thyssenkrupp AG

Heinrich Hiesinger - Chairman Claus Ehrenbeck - IR Guido Kerkhoff - CFO

Michael Shillaker - Credit Suisse Ingo Schachel - Commerzbank Alessandro Abate - Berenberg Bastian Synagowitz - Deutsche Bank Seth Rosenfeld - Jefferies Sylvain Brunet - Exane BNP Paribas Carsten Riek - UBS Rochus Brauneiser - Kepler Cheuvreux Roger Bell - JPMorgan Ioannis Masvoulas - RBC Patrick Morton - Macquarie Christian Georges - Societe Generale

Yes. Thank you very much, operator.

Yes, hello, everybody. This is Claus Ehrenbeck speaking from the IR team.

On behalf of the entire team, I would like to wish you a very warm welcome to our today's conference call on the Q2 numbers. Before we begin the presentation followed by the Q&A session briefly the housekeeping remark as always that you can find all the relevant documents for this call on the IR section on our website.

And when it comes to our Q&A session, please ask two questions per person so that everybody has a chance really to ask the questions during the call. With that, I would like to hand over to our today's presenter Heinrich Hiesinger who will be followed Guido Kerkhoff.

Heinrich, please go ahead.

Yes, Claus, thank you very much. Also from my side a warm welcome to our Q2 conference call.

In a very difficult environment, we could seize the opportunity and we made another important step forward on our strategic way by establishing a 100% ownership in CSA. It was important to on take the very complex governance and ownership structures.

This eliminates mutual claims that were caused by the contractual complexities and thus it significantly reducing risks, as well as preparing future options for CSA. In Q2, we have successfully executed the refinancing measures of €3 billion which is reinforcing our solid financial position at more favorable conditions.

Furthermore in a highly adverse and to say it very frankly, significantly worse than in November expected materials environment, our increasing focus in capital goods and the consequent implementation of our impact program paid off once again. All capital goods business areas further improved their earnings performance.

Elevator technology was up year on year for the 14th quarter in succession. Industrial solutions penetrated from a high-quality order backlog with high-margin projects in billing phase.

Moreover, five out of our six BAs improved quarter on quarter, including all our material businesses. Nevertheless, the sharp deterioration of the materials environment clearly left its marks.

Our first fiscal half year clearly captured all of the negative headwinds that have contributed to pushing both steel prices and inventory levels to a trough and on the other side import levels to unsustainable peaks. Given the late price recovery, especially in Europe and Germany, with significant windfall losses at material services and some spillover effects in our Q3 contract prices which is reflecting the time lag between spot price and contract prices, we had to reduce our outlook for the current fiscal year.

With that new outlook, it confirms that we continue to expect a significant sequential improvement in our earnings and cash flow performance in the coming quarters. The run rate in the second half should significantly accelerate just to make the math it need to be above €800 million.

All in all, the first half of the fiscal year has been tougher than expected. Nevertheless our capital goods and impact performance provide strong evidence that our strategic way forward has a clear and effective for roadmap going forward.

With that the volatility of the material businesses is high but it becomes more manageable as we continue to reduce our exposure and as the increasing focus on our capital goods business continues to provide structural earnings growth. Our powerful impact program continues to pay off as more than €450 million efficiency gains or more than half of the targeted €850 million for the year have been achieved off the first six months.

Capital goods upside for the rest of the year is well secured by structured growth, especially at the elevator and components technology. In addition, all our materials business areas should significantly improve in Q3 and especially in Q4 due to the price recovery and the effectiveness of impact measures.

However, as mentioned, due to the worse than expected materials environment in the first half year, we have lowered our full year EBIT adjusted forecast to at least €1.4 billion. Nevertheless this implies structural upside at our capital goods for the year as well as for the second half and a significant acceleration of the Group's earnings run rate in the second half.

Net income which has been back to the positive territory in Q2 should come out in the current fiscal year on prior-year level. Free cash flow before M&A is expected to come in between low €3 digit million negative and breakeven.

This depends on payment timing on big tickets order in our industrial solutions business.

With that, I will start. Order intake in our CapGoods businesses was up year on year in the first half, also on comparable basis.

