Siemens Aktiengesellschaft
Q2 2016 Earnings Call Transcript

Published: 7 May 2016

[Executives:]

Sabine Reichel - Head, IR Joe Kaeser - President & CEO Ralf Thomas - CFO

[Analysts:]

Simon Toennessen - Bereneberg James Stettler - Barclays Peter Reilly - Jefferies Gael de Bray - Deutsche Bank Will Mackie - Kepler Cheuvreux

[Sabine Reichel:]

Good morning, ladies and gentlemen, and welcome to our Q2 Analyst Conference in London. Our President and CEO, Joe Kaeser, and our CFO, Ralf Thomas, will present the Q2 results. In addition, Joe and Ralf will give you also an update and further proof points of our successful execution of Vision 2020. As usual, after the presentation, there will be time for Q&A. The Q2 earnings release and financials were published this morning. You can download those files on our website. You will also find a replay of the webcast which will be available soon after the conference. As always I would like to draw your attention to the Safe Harbor Statement which you can find on Page 2 of the presentation. And for housekeeping purpose, please switch off the mobile phones for those who are in the room. And with that, I'd like to hand over to Joe.

[Joe Kaeser:]

Thank you, Sabine. Good morning, everyone, and thank you for joining us for the second quarter conference here in London. We are in the middle of executing on our Vision 2020 and we are executing well. We are building a leading and highly adaptive company, along the value chain of electrification, automation and digitization. And that's all based on a, what we call, powerful ownership culture. The system of EAD, electrification, automation, digitization is unique. And it matters, it matters to our customers, it matters to our employees, our shareholders since it provides a unique value proposition. As we continue to operate in a reasonably complex economic environment with little change in demand patterns in our end customer industries, we focus on quite a decent, really quite a decent amount of market opportunities across the globe and take advantage of our unprecedented global reach. We also address our self-help potential, which is provided by our cost-out programs within Vision 2020. And we have made good progress also in the second quarter. As you can see in our financials and also in other areas of our Vision 2020 concept, we delivered what we promised and achieved a convincing, at least what we believe convincing, top- and bottom-line performance compared to both the previous year and the industry. Orders continue to grow and were up 10% excluding currency effects driven by obviously some major orders. Major contributors came from power and gas where we booked the remaining two combined cycle power plants in Egypt for about €3.1, and also secondly, wind power we recorded a €1.2 billion from an offshore wind farm project in the United Kingdom. And I'll give you more details in a minute. As indicated, we accelerate the revenue growth to 7% excluding currency effects and 5% on a pure organic basis. Wind power and power and gas delivered double-digit growth while mobility and healthcare also showed strength in growing their business. The industrial profit margin was at 10.9%, which obviously was up 190 basis points year over year, and was driven by what we believe strong showings in most businesses particularly in power and also in energy management. Furthermore, about 60 basis points of the overall margin improvement relate to positive effects in power and gas from revised estimates in the context of ending sanctions against Iran. And Ralf will provide more insight later on this one-off which had already been discussed quite a lot in the press call earlier. Cost savings and stringent project execution backed up margins as well. The strong performance in industrial business also lifted net income to about €1.5 billion which is up more than 60% year over year if we exclude the one-off gains of €3 billion in fiscal Q2 2015. And finally, free cash flow came in with €800 million and was clearly stronger than the prior year ago, mainly due to materially improved working capital management. Now maybe we should have a look at the regional trend. We already mentioned large energy-related orders drove growth in the Europe and Africa region, while Germany and the Americas were down on tough comps from a year ago. In line with the particularly difficult macroeconomic environment in those regions we saw continued order weakness in Russia and Brazil, while order intake in China actually looked good, and we took advantage from our competitive position in efficient gas, de-central generation and HVDC while short-cycle demand was still reasonably weak. Sharp revenue growth in the U.K., Turkey and the Netherlands reflected strong backlog conversion from mostly wind orders. And in the United States we delivered solid revenue growth across all businesses reflecting our strong market position in the region. India continues to be a bright spot, benefiting from a vibrant GDP growth and strong management team converting our unique offering into substantial revenue growth. Maybe now I'll give you maybe some information on two major orders in the first quarter. As you know, we've won a megadeal order in Egypt for three combined cycle power plants with total four 24 H-class turbines including service. And that's all now fully in our books. Closing for the financing of Burullus and New Capital projects took place during the second quarter. We are lining up all our resources to execute those megaprojects in time, in the money in order to support our customer with a comprehensive training scheme for future operations. And just a few days ago we announced the East Anglia ONE project with ScottishPower Renewables, our largest offshore order ever regarding the capacity volume. This is about our 7 megawatt direct drive turbine, which received quite a strong acceptance in the market. And we'll deliver this project out of the manufacturing places in Hull here in the UK as well as Cuxhaven. And both facilities are being built as we speak. Now let's have a look at some key developments in the divisions. As mentioned, power and gas operates in a very competitive market environment. And the team continues to drive productivity, foster efficiency and focus on the opportunities in the global marketplace. In total, we shipped 16 large gas turbines in the quarter, among those five H-class turbines. And we continue to grow our market share. We have sold 78 H-class turbines now, and improved our own world record to 61.5% efficiency at 603.8 megawatt electrical output at our Lausward plant. Above all, our fully operational H-class turbines have now achieved more than 200,000 operating hours, demonstrating a unique, a real-life day-by-day performance and reliability. And I have to say I feel very pleased with the performance of the power and gas division management team and all the people there in absolute terms as well as relative to markets, although a positive impact and the favorable mix have driven an extraordinary merchant development for the quarter. Revenues were up 15% mainly due to ramping up execution of the PG projects. The reported profit margins of 13.6%, was noticeably supported by about 280 basis points from the already mentioned one-off item. Wind power has a very robust sales pipeline, resulting from abundant backlog of almost €15 billion. Strong conversion of exactly the backlog drove revenue growth in both onshore as well as offshore. Significant process and progress in our efforts to optimize our operational excellence and a strong project completion and execution helped drive an exceptionally strong profit margin of 9.4%. Although this may not yet be sustainable for the quarters to come, we expect wind power to deliver within the target margin range for the remainder of the year. Energy management continued to improve its performance approaching the target margin range on the back of stronger profit contributions from solutions, transformer and high voltage projects in the business. In the transmission solutions businesses we continue to have a very clear, a very clear backlog focused on quality of the backlog including risk and merchant. Building technologies delivered a reliable and solid set of numbers, although seasonably light. Management team continues to build a robust line of business by focusing on service and on the benefits from a strong automation and digitalization know-how of the company. Digital factory manages the cyclical challenges well, and benefits from its strategic advantages, especially in the softer components area of the business. Order growth was driven by PLM software, while the short-cycle businesses were down as expected due to market conditions. PLM delivered also moderate growth driven by double-digit growth in Germany and our excellent positioning in the United States. Automotive is still the strongest vertical with further growing demand on an already high level, while machine building continued to lose dynamics, although we see some early signs of recovery in the machine building environment. Despite the cyclical challenges in the market place, profitability increased to 15.1% which is actually up 100 basis points year over year. As for the second half of the year we already flagged out in March this year here in London that regarding the recovery of short-cycle business in the second half the jury is still out. While we believe the bottom has been reached, we do expect a slower recovery over the next quarters rather than a material growth, which is mainly due to the fact that the channels are still reasonably well supplied. While automation and low voltage recovery may remain slow, we expect the software business to continue good revenue growth in line with our digitalization strategy. As laid out previously, process industries and drives faced further weak demand from commodity-related industries, which were only partially offset by order growth in wind power-related businesses. As a consequence, we announced a restructuring program to adjust capacities and align footprint on demand structures. For 2,500 jobs and other assets which are affected by the restructuring we expect severance charges of about €200 million to €300 million probably impacting fiscal Q4. Mobility delivered another strong quarter and consistently performs within the target range, thanks to its strong vertical integration of the business. We are also pleased again with what we saw at healthcare. Order revenue growth was mainly driven by our even increasingly strong position in the Americas, and continued strength in the diagnostics imaging business on top and bottom line. Profit margins of healthcare benefited from a foreign currency impact of about 140 basis points to the positive. As you might have seen that healthcare just released its new brand, probably a few minutes ago if I'm not mistaken, and they are now Siemens Healthy News. This is another milestone on the way to further accelerate our healthcare business in Siemens, giving it even more customer focus, powerful employee and innovative strength in the marketplace. And you will hear more, you'll learn more about this exciting brand identity launch from healthcare management in the next few hours, days and weeks. And with that I hand it over to Ralf to give you more insights on our financials. Ralf, please?

