May I now hand you over to Claus Ehrenbeck, who will lead you through this conference. Please go ahead.
Yeah, thank you very much, Operator. Yeah, my name is Claus Ehrenbeck, and on behalf of the entire team here, the entire IR team, I would like to welcome you to our conference call today on our Q2 numbers. We have released all documents already this morning at 7:00 A.M., and you can find all the documents for this conference call at the IR section of our website. And with that, I already can conclude my housekeeping remarks here and can hand over to our CFO, Klaus Keysberg, who will lead you through the presentation and will be available for the Q&A session afterwards. Klaus, please.
Thank you very much, Klaus. A warm welcome from my side to today's conference call on the Q2 figures. Today, it is my premiere for me addressing you in this conference call. Therefore, before we start, I would like to introduce myself shortly. I joined the company back in 1996, and after various management positions in the automotive area, for instance, amongst others at Bilstein, I became member of the executive board of Materials S ervices in 2011, first as COO, afterwards then CFO, and later on CEO. In October last year, I was appointed to the executive board of thyssenkrupp, and as you know, I took over the CFO function in April this year. Before we have a look on the financials, let me start with a short update on new TK and what have we accomplished in the past months so far.
For example, for Springs and Stabilizers, which is, of course, part of Automotive Technology and one of the businesses under review, an extensive restructuring plan for the German sites was approved, including the discontinuation of the Olpe site by the end of 2021. The Hagen site will be realigned and converted into a center of excellence for the development and manufacture of Springs and Stabilizers. And around 490 jobs will be impacted by this restructuring of both sites. Some 330 out of this will be affected at Olpe. In the coming weeks, agreements are to be reached with the employee representatives on a reconciliation of interest and social plan for the two sites, which is clear. At Steel Europe, we already started the implementation for the new Steel Strategy 2030, as already announced a few weeks ago.
An important element is a significant reduction in cost, including cuts of 3,000 people, 3,000 jobs, more or less 2,000 short-terms, and the other 1,000 medium-term till 2025, 2026. Moreover, an action plan has been developed addressing the optimization of the production network, expansion of technological capabilities, and shifting our product mix even more to the higher margin value-added grades. Furthermore, for our Heavy Plate operations, another business under review, we will make a sell or close decision until the end of fiscal year 2021. Irrespective of the currently difficult environment, we are convinced that the Steel Strategy 2030 is the right response to the enormous challenges we see at the steel sector and the right way, of course, forward to strengthen our position as a technology leader and the fundamental value of the steel business. At headquarters, at corporate headquarters, restructuring is also progressing as planned.
Not only did we reduce the number of corporate functions from 15- 10, but headcount reduction is also underway. As of April 1st, 177 FTEs decided to leave the company or join a transfer company, to be more precise. Confirming with this is our target headcount reduction from 800 to roughly 400, a little bit more than 400. Year to date, throughout the entire organization, we already realized or decided on personnel restructuring of up to 2,400 FTEs. 1,400 we have realized so far, and additionally, we have decided on out of the frame of the overall 6,000 people you may know. Next, to performance, we focus now on the portfolio pillar. The elevator transaction is fully on schedule. We already obtained approvals from eight out of 13 merger control authorities, among others, essential ones, especially from the U.S., Canada, and China.
We are in contact with the buyer consortium on a nearly daily basis, and we are both very confident, as we have been since the signing, that the deal gets closed in the course of the fiscal year. We do not see signs of having lost confidence, or we do not even see signs of losing time track or something like this. At Plant Technology, we continue to the evaluation of opportunities to realize best owner concepts, either through alliances or the pursuit of M&A. For the individual business or the entity as a whole, we see vital interest from strategic buyers. So far, we received indicative offers that, of course, are currently being screened. Of course, going forward, the corona implications have to be considered.
In about a week, on May the 19th, post the supervisory board meeting on Monday, we will present the main cornerstones of our portfolio assessment also to you. And with this, I would like now to come to the financials. Overall, order intake was down year on year. In an already weak auto environment, all businesses were lower than year on year. And with our materials, as well as car and truck component businesses, experienced the strongest decline, worsened on the back of the first effects from corona due to a drop in demand in China and Europe as OEM customers shut down their production. The development for sales mirrored the order intake situation except for Plant Technology, where they are showing a strong increase driven by the execution of projects for chemical plants.
The economic slowdown, particularly on our materials and components business, was the main driver for the EBIT adjusted development in the second quarter. On top of that, we experienced first pandemic-induced effects at Automotive Technology, Steel Europe, and also for Forged Technologies, for a mix , and discontinued elevator activities. Without these effects, we would have been slightly positive. Free cash flow before M&A came in lower year on year and remaining negative despite a sizable release of net working capital by inventory reductions at our materials businesses and also in parts also in the steel business. And significant milestone payment at Marine Systems. But these positive effects could not overcompensate the negative effects which came out of the overall development.
Due to the global spread of the corona pandemic and the associated effects on the economy, we withdrew our original forecast for the fiscal year with the ad hoc announcement on March the 23rd. I assume I'm not telling you anything new when I'm saying that providing an outlook for the next six months has never been more difficult than now, as the economic effects, particularly in our auto-related materials and components businesses, are not yet fully foreseeable and quantifiable, and from today's perspective, we expect a significant decline in our key performance indicators, with the third quarter likely marking the trough. On the positive side, once the closing is accomplished, our balance sheet will see a strong push from the elevator transaction, specifically a significant uplift on our book value of equity of more than EUR 14 billion.