The second quarter was generally a bit more subdued without big ticket orders at industrial solutions and influenced by negative exchange rate effects. The components technology's growth in car components in China and, though slowing in the second quarter, Europe and the U.S.

largely offset the weaker markets for heavy trucks, China, Brazil, U.S.A and construction machinery components. Demand for wind energy components is currently normalizing in China.

2015 has been exceptionally strong in anticipation of expiring incentives. Nevertheless, growth is still available in the offshore and high megawatt segment.

The midterm Company-specific growth outlook remains highly encouraging as in particular the market feedback on our recently introduced electric power-assisted steering systems continues to be very strong. At elevator technology, we continue to see higher demand in the new installation business in the U.S.

and South Korea, while Europe in general was lower year on year and Brazil remains very weak. In China, we see new installation units and our order intake developing flattish.

Like-for-like H1 was almost at prior-year level and Q2 was even up year on year, 3.7%. Additional unit growth followed the acquisition of majority shareholding in Marohn.

And industrial solutions orders are up in the first half, benefiting from the strong first quarter which included entirely the large cement plant order from Yamama. Q2 lacked big ticket orders and was weaker there for year on year, but higher order volumes for fertilizer and cement plants in the U.S.

and MENA are in advanced stages. Our system engineering continues to benefit from strong underlying demand for automotive plants.

Nevertheless, given overall challenging commodity market, [indiscernible] and his leadership team have initiated a strategy and restructuring program to secure sustainable profitable growth. Let me come back to the submarine contract.

As you all have seen, we have lost the contract in Australia. Nevertheless, the order backlog is well filled for submarines and the utilization remains on a high level.

The overall sound development at our CapGoods business compares to weaker materials performance and a significantly weaker materials environment. Mainly as a result of continued high import pressure and significant price decreases all material businesses declined year on year in the first half as well as in Q2.

However, as you know there have recently been clear signs of recovery on the materials market with spot prices rebounding and sentiment improving especially for the American markets. EBIT adjusted all capital goods companies are up year on year.

Components technology, improvements in car and wind energy components outweighed the downturn components to trucks and construction machinery and the market weakness in Brazil. In elevator technology, we're well on track with sales growth of 5% in Q2 and 50 bps margin improvement, despite the continued difficult market situation in individual European countries like for example France.

Industrial solutions, strong second quarter with high margin projects in billing phase and the margin at 9.5% in the reporting quarter, temporarily above the 6% to 7% target range. In contrast to this, all material BAs down year on year reflecting a highly adverse price environment.

Nevertheless, all material businesses could improve quarter on quarter. Materials services could slightly improve quarter on quarter despite even higher windfall losses which increased from around €30 million in Q1 to around €50 million in Q2.

And steel Europe, they could improve quarter on quarter as low average revenues per ton were more than compensated by additional efficiency gains and seasonally higher volumes. Shipments were however significantly down year on year, reflecting our selective margin-oriented sales approach.

On steel Americas, we were also slightly up quarter on quarter, but on a low level, as another significant decrease in average revenues per ton and thus raw material spread was compensated by higher shipments and efficiency gains as well as by a positive sales tax effect of around €16 million. Free cash flow before M&A came out at minus €365 million and remained as reflected to you already in our February Q1 call similar to last year's profile negative.

This reflects an increase in our net working capital with price related lower inventories offset by lower net advance payment and includes as well the majority of our annual interest payment. Gearing came out temporarily higher at 175%.

Same time last year it was 162%. Given the higher net debt and lower book equity reflecting again a negative effect from Forex 136% as well as higher pension discount rate, we lost €400 million.

German pension interest rates went down by 0.6 percentage points just in this one quarter. We have adjusted the full-year cash flow outlook in line with the adjustment of the earnings forecast to free cash flow before M&A to a low €3 million digit negative towards breakeven.

The exact figure will depend on big order tickets and the payments that will come in before September or after. In any case, this implies for the second half, similar to last year's profile, a significant positive cash flow contribution and a significant decline in gearing driven by a more favorable distribution of milestone payments at IS, seasonally lower networking capital requirements, as well as a much improved earnings run rate, more than 50% up compared to the first half.

