Siemens Aktiengesellschaft
Q4 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Executives:]

Mariel Von Drathen - Non Executive Director and Member of Remuneration Committee Josef Kaeser - Chairman of Managing Board, Chief Executive Officer, President and Member of Equity & Employee Stock Committee Lisa A. Davis - Member of Managing Board Ralf P. Thomas - Chief Financial Officer, Executive Vice-President, Member of the Managing Board and Member of Equity & Employee Stock Committee

[Analysts:]

Andreas P. Willi - JP Morgan Chase & Co, Research Division Michael Hagmann - HSBC, Research Division Martin Wilkie - Deutsche Bank AG, Research Division Fredric Stahl - UBS Investment Bank, Research Division Ben Uglow - Morgan Stanley, Research Division Simon Toennessen - Crédit Suisse AG, Research Division Gael de-Bray - Societe Generale Cross Asset Research James Moore - Redburn Partners LLP, Research Division James Stettler - Barclays Capital, Research Division Olivier Esnou - Exane BNP Paribas, Research Division Daniela Costa - Goldman Sachs Group Inc., Research Division Alfred Glaser - Oddo Securities, Research Division Andrew Carter - RBC Capital Markets, LLC, Research Division

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Siemens 2014 Fourth Quarter Conference Call. As a reminder, this conference is being recorded. Before we begin, I would like to draw your attention to the notes and forward-looking statements section on Page 2 of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. At this time, I would like to turn the conference over to your host today, Mrs. Mariel von Drathen, Head of Investor Relations. Please go ahead, madam.

[Mariel Von Drathen:]

Thank you, Barbara. Good morning, ladies and gentlemen, and welcome to Siemens' fourth quarter fiscal 2014 conference call. The earning release, the flashlight and all other documents were published this morning at 7 a.m. You can download all of these files from our website. The presentation is also online, and this call is also being webcast via the IR website. Siemens' President and CEO, Joe Kaeser; Siemens' Chief Financial Officer, Ralf Thomas; and Lisa Davis, Member of the Managing Board, are here this morning to review the Q4 results and present the outlook for fiscal 2015. While Joe will give the overview, Lisa will provide more details on the Energy business, and Ralf will illustrate the financials. After that, we have time for Q&A with Joe, Ralf and Lisa. And with that, I would like to now hand over to you, Joe.

[Josef Kaeser:]

Thank you, Mariel. Welcome, and good morning to everyone. Thank you for joining us to discuss the fourth quarter results of fiscal 2014. We have a full plate to cover today, as you can see from the agenda. As for fiscal 2014, we made good progress on all aspects of our guidance we set out last November. This has been the first time since fiscal 2011. In line with our assumptions, revenues for 2014 came in at plus 1% on a comparable basis. Total sector profit margins came in at the midpoint of the 9.5% to 10.5% range we guided for, while earnings per share grew 25%, well ahead of our guidance. As expected, fiscal Q4 contributed a significant portion, with a total sector margin of 10.5% and EUR 1.72 per share. Our One Siemens scorecard looks good, with ROCE back in the target range. We do trail the competitor basket in revenue, which is materially related to FX impact, as well as some of our competitors who are more active in M&A. With a new strategic setup as of October 1, we have put a clear focus on a market-driven organization, which will help us to catch up again in the medium term. Looking at the margin performance of the sectors. We have seen another strong year in Healthcare, Industry recovered well, and Infrastructure & Cities delivered on a remarkable turnaround, improving its margin year-over-year from 3.7% up to 9.4%. Unfortunately, the challenges in the Energy Sector accumulated throughout the year and led to full year EBITDA margin of only 8.1%, which obviously is well below our own aspirations and strongly weighing on the operational and, of course, also overall results. And Lisa will talk about this in more detail later. Capital structure is still clearly below the targeted range of 0.5 to 1.0 industrial net debt-to-EBITDA. Throughout our ongoing share buyback, we're actively managing this parameter, and our recent acquisitions will have a noticeable impact here in 2015 as well. Now let's have a quick look at the regional aspects of our business during the fourth quarter. While Europe and Middle East were the order growth engines in Q4, United States and China were the strongholds in regional revenue growth. In Europe, we benefited strongly from several large offshore wind orders in the U.K., in Germany, as well as The Netherlands. We did see excellent success in the Transportation business in the United States, such as the large light rail order in San Francisco worth about EUR 483 million. China. China was mixed, with continued strength in Infrastructure & Cities across the board, Industry being stable, while Healthcare and Energy were obviously lower. Looking at revenues. Overall, we saw moderate growth in industrial short-cycle businesses, in line with the limited macroeconomic support. With this, we move on to the sectors we report on, for the last time, in that way. And I will start with Healthcare. Healthcare was again a strong profit contributor with a profit margin of 17.1%, although impacted by a negative currency effect of around 40 basis points. Diagnostics showed solid performance, well supported by good revenue growth in China. Overall, there are some good pockets of order growth in the Americas and Europe, but China continued to soften, reflecting the competitive market environment. As of this quarter, the hospital information system business is part of discontinued operations. This divestiture is yet another step to focus Healthcare on core fields, and I will come back to the audiology business in a minute. Now let's move to Industry, which delivered excellent profit expansion on, obviously, limited growth. Profitability in Industry Automation improved substantially to 18.1%, in major part, due to higher revenues in all regions, with particular strength in the U.S. and China, as well as some favorably lower amortization effects from the UGS acquisition. We grew faster than the market in the product business, but there was still some more negative volume effects from phasing out lower-margin solution business, which, at the time, was called industrial services. We are very pleased with the profit margins in Drive Technologies, that they returned to double-digit territory. Successful execution of productivity measures led to an improved cost position, and strong demand for our high-margin motion control products drove margins in the quarter. Finally, ladies and gentlemen, Infrastructure & Cities sector delivered again a very strong quarter, both in growth and profitability, on the back of an outstanding turnaround throughout the year. Transportation & Logistics achieved 10% revenue growth with, mainly, execution of large Rolling Stock projects in Europe and the delivery of components to China. And profit obviously benefited from a solid profit execution. Power Grid Solutions & Products improved its margins further, with 4% revenue growth. Most of the continued restructuring efforts in the low-voltage business paid off by achieving double-digit margins for the quarter and the fiscal year. We made significant progress and moved closer to attractive market levels. Finally, Building Technologies delivered once again a great performance and finished the traditionally strong fourth quarter with 12.4% profit margin. It is now in the profitability range we like them to have. Now as far as Energy is concerned, I'd like to hand it over to Lisa and talk about the opportunities and challenges we have in Energy. Lisa?

