Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Mariel von Drathen – Head, Investor Relations

Roland Busch – Chief Executive Officer, Infrastructure & Cities

Hannes Apitzsch – Chief Financial Officer, Infrastructure & Cities

Joe Kaeser – Chief Financial Officer

Analysts

Ben Uglow – Morgan Stanley

Andreas Willi – JPMorgan

Peter Reilly – Deutsche Bank

Simon Smith – Credit Suisse

Olivier Esnou – Exane

Fredric Stahl – UBS

James Moore – Redburn

Daniela Costa – Goldman Sachs

William Mackie – Berenberg Bank

Siemens AG (SI) Infrastructure & Cities Analyst Conference Call December 5, 2011 4:30 AM ET

Mariel von Drathen

Good morning, ladies and gentlemen. And welcome to the Siemens Infrastructure & Cities Conference Call. We started the new sector structure as of October 1st, today we want to give Roland Busch, CEO of Infrastructure & Cities the opportunity to talk about the sector.

The slides that Roland will walk you through can be found online. Following his speech, we will have a Q&A session solely on the Infrastructure & Cities sector. Both Roland and the CFO, Hannes Apitzsch will be available for your questions.

But before we walk about -- we talk about Infrastructure & Cities, there is another topic I would like to address. Last Friday we have made available to you by the Siemens’ IR webpage, financials for fiscal 2010 and 2011 in the new reporting structure, as well as the revised EBITDA ranges for Industry and Infrastructure & Cities. To walk you through some of the changes, I’m pleased to welcome Joe Kaeser, Siemens’ CFO to this call.

Joe, I hand over to you.

Joe Kaeser

Thank you, Mariel. Good morning everyone from my side too. While we still all waiting for the solutions of the European debt crisis, which I -- are hopefully underway this week, I would like to update you on a couple of topics this morning.

First one would be the so called One Siemens Financial Target System, as you know we’ve had with regards to the top EBITDA margins. We had three sectors, now there is a fourth one, which started October 1, 2011.

As you can see on the slides, we have basically taken the old scheme of Industry and obviously, our energy and reallocated the competitive landscape accordingly to the two new sectors, which is Industry and Infrastructure & Cities. There have not been material changes to the competitive landscape even though in some areas we have been adding a few more competitor profiles just to make sure that it better match the profile as we move along. There would not have been any changes though, if we had taken the old one like-for-like.

As you can see, Industry now has a margin band, EBITDA margin band of 11$ to 17$, which will also reflect the somewhat higher volatility from trough to peak in the market as respective by the short cycle environment of disrespective sector.

Infrastructure & City now has a EBITDA band of 8% to 12%, also reflecting the somewhat more steady and stable flow of business in that respective area, as you know there is quite an amount of business which is actually been driven more by the backlog, and more long and steady backlog rather than a volatile Book and Bill business in that sector.

Settlement, I have all read that in media already, some I think well 8% to 12% is maybe not as exciting 10% to 15% vary for Industry all along, but please keep in mind that first and foremost, they talk about capital efficiency rather than EBIT or EBITDA margins only, and with capital efficiency I’m sure that the new sector Infrastructure & Cities certainly will play quite favorable role within the global Siemens financial framework.

So that’s pretty much on the new margin band, EBITDA margin band, please again keep in mind that those assumptions of the EBITDA margins are actually supposed to be valid for trough to peak market, profit pools which we believe we are in compete versa the markets.

So now on the next topic which probably is the financial reporting in the new sector structure, they have of course been and there is also slide which you may find in the slide deck, just give you maybe a couple of seconds to find it, says, New Reporting Structure as of October 1, 2011.

There have been some concerns that the company would basically limit the information and transparency which obviously has not been true. If you look at the new reporting structure, you can see there have been no change in healthcare obviously, there have been slight changes in energy, we have actually as of October 1, 2007, have been splitting the renewable energy business in two smaller businesses which has been solar and hydro, just in order for a long-term development also in the solar and hydro matter for reporting purposes and also just to keep the line from what the market was use to, we nothing here to report when solar and hydro under renewal energy is going forward.

As I said you earlier, solar and hydro really do not really matter in a material way with regards to the current financial numbers. They will in mid to long-term future and -- there we’ll keep you updated on how much we spend in developing a meaningful long-term profitable and capital efficient solar business in mid and long-term.

On the two sectors, Industry and Infrastructure & Cities, those have been the areas which have been most effected by the organizational changes and the establishment of the new sector. You can Industry which now reports Industry Automation and Drive Technology. The customer service fees will be included in the two product division industry and DT, the same model as we have been using in energy for years, because is still to believe that products and product related services in the way come together as we look at the business and in the market environment.

