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Executives

Mariel von Drathen

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

Ben Uglow - Morgan Stanley, Research Division

Peter Reilly - Deutsche Bank AG, Research Division

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

Olivier Esnou - Exane BNP Paribas, Research Division

James Moore - Redburn Partners LLP, Research Division

Simon Toennessen - Crédit Suisse AG, Research Division

Gael de-Bray - Societe Generale Cross Asset Research

Fredric Stahl - UBS Investment Bank, Research Division

Mark Fielding - Citigroup Inc, Research Division

William Mackie - Berenberg, Research Division

Siemens Aktiengesellschaft (SI) Q3 2013 Earnings Call July 31, 2013 10:00 AM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to Siemens' Conference Call. As a reminder, this conference is being recorded. At this time, I would like to immediately turn the call over to your host today, Ms. Mariel von Drathen, Head of Investor Relations. Please go ahead, madam.

Mariel von Drathen

Good afternoon, ladies and gentlemen, and thank you for joining us on short notice to our somewhat special conference call today to walk you through the third quarter results, but also to talk to you about the changes in management. We released an ad hoc announcement at 11:30 today on the decision by the Supervisory Board to accept the early departure of Peter Loescher as President and CEO and to appoint Joe Kaeser as the successor. The Q3 documents are released at 12 today. You can download all the files from our website.

I'd like to draw your attention to the Safe Harbor statement on Page #2 of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations, and certain assumptions that are therefore subject to certain risks and uncertainties.

I have with me, and I'm very honored to have him with me today, Joe Kaeser, the current CFO of Siemens, and, of course, as you have all read, becoming CEO and President of Siemens as of tomorrow. He'll walk you through the Q3 numbers and be available for Q&A.

Joe, it's your turn.

Josef Kaeser

Thank you very much, Mariel. Good morning, good afternoon, good evening to everyone listening on the phone. Been quite a day today as you can imagine, and it's been quite a few days prior to that. And I believe, to summarize it, it's just about time that this company focused on what it is supposed to be focusing on and that is to get the job done. And that's exactly what we're going to get started now going forward. And we'll remain in contact, as we have been, and messages will continue to be transparent and clear. And I look forward to seeing you all again, same people, same person. It just may be a different job.

So let me maybe, after that, come to what we have been seeing in our fiscal Q3. And over, also, as far as the outlook for 2013 is concerned, I'd like to draw your attention on this page, the summary page, which we have already been submitting to the Internet.

Our key financials for the third quarter show a mixed picture in what I would call an ambiguous macroeconomic environment. This still does not give any major coherent signals for an improving investment climate in the sector. I think that's what we've been seeing. There is some hope here, there is some positive there. But there also have been some volatility in the way on how we believe to we have them judged going forward.

Our orders grew essentially by 21% on easy comps, and obviously, the main driver being a EUR 3 billion order, which we have been receiving from the Department of Transport for delivering of -- maintaining about 1,140 railway cars. This is an order which goes for many, many years. Its margins obviously compared to the average mix on Siemens are not what we are expected to have in Siemens. On the other hand, it helps us to stabilize an underlying utilization in the divisions.

Another good example for good order intake is a large order, which we have been getting for an LNG project in Yamal, which we deliver our latest gas turbines to the power plants, feeding one of the most ambitious natural gas projects in Russia.

Geographically, I want to highlight our business in China, which clearly has been showing a significant order growth of 13%. Revenues is mostly down by about 1%, driven by declines in industry and energy. It's not really a surprise since we have been seeing as slowing order dynamics in 2012, and now we do see the outcome also in the revenue side. The decline resulted mainly from the Americas due to a steep decline in the U.S. onshore wind market. On the other hand, our other 2 major regions showed some moderate growth rates. In regards to profit from total sector, this was strongly impacted by total charges of EUR 436 million related to our program since 2014. That actually means that it's been successful and able to quite catch up with the number of agreements we have been getting with the unions in order to free the way for a cost-cutting action going into the restructuring area of manufacturing and engineering.

In Energy, the Oil & Gas Division and Fossil Power Generation show quite a decent underlying performance in transmission. And the first 2 grid axis projects in the North Sea, achieved a major milestone by successfully installing the base frame on the platform. During the fourth quarter, we are going to then fertile [ph] the top side of the platform, which obviously is a critical milestone for delivering the projects in the planned time frame and obviously also, in the subsequently planned cost frame.