Moreover, we will have a significant and sizable net cash position, which now is more than ever important. Also, on May the 8th, so last Friday, we concluded a credit line of EUR 1 billion from the KfW, Kreditanstalt für Wiederaufbau, a state-owned bank, the special program with the consortium of KfW and other banks. This credit line will additionally secure liquidity during the coronavirus pandemic until the cash inflow from the sale of the Elevator Technology business area expected this fiscal year. And together with our free liquidity at the end of the second quarter in the amount of EUR 4.5 million, we really have to say, or let me say this really clearly, we feel that with this, we are in a quite strong position in terms of liquidity. And in these times of the pandemic of corona, cash is king.
Liquidity is the most important and best thing to have. With the elevator deal and with the bridge loan from the Kreditanstalt für Wiederaufbau, we are really feeling quite comfortable, and we really think that we are in a very strong position regarding liquidity. Looking at our operational performance in more detail, EBIT adjusted at Automotive Technology came in lower year on year and negative. In an already weak auto environment, plant shutdowns in China starting in February and continuing in Europe as of March resulted in a significant demand and production decline, putting further pressure on earnings. However, both dampers and camshafts held up quite well but couldn't compensate the ongoing and year-on-year more negative performance of Springs and Stabilizers, as well as Systems Engineering to underutilization. Industrial Components delivered a positive earnings contribution. However, higher earnings from bearings for wind turbines, good development we see there.
This was overcompensated by a weaker forging business due to the cyclical lower demand on components for heavy-duty engines and construction machinery and first effects from corona. On the back of stringent G&A cost reduction, Plant Technology continued to improve year on year, yet remained negative, confirming that our turnaround program is bearing fruit. Moreover, the earnings contribution from chemical plants is up year on year, reflecting increasing execution of sales from major orders. EBIT adjusted at Marine Systems was positive and up year on year, as measures for performance improvement showed results. Nevertheless, earnings continued to be held back by low margins on project build. But let me make one remark. This business is not very much impacted by corona, so coronavirus is a quite stable business.
Challenging trading conditions continue to drag on Materials Services, EBIT adjusted, reflecting year-on-year lower shipments to 10% in comparison to previous year and prices in the main product groups. In addition, the prior year quarter benefited from substantial positive one-time effects. AST was lower and slightly negative year on year due to the downward price trend in stainless steel, but also due to the temporary plant closure in March until early October. At Steel Europe, mainly lower shipments of higher margin products to the automotive industry, negative price effects, and high raw material costs, particularly in iron ore, as well as costs for lower capacity utilization, dragged on EBIT adjusted in the second quarter.
Despite the continuing implementation of measures to reduce administrative costs, corporate headquarters costs were slightly higher year on year, but the influence out of this has something to do with valuation issues, reflecting also higher project expenses for the Project New TK and other provisions. For elevators, I don't want to spend too much time discussing about elevator development, but they came in slightly lower year on year due to an adverse sales development in Asia, especially China impacted by the corona pandemic. In the current environment, protecting the health of our employees while mitigating the economic impact of the pandemic through stringent cost control and preserving our liquidity is our top priority. Overall, countermeasures planned sum up to savings, cash, and EBIT-wise to roughly EUR 1 billion in the current fiscal year.
At the moment, roughly 32,000 people or 32,000 FTEs are in short-time work all over the world, predominantly in plants and administrations affected by plant closures and production cutbacks at our customers. In addition, we make use of more flexible working hours, such as reducing overtime, holidays, and temporary work while expanding the possibilities of teleworking to keep the risk of contagion between employees as low as possible. Lastly, where possible, we reduce or postpone maintenance and repair investment projects and release net working capital, which is possible, especially at our materials business. However, against the background of the still consolidating estimates of the economic research institutes for the expected economic downturn, a reliable forecast for the development of our key core control parameters is currently only possible under great uncertainty. Consequently, we only make trend statements for the fiscal year.
As a result of the drop in demand in our business with materials and components for cars and commercial vehicles caused by pandemic-related temporary plant closures and production cutbacks by our customers in the automotive industry, we see sales of continuing operations are expected down sharply, particularly in the second half of the year, or to be even more precise in the third quarter of the year. Declining sales and the resulting underutilization of capacity pull EBIT adjusted of continuing operations down into strongly negative territory for the fiscal year.
With the third quarter likely marking the trough, for the third quarter, a loss in the high three-digit million EUR range is likely, but it cannot be ruled out that the figure might go up to a good EUR 1 billion, depending, of course, on the pace of resumption of production by our customers, which is just beginning, but also depending on the stability of demand and supply chains. For the remainder of the year, fiscal free cash flow before M&A of the continuing operations will be determined by, of course, the operating performance, but also pretty much cash in from milestone payments in order intake at our project business, payments for restructuring, and lastly, our net working capital needs, respectively, the magnitude of releases in the fourth quarter of the year, which we normally also do. Wrapping up and looking forward before we jump to the Q&A.
