thyssenkrupp AG

Claus Ehrenbeck – Head of Investor Relations Heinrich Hiesinger – Chief Executive Officer Guido Kerkhoff – Chief Financial Officer

Seth Rosenfeld – Jefferies Ingo Schachel – Commerzbank Michael Hagmann – HSBC Alessandro Abate – Berenberg Michael Shillaker – Credit Suisse Bastian Synagowitz – Deutsche Bank Sylvain Brunet – Exane BNP Paribas Carsten Riek – UBS Cedar Ekblom – Bank of America Merrill Lynch Marc Gabriel – Bankhaus Lampe

Yes. Thank you very much, operator.

Yes, hello everybody. This is Claus Ehrenbeck speaking from the Investor Relations team of ThyssenKrupp.

Also on behalf of the entire team, I would like to welcome you to our today’s conference call. All the documents for this call are available since 7 a.m.

CET this morning, as always. So as always very early in the morning, we list our numbers.

And before I now hand over to Heinrich and Guido, I would like to make some remarks here. I would like to mention two activities that we are planning for the remainder of the year.

First, is our Capital Market Day for this year. As already said the last time, this event is scheduled for December 8.

It will be held at our new elevator Test Tower in Rottweil, near Stuttgart . And there, we can demonstrate to you our innovative elevator system MULTI, the world’s first elevator that works without ropes and can also move in a horizontal direction.

The Capital Market Day will focus on innovation and technology and, of course, also on elevator. The presentations there will be hosted by our group head of Technology and Innovation, Dr.

Heinrich Hiesinger as well as the management team of elevator and, of course, also Heinrich and Guido will be there. Second, it’s about the International Frankfurt Motor Show in September.

TK, for the first time since many years, will be present there with a booth. We will exhibit our technologies we are offering for the automotive industry across Component Technology, Industrial Solutions and Steel Europe.

The key topics, which we will cover and which we are doing in our activities are in mobilities, autonomous driving, intelligent chassis and also future automotive factory. For those of you who are there anyhow, we are prepared to host you at our booth by Investor Relations, our engineers, and last but not least, by Karsten Kroos, the CEO of that business.

And we also scheduled a guided tour by Karsten Kroos for September 13 from 4:15 p.m. to 5:00 p.m.

and if you would like to attend, please contact Investor Relations. With that, I would like to hand over to Heinrich.

Heinrich, please go ahead.

Yes. Welcome to all of you to our Q3 highlight and call.

Let me start with a statement on our JV discussions with Tata, which probably is in the head of many of you. What we shared very openly with you in our half year call that for us the next important milestone to proceed with those negotiations, our sustainable solution for the pension scheme U.K., Tata need to achieve the regulator and the trustees.

And such an agreement has not achieved until today. But even if you might read such an achievement as an announcement in the media, it will take some time until they can provide us the contractual document and ask to verify because this is a complicated contractual matter.

There is no doubt that although we, as a leadership team of ThyssenKrupp, would prefer a fast solution, but such matter, I think it’s obvious that quality is more important than just achieving a specific time. With that, let me jump onto the Q3 figures.

After nine months, focus at ThyssenKrupp remains firmly on track. Our order intake increased to the highest level in the third quarter as well as after the first nine months since we have started our transformation, the Strategic Way Forward.

Order intake growth is strongly driven by our capital goods businesses. Components Technology reached a new record in Q3.

And Elevator, a new high after nine months, with a book-to-bill above one and sales up on a year-on-year comparison. Order intake and Industrial Solutions almost doubled year-on-year in Q3 and increased by more than 50% of the first nine months, again confirming the strong order momentum, which we can see this business year.

In addition, the consistent implementation of our efficiency and growth initiatives paid off again, driving our adjusted EBIT significantly higher on a year-on-year basis. Temporary earnings shortfall at the Industrial Solutions were more than compensated by the clock-like structured focus at Elevator Technology and a significant margin expansion at Steel Europe.

Earnings after-tax for the continuing operations tripled on a year-on-year basis to EUR268 million, reflecting the improved operating performance, lower special items and the more favorable tax rates. In addition to operating improvement, last week, also included important strategic milestones.

For us, it was quite important that the Brazilian competition authority, CADE, approved the sale of the Brazilian steel mill at CSA to Ternium without restrictions on August 1. The approval will become legally binding after an expiration of a 50 days waiting period.

Furthermore, we are pleased to announce that first test for our MULTI elevator, the world’s first ropeless and sideways moving elevator system for a very innovative planned building in our capital, Berlin. While this is complemented by additional measures initiated our impact program.

It was quite clear to us that our administrative cost of currently around EUR1.2 – EUR1.4 billion throughout our global organizations are too high. Based on the comprehensive benchmarking exercise, we identified the corresponding cost reduction target of EUR400 million over the next three years for this G&A cost.

Furthermore, Peter Feldhaus, the new CEO for Industrial Solution, and his leadership team are accelerating the execution of the transformation program at Industrial Solutions. To ensure that the performance targets are met, cost reduction of EUR300 million are planned, in addition to the measures already launched and announced.

