Siemens AG Management Discusses Q1 2013 Results - Earnings Call Transcript

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Siemens AG (SI) Q1 2013 Earnings Call January 23, 2013 2:30 AM ET

Executives

Mariel von Drathen

Peter H. Loescher - Chairman of Managing Board, Chief Executive Officer, President and Chairman of Equity & Employee Stock Committee

Josef Kaeser - Chief Financial Officer, Head of Corporate Finance & Controlling, Executive Vice President, Member of The Managing Board and Member of Equity & Employee Stock Committee

Analysts

Ben Uglow - Morgan Stanley, Research Division

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

Mark Troman - BofA Merrill Lynch, Research Division

Peter Reilly - Deutsche Bank AG, Research Division

Martin Prozesky - Sanford C. Bernstein & Co., LLC., Research Division

James Moore - Redburn Partners LLP, Research Division

Gael de Bray - Societe Generale Cross Asset Research

Simon Toennessen - Crédit Suisse AG, Research Division

Olivier Esnou - Exane BNP Paribas, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Siemens 2013 First Quarter Conference Call. As a reminder, this conference is being recorded.

Before we begin, I would like to draw your attention on the Safe Harbor statement on Page 2 of the Siemens presentation. This conference 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'd like to turn the call over to your host today, Ms. Mariel von Drathen, Head of Investor Relations. Please go ahead, madam.

Mariel von Drathen

Good morning, ladies and gentlemen, and welcome to Siemens First Quarter Fiscal Year 2013 Conference Call. The earnings release, the flashlight and all other documents were published this morning at 7:00 a.m. You can download them from our website. This morning's presentation is now online, and this morning's call is also being webcast via the Siemens IR website.

Siemens President and CEO, Peter Loescher; and Siemens Chief Financial Officer, Joe Kaeser, are here this morning to review the Q2 -- sorry, Q1 results with you. And as in recent years, Peter will have to leave, unfortunately, after his speech for the Annual Shareholder Meeting. We will have time with Joe Kaeser for the Q&A. And with that, Peter, I would like to hand over to you.

Peter H. Loescher

Thank you, Mariel. Welcome, and good morning to everybody. Thank you for joining us to discuss the first quarter results of 2013.

In a nutshell, our start into the new fiscal year and towards our Siemens 2014 target was solid in a still difficult macroeconomic environment. Despite the clear stabilization in the financial markets in Eurozone, the recession in a number of countries continues and leads to an overall subdued investment climate. The U.S. economy has stabilized, yet the ongoing discussions about rising the debt ceiling and pending decisions about budget cuts results in a certain reluctance to invest. In China, we see some areas pointing to an economic uptick, yet the situation remains incoherent. We continue to expect the recovery in demand for the second half of calendar 2013. In this environment, our order intake's decreased by 5%. This was mainly due to an unexpected slowdown in the Industry sector as the result of a consolidation in the U.S. and Germany on high level and still difficult conditions in China.

In addition, we booked a lower number of large orders in Infrastructure & Cities. With a book-to-bill ratio of 1.06, we are back above 1 for the first time since the starting quarter of fiscal 2012. The order backlog stands at a healthy EUR 97 billion. Revenue declined only marginally by 1% despite a 3% growth in emerging markets, which accounted for 33% of total revenue.

Sector profit improved by 4% over the prior year due to a 12% rise in Energy and a substantial 38% increase in Healthcare, where we reap the benefits from executing on Agenda 2013 for Healthcare. This overcompensated for our project charges mainly related to high-speed trains in Transportation & Logistics, further charges from legal and regulatory matters associated with sanctions on Iran in the Oil & Gas division and initial transformation cost of EUR 50 million related to the productivity program, Siemens 2014.

The execution of Siemens 2014 has started on all levels of the company, and we expect an accelerated increase of transformation charges over the coming quarters. We have outlined the planned charges for full year 2013 on the following sector-related slides. Below total Sectors recorded a positive profit contribution of EUR 153 million, with a particularly favorable development at NSN. However, results from equity investments are expected to be volatile in coming quarters, mostly due to ongoing restructuring at NSN, like the already announced site closure and divestitures in the coming quarters. Income from continuing operations is just shy of the previous year due to a higher tax rate, while earnings per share improved to EUR 1.52 on a reduced number of shares as a result of last year's share buyback.

After the extraordinary strong free cash flow at the end of fiscal 2012, we saw an expected swing back in fiscal Q1 where we recorded the substantial buildup in net operating working capital and smaller contributions from customer prepayments. This led to a negative free cash flow of EUR 1.4 billion in the current quarter.

We achieved a return on capital employed of 16.7%, within the targeted range of our One Siemens framework.