With that I have come to the outlook. EBIT adjusted outlook for Q3, we expect Group EBIT adjusted in Q3 still lower year on year, but quarter on quarter significantly up reflecting sequential improvement at five out of our six BAs and IS quarter on quarter lower but broadly stable year on year.

Quarter on quarter with 9.5%, we had a very high quarter due to some final settlements of contracts. And components, we expect year on year as well as quarter on quarter high adjusted EBIT, reflecting continued operational improvements and cost discipline as well, continued growth in the Chinese auto market against a weaker prior-year quarter more than compensating for weaker truck market.

At elevator technology, we expect to see continued top line growth and margin improvement in line with our full-year target. At all our materials BAs in Q3, we still expect to be down year on year, but up quarter on quarter.

At materials services, we expect a significant sequential increase as windfall losses fall away. Please keep in mind H1 came in with €80 million of windfall losses.

Steel Europe should benefit from high efficiency gains and volumes closer to prior-year levels with given the lag effect quarter-on quarter flattish revenues per ton. Steel Americas should already benefit from albeit given some lag effects only slightly higher revenues per ton.

This is slightly diluted by higher iron ore cost and of course ultimately earnings are still subject to uncertainties. Regarding the potential effect Forex effect on the sales tax asset, given the current uncertainties around the Brazilian environment it is not easy to predict, but our guidance implies that we're broadly stable on the current levels.

That's why we clearly want to highlight that if in Brazil things were to go wrong in whatever direction this could affect us. Clearly, if current price holds, Q4 could see a significant jump in profitability and already in Q3, we will see some improvements as Q1 and Q2 was really significantly hit by the downturn there and the upswing in prices are much stronger for steel Americas than we saw it for steel Europe so far.

To sum it up, the first half of the current fiscal year has been tough but our CapGoods and impact performance provide strong evidence for structural progress. And our leadership teams at our materials businesses are holding up very well versus peers.

Besides that, there's a lot of homework and improvement potential let at every BA and thus a clear value upside on our transformation there.

Thank you very much, Guido. Thank you very much, Heinrich.

With that, we can go over to the Q&A session and, operator, could you please take over?

Two questions then. First of all, in relation to the guidance, a lot of the commentary is focused on the weak H1, but I guess in February you would have had a pretty good idea of how H1 was panning out.

So what really has changed in your mind between February and now to effectively got the guidance range by up to between €200 million to €500 million because that really in principle have to be skewed towards the second half given that in February you would have had a very, very good handle on H1? And then the second question, if I may, just on materials, a lot of commentary on how negative materials have been.

But if you actually look going forward, clearly the steel market is going through a period of recovery. And actually the business that looks weakest in terms of order book is plant tech which has gone, A, back to 2009 levels, but also I think anyone who correlates this business with commodities, oil prices, none of which are expected to go back to former levels suggest that plant tech order book going forward could be very weak.

So, I guess two sub questions to this. Is there a risk actually that you're getting, potentially, rid of steel and keeping plant tech at the structural trough of the steel cycle but the structural peak of the plant tech cycle?

And the second thing in plant tech, what is the remedial action you intend to take in the absence of future big-ticket items coming in? Thanks a lot.

Mike, maybe I'll start with the first one, what happened between February and now. I mean, in February we clearly already told you when we talked about our guidance that we saw the market already bottoming out.

And as you can clearly see, for example on material services, we had even more windfall losses in the second quarter than in the first. And that means the recovery not only started later, we expected it to happen somewhere in Q2 stronger so that in Q3 and Q4 we would already completely benefit.

And now we see with the lag effect that it will be a bit later. But it went down further than we expected.

In February, it was not over for us, we had more windfall losses coming in and that was the reason why we had to take it down. Now that was the news for us.

We didn't expect it to go down further and we saw a recovery a bit earlier. And as our year ends end of September, this is a bit too late for us.

And the fact that the pricings were still very flat, our customers were still reluctant to order and this was really the reason why we were again short in volume in our steel Europe business because we clearly said we go for a margin optimization and not going for tons. But as, let's say, the prices were flat, customers were still waiting and therefore if you have looked on our volume figures in steel, we're 10% down.

And this is definitely when we guided you last time we said probably we have potential that volume in steel Europe will pick up which actually did not happen. We lost minus 10%.

