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Executives

Mariel von Drathen

Peter H. Löscher - 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

Mark Troman - BofA Merrill Lynch, Research Division

Fredric Stahl - UBS Investment Bank, Research Division

Michael Hagmann - HSBC, Research Division

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

Ben Uglow - Morgan Stanley, Research Division

James Stettler - UniCredit Research

Daniela Costa - Goldman Sachs Group Inc., Research Division

Simon Toennessen - Crédit Suisse AG, Research Division

Peter Reilly - Deutsche Bank AG, Research Division

Olivier Esnou - Exane BNP Paribas, Research Division

Gael de-Bray - Societe Generale Cross Asset Research

Jeffrey Taylor - Invesco Perpetual European Investment Series - Invesco Perpetual European Equity Income Fund

Siemens Aktiengesellschaft (SI) Q2 2013 Earnings Call May 2, 2013 4:30 AM ET

Mariel von Drathen

Good morning, ladies and gentlemen, and welcome to Siemens Q2 Fiscal Year 2013 Conference, Analyst Conference here in London. This conference is also being webcast. We will have today, Siemens CEO, President, Peter Löscher; and Siemens CFO, Joe Kaeser, present to you the Q2 numbers. We will also provide you with an update on where we stand on the productivity program, Siemens 2014. And last, but not least, we'll also give you the assumptions for the outlook of this running fiscal year.

All documents, the flash slide, the earnings release, the presentation and all documents are being posted on our Internet site, so you can download these files as you wish. I would also like to refer to the Safe Harbor statement that you would find on Page #2 of the presentation deck.

And with that, I will ask Peter to first start with his speech and then Joe. And then we'll have time for Q&A afterwards.

Peter H. Löscher

Thank you, Mariel. Good morning to everybody.

Let's start with the financial summary. In a nutshell, our key financials for the second quarter were mixed. Order intake and EPS growth were highlights in another operational challenging quarter. The macroeconomic environment remained subdued with continued recession in the Eurozone and reluctance for capital investments in many countries. And due to some uncertainty around tighter fiscal budgets in the U.S., we saw an overall softer investment climate also there. As for China, the expected broader upswing in our industrial customer base has not been taking place, and we do not believe it will in fiscal Q3. Our assumption is now that our short-cycled business in China will show some signs of recovery in Q4.

Despite this broad-based economic weakness, we achieved a substantial order growth of 20%, thanks to a high number of large orders in Energy and Transportation & Logistics, which overcompensated the slowdown in our short-cycle businesses. In contrast, revenues were down 6% due to weakness in short-cycle businesses and on the back of tough comps in Energy, where we benefited from the U.S. wind boom and from a higher amount of turnkey solutions in the previous year.

As a consequence, our book-to-bill ratio reached a strong level of 1.19. The order backlog increased a very healthy level of EUR 101 billion, and profitability was burdened by further charges of EUR 84 million, mainly for the German offshore grid connections in Power Transmission and EUR 161 million for further delays for the high-speed trains, Velaro D and Eurostar.

A number of businesses, such as Healthcare, Fossil or Oil & Gas, delivered strong profit margins, while indices profit margin declined significantly due to lower volume in the high margin, short-cycle businesses, a less favorable product mix and continued weakness of the renewable offerings. This led, in total, to a substantial decrease of profit from total sectors by 29%. The shortfall of Sector profit was entirely compensated by improvements outside the sectors, namely at NSN, where we saw another decent operational quarter, as well as a strong performance from SFS. As a result, income from continuing operations remained at the same level year-over-year, while EPS improved by 6% to EUR 1.14 on a lower share basis.

Free cash flow generation was strong. It reached EUR 1.4 billion, significantly up over last year, making up for a weak first quarter, and Joe will discuss this topic in more detail later on. Since there's currently no support from the overall economy, the entire team is even more focused on factors, which are really in our hand. We are focusing, and therefore, on the execution of our productivity programs, Siemens 2014. And I will use some more color on the progress in a minute.

One key element of Siemens 2014 is the ongoing portfolio optimization, where we have made good progress in recent weeks. The road to the OSRAM listing is cleared, and we expect first trading in early July. Invensys closing is taking place as we speak, and we are looking forward to create a leading Rail Automation business. The integration teams are ready for implementation. We will update you on the progress accordingly.

The exit from the solar business proves to be more difficult, while the whole industry continues to suffer. And technically, challenges remain in our project in Spain. There's no high probability for a trade sale anymore. Thus, we reintegrate the asset into the energy Sector, and it remains our clear intention to exit the solar business. If the assets cannot be sold, we will ramp it down in due course.

From a regional perspective for orders and sales in the second quarter, also a mixed picture. Order growth in Europe was driven by 2 very large offshore wind orders in Germany and the U.K., as well as 2 large rail orders in Germany and Austria. The base business across all Sector was flat, with some positive momentum in energy and healthcare and weakness in industry. We also saw good order momentum in emerging markets with a comparable growth rate of 25%. China was up 3%, driven by healthcare and energy, balance in the Industry business. And Russia, plus 107%; Africa, EMEA Middle East with an increase of 40%; and Brazil, plus 25%. Emerging markets accounted for 32% of total orders. The decrease in revenues was regionally broad-based. In U.S., the main driver was a sharp decline in Wind Power, driven by the B2C uncertainty and compared to an exceptionally strong quarter a year ago. Although, in emerging markets, we had some pockets of growth, such as Russia and Africa, both growing above 50%.

Overall, the revenue share of emerging markets was 33%, up 1 percentage point over the second quarter fiscal 2012. When we look at the macroeconomic indicators, such as BMI, IVA [ph] industry value add, they all point to further sluggish growth in the months ahead. And this is generally in line with what we hear from our customers.

Let me now briefly highlight the key developments in each of the 4 sectors. First, Sector Energy. Overall, continued strong performance was backed by fossil and robust service. As already mentioned, orders in Energy went up sharply by 45%, largely due to the highest quarterly order intake ever in wind with EUR 3.3 billion. I want to specifically mention the EUR 700 million Butendiek wind power order for a total capacity of 288 megawatts. It is the first offshore order with the 10-year, long-term service agreement and supported by an equity stake of 25 -- 22.5% from SFS, an excellent example for our unmatched comprehensive offering in this field. We expect the BDC extension in the U.S. to have a positive impact on orders in the course of the second half of this calendar year. To late, though, to show a significant impact in our revenue in fiscal 2013.

Fossil showed strength in orders with several large service awards, and we booked orders for 12 advanced gas turbines, well ahead of our competition.

In transmission, we continued our path to be more selective on orders and walked away from low-margin and higher-risk businesses and gradually improve the margin in our backlog.

The Energy market, overall, remains highly competitive with no major change to regional dynamics compared to the previous quarters we have discussed. The Sector backlog was at a solid EUR 58 billion at the end of the quarter. Second quarter revenue decreased by 9%, mainly due to a lower volume of turnkey solution projects in Fossil and the weak Wind business in the United States.

On profitability, Energy shows a heterogeneous picture. Fossil delivered again a strong 17.6% profit margin despite lower volumes and supported by a strong earnings contribution from the service business.

Wind Power achieved 5.1% profitability, down from last year's extraordinary strong quarter due to lower revenues and some adverse mix effects. After some weaker quarters and charges from legal and regulatory matters, Oil & Gas returned to a profitability of 9.8%.

Power Transmission executes as planned on its restructuring program, Transform to Win. More than 40% of the planned headcount reduction by 8% until 2015 has already been achieved. But transmission faced, again, charges of EUR 84 million, mainly related to the execution of grid connection projects to offshore wind farms in the Northern Sea. We expect continued challenges in coming quarters related to the transport and installation of those platforms.

