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Executives

Mariel Von Drathen - Director and Member of Remuneration Committee

Josef Kaeser - Chief Executive Officer, President, Member of the Managing Board and Member of Equity & Employee Stock Committee

Ralf P. Thomas - Chief Financial Officer, Member of The Managing Board, Executive Vice-President and Member of Equity & Employee Stock Committee

Analysts

Ben Uglow - Morgan Stanley, Research Division

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

Gael de-Bray - Societe Generale Cross Asset Research

James Moore - Redburn Partners LLP, Research Division

Simon Toennessen - Crédit Suisse AG, Research Division

James Stettler - Barclays Capital, Research Division

Daniela Costa - Goldman Sachs Group Inc., Research Division

Olivier Esnou - Exane BNP Paribas, Research Division

Fredric Stahl - UBS Investment Bank, Research Division

Andrew Carter - RBC Capital Markets, LLC, Research Division

Siemens Aktiengesellschaft (SI) Q1 2014 Earnings Call January 28, 2014 2:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to Siemens 2014 First Quarter Conference Call. [Operator Instructions] Before we begin, I would 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 and are, therefore, subject to certain risks and uncertainties.

At this time, I would like to turn the call over to your host today, Mrs. Mariel Von Drathen, Head of Investor Relations. Please go ahead, Madam.

Mariel Von Drathen

Good morning, ladies and gentlemen, and welcome to Siemens' first quarter fiscal 2014 conference call. All documents, like the earnings release and the flash slide, have been published this morning, and you can download them from the Siemens' website. Also, this morning's presentation is online, and this call is being webcast via the IR website.

Our President and CEO, Joe Kaeser, and our Chief Financial Officer, Ralf Thomas, are here this morning to review Q1 results with you. Since the Annual Shareholder Meeting starts right after this call, we will limit the duration of the call to 45 minutes. Joe will start with a brief presentation, and then we will have time for Q&A with Joe and Ralf. And with that, I would like to turn over to Joe.

Josef Kaeser

Thank you, Mariel. Welcome, and good morning, everyone. Thank you for joining us to discuss the first quarter results of fiscal 2014. All in all, I believe we had a sound start into the new fiscal year and we are on track to achieve our 2014 guidance in a slowly improving macroeconomic sentiment. Advanced economics show some improvement with production in the U.S. picking up and Europe starting to recover, albeit in a sluggish pace.

Mixed signals are still coming from China continuing to shift its economic mode through reforms, and a number of countries such as Brazil, India, Russia, dealing with ongoing structural challenges. Therefore, we continue to expect meaningful macroeconomic support on our short-cycle businesses only late into fiscal 2014. And we come to that later because I'm sure you folks have all a lot of questions about short cycle.

In this environment, our order intake increased significantly by 12% on organic basis growth all across the sectors and geographies. This was mainly due to a substantial increase of large and, in particular -- in part, multiyear orders in wind and transport and logistics.

Key drivers were emerging markets growing 27% and accounting for 41% of the total order volume. China, for example, was up 23%, while emerging countries outside the BRICs delivered remarkable 40% order growth. Book-to-bill was 1.2, which we believe is healthy, but I really do want to draw your attention that we are talking mostly about multiyear orders in both wind and rail, so one should not get overly excited about order intake growth in fiscal Q1.

Overall, top line growth was significantly affected by the dual strengths of the euro against nearly all currencies that shook away around 4 percentage points from revenue development. Now what we do know that this is a competitive matter all across the board, but it still remains to be seen what the impact will be going forward.

On the bottom line, we saw a negative foreign currency effect of around 40 basis points, with the main impact in the product business of healthcare and Industry. Revenue declined marginally by 1%, mainly driven by the Energy Sector, which decreased 4% on a lower power generation and transmission sales. Despite substantial foreign exchange headwinds, Total Sector profit improved by 15%, but with the prior year benefiting from a better project execution, particularly in the IC Sector and contributions from Siemens 2014 productivity measures. So Total Sector margin returned to a double digit 10.2%.