Now coming back, let's say, to our plant business. The fact is we had an outstanding Q2 in our plant business and also the outlook for the year is a positive one.

Nevertheless, as clearly stated by Guido, Dale Fricman is already starting a restructuring program. So, he is reacting on the fact that the outlook is more challenging.

And his target clearly is that he is reducing, let's say, our, let's say, dependency on large-scale businesses. So the target structure is actually going for one-third product business, one-third service business and one-third only these large-scale project business.

In order to achieve that, we need a much stronger regional focus because the small-scale business, we call it more product or system business, very often driven by expansion and modernization and the service business, you can only capture it to a higher rate if we're much stronger localized. This is what he is doing, as one example and where we have already very clear signal that underutilization is happening, for example in our mining business in Australia, we're already implementing restructuring.

So we're not waiting until, let's say, this thing is coming. We already are quite aggressively reacting today.

So we believe we can really run that business also, let's say, on a whole the order intake side we're heavily depending whether a large scale order will come in or not but we want to reduce this dependency over time.

Okay. And this is a follow-up, so you don't see any risk that we could be in a situation where we're at the bottom of the structural steel cycle and the top of the structural plant tech cycle and actually at the end of the day five years out, you would be earning better returns in steel than plant tech?

Let's say, it's very difficult to predict. I think we make our decisions on effects and outlook which we see today.

Yes, the cycle is always the cycle. It doesn't change the overall oversupply in steel and that's why wherever you are in the cycle, I think our arguments why consolidation could and would make sense, is meaningful, remain true in whatever situation in the cycle you are.

I have two questions. The first one would be on the elevator segment.

Compared to peers you had a quite strong performance in China. Just wanted to hear because you've only given the volume development more or less.

Whether you could also comment a bit on pricing for some of your peers that obviously reflect stronger pricing pressure there, also something that you've seen and could you interpret your stronger volume growth as you being willing to accept a few more orders at lower price points here? And also given that Marohn seems to have contributed nicely to your success in China in the quarter, I would also appreciate a quick comment whether you would think that with the consolidation that Chinese elevator market picking up, you would hope to acquire a few more of those companies like Marohn or whether you're, let's say, satisfied with the footprint with four brands there?

And the second question is on CSA. You've obviously done a very important step to streamline the shareholder structure there to potentially make it easier to pursue strategic options there.

Just wanted to understand a little bit, I know it's quite early days, but trying to understand what your thinking is to figure out the trade-off between balance sheet strengths and eventually getting rid of this asset which has at least in the last quarters contributed to quite sizable loss again? I think you made quite clear to the press this morning that you do not see the need to raise more equity, but if you were confronted with the trade-off where you might be able to get rid of the assets, but you might have to incur book loss on that.

I know it's difficult to chance at this point, but any color on your thinking on this trade-off would be appreciated.

Let me start with the elevator side. As you said correctly, we were quite happy with the performance on the new installation without Marohn that actually our second quarter we could even grow by roughly 4% which brings the full half year number of units to only minus 2%.

We were let's say the major driver in that area was our success in commercial and infrastructure projects. So, the price pressure, yes, the price pressure was increasing.

We still see that as a single-digit level, but the statement is not true that we could keep our number of units, let's say, on a comparable level because we were sacrificing our margins or prices. On the contrary we expect that also our Chinese team is contributing, let's say, much improvement of elevator as a whole.

And I was personally there two weeks ago and I've really seen that they have started a quite comprehensive program called Elevate China to really make sure that even in a flat market environment by number of units and some price pressure we stay successfully on that road. Marohn for us was - and the first idea really supporting our multi-brand strategy because we clearly recognize that at the very beginning, serving the entire Chinese market only with Thyssenkrupp brand was spreading the brand too much and it was difficult for us to keep this quality brand mark for high-raise, high building, high speed and specialty like TWIN and still serving, let's say, the more competitive residential market.

And therefore we have introduced three-brand Thyssenkrupp for the high end, clearly [indiscernible] all our components are Thyssenkrupp made and then for the more competitive let's say with Marohn. And the development was so happy that was the reason why we're talking over maturity.

We're always interested in our elevator business not only in China to expand our service business and seek opportunities if we really can grow this business successfully.

