Siemens Aktiengesellschaft
Q2 2019 Earnings Call Transcript

Published: 8 May 2019

[Operator:]

[Unidentified Company Representative:]

Good morning, ladies and gentlemen, and a very warm welcome to the Siemens Press Conference for Q2 Fiscal 2019. Thank you very much for having traveled here, all the way to Munich and thank you very much also to everybody who's following the press conference online.

[Operator:]

And participants here in the room please select Channel 2. If I may [indiscernible]

[Unidentified Company Representative:]

Now it is my pleasure to welcome our CEO, Joe Kaeser and our CFO, Ralf Thomas here today with us. Now just a few housekeeping remarks ahead of time. I would like to ask you to switch your mobile phones to mute and to all the photographers during the event please do not use flash photography. Thank you very much. Now ladies and gentlemen, this morning you received the documents on Q2 fiscal 2019. All the documents can also be found online on our press page. siemens.com/press. There you will also be able to find the livestream of the press conference. Please also take note of the fact that we have some remarks and additional comment on page two of the presentation. On the rundown of the press conference Mr. Kaeser and Mr. Thomas will lead you through Q2s numbers. First of all and - afterwards both of them will be available for questions. Towards 8

[Joe Kaeser:]

Thanks, Charlton. Thank you very much. Clarissa, good morning. Ladies and gentlemen, I'm sure you have noticed that our employees are very much in favor of paperless office. Nevertheless we all have got notepads here, physical notepads here on our desk in front of us, just in case that we cannot remember all of your questions. Thanks for joining us again this morning. Again, because last night we already had an intense discussion in our telephone call about the latest news and the transformation of Siemens's. Of course, this morning and also last night I did read the headlines and I think it's always quite remarkable to see how such a historic event, and for me it's also a moving one can be focused or reduced to just individual elements of the overall undertaking. And of course, we have made a set of documents available to you for second quarter because business has to go on and today together with our CFO, Mr. Thomas, I would like to take you through our Q2 numbers and I can of course imagine that you also have got a couple of questions on the news that we announced and explained to you yesterday. And today we're also holding a Capital Market Day, where we once again would like to answer the questions of the shareholders and shareholder representatives, also regarding the news that we announced last night. So it might be worthwhile watching that webcast as well. And of course, the management teams of the operating companies that is of GNDI and SI, they will present their view and their details. Now, if I were asked to summarize the performance of the company in the second quarter of this year, then I think it would be quite appropriate to say it's been an outstanding quarter. Now this is obvious if you realize the numbers were above the expectations, which the analysts had defined beforehand and in almost all areas our numbers exceed the so-called consensus. In some areas we are just on target. And however I think the fact that this has been an outstanding quarter is also due to the fact that we've had a quarter or even an entire half year during which all of our colleagues, apart from their normal business namely to deliver on time, to win contracts and to do so also in a profitable manner. Now in addition to all of that we restructured the entire company, in August last year we defined and published the overall framework for that program and then of course the real work began. And it's really impressive to see at what speed and at what quality our colleagues who were directly involved or indirectly involved in that business how they implemented a program, in addition to their normal day to day business which is not always an easy one and they did so on time and in a reliable manner. And I'm saying this specifically at this point because I would like to thank the many thousand, hundred thousands of people who've made this possible and this starts with the team manager and a project leader, all the way - to all of the teams who worked hard and this cost centers have been changed, salaries had to be paid, contracts had to be booked. It's not a walk in the park actually. We've got a successful team and I'm proud of that entire team and that all manifest itself in our Q2 numbers. And then of course, people very often get asked why don't you just stick to it. Why don't you just kick the can down the road enjoying that outstanding performance? But ladies and gentlemen, you cannot stand still. And that's what why we decided on what we announced last night. Now looking at the numbers, I'd like to draw your attention to do one thing in particular, which tends to get ignored quite often. In the first quarter of this fiscal year we hired a lot of new employees. All in all, it's now 23,000 new hires worldwide in the first half of the year and 2007 of them were new employees in Germany. Now we wouldn't have to do that, but we did. And even on a net basis we have increased our workforce, 5100 colleagues more were on our payroll as of the 31 March 2019 compared to the 30th of September 2018. And that is something which I really would like to emphasize at this point, because I do believe that people and - take matters seriously, and just look at the discussions in our society, all the way up to the proposals which have just been launched, to nationalise large family owned companies and of course such proposals are brought forward by people who are not involved in our daily business and who just pick up on some ideas they hear here or there. And therefore once again I'd like to emphasize Siemens is a major - is a dynamic employer. Every quarter we hire thousands of new employees and we even increase our workforce on a net for net basis. And of course you might point out that we reduced our workforce by 1000 in the GNP division. Of course that is true, but I'm not quite sure whether this really reflects the true picture alone, but I'm sure you're familiar with all of the details anyway. There's also been talk about our GNP business being in a crisis. Now if this only were directed against me or Mr. Thomas, I think we could handle that. We could take that and digest it, but this is also about the people who do their best every day, every week, every year. People doing good business and they're not so easy environment and people who increased our profit from €114 million to €156 million and this with a margin of 5.6%. So I believe that many of our competitors would hope to be in such a kind of crisis, which we are currently undergoing allegedly. So, ladies and gentlemen, this is not a message directed to you, maybe also a little bit, but above all this is my message to all those colleagues working hard every day and doing their best in a difficult environment. Now with that, I believe we should now finally take a look at our numbers. I think we delivered what we promised and we exceeded the expectations of the market in many areas. And of course, that is always a basic prerequisite, ladies and gentlemen, at least from our point of view to be able to implement those things which we announced last night. Because that is a fundamental change of the company which you have also covered very clearly and precisely in their reports. A fundamental change and I've repeated - and repeatedly said it's a change of the DNA of the company because our brand is known for its major projects. And it's also a bold, but also a very important emotional decision which doesn't come easily to me. I feel employed by this company for almost 40 years. I have seen things evolve and I've seen things in business come and go. So that's not an easy decision for us. But we all know also if we listen to reason that we cannot stand still because those who rest on their laurels and the things that just can keep calm, they cannot take action anymore if it's necessary and sometimes they get even ignored. So we did have a good start with our vision 2020 strategy. We did a great job there. I mean, that was not really my merits, but it's our team which did a great job