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Edited Transcript of TKA.DE earnings conference call or presentation 21-Nov-19 1:00pm GMT

Full Year 2019 Thyssenkrupp AG Earnings Call

Dusseldorf Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Thyssenkrupp AG earnings conference call or presentation Thursday, November 21, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Claus Ehrenbeck

thyssenkrupp AG - Head of Corporate IR

* Johannes M. Dietsch

thyssenkrupp AG - CFO & Member of Executive Board

* Martina Merz

thyssenkrupp AG - CEO & Chairwoman of the 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

* Bastian Synagowitz

Deutsche Bank AG, Research Division - Research Analyst

* Ingo-Martin Schachel

Commerzbank AG, Research Division - Head of Equity Reseach

* Jason Robert Fairclough

BofA Merrill Lynch, Research Division - Head of the Developed & Emerging EMEA Metals and Mining Equity Research

* 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 customers' request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Claus Ehrenbeck, who will lead you through this conference. Please go ahead.

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

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Yes, thank you very much, operator. Good afternoon, ladies and gentlemen. This is Claus Ehrenbeck. On behalf of the entire team, I would like to wish you a very warm welcome to our -- today's conference call on Q4 numbers, fiscal year numbers, '18-'19, and also the outlook for our fiscal year '19-'20.

For housekeeping reasons, I would like to mention that all the documents for this call are already available on the IR section of our website since 7 a.m. in the morning.

Yes. And with that, I would like to hand over to our today's presenters, Martina Merz; and Johannes Dietsch. Martina Merz, our new CFO -- CEO, sorry, CEO, who would like to provide you in her presentation with her view on the company and explain to you the cornerstones of our newtk program before I would like to then hand over to Johannes Dietsch, our CFO, who will go with you -- for you through the financials.

And with that, Martina, the floor is yours.

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [3]

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Thank you very much, Claus. Hello, everyone. This is Martina speaking. I would like to welcome you, also on behalf of the entire Executive Board, to today's conference. We heard that we have really many, many participants now in the call, and I really thank you for that. We feel honored by your interest for this year's annual press conference and this call. Today, a premier for me, addressing you in a conference call for thyssenkrupp and therefore, before we start, I would like to introduce myself.

I have spent my entire career in industries advancing but also fixing businesses. I have exposure along the entire value chain from manufacturing, production, distribution, to managing companies. Of course, this provided me with essential knowledge of work flows and processes. So I have a very long and deep operational experience. In my management positions, I was responsible for managing complex turnaround and transformation programs. In fact, I had only one position where the company was already providing positive results from the beginning. So I, more or less, spent my entire business life in restructuring and extensive restructuring jobs. But also, I was part of the sale of entities and part -- and I had at least 2 entities, you might have checked this out already, where I sold myself off together with my team.

In numerous M&A situations, I negotiations -- I negotiated an interactive with buy-side stakeholders, including large corporate family-owned companies as well as private equities.

Now coming back to thyssenkrupp. We, my fellow Board members and I, have been working together in the last 7 weeks in this new constellation, which is really a short time in view of the challenges ahead. However, it's sufficient time to get the first impressions. And yes, as you all know, the group is in a difficult situation -- in a very difficult situation. We have to admit that to ourselves and nothing can be embellished. Nevertheless, in many of our businesses, we have strong market positions and technologies. And in order to much better capture the opportunities arising from that, we have to start working much more intensively on our execution and our -- and on our process.

This current situation requires a [solid] approach, hard work with the facts and dealing with different options. There is not only one option. That's why we won't be able to present the one solution for thyssenkrupp's future today. Nevertheless, we want to describe how we foresee it from here on a path with very small [set] and, of course, a path which is demanding and which will take some time. In my discussions in the recent week with managers and employees, I felt that people were waiting for change more or less everywhere. And the challenges thyssenkrupp is facing become very clear. And of course, the first findings are, as you all probably might know or assume, in many areas, we lag far behind our own ambitions.

On the one hand, the businesses operated with plans that were unrealistic and hardly achievable in terms of time. On the other hand, the businesses have many good plans for operational and strategic improvements but far, far too little being implemented partly due to financial constraints but also through a lack of focus probably. The main focus of the new Management Board will consequently be to enable the businesses so that they can implement their plans. Our task is the task of the Board of Management -- of the group Board of Management, our task is to prioritize the use of funds for the purpose, which means to significantly improve our process of capital allocation. And in the process, we will transform the culture to one of accountability. Meaning, the management of businesses of our, then, more decentralized business must deliver the expected results and if not, take the responsibility for them and for the business.

We are currently intensively discussing 3 questions with the units as a basis for this. And with the units means our business units. It does not mean the business areas. So we go one level deeper in order to deepen important analysis and develop a holistic transformation plan.

So our 3 key questions are: What is the right level of ambition for each business? Question two, what do we have to measure ourselves against and the best in the industry? What resources and skills do we need to get there? And last but not least, how long will it take? So these 3 questions are the key questions now for our analysis and these 3 questions are the base for our transformation roadmap. But this is not all.

At the same time, we also need to change the way we work together within the group. We have to see ourself as a team, not just the 4 of us in the Board but beyond that. We need to significantly improve the momentum for change in the company. We have to work together more on a factual basis, less politically, less hierarchically and less top-down. And that, I think you all know that our key [mighty] priority is to regain trust. And this regaining trust is not only within our own community but beyond. We simply have to accomplish the targets, which we provide as those to our stakeholders.

We have already achieved a lot in the recent weeks. Even if these are not fully visible changes for you, for us, this is cautious. And I think you all know that gaining momentum with a big organization is not always visible to the outside world, but I think there is a momentum of change now.

For me, the topic of leadership is primarily about 2 things: trust and cooperation. We see ourselves as a Management Board that is much closer to the needs and requiring -- and requirements of the operating business. I think you all know that with my own operational background and the background of leading business but also being an engineer allows me to go very close to our businesses. And in addition, we replaced the top-down target [ceiling] by a joint planning process, which develops a much more interactive style of working together with our team and with our business areas and business units.