Yes and coming back to CSA and your question around CSA, clearly the structure now that we own 100%. It's not finally closed, the fund and we've got the CADE approval.

So, remains to be seen how it continues, but closing is not unlikely. Now, if we get it, we're in a better situation and it's clearly non-strategic this asset, but on the other hand, the Brazilian market is currently in a very weak situation.

So whatever you would assume as a potential solution is not so easy to see the liability and that people would do it. So it's clearly that we definitely want to sell it off and find a good solution for it, but in the current market environment, it's not so easy to see a viability of the solution or a solution coming up, if a good solution is doable, I think we can get it done.

So we're clearly committed to that.

My two questions, related to the expected adjusted EBIT in H2, that has to be above €850 million, would it be possible to make a split in terms of percentage, how is it distributed between the two quarters, just to have an idea of the potential exit rates into Q4? And relative to the M&A, I mean there has been a lot of news flow related to the potential deal between you and the Europe and Tata Steel [indiscernible].

But what about the other two divisions in material services and CSA? Can we expect that you're putting the same effort in analyzing the potential scenarios for a potential consolidation of the segment in material services as well in Europe?

Thank you very much.

Alessandro, well let me start with the first one, the split for the second half. I think, on page 9 of our presentation where we give you a clear indication of how we see it developing year-on-year and quarter-on quarter.

I think there is not more detail that we really want to lay out and I think you can see where we expect the major changes. So it should be good enough to make your model.

Regarding the M&A thing, there are a lot of talks going on. What we clearly can say is CSA as well as AST is on our list where we say clearly non-core assets we'd like to dispose of.

And then steel Europe we've clearly said we think a consolidation makes sense and there have always been talks between all relevant parties, but nothing else and nothing more so far to say to that. Nothing else on M&A has been on our list and we'd stay with that.

Guido, just a follow-up question. What about material services, do you see this as a potential consolidator in the business or it is going to be basically division that you think it can stay in a decent portfolio for a while?

Our position was always very clear, we keep a very clear focus and the focus, let's say, where we put all our efforts in is really finding solution in steel and this really has paid off to have a clear focus in the past.

I've got two questions. Firstly, on elevators which had a softer quarter on the order side and looking at the numbers in the first half orders have now been up only just below 2% but with a negative trend in the second quarter.

FX is already starting to become a bit of a headwind here, but could you please update us a little bit on what you see in the market in the second half of the year and how confident are you to get back on the growth track for the rest of the year here as well? And then my second question is on steel Americas.

I guess Brazil should be a significant improvement once the recent price increases have had through in your P&L, it seems like the spot market also for slabs has not started to pick up a little bit. Assuming the current price levels remain stable, is it fair to assume that steel Americas will be break even on an underlying EBIT basis in calendar Q4 at the latest or is there a chance you may be breaking even in your fiscal fourth quarter already?

Thank you.

Let me start with the elevators. To make that very clear, we have not given a guidance to the growth rate of elevators.

We have given a guidance for the margins. Now what at the end, the growth rate will be, it's clearly the mixture of - we see still very, very positive growth opportunities in North America and South Korea.

Clearly, we have talked beforehand with flattish units and slight price pressure, let's say, on a comparable basis without Marohn, China let's say is softening in order intake, but still growing in sales. Including Marohn significant growing in sales, but we still have also the other part which is Europe and in Europe we have some countries which are weakening, just to name one which is France.

And clearly, we have the weakening environment in Brazil. But our clear focus is and this is also what our entire elevator team is doing, you tune your cross in a way that you support the margin improvement way of going forward.

And with that all the region have kept dedicated target and ranges in which they have to offer it.

Yes. And coming back to CSA, breakeven in Q4 for steel Americas is doable.

Maybe just following up briefly on a different topic on and that is material services. You incurred €80 million of windfall losses so far, prices are obviously now back on the rise, shouldn't we really expect a reasonably material windfall profit in the fourth and in the third quarter?

Let's wait and see. If the windfall losses would disappear that would already be a significant improvement.

Whether we come to windfall profits, some outlook but still let's stay cautious on that one and see how the trend will continue.