Let me turn to the order intake. The profit of our order intake remains highly encouraging, highlighting structured growth perspective at Components Technology and Elevator Technology.

And what is extremely important, confirming the inflection point at Industrial Solutions. Also in Q3, Components Technology are up year-on-year by 12% on a comparable basis, driven by growth in components for light vehicles and construction equipment and improving demand for truck components.

Also in Q3, Elevator Technology are up year-on-year by 7% on a comparable basis and just year-on-year across all business units, with the most pronounced increase at the Americas driven here by the new installation segment. Monetization business is developing positively in the U.S., and maintenance markets in all major regions are characterized by continuous growth year-on-year in Q3.

In China, new installation units were up year-on-year. New installation is slightly down in lower currency by the fact that price competition remains fierce.

However, market seems to stabilize on a lower level, especially in higher tier cities. Maintenance in China is showing promising market growth, our order intake in Q3 could show a double-digit growth here.

Also in Q3, at Industrial Solutions have almost doubled year-on-year to more than EUR1 billion, really confirming the turnaround in order intake and the very strong project pipeline. Also in Q3, Industrial Solutions included in particular as the main plant are in Bolivia and various orders for planned expansions and modernization as well as a major mining order for shipload and stockyard equipment in North America.

In chemical plant engineering, this is the only area within Industrial Solutions where order intake is still behind schedule. And as a consequence, the business thus faces underutilization, but the pipeline is promising and includes major projects at an advanced stage of negotiation.

Orders at Materials Services are up by almost 10% year-on-year on a comparable basis, reflecting higher price levels. Following recovering in that business, prices started to decline in Q3 at almost all product segments.

However, in recent months, prices have split these products are currently rising again, driven by the increase in raw materials. At Steel Europe, order in Q3 was down year-on-year despite higher prices as a result of lower volumes, reflecting customer destocking, especially at the industry sector.

But the general framework of that business, the real demand in our market remains strong and the same demand for the next quarter is very positive. So that’s where you stand on EBIT adjusted.

This is also accompanied by clear improvement of earnings. EBIT adjusted is significantly higher year-on-year.

Continuing operations are up 29%, with four out of five business areas on or well above prior year levels. EBIT adjusted at the Components business came out flat year-on-year despite higher sales, reflecting mix effect.

Automotive system sales increased almost 30% in Q3 as well as ramp-up cost. Nevertheless, earnings at Components Tech are expected to significantly increase year-on-year in Q4.

Elevator Technology increased adjusted EBIT and margin year-on-year for the 19th quarter in succession, and we expect this to continue in the quarters ahead. Adjusted EBIT at Industrial Solutions were down year-on-year, reflecting lower-margin project milestone as well as partial underutilization.

This was partly offset by positive effect from full consolidation of Atlas Elektronik. We expect this consequential improvement of the earnings run rate in Q4.

Adjusted EBIT at Materials Services was up year-on-year by 39%, reflecting a more favorable price environment as well as sustainable success of performance programs, not least at AST. Q4 is expected to reflect temporarily weaker prices and negative windfalls.

Earnings at Steel Europe came out significantly better quarter-on-quarter as well as year-on-year, reflecting significant margin expansion. Q4 is expected to be down quarter-on-quarter due to higher material costs as well as seasonally higher maintenance and repair expenses.

Nevertheless, Q4 will be significantly up again year-on-year. EBIT adjusted at discontinued operations in Steel Americas benefited from the positive price trend and elimination of regular depreciation charges.

Unexpected free cash flow was clearly negative for the first nine months, reflecting higher volumes in particular, continuing raw materials, market dislocations, which also weighted on cash flow in Q3. Processing of existing orders and a temporary shift in the payment profile in the Industrial Solutions as well as strong growth, especially in the Components Tech.

However, our cash profile will become significantly positive in Q4, benefiting from higher earnings as well as from much improved cash conversion, which will lead to major deleveraging. Cash flow at Industrial Solutions will follow the inflection point in orders and benefit also from a much more favorable billing profile, and thus will turn significantly positive in Q4.

This will also be accompanied by major networking capital releases at the materials businesses. Together with the cash in from closing the sale of CSA, this will bring net debt significantly down and will clearly improve gearing at the end of the fiscal year.

Due to the likely earlier than expected closing of the sale of CSA to Ternium in Q4, ThyssenKrupp Group numbers might not benefit from CSA planned strong September cash flow profile. That is why we now expect free cash before M&A for the group to be negative in the mid to higher three-digit million euro range.

Free cash flow before M&A from discontinued operations might be weaker than originally budgeted, but this would correspond to the higher purchase price of CSA. Hence, it’s neutral for our expected net financial debt and as a pure shift could mean free cash before and from M&A.

As I said, in any case, you will see a major deleveraging in Q4. Coming to the outlook.

Following encouraging structural top line performance at cap goods as well as strong price cost inflation in materials and significant progress in earnings, we reinforced our sales and earnings forecasts for the group in continuing operations. Net income of the group was still including continuing restructuring expense expected to show significant improvement year-on-year if adjusted for the negative earnings impact from the sale of CSA.

