Thyssenkrupp AG (TYEKF) CEO Guido Kerkhoff on Q1 2019 Results - Earnings Call Transcript

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About: thyssenkrupp AG (TYEKF)
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Earning Call Audio

Thyssenkrupp AG (OTCPK:TYEKF) Q1 2019 Earnings Conference Call February 12, 2019 8:00 AM ET

Company Participants

Claus Ehrenbeck - Head, Corporate IR

Guido Kerkhoff - Chairman & CEO

Johannes Dietsch - CFO

Conference Call Participants

Ingo Schachel - Commerzbank

Bastian Synagowitz - Deutsche Bank

Sylvain Brunet - Exane BNP Paribas

Cedar Ekblom - Bank of America Merrill Lynch

Lars Brorson - Barclays Bank

Andre Kukhnin - Crédit Suisse

Alan Spence - Jefferies

Luke Nelson - JPMorgan Chase & Co.

Carsten Riek - UBS Investment Bank

Rochus Brauneiser - Kepler Cheuvreux

Marc Gabriel - Bankhaus Lampe

Operator

Dear ladies and gentlemen, welcome to the conference call of thyssenkrupp. At our customer's request, this conference will be recorded. [Operator Instructions]. May I now hand you over to Claus Ehrenbeck, who will lead you through this conference? Please go ahead, sir.

Claus Ehrenbeck

Yes, thank you very much, operator. Good afternoon, everybody. This is Claus Ehrenbeck from Investor Relations speaking. On behalf of the entire team, I would like to welcome you to our today's conference call on our fiscal '18/'19 Q1 numbers. All the documents for this call and our release this morning are available on the IR section on our website. And I think with that, I can immediately hand over to Guido for the presentation. But before I do that, I would also like to welcome in our today's conference call our new CFO, Johannes Dietsch, who is also with us here today in the room.

Guido, please take over.

Guido Kerkhoff

Yes, thanks, Claus. Before we come to the financials for the first quarter, I would like to point out the topics that keep us busy and are our top priorities at the moment. First of all, consequently driving the performance across all BAs towards their defined targets. Closing of the steel JV with Tata. As well as the group separation into tk Industrials and tk Materials.

Starting with the progress of the group separation. The first step is to drive the organizational change going forward with the announcements on the new BA leadership teams, Elevator, Industrial Solutions and Materials Services. And as of February 1, Johannes Dietsch became the group's new CFO. I'm convinced that Johannes' wealth and the new BA leadership teams are outstanding additions for thyssenkrupp and I look forward to work with all of them to tackle the challenges ahead. The next milestone for separation has been reached with a decision on efficient management structures with the ultimate corporate cost target for the two new companies together of below €300 million. More about this later.

So with respect to the group separation, we are as of now fully on track with our ambitious execution time line with a separation readiness as of October 1, 2019. The Steel JV is also progressing as planned. At the end of December, we announced the future joint management board whose first responsibilities, after the planned JV has received the necessary regulatory approvals respectively after closing, will be planning and execution of the proposed merger integration while ramping up the synergies concept.

Regarding the regulatory approvals for the Steel JV, the ball is now in the court of the European Commission and further jurisdictions. Currently, we already obtained amongst others unconditional approval from the U.S., China, South Korea and Brazil. Moreover, yesterday, the EU commission informed us that we will receive a statement of objections at the end of the week. This doesn't come as a surprise for us, rather we see it as a continuation of our constructive dialogue. Once we have received the statement of objections, we will examine it closely. Nevertheless, we're still confident to close the transaction in spring.

Now let's have a look at the financials for the continued operations. Order intake figures came in strong and are promising with all industrial businesses up year-on-year, particularly Elevator Technology accounting for a large share with a new record high. However, adjusted EBIT came in as expected significantly down year-on-year, especially due to market headwinds at Components Technology and Materials Services. Nonetheless, the performance of all BAs is far from satisfying.

Net income was €58 million, is well above prior year period, mainly due to lower interest expenses and tax expenses and the absence of a onetime noncash charge from U.S. tax reforms in the prior year period. As flagged to you in November, cash flow for the continued operations came in clearly negative in Q1, explained by a pronounced seasonal increase in the net working capital at Materials Services, while the remaining industrial businesses performed in line with our expectations, respectively improving significantly year-over-year. Especially Marine Systems substantially reduced its cash strain compared to last year, mainly due to higher cash in from backlog projects while Elevator Technology increased its cash contribution on the back of higher prepayment received on a number of big tickets.

So overall, given that the increases in the net working capital at our Materials is seasonal while cash flow at our Industrial businesses is in line with our expectations, we are optimistic to bring cash flow towards guidance over the course of the year. Overall, we confirm our guidance expecting an adjusted EBIT for the continued operations of above €1 billion; respectively, free cash before M&A for the continued operations to improve significantly year-on-year but remain negative overall. However, we need to take into account that economic indicators did not improve since we gave our guidance in November last year.

