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Executives

Claus Ehrenbeck - IR

Heinrich Hiesinger - CEO

Guido Kerkhoff - CFO

Analysts

Mick Shillaker - Credit Suisse

Alessandro Abate - JPMorgan

Ingo Schachel - Commerzbank

Bastian Synagowitz - Deutsche Bank

Carsten Riek - UBS

Neil Sampat - Nomura

Jeff Largey - Macquarie

Rochus Brauneisen - Kepler Cheuvreux

Sylvain Brunet - BNP Paribas

Alexander Hauenstein - MainFirst Bank

ThyssenKrupp AG (OTC:TYEKY) F1Q 2014 Earnings Conference Call February 14, 2014 8:00 AM ET

Operator

Thank you for standing by and welcome to ThyssenKrupp’s Q1 Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions]. I must advice you, the call is being recorded, Friday, February 14, 2014.

I would now like to turn the conference over to your first speaker today, Claus Ehrenbeck. Please go ahead, sir.

Claus Ehrenbeck

Thank you very much, Steve. Yes, hi, hello everybody. This is Claus Ehrenbeck speaking from the IR team. Also on behalf of the entire team, I would like to welcome you to our today’s conference call on our Q1 financial results. Before we start with the presentations, brief from my side. As always you can find all the relevant documents for this call on the IR section on our website and I would like now to hand over to the speakers today. As always we have Heinrich Hiesinger and Guido Kerkhoff for the presentations. Heinrich, the floor is yours.

Heinrich Hiesinger

Yes. Thank you very much and warm welcome to all of you to our Q1 conference call. I think the overall framework for today is really that we have met or exceeded all financial targets which we have give outlook for Q1. In more details, EBITDA adjusted is more than doubled on the year-on-year basis and very positively all capital goods business contributed both on a year-on-year and quarter-on-quarter basis and we saw a significant improvement on Steel Americas with moved the margin up also on group level.

Net debt decreased on a quarter-on-quarter basis from 5 billion on year end to 4.5 billion. Now, it’s really moved up or improved our gearing 64 percentage points to 136% right now from 200% at year end. We can also report some good progress in further de-risking with our company as we got nearly all approvals required for the loan swap against the assets of VDM and AST, a transaction as we said last time, definitely not strategically but it will cut all financial links with other Outokumpu and will secure value for our company ThyssenKrupp.

Furthermore, we have received all regulatory approvals for the sale of Steel U.S.A, a transaction that will bring in cash round about EUR1.2 billion and has in addition a valuable long term slab supply agreement for our steel plant in Brazil and as you have seen on the improvement on our Steel Americas, we continued while the sales process is running on significant operational performance improvement, which was one major driver that the EBITDA per even point could be reached in Q1.

What you can really see in the order intake that our spreadsheet of increasing exposure to our attractive capital good business really is the right approach and it’s really confirmed by the strong top line improvement, we really could see a gross in new orders up 12% on a year-on-year basis with a book-to-bill ratio of 1.3 and we can report a new record level at Elevator Technology and also quarter one of prior year in our industrial solution business was already high. We could confirm this higher value by a big ticket submarine order at Marine Systems. So given this could start in the fiscal year, we reiterate and confirm our expectations for the full year which should show a significant improvement in earnings and cash flow.

So our targets in detail, for us it’s obvious that we are still working in Q1 and according to our assessment also going forward in a highly competitive business environment. So if we want to achieve our cash and profit targets, our impact growth remains the major lever. So, we are targeting $850 million cost reductions in the full business year and given the savings of around $200 million in Q1, we are well on track to achieve these targets.

Most important is that these savings can be reserved [ph] in or can be seen in our earnings and our cash flow performance. We clearly had a good start here. Our EBITDA adjusted is up on year-on-year basis by 130% and if we make it comparable excluding divestments and foreign exchange account, we are even up by 150% and we have positive contribution from 5PA’s [ph] and also Steel America made a tremendous improvement and reached EBITDA breakeven. Our free cash flow, before positive effects from divestments came out at minus 85 million this is well ahead of the prior year quarter and also and here we need to be very open, some 300 million better than originally expected in guided. This was really a result of earlier than expected customer prepayments and it will be a [indiscernible] for Q2.

On top of that successful 10% capital increase which we executed in December brought on net down to 4.5 billion and we consider the successful placement of the capital increase as a strong signal that the market players believe in our long term strategy and trust that we have the executing capabilities to transform ThyssenKrupp into a diversified industry industrial.

Let’s come to the order intake. As I said what we have seen in Q1 and we believe will remain for the entire business year is quite a challenging market environment which continues with intense price pressure and competition particularly in our material business. So our capital goods business was once again driving the order growth. Overall group orders came to 10.7 billion, which was up 18% on a quarter-on-quarter basis, up 6% on a year-on-year basis. If we make it comparable then we are up 10% on a year-on-year basis.

Component technology was seasonally slightly dull on a quarter-on-quarter basis, but - and this is a very good signal; up 12% on a year-on-year basis if you make it comparable. And this is really driven by some first signs of recovery in the European auto industry and we also see some recovery on the Chinese wind energy components.

Our elevator technology could really lift up orders to new record level. On a comparable basis orders are up, on a year-on-year basis by 16% and it could really take advantage of strong new installation business in the U.S., in Russia, and especially in China and we could also see an ongoing growth in our maintenance business.

As for our industrial solution business, orders on a comparable basis were up by 18% compared to prior year. And this is really significantly above the already higher prior level and here you could really benefit from a big ticket order at Marine Systems related to two submarines for the Singaporean Navy. We also see a continuous good momentum for our cement plants, very much driven by the infrastructure growth in Asia.

As other players on the market, we see some weaker environment in new installation business in mining but we caution this some projects on our material enhancing systems and a growing service and maintenance business. And overall the order backlog in our industrial solution business reached a value of $15.5 billion.

At our materials businesses we saw a relatively robust volume development, but again this was accompanied by fierce price competition and nevertheless in such an environment if you look on the overall order our material service business was up on a year-on-year basis by 6% and Steel Europe up 1% on a year-on-year basis.

Orders at Steel Americas showed a very positive price mix and volume effect as we have overcome the delivery constraints which were a consequence of the interruption of blast furnace number II last business years. So on a quarter-on-quarter basis orders were up by 24% and the very good story is that we have already 20% of those orders from external select customers.

It’s more important that volume is a contribution to the steel EBIT. And also here it is pays off, that we have a very strong focus on our capital good business because they did really support the group earnings, in addition to the improvement in Steel America. Overall as mentioned before, EBITDA adjusted came out at 247, reflecting significantly reduced losses at Steel Americas and a year-on-year improvement in all our capital goods business. In component technology both EBIT and margin improved. This was really supported by the restructuring and efficiency measures, let’s say implemented a year ago.