This is already visible in much improved reported earnings after-tax from the continuing operations. Free cash flow before M&A for the group is, as explained, now expected negative in the mid to high three-digit million euro range.

The change with our previous outlook is unlikely earlier and expected closing of the sale from CSA and the corresponding shift between free cash before and from M&A. As I said in any case, major deleveraging in Q4.

Looking beyond current fiscal year, we’re confident to show further strong structural earnings improvements driven by the consequence of implementation of our Strategic Way Forward. We’re constantly feeding our revenue pipeline by stepping them up R&D, IT and process and product innovation initiatives as well as by continuously adding performance programs.

This is based on comprehensive plan with well- defined target across all functions and organizational units. There is a lot of homework and improvement potential every day, and thus [indiscernible] on our journey.

Yes. Thank you very much, Guido.

Thank you very much also, Heinrich. Anyway operator, please take over for the Q&A session.

Seth Rosenfeld with Jefferies. I have two questions.

First, on the prospect for a deal with Tata and then secondly moving on to Steel Europe. For a potential deal with Tiffin – with Tata, sorry, there has been some recent press about management exploring Plan B options that might not include Tata, should the pension restructuring not go through.

Can you just give us a sense on your current thought process around how Tata stacks up versus other options that might be on the table? And at what point you would want to move forward with another option with or without Tata if that were feasible?

And then secondly, on Steel Europe, could you give us a bit more color on the outlook for margins going into the back half of the calendar year? I think you mentioned earlier – very quickly earlier on the call that you might see higher raw materials costs in the last quarter.

Can you just walk us through the expectations for especially coking coal, which has been volatile in recent months, and also for your steel contract resets that you might have seen in the last quarter? Thank you.

Let me start with your questions to the JV discussion. First of all, you can only lead a 160,000 Plan E company if you clearly tell the organization what you want, so you can also only work with a Plan E.

This is clearly that we want to achieve that joint venture, because they’re – it has two reasons, which any other options might not provide. It provides synergies beyond any business case.

You can do by yourself or any other options. And secondly, it will start to address the structural problem.

But what clearly, they should not underestimate or believe that we as a board have never our mind to only one option. On the contrary, when we have convinced ourselves, or advisory board, that the JV is the best one, we are clearly also explained to them the other options.

And we as a management board did a regular process each and every year in our strategic process also update as all other options, and this is probably what the people make. One, is that we have a clear decision made what we want to achieve, but secondly as a responsible leadership team that we are always prepared and make us always responsible to look on the full picture and sometimes maybe mix both elements.

On Steel Europe, margins for Q4, as you rightly said, and we wanted to outline raw material costs are again volatile and are increasing. Now on top of that, we have a bit longer-term contracts.

That’s why you saw in Q3, in our case, now already in Q2 improvement and a strong improvement quarter-over-quarter. And we think to a certain degree, it’s going to last.

But on the other hand, we see that raw materials are increasing. So we see margin going down for Q4, but we see a good result overall.

Thank you. Just to follow up on that last point.

Can you give us a sense of how your most recent contracts settled, I guess with reference to the most recent quarter two of margins, assuming that some of your contracts reset in July. Would at least for that portion of your order book be in line with the fiscal Q3 order book or something different?

That’s going to be a bit difficult, not much I can say here. Look, as you know, we have a lot of half-year contracts, we have renegotiated them and we’re – that’s why I said we’re confident going forward, but we see that the raw materials will affect the margin overall.

So there’s not so much more I can really say.

Great. Thank you very much.

Thank you. I have three questions on your Industrial Solutions segment.

First one, really quick on the earnings outlook for the fourth quarter. I think to reach your group EBIT guidance, you don’t need to make EBIT and Industrial Solutions would be a correct interpretation if we reach a guidance that suggests then that you show that Industrial Solutions are going to be positive, but I don’t want to commit to a specific number or do we hope that the margin comes at least back to the level that we saw in the quarters before that, in the 2% to 4% range?

The second question would be on the planets program, and it’s now already more than a year ago that the planets program was launched and, of course, part of it was tracked the progress based on the profit numbers and, of course, that doesn’t look too good right now. Would you say that the planets program has been less effective than you hoped in certain aspect, adjusted the end markets and the timing effect has completely taken away the benefits from tenants?

And on the repositioning management change and so on, in Industrial Solutions more generally, what should we expect going forward? Would it be something like planets announcement, just more press release of higher cost saving ambitions or could we expect that more logical point in time to expect slightly bigger announcements, the new permanent CEO after one or two periods you have enough capital to potentially bolt-on acquisitions there or maybe come up with a new margin target for Industrial Solutions.

What do you think should we expect for the new CEO there, and I guess he has been in office for your strategy functions already for two years, so you probably already know quite well what you might get to?

Let me start, first of all, what was already said before. We clearly expect that the EBIT contribution in Industrial Solutions in Q4 should be better than in Q3.

So we consider really Q3 as a trough in the earnings performance. Now the issue in our planets program is that the planets program as such as presented to you in our capital market in December is well on track, so we’re really from the additional [indiscernible] and tracking planet, we are really fully on track with them, but the baseline is eroding because we did not expect such a high underutilization because in the original planning, we expected that the Chemical business is coming back later in Q2.

