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Earnings Call Transcript
Transcript
Earnings Call Recording
Other Earnings Calls
Dear ladies and gentlemen, welcome to the Conference Call Interim Report First Quarter 2017/'18 of thyssenkrupp. [Operator Instructions] May I now hand you over to Mr. Claus Ehrenbeck, who will lead you through this conference? Please go ahead, sir.
Thank you very much, dear operator, for this introduction, and dear participants, a very warm welcome to our today's conference call on our first quarter number for fiscal '17/'18. We released the numbers very early this morning. And as always, all the numbers and relevant documents are available on the IR section of our website, and a document -- a replay will also be available shortly after the call. I think with that, I can hand over to the speakers today, as always, will be Heinrich Hiesinger and Guido Kerkhoff. Heinrich, please take over.
Thank you, Claus. Also from my side, a warm welcome to our Q1 earning release. In the first quarter, we made further progress on our transformation into a strong industrial group. Together with the union, IG Metall, we reached a negotiated settlement on the planned JV with Tata. We clearly welcome the approval given by the IG Metall members at the beginning of February. What is important to mention, the agreement enable us to pursue our strategic and operational goals, including the synergies for the steel joint venture. Our partner, Tata Steel, is also in dialogue with its employee representative in the Netherlands and U.K. So as of now, we are on schedule with the due diligence and the signing process. Now let us have a look at the figures. Order intake, sales and earnings, all are up year-on-year. Adjusted EBIT reached its highest level in the first quarter since we have started our transformation, with 4 out of 5 business areas well above or at prior year levels. Components Technology and Elevator Technology continue to demonstrate reliable structural progress. At the same time, the Material businesses benefit from a very positive spot price environment. Corporate costs, as indicated, came down this quarter. Industrial Solution is still temporary weaker year-on-year. Nevertheless, we expect effects from restructuring measured from the second half year onwards, leading to a planned higher full year contribution, as guided. Order intake figures came in strong and are promising. Components Technology and Elevator Technology are significantly up year-on-year, driven by robust customer demand, while our Material businesses continue to benefit from favorable trading conditions. Net income is well above the prior year period, driven by lower special items as well as lower interest expenses. However, higher tax expenses due to our better operating performance as well as the onetime noncash charge from U.S. tax reforms partially offset these developments. Without the effect from the U.S. tax reform amounting to EUR 87 million, net income would have been even higher. However, from Q2 onwards, we will already benefit from the lower tax rates in the U.S. As flagged here in November, cash flow in Q1 has been clearly negative, but is already above the prior year period. This is explained by a seasonal increase in net working capital at all our Material businesses due to more favorable market conditions and volatile raw material prices as well as by working down the backlog in our Industrial Solutions businesses. However, both Industrial Solutions and Materials Services showed substantial improvements compared to last year. Based on these numbers, we are optimistic for the full year and confirm our guidance. As mentioned, the order intake profile remains encouraging, benefiting from the positive spot price environment in our material businesses and marking a new record high at Components Technology. Specifically, order intake at Components Technology benefited from a strong demand for automotive and construction equipment components, while the market for heavy truck components, especially in China and USA, is improving. Nevertheless, demand from the wind sector, in particular, in Brazil and India, remains challenging. Orders at Elevator Technology were up year-on-year, with the book-to-bill ratio above 1 and the order backlog at a high level of EUR 4.9 billion. Overall, growth is driven by new installations and modernization in the U.S. and Canada and supported by some major projects, in particular, in South Korea. New installations in units in China are also slightly up year-on-year. Nevertheless, price pressure and the [ mix ] have some countervailing effects. Regardless of low order intake Industrial Solutions due to a lack of big tickets order, the project funnel across, virtually, all verticals continues to be strong. We see good demand in chemical plant engineering and cement from the MENA region as well as from mining from the MENA region and Australia. In the past quarter, orders included multiple small and midsized tickets. This is our targeted structure, for example, a medium-sized refinery contract in Germany, cement medium-sized orders in Mexico and Marine Systems with smaller maintenance and service tickets. At system engineering, outlook remains positive. We see a robust demand for production systems in the automotive industry, above all, here in Europe. Our Material businesses are up year-on-year, mainly due to higher prices. Steel Europe at prior year with order volumes slightly down. Material Services significantly up, mainly due to strong warehousing and service businesses.
