Siemens AG (SI)
March 20, 2013 4:50 am ET
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
Mark Troman - BofA Merrill Lynch, Research Division
Thank you very much. That was quick. That was quick, and thank you, also Mark, for the upgrade the day before yesterday. And we'll see how that is going to go this morning. Glad to be here. It's been a while that we've seen each other. And I guess, it's just about the right timing to talk and to communicate and to see what you think and what you ask. Obviously, before we start, this is the Safe Harbor statement. You should have already carefully been reading it and what it, in essence, says, as you know, is that the future is uncertain and this is always important if it comes to forecasts and the likes.
Ladies and gentlemen, if we look at Siemens, and I'm sure you all know them, if you look at them in terms of structural setup, that's a place you want to be at if you have a choice. It's good because we address the right markets. It's great because we follow the right trends, and it's good because we have the right products. So the incremental setup of this company is in the right space. And this company, if you really look at it all the way from the spectrum, this is an energy efficiency company. It goes all the way from energy exploitation, generation, transmission distribution and energy efficient use of those applications, be it in housing, in the manufacturing, being in mobility, infrastructure and last, but not least in health care. And we do not need to go on and on and on what this is all about. You know that, but this company is structurally set up to be a long-term success because we're in the right markets, we have the right know-how and in general, we also know what we are doing.
The way we have been running this company in terms of its financial framework, how we manage the company, this is set in our One Siemens financial framework. And that Siemens One financial framework basically discuss 3 major items: item number one, and that's important, that's the foundation, if you want. This is the aspiration of continuous improvement against the market. Continuous improvement against the market. Now obviously, this aspiration to outperform offers both an opportunity to catch up, and secondly, of course, also a direction of the company to create value over time.
The foundation of One Siemens, obviously, is in the middle of everything. This is capital efficient use of resources. And this is why we have been setting our return of capital employed into focus, into the center of our financial framework, and that is based on very robust margins. I do not want anyone in this company to focus on ROCE only on the back of very light margins. While it's about enumerators, it's about the numerators, and we do want to have robust margins. And those margins ought to be in the middle of what this industry is able to deliver. And we believe energy is between 10% and 15% over the cycle. That's what the profit pool is all about. Health care, 15% to 20%. That's probably -- that 15% to 20% EBITDA range in health care probably needs some revisit since we do believe that the market is more attractive in terms of margins as to what we have been setting ourselves up to achieve with the 15% to 20%. So if you look at the competitors' basket, if we look at the attractiveness of this market, I would actually expect that margin, and that aspiration band to move up towards the higher set of numbers.
Now obviously item number three on the One Siemens framework is about capital structure. Now why is that important? First of all, this is about efficient use of capital. And secondly, this is about what to expect as a shareholder going forward in terms of payout. You might have noticed that we have been increasing the payout ratio by combining dividend and also means of share buyback from 40% to 60%. So even though we have been lowering our threshold in terms of M&A, the investors can expect a solid payout in the neighborhood between 40% and 60% of the annual earnings. That's what the commitment is all about, and that's, ladies and gentlemen, what we also have been making good at in the past, and I'll come to that in a minute.
If you talk about capital structure, you might have noticed that Siemens has been taking quite an advantage out of an extremely favorable debt environment. We have been refinancing our debt into the long-term space. You can see that on the lower left here, that's the green bars that we have been tapping the financial markets. We've been going out for about EUR 3 billion of refinancing of debt. The average coupon, which we are going to pay on an average maturity of 11 years is 2.25%. And I guess that's a favorable and worthwhile condition to also tap the debt market. It also shows, ladies and gentlemen, it also shows the credibility of Siemens in terms of people believing that we can pay back our debt going forward.
Now obviously, if you look at this chart and that might be new in a way, not only is Siemens strategically well positioned as, I guess, we can all agree to, it also provides a very robust set of cash flow over time. If you look at the selected sources of cash, and I'm sure you have already noticed that this is not a full reconciliation of sources and uses of cash, but if you just take a minute and look at the selected sources of cash, this company has delivered EUR 44 billion, EUR 44 billion of gross operating free -- of gross operating cash flow from continuing operations in the last 5 years. EUR 44 billion, we unfortunately needed some EUR 4 billion of cash to take care of missed opportunities in a way, which is obviously project charges. But still, we also have been getting disposals -- proceeds from disposals in the framework of about EUR 16 billion -- of EUR 57 billion. EUR 57 billion of cash has been generated over the last 5 years. And that's why -- and that's why, ladies and gentlemen, this is a good business to be at. And it can be more, by stronger execution by more focus and also, of course, then by tighter management of the actions being taken going forward.