As mentioned, solar was moved back to the Sector level and posted a loss of EUR 21 million pretax this quarter. We expect the full year loss of approximately EUR 300 million post-tax. Sector Energy recorded EUR 20 million in transformation charges for Siemens 2014 and expect the significant increase in the second half of fiscal 2013.

Let me move on to Healthcare. Healthcare delivered another strong quarter, a successful execution of Agenda 2013 is showing an improved cost position. Bookings grew strongly with 4% on the back of strong equipment orders contributing with 7% growth. Based on our strong offering over the entire product range and investments in the go-to-market setup, China stood out with a substantial double-digit order growth. As some of you might know, our ultrasound business has not been a particularly point of strength in the past quarters. I am pleased to report that we successfully turned it around by now.

Our new products are well accepted, and equipment orders grew in high-single digits this quarter. Revenue declined by 1% mainly due to some pushouts, but this will support revenue in the next quarters. Healthcare's underlying profitability saw an improvement of 30 basis points year-over-year to 15.3%, despite a negative impact of 30 basis points from the introduction of the Medical Device Tax in the United States.

Diagnostics saw a flat quarter in orders and revenue, with emerging markets compensating a decrease in advanced markets. Underlying profitability improved by 70 basis points to 13.9% despite the negative impact of 60 basis points from the Medical Device Tax. Healthcare is moving to the final steps of the execution on Agenda 2013 and recorded charges of EUR 13 million in the current quarter.

As already flagged last by Ziggy [ph] Russwurm during the Capital Market Day in Hannover, Industry faced more challenging market conditions in the short-cycle businesses of Industry Automation And Drive Technologies. Also, our Metals business was affected by slow steel Industry volume. This leads to an overall order decline of 11% for the Sector, with particular weakness in Germany and China.

Our software business performed in line and contributed single-digit growth. Revenue in this Sector was down by 9%, with declines in both divisions and also in metals. Geographically, Asia and the Americas were down double digit, while Europe held up better. Lower sales and the significantly less favorable mix, including a higher share of lower-margin solution business in Industry Automation led to a significant profit decline. In addition, we recorded acquisition-related costs of EUR 25 million for LMS. We expect this quarter's Industry Automation profit margin of 9.2% to have reached trough levels.

Drive Technology's margin declined by 480 basis points to 6.7% on a significantly lower revenue in both the motion control business and in mechanical drives. Drive Technologies executed further on the Siemens 2014 transformation measures and recorded the largest share of industry's charges, which added up to EUR 49 million for the whole Sector. Going forward, we see for Sector Industry again, a difficult third quarter, but expect to return to order growth in the fourth quarter, also due to easing comps year-over-year.

Finally, I want to highlight key developments in the Sector Infrastructure & Cities. Order volume for the Sector increased by 34% due to 2 large rail orders, one from Deutsche Bank for an ICE extension contract and the first order for 100 local and regional trains worth around EUR 550 million from the frame agreement with Austrian railway provider, ÖBB.

The Transportation & Logistics division posted a loss due to the above-mentioned charges of EUR 161 million, which severely impacted profitability. As in previous quarters, the revenue mix was less favorable due to lower margin associated with large, long-term contracts from prior periods.

Power Grid Solutions & Products delivered steady margins of 6.8%, with a favorable mix in Smart Grid business, while low and medium voltage was seasonally weaker. Building Technologies saw a profit decrease of 100 basis points, mostly due to a revenue decline of 5%.

After 6 months into the fiscal year, I want to update you on the performance on our One Siemens operational framework. On the upper left, our growth rate of 2.7% is almost in line with the competitor basket, where some peers still benefit from acquisitions during the last 12 months. A clear focus area is the EBITDA margin improvement, while we target through the Siemens 2014 program. And after 6 months into 2013, only Healthcare is at the higher end of their targeted EBITDA range. This is a clear proof point for the successful execution of their Sector, Agenda 2013. And we are in the regular process of assessing the margin ranges for the respective markets, and the overall profit pool for Healthcare is highly attractive. For this reason, we assume that we will increase the upper end of the EBITDA margin range for Healthcare going forward.

ROCE achieved 13.9% for the first half year, affected by both slightly weaker profit and the higher asset base compared to the prior year. Our capital structure ratio reached now the high end of our target range for adjusted net debt over EBITDA, and main reasons were the dividend payment in Q2, as well as the cash outflow for LMS around EUR 700 million during the quarter.

Let's talk now about the status of our Siemens 2014 program. The whole organization is fully committed to achieve and deliver this program. First of all, as you may have seen also in the flash slide distributed this morning, we have restated our 2012 starting base by including the solar business. As discussed already in detail during the Capital Market Day Industry and Energy, the impact of the transformation measures is rather back-end loaded and still around 45% of the 2013 productivity target is already P&L-effective with a large portion coming from procurement. The additional measures required to achieve EUR 2 billion in 2013 are well on track. Also, a significant part of those measures, which will be affected in fiscal 2014 are already in implementation. They are particularly designed to cost areas, as well as footprint measures where we are in intense discussions with the employee representatives. Up to now, we have booked around EUR 150 million in transformation charges. And as previously indicated, we expect in total, up to EUR 900 million for the full fiscal 2013. From today's perspective, the split of the remaining EUR 750 million will be around 1/3 in Q3 and 2/3 in the fourth quarter.

You have seen this slide before, and we have updated it now except the goal. Yet as we have lowered our growth assumptions for fiscal 2013 and sticking to our 2014 margin target, we will cover the missing growth contribution, with additional productivity measures predominantly from easing prices in commodities. We have, therefore, increased our productivity measures from EUR 6 billion to EUR 6.3 billion.

Finally, let me complement the missing pieces for the 4 Sector bridges. Assumptions are fully aligned and broken down to the sectors. You saw already the Energy and Industry bridge during the respective Capital Market Days. We have updated Energy where we need some additional productivity to cover a slightly higher price erosion. Healthcare is already very advanced with the execution of their Sector Agenda 2013 and will reap the benefits of its productivity measures in the coming months to achieve at least 15% profit margin by fiscal 2014.

As you can see, the volume integration is almost leveling out with the expected price erosion of around 3.5% to 4%. Healthcare will deliver around EUR 800 million in productivity over 2 years. Infrastructure & Cities is targeting for a net improvement of 120 basis points to achieve 7.5% in profitability by 2014.

Therein, the portfolio movements from the Invensys integration and the planned disposal of baggage handling and postal automation will have a combined short-term negative impact of 40 basis points. Infrastructure & Cities is also planning to compensate with volume degradation for price erosion, effects of slightly less than 2%. The required productivity is EUR 800 million over 2 years under the assumption of reliable project execution in fiscal 2014.

And with that, I would like now to hand over to you, Joe.

Josef Kaeser

Thank you, Peter. Good morning, everyone, here in this room and anywhere in the world, who are watching us.

I mean, obviously, the most important matter has already been confirmed, ladies and gentlemen, and that's the execution of our Siemens 2014 program where we delivered 4% Sector profit in 2014. And obviously, this is not meant to be a one-off item. That's supposed to be an ongoing escalation. And obviously, all the actions here are taking and have been taken are supposed to be sustainable over time. And with that, ladies and gentlemen, let me move on to the next exciting topic, and that's OSRAM and the listing of that asset end of June, early July.