But this definitely and this was one of the first questions from Michael, what we have underestimated, we had already the opinion that, let's say, the prices were flattening out Q2 and did not at all expect the €50 million windfall losses in Q2. That's the reason why we're a little bit careful here to make any, let's say, better statement.

A couple of follow-up questions on your European operations on the material side. First on AST and on the stainless operations, I was wondering if you can comment on the prospects of European stainless market both in terms of prices and import.

And you noted last year some plants that you have shut were half of AST in the second half of this year. Is that still on the cards and when should we expect to have some confirmation on your plans on the capacity closures side?

And then separately on steel Europe on the carbon steel side, obviously your commented earlier a bit of a change in your strategy, focus on pricing rather than volumes. Has that affected your contract structure looking forward and how would we expect doesn't impact kind of P&L implications for spot price moves in the coming quarters?

Thank you.

Well let me start with AST, what we've seen although underline we realized all our efficiency targets and they're really well on track and operationally doing a very good job. We released more than 300 people over the last 12 months.

What we saw was a nickel driven prices went down, some imports were there as you correctly mentioned. So there was some pressure and contraction in the market.

Now we see the nickel moving up a little bit and so the market should be in a better shape for the second half. Now, we have the plan and we still have the plan in place that we can shut down the second electric arc which is there.

But currently with all the volumes we sell and we're selling more than we can produce with one electric arc is profitable. So far as long as this is the case, we continue with that one, but the plan that we can shut it down is in place and we can do so if needed.

On steel Europe, yes, we were going for pricing versus volume, but so far, it didn't change our shift or shift from less contract to being more to spot, so that hasn't effected that one, that was more basically for all the mix.

And can you just quickly confirm what the mix is for contract versus spot and perhaps the timeline for any contract renewals?

The contractors we have - around 50% of our contracts are six months and longer. We have about 25% three months and the rest is below three months, but most of that is volume that we do not sell on spot but service centers and others and longer term partners that we do have and even contract volumes below three months.

So, we're not that much related to spot volumes.

And coming back to the AST side, we clearly outlined in our industrial concept that we're preparing for shutting down an oven. This was clearly based on the analytics that a significant share of that volume was not contributing to margin.

So, we continue that measurement, but today all of that volume is contributing to margins. So, that was the reason why we have recently announced that we have a conditional expansion to operate these two ovens.

So, we will continue that measurement. As long as this volume is a margin contributor, we're ready to operate in that mode.

If for whatever reasons it would change then we're prepared to go to the [indiscernible] concept.

Yes. And all the CapEx that was required and all the measurements that were needed that we can just survive and get all the volumes in place with one electric arc have been done.

So, we can shut it down.

One last question. Does that change your outlook for continuing to hold on to this business in the longer term?

No, not at all.

If I could ask you, first question on your free cash flow guidance. Just to get some color on what's missing to get the full reversal in the free cash flow number that you were expecting in February as we talked before?

And when I look at for instance industrial solutions, we can see that over the last six quarters actually the business cash flow was negative. So, likewise what is needed to reverse the trend?

Is there a minimum intake number that you need to see? Second question, if you were to pursue for the consolidation on the steel side, could you please talk little bit about even conceptually what structure you would prefer to make sure that the pension liabilities would not be a deal breaker in any dialog you would consider?

Thank you.

Industrial solutions, you're right, they were negative for a couple of quarters. But as we have already outlined in our last call, there are some big ticket orders that we're preparing some, we're just missing financial close.

And these are big ones that are out there in the market like the Fatima one. So, it's really big orders that could come in.

The current run rate that we have in order intake without any big tickets is of course not enough. It's below revenue and if we're below €1 billion in order intake, how can you make enough because you're working down than your order backlog and you pay out more.

So we need some big orders. And as Heinrich outlined even going forward we expect one-third to be coming from big order tickets.

So they have to come through and we have signed some good contracts and we're in negotiations of bigger ones so that they can contribute that we can improve on industrial solutions. Now coming to your second question on the steel Europe consolidation and the pension issue, yes, as you can see in our financial reports, we have some pensions within the steel Europe division and therefore they have to be taken always into account if we talk about something that we could do and that we might consider, but this is just a part of the pensions that we have overall in the Group.