Now let me jump over to the EBIT. EBIT adjusted is significantly up year-on-year, marking the best start to a fiscal year since the beginning of our Strategic Way Forward. EBIT adjusted at the components business has further increased year-on-year, reflecting growth, especially in car and construction equipment components. Despite lower volumes in wind energy components and adverse FX effects, however, margin is slightly down year-on-year, as ramp-up costs for new plant as well as product mix effects diluted margin expansion. Elevator Technology increased adjusted EBIT and margin in the first quarter year-on-year in an overall more challenging environment. As you know, some competitors already flagged that they are also dealing with adverse effects, especially in raw material costs, while we, for the 21st quarter in succession, increased our margin despite offsetting exchange rates effects, U.S. dollar and CNY, and higher material costs, particularly in China. Adjusted EBIT at Industrial Solutions was significantly down year-on-year. Lower sales, a less favorable sales mix as well as partial underutilization dragged on earnings. Nevertheless, we expect positive effects from restructuring measures to materialize from the second half of the year onwards, which, as pointed out at the beginning, leads to a higher planned contribution in the full year. At Materials Services, earnings remained on prior level, with a larger contribution by AST and supported by performance measures and positive market developments. Last year's Q1, stronger price dynamic lead to windfalls that were mostly absent this quarter. Positive market effects were also the main drivers of Steel Europe's adjusted EBIT, coming in significantly above last year. Higher selling price as well as operational improvements are also reflected in a significantly higher margin year-on-year. Adjusted EBIT at Corporate, as promised, came down this quarter, next to lower expenditures for our group transformation initiatives, we had a positive impact from a real estate sale in the size of EUR 16 million. To be clear, even without this positive effect, Corporate costs would have been clearly better year-on-year, setting the basis for sustainable cost reductions going forward, mainly by G&A cost reduction and lower cost for transformation programs. In a nutshell, despite countervailing effects, such as FX and raw material prices, we're confident that our strong Q1 results have laid a good foundation and thus, bode well to reach our full year earnings expectation. As flagged to you already in November, free cash before M&A came in well above EUR 1 million negative after the first quarter, nevertheless, with improvements year-on-year. The higher-than-expected cash outflow is mainly explained by a significant temporary increase in net working capital, reflecting an increase in inventories at our Materials businesses due to favorable market conditions and volatile raw material prices, which led to a higher-than-expected net working capital build up, in particular, in the second half of the quarter as well as growth investments, especially at Components Technologies. At Industrial Solutions, despite worked out a project against limited milestone payments and partial underutilization, improvements year-on-year were already visible, especially due to an improved payment profile from percentage of completion. In line with our typical seasonal pattern, we expect significant sequential improvements to our free cash before M&A, with an improvement towards breakeven in Q2 and to positive territory for the full year. We saw significantly higher earnings, especially at our cap goods businesses. Free cash flow throughout the rest of the financial year will benefit from a significant release of net working capital at Steel Europe and Materials Services. Nevertheless, we will continue our restructuring efforts, especially at Industrial Solutions and Elevator Technology. As said before, we're confident that our Q1 figures have laid a solid foundation for strong earnings growth this year. For 52 weeks, we expect adjusted EBIT to increase towards EUR 500 million. Based on improvements, especially at Steel Europe, our cap goods businesses, Elevator Technology and Industrial Solutions, are expected to be flattish year-on-year, while Components Tech is expected to be down year-on-year due to adverse ForEx effects. After an exceptionally good quarter last year, with strong support also by windfalls, earnings at Materials Services will be lower year-on-year. Quarter-on-quarter, we expect improvement at 4 out of 5 business areas, except for Elevator Technology experiencing same and some seasonality, for example, Chinese New Year, and in the winter, there's construction less in the markets where we currently do have winter. Consequently, our full year outlook remains unchanged. We will build on an overall good start and show strong sequential improvements in earnings and especially in cash flow, bringing full year adjusted EBIT to the guided range of EUR 1.8 billion to EUR 2 billion, and free cash before M&A to positive territory. As already flagged in November, once the signing has taken place, we will provide you with more granularity on how this reshaping affects our main KPIs, earnings and much more important, cash flow. Overall, we're confident that by further executing our performance and efficiency programs across all BAs and thus, continuing to close the margin gap step-by-step, we bring a lot of untapped market and business potential to each business area and thus, upside for the group as a whole. This enables us not only to reach a positive free cash flow before M&A for the full financial year, but brings us also further on our transformation journey.