As discussed during Q4, a key lever of Siemens 2014 is focusing our portfolio where we made good progress. First, we closed the acquisition of LMS International, a Belgian software company, in early January 2013. And during the Capital Market Day's Industry at the Hanover Fair in April, we will give you an in-depth view on our well-established capabilities in industrial software design and simulation capabilities. Second, we signed the acquisition of Invensys Rail to further strengthen our Rail Automation business. And third, we have started the divestment process for the recently announced disposal of our water treatment, postal automation and baggage handling businesses. All of them are currently still reported in continued operations. For the solar activities, which are currently held in discontinued operations, we had to record a further loss of EUR 150 million this quarter mainly due to EUR 115 million pretax impairment charges, mostly as a result of ongoing challenges related to a major project in Spain.

Finally, as you know, in today's Annual General Meeting, we will ask for approval from our shareholders to spin off OSRAM with an underlying margin of just over 7% positive free cash flow development based on tight asset management and delivering on their transformation activities. OSRAM had a good start into this fiscal year. Growth, especially in the office semiconductor market, offset some revenue weaknesses in general lighting.

Let's have a look at some key developments in each of the sectors. First sector, Energy. The book-to-bill ratio in Energy is back at a very healthy 1.13. Orders were down 3% mainly due to a sharp decline in the U.S. wind business and more selective order intake in the transmission business. Fossil order intake was up significantly by 16% due to a number of large solution and service orders, such as Lausward in Germany. Some of the project awards were earlier than expected. So we will see some normalization during the next quarter. First quarter revenue was stable on the conversion from Energy's strong order backlog, with significant growth in the Americas and driven by an increase of 23% in the wind business, completing all wind farms ahead of the old BPC expiration. We are currently evaluating details and impact of the newly announced BPC scheme in U.S. based on the new trading event, start of construction until end of 2013. We are confident that we will see renewed interest from our customers in the U.S.

On profitability, Energy delivered a mixed picture. Fossil delivered a healthy 19.6% profit margin, continuing its excellent project execution in the solution business and the seasonally strong earnings contribution from the service business. Wind Power achieved 4.6% profitability through higher revenues and positive effects in connection with the settlement of a claim related to a major wind farm project in Europe. On the downside, Oil & Gas faced a sharp decline in profitability due in part to EUR 46 million in charges resulting from further Iran-related legal and regulatory matters. The impact of the sanctions may also affect the division's operational margin going forward. Power Transmission is executing on its restructuring program called Transform to Win and works through the grid connection projects to offshore wind farms. Profitability was held back by EUR 28 million in project charges related to these projects and the conversion of lower margin projects from the order backlog. As indicated in December, during the Capital Market Day, the Energy Sector expects transformation charges for the full year in the magnitude of EUR 300 million.

Let's move on to Healthcare, which proved once again the resilience of its business model with 1% order growth and excellent profitability. The business environment, especially in Europe and the U.S., remains challenging, while Asia, Australia showed robust growth. Main revenue growth driver was, again, China with a double-digit increase. Healthcare profitability saw a substantial improvement to underlying 16.8%, led by strong earnings from both the imaging and diagnostics business, both benefiting from a favorable business mix. Furthermore, Healthcare's cost position is improving from continued progress in executing Agenda 2013. In fiscal year 2013, Healthcare expects around EUR 80 million further charges as part of its Agenda 2013 being part of the overall Siemens 2014 numbers. The sector's innovation pipeline is well underway, and we received excellent feedback from our customers on our new products during the RSNA. The innovations covered high-end systems, such as new x-ray tubes and detector technologies for angiography systems that improved the minimally invasive therapy for coronary heart diseases, stroke and cancer. In addition, we introduced a number of economically attractive systems with good image quality, high process efficiency, both with relatively low overall operating cost.

Next, I want to highlight the key developments in sector Industry. The market environment for the short-cycle businesses was more challenging and impacted mainly the motion control business in Drive Technologies. Orders went down in the sector by 9%, somewhat overstated due to a recognition effect in the PLM business of Industry Automation year-on-year. Revenue in the sector was down 3% across both divisions, with lower revenues in Europe and Asia, while the Americas held up well, mostly due to decent demand in automotive and food and beverage factory buildup. Profitability in Industry Automation declined moderately by 40 basis points due to lower volume, while Drive Technologies lost 90 basis points, impacted by weaker demand for higher margin, short-cycle products and lower contributions from its renewable offerings, with the closing of the latest IA acquisition and the integration of LMS and the software business of Industry Automation has started. Industry expects around EUR 400 million further transformation charges as part of Siemens 2014.

