Siemens Aktiengesellschaft
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Executives:]

Sabine Reichel - Head of IR Josef Kaeser - President & CEO Ralf Thomas - CFO

[Analysts:]

Mark Troman - Bank of America Merrill Lynch Andreas Willi - JPMorgan Chase & Co. Benedict Uglow - Morgan Stanley Peter Reilly - Jefferies LLC Simon Toennessen - Berenberg James Moore - Redburn Jonathan Mounsey - Exane BNP Paribas James Stettler - Barclays PLC

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Siemens 2017 Fourth Quarter Conference Call. As a reminder, this conference is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mrs. Sabine Reichel, Head of Investor Relations. Please go ahead, madam.

[Sabine Reichel:]

Good morning, ladies and gentlemen, and welcome to our Q4 conference call. The earnings release and Q4 presentation were released at 7 a.m. this morning. You can find everything on our website. Our CEO, Joe Kaeser; and our CFO, Ralf Thomas, are here to review our results today. We will also give you an update about the successful implementation of Vision 2020 and our expectations for 2018. With that, I will hand over to Joe.

[Josef Kaeser:]

Thank you, Sabine. Good morning, everyone, and thank you for joining us on our fourth quarter conference call, which obviously is also a year-end conference call. I think we have a lot of topics to cover today, as you can already see from the agenda. If you look at fiscal 2017, I believe that our team delivered once again an operational record year in many aspects, after we have been raising our guidance twice in the last year. Dividend is growing, and many of our businesses are stronger than ever in highly competitive markets. And we are working really hard to address these challenges in those areas where markets are adverse or even structurally declining and challenged. We've made great progress to execute on our Vision 2020. The team is impact-oriented, result-driven across all areas because of the focus in innovation, efficiency and adaptability. These are a key pillars for our strong performance, cornerstones of our Vision 2020. And this is what we are going to build on for 2018 going forward. Ownership culture, the foundation on how we act and how we behave results in impact-oriented in the marketplace. The achievements in what I believe is an economically improved global environment clearly showed cycle businesses have been helpful. On one hand side, I think if you really look at growth in profitability, that performance comes from Siemens. It's not only tailwind from a short cycle, it is also an inherent improvement of market penetration, market share, and obviously, also earnings conversion in the market. It gives us the freedom to invest in areas where we believe revenue can be created as we move along. Furthermore, we believe, however, that the geopolitical tensions could actually give some uncertainties going forward. It's hard to judge, but we'll see how it goes. And that's also been one of the reasons why we are a bit more conscious of 2018 and what we expect. We continue to optimize our operational and portfolio setup, also by act of consolidation, in highly competitive markets. The preparation for the health care IPO are fully on track. In fiscal 2018, we will again focus on diligent operational execution to achieve those targets, and there will be no complacency. The leadership team already is working on setting the next-generation strategic direction for Siemens. And the goal is clear,,,,,, continue a sustainable value-creation for all stakeholders in a modern company. We fully achieved our ambitions for fiscal 2017 targets, which, as I said earlier, had been raised twice in the year, explicitly first and then over the implicitly, after including certain aspects which were out of the guidance. Organic revenues grew moderately by 3%, while book-to-bill was at 1.3. Large orders below €50 million also showed clear growth in fiscal 2017, very important than obviously associated with the short-cycle performance. Industrial Business margin of 11.2% was up 40 basis points year-over-year and reached the increased target corridor of 11% to 12%, although we have been challenged with some market as well as internally driven topics, which we need to take care of in the Siemens Gamesa Renewable Energy environment. Earnings per share grew 10% to €7.44 compared to fiscal 2016 and well within the raised guidance. Looking at the key highlights of Q4. Obviously, been very important strategic move to sign the MOU with Alstom in order to create a fully vertically integrated European Mobility champion who is well prepared to go after dominating players in the market and provide our customers with sustainable opportunities. Q4 also shows strong finish with broad-based order growth of 16%. This is really a very, very fascinating achievement of our people in the marketplace, 16%, an outstanding result, might be some easy comps, but still growing orders by 16% certainly helps the future in terms of volume growth and revenues. Book-to-bill reached 1.06 and order backlog of Siemens stands now in accordance already with IFRS 15 at, I believe, impressive €126 billion. Revenues increased organically by 1%, with growth in most division and obviously compensating for a significant decline in the Power and Gas environment. Industrial Business, which, obviously, 2017 still include severance, reached 10.5%, down 100 basis points year-over-year, heavily impacted, of course, by the challenges of Power and Gas in the marketplace. If you compare numbers, you know that we've been actually, relatively speaking, have been holding our acts together, although the market clearly shows its token in the financials of the company participating in the marketplace. Net income and earnings per share were up 10%, benefiting, of course, from some positive effects outside also the Industrial business. As a key pillar of Vision 2020, we achieved major milestones in strengthening our portfolio during the course of 2017. We extended our leadership in the digital enterprise through the Mentor Graphics acquisition, which actually has turned out to be quite favorable as to what is our original thinking. So very valuable asset with integrating the physical mechanical design, together with the electrical design, going forward. So it already shows now that this was a very important move to complete the picture in the environment of simulation. Three important steps in the portfolio like renewable energy, mobility and health care. We set strategic directions to give them more independence going to market innovation, and obviously, also resource allocation. There will definitely be more focus, while still obviously benefiting from a strong, and I'm sure you have seen that also, very reputable Siemens brand in the marketplace. And of course, they will also get a much more simplified governance going forward. Siemens Gamesa, obviously, had a bumpy start, but it's working hard to implement synergies, actually pulling the synergies inwards from 4 to 3 years, with a full package, the optimized footprint and portfolio, as well as leverage with a large installed base of 83 gigawatt. Needless to say, that installed base of 83 gigawatts provides tons and terabytes of data, which then, in turn, are a prerequisite for modern, efficient and customer impressive service models going forward. Obviously, coming back to the Siemens Gamesa, a bumpy start, I mean, much has been related to market time, of course, also by doing that the first time. But I think if you look at the marketplace today, with also new numbers skew out, one can clearly see that this is an industry topic, and I believe the first ones who are actively solving the issue will be the ones emerging even stronger than they have been going into the market-driven setback. The preparation work for the Healthineers IPO is fully on track. Listing is planned for the first half of calendar year 2018. For now, we are just going to get ready so that we keep the power to act whenever we believe is a good timing in the market. That's exactly what we do now, of course, under the leadership of Michael Sen and Ralf Thomas, who are going to design the approach for that asset into the market. Furthermore, we will create with Siemens-Alstom a mobility champion, which has a synergy potential for more than €4.7 billion at net present value. Needless to say, if and then that potentially is acquired, it's going to be a strong company in the marketplace. Since 2014, we have constantly increased R&D in absolute as well as relative terms. Now obviously, increasing R&D is one thing, but gets innovation out of it is the other, and I am sure you agree with me that you've seen a lot of good things coming out of R&D, especially Digital Factory, but also other areas of the Siemens spectrum. We intend to grow our R&D investment further also during the course of 2018, with almost exclusively applying those resources into the rising importance of software and digital applications across the entire product range, first and foremost, of course, Digital Factory, process industries, Mobility, automation and building technology. As you can see from other examples, the focus topics are linked to growth areas and profit strongholds, reflecting a stringent resource allocation also in R&D. An example, because we have RSNA and market shows coming up like San Francisco, which has recently received the FDA approval for our high-end 7 Tesla MRI also for clinical use, needless to say, this is another first, another token of innovation in the marketplace, which we are sure will be well received in the marketplace. Once again, we were able to extend our leadership in the digital enterprise and gained further market share, significant further market share. We achieved digital revenues of €5.2 billion, a strong growth rate of 20%. The combination of inorganic growth, primarily through mentor complementing our software business, and of course, also strong organic growth across all the division. We continuously expand our data analytics and application capabilities to offer leading digital services, which makes customer pay for because they get a value for it. A good example, outside Digital Factory, which is always being named, is Mobility, where we just have implemented digital service projects with more than 50, 5-0, loyal customers. That clearly shows us that our EAD system, electrification, automation, digital enterprise is working. It is the winning formula in the marketplace. However, obviously, one of the key areas and priorities for fiscal 2018, which we have and will tackle, are the structural challenges at the Power and Gas division. We'll do that in a prudent yet consequent way going forward. We expect a further decline in the large gas turbine markets by around 40%, 4-0, for a period of 2017 to 2020, if we compare that to the 2016 levels. And as a consequence of overcapacities and other behavioral aspects, prices have come down significantly. We have thoroughly analyzed the market situation and our footprint and are close to coming up with a comprehensive concept for a future-oriented setup at Power and Gas, mostly associated with the area of larger turbines going forward. And now I believe it's the time that Ralf gives you an overview of the divisional performance and also analyze and discuss the outlook for fiscal 2018. Ralf, please.