If you look at the selected uses of cash, and I have said this is not a comprehensive method because obviously, there was also change in working capital and other things on the uses of cash side, but still about EUR 15 billion has been distributed by -- to the shareholders by means of a share buyback and dividend in the last 5 years, EUR 15 billion. We have invested about EUR 30 billion into the business in the last 5 years. That also includes, of course, the receivables from financing activities, which mostly went to SFS. And talking about Siemens Financial Services, which obviously is SFS, this entity has the primary purpose of selecting the industrial businesses going forward by combining the financial logic, which SFS can provide by means of financing of projects; and the industrial logic, which is nothing but incremental orders, incremental gross margins by making the projects happen in terms of setting up the financing.
Now obviously, if you talk about charges and the missed opportunities, I would want to caution you about a couple of legacy projects, which are still underway and have not been yet completed in terms of projects, one obviously, being the high-speed train environment. You know that we've been struggling for quite some time to get the high-speed train not only out but -- to the customer, but also delivered in terms of software upgrades and other topics to manage. So I cannot rule out at this point in time, that those legacy projects will also cause further charges going forward. That also is true for the so called grid connection in the North Sea. You know that we've been building platforms, where we are going to connect all the wind products or series of wind products and get the power to land. That's been quite a struggle. We've been booking a series of charges already. And since now, those orders on the projects are being at gross margin 0, you just need to expect further risks going forward. And that might, of course, also be true for other areas. I can do that in a minute.
Now obviously, if you look at our recent performance on the One Siemens framework, which I have said is the financial framework for Siemens going forward. If you look at capital efficiency on the lower left, you can clearly tell that, obviously, a reduction of ROCE by 490 basis points from 2011 to '12 is not what we are going to accept going forward, and especially on the back of EUR 5 billion revenue growth. And that needs to change, and it's got to become better. And that's, ladies and gentlemen, why we have been setting up our Siemens 2014 program to get back on track that we used to be in 2009, 2010 and most parts of 2011.
In terms of capital structure, that's the lower left. You certainly have noticed that we have been doing an equity debt swap, financing and share buyback, taking advantage of a very, very favorable bond and debt environment. And I guess, you should be well aware that we intend to continue taking advantage of the circumstances we have at this point in time in the environment of debts and bonds.
Now talking about how do we get back to where we used to be, being a leading -- not only leading provider of products and services, but also a leading cash and margin provider as a company. This is the sole purpose of the Siemens 2014 program, supporting the One Siemens framework to perform at or above the industry's level. And so what is being needed by the program, first of all, we need a tighter grip to refocus the company on productivity. We enforce the actions top down, and we plan the actions and the measures bottom up. So there is a high commitment on the organization all the way down to the business units. And you will see a tight enforcement from the company and corporate to get it done.
We're very focused on the Siemens 2014 program. We're very focused. It's not about growth. This is not about markets. It's not about potential in the emerging economies. The sole focus of Siemens 2014 is nothing but addressing and tapping the self-help potential this company has. So this is all about area of influence and not so much about the area of concern. We address design to cost, we address OpEx efficiency, and we do very much address the reallocation of the company's manufacturing and engineering footprint to where demand happens. And demand happens always somewhere in the world. And you can be rest assured, ladies and gentlemen, Siemens has been already there where demand happens, we are going to focus our resources going forward.
Now obviously, based on our market expectations in terms of growth over the next 2 years, in terms of pricing pressure, in terms of cost inflation, based on those assumptions, we have been making over the course of 2 years in 2014, we expect a productivity of about EUR 6 billion gross to achieve a 12% sector profit by 2014. That's the assumption, and that's what we are focusing on. And that's, ladies and gentlemen, what we are going to make good, focusing on self-help potential of the company. Nothing else. It's not rocket science. It's all about execution. It's been done before, and it can be done again.
Now obviously, in order to get there, we have originally been planning for about EUR 1.5 billion on transformation charges, which is restructuring or write-off of assets, which are not being needed in a certain place in the company or in certain regions. That up to EUR 1.5 billion is likely going to be less in the neighborhood of EUR 1 billion to EUR 1.2 billion. And we are going to achieve the same savings. We are going to achieve the same savings based on less charges, as we have been assuming when we started the program.