and the team has also won important contracts and interestingly enough here we always talk about the major projects. I'm talking about the LNG to power project in Brazil, 1.3 gigawatts, 1300 megawatts, so that's a huge power plant, it's the first contract for the eight class turbines which is our flagship if you want to put it this way, which we developed together with EON [ph] here in Germany and here we've reached more than 60% of efficiency. And this is really important project because we did lose a couple of projects here in Germany. And this is also a message to our customers. The H class has now exceeded one million operating hours without any failure. No broken blades, no major signs of abrasion, no hundreds of millions of so-called project charges. So that is quite an achievement. We've got 6 - 70 turbines in operation and 100 units have been sold. We are the world market leader with our H class and that was just a message. The numbers are telling you and that doesn't require any further explanation. We also signed a project for the energy roadmap for Iraq not too long ago and not only did we thus win the upper hand over our competitors, but also over other forces who've got other interests in this area. And in this current quarter we will have an order intake of about €1 billion as a first stage. That's the €700 million which you have read about in the press release and about €300 additional million which we didn't even talk too much. And this shows that if you've got such a major project, like the one in Egypt, now that the words will spread about this and then you can build up upon that. And you know that the overall conditions in that region are not really excellent. Mobility also very gratifying development. And this is also a business which did always post double-digit margins, especially not in the profit and loss statement, sometimes of course in the contract calculation we did expect these double-digit margins, but in the end and the bottom line this did not always turn out this way. But still mobility is a major growth business for Siemens which we want to further strengthen. We are in fortunate, but also well-deserved situation of being able to decide on how we want to handle that and we are not dependent on third party proposals due to poor performance. I mean, that happens quite often. And if you fend off such proposals for too long then it may even happen that you are not in control anymore. I mean, there's a couple of examples of this out there. So therefore apart from talking about the numbers, it's also important to give you some more details on this. And of course, let me also give an example of the industrial core of our company which I would love to do and then I'll leave that story behind. Now, together with Volkswagen and together with an American company which is in charge of storing data in the so-called cloud, now let me once again underline that the cloud is nothing but a computer center where you don't know the address off anymore. But that's nothing different. And therefore we should not over rate it. There is so many people talking about a cloud, as some mystic plays, well it's just the computing center where you can book storage capacity and it could be in Nevada or in western Germany. It's just a virtual storage space. And of course it involves some questions about data security, but we all know about that. Now what we agreed upon with Volkswagen is that the entire company of Volkswagen is going to use MindSphere as the basic platform to connect all of the factories. In the first step it's going to be 122 Volkswagen factories with thousands of employees and machines and we will connect all of them on a global scale on the basis of MindSphere and all of the systems that you use to develop and manufacture products. Now why is that so important? Well, Volkswagen is not just a small OEM, of course, you know that. And it's also important because thus we are establishing a standard which will also be relevant for all suppliers in the final analysis. So in future suppliers will not only deliver product and hopefully also be paid in good time, no. In future suppliers will deliver the products with the virtual twin, which means all of the quality data, all of the engineering data, the origin and where they have been manufactured by whom in which country, using which materials, under which ambient conditions, all of this will be part of the future and imagine what's going to be the means of transportation, it's going to be MindSphere and the automation software of Siemens. And I'm sure that you all know that the automotive industry has got the highest degree of vertical integration in - of all industries and that's really an important achievement for us, because usually of course, that kind of business which we are in is considered to have very short cycles and sometimes you can only come up with reliable estimates for the next six to eight weeks. Mr. Thomas will certainly agree with me. And with that new agreement with Volkswagen that's going to change because on that basis we will have a continuous net inflow of revenues and of once you've become an established partner into Volkswagen then of course it's going to be rather difficult for them to change it again. Now a lot has already been said and read about Hannover trade fair, I think. I don't need to dwell upon this any further. We had about 100,000 visitors at our booth and this already also reflects the size and the size and the strong presence of our booth. And of course, we also had a couple of VIPs paying a visit to us which we are also grateful for. But more than 10,000 visitors said I want to learn more about this. Please tell me whom I can talk to in order to benefit from the Siemens now. So that's a huge improvement because that's an increase of our leads by 12% over the year 2018. Customer's, potential customers who had specific questions and in the best case this also leads to new contracts. And of course, here are some of the numbers which you can easily compare, orders increased, the same goes for revenues and this is - the slight decrease is especially due to portfolio and currency translation effects and the order backlog now amounts to €142 billion. That is really a very reliable number which you can build upon. Half of that is the order backlog of what we described yesterday as the Power and Gas NewCo. Now why am I saying this? Because later on we'd also see a change in Siemens industrial, market proximity and better understanding of the markets will become even more relevant than in the past. And the second message is that the new company is going to be able to build upon a highly reliable order backlog. Earnings per share is €2.32 and net income €1.9 billion. Now that looks a bit less than in the previous quarter, but in this case you need to know that at least €800 million of one off revenues had been booked in the second quarter contributing to the €1.9 billion. You'll remember that the Atos shares were transferred to the pension fund, which was also very smart move by our financial department. And for that reason we were able to book those one off revenues which of course looked good on one hand, but which we - which didn't impacted the cash on the other hand and therefore for that reason. You should take - you should compare to €1.9 billion to the more than €2 billion minus 800 of the previous year's same quarter. And then of course, we also did have a positive tax effect. So nevertheless we are glad about these achievements which were made possible by the efforts of many, many colleagues. And of course, we are also grateful to our customers for the trust they placed in us with their orders and of course we are also happy if you are happy and if the markets today are happy, you all know that the overall economic environment is not really that favourable. These days it's not performance and numbers and substance that have an impact in the world, but rather those things which you find in messages, in short messages which we can - which can spread and communicate very creatively. However we can say we focus on our customers and our employees and we will continue to work hard to make sure that the success that we have achieved so far will be a sustainable success for our entire company. And with that, I'd like to hand over to Mr. Thomas, who will give you more details on the individual businesses.