[Ralf Thomas:]

So thank you, Joe, and also good morning from my side. Let me highlight now the performance of the divisions. As we have pointed out for quite some time, Power and Gas continues to operate in a very challenging environment. Global Energy trends towards renewable lead to declining markets for new units across the portfolio. In addition, the demand from oil and gas customers remains at low levels. In this unfavorable environment, we booked orders for 11 large gas turbines and 23 small and medium gas turbines. The service business held up well in the fourth quarter and drove order growth of 17%, with particular strength in the digital portfolio. Our backlog for the so-called FlexLTPs has grown now to almost €5 billion. The cushioning revenue effect from the Egypt megaproject is fading away and led, among others, to a revenue decline of 17%. Lower capacity utilization impacted profit margin, which declined to 8.3%. As Joe alluded to, price pressure due to substantial overcapacities on reduced demand continues and requires material footprint and capacity adjustment, which we will announce in due time. For fiscal Q1, we expect revenue to be clearly below prior year, which will have a corresponding negative effect on the profit margin. Energy Management outperformed competition once again on strong orders, up 23%, driven by large transmission solution projects such as DolWin6. Profitability recovered from the weaker previous quarter due to a decent performance in our product and system businesses. Building Technologies closed its best year ever, delivering double-digit margin of 12.1% for the quarter and also on similar level for the full year. Revenue growth accelerated to 7%, building on a leading integrated offering in automation and digitalization for buildings, combined with highest customer proximity to a strong branch network. And very compelling for the CFO, of course, BT has developed into an excellent asset-lean business, with cash conversion above 1 every year since 2009 consecutively. Another high performance division is Mobility, which delivered all-time high quarterly revenue of €2.2 billion. This came with a very strong profit margin of 9.8%, excluding severance. A strong contribution came again from highly profitable automation and digital businesses. Mobility has built a sustainable execution track record with 4 consecutive years in target margin range. For the first quarter, we expect a strong top and bottom line development for Mobility. As already highlighted, we are again very pleased with the performance of Digital Factory. They delivered another excellent quarter with strong top line growth, particularly in the short-cycle businesses, clearly winning market share. Our short-cycle business achieved strong revenue growth in all major countries, China, up 27%; U.S., up 14%; and Germany, up 8%. Demand continued to be favorable, especially in the automotive and the machine-building industries. The PLM software business grew revenue mid-single digit in the current quarter, in line with peers. It is very encouraging to see that Mentor Graphics integration hit all defined integration milestones 6 months after closing now. As expected, the cross-selling pipeline is filling up with new opportunities. As already announced earlier in the year, we now implemented the targeted improvements in the business, impacting profitability by severance charges of €86 million. Digital Factory's margin is at strong 20.5%, excluding severance impact from Mentor effects, as well as expenses for advancing the MindSphere platform. Process Industries and Drives showed again order growth up 9%, after oil and gas and commodity-related markets are stabilizing, while on the other hand, demand for wind power component business fell substantially. Main driver was the business in China with a sharp increase. Profitability is still burdened by ongoing operational challenges in the large drives business. We saw a significant impact by non-personnel charges related to capacity adjustments of €68 million in the quarter, and we expect to see further measures to adjust the global footprint in the coming quarters. Healthineers is in a very good position ahead of the intended IPO. Revenue grew double digit in China as well as in Europe, Russia and Middle East. A strong profit margin of 19% at the upper end of the target margin range was driven by the diagnostic imaging businesses and benefited also from currency tailwind. Important to note is the successful commercial launch of Atellica. We received very positive customer feedback from the first installations. Preparations for the intended IPO are fully on track to hit the first half calendar year '18 time frame, as previously announced. When looking at the Siemens Gamesa performance, we saw satisfying order wins such as the large Dutch offshore order, Borssele, as well as several large onshore projects totaling 780 megawatts in the United States. However, profitability was disappointing, impacted by severance charges, expenses for capacity adjustments and burdens primarily from the write-downs of inventories in the amount of €134 million. Board of Directors of Siemens Gamesa took swift action and strengthened the management team with very experienced finance and industry leaders to drive integration as well as to define and execute a sound strategy going forward. On Monday, SGRE also announced further material capacity adjustment measures to address changing market conditions. What do you expect below Industrial Business in fiscal '18? We will prepare great strategic steps as part of our fleet of ships approach, which means there's a lot of work ahead of us. Executing the Healthineers IPO and preparing the announced Mobility carve-out will result in significant volatility below Industrial Business. We have a clear view on all major topics and want to be transparent about the overall impact. While we expect some positive and some negative effects, they will broadly net each other. Looking ahead, we will work in fiscal '18 with the following assumptions, a major area of volatility will be centrally managed portfolio activities containing a number of businesses and equity investments. We expect the position to be overall positive, also due to the already realized Alstom gain of around €650 million. However, we expect volatility to continue due to the various assets and liabilities as well as carve-out-related items. For corporate items, you can see and assume a cost run rate of around €150 million per quarter, driven by significant central invest in innovation and digitalization. Pension is expected to be in line with fiscal '17. PPA assume around €300 million per quarter. This is approximately €200 million higher than in fiscal '17 due to the Mentor and Gamesa to be recognized for a full fiscal year now. Elimination, corporate treasury and other items will be around €100 million higher than in the prior year due to M&A-driven increase of interest rate expenses. Preparations for the Healthineers IPO, as well as Mobility carve-out, are progressing as planned. Hence, we expect certain tax burdens related to those items in fiscal '18. That's why we expect a higher tax rate compared to fiscal '17 in the range of 27% to 33%. In Q4, we delivered a satisfactory Industrial Business' free cash flow of almost €2.8 billion or €7.5 billion in total for the fiscal year '17. For the full year, we are on level with fiscal '16, albeit coming along with a more balanced quarterly development. While most divisions saw a strong cash conversion in the fourth quarter, the overall decline is due to Power and Gas, driven by lower customer project payments and Siemens Gamesa's weaker operational performance. As Joe mentioned at the beginning, we made significant progress in executing Vision 2020 to lift the performance sustainably onto a new level. Continuous drive for productivity and ambition to develop Siemens into a fast-learning and adaptive organization is bearing fruit. We achieved another year with total cost productivity gains of 5%, at the upper end of the target range. A key driver is the accelerated implementation of cost value engineering in the supply chain. We are also taking major steps to improve time-to-market for product development by using our own PLM software product as digital backbone to improve collaboration and increase process speed and transparency. More than 13,000 Siemens developers are now using our own PLM software. We are also pleased with our project execution. As pointed out in the past, we will not be able to rule out project charges entirely. After no net negative impact in fiscal '16, we will stay clearly below €200 million negative effect for fiscal '17, confirming the grip of our