And one of the major areas for a sustainable value creation and for sustainably reducing complexity, and I'll say this again, for sustainably reducing complexity, is not about lowering the amount of corporate surplus, this is about focusing the portfolio of the company, where we believe we can make a meaningful difference based on our strength. That, ladies and gentlemen, what the matter is all about. And it is important because if you look at the methods which went wrong in the last 6 to 8 quarters, and there have been a few, which went wrong and should not have gone wrong, would have done differently, we looked at that, and if we look at the root cause of those methods, this was not about lack of competency on project management. This was about taking on too much too quickly, and we did not finished on time or in the cost, and that is going to change. And that, ladies and gentlemen, is going to be supported by focusing the portfolio. And we've seen a few proof points already. We have been exiting solar, which was just about due. What we unfortunately see is that the solar environment is not only tough in terms of profitability and markets in general, it's a very, very tough market for sellers. So I could not rule out that the solar business will favor us for a while until we find a more favorable environment in terms of disposal.
Water treatment, postal automation and the airport handling is on track as we're carving out the business. It's been agreeing upon our business plans, so we know pretty much where we are going. There is a significant amount of interest on both postal automation as well as water. And we are very confident that this will going to grow to a new owner on time. So nothing new here. We are right on time. We are going to move on and execute as we have.
At OSRAM, same matter, we are not going to let some people who are just greedy for money be in our way of disposing the assets. We do plan currently to have this asset floated during the summer time frame, plus or minus a few months give or take. There are a few so called shareholders who would like to get some money out of us by settling a complaint and have been filing. But as you know, 98.2% of our shareholders have been agreed to transaction. And we are going to execute reliably in the best interest of the 98% of our shareholders, and that's what we are going to do. And we do believe that the OSRAM asset is a nice asset, which will make its way in the market.
Now talking about markets. Obviously, how do we see the markets in 2013 and '14 in the short term, what our expectations? Now obviously, if you go by data points, which all of us sometimes do, then all those data points are not really coherent. They're up and down, there is hope and there is disappointment. And this has been going on and on and on for quite some time. This is true for the United States. This is true for Germany, and it's, first and foremost, true for China. Now one way to look at data points, the other way to talk about -- to talk with our customers about what they see in their markets and what they believe they can buy and do with us together. So if we summarize those talks with our customers and kind of double check them with the data, so what we see in the United States is there is an absolute clear, absolute clear positive perspective on the United States with all the energy-related topics, but this will take time. This is nothing which we will be seeing in '13 and '14. It's going to come. All roads lead to gas. All roads lead from gas to a reindustrialization, not coming back from Mexico and China, which is naive, but building up new value add in the United States. And we, ladies and gentlemen, will be there because we know how to automate manufacturing environment.
Now in the short term, we do believe that the housing market will give some decent tailwind for the U.S. economy to come as long as the Fed continues to support the housing environment. This is a good indicator, and there is some adjacent opportunities also for Siemens associated with that one.
Eurozone, not really structural change. Mr. Draghi's foot is, as you know, is holding. And that will lead to the fact that Germany remains to be strong on the high level with limited growth opportunities. Limited growth opportunities, but we'll stay on the high level. We feel -- do see robust exports to the rest of the world based on high innovation and manufacturing and engineering capabilities, also so-called German Mittelstand on the one hand side, but also on the car and automotive and associated industries on the other hand.
China. China has been an unfulfilled promise in the short term. We've been hoping that we see some stronger comeback right after Chinese New Year. We do see today that China in the short term, that could be fiscal Q2 and fiscal Q3, maybe reaching into fiscal Q4, has actually more spots of weakness rather than spots of strength. And that's predominantly true for the so-called short-cycle environment. So I would not be too surprised if we do see some short-term downside of industrial automation, motion control and some parts of rail technology. Short term, fiscal Q2, fiscal Q3, some pockets of weakness in the Chinese environment. And that, I guess, is something just to consider.
Now obviously if you talk to the long term, if you talk to the long-term, mid-term outlook, long-term, this is the place to be. We continue our conviction that China, if it comes to manufacturing, industrial environment, if it comes to energy, that's the place to be. This is where growth is going to resume, and it's going to be both. It's going to be the topic of energy generation and transmission. We will see more demand on high-voltage transportation. And we are especially going to see a very, very robust demand on industrial automation.