[Ralf Thomas:]

Thank you, Joe and good morning also from my side ladies and gentlemen. I would now like to briefly go through the individual divisions with you and report for the last time within the framework of this company structure. Now I won't go into the figures for Siemens [indiscernible] since they've already been announced yesterday, and actually also last week, for a detailed review of all our businesses our earnings release is available as per usual. We can surely speak a very good second quarter with revenue growing in six out of eight of our industrial businesses. The same number of businesses lay within or even above the respective target margin ranges. Now to the individual divisions, Power and Gas held up well in the ongoing challenging market environment in Q2. Orders rose slightly, while revenue declined primarily due to weaker orders for new plants in prior quarters. The divisions adjusted EBITDA margin improved year over year as Mr. Kaeser has just explained. The Energy Management Division posted considerable order growth spanning almost the entire E.M. portfolio and particularly from several larger orders in the product business for high voltage power transmissions. A slight increase in revenue resulted from continuing growth in the business with low and medium voltage products. This was partially offset by declines in the products and end solutions business in the transmission sector. The adjusted EBIT margin of 9% was clearly within the division's margin range. The adjusted EBITDA also benefited from a gain of 55 million from the sale of a stake in an equity investment. The building technologies division maintained its successful track record with growth in orders and revenue. In terms of geographic regions, the strongest growth momentum came from the America - from America and Europe. The adjusted EBITDA margin of 10.5% remained at the upper end of the division's margin range. Profitability was affected by ongoing investment in smart building solutions and associated IoT offerings. We're continuing to strengthen the digital future of our smart infrastructure business with these investments. We were again especially pleased with the mobility division's performance. On a comparable basis, orders rose an impressive 42% to among other things to several large contract wins. Joe has already mentioned the order for our export [ph] regional rail work, network you saw it in the slide, but we won another major contract from Amtrak, our U.S. customer which ordered a 75 diesel electric locomotives. This order worth around €740 million also includes a long term service agreement. Revenue at mobility remained close to the level of the very strong prior year quarter. The division's profitability at 10.8% remained at the highest level in the industry and again exceeded the target margin range. Despite some timing effects related to the execution of large projects. Let us now turn to the Digital Factory. DFs strong software business again drove orders and revenue in the second quarter, while demand for automation solutions could particularly in the automotive and machine building industries. Now overall revenue increased by 2% to €3.4 billion and with the automation business remaining of the previous year's level. Within results of €663 million euro, the Digital Factory is well-prepared to continue success story now as part of the digital industries. Here to the software business made a growing contribution with an excellent adjusted EBITDA margin of 19.6%. The division remained at the top end of its target range despite higher ongoing expenses for a new cloud based offerings. Now to the process industries and drives division, which continue to make solid progress. Now revenue rose 9% year over year across all businesses, most strongly in the Wind Power Components business. Orders remained stable. The adjusted EBITDA margin grew 6.8% also driven by ongoing operational improvements in the large drives business. The efforts being undertaken at PED are paying off truly and the team has again done a very good job. We are firmly convinced that we will be much more effective at leveraging the potential of these businesses in the new setup. Last but not least, Siemens Financial Services continues to make an impressive contribution to the success of our industrial businesses worldwide with its customized financing solutions. Return on equity rose year over year to 30.3%. This result was strongly influenced by a gain of €57 million from the sale of a stake in an equity investment. Now allow me now to briefly comment on our non-industrial activities. This again, I would like to refer back to our assessments from last November when we presented our figures for fiscal 2018 and the outlook for 2019 with one exception, we now assume that the tax rate for the current fiscal year will instead of the 25% to 31% that was given at the time will actually be 24% to 28%. Now, so much for our businesses in the second quarter based on our formal organizational and reporting structure. As of the third quarter, ladies and gentlemen, we will be reporting based on the new organizational setup, meaning we will have figures for our operating companies Gas and Power, Digital industries and smart infrastructure, as well as for the strategic companies, Mobility, Siemens, Healthineers and Siemens and Gummy's [ph] You'll be able to find our business figures for Q1 and Q2 reported on a comparison basis for the new structure on our Investor Relations home page. Ladies and gentlemen, in Q1 we kicked the year off quite well and with Q2 we truly have maintain our profitable growth course, laying the foundation for a strong fiscal 2019. We confirm the financial expectations for fiscal 2019 as presented to you in November 2018 already. And with that being said, we are very much looking forward to your questions. Thank you for your attention.