measures. Nevertheless, we will continue keeping a strong emphasis on stringent execution going forward. Another key pillar of driving performance is the stringent improvement of underperforming businesses in our portfolio. Progress is clearly visible with 80% of the identified business volume of around €15 billion in fiscal '17, delivering around 6% margin. A smaller portion of the businesses of around 20% revenue share is lagging behind, and we will closely look at strategic and operational measures on how to improve these businesses. A very good example is our Intelligent Traffic Systems business, which achieved a remarkable turnaround since fiscal '13. The business transformed through restructuring and targeted investments from a local-oriented hardware provider into a global-leading software and service provider for intelligent graphic solutions. Margins are up by around 800 basis points, and growth was significantly accelerated in fiscal '17. Fiscal '17 was a very successful year for Siemens. We achieved our targets, and all stakeholders will benefit from the successful value generation. Thus, we propose a dividend of €3.70, which is an increase of 3%, and equals the payout ratio of 49%, well within our payout policy. With a dividend yield of 3.1% as of September 30, we offer a very attractive and sustainable return, also reflecting our operational performance. We are continuing our current share buyback program of up to €3 billion until November 18, which is currently completed by around 40%. Furthermore, the managing board has decided to contribute a third endowment of €100 million to the Siemens profit-sharing pool. Since the total volume will have reached €400 million, we are planning to distribute it in equity to the eligible employees. This will boost the number of employee shareholders in line with our Vision 2020 target, well beyond the target of 200,000 employees. Before I give you the outlook for fiscal '18, let me share some assumptions with you that are relevant for our guidance. Globally, we see an improved economic situation with higher fixed investment growth rates compared to '17. The U.S. is expected to grow moderately, and the recent expansion in Europe is expected to continue after a prolonged period of stagnation. China will see further industrial expansion, but on a more moderate level. Reflecting on Siemens, we expect a mixed picture in our market environment in fiscal '18, ranging from robust markets for our short-cycle businesses to unfavorable dynamics in our energy generation market, as well as geopolitical uncertainties that may restrict investment sentiment. Negative pricing impact is expected to be around 2.5% of revenue. Regarding productivity, we expect to be well in the range of 3% to 5% of the total cost base again. As mentioned earlier, we plan to incrementally increase R&D invest by €400 million. Since we have taken some decisions to expand and optimize the footprint, CapEx in the Industrial Business will go up clearly in fiscal '17. We expect significant headwinds regarding foreign exchange on current levels to negatively impact top and bottom line. Now let me explain the outlook for our Industrial Business. As already mentioned, some of our businesses are operating in a very difficult environment. Related measures to address capacity adjustments are still in progress. But one thing is very clear. We will take decisive steps to strengthen our business, and we will look at necessary footprint adjustments. Currently, we are not in a position to give you an exact number regarding severance charges. Therefore, we decided to give guidance, excluding severance. In fiscal '17, we benefited, as you know, from 2 significant positive items, the eCar gain and a pension plan amendment. They broadly offset last year's severance charges. Excluding those effects, we delivered an adjusted industrial profit margin of 11.2%. For fiscal '18, we expect industrial business profit margin, excluding severance, in the range of 11% to 12%. We believe this is ambitious. Let me explain you why. Most of our businesses such as Energy Management, Mobility, Building Technologies, the Healthineers and Digital Factory are extremely well underway, just to name a few. They will compensate for significant headwinds, which we expect next year. First, further margin impacts from a weaker new unit business in Power and Gas; second, a structurally dilutive margin effect due to a larger revenue share of Siemens Gamesa, also operating in a challenging market environment; and third, a significant negative currency impact on our profit, which at current rates would be in the area of ballpark mid-3-digit million euros. Finally, the EPS guidance. Taking again the same adjustments into account as just discussed in substantial specific items in CMPA such as the asset retirement obligation of HANA, we delivered in fiscal '17 an adjusted EPS of €7.09. Looking into fiscal '18, we are excluding major steps to build the future Siemens as an even stronger fleet of ships. Despite the headwinds and structural changes already mentioned, we will still be able to increase earnings per share to achieve a range between €7.20 to €7.70, excluding severance again. This equals an EPS increase of 2% to 9% year-over-year. To sum it up, we expect for fiscal '18 modest organic revenue growth and a book-to-bill above 1. We expect a profit margin of 11% to 12% for our Industrial Business and EPS from net income in the range of €7.20 to €7.70, both excluding severance charges. With this, I hand back to Joe to give you the strategic perspective on beyond Vision 2020.

[Josef Kaeser:]

Yes. Thank you, Ralf. Before we go into the Q&A, I just have seen so much talk and floating around on what's next in financial holding and fleet of ships and what have you. I'd like to really maybe comment a little bit on that, what we expect going forward. Obviously, as you have seen, and hopefully also agree that, in 2014, we have achieved a lot in implementing Vision 2020. The operational priorities for fiscal 2018 are clearly defined and obviously designed to achieving further profitable growth, first and foremost, in bookings, but also we expect growth in buildings going forward. However, however, feel of change is continuously accelerating. And with many traditional competitors reshaping and focusing their profiles, new competitors from the software world are really pushing hard to capture opportunities. Siemens is as strong as never before. Yet, there can still be significant, significant value creation. And in order to stay ahead of that curve, we have some work ahead of us. Therefore, in fiscal 2018, we will set the direction for Siemens' next-level strategic development and the working title we do that under will be called Vision 2020+. I'm sure we'll find a good name once we have a good concept, but that's what the working title is all about. The cornerstones of the advanced strategic concept are, first, a strong brand; second, a powerful and focused business area or business areas, with clear accountability; and thirdly, a lean, flexible government. Siemens is one of the most powerful brands in the world. It stands for quality, stability and reliability, and of course, also for engineering competence. It does not really come as a surprise that a professional international community of 15,000 opinion leaders from 65 countries rank Siemens as the number one of the most reputable companies of the Fortune 2000. Our industrial units will need more focus on their specific needs, and it assumes more responsibility and accountability to drive the business needs. They will be benchmarked against the leading standards in the sectors, and they will decide on their go-to-market and their innovation priorities. Corporate governance and support functions will be significantly more focused and tailored to their specific business needs. Flexibility and speed will prevail over decelerating one-size-fits-all support processes. Resolve different scope is preferred over taking lengthy processes as a proxy for impact and results. The accountability and responsibilities of the essence and the businesses will decide on the scope and the coterie of service from the support functions, and the fleet of ship concept will be designed to strengthen our businesses, which I've already, for the most part at least, on a very successful way. We will discuss these and other relevant topics and their implications in depth with the leadership team over the coming months and to communicate more about the Vision 2020+ in the course of fiscal 2018. With that clarification, hopefully, clarification to set the framework on what to expect, I'll give it back to Sabine and Ralf and are happy to take your questions now. Thank you.