Sector Health Care is reaping the benefits from its Agenda 2013 and delivered quite excellent margins. And I'm sure you have seen them and compared them to the space in the sector. And that clearly shows, once a program has been established well and is going to its end and has a change in culture and a change in the way they do business, this gives some underlying benefits coming along with it. In sector industry, market conditions show quite some stabilization in the third quarter. And we actually expect some seasonal -- that to be a seasonal uptick in the short cycle businesses. However, especially in that area, there's still some macroeconomic uncertainty, and we cannot really see, we cannot really see a sustainable upward trend so far.

Underlying margins, though, Industry Automation was supported by the improved business mix and some additional positive feedback, so for Siemens 2014 cost reduction measures. In the IC sector, the Invensys integration is going well. It's quite on track. And profitability in transportation and logistics has been impacted by some significance Siemens 2014 and the rolling stock-related charges, which will result in productivity gains going forward.

Income from continuing operations and basic earnings per share benefited mainly from a positive result in equity investments due to the NSN sale of our 50% stake, which is supposed to be closing soon. It has been getting the release from the Brazilian authorities. We still have to wait for a few days for potential objections, which we do not expect to happen, so that actually means that it will be closing somewhat ahead of time in the current fiscal quarter. Free cash flow showed an 8% increase year-over-year despite an increase in operating working capital, which is mostly due to some outstanding order payments in the project business.

In the quarter of July, we also did make significant progress to streamline the portfolio as part of Siemens 2014. As mentioned, already first, the disposal of our 50% stake in NSN to Nokia for a purchase price of EUR 1.7 billion. And as mentioned, we do expect the closing any time soon, and we do not expect to be anything crossing that way in the next couple of days.

Secondly, we also finally successfully spun off OSRAM on July 8. You've probably seen the news today. Share price is up some 5% to 6%. So finally and after all, we believe that transactions has been showing the effects, which we have been targeting for.

Bearing the results of the first 9 months in mind, we do expect our outlook for the fiscal 2013 to be as follows: First, we do expect clear order growth and a moderate decline in revenues compared to the prior year, both on an organic basis. So if you say clear, that's a material uptick as to what we have been reporting during the fiscal Q2 call. There is still -- we're looking for a moderate growth, so that now, thanks to the big and large orders in wind and rail, will be a clean order growth year-over-year.

Charges associated to Siemens 2014 program in the sectors are expected to be about EUR 1 billion, which is quite similar as to what we have been discussing with the market so far. It could be maybe EUR 100 million above it, which would mean that we would be able to pull in some charge -- restructuring charges for 2014.

Given these developments and financial results for the first 9 months, we do expect income from continued operations of about EUR 4 billion in fiscal 2013, including the solar business, as well as the gain from the transaction of NSN. And solar, obviously being adverse in the neighborhood of about EUR 300 million. The outlook excludes other significant portfolio effects, and obviously also legal and regulatory matters in the fourth quarter.

Before coming to your questions, let me maybe give you some brief perspective on fiscal 2014. We are continuing our actions full speed, with the implementation of the program as far as productivity actions are concerned. We are reasonably well on track, and we do expect those measures to optimize our portfolio and reduce costs going forward in 2014. Nevertheless, an important condition to reach our biggest target of -- our business target of 12% plus the return to moderate revenue growth in fiscal 2014. This growth, we do not expect to materialize mainly due to the market environment. As a result, we do no longer expect to reach a margin level of at least 12% by fiscal 2014, at least not on an operational underlying basis.

And with that, ladies and gentlemen, I hand it over to Mariel to start the Q&A.

Mariel von Drathen

Yes, we would like to open for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] We can take our first question from Mr. Mark Troman of Bank of America Merrill Lynch.

Mark Troman - BofA Merrill Lynch, Research Division

Joe, Mariel, congratulations on your appointment. First of all, on the guidance, Joe, I'm just trying to understand the root cause of the lower growth guidance effectively, not being able to do 12% sector margins, where was that coming from? Is that a broad-brush global GDP issue? Is that a regional issue? I heard you say on the call you thought U.S. demand might be slower. Is it short cycle, long cycle? Maybe a bit of color on where the shortfall is on the growth expectation would be very helpful, thank you. And the second question on the process of constructing new guidance, I realize you'll go through that in due course. It doesn't feel like the key global competition is lowering guidance. So in theory, the gap versus those peers may widen. What do you feel you need to do to bridge that gap that's not being provided by the expected growth?