[Lisa A. Davis:]

All right. Thank you, Joe, for the introduction. And also, welcome and good morning to everyone from my side. Looking at the fourth quarter performance in our Energy Sector. We clearly saw the impact of a very competitive market on our order books, with an organic decline of 5%. This was mainly driven by fewer power generation sales in the Americas. Our book-to-bill ratio was just shy of 1, with 0.99, and we have a strong order backlog of EUR 58 billion. Power generation delivered a solid margin of 13%, albeit lower than 1 year ago. While the Service business held up well, we saw the impact from the competitive large gas turbine market in our margins as well. Wind Power has been strong in orders due to a number of large project awards, although, even with this, profitability was disappointing. The primary factors for the significant profit swing were charges totaling EUR 223 million for 2 key topics

[Ralf P. Thomas:]

Thank you, Lisa, and welcome and good morning, everyone, from my side, too. Let me walk you through the below-sectors lines first, where we have seen quite some movement during the fourth quarter. Equity investments delivered a solid contribution of EUR 65 million, driven by our BSH equity investment, albeit lower than in the prior year when we sold our share in NSN. SFS executed its value-creating asset growth with an excellent return on equity of 18.3%, well within the target range. Total assets grew significantly by 18% in this fiscal year and reached nearly EUR 22 billion. The growth speed of SFS will slow down materially in fiscal '15. Centrally managed portfolio activities benefited strongly from contractual changes we negotiated related to some metal technologies projects, which enabled us to release accruals. Looking ahead, we will see some structural changes in the way -- how we report our business below so-called industrial business, where we'll comprise all divisions except for SFS. A set of historic financials which are transferred to the new financial structure will be provided by our Investor Relations homepage next week. In general, we expect that the execution of Vision 2020 will have significant positive influence on net income due to portfolio optimization. I'll run you quickly through the right part of the slide, where we put together some expectations for the newly structured below-industrial business items in fiscal year 2015. SFS will be on a similar level as in fiscal '14. Fiscal '15, we have integrated equity investments into centrally managed portfolio activities. Please note that BSH is classified as asset held for sale, and therefore, we do not record an equity result anymore. We will just record the book gain once the transaction is closed. Please keep in mind that Unify, remaining metals projects and our postal and baggage handling business are undergoing significant structural changes, which may have an impact on the CMPA results. SRE is, as usual, depending on disposal gains, but we see them lower than in fiscal '14. For corporate items, you can assume a cost run rate of around EUR 150 million per quarter with a seasonal component. This item depends, on a certain extent, on the changes in the fair value of warrants, as in previous quarters. For pensions, you should be safe with a cost assumption of around EUR 125 million per quarter. Since we measure our operational divisions on profit before acquisition-related amortization of intangibles, you can find the PPA item now in the below-industrial business section. Around EUR 0.5 billion is a fair assumption for fiscal '15. Finally, we will see the results and gains from Healthcare IT, audiology and metals in discontinued operations. Having said that, I would like to highlight some specifics of the, once again, outstanding cash performance in the fourth quarter. On the total sector level, we achieved a free cash flow of almost EUR 4 billion, close to the prior year level of EUR 4.2 billion, on strong profit conversion into cash. This quarter included also inflows of EUR 1.4 billion from a significant decrease in operating net working capital, with lower inventories at our project business. The larger gap year-on-year on all-in level for the quarter was mainly due to Corporate Treasury activities, including a negative swing in settlements of hedging instruments. We improved slightly on the steadiness of the cash flow development over the year, yet there is still a lot to do. On the downside, we saw further deterioration of operating working capital turns to 7.2 for the full fiscal year '14 from the fiscal '13 level of 7.6. I have to repeat myself on the main reasons, which have been flagged out now for some time. Our customers, particularly in the project business, have changed their payment behavior, which led to a significantly lower level of advanced payment and billings in excess. Order selectivity on our side played a role as well. In total, the absolute negative impact year-over-year was around EUR 1 billion for 2014 on only moderately lower orders. So far, we don't see any reversal of this trend. As we have laid out in our One Siemens framework, we are committed to return 40% to 60% payout to our shareholders via dividend payment. Since we improved our operational performance in fiscal '14, we want to let our shareholders participate with an increased dividend of EUR 3.30. This equals a payout ratio of 49% of net income. A second important component to create shareholder value, we have started in May with the share buyback and have, so far, spent already approximately EUR 1.5 billion to buy back around 116 -- excuse me, 16 million shares until end of October. Our cash position is healthy at year-end, with close to EUR 9 billion, and we expect material proceeds from the various divestments next year. We are well prepared to execute on the planned acquisitions and continue the share buyback within the agreed frame of up to EUR 4 billion. With that, I hand over back to you, Joe, to give you an update on Vision 2020 and the outlook for fiscal '15.

[Josef Kaeser:]

Thank you, Ralf. When we laid out our Vision 2020 back in May, we gave a clear direction of where this company is going and defined milestones for the implementation. So far, we are off to a good start. We finished remaining measures from the Siemens 2014 program and have been setting up the new marketing organization at the same time. This October 1, the new organizational structures are in place, and we have started to define simplification and process optimization methods. A simplified, targeted and tailored incentive system is in effect, which I will explain in a minute. A crucial aspect of the mobilization of the whole leadership team and all employees towards cultural change

[Mariel Von Drathen:]

Thank you, Joe. Barbara, we would like to open the call now for questions.

[Operator:]

[Operator Instructions] We will take our first question today from Andreas Willi from JPMorgan.