Okay. Thank you very much, Guido. Thank you very much, Heinrich. With that, we can hand over to you again, so, operator, please take over in order to manage the Q&A session.
[Operator Instructions] The first question is from Mr. Michael Shillaker, Crédit Suisse.
My first question, if I may, just on Industrial Solutions, if you could give us a little bit more help with the outlook for the business. I mean, I think we fully understand that the order intake is lower, the sales are lower, we're still dealing with a lot of cash out from big ticket items in the past where the prepayments came in, they've gone and that's why the cash flow is so bad. But just looking at the numbers today, again, EBIT of where it is, EUR 368 million of cash out in the quarter as well. And I'm looking at the employees, where this restructuring program, I thought, was mainly aimed at cutting employee headcount to fit the group to the new size. And yet I'm seeing 2,000 more employees in the current year than the prior year, year-on-year. So can you give us, first question, a greater road map for when the big ticket items, the expense for that, that's going out rolls off. When we're actually going to see a very, very serious cut in headcount or whatever, whatever you need to do to get the structure of the business right for the size of what you're doing? And when we actually should expect to see earnings genuinely pick up with momentum and cash flow actually start to go structurally positive? That's question #1. Question #2 is just on a couple of promises you made this year. Firstly, the target that you're going to report on the signing of the steel deal in Q1. It's great to see you're going give us EBIT and free cash, but will you also be giving us much more granularity on, a, the time frame of those targets, and b, also the road map to get there? Because I think this feels a little bit like an eternal carrot on the end of the donkey's nose right now. We know -- we can work out what your targets are, but it's very, very difficult to the investor base to actually get quite when we can achieve that and exactly how we're going to achieve that. And the second promise, I think, you've also made this year is on a full strategic review. Can you give us some kind of sense, in May, what is the scope of this full strategic review and what exactly is the endgame? Is this going to be a look at every single business within thyssenkrupp and to decide whether this fits or it doesn't? Or is it going to be a much higher level review than that? Because I think, again, and I think some of your shareholders made this point, just looking in Industrial Solutions, had this been a standalone business, maybe there would have been a greater sense of urgency to restructure this, but sitting within the conglomerate, maybe that urgency isn't there, which is why it continues to bleed cash, we haven't seen the restructuring come through quite as quickly as possible. So if you could give us some kind of sense of the scope of the strategic review you are planning.
Yes, maybe, Michael, I start with the second first. Clearly, our strategic review will give you the details of this question. Because the reason why we have only given the targets per business and sort of the company as a whole was that we always said the -- well, actually in the steel business, it's so high that it does not make sense. Clearly, with the JV in place, this argument is significantly reduced, so that means we will give you a more precise target range both for free cash flow and earnings, and also more precise time frame. This is what you can expect from our side. Now let me jump on the IS side and put you through some of the figures. First of all, the order intake. Sometimes the success of a quarter earlier is the negative for quarter later, because look, we came in at EUR 6.4 billion last year, to be quite frank and open with you, our target actually was EUR 6 billion. And one of the projects which we had actually planned for Q1 came in at the very, very last day. So from a storytelling, it would have been much better to come in EUR 6 billion last year and EUR 1.3 billion now in Q1. But it doesn't matter, the most important is that it's part of our backlog. Now let's say, going forward -- let me start with the headcount. I think what you should not neglect is that by mid of last year, we had the consolidation of Atlas. This is roughly 2,300 people. If you take that out, then you see already the beginning of the restructuring effect which will gain pace significantly in the running year. Despite the fact that the -- we have grown our service and regional setup in our core Plant Technology, last year, we have, let's say, globally taken out 1,200 headcount. Now the reason why in this business here the major effect, especially here in Germany, are coming in the second half of the year is the following that we have outlined the restructuring demand of roughly 2,000 persons in August. We have said 2/3 in Germany. The team was successfully in finalizing the maturity of the negotiation with the unions in the first quarter. But that means the impact that people leaving the company, the majority will be effective starting on 1st of April. This is the reason why the majority of the restructuring really, let's say, comes in, in the second half of the year, and from that moment onwards, you will see it in both in the headcount reduction, but also in the EBIT development. So hopefully this, let's say, clarifies some more insight in the IS business. So we clearly see the trend with the fundamental shared with Guido and myself that they will be significantly better in all respects going forward. Now from the cash flow, you said they still have EUR 360 million. That's true. The major reason is the -- let's say, the age of the order backlog, but if you compare who made the biggest improvement within the business year, actually it's IS, with an improvement of roughly EUR 180 million compared to last year. It's not where we want it to be, but at least you see that they gain some momentum going forward.