[Sabine Reichel:]

Thank you, Joe and Ralf. Operator, we would like to open for Q&A now.

[Operator:]

[Operator Instructions]. And our first question comes from Mark Troman of Bank of America.

[Mark Troman:]

I've got two questions, if I could, please. Firstly, on Power and Gas, clearly, profits are below the target range, the margin range of 11% to 15%. I guess I'm just trying to understand the downside, if you like. You talked about 40% decline in large turbines, I think, to 2020 or so. How close are we to the trough in terms of margins in that division taking to account that? And of course, obviously, you have some restructuring and capacity adjustment intentions. So that's question number one. And also, the range, the 11% to 15% range, I didn't see that altered unless I missed it. But are we sticking with that range for the medium term? So that's question on Power and Gas. And then, secondly, on the sort of why the restructuring outside of Power and Gas, Process Industries and Drives obviously has a few issues. But could you outline what you need to do in terms of capacity adjustments in other divisions outside of Power and Gas?

[Josef Kaeser:]

Thank you, Mark. Before Ralf goes into the question two, maybe I'd give you my take on Power and Gas. I mean, obviously, profits have been falling, not as much as everywhere, but still, we do have a serious environment. Decline is forthcoming, not unexpected, with the capability of renewable energies to capture economically feasible territories, and we still expect today that capacities in the markets will large turbines, large gas turbines might be as much as 400, 420 units a year. So assuming we are at 110, 120 a year, obviously, there is a significant demand for the rightsizing. On the other hand, if you look at the characteristics of the business, there is an obviously new business, and there is the service business, which the latter one remarkably strong in both the top line, as well as in the quality. As many reasons, I think we pretty much understand why that is and why we believe there is no real issue there going forward for the time being from what we see and what we hear from our customers. There's also the new business environment. And the combination of those 2 saw the drop happening now to below the target range. If we do the -- I believe if we do the restructuring and the rightsizing right, if we continue to be as successful as we have been in designing the innovation path to towards efficiency, then I believe the profit pool should be -- underlying should be in that range of 11% to 15%, at least for the time being. This may change over time, but at this point in time, there's no reason to believe why the profit pool should be materially below a double-digit environment. So that's why we believe, if we do the right action, we should be okay. Obviously, no one knows what a significant capacity, and therefore, capital cost overhang in the marketplace will do to the behavior of players in the market. You've seen some remarkable developments there in the recent past. And obviously, they surely will be out on how that develops going forward. So hard to tell, but we still believe if we do our job right, we should be able to reach that underlying again as we go forward. So that, I think, concludes the general assumption on this one. And obviously, honestly, if there was something to change because things go differently in the midterm, this would be part of the -- what we just laid out as Vision 2020+. But in the short term, there is no reason to believe that this cannot be planned. Maybe I'll hand it over to Ralf on the restructure part. Ralf?

[Ralf Thomas:]

Yes. Mark, Ralf speaking. So you have been also asking about the wider picture. You have been calling it restructuring. I mean, of course, the dominating piece is going to be around capacity adjustments in Power and Gas, as we have been pointing out. There is still, and I tried to address that also in my speech, a need to look into Process Industries and Drives. So the big picture there looks like, from a commodity market and oil and gas perspective, it looks like we may see the trough or may have seen the trough, so there's positive momentum also on the top line already in the fourth quarter, and the third quarter of last fiscal year that we could sense. Is it sustainable? We need to watch very carefully, but there is also quite heavy impact from the fierce fights in the renewable energy environment, where the wind power components that our large drives division is delivering is still quite under pressure. Not that much on quantities, but rather on pricing. So we need to be very careful there. And then coming back to the big picture, of course, we do not look at capacity adjustments only. We also continue in our ambition to drive our footprint closer to growth markets as we continuously do. So beyond that extraordinary impact of capacity adjustments, we also see that what we have been calling an underlying normal need to -- for restructuring on an annual basis, if you will. And for that, I wouldn't exclude any of the divisions. So we will kind of having a look into that on -- in aggregate and then share with you as soon as we get a grip around figures. In that regard, I don't know whether you have been having the opportunity to listen to the press conference we just had. The same question was, in the end, people asked whether I couldn't at least quantify to a certain extent. Unfortunately, I can't at the moment. That's why we have been guiding you also before severance charges. But from a lump sum perspective, I would expect that the overall amount for severance will be substantially higher than in fiscal '17.

[Operator:]

Our next question comes from Andreas Willi of JPMorgan.

[Andreas Willi:]

I have two follow-up questions on Power, on the details. On the Service business, you gave a relatively robust assessment there compared to GE, which cuts substantially there, and also MHI, which reduced guidance in service. Maybe you could give us a little bit more information around that? What are you seeing there? And to what degree is this difference to other companies may be driven by the treatment of accounting and advanced gas parts upgrades? And what do you see in the outlook you say for the foreseeable future? It looks -- or the near-term future, it looks fine. But we are hearing that new gas turbine service contracts are agreed at 20%, sometimes even 50% below old contracts. When is this going to translate into margin pressure, which given that probably equipment is loss-making and staying there for a while is obviously the key question going forward. And maybe also, on Dresser-Rand, where we finished the year, is the book-to-bill now above 1 or -- so the business can stabilize? And how the integration is going and given also you're now on the third CEO of that business this year.

[Josef Kaeser:]

Yes. Thank you. Thank you, Andreas. Maybe I'll start with the topic of power generation, and obviously, the service business in particular. We do not know what our competitors do and how they assess the situation at their customer base. All we know is from certain database sources is that we have quite a full pipeline in that area. Maybe this has to do with the geographical correlation between demand and service. I can't -- as I said, I want to comment on our numbers and not to answer somebody else. Definitely, we do not need accounting flexibility to drive anything. We've never done that. And if I just look at the environment, I think it was a wise idea to focus more on the business than on accounting and the reporting. But -- so what I can tell you is, for the foreseeable future, we see a very robust business there. We do a lot in terms of demand response in digital, using our digital capabilities in the service area. And so I believe we should be okay, assuming that there is no disruptive way of doing some matters differently. In the long term, I mean, it is also an outcome of a competitive environment. Sometimes, you have the new business and debt to service business and there's a customer negotiation, and maybe one or the other said, well, I give the service away for a better price as to get the order book, we don't know. There is provisions on that one. I think it's much more important to understand what can our capabilities in data analytics, in 3D printing, which we have been started to serve our customers within that and what can that do to keep the stickiness of that business. I think those are the questions we ask ourselves and have some answers to it. And as I said, foreseeable future, robust. But then again, we'll need to see what the market behavior is in the totality of the stakeholders.