The order intake profile, especially at our Industrials businesses, remains encouraging. Orders at Elevator Technology surpassed the €2 billion threshold with a book-to-bill well above one and order backlog also near record level of €5.3 billion. Overall, growth was driven by new installations in Asia Pacific and supported by major projects, in particular in Australia, Americas and China. New installations and units in China are also encouraging, up year-over-year, despite persisting price pressures in the market. Orders at Components Technology were up year-on-year, mainly due to growth at industrial components benefiting from a big order from the wind energy sector and continued strong demand for construction equipment components. Whereas the markets of heavy truck components, especially in the U.S. and Europe still growing, although with spindling growth dynamics. Demand for automotive components is slackening. Particularly, demand slowed down in China and Western Europe, the latter one influenced in part by new test procedures for fuel and electricity consumption and vehicle emissions, WLTP, and Brexit uncertainties noticeable with customers, overcompensated growth in the steering business with the start of production at new plants.

Despite the lack of big ticket orders at Industrial Solutions, the project funnel, especially for the chemical plants and mining, continues to be strong. Market dynamics for chemical plant engineering are improving with promising orders from MENA and the U.S. The past quarter, orders included, among others, medium-sized ammonia plant in Saudi Arabia for Ma'aden and orders for services in Asia, Africa and Europe, as well as medium large order for stockyard equipment in Australia for BHP South Flank with an order value of approximately €150 million.

At system engineering, order intake increased year-over-year driven by Europe, Asia and Africa. However, looking forward, uncertainties surrounding Brexit as well as the economic risks shouldn't be neglected. As expected, Marine Systems did not book any big ticket in the first quarter. However, included are an extension for an existing contract as well as smaller service and maintenance contracts. Looking ahead, we're quite optimistic as we're in final negotiations for four frigates for Egypt. Moreover, on the submarine side, we're expecting the six submarines for Norway and Germany to come in the current calendar year.

Orders at Material Services matched prior year level, with margin pressure from declining spot price environment, especially in warehousing and distribution in Europe. EBIT-adjusted at our continued operations came in as flat at our full year release well below prior year. Earnings at Components Technology were significantly down year-over-year, even though conditions for heavy vehicle and construction equipment component improved. Higher costs for ramp-up of customer projects, continued underperformance at Springs & Stabilizers, softer demand for automotive components, especially in China and Western Europe, as well as customer-induced slower ramp-up new plants in China put pressure on earnings and margin.

Despite the consequent execution of performance measures and G&A cost-reduction programs at Elevator Technology, adjusted EBIT and margins contracted in the first quarter in a continued challenging environment, mainly due to material and selling price trends in China and the Americas and the U.S. owing to tariffs on material imports. Adjusted EBIT at Industrial Solutions came in negative and down year-over-year, mainly due to lower margins on projects billed, planned engineering. Nevertheless, we still expect a significant improvement in adjusted EBIT with gradual progress over the course of the year towards breakeven earnings, with positive effects from a comprehensive turnaround program.

Earnings at Marine Systems were steady year-over-year with continued low margins on projects billed. In a softening market environment, adjusted EBIT at Materials Services was significantly below the high prior year level, despite support from cost-reduction programs. Margin pressure from declining prices, particularly in warehousing and distribution, compared with positive effects from dynamic price increases in the prior year. AST was significantly lower year-over-year, mainly due to price trends in stainless steel, also caused by continuing import pressure. Corporate continued its positive trend from the previous quarters and came in stable year-over-year. Next to the continued focus on G&A cost reductions, first quarter results were supported by positive effects from real estate sales totaling €3 million versus a low 2-digit million number last year.

Our discontinued steel operations, including mainly Steel Europe and thyssenkrupp MillServices from the Materials Services business area came in significantly lower year-over-year. Positive price effect year-over-year were overshadowed by effects from lost volumes, reflecting logistics constraints on account of lower water levels on the Rhine and shift in demand due to new emission standards, WLTP, in the auto industry. Moreover, the low water levels resulted in significantly higher costs due to changed transportation logistics.

Despite a weak start, we are confident that we will deliver on our forecasted earnings growth, especially pronounced in the second half of the financial year stemming from the elimination of onetimers, which burned '17/ '18 second half significantly, demand recovery for auto components in China, the compensation of cost pressure in Elevator Technology in China and the U.S. as well as operational improvements from the stringent execution of our performance and efficiency programs, especially at Components Technology and Industrial Solutions. Nevertheless, for fiscal Q2, we expect adjusted EBIT for the continuing operations below the prior year. Components Technology will be down year-over-year due to still softer demand for automotive components, especially in China, while Elevator Technology, Industrial Solutions, Marine Systems and Corporate are expected to be flattish year-over-year.

After an exceptionally good quarter last year with strong support by windfalls, earnings at Materials Services will be lower year-over-year. In line with our typical seasonal pattern, we expect significant sequential quarterly improvements of our free cash before M&A with free cash flow before M&A in Q2 broadly stable year-over-year. However, we need to take into account that economic indicators did not improve since we gave our guidance in November last year.