Josef Kaeser

Thanks, first of all, for the good wishes. We definitely do need it, as you all know. As far as 2014 is concerned, what we've been always thinking was that the whole 2014 recovery of growth would be related to the recovery of short cycle business, which always is true in a way. However, in the meantime, also to see that the mid and long cycle environment, especially energy, energy fossil, for example, is still lacking the growth perspective in 2014 going forward. So there will be a dip also in the longer-cycle environment, which we need to clearly address by incremental productivity actions. Secondly, as far as the short cycle, short cycle CapEx-related environment, which is discrete manufacturing, there is still no sign that we would see our end markets be growing and taking up as we originally thought this would happen in the second half of calendar year 2013. And that basically took us to the position that we would no longer hope for any growth support in 2014 from any of the divisions in the company. And that's, more or less, related when you said that 12% would not be achievable anymore in '14, at least not operationally. In the -- your second question, process of constructing and new guidance, I mean obviously, you can understand that I'd like to have my management team together now starting tomorrow and really go through item and item, spectrum by spectrum, what this company will be looking like going forward in the years to come. And from that one, we will derive a more precise and clear guidance going forward as to what needs to happen to narrow, and finally, close the gap between our sector basket benchmark and the performance of ourselves. And then we will be more precise on this one when we will be releasing our number for Q4, including the outlook for 2014.

Mark Troman - BofA Merrill Lynch, Research Division

Josef, so 2014 is more a bottom-up constructed guidance, whereas perhaps before, it was a little bit more top down. Is that fair?

Josef Kaeser

In a way, I believe that's fair for now. It is bottom up, but it has not yet gotten the full prioritization our management board needs to take in order to see where the market is and where competitive profitability is going.

Operator

Our next question comes from Ben Uglow of Morgan Stanley.

Ben Uglow - Morgan Stanley, Research Division

Obviously, not an easy week. I guess, everybody's probably going to probe you on the issue for 2014 guidance. One thing, Joe, first of all, in terms of the statement that was put out, you said that the cost savings or the productivity was reasonably on track. Is that a covert message that, in fact, you were falling short on that target as well? Could you elaborate on that one? And then I just really wanted to understand your -- what precisely you're saying about the short-cycle environment. The short-cycle margins, Industry Automation and Drive Technologies, have been -- well, frankly, they inflected positively this quarter, whilst I see that the orders haven't. So my question is, are you looking forward into 2014 and saying that you don't expect to see industry margins necessarily get much better? Is that the message?

Josef Kaeser

Well, Ben, first of all, if I say reasonably on track, that basically means that everything, which we can do is going well. If I say reasonably on track, insinuating that the EUR 6.3 billion might be less, then this is mostly related to the fact that the volume is smaller benefit. For example, from purchasing obviously also are lower in absolute numbers because of the lack of volume. So as far as the structural actions are concerned, we are mostly in plan. We've been making, as you can see from the charges, especially from the restructuring charges, we've been well on track in getting the agreements done with the unions and the workers' representatives. But it now needs to be done quickly is that we get the -- that we simplify the processes, get the workload down and then subsequently reduce the workforce and take the cost out. And that's now in a very focus of the next month in order to get this done. So if there is a gap just between the original 6.3 numbers over 2 years and what we might be coming up with now, this is mostly related to the lack of volume and subsequently related to a smaller productivity because, obviously, if you buy -- if you sell less, you buy less. The short-cycle margins, if it comes to industrial automation, we've been satisfied with the underlying margins. On the other hand, though, what we do see in industry is that the metals business is still far away from meaningfully delivering margin contribution, which takes down the sector as a whole. And secondly, if it comes to the business, the discrete automation is not doing that well as process industry-related activities are doing, so we need to yet see when this manufacturing rate uptick is going to come. We still do believe that China will help us in '14, but it's too optimistic to keep it if the end markets don't see any coherent sign. So that's, I guess, all I wanted to say. But then again, just bear with us. There will be a clear restructured of guidance in November, and it will be very specific about what can be done and what should be done. On the other hand, and maybe that's important for you also to ease the minds, if we -- and we do know that it was not exactly perfect to put out a warning to not achieve something without naming what the option is. We realize that. On the other hand side, in all times and the subsequent events, please bear with us that it would be premature to come up with a new number, which may as well not be the one which we want to go after. So this is not going to be earth shattering. There is no reason to believe that there's not going to be a significant improvement of the company going forward. All we've been saying is be careful. There's been a series of impacts on the top line, which this company is not able anymore to compensate for due to timing also, because it's July. And that means that whatever we would do now to additionally boost productivity would not necessarily and not very likely help us in getting the output benefits already in '14.