[Andreas P. Willi - JP Morgan Chase & Co, Research Division:]

I have 2 questions, please. The first one on your guidance for the -- on the operating side for 2015. If I understand that correct and if we leave restructuring charges, project charges, that aside, you look for about 5% underlying operating profit growth in '15 over '14 at the midpoint of your guidance. Given that you say you have no sales growth and that you're going to invest EUR 800 million more into the company and the kind of price pressure and cost savings seem to offset each other, more or less, where is the improvement coming from? In terms of -- is it coming from better project margins in the backlog or already savings from the currently starting overhead cost-reduction program? And the second question is on Healthcare. You said in the press call this morning earlier that it doesn't really have synergies with the rest of Siemens. Wouldn't it be the right and consequential decision then to hand it to your shareholders as a spinoff? You also speak about paradigm changes, but what are you actually doing now to position Healthcare for this paradigm changes? What is the growth strategy of Healthcare? And it reminds me a little bit, maybe a bit different, but still of OSRAM in 2007, when you very early on talked about the potential impacts from LED, but then, actually, OSRAM wasn't really prepared that well for it when that was spun off.

[Josef Kaeser:]

Andreas, could you help us a little bit on your assumptions with the 5% profit increase on operating side? Can we, please, talk a little bit about that? So we said it was going to be 10% to 11%, excluding PPA. So in our calculation, this is basically flat year-over-year on a comparable basis. What exactly is it that we missed, if did you take an assumption based on 2, 3 years?

[Andreas P. Willi - JP Morgan Chase & Co, Research Division:]

So if you call it flat, that still means you need to improve, given you need to invest EUR 800 million -- or you plan to invest EUR 800 million more in '15. So where is the offset to the EUR 800 million higher investment?

[Josef Kaeser:]

Oh, I see. Well, obviously, this is part of the design to cost efforts on our productivity. As you know, we have been planning -- no, flagging profit -- productivity increases in the neighborhood of 3% to 5%. We shared that '15 assumption is close to 4%. And if you take that into consideration, including also the price decline, we should actually realize at similar levels as we have been. Now on Healthcare, obviously, we had a reason why we have been flagging the fact that Healthcare is different as to the closer value chain of electrification, from energy generation all the way to its efficient use in -- down to Building Technologies and Mobility. But then again, Healthcare, at this point in time, returns very good margins. It returns extremely good cash from -- it returns the cash from acquisitions, which the company has to make earlier. So there is no reason at this point in time to not give to shareholders of Siemens that free cash flow. On the other hand side, we are well aware that paradigm shift can change business models, and that's why we start building a prerequisite for this unit to be proactively prepared. Sometimes -- we decided to make Healthcare stronger also operationally because they will focus their go to market on their priorities. They will focus their cost-efficiency programs on their priorities and not of being part of the overall efforts of a greater scheme of things in the company. Sometimes, thinking about the mid- and long-term aspects of such paradigm shifts, one also need to put into consideration that there are legal and regulatory matters in businesses. And if we look at, like, FDA procedures and others or reimbursement questions, on the other end, there's a lot to prepare in due time. Sometimes even, there might be tax methods involved in the greater scheme of things. There are a lot of things to look at preparing an asset for an even more successful future. And having said all that, you can rest assured that we have very close look on what to do and what to expect from the markets in post-paradigm shifts as well as grabbing the opportunities. And that's why we do what we did, announced that Healthcare will be a company in a company, announced that we now take it legally separate and prepare it for all potential moves. We need to learn what to do at that point in time. And we want to keep control on when and how to act, and that's exactly what we are preparing for.

[Ralf P. Thomas:]

Andreas, maybe I can add a bit on the margin development for next year. Because when we say flattened, mentioning these investments into sales and R&D, we also need to bear in mind that we hedge these extraordinary negative impacts on EM and also on wind business in 2014. Of course, we will substantially improve that situation and plan so for the next year to come. On top of that, we see a bit -- not much, but a bit momentum also in our high-margin conversion businesses on the short-cycle side. So these 2 components will also help then compensating for these investments, if you will.

[Operator:]

Our next question comes from Michael Hagmann from HSBC.

[Michael Hagmann - HSBC, Research Division:]

I was wondering about 2 things that Lisa Davis was saying this morning. She was saying in 1 comment that she would like to change the way that power gen is going to market, and then the other one was that she was talking about a more creative approach to financing. So I was wondering if she could share a little bit with us what the change in route to market will be and how fast that can actually be implemented given that we are still looking for the integration of Rolls-Royce and Dresser-Rand. And then when it comes to the more creative commercial terms, I was wondering what that could be, given that Dr. Thomas was saying that the SFS balance sheet is not going to be growing. So are we simply talking about lower advances? Or are we looking at completely different models, like power by the hour?

[Lisa A. Davis:]

Thank you. Yes, I can certainly touch on those. For the go-to-market piece in power generation, really, the focus there is really moving our sales staff closer to the customer. Today, we are a bit distant from where the customer is and where the developing markets are. So it's about customer proximity, and it's also about just the capability of our sales team. And we've been a very strong technical sales organization in the past, and we still will retain that. But we also need to be a very strong commercial organization as well. And that leads into your second question about the more creative approach, and I said it's really to customer offers, not specifically financing. And what I mean by the commerciality of our customer offers is what we see in the marketplace today are offers that include guarantees, offers that include profit sharing, and this is what our customers are expecting with respect to new business. And so we, as a company, need to be able to respond to that and have that capability in our sales team and leveraging SFS where appropriate to allow that to happen. But it's not specific to SFS. It's more about understanding the customers' needs and being able to leverage beyond technology to meet those.

[Josef Kaeser:]

For example, if I may add -- Michael, this is Joe. It's not about creativity in financial terms, adding more risk to anything. That's actually not what was meant. But think about what Lisa said, knowing from data that certain warranties or certain maintenance topics would not even exist, because we know from our data in the installed base that those methods are [ph] containable. So then why not exclude such methods because of the knowledge of our data. People talk about digitalization. It is also about the benefits, knowing our data of our installed base, our business and optimize the commercial terms and conditions based on that knowledge.

[Operator:]

Our next question comes from Martin Wilkie from Deutsche Bank.

[Martin Wilkie - Deutsche Bank AG, Research Division:]

This is Martin from Deutsche Bank. A couple of questions. The first one on China. You mentioned in Healthcare there was some weakness in that market. Obviously, it's one where, because of some centralized procurement, we've seen that for a few quarters. I just wanted to find out has there been any change in that towards the end of the quarter. Having some other companies saying that the procurement is now sort of easing up in terms of a bottleneck, I just wanted to see if that's something that might improve over the next couple of quarters. And the second question also related to China. If we x out Healthcare, if you could just sort of step through what you're seeing in your industrial businesses in terms of how that business went in the quarter in terms of order growth.