If you'll look at the spin-off process so far, we have gotten quite a majority of approval for the spin-off process in January 23. In the meantime, we could also collect the missing pieces from a court order. And on May 17, we will be having our Capital Market Day on OSRAM. And I really, really would like to encourage you to participate, because that matter will not only be about the equity story, why this is good to have and to own OSRAM shares, this is also about some news in that -- it's on corporate governance and how we basically expect the supervisory and the governance to happen in OSRAM.

As you know, OSRAM has been considered to be a discontinued operation item during the course of 2013, and therefore obviously, numbers are missing. As such, I'd like to give you a little update and heads up on how the quarter end, Q2 2013 on OSRAM. If it was a division of Siemens, this is kind of a bit hypothetical, but still like-for-like revenues would have been about EUR 1.3 billion, just about the same level on a comparable base as the second quarter 2012. Profitability, net profit was tough, about breakeven with plus EUR 2 million. That's an EUR 86 million increase year-over-year, and you can already see that the actions, which that management has been taking are bearing fruit.

Margin, EBITA -- EBITA margin would be between 6.5% and 7% underlying, without special items. And so, it's just about also at the level of what we have seen in Q2 2012 before, basically the slump also in the lighting environment.

Now, if you look into the lighting business itself, this is quite a paradigm shift, which the asset has been going through. We do see a massive decline of the basic elements of lighting, such, as light bulbs, but also the so-called, energy saving lamps. And what we see growing, and that's what the equity story will be mostly focused about, that's about the solid-state lighting. That's about LED and the industrial application of LED. And that's what you will be hearing also in the OSRAM Capital Market Day. It is about light design. It is about industrial light engineering, and it's also about productivity in wafer fabs, as well as in the markets. But as I said, you'll be hearing more at the Capital Market Day on the 17th of May, including some governance items regarding OSRAM.

Now obviously, if you look back, hindsight, we believe that the spin-off was really the matter to do as compared to an IPO. But first of all, we would likely never have been able to place about 80%-plus of the asset in the market. Secondly, there's a full return to shareholders, and the shareholders decide on what to do with the asset. And last but not least, of course, the timing seem to be just about right as far as the LED cycle is concerned.

If you look at what has been also done in the meantime as far as transformation is concerned, you could clearly see that there has been a massive, massive impact on cost. There was just about EUR 1 billion, which is considered to be saved over 3 years. And the asset, definitely, has a target to be at or above 8% EBITDA for 2015 onwards. And as you can already see, the cumulative headcount reduction will be quite significant. That's for now.

The intangible restructuring, there will be an equity story. And there will also be series of topics about why it is important and lucrative to be in industrial lighting and light design as a whole.

With that, let me move on to the so-called, below-the-line items between the Sector profits and net income from continued operations. As you can see here, we have about EUR 8 million profit on Equity Investments, which is just about a EUR 600 million swing year-over-year since significant restructuring measures in NSN have been bearing fruit. NSN is a different asset as it used to be 2 years ago in both: first of all, its strategic focus on mobile broadband; and also in terms of its cost competitiveness following a series of significant restructuring and cost takeout in the company.

If we look what to expect in the second half of the year in Equity Investments, obviously, while NSN has made significant progress it's still in an environment, which is a tough one to be in, telecommunication OEM and telecom, in general, is a complicated area. And that's why we expect also results to be volatile going forward in the coming quarters. NSN definitely will continue, will continue to take costs out and improve its competitiveness going forward, so that's why you should expect also further transformatory charges in the second half as far as NSN is concerned. If I look second half, of course, that's the Siemens fiscal year 2013. As you know, in a sense that's a different fiscal year, which is the calendar year.

On SFS, it's been quite a decent performance, just about the same as last year on a like-for-like underlying level, because last year was burdened by some EUR 30 million one-off. So it's been a steady way of making profit by combining industrial and financial logic and support the business going forward. And that's what we also intend for the years to come. SFS has a supportive matter to drive business performance in the industrial environment of Siemens. On the second half of SFS, I guess if your model takes just the 2x first half, and you'd pretty much on the annual result of SFS, so take that one as a linear one. The corporate managed portfolio assets should see some restructuring in the second half, so we may not as well be on the same level, but underlying should be just about the same ballpark.

On SRE, obviously, which we're just about breakeven in Q2, everything depends on the degree of real estate sellings. That's obviously depending on the market. We do continue to look at the disposals of real estate assets since we are not in that part of the business. And I would actually expect SRE's P&L in the second half to be just about EUR 100 million profit, as I said, depending on the closing of disposals, so that should see some tailwind here.

On the corporate items, they are usually quite favorable in the first half. They tend to be deeper in the second half out of several reasons. So if you just assume about EUR 250 million for the quarter, for the remaining half year, you should be pretty much right on and on the safe side for the model.

Corporate Treasury, obviously, that's a hard one to predict. It's about FX, hedging. It's about interest hedging. It's sometimes even also on the asset yields side for our liquidity. So I believe a EUR 50 million per quarter ought to do it for the model.

Having talked about liquidity in Siemens, we did expect a decent free cash flow in the second quarter, in parts, making up for some slowness in the first quarter. As for the year, we continue to see a quite reserved appetite on prepayments for orders, which is surprising in a way because obviously, debt is cheap. But still, our customers are holding the money together, so there is some reluctancy to pre-finance the working capital. And as you can see on the upper left here, the operating working capital turns has been going down from 8.9 to 7.1. I do expect those turns to go up again slightly, maybe into the neighborhood of 7.5 to 8, supporting the free cash flow in the second half. But they will be likely shy on the levels which we achieved in 2012, which was EUR 4.7 billion. So if someone assumes a profit [ph] for 3.5 plus that you just be about what we would expect from the business going forward.

The net debt increase on the financing side of the business is quite pretty straightforward. There is a material increase of the net debt as compared to Q1 2013, which is mostly due to the fact that we've been paying dividends, EUR 2.5 billion. Everything else is, obviously, self-explanatory here on the chart.

I just want to draw your attention that with the dividend payment then, of course, also the acquisition of the LMS asset in the industrial sector, we've been driving up the adjusted net debt over EBITDA to the upper limit, if you want, the upper bandwidth of our capital structure goal, which is adjusted net debt over EBITDA of 0.5 to 1.0. So we are at 1.0. For the year-end, we expect to be just about in the midrange, kind of between 0.5 and 1.0. But then still understanding and having in mind that, obviously, debt is very cheap. And that is certainly something, which we want to keep in mind with our actions going forward.

Now I guess, Peter, with that outlook for '13, I'm going to give it back to you for the real outlook on the company for 2013.

Peter H. Löscher

Thank you, Joe. Bearing in mind the performance of the first half and on the basis of the global economy not providing tailwind, we have further specified outlook for fiscal 2013.

For fiscal 2013, we confirm our expectations of moderate organic order growth, with continuing challenges for our businesses whose results react strongly to short-term changes in the economic environment. We now anticipate a moderate decline on an organic basis compared to the prior year charges associated with the Siemens 2014 program in the Sectors are expected to total up to EUR 0.9 billion for the full fiscal year. And given these developments and financial results for the first half, we expect income from continuing operations in fiscal 2013 to approach the lower end of our original expectation, EUR 4.5 billion before impacts related to legal and regulatory matters and significant portfolio effects, which we expect to burden income by up to EUR 0.5 billion, due primarily to the Solar business. Having said this, we still expect all-in EPS for the year to reach, at least, last year's level.

And with that, I would like to hand over to Mariel for opening up the Q&A session.