And finally, sector Infrastructure & Cities faced a mixed quarter. Order volume for the sector declined by 9% due to substantially lower large rolling stock orders and tough comps. For comparison, we recorded a large high-speed train order in Russia in Q1 of fiscal 2012, and the Transportation & Logistics division posted a loss due to charges of EUR 116 million, mainly related to delays of the delivery of the high-speed trains. As in previous quarters, the revenue mix was less favorable due to lower margin associated with large, long-term contracts from prior periods. The Power Grid Solution & Products business improved its margins by 90 basis points due to successful implementation of productivity measures in the low and medium voltage business and better product mix. Building Technologies achieved a solid profit margin of 6.6% on stable revenue, an improvement of 40 basis points year-on-year. For fiscal 2013, sector Infrastructure & City expects around EUR 240 million transformation charges as part of Siemens 2014. Below the Total Sector line, I would like to highlight the consistent strong result from SFS, generating EUR 117 million in profit on a stable asset base of EUR 17.4 billion.

Before moving to your questions, let me close with a brief closing remark on outlook. All sectors are working diligently on implementing Siemens 2014 and we will see a ramp-up of transformation charges and productivity gains over the coming quarters. As indicated in November, we will give you an in-depth status on the progress with the half year results. And the sectors will give you a detailed specifics on their targets during their respective Capital Market Days.

To sum it up, after a solid first quarter, we are well on track to deliver on our outlook for fiscal 2013. And with that, I would like to hand over to Joe, and I apologize that I have to now leave the conference.

Mariel von Drathen

Thank you, Peter. With that, we would like to open the Q&A session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Ben Uglow from Morgan Stanley.

Ben Uglow - Morgan Stanley, Research Division

A couple of questions. First of all, on the short-cycle businesses and particularly Industry Automation, I was trying to get a sense -- I mean, I see where the orders are, down roughly 12% year-over-year and sequentially down about 9%. But what I'm curious to understand, Joe, just in a qualitative sense, when you look at that business and maybe a little bit of [indiscernible] as well, do you get the sense that the end market demand is stabilizing? And can you give us a sense of what happened during the quarter, particularly in the big markets like Europe and, obviously, China? So that was question number one. Question number two, I mean, what an unexpected surprise to see a EUR 51 million profit from NSN below the line. Can you give us a sense of what is driving the improvement there? Is it simply cost reduction? Or is the pricing in the end market a little bit better? And how sustainable is this situation within NSN? And does it at all change your ability or your desire to, at some point, offload the asset?

Josef Kaeser

Maybe if we basically start the answer in the question of Ben, let me maybe summarize the way I've seen the Q1 developing. We believe, overall, it's been quite an uneventful quarter, which we like at this time because, obviously, there is some uncertainty out there and we are overall satisfied with the quarter, and there have been quite a series of excellent achievements if you just look about fossil, Industry Automation and also imaging. We have also to recognize there are areas where we need to step up our efforts. We've been somewhat slow on the transformation charges, which in a way would suggest that we are also slow in ramping up the productivity, which, as a matter of fact, is not true. As many of you know that Siemens conservatively book the charges mostly only if there's an agreement with the brokers' representatives. So one should not assume that the slow start of transformatory charges would suggest any delay in our efforts to step up productivity and cost out. Now obviously, we do know that there are some areas where management will be focusing on since they continue to trend unfavorably. That is the transmission area. That's the grid access in the North Sea. There is some challenges in solar. And obviously, we deal with the trains. And as I said, in a summary, we are satisfied with the quarter and we work diligently on improving our profitability as we move along. Now Ben, let me come back to your questions on the short-cycle environment, where -- what do we see? There are 3 areas which we look at, that's China, that's the United States and that's Europe and predominantly in the German environment, that we do see toolmaking and automotive working from a very high level. And we do not expect that high level to increase. It's actually more a downward trend slightly in Germany and also in the northern part of Italy in the toolmaking environment. So that's where, in a way, also some weakness has been shown in terms of bookings in Industry Automation. So United States is still pretty strong. We do expect that to continue. And now the question really remains, when will China kick in and provide some necessary relief and growth by year end. If you look at China, we do see some signs of encouragement, especially in the CPU environment of Industry Automation, which would actually suggest that manufacturing activity picks up. But then we also do see that there is still some volatility in the sell-through from this sell-in to end market sellout. So it remains quite an area of focus as we talk about China. On NSN and obviously, it's true we've seen decent profit and the majority of that profit has its root cause by the significant restructuring, which NSN has been going through. Remember, we -- NSN announced a job cut of 17,000 people. More than 11,000 of that have already been leaving the company. So there is quite the cost reduction here, which also drives profitability. By the same token, I have to say that the focus -- NSN now is providing towards mobile growth and -- also helps the mix because these low-margin value-add services have been pretty much cut down and that will also provide a decent mix improvement. So is that sustainable? Well, I mean, the overall market conditions in that area have not changed. It is a complicated market for both the operator as well as the OEM. NSN's got the window now because they've been ahead of the curve in terms of cost reduction, and this is what NSN needs to use to foster its position.

Operator

We will take our next question from Andreas Willi from JPMorgan.