In light of this nervous environment, it's even more important to promptly deliver on our performance and efficiency programs based on our financial year 2021 targets. Specifically at Components Technology, the focus lies on managing plant ramp-ups, not only to achieve fixed cost dilution, especially at our plants in Asia, Mexico and Eastern Europe, but also increase the delivery of our new electric powered steering systems. At the same time, we will fix the operating inefficiencies for all critical steps along the entire value chain with dedicated internal teams. On top of that, we've hired an external experienced COO at Springs & Stabilizers. At Elevator Technology, improvements will result from the ongoing restructuring of the European business, specifically optimizing capacity utilization in Germany, the further optimization of organizational structures with respect to the different regional requirements to be able to better capture the arising opportunities. It is, for example, separating the Americas with North America focusing on growth and performance while South America requires adaptations to more challenging trading conditions.

Industrial Solutions will see positive effects from a comprehensive turnaround program at plant construction, targeting a reduction of administrative material and product cost, improved project execution, optimize selling costs as well as structural adjustments. For example, the simplification of regional structures through the evolution of the network of excellence structure will ultimately lead to leaner structures, less complexity and clear responsibility in the businesses to harvest on the positive market fundamentals, especially at chemical plants and mining. Although Marine Systems has a promising order pipeline and several projects are in final negotiations, the recently started performance program will further improve core processes and stabilize operational performance in current and future orders. At Materials Services, we will build on the outsourcing trend of our customers to further grow in value-added services as well as the reduction of G&A costs to compensate cost increases.

Despite the fact that corporate costs already started a steep decline over the past quarters, additional savings will be realized by further executing existing initiatives aiming G&A cost reductions in the corporate headquarter as well as in the regions. Now let's come to the future set up of tk Industrials and tk Materials. While we decided on the future organizational set up, our ambition was to create companies that are more efficient and agile, thus quicker to implement new projects and innovations, faster to respond to market developments and closer to our customers. Specifically, we will reduce the number of board members to three at each business with a CEO, CFO and CHO, while reducing the number of corporate functions also by combining them at both entities. Moreover, we will replace the matrix organization structures. Despite the fact that it brought us significant synergies in the past like centralized sourcing and recruiting, it made implementations slow and muddled the divisions of responsibility.

In the new businesses, our previously four matrix dimension, corporate functions, business areas, regions and service units, are reduced down to only two by integrating our shared services into the businesses. Specifically, shared service units will be allocated and focused more strongly in line with business requirements. Moreover, we will move away from our regional headquarter organization, making regional structures simpler and adapted to local requirements of the business units, ultimately strengthening responsibilities, reducing complexity and making decision making faster.

At the same time, the above-mentioned steps and the previously planned measures to reduce administrative costs at the corporate level leads to corporate cost target for the two new companies together of below €300 million compared with €377 million in '17/'18, clearly satisfying the equation 1 plus 1 is less than two. Roughly 70% of the costs will be owned by tk Industrials while the remaining will be owned by tk Materials. So overall, both organizations are designed for greater entrepreneurial freedom. Industrials as a management holding, enabling our engineering competency positioning whereas materials is set up as a lean holding with a focus on portfolio, performance management and governance.

With respect to the financing structure for the two businesses, I can tell you the following: The terms and conditions of our existing bonds totaling €4.7 billion remain untouched. The existing bonds will eventually be split between tk Industrials and tk Materials. However, as of now, the proportions allocated to each business are not yet decided. It goes without saying that the rights of creditors are maintained. Our priorities for the upcoming months are clear. Alongside the merger control procedures of Steel JV, we work stringently towards the improvement of our performance in every BA with the ultimate goal of above €1 billion free cash before M&A by 2021 in the group in its current structure. However, the biggest construction site remains the group separation. The execution time line with separation readiness as of October 1, 2019, remains unchanged. But let me walk you through the upcoming steps again.

Among the first steps was the decision on business area leadership teams and the definition of leadership models for both companies that I just talked about. In spring, we will inform you about the designated management boards followed by further details on the strategic positioning in May. Separation readiness and the operating start-up of newly created companies is scheduled for October 1, 2019. Equity stories and spin-off documents will be published at the end of the year followed by a Capital Market Day and a comprehensive IR program.

On these details - once these details are finalized, we will be able to put our proposal for the spin-off of tk Industrials to the vote of the AGM at the beginning of 2020. That is where the final resolution on the separation of the group will be made.

Until then, we will continue to update you on our progress and are now ready to take your questions.

Claus Ehrenbeck

Very good. Thank you very much, Guido. And operator, please take over now for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question is from Ingo Schachel of Commerzbank.

Ingo Schachel

I have two questions. The first one would be on your free cash flow. Of course, we've gotten used to Q1 cash flows being a bit weaker. But I think even compared to last year's, it's a bit unusual that the Q1 net working capital build exceeds even the Q4 release. And I think it's also maybe a bit surprising that it's really all about the payables, really in a segment like Materials Services and not in Industrial Solutions. Can you explain a bit more why specifically payables in Materials Service went up so much? Is it really that you can't keep the same payment terms with your suppliers in the new tk Materials, Industrial set up? Or is it just coincidence and bad luck? I would, of course, also be interested now that Johannes Dietsch is on board and probably the only board member with currently a track record of a positive free cash flow so far, wondering whether he also sees the topic of net working capital moderation as high on his agenda or status on the CFO agenda is mainly dominated by the spin-off related issues. The second question would be on elevators. Just on pricing, because there are so many different views at the moment on the Chinese new equipment pricing, I would be curious to hear your view on how you saw Chinese new equipment pricing developed recently, whether you also see that stabilizing or even up slightly or whether you still have to compete a bit of pricing, also given that you won market share. And also if you could quantify the raw material cost inflation you still expect for the elevator side in 2019 for the entire elevator unit, that would be interesting as well.