Question-and-Answer Session

Mariel von Drathen

Thank you, Peter. Thank you, Joe. We will start now the Q&A session. I'll ask you to clearly state your name. And we will start with the last row, Mark Troman.

Mark Troman - BofA Merrill Lynch, Research Division

Mark Troman from Bank of America Merrill Lynch. Three questions, please, Peter and Joe. First one on cost savings. It's obviously a critical issue, I guess, for the equity. Could you outline what process incentives framework -- what is the process that you're going through to ensure this EUR 6 billion, EUR 6.3 billion of cumulative savings is delivered? Secondly on short cycle, I just wanted, want to be -- could you provide a bit more color what's going on in your short-cycle businesses in terms of, are there any areas, which are still decelerating, or is it just the case that you're signaling stability, no real improvement? So are there any areas of deceleration, or is it more stability? And finally, on charges, what visibility do you have in terms of how these might evolve? You talked about challenges on the installation of the offshore platforms. Are the worst of these charges behind, or should we -- what sort of run rate should we expect going forward for charges -- project charges, that is?

Peter H. Löscher

Mark, let me start with your last question first. Obviously, there's no prediction for charges. I mean we have taken all the charges, which we believe are -- which the company has to take based on everything, what we know. So having said this, we just have to bear in mind, a, number one, there is a tremendous visibility in the organization to really focus on this project. I can assure you this one. We have made multiple efforts to really beef up, support competence and we talked about over the last quarters. Having said this, we just have to bear in mind that the margins of now of these -- of the projects 4.1 in the North Sea where we basically have a completion rate overall in the vicinity of 55%. The projects, which we are now starting to install this year, 2 of them are above 70, and then it goes down to the others, who we will do next year. As well as the 2 rail projects, Velaro D and the Eurostar are now based on 0 margin. And so whatever small thing happens is, as we know, will obviously find its way immediately into the P&L. This is just one other reason why we do everything what we can to ensure successful completion. But we have to bear in mind, these are -- quite frankly, before this huge monsters of steel are not pulled out of the water, 120 kilometers off the shoreline of Germany, you simply don't know what will happen. So maximum attention for all projects, but this is just -- we just have to face it. These are the risk projects, which have absolutely higher visibility, support and encouragement from us.

Josef Kaeser

Here, Mark, on the cost savings and the short-cycle environment. The process on the cost saving is pretty straightforward. We do meet with our divisions every month in a so-called, monthly operating review. And that monthly operating review, we discuss the, obviously, the business on what we expect for the coming quarters and how the performance has been for the months, which have ended. And we also do talk about the progress of the actions we have agreed upon with the business. Remember, we said this program is planned bottom-up, in terms of buy-in and the granularity of actions, but it's being enforced top-down. So that's a very rigid process about validation of the real savings. And as you can actually see, first half was not all that bad in terms of productivity. I don't think we can find them in the P&L. Unfortunately, they're being wiped out for the most part in areas for, like project charges and some weakness on the short-cycle environment. But we do know, clearly, about the actions who is it, who is responsible, when does it take place, and what is the outcome in terms of the impact on the P&L? And that structure, we are going to maintain. We are a bit slow in getting our restructuring matters fully together, which did not really catch us by surprise because obviously, this is very, very sensitive matter, which we take very seriously also with the discussions on the workers' representatives, but even there, there is reason to believe that the final agreements now are just about to be finalized in order for us to consider the restructuring charges and then move on with the incremental savings. So that's just part. As you can see, we have also been already acting and reacting on the missing part of growth. It was supposed to be 2013. Remember, in our bridge on the assumptions on how to get to those 12%, we said that we'd have modest growth for revenues in 2013 and '14 on leverage. That was in 2013. There's not going to be any growth. Actually, we expect a moderate decline, on revenues in order to catch up on this missing moderate decline, we have, again, discussed and agreed upon a set of actions on the cost side to increase the productivity to make up for the perceived loss of revenues in 2013. So that's pretty tightly managed. Of course, we do have our setbacks, but we also have our opportunities to get it done. There's no reason to believe that we could not do it at this point in time. On the short-cycle environment, I mean that's obviously the big question, which is not only material for the whole industry, but also material for our P&L, since the short-cycle environment in Industrial Automation, in Drive Technologies, and in parts also on the low mid-voltage environment, that has a significant impact on the P&L, either if it goes up and if it goes down. So the question is if we see the bottom, or are we going to see the bottom in Q3? We really, truly have to say that we assume that we will be seeing the bottom in Q3 with just about revenue levels in Industry, which are just about the same as Q2. So sequentially, just about flattish. But the jury is out. The jury is out on whether there will be some rebound in Q4. Reason being is that whatever market, end market we look at, be it semiconductors, be it chemical process industries, be it housing and the likes, or be it regions like China and the likes, we do not see a coherent picture that end markets are picking up. We've seen some encouraging factory output in April, but that's not necessarily meaning that the sell-through will be intact. So we do see some technical reactions between POP and POS on the distribution side, which suggests that inventory levels are low, which would also suggest that in times of the end markets accelerating, there should be some rigid upturn. But as I said, the jury is out on this one, but our current assumption is Q3, just about bottoming out as flattish as we've seen in Q2. And then there's some plant life coming back in Q4. So that's the outlook on our side. But again; no coherent picture on the point of sale, but reason to believe that the channel is pretty empty, and that people are not holding too much inventories in the chain.

Mariel von Drathen

Okay. We'll continue on the last row, please, Fredric Stahl and then Michael Hagmann.

Fredric Stahl - UBS Investment Bank, Research Division

It's Fredric Stahl here from UBS. Can I ask you about the offshore wind market if you can update us on the tender activity right now, how you see competition and profitability developing in that marketplace? That's the first question. And the second question, similar, but on Healthcare. If you can tell us what you see and talk a bit about what you see in Europe and in the U.S. over the next few quarters?

Peter H. Löscher

Yes, Fredric, let's start with the Healthcare environment, I would say, is no surprise. First of all, we have done extremely well. When we look into the quarter in terms of growth, and particularly, equipment growth of 7% is compared to what other companies have reported, we have done very well. So we see basically a pattern continue that we see already since a couple of quarters: a, China becoming more important. Secondly, this healthcare market, as we speak, doubling over the next 5 years. We are growing solid, solidly, double digit. So therefore, our strategy, what we have initiated, already numerous quarters or years ago, I would say, in terms of entry-level products, what we call SMART products is really paying off, and this will continue. So the emerging market agenda for Healthcare continues to become much more important, and there is an issue of footprint, of product portfolio, so that's -- this is continuing. The U.S., the excess tax, obviously, has a short-term impact. I would say a very important profit pool, a very important -- continues to be a very important market, but from a growth perspective, it will be a low-growth environment. Europe and any public healthcare system in Europe is, as all of us know, is part of the fiscal consolidation initiatives, budget consolidation, what is happening around Europe. And therefore, I would anticipate that Europe will continue to be very difficult, tough. And we see more and more decisions being also made, being either, no longer just high end, being really focused on what is the right product, and what can I afford in terms of impact to the Healthcare delivery, what I am responsible for? So continue to be -- and this will also continue for the years. So we have done well, right strategy and continue to drive this agenda. And the healthcare is just -- I mean the healthcare strategy is -- you can see it in the number. When it comes to wind offshore, wind offshore for us is, obviously, a very important one. We continue to see this also from a margin quality being -- holding up despite the fact that this also becomes more competitive. We have now more companies trying to enter, and then you have to talk about which projects behind which customers. Obviously in France, you have a slightly different environment than we have it with the company like DONG. But here, we are really benefiting from the over 20 years of experience from the innovation leadership, what we have there. And this is, for us, very important, and we continue to be quite active in -- and we see an active activity in this area. It's shifting a little bit towards east. China is becoming much more difficult in terms of the overall wind environment because you see consolidation in China. You see the clear intention that companies like Goldwind and others trying to position themselves. But despite all of this, we have, I think, a good footprint there. We have a good position there. But from a penetration perspective, it will be an a environment where Chinese players will go global and continue to go global. Profit pool in Europe is good. We have very solid positions with key customers, with lead customers helping us innovate in this area. The BDC now, what we see in the U.S. should help, and I'm talking also onshore, not just offshore. So we continue to see a growth environment in this area, but importance to keep long-standing strategic relationship with core customers with whom you innovate. For example, Putin, it was a good one, where we say we bring out technology expertise, the equity participation and the experience to customers. And this is a differentiator, what other companies in this context don't have.