[Operator:]

Thank you very much. We now continue with our Q&A session. [Operator Instructions] I think the first question comes from Mr. Magnum Herman. Yes he is first today not only because he is sitting in the first row, because also it's his birthday. Happy birthday. All the best to you.

[Unidentified Analyst:]

Well, I go to bed last night with Siemens and also once again got up this morning with Siemens in my mind. Well, I've got a question about yesterday. Now that increase of 20,000 employees and the cut of 10,000 jobs on the other hand, now it has not clearly been said where it is going to happen geographically or regionally speaking, theoretically might be that the 10,000 cuts will take place mainly in Germany, whereas the increase of 20,000 will take place mainly outside of Germany. Do you have any agreements with the trade unions of the works councils? I mean, Ms. Steinberg in her press release made some remarks moving into that direction. So have you entered into any commitments as to how the number of jobs is going to change in Germany? You also said that 5000 new jobs have been created a net basis in the quarter, that is backed by Germany, at same time we've seen a cut off for 1000, so is that going to go [Technical Difficulty] …skills and you also create new jobs, where certain features and necessary characteristics are given. These are the standard factors which you discussed and management one or one and you do not build up or cut the jobs just on the basis of certain agreements. And of course, there's also - it's also a matter of know-how protection, you don't want to - the latest innovations to be manufactured in the most remote region, you rather would do that where you've got the lowest staff turnover, for example in Germany. So first of all, we're once again grateful to you for detailing that that point. We always emphasized that in the vision 2020 plus strategy is a transformation program geared towards growth, geared toward growth. That's very important. Now why is that so important? Well, transformation as a name already indicates means that business models paradigm demand structures and contents of business change fundamentally and handing this is not always easy for a company because this of course will also have a geographic impact. It will also have an impact onto the skills required within the business models and of course that's something you've got to be able to handle. The good thing about this first of all is that, that the tasks and functions which we are losing due to their transformations how the 10,400 jobs, now in many cases we can handle this due to our age structure, especially in eye, the digital industries. And the second thing that is important is that in addition to that net increase of 20,500 which is directly derived from our growth plans, now on top of that every year we hire about 40,000 new employees every year, as a kind of replacement because certain people leave the company either because they retire or if they - because they seek a new employer. So that means we've got a tremendous potential also for those who are affected by potential job cuts. And the question is which up-skilling actions, which training offers do we have to devise in order to help those people who are affected in order to meet the requirements profile which evolve from that net increase of 20,000. That's important question which of course we did discuss with the employee representatives, because managing a company means to integrate the interests of all stakeholders, preferably with a bit of know-how about the business you're doing. So we were not just increasing the number of workforce just for the sake of our employees and we do not generate profits just for the sake of our shareholders, it is rather a full system where all elements interact and for the first time as far as I can remember, and that it's a long time if you don't forget things. Now this is the first time that the management and supervisory board and the employee representatives, all together launch a press release together with quotes of the individual stakeholders. So here we learned a lot from the event one and a half years ago, where all of the people and the individual parties were trying to drum up support for their interests only and only after that did they talk to each other. So here we really have gotten better and I think we can now move ahead together. The employee representatives have understood that you can only further develop and run a business if you can make additional resources available to that business. And within a group of companies if you have businesses in that group where you can earn between 16% to 20%, here I am always talking about the adjusted EBITDA margin and if you can do so if a low risk and if on the other end you've got business where you can only earn 6% to 8% at higher risks because you've got to do that at larger, in larger projects with lots of sub-suppliers. Then of course, it's obvious that you rather would want to allocate your money to those businesses where you have a high return at a low risk, rather than the other way around. I think that's obvious you would do it in the very same way, wouldn't you? And that's really been an important discussion, because we said that a company which is well funded which can keep can - keep its own matters under control of course it make sense to give it more independence, rather than that company having to wait for all of the others to follow suit. And the business which we bundle in the new company is a very interesting one, especially in the setup that we have selected. We've got conventional power plant technology, which of course has seen the highest growth cycles in the past and that's obvious. And of course, that's also been confirmed by data. But we also intend to hand over control to that new company - of the company which is the biggest manufacturer of renewable energies all over the world. So that means we will have a good balance in the new company, and all of the well of course we see an increasing demand for power, electric power, that that's obvious. That's the key message. And if everybody in Germany for example were to go for electric cars, well that would not even be possible today. We do not have the electric power, whether it's based upon renewable sources of coal or gas. We don't have it and in production and also in terms of transportation of that electric power, we still do have major shortcoming. So there's a tremendous potential for example to switch over ICE cars to cars driven by electric energy. And that in many places in the world where there is no electric power available at all, many of the others do not have renewable electric power and no affordable power and of course, this also places an extent to Germany as well, which is quite remarkable considering all of the investments in the so-called Germany energy transition. So that means the opportunities are tremendous. It's a transformation from coal to gas or maybe from coal to renewables right away. That's always going to take some time because there are different interests involved. But that's certainly going to come. And the new company will be able to cover both. So the new company will be able to look at the specific needs of individual customers and then they can propose an ideal energy mix to that customer. And we don't have to especially focus on one kind of energy because that's the one we've got in our portfolio only. And that's an interesting and convincing and compelling story for our customers and also for the investors. There's always that equity story which you always have to ride if you want to launch a new company on the stock exchange. And then in between, we've got two industries such as oil and gas which do have their very special characteristics, but we see the demand for oil picking up by 3% to 5% every year. We're not talking about 105 million barrels per day. And the first time when it was said that oil is history we were at 80 million. So it may still take some time. Then there's energy transmission, high voltage energy transmission, which is an important area because usually power - electric power is generated where you've got a lot of space which applies above all to the renewable energies. But the demand is where you've got little space only, so you need transmission. So due to the diversity of energy generation somebody has to take charge of planning the transmission grids and that's why having a full understanding along this entire value chain, that's really a very important asset. And that's exactly what this new company will have. Well next, we take the questions by Mr. Flanigan Mr. Fermen and Mr. Hepner.

