elevators and is still to be very open when it comes to the portfolio management of the residual group. Is your plan now to manage the rest of the group in a similar way, i.e. you will do adjustments more proactively and sell assets when they're actually doing well rather than falling in love with them at the peak of the cycle and sell them into a biased market when the cycle is turning? That is my first question. And then my second question is probably more a technical one, again for Mr. Dietsch on the accounting effects of the planned Elevator IPO. You're showing capital employed for Elevator of EUR 1.3 billion. Could you please give us some color on the gross asset value? And if the write-up, which you have -- just been talking about is just for the share of assets you're basically selling. Does this mean you would incur an incremental tax payment for any further stake you may sell at a later point in time? Those are my first 2 ones, and I have one more, but I'll leave it there for now.

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [31]

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Selling assets at a trough is the worst you can do. That's why, clearly -- I mean, on one hand, our balance sheet is not strong enough. That's why we clearly said, look, let's start with an IPO of Elevator. Elevator is performing not badly. They are good. They have a clear plan going forward. You have a clear valuation of these assets. So this is something we can do, and you should be able to realize and acceptable value the rest. And that's a combination where we clearly said, performance first, we have to fix things, we have to get them right and we have to drive performance and then see how we go about a flexible approach. That's what I want to clearly demonstrate because I don't want to just throw away assets at lowest value that is possible. They cannot be the target and very often you don't find a buyer then or you just throw it away. So we will drive on the performance. We will address the issues. I mean earlier in this call, the questions came around Springs & Stabilizers and the people, and I can clearly tell you they're very depressed by the situation that they see, but they're addressing all issues to fix it and get it done, and they're doing it on a very diligent and good way. And so I'm completely behind the measures they do. You couldn't just throw it away, it's then always the trough. You need to fix it and then see how you can drive further value by potential partnerships. So we don't want to just throw away what's not performing well. We want to address the issues, fix them, do them and then see what better development we can value driven do with our portfolio.

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [32]

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Yes. So regarding your questions, regarding Elevator and capital employed and in this situation what can we expect with an IPO? As Guido rightly mentioned before, we have relatively low book value. And therefore, a significant hidden value, which might crystallize at the time of the IPO. And the difference between market price and book value is significant, and if we're going to sell shares, 95% of the proceed is tax-free here in Germany, therefore, it's basically a significant uplift in value for a portion of Elevator to be lifted in the stock market.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [33]

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Okay. Maybe just following up on this one. Can you give us the gross asset value of Elevators? I think you just show the capital employed.

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [34]

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Well, that will be defined by Capital Markets, and that can only be answered when the Stock Exchange is listed. We are looking at your report -- at your research report, the variation of Elevator and the enterprise variance of clearly above EUR 10 billion. But I don't want to give any guidance on the perceived value at the time of listing of Elevator at this point in time.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [35]

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Okay. Okay. Fair enough. So basically the capital employed is very similar to what the gross asset value is what I, I guess, observe from your answer then. Okay. Then my last question is just again following up on Elevators. And I think you already elaborated on this a little bit, but there was always this debate on, I guess, whether your Elevator margins, the ones that you report, would be fully comparable to the peer numbers? And I guess, you've have always claimed that, that is the case despite obviously having this large group and corporate line. Can you maybe just be a bit more precise, i.e. should we not expect a major cut to your margins once you're basically been carve -- once you will be carving off that business, maybe defining measures maybe a certain percentage point or more?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [36]

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Should I give it a try? Of course, Elevator, for instance, as a business area that has its own resources and also significant G&A cost. Of course, if we list the company, we need to equip the company with certain functions. We still have to figure out how we can solve it from -- to support jointly for the group and what needs to be equipped additionally in Elevator. But that should not be a significant amount that we can expect that the margin will not be significantly impacted for the listing of the Elevator group. But on the other hand, also, Elevator is working hard on reducing the G&A cost over time.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [37]

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Okay. So not significant basically less than 1 percentage point then?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [38]

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I don't give guidance here, but it's not significant.