So why is that? Why is that? And it's going to be actually 3 topics which will drive that. And that could be a fundamental upswing in China in the next couple of years to come. First is it's the cost topic in China. Inflation for labor is high. There are not too many skilled people on manufacturing. There is a lot of people but not too many which have the right skills in place. And last, but not least, ladies and gentlemen, if you look at the 5-year plan, which China has issued and which they are going to execute on and which they are sure about, this is about high-end manufacturing. You might have read the latest news on where they are going to go. This is about aerospace, and that is about automotive industry. Now if you're going to aerospace, if you're going to automotive industry, those are industries we can't allow to fail. This is not an industry where you have 5%, 6%, 7%, 8% of yield loss like a phone, like in telephone. This is about 5 parts per million. And if you have to secure 5 parts per million automotive and aerospace out of all these reasons [ph], this is about quality, that's about Six Sigma, and that's about automation. There is no way around to secure quality on those markets in the aerospace and automotive if you don't have automated processes in your factory. And ladies and gentlemen, this is what Siemens is good at. This is what Siemens has been developing over almost a decade in China. We are in more than 60 cities in China already established. We have a sound distribution network, and this is what we are going to take advantage from in the mid-term. We are very, very confident that this is about Siemens and that we do have a leading edge on the recovery and the build-up of Chinese high-end manufacturing. That's also true, of course, and has been true almost for a decade that Siemens is strong in health care in China.
Now China is one of the most prominent -- Siemens China is one of the most prominent exporters of health care equipment all across the world. We've been growing in China double-digit percentages for several years in a row and counting. You can see it in Q1, we expect that to see in Q2, and we are going to target that also for 2014. That's the sweet spot in health care prospectus of industrial automation, and high-end manufacturing will automatically tie Siemens to the growth of that.
So if I sum it up, 2013 will still be impacted by refocusing for both the legacy projects like rail, like grid access and also some continued challenges in solar in association with the exit. Short-cycle business will be showing some areas of weakness in fiscal Q2 and likely Q3. 2014 is all about executing on Siemens 2014. That's what the message is all about, focusing on basket of self-help potential. We don't need the market. We don't need weak competitors. We don't need help from our customers. All we do is executing on what we can do on our own. That's about design to cost. That's about focusing the portfolio. That's about executing on a more limited number of projects, and that's about bringing OpEx efficiency to where it used to be in 2009, '10 and parts of '11. And that, ladies and gentlemen, this portfolio of focus is the single most important topic this company to execute on because this is sustainable in both products as well as in regions. And then, ladies and gentlemen, this Siemens -- One Siemens aspiration to perform or outperform the markets we are at remains in place. So that's what we are going after, and that's what the management commitment is all about. Thank you very much.
Mark Troman - BofA Merrill Lynch, Research Division
We will open it up for Q&A. We have a shy audience at the moment, Joe. No, we've got [indiscernible].
Can you please remind us of the length of the projects that are a problem and whether you can -- they will finish for this year, so that you can have peace of mind that next year those won't be a problem? Yes, whether are the problem contracts or the areas of -- that problems that may produce charges this year, whether they finish this year. So that would be question number one. Number two, whether in your bridge, the pricing equation, the 2.5 to 3, whether you see that materializing so far in your orders, that you will see those price this year and you probably start the feeling for next year is actually an area of upside. And an update, please, on the NSN effort you're doing.
Yes. So why don't we start on those legacy projects? I mean, obviously, the high-speed rail environment, as well as the grid connection in the North Sea, those 2 are a series of projects, which we have been writing down the gross margin to 0 already and took some incremental charges. So since those projects now are working on gross margin 0, every little distraction from what the trend process looks like will, obviously, directly go into the P&L. And that's been what I would like to caution you, so we've got just 0 cushion to any unforeseen matters which might be along the way. So if we have seen them, we would have booked them obviously. All I'm saying is if we are less than halfway through with completing the projects at a gross margin 0, it's just a natural thing to caution an audience that this could also have some incremental as we move along to full completion.
When are you due to complete them so that the uncertainty is over?