[Unidentified Analyst:]

I actually have two questions on the transformation for Mr. Kaeser and also for the forecast for Mr. Thomas. You've mentioned a growth plan Mr. Kaeser for the industrial core. What does that look like specifically? Do you expect any kind of growth to a larger extent? And also the forecast Mr. Thomas, why did you actually not increase the outlook for the EPS that went quite well in Q1. The tax rate is also looking quite positive, are there any extra strains or burdens in the second half of the year?

[Unidentified Company Representative:]

Well again, there was there was a two part question, so what was a specific growth path. Now, if you have the opportunity to check the Capital Market Day, you will actually find a lot of that covered what is going to happen where specifically in order - well, specifically foster growth in the [indiscernible] but of course, we're going to explain in more detail during the Capital Market Day what's going to take place. Also in Mobility of course, have we planned any an organic measures at this point? Well, I think at the moment we're quite busy, aren't we? And of course, these sorts of things need to be implemented and executed in a very robust state. And I think that's quite apparent and quite obvious if you will. But if a company refocuses or focuses itself and knows what it's doing across the board then of course at a particular point in time which you cannot truly determine ahead of time is that the company will be able to shape the so-called merger end game across the industry. That is simply a fact of nature, whether you do that or not or whether the company does it or not is a different question. But that's a fact of nature. And if a company can do everything across the board from fuses to a computer, MRI machines, power plant and everything in between, I don't want to forget too much then it's a different story with all these things and we'd rather be a little bit careful. And I think that's all I can say on that today. Right. Mr. Fleming, thank you very much. On our guidance, now on the one hand of course, you know with €6, €30 to €7 we've already given a range which of course also has an upper half. And in my remarks I've also pointed out that the 14.4% tax rate in Q2 will not repeat itself. And we've specify the range accordingly and I do believe with Q3 we will once again see a specification in our guidance accordingly. Yeah. I actually wanted to double check with Mr. Fleming's question to rephrase the revenue hole which basically materializes through the carved out energy business. Do you want to rebalance that revenue “hole” or do you say Oh we're actually happy with €50 billion to €60 billion and we can have organic growth. Well, Hi. I admirer Mr. Thomas because he can say so much with so little words, so few words on the guidance. And yes size isn't a value by - and by itself if it doesn't actually change the competitive landscape in our advantage. Now Mr. Fermen. Well, Mr. Kaeser, you have decided on an IPO, you have also decided on the carve outs for the power plants division, there were also other options. Can you just outline roughly what other options there were and why you have actually decided on this particular one and what was your personal preference in this particular case? Was it exactly what has happened or would you personally have - I don't know, maybe preferred a merger with another competitor? Well on that you would of course have to know what all the alternatives were and I read for example that there were some German, Japanese relationships that some people found particularly interesting. But whether or not that was ever truly an alternative, I mean, I'm sure it was theoretically because of course there's always a number one and then number two and number three and if number two a number three merge they usually become the stronger party or not. And all of that of course has to be evaluated. Now that being said, I do believe management has the important task to create options. To always just rely on solely one thing is usually a recipe for disaster. So you usually have to weigh the pros and cons, you have to weigh - do we continue as we have always done unless it gets really, really tough. That's usually the most comfortable one. But if you look at the power plant division and we've increased our earnings by 36% in this division. So it doesn't really look like a crisis, if that was a crisis, I'm looking forward to the next, well let me tell you that and that's why we could have definitely continued the way that we have so far for another few years happily so. And of course there are also other factors in place and of course you've asked me for my personal preference, and I would like to mention that we might have had other options, but at the end of the day you come together as a management team and you try to hash out what's best for the company. And we ended up with a decision that we should create a new company the way that we have done it, so would be a focusing of our resources which we have in the company in a very, very high quality level and I believe and we believed that that was the most promising model, because there is no provider who has all of those different KPIs unified in one single company. There is no one, everybody is missing one or multiple of those success factors and I think that's a really convincing aspect that we have with our customers. I'm always out there with our customers. I'm sure you see the photos or you've read the articles and I don't do that because I would like to be presented to the media at all, I would like to understand the market, I would like to understand how the markets work. It's always very helpful if you have to evaluate these different alternatives and options and I think if you look at everything, I think this is a very attractive customer story. Then the second aspect of course is, well what did the employees think? What's their perspective because without them we can't do anything? And if you look around the employees are quite proud of what they do on a day to day and they have every right to be. And just trying to ensure your revenue by having one wave of restructuring after the other, outside of any economic and existential fears. That's just not very motivating for anyone. So it's not great - that wouldn't be great. And that's why of course, you always have to think about what the employees would prefer. And then you have to think is that even feasible. Well, the majority of the stakeholders prefers. Is that feasible, if it's not feasible then of course that won't do anyone any good. Then you have to do what is most probable and you know, at the end of the day it might actually go wrong if you just listen to all of these different stakeholders and you say that's what you wanted. But that's not leadership. Leadership is that you might sometimes know better, the management sometimes might know better and that's why you execute it. Sometimes it's a combined effort and that's what we've done and we've all ended up with the result that this simply is the best solution. From the Siemens investor perspective of course it is the best solution because we do take a business which earns under proportionally and retained over - an over proportional amount of capital. If you take that and you take it out of the capital equation if you will, then of course the numbers will shake out very differently. So the calculation was very simple quite frankly. It's quite basic math, but of course, the execution itself was very different. So I think we've really looked at it from different perspectives, from the shareholders, the stakeholders, the employees, from the different opportunities that we have. And it was quite unanimous, on the board it was quite unanimous and the supervisory board as well and we've all come out on this and that this was the best solution and quite frankly if my emotions had played any role in that, I probably would have actually preferred of this exact situation as well. But that being said, my emotions didn't play a big role. Now let's continue with Mr. Koontz and then Mr. Puwards question.