Mariel von Drathen

Okay, we'll continue with Michael Hagmann last row, and then we move over to Andreas Willi.

Michael Hagmann - HSBC, Research Division

It's Michael Hagmann of HSBC. Two follow-ons on healthcare and one further on the cost savings. On healthcare, we've heard different stories from GE and Philips as to their fortunes, how they're doing in Japan. Obviously, with a weak yen, it would be quite interesting to hear if you've actually been able to raise revenues in Japan in healthcare? And if so, how you cope with the lower currency? Second, you've been mentioning ultrasound and saying that's now much more fun to look at than it used to be. Has it reached its equilibrium margin, and are there other ailing businesses within healthcare where you see progress? And last, on the cost savings. EUR 6 billion or EUR 6.3 billion is still a big gap to bridge from the EUR 900 million. And so far, you've taken relatively little charges. So I assume the EUR 900 million savings that you've achieved so far is more like ongoing regular productivity gains. Can you give us a little bit more steer on the remaining cost savings that you want to achieve and how they will be phased? That would be great.

Peter H. Löscher

Mike, I understand in terms of the question. What you asked is not just the market of Japan, but also how Japanese competitors, for example, benefiting from a lower yen, right -- in there?

Michael Hagmann - HSBC, Research Division

And also the...

Peter H. Löscher

And also the other way, how we're doing in a Japanese market?

Michael Hagmann - HSBC, Research Division

Yes, because like I think that's one of the few areas where you actually export into Japan. So the question is also like if you've been selling a lot into Japan, how do you cope with the weaker currency, so what is happening to the margin there?

Peter H. Löscher

Yes, the Japanese market is a good market for us, so I would not -- but it's also a competitive market. So obviously, this is impacting local -- this is favoring local competition. So let's not fool ourselves. But we still continue to have good activity there, and the margin in Japan is actually a solid margin for us going forward. The yen issue is, the other way, also an important one. I mean we also have to bear in mind, if you, if we talk -- if you compare the yen how it has appreciated over the last 5 years and what is now happening, I think when you take it over the longer term, I would not say -- I would not come to the conclusion there is a massive competitive shift now happening, which is favoring one or the other. So at the end, it comes always down to right products, performance of products versus any given customer base. And there, we are continuing to be benefiting from the broad portfolio, what we have, because we have the chance to offer a broad mix. I mean we can offer the MAGNETOM ESSENZA out of China for any kind of global customers, who have a broader product mix. And this is helping us in this regard as well. Ultrasound, I would -- what I try to highlight is that we have, obviously, passed the inflection point of pain in this area. Is it fun to be in ultrasound for us? Not yet in terms of margin, but it starts with -- but the new product generation is clearly driving and holding up. From a performance perspective, the quality issues are, to a very large extent, being resolved, and we have now -- we are now seeing a light at the end of the tunnel of a painful experience of a decade of Siemens in ultrasound. So it is turning in the right direction. And we're having now, for the first time, a good product generation, but having fun. There are others who are leading this segment, it's not us. And you know them, who they are.

Josef Kaeser

Yes, Michael, on the cost savings, obviously, we will expect about 1/3 of the EUR 6.3 billion in 2013 and 2/3 in '14. That already signals that there is also a subsequent back-end loaded process on the headcount-driven savings. So we'll be somewhat back-end loaded in the restructuring, which, obviously, naturally suggests that there's some back-end load also in the value-add savings of the company. That goes along with design to cost also, since design to cost is something which happens just next quarter. That's something, which needs to deliberately planned between engineering, manufacturing, supply chain and purchasing. So that will also be mostly coming in 2014. And the non-reoccurrence of project charges is a significant matter for '14, since obviously '13 has gotten already off to a bumpy start. So 1/3 in '13, which is about EUR 2 billion; and 2/3 in '14, which is EUR 4.3 billion; about EUR 1 billion of that, the non-reoccurrence of charges; about EUR 800 million roundabout from the savings of value-add related topics, which is mostly, of course, headcount; about EUR 200 million, you can expect this year, and the design to cost also in the same range, 1/3 to 2/3 for 2014. The good news about the design-the-cost method is once they are designed to a product, they will eventually also materialize in the design-in of the customer space. [indiscernible] , one topic to Japan. It is not only new business, which obviously is not that greatly doing with regards to FX, but there's also installed base. And one should not underestimate the power of an installed base in a certain country.

Mariel von Drathen

Okay. We'll continue with Andreas Willi and then move over to Ben Uglow.

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

Andreas from JPMorgan. I have 2 questions on the Energy business, particularly, Fossil. You had a good performance on the profitability despite the top line that came down quite a bit. Your U.S. competitor noted a very weak service business in Europe and had a big hit on earnings because of that. Maybe you could comment a bit what you're seeing in that business in terms of the good margin resilience in the quarter. But then the top, the weaker top line, was that also due to a step-down in service by European utilities, and how you see that developing in the next couple of quarters also in terms of the profitability? And the second question on the underlying margin in mobility, obviously, you mentioned lower margin contracts coming through. Also historically, their message has always been if a division needs to focus on margin improvement, it shouldn't do M&A. This one is an exception, I guess, with Invensys. But what else is not going right in that division in terms of having an underlying margin of effectively near breakeven?

Peter H. Löscher

Andreas, yes, let me start with your Fossil question in terms of profitability. A, number one, we see a solid service development in this area. We have the mix issue in terms of -- I'll try to highlight it in terms of more solution business last year versus this year. The markets are solid. Obviously, we see aggressive pricing behavior in some projects from some competitor, I would not say it is an overriding industry behind all projects, but you can clearly see that certain projects are highly contended. And the environment is actually, I would say, continues to be regionally no change what we always have discussed the last couple of quarters. 2015, we expect an uptick probably in the U.S., but this is what we have highlighted versus others. We are sometimes talking about 2014, so the reserve margin is still high enough, but it will be a good gas market in the United States for sure. In Europe, basically, the activity has basically come to a standstill, I would say. I mean we have singular projects which are happening. And this is simply due to the fact that there's the uncertainty, the German situation is a specific one, but there's also no really capacity build-out. In Europe, the emerging markets are very solid. Middle East is solid, but highly contended in some markets, so I would say a solid environment. We have a good mix. We are benefiting from the fact that we have now leveled our industrial footprint, tailoring much more different market environments, so we can be very competitive. And we are in good position from product lineup -- footprint perspective, and the market continues to be a solid market for us going forward as well. The underlying margin in mobility, you were highlighting, Andreas, this the same division, it's actually not. We have within, as you know, we have the mall [ph] division, which is really acquiring and the issues what we have behind trains is internally in a separate division. And this is, I mean without any doubt, we have a couple of issues. One, we have the regulatory uncertainty in terms of how trains are certified in some markets. You're well aware about the German situation, also the European situation. So we have an external rather less-predictable environment. And then we have also productivity issues. I mean, to make it very clear, we are spending too much engineering hours for the train. There's a specific program for this division, it’s called, Rail on Track, with clear productivity measures, much more closer interaction -- bringing down engineering hours, linking manufacturing footprint much better in terms of also linking it back into supply chains. And we must become, here, much more competitive from this standpoint. Also footprint development, because the projects, which are currently happening, are happening not in our historic markets. So we talked about Russia, for example, where we have already good footprint. There are projects there; we have now projects in the Middle East. We're not [ph] talking about tender activities going forward, so we have to have a SMART footprint policy. We have to ensure that we leverage much more platform and design development, so this is a clear productivity program in itself, which the division has focused on.