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

Joe and Mariel, 2 questions please. The first one on imaging in terms of the order trends there, obviously, you have some -- you're exiting some businesses overall in health care and have some other items in there. Maybe you could give us some indication what the order trends were just in the imaging business and how you expect that to develop in '13. And the second question on transmission, ABB has kind of more formally announced that they are going to exit some -- basically the lower-margin contracting businesses and -- because there is just not enough margin in these businesses anymore. What should we expect from Siemens in terms of kind of the impact from being more selective? What's kind of the amount of revenues you could lose while you improve profitability in that business?

Josef Kaeser

Thanks, Andreas. On imaging, health care, I mean, obviously, we are very satisfied with the performance especially in that division. If we look at orders and revenues, I would not be too surprised if we see another strong quarter in fiscal Q2, the reason being that the division is highly competitive in terms of its offering. Secondly, the China strengths, which the division has been building up years ago by local design and local manufacturing, now is bearing fruit. We continue to see a very robust growth in China and associated economies in the region on the back of an extremely weak order intake environment in Europe, especially in Germany. So that's what we see in health care. And as I said, we like what we see in imaging compared to what we have achieved in Q1, and we'd also like to see -- we also like what we see in terms of our competitive behavior in the space. This is somewhat different if it comes to transmission. Some of you might have heard me say that we believe -- or I believe that transmission will not be a great place to be for several quarters in a row. That, first of all, has got to do with our challenges in the wind grid access in the North Sea, where we are operating at, obviously, gross margin 0. So that will dilute earnings as we move along until the orders are being fully finished. And secondly, there is a lot of overcapacity in the transformer environment, predominantly in the distribution transformer environment. And the pricing issues continue also in the substation environment. So that's a complicated space. We like the announcement of the market leader to look into pricing and if this pricing would be a feasible option and the market accepted that Siemens, certainly, would not be in the way to get more profitable orders rather than many orders. So profitability is here in the focus. And the top line growth, at this point in time, has got second priority. The transmission division needs to fix its challenges, which we have in projects, and then also make sure that there is enough consolidation in the transformer environment. And that's what we see and that's what we do.

Mariel von Drathen

Thank you, Joe.

Operator

And we'll take our next question from Mark Troman from Bank of America Merrill Lynch.

Mark Troman - BofA Merrill Lynch, Research Division

Joe…

[Technical Difficulty]

Just following up on -- sorry, 3 short questions, please. Just following up on Andreas' question on the health care. If we look through 2013, Joe, how do you see the market in U.S. and Europe? I mean, Europe's obviously been a bit weaker, U.S. as well, I guess, due to some regulatory uncertainties and, I guess, the fiscal cliff-type effects. How do you see that develop? Do you see a pickup in the second half? Or is it fairly subdued through the year? That's question number one. Question number two, on Siemens 2014, that's obviously ramping up, would you expect to get material benefits in the fiscal year '13? Or is this really all about delivery to the margin target in '14? So I guess, how soon should we expect to see some noticeable benefits from the program you're implementing? And finally, on cash flow, we all know that it was extremely strong in Q4, EUR 2.5 billion, EUR 2.6 billion of working capital build. Was that what you expected? Or is there some issue there that needs to be addressed?

Josef Kaeser

Thank you, Mark. As you have heard, I've been talking about imaging earlier when Andreas was asking the question and that imaging is supposed to continue to be strong in the Asian environment. On the U.S., I would say it's kind of neutral. And Europe and Germany remain to be weak also during the course of '13. Overall, we do expect some growth here, some modest growth. As I said, I would expect Q2 to be strong. And once we have that, we'll take it from there because as you say, there is some regulatory matters going on especially in the single biggest health care market in the world. But then again, with all due respect, the world is more than the United States and we are heavily betting -- continue to heavily bet our imaging and health care strategy also on the emerging economies, where people and population grows every day. On the Siemens 2014, we obviously do expect -- we do expect savings also to materialize already during the course of 2013. And that's almost solely related to the fact that there is purchasing and procurement savings also in 2013, which, in parts, are already coming in as we speak. We do not expect major savings from the transformatory elements. As you know, it's supposed to be EUR 1 billion savings overall in the value-add-related space. That's mostly in terms of savings that mostly will happen in 2014 as a result of the charges we expect in 2013. That's -- as I also said earlier, that's got to be in the focus of the attention to bring in the charges quickly and free up the way for the savings. On free cash flow, I mean, obviously, I've been flacking [ph] at the fact that we do expect a very weak fiscal Q1 since about EUR 800 million of the heavy free cash flow in Q4 was expected for Q1. So overall, it is a -- quite a mediocre cash flow, but it doesn't fully concern me at this time. And I would expect Q2 to do most of the catch-up, which we have lost in fiscal Q1.

Operator

We'll take our next question from Peter Reilly from Deutsche Bank London.