The first quarter -- and this is what I'm really very satisfied with, in the first quarter, all sectors were in the target EBITDA margin range, and we are confident to achieve this goal also for the full fiscal year.

I will give an overview of the performance per sector in a minute.

Total Sectors or below Total Sectors recorded an exceptionally strong first quarter with a positive profit contribution of EUR 178 million. This was mainly due to a significantly higher disposal gain at Siemens Real Estate, which are obviously volatile and may not be expected in the quarters to come.

For our second quarter below sectors results were normalized and for the full fiscal 2014, we expect a development close to the framework outlined last November, maybe some upside from disposal.

Net income grew by 20%, also supported by a positive EUR 65 million tax effect in discontinued operations related to a formal communications activity. Correspondingly, our key metric basic earnings per share net income all-in improved to EUR 1.70. As for the extraordinary strong free cash flow at the end of fiscal 2013, we saw an expected shrink back in fiscal Q1. There, you'll recall, is a substantial buildup in net operating working capital of EUR 1.4 billion.

BHEL state substantial improvement in return of capital employed of 18%, well within the targeted range of our One Siemens framework. However, obviously, I still want to draw your attention as this has also been impacted by positive one-offs, be it the tax or also the discussed Siemens Real Estate with EUR 120 million in Q1. You probably have read our press release that we are planning a delisting from our -- of our ADRs from the New York Stock Exchange and a de-registration from the SEC. The main reason, clearly, here is that we address the change in the trading pattern of our investors, with the fact that the share of the global trading volume of Siemens shares in the U.S. was significantly less than 5% in 2013.

Frankfurt, and especially electronic LTC trading platforms are, by far, the most important trading venues for our shares, including for U.S. investors. As a consequence of the delisting, we will also simplify the processes of financial reporting and increase its efficiency going forward. You can be rest assured that Ralf and I will make sure that the highest standards of transparency in the financial reporting and in the corporate governance will continue to have the highest priority at Siemens. This goes without saying that our strategic focus on the business is our single -- one of our single biggest markets in the U.S. remains unchanged.

Now let's have a look at some key developments in each of the sectors. First, the book-to-bill ratio in Energy was at a very healthy 1.25. Orders were up 3%, entirely due to a doubling of orders in the Wind business, where we, for example, recorded the largest onshore order ever from MidAmerican Energy for 5 projects in Iowa, totaling to 448 wind turbines. Beginning of fiscal 2014, the new combined power generation division started a merger from the former Fossil and Oil & Gas divisions. Orders are at 12% -- orders are 12% lower across the regions due to less volume from large orders.

In transmission, we continue to be sensitive to pricing in order intake, primarily in the Solution business. Overall, the market environment for Energy remains highly competitive and should not change anytime soon. First quarter revenues were down 4% with growth in wind and lower revenues in power generation, driven by less solution and gas turbine businesses.

On profitability, Energy showed an improved performance year-over-year. Power generation achieved an excellent 16.6% profit margin, continuing a stringent project execution and a seasonally strong earnings contribution from the Service business.

As indicated before, we expect the division to have a normalized margin of around 15% going forward. Wind Power reached 4.8% profitability supported by higher revenues also from the expanding Service business and adversely affected by a seasonally lower share of the offshore revenues. On the downside, transmission faced continued project execution challenges resulting in charges of EUR 67 million, mostly related to the North Sea offshore grid connection.

Above and beyond, obviously, on the offshore grid connection, we do continue that our focus on transmission because what we see in the underlying performance is not what we like, so actions going forward are imminent.

Power transmission is executing on its restructuring program, Transform to Win, and continues to work through projects with very low margin throughout the rest of fiscal 2014. So do not expect a significant improvement in 2014. This will be reserved for '15 and beyond, and we have assured them and we have said that on various occasions that transmission needs time in order to fix the business as we move along.