[Ralf Thomas:]

And Andreas, if I may add to that, just about accounting practices. I think Joe said everything about the steady stage, but also you can maybe take from the adjustment needs that we will have and have from IFRS 15 that we have been pretty much anticipating and sticking to those rules that are now mandatory for all the other players as well, and I mean, just the magnitude of adjusting new orders last fiscal year is around €100 million only, €180 million on revenues and only 10 basis points on the margin, as well as €0.10 on EPS. The impact on the backlog, however, is massive. I mean, we have €10 billion more in our backlog now, which is also a clear signal that we have been, I think, doing that rightly and prudently, and we have been providing all the adjustments for the new accounting standards. I think that's something, if you wish, we can take later on today when we meet each other. So very conservative practices that have been continuously applied over a long period of time. So talking Dresser, the question was, where does book-to-bill stand? It was clearly under 1 in fiscal '17, and the margin was in the low single digits.

[Operator:]

We will take our next question from Ben Uglow of Morgan Stanley.

[Benedict Uglow:]

I guess, we're all sort of looking at the same puzzle around power, and to some extent, it was already addressed. But just on power service. I guess I'll ask the previous question in a slightly different way. Your competitors are seeing some pressure from lower outages and lower fleet utilization rates. Are you seeing the same pressure on utilization but you're actually able to offset it, so that somehow, you're not seeing the same degree on the margin line? So that's question number one. Question number two, I realize this is slightly unfair, Ralf. But you gave us nicely an indication on the margin in oil and gas. Is it fair for us to assume that the oil and gas margin should, if anything, be getting a little bit better in 2018, i.e. that this 2017 will have been a trough level for the Dresser and other businesses? And then the final question. I just want to clarify the CNBC interview and Bloomberg, et cetera, mix sort of impressions around the Healthineers timing. Are you saying that you want to go ahead with the IPO in the first half of 2018? Or are you saying that you want to be ready for the IPO at some point during the first half of 2018? I guess it's whether you're getting ready or whether you're actually going to do it.

[Josef Kaeser:]

Yes. Thank you, Ben. Maybe I'll start with the last one since I gave the interviews. What I said was that we do want to keep control over the timing. So therefore, we will be ready quickly with the preparation so that we can act in the first half of 2018. So we want to be quick, together with seeking orders so that we have choice of when to go into the market and how. There was a gap, by the way, if you haven't yet seen it. We have a new CFO at Siemens Healthcare who will also be one of the guarantors for a good start. Jochen Schmitz has been the controller of the company, and so that is also one of the areas which we view as important. Very clearly, first half 2018 is the targeted time frame to close the market. And obviously, we are speeding up to be ready as quickly as we can. So on again, maybe one word on the Power and Gas. Just want to remind you there's more businesses in Siemens. And obviously, we don't have the volatile ones at this time. As I said, what I can tell you is our view of the next 18 month. And I think that has been said with Mark and Andreas. The only one speculation I can add hopefully with some clarity, probably it depends on the geographical mix of what you have in services. I will give you an example, look into like -- pick one, maybe Saudi Arabia, I could just come back from there. Obviously, there's a lot of power demand and there is a lot of turbines which are either crude oil fired or have heavy fuel and this and that. When the oil price collapsed, the kingdom's budget was in trouble. So they need to cut subsidies and all that good stuff, which was obviously not well received, to tell you now, in order to get the income and costs matter in order. What they did is they've been raising taxes and cutting subsidies. Days after that, the energy demand was massively dropping, which obviously has a lower rate of utilization for the power plant. Now depending on who owns those power plants or service system has -- there's a utilization. So that's why it's very hard to discuss that on an overall industry level. I really do believe it's got to be done in the regional context and then maybe there's more clarity on who is affected more or less. Now needless to say, for example, just to give another example on the other side of the coin. Now with Europe, obviously, doing reasonably well based on easy comps. In the economy, there is more power demand. Now if you got more power demand, you may need more service. So if you have a strong footprint in Europe, well, obviously, you may be a bit more optimistic about things and -- that's right. So I think that's seeing along the lines how you probably need to think of or get just more clarity from the ones who are a bit more concerned about this topic.

[Ralf Thomas:]

Ben, Ralf speaking. With regard to your question on oil and gas, to be honest, I'm not that optimistic in terms of margin development. I mean, what we see in the market is that top line, we should have seen through in most in the commodity and commodity-related markets in 2017. However, when you look at the backlog that has been created in that time with severe price pressure, you would rather expect that the margin corresponding to then putting that into revenues, would be fairly difficult, and therefore, in terms of top line development, I agree, '17 could have been the trough. But with regard to margin, we need to bear in mind that, that was very much utilization-driven when we have been and all the other players accepting orders. So that will create quite some burden on bottom line, I think, in '18, too.

[Operator:]

We will take our next question from Peter Reilly of Jefferies.

[Peter Reilly:]

I've got two questions, please. Firstly, I was very interested in some more color on that's happening with Atellica. It sounds like you're getting more positive now that you've got some real installations out there in the field. Maybe you can give us some -- a bit more detail on what customers like about it, how it's going. And also, I assume this is still quite a material margin drag since you're selling mainly equipment at this stage. And then, secondly, on corporate items or corporate costs that came in lower than I expected, I wonder what happened to the stranded overhead from the -- from Siemens Gamesa. Where we see that in the report and accounts? And also, your guidance of about €600 million for fiscal '18, does that include the reallocation from health care which comes when you do the IPO? Or does that exclude that? So do we, in effect, get a much higher number by the end of fiscal '18 because we have more of that coming out of the health care business?