[Josef Kaeser:]

Sure. Martin, on China weakness, Healthcare, I mean, it's all relative, right? As you know, we've been enjoying very solid growth on total Healthcare in China for a long period of time. We've been seeing that slow down, especially in the imaging environment. Diagnostics is still very strong, but imaging has gotten a bit slow, among other things, due to the fact that, admittedly, the Chinese government is also favoring local players much more over the multinationals. We've seen that, and we deal with it through more localization and higher value-add in the country. And that's actually also the actions we are taking to make sure that Siemens is considered to be local, pretty local player as compared to the others. You're right about the procurement easing, that's coming now after several of the political and commercial reforms about who makes decisions in which area. But then again, there is this topic of localization and tighter scrutiny on multinational environment. Above and beyond Healthcare, we've enjoyed a decent growth on the short-cycle environment in China last year. As we move forward, we believe there might be some pause on this one, so we do not expect our business in short cycle to grow moderately in 2015, so it's more modest than anything. But then again, it doesn't catch us by surprise. We've seen that coming. The pipelines have been filling up, which was good for us because we saw revenue increase. When it comes to orders, which you might also see a bit slowing down a little bit, as we reported as much, because some have been real tough comps if you go year-over-year. So all in all, China is according to our expectations, with some significant upside on Energy Management due to the fact that electricity is needed in the east and needs to be transported from the north to the south and west to the east. And that's where we see major growth areas. The Mobility business is picking up quite strongly. And obviously, also, if it comes to distributed generation, given the national structure in China, this is also an area of growth where we expect significant opportunities as we move along.

[Operator:]

Our next question comes from Fredric Stahl from UBS.

[Fredric Stahl - UBS Investment Bank, Research Division:]

I wanted to start with a question on -- you spoke a bit about decentralized power generation and the Smart Grid opportunity. And my question is, do you think that this is a -- let's call it, a traditional hardware opportunity? Or is it more a very software/information opportunity? How do you view it?

[Josef Kaeser:]

Well, the reason why we -- why in our new organization, as of October 1, we have been creating a division called Energy Management, which is a traditional TNT, but then surrounded by the Smart Grid, Energy Management operations, okay? And what we see is that the world is also changing, not just in distributed -- or centralized distributed energy, it's also changing from a single, one-source generation to a multi-generation environment. In old times, there was a nuclear power plant or a 1,100- or 1,200-megawatt gas or combined-cycle gas power plant. And then this was starting the transmission, and then there was a substation and what have you. In the new times, you have generation from gas, from nuclear, from renewable, like wind and solar. And that's all coming to the grid at a time which is also not always necessarily containable because it's about the weather and the wind -- or the sun and the wind. So therefore, this will increasingly also become a software-driven component, in terms of growth, to manage exactly the volatility of the grid. So if you talk to me on China, that's still mostly hardware. That's high-voltage AC/DC transmission. But if you look at the general opportunities in Energy Management, it is also about software-driven, managing the grid and the utility-based operations.

[Fredric Stahl - UBS Investment Bank, Research Division:]

Okay. Can I also do one more question, just one? I'm just curious here. So you had, let's say, EUR 150 million to EUR 200 million of costs relating to a faulty bearing in your wind turbines. Can you -- is it possible for you to recoup that cost at a later stage from your supplier?

[Ralf P. Thomas:]

Obviously, we are just in the middle of just understanding which responsibility they have and which we have. And as Lisa mentioned in the press conference this morning, we are busy investigating that. And if there's any chance for us to recover anything, be rest assured that we will go for that.

[Lisa A. Davis:]

Yes. Our focus has really been on understanding the root cause so we can eliminate the issue.

[Josef Kaeser:]

Yes. And we should take it [ph] from there.

[Operator:]

Our next question comes from Ben Uglow from Morgan Stanley.

[Ben Uglow - Morgan Stanley, Research Division:]

I had a couple. The first one, I guess, was for Joe. Just in a very general sense, in terms of the revenue outlook, the flat outlook, is that solely due to power and gas? Is that where your -- is that the thought process, Joe, i.e. the power and gas division will be under pressure top line next year, and everything else should be showing some kind of moderate or improving growth? Or is it more a general concern about growth? I wanted to know how focused you were just on power and gas. So that was question number one. Question number two is for Lisa, which is, some of the comments on the press call was calling out issues of overcapacity and go-to-market, et cetera. Things that have been around for a while. What I'm surprised by is the sort of commentary on pricing and the indication that pricing has become so much more competitive than it was recently. And when I looked at -- well, your largest competitor's numbers a couple of weeks ago, they were still showing thermal pricing in a positive territory. So what I'm trying to understand is, what has happened so quickly since the GE-Alstom deal to make pricing that much more difficult?

[Josef Kaeser:]

Before maybe Lisa goes on that route, I intend to give [ph] -- the answer to your question, it's actually simply yes. So it's related to pure power and gas. Everything else is stable and there's even some pockets of growth here and there, although reduced with that one. And it could be, in a way, anticipated over the time because of the fact of the order intake, right? Also on the profit margin, I may want to draw your attention to the May 7 announcements, where we laid out the new margin goals for new divisions. And so it shouldn't come as a big surprise to anyone that this is slowly but surely materializing. With that, I hand it over to Lisa.

[Lisa A. Davis:]

Yes, Ben. We do see pricing pressure in the market continuing just as a result of the overcapacity and the number of competitors that are in the market today. In fact, in 2014, we had price erosion of about 4% in the market. We expect that to be a bit less in 2015, but still some pressure out there just because of the nature of the marketplace.

[Ben Uglow - Morgan Stanley, Research Division:]

But how -- but I guess what my not-so-subtle question is, is how pricing dynamics in the market changed because of the GE-Alstom deal?

[Lisa A. Davis:]

I don't think -- well, I mean, my personal view, I don't think they've changed yet as a result of the GE-Alstom deal. We still have the same number of competitors in the market today. Perhaps, going forward, when the number of competitors has reduced and customers have less choice and such, then maybe pricing changes further. But we have seen a general erosion in pricing over the last probably 2 years in the marketplace with respect to the overcapacity.

[Operator:]

Our next question comes from Simon Toennessen from Crédit Suisse.