Let's move now to healthcare, which is operating on a consistently high profit level. Order and revenue growth was fine given the environment. Nice to see the good balance between advanced and emerging economies if it comes to growth. Healthcare profitability remained at a high level of 16.5% underlying margin, led by a strong emerging business and solid performance of the Diagnostics division. Profitability was impacted by 30 basis points year-over-year from the medical device tax in the United States. In addition, healthcare is strongly affected from negative currency impacts due to its large exposure to both the U.S. dollars as well as the Japanese yen.

Once again, we're very impressed from the very positive feedback from our customers from the latest innovations at the RNSA fair in December. This was true for both our Somatom Force, a low dose CT, which opens up computed tomography to highly sensitive patient groups, or our Artis one, a highly flexible and efficient angiography system for routine interventions at a very competitive price. With these, we continued our restoration of innovation leadership in the space.

Next, I want to highlight the key developments in the sector industry. The market for our short-cycled business is too slow for the motion control business, but we saw some improvement for Industry Automation division, in particular from China, and mainly due to restocking effects.

Total capacity utilization in certain industries and geographies are still below the required level to trickle meaningful growth in capacity expansion in the end markets. For this reason, we expect the recovery of our short cycled businesses only late in fiscal 2014.

Order growth of 8% in the sector was mainly driven by its long-cycled businesses and PLM Software. Our LMS acquisition for a simulation software from 2013 has strengthened our software suite significantly and integration is as planned. Revenues in the sector was flat with growth in Europe and Asia, compensating for lower revenues in the Americas.

Profitability in Industry Automation improved by 110 basis points due to far more favorable business mix with higher-margin products while, in contrast, Drive Technologies was 160 basis points lower due to the smaller share of high-margin, short-cycled products in the machine tool area.

In January 2014, we closed the divestment of our Water Technologies business to AEA Investors for a purchase price of about EUR 600 million. We do not expect significant effects on income from discontinued operations from this transaction.

Last but not least, the sector Infrastructure & Cities showed a clear improvement, driven by its transformation efforts, which the sector reported on during its recent Capital Market Day. Order volume for the sector grew sharply by 45%, mainly due to the EUR 1.6 billion Riyadh metro turnkey project, which was explained in depth during the Capital Market Day which the Sector has held recently.

On top, the Rail Systems division recorded some attractive large-scale high-speed components order from China. The Power Grid Solutions & Products business improved its margins by 210 basis points, mainly due to favorable regional business mix in the Low and Medium Voltage division. Substantial growth in China continued and in particular the project -- and product business showed healthy margin improvement as indicated in December.

Finally, Building Technologies delivered good results for the transformation measures of Siemens 2014 and increased profitability by about 200 basis points to 8.6%. Before we move to your questions, let me close with a brief remark on our unchanged outlook. All sectors are working diligently through the Siemens 2014 measures to achieve the targeted productivity gains. We are on track to deliver our commitment from November to increase basic earnings per share for net income by at least 15% from the 2013 level. With that, ladies and gentlemen, Ralf and I will be happy to take your questions, and I return the mic to Mariel.

Mariel Von Drathen

Thank you, Joe. Operator, we would like to open it for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Today's first question comes from Ben Uglow from Morgan Stanley.

Ben Uglow - Morgan Stanley, Research Division

Joe, Ralf, Mariel, I had a couple of questions. First of all, Joe, can you just sort of articulate the short cycle environment and particularly, the notable pickup in Industry Automation, the underlying margin at 19%. How much of that is simply due to restocking in China, or are you seeing a more broad-based effect across the group? So that was Question #1. Question #2, obviously, I haven't completely disaggregated margin effects in Oil & Gas and Fossil Power. But what I'm curious to understand is, is the underlying margin in the former fossil power business, is that continuing to improve? If so, why? And what is the basis, in your view, for the margins going from 16.6% back down to 15%? I'm trying to reconcile what looks like a robust margin performance in fossil power with a lower forecast.