In our Elevator business, on a year-on-year basis both EBIT and margin improved; as efficiency and restructuring efforts gained traction and there was especially, again a significant margin improvement in China, a growing market, and in Spain, a very flat market.

Industrial solutions; EBIT adjusted year-on-year up 24% to 173. This is well in line with our full-year indication given on the capital market in December. The year-on-year improvement really reflect billing related higher earnings at Marine Systems, higher contributions from our plant engineering business, and this could really overcompensate the slightly decreased earnings at system engineering.

However we need to accept the fact that despite the solid EBITDA adjusted performance in Q1, our income after tax remained negative. And this is driven by the elimination of the OTK, auto combo exposure which led to a negative evaluation of adjustment which we highlighted already to you on our year-end closing in November.

The negative adjustment accumulated to an amount of 276 million, and as I said this is related to our shares with OTK, and there our impact in the financial line on continued operations. This was largely but not fully cautioned by provisions that could be released as the Inoxum to share negative financial consequences under merger control requirements ceases to apply.

The release of the provision shows up as positive special items at the discontinued line. So we do understand that our P&L is not easy to read and understand for this quarter. So excluding those effects and the net effect is around about 90 million. So we would have had a positive net count in our first quarter of automotive business. Very clear for us, after we have achieved the free cash flow turnaround last business years our target remains unchanged that we come closer to the net income around breakeven.

So our Q1 result as well as our Q2 guidance which Guido will be highlight -- the Q1 is really well developing with our full year outlook and that’s the reason why we confirm it. So coming back we said EBIT adjusted for the full year remains unchanged at around 1 billion. We continue to expect that sales in the current fiscal year should grow by a mid-single digit percentage rate. We also expected unchanged, the EBIT adjustment improvement to come from growth in our highly profitable capital good business but most important from our group wide efforts to enhance performance by the impact program which should accumulate in 850 million savings.

The elevator technology in particular will further improved its earnings and margins as a next step towards the 15%. We will also see earnings continue to improve in our Industrial Solution business and with a restructuring and some market opportunities given for component technologies we also expect some upside here. Despite continuing strong competition we also expect within our material business that they deliver higher efficiency gain, especially through the best in class program started in Steel Europe and we also expect that the operating improvements goes on and that we will see significant lower losses at Steel America. I think this prediction is now much more reliable and trustful after we have these significant improvements in Q1. Also our guidance in the free cash flow for Q2 will show a significant narrative. We confirm our full year outlook that before divestment and settlement payments, we expect free cash flow around breakevens and as one lever to do so we will control CapEx and we’ll limit it to a maximum level of 1.3 billion.

With that I would like to hand over to Guido.

Guido Kerkhoff

So, I will come then to more details on the business areas and the breakdown. We delivered on our targets in Q1; EBIT adjusted at 247 more than doubled this prior year quarter and all business areas but Steel America generated positive contributions, while Steel America’s losses were reduced by more than 100 million to an EBTIDA breakeven and all capital goods business areas and group could improve margins year-on-year as well as quarter-on-quarter.

Coming to our materials related business, material services could keep earnings contributions close to prior year level and the materials environment characterized by fierce price competition. This reflects strict cost management as well as effective sales initiatives with shipment of stock year-on-year up by 9% to more than 1.3 million ton. Quarter-on-quarter lower EBIT adjusted is explained by the major price cost increase as well as in particular by seasonally low volumes quarter-on-quarter down 8%.

At Steel Europe EBIT was broadly in line with prior year contributions, in particular when also adjusted for the Tailored Blanks divestment we still had in our figures last year. Quarter-on-quarter similar material services lower EBIT contributions mainly explained by lower shipments, 9% up quarter-on-quarter average selling prices largely stable down 2%. At Steel Americas as mentioned we could reduce loss year-on-year and quarter-on-quarter by more than 100 million where we have seen operational improvements as well as positive volume and ForEx effects and stronger U.S. prices which brought Steel Americas to EBITDA breakeven.

Quarter-on-quarter equity increased by 755 million to now 3.3 billion. This is mainly explained by our capital increase to 10% capital increase executed on December 3rd bringing the equity ratio now up to 9.2% and the gearing down to 136%. Other factors influencing the equity as a net effect of minus 124 including the net loss reflecting as mentioned the negative one-offs, we couldn’t release already in last year figures we would have liked to but we could and negative ForEx effect which was the biggest part of the negative equity change. Very clear as mentioned, while having achieved the free cash flow turnaround in 2012-13 the target for the fiscal ’13-’14 remains unchanged to improve net income towards breakeven and we were not far away this quarter without the outlook [ph] we’d made it.

The gearing will further benefit from the cash in at the closing of the sale of Steel U.S.A, which will bring us a step closer to our gearing target to achieve below 100%. Year-on-year business cash flow and free cash flow improved in Q1 by roughly 200 million based on higher earnings and temporarily lower CapEx and came in overall better than expected and guided, reflecting early customer prepayment and prepayments in particular industrial solutions that were originally expected for Q2 and this was in effect of around 300 million and I will come to that. This is a number that will be missing in Q2. So therefore the free cash flow development looks very good. It was strong but it was in line operationally with our expectations and guidance and the 300 million is indeed to ship between Q1 and Q2, which will be reflected in our Q2 figures. I will come to that when I come to the guidance for Q2.

Overall, effects from net working capital were limited. We have significant investments and high inventories of 600 million, which is reflecting a ramp up in the U.S.A Steel they had to recover on the blast furnace outage last year. So they had to ramp up volumes and slab again. And 80% of that increase of the 600 million were in materials businesses where we saw stronger volumes overall and a normal restocking after our year end. So they were compensated this time by higher accounts payable and lower accounts receivable to be offset. So overall net working capital was not having a huge effect.

Going forward, we will see that we have with organic growth overall, a slight increase in our stocks that we have to provide for in line with the business development. Having moved away overall from the disproportionate year end optimization since end of 2011, the volatility of our net working capital remains limited and reflects the underlying business operations and performance [ph]. Quarter-on-quarter working capital was virtually flat, high inventory as I said cushioned by early customer payments and prepayments at IS. In Q2 we expect somewhat higher net working capital as the advanced payments at IS will be lower. Inventories and sub-suppliers will be paid to a certain degree. Accounts receivable will go up with higher sales and we need to prepare for realigning of our blast furnace volume to heat induced [indiscernible]. So we have to prepare for that by building up some stocks for the time where it will be offline.