[Ralf Thomas:]

Thank you, Joe. Let me now walk you through the line items below industrial business where we saw a development mostly as expected. And let me also give you some guidance going forward. SFS delivered an exceptionally strong profit of €226 million and was supported by a positive €92 million resulting from an at-equity investment. During the second half of fiscal 2015 the SFS performance is expected to normalize on prior year's level. Centrally managed portfolio activities saw a negative impact from the Hanau asset retirement obligation driven by interest rate movements. Furthermore, it recorded an equity investment loss from the Primetals joint venture which is operating in a difficult market environment as you know. For the second half of fiscal 2016 we continue to expect volatility in CMPA activities; however, negative profit contributions will be smaller than prior year. Siemens real estate is as usual depending on disposal gains. For the second half of fiscal 2016 we see them in line with prior year. As planned, we will see a seasonal component for corporate items with higher cost in the second half of the year on level compared to fiscal 2015. Pension has and will continue to develop liked planned at a quarterly run rate of around €125 million. PPA will remain on the same quarterly levels as in the first two quarters with a slight upward trend due to the integration of CD-adapco. The tax rate of 27% has been in line with our guidance and we maintain the 26% to 30% range for the full fiscal year. Net income benefited in discontinued operations from a disposal gain of €60 million of the remaining Sivantos assets, our former audiology business. For the second half of the year the expected impact from discontinued operations will be rather limited. Having said this, I would like to focus on the improved free cash flow development with €812 million on the second quarter, a positive swing of €1.1 billion year over year. Two factors have been driving that development. First, all operational divisions posted a positive free cash flow with wind power, mobility and healthcare showing significant improvement over prior year mainly due to improved working capital management. Second, last year was burdened by a significant negative impact in corporate treasury mainly related to settlements of hedging instruments as discussed. We expect a significant seasonal improvement in free cash flow from our divisions in the second half of the year fiscal 2016 as in previous years. Driving performance is a key priority within our Vision 2020 ambition. I am pleased to inform you that our cost reduction program is fully on track to deliver the intended savings. The good news is that we are confident to raise our expectation for cumulated savings in fiscal 2016 to achieve €850 million to €950 million. As discussed, a main driver for these savings has been complexity reduction in our organization. We simplified structures and have a very tight grip on the organization. For example, we decreased the number of business segments and sub-segments by more than 60% with a clear reduction of overhead. Another important lever is the optimization of IT infrastructure and support costs, for example, through consolidation of SAP systems and moving data storage to the cloud. The latter has been one of the single biggest savings levers with an impact of around €50 million. However, we also drive significant initiatives to use digitalization in our own processes by connecting our data warehouses and gain smart data for better transparency and decision-making. Finally, I want to give you a brief deep dive on our supply chain optimization initiatives, which is a key lever to achieve our annual productivity target of 3% to 5%. The purchasing volume covers around 50% of our cost base. Our current supply chain management initiative focuses on two main aspects. First, continue to make progress in traditional procurement levers such as pooling of our purchasing volume, which reached about 46% on corporate level meanwhile. Global value sourcing stood at 26% in fiscal 2015. We have the clear ambition to further grow this rate to around 35% points in fiscal 2020. Beyond these traditional procurement levers, we are striving to foster collaboration between procurement, R&D, engineering and product or project management. The goal is to achieve cost optimized design solutions in a very early phase and provide cost transparency and unveil savings potential along the entire supply chain. I want to highlight that we are rolling out a state-of-the-art cost and value engineering across all divisions including design-to-cost. Cost and value engineering built precise analytics and strong judgment on expected cost. Our goal is to significantly increase the cost and value engineering coverage. A key success factor is the increasing internal use of our team center software for product cost management. With this example of operational excellence I would like to hand back to you Joe.