We have received another question from Mr. Ingo Schachel, Commerzbank.
The first one would be on IT unITe and T-Systems. I think some of us were surprised that you terminated the contract with T-Systems. So I was just wondering whether you could shed a bit more light not on the reasons for that but really more on what that means going forward. Of course, unITe has been a very important part of the equity story. Just wondering whether the plan is now to do the same thing on an insource basis or whether you feel it's the right time to reconsider some of the things to look for more decentralized approach, more segment-specific or whether it's really just the same thing on an insource basis. And the second question would just be on the margin progression and Components Technology. You mentioned ramp-up costs, and maybe my expectation was not quite right there, but I thought that most of the order ramp-up across the peak would already have been last year and that now the pace of ramp-up is a bit lower. Could you just remind us what you would expect in terms of progression of ramp-up costs in the Components Tech, whether they're already better in the second half of this year, or whether in light of the very strong commercial vehicle, passenger vehicle market products, you might even come up with new growth projects on the Components Tech side.
Ingo, let me start with the IT. Yes, we finally canceled the contract with T-Systems, because we both had to see that the targets we had and what we wanted to achieve for more than 2 years now with them couldn't be achieved anymore. And in the meantime, the structure of underlying IT change, so we are moving less -- or more away from data centers to cloud solutions nowadays. So that's why, jointly, we decided to cancel this contract. This doesn't change that much our IT strategy overall, just a little bit. The approach for the target to unify and to centralize our data center structures throughout the BAs remains unchanged. Some will now move a bit faster into cloud solutions. So the targets are basically the same, but the way we wanted to approach it with T-Systems finally failed, so we couldn't continue that one. But again, it's not going to be, therefore, a much more decentralized or different approach. It's just the way how we want to achieve it will change a little bit. Now coming onto the CT margins, the compression to a certain degree was ramp-up cost, but you had some ForEx effects there as well, because we have some cross-currency deliveries that we have in here. So the ForEx development was indeed for the -- we have some transactional effects coming out of that, and that was leading to a bit of margin compression in that business.
And to add to that one, it was also portfolio mix, because we had the highest growth in automotive systems, where you know, it has the lowest margins. While we had some headwind in one of the, let's say, highest-margin business in our wind arena, which will also impact Q2. So in addition to what Guido said, the mix of the sales was -- had also some impact.
The next question is from with Mr. Seth Rosenfeld, Jefferies.
I have a couple of questions just digging into the Corporate costs, please. Can you help us understand some of the drivers of the meaningful sequential drop you saw in Q1 and to better understand how sustainable this is? I think, in the introductory comments, so this represents the efforts to cut Corporate overhead in the longer term, but what is the run rate we should expect for the next couple of quarters during fiscal '18? And then just more broadly, can you give us a sense of exactly what you're doing to cut that overhead cost or alternatively, to better allocate that to the individual business units? I think it's been an area of a lot of confusion amongst the key investors.
Yes, thanks for the question, Seth. I mean, the EUR 75 million, as you can see, that's why we outlined we had this effect coming out of the sale of real estate, which was adding another EUR 16 million. Overall, we would say that we have really reduced our Corporate line, but going forward, we would say a stable line is still somewhat above EUR 100 million. So even if you adjust for the EUR 16 million, the overall run rate per quarter is still slightly above EUR 100 million. What have we done? I mean, we have given out with our benchmarking of functions where we compared ourselves to others in other industries and to find out what we can do on G&A costs is we have definitely changed the approach, and we've given our targets to all the people here. And we want to cut by EUR 100 million gross in Corporate overall in 3 years, out of which, we want to achieve, at least, 25% this year. We're on a pretty good track here, but -- and these effects will be reached without changing allocation mechanism. This is not what we've done, just trudging it out to business areas and hiding it somewhere else. That's not the target here. We want to get our -- indeed, the primary cost that we do have here down and improve the approach. And it is cost driven, not only headcount driven. Very often headcount is a driver of it and where do we have your people allocated, be it here or in other countries. But we've clearly argued with all our functions, what is your cost target, and they worked on it, and they work it down now.