Operator

Our next question comes from Peter Reilly of Deutsche Bank.

Peter Reilly - Deutsche Bank AG, Research Division

Joe, moving away from the guidance to some of the bigger-picture issues, could you talk about what sort of mandate you got from the Supervisory Board? I mean, is it just around the business better operationally, or do you have the mandate to make more dramatic changes? And secondly, and related to that, what are you going to do differently? Obviously, there's been a number of problems over the last couple of years. Do you see your job mainly as running the business better in terms of operational control, risk control, or is it more about portfolio and strategy or a combination of both? And then lastly, what can you say to reassure us about the record EUR 102 billion backlog? Do you see anything out there in the backlog which is making you nervous for 2014 or '15?

Josef Kaeser

Peter, the mandate is that we create incremental value for this company going forward with lesser volatility in the way we act. And that's not necessarily the mandate which has been given to me. That's the mandate which I expected the board to help me with. And that's all I can say at this time. There's been a lot that's been going well in Siemens; and recently, there's been a few things which didn't go that well. And there is a series of reasons for that. One, obviously, has been the fact that we've been trying to achieve too much too quickly. And that definitely has -- its root cause is -- it's in a series of goals, which we finally couldn't achieve. That needs to be corrected. That needs to be more focused on projects and execution of quality and reliability. That's the operational side. As far as the portfolio optimization is concerned, I hope you can mostly agree with us that there has been progress when you think about the water business, the Abbott logistics business, OSRAM, and finally, also NSN, which does not necessarily relate to the sector, but still is a significant improvement in terms of risk management and protect the down side. So there has been progress, and that progress will continue. And everything else, please bear with me, I'm still the CFO today. And tomorrow, I'm starting that other job, then you can be rest assured that we will look at everything, which we have in order to grow this company, not just in revenues but particularly also in value.

Peter Reilly - Deutsche Bank AG, Research Division

On the backlog...

Josef Kaeser

On the backlog, I mean, obviously, what we have to just keep in mind is that the very nice and also favorable development in orders in Q2 and also Q3 comes with the tag that this is going to be diluting in terms of margins compared to the average business in the company. And we are very well aware of that. This is true with rail, and this is also in part true with wind. On the other hand, those businesses also do not require that much OpEx, as, for example, industry with mass market distribution channels do. So we do not see particular risks in the backlog as far as the projects -- the complexity of the projects themselves, but we do have an amount of backlog, which has smaller margins as a business than the average of the Siemens spectrum. That's definitely something, which need to be always clear about. When this volume materializes in revenue, that may not convert as many profits from revenues as the average of the business.

Operator

Our next question comes from Andreas Willi of JPMorgan.

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

First question on the fossil business. You had weaker orders there, and you mentioned also weaker service business, but profitability was quite strong. In the past, you gave quite precise guidance on the fossil margin. Maybe you could update that on us -- update that. Also, given that, obviously, some of the utilities in Europe are no longer using turbines as frequently as they used to and, therefore, are inclined to try to renegotiate the long-term service agreements they have with you. And whether -- also in energy, whether the downgrade on the guidance was also at least partly linked to a change in competition due to the weakness of the yen, and then just a clarification on what you said on backlog dilution. These orders in wind and rail, are they diluting also relative to what these divisions currently already earn, or is that just a result of the overall mix if those businesses grow faster than the rest of Siemens?

Josef Kaeser

Andreas, let me start with the last one. That's exactly the point. So those orders which we have been taking and which we have -- which have been helping us in Q2 as well as in Q3 to be above 1 as far as book-to-bil and then in terms of order growth, those orders are not dilutive to the divisional business itself. But obviously, since the whole growth has been coming from dilutive businesses to the average of the company, that's what I wanted to say. So divisionally like-for-like will be fine. The stronger growth in orders in those businesses, which have traditionally lower margin as compared to the total company, are obviously dilutive. That's the clarification here. Fossil business, we continue to expect fossil, including service, to be in the neighborhood of about 16% to 17%, just a bit shy of what we've been seeing in the last fiscal quarter. And that's expected to continue. As far as this whole service matter is concerned, and I know there's a lot of talk about it, I just want to give you a few -- a bit of a flavor in where our businesses are located at. The European Service business is about 15%, 17% end of the total. Germany is very small. You could probably -- if you estimate about 5%, you're not too far off. So it really is not that meddlesome if the German Energy change will eventually kill the gas turbine business here. It really doesn't matter much in terms of impact because the U.S. portion on our service is north of 40%, 4-0. So if you look at that, we do see some, obviously, weakness in Germany, some slow environments in Europe. But the real meddlesome topic is still a little contained. And this discussion about the make or buy with the utilities if it comes to service, I mean, one should not underestimate the economies of scale one has in servicing different customers in different locations as to if one utility needs to provide the whole infrastructure to do it on its own. So we are not really worried or concerned about this discussions because it's happened before.