Mariel von Drathen

Ben Uglow on the right, please.

Ben Uglow - Morgan Stanley, Research Division

It's Ben Uglow from Morgan Stanley. I mean I had really a follow-on to Andreas' question about Fossil. What we have been hearing is that service contracts in Europe may be coming under a little bit of pressure, i.e. the E.ON, the RWEs of this world are exercising their desire to lower the cost of those operation and maintenance contracts. And given where low factors are in gas at the moment, that's an understandable debate. What I think Andreas is getting at was, do you see any evidence of this at the moment in terms of your -- the big German utilities coming to you and trying to say, "Let's cut the cost of this for a couple of years and we'll pay you back later?" Is there any evidence in your portfolio that operational and maintenance contracts are coming under pressure? So that was question number one. Question number two, I guess it relates to rail as well, is the new orders that we saw this morning, I was delighted to see a flurry of new orders. I have to confess, I was not so delighted to see if they were in rail and wind. What conviction level do you have for the gross margins on those new orders are definitely going to be above 0, i.e. how back tested, how back checked? How confident is everyone that the new orders coming in are not as bad as the ones we're seeing in the P&L at the moment? And then just the final question on healthcare. That potential raise in the EBITDA margin guidance, is that coming from more confidence on mix, i.e. ultrasound or whatever, getting better, or is it the impact of the EUR 800 million cost savings? Was that already included, the EUR 800 million in the old guidance? So is it cost savings or better product mix on better healthcare margin?

Peter H. Löscher

Okay. Then I start with the -- I don't want to go into individual comments, how the relationships are with specific customers. I apologize that I will not -- I don't want to comment on a specific customer. But I do understand the question, what you're getting at. I mean it's obviously -- there's no question that -- I would say they're always contented. So at the end of the day, it is always a question of what is the value add of your service, what you're able to bring to the table. So I would say third-party servicing, it's massively under pricing pressure. Within your own fleet, you have obviously, totally different levers to play with, and then it becomes total cost of ownership. And it becomes a different type of discussions with your customers. And I would not confirm that there is a massive shift of -- there's always a contended debate and -- but I think what we are leveraging is now, we have, in the meantime, established a very solid global service organization with up time -- you have seen it in Charlotte and in others. So contended debate, yes, but the margin continues to be a good one. Third-party service is not a business I would say, which is highly attractive for a company like Siemens.

Ben Uglow - Morgan Stanley, Research Division

Just -- and I totally understand you can't talk about individual customer negotiations. But just conceptually, you're not seeing a big trend of European utilities trying to tear up and renegotiate contracts?

Peter H. Löscher

I will answer differently, Ben, if you allow me.

Ben Uglow - Morgan Stanley, Research Division

Within the market, generally.

Peter H. Löscher

You should not expect that there is a massive earnings quality change of our service business globally. Yes, and what was this...

Ben Uglow - Morgan Stanley, Research Division

I mean gross margin on these incoming orders, are we confident that they're not bad?

Peter H. Löscher

Yes, I would say one is the ICx extension. And this is basically a contract where customer has decided to have a more modern design and appearance, which for us, obviously means there's much less risks involved in such an offer. So the extension of this one is from a -- if you -- from an inherent perspective, obviously, should be something, which we should be, feel comfortable with. The wind business offshore was actually always, relatively speaking, not a bad business for us. It was actually good business. We have not yet had big execution issues around offshore wind. I mean this is not the transmission aspect of it. This is the wind turbine aspect of it. So and the underlying rail business, as I said, is an industry, which is an Industry has to evolve. But I would not expect out of the contracts what we have now highlighted to offshore wind projects, have not obviously the quality of, and I do understand your remark, healthcare or Fossil. But within the wind business, it should be the upper end of what Siemens is able to deliver.

Ben Uglow - Morgan Stanley, Research Division

And just finally, on healthcare, on why there might be the scope to raise margin?

Peter H. Löscher

Yes, I mean this is an industry issue. So obviously, we believe that the mix, what we have now, the quality and the performance of the Healthcare Industry, we see this, and you can see this with our competitors. We believe this is an industry where -- because I would not argue that this business is now at the upper range of its cycle. So we continue to see this as an industry, product mix-wise and what I've discussed earlier that there should be an opportunity for us to signal that we have confidence in this business at this -- on a sustainable basis to deliver a higher margin quality what we have seen.

Mariel von Drathen

Then we'll pass on the mic to James and then to Daniela Costa.

James Stettler - UniCredit Research

James Stettler, Canaccord. When you look at your fiscal '14 targets, I mean, first of all, what kind of macro assumptions do you have? Do you still feel comfortable with those? What further levers can you pull if that doesn't come through? On China, what leads you to believe that Q4 is going to show a recovery? What was sort of the indicators there? And finally, sorry another question on Fossil. When you hear about E.ON and RWE talking about mothballing and shutting down gas-fired plants, is that just a warning? Are they being serious about that? We've also had Gaz de France shutting down 2.5 gigawatt in gas. Is that a real risk you see, or is that just the political sort of issue?

Peter H. Löscher

No, this is an absolutely real question. I mean, as we speak -- actually, you have a nice example. I'm not -- GDF, I cannot comment on. But I can give you good example because it was just announced in Germany. Our most advanced gas turbine in Germany, called, the Irsching. They have now signed -- E.ON has signed a contract with TenneT to find an agreement, which allowed them to continue to operate. I mean this is -- we are now at the -- this is a very, very serious issue in Europe where you have the following situation: you have now buildup of massive renewable on one side. For example, in Germany, it's out of -- it's over 51 giga, it's roughly 51 giga out of an overall of 85, 90, what you have. So it's more than -- so it's over 50%. And then you have a situation that all coal plants are continuing to operate profitably. And the gas in between is squeezed, so you have now a situation in Germany, for example, where the government has spent EUR 200 billion for 51 giga, delivering 5% of base load. The old coal plants continue to operate because they are written off. Gas plants are now operating -- I mean this issuing plant is now down, I think initially, it was actually over 4,000, it's now down to 1,600 hours per year. Obviously, it has its difficulty in providing profitability. And the CO2 emissions are going up. So this indeed is -- this is one of the debates what we have found in Europe. How do we ensure that baseload capacity is provided profitably against the backdrop that nuclear in some parts of Europe are actually ramped down. So absolutely happening, without any doubt.