In Q2 therefore our impact program will continue to drive our sequential improvements of our EBIT adjusted. Better than expected free cash flow in Q1 nevertheless leaves us with the challenges I already mentioned for Q2. Free cash before divest and Deutsche Bank settlement payment is therefore expected to be quarter-on-quarter temporarily more negative, given the 300 million early in customer prepayments in Q1 that we had in our plan for Q2. Quarter-on-quarter we will have 200 million of high interest payments. We usually have in our second quarter the biggest amount of interest payments for the group. And we will have some lower prepayments and milestone payments in Q2 and we have to prepare for the realigning of Schwelgern No. 2 blast furnace. So therefore overall our guidance is together mid three digit million negative free cash flow in the second quarter.

And even if you will compare H1 prior year to this year, because of these are net working capital effects we have, because of the realigning and the growth in our underlying sales, we might be a bit worse than previous year figure. Nevertheless this will not change full year outlook, but just to be prepared Q2 will be negative there mid three digit million. Full year improvement therefore, the target will remain to be breakeven but it will definitely come out more of the second half of the year [Audio Gap] but the target remains unchanged here. Earnings and margins in our capital goods businesses should further improve in Q2 compared to the prior year quarter at CT and at ET, should be stable at industrial solutions. Material services in Steel Europe we expect quarter-on-quarter higher contributions, reflecting especially higher shipments as well as efficiency gains.

At Steel Americas, we expect quarter-on-quarter stable performance with our few men in Brazil already having well loaded order book extending well into the financial year with more than 20% outside orders already not, Alabama. So we’re doing good progress here. So overall we’ve made important progress in de-risking the group and improving our performance ambition across the entire organization. We have once again delivered on our operational milestones in Q1 and we expect further sequential earnings improvements in Q2. We’re once again confirmed our full year targets and expect a further significant improvement to our free cash flow towards breakeven before divest Deutsche Bank settlement payments. We expect to significantly improve our EBITD adjusted to around 1 billion, mainly contributing from our 850 million additional efficiency gains We expect a further significant improvement over our net income towards breakeven and we expect the divestment of the Alabama plan to further significantly reduce our net financial debt and gearing.

So with all that we’re still away from acceptable and targeted level. But impact is really having an impact to our bottom line. The trend seems to be right and the roadmap is clear. The minimum requirements and aspiration levels for all our business areas are well defined and the new leadership teams across all covenants and management levels are well aligned and committed but this still a lot homework and improvement potential at every [indiscernible]. Well that’s I think clearly the upside for ThyssenKrupp.

Claus Ehrenbeck

Good. Yes Guido, Heinrich thank you very much for the presentations. So we can now go over for to the Q&A sessions. And for that operator, please take over.

Question-And-Answer Session

Operator

Thank you very much. [Operator Instructions] The first question we have today comes from the line of Mick Shillaker from Credit Suisse. Please ask your question.

Mick Shillaker - Credit Suisse

Yes. Good afternoon. I’ve got two questions, if I may. The first one on CSA, could you just dig into a little bit more detail because I think clearly the Americas as a whole is improved beyond expectations. Obviously Alabama is a little less relevant given where it’s going, but could you talk a little bit more about CSA in terms of what is currency? What is just a general ramp up in improvement of efficiency? What is market in terms of -- and I think you’re still guiding this to be breakeven EBITDA two years out, which probably seems a little bit cautious where you are at the moment. So give us your thought process on that if you can.

Second question, just in terms of -- actually we’ve got a lot of sort of turmoil in emerging market currencies at the moment and I think lot of people scratching their heads as to what this actually means. Are you picking up in any of the areas where you do have people on the ground? Are you picking up any signs that you’re seeing actually underlying demand, weakness in any of your earlier cycle businesses, potentially in any of the emerging markets? Thanks very much.

Guido Kerkhoff

Mike, let me start with CSA. What was happening there compared to prior year and previous quarters. We do see indeed operationally improvements. The last quarter has been on a stable operation. We didn’t have any defaults on fuel rate or a major setback. So, overall our fuel rate is moving in two directions, where you see it on other markets and the PCI rate is more stable and a three digit figure in both blast furnaces and improving. So we really do see that they are operationally improving. On the other hand the market was helping, which was clear. Prices went up and the margin between American or U.S. steel prices and the world market iron ore price was supportive for that one and we could increase the qualities and the levels we sold in Alabama.

And this is something that will help us even if the deal with Alabama will be through. As you know, we will ship to Alabama on an overall [ph] minus basis. And so therefore if the U.S. market will continue to develop nicely, we will get our share for that in CSA with the 2 million tons. So it was not just ForEx and some tailwinds. And the ForEx was coming down a level that is more reasonable now. The Brazilian real against dollar and against euro was developing into regions which regarding power price, apparently it was ridiculous. So, it came down. That was helpful. We stay with our guidance that for ’14, ’15 we want to be breakeven. We got a good quarter. We were EBITDA breakeven with the Americas now. But now let’s continue and hopefully we see some other good quarters coming but we will continue to work operationally on the asset and then see and take it how it comes.

Heinrich Hiesinger

I think one positive story here which I would like to add, in the last call we got lot of questions, what volume do you need to really keep both blast furnace into operation and my statement we need to 3.4 million to 3.5 million tons and today we have a strong confidence that we have really secured enough orders in local markets in addition to the 2 million which we have agreed to consortium to at least minimum achieve that level.

Now you asked about the underlying demand in some of the emerging markets. We do not see any let say, consequences of the foreign exchange turmoil term which we have seen in emerging markets. On the contrary the momentum in China and others are moving up. We see only one market where we see a reduction in customer demand which is Brazil both in automotive and infrastructure but we do not relate this to any financial turmoil. We relate this to let say fact that now the infrastructure boom for the soccer world championships comes to an end naturally because championship will run in summer and secondly, we also see some softening here in automotive. So, here also demand in all the automotive component, which we probably relate a little bit to the uncertainty given in Brazil by the fact that we will have elections in second half of the year.

So in our let’s say going forward, all emerging markets on tracks with gross momentum, -- of let’s say more flatten to weaker situation for Brazil, which we believe will come back next year.

Mick Shillaker - Credit Suisse

Sorry, could you also just touch very quickly on European steel as well, because Steel Europe is still not performing particularly well and it feels like there is no real traction in the market. Metalis [ph] tried to put up prices but it is questionable whether those are sticking at all, maybe a little bit. So can you just give us a sort of brief outlook in terms of what you’re thinking? I saw this morning you saying the demand is better but how much better is it?