Guido Kerkhoff

Yes, Ingo, let me start with your elevator question. What we see currently is, yes, order intake in our case with big projects was strong, especially in Asia. What we saw the price increases, it went through pretty well. So we indeed could do more than we initially planned. That's why we think that the raw material prices that went up, steel prices that went up should be digested throughout the year, so that we don't have year-over-year negative effect, it should decline. And you've seen that we're margin-wise still behind previous year. But the lag compared to the previous quarter is shrinking. So we are already on an improvement track. Still negative, but they're on the right track. So going forward, I think that will continue. On the free cash, to start off, before Johannes can say something about his agenda there, yes, we had a stronger bounce back and a very strong Q4 in Materials Services. So you saw it on one hand on the payables. But on the other hand, we saw a bit weaker volumes that was reflected in steel by the way, as well. Weaker volumes in shipments in Q1 led to higher than originally planned inventories.

So we were hit there more than we expected. And if we take a look at the number and you said that and I fully agree, it's a very negative number how we start, but if we take a look at the decomposition, we clearly see that at the Industrials level, and last year, we had many, many concerns around the free cash in Industrial, the Industrials came in ahead of our internal expectations and was stable. Now the materials sector is volatile. We all know that. And we were hit stronger with the materials sector. But what that means on the other hand, if market stabilized or you adapt your inventory policy, you can throughout the year, therefore, adjust a lot more. If underlying, we were weaker in Industrials, would concern me more. Are the numbers good, no, they aren't. But it's indeed clearly coming out of the volatility and the negative trends we saw, especially in Europe, in the materials sector. So that's why I think you have to split between the two, if you take a look into the indeed not convincing numbers. Johannes?

Johannes Dietsch

Yes, thank you, Ingo Schachel, to invite me already in the discussion here, on board for my second week now with thyssenkrupp. And you're right. I'm used to work in an investment-grade-rated company with relatively high margins and also really high cash flow development. Now with thyssenkrupp, you see very weak first quarter with regards to our cash position. And the focus from the CFO side should be clearly, number one, to work on the performance; and secondly, also to transform the EBIT into cash. So the cash conversion is a very important topic here. And ultimately, to have a sustainable development of the company, we need to have much better ratio and cash conversion. And the target we have in place for the business to reach more than €1 billion in free cash flow in 2021. That is certainly the key topic to follow on. And of course, it ripples down into questions like financing and rating. And that all is high on the agenda here at thyssenkrupp. We need to be better in our cash flow performance going forward.

Operator

The next question is from Bastian Synagowitz of Deutsche Bank.

Bastian Synagowitz

I've got two quick questions. Just firstly, just on the supply side in the steel business, I guess you had traditionally relatively high supply exposure to Vale. Have you received any signals which would concern you in terms of the stability of the supply chain? And then also, what is the situation looking like in the order contracts here? Do you have any ability to potentially lift order contracts should these higher ore prices actually last? And then secondly, just looking a little bit further ahead, as we think about the newly formed Materials units after it has sold the stake in Industrials and also the Steel JV, it will be a very cash-rich entity and I understand that you, Guido Kerkhoff, will be part of the management team there. What would be your financial strategy for the asset? Would it be financing of the remaining pensions? Would you be looking for M&A opportunity? Would it be a onetime dividend? Just getting some early color on what your vision is, that would be great.

Guido Kerkhoff

Okay. Yes, first of all, let me start with Vale. We do - we are not supplied from the region that was affected. We get it all from Carajás, so basically I know delivery can continue. We have set up a contingency plan, what we can do and where we can order instead of Vale, if needed, so far the delivery works. Yes, we've seen some price movements in iron ore following this incident in Brazil. Nevertheless, our order contracts are still on longer term, and therefore, spread-wise on better margin levels, you saw that in Q4. The rest can be reflected then accordingly once we renegotiate them. The price movements we've seen are not indicating that we're out of normal ranges. So yes, they're a bit negative. But we still are on pretty good levels then. Regarding the management teams, first of all, there has never been any kind of announcement who's going to be where. We're neutral, and it's completely not clear who's going to be where. So I can't tell you anything about that. Don't know where you got that from. On the other hand, coming back to the point what happens with the 30% stake and once the financing is done, as we all know, on the Materials side, we have more volatility in the businesses. Meaning cash flows and EBIT can be good but can be weak as well. So overall, this entity cannot afford a large-scale headquarters or overhead or what have you. And on the other hand, cannot afford to have high debt levels. So therefore, reducing net debt is clearly a priority for that company and the remaining stage is set up to give it a sound financial basis going forward.