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Operator [39]

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The next question is from Rochus Brauneiser, Kepler Cheuvreux.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [40]

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The first one is on the group guidance, just for clarification of the H2/H1 dynamics. I guess a lot of the commentary is -- has been centered on macro trends and the headwinds you are facing in your business. When I take your group EBIT and I take away this D&A reversal, then I would be in a range of around EUR 460 million in the H1, and so we need a certain -- we need an acceleration in the second half to get to the targeted guidance range. So ballpark, in which camps shall I see this improvement, I guess, Elevators was already reflect on the core now and what are the other compartments? And in the same context, maybe I got that wrong and when I look at the steel contribution of EUR 300 million, you had a EBIT of EUR 75 million without the depreciation. How is the step up in the second half coming, even though margins should be a lot under pressure? But maybe this has to do with this D&A effect. I'm not sure about that. The third question on Elevator. Just very holistically, my -- I think Elevator was always a good asset in the past to cover the cash needs for your pension provisions. So if you do an Elevator IPO, what is the general thinking in terms of usage of the cash proceeds? I think if there is a link between pensions and this, then it would be in a way logic that any incremental amount of the asset you might want to sell or want to capitalize on, would that be reserved for externalization of pensions? Maybe any view on this would be interesting.

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [41]

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Yes. Let me start with the second half. Clearly, as you rightly said, Elevator is going to have a stronger performance for the second half. Margin's higher, more working days, no winter. In the -- secondly, steel, never forget that we had a lot of one-offs due to the low water level from the Rhine, which will help in the second half. The same is true for a certain degree for Materials Services. We saw a lot of headwinds coming in the first half. So therefore, with all these businesses, we see a stronger second half. And even at Components, we're expecting a stronger second half. So -- and all of that together leads us to these levels. Your other question? I only got 2.

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [42]

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Yes, cash needs for pensions and of course, proceeds from the IPO will help us to strengthen balance sheet and also to pay for restructuring and needs for them as we go. And as long -- and that's my personal view as a CFO, as long as you still have financial that preserves, that's what comes first before you fund your pension.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [43]

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Okay. And on steel?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [44]

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Could you repeat what you had on steel?

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [45]

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So maybe I just want to crosscheck whether I misunderstood something. When I look at the expectation for Steel Europe, as part of your guidance, you added this EUR 300 million, I guess? When I look at the first half, you had EUR 75 million of EBIT. If I remove this reversal here, so you have a step up in performance. So the question is, I understood that there was a -- you have Thyssen one-offs, but against this there will be this margin squeeze because steel price in Europe came down whereas raw material costs go up. Is there anything else in the equation I should be aware of?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [46]

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No. First of all, low water levels on the Rhine was around EUR 70 million to EUR 80 million on effect. So you had an underlying therefore, and we had some personal cost items, one-offs as well, around EUR 60 million, which were in the first half. So if you take that out and see the run rate, the underlying run rate was quite a bit higher. And if you assume that to come, including the other operational improvements we see at steel, we should make it to the level of around EUR 300 million.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [47]

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Okay. Yes, understood. Maybe I...

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [48]

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Which is still significantly behind previous years. It's half -- less than half of previous years.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [49]

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I know. I know. The other thing is on IS. I think it sounds a bit -- a little bit more muted than maybe a 3 months ago. Can you comment to what extent we shall expect a sequential improvement of the earnings run rate between the third quarter and fourth quarter? Can we expect that an EBIT or EBITDA breakeven will be already achieved maybe in the final quarter?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [50]

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Well, mixed deteriorate, industrials are -- you know that the system engineering part is still part of it. And they are a bit weaker than we expected internally due to the weaker auto market, which is something we didn't have in the calculation. Chemical plants on the other hand came in better. So I wouldn't change your view that its worst, but mixed underlying.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [51]

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Right. Do you think a breakeven is doable in Q4?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [52]

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We'll get better. So if you take a look at the cash flow and the EBIT is not underlying or really worsening compared to previous years, but getting better and our cash performance is better. Order intake is better than last year. So it's not such a positive surprise that everything's in the good zone. But we're on track. We're improving. And this is what I think, if you take really a look into it, this is what you can see. Clearly, some headwinds, more headwinds in automotive -- system engineering on the automotive side. Chemical is a bit better. So no overall right track.

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Operator [53]

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The next question is from Luke Nelson with JPMorgan.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [54]

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A couple of questions for me, firstly on Elevators. Can you remind me how you're thinking about the medium-term sales split between maintenance, modernization and new installation across North America, Europe and Asia within ET? And then a follow-up from an earlier question, is it possible to split ET's capital employed by region? I'll leave it there, and then I've got a few follow-ups.