Guido Kerkhoff

Not significantly better. We saw a very slight uptick in the volume in tons but the pickup was by far not good enough, not at all to really bring a positive momentum into the pricing. On the contrary this was the reason why I stated that the fierce competition, let’s say on the price side in European steel remains affect and that’s also, let’s say one of the reasons, the major reason is that Tailored Blanks is not anymore in, why we could only deliver 19 million EBIT adjusted in our Steel Europe business. So no positive uptick. There is a lot of talks that it might come back. We haven’t seen it so far. But here also, we do also not see the negative. We trust, unfortunately, we have to move on as it is.

Operator

Thank you very much. The next question we have today comes from the line of Alessandro Abate from JPMorgan. Please ask your question.

Alessandro Abate - JPMorgan

Just have a few question. Just going back to Steel Americas, would it be possible to have a little bit more granularities on the contribution improvement results coming from U.S. Steel prices, how utilization rates are covered and efficiency improvement in CSA? Then the second one, if you can give a little bit of breakdown of the 200 million savings across your divisions, and if you also can clarify a bit more what’s the contribution from the new plants in component technology has been in Q1 2013, 2014 or if there was any? I mean, how much do you expect in terms of EBIT contribution for the rest of the year? Thank you.

Guido Kerkhoff

Thanks Alessandro. Let’s come down to the split and break down what we’ve seen what was helpful on CSA and USA. Clearly what we see is that the market and that the spread was increasing between the steel market process and iron ore was helping, but the operational figures and operational performance was the second biggest contributor here, especially coming from Brazil but the operational cost in producing the slab were reduced. So therefore this all was supporting the improvement compared to the prior year was not just the market. ForEx was contributing as a third player, but that was not so important, as improvement compared to the other two.

We’ve seen -- therefore as the current ratio and the current price as we’re selling between the two is different one that we’ll finally have after the Alabama sale. A bit more of this contribution in the U.S. than in CSA, so therefore the split was bit changed. And always keep in mind in the U.S. as a disposal group; we do not have any depreciation in these figures. As I come to the 200, where we have a breakdown of the business areas, we do see by the end of the day that the breakdown of the business areas is more or less in line with what we’ve seen so far. So no big change widely spread throughout the business area, a smaller portion at material services.

Heinrich Hiesinger

And maybe to give you kind of an indication about the utilization rate right now, we have grown about 70 in U.S.A, I mean, all about 80 ton there in Brazil.

Alessandro Abate - JPMorgan

What about the contribution of new plants in the component technology?

Heinrich Hiesinger

The contribution of the new plant is not the major driver because the ramp up takes pretty long. I think, this is a nature of automotive business and we definitely are now in a position that we deliver the first product of that let’s say plant to our customers, but you know the process that release of the SoP takes by. So we’re on plan with our plans, but the contribution both in volume and also consequently in EBIT margin is I think not significant.

Guido Kerkhoff

It’s still below our average margin.

Operator

Thank you very much. The next question we have today comes from the line of Ingo Schachel from Commerzbank. Please ask you question.

Ingo Schachel - Commerzbank

I have three questions. The first one is regarding industrial solutions. Your guidance suggests more or less stable earnings that sounds pretty straightforward, but it probably isn’t. Can you provide a bit more granularity how you see the different business units there in the second half compared to the first half? Especially can you confirm that earnings in Marine Systems and Mining will be notably low on the second half than on the first half that the other units shall compensate that or are you seeing a more positive environment for Marine and Mining in the second half?

The second question would be regarding the European Commission decision, clearance for you to buy Turney [ph]. The EC press release mentioned that you had given certain assurances to develop the asset. Can you comment a bit on the nature of these assurances and whether they in anyway limit your ability from a legal perspective to sell or restructure the asset? And lastly a short question on Elevator. You attributed the 42 million restructuring charges mainly to France. As far as the cornerstones of the French restructuring program are publically known, I have the impression that the scope of the restructuring France would be a bit slower, expecting maybe 200 employees or so. So the restructuring charge looks pretty big. Can you comment a bit on what the 42 million actually for? Whether the France was bigger than discussed from the press at the end of last year or whether you had significant restructuring steps also in other countries than France?

Heinrich Hiesinger

Yes, let me start on Industrial Solutions where we have the state of earnings from Marine and for the Mining business overall we’re flat throughout the year. We currently do see slightly increasing. There’s some good order intakes in marine as you saw. So we have a pretty heavy load over that and some efficiency gains we should get out of these factories as well. So therefore, yes, I’m slightly positive. AST, we’re still in the process. We got the final approval now from the European commission. So we want to take it over and we want to see where we can take it. As we’ve announced we will have it run by our management team from material services, as we clearly do see that the major part in this one is we need to find the right customer access and get a strong distribution channel, as it will be out of the Outokumpu group. This will be the first thing we will look into and we want to that. Whatever we want to do later on, we will see, it as a tactical move. It was no strategic move as we clearly said. So therefore you can be aware that we want to keep our flexibility as good as we can get it. But nothing more we can say to the current status. On the Elevator—

Guido Kerkhoff

Yes, on the elevator business you’ve mentioned the 42 million restructuring cost. I think little more than 20 are related to France. Others are related to other countries in Europe because I think there is a channel of situation in Europe that the markets are weak and I think here our Elevator team has a very good track record that they to adjust immediately when they see that the market is weakening.

Ingo Schachel - Commerzbank

Okay very quick follow-up question on the mining related method. We saw the pretty good order intake that you had. That’s it’s regarding the pricing quality. You had also seen no deterioration compared to previous auto wins in similar markets and magnitudes.

Heinrich Hiesinger

There’s a bit of pressure on it, which is clear as the volumes going down overall. Therefore we want to overcome that by shifting to offer more efficiency to our customers.

Operator

Thank you very much. The next question we have today comes from the line of Bastian Synagowitz from Deutsche Bank. Please ask your question.

Bastian Synagowitz - Deutsche Bank

I’ve got a couple of questions. Firstly on Steel Americas, there’s clearly a strong improvement here with the main positives in the numbers today. Could you give us any color on how the Steel Americas results would have looked like in the new structure, i.e. if you do not only separate CSA from Alabama but also basically use approximation of the higher trends of prices and then slightly lower volumes? I’m sure you did that exercise. And then secondly, on order intake in industrial solutions; if we strip out Marines which has been very strong, it seems like the book-to-bill ratio in plant has been again roughly around one, based however on the relatively low sales number. I know this is a business where orders can be pretty bulky. So could you please give us a bit of color on the product pipeline and the outlook for orders in the next quarters?