Peter Reilly - Deutsche Bank AG, Research Division

I've got 2 questions, please. Can you give us some more information on what's happening in Transportation & Logistics? The scale of the charge for high-speed train, I think, was higher than you were indicating back in December. And also, if you could let us know what's happening with ICx, whether that program is on track, given it's a large part of the backlog. And then secondly, in terms of the charges, you've indicated it on a sector basis and I was surprised to see that Industry A, probably the best performing sector, has got the highest charge and Infrastructure & Cities has got what I thought was a surprisingly small charge. So maybe you can give us some indication of how come you're spending less than maybe you might have done on one of the poorer performing sectors?

Josef Kaeser

On transportation, I mean, the charges, if I remember correctly, were kind of like the -- immaterial for the company but obviously still in high-double digit million environment. Now we ended up with EUR 116 million for the high-speed environment, mostly, obviously, the German ICE delay. We have reached an agreement on how to go about the delays with our customer and also the regulator. So people are now in agreement what needs to be done. And so there is a plan, and people are executing diligently on that plan. The situation on this high-speed ICE is reasonably complex due to the fact that the regulator is not working from a predefined spec, but more a next-post release on the train. But as I said, we're working on it. And at this point in time, we believe that the execution can be done a decent way. Now on the charges, obviously Industry having quite a decent number and that's got to do with the fact that Industry has got by far the biggest amount of production sites in the world and also, by far, the biggest amount of production sites in Europe, which obviously has got a structural challenge to fix. So therefore, there are quite a number of charges in Industry. I&C, if you look at the structure of the business, it's about Smart Grid and that's mostly software. It's about trains, which is more an execution topic than any consolidation matter at this point in time because the order book is full. So it's not about adjusting the capacity to a lower order book. It's more about executing what has been planned in the first place. And the third topic, obviously being mid and low voltage, and that's predominantly the area where you can expect most of those charges happening as we move along.

Peter Reilly - Deutsche Bank AG, Research Division

And ICx, is ICx on track?

Josef Kaeser

Well, ICx, at this point in time, is EUR 3.7 billion backlog, where we will be starting delivering -- starting to deliver in a few years from now. So at this point in time, everything is track -- is on track as it relates to ICx. But then again, we first need to do the first step, and that's delivering the ICE and the Eurostar. And then in the third, we have the ICx. But generally, I just want to make that clear, it's all high-speed trains based on the same platform, ICE, Eurostar and ICx. So if ICE doesn't work, there is a similar challenge to Eurostar. And if that doesn't work, there would be a similar topic to ICx. So we've just got to focus on this matter very diligently and, obviously, work hard and concentrate it to make it -- to fix it.

Operator

We'll take our next question from Martin Prozesky from Sanford Bernstein.

Martin Prozesky - Sanford C. Bernstein & Co., LLC., Research Division

I have just 3 quick questions, please. The first on the guidance for financial '13, the EUR 4.5 billion to EUR 5 billion net income from continuing, can you just give us a sense -- in the business, in terms of a EUR 1 billion charge, do you have any further provision for business-related charges, such as we've seen at Deutsche Bahn, Iran, North Sea, in any of the remaining divisional businesses, current expected charges or future potential charges? Just give us a sense for that. And then in the -- the fact that it's a net income on ongoing businesses' guidance, what is your expectation for the discontinued? I mean, last year, it was obviously a big negative number given OSRAM. With solar in there, the logistics business moving in there, what's the guidance for the discontinued? Then second one, on the free cash flow, thanks for the comments before, I just want to understand. The payables have changed. I mean, the swing we saw of EUR 1.5 billion, is the biggest in a long time. Can you give us a bit more color on what happened in payables? And then lastly, within the divisional businesses, in Oil & Gas, the 5.7% underlying margin was the weakest, I think, in -- since we've moved to this divisional reporting structure. I see there was some compliance-related cost, but what is the -- kind of the reasonable expected run rate for this division now?