Bastian Synagowitz

Okay. Just a very quick follow-up, if I may. Actually on one of the questions Ingo asked before already, net working capital build which you had, particularly on the steel entity level, do you expect some of that working capital still to be released before you actually close the deal, i.e., let's say, before end of the first calendar year quarter? Or do you actually think that this working capital level would pretty much stay as it is before the JV will be formed and finalized?

Guido Kerkhoff

Yes, as we clearly already announced, we will transform day one or we - Steel Europe will move into the JV with a normalized working capital. So we have ratios based on average levels over the last 12 months that we will contribute later on. So therefore, yes, this is going to change. But on the other hand, our end of September figures are artificially low, as we all know. And that's why we've clearly set a higher three digit number. It has to be built up and to be taken into account to transfer. So the current levels you see are pretty close to what we would have to transfer once the deal would have closed at end of December, working capital levels, yes.

Operator

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

Sylvain Brunet

Maybe my first question is related to the discussions with the European Commission. I know you are limited in what you can comment, but you hinted at constructive dialogue. My only question was to know if you've been surprised in any way by the definition of the market so far in the calculation of market share or if everything was in line? My second question is on components. If you could please quantify for us the start-up cost, so we can restate the one-offs and explain to us a little bit more the cost developments at Springs & Stabilizers, where it is coming from and is it over now? And lastly, if we talk about automotive end markets in Europe, do you believe - and you expect the WLTP effects on volumes to get absorbed already in Q2. Are you seeing this more of a Q3 event to go back to normal?

Guido Kerkhoff

Yes, at EU, we are in a constructive dialogue, as you correctly mentioned. The questioning of the auto sector, as you might have read, was a bit surprising. That was new. I've never heard about it and in the Oslo case, that didn't show up. And so we have to see how they will formulate whatever they see in there. But indeed, we're in a constructive dialogue. So no surprises, this announcement yesterday that an SO is going to come, we knew that before. On components, the start-up costs that we do have is a sizable double-digit figure that we see for the full year in there. The things at Springs & Stabilizers, we had to move from leads. We had some underlying issues that will continue and prevail. So Springs & Stabilizers margins is below average, let me put it mildly, and that will take some time to recover. We're working on the issues that we have. We're improving, but there are some effects gradually we will be improving. And on the forex effect, it will not just be Q2. It will take further on into Q3.

Operator

The next question is from Cedar Ekblom of Bank of America.

Cedar Ekblom

My question relates to the Materials business. You just said that it's going to be formed with quite a high level of debt and that it is a very volatile business. Can you talk about what levers you have on the balance sheet today and also potentially at the Materials business post its formation in order to improve its leverage position? Obviously, people are asking about a capital raise in the near term. I know that you have ruled that out. Can you talk about potentially what assets you will see at Materials Services that maybe are at for sale that could go a long way to addressing that very high level of gearing what you say yourself is not appropriate for that business?

Guido Kerkhoff

You're two steps ahead of what we can really announce. Clearly, I can't talk about the leverage position and the level of debt, but we've been very clear that we want to have appropriate positions and that we see this cross-shareholding to further drive down the debt of that appropriate - and that business and have it in an appropriate situation. That's why we've clearly ruled out a capital increase as well because in such a setup, we can adjust and make it happen that we don't need it. And what Materials business can be addressed, one, that's by far too early. What we have clearly said is that with the Materials positioning, they will have as a share and the businesses, number 1 and 2 businesses in that sector. They're well-positioned to participate in any kind of consolidation and there are moves that could be value accretive. But we have to leave it there.

Operator

The next question is from Lars Brorson of Barclays.

Lars Brorson

It's Lars from Barclays. A couple of questions, if I could. I'm going to take them one by one, Guido. Can I follow up on the accounts payable question. I'm not sure I quite understood the answer to that question. I mean, accounts payable of an incremental €600 million compared to the same quarter last year in your continuing operations. We can talk about discontinuing operations separately. But can you help me understand specifically why that is? And I understand you don't use any material reverse factoring. So maybe you could just help me understand what is going on with your suppliers and what sort of conversations are you having with them at the minute?

Guido Kerkhoff

Clearly, what you said, there's no reverse factoring, we don't have it. We had a bigger bounce back from year-end figures than we had previously. As you've seen, we had a very strong cash flow in the fourth quarter last year. Indeed, it was stronger than we expected internally even at Materials Services. So therefore, we had a stronger bounce back. That was one of the things. We haven't seen that any turns have been really completely changed. You see in the current environment, end of December was clearly for some of our customers the year-end. So they obviously optimized a bit more than we expected as well, but we haven't seen any underlying changes in structures or terms so far.

Lars Brorson

It would appear as though we are from the outside at least, but should we assume that there is more to come here? Or if this unwind, if you like, done for now?

Guido Kerkhoff

No, no, no. It's going to normalize from now on.

Lars Brorson

And can I just ask the same on discontinuing operations. I mean, I appreciate you've got slightly lower cash earnings there, but we are again incrementally €400 million cash lower versus same quarter last year. What are the remaining components of that?