[Simon Toennessen - Crédit Suisse AG, Research Division:]

My first question is on charges going forward. You said earlier that you expect lower charges outside the legacy projects and issues. What would you classify as charges outside the legacy projects in 2014? And is the current issue in Wind Power that you're seeing a legacy project? And what are you expecting going forward? And maybe as a last point on that, in your margin guidance for next year, could you maybe give us a bit more guidance what level of charges you are implying in that? The second question on trends in Industry. Joe, you flagged the more difficult comps earlier, but even if you take those out, it seems that the Industry business has been growing orders quite a bit less than peers have reported so far in the quarter. The comments around particularly drives and motors has been a bit more upbeat. I would just like to get your view on that. And a last point on the news we had out of Germany and T&D this week, where it seems Germany is pushing through with the HVDC investments and also quite a lot on modernization of the grid against some of the concerns flagged throughout the year. There is an investment value stated of EUR 22 billion over 10 years. Can you just maybe comment on that? What are you seeing? What are you expecting from this going forward?

[Ralf P. Thomas:]

So Simon, let me start out with the first question about the charges. I mean, it's a very valid question because we try to be as precise as we can in that field. When we said project charges, that was very much related to those projects that we have been discussing as legacy projects in the past, including the grid connection in North Sea and so on. As Lisa has been describing the problems with industrialization of the wind industry, that is not in particular a project charge as such, therefore, we said these are project-related charges in terms of project business. And what it goes to is it's actually that we need to substantially improve our supply chain, the make process in total and understanding the impact of material, like eroding materials under rough weather conditions, for example. So that was something that, if you will, was not part of the EUR 700 million in the past that we have been using as a baseline, when we said last year that we are targeting -- putting that figure in halfway forward. And what you still may expect that we don't plan for charges, having them, but we try to work them down as far as we can. And we have been getting quite a firmer grip around the allocation of risk and accepting that or not in the process, before we accept the customer offer or not. So we are quite restricting ourselves in that field. So in front of that backdrop, you may expect that we substantially go down in '15. Whether we reach half-ening them or not is not determined yet, but you may expect that there's a substantial move into that direction tailored into our budget assumptions.

[Josef Kaeser:]

Yes, Simon, our Industry business year-over-year for the quarter, we do see a change and also the tough comps. But keep in mind that fiscal Q4 2013 was heavily affected by very large, long-range orders, among other things, also for the drives and the propulsion systems for Chinese high-speed trains, which go over years. So we're not particularly concerned about the business outlook on Drive Technologies and Process Industries for the year. We actually do expect some growth -- signs of growth here in several areas, like the United States and also in China. Some encouraging signs there on high-speed trains, and so on and so forth. So that's maybe for you to look forward on this one. The T&D, look, there's a lot which is written in daily newspapers, which are today's news and tomorrow's fish wrap. We know there is a strong demand for bringing together the renewable energies in the South, which is mostly photovoltaics, and wind energies up in the North, together with the more baseline services of gas and then still coal-fired power plants. So there is a need to invest. Whether it's going to be EUR 22 billion or less, and whether it takes 10 years or not, I mean, obviously remains to be seen. But there is demand. We are well positioned to be doing that. And of course, we'll work with the customers and the government to help them understand what needs to be done, in what time and in what fashion.

[Operator:]

Our next question comes from Gael de-Bray from Société Générale.

[Gael de-Bray - Societe Generale Cross Asset Research:]

Could you give us an update on the EUR 1 billion productivity gain program? I mean, where do you stand in terms of negotiations with the employee representative? When you actually expect to book the corresponding charges and how you expect the savings to be split over 2015 and '16? The second question relates to the profit margin guidance. Does it include the planned restructuring charges? And if yes, for how much? And also within the guidance, do you actually expect Transmission to reach breakeven in 2015? And do you also expect Wind to be back in the targeted margin range for that year?

[Ralf P. Thomas:]

So with regard to the savings that we are striving for in our 1x16 [ph] exercise, at the moment, we are pretty much determining that -- what needs to be changed on a very detailed level. We have been putting into play something we call activity splits, so what really needs to be changed in the workflow of our support functions. And we are getting to a very high level of maturity at that point. As soon as we have been finalizing that, that will be around Christmas, we guess, then we will go and take the next step and really consider in detail what work will go out and what impact is that going to have on employment in the support function area. As soon as that has been determined, we follow through the process that we are acquainted here under German labor law to reconcile with the representatives of Labor, and that will take a couple of months. So I think we are on a very good track there, and we will see the first results very late in this fiscal year, but it would be too early to determine the quantity of savings. But of course we'll be done. And Joe has been saying that in the press conference before, is that we have been putting mid-triple-digit million amount of money into the budget, taking care of that aspect.

[Josef Kaeser:]

So you also asked the question of whether or not the total guidance includes restructuring or not. So it does include restructuring. So we financed the transformation also by one-off gains associated with the strategic realignment of the company. On the other topic of breaking even at Transmission and Wind, I mean, obviously, the answer is yes. And the target margins, Transmission is not yet a division anymore, it's part of the Energy Management, so it's hard to really give that answer straight. But Wind, definitely something which got good opportunity to get back to where it belongs to be, and that's the margins we have set out further and as we go [ph].

[Operator:]

Our next question comes from James Moore from Redburn.

[James Moore - Redburn Partners LLP, Research Division:]

I have 3 questions. On the '15 guidance, please, could you give us the assumption for disposal gains? Are we talking a 4-digit-plus number? And Lisa, as you're here, I wonder if you could help us understand the underlying dynamics in the Power Generation business, and how much of the aftermarket deterioration is behind us or how much we still have to go. So specifically, I'm thinking about the Fossil Service business, which is a big profit driver. Could you give us a feel for how much the utilization of your turbines in the field have come down, and whether you think that number materially worsens going forward as renewable continues to take more of the mix? Or do you think that, that decline has now all happened? And then finally, Joe, maybe you could help us with the Healthcare growth environment in 2015.