To this end, we have established the executive -- an Executive Committee and the new Steering Committee. This Executive Committee brings together the Group Management Board and the CEO of the businesses. As the new and -- this Executive Committee is the new power center for controlling the group. And this new power center, together with the central function, of course, is our core team for the transformation. And this transformation measures itself against a transformation roadmap, which will be provided to our stakeholders in the first quarter next year at the beginning of 2020.

We see a considerable need for action. I think that's known to everyone. And to be honest, much time past unused. And to sum up what we have done, and I repeat myself, is by far, not enough. So I can only assure you that we have the utmost sense of urgency. However, as our transformation roadmap is what we measure ourselves against, I ask you to be patient as we turn every stone, means every individual business with the unit is being reviewed.

I share with you what I can share now, today, and keep you updated, of course, along the way. I'm deeply convinced that newtk is the right plan to set the course for our future. It's also important that we stick to what has been said already in May: performance comes first, that we derive a flexible portfolio from it and that we can create an efficient organization that best accompanies our businesses.

Through this, and you probably heard it already, through this, and you know it, that we will not be able to develop all our business to the best in their respective industry. [And to this side], we then be, for example, that if we cannot catch up with the best in the industry, then we are definitely not the best [owner], then the flexible portfolio is the logical second pillar of newtk.

And this is why for Plant Technology , which is a very significant decision already taken now so quickly, that for Plant Technology, the former Industrial Solutions, we announced this morning that we are also pursuing M&A either for the individual business or the entity as a whole.

Also, the decisions about the financial situations of Plant Technology prevail. We have excellent technologies and engineering excellence. We are the market leader in various segments. We generate promising interest from potential buyers already now. We, parallel, still see opportunities to further develop the various businesses together with partners and even after a new roof. At this moment, we are preparing up-to-date information on the businesses in a so-called fact book, which will be sent out by the end of the year to interested parties, enabling us to quickly substantiate the discussions. And nevertheless, we continue and we accelerate our work on the turnaround. At the same time, we need to restructure the organization and business to make them more efficient and leaner, enhance competitiveness so that they can (inaudible) of the changing conditions.

One other example of our decision making in the last weeks is System Engineering, one of our business units -- of the bigger business units in our Components Technology business area. System Engineering is heavily affected by the auto cycle as well as the transformation in the industry. And a few days ago, and this was confirmed just yesterday and announced, we started restructuring in this area, targeting a deduction of 640 full-time equivalents.

Moreover, we are largely dissolving the management companies of Automotive Technology, Plant Technology, thereby reducing the headcount in these management companies by about 80% and also abolishing the matrix organization there, allowing these businesses to gain speed in their transformation and being closer to the absolute needs of the business.

Last but not least, I think you all -- you have all the details available, we see great potential for the streamlining of the group by addressing administrative costs. We are progressing well in reducing central administrative costs, and we are well on track to bring corporate costs to below EUR 200 million. Specifically, we are reducing the number of corporate functions from 15 to 10. And as also announced last night, the number of full-time equivalents at the headquarters will roughly go from 800 to 430 only in the next 12 months.

In parallel, and already announced in May, we communicated and worked on the group-wide reduction of 6,000 jobs. 2,100 of this 6,000 reduction is already ongoing. At the moment, discussions with the [quota] termination are under way in the affected areas, and we are progressing well. Currently, we cannot rule out the possibility and we are not ruling out publicly the possibility that the number might be even higher.

A more realistic view on the business, the upcoming restructuring initiatives and the continuing economic uncertainties with limited visibility at our cyclical businesses are the reasons, and Johannes Dietsch will come to that, are the other reasons why we are cautious in our forecast for the current fiscal year. For this reason, we postponed our midterm targets, which we just set last year. In addition, possible forthcoming portfolio changes under the flexible portfolio initiatives might also have an impact, but we are no less ambitious on the long term.

In implementing newtk, we aim to ensure that all our businesses are amongst the best in their respective sectors in terms of performance and, accordingly, generate positive earnings and cash flow contributions for thyssenkrupp. And with all our business in the light of the flexible portfolio, it's clear that we mean all our remaining businesses. But nevertheless, some of these businesses will achieve their targets at a different time in their respective cycles.

Last but not least, on the Elevator Technology. The preparations for the IPO are on track. By the end of the year, we will have completed the carve out, and thus already have the Elevator division largely ready for the capital market. But also, as said, we stick with the dual track. Meaning, that, while preparing the Elevator IPO, we are also evaluating the expressions of interest from potential interested parties. Regardless of whether we end up with an IPO sale or partial sale, we will do what is right for the company in the long term for its shareholders, customers, employees but also for the Elevator business itself.

So far, sorry for the very long introduction, I would now go and highlight -- mention a few highlights on your second -- on your Page #3 outlook. I think we discuss anyhow afterwards. It makes no sense that we now go through the discussion, right?

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

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We can also continue with Johannes' remarks and then we can come back (inaudible).

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [5]

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Yes. Okay. Okay.

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Claus Ehrenbeck, thyssenkrupp AG - Head of Corporate IR [6]

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Surely, also in the course of the discussion that we will have.

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [7]

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Okay. Thank you, Claus. I hope -- so then I go ahead with Page 3. As I said before, we have an overall cautious outlook for '19, '20, which reflects, of course, also the limited visibility for our more cyclical businesses with materials as well as the car and truck components with the limited planning reliability at this point of time. In light of this environment, we strive to increase sales, of course, for the group in the low-single-digit percentage range, while EBIT adjusted for the group is expected to be leveled with prior year. This reflects the overall progress in the capital goods business and, on today's perspective, generally significant weaker earnings in the Materials businesses.

In addition, we will continue and intensify the measures to develop and to structure our business. And the level of restructuring expenses will depend, in part, on the speed achievable in the restructuring of the businesses as a group.