[Joe Kaeser:]

Thank you. Ralf, for, as I believe, a very clear and insightful analysis on the financial. We do hope, ladies and gentlemen, we do hope that it has become evident that we are working hard, diligently and also successfully on our commitments laid out in Vision 2020, although there is still a way to go. Above and beyond our operational goals we continue to strengthen our portfolio. In the second quarter the divestment of Unify and Sivantos, that's the former hearing aids business in Siemens, were successfully closed. Clearly ahead of our original schedule, we closed the acquisition of CD-adapco a simulations specialist for fluid dynamics for $970m in early April. CD-adapco is being integrated in our PLM software business. And you already had a very convincing joint appearance at the Hannover Fair which obviously left a lot of customers impressed about our digital strategy in this area. And we are also looking into strengthening sustainability evolution and long-term visionary innovation. A good example for efficiency driving is the sustainability agenda which we write with the formation of a 50/50 joint venture with Valeo to provide high-voltage powertrain for electric cars. As for the longer term aspects, we have also announced a cooperation agreement with Airbus where we join forces to electrify aviation through hybrid electric propulsion systems, drastically reducing the emissions in aviation. About 200 employees from both companies will develop prototypes for such drive trains, and we want to demonstrate the technical feasibility. Together we will invest a mid-three digit million R&D amount until 2020. Just a few days ago the world's biggest Industrial Trade Fair closed its doors in Hannover. Above and beyond the visits of obviously most prominent political leaders around 100,000 customers and industry experts, 100,000 customers and industry experts visited our booth. Industry 4.0 or IOT, ladies and gentlemen, is quite a hype. Most everyone talks about it, many try to do something there and only a few have made it through. Our customers have a very clear view, a very clear view on who this is and we share this view. With our comprehensive offering, customers can start digital transformation of their business at any point in their value chain from product design all the way to service. Our portfolio for digital enterprise comprises four elements, which we can tailor our customer's needs. First, a comprehensive digital enterprise software suite which for example enables the creation of a digital twin throughout the entire life cycle of a product or a plan. We will continue to expand and complement this platform. And we have the automation portfolio for real production in the plant. Second, our offerings for industrial communication, real-time in the digital enterprising environment. Third, we have the products and services for industrial security to protect the plants and the assets and the processes from cyber attacks. Fourth and not least, industrial services, we launched our industry cloud, which we call Mindsphere, which is powered by Sinalytics which is an open platform for our customers to run their apps at their platform with their data. So we are not in the way of our customers' needs, we support them to be successful. We have already more than 300,000 devices connected to our Sinalytics platform, and that's far more, far more than any other player in this space. After this more strategic outlook, let me close with our short-term view where we confirm our financial guidance for fiscal 2016, which obviously as you remember has been upped in the first quarter. And we upped it and confirm it, although the market environment for our high-margin short-cycle businesses may not pick up materially in the second half. And with that, be happy to take your questions and hand it back to Sabine.

[Sabine Reichel:]

Thank you. Joe. Thank you, Ralf. So I look into the room and see a few hands. Okay. Let's start with Mark and then Simon, Mark in the back.

[Unidentified Analyst:]

Yes, good morning, Ralf and Joe. First question on that short-cycle outlook Joe, obviously not that -- you don't see it materially improving but you do -- you did say I think you said early signs of recovery in machine building. So sounds as though it can be a bit better just maybe not a lot better. First of all, is that correct? And these early signs of recovery, are you actually seeing that in your monthly business rates say in March and April, etc., or is that the sense that you're sales team gets from your customers? That's the first question. And just a follow on one related, if you could maybe go through what's going on in China, particularly for healthcare and digital factory that would be very helpful. Thank you.

[Joe Kaeser:]

Thanks, Mark. Good pickup, so not material means still growth that's very true that's exactly what's the meaning of that. Although, however, based on maybe a bit easier comps than any other material improvement. Secondly, the reason why we said early signs of recovery if we had seen it in our business already there would have been signs of recovery. And the reason why we said early was because we are also talking to the customers of our customers. And they seem to be more encouraged by the environment they see. So what that means is they need to place the orders through our customers to machine makers and tool makers and then hopefully follow suit and do the same with us. So that's how you should look at it. China, I've been there a few weeks ago in the China Development Forum where a few company leaders were discussing the 13th five year plan with the Chinese government. And if you look at the five-year plan and the way the discussions went there is a very clear dedication from the government to make this work in both adding productivity in the labor market but also looking to renewables and the air pollution as well as building out infrastructure. So that almost feels like a description of business for Siemens. That's good news, although I still sense that the progress on reforms which in that case means restructuring of the old world overcapacities, shipbuilding, metals, mining, cement is still considerably slow. And we've seen in our company too if you want to add to the progress you also need to let go on the tail-end of technology. So that's why I believe it may take some time to see noticeable upticks in the industrial capital goods environment. Interestingly enough though, if I may because I think that's important, what we got positively, I wouldn't say surprised but positively impressed about, was that China massively looks into efficiency improvements. And that's one of the major explanations why our software business, PLM Software business is growing reasonably well in China where one would think this is more automation than anything else. So that's why I believe there's some upside on the software while automation still maybe a bit slow.