[Josef Kaeser:]

So why don't we then start on the 2015 guidance. I mean, obviously, it's hard to talk about gains when the deals have closed, right? So that's why we've been refraining from going into the what ifs and what have yous. But as a general guideline, you've seen our ranges for the Industrial business, 10% to 11%. Make sure that it's well understood what happens there on flat -- kind of flattish revenues. We also said there is a mid- to high-3-digit million around reserved in the budget and subsequently in the guidance for the transformation and restructuring efforts. And obviously, if everything goes through as planned, we obviously do expect a, what you say, a profit from disposal in the 4-digit million range. But again anyone should not get overboard speculating how much that could be and how great it is. We've made it very clear that 2014 was a year of significant action, '15 will be operational consolidation and integration and further focus on the portfolio. And in both years, above and beyond the transformation and the strategic realignment, we are going to improve the bottom line significantly out of several other areas, which we have mentioned. Now Healthcare, Healthcare obviously depends on the regions. I mentioned already our outlook and our assumptions as it comes to China. There's some slowdown there on the imaging environment, the Diagnostics still being very decent in the space. That's also true for the total Healthcare environment. If you look at that, especially also in, for example, the United States, where we do expect some modest growth in Healthcare overall. And if we come to, for example, to Germany, we actually expect that one to recover because they haven't been spending almost anything in years, so that could actually be supporting some moderate growth in that space. And again, back to China. As I said, moderate growth overall, but good opportunities in the area of Diagnostics.

[Lisa A. Davis:]

So maybe to respond, James, to your comment or your question on the dynamics in the Energy business and specific to the aftermarket, before I comment on the aftermarket, just a comment on Energy overall. Obviously, we continue -- we still -- we see continued growth in the Energy market, especially in the need for electricity or the demand for electricity. This will be based largely on renewables and gas going forward. So we see quite a demand for both areas of Energy supply. In terms of the aftermarket, we have seen a decline in our Service business, in Europe predominantly. We do think that, that has reached a level of no further change, in a sense, so it's bottomed out, if you could say. We've been able to shift our Service capability to other markets to offset that decline in business in Europe. So we still see the Service business or the aftermarket, as you phrased it, as quite a positive contributor to the business and, in fact, an area of growth going forward for both the gas turbine business as well as the Wind business.

[Operator:]

Our next question comes from James Stettler from Barclays.

[James Stettler - Barclays Capital, Research Division:]

First of all, if we look at the Power Generation business, I've at least been under the impression that you've been outspending the competition in terms of R&D, trying to be ahead of the curve. Were you taken by surprise by this paradigm shift? And I'm just a bit surprised that you feel that you now need to catch up vis-à-vis competition in terms of R&D spend. Secondly, this whole phase, which is a lot of inward-looking restructuring, how do you ensure that you not lose out in terms of protecting your market share and, in certain cases, even gaining? And then finally, if you look at all the changes happening in the wind industry, do you still think, longer term, that can be an attractive business? And if so, how important is Service going to be going forward to really drive the margin?

[Lisa A. Davis:]

Okay. Thanks for a number of really good questions. On the R&D side in Power Generation, we have been a very consistent spender in R&D in the past. How we compare to the competition, I really don't have that visibility, but we do see this as a very important part of our business. It's not so much catching up on the R&D. We've been R&D leaders and technology leaders for many years, so it's really about changing our R&D focus a bit and as we see the market changing in terms of the speed of innovation, innovation cycles are getting much shorter, so we need to change our processes to continue -- or to keep up with that trend in the marketplace. So that's really what the investment is for. It's for more focus and also to speed up the processes that we have to bring innovation to the market faster. On the comment about a lot of what we're doing being -- of the restructuring being inward-focused, we are looking at our internal approach to how we do business to improve our efficiencies and our effectiveness. But one big element of that is our go-to-market. But to me, it's really looking at our external approach to the business, how we work with customers, how we make sure that we're understanding their needs and then meeting those needs. That's a big area of our focus. So to me, that's very externally focused and an area of improvement that we'll spend a lot of time on going forward. And then the last one, with respect to wind, we do see this as a longer-term growth area, both onshore and offshore. So we do and we are investing in new technology in this space and reducing our costs to make sure that wind is not just the most competitive renewable but a competitive energy source in the future so that it does continue to grow on its own. So we do see this as an area that we continue to invest and grow quite a bit.

[Operator:]

Our next question comes from Olivier Esnou from Exane.

[Olivier Esnou - Exane BNP Paribas, Research Division:]

So I would like to come back on an earlier question about the profit bridge into '15 and the support you have in this from high-margin, short-cycle business. I was under the impression earlier this year you were maybe calling out a little bit the peak on some strongly profitable vertical markets, like automotive, for example. So could you be a bit more specific about which vertical markets are supporting the high-margin, short-cycle business going into '15? That's question number one. Question number two, coming back to the Wind business, there's a very high backlog and I had a high growth forecast for this business going forward. I was just wondering, with the execution issues, how we should think about the growth outlook for that business, please? Maybe guidance for '15 here? And thirdly, the order intake showed good performance in Wind and Transport, large projects. I was wondering to what extent they benefited from your new process of the internal memory team reviewing potential large risk contracts. Could you maybe tell us to what extent they've been reviewed and that they're a good margin business, really?

[Ralf P. Thomas:]

Olivier, let me start with the last one, if you'll allow, because I have been elaborating on that already a little bit. Of course, all the new orders that are now coming into our remarkable backlog, I think we have been mentioning that we are sitting on EUR 100 billion there, and we did, of course, apply these higher level of risk awareness as we set that out. So just to give you one example, I mean, we're just about changing our whole process of limiting the authorization of individuals accepting certain contract conditions and technology challenges, if you will. And that was a multilayered process in the past, which was going from one stage to another, finally ending after 3 or 4 levels on a hierarchy that finally was responsible and accountable for that. What we now do is, we really literally collect all the knowledge in the company around the table to either one-stop shop, if you will, get everyone involved who can contribute here, disregarding which organizational destination (sic) [designation] he or she has and we bring that into the decision-making process directly, which will no longer have tons of signatures on different layers but only 3, being the ultimate decision-maker on the project side, plus the responsible CEO and CFO on the highest level of hierarchy being involved in decision-making. So we are very crisp in that, meanwhile. And that will, of course, filter through in the risk being implicitly in that backlog. Of course, we also had a detailed look into the legacy projects. We have been reviewing that many times in those cases where we really have been realizing problems on a major scale. So the quality of the backlog, as such, when it comes to assessing the risk, knowing how to deal with it and also mitigating them because we know earlier, if need be, that is on the way. So from that point of view, the order intake of last year is definitely having a higher level of quality than in the years before. Now touching on your first question with regards to what are the verticals that the short-cycle business is leaning to, let me quickly repeat what Joe has been saying before. China is still the kind of pacemaker in -- or the global driver of that, even though the general economic environment is getting a bit more cooled down in the meanwhile. So we must not expect a double-digit growth rate on a continuing basis anymore but still in the higher single-digit environment, which is quite good for a business that is converting margins over and above 50% on a regular basis. When it comes to the verticals, as such, beyond automotive that you have been mentioning, construction and infrastructure are still on a positive track, especially also in Asia. But also, there, we see a cooling down but still in the double-digits growth rate area when it comes to factory automation and also the traction business, as Joe has been elaborating on before. And let's not underestimate that also the machine-building business is quite remarkable coming -- has been quite remarkably coming back, particularly in the U.S. and also in China, where we still saw double-digit growth last year. While Europe, as the origin in terms of exporting business in that field, has been rather coming down but still benefiting from growth in those countries that I mentioned.