And now we have not received those big orders in Q2 and Q3. And therefore, the negative impact of underutilization is significantly larger than we originally expected.

that’s the reason why we clearly now said we cannot wait longer. We need to add in addition to the 1,200 employees, which we have taken out of the organization, we need to be more aggressive in reducing our forces here.

So all that was planned in addition in planet, well on track, proof point enough, but the reference point, which was considered as a baseline was administering the significant higher underutilization as planned. Look, let’s say Peter Feldhaus, as you said correctly, he was head of Strategy and therefore, he was already involved in planets and closing the details.

But I think where we focused now is clearly on bringing back the operational performance, and this is also what you should expect when he made the announcement what is the full, let’s say, frame of the accelerated and enlarged program to bring the earnings back on track again. No major M&A or strategic discussion of this.

Let’s say it will come later but not at the present time.

I didn’t ask for question. Thank you.

Hi, good afternoon. Just three questions.

Heinrich, sometime ago, you spoke about a new business approach to Industrial Solutions, according to which you would have targeted the very similar projects globally, depending. If you take a look at the order intake, the way it’s developing and let’s say the next 12, 24 months, how much out of the potential improvement on Industrial Solutions is expected to come by the small major scale projects going forward?

And what kind of area of the expertise would be benefit from that? The second one, I mean, also related to the digitalization process that you have across your business area, mostly Materials Services and Elevators, if I remember correctly.

If you can give an update, basically where are you heading to in terms of progress, so what kind of outcome you can expect going forward? And the third one is related to your view on the steel factors, the prices for material costs.

I mean, what actually is happening at the moment? Also, there’s been an announcement of another antidumping duty put in place on import of galvanized material from China recently, just today.

How do you see now this kind of cash flow push would boost steel prices, HRC in Europe by another EUR20, EUR30 likely to be announced by the end of the month, early September or later? Thank you very much.

Thank you, Alessandro, for those questions. Let me come back to the structure for orders.

The different style of the portfolio, which the team is trying to telling is reducing the share of large APC orders and really coming back 1/3 services, 1/3 mid-sized orders and 1/3 turnkeys. And I can tell you that the order structure, with the exception of the last operating that you have in Q2, is exactly in this middle segment.

It does not have any order beyond EUR200 million in the other segment, it’s rather more around the EUR20 million, EUR50 million so it goes exactly in the direction, which we have planned, and also the service business is growing. So it’s really working.

Clearly, what is missing and because we cannot change in one year is that we have a similar, and my statement is true for cement and is true for mining, what we are missing right now that we see is similar order intake in chemical area. All the others are exactly going in that direction, as announced by [indiscernible] when he started the program, confirmed by, let’s say, now the new leadership team around Peter Feldhaus, Stefan Gesing and Johan Cnossen.

Now the digitalization process, clearly in public, the most relevant player in our company are elevated material service, but I can tell you it’s relevant for all our businesses. So we have enforced digital project even clearly also in components but also in steel and all other businesses.

Let me give proof points of that front. Clearly, in Elevator, you know that we have provided the service of [indiscernible] we have now connected more than 100,000 of our elevators to this new service platform.

And you also have seen, let’s say, I think the striking example with the HoloLens and we are continuously growing the applications here for HoloLens. In Materials Services, I think the most prominent and visible is our additional phase channel materials for me in Europe, in U.K., Spain, Austria and Germany, and just recently, we have started here a kind of a start-up driven by Materials Services for additive manufacturing or in short 3D printing, because we want to really fully understand – we do not want to build printer, but we really want to understand what value can we provide to our customers if we use design and manufacturing, let’s say, or this additive manufacturing.

In Components Technology, they have taken the responsibility to build out our knowledge for advanced robotics. So they have just opened a lab in our roundhouse steering environment [indiscernible] for advanced robotics.

And the striking thing is that we are now able, this experience made in that lab in less than seven months, to bring these advanced robotics into real production lines. And I could go on with similar example in the other businesses, but just to make sure, this will be also an area, which we’ll provide to you in our Capital Market Day on December 8, the digitalization has relevance for all our businesses, not only for those who are prominent in the press, which is Elevator and Materials Services.

Now clearly, if you look forward in the steel, I think our statement to Q4 was quite clear. It will be slightly bigger than Q3, but it will be better than Q4 a year ago.

Here we have, I think, a meaningful visibility. What we see right now, as explained when I drive the order intake in Materials Services, that we have seen, let’s say, decreasing prices from March until June, but recently, the price for carbon-based steel came back driven by the underlying raw material prices.

And now it’s really – you know that game, the very intensive discussion we have with our customers, let’s say, how can this be reflected, let’s say, in the context going forward? So I ask for your understanding, Alessandro.

You know that this business really better. We have the visibility for three months, we have clearly described the outcome of that three months visibility.

And we will not comment further.

Okay, got it. Just a follow-up on steel, I mean, taking a looking at AST, right, working pretty decently.

I’m receiving conflicting information about the intention of the European Commission. They’re still willing for playing in the stainless steel only with softening in terms of approach and accepting eventual reduction to [indiscernible] How do you see that?