[Ralf Thomas:]

Peter, thank you for those questions. Let me start with the last one. I mean, we are preparing the IPO for the Healthineers for quite some time now. And we, of course, have been tailoring our supporting -- support functions, including corporate activities, of course, in a way that we have been carving them out and dedicating them through the Healthineers as there is demand for that. So it has been tailored as one of the rationales of putting a company and the company in place. We have been allowing them to tailor these support functions to their needs, and we have been quite successfully taking down corporate costs in total, along the last -- throughout the last 18 month. So that's, I think, no area of concern for me. When it comes to the Healthineers, of course, we are now also preparing for the business combination with Alstom on the Mobility side that will also drive that one step further. And as Joe has been indicating a couple of times, I mean, under that big picture of the fleet of ship, I think we need to also, for the way forward, look into creative patterns, how to provide services. Be it from corporate or anywhere else, it will be always striking the balance between economies of scale and tailoring those services to the needs of the specific businesses. And so you need to give us a bit more time. But with regard to the Healthineers, we don't have any headache in that regard. What we do see there is costs associated in that field for carving out businesses. We have that in our corporately managed portfolio activities, where we are preparing, so to speak, also all our portfolio effects. As a matter of fact, I mean, there will be a couple of parts moving throughout the next -- how many months is left? 11 months left in this fiscal year, and we will keep you posted. But we have a very clear understanding of where we need to go, and that's definitely the cost out way. When it comes to corporate and SGRE, I think pretty much the same is applicable. I mean, we have been transferring all the resources to the combined business of SGRE. And the redundancies that have been left behind will be managed and are going to be addressed. At the moment, again, I don't see that being a major driver of the overall picture when it comes to corporate cost development. But in a nutshell, we will have a strong focus on managing our corporate costs and having governance as lean as possible for the way forward. When it comes to Atellica, I think what I said and if I remember correctly, we have been discussing that also. I mean, all these steps for FDA approval and the likes are taking now. I mean, we have been putting the first systems in place, first instruments in place. And what we hear is that all the parameters around efficiency, new efficiency levels were going to be met. Now the number of the reagents that shall be applied on those new instruments will also be a part of the second wave now, if you will. So no indication up to now that any of the parameters and the goals we have been setting for ourselves would not be met. However, before we do see material commercial impact on that business going forward, there will be definitely another 12 to 18 months, as I said that before, because the real impact on bottom line will only be visible once we get the reagent business on a broader platform, means economies of scale, razor-razorblade, we exchange all that. So we'll take some time before we see success on that one. But good thing, on the other hand, is that we have been now completing the efforts to creating all that, means R&D that has been quite peaking in that area is now going to face its end there.

[Peter Reilly:]

And if I can just add a follow-up on again this issue of cost and carve-out. You talked about you have -- the CMPA being positive, but you got a gain to book there of €650 million. So -- and that sounds very positive rather than positive. Do you have a loss of costs coming in CMPA that we can't currently see for carve-outs and other issues that's going to consume most of the...

[Ralf Thomas:]

Sorry, Peter. Sorry to interrupt you. Maybe I was not then precise in the way you have been using the terms. I mean, from that, how you interpret that, I would expect CMPA to be very positive.

[Operator:]

We will take our next question from Simon Toennessen of Berenberg.

[Simon Toennessen:]

Firstly, on Digital Factory, I assume orders are up double digits in China, maybe you can clarify just on the order number there, because I think you only gave the revenue number. And if so -- and if orders are double digit up there, why only sort of divisional orders up 6? I know the comps are getting slightly tougher, but certainly, other regions must have been a bit weaker there. Maybe you can comment on that. And if I look at Slide 34, about the software growth within the assets you're expecting, it looks like you're implying 30% growth roughly in software sales in 2018 and further 10% to 15% in '19 and '20. So how should we think about the impact from subscription there? I know you've talked about the €20 million sort of cost impact there. But it looks like it's not going to impact growth at all. So any clarification there would be very helpful. Secondly, on M&A, it's been about a year now since the last large deal, Mentor. So how should we think about 2018 with regards to potential deals? Maybe you can talk about across the divisions where you still see potential gaps, if so. But I would also like to hear your thoughts on the process automation, in particular, given some of your competitors obviously have been here, particularly more acquisitive when it comes to software in that part. And lastly, just on tax, Ralf. The range is quite wide, 27% to 33%, and each percentage point has about €0.10 impact on your earnings. Would you advice us to model in the middle of the range for '18 to be on the conservative side? Just some views there, please.

[Ralf Thomas:]

Well, Sam, thank you for those questions. I need to be focused now to avoid spending the next 30 minutes with them. Let me start with tax rates. I mean, of course, the reason why we have been providing that fairly wide range, between 27% and 33%, is due to the fact that we don't know by now. And there's 2 aspects to it. Of course, there will be regular taxation, if I may call it that way, around the globe for the ongoing business. And there's also extraordinary impact from the finalization completing this scenery for that subgroup for the Healthineers before they finally can be IPO-ed. We have been discussing that. I think it was about 1.5 years back intensively. In some legislations and some jurisdictions around the globe, you have a preference over a period of time to make best use of your tax assets. In other countries, you unfortunately don't. So therefore, waiting doesn't help you. So that part, the latter part will then hit our accounts. And also, our tax rates, at the end of the day, when we are pushing for the very last step for establishing that subgroup that we have been discussing there. I'm afraid I can't be a lot of help in finding the right figure for you, but if I was in your shoes, I, of course, also will just take the middle of the corridor being provided. But don't be surprised if that doesn't work out at the end of the day. We will keep you posted. And as soon as we get really, really close to the IPO, we, of course, will share the impact from taxation with you. That's also in our interest, obviously. Same, by the way, will be applicable then for Siemens Alstom one day. Again, there also will be a couple of countries where we will not be able to manage the tax rate in any regard, so there will be impacts also there. Unfortunately, today, I can't provide precise figures on that one. Then talking Digital Factory, you're right. We have been extremely strong in the short-cycle business in China. And I have been providing figures there for 27%, as well as for the U.S., 14%, and Germany, 8%. I didn't mention Italy, which is also 16%. And in our short-cycle business, as you know, new orders are fairly close to the revenues in most of the businesses. But what I can share with you is when you look into the channels in China, it appears that we had a net outflow of the shelves of our distributors. And I can also see that in the first signals for the just new begun fiscal year '18, October, I have the feeling momentum has been keeping strong in China, even though the driving forces of automotive will no longer grow with the same high growth rates that we saw in the past, but still have some moderate growth momentum, I believe, for the way forward. And coming to Page 35 and trying to give you some flavor and figures for how we're going to move along. First of all, I'm not trying to get too much in theory, but we are not talking about subscription. We are talking about software as a service, which is going to be cloud based and has a massive different pattern of how to distribute new features, which is highly important for that type of business and which will make us more -- or will us -- will make us better positioned in terms -- compared to those that are going through subscription. Because in subscription models, you need to deliver software to each and every location, and that needs to be installed. I'm overdoing a little bit now, but that's creating massive, massive delays in terms of rolling out and massive impact on efficiencies while we are going to be cloud based, so we take out times. We accept the preferences of our different customers, and in a black or white module, would see that small and midsized companies would rather go for that software as a service model fairly quickly because it's scalable for them, while the large customers that we do have will rather slowly move into that new modeling of software as a service environment. But therefore, we are in the positive situation, I think, and in a favorable spot that we can roll that out over the next 2, 3, 4 years in a way that it will likely not have any material impact on the margin development because as soon as we get more customer base, broader customer base, and the small and midsized companies, the positive impact of that will then kind of compensate for the rollout costs and for the preparation of the concept as such. So the pattern you see on that graph is -- it looks pretty flat straightforward, but it took the Digital Factory guys quite some times to manage it and plan and roll it out that way that it will be minimally invasive, if you will, to the margin and profitability development of the division, and in particular, of our PLM business there. Last but not least, when it comes to M&A activities, you, of course, would be surprised if I shared any concrete ideas at that point in time. But what you have been hearing us talking about in the past was that we see ourselves in a very, very advanced position when it comes to penetrating the area of digitalization and of industrial software. We are not that strong on the process side as we are in discrete manufacturing and automation. So smaller additions will always be driven by new opportunities and the verticals around the industrial space, and it will always be driven under the paradigm shift towards digitalization. Process automation and what do other competitors plan for or wish for, I won't comment on that one. But we believe that we also have a very strong footprint already when it comes to the software penetration in other industries that we can facilitate on our IoT platform then and tailoring to the specific needs of other industries where the applications that can be provided them beat by us or even by our customers themselves because we have an open system in place, which is a huge advantage as we can see right now compared to one of our famous competitors.