Josef Kaeser

All right, thanks, Ben. On the short cycle environment, really, nothing much has changed as to what we have been saying in November's timeframe as well as in the roadshows in December. There are no real coherent signs on a broad-based recovery of the end markets, reason being that our spectrum is mostly CapEx related rather than OpEx related, so we are still looking into a coherent sign of recovery. When it comes to the Industry Automation for the quarter, obviously, the single biggest and material impact has been coming from restocking efforts, mainly in China, and not so much from the point of sales into the end markets. Reason by motion control, the Sinumerik piece has not been that active as we have seen it in Industry Automation. It's merely the fact that there is little channel activity here and that our product spectrum in Sinumerik motion control is pretty much back-end loaded if it comes to recovery in the machine tool-making environment. So this is a natural impact. Now if you look at the -- and especially the German machine tool data, chances are that we do see a recovery in the quarters to come, but yet they need to materialize in orders and I would not be overly optimistic on a sharp improvement anytime soon. So we diligently work on cost management and productivity rather than betting on market improvements going forward. If that was to come, then we, obviously, would be ready and prepared to take advantage from such an uptick in the manufacturing environment.

Ben Uglow - Morgan Stanley, Research Division

I'm sorry -- just on that, sorry to ask a dumb question, but why could the margin go up so much then? What is actually driving that big improvement?

Josef Kaeser

It's twofold. If you sell high-end industrial automation parts, the chances are that we have 6% to 7% euro dropping to the bottom line. So it's very mix dominated and that's what we have seen. And we've always made clear if there is recovery, there will be significant growth conversion into the bottom line. So that was a positive -- but I'm just saying there is no coherent sign that the sell-through will last in the next quarter. On EP, which is Energy fossil including Service and the Oil & Gas products, so to speak, I mean, we are -- I wanted to emphasize 2 matters. First, we had a very decent quarter in Q1, which was predominantly due to the fact that the Service component in the total mix was rich, so was the margin, and that actually helped us drive to the 16.6%. Going forward, we said -- in the whole organization, we had said a normalized margin for fossil, including services, would have been 16-plus percent. Now with the integration of the industrial turbine, you know that new normalized margin I wanted to guide the market with is more in the neighborhood of 15% so that's just for your orientation. Now why have we been so strong in Q1? Obviously, 2 things. First, there was a good set of products business as related to solutions and so it has been strong in Q1.

Operator

Our next question comes from Andreas Willi from JPMorgan.

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

I have 2 questions, please. The first one on foreign exchange. You mentioned the impact here also going forward. You said in the quarter, you had a 40 basis points impact on profitability from the transaction exposure. Maybe you could give us some indication on to what degree you still benefited from hedging in Q1 and how long that's going to last, and whether that transaction impact to margins is going to increase in the coming quarters assuming current spot rates remained the same? And the second question on transmission. You continued to execute low-margin or written down contracts, but maybe you could give us some indication what profitability in that -- in the business is outside the invoicing effect of written down contracts and better than 8% margin in 2015, which was kind of the indication back when you start the restructuring is whether that's still a reasonable assumption or whether pricing will not allow that?

Josef Kaeser

Well, thank you, Andreas, for that question around currency, because that's obviously one of the topics we have been intensively dealing with in our analytics. And it's right that the bottom line was impacted by some 40 basis points. Compared to the last year hedging levels, the first quarter was substantially below that level that we've had last year when it comes to hedging. And the way forward, we see that now steadily going to the lower end of that what our hedging policies is. And what we do is we put hedging in place for the next 3 months on a minimum level of 75%. However, having reached the current status of exchange rate, especially against the dollar, that will not have a substantial impact. What I would like to give you in addition to that is a few more data point on what impact that has on the particular different businesses in our portfolio. The 40 basis points for the first quarter are for Siemens in total. When it comes to product business, this is about 70 basis points. And in those niches, where we are extremely successful, as you do know, like healthcare and Industry, we see 1 percentage point impact in the first quarter on the margins. And since we do not have any indications that there will be substantial changes in the currency environment anytime soon, we have been planning for the rest of the fiscal year in line with that what we saw in the first quarter.