Josef Kaeser

All right, thank you very much. So on the guidance, which obviously stands for EUR 4.5 billion to EUR 5 billion at the midpoint, which kind of happens to be a comparable number for 2012, so there is no reason to readdress the matter. As you have seen, we have EUR 1.3 billion in the first quarter. If you take that one just by EUR 4 billion, you can see that we are still in the middle of the corridor to make it happen and so therefore, there is no reason at this time to add any more color or flavor to the annual guidance. Flat revenues, flat profit, that's just about the run rate and that's what we have achieved in Q1. And we just need to continue to work on our plans and then the guidance will be fine. If there is no massive and not a severe material change in the short-cycle environment, which obviously would change the world, but we'll talk about it once we see it and not now. On the discontinued operations, we obviously do have OSRAM as a major impact and that is -- also, the solar business, that's a major impact. Everything else is more immaterial. Now on solar, we obviously have quite a number of issues, which we need to deal with. And that's mostly related to a big project in Spain, which does not quite perform and develop the way we would have expected it to. That also provoked another EUR 115 million of write-offs, mostly long-lived assets, and also provided a maturity of the losses on the operational level. And that continues to be in focus, and it continues to be a complicated matter. So therefore, we -- I would not be too surprised if there were more losses coming along, associated with that project at a different time. However, we booked what we could reasonably book. On the OSRAM matter, as you have seen, it's been a positive impact in Q1. You also should know that if there was a gain from this spin-off with OSRAM, that would also be booked under discontinued operation. So there should not be too much negative on the matter but generally, we do expect solar to remain complicated. And OSRAM, if all plans go through in today's AGM, we, as well, may see an exit pretty soon, maybe even associated with some aspects on the kind of book value versus the value if we spin it off. Free cash flow, as I said earlier, I think it was Mark, did not really catch us by surprise even though it was an unfavorable development. And we expect the majority of that negative to be picked up in fiscal Q2. On the payables in particular, I mean, look, fiscal Q1 -- for us, it's fiscal Q1. For both of our suppliers, it's fiscal Q4. So there is some seasonality here. And with that, I would rather leave it and move on to Oil & Gas. Now Oil & Gas, obviously, is at the centerpiece of the matters we have been dealing with related to Iran. There, we already took a change in accounting as of 9/30/2012 and then also now had to kind of book another 40 -- close to EUR 46 million associated with the sanctions in Iran. So that will explain the reported number. Now if you go on the underlying performance of Oil & Gas, one needs to know that the Oil & Gas division is about 60% on industrial turbines and about 40% on process industries. Oil & Gas, obviously, is having a major part of that, being this business, with that country. And we do see some seasonal weakness on the industrial turbine space that has all the cost, the underlying temporary weakness in the division.

Operator

We'll take our next question from James Moore from Redburn Partners.

James Moore - Redburn Partners LLP, Research Division

It's James at Redburn. I've got 3 questions, if I could. I wonder if you could help us a bit more on the savings by sector and the timing. I think at the Energy Capital Markets Day, you talked about EUR 3.2 billion of the EUR 6 billion productivity savings coming out of Energy. I wondered if you could break down the other EUR 2.8 billion across the other 3 sectors. So just give us some sense on the timing as to how these numbers come in '13 versus '14. Secondly, the fossil orders have had a second good quarter. I wonder if that's a trend or just an aberration and how you see the outlook for the power gen demand environment. And thirdly, you talked a bit about the underlying margin in NSN, but the charges were perhaps a bit higher than we might have expected. Is that rate of charge going to carry on? Can you give us a sense of what the charge looks like in NSN for the coming year?

Josef Kaeser

Why don't we start with NSN? I mean, look, as you know, this is a -- it's a stand-alone company. It's fully consolidated into the books. So if Nokia and -- the agreement is that Nokia will also report forward-looking guidance, as well as underlying results. We, as a shareholder, are reasonably satisfied with the development of our Q1 and fiscal Q4 last year on NSN, and we continue to be very focused about doing the best -- doing actions which are in the best interest of the Siemens shareholders, that much through NSN. Fossil had quite a decent quarter, really, in terms of margin, predominantly resulting from the fact that we had a very, very -- even seasonally very high impact on fossil services. So from a time window, there was a lot of service going on in that particular time frame, which obviously helped the margin. So generally, we reiterate our guidance that the fossil margins could deteriorate down to 16-ish, 17-ish from what we have achieved in Q1 and also in last year. So that continues to be our assumption. If we deliver better, then we obviously take that also. But generally, one should assume there is some underlying -- there will be some deterioration on margins, down to 250, 300 basis points from the level which we had in 2012 and also in Q1. On the savings for 2014, the way we have been setting up the communication was that we will have our sectors report on their [indiscernible], their assumptions for market, pricing, cost increases, as well as productivity increases when they talk about their business in the Capital Market Day. Energy has done that, with examples on how this breaks down to divisions. Industry will do that in April when we meet at the Hanover Fair, and they will lay out their plans on how they get the savings done and what margins they are going to achieve. And then comes ICE. And health care, pretty much, is done with the advent of 2013. So please bear with me that if we do not -- now from corporate sites, do not release any savings numbers, that will be done when the sectors and the division talk about their actions and of how they achieve it.

James Moore - Redburn Partners LLP, Research Division

Joe, can I just come back on the -- on fossil? The question was about orders and demand more than margins, but that you've had 2 good quarters of orders and demand. Do you have a view on the current demand outlook in fossil? Is it better as the numbers might suggest?

Josef Kaeser

Well, as you said, I mean, Q1 was great. It's a 16% underlying order growth. That was already taking into account some orders, which were expected in Q2. So I would not be too surprised if there was a normalization for further intake in fiscal Q2 kind of compensating for the strong demand in fiscal Q1. So generally, underlying, we do not see any top line growth on fossil in fiscal 2013 based on the assumptions that you have in the United States, as well as in Europe.