Guido Kerkhoff

No, we have not made up the full calculations of how it looks like, CSA with a new processing, and how would that look like now. Let us clearly say here that the pricing formula we will have what we’ll call [ph] minus will enable us and will give us the opportunity to participate in a good development of the U.S. market overall so that we can get a fair share of that development for our Brazilian Mill with 2 million tons. So overall, compared to the current pricing that will be a slight advantage that we will have; but our current reporting as per Alabama, we don’t have depreciation included as it is disposal group. While on the other side in CSA we have it including depreciation. It does not really make sense to compare all these figures. Let’s now first close the deal and then we’ll come up with the appropriate figures, going forward, and we expect that Brazil will continue to improve the performance. This is at least we currently do see. Yes, on the book-to-bill.

Heinrich Hiesinger

You asked specifically for the industrial solutions business. We do expect definitely an overall growth. But your assessment is right. The major portion of it is really driven by the big-ticket order of Marine Systems. What we see on our process technology side, on our chemical plants is that we can stay on high-level. You need to consider that last year we had a significant step up with the large fertilizer orders. Clearly here the momentum is let’s say flattening out, not going down, but flattening. So we want to keep this level. On the mining side, we see a slight reduction on new installations but here we believe we can cover it or even slightly overcompensate it. This is still an ongoing dynamic in our cement and service business.

Bastian Synagowitz - Deutsche Bank

Just a follow-up briefly again on Steel Americas and working capital, what was the working capital change, and I imagine there must have been some, given the volume ramp up. So if we strip out working capital out of the operating cash flow, how much would that have been?

Guido Kerkhoff

That was a three digit number. So a hundred something.

Bastian Synagowitz - Deutsche Bank

Which means then on an underlying basis, netting out working capital, your FFO has been almost redeemed.

Guido Kerkhoff

Not too far away from that, yes.

Operator

The next question today we have comes from the line of Carsten Riek from UBS. Please ask your question.

Carsten Riek - UBS

The first one is on elevator. We have seen another restructuring charge but the margins are still around 11%. You mentioned [indiscernible] that you expect a margin improvement. How big could that be and how quickly could we see it? That’s a first one. Second one is on your impact, 2015 program. You mentioned in your Interim Report it affected your first quarter EBIT by EUR200 million. Can I get a breakdown on the different divisions, because I just want to figure out where the achievements were, because if I strip that out of the EBIT, the Group achieved only EUR50 million, that it seems to be a little low.

The third question I have is on Steel inventory in Europe, because if I look at your production number, it has had a big jump here and we are now on a production to shipment ratio of about 82%, which looks to me very, very low, which looks to me like inventory buildup and given your statements, about the EU Steel industry as such, it sounds to me a bit dangerous having that much inventory on your books. Could you say something about and also related to it, given the big jump of 20% in your production, but if I look at profitability in Steel Europe it was pretty much still subdued on the level of last year. Where can we actually see the improvement here from the performance, projects you have in place. Thank you very much.

Heinrich Hiesinger

Let me just start with the elevator, I think the elevator right now, we have an year on year improvement of 0.4% and definitely and this is what they presented in December on our capital market in London. We expect them on a full year basis to add the next lever. So now after they have delivered the 11% for the full last year, we said what we expect from the team is an improvement per year between 0.5% to 0.8% a year, it depends a little bit on the market environment but we really see a positive momentum and just for background information, just the last two days, the team around [indiscernible] have collected the entire team on a global elevator, let’s say leadership to really make sure that everybody has understood the details, the content measures to really move it up.

On the steel side, you’re right we’re building up, but this was already highlighted by Guido. We plan to really realign our last blast furnace somewhere in summer. The detailed timing is still on decision. This is the biggest blast furnace. In order to prepare for that time, we are really producing now on stock and this is really what you see in our network and cable going forward.

Guido Kerkhoff

And let me come to your question on the EUR200 million impact that you’ve seen. As you know we have always clearly said that we expect impact to hit the bottom line by 30% to 50% maximum because competition is not sleeping. So you have to pass on your efficiency targets to competition. So the calculation that we just did, 47 out of impact is not so correct but what you clearly see there as well is that efficiency is what it makes. So we have to move faster than our competition and we have to catch up to get profitability to good levels and that’s where we’re heading for and what we have done last year and this year again successfully. The breakdown of the business areas is like we target, it’s for steel around 27% of our impact targets. Steel America’s 13%, material services 12%, elevator 14%, components 14% and industrial 15%. So it’s largely split across all business areas more or less the same size. Steel, double of the portion as it is, double is big. So I think an equal distribution.

Carsten Riek - UBS

Perfect, just very quickly on Steel Americas, you mentioned here order inventory buildup. Can you remind me how that will be handled when you hand over the asset to [indiscernible]?

Heinrich Hiesinger

That has been reflected in the contract. We’ll get it back.

Carsten Riek - UBS

Okay, so at the full price? So if steel prices come down you would also still get the costs?

Guido Kerkhoff

We have found a regulation with Arcelor Mittal which is a good one to reflect the operational improvement and both parties were well aware what’s happening and how this has to be dealt with. So it’s fine. We don’t have a risk out of that.

Operator

Thank you. The next question we have today comes from the line of Neil Sampat from Nomura. Please ask your question.

Neil Sampat - Nomura

I’ve got three questions. Firstly at Steel Europe, I guess we’ve seen production pretty strong over the last quarter, at least on quarter on quarter and I guess you’re no longer shipping slabs from Brazil to Europe. When do we expect to see this reflected and this increased cost dilution reflected in the average cost per ton. Is that when shipments pick up in the next quarter and also a related question or a similar question on Steel Europe in terms of cost base, you’ve seen the headcount reduction come down. When can we expect that to impact the P&L as well? A question on material services. I guess if I look year on year, so first quarter versus first quarter, shipments were up year on year and looking at the pricing environment, it didn’t seem to be worse than in 2012. So why was EBIT down year on year? And then final question on your EBIT bridge for your full year EBIT guidance on Slide 8. That stayed the same I think since the last or since the full year results, and you seem to imply in that bridge that there’ll be a roughly 0.1 billion improvement in Steel Americas earnings year on year. Now compared to the Q1 result and the Q2 guidance, that seems pretty conservative, but at the same time, I mean unless the losses here are so large that once Alabama leads, then run rate decreases pretty dramatically and similarly, you still sticking to that guidance that Steel Europe and material services will deliver a higher year-on-year improvement in EBIT than Steel Americas will?