And if I can ask a second question please. With regards to Industrial Solutions, can you give us an update on the general order intake mix between larger projects and smaller-scale projects as well? You noted that in the recent quarter, there was success in small-, medium-sized projects, but of course, the total intake fell quite meaningfully. How has the effort progressed to really try to de-risk this business by walking away from some of the kind of white elephant-sized projects?
Thank you for that question, because while the overall figure was slightly above EUR 800 million, it's clearly disappointing for the reason that we did not have a large-scale project. The structure is a positive one, because we still reached this EUR 800 million, let's say, and the biggest project was basically shortly above a 3-digit million amount. So that means that our intended target is that we have a much more robust and solid and, let's say, lower risk profile. This really worked out quite nicely in Q1. So this went extremely well. And the majority of all those orders were really identified and acquired by the regional organization. Again, this is the reason why we restructure very heavily in the headquarter, while we build up some resources more closer to our customers in the regions. So the structural targets, Q1 was a good confirmation for that direction.
And could you just -- one last question, can you confirm if those margins on those new order wins were above or below the long-term target you have for the business? Or [indiscernible]?
They fully -- no, they fully confirmed the long-term targets, which we have outlined to you.
The next question is from Mr. Sylvain Brunet, Exane BNP Paribas.
First question maybe on the overall guidance number. Just to confirm, you do agree with the math that if we run like EUR 500 million EBIT for, say, 3 quarter, given the new lead is strong finish that we get from the cap goods business on top of what you guys shipped already in the fourth quarter, it's hard to see how you could be below EUR 1.9 billion? So I'm wondering -- I know you want to be cautious, it's only February. But would you agree that the high end of the guidance with the steel markets we are seeing at the moment is definitely on the cards? My second question is on Industrial Solutions. Could you talk a little bit about the Marine side of the business? If you could give us a bit of sense of how much of the order backlog comes from this part of the business, to the extent you can comment and the part where it was a higher-margin business. And lastly, if you could explain what the production issue was at the heavy plate you mentioned in the Steel division that contributed to the lower tonnage of these plants?
Yes, let me first start with the lower tonnage. The major impact in the lower tonnage actually was a logistic issue, because -- I will not blaming business partner, but we struck heavy lead with the performance of Deutsche Bahn. And this probably has cost us maybe even up to 100,000 tons in shipments, which is part of the net working capital increase sitting right now on our side. This was really the one of the major impact, significantly larger than, let's say, some issues on the heavy plate side. Coming to your first question, our EBIT guidance, we always said, if the dynamics in the material market will carry through throughout the business year, we are rather targeting the upper end of our guidance, and this was also always our comment. But as we had some learnings in Material business, we only guide what we can see. For the next 6 months, we see clearly at that height, very positive run rate. So overall, with that assessment, your statement is a true one.
Yes, we're confident on the guidance. And on Industrial Solutions, the overall backlog in total is EUR 11.2 billion. Out of that, about half is Marine Systems.
And would you say we should expect some prepayment, therefore, to contribute from the second half, as these orders get into...
No, in the Marine Systems, this year, we do not expect large projects. They will rather come in '18/'19. So let's say, this year, the order intake will be driven really by our core Plant business and system engineering, and only, let's say, the major business in Marine Systems will be upgraded to [indiscernible] and service. But no ticket at all in Marine Systems this year.
No, that would be helpful, but unfortunately, not to be seen.
Okay. So it's no chance compared to your Q4?
No.
The next question is from Alain Gabriel, Morgan Stanley.
Two questions from my side. If I can go back to the Components Technology business. Do you mind putting some numbers behind the ramp-up costs that you have faced during the quarter and how quickly they expect those to -- if you can remind us, how quickly they expect those to fall out? And the second question is on the working capital build, also can you kindly quantify the spread between the working capital build in the Material Services and steel business on one side and the cap goods businesses on the other?