[Sabine Reichel:]

Okay. So next question, Simon Toennessen.

[Simon Toennessen:]

Thanks very much. The first question on PG could you talk a bit about the mix that you've seen in PG in the quarter. Obviously there was the Iran impact, but can you just talk a bit about the service in Europe, we've talked about that a lot in the past and also about Dresser and the service business there I think that's particularly where you were quite positive about -- still in recent quarters. So that's the first question. Second question on PD, we are obviously getting some of the headcount reduction savings coming through over the quarters the margin at 4%. How should we think about the margin over the next few quarters as these headcount reductions come through? Thanks very much.

[Joe Kaeser:]

On PG obviously if you look at the margin at face value it's nice but obviously we need to look into the underlying business. We discussed the accounting impact of actions we took. So that obviously would need to be deducted to see where we are. Typically, and that's the reason why I was mentioning the mix, typically if you go to summer or pre-summer sometimes the service component of the total business is relatively less than new business. And that's why we kind of are just flagging that this may be a bit different this third quarter when you see -- when you look at the mix. Service Europe stable on a base which is obviously lower than average of the last years due to the fact that there are not too many gas turbines running full steam these days. On Dresser let me refer the whole -- call it Dresser-Rand, it's the oil and gas business predominantly upstream and others. So if you look at oil downstream is obviously just really slow, really slow. Mid-stream oil is still being transported no matter what the oil price will be, so that looks actually well and this is also good for service. And downstream obviously is not much related to the acquisitions which we made on both Rolls-Royce and Dresser, so therefore it's got no big impact. So when you were quoting me about being positive on service the answer I guess I would have is it's all relative, so that's what it is. So the industry is struggling. We support our customers as much as we can to help them get the cost out and there are good areas there. We are very active on LNG where we, I believe, provide quite a good opportunity for them to reallocate their productivities. So we are making progress but the environment is not exactly supporting the CapEx spend.

[Ralf Thomas:]

And your second question was around PD or PG?

[Unidentified Analyst:]

PD.

[Ralf Thomas:]

So at the moment as Joe has been pointing out we are in the process of negotiating with the representatives of labor and we may expect an impact in terms of severance charges in the last quarter between €200 million and €300 million. So implicitly means no major impact from that part of the restructuring process, but as we have been pointing in the past, we expect that operationally, we steadily but slowly make progress throughout the course of the year. And that's what we are still expecting for the third and fourth quarter but no miracles to happen, because the underlying challenges the marketplace and not only our internal homework which is on its way. And I think with regard to timing and the level of ambition we are following up on that what we have been planning in the first -- have been sharing with you I the first quarter.

[Sabine Reichel:]

Okay. Next question, [Andreas], the gentleman in the second row.

[UnidentifiedAnalyst:]

Thank you. First question is on acquisitions and balance sheet. You're at the upper end of the leverage target. It's temporary probably given its Q2 and you've paid the dividend. But you mention in the press call or in an interview this morning that you -- Siemens is the one to drive industry consolidation. Can you maybe elaborate a bit on that in terms of both where you are in terms of leverage and your ambition to drive industry consolidation and where? And the second question on process and drives in terms of the order pattern and where we are in the cycle there, because you have the wind component business there which occasionally helps. Where are we in terms of where we used to be at the peak, just for the more industrial-related business within that division?

[Joe Kaeser:]

So if I recall the press meeting this morning the comment was related, all related to wind and nowhere else so I think that's important in that context as far as industry consolidation is concerned. On the PD take that one?

[Ralf Thomas:]

So in terms of the industrial piece of the seasonality that was your point, of course, we are benefiting to a certain extent from the wind business being up in that field. The real challenge is related to the commodity and raw material industries around the globe where large drives are playing a major role. And in that field I think it would be too early to say that we have been seeing the [ever low]. But with regard to our own contribution and our self-help potential what we can do we have been starting to take cost out consistently. We are addressing the workforce and we have been doing that I think quite consistently what you have been taking from media throughout the last could of weeks. I think we didn't shy away because it was necessary to act consistently in that field. And the adjustments resulting from that will not be seen in the current fiscal year obviously.

[Joe Kaeser:]

If you look at -- is there another way to look at it would be a question whether we've seen the bottom of the margin compression in Q2 on PD. So if that question would that have been asked I would have said yes.

[Ralf Thomas:]

I was answering the top-line question.

[UnidentifiedAnalyst:]

But on the balance sheet to come back to it, what's really -- would it be possible to go above that leverage target or is this something that you are quite strict about.

[Ralf Thomas:]

I thought since you have been giving yourself the perfect answer to that question already it is de-facto of that last second quarter. We didn't have -- we haven't closed the acquisition of Dresser-Rand yet so the impact year over year is including this acquisition. And on top of that, the €2.8 billion of dividend payments are of course playing a role. The way we do the math for that is of course having seasonality being driven by dividend payment. You all know and I indicated that in my presentation that the first half of free cash flow, even though by far better than last year, is still not the stronger part for our fiscal year. So we expect improvement on free cash flow in the second half of the year, again very strong in the third and fourth quarter. So the overall target for our capital structure remains as we said. And the €1.1 billion you see at the moment is definitely not the new normal.

[Sabine Reichel:]

Okay. James, next please, James Stettler on the right there.