Out of the almost €8 billion within steel directly is something around €2 billion.

My two questions, the first one, do you expect lower shipments going forward in Brazil? What did you just adjust the net working capital here, because I noted that Q3 production was down 14% while the shipments were up 6.5%.

The second question on the cash flow. In the operating cash flow there is one item of €771 million which pretty much drove down your operating cash flow quite significantly.

Could you just give us some hint what is behind this position because it's comparably big? Thank you.

Let me first come, let's say, to the fact that our production level was lower in Q2 in our CA. The root cause was actually that we had to repair a bearing on the convert of the steel plant.

That was the reason meanwhile we're back to normalized production rate. So your statement is likely that we will have higher volume in tons in the second half of the year and clearly also in more attractive terms.

Yes, no, that's very clear. The €770 million we had - and you can see that in our other parts of the working capital receivables, payables we had some changes as well.

As you could see on industrial solutions I mentioned that we have some settlement of bigger contracts and when we finalized all the PoC accounting for that we had huge shifts in all these parts because when you change and have some provisions instead of that and you close that down and that was driving these figures there. So working capital is not so easy to compare quarter-on quarter this time.

Okay. No, that's fair.

So going forward, we won't have this kind of big numbers there, it might be clearer again.

Hope so.

Just a few follow-ups. One is on the naval business.

Can you comment a bit on your submarine strategy following the failed bid in Australia? Is there anything which might be changed in terms of the setup maybe broadened portfolio to have an offering also for larger vessels if needed somewhere in the world or would the potential sale of the submarine business coming on the table now as this thing has passed?

That would be my first question. The other one is again on your industrial solutions business.

The review and the restructuring program of [indiscernible], is that from today's point of view a program which is boosting the margin beyond the 6% to 7% you're currently targeting or is this more of a program to defend against any potential weakness in forthcoming order intakes?

First, let me come to the naval business. You can imagine that definitely the team and the entire Company is disappointed that our efforts did bring the success.

What we're doing right now is really that we make a very professional debriefing with the customers in the dimensions what let's say is the technical assessment, the contractual assessment and probably did we, let's say, master in the best way the political side and with that results, the debriefing did not happen, we will draw our conclusions. It's certainly a disappointment because it would have been a promising outlook for sales in the years from 2020 until 2030, but we need to keep in mind, the last four submarine orders for conventional one we did win it.

So, it is disappointing that we lost Australia, but it's not that we, let's say, we're not successful in winning the last four. Now, with the debriefing learning we will definitely fight now for the next one and that projects are coming up in Norway, India and other parts.

And now let's say, we have to re-focus the team on executing the one which are right now, let's say, in engineering and productions and deliver, let's say, to the customers' expectation going forward. Now, let's say, the program again Fricman is starting will secure that we can stay in the target margin, because if you look on the competitive environment in industrial solutions, our 6% to 7% are really above benchmark.

Most of the others right now in a very challenging environment have reduced margins. So, we have started that program with the ambition to really find a way in a very challenging environment to stay at this level.

This is the target what we're going forward.

Okay. And maybe a follow-up question on AST.

Can you quantify whether the second quarter was also impacted by windfall losses and can you defer a bit of an outlook how you see the second half sequentially there with base prices in Europe still about flattish and maybe volumes, maybe only slightly up versus the first half?

We saw some effects on windfall losses in it, not to such a degree like in the material services business, but in AST we saw it as well. So it was a bit weaker in Q2 than originally expected without that.

So we think it will improve sequentially.

Really just one or two questions on the CapEx budget. Is there a scope to spend significantly less than the guided €1.5 billion of CapEx for the year?

Obviously the run rate year-to-date is well below that level. And if not, if we're going to see this acceleration in CapEx in the second half of the year, is there anything in particular that you're - any large items that you are spending capital on?

Thanks very much.

I think if you look on last year figures you will recognize that we use any opportunity not to spend money. On the other hand we have now won these large ticket order on the steering side and we need to make sure that we can support it, let's say, with the investments we're doing right now.

You might have heard recently that we have opened two weeks ago or had the ground laying of new steering plant in Hungary. We're building right now a new steering plant in China, but clearly our tendency is always minimizing it.