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

And the percentages were for just the fossil service business or for the overall service business?

Josef Kaeser

That's Energy Service, but this obviously is being driven by fossil.

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

;

Because you used to have a slide, which showed about 1/3 being Europe.

Josef Kaeser

So the 15% to 17% base is the fossil-related portion, which -- in the fossil margin of 16% to 17%.

Operator

Our next question comes from Olivier Esnou of Exane BNP Paribas.

Olivier Esnou - Exane BNP Paribas, Research Division

A couple of questions. So first question is about the -- there was a -- there's a visible strong quarter-over-quarter improvement in the EBITDA of both Oil & Gas and Imaging and IT -- I mean, Healthcare x Diagnostic. On my numbers, the EBITDA is up by as much as the sales improvement quarter-over-quarter. So I was wondering if, there, you have any more details about some specifics, one-offs, or whether this improvement, you see that as sustainable or not going forward. The second question was about your new role as CEO, if you see rapid changes you want to implement in the way the company is run. I was thinking about that because when Peter Loescher arrived, he changed -- he created the CEO structure at the board level. So are you happy, basically, with the way the company general processes are running now and -- or do you want to make some changes? And I think a fair question would be, is there other implication in terms of management from what has just happened in terms of the change of guidance? A third question, probably a bit broader as well. I was listening to -- in the press conference this morning, several times, you were mentioning the topic of Siemens being on the electrification change and that Siemens needs to structure itself along this electrification chain. So if you think over the midterm -- I mean, we could put a lot of things into it, but, I mean, you decided OSRAM was not part of this electrification chain. And it is probably a fair question to ask if Health Care, in the medium run, is also part of that chain. So are you able to maybe bring some light about what you see, how electrification is going to structure Siemens in the medium term?

Josef Kaeser

Yes. Thank you, Olivier, and, again, sorry for interrupting. The strong performance on both Oil & Gas and Imaging, it's got mostly to do with the structural product mix on Oil & Gas. As you know, there is a process industry services and there is the industrial turbine business. And we've seen quite some strong development in industrial turbine, and that's supposed to be just about similar in Q4. So that's much to this one. And you may as well, in the next couple of days, will also notice some structural improvements related to Oil & Gas and also how we position it into the fossil environment. So that's something which is just about to be discussed, and we'll keep you updated there. This action will be targeted at further improving profitability and productivity in the fossil turbine environment. So Imaging, as always, is something how many big machines have we been selling, how many refurbished ones, what's the service portion related to that. So it's been a good quarter. It should be similarly well in Q4, however, based on a significantly more and higher revenue target. So nothing really structural, just a good mix, and that is to those 2 topics. Now on your broader question of what will the implications be on the new role. Obviously, as you know and as you can imagine, I have my views and I have my visions and I want to discuss that with my team and get a meaningful strategic outline going forward. So please give me a few more days till I start the role tomorrow, until I get my people together, my team, and get them into the direction we believe is good for everyone, the employees, the customers and last, but not least, to -- also, of course, to the shareholders. If I talk electrification, obviously, what I do mean is that this company is -- almost no one else is so well positioned along the electrification chain. It starts with energy generation, T&D, efficient use of energy in industrial automation and drives in building automation, in mobility management and, of course, also in health care. And obviously, health care also needs power and electrification. So I would not really jump to any conclusions in the short term about whether or not any material sector is part of Siemens or not. So please -- as I said, please give me some patience here to outline the priorities of the company, which we will be revisiting and rediscussing during the course of the next weeks and months and get out to you again in November.

Operator

Our next question comes from James Moore of Redburn Partners.

James Moore - Redburn Partners LLP, Research Division

Congratulations and good luck in the new role. And it sounds like you'd rather have a bit of time for big-picture CEO change questions, so maybe I'll leave those and try some housekeeping ones. Could you say, without giving the new EUR 6.3 billion number, unless you're happy to, what the group cumulative savings is so far? Secondly, the corporate line was a nice help and has been a constant source of feed against guidance over the last few years. I'm sure you'll probably say it's going to be a big hit in the fourth quarter. But could you give us a realistic picture of what that looks like and whether you can see any regulatory or legal charges coming in the fourth quarter? And then finally, I see the gross margin has fallen 110 bps year-on-year, and I think it fell something similar the year before. We can't see the split of one-offs by OpEx versus COGS from the outside. Without hard numbers, can you say anything qualitative about the underlying gross margin development in the quarter, please?