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [55]

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Yes. Well, see, we're trying to address growth wherever we can and especially some on top of the normal organic measures we would see maybe some inorganic moves as well going forward, especially on the very profitable U.S. market where we're heading towards some acquisitions that might help us to improve further the performance. So it's a mix of all. So we were good in new installation. The service growth in China is coming. We're working heavily on improving service and service contracts, that's clearly of the new management team, service is their #1. And what they want to achieve more and where they want to grab a higher share. They're working consistently and stronger than ever on reducing churn and getting a better position there. So it's a mix of all.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [56]

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And then -- sorry, the capital employed by region?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [57]

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Capital employed by region, we don't give it out, sorry.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [58]

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Okay. No problem. And then just some other questions, specifically just with the Friday announcement. Have you managed to have discussions with unions yet, specifically around how they're likely to vote around the proposed IPO?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [59]

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They're supportive. The unions are supportive. We found a basic agreement with them, accepting the 6,000 and not ruling out source, business source. So they are supportive there. They see that the situation of the company is worsening and that we need measures. They support the IPO. They support the 6,000 layoffs that we announced. And again -- and that's first time for thyssenkrupp at all that forced dismissals are not ruled out in that paper explicitly.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [60]

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Okay. And then just in terms of those 6,000 redundancies. What -- have you provided a rough split by division? And then also, sort of the tangential, but the...

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [61]

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No.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [62]

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Sorry, you go ahead.

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [63]

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No. No. The split we have is, say, 2,000 -- around 2,000 is in steel. And 2/3 in total out of the 6,000 will be in Germany. So 4,000 in Germany.

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Luke Nelson, JP Morgan Chase & Co, Research Division - Research Analyst [64]

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Okay. No problem. And then final question from me. Just in terms of your total German workforce. How much -- what proportion of that is within ET?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [65]

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Elevator has a small German workforce that's largely international. You can look it up, but it's not big.

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [66]

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I think we will follow up from the IR site on that question of the number of employees of Elevators in Germany.

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Operator [67]

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The next question is from Ioannis Masvoulas, Macquarie.

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Ioannis Masvoulas, Macquarie Research - Analyst [68]

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A few left on my side, I'll start with the first one. Again, on strategy and specifically Steel Europe. You flagged the potential for consolidation opportunities with smaller players. However, if I go back 2 to 3 years, most domestic competitors were not interested in potential tie-ups. At the same time, right now, Tata is also exploring similar consolidation opportunities and so you probably have a new competitor in that process. Can you provide some color on what sort of opportunities are possible from today's point of view? And are we looking at potential deals with partners outside Europe?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [69]

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Consolidation is rather doable in Europe, because we are in Europe. And it's -- as I clearly said, from us, it's value driven. If there are opportunities we can do, fine. But we are already #2 in Europe. So behind also -- not very far ahead of Tata, but we are ahead of Tata. We are the #2. If there are opportunities, we are willing to pursue them. If not, we continue and we'll find an appropriate set up and Steel Europe in the past has always proven that they are cash flow and EBIT positive. So we'll try to continue on that path and make it stable and a strong business. And in that sector, it is a good asset with good quality customers and good quality products. So that's what we want to continue and the rest is opportunistically. If it's there, we'll pursue it, we're open for it and we're open to even offer shares for that. But if there's nothing, we don't do it. We organically can continue and we'll develop it.

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Ioannis Masvoulas, Macquarie Research - Analyst [70]

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That's clear. Second question and just to clarify on the free cash flow guidance for -- so for the first 9 months and the full year, if I look at what you have guided for, it would seem that you need a pretty big cash inflow in Q4 in the range of EUR 1.7 billion to EUR 1.8 billion to hit your negative high-3-digit million. If I look back a couple of years, in Q4 '17 and Q4 '18, you did close at EUR 1.3 billion to EUR 1.4 billion of cash inflow. What makes you confident you can deliver on such a strong Q4? And to what extent does the guidance rely on big prepayments, especially in the Marine Systems and potentially Industrial Solutions as well?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [71]

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Yes. It's a bit depending on some order intakes and some down payments. It's true. That's correct. Otherwise, the seasonality is -- like we saw it in the last years and you could see that in the second quarter, we were already slightly ahead of consensus and we were slightly ahead of our internal expectations as well. So let's wait and see how through the year we can manage it and whether the steep increase to Q4 is indeed needed that steep as you can see. But we have a couple of orders at Industrial Solutions and Marine Systems that are about year-end to come with down payments. Yes. So Q4 should be stronger there.