Mariel von Drathen

Thank you.

Operator

We'll take our next question from Gael de Bray from Société Générale.

Gael de Bray - Societe Generale Cross Asset Research

Two questions, please. Could you first elaborate on the rationale behind the creation of the power grid division a couple of years ago and the rationale behind the combination of the low voltage and the medium voltage businesses. What kind of synergies and what kind of complementarities are you seeing in such a combination? I'm obviously trying to judge how core the low voltage business is for the group. And if you could give us an idea on the 2 businesses' respective margins in Q1, that would be great. The second question relates to Drive Technologies. Drive Tech's margins have dropped to new historical lows in Q1, and there seems to be a combination of reduced demand in short-cycle businesses on one hand and also good results in long-cycle businesses on the other hand. So what's the risk now that long-cycle businesses within Drive Tech further deteriorate in the coming quarters and pushing margins further down?

Josef Kaeser

Gael, thanks for the questions. On the -- I assume if you talk about low voltage, mid voltage and Smart Grid, I assume you talk about the I&C sector. I mean, look, we have been combining assets in the company and put it in the city and infrastructure because we wanted, first of all, to fix the product base. And then secondly, once we have done that, also by focusing the spectrum there, then we are going to add capabilities the company has in projects, in financing, in integration to make meaningful service offerings for urban centers. So that's the strategy, and there will be more to that when Roland Busch gives his presentation in the divisions on the sector. And that's what we are doing. And you might have seen from our actions in Q4 in fiscal Q1 that the first priority there is focusing the portfolio towards having a strong head. And one area where we have been focusing was Rail Automation, and that's obviously something which we like. Another area of focusing is the space of Smart Grid mid-voltage services. Now we also do believe we have quite a decent footprint especially on energy automation. There, we are very, very good at not only by market penetration, but also by margins. So those are the 2 focus areas in that space. Then obviously, you have been addressing the matter of low voltage versus mid voltage. I mean, obviously, I understand the background of the question because mid voltage comes from the grid to the basement and then starts low voltage. So there is no real evidence of synergies as far as technology is concerned. On the other hand though, if you look at it the way from the product side versus the solution side, where we have elements of product and solutions in both business units, you can clearly see that by combining low- and mid-voltage product, there is a lot of synergy in the manufacturing environment, especially if you look at MCPs, ACPs and MCCPs, quite a number of commonalities in the product space, and that's why we have been putting them together. And then we also had a business unit, which then takes care of the solution side. And doing solution business, it's got the same pattern, the same capabilities, the same integrational skills on both low voltage, as well as mid voltage. So that's been the rationale we are putting those together into one division and have been then separating them into products and solutions. So on DT, I mean, obviously, the diamond in the rough, so to speak, on the DT business is the motion control. If I talk about diamonds, the CFO always looks into the profitability, first and foremost. And so that's actually the area where we will be determining how we achieve our goals in '13. So motion control has been somewhat slow in fiscal Q1, and that's been also driving the deterioration of profitability, along the side that we have ongoing capacity adjustments to make on mechanical drives due to the fact that some of those mechanical drives are not only much in demand but also are approaching end of life due to the fact that the wind turbines go more and more on gearless. So that's been -- that's the story on Drive Technologies and that's also -- those areas are also being addressed as part of the transformatory charges, which we have been reserving for in Industry.

Operator

And we'll take our next question from Simon Toennessen from Crédit Suisse.

Simon Toennessen - Crédit Suisse AG, Research Division

My first question is just on pricing in general, whether you can give us any indications of how that developed throughout the divisions in Q1? It was of particular interest in health care. You flagged, in the past, around 3% pricing pressure in health care. Listening to GE last Friday, they said less than 2% in their most recent quarters. So if you could just elaborate a bit on that, what you've seen throughout Q1. And the second question is on your transport and logistics business. One of your European competitor reports relatively strong order growth and book-to-bill ratios in transport, and Siemens' order book is down 30% in this division. So are you losing quite a bit of market share? You flagged the large contracts on the call but -- so maybe just a bit more color around that. And lastly, on the charges, and I don't know whether you can give any indication of that, possibly not about the Deutsche Bahn delay, but whether you expect the sanctions in Iran and the transmission costs to continue off sort of similar level that you've seen in Q1.