[James Stettler:]

Thank you. Just starting off with healthcare, if I understood that correctly you had 140 basis point margin tail wind so that would suggest the margin was down underlying. What drove that? And then on digital factor could you talk a bit how we should think about the revenue development, so software versus the short-cycle equipment to give is a feeling there? And then finally, just this German draft piece out on the power market would that sound to be pretty positive for Siemens if that comes through, could you comment on that?

[Joe Kaeser:]

Can you get the last one, Ralf?

[James Stettler:]

On the German energy reform there's a draft document out there, if you could talk about that?

[Joe Kaeser:]

Yes.

[James Stettler:]

Indeed and shutting down coal.

[Ralf Thomas:]

So maybe I can start with the first part of it.

[Joe Kaeser:]

Go ahead, anything.

[Ralf Thomas:]

James, we need to recall that last year second quarter healthcare has been also benefiting from the disposal of a business that was translated into basis points 190 I think if I recall that properly. So the exchange rate current fiscal year even though very supportive also had comparable in prior year's quarter. So from that perspective I think it's valid to say that we continue performing very strong in healthcare. And that in particular is also referring to the highly competitive market in the US so, so much about this. With regards to the split between software and short cycle we are very well positioned, as Joe said in his presentation, with our software business which has been moderately growing in total with a strong double-digit growth in Germany, in both Germany and also in the US. China was also growing on the back of striving for more efficiency and effectiveness in their industries. So this is something where we believe we will also have a leading edge in the future when it comes to grow. Unfortunately, the flipside is that the short-cycle business in digital factory has been facing tough market conditions. And there we also see a moderate decline -- a modest decline, sorry, which is also in terms of ending up in our books with a focus in the machine building environment as Joe said. So looking at the customers of our customers is a very early indication. And typically from that what I recall from my time at industry it takes about half a year before you see the customers, customer's impact on our own book.

[Joe Kaeser:]

And on the draft, on the energy policy, look, Germany is an important country but in fiscal Q2, for example, Germany was about 10% of our orders. So that also obviously relates to wind. It is a global business. The other reason why we also have been investing right in front of the ocean in Cuxhaven or in Hull, so we see that as some debate going on, on what to do with offshore next. But then we are a globally acting company and we have a lot of opportunities in that sector. So we are not honestly overly concerned about any impact that might have.

[Sabine Reichel:]

Okay. Next is Peter Reilly.

[Peter Reilly:]

Good morning. It's Peter Reilly from Jefferies. Two questions please. Firstly, coming back to wind it's been a very bumpy ride. You've suffered from low profitability, technical problems. You've now had a very high margin in one quarter. You've got a rising backlog I guess with more and more offshore. So can you help us understand whether we are now on a sustainable path or whether the problems are behind us or whether you still see some further issues in the future? And then secondly on PLM, you talked about moderate growth. Previously I think you talked about double-digit growth. It sounds like the growth rate has moderated a bit. I'm trying to work out whether it's a trend maybe because it takes time to convert interest into orders or because there's a slow macro. But I'm assuming you'd expect that business to have the potential to accelerate given all the innovation around team center and integrated offerings and so forth.

[Ralf Thomas:]

Absolutely, Peter, if I may continue on the PLM question. What I tried to express is that the second quarter that was moderate growth and this was pretty much in line with that what successful competitors obviously have been accomplishing in the marketplace. What I tried to underpin is that in the markets with growth potential we are still in the double-digit area as I have been referring to Germany and the US. And also China was very close to being double-digit again. There is of course also in other countries single projects or major projects that have a material impact on the growth pattern in these countries. And we also have a bit of seasonality in our internal demand, because we also roll out the same enablers for efficiency and effectiveness of our industrial processes in our own factories around the globe of course. So from that the pattern is unbroken if you want to look upon it from that perspective. And it will not occur quarter after quarter on the same levels obviously. What is important for us is that the way we see the competitors act there is not anything that would widen the gap in any regard. So talking about the wind business and why was it that strong in particular in the second quarter. There were no major one-offs positives releases of provisions or something. I think it would be too early to say we have found new normal in steady state, but we have been addressing for two years now in our discussions with you that we have been intensively working on stabilizing our supply chain processes. We have been admitting that industrialization hasn't -- did not have reached a very mature level in the past. And we have been also addressing internally many different areas on which we have been working on, and it looks like we are now gaining ground also in tangible outcomes. If you look at the yield, the first part yield, past yield in the blade factories that has been improving by more than 20% which is substantial obviously for that kind of capacity utilization, which is then driving higher absorption of cost of course because the output is higher. So in total, non-conformance costs have been addressed in many different ways throughout the complete supply chain and that is bearing first fruits now. Will it be on that level quarter after quarter, definitely not. It also depends on how much projects you complete here. And so from that perspective, as Joe said before, we feel quite comfortable with saying that we expect the wind business being in their margin band throughout the next quarters to come. And I believe stabilization and controls over the processes in the factory and at our suppliers is an even bigger asset than having a single quarter with a margin level that is even above the corridor that we have been planning for this business. What it also shows is, if we have the right management team and have a consistent clear view on what needs to be done, things happen over time. So I have to say I'm very pleased with what I see there and it shows, first of all, there is good profit pool, also new business. It is a young business so it's got quite some opportunities, and coming back, James, what you said earlier in Germany, there is still the policy that offshore will grow from 16 to 22 gigawatts until 2022. Secondly, and that's also something one should not underestimate, there's a huge installed base in onshore at very good locations for wind, but at very bad efficiencies of the turbines. So, what you're in essence looking to is to replace the turbines at that place with more efficiency so that you gain more outcome. And being concerned about policy drafts is one thing, but I also think the policy makers ought to be concerned about their jobs are going if they don't get it right. So there is a lot to lose on both sides.