The -- if you recall our, let's say, year-end earnings release, we clearly said that the ramp-up costs in Components Technology were to mid-higher 2-digit million number. For the running business year, it's definitely, as said before, by Ingo Schachel, slightly lower. Though this year, we'll probably come back to mid-2-digit million number, it will go down step-by-step over time.
Yes, on the working capital build, what we see at Materials Services and Steel Europe is about EUR 100 million each and about EUR 100 million more in the cap goods business, more than we expected when we started the quarter.
The next question is from Mr. Fraser Jamieson, JPMorgan.
A couple. Firstly, on Elevators, you've obviously done a good job over the past few years, increasing the margins there, for it's quite notable when you look around the rest of the industry is the fact that margins on -- for your peers are coming down a bit. So just in terms of your ability to push margins further from here, to what extent are you still confident in ultimately pushing up to the sort of 15% level that, I think, you've spoken about in the past? And what features of your business are such that gives you confidence around that? And then the second one was just on the restructuring charges, obviously, very low numbers for the first quarter this year. The pattern really has been that they've tended to come later in the year. And I think, on the last quarterly results, you talked about kind of similar restructuring charges for this year as last. Just wondering if you could outline your views on those restructuring charges and how they might come through, through the remainder of the year, please.
I think you refer, let's say, there's positive evaluation of our progress in our Elevator business. Look, we do not discuss whether fee -- about the 15%. The business has a potential to -- for significant improvement. We'll rather focus on improvement year-on-year, and, therefore, what we guide is that we are targeting 0.5 percentage points a year. Clearly, we cannot, let's say, decouple from the reality of the market. Also, our Elevator business saw a headwind from FX, but also from the commodity price increase, primarily steel in China. But in Q1, the team did a great job, and it could really completely compensate for that. And what we also see extremely positive that they could really slightly grow in the units year-on-year in China. Clearly, here we saw price pressure, but overall, I think it's a good performance. And the team is meeting right now in Brazil. I will -- sorry, in Barcelona. I will, let's say, join them tonight, and we will really identify how can we work against that headwinds there. So we have potential in our organization that we continue that improvement track and whether, let's say, at the end 15% is the right figure. Let's discuss this point, when we are much closer there.
Yes, coming to the restructuring. Yes, your analysis of our pattern throughout the year is correct. So it's always in Q3 and Q4 more than in the first half. So that's why the 22% will not be a run rate for the full year, probably. But what we've clearly stated already last year is that we've seen the peak. We do not expect this year to be at the same level as last year. It's going to come down, and it's going to be a significant step.
The next question is from Ms. Cedar Ekblom, Bank of America Merrill Lynch.
I have just got a question on -- it's early days and you're approaching the plans to come out with sort of full strategic review of the company. If we're looking at the business over the last sort of 5 years since you originally came out with Strategic Way Forward, there have definitely been some improvements. Cash flow generation is moving in the right direction, but in some businesses, margins continue to lag targets and Components Technology margins went down year-on-year, despite the fact that you still maintain the 6% to 8%. Now you've spoken about why the margins aren't improving, and I think we can all appreciate that. But I'm just wondering, as you're approaching the strategic review process, are there businesses where you actually say, we can't get to the margin targets as quickly as we'd want to under our own steam, and maybe there's bigger gains that we can make by either divesting businesses, looking at strategic tie-ups like you're doing in steel. I'm just wondering how you are thinking about this process? Are we going to get Strategic Way Forward 2.0, which is basically the old plan dusted off and a few more details, but ultimately the same targets? Or are you approaching this with a fresh set of eyes and saying, can we actually do this completely differently to how we've been thinking about it in the past?
Look, unless you have plan, we're with you in May. But one of the major reason why, let's say, our step improvement, and here I have to correct you, if you look on our Components, in the last 4 years, they actually did improve also in smaller steps year-by-year. And the reason why it's only smaller steps is the significant time lag between investments in new products and the time when we can really see it in our sales and significant better margins. Even in such an earnings release calls, but I'll leave more in our AGM. I have given two examples, and let's only jump on one. On our steering business, where we really started to build up the portfolio in 2012, we have now all the ramp-up costs both in R&D and getting prequalification with the customers and building the new plants. And all this needs to be pay out, out of the old backlog, where the margins are still challenged. And we only starting in '18, '19 will have the much higher backlog with much more promising margins and this is a major, let's say, contribution, despite, let's say, cost efficiency, which will change significantly our earnings profile. And all the rest, how we approach the strategy, I think we do it in one, let's say, complete picture in May.