[Unidentified Analyst:]

Right, I actually have three quite boring questions. Now Mr. Thomas the time delay when it comes to the large scale projects with Mobility does it connected with the ICE 4 fast train, are there any more delays. Then two, the order backlog for Gas and Power, how high is the service's share in that. And of course, connected to that the result quality of the service contract now in the face of the rough market environment, are they going to sink significantly for you to actually to onboard them at a lower profitability? And then lastly, Mr. Kaeser on the Iraq contract, what share of the pie are you looking for. Because you're not going get everything.

[Unidentified Company Representative:]

Well, Mr. Koonz let me start with the first two questions. Thank you very much for the question. When it comes to the delayed effects on the contract, sometimes simply when you're setting up different sides of project business even the revenue is paid out according to the process and also the earnings realization of course happens. So there are simply certain milestones that you have to hit and if those aren't hits then of course that also relates to the revenue and at the end the day to the income. Now the ICE 4 delay that didn't play any role in that, because of course the data bond did stop buying them. There was a certain delay now of course, quite admittedly, so there was a little bit of a uncomfortable situation which is simply missing on the cash side, but we're quite optimistic that all of this is going to work itself out. But there are no large projects that you should be worried about in regards to what Mr. Kaeser described initially how - I think it was about 21 quarters ago, that Mobility business wasn't working properly, so for 21 quarters it's been working brilliantly. Now on the order backlog in Power and Gas, we have about €41 billion in terms of order backlog or roughly 80% of that is service contracts, sometimes with very, very long tenure. Yes, you heard that right, 80% and they are in a very, very solid and stable margin range. And again, here you can truly see the fruits of our decades of labor. And we also believe that you can fully see R&D spend that was invested in the past, finally paying off because the service with each upgrade can actually be increase on the customer side. So I believe that is quite different than with other competitors who possibly thought more in the short term and they weren't really looking at the serviceability of the so-called service ability in their R&D activities and that's why in a nutshell our business is in an excellent state and our customers of course also honor this by already ahead of time rewarding us with additional service contract extensions and that usually ends up with a double win, a so-called double win and the double win is because of course we are able to provide services to our customers and maintenance to our customers for longer. And on the flip side of course, our customers also have an increase in efficiency which we didn't have before or they didn't have before. And the reach of the backlog now of course there were some contracts in there that were - that are incredibly long term, some of them are up to 15 years, but the range in that reach wasn't huge in the last few quarters, let me just say that. Now on the Iraq situation, I think it's a very interesting constellation which of course has been ongoing for a while and I'm personally quite happy that we are now able to - or we were able to win these contracts and also the Iraqi Prime Minister also mentioned in Berlin that this Iraq deal is very important for him that there's €14 billion overall volume of which will wholly be paid out in 2025 or up to 2025 and that's going to happen through four phases is what he said. And of course, you have to take that for what it is and that's why in Phase 1, which is €1 billion., we have a 100% market share, that is legally signed, sealed and delivered and we're going to book it in about one quarter €1 billion. So that's quite decent. Now of course it's one out of 14, but zero to 14 is worse than one out of 14, so that's why that's already really good. We're very happy about that because of course all the participants - it wasn't easy for any of the participants, also not for the customers. It was also wasn't able easy for the customer to give a German company 100% and then Phase two which is going to be the immediate successor, it's going to be €2.5 billion to €3 billion net worth and that of course also depends on how the production and the transmission will actually shake outs. And in fact, regarding the time component, we do have a significant head start compared to others, whether the head start will prove to be sufficient, we'll see, but it looks quite well. And I'm actually speaking for example particularly of specification and products and I'm not talking about political head start for example. And I'm sure you've also seen that the American state secretary canceled