Siemens Aktiengesellschaft
Q3 2015 Earnings Call Transcript

Published: 2 Aug 2015

Executives:

Mariel von Schumann – Head-Governance and Markets Joe Kaeser – President and Chief Executive Officer Ralf Thomas – Chief Financial Office Stephan Heimbach – Head-Communication and Government Affairs
Analysts:

James Stettler – Barclays Andreas Willi – JPMorgan Ben Uglow – Morgan Stanley Frederic Stahl – UBS Peter Reilly – Jeffries James Moore – Redburn Gael de Bray – Societe Generale Daniela Costa – Goldman Sachs Alex Webb – Bloomberg
Mariel von Schumann:

Thank you very much. Good morning, ladies and gentlemen, and thank you for joining us for the combined press and analyst conference call on the third quarter results of fiscal year 2015. I would like to welcome you also on behalf of Stephan, or as I just said, Stephan Heimbach, Head of Communication and Government Affairs. The earnings release was published this morning at 7 am. You can download this file from the Press and the IR website. This morning’s presentation is now online and this call is also being webcast via our website. Allow me a short overview of today’s proceedings. Our President and CEO, Joe Kaeser, will briefly review the Q3 results, before he, together with our Chief Financial Officer, Ralf Thomas, will answer your questions. We will start with the Analyst Q&A in English, followed by a Press Q&A in German language. A corresponding simultaneous translation is provided throughout the call. I would like to draw your attention to the Safe Harbor statement on page number 2 of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the Company’s current expectation and certain assumptions and are therefore subject to certain risks and uncertainties. And with that I would like to hand over to you, Joe.
Joe Kaeser:

Thank you, Mariel. Welcome and good morning, everyone, and thank you for joining us to discuss the third-quarter results of fiscal 2015. We delivered a solid quarter with quite some underlying strengths in many areas, despite a softening environment. Compared to our last quarter almost all businesses improved their profit at least on operational level, in part also helped by FX and currency. However, we know there is still a lot to do and the short-term market conditions are not helpful. During this quarter we continued to execute on Siemens Vision 2020 as planned, and I just what to highlight a few important milestones. First, we made a recent agreement with the workers’ representatives for comprehensive measures to improve productivity and simplify structures in support function areas. Implementation of these measures across the organization is now in full swing to drive performance towards 2016 and onwards. In total, we recorded €274 million severance charges; €173 of which is in the industrial businesses. Negotiations with the workers’ representatives for the recently announced actions on footprint optimization as well as fixing the underperforming businesses are in well-advanced stages. Second, we strengthened our core and closed the Dresser-Rand acquisition, giving us a significantly strengthened offer and footprint, in particular for distributed power generation, including the oil and gas industry. Integration has started, and initial customer feedback is very encouraging, although the depressed oil price remains a concern in the short-term. And third, Mobility has signed a major €1.6 billion long-term service contract for regional trains in Russia. We will further scale up data-driven services business as one of the key levers for structurally improved profitability. Overall, the business environment started to soften further in the third quarter, while the geopolitical environment saw encouraging moves in some areas. However, the continued risk from various geopolitical conflicts economic issues like Greece, volatile currencies and raw material prices create uncertainties in the business, going forward. On the other hand, political reforms, such as in India or the recent agreement relating to Iranian nuclear program holds further opportunities, if executed in a stringent way. Our short cycle business showed moderate growth on robust demand from automotive and machine building, particularly in Europe, although opening signs of weakness in China remain a concern, going forward. In the United States we continue to see steady growth in the construction and consumer related end markets, while the strong U.S. dollar weighs on export- driven industries in the region. In this low global growth environment we continue to focus our resources on being even closer to our customers, tap existing pockets of growth, such as more regionalized business approach at Power and Gas and in other areas. Now let me highlight some key developments in the third quarter. The product and service business delivered healthy order growth. However, compared to the same quarter a year ago we saw some significant lower large order volumes in Power and Gas, Wind Power as well as Process Industries and Drives, adding to an overall order decline of 5% like for like. Revenue was down about 3%, mainly driven by the project businesses, while Healthcare, Digital Factory and Energy Management showed their strengths in growing the business. As previously indicated, the positive currency impact on profitability accelerated and reached around 70 basis points in the third quarter. We expect this to continue in the fourth quarter, assuming there is a similar relation on currency, of course. Overall, the reported industrial business margin stands at 9.5% for the quarter, and excluding severance charges, at 10.4%, despite a softening market on the top line. And as I said earlier, compared to fiscal Q2, all our divisions improved their profits on an operating level. Income from continued operations declined by 7% due to negative swings in Corporate Items and Centrally Managed Portfolio Activities. Main driver were the severance charges of €97 million in Corporate Items, and losses from a number of items in the centrally managed portfolio activities of in total €47 million. As previously indicated, we are cautious regarding the development of CMPA, which can be volatile, among other things, also due to changing interest rates and structural movements in the centrally held portfolio assets. Net income benefited mostly from positive tax effects in discontinued operations related to previously divested businesses. And as expected, free cash flow was substantially weaker year-over-year, in particular due to higher networking capital in the project businesses for Wind Power, as well as Power and Gas. For the fourth quarter, we expect a seasonally strong free cash flow development although it may be well below prior year. The execution of our buyback program is well underway and we expect the program to continue as planned. Now let me take a closer look at some key developments in the division and the industrial business. Power and Gas is diligently implementing its growth and productivity program, PG2020, to improve its market and cost position by footprint optimization and accelerated innovation. The environment remains challenging with global overcapacities and aggressive competitive behavior. A further key priority is the stringent reverse integration of Dresser-Rand and the Siemens compressor business as part of capturing the expected synergies in the business combination. The first line management at Dresser is defined, and in the fourth quarter we focus on providing a seamless customer interface as well as implementing early synergies, particularly in procurement environment. In addition, we are planning in depth the global operations footprint of the combined business to capture the benefits as planned. In the third quarter, orders were down in tough comps due to fewer turnkey projects; however, we succeeded well in the market by selling 17 large gas turbines, particularly through increased demand in the United States as well as in Mexico. We signed the largest Siemens order ever with 14.4 gigawatts and some €6 billion order volume in Egypt, of which about €3.6 billion are within the Siemens scope. We expect the major portion of the order to be booked early in fiscal 2016. Together with the customer we’ve set up a fast track schedule to deliver 4.4 gigawatts within 18 months from the notice to proceed. As expected, profitability in Power and Gas was impacted by lower margins in the large gas turbine business and deliberately higher selling and R&D expenses, while the service business was quite a strong profit contributor. The quite decent performance was dampened by having to take €106 million additional cost related to a project booked in 2011, as supply and labor conditions have significantly worsened since then. As already indicated, we expected the PG margin to be around the lower end of the margin range, excluding severance charges, for the full year in 2015. Wind Power managed to swing to profit, and delivered a margin of 3.6%, including a strong contribution from the service business. We expect the fourth quarter to be very robust in terms of orders, since we have already booked some of those orders in July. We like what we see on this slide, with a lot of green color, and I’m talking about Energy Management. The division reached a profit margin of 3.7%, which is making steady progress across the businesses. The restructuring program Transform to Win is well on track and will drive underlying profitability going forward in the quarters to come. Order growth was mainly driven by large projects in the Middle East. The team achieved significant milestones and has now handed over the four offshore grid connection projects to the customer TenneT. With that we close a chapter of quite a learning, which, of course, was also commercially quite a challenge. Building Technologies had quite a strong quarter with accelerating order growth driven by the Americas, first and foremost. The margin improvement to 8% was supported in parts by a favorable mix with higher product and service shares. In addition to the stringent execution of productivity measures, they also helped mitigate the adverse effects of the appreciation of the Swiss Franc. Digital Factory delivered an excellent quarter in all aspects, and as you can see in comparison with competitive environments this division is well under way. Here we can already clearly see the desired impact of the organizational changes as of October 1, 2014, where we combined manufacturing, automation, motion control and the PLM piece of the digitalization in the division. As expected, China saw moderate revenue decline due to soft growth momentum in industrial production. In addition, distribution channels are still well filled; therefore, short-term demand might be at the lighter side of expectations. Within the division the United States, Germany and Italy delivered growth, benefiting from a high level of production in automotive and machinery industry. Digital factory continuously invests into further feet on the street in the regions and innovation to target additional growth potential including capturing market share, going forward. A clear highlight was the successful completion of the biggest CAD software migration project at our key customer, Daimler, to our NX software within the planned schedule in the money and on time. Process Industries and Drives faced lower volume from large volumes on tough comps and ongoing weak demand from commodity-related industries, including metals and mining as well as oil and gas. Margins came back nicely, Q2 over Q3, towards the lower end of the target range. The challenges in oil and gas and other verticals remain in place and therefore further measures to optimize the footprint and to reduce costs are under way. Let’s now move on to Mobility, which we believe delivered quite a solid quarter with 5.8% profit margins, including about a 160 basis points negative impact from severance charges. So if you look at the business on its underlying strength, its vertical strengths on automation, we believe that we have quite a competitive advantage in a highly debated market environment. Organic revenues declined due to timing of milestones for large rail projects, while the infrastructure and service business delivered quite some profitable growth. A very important milestone was reached for the Velaro D, that’s the European super high speed trains, where we achieved the start of cross-border commercial service to Paris during the month of June. Finally, we believe we have reason to be pleased with the Healthcare performance. Orders were up 4% on increases in all businesses, driven by a very strong showing of clear double-digit – I repeat that, clear double-digit equipment growth in the Americas. The decline in Asia is related to a weaker development in China that’s also partly due to tough comps, but also an expected and continued slowdown in the local market. Diagnostics and imaging showed an excellent profitability development, which, as expected, was also supported by currency tailwinds. Healthcare is progressing like planned to further optimize its business, operationally as well as strategically. It will be set up to be the enabler for healthcare providers globally. Building on a successful implementation of our Agenda 2013, and recent portfolio optimization, the Healthcare organization will be realigned with focus on strengthening the region, give decision power to the region, make it faster in the market and a new set-up of business areas, which are tailored to specific customer requirements. As defined in Vision 2020, Healthcare is aiming to grow in the following areas
Mariel von Schumann:

Thank you, Joe. We would now like to open for questions with both Joe and Ralf. Operator, please?
Operator:

Thank you, madam. We will now start today’s first question on [indiscernible] [Operator Instructions] We will now take our first question from James Stettler from Barclays. Please go ahead.
James Stettler:

Yes, good morning, all. Could you just talk about the pricing environment as you see it across the industries, and are we seeing any changes there in the short cycle areas? Could you also maybe go into a bit more details about the headwinds you see, potential headwinds you see in Digital Factory in China? And then finally, could you make a comment? There’s been a lot of press speculation about the future of Mobility; really just to clarify again where you see that business, and vis-a-vis the competition, where you’d like to see positioned longer term? Thank you.
Joe Kaeser:

Hi, James. Well, quite a spree of questions. On pricing environment the good news is it’s unchanged. The other news is that there are pockets of aggressive behavior in the market, mostly due to overcapacities in areas such as large turbines. In parts we also do see some pressure on the imaging field. On the other hand, I think we can well handle the issue on imaging, and we’re doing what we have been describing on the power and the power turbine environment. On short cycle pricing, it’s quite robust, reason being that installed base matters as it has always been mattering, so that is pretty stable there. And with our innovation packages in digital factory in both motion control and in particular PLM we are very well prepared to counter pricing attempts by innovation and customer benefits. On the headwinds on Digital Factory, it’s mostly related to the Chinese environment that has seen some weakness going forward in the end markets, and as I mentioned in my speech, the channels are still pretty filled, but that requires quite a close traction of what the channel does, from the POP to the POS and that’s exactly what we do. Future of Mobility, I mean, obviously there has been a lot of debate and speculation on the one hand side, and as you know, we never comment on those parts of the business, but if you look at the business itself, what we have seen in the competitive environment there have been quite large transactions. The number one and number two in the world has been merging to an even stronger number one. There have been activities between Japanese and Italian companies, and that obviously creates an environment of consolidation pressure for some. If you look at our business, which we are responsible for, if you look at Mobility, this is not only about trains and tubes and cars. This is about a highly vertically integrated mobility system. So, unlike any other competitor in that field, Siemens has quite a vertically integrated area with a very strong rail automation business. We obviously do benefit from Digital Factory and the drives automation technology in other areas of Siemens. We also are very active in mobility management, which is a highly digitalized and software-integrated business, which we are pushing really hard, including the service business, like we just signed this contract in Russia, and there will be more to be looked into. So, I think we are well positioned in that space, but definitely there is movement and consolidation in that market going forward and we definitely will be very mindful about what can be done here.
James Stettler:

Great. Thank you very much.
Mariel von Schumann:

Next question please.
Operator:

We will now take our next question from Andreas Willi from JPMorgan. Please go ahead.
Andreas Willi:

Good morning, everybody. I’ve two questions on energy please. The first one, if you could elaborate on your strategy regarding Shanghai Electric, your partner in various energy businesses. You recently sold some shares in the listed Shanghai Electric company. Shanghai invested in Ansaldo, and may also get into the gas business more if Alstom has to dispose some of the assets to them, as speculated recently, so how do you plan to work with them going forward, now that they’ve become more of a direct competitor? And the second question on Dresser-Rand, which you start to consolidate now, if you could give us some indication of order run rates or revenue and profit run rates to help us model the first few quarters? And as follow on there, the Rolls Royce business you acquired contributed about 3% to orders and 8% to sales in the quarter in Power and Gas, which indicates a very weak book to bill. Maybe you could elaborate on that? Thank you.
Joe Kaeser:

Yes. Hi, Andreas. Before we come to the Dresser-Rand and the likes, obviously Rolls Royce being a major part of areas or verticals which are not exactly booming at this time it didn’t catch us by surprise, that’s why it is more important that we very much focus on the integration and capturing synergies, which we have expected by the transaction. On Shanghai Electric, look, the disposal of shares doesn’t really have anything to do with the strategic outline of the business. We’ve been working together for a very long time as a partner. We continue to work together in the area of steam and wind. As you know, we actually have been streamlining our wind value chain together with them; make sure we are more effective in the market. That’s been done now, and you can already see that this works much better than it used to. And on the speculation of who disposes what to whom and why, and whether that will be a meaningful move or not, as I said, we do not really comment on those rumors. We’ll see what the results are and we’ll definitely have an answer to that. And in the meantime we continue with a very close partnership with Shanghai Electric because the better technology you offer the more welcome you are as a partner, especially in China.
Ralf Thomas:

Well, to add to you a bit on the Dresser situation, Andreas, you do know that we are reversely integrating our compressor business, including service into that and we will form an entity that will most likely reach a business volume between €3.5 billion plus, in the area of €3.5 billion plus, so we need to ask you for some patience before we get into more details, because you know we have been closing on June 30, and since they are in U.S. GAAP it will take a few days before we finally have been converting figures, including revenue recognition on an IFRS basis. So next quarter you will hear a lot about that and we will give you full transparency of course. But what we can confirm is that what we have been indicating to you before that of course PPAs are supposed to go up substantially now, and the rate for a full fiscal – the amount for a full fiscal year will be in the area of €250 million. So, also in that area we will supply more information for the quarterly pattern and so on in the next quarter.
Andreas Willi:

Thank you very much.
Joe Kaeser:

You’re welcome.
Mariel von Schumann:

Next question please.
Operator:

We will now take our next question from Ben Uglow from Morgan Stanley. Please go ahead.
Ben Uglow:

Great. Thank you. Morning, everyone. I had three questions. One was on Digital Factory. Joe, you mentioned some of the moving parts in the quarter in terms of the trends, and obviously 6% order growth is pretty interesting in the current environment. Could you tell us what’s going on in the different end markets between auto, machine building and PLM, what you’re seeing? Is there a pickup in Europe or is this more North American auto related? Just a bit more granularity there. The second question, I guess you touched on it for Digital Factory, but your general view, what you’re seeing on the macro side in China. Are you in the camp that China is going to stabilize in the second half of the year or are you thinking things continue to drift downward? That’s a broad comment across as many of your businesses. Then final question, just for Ralf, can you give us a hint or confirm what the severance level will be in the fiscal fourth quarter? I have in the model, which may or may not be completely correct, about €200 million ballpark and I just wanted to make sure that that level was basically correct.
Joe Kaeser:

Hi, Ben. On the Digital Factory we’re going to split the answer. I’ll give you the more macro view and the strategic view and then Ralf will give you a few data on the regions and why order growth happened in which segments. On the order growth obviously we also do compare of course numbers with competition and ourselves and to see where we are at. That also relates, of course, to Digital Factory and order growth. I think it pays off now finally that Siemens has always been mindful about not just doing distribution of products but also looking into the solution business with our customer to better understand what the customers’ views are and programs are going forward. And we’ve been adding quite some market share, especially in the part of manufacturing premium brand environment by helping our customers do solution businesses together. And as part of the order intake, where, for example, there was one big customer, both having premium cars and mass market cars, which has awarded 16 projects out of 16 to Siemens, which obviously is hard to beat. But therefore this approach combined solution business and products business that subsequent to be delivered. I think it’s one of the winning formulas in that business, which gets more and more integrated between PLM and manufacturing. And this is obviously something we focus a lot on because the topic of PLM, which is software and licensing, is a much more robust business through the cycle, because it’s about licenses and this and that. So that much for the strategic outlook on this one, before Ralf goes more into the regional topics on where we grow and where we don’t. On the macro side, China, does China stabilize? That’s probably the billion dollar question. So, the answer is
Ralf Thomas:

Thanks. Yes, so I may add a bit on that. First of all, I think you agree that the third quarter was quite favorable in terms of top-line development on our Digital Factory short cycle business, which was mainly driven by a clear growth rate in the software business, also supported by some large maintenance contracts that we received in Chinese environment. Product business was rather modestly developing, so Joe has already been elaborating on the macro environment, so the growth dynamics for the global industrial production has been weakening during the last month. You could also see that from what our competitors have been receiving in that area. So there are currently no indications that it will significantly gain momentum in the short-term, so our expectations still remain cautious in an overall picture. China growth momentum of industrial production remains soft, as said before, especially investment-driven industries like machinery show weak growth only. In the U.S. the consequences of the oil price plunge appear stronger in the recent production data that we saw as originally expected, so especially parts of machinery are under pressure, while motor vehicles, automotive remain stable, and we expect that growth dynamics will remain slow, but still impacting the US. Europe, dynamic is currently on a slight upward path and should continue to gain a bit of positive momentum from low interest rates and weak euro support; however, environment remains fragile there also for political tensions, as you have been hearing before. So Germany’s key industries are still in a modest growth path, but there are no significant opportunities deriving from the global environment in short-term. So that’s our view. When it comes to our business split, in the Digital Factory, as Joe already said, the PL business had revenue growth with a clear growth rate strongly above prior year’s quarter. That includes China with a clear double-digit growth rate and also Germany. The U.S. has also been benefiting from that momentum, and there’s also a heavy focus on license business, which is also, margin-wise, quite attractive. On the global automotive side production, expands with modest drive only, but dynamics are varying significantly across the countries with the U.S. remaining strong, while China has been slowing down to a moderate growth rate only and Europe expands on a stable path. When it comes to factory automation and product business there’s a moderate growth at the moment with the focus in Italy, which is getting close to double-digit, and so is Germany, and there’s moderate decline in the U.S. and also in China, obviously. Machinery production has been developing slightly positive, while China and the U.S. have been coming down. Europe was stable with a modest growth pace and investment expectations are restrained, obviously due to several regional uncertainties in the European environment. When it comes to machine tool making and machine tool systems, there was also modest revenue increase last quarter, and therein Italy again has been playing a major role with double-digit growth rates, rather moderate in Germany, and still a tick, a modest development to the positive in China, while the U.S. has been down clearly the last quarter. And finally, on the global manufacturing dynamics, which have been deteriorating further, but still modestly growing, we have been seeing only in Europe gaining a bit of positive momentum. So with that, I think I have been covering all the segments and the regions and I hope that is helping you.
Mariel von Schumann:

And Ben, there is a transcript that will be available, in haven’t been able to follow all of these [indiscernible]
Ben Uglow:

I was trying to get as much down as possible, but no, that was a lot of color, thank you.
Mariel von Schumann:

We didn’t hear this. We did hear this, but guys I think the question that wasn’t answered was on severance, was it?
Ralf Thomas:

No, that’s what we will continue with, and you are fairly right, Ben, with what you said. We have been telling you in the last quarter that we have been – we advised you, actually, to put in the midpoint of our expectation, which was €750 million. Currently, for the year-to-date we have been booking €461 million and €300 million of them in the industrial business, so the residual would be pretty much in the area that you have been describing, but again, we have to repeat that depending on progress that we make in the negotiations with the representatives of labor that can be substantially above that, and the original indications that we gave to the highest to the extreme point of €1 billion is still intact. From today’s perspective I would expect the fourth quarter severance charges between €200 million and €400 million.
Ben Uglow:

Okay, and obviously, between that €200 million and €400 million at least half would obviously be in the industrial businesses, right? Not in the corporate?
Ralf Thomas:

Absolutely. Yes.
Ben Uglow:

Okay, that’s very helpful, thank you.
Operator:

We will now take our next question from Frederic Stahl from UBS. Please go ahead.
Frederic Stahl:

Yes, hi. Good morning, everyone. It’s Frederic here from UBS. Can we go back to Digital Factory? I have two questions. First on Digital Factory, could you maybe give us an idea on how big the industrial software business is today? And maybe if you can give us some color on the type of growth it did last year and year to date? I appreciate the comments on the current quarter. And then secondly, on renewables, or wind, how should we think about the comparable growth rate in the coming quarters? I mean, we’ve had two quarters now weak revenues, but I still think you have a pretty sizable backlog, so a bit of help there would be welcome. Thank you.
Mariel von Schumann:

So Ralf I think you were not detailed enough, enough, so, maybe on Digital Factory?
Ralf Thomas:

On the Digital Factory part I said before that we saw clear growth on revenues, so and the way we have been describing that in the past that is definitely in the range that is getting close to double-digit but still not there. For the full fiscal year so far the growth rate was also between 6% and 8%, and so as I said before, when you look into the top line in terms of new orders, there’s also maintenance work in that that will not materialize in a single quarter, obviously on the revenue line. In total, the magnitude of the business that we have been forming, and we described that in our Capital Market Day last year a bit more in detail, will be in the area of €2 billion for full fiscal year and that is quite a success, considering that we literally started from scratch a few years ago, only.
Joe Kaeser:

Frederic, hi. On the wind business, I mean, first of all, as you rightfully said, remember we booked about almost €8 billion last year in 2014, quite rich. The order intake in fiscal Q3 was obviously somewhat slim, but we expect a significant order intake again in fiscal Q4. Many of those projects are quite known already so I wouldn’t be too surprised if that goes just a bit shy of about €2 billion. So there will be, as you know, this project business there’s going to be big, big orders and then they last for a while. On the top-line revenue growth we obviously diligently work that backlog as noticed to proceed and the focus on wind is twofold. On the short-term we still have a few – quite some homework to do in terms of getting the supply chain where it needs to be and where it can be. And if you look at competitive margins elsewhere, it clearly shows that this business can be operated in a much better way and that’s what we are up to, in the short-term to the mid-term focus is on innovating the onshore turbine environment. Siemens, as you know, has been quite strong in offshore, actually very strong with some shortcomings on onshore that’s been historically developed out of where we come from, and we’ve been spending quite an effort on the onshore low wind technology where we’re making what I believe is decent progress, comparing that with the environment. So that’s where the focus is. So clearly, I’m very pleased with the switch now from – to make break-even. That needs to be stabilized in fiscal Q4. That’s what everything is poised to, and I’ll take it from there.
Frederic Stahl:

Okay, thank you.
Mariel von Schumann:

Next question please.
Operator:

We will now take our next question from Peter Reilly from Jeffries. Please go ahead.
Peter Reilly:

Good morning. I’ve got two questions please, both on Power and Gas. Firstly, can you give us a bit more color on the €106 million of project charges? This is obviously an older project. We have been going through a period of much larger project charges, so is this just a, sort of, one-off accident from the past, or is this something we should be concerned about in the backlog for Power and Gas? And then secondly, I was pleasantly surprised by the order intake in Power and Gas, book/bill of €1.1 million. You’ve made a few comments that the large project business has been weak but also you’ve been selling some more gas turbines, so maybe you could talk about the quality of the backlog in Power and Gas and whether you’re having to offer competitive prices to have this rate of book/bill or whether you’ve actually got a decent quality backlog, because it’s more small ticket items and therefore a bit less price competitive than the larger projects.
Ralf Thomas:

So, Peter, thank you for that question about that unpleasant event of those project charges of €106 million for a project that has been acquired in 2011. It is executed in South Africa, and what is really sad story is that it is exactly along those lines that we are avoiding now consistently after that what we announced last year, there was very low Siemens value add in that project only. There was a supplier that was obviously not reliable and strong enough to pull through in difficult environment. So we lost one of those suppliers that really had to make a difference in that project and finally it ended up in our books with €106 million of charges for the third quarter now, which is pitiful, which is pitiful. But good news in that is that, and it’s probably what you already took is we have been addressing that stringently. We told you throughout the last couple of quarters that we do not allow any more projects being taken where Siemens does not have a strong value add in by themselves, and if partnering is required we really pick those partners that have the ability to sustainably support long-term projects, so that’s in a nutshell, a description of that project.
Joe Kaeser:

So I think, in summary, there’s no reason to be concerned about a systematic development anywhere in the order backlog. The project was called notice to proceed, and then when we looked at the supplier it was bankrupt. So that’s the short story. We need to move on. On the other topic, which I think Peter you really picked up well on. Our order intake in Power and Gas has been nice. It shows that having people closer to customers rather than headquarters pays off, and we continue to be mindful about that proximity matters, including executives selling, by the way. So that’s the first part. The second, did the gross margin suffer? The gross margin in the backlog suffer from a more active order intake? The answer is no, not materially. The quality of the order backlog of P&G remains just about the same if it comes to gross margin. Is the market – year-over-year it’s exactly the same. If you compare the backlog of Q3, 2014 to Q3, 2015 it’s the same quality, so therefore it doesn’t suffer materially. However, of course, going forward, we still need to make the cost productivity which we have been talking about during the course of PG 2020.
Mariel von Schumann:

Thank you, next question please.
Operator:

We will now take our next question from James Moore from Redburn. Please go ahead.
James Moore:

Yes, good morning, everyone. I’ve got three questions on oil, China and currency please. Firstly, the oil price is now nearly back to $50. Could you help us with the outlook for margins next year for the Process and Power and Gas businesses? Now with Rolls and Dresser, the old oil and gas is nearly half of Power and Gas, and I’m just wondering whether we should expect margins to progress in 2016 or decline. I know you have internal actions but I guess those book-to-bill, short lead time business that could continue to suffer from the oil environment. Secondly, on Healthcare, strong double-digit order growth is great, and I see some of the competitors are seeing an equally strong environment in the USA. I wonder if you could say whether you think that is temporary or the start of a longer period of decent U.S. imaging growth. And finally, on currency, you’ve already helped us with the outlook for the second-half impact on the margin but at current rates, given hedging, could you give us some sort of early read as to what margin impact and basis points might look like for full-year 2016? Thanks.
Joe Kaeser:

Hi James. So a lot of good questions. Since they’re mostly related to 2016, so please keep them in mind, and when we do the 2016 outlook in November we will all be answering those questions although we are obviously having the same questions now as we do the budget and the allocation of resources for the next fiscal year. On the order growth in Healthcare, as it relates to the United States, obviously I cannot – can and do not think it’s appropriate to comment on competitive environments. I’m sure they have their opinion about it. As it comes to Siemens we did see some nice pockets of excellence in the United States. We do know that if it comes to new equipment orders we are winning market share. We believe it should actually be quite considerable market share win because obviously the underlying demand doesn’t suggest that the market is growing all of a sudden. So that’s why I would be cautious about calling that the new normal, going forward. So therefore, as you rightfully said, it is about a market which is very competitive. You win through innovation and you win through proximity to your customers. And with that I will hand it over to Ralf on the FX.
Ralf Thomas:

James, of course that is a very valid question and as we have been indicating before, the second half of the fiscal year is a completely different picture to us because we were literally stuck in the legacy hedging framework for the first half of the fiscal year. The improvement you saw now in third quarter with 70 basis points, of which the main beneficiaries have been Healthcare and also Process Industries and Drives, that will continue being in place for the fourth quarter. I mean, I cannot anticipate what the exchange rates are going to be throughout the next two months, but given the situation as we see it, as per today, you may expect a similar picture for the fourth quarter, which will still leave us with that what I said before in the second quarter that there is up to 90 basis points for the second half year of potential, yes, if exchange rate develops along the lines that we saw in half year, and remember we have been sitting on €1.06 against dollar at that point in time. Now we are at €1.10 and you may conclude that we therefore are still in the same ballpark and continue assuming that what we said in the half year up to 90 basis points of positive impact second half of the year.
James Moore:

And too early to say anything about next year?
Ralf Thomas:

Of course too early about that, but I mean, you may imagine, if the first half was substantially driven by the fact that we had hedging legacy system in place in the first half of fiscal 2015, you may assume that all others equal, the first half of 2016 could still benefit from that.
James Moore:

Thank you very much.
Joe Kaeser:

I think it’s important for us especially, and we had a discussion on the Board yesterday, it is important to focus more on sustainable productivity and innovation rather than speculating with currency, and that’s what we are really focused on. If it continues as we are today it’s good, but you are not relying on FX relations throughout the company.
James Moore:

Thank you.
Mariel von Schumann:

Very good. Thank you. Next question please.
Operator:

We will now take our next question from Gael de Bray from Societe Generale. Please go ahead.
Gael de Bray:

Yes, good morning, everybody. Thanks for taking the questions. Actually, probably three questions for you. The first one is for the Energy Management division. With all four North Sea grid connection platforms now delivered to the client, I guess visibility has improved for that business. So what do you need to get back to the 7% to 10% margin range at Energy Management? Question number two is a follow-up on Power and Gas. The book-to-bill has actually constantly been above 1 times in the past 5 to 6 quarters and yet we are still seeing an accelerated organic sales decline for the business, now down 15% in Q3. So how do you reconcile the resilience in orders and the negative sales momentum? Maybe do you see some of your projects in the backlog being delayed by the customers? And when would you expect maybe sales to stabilize? And the last question would be on the guidance. Given the performance in the first nine months, achieving the targeted 10% margin for the full year would probably imply a margin of about 11% in Q4, probably equivalent to 12% adjusted for restructuring. So where do you see the sequential margin improvement coming from in Q4? Thank you.
Joe Kaeser:

Hi, Gael. On Energy Management, that is obviously quite the visibility because obviously, as mostly large projects, if it comes to transmission there is less – much less visibility if you go to areas like low voltage and the likes because that’s a more distribution-driven business. So it’s a mixed basket. We understand that some competitors which are in the transmission area, have that comment. But if it comes to our Energy Management, it’s a mix between distribution and transmission and – first of all. That’s important to know. So we do have visibility on large projects. We just won a big one in the Middle East which we like a lot, also in terms of what the margins are. But – so we know the market well in transmission. As far as book-to-bill is concerned, I mean, there is – especially in the transmission area, there are big projects. Sometimes they take time till they are called to proceed, so therefore it’s good to have the backlog prepared. So we have no concerns with the development of the business. The Energy Management is in many parts…
Mariel von Schumann:

I think, Joe – I think, Gael, if I’m not mistaken, your question was more related about PG.
Joe Kaeser:

Was it PG or was it Energy Management?
Gael de Bray:

Well, the first question was for Energy Management and whether the 7% to 10% margin [indiscernible]
Joe Kaeser:

It was the book-to-bill. Yes, book-to-bill. Yes, yes. The explanation is also true to power and Gas – to Power and Gas. We’ve booked large orders. We’ve got the notices, the call to proceed. So as I said earlier, we like the order intake. We like also what we see in the margin. It gives us also sometimes to improve the margins going forward. Service sometimes is related to it. So therefore we do not see any margin decline in the backlog. So – and it’s good to have a steady supply in the area of revenues. As far as the guidance is concerned, I mean, we’ve always made it clear that we need some strength in the fourth quarter in some areas, which we have a very close look at. We also have been saying that we are targeting to the lower end of the margin, and as – the numbers you have been suggesting pointed exactly to that. There’s not really much more to say further, so we target to be in that area and we work diligently to achieve it.
Mariel von Schumann:

Okay. Thank you. I’m mindful of the press Q&A to follow the analyst Q&A, so, operator, I think we have time for one more question.
Operator:

We will now take our last question from Daniela Costa from Goldman Sachs. Please go ahead.
Daniela Costa:

Thank you for taking my question. I’ll keep it short and just ask one follow-up on Healthcare, where you talked about the U.S. outlook in quite detail. But can you comment on what you’re seeing in China? I guess you had a much better evolution than some of your peers. And also in Europe. Thank you.
Joe Kaeser:

Hi Daniela. Yes. Short question; short answer. I mean, China has seen much bigger growth rates in the past. The market itself is – now it’s going down. And we do see that also in new equipment sales on the imaging side, definitely. Then what helps us that they have a more modest decline because it’s a service business which is, kind of, robust still, and it is about diagnostic service, still see some opportunities in the market.
Daniela Costa:

Thank you.
Mariel von Schumann:

Very good. Thank you very much. I would like to hand over to Stephan Heimbach now.
Stephan Heimbach:

Operator?
Operator:

Thank you, ladies and gentlemen. That was concludes today’s analyst question-and-answer session. We will now open the Q&A press for journalists. [Operator Instructions] I will now hand the leasing over to Stephan Heimbach to start the press question-and-answer session.
Stephan Heimbach:

Thank you very much. We’re now moving on to the Q&A for journalist, Mr. Kaeser and Mr. Thomas are answering the questions. I’m asking you to both, the first question. First question by [indiscernible]
Unidentified Analyst:

Good morning I have three questions. First, can you say something on the personal change in process industry? Why were the – I was the top manager replaced here now the 10.0% for the fourth quarter for the industrial margin. Is that already visible cannot already be seen at the moment or is that optimistic thinking. And last question, how do you think was your development compared to the competitors in the last quarter, you do internal benchmarking’s as well. Do you think you already on the white check?
Joe Kaeser:

Good morning [indiscernible] as far as the personal change is concern that in PD that’s a decision that was quite anonymous Mr. Heimbach, I wanted to do something different and we had a successes. So this was something that was achieved based on mutual concerned, we are looking forward to Mr. Brandis, who use to work in the division and he’s very well familiar with the divisions of that shows, as far as success of planning is concerned that we have always done a good job there and found good solutions, as far as the final sprint is concerned for the last quarter that is already visible. The comparison with our competitor as well, it’s always good, if you don’t have to do this yourself, but the capital markets are the one step decide, I don’t know how the shares are developing at the moment, but I think this is quite a good index for the way that our shareholders see us and see our competitors. There are a lot of colleagues out there doing that. So I think you have quite good comparisons there. Next question please.
Stephan Heimbach:

Thank you, next question will be ask by [indiscernible]
Unidentified Analyst:

Good morning, I have a couple of questions to clarify, things maybe you can talk about the currency effect of the euro versus the dollar. Because we’re seeing that growth is dependent on currency rates exclusively on 7% percentage points. What about the results and this does help you considerably when it comes to dealing with special charges on your business in Asia, that has declined considerably, can you tell us that whether this is mostly due to China, how big are is the declined there. And then one question concerning understanding 10% to 11%, you mentioned that lower margin and now you – that we do not include the severance charges. So do we have to expect that those two 10% to 11% in Q4 include the severance charges yes or not will be cross to 10% line.
Joe Kaeser:

Well, good morning [indiscernible] the currency impact will be described by Thomas in the second, I would like to talk about the base business that has not declined, we are expanding it and I can tell you the base business. The business that is not developing spectacularly based on big orders has grown by two digits. I’m also including currency impact, but it has – do you can subtract 7% to 8% of currency impact. So you can see that we did have a two digit growth there some divisions we can see this quite nicely. They don’t depend on big projects that arrive in one quarter, I’m look at Digital Factory, for example, Digital Factory has grown considerably a lot stronger than the competitors look at health technology, where we also do not have big project orders, we have grown there in a comparable level. So, you can see everywhere were sort cyclical elements have to take whole that we can already see signs that will be a positive impact in the fourth quarter low voltage and Digital Factory for example. Now the 10% to 11% that you mentioned have included them restructuring, I can assure you that everything is just included here, but the fourth quarter still requires a lot of work for us.
Ralf Thomas:

Sure, [indiscernible] to a little bit more specific with regard to the currency impact. You’re absolutely right. During the third quarter, the currency effects had an impact on top line 870 basis points on quarters, 910 on revenue and in the overall results 70 basis points contributed what that surprising. No, you remember that in Q2, we already said that the second semester will be beneficial for us, because over the course of the first semester of the financial year 2015, we had a solid currency hedging strategy that provided this with an advantage, we use to have a dollar 135 over the euro and that’s the level that we entered our hedging business into and we now have a level that’s considerably below that and as an expert oriented company, we are benefiting from that. And the biggest advantage derived for process industries, healthcare and drives. But it’s also important to note that Digital Factory, which is in our term of these influences, because of the meaningful distribution of the value chain did not see any positive impact from that, it was more or less zero during the third quarter. And so no currency impact on the business of Digital Factory and that’s not surprising, because Digital Factory has a short cycle business with the high margin conversion, produces a lot of results from growth. And on that’s how we also believe the fourth quarter will develop, we will continue to focus on what we said, at the middle of the year namely that in the second half of the year depending on the development of the exchange rates. We generally expect a positive impact above up to 90 basis points for the margin, but and I would like to highlight that. It was said that to you the previous speaker, I’m ask whether this was optimistic thinking for Q4, we have a solid plan that we are building, and there is no optimistic thinking in financial dealings. But currency is due play one roll but not the exclusive roll. So we already reported that over the course of this year, we’ve seen first success – an expecting first success from our cost reduction measures, particularly the one that does not focus on personal will bare fruit. So you can assume that we do not only focus on currency exchange rates, but also on measures that we are responsible for and we’ll advance over the course of the fourth quarter. The short cycle business with the high margin that we talked about, we’ll also have to a manifest itself over the fourth quarter and our expectations have to be implemented, but from today’s point of view, we do not doubt that we’re on the right track as we have seeing throughout July. Thank you. Next question please.
Stephan Heimbach:

Next question will be ask by [indiscernible]
Unidentified Analyst:

Good morning Mr. Kaeser and Mr. Thomas, Mr. Heimbach, three questions on rail industry on expenditure policies and on rail technology. Mr. Kaeser you said you have to closely monitor what you exhibit on 4C, if they were European solution one way or the other than you have to also take into consideration antitrust legislation. Do we – to providing our authorities have to position themselves differently. Particularly, if you look at the development in China on Q4, despite all of the explanations I still don’t fully understand what the operating improvements are that in based your expectations on now. Mr. Thomas focused on short cyclical business that needs perform. It was quite cryptical with this final sprint that’s become visible. I kind of happy impression that Siemens is pulling together rather strength for the first quarter, which will then have a negative impact on the first quarter of the next financial year. Third question on expenditure, administration, research and development after nine months have gone up a €1.3 billion. Even if the restructuring costs are excluded, I believe that you have already surpassed the increase of €800 million for the entire year. Now, you briefly mentioned that, but €3.4 billion plus, as far as costs are concerned is quite considerable. Is something going off track here particularly, if you include your diagnosis that market conditions are rather soft at the moment?
Ralf Thomas:

Let me start [indiscernible] what I said on Q4, you said that the fourth quarter is always quite strong with Siemens. But this is not necessary link to the first quarter of the next year being weak. This is due to the fact that and that’s also visible in other company is certain projects are finalized in the fourth quarter and there is a final sprint and we’ve had that over many years now and we’ve gone that successful. Maybe you didn’t listen to the last part of the [indiscernible] as I said from today’s point of view end of July, while we don’t have financial statements yet. But we can see how the business in July have developed and we do not have any indications that our expectations will not come to and finally on the fourth quarter, let me again point out, what I said previously that the currency exchange impact has dollar and euro development show will give us a clear boost, because in I’m compared to the previous year we have an entirely different currency exchange scenarios and had a negative impact over the first semester of the financial due to a hedging. As far as savings are concerned and as far as the development of the overhead and costs in the third quarter are concerned, you have to keeping mind that by acquiring Rolls-Royce, we now have a higher level just around is not yet included as of June 30 – we closed on June 30, so we only have the assets included, it will be included in the fourth quarter and present in detail with the end of quarter four and you rightly said that restructuring costs played a roll. So take this has a first indication or the fact that despite the FX mentioned we are on a good person, we are a following these individual savings measures that we’ve taken in very intensive steps we’re doing this also in the Board meetings we did at last week at the last Board meeting and you can assume that top management attention and everybody, who is responsible for the implementation of these measures attribute there full of dimension to these issues to give you feeling of the influence of currency exchange rate €500 million in OpEx and you can see that this is not a marginal impact. I think that was very well explain and analyzed, I think you can assure that we all know that after Q4 there is another Q1. So moving certain issues into other booking cycles has something that we are not doing and you can see that there is a final sprint I’m going on company’s provide forecast for the different quarters and that also shows, where certain things have become visible. But let me move on to rail technology and I think this is a very strongly analyze topic, because of the considerable consolidation that has been going on. I think if the number one in the world is merging with the number two in the world and nobody really cares about this, as far as antitrust bodies are concerned, then I’m rightly ask the question, as you are also doing this whether this needs to be reassessed or not. But there is nothing worse than advice that nobody was asking for and we will show the strength here. In the entire discussion, I’m concerning just around we have made good experience with a respective bodies and I think it’s legitimate that you’re asking. It’s the question that it is not only asking rail technology, think of the entire issue of digitization. Those markets don’t have any geographic orders it’s having the internet is ex-territorial. So the question is a question that should be a general question also with regard to European legislation and the European business policies and maybe rail technology is could be reason to ask this question in concrete terms. And let me also point out with regard to your last question the development of reserves and this is nothing that we’re leaving to chance the development of the reserves. And that is subject to close to provision where reserves are built up and also for what reasons and we find out that in certain business areas that come in the past, we’re characterized by down payments, we know longer have these down payments, but we want to have these down payments, if they are attractive for us. So we have to accept that behavior in certain industries change and that leads to more and needed that we also find out that some project that we want to quickly deal with, because of the customers want to have them debt with quickly and even before down payments are made or even before orders come to close, we have to make the payments in advance and these payments in advance are only made, when they are not give mark to one project only. Though, there is no risk of material disappearing, if these projects aren’t carried out. So we’re in full control of the process and we do not some allow this to go of track as you state in your question.
Stephan Heimbach:

The next question comes from [indiscernible]
Unidentified Analyst:

Good morning everybody. One that has turned out about the everyone rely to ask three questions, which I’m happy to do as well. And therefore, my first question would be for healthcare. We’re wondering what is your strategy, what will be the next steps going forward in terms of healthcare. The same trust will be my second question was just around, the integration is now beginning. Now, how should we – what should we expect to happen here, you report also to Rolls-Royce, where integration still require some [indiscernible] is also I understand. And my third question would be the severance charges are there is another restructuring measure. Now, can I – do I understand you correctly, that we’re talking here about the total of personnel adjustment measures to the tune of €1 billion in terms of severance charges, because the negotiations with industry labor representatives are still ongoing. Now I understand the word, I know Mr. Kaeser, when it comes to healthcare, well, in my speech earlier today I’ve summarize one of our strategy is and this is very much in line would be the last year. We want to healthcare from a very good business into an excellent business. And we have aligned our business regarding the healthcare is an excellent business, the expectations – growth expectations massive also given the backdrop of the demographic changes. But business models are changing more, more players are integrating, we’re looking into molecular diagnostics something that also we referred as life science is a mega trend in the industry and we need to respond to that. We’re not responding and being reactive, but we have proactive saving the way forward. When it comes to Rolls-Royce and the integration that need some improvement as you – well, I’m not aware any improvement that we have to do on the integration of Rolls-Royce. In fact, the Rolls-Royce integration is doing a scheduled, but it is not quite doing so well, is the current sales deterioration with current business of the – in oil and gas industry. But the integration is we’re running out planned with that’s around the same story here, the purchase has been improved by all government agencies or [indiscernible] bodies are have to improve. Now the question is how we capture synergies, the other value that have been materialized by the acquisition needs also returned into tangible improvements and this is what we’re doing the right value, the number is measures and that later point in time will be happy to respond to that. Again, because it will take too much time if we do that, but this is what my focusing on at the moment.
Joe Kaeser:

Mr. Geese, when you come back to the severance charges and their effect on balance sheets. You are right to point out in earlier quarters, we’ve thought the severance charges over the course of the year make you up to €1 billion and earlier in the analyst call, I also made the statement that effect, but let me equal that here. Third quarter €274 million was booked on Siemens, €173 million in the divisions, i.e., the operating businesses, now that means for the current year across all the three quarters, we’ve talked about €461 million Siemens large of which €302 million in the industrial business or in the divisions. And I also earlier, I said, your processes are depending on the future development of the ongoing negotiations with the [indiscernible] representatives we are also expecting additional charges in the third quarter not at the moment, we expect anywhere between €200 million and €400 million depending on the successful manifestations off the negotiations to the ongoing negotiations to play well. Heimbach, next question please.
Stephan Heimbach:

Thank you very much. The next question comes from [indiscernible]
Unidentified Analyst:

Good morning gentlemen, I have only two clarification questions. One is the train business Mr. Kaeser, is it right that five weeks ago, you have talk to your colleagues form Bombardier met with him, in order to talk directly and openly about the potential consolidation pressures on the industry and what you can do together. And what is that comes to mind, do you thinking about the corporation, merger of the two companies and you also talked about antitrust regulations moment to go.
.:
Ralf Thomas:

Okay, if I was to answer the question that you put to Mr. Thomas, I would say well, that’s a not an invisible abbreviation or truncation of the complex statement. But I don’t want to do that, I talk about the train business. The last question, I met was [indiscernible] while it’s true forfollowing said you regularly meet, when you traveling across Europe, or when you go to China to participate in for conferences. So I’m not – I don’t know whenever – when I have met the CEO of Bombardier, I haven’t met him. And I met Mr. Beaudoin, who is the Chairman of the family that that this was when we talk about all kinds of things. I wouldn’t want to disclosed any contents of conversations I had with people, which is more important though is, Siemens is a highly integrated mobility business company. Some opportunity in train business, it’s mobility business, which includes the strong powerful software component we are a world leader and rail automation, automation technology for road networks. Therefore, I aware of the fact that mobility is a very promising business and then we proves acquisition of inventors has gone really well much better than we have to initiate goal. So we are very happy about this stage of pay, we have the major synergies in automation technology with electric drives, Siemens – another words we are highly vertically integrated business with the mobility segment that looks not only at individual trains, but looks networking urban centers. Digitalization software solutions and that is success apart for many other manufacturers in the industry. We believe that in terms of our structure and strategy, we’re well positioned and also in terms of our revenue strength we can guide more then we also point out that our mobility business, when it comes to the capital efficiency ROCE, the return of capital employed. It’s still very lucrative business, but it is also means that we need to work through our project properly, whenever, we acquired them and you’ve seen that with our business in Russia that we have increasingly now focused on the service business, which is so far has been on the side of the customer. So this is our strategy while we’re going forward. Digitalization software and then add-on top of that hardware, when it’s needed than it will on the right track. So I can say that we’re acquired selfish showed that we are mastering the industry digitalization and this is our – we won’t that to be understood. And your question on foreign exchange effects, I’m gratefully appointing that how to get, because the actual underlying question is not the foreign exchange management, but the economic capability of the company, if you look back to previous year compared to the third quarter of 2014 or previous fiscal year we had a certain dollar to euro exchange rate and I know it was truthful, other important current reason in which we have transactions and the euro to dollar exchange rate was €135 at the time. Because we are not speculating, because we are stabilizing our supplied chains to, as closes possible to our end markets. But early, when it comes sales, but also – and factories, but also with the development. And therefore, we’ve ended up something with in natural hedge and other words, FX effects convertibly be eliminated in those areas, because the performance delivery is local in the places where our products are sold. And therefore, our company is in pretty good shape compared to our expenditures, we’re a global operations, you know that really well in that FY, it makes the drill deep a bit. Now comes to big, because last year, because we’re not speculating we have focused on the hedging of €135 for the following month. Because we are not focusing on currencies, but on our economic performance and that has meant hedging in the first half of 2015 has given us disadvantages because the exchange rate has developed more favorably for our company that is exporting from the euro area, and that previous disadvantage has repaired, in other words the current situation reflects the actual economic performance of the company, then from a financial analysis that respective. As we’ve see in the previous quarters, by the hedging instrument still at the effect. So we are not seeing in that effect towards an improvement in our books now, but indeed it is an overall improvement compared to the previous year. Of that improvement is here to stay, I don’t want earlier when the question was asked, I could have asked would not have answered comes up, how we are developing in the future. So with the current FX effects we still maintain our particles we are a powerful and capable company images globally. Next question please.
Stephan Heimbach:

Thank you very much. Next question comes from [indiscernible]
Unidentified Analyst:

Hello, Mr. Kaeser good morning. On the very brief question and a very straight forward one. My question is this, how to you evaluate the current situation in China, it general economic situation in China and what’s the impact on Siemens of our risk to use, it’s related to China.
Joe Kaeser:

Hello, good morning. Well, of course, country of China is in the focus of many considerations, we’re talking about 1.3 billion, 1.4 billion people believing in the country. So we are aware of fact about, we have to be focus on develop and watching the developments there in that country in China has significantly contracted in terms of growth dynamic, but the country itself it posting 7% or 5% or 6% of growth. It is still growing – still stop, but if you drop from a high level to less high level of growth, obviously, that means an incremental disadvantage in the growth dynamic. We believe can be seen in China is that the format that have been filtering lately for a number of reasons and we analyzed individually. Because they’ve reforms in China also mean restructuring has not always a political task that is coming about easily. And because that is so the country needs to invest and these investing more into domestic infractures, that has number of advantages for industrial businesses. Road construction, train businesses, energy transmission is a lot of investments going in there. The question is, is that really a sustainable going forward. Can you invest or should you invest more without ongoing reforms and as quite a number of uncertainties also by local stacker and it’s under volatility is also, I think an impact on our businesses. And secondly, we also see that it’s a national interest of China to develop an industrial base within their own country. And then largely, leads the situation, whereby the country is also focusing on their own national companies to engage, how translates with external players and that’s quite a few challenges – because it’s quite a few challenges to companies work in globally, including in China. But the complex situation, so you see this short question there is not always want a quick answer, because it is very intent one with the number of other factors. Generally, position footprint in China is really good in the third quarter and it can be really approving objectively, we’ve been performing better than most of the other multinational competitors indeed. It’s an ongoing effort to keep the situation from deteriorated. Okay, thank you very much. And then next question please.
Operator:

We will now take our next question from [indiscernible] from the Financial Times. Please go ahead.
Unidentified Analyst:

Yes, good morning. I have been three questions please, all of them on subject of corporate investment. Low interest rates and constant leasing as opposed to have stimulated a recovery in Europe, I just wanted to say that toward extent low interest rates have been an incentive to Siemens to invest more and how you in fact being able to low your way to average cost of capital, and how do you adjusted your hurdle rates for investments. The second question in the U.S. has currently a lot of discussion about the weak business investment environment, for example, from Hillary Clinton on the campaign trial and so the suggestion is that companies have become too short-term; it’s simply recycling cash back to shareholders by dividends and share buybacks. Do you think company’s are in danger of reaching themselves? And third question, for Siemens is will be the third year of basically no growth, I just want to where they’ll starting to buying to Larry some of this very secular stagnation that investment growth will simply remain low for quite a long period, because it’s demographic trends the following cost of investment goods and a shift the way from traditional CapEx to IT and software. Thank you.
Joe Kaeser:

Well, first of all, let me just tell you what the influence of the low interest first half, that’s the number of consequences of course. First of all, you see of course, how vulnerable LATAM and economic interest come through low interest as situations, which had also microeconomic effect. If you look at the effect of the discount rate, which is related to the interest rates, pension obligations for instance that have been moving down of un depending in many companies, because interest rates have increased quarter-on-quarter, but your question if I understood not correctly rather focusing on whether the ongoing low interest of pays the worldwide to other investment patterns or structures developing and outline to respond cannot – now with the issuance of the U.S. dollar bond of €7.275 [ph] billion. We have entertained the transaction was actually shown that the chances about currently in the market or be inactively used and they would comes to play here, is that we’ve had a transparent and conservative financial concept that we have noted over the years in the market and other words that we had a lot of trust and confidence of out customers, because we are investing prudently, we’re not speculating and subject to any such speculations rather in the past or in the future, I should have, where you making good use of those opportunities, but at the same time the investment hurdle rate that was also the term that you’ve used is not only dependent on the interest level on the capital market, but also depends in a number of other factors and including also individual business risks. So that the important variable if the weighted average of capital cost, where interest rates in the markets are just one component, because one out of many in terms of the long-term change or long-term investment decisions, you would never only focus on short-term refinance options and I will be a contradiction. So what we’ve said before that we are on the conservative prudent in terms of our financial policies that we wouldn’t derive any statement saying we cannot hold to do more now. Now rather we’ve realize that we now have opportunities that we would now target on the furthering of the value of the company and I would mean, are we in the position to go – to generate profits beyond our capital costs and that point we measure investment behavior only where we can create other value, so where the options [indiscernible] can be massively exceeded, only then what we increase our investments. And maybe let me say also, word on Europe and America in the general economic policy outlook, of course, we see some recovery in Europe, that’s quite visible. But you should not forget what level we are talking about or where we come from and how the general situation has been over the years and how much has deteriorated over those past years. I’m personally believe that’s the agreement with respect to Greece and also the way how the European political leadership has been trying to bring about a solution is really good signal for European integration moving forward. And that real some see what so much has been invested in the country, which kinds for really 1.3% of the European GDP. So it might be seen to be very relevant, but this is about a different thing, this was about consolidating the integration of Europe, with the sense of solidarity of the strong thus as the weak. So I can only really congratulate the European leaders with what they have achieved and wish them good success going forward. And we’ll of course, haven’t also an impact on the general sentiment of people in Europe and the consumer behavior, on the investment activity, so we are happy that progress has been made. But we consider however to be more important as a company. Is that the decision of whether or not the United Kingdom will stay within the you is much more relevant for us, why because we’ve been making good progress in the UK and therefore the UK, now is one of the most important countries, and one of the most important markets there in Europe. And when we talk about the U.S. be quiet open on the, when this is part of translation of your question, but if you asking about how we assess to market geopolitically, let me do say two things. First of all, you’re not the state of the larger economy of the world with geopolitically and economically is integrated or united and we’ll continue to be attractive or being going forward and this is my way going to invest in those markets as well and to allocate our resources. And what people temp to forget these largest economy – national economy of the world is also geopolitically the most stable environment, when it comes to legal certainty and the integrity of leading business that. So we’re feeling really very much at home there. And we are continue to our resources, when it comes to secular growth, well, let me also remind you to be energy requirement and the energy demand of the world from 2013 to 13 will double. So in terms of turbine technology has the something that to stay. The question is how do we cover these energy needs with renewable with fossil fuels, will it be centralized will be distributed energy generations, these are the question that we need to deal. I think we found a good answer for this going forward. For reasons of time, we can only take two questions now, two more questions and then we have to wrap up the conference call. The next question please.
Operator:

We will now take our next question from Alex Webb from Bloomberg. Please go ahead.
Alex Webb:

Good morning. Two questions from me, in your address you said that that further measures to optimize footprint and reduce the cost that underway in the process industries and drives division. I’m wondering if you could explain where the footprint changes going to take place, I’m assuming some sort of head count reduction in Germany and adding groups elsewhere. If you going to this measures little bit, those are slightly weigh reference to some sort of restructuring in healthcare as well, focus on strengthening the regions in new set of a business areas, and sort of [indiscernible] when you could explained a little bit what that means and it’s been roll and media’s spoke lot about, I’m sorry maybe a kind of closing thing spoke a lot about, the promising the energy division, but it seems that actually the automation digitalization side seems to saved you rather in this quarter. I’m wondering if you could explained a little bit we’ve feelings by now.
Joe Kaeser:

Good morning Alex. Let me start with the last part of your question. Let me remind you that energy generation power and gas, if you some forget this is problem in South Africa continues to have a 10% profitability and underlying 10% profitability and that’s something that we haven’t achieved for the company as a whole. So this business is very good, but our competitors are outperforming as far as the margin is concerned and we use to have such a margin, we won’t to get back them to it. We are at a very high level and we’re working on improving the fact that automation is quite strong is something that we are happy about. It’s also a measure based on some of the mergers within the Digital Factory and there is no other company in the world that can do what we are doing and is able to do what we are doing and we see the success of this and we want to expand it. But one doesn’t have anything to do with the other, as far as the issue of restructuring within healthcare is concerned, I spoke about I didn’t think about restructuring I spoke about a further development of a very good business in order to even improve it. And that is why we have change the structure of the health sector of Siemens, we have developed further in the sense of an overall service, while our customers where more present on the round as far as manufacturing and development is concerned, but also as far as decisions are concerned. So we cannot talk about restructuring but the further development of efficiency and market access, as far as PD is concerned further measures in that field, well that should be understood as follows. In this division we have a number of underperforming businesses. So businesses that so far have not made any money and in the future this needs the change and we defined measures and have some also included them in the publication of the restructuring measures of the past quarter. So these are measures that will lead to the respective savings of the course of the next quarter. Now the last question please.
Operator:

We will now take our last question from Christopher Alexis [ph] from Wall Street Journal please go ahead.
Unidentified Analyst:

Hi, thank you. Mr. Kaeser, actually most of questions have already been answered at this point. But I just wanted to clarify that when you said you met with the Chairman of the Family of Bombardier in Canada. You meant with the Chairman Emeritus, Mr. Pierre Beaudoin. Is that correct.
Joe Kaeser:

Well, first suddenly in Canada I met with him during in event that I forgot the name of and the reason for this meeting was not to discuss our business with them your fact that we were invited to an event that had an entirely different background. So that needs to be put into perspective and I also regularly meet with other colleagues at certain events where our respective tend to meet companies are represented. So this is not a peculiar special meeting due to both of us belonging to our company.
Unidentified Analyst:

[indiscernible] that still have been clarified.
Joe Kaeser:

We will probably a meeting in on November 12, for the publication of the figures for the fourth quarter and the preliminary results of the financial year 2015. And we wish you a very good day and should you be ready to go on vacation. Enjoy your vacation, thank you very much.

Siemens Aktiengesellschaft Q3 2015 Earnings Call Transcript

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Siemens Aktiengesellschaft
Q3 2015 Earnings Call Transcript