[Ralf Thomas:]

Yes. Let me maybe comment on the second one, on M&A, be maybe even a bit more precise. I think we could summarize it in a way that we are not motivated by our large deals at this point in time. And there's basically 2 reasons. First of all, as Ralf mentioned, it's been busy in getting our act together on the mechanical and electrical design environment. So we are the only one company in the world in that space which can provide a fully comprehensive digital trend from the design of a product, to the product line, all the way to the service model. We feel pretty good on what we do there. And obviously, if you go by the numbers in the space, you will see who wins and who doesn't so much. On the process industries, we admittedly have our gaps which now has been, let's say, being filled by others -- with others. We, as you remember, we signed a deal and a cooperation agreement with Bentley. So we do have 3D design access, and in turn, we provide a global distribution network for that product. So huge benefit for both without any major cash associated with that. We are, in general, a bit shy about doing rich cash deals because, I mean, if you have more intensive models like we have been applying in the last 2 to 3 things, we had to reverse in this and that and get access to flexible assets and consolidate them, I believe this is the choice. And you also do believe that the valuations have gotten pretty rich in the space where we are active in. So that actually helps us a lot because we have quite of a full plate in 2018. It is about the rightsizing of PowerGen. It is about the Vision 2020 enhancement, which we are up to be doing. So we actually feel pretty good about the fact that we do not really need to do something to catch up with the ones who are leading the pack.

[Operator:]

We will take our question from James Moore of Redburn Capital.

[James Moore:]

I have three, one on Digital Factory and 2 on power. Could we perhaps dig into the margin in Digital Factory a little? At 20.5, I mean, it's great in absolute terms. But I notice it is down 50 bps quarter-on-quarter and the revenue is up 6%, 7% quarter-on-quarter. Are there any mix topics in that result we should think about? And more importantly, is this quarter more reflective of the underlying running rate into next year or the last couple of quarters? Secondly, if I could come back to power. Thanks for Slide 9. I see that the 30% price pressure in 3 years or 10% a year, that's the market level. Was your price pressure similar in the period? And perhaps more importantly, as we go into your 2018 guidance, should we assume -- do you assume that, that pace continues into 2018? And can you help us a bit further about what underlying margins in Power and Gas specifically doing this coming year? And finally, on service, you mentioned some of the good results. Would it be possible to share a little bit how orders and sales actually grew organically in the quarter? And can I interpret your service bottom line comment as meaning that, roughly, service margins were flat in the full year '17 versus the full year '16 or were they up a bit or down a bit?

[Ralf Thomas:]

Yes. So thank you, James. With regard to the Digital Factory and the underlying 20.5%, I mean, we have been sharing with you the severance piece in it. And we also have been indicating that this is also on Page 35, for the full fiscal year that we have been spending €100 million on getting MindSphere in place. I also remember our last meeting, we hedged all the second or third quarter, I can't recall. We have been indicating that we will see that investment continuing for the next 6, 8 quarters to come. And therefore, on that Page 35, I think that we just had -- have been touching on, we will see the MindSphere investment peaking in 7 -- in fiscal '18 with €175 million. So that's probably the biggest step forward then, which doesn't mean that we don't make use of MindSphere already at that point in time. But it means that it will be then also tailored into the specific needs of certain customer groups for the way forward. That investment of €100 million was pretty much focused in taking place in the second half of the year, so it's growing. So therefore, the impact for the fourth quarter was obviously there. We also still had residual impact, and we'll have declining but still material impact from integrating Mentor. We have been discussing the haircut issue. If you remember the third quarter, that was much lower now in the fourth quarter, but still we'll continue in fiscal '18. So the way we try to create that graph, obviously, it didn't work though, was giving you confidence that we are managing three different investments at the same time and still making sure that the margin is staying in a descent ballpark. So the underlying of 20.5%, I personally believe is a very healthy figure for that what we are managing at the same time, because you also need to bear in mind that the base investment in R&D and in our sales force is continuing to grow. We are quite nicely -- or the business is quite nicely balancing investments and also delivering to bottom line. So we will keep you posted with the different impacts from MindSphere, from Mentor, and also with the initial investments net on software as a service in '18 on a quarterly basis. So the second question around price pressure on the PG end was massive, yes, and you also need to see that in the context. I mean, in a market that is substantially contracting, as we see, that 4 new units there, it's that all the players go for the same targets. And you meet the same faces in each and every boardroom when it comes to final decision-making on the customer's end. And so price pressure has different faces there, one of them being that the new unit business is affected. The other one, of course, is the long-term perspective when you look into the combination of a potential service component for the years to come. And so from that end, you also need to be aware and need to make sure that you get the big picture in place and don't focus too much on a single component. So it's life cycle thinking and that, to a large extent, in more and more countries, in the emerging countries, in particular, the financing is playing an ever-growing role now in there. So the basket is bigger than new units, that's my point. But there, price pressure will not go away anytime soon. I'm absolutely sure because overcapacities need to be eliminated first, and then we will see the new normal. So I'm prepared. We are prepared for the same level of pricing pressure in fiscal '18 when it comes, in particular, to large gas turbines for the next couple of quarters. And then the last question around the margin in service business. I mean, we have a lot of visibility in that area, as Joe has been pointing out. I mean, the next 6 quarters, I think we have quite a firm grip around that. What we see, the geographical footprint may play a major role there when it comes to utilization rates of the installed base in Europe, probably different way forward than in other geographies. So I cannot see any indication that, that would be a massive impact on the service margins so far. But again, as I said, you need to look into each and every deal because sometimes, you also need to kind of tailor the offering to the individual needs of the specific customer, and therefore, service may be differently affected, if I may put it that way, in each and every large order. If I just remember the Egypt megadeals, that was completely different contract at the end of the day compared to that what we normally have seen. But in general, service is making up for about a bit more than 2/3 of the overall backlog in our Power and Gas business, which is still standing at strong €40 billion.

[Operator:]

We will take our next question from Jonathan Mounsey of BNP Paribas.

[Jonathan Mounsey:]

The first one, just a short one. Obviously, we've got guidance on tax for 2018. It sounds like maybe Siemens Alstom, the carve-out there might impact '19. I realize it's already difficult enough to forecast the tax for '18, but should we be thinking the tax rate is going to normalize, back to more like where it was in '17 come '19? Or should we be modeling a higher rate in '19 as well? And then on the fleet of ship strategy, obviously, maybe there's been very little comment today so far on Siemens Gamesa. I appreciate it's a separate company now, but I guess it does have perhaps some lessons for the fleet of ship strategy as we move forward. Once Healthineers goes, first of all, are there any lessons for that? And then afterwards, does what's happened with Siemens Gamesa influence the plans maybe to float a few more ships post Healthineers, if I put it that way?