Looking at the pillars from new TK, firstly, performance. Of course, the pandemic will likely overshadow the rest of the year, but we will fight back with stringent cost and cash measures up to EUR 1 billion, as I said before, to mitigate the economic impact. This is, of course, short-term. Additional measures are flanked by our restructuring initiatives, especially at Steel Europe, where Steel Strategy 2030 will push fundamental value. Meanwhile, we will drive restructuring while enhancing performance across the entire organization. And this, of course, will be the absolute focus area for the future. For the second pillar, our flexible portfolio, results of the portfolio assessment will be communicated on May the 19th. Alongside, we will continue the best-owner process for Plant Technology.
More details on the use of proceeds from the elevator transaction will be provided once the uncertainties have lessened and the economic parameters for businesses' planning have stabilized again. Last but not least, closing the elevator transaction is expected in the course of fiscal year 2020. And with the inflow of the purchase price, we will significantly strengthen our balance sheet, providing us a sizable safety cushion. And having said that, I'm happy to answer your questions. Thank you for listening.
Yeah. Thank you very much, Klaus, and Operator, please take over for the Q&A session.
Yes. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question for our speaker, please dial zero and one on your telephone keypad now to enter the key. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial zero and two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. We've received the first question. It is from Ingo Schachel, Commerzbank. Please go ahead. Your line is now open.
Yeah. Yeah. Thanks very much. And congratulations on your new role and CFO job. My first question would be on your free cash flow. You've given us some guidance for the third quarter, and it's obviously too early to talk about Q4 in detail, but can you just shed some light on what net working capital tactics you expect for the fourth quarter? Should we expect another quarter with clearly positive cash flow in Q4 like in previous years, or would that change because you've got the elevator proceeds and don't necessarily have to release much net working capital? And beyond this, let's say, tactical net working capital point on Q4, I would also be interested in a, say, slightly structural comment on net working capital because I think we've heard from many companies that they are taking more steps to push suppliers to offer better payment terms.
Is that something that you, as the new CFO, will also be pushing for with your suppliers, or is it rather the other way around that some of your, let's say, clients in cyclically challenged sectors are pushing you to even improve your payment terms to them?
Yeah. Thank you. A lot of questions. Let me start with the last question. So up till now, we have not seen this trend or dynamic which you mentioned that our suppliers are pushing us. This is not the case at the moment. If you look at the development of the net working capital in the fourth quarter, so having said that we mitigated the risk of liquidity during the fiscal year, we still have our focus on liquidity and also on cash, which is very clear, and we will also do these things we did also in the previous years in optimizing our net working capital, especially in the fourth quarter, and we will also do this in spite of having cash in from elevator deals, something like this. This will be the same.
But I cannot give you at the moment an indication, first of all, how much it will be. And second, also, will it be, let's say, how much will be the effect from the EBIT influence about this? Yeah. This is regarding the development of the fourth quarter. I think this will more or less be the question. Thank you.
Just maybe to follow up on the question whether you can structurally use everyone knows that you have a negative cash flow at the moment. Use the opportunity to push your suppliers to offer better payment terms to you?
Yes, we do. We do. Yeah.
Okay.
We do it case by case, by businesses, not as an overall thing, but we, let's say, stimulated our people to do something like this. Yeah.
Okay. And then just a quick one on the Plant Technology divestment process. I think you mentioned that you've got indicative offers that you've received. Just wondering whether you would feel that those offers support the current book value or whether you would think that the current stage of the process is maybe right now or maybe with the next quarterly results a point in time when we should see impairment or value adjustment based on offers that you've received. And also, the numbers are probably much weaker with a triple-digit loss for next quarter which are guiding for Plant Technology. Are you still confident that all business units can be sold, or is it probably more prudent to wait with certain parts of the Plant Tech divestment?
Yeah. Let me start with this way. So we received some indicative offers from very reliable parties, and the offers are also, to say it, interesting. But, of course, in times of corona, let's say, it's not easy to really bring it quickly to an end. But we will focus on this M&A process, of course, but we will not make fire sales or something like this because we don't have the necessity from the liquidity portion of us. So we will look at it, and we will, let's say, at the right point of time, see whether we can have a good deal or not. So that's the thing which I can say at the moment. I cannot say much more. But we don't see at the moment that there is the necessity to make some book value adjustments or something like this.
Yeah. Understood. Thank you.
Thank you. The next question is from Sylvain Brunet of EXANE BNP Paribas. Your line is now open. Please go ahead.
Good afternoon, gentlemen. My first two questions are on the steel side for Steel Europe. Given the circumstances and the crisis, do you agree that we should expect a faster decision on heavy plates? Obviously, with the year-end in September, that's a couple of months away, and in this environment, as we can see, every week counts. A related question to that is to know what level of production cuts you've implemented across steel operations already. There were reports in the press, but no official release. My second line of question is on short-term work. I can see you've effectively applied for short-term work for 57% of your workforce, if I exclude elevators. Was there any constraint to extend it further, or what were the criteria?