Josef Kaeser

Yes. The 2014 -- and I already do understand and do respect that this is the centerpiece of all your minds, and that is also the centerpiece of questions, again, there's not going to be any earth shattering development, which we see and you can see and which we see and we would not tell. The only one thing where we said we'd be careful and pull that trigger on it was that a lot of supporting areas, it do not point to the directions which they should. So now, the EUR 6.3 billion, which used to be 6 plus 3 -- 0.3, as you know, the current planning goes in about EUR 5.7 billion, EUR 5.8-ish billion. So it's -- we are still having a lot of actions, which will materialize for '13 and '14. And the difference is mostly related to the fact that if you sell less, you need less to buy, and if you buy less, your absolute numbers of design to cost obviously goes down. So that's -- again, as I said earlier in my quick intro, we are still working full power on achieving the structural changes in the company in terms of productivity. What I'm a bit more concerned about and what I will put a lot of focus on is the gross margin development over time. And the one of you who -- you follow that and you will do clearly can see that the both underlying, as well as reported, the gross margin has been going down over time, even though revenues are up even at times. And this is something I really do want to understand what the root cause is, and we'll fix that root cause because that's important. Now obviously, if this is only a result of a structural change in business as to saying that certain businesses like wind do not need that big of a gross margin because they have lesser OpEx to spend in order to get good margins, that's fine. If it's an overall trend, that needs to be corrected and it better be corrected quickly. So, you can be rest assured, that it is a very important focus to us, understanding the root cause of that development. In terms of giving you a flavor of what the gross margin does underlying -- the profitability does underlying, so if you take out everything, the charges which we expect to be one-offs, as well as the transformatory charges, you can kind of expect the total sector profitability in the neighborhood of 9.5% in Q3. So that's what we -- that's how we look at the business. It was about similar in Q3 2012. So corporate line, yes, you're right. That's been favorable for 3 quarters in a row. But please, again, Q4 will be -- due to the nature of the way -- also we charge out corporate efforts to the businesses, you need to expect quite a significant impact -- efforts impacting Q4. So if you take similar numbers than last year, you'll be okay. I believe that was pretty much it, right?

James Moore - Redburn Partners LLP, Research Division

Unless you have any legal or regulatory charge comments.

Josef Kaeser

Well, look, if we had known the charges already, which -- we expect we would have booked them in Q3. So at this point in time, there is nothing which we can see. But then again, please bear in mind we are shipping out the first platform in the North Sea, and there is a lot of conditions which need to be favorable to get this one done on time and in cost. So there is -- are a few topics which we are -- obviously, we need to monitor it closely. There is always this topic, which we already have the first and second quarter of year end, this legislation changes, if the sentiment on how to apply this legislation changes, there could always be something related to that action. But at this point in time, we do not see any material impact above and beyond those examples.

Operator

Our next question comes from Simon Toennessen of Crédit Suisse.

Simon Toennessen - Crédit Suisse AG, Research Division

First question, on Health Care and the order development in there. Could you just talk a bit more regionally how that has developed, with sort of a particular focus on the U.S. and in Europe and Imaging in particular? And the second question is on free cash flow, EUR 1 billion in the quarter, but you've lacked the working capital impact, plus EUR 1.3 billion, in there. Could you just elaborate a bit on that? What was the difference on -- particularly last year? And then the last question on the equity investment line with the -- of the EUR 150 million -- EUR 143 million profit this quarter, maybe you can give us a bit of guidance what we can expect for the fourth.