For the upcoming year, we expect restructuring costs in a mid-3 digit million euros amount. And as a result of this and with the absence of positive effects from the previous year, we expect significantly higher net loss for the year.

The free cash flow before M&A is expected to be lower year-over-year due to significantly higher expenses for above-mentioned restructuring initiatives, the payment of the anticipated fine in the cartel proceedings at [heavy plate] and the offset of operational improvements visible at most of our businesses.

Moreover, the free cash flow is dependent on cash inflows from order intake, of course, and payment profiles for projects at Plant Technology and Marine Systems.

With that, I hand over to Johannes, who will give you an overview of the performance of last quarter.

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [8]

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Thank you so much, Martina, and welcome, everyone, from my side. Before I get into the numbers, I wanted to make some brief observations on how I see things at thyssenkrupp and what lies ahead.

In the past few weeks, we have met with and talked with 150 managers. And once again, I have been totally impressed with their deep knowledge of customers, technology and engineering. This company has so many strengths. And at the same time, all of us realize that we must speed up the pace of change and restructure. And Martina, the Board and I are looking at everything and taking our cue on what can remain and can be fixed and what must go. This coming year will be a challenging one and a busy one. Driving performance and reshaping our portfolio, including maximizing the value of our Elevator Technology activities. Looking out a bit longer, we will turn thyssenkrupp to higher performance and long-term competitiveness.

So let's start with the financial results from the recent financial year. First, order intake.

Overall, orders for full year '18-'19 came in at EUR 42 billion, slightly up over previous year. The strong and growing order intake at 3 of our 4 Industrial businesses was clouded by headwinds in our auto-related and materials businesses. Growth at Components Technology was driven by our industrial components business, especially demand from the wind energy, construction equipment, heavy trucks sectors picked up significantly. At the same time, growth in the steering and camshafts business slightly overcompensated the weak market environment for car components, especially in China, but also in Western Europe and the U.S.

Elevator Technology marked a new record high with more than [830] new orders in the fiscal year driven by new installation both in the U.S. and, moreover, a positive trend in services across all regions. While in China, we have seen promising growth in units over the year.

Marine Systems recorded a significant increase mainly due to an order for 4 frigates from North Africa in the fourth quarter. Mainly, order intake in Industrial Solutions was down from the prior year. The prior year benefited from a major order in the chemical plant business.

Overall, customers were reluctant to place orders for production systems in the automotive sector, resulting from the emerging technology shift towards e-mobility, industry-specific economic risks and uncertainties in connection with Brexit. While demand for cement plants remained at a low level, mining equipment demand decreased slightly. But there was also light, in the chemical plant construction, despite down year-over-year, we recorded a positive demand trend supported by, amongst others, 30 [other] plants in Egypt and Saudi Arabia and a robust demand for electrolysis plants, equipment and services, especially in Europe and Asia.

EBIT adjusted for the group, fell short of our own expectations until prior year figure, especially at our cyclical automotive and materials businesses, which were impacted by the weakening macro environment, lower-than-expected automotive demand, mainly in China, as well as resultant negative price and volume effects, summing up headwinds of more than EUR 700 million from external effects.

On the positive side, 3 of our 4 industrial businesses improved over the previous year. Components Technology, coming from a low level, increased its earnings contributions mainly due to a significantly better performance of the industrial components businesses.

Elevator Technology, despite higher costs, owing to higher material prices triggered by the tariffs in the U.S., was up over previous year driven by the significant growth of the service business in the U.S. and China. The implementation of performance programs were positive contributions through performance optimization and restructuring. While EBIT adjusted in China offset impacts from higher material prices in the U.S. In the second half of the fiscal year, Elevator reached a margin inflection point and came back to year-over-year improvement.

Marine Systems saw the biggest swing due to higher sales and the absence of onetime project expenses, although lower margin for projects is within burdened earnings. Only Industrial Solutions did not improve. The biggest earnings lack being Systems Engineering.

Earnings in the chemicals and cement plant and mining equipment were also down from the prior year due to lower margins on projects in Berlin as well as partial underutilization.

Corporate EBIT adjusted -- improved significantly mainly due to the faster-than-planned implementation of measures to reduce administrative costs at headquarters and in the regional organization.

Free cash flow before M&A was sharply down year-over-year and negative, especially the significantly higher net working capital requirement, in particular in raw materials business, led to a negative figure after 9 months. The strong positive cash flow and positive contribution from the materials business as well as Components and Elevator Technology in the fourth quarter could not compensate for this.

Overall, the results of the fiscal full year underscore the exceptionally tense situation of thyssenkrupp. The bottom line for us is that no company can accept this in the long term.

Order intake at our materials business were clearly below the prior year's level in the fourth quarter mainly due to lower volumes. The order intake profile at our Industrial business remains encouraging.

Orders at Components Technology were significantly up year-over-year due to continued growth at industrial components. Automotive components came in higher over a year. Growth in the steering and camshafts business with new plants and ramp up compared to weak underlying auto demand.

In the fourth quarter, orders at Elevator Technology matched the higher prior year level, thereby marking a new high of EUR 8.2 billion in the reporting year with the book-to-bill ratio to be above 1. And the order backlog stands, excluding service, at EUR 5.6 billion, up significantly from the prior year, setting a new record.

Overall, growth was driven by new installations [caused] in the U.S. Major orders from China and the U.S. also supported our future growth perspective. New installations in China experienced a slight decline in units, however, with a slight increase in prices.

Orders at Industrial Solutions came in significantly lower year-over-year as the prior year quarter benefited from a major order in the chemical plant business and the strong mining demand. We continue a challenging market environment in cement. And System Engineering were down, while order intake for auto assembly lines at System Engineering was further slowing. We already mentioned order for 4 [to date] in Egypt in August, boosts order intake at Marine Systems.