Guido Kerkhoff

There as well, we had working capital and especially inventories went up because we had lower shipments. So raw materials and - as well as finished goods were higher as we were something like almost 15% down in shipments.

Lars Brorson

So not an accounts payable issue in steel, to be clear?

Guido Kerkhoff

A lot less. A lot less, with some changes in accounts payable to prepare for the day one as well. But no, it was more inventories and lower volumes than we expected. And this has always been fewer than bigger effect. But you can always counterbalance, if you see that the volumes remain that weak, which is currently we don't have the signal. Same is by the way true for materials. We're not sure where especially the auto sector is going. January was slightly confirming in stronger numbers again. So we have to see where it is. But throughout the year, we can adjust our inventory levels and raw material levels. So far, we don't see it. So we're taking cautious look, but we don't want to miss opportunities again that we cannot deliver. So we will sort it out. But throughout the year, we will adjust it to the then stable outlooks we will see later on.

Lars Brorson

Secondly, if I can just ask on IFRS 16. I know we are a few quarters away before you adopt that accounting standard, but anything you can say in terms of preliminary guidance on the impact on gearing?

Guido Kerkhoff

Can't be big. Can't be big in our case. It will not be a major impact. No, no. I mean, you can read it in our financial statements what we have as leasing contracts. This is not big amounts.

Lars Brorson

Certainly. And finally, if I just can. Can - any updated thought on the equity value in your steel joint venture. I know what we talked about seven months ago. The world has changed slightly since then. Any updated thoughts on what that number look like?

Guido Kerkhoff

No, I can't give you any update. I mean, we all know steel is volatile. So situations never stay the way they are, and we have given quite a broad range of where it could be. So therefore, let's wait and see where we will finally be.

Lars Brorson

But you think there's positive equity value today in the joint venture?

Guido Kerkhoff

Oh yes, clear.

Operator

The next question is from Andre Kukhnin of Crédit Suisse.

Andre Kukhnin

I'll start one at a time and just start with elevators. Could you maybe talk about the management change there and the new appointments, what the new head of the business brings and whether there's been any change in priorities for this business as a result of that change? And related to that, kind of beyond the divisional level, divisional management level, is there any change in the way the business is now run? Is it still kind of regional focus? Or has there been change in kind of focusing on service separately to new equipment, if you could talk about that, please.

Guido Kerkhoff

Yes, clear. No - I mean, innovation remains important at elevator, but the key change in priorities with the new appointment from Peter Walker was that we need a stronger focus on performance and really catching up towards competition, where I believe the focus has not been as strong as it could and should be. Now Peter Walker coming from the Asia Pacific region, he's an Australian, he's run successfully the transfer, the growth and the margin improvements in our businesses. So he's, I think, the right guy who knows our business and who has led and integrated regions successfully. So across the very independent regions as we had it in the past, he's going to be a guy who's driving more, I wouldn't call it centralization but say, more behavior in the same direction, group-wide behavior in elevator, create more common sense among everyone, so that it's going to be less regional. And you see that already on the divisional level. We have changes in the U.S., and we have split North and South America from each other. North America was governing South America, which didn't make sense that much. Different management focus and different situation the businesses are in, in South America. You have to cope with the markets and the not-so-stable environment as they are in. U.S. and Canada are completely different. So I think he's addressing the right issues, and he's creating synergies within his group in a much stronger way and will drive, therefore, the efficiencies, be it on procurement, be it on construction, be it on production, everywhere and the design of the elevators. So he's really addressing it.

Andre Kukhnin

Got it. And is the business right now is run as in regions, right? So the regional heads are head of both new equipment and service.

Guido Kerkhoff

Yes.

Andre Kukhnin

Right. Got it. And can I just, while staying on elevators, you obviously delivered very strong order growth. You highlighted large ticket items in the three regions - or three countries in the region. Could you just talk about maybe the funnel development? I'm trying to gauge whether that was a sort of a largely one-off blip of the trend because some large lead items came through? Or you're actually seeing kind of funnel filling up with these larger orders and what we've just seen in the last quarter is that starting to materialize into signed orders or prepayments made?

Guido Kerkhoff

We see a good funnel, but Q1 was very strong. But we don't see anything underlying that is worrying us. But indeed, as you outlined for Asia Pacific, it was indeed a very strong quarter.

Andre Kukhnin

Right. And is there any indications on China kind of coming out of the new year weak? I know it's really early days, but...

Guido Kerkhoff

Yes, it's early. It's early. It's a question for Q2 call, please.

Andre Kukhnin

Okay. Definitely wait for that. And if I may just the last one, switching to the Component Technologies or kind of the new formation of that, and at the assembly lines bid, something we picked up was FFT being acquired by Fosun from China and I guess they're one of your kind of key peers in that sort of automotive assembly lines. Have you seen any change in behavior in that market segment since then now that it's been a while?

Guido Kerkhoff

No, but maybe it's too early as well. We're watching, but so far, we haven't seen any change.

Operator

The next question is from Alan Spence of Jefferies.