Guido Kerkhoff

Yes. Let me start maybe on the steel Europe questions. Yes headcount is going down and we’re doing all the other improvements in our big reloaded program which now over time will hit the P&L. Even if you have the headcount reduction people will not leave immediately and you have some things you have to do till they’re really off the book. So that will come over time but we’re targeting more than 500 million of savings here on Steel Europe which is definitely needed and they will come over time. We have seen first results in our P&L and that will continue overall.

If we take a look at our shipments they were up, yes but the pricing overall and the pressure coming out of the pricing as we set is indeed increasing and we have lower margin coming out of it. Please take into account that in last year Tailored Blanks was still included in the mix of the price. This is now to be taken out, which brings it down. So we have loss on our average pricing per ton overall. So therefore there is pressure coming from the top line although we have some high shipments here and the cost advantages are not really making up for it.

For the year end, compared to prior year, we stick to our guidance that while we think that our cost measures should come into place and hopefully pricing will recover bit as well, as that we see will the shipments that we currently have, that we have achieved a bit higher results than in the previous year. On Americas compared to that, yes we do see an improvement and we want to continue like we do currently. Nevertheless it remains to be seen there is always some volatility in the figures foreign exchange and how the markets deliver. We have had a good quarter; we want to continue like that. So there is on underlying assumption from our side that big losses would occur in the next quarters to come up.

Heinrich Hiesinger

It’s just what we have learned last year. Last year when we started our guidance, we had the same comment from your side that you considered us to be conservative than lot of other companies. They had to reduce their guidance, we sticked on it and its now, we have Q1, we started very nicely but if you multiple our EBIT which we have achieved the 247 and multiply it by 4 you are trusted [ph] our guidance. So, we rather look, let’s see how is the margin is coming. So we do not see any specific risk but we rather want to see -- lets go on the track and if let’s say Q2 we have that result, then we will come back to you and say what is for the year end.

Neil Sampat - Nomura

Okay. Thank you. And just to cover on the material services, Guido, I think you mentioned Tailored Blanks. Was Tailored Blanks not from Steel Europe?

Guido Kerkhoff

Tailored Blanks was steel Europe.

Neil Sampat - Nomura

So, in terms of the weaker material services year-on-year, how is that explained?

Heinrich Hiesinger

That comes from the strong price pressure that we do see in that industry still. And we expected year-on-year, I mean it was rather flat it was not that much that we saw deviation coming out of that compared to the previous year and we expect it for this year to continue more or less on the same level. The environment is not easy.

Guido Kerkhoff

And you need to compare also -- we saw a slight reduction our performance, where the industry peers.

Neil Sampat - Nomura

So, year-on-year material services earnings, roughly flattish?

Guido Kerkhoff

Yes.

Operator

Thank you very much. The next question we have today comes from the line of Jeff Largey from Macquarie. Please ask you question.

Jeff Largey - Macquarie

My first question is on the free cash flow guidance and specifically I guess looking at the potential Deutsche Bank settlement, is there -- I guess what can you tell us about that in terms of maybe size or timing? Just trying to get a sense of what that means for free cash flow outlook.

Guido Kerkhoff

I think the figure which was on the margin was the settlement of about 150 million. Meanwhile we got the full brief [ph]. So we will have the cash out somewhere in February.

Jeff Largey - Macquarie

Okay. So, it should be reflected in this quarter’s results.

Guido Kerkhoff

Yes.

Jeff Largey - Macquarie

Okay. The second question is just to go back to Steel Americas and not trying to beat a dead house here but I think you mentioned Guido that it was -- the business was EBITDA positive in the last quarter -- I’m sorry, EBITDA breakeven in the last quarter. Is that correct.

Guido Kerkhoff

Yes.

Jeff Largey - Macquarie

Can you provide more granularity as to TK Steel U.S.A versus CSA? Like was one EBITDA positive and one negative or were they operating at the same level?

Guido Kerkhoff

The U.S. where EBITDA and EBIT are the same as we don’t have deprecation, that was slightly positive and CSA was slightly negative.

Jeff Largey - Macquarie

Okay. And so in the guidance that you provide for the fiscal second quarter outlook, I mean I guess trying to understand that I mean -- that basically looks at Steel Americas as it is but if you take away the positive EBITDA contribution from TK Steel U.S.A, was it still possible to be stable or are we looking at a sequential decline…

Heinrich Hiesinger

It still belongs to us. So, it will be this month and the previous months January, February will definitely always be included and then it depends on when the closing will happen. And we want to sequentially improve and if you take a look at our track record over the past year, we have sequentially with our impact program always improved our performance quarter-by-quarter. We want to continue that. So we want to be better than the 247 in the next quarter. And we’re pretty positive that we can achieve that.

Jeff Largey - Macquarie

Okay I think that’s -- I understand, that’s fair I guess for this quarter. I guess I’m trying to think about post-closing which --

Guido Kerkhoff

I know. But that’s what we said, around 1 billion unless -- first we get the things done, we are working on our initiatives.

Jeff Largey - Macquarie

And just further to that point, again I know it’s probably difficult to speak about but can you give any sense or color on how things look with VDM and Turney [ph]. Again obviously, these are in necessarily businesses where there was a lot of disclosure before, but they will be coming back into the fold and just trying to get a sense of how they will affect the bottom line?

Heinrich Hiesinger

Yes, but VDM, as you might have seen from the recent Outokumpu announcement was still positive last year, but not that heavily positive. So in the previous years they were a lot better on the performance. So we have to take a look into that business and see what’s going on. We have seen some weakening in the market. So obviously that obviously is reflected in the P&L. But it’s pretty much a standalone business with not so much synergies to the other businesses and to the restrain [ph] this factor. So we will have a deeper look into that and move it then from the positive basis where we think we should get it to then. But let’s give you an update once we have really taken a look into it. Given all the EU investigation that we are ongoing, we did not have a too deep look into it. So let’s first close and then we will come with that to you.

AST was in a difficult situation. It was loss-making last year. Definitely now with the setup that we say, the biggest problem is definitely that it doesn’t have a real sales force and sales contact. It was always integrated before that in the Inoxsum group, now in the Outokumpu group. We have to make it a standalone business and see where we can get the sales to. That’s why we put it to material services. They are from the independent service center, the biggest stainless steel service center overall stainless steel center [ph] in Europe. So we do see some upsides there and we want to see it from them that they provide us with a clear plan, how they want to place the product from AST across Europe and Turkey probably. And we need to first analyze, discuss with the management and then get a timeline on how to transfer it before we want to make any statements. What we said in the past was obviously it seemed that they were running at something like a 10 million loss per month last year. So that was -- what was rather official. So let’s see where we can take it once we have it.