In light of the slowing macro, Materials Services experienced lower volumes, especially in Europe, in the auto-related service centers, which are partly offset by higher volumes in North America, while steel in Europe experienced significantly lower volumes primarily due to the automotive business.

Despite the continued good performance of Component Technologies business with bearings, crankshafts and construction machinery components, the continued lower demand for automotive components, especially in Western Europe and China, was only partially compensated by the ramp-up of new plants and projects. However, the biggest drag in the ongoing negative performance in EBIT of Springs & Stabilizers was [worth] a EUR 56 million strain on EBIT adjusted in the last quarter alone.

Elevator Technology's EBIT adjusted and margins are on track, with EBIT adjusted 13% to 19%, and margin expanding by 1.4 percentage points year-over-year. Sales price and material cost development in China compensate the continued pricing pressure and material cost tariff development in the U.S.

Since Elevator Technology is currently in the spotlight, I will shortly describe how the business is expected to perform going forward. Top line, we expect continued growth with a currency-adjusted sales increase in the low to mid-single-digit percentage range.

Looking at ET on a stand-alone basis, additional costs of roughly EUR 20 million to EUR 30 million are expected to be incurred in the future for the carve out. Accounting for that, we forecast an EBIT adjusted margin between 11% and 12% for the year '19-'20. This compares to a margin of 11.1% for fiscal year '18-'19, taking into account these additional expected stand-alone costs. For fiscal year 2021, one year later, we expect the EBIT adjusted to reach a range of 11.5% to 13% and further upside potential is recorded there beyond.

Coming back to the past fiscal quarter. EBIT adjusted at Industrial Solutions came in negative and slightly down year-over-year. Higher sales as well as improved margins at chemical plants couldn't compensate for earnings decline, especially as Systems Engineering.

Earnings at Marine Systems really improved for the aforementioned period. Persistent weak trading conditions weighed on the Material Services EBIT adjusted, coming in significantly below the high prior-year level and negative. Lower shipments, in addition to margin pressure, particularly in Europe from declining prices, especially in warehousing compared to a dynamic price increase in the prior year quarter. And AST came in lower and negative in the quarter over previous year mainly due to price trends in stainless steel also caused by continued import pressure.

Finally, Steel Europe was significantly lower and negative in the quarter driven by the significant cost increases for raw materials procurement in addition to a decline in shipment volumes, in particular with auto OEMs, and additionally burdened by the negative contribution of heavy plates, and then the start of the current fiscal year will surely be challenging.

Corporate continued its positive trend from the previous quarter, further improving its EBIT adjusted by -- on the back on -- of our ongoing efforts to reduce G&A costs and positive one-time effects.

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Claus Ehrenbeck, thyssenkrupp AG - Head of Corporate IR [9]

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Yes. Thank you, Johannes. With that, I would like to hand over to you, Martina, for some final remarks.

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [10]

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Thanks, Claus, and thanks, Johannes. And dear ladies and gentlemen, we are all sorry for the long info, for the long speech before we go to the Q&A. But as we are now at the last slide, next step. Besides, I think our priorities for the upcoming months are crystal clear. Besides trialing our initiatives, underperformance first, we are setting up the new lean organization, and new leadership structures will become effective as of January 1. And yes, we stringently work, of course, on the carve out of innovative technology.

A very important step, of course, the Capital Markets Day. The Capital Markets Day on Elevator Technology in London to kick off the marketing process, and the invitations will be sent out in the course of the afternoon. Maybe they have already been sent out.

At the same time, we stay in the dual track, I repeat myself, and work on all options. We have received indicative offers from strategic and financial investors. And yes, then, following a due diligence phase, we expect concrete offers by the end of the year. And the decision whether we primarily pursue a minority IPO, a sale or a partial sale will be made in calendar Q1 2020, and we hope in the early Q1 2020.

Around the same time, we will have more information about our group restructuring and transformation program available for you. With that, the future concept for Steel Europe, showing our approach for the challenges and opportunities at Steel Europe. And because -- of course, before we can present this to the -- to you and to our employees, we have to present the concept to our Supervisory Board and also talk with our colleagues on the core determination.

Let me say a few final comments before we go over to the Q&A. I would like to thank my predecessor, Guido Kerkhoff, for the commitment he has shown to the company. He took the responsibility in a very, very serious and difficult situation for the company. As a Board and the management team, we know that huge effort lies ahead. We will not leave any stone unturned nor waste time to make difficult decisions. To drive the value -- to drive value, we need to improve the performance and ultimately, ensure our long-term health. Over these last 7 weeks, the management team has met with our top 150 managers and delivered this message in clear -- very clear terms.

Some really final comments. And this is a kind of assessment where we stay -- where we are. There has been a lack of accountability and an inefficient capital allocation. We are fixing this. We believe that the key enabler for our businesses is to drive better performance, and that is enabled by more entrepreneurial freedom and responsibilities for our businesses, a more efficient and rational capital allocation decisions by the group management, a bottom-up process for target setting and a leadership approach with clear accountability for the outcome and the results.

Last but not least, it's important to say that newtk, as described, is supported by all stakeholders in our Supervisory Board. And even the employee representatives have now understood that thyssenkrupp needs to act more drastically in the past.

Thanks a lot for your support so far. I'm looking very much forward to speak with you and to speaking with you in the future, to meeting with you. And I have to excuse myself. I definitely think it's my priority now to organize the turnaround, to develop this transformational (inaudible). This is why I was not available for you and will be in a, let me say, somewhat limited way available in the weeks to come. I definitely feel the best value I can create for the company is by gaining momentum for change in the company. Thanks for your understanding. I'm looking forward for an intense Q&A session. Thank you very much.