Berlin, instead drove to Iraq. So I would assume he had his reasons. Now of course, you could start interpreting quite interesting things into that. But you shouldn't truly elevate people or topics to an unnecessary level, particularly if they haven't deserved it. So that again that's going be another few billion as mentioned and I do believe that we're on a good track here. Now that being said of course, there's still €10 billion outstanding and those are going to be the mid to long-term topics that the Egyptian president awarded and delivered to their people a little faster. Fortunately that's not a thing at the moment with Iraq because despite all the improvements Iraq is still in a very difficult geopolitical environment. They're getting it from all sides if you will and yeah that's why we simply have to see how to deal with all of that and that's again free. Basically everybody can win that. But you know, if you sign a specification with a customer that's the specification that is the best fit for us. It doesn't mean that others cannot fulfill this specification as well, but we have to see. We know how to do it. That's all I can say on that and everything else. I think is truly astounding mix of geopolitical and national and economic interests. That's - don't necessarily foster innovativeness, competitiveness or profitability. So we'll have to see - you have to be quite relaxed about these things. But one thing is clear and I've said it yesterday in one off remark. The question was also asked yesterday where the new co-HQ would be. We didn't answer that question. Now that you have to list in Germany of course that is derived from these carve out or spin off regulations. Of course, it has to be listed, you can't do it any other way. But that's just one question, because a listing doesn't create any jobs. Currently the HQ is in Houston as of today. So once a new-co is in existence, we'll have to decide it and then of course you also need to look at the location factors, we've mentioned that, talent, competencies, supply and demand, but at the same time in these sorts of businesses you also have political involvement and influence. And the question is who supports this company best? And particularly for these sorts of businesses that the company will reflect, it's more important than other businesses. And we will have to simply clear and clarify certain things. And I guess, a lot of locations will apply for the HQ location for this NewCo and I think that's why there's going to be a lot of opportunities for work.

[Operator:]

Next Question by Mr. Pearl and then Janesville.

[Unidentified Analyst:]

Good morning Mr. Kaeser. In your vision 2020 when P&G was still part of Siemens to announce job cuts of 6,000, about 3,000 of them in Germany. Now I'd like to know how this plan is to be implemented in the new companies. Is that plan going to be continued or is it going to be changed. Could you elaborate on this?

[Joe Kaeser:]

No the plan stays because the business itself doesn't change. We've got customers, we've got employees, we've got products and orders and the kind of legal structure which we will later on have that doesn't impact that situation at all. And as of September 2020 by the earliest will this become relevant because that's when we intend to have our IPO. The company has to be set up a bit earlier. And of course the carve out has to be implemented. That's a big, big story. Not everybody can do that. We can do it. We did it with Astra Ostrom [ph] and we did with Healthcare and we also did the same with Mobility where we also saw some results. Here we went through a major learning curve, but we can do it. And that's why we defined a timeline which is very aggressive objectively speaking, but we went for that timeline because we've done it before. We know how to do it. And Mr. Patrick you have certainly read about this. Now once again we rehired him again because he already did that quite successfully with Ostrom and apart from the normal operations business of Mr. Baker and Ms. Davis, he is going to be very much in charge of that carve out activity and the actions which are required in terms of innovation and restructuring that's not going to be implemented - affected at all. And John Neville please.

[Unidentified Analyst:]

Yes I do have a couple of questions please. Now you said that you want to remain an anchor investor in the new Power and Gas Company. And I'd like to know for how long do you want to remain that anchor investor, just on short term or long term? And is there any kind of forecast - a figure as to how big the company is going to be. That is the value of that company at a stock exchange. And the second question is about Mobility. Now you said yesterday that you've got lots of different options, but you - and you also said that you're not under any pressure to take quick action. But how much time do you have, do you have a certain forecast and what are the specific options which you are looking into? Thank you.

[Ralf Thomas:]