Alan Spence

I have two questions. First one is Steel Europe. Appreciate you've taken a bit of a conservative view on WLTP in near term new order demand, but can you quantify the impact in fiscal Q1 the Rhine water levels as we try to think about the sequential earnings moving into Q2? And then separately on the broader guidance for adjusted EBIT over €1 billion, you flagged an expectation for stronger H2 as compared to H1. But are there any divisions where that may not be the case?

Guido Kerkhoff

Let's start with the WLTP. We saw order volumes and shipments down something between 10% and 15%, be it components or steel. We have some signals that January is stronger. So production levels are higher relatively than in December compared to previous year. That's a bit too early to say what does it mean. But WLTP, we still think it's just temporary issue. So we're cautiously watching, but we're not - they're not only negative signals, let me put it that way. H2 EBIT should be stronger everywhere, but in the materials sector will be depending on the market segment and where, say, raw material prices and underlying demand will then go to because of the volatility. Again, as we see that January came out a bit better, hopefully it doesn't continue like in Q1. And that will be helpful and needed.

Operator

The next question is from Luke Nelson of JPMorgan.

Luke Nelson

Just a couple of questions for me. Firstly, and I had a question on - following on the EBIT guidance. So effectively it means a quarterly run rate of around €300 million per quarter, which hasn't really been done since FY '16. And just given your macro outlook is pretty downbeat, can you provide just a bit more granularity in what gives you comfort that you can hit that H2 step-up, particularly more in ET and CT? Sort of anything regards to your progression in margins in ET, what you're factoring in, in autos, et cetera? That's my first question. And then secondly, just on the separation, can you remind us of the costs of the separation you're currently expecting to incur including the cash tax and also the timing that you expect that they will come through in the cash flow statement?

Guido Kerkhoff

Yes, let me start with the run rate. We do see improvements at Components. Clearly, the run rate for Q1 was weak, orders were weak, and we had to cover some weaker Springs & Stabilizers and to work on some quality issues. Now elevator on the other hand, we see that the raw material effects we saw and the import tariffs we saw with the effect in the U.S., that should over the year go out and the price increases, as I already mentioned, should come in. So over time, we think that's going to impact raw material prices in China rather going down. So helpful as well. So therefore, the run rate should improve. Q1 is never a strong one, that we always see Q3 and Q4 in a much stronger level. And Industrial Solutions run rate should improve by less underutilization and the G&A costs, and all the structural measures the new management team is putting in place should come through. And therefore will be helpful. Marine Systems over time, they're already on a rather stable run rate. Materials Services should improve over time. Windfall losses should not continue the way they burned the Q1 results. Corporate, largely stable.

Luke Nelson

And on the separation costs?

Guido Kerkhoff

Separation cost remains largely the same. So higher 3-digit largely tax. Timing, it's not all to be this year. So we have to be ready and have it all in place until we come to the split. So some of that will be next fiscal.

Luke Nelson

Okay. Maybe just a follow-up question, if I may. Just given where net debt currently stands and given the cost of separation over the next 12 months, can you give any sensitivity around the level of cross-ownership, if free cash flow and net debt don't match your guidance? I know it's early days and you sort of said you still plan towards that, but any sort of indications around what those sensitivities may be?

Guido Kerkhoff

No. First of all, let me say, we clearly have a strong liquidity position. We've more than - we've almost €5 billion in available liquidity, which is a good factor. Then, cash flow is going to come back as we make it to our guidance, which is negative but better than last year. You see that the increase compared to the current year shouldn't be coming out of that. You have the steel JV, therefore, in effect and partly the separation costs coming in. That all has been taken into account when we gave out our guidance where we finally want to be and then we see what kind of cross participation will be there and is needed to make them both financially viable. So I think it's too early and one shouldn't take the Q1 numbers as any kind of indicational concern. At thyssenkrupp, you always have to look at the full year numbers for free cash, and we all know year-end, we've managed and it's going to be the same this year. So we rather have to work on projections of the year-end and see what it finally then means. And therefore, you rather use this and not the Q1 number alone. The deviation is mainly coming from the Materials sector and this volatility, as I've said, are regarding inventory levels, payables, receivables. Once you see your own stable level of the market, you can adjust rather short-term and therefore counterbalance the effects we've seen in Q1.

Operator

The next question is from Carsten Riek of UBS.

Carsten Riek

Two questions, mostly, actually less from my side. The first one, again on the net debt, we have seen the doubling. We all know that you're getting closer to net debt-to-equity levels which we have seen last time pretty much a year ago. What other cash flow could we expect rather than the usual net working capital changes at the end of the year, as we all know that there will be some adjustments? But what I'm much more after is, is there anything which we could see on the disposal side as well to actually get a little bit of boost in the cash here? The second question I had is more on the special materials. Just looking at the business cash flow, there seems to be a significant net working capital build-up in that business in the current - in the last quarter. Does that mean that you're still overstocked in that business? And does that have any impact on your second quarter profitability? The third one is also on the business cash flow in automotive. Because you spent quite a bit of CapEx in that business, but the business cash flow is negative again. And I believe apart from the fourth quarter, has been negative for a few consecutive quarters. When can we expect out of this business a positive free cash flow? And what are actually the issues here to see continuous negative one?