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Ioannis Masvoulas, Macquarie Research - Analyst [72]

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And in terms of the job cuts, so just a follow-up here. So you reached the agreement with the labor leaders over the weekend. Could you provide a bit of color, should we just take 6,000 jobs times something in the range of EUR 50,000 to EUR 60,000 per person or is it still going to have any visibility on the potential costs?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [73]

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No. We have not agreed on what we pay them. Now that's clear. I mean this is a frame agreement regarding the whole group, and it's rather regarding how we deal with the German employees, because that's largely for them how we deal with the German employees and what measures we're using and how we do and set up the process. Secondly -- and that's why I mentioned, first time ever it was mentioned that forced dismissals are not excluded. We're trying to avoid them, but it's not excluded. In general, if you take a look at the agreement we had when we did the split, they were excluded with the reasoning of the split. Now that's different. On the other hand, we clearly said, if we go for portfolio changes, we'll have a best and care owner agreement. This is something we did in the past as well. So it was defining of the rules on how we develop and how we set out the measures later on to implement the 6,000 and how to work on this flexible portfolio.

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Ioannis Masvoulas, Macquarie Research - Analyst [74]

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I see. And a very last question from me. Again, on the corporate costs and the guidance of reducing cost there to below EUR 200 million. Is that comparable to the EUR 300 million previous guidance? Or is that another element of transferring costs to the individual unit as part of the new holding structure?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [75]

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Yes, it's a combination of both. We will try to define a lot more efficient organizations take hierarchy levels out wherever we can do. So the new setup of this holding will not only thus far set it holistically, we will not just review corporate, we will look through the organization, business area, business unit, operating unit, wherever we can allocate the work and where we can avoid double work, and where we can reduce. And then appropriately, allocate. So it will be some shift from corporate to some other parts. But it's going to be a reduction in layers between business areas, business units and operating units in the business areas as well. And overall, it should lead to cost reduction.

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Operator [76]

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The next question is from Christian Georges of Societe Generale.

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Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [77]

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Just going back on what you were saying about consolidation in steel in Europe. Let's assume that there's no option left really to have a value-creative association. Over time, are we looking at -- is there possibility that your Steel division will be listed the same way as the Elevator is going to be listed with thyssenkrupp becoming a total holding company of industrial assets and Steel Europe being a separate company with a separate management?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [78]

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I think first of all, let's focus on the restructuring needs that we have to do within the steel company and now to set it up appropriately. That will take some time. We need to focus on that because there are some measures that we have to put in place now that we cannot do it within the joint venture. We have to review what we'll stop and will do differently, and we'll come up with a comprehensive plan there. In the current situation, the steel market overall if there is -- it doesn't make sense to talk about IPOs.

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Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [79]

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Okay. And on the auto components side, as stated that as you're part of the assets, you're considering or potentially associating with other players, but you're also prepared to sell the assets eventually once you're happy with the level of profitability, you're happy to say it altogether?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [80]

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Yes. I mean that's why we said it's a flexible portfolio approach offering a value base what we will do. So your line of thinking is correct. And let's wait and see what we can do. I think it gives us a clear orientation what we want to do and then we will assess it step-by-step.

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Christian Eric Andre Georges, Societe Generale Cross Asset Research - Equity Analyst [81]

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Okay. And then my last question is, I'm not sure if you explained that already. Is the timing for the IPO of Elevator and the value you're trying to cover, I mean are we looking at within the current year or on the same basis as what was the original plan for a split? And is the amount you're trying to raise equivalent to your current debt level or is there any issued guidance?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [82]

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No, we haven't given any guidance on that one. But in this fiscal year, we definitely cannot make an IPO doable. We need to cover the organization that takes a bit longer. We will be ready in the year '19/'20 and then we have to see where capital markets are, in what situation and then we will assess how we progress with it.

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Operator [83]

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The next question is from Alain Gabriel, Morgan Stanley.

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [84]

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Just one question on your plans to reduce the labor, 4,000 employees in Germany. There are some headlines from IG Metall suggesting that they're opposed to those plans. How do you reconcile those headlines with what you've stated earlier that the unions are onboard?

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Guido Kerkhoff, thyssenkrupp AG - Chairman of the Executive Board & CEO [85]

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If they were really against it, they would be waving flags. So the statements are the normal stuff.

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Operator [86]

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There are currently no further questions. (Operator Instructions)

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Claus Ehrenbeck, thyssenkrupp AG - Head of Corporate IR [87]

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So well, if there are no further questions, then I would like to thank you for participating in our today's call. And as always, the Investor Relations department stays tuned for your further questions, for further discussions. And we will also be on the road on Thursday, Guido and Johannes will travel in London. And next week, they will travel in New York and in Toronto. With that, I would like to finish the call and look forward to staying in touch with you over the phone or in personal meetings going forward. Thank you, and bye-bye.

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Operator [88]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.