If you look into the numbers which you also have been seeing in Friday already what you could see is that the margins has being dropping quite a bit on Industry Automation and Drive Technology that’s related to the changes which we have made to Industrial Automation. They are about $700 million and about $1.1 billion from water which goes from Industrial Solution into the new Industrial Automation and those business obviously have been dilutive to the old products spectrum of Industrial Automation as a similar development on Drive Technologies as about a billion revenues, which goes from Industrial Solutions into Drive Technology on services and there is another about $400 million on Mining which also makes up the new DT division.

So that’s pretty good visibility on what the margin dilution will look like and how it also develops in the new structure. One topic I also may want you to know is that we intentionally have been noting down the body leasing Industrial Solutions business as much as about $4 to $500 million, so that actually means that if we want to compare growth like-for-like those $4 to $500 million need to be considered. So very intentional low margin, higher risk, body leasing revenues which are actually melting down at the moment the contracts expire with the customers.

So that pretty much takes care of the matter in Industry or Infrastructure and Cities, as you see, Roland has been laying his new sector structure in a very mid and long-term oriented way, there growth areas are and this is why we have had a somewhat granular divisional structure, because it addresses more the mid and long-term, for the time being we will report three businesses to also externally one is transportation and logistics, this obviously includes several systems Mobility and Logistics we will report Power Grid Solutions and Product which obviously consist of low and medium voltage including Smart Grid and they will be Building Technologies as you have seen it with the exception of course that low voltage now is in a different camp.

So that pretty much takes care of the structure and the formal organizational reporting as of October 1, 2011, the numbers have all made, have all been made comparable, so that there should be a pretty good set of technical information on how to compare the old and the new structure within Siemens as it comes to the four sectors as of October 1, 2011.

So that would actually conclude the description of what we expect in terms of reporting structure. And with that, I’ll hand it over to Roland Busch to give you some light in content on what the new sector is all about and what the targets are as we move along. Thank you very much.

Roland Busch

Thank you, Joe, and good morning ladies and gentlemen from my side to our Infrastructure & Cities on this call. I will give you a brief overview on the strategic rational and the operational priorities of the new sector before having time for Q&A. We are sitting together here with the CFO of the new sector, Hannes Apitzsch, and both of us will be happy to answer your questions.

We’ll start on slide one. The new IC sector provides a more focused approach on the Infrastructure & City market, is an attractive growing addressable market driven by the basic needs of cities. Today 50% of the global economy growth is already generated by 600 bigger cities. These are cities with more 750,000 inhabitants. And nowhere is an economy growing faster than in cities.

Accordingly, we see an increasing cost demand for efficient transportation of people and goods reliable and efficient supply of energy, comfort and security, and reduce emission, just to mentioned a few. This overall market for Cities & Infrastructure addressed by Siemens in total is around €300 billion per annum and €225 billion is addressed by the broad range of technologies from the new sector IC.

The remainder is -- the main remainder is targeted by healthcare, water and also others. The Energy and Industry sectors markets are excluded from this consideration, these are particularly focused markets. Regarding the growth in our Infrastructure & Cities market we see a modestly growth in fiscal year 2012 and mid-term stronger growth rates.

We are going to report along three business areas. The rail system and mobility and logistics are reported as Transportation and Logistics, smart grid and low and medium voltage are reported as Power Grids Solutions and Products, and Building Technologies is reported as if, these three reporting units will be shown as they are in positions, meaning they are submission of operating divisions, so no consolidation. I will discuss this grouping of business areas later.

Our Infrastructure & Cities market is growing in mid-term as I said, we expect a CAGR between 3% and 5%. We anticipate that this will includes a clear increase and demand in Americas and Asia, and well-balanced market growth across the products and solutions offered by this sector.

It is true that the micro-economic environment is a challenging one, but if cities will continue to grow they will have to invest into their Infrastructures, after all cities themselves are competing with each other to become valuable, more competitive and more sustainable, so we believe that there will be investments driven by this demand.

In addition, we offer innovative solutions, such as energy performance contracting, this approach guarantees increase energy efficiency through the performance of new equipment upgrades. These upgrades would be financed by Siemens and we will share the costs cutting of the power bill with our customers, so therefore this is a win-win situation for Siemens and for our customers, and for the environment as well.

We can also offer solutions that generate additional income for the cities such as tolling systems. Having said that, generating the capital need for large infrastructure investments out of tax receipt alone is not sufficient, therefore access to private sector finance is needed, using financing options that offer efficient and competitive solutions for towns and cities, and their stakeholders alike.

Here Siemens financial services come into place, they offer a broad portfolio of financial solutions that can help save cities and tax payer’s money. During recent months we have received very positive feedback from the market in particular from urban planners, decision makers and cities and others.