And last year, I think we could come in lower than our expectation was by mid-year.

Okay. And then in terms of the free cash flow guidance for the year, then presumably that assumes that you do spend up to still €1.5 billion?

We take all of the measurements into account, we need a significant positive run rate for the second half. So that's quite a task.

And given what we have achieved over the last year, second half has always been much stronger. But it's quite a big turnaround from minus €1.2 million to lower €3-digit million negative towards breakeven and there is a lot.

And we take everything we can get to achieve that number.

Most of my questions have been answered. I just have one question though on cost cutting.

You hinted at a traditional cost saving at steel Americas in terms of slab production. Can you quantify these initiatives and would they come on top of the €800 million target and how about further cost cutting at the steel Europe?

Thank you.

A lot of you were, let's say, actually concerned when achieving the €2.5 billion, we will stop cost cutting and we're saying to our organization, cost cutting is something which you do always and that was the reason why we clearly guided €850 million for this year and we're slightly above in our run rate by half year. And we also guided you that all of the BA is contributed above €3-digit million contribution, so, including Americas and steel Europe.

And definitely also we're right now working on identifying measures that will also give efficiency and cost cutting potential for the year coming, but it's not only CSA, it's all our businesses.

Regarding the pickup in demand that has happened in the steel industry as evidenced by steel prices, is there any concern from your perspective that this is heavily a restocking event which could fade in the second half or do you see from your sort of insider's perspective that it feels like fundamental improvement in demand?

No, we believe that the situation we have seen in the first half of the year was unexpected trough from sides, first, from the price level which was extremely low but also from an inventory level. So, we believe that part of the restocking is just coming back to a normal run rate because the end customer demand was quite stable at that time.

So, as end customer demand is quite stable, we do not see that this is, let's say a short term event. So, we believe that this is quite a stable development for our second half of the business here.

And then finally sort of related to the question that Ioannis just asked, the nature of cost savings that you're implementing, perhaps it's not possible, but do you have kind of specific examples of an area where you're able to remove costs out of the business that should be sustainable even if input prices, commodity prices rebound consistently into next year, what's an example of a way that you're actually removing cost from the business?

We've always said that 50% of our savings are really the last three years, but on this year it's actually coming from our purchasing initiative and we only account sustainable things. Another point is we have implemented kind of a production system where we use 15 KPIs all across our manufacturing sites and for example, out of that our components technology could save in a three-year period €200 million in just tuning the operations to similar KPIs.

And now we're spreading this learning from this production program into other areas like elevator to really gain similar efficiencies, just to name a few examples out of that.

Just a couple of very quick ones left. The covenant you have in your debt, it's 150%, I mean given that you are not in control of discount rates and assuming that there is still some downside risk on that and associated risk to your equity, do you see that this covenant should be reorganized or renegotiated a little bit here in potentially a difficult situation in the future if the cycle returns again in the industry sector once more?

Now coming to the covenant, I mean this is in our syndicated loan. We have just recently renegotiated it and they extended it for five years and it's based - and you always have to take into account that we're a BB rating.

So it's based on an investment grade documentation and we only have one covenant in it and this is this one. So given our ratings situation this is a pretty strong situation and we couldn't change it and we didn't change it.

So that one is in and it's there to stay for some time.

But you had worried [indiscernible] if the discount were to come down further that could be a risk here?

Last year we had to cope with that one as well and it went even down further. And we went during the year a bit higher.

And driven by a positive cash flow for the second half and positive net income we expect for the second half, we think we can organically improve our situation even on the current level of our - of the pension and the interest rates and cover something in there.

And secondly a quick question on your pensions, I think you remember your guiding roughly at everything being equal [indiscernible] being a reduction of about €150 million per annum, it is right?

Yes, that's okay, fair assumption.

Well, I think with this, ladies and gentlemen, operator, we're coming to the end of our today's conference call. We would like to thank you very much for participating.

Thank you very much also for your very good questions and your active contribution to the call. After this call, of course the team and myself, we're available for you if you have got more questions and also in the course of the next weeks, we will be on the road and at investor conferences and happy also to see you there.

Well, we look forward to staying in touch with you. Wish you a further nice day and look forward to speaking with you again.

Thank you very much. Bye-bye.