Josef Kaeser

So then on the assumptions for fiscal 2014, if you look at the bridge, which is, by the way, Page #11 of the handout, if you want to follow on that one. On a comparable basis, the baseline was 9.3% -- 9.2%. That now includes, obviously, the reclassification. Solar used to be 9.5% for the ones who want to have this bell rang. So the modest growth. At a time when we were laying out the assumptions, we were actually expecting fiscal 2013 to be just about the same level like-for-like, in revenues as '12. That is not going to happen. We expect now a moderate decline on revenues, so that will actually mean that there's got to be some incremental productivity to be paid to make this one up. Having said that, we still expect 2014 now to be moderate, not modest, but moderate growth. And moderate would usually translate in areas up to 5%, 6%. So that is definitely something one needs to keep in mind that the assumption for '14 is quite a significant rebound in the short-cycle environment, because otherwise it's not going to happen since we know our backlog very well. So that's important to know. In terms of pricing, obviously, there is some gradual changes here and then. The fundamental assumption on 2.5% to 3% remains in place. There is incremental activity on pricing also deriving from the currency, which is yen, the devaluation of the yen. Not so much that we would see it in the Industry since the installed base prevails. However, if you look at the big-ticket items on Healthcare, as well as in parts of the Fossil turbine new business, then you can clearly tell that some competitors operating in that space obviously do have some tailwind from FX. Another question is, are they going to use it for competitive pricing or for a higher amount of profit? So that's something where we see some dynamics. Industry, in general, has got some eases, some pricings that are in limited amount of areas. We can actually increase pricing with the release of new generations. So Industry might be a bit favorable. Energy continues to see significant competitive environments in areas like Trafos [ph] . And we expect that to be there for a while, obviously due to the fact that there is massive capacity in the world. And you also do see some continued substation activity if it comes to pricing. So overall, the 2.5% to 3% stands, as I said, with some up and downs within the spectrum. Cost inflation, usually in times where there's no scarcity of labor, a cost inflation is a bit easing, so could be some few base points here, which may ease the mind going forward, but I would not really feel compelled to have -- make this as a change in assumption, and at least, start with a EUR 6.3 billion. So that's a quick walk-through of the matter of our assumptions going forward. So the other question was, what makes you believe that areas like China can rebound in Q4? So quite a quick answer, it's the POP, it's the distribution channel. End markets, at this point in time, will not provide any meaningful upside in Q4. It's got to be about the point of purchase in the distribution channel. That's the assumption.

Mariel von Drathen

Okay. Then we'll continue with Daniela Costa, please.

Daniela Costa - Goldman Sachs Group Inc., Research Division

A question on the free cash flow side. Obviously working capital was a positive, but when we look at the very large increase in the orders, in the large orders particularly, in the billings, that does not seem that still meant billings were down year-on-year. And you've talked for a long time about trend towards the level of advances being lower, but has this materially gotten worse, or is there some sort of mixed effect because of where the orders come from?

Peter H. Löscher

Daniela, it hasn't gotten worse, but it's just about what we've been flacking [ph] for quite some time that it is a change in behavior if it comes to prepayments and financing of working capital, definitely has been. And we see that now also in the bigger type of orders. There is less prepaid and prefinancing. And what we've been seeing now, the current order intake is somewhat slow in terms of prepayment. But the backlog, which got prefinanced at some point in the past, now is starting to build into PUC revenues. So what you see, you build up your working capital for products and services and projects, which we have got in prepayments in the past. And that technical effect we're seeing now, that brings down the working capital turn from about 9 almost, 8.7, 8.8, to about, I would say, 7.8, which is about 1 turn. And the rest is something, which we need to become better in, and that's asset management in the factory and the process itself.

Mariel von Drathen

Okay. We have some questions on that side. We'll start with Simon on the third row, please. And then Peter Reilly.

Simon Toennessen - Crédit Suisse AG, Research Division

It's Simon Toennessen, Credit Suisse. The first question is on mobility again. Obviously, the delays that you're currently seeing is in the, for the ICE delay, but you've got to huge ICx order in the backlog as well. So as the current order gets delayed further, is there any risk that the ICx order gets delayed as well in terms of production and delivery? The second question is on China again. I mean I believe you're more exposed to the factory automation side, which has obviously weakened; you're flagging this. But competitors of yours are flagging an improvement in construction markets and transportation market, so what are you seeing there? And the last question is on the cost split for '13. I wasn't quite sure whether I missed this, but could you give any guidance on the split of the remaining EUR 750 million on sort of Q3 and Q4, and how we should think about it?

Josef Kaeser

Cost split, EUR 250 million, EUR 500 million.

Peter H. Löscher

China, we see definitely the same thing happening in terms of when you talk about order activities. The rail business we definitely see this as a very important one. I mean this was basically completely stalled as you know. And now, what they have done, they have now separated the ministry from a separate entity that's particularly in the intercity rail market and metro markets. There's certainly activities going on. And so we -- and they have actually announced and I think it was an EUR 88 billion, I'm not sure if it's Euro or dollar, investment program in rail. So this is happening. Construction market, we have very limited exposure to this one. So this is maybe why others see this differently. And on the ICx, that's not a direct -- there's no direct link between what is now happening between these 2 orders and the ICx. The only commonality, which is one, which should be -- just simply bear in mind and I, therefore, would like to highlight how important this is, is the certification process. Certification process in Germany is not predictable. The industry has more than EUR 1 billion in rolling stock material in the backyard. And we have to find a way how this whole process becomes much more predictable. But what is happening, there is no direct linkage between the 2 and the ICx.

Mariel von Drathen

Okay. Simon [ph] , if you can give the microphone to Peter, please.

Peter Reilly - Deutsche Bank AG, Research Division

It's Peter Reilly from Deutsche Bank. Sorry to come back to rail, but 2 questions on rail. Back in late November, Roland Busch said that you didn't expect material charges for the Velaro and Eurostar contracts. And here we are, EUR 277 million of charges. So can you talk us what's gone through, what sort of happened over the last 5 months, and how this has come as such a surprise? And secondly, on a related note, given you're now getting bigger in signaling and given that rolling stock has got quite a long history of poor performance, isn't now not the time to exit rolling stock completely as part of your transformation process and make this more of a product of components and software business? And thirdly, on the capital structure, you're at the top of the target, but you said in mid of the target, by the end of the year. But Joe, you also said you reminded us that debt is very cheap currently. Are you saying you can go above the top end of the capital structure target if you had the right opportunity, either for acquisitions or buybacks?

Josef Kaeser

Yes, why don't we start with capital structure? As you rightfully said, Q2 is now up to 1.0 predominantly due to the fact that there was this one-off dividend, EUR 2.5 billion in end of January. For the full year, I expect that to be just about midrange between 0.5 and 1.0. I mean the statement that the debt and the bond markets are extremely favorable to the ones, who have a decent rating, I mean just suggests that this is something we always have in mind, if and when we talk about the greater good of the company and the shareholders. So there's nothing more and nothing less. We definitely do not expect to increase the ranges going forward because we have rightfully understood that the company like ours, which is in the Infrastructure business, has got, basically, 3 messages to tell to people. To the customer, we are a reliable and sustainable and stable company. And if something goes wrong, technically, we can fix it no matter what. And that's important on infrastructure. Secondly, the message to our bondholders is you'll get your money back with some limited interest. And thirdly, we also want to make sure that our shareholders understand what to expect in terms of payout and what equity structure we expect to have tacked on to the company's balance sheet. And so, 0.5 to 1.0 remains over as a long-term goal. There might be some volatility in the short term. But obviously, it's not a change in plans, nor in concept. Now the signaling, I mean obviously, that's been a good business already in Siemens in Rail Automation. This is mobility management, not so much about hardware adventures. And that has been good in like what we see from the impact on the acquisition. We do like what we see. We do believe that everything which we have been planning for in terms of synergies and meaningful additions is falling in place and will be a good business going forward. So there is no reason to believe or no reason to regret that will -- which we have deliberately been looking for quite some time. The rail topic itself -- I mean Peter has mentioned that. The rail business needs an overhaul in both structurally, as well as in the regulatory environment. And that's predominantly due to Europe. That's all what it takes. And the fact that Dr. Busch did not expect any charges in November has also its good side, because then obviously, he didn't know about it, which is important in accounting. And it's really unfortunate, but I do want to remind also in terms of Dr. Busch, I want to remind the audience that he has been taking that on. And he now diligently goes to the bottom of everything. He's been working hard with the team. He's going through the bits and pieces and also the uncertainties of regulatory matters. And that's the outcome, and we do not expect any news, anytime soon on matters, but this remains a challenging asset as it remains challenging on the North Sea. So I'll be clear about it from what we have been seeing from what is possible at this time, this is what we have reserved.