I mean, have you any kind of feedback from the European Commission related to potential disposal disaster to one of your peers in Europe? Thank you.

To make that very clear, and if you look at all our conference call, in none of our guidance we did consider any reaction of the antitrust authority in Europe. We also gave you guidance on the knowledge we have here.

And generally, our statement was also always clear. We are slightly disappointed about the speed and let’s say the relevance of the decision made in the European Antitrust Authority because they – if you compare the decision made in other markets, in U.S.

and other, let’s say, we see a different behavior. But in all statements of our guidance, about margin development, we never include additional decisions made from the European authority.

Yes. And we’re currently focusing on improving further our performance in the asset, which we have done successfully so far, and that’s another positive quarter.

Thank you very much. Well done, again.

Yes. Thank you very much, indeed.

So I have a couple of questions, if I may. Firstly, Guido, just to confirm.

If we take your prior guidance for net debt, and I understand the issue with working capital is similar and Ternium paying more but not getting working capital balance sheet at year-end, but basically, does this mean that when the Ternium, a, can you give us a sense of the cash, the 1.5 plus, whatever it is, in terms of working capital build through the year that you would expect to receive from Ternium? And given that your guidance ex-M&A or including M&A actually hasn’t changed, does that mean that we can comfortably say net debt will be EUR2.5 billion or less at year-end is question number one?

And question number two – and again, I understand your reticence to rush through a deal with Tata, but I guess you guys have clearly been talking for a long, long time and this does seem as though pensions is just the final stumbling block. I also understand you’ve got to get the this through your lawyers and everything else, but what else technically is there to do?

Are you still negotiating in terms of valuation and similar? Has the improved steel market changed the stance of either side in terms of valuation and similar?

And in terms of the time frame, therefore, how long all else equal would you expect to take – to be able to announce a deal more or less once the regulator is okay and once your lawyers are okay with the situation? And third question, Tata’s strategy appears to be very much focusing on core businesses and India.

That suggests to me that they would probably, this is my words, not theirs, but probably like to consider IPO-ing the JV relatively quickly. You’ve always been more reticent and said, look, we’ll bed down the business, we’ll generate synergies and then we’ll see what happens.

And this could take two or three years and also runs the risk of making a similar mistake you made with Duisburg back in 2000, waiting for perfection and then trying to IPO perfection, which doesn’t always work. If Tata basically say to you at the start, look, let’s get on and IPO this.

You don’t need to give me a yes or no concrete, but is this the kind of thing that you would entertain in terms of moving ahead faster with an IPO steel than you perhaps have suggested previously? Thank you.

Mike, let me start on CSA. As you know, we’ve done a transaction where we really are in our last box, so we sold it basically on the financial terms of end of September last year.

So whatever happens therefore changes only sales other than final purchase price and our free cash in the meantime. So therefore, I don’t know whether you expect there something to be significantly above EUR1.5 billion.

We have never stated anything like that. I mean, we see good results that are already more or less owed to Ternium.

On the other hand, some working capital deployments, but we will see where we will be by the end of the day. So if – and if you come to numbers of 2.5 or below, you must have significantly higher numbers in there because I don’t arrive there.

And then you have to see where we paid off some dividends and other stuff and some M&A that you have to take into account as well. So overall, I don’t get to these numbers.

And ForEx is something we have to consider as well. So therefore, stick with a number that we said, it’s a mid to high three digit and see all these effects that are below free cash before M&A.

And therefore, I don’t come to a number like you made it up, but I won’t give you an exact number for where we want to do. So it remains with a free cash guidance and wherever you come up there.

But I don’t get down – as much down as you do. Look, the time frame on the Tata transaction, we don’t want to contribute to all the speculation, what could be, what exactly it is and how much time does any kind of this consideration take us?

And in the negotiation now, the pension issue itself is not only just the pension and how much, how much do they put into it, how does the legal framework look like. All the mathematical computation and all these effects is not easily done, so it needs to be considered carefully and it’s indeed something that takes some time.

And therefore, that’s why I clearly stated, and this is what I did this morning as well, said for us it’s quality before time. And therefore, don’t press us on a time frame.

We won’t give you an exact time frame because it takes as long as it takes, we will do what is needed. And we all know and you can be sure that we would like to get it rather sooner than later.

But nevertheless, if we have to take them for quality, we will do that. So we won’t – we don’t want to disappoint but I don’t want to see too much confidence that people think, oh, look, now pension is out a week later, we should expect an announcement.

It is not like that and that’s why I clearly stated that. But be sure would like to say something sooner – as soon as we can.

So therefore, give us that time because we don’t want to have undue pressure on this one. The same thing core in India, as you said on Tata and when could an IPO be expected.

Let’s first get first thing done, and money in is always good. So don’t expect us to retract.

You said you had a bit of different notion that we will not be open to any kind of other solutions. Again there, it is from our point of view in the board that you do things like that if you consider them at all.

You have to do them at the right time, and I don’t want people to be overly bullish, to complete such a transaction, already take some time and some people are very, very bullish then, and this is what you want to avoid. It doesn’t mean that we are reluctant.