Let me turn to the next slide. Let me show some proof points which encouraged us to go for a new sector setup. We already have a long and established basis for success in terms of City & Infrastructure business from which we can build. And here we provide you an example, London, which provides a compelling example, of how early engagement increases our chances of driving sustainable business, by also providing real value to our customers.

We began working with London intensively some years. We installed a city account manager for London to understand the long-term needs of the city better and having a sensible interface to the mayor, urban planners and city decision makers. Being most early in the planning process for Infrastructure project has made a real difference.

For example, we performed in London a sustainable urban infrastructure study that describe a serious of technologic, technological and infrastructure levers that can contribute to greater environmental sustainability and enhanced quality of life.

With this as a backdrop, we have built a significant business in London over the last few years and it continues to expand. You can see in the slide a number of successful projects and most importantly the city has rate some fantastic results too. So the traffic, the street traffic was reduced by 20%, CO2 emission was cut 150,000 tons a year and the traffic flow accelerates by 37%.

In total our business is London is the in the substantial three-digit million area, even excluding the railway eco business we got on top. The experience begin in London being applied across the world, so this brings me to next slide, very importantly we have successfully transferred our approach into fast growing market as well.

And here Shanghai is an excellent showcase. Without going into all the details here, you can see some good examples which prove our success. We have invested in a strong team of city account managers globally and we will continue to ramp up our resources according to the city potential. The city account managers can offer the entire Siemens portfolio from hand and try to be involved as early as possible in the city planning process and through consultative selling.

Of course, we step back when the official tenders prepared and let the process run its [internal] costs. But it’s clear that the earlier we can contribute on how better our chances for lending business operating is later is in concrete projects.

Further point of differentiation offered by the enhanced management and technology focus of the sector is establishment of our global centers of competence, experts from different disciplines like engineers, software specialist, project manager’s work in these centers on end-to-end solutions for cities worldwide.

So the center of competences will covering the following main areas, one is urban planning competencies for our technologies, mobility logistics and building, operation of external institutions such universities, NGOs and think tanks, bidding of no how and project support, in particular bidding of no how of solutions deployed by Siemens somewhere globally where cities and decision makers and cities can go and learn, collaboration with urban decision markers, architects, urban planners and DPCs, but also analytic -- analysis of new customer demands and transferring of this no how into the respective R&D departments of our divisions and business units.

The first center of competence is currently under construction in London to others will one in Asia and one in the United States. So to sum it up, we are tailoring our sales organization to urban and infrastructure needs, to seeing new approaches for customer contact and orienting our offers to the specific needs of Infrastructure & Cities.

Experience has shown that when we focus on specific markets our business opportunities grow significantly. With our new sector we have given clear responsibility for the cities and infrastructure market to our what was previously an initiative, it’s now a fully flat sector organization with required level of management focus, which brings me to the next slide, which is talking about our new organizational setup, which is tailored to market needs and focus on business types. Our product solutions split is aligned with the needs of our customers and reflects the markets we serve.

Here you can see the business areas, which we are reporting and our divisional and business unit structure therein, business essentially how we manage our business. With our new organization, the division can serve the target groups, greater impact and drive their core technologies. In other words, we now have more consequent portfolio strategy with enhanced focus and specific markets -- on specific markets and its technologies and business types.

So let me provide you with an example, and doing so, I would talk about why we reorganized the mobility division. Rail Systems and Mobility and Logistics focus on a transportation and logistics market, while Rail Systems focuses on manufacturing of trains, basically assembling trains, in mobility and logistics business, model is solution, IT and software based, managing the flow of traffic, and goods and cities. We elevated our last transit business from sub-segment to a business unit in order to have diligent management focus.

So separating these areas provides enhanced management focus is more aligned to customer needs and is based on clear value added and business models. So it’s clear that assembling railway eco is different from an IT driven railway eco infrastructure business.

Importantly, our customers come first and so regardless of our structure, we still serve them from one hand with a clear line of lead contact. For instance, the Rail Systems has the ownership for a customer’s like the Deutsche Bank even though other divisions are delivering to this customer as well.

Overall, you can see that on the left side we have a roughly 50-50 product solutions split which reflects the demand from the markets that we serve based on our spectrum. Products and related services contributed well to our profitability but the Solutions and Systems businesses are delivering significant growth. In addition, our solutions and systems business drive related Product and Service business for us and keeps us close to our customer.

Go on the next slide, in order to drive value of the IC sector we will manage our costs and invest in growth at the same time. The establishment of the IC sector has created numerous internal effects that have and will lead to cost savings and deficiency improvement.