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Claus Ehrenbeck, thyssenkrupp AG - Head of Corporate IR [11]

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Okay. Yes, thank you very much, Martina. Yes, and with that, we would like to hand over to the operator now. Operator, please take over for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we received our first question. It is from Ingo Schachel of Commerzbank.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [2]

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On your strategic roadmap, thyssenkrupp has obviously seen several management changes during the last years and every time management change came with the expectation of change and performance improvement. I would like to understand what makes you confident that your measures will be more successful. I think on portfolio and structures, you're clearly doing more and doing things more quickly. But especially on the cultural side, you also alluded to your observation that the organization is bureaucratical, hierarchical and so on. I was wondering what you, as the CEO, can really do to notch the organization in the right way, culturally speaking?

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [3]

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Thank you very much for the question. It should be answered (inaudible).

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

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Yes. Yes.

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [5]

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Okay. So I think yes, and everybody knows that a cultural change is not a 1-year exercise. So I have to thank my predecessors because a long history -- this company is a very, let me call it, it's a relatively old company. Fortunately, we have a long history. But unfortunately, in the long history of the company, and I think people who look back knows that we had a long history of relatively big egos, let me say it like that, at the top of the company, very strong leaders.

Well, they -- with a leadership style which, I would say, is not what we need today in order to broaden and to deepen, at the same time, a transformation of the company. So my leadership style is definitely following [on] principles. A turnaround is more than one person. If you need people, and of course, that starts with the Management Board, and a team approach from the top, a team which is deeply committed to its success. It goes beyond the CEO. tk is now in a very fundamental process to turn around. And at heart, as an engineer, I try to organize this process in a very structured way. Very structured means we have a process will be developed and where we go -- where we turn every stone means, we review each individual strategic plan of our business units and develop a plan going forward on a business unit level.

At the end of the day, considering all needs of the individual business units, they can develop a transformation plan going forward. This takes time. However, it creates resilience because you understand the needs and the opportunities on a business unit level. This sounds -- and I really -- this sounds -- really is a process, which is not appropriate for a EUR 42 billion -- for a EUR 42 billion sales company. However, after all the strategic changes the company has faced, I see no other option than really turning every stone and developing, on a bottom-up process, a holistic transformational roadmap.

So this is what I think is a change in our culture. We leave a relatively, let me say, top-down structure and go into a bottom-up process, developing a holistic transformation process. This takes time, and I have to ask you for your patience. I'm sure that we said we can develop a much more resilient plan going forward.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [6]

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Okay. That's very clear. Maybe moving on to a more tangible topic of free cash flow. It's highly negative again this year, apparently, of course, I understand that you cannot give a guidance for 2021, but I would like to understand what you see as the main -- or how you see the main swing factors? I guess the key swing factors are on restructuring. Should we expect that EUR 500 million number to remain in the ballpark for the next few years as the new normal in times of transition? And also on the other cash needs of the business, I mean, do you see any scope to take specific measures to release some net working capital or reduce CapEx in 2021? Or is there not much you can do other than wait and hope for prepayments?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [7]

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Yes. Thank you for the question, (inaudible). Now, you're right, the cash flow figure for next year is predicted to be even lower than the previous year. You have, number one, to take into account that we will have the payment for the (inaudible) fund. And we reserved actually a 3-digit mid-million number for restructuring charges and payouts, which, of course, influence significantly the negative cash flow. And given the cash flow profile that we have in our company, where we have significant pension payments we made, interest costs and tax payments. We have the operating divisions to earn more than EUR 1 billion positive in order to make up for those structured costs. Going further, the restructuring needs to be done in order to improve the financial performance in the following years. Although our performance program is not a 1-year program, it will take more time, and it is certainly a journey, but we will have, significantly, amounts already reserved for fiscal '19-'20, which needs then clearly to transform into positive results in the following years where we see clearly an uptick in our profitability and also now our cash flow profile.

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Ingo-Martin Schachel, Commerzbank AG, Research Division - Head of Equity Reseach [8]

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Okay. And maybe just on the source of financing. Just as a quick follow-up on the cash needs that you will have in Q1, I think you have EUR 2.3 billion headroom on your commercial paper program. Is this, sort of the syn loan, the next instrument you will draw on? Or would you rather look for other sources of financing if the commercial paper is not enough?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [9]

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Actually, we have a liquidity position of EUR 7.6 billion at the end of September, which consists on undrawn credit line, by (inaudible) lines, as well as the syn loan, plus significantly, cash positions in the group. And this is quite clearly sufficient to cover the movement and the fluctuations during the fiscal year to cover, then, overall the negative cash flow for the full year. And therefore, we are sufficiently financed. Of course, we make use also of commercial paper, if needed, but we can also make use of our cash position as well as our credit lines. So that should be easily [do it]. But looking at the full year, I shout out maybe one remark. We are looking more on the gearing side, where we have this financial covenant in the syn loans, where the net financial debt shall not be higher than 2x the equity. We have seen that last year's equity came down due to the negative result and the pension reevaluation and the net financial debt increased, of course, because of the negative cash flow. And that will continue in the year '19-'20. And for that, it is of utmost importance for us that we do an elevator transaction in order to strengthen our balance sheet.

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Operator [10]

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

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

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Maybe drawing on the previous question on free cash flow again. So implicitly, if we strip out the EUR 870 million of negative one-offs into this current fiscal year, we're left with something close to EUR 400 million underlying negative. Could you, maybe in a bottom-up approach, give us a bit of a sense of where you expect the biggest contributors to this negative number to come from? And where do you think this is -- these are internal drivers versus the cycle?