Is there a case where if things don't improve as you think in the later part of Q3, you could still use more, or is there a maximum already? And lastly, on marine, have you got more visibility at this stage on whether you'll be able to secure some prepayment from the Norwegian order before this year ends? If we now have to assume that this will not contribute to free cash flow this year, please, thanks.
Okay. Thank you for the questions. I will start with Heavy Plate. Of course, Heavy Plate, we have also an agreement that we will have a decision until the end of this year. This must not necessarily mean that we cannot be quicker. But this is also something, to be also very honest, I don't think that it will be feasible to make it really quicker at that point of time to really talk seriously about divesting Heavy Plate. If we judge both opportunities, shut down or divest, I don't think that it will be very much quicker to have a decision till the end of this year. This is the first one. The second one was, I think, level of production cuts so far. Of course, you know that our main customers, some of our main customers, especially automotive, shut down, and also we have lower volumes.
I think this is very clear. And so far, we reduced our capacity utilization in the downstream aggregates up to 30%. And this was also done with the blast furnace area. But as you also know, that we already also were able to bring down one blast furnace in HKM so that we are now more flexible with the existing four blast furnaces we see at our steel site. So this is the comment on the capacity utilization at steel at the moment. If we talk about short-time work, I think the question was more or less, could we do more, or what is the ratio behind? So up till now, I think worldwide, we tried to use this instrument as far as we could.
And we used this instrument where it was also indicated, where we were dependent on the situation that also maybe our customer shut down some work and where we have not a good utilization. So I think we are pretty much on the maximum. Maybe there are some 5% or something which we are, or 2 or 3% which we can enhance, but we are pretty much on the level where we think that we can use this instrument here. Sometimes it's also a legal issue here, or not a legal issue, but it's not provided in any case in the world.
That was the fourth question on the Norway order, whether we expect prepayment to come in.
No, I do not personally expect a prepayment this year.
Okay. If I could just follow up on the short-term work question, do you have an estimate of how much cash this is saving to the company on a, I don't know if you measure on a monthly or weekly basis?
We think that we will have a cash release of roughly EUR 300 million, at least for the next five months or something like this. This is an estimate, roughly estimate.
So that's per month or for the whole?
No, no, no. Not per month. Sorry. This is for the four months.
For the four months accumulated?
Four to five months. Yeah, so roughly till the end of the fiscal.
Yeah. All right. Thanks so much.
Thank you. The next question is from Carsten Riek of Credit Suisse. Please go ahead. Your line is now open.
Thank you very much. Three questions from my side. The first one is, I believe, on the third quarter. You talked actually that the second calendar year quarter could be the worst one. The third calendar year quarter could be better. Question, do you already see signs of improvement in your bookings? And here, particularly in steel and automotive, which are heavily impacted by COVID-19. Second question, Plant Technology. In the last crisis, we have seen some kind of cancellations of orders. Do you see the same kind of pattern right now, or are the orders safe, and what does it mean to the prepayments? And the last question I have, I noticed that your pensions went down as the discount rate went up to 1.6%. The jump seems to be quite big in discount rates.
Could you just give me or shed some light on why the interest rate or discount rate went up by, I think it was 70 basis points? Thank you very much.
So yeah, let me start with the questions here regarding the third and fourth quarter. I mean, what we clearly see is, and what is also, I think, very obviously, that, for instance, the OEM producers, they shut down production at the end of March, and then they kept it down in April, and now they are coming back to work. And that is now the question, what is going to happen? They are coming back to work, some with one shift, some with two shifts, and they will remain in this, let's say, mode of driving the shifts, I think, from our perspective, till summer or something like this. And the question is now, do they really produce for a real demand, or do they produce because they produce for the stocks?
What we see is, let me say it this way, what we see in China is that it seems to be that there is a real demand, and we see that production is going up, and it seems to be reliable. For Europe, of course, we see that our customers are starting to produce again, and as we see, they are only producing with one shift, and obviously, they are trying to see whether the supply chains are working or not, and of course, we see now here that we get a slightly higher demand, but to also be honest, we need, of course, more, and this is the question when it's going to be decided when there will be more or not, and this is something we will see during the time.
This is also something which makes us hesitant to say it's going to be that much better in Q4 or that much better in Q4. We really think it's going to be better, but we don't have an estimate how much it will be better. So just to give you a statement, if automotive production from our customer in April went down to, let's say, 70% in comparison to the pre-corona situation, maybe in Q4, is it then a reduction of 20% or still a reduction of 50%? We don't know that. They don't know either. But these are the scenarios we are looking at. So definitely, we see an upcoming production, but the question is how much will it be? If we come to plant technologies, you'd mentioned that in previous crises, you saw cancellations and effect on prepayments.
This is what we are not seeing at the moment. So we do not see cancellations, and we also do not see effects on the prepayments, to be very clear about this. What we see is, and this is very much different from country to country, that in some countries, we are able to come to the plant and work on this, but in some countries, we are not able because there are some regulations that because of corona, you cannot enter to the plant. But this is what we are having here in the situation in Plant Technology. Some problems with the access to the plants, but no problems with cancellation of orders or prepayments. The last question was regarding pensions. Yes, of course, our pension liabilities went down because of the valuation or the, let's say, the adjusted interest rate of the valuation.