Does this answer your question, Cedar?
Yes, it does.
The next question is from Rochus Brauneiser, Kepler Cheuvreux.
Few ones left on my side. One on the joint venture with Tata. Having listened to the call of the Tata Steel, you could have gained the impression that the realization of savings from staff reduction on the operational downstream side would come earlier than those on the SG&A side. And in that respect, I'm interested to understand, have the full amount of workforce reductions or the 2,000 on your side been fully discussed with the unions at this stage? Also the one for the SG&A side? The second question is, can you help us a little bit on the free cash flow improvement you are envisaging for the rest of the year? So last year, you had a situation where you turned around EUR 1.1 billion in the receipt over 9 months, now it's a minimum of EUR 1.5 billion. But this year, it's against the EUR 200 million of restructuring. You have the similar working capital build of EUR 1.8 billion in the first 3 months. So maybe can you help us a little bit more how much is coming from the working capital side this year and what comes from other areas?
Let me start with the joint venture first. When we have signed the memorandum of understanding with Tata Steel, both sides clearly committed that we will ensure that the agreements made with the unions allow us to really step up to the synergies committed to you to the EUR 400 million to EUR 600 million. And to make it more precise, we both have the challenge now, and I think we are, let's say, have done our homework, that we've settled an agreement with the unions, which allows us to really reduce up to 1,000 people in the G&A functions and another 1,000 in downstream. And by the way, this is really reflected in the agreement which we have signed with IG Metall. Very often this is mentioned that there is a site guarantee. First of all, a site guarantee does not mean that you cannot close part of that site. And for 3 specific sites, where we see the necessity to adjust, we have not given such a guarantee. So it was a very honest and transparent dialogue with the unions to really make sure that on one hand, where we don't see a need at all, our employees, let's say, are -- feel more secure. But we were also honest enough where we see the necessity for adjustments that this is also reflected in the agreement. And absolutely the same commitment was made by Tata in the MOU, and they are working on it.
Coming to the free cash flow improvements that we want to see for the second half. Working capital, definitely, as you know, there are always some year-end effects here do play a role, but that's why we explained a bit more in detail why that will come out of the EUR 1.5 billion, and what EUR 300 million we basically saw that we think are seasonal, especially in Materials Services. In Europe, we saw that working capital went up by higher prices and higher volumes, largely due to the better shipments we had in Materials Services and some problems in logistics and a higher working capital in tonnages at Steel Europe as well, so where we think that this will turn around as well. On the other hand, we do see an improvement in our adjusted EBIT figure. Don't forget that, which will help that overall the cash coming from the business should be on a higher level. So that, if you take that all into account and compare it to the previous year, should give you a way how we want to achieve it.
We have received another question from Mr. Christian Georges, Societe Generale.
Two questions. One is on your distribution -- steel distribution operation services, excluding AST. It's the third quarter in a row that you're down on profitability year-on-year. So where the steel operation seems to have turned the corner on volume and on prices and there seems to be trading steel. So looking forward to the next quarter, should we expect that we're normalizing this kind of profitability levels? Or we're just on the lower sequential type of relative profit? And the second question is on your tax looking forward. So in the quarter, we've had a one-off impact, which, I suppose, adjusted, gives you again about a 40% tax rate. Going forward, do you get a benefit from the changed tax environment in the U.S.? And if so, what magnitude should we expect?
We see our performance in our distribution business different. Please keep in mind that in a, let's say -- you made a reference to the last 3 quarters that in last year, especially in the first 3 quarters, we had tremendous positive impact by windfall profits, which are not existing right now. So what you see it flat right now, but, let's say, now windfall profits are now replaced by operative performance. So overall, we do not see, let's say, that this business is turning negatively on the operative side. It's rather the opposite that the onetime gains which we could benefit of last year are now, let's say, filled up with operative performance.