And we also said, on the other hand, what we clearly said in order to really be for the flexibility to decide for the right timing. We are seeking a structure which gives a lot of the value back to our shareholders already on day one.

We have given you some indication. So as you know, as we just said correctly, if you announce an IPO then you’re under pressure from day one and the other might gamble with you.

We want to make a meaningful decision, but we also respect, let’s say, the view of our shareholders. So our idea is that we would like to see a JV structure, which really let’s say values or bring back the value to last extent at the day of closing.

Okay. Can I just go back to the first question, if I may?

Because the prior guidance for free cash flow is pre-M&A, mid-triple digit. So if I look at mid-triple digit cash flow and I add that to the net debt last year of EUR3.5 billion, I get to something around EUR4 billion, then I take that CSA cash as it stands without the lockbox or similar.

So EUR4 billion less EUR1.5 billion gets me to EUR2.5 billion. So where is the big difference between where you may be versus, because that doesn’t stack up with your prior guidance?

What you miss on that one is we have already spent something like about 200 on M&A, smaller M&A activities. We pay dividend.

All that stuff goes out. And ForEx, you always have to take into account.

So with that calculation just from free cash, you don’t get the bridge currently already. So therefore these are factor yet to see, there is quite a difference there.

It doesn’t bring you to EUR2.5 billion.

Okay. So your free cash guidance prior mid-triple digit excluded dividend and M&A payments in the?

Always. It has always been a free cash guidance before M&A.

Exclude dividend and all that stuff, that’s never in free cash flow as we define it, has never been.

Okay. All right, thank you.

Good afternoon, guys. I’ve got three questions left, and the first one is on elevators.

We’ve been quite impressed by the order intake in an environment where your largest market is essentially falling. Do you continue to see that environment of growth to remain stable in the couple of months or quarters?

Or do you see any change in trend? That would be my first question.

And then my second question is on a fixed, which seems to be moving a little bit against you here. How far do you see the currency becoming a translation headwind in the business like Elevators and also Components, just given the appreciation of the euro against the dollar?

And then lastly on Industrial Solutions, which obviously was quite weak. Now forward-looking, can you just let us know whether you’ve turned incrementally more positive or negative when it comes to the overall order pipeline in that business?

Thank you.

Let me just look on the market in Elevator. I have to correct a little bit your assessment because our largest market from our fuel is U.S.

and it’s not falling. As I said, here we had the most positive development in new order intake.

But also in this quarter, we were lucky because we really could hit two or three let’s say large-scale orders, which, let’s say, probably were the success of our strong team. There is still, I think, maintain good momentum also the market favorably is clearly China.

As I said, really are quite happy that we could again grow in the units on the year-on-year comparison, had only a slight reduction. Think of this as reduction in lower currency.

So in let’s say a shrinking, or in this case, flat market, our team is doing quite well. So clearly, I think to have growth, which you could see in Q3, probably depends very much in our capability of having these large orders, but we believe we can keep a very good momentum with book-to-bill rates above one.

On the currency, yes it’s right. The euro is indeed appreciating, so that gives us some headwind.

But always keep in mind on the Elevator business, we’re doing whatever service we’re rendering for getting the revenues. It’s basically in the same currency.

So therefore, it’s rather in effect on the net results, not so much of that we have cross-country, cross-currency effect. So therefore, yes, there is some headwind but that’s going up and down all the time.

So this is something more or less a natural and not so much therefore giving us a headache. It will be more if we had more cross-currency effect from other countries.

On Industrial Solutions, as Heinrich already pointed out, still especially on the chemical side, we’re not so positive the other ones are developing as we expected more positive and much more sound basis in the order intake coming from mid-sized orders, which usually are more stable, so not so much dependency on the big-ticket orders but on the chemicals, and that’s giving us of the headache that we see on the EBIT as well as the underutilization. And on Marine Systems currently, we’re largely working on contracts that have low or hardly any margins.

So that’s the burden on the EBIT. Over time, it’s going to go away.

The order intake we see is supporting what we want to see as a target margin so that we can develop towards that in the future if all that becomes attractive and we’re working on it. But again, it’s a long cyclical business, so it goes step-by-step.

And Marine Systems, for example, these submarines with a low margin will be there for quite some quarters. But with the new contracts coming in more and more, we’re going to work out of that again.

Sorry to interrupt.

It’s really the sequence, which we will see. The team is that, first, we have to bring back the order intake book-to-bill one or higher.

As a consequence, this will turn the cash flow because as long as we have sales higher than the order intake, we always have this negative cash profile. And I think the first five months are quite promising in that direction.

It will take a little longer. Until then, we see the execution of that new orders, which will then beef up again the EBIT profile.

This is the sequence how you will see it.

Thanks for the comment. Just a follow-up again on Elevators.

So clearly, obviously the FX is really more translation rather than transaction impact. But given your last year as exposure, are you growing a bit more concerned?

I think in recent conversations, you seem to be pretty confident to hit the EUR1 billion EBIT target by next year already. And in this environment of weaker U.S.

dollar, are you growing more concerned that, that may become more of a challenge or do you see that really still within reach?