[Ralf Thomas:]

Thank you for your question. Let me start with the tax piece of it. As I said before, I mean, there's two unknowns, if you will. The one being if we -- as we foresee Siemens Alstom being closed most likely at the end of the calendar year '18, it's hard to tell when we will have seen the final tax impact on that because, as always and this is not Siemens specific, you save the best for last when it comes to taxation and building subgroups. So I don't want to speculate on that one. But from a broad pictures perspective, '18 will be fairly unique in terms of taxation, obviously. So the normal guidance we used to give in the past was something between 26% and 30% of tax rate, that will be valid also for the way forward. So if you take the 27% to 33% in terms of magnitude and also in terms of spend with -- as a special year, I think that's fair for modeling the way forward. Normalized tax rates, of course, also depend on the jurisdiction. And as long as some presidents around the globe have a hard time getting their tax reforms through their senates, I would not be in a position to precisely predict what we are going to see in '19 and beyond.

[Josef Kaeser:]

Yes. Jonathan, maybe on the fleet of ships debate, which actually in a way is a, I think, placeholder for what I said earlier if you're going to enhance the Vision 2020 strategic concept at a wide scope in time and that obviously will be a part of the math to answer those questions you have been addressing. I mean, I laid out the sort of cornerstones, which matter and which matter less, and what it's all about. There are other aspects to consider, and we'll introduce that to the market in due time as we have very successfully done it with the Vision 2020. Now SGRE, of course, there have also been learnings, especially in the area of how to control and manage a business in an indirect way, and we'll continue to do so. But with regard to the actions which had been taken on the entrepreneurial and the business side, I mean, you would not have done it any different within Siemens because you've got to do what you've got to do. The only one difference on the combined company is now that you are better prepared for the changes in the marketplace because you have significant synergies in combining the efforts. In the old days, a stand-alone Spanish company and a Siemens division, just give you an example, both have developed both the same low wind turbine capacity as they do now for one and they would still -- at some point in time, a Spanish company would still have to try to get enough knowledge, capabilities, competencies and experience to execute on the offshore opportunities in France. Now I guarantee you, it's much simpler for a combined entity which has the market leader in offshore with 20 years of experience on how to do that as part of the game. And I could go on and on and on and I think in the interest of time, I stop here, and maybe get the last one to ask a question and especially get it answered.

[Operator:]

We will take our final question from James Stettler of Barclays.

[James Stettler:]

Two questions on Digital Factory. Could you talk a bit about how you see the drop-through margin this year at this stage in the cycle? And then, Joe, you mentioned earlier on in the prepared statements that you're seeing pure-play software companies being much more aggressive. What can Siemens really do to protect its position in this segment?

[Ralf Thomas:]

Thank you, James. Let me start with the question around the cycle. I mean, first of all, as I tried to explained that very page, 35, what the business has been really doing diligently and also wisely from my perspective is they use the high-margin conversion of their short-cycle business to at the same time invest into more penetration of our software and digital accounts. So that is well balanced from my perspective. And therefore, the drop-through margin as such, you will not see on an aggregated level of the Digital Factory, obviously. But if you take into consideration the figures of Page 35, I think that it is really a massive investment on top of that what the normal course of R&D and going to market implicitly requires for a growth momentum of that magnitude and still balancing the margin and balancing profitability in a way that we will not dip in any regard. So that's, I think, good news. Why can't we say that? What we do see is we see quite good momentum in the key industries of the Digital Factory, and that is still pretty much driven by global automotive, even though that has been -- even though that has been very strong in terms of growth momentum throughout the last 4 quarters, and we don't expect growth to continue on those levels. However, it will still be, I think, fairly moderate on a global basis including China, which is important also for the exporting countries in -- and across Europe. So the short-cycle momentum will stay in place for quite some time, and that's what we are building also our guidance on. So for the next 2 quarters, first and second quarter of our fiscal '18, we expect quite some momentum from there. But what is even more promising is that global machinery continues to report clear growth momentum. So machinery now is ranking #1 of the world industry growth performance in our portfolio at the moment. So we see, if you will, another wave in the portfolio taking over in that regard, so that is giving us quite some visibility when it comes to margin development, and that's why we also can put our investment thesis, if you will, for the digitalization and software piece of the portfolio on such a stable footprint, if you will. So I hope that is answering your question.

[James Stettler:]

Question really was, does the gross drop-through remain the same?

[Ralf Thomas:]

Gross drop-through, what is that?

[Sabine Reichel:]

Gross drop-through. Could you explain, James?

[James Stettler:]

Before any investments. So just like-for-like, if you look at the business.

[Ralf Thomas:]

Yes, the earnings, that was my point, James. So the earnings conversion on the incremental volume, this is clearly tangible for me. At the same time, we have been putting investment plans in place that anticipate further growth momentum, as I have been explaining, for the next 2 quarters, which will be reinvested, if you will, the incremental margin earned on that one into the software piece and into developing MindSphere because that is going to see its peak investment in fiscal '18. So that was the rationale behind there. So on a net basis, I think we will be fairly balanced in terms of margin and profitability. Underlying, you will see -- we see the drop-through of that growth momentum in margins, but it will be reinvested in digital factories way forward for MindSphere and also for paving the grounds for software as a service.

[Josef Kaeser:]

And James, on the comment of pure play, software companies are more aggressive. I don't remember that I said it, honestly. But if I had, probably, it would mean that they just look aggressive for the incumbents because software companies naturally, they got to come in from a different angle into the manufacturing and engineering space. They lack the direct access to the physical world of manufacturing and engineering. So they did try to make that case on the scalability of software. I mean, we do understand that. We have more than 23,000 software engineers in the meantime, both for embedded as well in the product in the physical world, as well as in the vertical software, all the way down to designing semiconductor systems and apply that capability to industrial systems. So they don't look to us as overly aggressive because the only one company is getting combined the physical world with the, obviously, with the world of design and virtual world. So we have a lot of software ingredients. We have the physical world of electrification and the layer in between on automation. So actually, we have everything it takes to be successful. The biggest danger we have is our own complacency, and this is something we just must not let take part of the organization.

[Sabine Reichel:]

Thank you. So thank you, Joe. Thank you, Ralf. Thank you, everyone, for participating today. As always, the team and I will be available for further questions. The next event will be our Innovation Day on December 15 in Munich. We have already sent out the invitation. So please, we are looking forward to seeing you. Please come and get in touch with us for registration. Thank you. Goodbye.

[Operator:]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. Once again, let me repeat the instant replay numbers. Participants in Germany, please call replay number [phone], access code 1900950#. Participants in Europe, please call the replay number [phone], access code 190-0950#. And participants from the United States, please call the replay number [phone], access code 1900950#. This replay service will be available until tomorrow night. A recording of this conference call will also be available on the Investor Relations section of the Siemens website. The website address is www.siemens.com/investorrelations.