[Sabine Reichel:]

Okay. Then Ben in the first row next.

[UnidentifiedAnalyst:]

So a couple of questions. First of all, Joe, in the U.S. I think we've seen a number of companies this quarter have fairly softish order development. You mentioned that we always focus on the short cycle in China, what are you seeing in the short cycle in the U.S.? And you mentioned in your opening remarks about the channels not being sufficiently empty, is that particularly true of the U.S.? So that was question number one. Question number two, depending on FX or whatever, but the base level of orders in power and gas looks stable-ish, just generally, what are your impressions at the moment of the tendering environment? Not for the mega projects, not for Egypt, etcetera., but are you seeing any change at all in the underlying demand environment in fossil power? So that's question number two. And the third one, and I may have missed this early, but it's for Ralf. With the €200 million to €300 million of additional restructuring from process industries, what should we expect for the total industrial restructuring in the second half, so for all of Siemens? And also, what is the corporate restructuring in the second half?

[Joe Kaeser:]

Well, let me start with your first question, Ben, about the US short cycle development and how we see ourselves in that environment. If you allow I do that by verticals. Automotive has completely different dynamics, obviously, compared to machinery. So in the automotive environment I think the U.S. has still some momentum and we participate in that obviously, but not in each and every quarter, because it depends on the investment cycle change of assembly lines and so on at our customers. So I would see our factory automation product business rather flattish to continue, but taking opportunities of particular investments at some of our key customers and then it doesn't depend that much on geography, but on their global manufacturing set-up, where and when they invest, obviously. The second piece, in terms of machinery, I think the US in machine tool systems is fairly weak at the moment. I agree with that what some of our peers in the market comment on and I wouldn't bet on a quick recovery in that environment. And last, but not least, when it comes to global manufacturing, I think we are quite at a low level at the moment, that's also the consensus of that what I hear and read about the comments of our peers, but there the sluggish dynamics may get modest momentum maybe later in the calendar year. So that would be my read on the U.S. in terms of short cycle. Then, with regard to restructuring, I think that was the last part of your question, you saw us disclosing €106 million for the second quarter, €87 million of them being in the industrial business arena. The first quarter we had some €50 million of restructuring in the industrial business, €60 million for Siemens in total, and if you just assume similar figures for the second half of the year as non-PD-related restructuring, I think that should suit your model. Whether it's €200 million or €300 million for PD, as Joe has pointed out, we will see from the course of the negotiations as they take place.

[UnidentifiedAnalyst:]

Sorry, just so I understand that. So if we take the first half we have ballpark €170 million.

[Ralf Thomas:]

€130 million for industrial business and €160 million-odd for Siemens in total, but you asked about the industrial footprint that was what I understood. So take that times two that will be roughly what the underlying beyond PD is.

[UnidentifiedAnalyst:]

Okay and then PD on top?

[Ralf Thomas:]

Yes.

[UnidentifiedAnalyst:]

Okay. Thank you.

[Joe Kaeser:]

All right, so maybe Ralf talked about the short-term outlook or the short cycle in the United States so this what it is, but if we look a bit further, I believe that the outlook for automation PLM to be put together in an industrial suite will actually see its best yet to come. So why is that? First of all, if you look at this industry, it's all about cars in the United States. There is hardly any big country in the world where the oil price decline has arrived as quickly and as directly at the pump station. So that in turn triggered a massive demand on cars and we see that already if you look at the pickup trucks, I don't think that many pickup trucks sold in a long time than they are now. So that's a positive. Why do we believe this is good? Because the automotive industries look for two things; time to market, make more models quicker, and that's only possible by doing automation and simulation together. There's no other way anymore, because the isolated tools have all been used. Second topic is and that's really important, there is ever more car versions coming along in the offering. In the old days there was one car and you could have it in any color as long as it was black and it then diverted a little bit into more colors, a bit more interior. Today there are sometimes 30 or 40 models on one platform, so many more models on the same platform and that puts a massive strain on logistics and manufacturing flexibility. And that's another area where, if you don't have everything in one cloud, PLM and automation, you're just not going to have it anymore, at least not as fast as your customers demand. And so I'm really actually excited about this combination. We saw it really also in the Hannover fair when our customers told us where they have their challenges. So that's a bit more mid-term outlook and why we continue to significantly invest, mostly organically, in that space. So now with the underlying demand environment, almost every project if it comes to power generation, maybe above 65 or 80 megawatts, is a busy place. And so it's not this thing anymore, there is a mega project that everyone participates and everyone else is being first come, first served, those times are over. So you have to have core teams who can convince your customers that you are the better choice, and that's what we've been focusing for the last one and a half years in the global market and, if you look at what the market shares do without sacrificing margin and risk, we feel good at what we do.

[UnidentifiedAnalyst:]

One obvious follow-up on that, have you seen any significant step down in pricing throughout the market? Has there been any incremental pressure?

[Ralf Thomas:]

Good point. It's been -- pricing like for like has been easing, it is more around what comprehensive package you can provide in terms of customer support and it is also about efficiency based on space.

[Sabine Reichel:]

Okay. Okay, so James first and then Gael.

[UnidentifiedAnalyst:]

Good morning, everyone, Joe, Ralf. Maybe firstly on savings, you mentioned the move to 850, 950; I wonder if you could say, as this is the biggest year of shift, where we are at the end of the first half? I'm really trying to think about when is the best quarter year on year for that specific program. And within savings, the underperformer plan we haven't talked about much today, could you perhaps say where we are on that and which units are running ahead or behind? On wind, I'd just like to go back to your comment that there's no provision release and understand why you singled out main bearings in the press release this morning? And also, where are we on onshore and offshore mix, because that was often a big part of the margin story and has that also helped this number today? Finally, on FX, a bit of housekeeping, I wonder if you could say what the basis point impact was to this quarter and what you might expect at current rates in the second half, please?