We’ve always given out two targets. We want to grow, but we want to see 15% and we’ll approach that and the margin by 0.5 to 0.7 percentage points per year.

We stick to that and we’re on a good track. So far, 19 quarters in a row, we always improve.

And we’re this quarter again shared the 1.5 was doable. Now the EUR 1 billion is the second thing because we don’t want to just get to this target by shrinking.

Now definitely, if you have some currency headwinds relatively, that might make it a bit longer, but it’s not a major deterioration. So if we continue to improve by 0.5 to 0.7 percentage points towards the 15%, I can live with the currency headwinds.

Thank you. Then, just one more follow-up on Industrial Solutions then.

Within this [indiscernible] of measures, which you’ve launched and which you’re putting through across the business, do you see kind of enough self-help within your control to get the margins back at least towards the lower end of your target margin range?

Absolutely. The only thing is the timing.

Clearly, this is the potential of the business and if you look at the margins, which we’re now getting in, it’s absolutely clear that we have the potential to come back to the lower end of our target margin, but it will take some time, that is the issue. And especially in Chemicals, we now need to seek new order because right now, we are suffering extremely from that underutilization.

And also in luckily in Marine systems, we got in an order by the second quarter. But so far, we have only engineering.

Also here, we need more higher sales contribution to compensate or overcompensate, let’s say, the contract we are executing right now, which are on a lower-margin level. The business has by all means a potential to bring it back.

So although business environment being stable, how much – how long would it roughly take you to get the margin on the quarterly run-rate basis so…

Ask me when we have the final sold in Chemical, because this is the big headache right now. We need to have also this business back in normal condition.

So I cannot give you a qualified answer, which you can expect from me at that point in time.

Okay. Thanks for anticipating all of my questions.

Good afternoon, gentlemen. Just following-up on Industrial Solutions with two quick questions, hopefully.

If you could help us think about the time line for prepayments, number one. And number two, you mentioned underutilization in the – in your earlier comment, could you help us quantify that?

I don’t know how you measure that but the utilization rate if you can. And last one, as we’re talking the about price composition to be included or affected in the final CSA proceeds.

Would it be fair back of the envelope assumption to look at the BCF negative 89 in the last quarter and to assume this would be a good proxy for the working capital effect you would like to be compensated? Thank you.

Look, prepayment time line, I mean, now we have more and more orders coming, so we expect that the prepayments will come if they are all affected and will come in. So already for Q4, as we have given out the guidance as we expect more because so far this year, the prepayments were clearly lower than the payout we had for the contract.

So – and it’s going to build up step-by-step with the contracts now coming in, and especially some of the bigger contracts we still expect. So for Q4, we definitely expect a lot more in prepayment than we’ve seen in Q3 and before.

Look, on the underutilization, to give out grades, and that’s a bit of a difficult issue. So we do see some underutilization, where it is especially on the chemicals where we expect bigger orders to come.

That’s why to a certain degree and we’re expecting underutilization to be ready once the contracts will be there and we will work on them. And so then we will need it.

And as we don’t give a complete display of all the BAs, it will not be that helpful. That’s what we’re working on it, and we clearly say we currently do have some underutilization, which we see on the P&L.

For the compensation, the CSA, that is somewhat a not too bad proxy, that the working capital is reflected in the business cash flow that you see there. There are some other effects there as well, but to use it as a proxy is not so wrong.

Thanks so much.

Thank you very much. Three questions from my side.

The first one is on AST. The AST performed very well compared to the peers, especially when I consider a drop in shipments of about 15% quarter-on-quarter.

What made the success in AST? Did you just have a longer lead time on the alloy element or is it something else?

It would be good if you could elaborate on that. The second question is around the movements in receivables and payables, which surprised me a bit this quarter because most of your net working capital moves actually because of the detrimental movements of receivables and payables.

What caused it and how much of that will we actually see reversing in the last quarter? One word on the potential Tata deal.

It looks like, at least in the German press, that the unions are pushing back quite hard and the Plan E, F or whatever, which they consider is keeping still. How much is that also a component of you being a little bit more cautious on the time line?

Maybe you can say something about this. And last but not least, very easy.

There was previously a slide in the presentation about the outlook guidance per segment, that is no longer available. Any reasons why?

So let me start with the union and AST. The reason why we have that reaction from the union and to be quite honest, to be more precise from the union members only of steel, not from the entire one.

It clearly understand we are now in negotiations for roughly 1.5 years and we cannot present a very specific case on industrial concept and saying, let’s say, so many people are part of a restructuring or efficiency program and this size are really in danger. So that means the unions seen the worse.

And as we always share, what I said in the beginning, our options in the Supervisory Board we have also other members in, they know the options. So if you do not or if you think the worst of a JV because you know nothing but you’re part of the Supervisory Board, you know all the presentation of all other things, then clearly you compare this one.

And this is probably the reason. I can tell you within the company, we have a very constructive thing and we move forward with all the other things on our impact program and others.

So I think sometimes we need to distinct between, let’s say, the understandable reaction in public and the way how we work in the company. So your statement that the reaction of the union has any impact on the time line, I – let’s say, totally disagree with that statement.