Guido Kerkhoff

Yes, coming to your other cash measures, I mean, as our new CFO outlined, he's going to be working on cash flow measures, but other than disposals, because disposals in the current frame, they don't work if they're working on the split, therefore, we have basically a freeze on portfolio issues. So therefore, no real disposals we're working on. Materials Services, over start, we had in Europe weaker demand and weaker shipments. Yes. Therefore, in certain cases, we have more stocks than we expected. What was affecting us more was the price movements and therefore revaluations and windfall losses. Do we have any other effects coming out of the slight overstocking therefore, it depends on where the markets will be going, what the demand is now that we are - see how the calendar year is going to start, we have to see. I don't see balance sheet effects other than windfall gains or losses. But let's wait and see where the price levels are going and where the demand is going. So there are some positive signals as well that demand is increasing. So that remains to be seen. We're not really sure yet where the market is going to go. That's why we haven't taken significant measures to reduce or not. We have to further see how this quarter is going to start. On the order side, we've given clear guidance for 2021 that you want to have a cash conversion of 0.5x. We're still away from that, we're still ramping up factories, in some cases, in China as we've said. We've seen that new model launches, although we ramped up, are a bit later due to the market demand situation. So we have to see that this works, and then it's going to develop over time to a positive and to an 0.5x.

Carsten Riek

When will that be? Do we talk about 12 months? Do we talk about 24 months or only midterm? When do you think it will turn into cash positive?

Guido Kerkhoff

Look, 2021 is not that far away, and we want to reach 0.5x. So it shouldn't be too far out.

Operator

The next question is from Rochus Brauneiser of Kepler Cheuvreux.

Rochus Brauneiser

Maybe you can go through them one by one. The first one is on elevators, please. I think in the last two quarters, you have seen quite a rebound in your revenue growth year-over-year. Based on your funnel, is that the kind of growth level of 4%, 5% which we could maintain for the rest of the year? And what about the improvement in margins? From when roughly shall we expect that the margin is showing - starting to show year-over-year improvements again? That's the first question.

Guido Kerkhoff

Yes. Coming to the revenue growth, we expected for the year low single digit. I mean, we had a strong start, which is helpful and should support what we are doing and the rest remains to be seen. But we are better year-over-year, will be Q3. We will continue to improve, but still - I mean, we were 1.3% behind the previous year quarter and - which was better than the two we had in Q4. But it's going to come gradually.

Rochus Brauneiser

Okay. On Industrial Solutions, I think you have to - you had the trough in the backlog quite a couple of quarters behind you and you also are showing relative strength in your order intake now. Is that the kind of framework where you approach a red hero? Or is the continuation of this order trend giving you any upside for your previous expectation on that business?

Guido Kerkhoff

It's rather supporting what we have given out as a guidance. We needed a strong order intake, and it's stronger in chemicals, it's stronger in mining. But it's still, as we always said, pretty weak in cement. This was a burden as well. Service is slightly picking up. So no, no, that's what we need to get our guidance, but it's in line. It's no negative surprise. And it's improved compared to previous years. So the track is showing in the right direction. And funnel doesn't look - funnel looks promising even margin-wise. So that will be helpful.

Rochus Brauneiser

Okay. Last question is on your steel joint venture again. Can you remind us what would be the cash tax effect on this book gain you were expecting or you're still expecting?

Guido Kerkhoff

Zero. It's just group accounts.

Operator

The next question is from Marc Gabriel of Bankhaus Lampe.

Marc Gabriel

Welcome to Mr. Dietsch. I have a question regarding the potential order volume for the four frigates and the six submarines and when do you finally expect that order to come in? And in addition to these orders, do you still have capacities at Marine Systems for additional orders? And with regards to these orders, could that - could these new orders change your forecast of breakeven goal for Marine Systems for the fiscal 2021? That's my question.

Guido Kerkhoff

Well, the four frigates are above €1 billion, altogether. six subs, I mean, you know what subs are all about, that's more. It's not just €1 billion, but quite a bit more. For the four frigates, we're pretty confident for this year, this fiscal. The six subs, we've said it's this calendar year that we expect it, so it remains to be seen when it is back. This will all help. So we can carry it out, we can build all these boats. And they will not be built at once. So therefore, we still have capacity to do other stuff other than that. And we're redoing currently the whole shipyards in Kiel to modernize them in line with the whole restructuring project. And some of this we only have material packages, so they are finally assembled in the country. So it's not always the workload, just on our yard.

Marc Gabriel

Would that change the breakeven goal?

Guido Kerkhoff

Let's first get there. I'd like to.

Operator

And I will now hand back to the speakers for any closing words.

Claus Ehrenbeck

Yes. So then, thank you very much for dialing in, for joining our call and for being interested in the development of our company. In the next couple of days, Guido and the team will be on the road, tomorrow in London and the day after in Paris. And as always, the IR department is available for you if you need more information, have more questions. Please give us a call, send us an e-mail, and we will be ready for you. Thank you very much, and we look forward to staying in touch with you. Have a nice afternoon and a good day, and bye-bye for then.

Operator

Ladies and gentlemen, thank you for your attendance. This conference has been concluded.