If I can also follow up with 2 more questions. One, obviously, it's early days in your assessment, Mrs. Merz, but keen to get your fresh first look at the company and in your own assessment before any scenario is chosen. Do you think that thyssenkrupp can live without Elevators, simply? And the last question is on pensions. Obviously, the group has a large pension item. And again, as a very first assessment as you were taking over the leadership in the company, what would be your first ideas to address the issue?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [12]

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Well, let me look at the free cash flow figure and the cycle and also questions regarding working capital. Looking at the last fiscal year, we saw the free cash flow from the materials business turning down sharply from the year before. In '17-'18, we recorded record numbers in free cash flow due to extraordinary working capital releases. We had more than EUR 700 million in SE and more than EUR 600 million in [MS]. At this time, this came greatly down. And the major reason here is the working capital movement and the accounts favor a situation where we had significantly lower accounts payable compared to the year before. So going forward now with the outlook for the year, we will continue to see challenging situations in the materials businesses. And we continue to strive for a cash conversion of roughly 1. But going in line with the outlook. And here, we said we will have a fairly difficult start into the year with the Q1 to be negative, but of course, will have a weight on our cash position as well. On the other hand, we see very good development at Industrial businesses and here also an improvement. Like-for-like, if I take out the restructuring and the cartel fine, we will have improvement in operating business cash flow in this current fiscal year compared to the year '18-'19.

Now your second question, with regards to the Elevator [brand] transaction and the question, can we live without Elevator.

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [13]

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Yes. Is there a life without Elevators? That is my question.

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [14]

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Yes. It's a nice question, can we live without Elevator. We would love to keep Elevator because it's a fantastic business. It's really a great business because we can greatly expand our margins. We have a growing demand. We have very stable cash flow and a growing business, so this is a fantastic business, especially if you don't have too much CapEx to put in. Therefore, this Elevator business is a key cornerstone for our financing. And yes, indeed, once -- if we are going to decide on a full sale of Elevator, then firmly, we have to look at the remaining company, how this can be financed in a pretty different profile. So we have to mostly delever our balance sheet and our debt in order to be sustained with the outside.

Then I hand over to Martina on the CEO question.

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [15]

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I want to add something to what has been said, whether the company -- the Elevators question. As said, we turn every stone. And of course, our ambition level has to be, and you can say, Martina, this was said over the last 5 years, but still, I think we need to underline it. As we said in May, the ultimate goal is, of course, to develop the company in a kind of holding with a decentralized approach. In such approach, we need to stop cost-subsidizing in any way. That must be our goal and has been our goal already since the last 7 months. This is, of course, one of the reasons why we accelerated the portfolio activity for the Industrial Solutions business, plant technology. In all, as Johannes said, in order to improve the financial profile of the group. And this is why we ask for your patience until the first quarter of 2020, because it's clear that this question is one of the questions to answer, how can be this -- how can we stop cost-subsidizing in this group and develop a group portfolio where the business itself can, let me say, have a result which is at least on the level of capital costs as soon as possible. So that remains the goal. And that is, of course, the target which we measure our transformation roadmap against.

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [16]

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And on pensions?

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Claus Ehrenbeck, thyssenkrupp AG - Head of Corporate IR [17]

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Can you maybe -- excuse me, could you please repeat it -- with the question on pensions?

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Sylvain Brunet, Exane BNP Paribas, Research Division - Head of Metals and Mining Equity Research [18]

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This was a question for Mrs. Merz as well, in a company, which has such a large liability, what would -- what have been her first thought on how to address the issue?

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [19]

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(inaudible), just one comment. I'm fully aware of the issue. And of course, people think about these liabilities, and that's one of the key -- one of the key stones we are turning. How can we -- let me say, how can we deal with this liability? It's clear that this is one of the key contributors. And one of the key questions regarding for our transformation roadmap.

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Operator [20]

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The next question is from Bastian Synagowitz of Deutsche Bank.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [21]

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I've got one question as well on cash flow and your cash generation ability. But much more broadly, I'm more interested to think a bit further ahead. If we ex out the working capital movement from the EUR 1.1 billion free cash flow drag which you faced last year, we’ll obviously end up with minus EUR 400 million. And if we then factor in the restructuring benefits from what you're currently doing, and it seems like a lot of that is happening quickly in 2020 -- or '19-'20 already, we probably get to a situation where you're around cash flow neutral, obviously assuming that the world doesn't really change too much. If we then back out the Elevator business, it's obviously still leaves the rest of the group still losing at least EUR 0.5 billion in cash flow, which is already post the restructuring measures, which you have been launching. So I'm wondering, what is your vision to close that gap and get into a situation where these units are actually generating cash on a stand-alone basis and don't need to be subsidized by a business like Elevators and do the restructuring initiatives which you have announced so far, really go [fine off] from what you do since today?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [22]

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Yes. Basically, of course, I want to stick to the guidance we have for '19-'20. But looking out a bit further then. Of course, we will generate positive cash flows from our operating business. We will continue to have structural cash outs from pensions and maybe also from the interest side, very much depends, then, on the balance sheet that we will have and on the deleveraging which we are taking assuming for a second we will greatly reduce our financial debt and our pension liabilities, and we will have also a great relief on the structural cash outs. And therefore, the business itself is the business cash flow being positive should then be sufficient for a sustainable development of the company and more positive cash flows going forward.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [23]

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So do I understand it correctly, then that, basically, after this pretty intense phase of restructuring which you have already been announcing is the second phase or it would then be just more the financial restructuring? Or I'd say, like basically, a second step in restructuring which is in preparation, you're currently thinking about?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [24]

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Well, first, the operational restructuring is not a 1-year program. As I mentioned before, it will take several years. And certainly, we will also earmark some restructuring costs after year 1. However, the majority should still be done within this year. And a company to support with great business and good performance but, without Elevator, will certainly not be able to afford the debt level and the pension level that we have today. Then of course, we will have clearly to restructure also our balance sheet in order to have a sustainable cash position thereafter.

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Bastian Synagowitz, Deutsche Bank AG, Research Division - Research Analyst [25]

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Okay. Then one more question, just to follow up on Marines, and, particularly, with regards to your order book there. So my understanding is that you no longer do expect the Norwegian and the German Marines order in 2020 at this point. What has happened here? Are the negotiations simply taking longer? Or are the orders actually becoming more uncertain again?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [26]

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Well, we are striving for a more cautious outlook. And actually, in the first budget run, we have incorporated this order intake. But I must admit that we have done so also in the past year and the year before we have announced this project. The project is still running. It's in our pipeline. We are the only bidder. But as far as I can see, we need alignment between Norway and Germany on the design of the boat. We need also the parliamentary approvals in both countries, especially in Norway. And we are not sure whether the approval will come in within summer of next year, which will be a precondition in order to record it as order intake. So for that reason, we are a bit cautious and delaying the order intake in the next fiscal year, 2021. But there is a chance that it can also come even within this fiscal year.