Josef Kaeser

Yes, thanks, Simon. On Imaging -- I mean, obviously -- and in Health Care altogether, but in particular, Imaging, China is the strong foothold, with significant, nice, very satisfying double-digit growth rates and counting. So that's good. It's been developing at least up to our expectations, if not more, and we do not see any reason why that should change any time soon. The U.S. is still -- it's okay, given the circumstances. Europe, and in particular Germany, is very weak, and that should not be different as to what everyone sees in that space. Free cash flow, we've been not really satisfied with the development of working capital. On the other hand, what we can see now is something which I have been tracking for quite some time. The relative prepayment to order intake is going down. And you've seen that sporadically last year and have -- and continue to -- have been seeing that this year. So the order intake does not help us any more to compensate for the incremental burden, now with the projects going up and creating some significant demand on working capital. So that's why free cash flow has been weak, in a way. It goes to show you the -- that the impact on working capital from the change in prepayments, including billings in excesses, obviously, as they're similar in nature, is about EUR 527 million compared to Q4 2012 and the EUR 440 million quarter-over-quarter. So that's quite a significant impact to the free cash flow, and we do not expect that to change in trends. So if that continues to be the case that we are not able anymore to gather as much net asset financing for the projects as we used to, those businesses need to improve their margins, because otherwise that would not create value. That -- on the equity investments, obviously, those investments, that part of the P&L has been helped significantly by about a EUR 300 million positive gain on NSN. If we go forward, that would actually mean that we could expect -- but if you go with about a EUR 50 million to EUR 100 million positive for Q4, you shouldn't be too far off.

Operator

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

Gael de-Bray - Societe Generale Cross Asset Research

I'm actually a bit surprised by your bearish comments on the 2014 growth prospects, because from what I've seen to those numbers, the short-cycle businesses have shown a pretty strong sequential improvement. And overall, group sales were up 7% in Q3 versus Q2. So now if I draw the line and if I do -- well, if I annualize the Q3 performance, the sales growth should be, well, relatively mechanically, about 3% next year. So what does that mean exactly? Do you expect some sort of deterioration in the coming quarters compared to the Q3 level, or is there something else? And maybe also related to that, what do you see in China that makes you so cautious about the outlook there? I mean, because some of your competitors have reported relatively good numbers in their business in China in this quarter. You also had 13% order growth this time. So I'm just trying to understand why you are so cautious.

Josef Kaeser

Yes. Well, look, I'd rather be bearish on the growth potential and the benefit from growth and be bullish on getting the cost structure in order, because if I have that one, everything else creates an upside. So I believe as far as those priorities are concerned, we are in the right order, really push hard for productivity and sustainable cost cutting. And if and when end market changes, then we have the upside all from the top line. So that's why I believe in terms of actually attacking those 2 topics, cost -- getting the cost down is positive. On China, we have been seeing some growth that's been related mostly to the lower end of the CPU environment that tells us that exports from China still is not growing. It's more domestic sales-related applications in the toolmaking environment and that usually carries very slow and very small margins as compared to the others. The topic of other...

Mariel von Drathen

That was China.

Josef Kaeser

The topic of -- that was China.

Mariel von Drathen

Yes.

Josef Kaeser

So this is -- thank you.

Operator

Our next question comes from Fredric Stahl of UBS.

Fredric Stahl - UBS Investment Bank, Research Division

It's Fredric here from UBS. I just wanted to ask a broad-brush question. In case you're launching a new margin target with an implied or implicit growth expectation, could you maybe tell us how you see Siemens' revenue order sensitivity to GDP? Make us understand what changed in your world view here as you've downgraded your expectations for next year. Have we gone from 4% implied GDP growth to 3%? If you could give us some flavor on that, that would be interesting, I think. And then the second question, on Health Care. You're obviously having some success with the restructuring program there. Your clean margins are at 17.5%. You've been up here before, but is there more to go from -- go for from this level?

Josef Kaeser

Yes, thanks, Fredric. Look, on the discussion of GDP versus our own business, I'd rather look at our businesses in our space and in our customers' environment, because GDP, sometimes, does not always necessarily reflect the spectrum of our business. The reason why we've been slower than some in China is that we've been having our eggs mostly in the manufacturing automation, and that's CapEx-related environment, whereas others might be more associated with the process industry environment, including also, of course, the oil and gas and energy efficiency space. So what we have been looking into was our markets, where we are positioned that -- what we could expect from growth perspectives going forward and did not so much put the GDP growth in relation to our business. So it's more bottom. It's not customer segment driven from what we see and not being derived from any global GDP association with it. And that's what we have and that's what we currently look at, and we'll take it from there going forward. As I said earlier, again, I'd rather push my costs and bring them in order than speculate on a recovery of the industry going forward. On Health Care, I mean, you're very right, that 7.5% is quite a decent number. That is satisfactory. I would add margin to actually consider to be peak margin for Health Care.

Operator

Our next question comes from Mark Fielding of Citi.