Mariel von Drathen

Okay. We are running a little bit out of time. Still a lot of people wanting to ask questions. So we'll continue with Olivier Esnou and then Gael de-Bray. We'll try to work our way through.

Olivier Esnou - Exane BNP Paribas, Research Division

Olivier Esnou, Exane. Two questions, please. Coming back on the Power business, so it's been a very difficult quarter for the order intake. You mentioned the competitors -- some competitors being more price aggressive on the thermal side. At the same time, Siemens is actually strongly outperforming in terms of gas turbine order intake. So how do you make sure that Siemens is not the one in the marketplace being the most aggressive on prices, and is booking a good project? How do you monitor that? Secondly, on the cost savings program, you said that you were maybe a bit late on the restructuring charge; that the jury is still out on some short-cycle recovery. So what happens if the volume is not there? How can you maybe give us a bit more granularity, or where is the supplementary buffer in the cost savings program if the volumes do not come forward? Because EUR 6 billion is already a large savings number, so what makes you comfortable you could have more, if needed, and where does it come from?

Peter H. Löscher

Olivier, the first question is a very simple one. It's a market leader in this area and it's a key value driver for Siemens, the power generation business. We're extremely mindful of the profit pool of this industry. And we have an extremely good position now with the footprint what we have, with the product portfolio what we have, with the service quality, what we're able to deliver. And I think what you have just highlighted; look back to Siemens, how this business used to be 5 to 10 years ago. It was a totally different business.

Josef Kaeser

On the second item on restructuring, I mean when I said the jury was out on growth and turnaround in China was related to Q4 to the sell-through of the short-cycle business. It's all Q4. We just don't know at this time, there's no coherent sign about end markets picking up sustainably in the area of manufacturing automation. We are not talking about 2014. We continue to believe that China will be making good on its 5 years plan. And one of the most high-up items on that plan is high-end manufacturing. So if someone doesn't know high-end manufacturing, the question is what could that be, what would that be, what is that going to be? And there is reason to believe for the audience watching China that this economy will make its inroads into aerospace. And it's going to make its inroads into automotive OEM. And I think everyone who looks into that a bit deeper will understand that those are the areas, say, an economy needs to have at this stage of what it is at. So having said that, high manufacturing, that's not just about automation. This is about quality, quality of output. It's a difference whether you have a high -- highly manual production process where the yield is 95%, 96%, 94% or whether you supply the automotive industry that have a threshold of 5 parts per 1 million. And that is also true for the aerospace. Having said that, automation will be the decisive factor of entering this space in that area. And there is a very good company to look for help, and that's Siemens. And that's our assumption that this will materialize in '14, and that's our commitment that we will over-proportionately benefit from that upside. And by the way, the world in industrial automation is more [ph] in China. This is about the United States, building areas and on discrete manufacturing around premium car manufacturers, who decided to go from place A to place B to take advantage of domestic footprint. And there's the other areas like, for example, Indonesia or Turkey or others, which are running out of qualified labor and have a natural desire to go into automation. So the world is full of opportunities, and we, in Siemens, do intend to take full advantage when it comes to industrial automation.

Mariel von Drathen

Okay, we'll continue with Gael.

Gael de-Bray - Societe Generale Cross Asset Research

Gael de-Bray from Société Générale. Two questions please. The first one is about the losses related to the portfolio effects. You mentioned total losses of EUR 500 million, out of which EUR 300 million would come from the Solar reclassification. But where are the extra EUR 200 million losses coming from? The second question is back on the restructuring program. How do you explain that you've been able to reduce the planned restructuring spending from EUR 1.5 billion to EUR 1.2 billion by the end of 2014 despite the very slow start to the year, despite the macro uncertainties and still are guiding for a higher level of productivity? So again, what's really driving that? And maybe if I can, for 2014, you plan to spend EUR 300 million on restructuring. But what would have been -- or what would be for you a normal ongoing restructuring spending on an annual basis?

Josef Kaeser

So let's get started on the 0.5, which we've used as a bridge between the lower end of the guidance of 4.5 [ph] and what to expect in the areas which we have flagged as disclaimers. First of all, I want to be precise, if you read the earnings release, you can read it's up to 0.5. So what it does, it sets a limit that does not necessarily constituted, it's going to be 0.5, okay? So it's up to 0.5. So what has been the assumption? Well, first of all, it’s been about EUR 300 million on the Solar reclassification. This is gross for our net of tax impact is 0. Then we do expect up to EUR 100 million a little bit less of legal and regulatory matters which mostly have to do with the economy in the Middle East, which we have decided not to continue to supply. And the remaining items are coming from M&A-related topic. Remember, we also said that impact from M&A or bigger material M&A-related topics are also not part of the guidance. So if you look at the Invensys closing, which is happening today, there will be some integration one-offs very quickly because the teams are ready to go. And you will see that also in the actions, which secure our synergies and benefits going forward. However, if we talk about M&A-related topics, it also includes the fact that we have been carving out businesses, which are assets for sale. And that carve-out process and the way it's been going and the way it's going to go will also see some impact on M&A-related charges. And all those together could be up to EUR 500 million, not suggesting, it's going to be EUR 500 million for sure, but we wanted to inform and flag the market was that it could be up to EUR 500 million. Second topic was on the restructuring program we've been reducing. As you said, reducing the transformatory cost, which we have been assuming for making good in the program from EUR 1.5 billion to EUR 1.2 billion, reason being that some plans, which we have been laying out can actually be implemented with lesser cost. And that's predominantly the area of asset write-downs and the likes, okay? And that has been going down from EUR 1.5 billion to EUR 1.2 million. And the transformatory cost of EUR 300 million in 2014, the numbers we have been mentioning, and it's also true by the way for '13, those are incremental numbers. Those are on top of numbers to achieve on top productivities, okay? So that does not necessarily include some running structural changes, which we make along the line.

Mariel von Drathen

Okay. I think we'll take the last question. It's on the second row, Jeffrey please?

Jeffrey Taylor - Invesco Perpetual European Investment Series - Invesco Perpetual European Equity Income Fund

Jeff Taylor, Invesco. How long should we expect NSN to remain part of the Siemens group?

Josef Kaeser

As long as it takes.

Mariel von Drathen

Okay. I think with that...

Peter H. Löscher

I think directionally we are totally aligned.

Mariel von Drathen

I'm not expecting ...

Peter H. Löscher

And this is an urgency.

Mariel von Drathen

I'm not expecting any more from my 2 colleagues. And with that, I will -- I thank you for your attendance and for following the conference on the webcast or here in London. Safe travel home. Thank you very much.

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