Ralph, I mean that question is tailored for you. And then I'm going to talk about the overall matter. Now in a first step, for the spin off we are subject to a clear legally defined process until fall next year. And during that process of course there will be various valuation steps to determine the volume of the NewCo on the first trading day. Unfortunately my forecasting abilities are not that sophisticated to predict a value on the first trading day. However, rest assured that we'll make sure everything we can to provide the new company with a proper financial structure to make sure that it's viable for the specific market which is doing business into. Mr. Kaeser already pointed out that this is a very capital intensive market segment. And rest assured that the valuation - valuations which are currently based upon some of the parts approach and which also reflects a kind of consensus. Now rest assured that we aim for coming out higher than that consensus. But as of today, it's impossible for us to give a specific number. I think you didn't even expect that. Now your question about our Mobility business and also GP or we called it powerhouse. That that's a project name, which means it also including - it already includes the stakes of Siemens Gamesa which we intend to transfer to the new company. Now, ladies and gentlemen, if you are in the company, if you say that we want to create value then this is not just restricted to increases of the share price as quickly as possible. And those - and then to generate profits for those who are in the daily trading business. I mean, this happens then it's fine, but it's not our prime goal. And we consider the shareholder an owner of the company and not just a vehicle that we've kind of used for trading purposes. So creating value for us also means create and retain jobs. Creating value for us also means to establish innovations in the market and creating value for us also means to increase profits, enabling the shareholders to benefit from that increase. Of course, that manifests itself in the dividends that we pay out and if the share price increases on top of that well all the better. And of course, we - of course, we do have various interests to take into account and the management's job is to integrate and reconcile all of these interests and to optimize them in the best way. That's the task that we consider ours. And for that reason we do not view ourselves as a trading platform for people machines and business, we rather view ourselves as those who integrate interests and set priorities and setting priorities also means to allocate read sources in the most efficient and promising manner. And I don't like that kind of discussion about our Mobility business that much, because the first question which always comes up is when are you finally going to sell in Mobility, when will you have the IPO there? Now what changes, apart from the fact that we're in the headlines once again, well nothing. We might see a change in the assets held by those who already hold a lot of assets, anyway. But nothing will change in terms of the jobs that we can create or nothing changes in terms of the market change - market shares. So we do not consider ourselves a platform for market trades. And above all we consider ourselves to be people to set priorities. And if today, if I can either take a business which does have some structural difficulties, but for which we still want to create a prospect with 80,000 people and the business volume of €30 billion and many customers behind that, well in that case you've got to get your priorities right. And the question of whether we will have an IPO of mobility next year or in three years from now, I think that's an absolutely irrelevant question. If a chance and an opportunity, impunity arises to strengthen the business through such a transaction, whether it's still 100%, the Siemens subsidiary of 49% that remains to be seen in that specific situation. But if we can strengthen the business for example by going through a transaction similar to the one which we intended to implement and if that could make us more competitive., if this could allow us to create more synergistic potential to invest in innovation and paying our dividends to shareholders then this is a different question. So I just - the discussion about the further development of mobility is not a question of when we will listen on a stock exchange, but the question rather is which means we apply in order to strengthen the business and innovate it and thus the question about an IPO or a spin off or a joint venture, it's not a question about the purpose, but it's rather a question about the means to achieve a different kind of person. And those who have got a problem about this - about these priorities and the stock exchange, well they are free to sell their Siemen [ph] shares. It's not a prison. If anybody does not agree with the values that we apply. Well then that they're free to sell shares and buy shares in other companies. That's very important, because I don't like that discussion. Now rest assured, the process which we've just gone through with P&G and some of you wrote about it, talking about Siemens selling its roots and so on and I mean we don't need to confuse this with kind of romanticism, but now we have just resolved a problem or actually we have started addressing it and we have just done that and there's already the next question about mobility coming up and that really gives me a bit of a headache. I don't like that too much and if everybody wants to discuss that with me, well, I'm the first servant of that company. If anybody wants to discuss this with me, we can do that in our Capital Markets event and in just a few minutes. This is very important. It's about further developing a company which is changing fundamentally and everybody is talking about transformation. While talking about it is always easier than defining, planning and above all implementing it. And for that reason I can only tell you that our maximum priority is to stabilize a company which is really sound and strong in its core, that many companies are dreaming of being in a situation which Siemens is in and we know we do have an issue with transformation alone in P&G, also in digital industries, believe it or not, but because in DI we see a fundamental change of value change and all of a sudden 40% or 50% of the value chain it disappears for example in the automotive industry. So that kind of transformation is not only restricted to certain businesses, which some people might call the roots of the company or a low tech businesses. Now the fourth industrial revolution will fundamentally change all businesses and will also have a major impact onto people, onto their capacities and skills. And we've got the very same issue in digital industries. Just imagine we are going to lose 5,000 jobs, but we're creating 12,000 new ones. Now why do you think is that going to happen, because the contents of the work is going to change massively. So that's the key challenge though. So it's not about the difference between 12,000, 4,900 which we've got to handle. The key challenge rather is that we've got to handle 16,000 people and finding the right 12,000 candidates, that's not so easy because there's a massive demand for these people. And on the other hand, we've got to deal with the 4,900 in a socially compatible manner, working in one of the best companies in the world. That's the key challenge and that's why I do have an issue with those kind of questions. Now some people say, well now half a day later now. Now you've dealt with P&G and let's now turn towards Mobility. I mean, that's got nothing to do with you asking that question. It was just a message for all of the others. You just happen to be the one of giving me the clue and giving me the chance to once again clarify that point about what we considered to be a responsible and strict management approach.

[Unidentified Company Representative:]

And with that, ladies and gentlemen, I have to close that press conference. I'm very sorry, we do not have any time for further questions now. I once again would like to invite you must continue to stay in this room and participate in our Capital Market Day which is going to start in about 40 minutes from now. Thank you very much for joining us today. Thanks for your questions and your participation to Q&A and we will meet again on August 1 by latest when we're going to publish the Q3 numbers. Thank you.