This interest rate in the end of December was for Germany 0.9, and the end of March, it was 1.6. Let's say the reason. Did you ask for the reason why this interest rate went up? I cannot tell you.
Yeah.
Sorry?
Yeah, yeah. No, because it was 70 basis points. Just intuitively, I would have not thought it would go up that much.
Yeah. But of course, this is externally driven, but this was the case. Yeah.
Okay. Then that's fine. Thank you very much.
Thank you. The next question is from Bastian Synagowitz of Deutsche Bank. Please go ahead. Your line is now open.
Yes, good afternoon. I have a couple of questions left, and my first one is just a question on your equity, which I think would have gone negative, would there not have been the relief from the higher interest rates to your pensions, which you just discussed in the previous question. This is obviously not an issue once the elevator transaction is finalized, and I think they will obviously boost your equity by EUR 14 billion, and I think also you have a bit more caution in your German GAAP statements, but could you please let us know how far there is an issue for your access to your credit lines, and is the perspective of the elevator deal sufficient to alleviate any concerns with your credit counterparties? That is my first question.
Yeah. Coming to the first question, if we would not have this adjustment of the pension liability, the equity would not have been negative. I don't know whether it was your question or your remark. No, it would not have been negative. It would have been still positive. The effect on the pension or the equity was EUR 0.4 million. And the second question was more or less, can you help me again? It was how much banks?
Yeah, sure. Sorry.
Okay. So the German GAAP. No, yeah, of course. The equity, the IFRS equity is, of course, not a trigger for any worse things. You know that. And it's a local GAAP, and there we have more caution. That's right. And at the end of the fiscal year, we will have the proceeds of the elevator deal. And the question was how the banks are reacting in this regard. Well, let me say it this way. The banks are looking, of course, critically at us. This is very clear. And the elevator proceeds are helping, and we will start discussing with the banks starting next year. And of course, they will also look at, I think, what kind of equity story we are building after the strategy we will at least in part release next week. And for them, it's key how we will proceed into the future.
Elevator is helping, but it is not the case, to be also very honest, that banks are saying, w ell, this is now the end of the game. They want to be, of course, let's say, they want to have an equity story where we can clearly show that this company is going to proceed and going to earn capital costs and things like this, so we have to convince them, yes.
Okay. Okay. Then just one more.
Let me also one question. Sorry, one remark. You know that we have this bridge loan from the Kreditanstalt für Wiederaufbau , and of course, we also have to engage 20% private banks here, and we were able to engage them, just as a remark.
Maybe just on that point, as a follow-up, have eventually all of your house banks basically underwritten that credit, or have some of your, say, longer-standing credit counterparties pulled out of that?
You mean this Kreditanstalt für Wiederaufbau ?
Yes, exactly. I think there was a press article suggesting that some of your credit counterparties apparently have been a bit of a stumbling block in those negotiations, despite the 80% backup of the KfW.
Of course, we have a consortium of banks which were participating at these things, but we don't want to release the names at this point of time. But this is a mixture of banks. All in all, there are five banks.
Okay. Understood. Okay. Then I have one more question on your indicative guidance for the second quarter, where you say we may possibly go towards a billion in EBIT loss. Could you please let us know how far that is, including any restructuring charges or other one-offs, which I think you typically strip out? And could you also give us an update on the restructuring charges we should expect this year and next year, both on a cash flow and P&L level? Has that number gone up versus the last quarter?
Yeah. Regarding this estimation for the third quarter, this is not including restructuring issues here. This is an operative number. Of course, this is, let's say, a range where we, at the moment, still have not the clear view of what is coming out of this. And if you look at these restructuring issues, what you are saying, we are on the way, and we also announced the restructuring programs. And there will be some of this this year and some of this next year. And it will be, let's say, a high two-digit number in the third quarter, yes, and something more to come. So if you want to have more details, we are still in the planning process. I think we can deliver these details more or less in summer when we have this planning process, but at the moment, we are still in detailed planning here.
Okay. So also for this year, basically for the current business year, you couldn't give us an actual updated number for the restructuring, for the cash charges from restructuring?
I think if you look at the full year number, the amount for restructuring will be a mid-three-digit number.
Okay. Understood. Okay. Then I have one more question, and the very last one, actually, on your CapEx budget, where I've seen you cut the numbers down to EUR 1.4 billion. And I appreciate that question obviously comes early, and maybe you're just also going to give us an update next week. But could you let us know, is your general plan to keep it around that level? Do you plan to potentially cut even deeper, just given the situation we are currently in? Maybe if you could give us maybe a bit of an early color on that front, that would be great.
Yeah. It's difficult to give you more information without going into too much detail, but let me start it this way. In a situation like this, even if we have the elevator proceeds being in a crisis situation and having not so much visibility into the future, we will be very cautious in, let's say, in spending money, and if we talk about the strategy next week, we will also see this has something to do also with more streamlining. If we talk about portfolio companies, we'll be very much looking at what kind of money is going into what kind of business, and this is the first one, which has something to do with strategy.
On the other one, which has something to do with corona, we will have a bigger portion here on central level where we will have, let's say, a closer look on where to spend the money and if to spend the money, depending on the overall situation, so we will be more cautious of it.
Okay. Thank you.