That could go all the way to 2015, with some rail projects are due out in '15, and it's also true for the grid connection we are shipping 2 out of the 4 major platforms during summer 2013, which could be July, August, September, depending on weather conditions. There's obviously, weather matters in the North Sea. And there are some very tight specifics to that weather conditions. So there are some areas, which we do not fully have in our hands. And that's why I want to caution you about those potential legacy matters which will accompany us for a while. So that's about grid and trains, high-speed trains. The second topic I was cautioning was the topic of solar. This is not exactly a market where you have still assets in a very due time frame. So we just need to see what the options are. Meaningless to do nothing. Makes all the sense in the world to everything to get that matter done, but it could take longer than originally expected. They could also take different courses of actions to get the matter done, right? There is no change with what you want to do. There might be some changes on the way to get there. Now NSN, and I'm hearing and reading a lot of speculation about NSN. Well, in fact, the good news is that this company has been doing its restructuring well, been focusing on mobile broadband, that's the sweet spot. This is about the LTE and fourth-generation networks. That did actually reduce about 22,000 people in the organization, and that led to the fact that NSN is just about EUR 800 million to EUR 900 million of operating EBITDA to date, 2012, operating EBITDA. Now that's the good news. So it's been quite successfully restructured. It now operates out of a relative area of strength against some other competitors, which have not done their job yet, on the other hand, plays in the industry but has not gotten any better. But the opportunity to clinch that #3 spot, which we believe will eventually be up for grabs now that these 2 other jobs, which are taken, obviously has become better. Now what does that mean for Siemens -- so that's good for NSN. What does that mean for Siemens? I mean, I made that clear all the time. This is not the business that we have any -- any aspiration to stay. We have been divesting of it 6 years ago. In the way we have been doing it, it went more bumpy than we thought. And we are going to actively help NSN to find a better place in the telecommunication world. Now many people speculate about what does this mean that is the first term of shareholder agreement is running out, becomes due in April. So first of all, nothing which I view remains in place because it doesn't go anywhere, right? Secondly though, beginning of April, either party -- under the shareholder agreement, either party of shareholders can act unilaterally to dispose of its own holdings. And that's always what it is. And I do believe that 2013 will be the time for Siemens to help NSN to move into better space. The pricing -- look, I mean, 2012 was about 2% to 2.3% average pricing. We have been -- gotten a bit more cautious about our market assumptions for '13 and '14 on average. Now obviously, those pricing assumptions what you see here are not that much out of the way because we are also basing our assumptions on pricing on a backlog, which is about EUR 100 billion. And about EUR 40 billion of that EUR 100 billion are due out to become revenue in 2013. So we pretty much know what the pricing is all about in '13. And it's kind of on the lower range of that -- on the lower end of that range. So I would not -- and I said that earlier, I would not speculate on any favorable market condition. I want the organization to perform based on those more adverse market conditions because if the markets become better, then we have an upside. And that's what I said earlier. This company needs to get this 12% done based on self-help potential. If the markets are better, if competitors become more reasonable about pricing, all fine, but we focus on what we can do. And then we should be fine.
I've been looking at Siemens for over 2 decades, and it's been a restructuring story for over 2 decades. If you like, Argentina, it's been the promised emerging markets for the last 100 years. So the track record is pretty poor. Why should we believe you this time?
Well, because the company has proven from 2008 to mid-2011 that we can do much better than being a continuous unfulfilled promise. So we've done that before. We got somewhat distracted in '11 and '12 by trying to do too much too quickly out of good reasons, but it failed. We might have produced some decent results, but it should have been the best results in history and not the second best. So we've done that. We know how we do it. We've been trying to leverage the success, which we have been having in '09, '10 and parts of '11 -- and look at the numbers for yourself and then you see what I mean in trying to leverage that catch-up by giving down the responsibility to the next level of division to allocate the resources based on what they believe is right. That did not go the way which we had expected. And we clearly see that the way we've been running the company, '09, '10, '11 is the way to get it, and that's what we have been reinstalling. If we look at what we have been planning here and actions to get there, get back on where we used to be, that's the rocket science. That's the rocket science. This is not something which we still need to figure out what needs to be done. It's all about execution. It's about focusing. And it's getting back down to earth where we were in '09 and '10. That's why I believe this can be done.
Could I carry on a little bit on the same theme? In terms of the productivity savings you have outlined, it seemed pretty aggressive, pretty interesting. If you could talk a little bit more about how you think you can get there. And the second point in that is you've taken a charge, I think, already in terms of trying to achieve this, which will maybe cost -- which will cost you to achieve this, what do you think the total cost of achieving this saving would be? Have you taken all the necessary charges to get there?