[Ralf Thomas:]

Broken down by segment.

[Joe Kaeser:]

By month. No, with regard to the exchange rate, if I may start with that on, as I said, 50 basis points in the second quarter. And I said in the press call this morning as we had to report last year the fact that we don't speculate but that our hedging scheme is kind of running late, in terms of impact, we will most likely see another quarter being supported by hedging impact. So it means the third quarter may be affected by then, but after that there is no material impact then, because the year-over-year pattern and our hedging scheme trying to anticipate for the next six months and then hedging on a level of 75% of our exposure, mainly in product business, is kind of prescribing what is going to happen in the next couple of quarters. So yes, there will be more impact in the third quarter, but probably not a lot in the fourth. Then the biggest beneficiaries, as I said before, that was healthcare in the second quarter and will continue being and the other typical suspects on a by far lower level have been PD, DF and the product piece in EM means low voltage. So these are the other beneficiaries as they have been suffering in prior year of that running late of the hedging schemes. With regard to the savings, where do we stand at half year? I have been extensively, I think, discussing that a couple of times that we are doing a very in-depth analysis on where do we stand with all the measures that we are controlling on a degree of implementation basis. Lots of effort being given to that because it was so and still is so important to us, so the degree of implementation is ramping up and the momentum we gained now throughout the last two quarters will materialize of course in the second half on a full scale then. So, all these measures that are now getting into being P&L effective in the second quarter will be incremental. That's why we also felt encouraged to share with you our view on that the savings in fiscal 2016 will be even a bit higher than originally expected, means the spillover into 2017 will be smaller and we will keep you posted on how that is going to materialize. Let me just quickly correct myself, if I was misleading with regard to wind power, I didn't say that there wasn't anything with main bearings, what I said is, there was no material impact that was shaping the picture of the 9.4%. But the bigger impact was coming from continuous improvement of stabilizing our supply chain management and also the quality of the supply we bring to the process, as we have been pointing out a couple of times before. This is an industry that is still gaining maturity in terms of stabilizing industrial processes on a high level, that's why we very much look into the development of our first pass yield. I gave you the example of the blades, which have been improving substantially, more than 20% in terms of first pass yield over the course of the last month and then the same is applicable obviously for the inner cells. So in total it's more driven by getting non-conformance costs out of the system than by one-time effects; nevertheless, there was an impact from the main bearings.

[Sabine Reichel:]

The underperformers?

[Joe Kaeser:]

With regard to the underperformers, the target we have been setting ourselves is 6% return on sales for fiscal 2017. We are on our way to get there, it's not done yet obviously and we also said that we do not have a Plan A only, but also a plan B for each potential situation that may arise on the way to get there. We are making decent progress current fiscal year. Last year, we had the pleasure to report that we have been reaching a black zero, as we called it. This year we expect rather a margin of 3%, which is quite some momentum compared to the long period of time in which they didn't perform at all. It would be too early to tell you that we got everything under control for fiscal 2017, but we are very, very in a consistent way working on it with all the management teams that are affected.

[Sabine Reichel:]

Okay. Thank you. So now Gael?

[Gael de Bray:]

Thank you. Good morning, Gael de Bray from Deutsche Bank. The first question is -- sorry, I'm going back on Andreas' earlier question on the capital allocation strategy. I must say I have been a bit confused by all the noises around Siemens in the past few weeks regarding some hypothetical acquisitions in wind, healthcare, UPS, building automation, industrial software and so on. So can you elaborate maybe on where your real priorities in terms of M&A are today? The second question is actually on the mobility division. Some of your competitors are currently investing quite significantly to build up new factories and expand their original supply chains. I understand you now have a pretty strong global signaling business, but what about the rolling stock and how do you intend to manage the rolling stock business going forward? Do you believe in the multi-local present strategy and do you intend to expand your rail manufacturing footprint outside of Europe?

[Joe Kaeser:]

Thanks, Gael. About the confusion in the -- I think it's always important to figure out where the confusion comes from. If the Company says something and the shareholders are confused, there's a problem; if the media says something you should not consider this to be a problem if you are confused, because we are confused sometimes too, but we just keep on going and do the work which we are getting paid for and that is why we do not comment on the rumors. Because if we comment once and say it's nonsense, next time we don't comment and say nothing, obviously people come to the conclusion that it's true. So look, I'm not sure whether I caught all the rumors, but don't rely on the rumors because they're typically also made to create noise and traffic and that's not what we do. So priorities of M&A, we have a very clear view about where we want to allocate our resources. In general, we have the five strategic priorities. It's about areas of growth. It's about profit pool. It's about the competencies which we can add. It's important that this asset or this investment capital used as synergies to the greater good, otherwise you are better off going it alone. And the fifth one is do we see paradigm shifts which subsequently will change the business model of any sort of player and that's how we look at it. And the outcome was clear, we said decentralized energy is important. We did not acquire -- the companies we acquired or the assets we acquired in the last 18 months because of fracturing, we acquired them because we believe they make a meaningful contribution to decentralized energy concept which we believe will happen alongside renewables. We believe that and we have a lot of supporters in our customer base that we are leading the path of digital enterprise, not just how many connected devices someone has and all that nice read, it is about a comprehensive offering on electrification, automation and a digital world. That's what matters, bringing that all together in design to cost, in time to market, in flexibilizing -- I don't know if that word exists -- flexibilizing -- it exists now -- flexibilizing basically…

[Ralf Thomas:]

All about innovation.