Jeff Largey - Macquarie

Okay and one final question; moving to Industrial Solutions in particular. Again this might seem odd to be asking this at this time, given that you’ve been trying and maintaining a very low CapEx. But given the strength of the order book, are you experiencing any pressure, again from certain product end markets to actually try and increase your capacity there. Again I’m just looking in particular -- like you’re looking at submarine being delivered in 2018 to Singapore. Is there any pressure in certain end markets to try and step up your capabilities?

Heinrich Hiesinger

It’s not to step up the capabilities. Our capabilities are there, but clearly the message which we have given to the team, by the nature of the business which brings negative net working capital to us, we are happy with the margin performance of the team but what we did not see for many, many years was really a growth part, and what the team is now doing because probably we identify it as one reasons; why let’s say the growth momentum was not as we would expect, that we were very much euro focused with our cooperate seller.

And the team around Mr. [indiscernible], they are now really establishing retail center which should bring us first, more closer to our customers to fully understand their needs. So being able to offer without sacrificing margins and secondly; having a continuous presence there, which will be positive and beneficial to our service business. So this is the road going forward. We did not give them a fixed time so far because we also understand that it is easy to have volume in, let’s say, solutions business. But we want to have volume accompanied with stable margins. So we first build up this closeness to the margins first and with that knowledge then let’s say we also agree what is a fair timing for higher volumes by keeping the margin.

Operator

The next question we have today comes from the line of Rochus Brauneisen from Kepler Cheuvreux. Please ask your question.

Rochus Brauneisen - Kepler Cheuvreux

Rochus Brauneisen from Kepler Cheuvreux. Just a few questions left from my side. Maybe starting with CSA, I guess one of the strong points in the performance was that as you commented the blast furnace performance had been now quite stable. Can you tell us how the transition will work once the sale is closed for Alabama and then your shipments to the U.S. will come down from the 700,000 ton level in the Q1 to the 500,000 ton level as agreed? So how quickly we will be able to bridge that gap with the external slab sales? Based on your comments obviously 200,000 tons per quarter, how quickly can you double that up in order to be rather stable in your crude production? That will be the first question.

Heinrich Hiesinger

Yes, let me answer that. As we’ve clearly said, we’re pretty strong now developing into the sales in the Brazilian market and we do face currently that, that’s some others - there were some problems on the blast furnaces as well. So we have a strong order of book in there. Indeed we’re working bigger on the logistics to improve that we can really shift into the conflict. On the other hand, we sell to CSI, California Steel, 700,000 tons per year as well, which is helpful and therefore we think that the gap of the 200,000 compared to what we had in the last quarter can be bridged overtime. We’re not that negative on volume and capacity load. It’s rather currently that we’re focusing in the short term, but they’re not trying to overdo it and continue with a ramp up step-by-step, not to ramp it up too fast.

Rochus Brauneisen - Kepler Cheuvreux

Okay, in order to have a stable operation and the stable output, would you consider building inventory and then off sell it overtime or would do you adjust your operating?

Heinrich Hiesinger

We’re not operating that much via inventory, no, no.

Rochus Brauneisen - Kepler Cheuvreux

Okay.

Heinrich Hiesinger

With increased production, you will a have a bit more, yes, but, nothing else.

Rochus Brauneisen - Kepler Cheuvreux

Then on the breakdown of improvement between north and south, you had said more than EUR100 million improvement in Steel Americas. Can you give us a better sense? Is it like two-thirds Alabama - one-thirds CSA in terms of where the improvement was coming from?

Guido Kerkhoff

Yes, we’ve said, yes, it was a bit more in the U.S. currently reflecting the current pricing scheme that we have as a transfer pricing. We’ve seen a bit more in U.S. than in Brazil.

Rochus Brauneisen - Kepler Cheuvreux

Okay so, is the two-third to one-third a fair assumption?

Heinrich Hiesinger

It’s not so as easy as that. It was more in the U.S. than in Brazil.

Rochus Brauneisen - Kepler Cheuvreux

Okay. And maybe just overall on your capital growth guidance, I guess, particularly in respect to Industrial Solutions and Elevator you’ve talked about a year-over-year improvement. Can you give us a better sense how that would compare with the first quarter? Is that also up or more flat or downward quarter-on-quarter?

Guido Kerkhoff

I think, we have given a clear guidance for the elevator business both for Q2 and full year. As I said, we closed an Elevator last year at 11% and we clearly said what you should expect -- at least a half percentage point improvement on a year-over-year basis if the environment is a little better. We might, let say, be a little bit higher last year where we did 0.7% on -- Industrial Solutions, we rather said we would see an increase in earnings. We did not say that we would see an increase in margin because the message we have given to our Industrial Solution teams is defend the margin and let’s say invest a little bit growth. So here its earning in absolute terms while we defending the margin because even with that margin they have, as I’ve said before, negative net working capital. So it’s a really value chain narration for us.

Rochus Brauneisen - Kepler Cheuvreux

Okay, I guess you were referring now year-over-year?

Guido Kerkhoff

Yes.

Rochus Brauneisen - Kepler Cheuvreux

And, so on a quarter-to-quarter basis for the two divisions?

Heinrich Hiesinger

On the quarter-to-quarter basis, we have also given to you, Guido on the guidance. So Industrial Solutions on a - let’s say quarter-on-quarter basis is stable and Elevator also on a quarter-on-quarter slight bigger.

Rochus Brauneisen - Kepler Cheuvreux

Okay. Then maybe just to leave [ph] the fact now obviously better than expected Q1 and obviously further improvement in the second quarter. Why not increasing the guidance at this stage? Maybe any more light on that? Is this because you would not prefer to do it at the first quarter stage or are there any certain factors you were not fully aware of like losses from the stainless business which makes you to maintain the guidance or less earnings from entering in the second half, can you comment on that?

Heinrich Hiesinger

First of all our guidance is given without VDM and AST, because we said we will come back to you if we know that in depth. But we do not see any negative. It’s just a learning curve which we had last year. Our first quarter with 247 is full in line with our guidance. If you multiply by four you’re just there. If we would see even better momentum in Q2, then we will comment to you but having only a quarter of the year, even if we do not see additional risk coming, I think it’s more substance if we have half year in and then we come back and say how do we charge the rest of the year.

Guido Kerkhoff

And you know how ForEx and changes in raw material and end-customer process might affect our business. Therefore we think current timing, it makes sense to stay with what we said. We had a good quarter, first quarter, yes, good start, that’s it.