Thank you. The next question is from Rochus Brauneiser of Kepler Cheuvreux. Your lines are open. Please go ahead.
Yeah. Thanks for taking questions. Also a few follow-ups from my side. Maybe you can go through them one by one. Can you help us to get a better understanding what you actually meant with your third quarter EBIT range? I was a bit puzzled, to be honest, with the phrase of a good billion. I could imagine anything between 1.2-1.3. Maybe a bit of clarification. What would be the worst case from current assessment would be of help?
Yeah. I'll leave it to your interpretation. Let's say the more likely one is three-digit negative billion, million one. Yeah. Let me leave it with this.
Yeah. Okay. So if I take an imaginative point of this guidance range, can you give us your kind of gut feeling where you see yourself in the fourth quarter? Would you feel to be closer to the second quarter EBIT, or would you feel closer to the midpoint of this indicative Q3 range?
Yeah. This is difficult to answer because if we would have this visibility or if I would release my gut feeling now, then we could also have released, let's say, an estimation for the whole fiscal year, so please excuse me when I'm not giving a number on this, but we, of course, think that the number of the fourth quarter will be better than of the third quarter, and as I said before, there are scenarios where it very depends on how much the recovery of the production of our main customers will be, so I will leave it at this.
Okay. Fair point. Maybe if I consider, I think you earlier said in your presentation that you estimated the corona effect on the second quarter ballpark around EUR 100 million . If I consider that the bulk of the decline between the second quarter and the third quarter is largely corona, where it's up to 1 billion EUR, can you give us a bit of a sense about this multiplying effect? I don't know how you were hit worldwide in the second quarter. I think in Europe it was from mid-March. In Asia, probably you have been impacted in your whole March. So if I consider that most of the calendar second quarter is hit, I still struggle to see this escalation between this EUR 100 million and the up to EUR 1 billion .
Maybe you can help us to get us a bit of an idea how much of this corona effect of EUR 1 billion maybe is volume-driven, price-driven, and maybe attributable to other factors?
Of course, this is difficult to say. If you look at the second quarter, there are, as I said before, some different impacts on this. I think the Automotive Technology was the one who had the impact first. If you look at China, also Forged Technologies had some impact in China. The Material Services business and also the Steel business was more impacted in Europe in March. If you look then at the effects we will see, which we will see especially in April and May, there are, from my point of view, most of them are volume-driven, clearly volume-driven. Yeah. That's the point.
Yeah. And then the last question is, when I look at your expectation for steel and the potential deterioration there, it appears that you obviously struggle to fully offset the effect from the decreased fixed cost absorption. If I compare it to the statements made by ArcelorMittal the other day, where they said all these short-term instruments allowed him to fully offset that effect, maybe you can help me to understand that better, why this is still an incremental burden on the margin?
I'm not quite sure whether I understand what you said. So you said that we are not able to, let's say, compensate the volume decrease completely by short-term measures. No, we are not, to be very clear. So we are not. This is clear we do a lot. And I really, let's say, between us, I doubt whether other steel producers can do this 100%, but let's leave it as it is. This is the one thing. The other thing is, if you look at the steel business as it, of course, we are in a cyclical business. And if you look back at 2017, 2018, steel business earned EUR 700 million EBIT, is it good, or is it what kind of business we are in? So in this cyclical business, you have to look what are the cycles.
This is clear, but you also have to look what is your relative position against the competitors. And as I said on other occasions before, we think that our relative position to other competitors is not so good. So we have still homework to do regarding our performance. And this is the main reason why we introduced the Strategy 2030 and also this connected restructuring program, which we immediately start at the moment.
Okay. I think you're making a good point on this relative position. What I struggle to understand is that when I look at your performance over the last, let's say, five years, I haven't got the sense that thyssenkrupp was falling that much behind years in terms of the relative cost position, considering that a lot of cost work could not be done because I think there were some plans, obviously, to restructure some elements under the Joint Plan, Joint Venture with Tata. But when I look at the earnings, it feels like you had this drop-off in the last couple of quarters very sharply. So maybe you can add some color why this hasn't been kind of a steady step-by-step process, but more like a back-end loaded drop-off. At least it appears to me like that.
Yeah. It has something to do with the path, which I don't want to comment so much on it. So what I saw is that in this story of having this planned joint venture with Tata, there was so much planned restructuring, but always said, we do this when we have this joint venture. So at that point of time, of course, this is also my criticism. This is clear that we should have done something before. And I think the last, I don't know, the last couple of months or years, or at least one or two years, we were not good in doing these things. So let's say we missed to do this. We missed to do necessary things. And therefore, we lost a bit of our competitive position. And this we now, we have to regain with this restructuring program. We are just working at it.
Okay. That is very clear. Thanks for the detailed answers. Thank you.
Thank you. The next question is from Luke Nelson of J.P. Morgan. Please go ahead. Your line is now open.
Afternoon. Thanks for the call. My question's on the short-term effects you mentioned, which you said could save EUR 300 million over the next four to five months. Just to confirm, does this all relate to lower labor costs? And is it possible to give a sense for how much of this relates to steel? That's my first question.
We can, but give us a minute. Please go ahead with the next question.