[Joe Kaeser:]

The way people produce their goods. Or in other words, scale should not matter as much anymore if it comes to cost than it used to. If you have a million cars it typically would be cheaper than 10 cars to produce and with all these new ways of combining the real and the relative world and all that stuff does is that you can produce products quicker, also more customers the more flexible without having the cost of complexity. That's what those things do and if you only own one of those three you just cannot contribute to a meaningful outcome. And this is the area where we are going to further invest in both organic as well as rounding up our offering to make sure that we cover everything which is being needed in that space. Healthcare is a real good business, it can be even greater. We see the first signs of them being much more focused on what they do, rather than looking at the greater good of Siemens. You can see it in market share, you can see it the way they address their issues, which they have several of them, and that's also the way they form an identity as a team, which gives productivity in going the extra mile on addressing the market particularities and that's the areas where we make sure that we create more value to shareholders. And fixing underperforming businesses also matters, because even if you consider selling one of them eventually, you have a multiple of 10 in any business, if you make no profit you get nothing, if you have 3% profit you get a decent price. So that's why we continue to get the low hanging fruits out of the business and they'll take it from there. It's a very, very clear view on where we want to put our efforts, our people and our money to work. Mobility, we've done a great deal of work to be where we are at today; acquisitions, focusing the portfolio, drive innovation, productivity, manage risk in a decent way and that gets us now to margins of 7%, 8% from literally nothing if you allocate the charges also over time. The reason that we have achieved that was that we have been vertically integrating the business from rolling stock to mobility. We've got rolling stock, we've got identification, we've got signaling and that altogether makes a meaningful business sense. So that's why we are not in a hurry to look what others do. We just follow our course and do it right and, if there are opportunities for consolidation of aspects in that area we'll look at it. But we know what we are doing and that's the position we are at. Then if others invest somewhere, fine, and we will do our thing.

[Sabine Reichel:]

Okay. Will Mackie, please, next.

[Will Mackie:]

Thank you. Good morning, a couple of questions. If we could come back to energy management, the growth there limited in the first quarter, perhaps you could touch on your views of the outlook for growth in energy management. But more specifically you've been successful with your transformation program, the fruits of that coming through, and you mentioned the discipline on the order intake side. How should we anticipate the margin developing through the rest of this year for energy management? And then onto your digital enterprise business. It's a formidable collection of assets that you've amassed across the PLM and digital space. You've talked a little bit about capital allocation strategy. We saw that with CD-adapco. To what extent have you now completed the build-out of all the necessary building blocks to continue to win in the digital enterprise space or are there still white spots across the portfolio? Thank you.

[Joe Kaeser:]

All right, energy management, if you look at where they come from on both margins, charges, confusion, lack of focus, we've come a long way and that goes by a number of -- the team is very focused on getting focused on getting things done one at a time and that's why they sometimes also are not overly aggressive in going after growth, especially not in the area of solutions like high voltage solutions and the solution matters, which typically drive top-line orders and top-line growth at little value, which we add. So therefore they're a little bit picky about what they take and what they don't, rather than optimize their staff. And I would not be surprised if you see slow order intake also in Q3, it should pick up materially in Q4, all right? So overall, if you look at the whole year, then I think we can clearly say that energy management will grow like for like at a decent rate and decent would always be at least market if not above. On the margin, I think it's about time they smelled the sweet again, what it means to be within the target margin ranges, I think they deserve it. Digital factory and associated matters, look, there are white spots obviously, but they've become less. And what we typically do is we look at some spaces. We knew that fluid control was a matter which we wanted to own, because that completes the offering, especially in the car industry -- the biggest customers, as you can imagine, come from the car manufacturing environment -- and that's why we did it. Now we add organic growth to it by adding people and software engineers to open it up to a global reach, not just a very limited reach in the sales channels like they have out of obvious reasons. And then once we are done with that one we may look into another spot where we believe we would be a better owner than others. So a very clear, very diligent look at a business, understand what the strategic outcome will be in the long-term, take that business, develop it organically into a different level of growth and then look at the next one. Transferring our industrial business, not the industrial as a whole, but the industry space into what it will be looking like in 2025 will require a completely different speed as it requires elsewhere in the Company. So in the future you will see a Siemens which acts at different speeds and you can rest assured that the digital factory environment will be the speediest place in this Company in terms of focus, in terms of building resources and in terms of growth. And others are a bit different because they are not just in that space.

[Sabine Reichel:]

So last question then, Jonathan.

[UnidentifiedAnalyst:]

Hi, thank you, yes. Just on healthcare, I think the comments in the release suggest that it was imaging, diagnostic imaging that really led the growth there. I'm just wondering what that means for the rest of healthcare. IVD, it's another quarter where maybe peers grew faster than yourselves and I'm wondering the strategy to put that right. Is it something we should see improving even before maybe healthcare partly leaves the Group, or is it something where we may just see acquisitions to address the actual IVD portfolio relative to peers? Do you have the right assets? Does R&D need to rise materially from here? What's the solution to this?

[Joe Kaeser:]

Yes, if you look at the imaging space, you see yourself where we are and who we are and what we do. Ultrasound and the likes, the smaller ticket items have work to do obviously and that's what we do as we speak. We come to the second bigger piece of the healthcare company that's more the diagnostics area, how should I say that? If you ask me again in a year from now about how great that business is, you'll be getting a good answer.

[Sabine Reichel:]

Okay. So with that we will close this conference. Thank you for attending. I would like to highlight that we will be also on the road with Senior Management. They will be in New York, in Frankfurt, in Paris, in London as well on conferences, so if you would like to have a meeting, please get in touch with the IR team. I would also like to invite you to our Capital Markets Day in Houston on June 28 and 29. We are looking forward to see you there. And with that, thank you and goodbye.