[Lisa A. Davis:]

And I can also address, Olivier, the question on growth in Wind. We do see strong growth in the Wind business in general. As I mentioned, the industry, on the onshore side, anywhere from 3% to 4% per annum. And on the offshore, a much higher growth rate of about 20% per annum. In our business in 2014, we had a very strong year with respect to order intake. For 2015, we actually are assuming in our plan a slight reduction or a reduction in the orders, given the high, in a relative sense, versus 2014. So we do continue to see growth. We're expecting a little bit less in terms of our ability to capture that growth in 2015 versus 2014.

[Olivier Esnou - Exane BNP Paribas, Research Division:]

And if I may follow up, that means in your sales plan for Wind, you should be aiming for double digit 2015, yes?

[Lisa A. Davis:]

Yes.

[Operator:]

Our next question comes from Daniela Costa from Goldman Sachs.

[Daniela Costa - Goldman Sachs Group Inc., Research Division:]

Two questions. So you've given a lot of comments regarding Europe, U.S. and China across the various businesses. Can you give also a little bit of an overview on which areas are growing fastest and slowest versus your expectations on the other EMs by sector level? And then second, there was a lot of -- there's a lot of talk about portfolio pruning in the press call and here. You've also mentioned that 2015 will be about focusing on the operation. So I just wanted to clarify if we should think about the portfolio pruning wave has been mostly done or if there are still further things that you wish to execute on. And then finally, just a more general question regarding digitization. And how do you -- how do you balance, how do you think in your mind about the trade-off between is this really incremental growth when you account also for the fact that, I guess, the ultimate objective of connecting things is to have -- to make them run more efficiently and for longer? So there must be an implication on the traditional equipment demand. How do you balance the 2 things?

[Josef Kaeser:]

Daniela, on the -- on the portfolio pruning, I mean, obviously we've been, I believe it's not overstating it, reasonably active to focus our portfolio based along the lines of our Vision 2020 priorities. You know all the actions which we have been seeing, and that's obviously something we are pretty busy in executing on. I've never said this at the end of it, but we obviously would also not feel inclined to say it's going on like that several [ph] times. So as I say, we've done a lot. We've focused the portfolio to areas of growth, and we are now integrating the Dresser-Rand and Rolls-Royce. Obviously, the latter one closing rather soon; the other one may take some more time. And our assumption actually has been that it's -- it will even be summer of 2015. But time will tell. So that much to portfolio pruning. On the digitization, I mean, it was a good question. There will be some -- there could be some heavy position [ph] on the higher-definition automation piece. And that's why it's important to us that we put the 3 major elements of our digital factory together into one area of responsibility, and that's the manufacturing automation, that's motion control, which is robotics, in a way. And then have it integrated with the PLM simulation and design capabilities of our UGS activities. And it's my belief that by integrating them, there is an optimization between hard- and software-driven efforts. Now what is digitalization all about? It's all about data to business, so how do you make meaningful use out of data you generate out of an automated, which equals digitized process and then make the productivity gains out of it. And that's a business model, that's the application which you are looking for and which will provide value to our customers, and that's what we are extremely well positioned for because we, obviously, are market leaders in all those 3 areas. And that's I guess as much as we should speculate on what the growth rates will be. On the areas of fast and slow, I have been really talking a lot about the updates now on the regions. United States, we believe, is going to be the motor and the locomotive of global industrial growth in 2015, out of several reasons. Energy, that is very important; Oil & Gas, still a major mid- and long-term growth locomotive, that's not only about drilling more holes, it's also about the optimization and productivity to bring the average cost down per barrel, which we get out of the ground. You may, for example, be interested in the fact that in 2012 and into '13, the average cost per barrel to be been taken out of the earth, so conventional and unconventional, was $70. Now the average has gone to $57, which has all been provided by the oil & gas service providers and productivity matters most going forward. If you look at, again, on the strongholds, what we expect 2015 for us to be. In the U.S., obviously, this is about the Process Industries and Drives, as I said. That's also about Building Technologies. We do believe that commercial buildings will make some meaningful efforts to get energy efficiency to where it needs to be. So we do see actually good areas. Slow definitely will be Wind in the United States because due to the fact that we have really large orders in '14, and it remains to be seen what the tax incentive scheme will be '15 and '16. Germany, definitely, we'll see some recovery of Healthcare, which we like. Mobility is good. And we also expect our Wind Power and Renewables business to be able to show good growth out of the existing backlog, as Ralf has already been alluding to. And then last but not least, China, again, short-cycle, a bit slower based on very good growth in '14. And then definitely, a recovery in Power and Gas on new orders, as well as for Energy Management, which is first and foremost the area of transmission and high-voltage transmission in the country. So that's, in a nutshell, how we see the movers and shakers for '15 in terms of growth.

[Daniela Costa - Goldman Sachs Group Inc., Research Division:]

Sorry, my question was actually regarding the other EMs.

[Josef Kaeser:]

The other regions?

[Daniela Costa - Goldman Sachs Group Inc., Research Division:]

The -- yes, other emerging markets. Sorry if I was not clear.