It’s really this, let’s say, cautious, let’s say, look on it, do they have a sustainable solution for the pensions, nothing else. Now on AST, I think there are primarily briefing.

We have taken our restructuring plan quite seriously. Remember, what we have accepted that we were blocked from getting into the plan that we were really quite consistent in refusing our workforce and also getting better tariffs.

And so – and this would clearly pays off. Secondly, remember, we also outlined to our customer base that if, let’s say, the conditions remain as they are, we will switch off one of the electrical furnaces.

Our customers understood, and so we could renegotiate prices and we still keep now two of the furnaces running. But we are still ready at all point of time if market will be unfavorable for us to really go back in runoff scenario.

And thirdly, I think what really pays off that we have embedded is key in our Materials Services business. Because their reach into the market, including in customer markets, not only the spot market, is quite beneficial and helps to raise AST.

So it’s not only one specific point. So it’s a full set.

And to be honest, we need to give credit to the leadership team of Materials Service and AST, they have really turned the knobs in the right direction and drive it very consistently.

Yes. Now coming to the point of the receivables and payables, you clearly get both areas with receivables and payables were one of the parts where we thought, but there is no real simple reason for it.

There is not one thing really giving the reason. But indeed, that was one of the reasons why Q3 indeed was negative again.

And as you know, for Q4, we always work hard on that one and we’re very confident, and that’s one of the reasons it makes us very confident that for Q4 we’ll have a significantly strong free cash to bring us back to our guns.

And your question on the IR presentation. While we have given the guidance for the full year for the group and, of course, also for the business areas and our nine months numbers are now available, so it’s not that difficult to calculate what that can mean for Q4.

Well, if we can’t give the guidance here then we, in Components, we expect numbers to be up year-on-year. The same is true for the Elevator business.

Normally, the strongest quarter for Elevator is Q4. And for Industrial Solutions, there will be a strong improvement quarter-on-quarter.

And also year-on-year, the numbers would look better. If we look at the Materials businesses, we already discussed steel.

So steel will clearly do better year-over-year. Quarter-on-quarter, we have to consider some seasonality and maybe some effects from raw material prices.

And for Materials Services quarter-on-quarter, we need to consider the effects from seasonality, so it will look very similar to Q3, probably [indiscernible] is not quite as good as Q3. So that’s the guidance for Q4.

Perfect, thank you.

Thanks very much. One question from me, gentleman.

Can you just talk about the cash flow in Component Technology? It’s a business where we’ve seen some healthy earnings, but cash flow performance or cash generation continues to be negative.

I know that there’s been some investments in that business over the last few years in terms of developing new products and providing solutions to customers, et cetera. But can we just talk about where we are in the CapEx profile in that business and when we should expect to see positive business cash flow generated on a sort of sustaining basis?

Thank you.

Look, you have already put out the major effect. We have some ramp-up of new facilities where the production especially with the strong steel contracts we signed where we have to ramp it up and therefore the cash, so that is negative.

And due to the strong volume increase that we’ve seen, we have on the working capital side indeed increases as well. And these two things, so rather the growth and the technology development are bringing it currently back to negative numbers.

We have seen the last year slightly positive, and we think that’s going to continue going forward and will make it to free cash positive. So it’s driven by these two things.

But indeed, it’s good reasons looking forward that they are slightly negative.

Would you expect to be free cash positive for the full year in FY 2017 or do you think that, that’s more of a FY 2018 story?

It’s a 2018 story. And for 2017, let’s wait and see where we will finally come out.

Okay, perfect. Thank you very much.

Yes, good afternoon. Just one question left for my side.

Do you see any weakness from the automotive industry in the recent weeks due to the diesel scandal?

No, not at all from the diesel scandal. If you look on the markets, we have a very solid market in Europe.

We still see around about 3% growth in China. Clearly, we see a softening market for Las Vegas in U.S., but this is not driven by the diesel scandal.

For us, remember, we clearly said we serve both engines, diesel and gasoline. So that means if the customer would shift or our customers’ OEMs would shift from diesel to gasoline, probably, the impact of our business will be minor as we serve both combustions.

So we do not see any impact for the mid to short term. Clearly, what we need to watch carefully whether the discussions about dieselgate might have an impact for the mid to long-term development of internal combustion engine.

But until today, let’s say, no negative impact on our business driven out of that.

And always keep in mind, out of our Components revenues, just 20% is drivetrain related. The rest is chassis and industrial.

So whatever happens to the combustion engine, it will only affect 20% of the Components.

Yes, because for steering and damping it does not matter whether it is an internal combustion engine or electric automobile.

Okay. Thank you very much.

Okay. I think with that question, we have come to the end of our today’s conference call.

Thank you very much out there for participating and for actively contributing. Also many thanks to Heinrich and Guido for being available.

Well, as we look forward to being in touch with you going forward, we will be on the road shortly and we will also be at conferences in September. As mentioned, we will be on the Frankfurt Motor Show available for you, and we look forward to staying in contact with you.

Thank you very much, and bye-bye. Speak to you next time.