Yes, we have -- we know what the charges will be with -- starting in Q1. There will be more in Q2. So in order to achieve those actions here, those EUR 6 billion in total, we have been setting aside originally about EUR 1.5 billion for transformatory charges, about EUR 1 billion due in '13 and EUR 500 million due in '14. The latest estimate now is that there will be some EUR 900 million in '13 and about EUR 200 million to EUR 300 million in '14. We actually make good on those savings at the less of cost, et cetera. So what are actually the charges related to? If you break down the EUR 6 billion, and that's what we use, okay, over 2 years, the EUR 3 billion in 1 year to break that down. So EUR 6 billion, there is about EUR 3 billion ticket is about design to cost about integrating, purchasing supply chain logistics, manufacturing into 1 operation and get the sustainable benefits from integrating those efforts together, not just try to squeeze the supplier and take a penny here and a penny there. It is about sustainably working together, that's about EUR 3 billion, and that does not cost anything in terms of transformatory charges. There is about EUR 1 billion, about EUR 1 billion over 2 years, which says reallocation of manufacturing and engineering footprint, and this, ladies and gentlemen, that's about value add. That's about closing manufacturing phases, reallocating activities to get demand happens from structurally challenged economies to emerging economies, where we do see growth in demand coming forward. So that's supposed to be about EUR 1 billion in savings. And that will cost the majority of those EUR 1.1 billion, EUR 1.2 billion of charges logically because this is about value add. So we address that one. So that's about EUR 4 billion. EUR 1 billion is about better execution of projects, and that's what I have been alluding to earlier, focusing, focusing the spectrum. Siemens is not too large in terms of numbers. It's too wide in terms of portfolio. We've got to be focused now, and if matters on industrial automation, if matters on imaging, if matters on drive technology are so important to secure the profit pools where we are good at, then we don't have time for fixing the water business, and we don't have time for fixing airport logistics and solar and what have you. And that's about sustainably getting the focus to execute the projects. So that's EUR 1.5 billion, EUR 1.6 billion again over 2 years. That's about go to market and the associated reallocation of infrastructure cost and governance cost. Siemens is in about 213 countries, we're doing business in 213 countries. About 130 of them are countries where we do have our own activities. 89 of those countries have Siemens operations, and there's 20 countries we make 80% of our revenues. Now that's a fact. And if you look at the curve, there's naturally a potential on how to reallocate the go to market in those different economies. And that's how we expect the EUR 1 billion to be derived from associated with also the reduction of infrastructure and governance costs. So that's the EUR 6 billion over 2 years, okay? There's one over there.
Two questions please. First is on the large contracts, which you say the provisioning may run against you for some time. Can you just talk a bit more about the new business you win or you tender for? What's changed in the process of taking on new large projects to make sure that maybe these issues just don't recur as they have been historically, that's the first question? And then secondly, I think, you mentioned that there was maybe scope to be more optimistic on the health care margin going forward. Can you maybe talk a little bit more around that, why is that? And is it a function of potentially raising the range of 15 to 20, or is it raising the low end? Do you think the top end can go higher? Where do you think margins can go?
Maybe, I'll start with the second question. So if you look at our competitors' basket, remember One Siemens performs against competition. So that means every sector, we have our basket of competitors. So if you look at the basket, the weighted basket of competitors, what you see is that this weighted basket is actually above the 20%. But if your average basket you compare yourself with is above the bandwidth, you have just to follow suit and then find the new comparison, the new normal, the new benchmark on how we compare ourselves with. And that's -- if you look at the margin on health care, they've been pretty well established, but there's got to be more by focusing the portfolio, got to be more by focusing the portfolio, and we know what we mean. Now obviously, on the projects, if you really look at projects, for example, like the grid access in the North Sea, this is not -- and we've looked at it extensively as you can imagine because it's been rather costly. Those projects originally were calibrated at the margins of about 10% to 15% profit originally based on certain assumptions. The way we looked at it, why this did not materialize and why we finally ended up with a value of destruction, what we saw was this was not about project management on its own. This was about weaknesses in how we address new markets and new applications in the field. It is about market entry. And if you look at this and take the conclusion, and we eventually ended -- I would say, whenever we do new fields, new fields of application like building an oil platform with a trafo and a substation on it, that's in essence what is. Build platform and put a trafo and the a substation on top of it, if you enter into new markets and enter into new applications, then we have a different set of limit of authorization even though the project is calculated to be very profitable. So we changed the governance on market entry project. That's been the change, and that's how we expect those types matters in making mistakes in going into new fields of application should not occur again going forward.
Mark Troman - BofA Merrill Lynch, Research Division
Thank you very much.
Thank you. Thank you very much.
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