Okay. Second question, just on the guidance for Q3. Just in terms of what is being factored into that guidance, can you talk us through the assumptions around capacity utilization as we progress through Q3? So maybe a sense of how you're feeling about the exit run rate for utilization into the next quarter. And my third question is just a follow-up on the CapEx of EUR 1.4 billion. Can you give a sense of how much of this is pure sustaining?
Can you repeat the last question? I didn't get it so much. Sorry about this.
The question on CapEx, the EUR 1.4 billion guidance, how much of that is pure sustaining?
Okay, so let me come to the last question. How much of the EUR 1.4 billion CapEx is sustaining? CapEx, I guess you mean, which is CapEx to keep the.
Maintenance CapEx.
Maintenance CapEx or something like this. So our depreciation, you know it's roughly 1.3 or 1.2, 1.3. So you can make up your mind how much of this is real maintenance. It's a bit below this, but something like this. The next question was regarding the capacity utilization in Q3. Very difficult to answer because if you look, for instance, at the Materials Services business, we are at the moment in the Q2, we think that we had a 10% volume reduction against previous year. With the Q3, I think we will have at least furthermore 10%-15% reduction, or 20% against previous year, and it will come up, something of this in, let's say, end of May, June, it will become better. How much, we don't know yet.
But this is something. It depends very much on how much leeway we have at the end of June. Is it then against previous year 15% or something like this? We cannot really say, and the same, of course, is if you look at steel. The steel at the moment, we see that the automotive producers are producing with a capacity of 30%-50% again. This means that our capacity utilization, if you think that all in all we have a reduction of 30% in April, May, it will maybe come back to a reduction which is then only 20% or something like this. But this is really a very rough estimate, and I think this gives you a picture.
If you look then, for instance, at the Automotive Technology business, it's more or less the same as I described with steel. Is this helping a bit?
Yeah. Just a point of clarity, just on the 30%-50% of order production, you said, is that 30%-50% utilization or 30% below normalized levels, so sort of 70% utilization?
Yeah. It's 30% against the normal production. So there was still one question open. This was how much is of Steel Europe? The short-time work is roughly 33%, or one-third of this is with steel.
Excellent. Thank you.
Thank you. The next question is from Olivia Dewar of Bank of America. Please go ahead. Your line is now open .
Hi. Thanks for taking my question. So I have a quick follow-up on the COVID-related lower capacity utilization, please. So running at, I guess, a relatively meaningful lower utilization level, so does that mean that there would be any hot idling plan that we should be aware of? And then post-COVID, how much of a lag should there be between the end market turnaround and for you to bring back up the utilization level, please? Thanks.
Sorry, I didn't get the first question. So, lower utilization, can you please repeat? Sorry for that. The line was not too good.
Yeah. Sorry, so running at the lower utilization level as planned, does that mean that all blast furnaces are just running as usual, or do you plan any hot idling?
Yeah. Okay. As I said before, so if you look at the blast furnaces, you can partly reduce the blast furnaces' capacity by 30% or something like this. You can do so, but you shouldn't do this very long. So this is the reason why we, in the first time, reduced the capacity of the blast furnace by 30%, roughly, and then decided to pull out one blast furnace at HKM, the blast furnace A, to reduce blast furnace capacity in our production network and to partly bring up the capacity utilization of the remaining blast furnace again to levels where it don't harm for the future. This is the strategy for the blast furnace.
With this, we are quite well in, let's say, in the situation that we can cope with this lower capacity utilization because we simply put out one blast furnace and a small adjustment at the other blast furnaces. The second question was, if I got it right, is what is the capacity utilization post-COVID? Is this what you meant?
So what is the lag in terms of time that, for example, if you see that end market will turn around starting, I don't know, September, and then how quickly can you bring back up the utilization?
Yeah. Okay. So I think we don't have a clear picture. I think what we can clearly see is that we don't estimate that production of automotive or steel is coming up to somewhere to 100% before corona. This is not going to happen. But at the moment, we think we really cannot judge it. The question is, how much time do we have to bring the technical capacity up again? This is roughly six weeks, something like this.
Okay. Thank you.
Okay?
Yeah. Thank you.
Thank you. The next question is from Christian Georges of Société Générale. Please go ahead. Your line is now open.
Oh, thank you very much. Sorry, just one more question on CapEx, just on that EUR 1.4 billion. Can you tell us how much of that is the IFRS impact that you're highlighting on the slide? The second question is on Plant Technology. So you're mentioning relatively little impact so far. But do you have some prepayments that are due there, which you're expecting before the end of the fiscal year if all goes well? And my last question is on the steel operations, looking to the next quarter, are you looking at some relief on the iron ore pellets, or is that going to be an ongoing issue? And what was the final situation with regards to those negotiations with the auto industry on prices? I mean, is this still up in the air, or have you been able to agree on terms in general? Thank you.
Sorry, we did not get every question, so something has to be difficult with the line here. Sorry for that, but the last question I got is, what is the status regarding the negotiation with the auto motive industry, so what I can tell you here is that we had the normal negotiation round at the beginning of the year, and there we, let's say, were able to negotiate prices which are more favorable for us, but then, of course, corona came and the volumes went down, but these prices at the moment are in place, so this is what we can say, so lower volumes with slightly better prices or with better prices than at the beginning of the year, so this is the actual situation regarding the negotiation of the prices. The other questions, maybe.