Mariel Von Drathen

Joe, you want to take the transmission?

Josef Kaeser

Yes, I will take the transmission. Andreas, obviously, the performance of the division has been somewhat disappointing on both the renewal charge in -- for the grid access in the North Sea and secondly also for the rest of the product spectrum, which was predominantly impacted in an adverse way by a very, very low margin backlog on solutions. We are working through that backlog during the course of 2014 on a subdued gross margin level. We would expect this backlog to carry us in a -- to a breakeven small single-digit profitability for transmission for the fiscal year and then see some significant impact from order backlog, mix improvement, as well as productivity measures for 2015. But it's been a slow pace on the division and there are a series of actions which still need to be taken cared off in order to get the division back on track.

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

Just to make sure I understand correctly, the breakeven small single-digit margin in '14, is that underlying or reported including the already announced project charge and potential further charges?

Josef Kaeser

That's currently underlying and the aspiration is to have it also including the charge.

Operator

Our next question comes from Gael de-Bray from Societe Generale.

Gael de-Bray - Societe Generale Cross Asset Research

The first one actually related to the U.S. spend. How do you explain the disconnection between the solid macro data we've had in the U.S. for some time now and the strong decline in sales, again, reported in the quarter in the U.S.? And also in relation to that, could we maybe expect some sort of restocking in the U.S. as it seems to happen in China currently in 2014?

Josef Kaeser

Thanks, Gael. Look, I mean, the solid macro data has been driven by the housing market. And we know that once housing does sign then comes consumption, and then there will be industrial CapEx, the different expenses again. So that's the chain. Unfortunately, we are not in the early cycle of recovery. We've done some work in building technologies as well as the drives and instrumentation as it relates to the Oil & Gas tracking Sector. But you obviously also do see that now the weakness in U.S. revenues comes from the fact that there were nearly no order intake from wind in 2013. If you now look forward into the bookings of United States business, you can see that we have a very strong underlying booking in the -- for the U.S. business of 28%, plus mostly driven by wind orders, which we are also going to execute on during the course of 2014. So all in all, United States industrial markets for us are slow, and we do expect a recovery '14 and '15 when our term of the cycle will basically come into place.

Gael de-Bray - Societe Generale Cross Asset Research

Okay. Can I have a follow-up question on the metals business, please? Could you maybe elaborate a bit more on this one in terms of what's the outlook, what's the prospect and what you think of the business, generally speaking?

Mariel Von Drathen

Gael, you were talking about metals, did you?

Gael de-Bray - Societe Generale Cross Asset Research

Metals, metals, yes.

Josef Kaeser

Gael, look, I mean, the metals -- the steel and metals environment, obviously, is in a reasonably challenging environment on a billable perspective and we do see that all across the board in that space. So now obviously, it is a -- the metals -- steel market is a consolidation play. In the absence of growth, our short-term focus is on putting operational excellence back into the business unit. There have been a few incidents which were not to our liking. This is what we are going to fix. That will give us some headwind on margin improvements, but on the long term, the metals business needs to go into a further consolidation, and you'll see how that develops.

Operator

Our next question comes from James Moore from Redburn Partners.

James Moore - Redburn Partners LLP, Research Division

I've got 3 questions, please. I wonder if you could talk about pricing. We've seen your U.S. competitor talk about order pricing deteriorate in the gas and steam turbine business. I wonder if you could talk about that, please. And secondly, could you please remind us of your productivity savings target? It came down from EUR 6.3 billion to about EUR 5 billion. Is about EUR 5 billion still the right level? How much have you achieved so far and how much do you expect to actually retain of these savings? And then finally, could you say how the group feels about healthcare? There's been talk about a possible spin-off and removal. Is the May review to talk about such big changes or more minor changes?