Heinrich Hiesinger

The fact that the business model also in Steel Europe has changed from yearly contract to half year and quarterly contract just has reduced the visibility in our material business and they are the highest cyclical and that’s the reason why we’re let’s say -- we do not see anything negative but we’re just now -- our visibility in material is six months roundabout and therefore we’re caution.

Operator

Thank you very much. The next question we have today comes from the line of Sylvain Brunet from BNP Paribas. Please ask your question.

Sylvain Brunet - BNP Paribas

First question on the Americas again. I know you didn’t quantify the speed but if you could help us understand how much are you including the guidance, in the EBIT guidance for the full year; if an order of magnitude of $200 million for the Americas would be the right number to have in mind, and the second question is to give us some color on the trend in the order intake in elevators in Europe in particular and to remind us how much it accounts for in your current business.

Guido Kerkhoff

We will not give you a more precise guidance of Steel Americas and the reason is very simple; it’s a highly volatile business. Especially in Americas we are very low into the contract business. We are very much on a spot market. Any change, let’s say on $20 for us it’s round about $25 million. So as I said, let’s stick with our early comment. If we have half year in, then we will come back with more precise judgment. Now as far as our European Elevator business is concerned, here we do see a very slight momentum in the lower digit, single digit error in order intake.

Heinrich Hiesinger

Especially reflecting that in Europe and in Southern Europe we saw have seen the trough of low volumes. It’s improving a bit. The rest is broadly flat.

Sylvain Brunet - BNP Paribas

Just lastly perhaps on pensions. Do you expect further adjustments on a quarterly basis or is that more of an item that should change with your full year numbers?

Heinrich Hiesinger

No we change, for pensions the interest rate we change on a quarterly basis if needed but we’re already on pretty low levels. So in June we had 3.5. So it’s not very high.

Operator

Thank you very much, the next question we have today comes from Alexander Hauenstein from MainFirst Bank, please ask your question.

Alexander Hauenstein - MainFirst Bank

Coming back to Steel Europe and you commented already on steel prices a bit and I guess mostly related to spot or quarterly prices, what is your outlook for your contract prices, especially from auto clients? Will you be able to keep at least then stable roughly to the last contract or maybe even slightly lift them or is that too much to assume? Second question, when should we assume the closing of the Alabama deal and the cash inflow -- is there anything from the approval side missing still? And lastly we heard from the press that you might have some difficulties and strong resistance in implementing cost reductions in corporate activities. Could you comment here please a bit?

Guido Kerkhoff

Let me start with the last one, I think we -- so far it’s the full transformation of ThyssenKrupp and we did very tough things selling [indiscernible] of the company. We always had a dispute but at the end we find a settlement with the unions. Now we have initiated another significant revamp which covered shared services and it’s obvious that right now, also with the election of the unions lying ahead, we might see some stronger, at least public statements against it. For us we do not expect that the momentum, let’s say any, in the transformation of our company ThyssenKrupp is going down. I have different positions some times and we make it visible but the end so far we always find a solution.

Now I think for the closing of the Alabama deal, we believe this can be done in Q2 and in Steel Europe you know, I do not like to comment what we believe we can do in the contract business going forward. As you said it’s a fierce market but we do not have much room to make any compromise, because with only 19 million left in EBIT margin, you can understand that we have a very -- that we are very eager to at minimum keep it at that level because we do not want to go into the negative.

Operator

Thank you very much. [Operator Instructions]. The next question we have today comes from [indiscernible] 70:06. Please ask your question.

Unidentified analyst

One question on the Elevators division. Your peer, Schindler reported results this morning as well, and shown a sequential deterioration on margins. Apparently it looks at Schindler is being aggressive on prices in order to increase market share lever on a top line growth between 4% to 6% which is basically in line with your growth target. However you are expecting improvement on margins, while Schindler is sacrificing them. My question is, and I’m sorry for the long introduction; how confident are you on your midterm target of 15% EBIT margin for the Elevators business? Schindler margins are coming down, KONE margins are stable but Thyssen which is performing basically a strategy similar to peers is seeing margin improvement. What are you doing different from your peers? Is it more than only cost cutting? Can you please give us some color here maybe some update on what is happening in the marketplace?

Guido Kerkhoff

I think what is or at least what the team try to do to show you that independent of growth there’re some fundamental levers in our Elevator business which allows us to drive profitability. We know that today we have potential in our new installation manufacturing. Here we believe there is one of the reasons why we have a gap to where we want to go. That’s a reason why we have installed for example an Executive Vice President within our Elevator organization which really optimize with KONE KBIs [ph] all our manufacturing.

Secondly we have still too high complexity in our product portfolio by the fact that we have grown very much by acquisitions. So these are tremendous levers. The team has very clear roadmaps to reduce number of items in all our management in escalators, in controllers, in different elevator cabins.

And then we still have as one lever the performance within regions. Let’s say some underperforming country, you might have read that for example Greece we did sell to KONE just a week ago because this was for us just subcritical. It did not make sense for us to continue and this is only to mention three of the levers where we can act let’s say without looking at the market. Clearly in addition, we would like to grow and we’re doing very nicely in China in the other things. But let’s say even if gross momentum would go down a little bit, we have let’s say significant levers to move up margins. And I think that we -- our trend is a different one and Schindler is not only in Q1. I think we saw it already in Q4 last year.

Unidentified Analyst

Okay, very clear. Just one last question on the Industrial Solutions business. If I understood correctly, the outstanding margin you have reported this quarter was partially driven by the billing related earnings at the Marine System? Correct me, if I’m wrong. Can you provide us; if possible, what will be the underlying margin without this effect?

Guido Kerkhoff

Our margin is machinious. What I think is very favorable to our margins, that in our internal treatment we calculate a kind of interest rate for the down payment. That’s the reason why our solution business is double digit where more of the market is the higher single digit. But we have very openly announced the calculation. If we go for benchmark we naturally take these out. But there is -- if you look on the overall performance, the difference between the businesses is not very significant. They are more or less all on the same level.

Unidentified Analyst

Okay and by how much will I have to adjust EBIT by those interests from internal loans?

Guido Kerkhoff

On our capital market, we have given that it might go up to 5% margin from where we are right now.

Operator

Thank you very much. [Operator Instructions]

Heinrich Hiesinger

Operator and ladies and gentlemen, if there are no further questions then I would like to suggest that we close the conference call for today. We thank you very much for your contribution and for your very good questions. And we look very much forward to seeing you on the road and at conferences in the next couple of weeks. Thank you very much. And as always the IR team is there for you in case you might have any further questions. Have nice day and a nice weekend. Bye, bye.

Operator

Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect.

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