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Operator [27]

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The next question is from Alain Gabriel of Morgan Stanley.

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Alain Gabriel, Morgan Stanley, Research Division - Equity Analyst [28]

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My question is on the steel business. Clearly, now that the JV has been called off, what are the options that you have on the table? Would you consider retaining it internally? And if so, how can you fix that business given the landscape in Europe of the steel industry and the high carbon costs? Is that via reducing your footprint, shutting down some blast furnaces?

And the second part of that question is, would you contemplate renewing an attempt to a new JV?

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [29]

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Thanks. On the steel business, although the performance is currently depressed and Steel Europe is a very cyclical business -- an extremely cyclical business, it is not a bad business in it's (inaudible). thyssenkrupp belongs definitely to the technical leader in this business. And considering long term, it has reliable contributed earnings and it has a positive contribution to the cash flow of the group. In order to prepare it now for the future and to support its competitiveness, a lot needs to be done now. We built on the cost base. We shift the product portfolio to even more to the high-value-added range -- end of the range. We have to make sure that our plans and equipment are in the right shape, state-of-the-art. And last but not least, very, very long term, we have to address the CO2 issues. However, we feel well positioned to turn this challenge into an opportunity. On this what I call stand-alone approach, of course, we're going to provide details to the team and also to you early 2020. So on the steel, there is also, let me call it, a kind of dual track. There is a stand-alone approach, but yes, the European steel industry is facing overcapacities. We see constantly increasing import volumes, which, of course, creates pressure to the players in this market to think about consolidation. However, it takes 2 to tango. And it's not in our hands fully that there is a tango. But we have understood that, in this industry, there are overcapacities. And as that, it takes 2. And for that, we are working on, let me say, a kind of dual track. We are -- there is a pressure in this industry, but at the same time, we prepare our standalone transformation roadmap.

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Operator [30]

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The next question is from Alan Spence of Jefferies.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [31]

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I've got 2. The first one on, well, what formerly was called Industrial Solutions and your term about evaluating a best owner solution and a turnaround concept. How long do you think you need to evaluate a turnaround concept before you have an answer whether that really fits within your portfolio? Or should it be external?

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

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Yes. Thank you, Alan, for the question. Actually, we want to do that in parallel. Number one, clearly, our focus is on turning around the business. We have a performance program in place, we have numerous measures to be executed and we have an order intake with margins which are now significantly higher than the margins we had before. So on average, we are now looking at a gross margin of 18% compared to 11% from the per orders currently in our box. And that improves the situations. And we are working heavily on the cost base as well. Therefore, turnaround has a priority. And it's important to enforce the financial situation of our Industrial Solutions business. But -- and further, we are also preparing our financial books in order to be ready for an M&A process with all of the ingredients you need like due diligence and data room. And we do this in parallel and hope that we can also approach potential partners or even buyers for the business in due course. Therefore, we are heavily working in both fronts, improvement of performance and preparing the financial factors.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [33]

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Okay. That's very helpful. And then my second one is about Steel Europe. And perhaps if you could shed some light into what's kind of baked into your guidance there? The raw material squeeze was obviously a main impact this year. And iron ore has since -- has rolled heavily since July, which I thought should be quite a positive tailwind into the coming quarters for your profitability. I know you mentioned that there's limited visibility in those materials businesses right now. For your guidance, which paints Steel Europe to be negative for the year, is that effectively taking the current situation and extrapolating that over the year? Or can you share with what some of your assumptions might be for later in the fiscal year?

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

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Well, on Steel Europe, on raw (inaudible) materials prices are pretty erratic movements, as you know. So the iron ore price on Eurex in the quarter 4 of '18-'19 increased actually by 30 -- 52% over previous year. So this is a pretty dramatic increase if you look at the ODEX index. At the same time, we have higher costs also on the personnel costs from the tariff increase. And we certainly need to work on the cost base as well. Certainly, we have lower shipments overall. For the full year '18-'19, we stand at 10.5 million tons compared to 11.3 million the year before. And what is especially unfortunate is that the profitable business with the auto industry -- with the automotive industry is down compared to previous year. In this situation, automotive industry will prevail in the first quarter of this new fiscal year. And we also say that we have limited visibility into the next quarter. And will we see a better economic environment at the beginning of next calendar year? I can't tell you, we don't know yet. Therefore, we have this cautious outlook. And currently, visibility is only the Q1 where we say that we most probably will end up negative due to the raw material costs, lower demand and also the cost base we have currently in place.

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Alan Henri Spence, Jefferies LLC, Research Division - Equity Analyst [35]

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So is it fair to summarize that you've taken that Q1 view and assume that is fairly linear throughout the year?

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

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No, there's a good chance, of course, that things will improve for the beginning of next year.

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Operator [37]

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The next question is from Rochus Brauneiser of Kepler Cheuvreux.

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Rochus Brauneiser, Kepler Cheuvreux, Research Division - Head of Steel Research [38]

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The first one is, again, on Elevator and the potential strategy. Martina Merz, I think you described in length all the strategic options for Elevator and what needs to be done with the cash in order to improve the cash flow and stabilize the company over time. Can we maybe look at this from the other end, coming from the pension side? Is there anything as far as you see on this side of the decision making? Is there anything we need to think about in terms of the options there in terms of tax implications? Are there any restrictions if you would externalize the pensions how such an asset portfolio could be run? That's the first question.