Josef Kaeser

James, that's been the full -- a full bunch of flowers, I guess, mostly matters which I really appreciate you asking me again in May because you may get a more decent answer as to what to be expected today. No, but on a more serious matter, the pricing topic for gas turbines, I mean, obviously, is a topic. Pricing has been becoming more challenging in a market where, obviously, every order counts. We have, in particular, been seeing quite an active pricing behavior in the Middle East. This was about reallocating market shares over time. I would not, however, see this challenging pricing environment for gas turbines all across the board. But the question will be, whether or not a competitors outside the euro currency will use that deterioration of the currency for competitive access. That's a question we -- too early to tell, but that could further accelerate the pricing debate on the gas turbine space. As far as over the healthcare is concerned, look, I mean, there's nothing wrong with having a highly innovative and profitable business. And if you have the chance to see us at the RSNA or at least have -- as customers, I'm sure you have heard that Siemens, again, was in the limelight as to what was talked about if it came to innovation. So this is a good business. This is great. If there was -- if there's a long-term change in the business model which we could anticipate, we would obviously go see what that means for Siemens. But at this point in time, I like what I see. I like what we have and I, predominantly, like innovation strengths still in the imaging environment and Diagnostics recovering, so that means these underlying and good free cash flow, underlying free cash flow, on Diagnostics. And with that, I hand it over to Ralf to give you a little more flavor on the productivity environment which we have planned for at this time.

Ralf P. Thomas

When it comes to productivity, we are pretty much on track with regard to the EUR 5 billion. Most likely, we will end up slightly below, depending also on the headwinds that we will experience from currency, as I have been elaborating on before. But what is important for you is that we are still very confident that we will stay within the framework of the margin corridor that we gave you with improvements of between 200 and 300 basis points, and we have been excellently starting out with regard harvesting the impact from our transformation measures of last year in the first quarter. I had been indicating in the press conference before that we have been earning about EUR 165 million of savings in the first quarter from that, so we are perfectly set, on track with that so far.

Operator

Our next question comes from Simon Toennessen from Credit Suisse.

Simon Toennessen - Crédit Suisse AG, Research Division

Just 2 questions from my side. The first one on the Service business in power generation. Joe, you commented on a good solutions and Service business overall. Could you just maybe elaborate a bit more on the geographical differences where you've seen the good Service business and where possibly not? And then the second question is just on your buyback. Have you started with the buyback already, and what's your current view on that?

Josef Kaeser

Simon, power service was good all across the board except Europe. And this should not really come as a surprise, obviously, due to the fact what operations the gas turbines do these days. And obviously, power Service being seasonal, you could also see and feel its impact on the respective quarters. On the buyback, we have not started the buyback, but we've been getting ready and prepared to start it at any given time. We believe this is a good time to start.

Operator

Our next question comes from James Stettler from Barclays.

James Stettler - Barclays Capital, Research Division

Just quickly on the healthcare side. I mean, given, obviously, the big currency changes, shall we be expecting a tougher price environment also from your emerging Asian competition? And then on the balance sheet, obviously, even with the buyback, it remains extremely strong. Do you still feel there are areas where you have to look for acquisition to boost positions at this stage?

Josef Kaeser

James, let me start with the strength of the balance sheet which, obviously, is a luxury problem to have. And as such, we consider this whole issue. Now obviously, such having a strong balance sheet will not triggering us to spend money on acquisitions. So if we feel that we found the right target and the target feels that we've found the right partner too, obviously, that could post a match. Now as you certainly understand, talking about M&A beforehand is not a good idea to do. We are looking into the space is not going to be or shattering of any kind. There could be bolt-on acquisitions if we believe timing and environment is right. But we are not an active buyer at this time. On healthcare, I mean, obviously that's a good question on whether or not competitors will use the currency impacts in order to rethink the pricing policy. So far, we do see some of those activities if it comes to Japan. Outside, there is little impact at this time. But I'm not -- don't feel inclined that this couldn't change over time, so time will tell. But obviously, this is something we are very closely focused on and which we are very closely monitoring.

Operator

Our next question comes from Daniela Costa from Goldman Sachs.

Daniela Costa - Goldman Sachs Group Inc., Research Division

Just 2 questions. One following up on the earlier question on pricing. Can you comment on the other divisions beyond gas? And then second, given the surprise on the below the line items, can you update us on the guidance for the full year and whether that changes?