Yeah. There was one more.
Sorry.
I think you also asked what raw materials cost we expect for the third fiscal quarter in steel, and here.
That's right.
We assume that they go broadly sideways.
Yeah.
Yeah. Iron ore and coking coal, which are the main cost factors on the raw material side.
We don't see too much movement at the moment with the raw material prices, and the expectation further, the visibility is not so good, but we don't expect too much at the moment.
The IFRS.
Okay. And my two other questions were simple ones. Just the proportion in your CapEx of IFRS costs. The other one was whether you've got some prepayments due in plant technology.
So the IFRS portion, IFRS 16 effect in 1920 is EUR 100 million. And the.
Yeah. And I think it is that. Yeah, well, of course, we have for Plant Technology. We have planned or we have in our budget some larger tickets. And of course, we also have then considered the prepayments from those larger tickets in our, let's say, cash flow assumptions going forward. This is why we're saying that every cash flow guidance is also dependent on the payment profile in our project businesses, meaning in Plant Tech and in the Marine Systems business. And in Marine Systems, we are expecting a larger order here from Brazil to come and also the respective prepayments to come in the second half.
Maybe for Marine Systems, we just received in the last quarter an advance payment in a reasonable amount. And we also expect this for this Brazilian issue. So we don't see any problems in this case here with Marine Systems anyway. And Plant Technologies, as I said before, we also have no signs that there will be some delays or something like this. At the moment, we do not have bad experience on this.
Does it mean that when we look at Q3, you could have a positive surprise with regards to those prepayments impacting both Marine Systems and Plant Technology?
Marine Systems, the advance payment was in Q2, and we are expecting some in Q4, but not in Q3, to be honest, and we don't see, we are, let's say, quite aware of the payment terms, and we don't expect a surprise in Q3, unfortunately.
And the same for plant technology?
Yeah. Same for Plant Technology.
All right. Thank you very much.
Thank you. The next question is from Christian Obst of Baader Bank. Your line is now open. Please go ahead.
Yes. Hello. And thank you very much for being so patient so far. First, on Marine Systems, there are talks about the possible consolidation between thyssenkrupp Marine Systems, Lürssen, and German Naval Yards. Can you give us some kind of an idea where you are now in terms of negotiations, maybe talks whatsoever? The next two one are about balance sheet issues. Intangible assets went down from EUR 5 billion to EUR 3 billion. As I think there is comparable, these are comparable numbers. So where is the downfall of EUR 2 billion coming from? And last but not least, on equity, your equity currently stood at EUR 1.1 billion. Assuming that you're making a loss of EUR 1.1 billion or EUR 1 billion in the third quarter, are you prepared at least until the closing of Elevator to run your company with a negative equity? Thank you.
Yeah. Let me come to the last question first. The EUR 1.1 billion equity in the second quarter. The IFRS equity is not the problem or is not, let's say, the KPI, which is serious. So the real issue is the equity of local GAAP. And here we have more headroom. And on the other hand, it's only, let's say, a year-to-year comparison. So within the year, we won't have a problem, neither on IFRS nor on local GAAP. So we don't have a problem during the year. That's the first one. The second one was the intangible assets, the reduction of intangible assets. I don't have the balance sheet, but I think the explanation is that we have Elevator Technologies as discontinued operations here.
And so the intangible assets, there was some reconciliation or some other it was moved from the balance sheet position, intangible assets, to another balance sheet position in current assets. This should be the case. Otherwise, we do not have really movements in the real figure of our intangible assets.
Of course. So there's approximately EUR 1.6 billion you're taking out regarding to Elevator, and the rest was impairments, more or less.
No, we don't have goodwill impairments. So we have asset impairment, which you don't see in this line. The goodwill impairments, we don't have. And the movement you see is regarding the discontinued operation of Elevator.
Okay. Okay.
The last question was. The first question was Marine Systems. Yeah. You know that we are always open to talk about strategic issues. There are some informal talks, yes, but nothing more to say at this point of time.
And really, last one is before you also stated that there is a possibility that you're looking for partners in parts of the automotive business area. Is that still the case or currently not?
I did not mention it today. Right. But you mean we mentioned it before, yeah. It's always a question. You have to drive your businesses, and you have to really think what is best for the business and what is driving value for the business, and we have plans for our automotive business, but we always have to consider whether there are plans where a partnership or partnering maybe brings more value to the business, and let me leave it at this more general statement. We really don't have talks about this. We don't have clear ideas about this, but we have, in principle, this idea of creating value.
Okay. Thank you very much and all the best.
Thank you very much.
Yes. Thank you also now, everybody, for participating in the conference call because with the last questions or last answers, we have come to the end of this call. However, we do not want to miss to mention that in one week's time, there will be another conference call because we then would like to inform you about the results of our portfolio assessment. We will have a Supervisory Board report next Monday, and soon thereafter, the news flow will go out, and we will send out an invitation for the afternoon of next Tuesday, and as always, after the call, the entire IR team is available for you to provide you more information or to clarify any further questions you might have, so thank you very much for participating, and we look forward to staying in touch with you. Thank you very much.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.