Josef Kaeser

Thanks, Simon. As far as the pricing overall is concerned, there is not really much change as to what we have been laying out as assumptions for the year during our November analyst conference. So we said it's going to be about 2.5%, 3-ish percent, health care being more on the upper level of 3 point and change. And it hasn't really changed. I mean, obviously, if competitors do have different mix, different pricing, ultrasound versus imaging or CT versus MR, it's hard for us to analyze. We are not going to sell our price, which you can easily see on our margins. So we are very satisfied with the business conditions in health care and in imaging if it comes to the large-ticket items. There is still some work to do on the smaller ticket items, obviously, and that's been our focus. And you also have seen some recent management changes on that one, and we step up our efforts in the areas of smaller ticket items, such as ultrasound and the likes. Now on the transport and logistics -- I mean, obviously, transport and logistics, that's an area which is all about executing and making money and not about booking another set of orders, which then provides some work to do on executing. So the focus is deliver on productivity and deliver on margin, and then we'll take it from there, very clear, very crisp, just got different priorities here than growth. On the charges, for what we can see at this point in time, I would not expect any material matters happening on the Iran topic. So that should be pretty much covered for the year. How -- the question how we deal with the fact that at some point in time there might be a change on the regulatory sanctions and what that would mean for resuming orders, deliveries, I mean, that's just a flak in the long term but obviously now not something which we need to deal with at this time. So don't expect any further charges related to Iran and then, obviously, related to Oil & Gas if it comes to that country. I'm a bit more soft on 2 other topics. That's transmission and solar: solar obviously being in the discontinued but still has got to be paid at some point; transmission not so much about the execution itself and the preparation, which we have done to fulfill the order. It's more about the fact that those grid access projects in the North Sea are operating, in the meantime, at gross margin 0. So whenever you've got gross margin 0, which I don't need to tell you, that any little change from the assumption will automatically lead into a new charge if it's a southward trend. So at this point in time, we believe we put everything we could think of and which is overly probable. But there's got -- there's just got to be some uncertainty here based on the progress also of the completion of the project. The second topic also is similar. That's solar, which, as you know, is up for sale. We've been writing off all the long-lived assets. So there is not a single long-lived asset anywhere in the books, but there is still obviously the operating working capital and there is still the challenge to finish and operate and dispose of the project in Spain. So that's where we are and take it from there.

Mariel von Drathen

Thank you, Joe. We're running a little bit out of time, and I do realize that there is still a number of people wanting to ask questions. I mean, please do understand that we have to run to the AGM very soon. I'll ask Joe, maybe you can take one last analyst's question and then we'll be calling the others as well today. And please do not hesitate to call us if you have any further questions.

Operator

We'll take our last question from Olivier Esnou from Exane.

Olivier Esnou - Exane BNP Paribas, Research Division

So can you give maybe some indication of restructuring charge for Q2? I just want to make sure it's ramping up well given Agenda '14 is quite a short time frame. Secondly, regarding disposal program, you've -- so now flagged the few assets that are up for sale, water, postal and logistics. What's happening there? Will you move them to discontinued? Or will they stay in the division? And how is that going to progress? Can you give some indication of the speed of action here?

Josef Kaeser

Olivier, on the transformatory charges, look, I mean, as I said earlier in the introductory remarks, it's been a bit slow in Q1, which really didn't bother me because, obviously, it's been further foreclosed enough to fit through year end. Secondly, we have quite a conservative way of booking the charges once we are done with the -- at least in the -- and for the most part done with the negotiations with the brokers' representatives. So it's important that we do see that progress going on, talking and having a dialogue to get to an agreement pretty soon. So obviously, it goes without saying that we need to significantly push that process forward in order to get the necessary savings in a timely way. And that will happen in the next quarters. On the disposal of the announced assets, as you know, we have announced the disposal of solar, of water, postal automation and the airport logistics. Solar has been -- already been moved to discontinued as of 9/30. We are currently working on the carve-out of the water business, as well as postal automation and the airport logistics. And depending on the progress of that carve-out, we will decide, first of all, whether or not to move them into discontinued. That's got to do with the fact how material it is and whether it's a stand-alone unit, which is not integrated into the business itself. So as of today, I would say it's highly likely that water will also be moved into discontinued operations in the next, maybe, couple of quarters. And on -- in far -- as far as the airport logistics and postal automation is concerned, the jury is still out on this one because we, first of all, need to focus on carving it out and find a good owner as quickly as possible. And the way we treat it in the balance sheet, honestly, is less relevant as compared to getting it to a new owner and move on with the business.

Mariel von Drathen

Thank you, Joe. Thank you to all of you for participating to today's call. And as I said, please do give us a call if you have any further questions. And with that, I will wish you all a good day. Thank you. Goodbye.

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. And once again, let me repeat the instant replay numbers. Participants in Germany can call the replay number +49-69-2222-2236, access code 7404972#. Participants in Europe can please call the replay number +44-203-427-0598, access code 7404972#. And participants in the United States, please call the replay number +1 (347) 366-9565, access code 7404972#. This replay service will be available for 48 hours. A recording of this conference call will also be available on Investor Relations section of the Siemens website. The website address is www.siemens.com/investorrelations. Thank you, ladies and gentlemen. You may now disconnect.

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