Josef Kaeser

Daniela, first of all, it didn't come as a surprise to us because we've been planning that sale for quite some time, so it's an ordinary course of business where we transfer long term fixed assets into variable space also so that we can react on the floor space across the board. This does not change the guidance going forward. First of all, it would be too early and secondly, in terms of materiality, it's EUR 120 million on real estate, which is not really material in the greatest scheme of things, especially given the time of the year. Now secondly, on the pricing, as I mentioned, we do have selective pricing aggression to regain market shares, and so on and so forth, from other competitors. We've seen it in the space of emerging economies, predominantly in the Middle East. We do not feel inclined to open up that behavior. On the other hand, obviously, it goes without saying that gas turbines, among other things, are also important to have in terms of installed base because the service fees together that makes meaningful sense to access this installed base and this might have also been the motivation of some competitive thinking. In general, we do not see any change as to what we have been reporting on the pricing front in November. There is still decent pricing in industrials. Healthcare again, similar as to what we've said, 3% to 4% on average. Obviously, lower in Diagnostics before the consumable as compared to instrumentation. So all in all, we do not see material changes in pricing as of yet. We do monitor the currency related potential behavior, but at this time -- at this point in time, we still feel comfortable with what we have told the markets in November if it comes to pricing.

Operator

Our next question comes from Olivier Esnou from Exane.

Olivier Esnou - Exane BNP Paribas, Research Division

Joe, Mariel, just wanted to touch on the compensation system. There was a recent industry conference where you highlighted the changes there. And maybe if you could just say a few words about what you're trying to drive here in terms of behavior and your focus with this new system?

Josef Kaeser

Thanks, Olivier, good question. Look, what we're trying to drive is accountability. And the more focus we apply at that incentive system, that accountability, the better we can address it. And therefore, we have been changing the incentive system according to the -- also to the new way of how we go to market. And as changes were significant if it -- when it came to the sector responsibility, so the Sector CEOs which -- who are members of the board have a Siemens responsibility. They have a accountability for the region they are responsible for and the business they run. And therefore, we have also then rearranged our focus on incentives. So clearly, we drive accountability. We make sure that the colleagues have the freedom to really foster what they believe is important and material to be successful. And that's why we have changed it, and we believe it's a good thing to have.

Operator

Our next question comes from Fredric Stahl from UBS.

Fredric Stahl - UBS Investment Bank, Research Division

Joe, Mariel, could I ask you about emerging markets? We've obviously had another round of volatility in the last few weeks and we had the same a few months ago. I was wondering if your people on the ground in those particular places have seen any changes in demand for your products or any other things that are -- could be of interest to us that are happening on the ground in, for example, Brazil or India, Indonesia, et cetera, Russia? And then finally, I wanted to ask you about your own CapEx plans for 2014. How do you see your CapEx?

Josef Kaeser

Fredric, let me come to the emerging economies and then I hand it over to Ralf if it comes to CapEx and the likes. The emerging markets are not the same, so we do clearly do see a significant differential between certain economies, first and foremost, due to the fact that there are some geopolitical uncertainties along the way. I mean, obviously, if you had asked me 1 year ago or 2 years ago about Tokyo, I would have told you this is the place to be. We've got so many people. This is just peachy for us as an infrastructure, energy and healthcare provider. In the meantime, we do see that those geopolitical impacts have been spreading uncertainty also into the economic development of the country. Same could be true if you look into the space in and around Ukraine, that definitely will spread out into Russia because they are just too close. So those are the matters which really kind of, I wouldn't say keep me up at night, but which are difficult to predict because just has not usual matter of demand and potential. So we remain cautious about those geopolitical movements. And if it comes to China, we, obviously, do see that the government is, we believe actually, well underway in terms of reforms. But then again, reforms in the way the government has been addressing, it means restructuring. Restructuring means that significant rural or distributed areas are being affected such as cement, such as steel mining. And that obviously means that this restructuring takes time because the government, obviously, is aware and advised not to go after that too quickly in order not to provocate some uproar in the drop in the current environment. So that's why we believe it takes much longer than people would have wished for and what we see is exactly that. India continues to have the potential and we still look forward for the government to provide infrastructural requirements, so that the industrial growth can happen. Brazil, again, talking about geopolitical environments in the short term, would not expect any positive impacts there. But then again, our company and our business and customer relations in all those countries are built to last, and that's why we continue to support the country and our customers, but they are not going to be the driver of growth going forward. That's a fact. Other than that, if you look at Indonesia or other emerging economies in Asia are doing pretty well in both Energy as well as infrastructure. Middle East, you might have heard it when I talked about order intake, very robust, very enthusiastic about mobility management and the likes. Wind, in the United States, has been fine but then again, we do see quite a lot of signs of life into multiyear order environment and the short cycle still provides that potential upside if they recover as quickly as many others in the space believe they would. With that, I hand it over to Ralf on the CapEx side.