Mark Fielding - Citigroup Inc, Research Division

Two questions, please. The first one, can you talk just a bit about your thoughts in terms of the use of capital going forward, the dividend in the context of the slightly lower midterm earnings outlook and, particularly, how you think about things like the NSN proceeds, and maybe in that context, update us on the other ongoing disposal processes and whether you've gotten any further on them? And then secondly, maybe briefly just talk about -- in the context of Drive Technologies, the sensitivity of that business to, particularly, the wind market and what impact a pickup from admittedly a low base might have on profits going forward.

Josef Kaeser

All right. Thanks, Mark. Look, use of capital, also associated with the NSN disposals, I've always said that, eventually, NSN also belongs to the shareholders, and that's an aspect one ought to keep in mind. On the other hand, we always also made it clear that the use of capital and the policy and what we return to shareholders would be either by some sort of share buyback or dividend or a combination of both, and that aspiration remains in place. In terms of other ongoing disposals though, I need to caution you that this is not going to bring us to billions of cash, which one would love to see. All the businesses, which we have been talking about, such as water, airport logistics and postal automation, may not really be that billionaire type of capital returns. It is just the focus on streamlining our business and have the spectrum that we -- which we need to push forward. So NSN, I understand. And the other disposals, I would, as I said, rather caution you about the impact of this one. On wind relate -- as it comes to Drive Technology, obviously, this is a significant matter to us, because if you look at mechanical drives, this has been traditionally -- the wind business, traditionally, has been the growth engine for mechanical drive due to the fact that drives have been needed. Now -- and over the years have been needed. Now with the technology changing into high-performance 3.5- and up to 6-megawatt machines, they all run with gearless -- with the gearless spectrum. So that actually means that you need to continue to understand and act on mechanical drives, because this is going to go down further over time. So in -- if you look at it from the Q3 perspective, revenues have been down 17% in that wind-related aspect in DT as you do not expect any recovery. So that is a structural topic which we are addressing in the course of our transformatory charges and actions going forward.

Operator

Our last question comes from William Mackie of Berenberg Bank.

William Mackie - Berenberg, Research Division

Actually, just a couple of housekeeping. In the context of a lower growth outlook, do you envisage that the company should begin to flex the investments for innovation in R&D and CapEx against lower-growth expectations? And as a tidying exercise with regard to Solar within the energy sector, should -- how should we expect that to impact the charges for the full year? I mean, I think previously, you've said about EUR 300 million of the bottom line. Is there any change to your thoughts around the Solar exit?

Josef Kaeser

Okay. Thanks, Will. And obviously, if you look at growth perspectives going forward, where we see them, what they look like and what the actions are, we obviously need to differentiate between a weakness, which we expect to be temporary in nature, or whether it is supposed to be structural in nature. If that was structural nature, obviously, that needs to be addressed by structural actions, such as restructuring and asset corrections and what have you. And those are being addressed also in the course of the Siemens 2014 transformatory actions, which, as you know, amount up to EUR 1.2 billion. As far as China, for example, is concerned, we do believe this is temporary in nature. As far as the whole toolmaking automotive environment in Germany is concerned, we expect -- and also in the U.S., by the way, we expect that to be temporary in nature. So you would not really materially cut the R&D and engineering part of it. What we would do though if that was structural, like, for example, the mechanical drive matter, which we just discussed, or the inverted topic, it becomes Solar sub-deliveries from the industrial business to the space. If -- as far as our Solar business is concerned, we obviously have 2 topics here. One is the company, the Solel company itself, that actually has been pretty much handled already. There's very little to expect going forward, as far as any charges or other topics are concerned. The other topic is a project in Spain. It's called Lebrija. That one is still -- it needs to be fixed and needs to be developed going forward. So there could be some charges, which we could expect going forward. But the materiality of the charges is pretty well covered in what we have on the balance sheet.

Mariel von Drathen

Okay, thank you very much. Thank you, Joe. Thanks a lot to everyone for participating to -- on today's call. Of course, the IR team is available to give you more answers if you have further questions.

And in the meantime, I wish you and, I guess, all of us a nice holiday season. Thank you very much. Goodbye.

Josef Kaeser

Thank you.

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. Once again, let me repeat the instant replay numbers. Participants in Germany, please call the replay number +4969-2222-2236, access code 7978603#. Participants in other European countries, please call the replay number plus +4420-3427-0598, access code 7978603#. Participants in the United States, please call the replay number +1 (347) 366-9565, access code 7978603#. This replay service will be available for 48 hours. A recording of this conference will also be available in the Investor Relations section of the Siemens website. The website address is www.siemens.com/investorrelations.

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