The second one is, I'm not sure whether I got you wrong in the press call this morning, I am not sure whether you mentioned that thyssen would remain a diversified group in the future. Is there any new [annual] in terms of your roadmap towards becoming a focused materials company? And in that context, also, I think it's a big jump to cut down the headquarter capacity. What should we think about the shared services going forward? Because when businesses are dealing with portfolio, there might be also some necessity redimension the shared services business going forward.

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [39]

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So if I understand you correctly, I wonder whether you want to discuss about the tax implication on the ET strategy and also a question on external pension? Then tax implication, we guided that for the carve out, including taxes incurred for the carve out, we will see a low 3-digit million number, which is significantly lower than the number we once guided for the separation of the company.

And secondly, the tax bill can be higher if you go for a full sale, when we will have to add up another low-digit million number on this tax bill. But it's still relatively modest compared to the enterprise value of that asset.

As we think about restructuring our balance sheet or using financials as well as reducing our pension liabilities, yes, we might consider to externalize pension. Again, generally, we are funded with the provisioning on the balance sheet. We have no funded status and that can easily be changed with setting up a structured-trust agreement, CTAs and pension funds, in order to serve those pension liabilities. But this is way too early to discuss at this point in time. Currently, we are focusing on our financial debt to be optimized before we think about pension liabilities.

And I would like to come to your last question on shared service before I hand over to Martina on the diversified strategy for the team. Shared services, yes, the -- actually, reducing the number of jobs in corporate, in our holdings, will also result in increasing positions in the service areas and in the [VAs] itself. So we will certainly make sure that we have in the holding only truly government-related functions as well as functions which need to be done for steering the legal entities, like tax and timings and treasury. But overall, we will clearly reduce the services and the need for the VAs and also adjust the cost base in these service areas. And maybe, at the end, we will also pass on more service lines and more provisions back to the businesses where the businesses have been in charge on optimizing their own services.

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Claus Ehrenbeck, thyssenkrupp AG - Head of Corporate IR [40]

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Martina, do you want to take the last question?

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [41]

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Yes. I think the first question, it's -- I'm only -- as I said before, I can only repeat myself. We are going through a process of a review of each -- the strategy with each individual business unit. thyssenkrupp today is a diversity technology group. And yes, we go through a process to reshape the company. But from today's point of view, it will be a company centered around technology, vis-a-vis where we are good in. Its ability is centered around engineering and materials expertise. There is -- if there would be no common denominator, we would not have one, to be very clear. It is -- we have not yet finalized this process. I think, as a technology group, it will be diversified, but I would not say we have yet a common denominator, but technology will be one.

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Operator [42]

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The next question is from Jason Fairclough of Bank of America Merrill Lynch.

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Jason Robert Fairclough, BofA Merrill Lynch, Research Division - Head of the Developed & Emerging EMEA Metals and Mining Equity Research [43]

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I'll keep it short, Claus. Just on the Elevator sales, just a question on tax. If you were to announce in, say, March that you're selling this business for EUR 18 billion in cash, how much tax should we think about being paid on the proceeds, just roughly?

And then just secondly, if I can be cheeky. Is there a limit on how many businesses you can have for sale at one time? So for example, while you're selling the Elevator Technology business, could you also instigate a sales process in automotive technology or in plant technology or in some of the other materials businesses?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [44]

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Okay. Let me take this question, Jason. Here in Germany, we have the privilege to sell companies at no cost. That is a very nice privilege. Therefore, whatever the selling price might be, we do not have a corporate tax on it. We can do this tax-free. We only have to incur taxes in setting up the legal entity structure for the Elevator group, which means transferring subsidiaries in China and the U.S. and in other countries under the roof of Elevator AG, Germany. Currently those subsidies are sitting under a thyssenkrupp holding in the company. For setting up those structures, we have some taxes. That is already happening now. And as I mentioned before, that's a low 3-digit million number. Therefore, on the sale of Elevators, if it is a sale at the end, then we do not have to pay taxes here in Germany.

Then the other question is on resources for several M&As at the same time. Yes, we have the ambition to work on several fronts on and the restructuring and the turnaround programs while also looking at best-owner concept for the other businesses, which we call flexible portfolio. And that includes Industrial Solutions, as you heard today, where we're working on the textbooks but can also be true for other business of this structural portfolio.

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Jason Robert Fairclough, BofA Merrill Lynch, Research Division - Head of the Developed & Emerging EMEA Metals and Mining Equity Research [45]

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I guess, to sort of state an obvious thing here, I mean, if we're selling Elevators and if I look at our estimate of asset value, Elevators is about 70% or 75%. And if we're then going to sell or dispose or shut down of half of what's left, there's really not much of thyssenkrupp left at all. Is that a fair comment?

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [46]

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I think it is, as I say, we are undergoing this process. But I would say, look, if you see the Steel business, Materials Services, the automotive business, if you simply count that all together, it's still a pretty size -- it's still a very sizeable company, isn't it?

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Johannes M. Dietsch, thyssenkrupp AG - CFO & Member of Executive Board [47]

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It is.

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [48]

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So not so much left would I say is a pretty pessimistic view of the things. Yes, because adding on the flexible portfolio assets, we consider, for the time being, for example, the automotive business, components, technology not flexible portfolio.

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Claus Ehrenbeck, thyssenkrupp AG - Head of Corporate IR [49]

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Thank you, Jason. And I think with this, we have come to the end of our today's call. We would like to thank all participants for their time. Today, our call was a bit longer than usual. But we thought, given all the changes here at the company and that we have a new management team in place, we thought we should allocate a bit more time to the presentations of Martina and Johannes. And we hope it was valuable for you. And as always, for all the questions you might have after the call, the IR team is happy to take them and to go through to them with you together. And with that, we would like to end the call and thank you very much for your participation, and we look forward to staying in contact with you. Bye-bye.

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Martina Merz, thyssenkrupp AG - CEO & Chairwoman of the Executive Board [50]

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Thank you very much all. Bye.

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Operator [51]

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