[Josef Kaeser:]

Well, I guess -- I agree with you, there are still a few left, obviously. I mean, look, we very much look forward to the reform efforts in India. I just happened to meet the Prime Minister there and it's really encouraging to see him foster infrastructure investments, such as mobility and power transmission. With that said, the visibility [ph] is something meaningful. Then if you look into a similar matter on reforms in new government, that's basically Mexico. I mean, same thing there. There is a massive reform agenda, which will foster and push the generation, transmission as well as distribution markets. So there is a lot of things happening above and beyond the so-called BRICs and developed economies. So we do expect a single-digit growth all across-the-board.

[Operator:]

Our next question comes from Alfred Glaser from Oddo Securities.

[Alfred Glaser - Oddo Securities, Research Division:]

I wanted to come back on the question on disposal gains and growth without that. Of your 15% EPS growth expected for 2015, how much would be really just the underlying profit growth, excluding all the disposal gains? That was my first question. And then second question on procurement, which has not been discussed really today. Could you give us an update on the savings you could achieve on this item in 2014, and how much we could expect on procurement savings going forward? And third question, on your balance sheet. You have generated again very good cash flow in 2014, and your debt is down again significantly. Don't you feel that you're significantly under-leveraged now with the Siemens balance sheet? And what would you intend to do to really re-leverage the group?

[Ralf P. Thomas:]

So Alfred, rest assured that we permanently think making the best out of our balance structure and the leverage on that one. Of course, we are fully aware that there is -- that there could be opportunities every now and then, and we'll take them if we can. Also, bear in mind that with the latest acquisitions we made, there's also quite something to digest the way forward. But what you can definitely rely on is that we will stay within that corridor that we have been indicating for you with that zone up to 1.0 when it comes to net industrial debt over EBITDA. And as Joe has been mentioning this morning in the press call, the 0.2 that you see as the final result for fiscal '14 is definitely not the level you are going to see the way forward end of fiscal '15, though. So when it comes to procurements, I mean, we said before that we are considering that being part of our productivity measures also the way forward and, therefore, I have quite a demanding regime in place, keeping us at a base productivity on levels around 4% for the years to come in procurement, those definitely play an important role in that productivity measure mix, if you will. To give you kind of a gut feel, last year, that has been contributing on a total material basis around 4%. So it's pretty much in line with the general level we have been reaching on productivity.

[Josef Kaeser:]

Yes. And over to your first question, which I understand the motivation for, and we've been trying again, in the 3 hours, to give more clarity into the guidance on EPS growth. But the key takeaways I want you all to basically take away from the meeting this morning with the media and today, obviously, now with the markets. First of all, the 10% to 11% -- first of all, we are careful about the top line dynamics because we do expect the geopolitical aspects to heavily weigh on our customers' sentiments to invest. That's the first one. If it gets any better, well, great, then we have upside. Second takeaway we want you to have is that by flagging a 10% to 11% Industrial business margin in the total of our Industrial business is a stable profit development on the back of a no-growth assumption on the top line. Third, what we want you to take away is this company solidly and rigidly executed its Vision 2020 one step at a time. And while executing on those sets of monetary [ph] matters in '14 and '15 and, by the way, '16 as it looks like today, it's a bit early but still, is that even though we do that transformation, profitability will grow. So if this transformation does not get -- or go at the back of investors, the contrary is the case. We deliver double-digit profit growth. It doesn't matter whether revenues are flat or not, that's what we do, that's what we committed to. Whether this is more related to one-off this year or not, obviously, it matters for '16, but as I said, we are well on the way to deliver solid operational improvements, and this is part of it. And that's basically the key takeaway. So we do finance the transformation and still increase the bottom line. So it's got no impact on profitability nor does it on even dividend, which you can see that we raised dividend by 10%, from EUR 3.00 to EUR 3.30, and it has a reason why we did it. Sometimes, this profitability is as high as you can possibly think, then you increase your dividend. Another way to look at it is that we make good on what we say, and if we say 40% to 60% goes to shareholders, then the midpoint of 50%, I think, is a meaningful way to address it. And then thirdly, sometimes even dividend movements are considered to be a sign of confidence. So if you don't find yourself in the first 2 items, then take the third one. That's what we do. And that's the key takeaway we want you to go away with today. We execute, we are careful on top line and we focus on what we have in our hands and not what the politics and militaries in other areas do in the world. Okay?

[Operator:]

Our final question comes from Andrew Carter from RBC Capital Markets.

[Andrew Carter - RBC Capital Markets, LLC, Research Division:]

I just had one final one, please, which was just in terms of how to think about the Energy backlog. I think you gave us a number for that, but I was just wondering if you could talk a little bit more about what the sort of the year-on-year change in the Energy backlog might be sort of on an underlying basis? And could you talk a little bit about the sort of the -- sorry, the deliverability of that over the 12 months, just for us to be able to understand a little bit what the starting position is this year compared to a year ago?

[Ralf P. Thomas:]

Well, first of all, let me say that the backlog for Energy, old sector as an organizational entity, has been increasing throughout the last year. I mean, we started out with some EUR 54 billion end of fiscal '13 and ended up with some EUR 58 billion end of fiscal '14. And what you normally may expect that, that backlog has a very long tail, if you will, because there's a lot of Service business included. From today's perspective, we would expect that something between EUR 15 billion and EUR 20 billion of that backlog will materialize in terms of being turned into revenue in '15. Then the year after, that would be pretty much half of it. And then you'll see that what will be reflected in the Service aspect of it, which also, of course, has a certain impact on the profit -- of the quality on profitability in that backlog.

[Mariel Von Drathen:]

Thank you, Ralf. Thanks a lot, everyone, for participating in the call today. We very much look forward to seeing a lot of you Tuesday, December 9, in Berlin. We have been informed that we will have a larger event. It's actually a first at Siemens, where the entire Siemens Managing Board and all division CEOs will spend the day with you talking and having some deep dives into Vision 2020. So we're looking forward seeing you there. And until then, we are starting our roadshow as of this afternoon, so I'm pretty sure we'll see some of you. Thank you very much, and have a good day.

[Operator:]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. Once again, let me repeat the instant replay numbers. Participants in Germany, please call the replay number [phone], access code 5696239#. Participants in New York and the U.S., please call the replay number [phone], access code 5696239#. This replay service will be available until midnight, the 7th of November, 2014. A recording of this conference call will also be available on the Investor Relations section of the Siemens website. The website address is www.siemens.com/investorrelations.