Ralf P. Thomas

With regard to our CapEx plans, we see ourselves current fiscal year slightly above prior year, definitely not exceeding 10%. However, we will focus our investments in that area onto our very profitable businesses which have decent growth potential, of course, and we are very carefully watching how that growth potential is materializing over the course of the year. So in a nutshell, we are ready to react swiftly if needed.

Mariel Von Drathen

Good. We're running a little bit out of time. Operator, do we have any more questions?

Operator

We have one final question in queue and that comes from Andrew Carter from RBC.

Andrew Carter - RBC Capital Markets, LLC, Research Division

I have 2 questions. First of all, it was just on PowerGen, and I wonder if you could just talk a little bit about where the backlog is. One of the Siemens competitors, a couple of days ago, was talking about starting to see sales decelerating from here. And I was wondering whether we might see a similar trend in Siemens' business. And then the second one was just on drive technology, which I might have just missed some of your comments before. If that's the case, I apologize. But I thought the quarter did come in a little bit weaker than what I was expecting. And I was wondering what the reason was for that and also how does the backlog look for this business as we go through the rest of this year?

Mariel Von Drathen

Okay, so we have a power backlog question and a drive technology question.

Josef Kaeser

All right, then why don't we start with the PowerGen. I mean, you obviously might have seen that our revenues in fiscal Q1 on PowerGen, which is predominantly, obviously, EP in the new nomenclature, the sales had been somewhat light. We realize that this was a natural outcome of the order intake activities in '12 and '13. For the remainder of the year, we expect revenues to pick up year-over-year so that was some caution but some optimism. Obviously, PowerGen could be just about flattish year-over-year on a comparable basis. So we do expect some improvement of sales in fiscal Q2 and for the remainder of the fiscal year 2014.

Mariel Von Drathen

And Ralf, on the drive.

Ralf P. Thomas

When it comes to drive technology, we said that more long-cycled business is picking up, obviously, and giving us opportunities to grow. However, the short-cycled business, motion control, the higher margins is giving a lot of mixed signals. And in the first quarter, we did not see any material growth potential so far, which is not surprising us because, normally, especially in the machine tool making industries, you would see a delay in that pick up by some 4 to 6 months.

Mariel Von Drathen

Very good. Thank you, Joe. Thank you, Ralf. This will now conclude, I think, the Q&A. Thank you for participating in this call today. And if you have any further questions, please do not hesitate to call the IR Team, and we'll be glad to help 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 (0049) (692) 222-2236. Access code, 1125799#. Participants in Europe, please call the replay number (0044) (203) 427-0598, access code 1125799#. Participants in the United States, please call the replay number (01) (347) 366-9565, access code 1125799#. This replay Service will be available for 48 hours. A recording of this conference call will also be available on the Investor Relations section of the Siemens website. The website address is www.siemens.com/investorrelations.

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Source: Siemens Aktiengesellschaft Management Discusses Q1 2014 Results - Earnings Call Transcript

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