And coming back to the tax question. Yes, our tax rate will go down once the lower tax rate will be there coming from the U.S. So we expect it for the next years to go down within the 30s percent.
And does that impact Q2 or is that for later on?
We would see it in Q2, but the next years going forward, the mix blended tax rate should come down as well.
We have received another question from Mr. Fraser Jamieson, JPMorgan.
It was just on the JV. There was some comments, I think, you made this morning about a commitment to 6-year holding period for your stake in the JV. I was just wondering if you could outline if that is likely to be a hard commitment or is it something that could potentially be reassessed, dependent on market conditions, and obviously, with the agreement of both parties.
We see future agreement as a positive one, because if you look what they actually demanded at the very beginning is that we commit as thyssenkrupp to 50%, which would not have allowed us to go into an IPO. I think the result, which we now have negotiated, in those Tata and thyssenkrupp together will keep 50%, which would allow us, even from day 1 onwards, to place part of the JV, if they are very successful, to the market. So this was, let's say -- it is an agreement, so it is a commitment, but it offers us quite some flexibility also to consider IPO options also limited to, let's say, close to 50%. So I think it's a meaningful agreement, which you could make here.
And it shows on the other hand that the unions are not completely shut or close to good ideas. I mean that's what you'll see reflected that they allowed that from day 1. They see an IPO as a signal of strength, brings in money into the JV. So they're open to good arguments.
[Operator Instructions] We have another question from Mr. Sylvain Brunet, Exane BNP Paribas.
So I just have a very quick follow-up on the time line for the JV. To clarify, you would discuss the impacts and the targets on the day the signing is effective, which is still a time -- timing towards end of March, early April, to the best of your knowledge? Is that correct?
Early 2018 is what we've said. No change in our wording.
We have received another question from Mr. Carsten Riek, UBS.
Just a very -- 2 very quick ones. The first one is on steel. If I look at the sales per ton progress you had in this business, you clearly lack the progress from -- in other -- from other steel companies, especially Voestalpine, which has a similar profile. Why is that? Is it just that longer lag effect? Do we have longer-term contracts than first? Or why do we see that pattern? And the second one is, at least on the free cash flow, you seem to be quite confident to actually get to the positive free cash flow by the end of the year. What, in your opinion, would change your mind? What could actually happen that you would miss the free cash flow target you set out earlier in the year?
I have to correct you in 1 respect. We consider the portfolio of Voestalpine are not similar to ours. I think where they gained significantly higher margin is definitely on is heavy plate, which reflecting roughly 15% on the competitor you mentioned, and we believe this is quite profitable. Let's say, where we are, let's say, falling behind a little bit in heavy plate, let's say, in the period where we invested in the Americas. And the second reason is exactly, as you mentioned, that, let's say, the lead time in our contract business is slightly longer. So these are the 2 major reasons for the impact you have seen. So we definitely believe that we will, let's say, improve from the point you see today going forward.
Yes, yes. Sales per ton should indeed develop positively, given by the contracts that we currently do see. Now second thing that you asked, what can always affect the free cash flow guidance. One thing that is always important and that we've always seen in the Materials business is strong hikes in the price of raw materials, coking coal or iron ore, especially shortly before quarter-end, given strong volumes. This always can affect certain variables. On the other hand, always down payments. These are the 2 big strong levers that you cannot 100% control when contracts are signed. But having said that, given what we currently see, we fully confirm our guidance that we want to achieve it positively this year.
On the last point, what -- in your calculation, what kind of iron ore price and coking coal price will you use actually?
Okay. What we usually use is the current forecast you can see. And then you always have to judge in over what time frame can you really bring it down to the market. So you have something like 3 to 6 months lead time, and you have a bit of a payment schedule. So that's what you always have to take into account, but we usually take current forecast that you see on the market.
Thank you. There are no more questions at the moment. I would hand back to the speakers.
Very good, operator, thank you very much. Thank you very much for managing the Q&A session. Yes, dear attendees, participants of the call, thank you very much for your questions and for participation, and we look forward to staying in touch with you. If you have more questions, then, please contact the IR department, we are always happy to help you further. And we also look forward to seeing some of you on the road in the next 2 weeks. Thank you very much, and we wish you all a nice day. Bye-bye.
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