Importantly, we implemented and extremely cost efficient new sector setup. We have also committed ourselves to this cost deficiency moving forward and we will be achieve through lien sector headquarter, service level agreements with other sectors and other measures.

Combining our sales channels enables us to have a better market coverage. This applies especially to low and medium voltage, and Building Technology. In addition, synergies come also out of combining the low voltage and medium voltage business, here some examples, like optimizing of refractory footprint or the supply chain processes.

Together with managing our costs base we also plan significant investments, for example, in sales, I shared with you that already in competent center, city account manager, but also in sales approaches for our focus markets such as e-Mobility.

We invest in our portfolio, for example in smart grid and smart grid applications, and also in our regional setup to drive future growth. In fact we are investing a triple-digit million euro sum in our first year to ensure the accelerated growth.

And here I can you give you a good example, which is our acquisition of eMeter Corporation which will be announced later today. eMeter Corporation is headquartered in San Mateo in California, it will be part of this Smart Grid division of the IC sector and will become a global business segment and center of competence for meter data management.

This shows a clear commitment to strengthen our smart grid market, the energy information platform, which eMeter is working on -- eMeter is a leader in MDM software which strategic point in the smart grid value chain. eMeter expertise will compliment Siemens technology portfolio and integrated smart grid solutions offerings, which brings me to my last slide on our top-management agenda.

We are going to have tied everything together in our top-management agenda, those topics and programs that will keep us focused on the task ahead and geared up to reach our targets. Our focus is on three key parts.

First, our refractory of our core business or foundation, it is operational excellence in our core businesses and markets which will deliver the profitable, sustainable and capital efficient growth that will provide us with the additional room to invest in our growth areas.

During growth, for example diligent, project execution, productivity, working capital management and effective procurement, our order backlog is high and stands for €24 billion for the sector in total and what counts is that we execute on our commitment flawlessly and turn the backlog into profitable revenue.

Siemens has an unparallel regional footprint and we are committed to moving our best people into the right assignments wherever they maybe in the growth. So while making our foundation, our core business accelerate, we will also strive to go for growth beyond, this growth will be driven in many ways by our activities in an enhanced focus in emerging markets, where we have already a very strong and well establish presence.

We have to expand our footprint, as well as our entry level product portfolio faster than we did in the past to stay ahead of local competitors. Within the new sector we contribute one-third to the overall Siemens smart product portfolio, which is our entry level product portfolio developed, produced and sold in emerging markets. We will also expand our offering for vertical software solutions, an area which represents massive potential for the IC sector and indeed Siemens as a whole.

Clear advantage is that we have to feel an automation devices as well as the domain and process no how for our respective markets. In addition, we will continue to expand the existing software competence further, no other company will advise why you have such a broad and comprehensive Infrastructure & Cities portfolio as Siemens does. I discuss our approach to capital allocation and portfolio expansion earlier, but essentially we are fully committed to expanding our portfolio organically or by both on M&A activities.

The third part of our top-management agenda is all about an effective go-to-market strategy and opening up new markets. The markets we have already identified include but may not be limited to hospitality, data center, municipalities, distribution system operators, railway infrastructure, logistic stuffs and road traffic management. These focus verticals will help us to draw our technological competence across our various divisions and unlock our collective value and portfolio in terms of products, solutions and service offerings.

Whenever addressing these focus markets we will focus only on these solutions business where we have the right competent, a certain share of own product business and the potential for downstream service business. In turn, we will not pursue opportunities where we do not have the right product competencies for our business mix.

So ladies and gentlemen, in conclusion and before we get to the Q&A, I would like to shortly summarize the key takeaways. Our new sector provide some more focused approach on Cities & Infrastructure market, it’s an attractive and growing addressable markets driven by the basic needs of cities and the contact of rapidly increasing urbanization, early engagement and deeper customer understanding dramatically improve our changes of success.

We have proven this and our intensifying ourselves orientation in cities to grow the growth across the broad. Our new organizational setup is tailored to market needs and focus on business types. Our product solution split is aligned with the need of our customers and reflects the markets we serve.

We are committed to managing our costs but also to investing and focus initiatives for growth. Our top-management agenda represents a clear personal commitment from my side and I look forward to updating you on our focus on these items at our IC Sector Market Day is scheduled for June next year.

So thank you very much for your attention and so I hand over to Mariel.

Mariel von Drathen

Yeah. Thank you, Roland. Thank you very much. We’d like to open it up for questions now. I would ask you to please focus your question on the IC sector only to use the time wisely with Roland Busch and his CFO, Hannes Apitzsch. Of course if you have any questions regarding comments Joe made earlier in this call or any questions regarding the financials that we have made available to you last Friday, please give myself or my IR colleagues to call following this call. So with this the Q&A session is open.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Ben Uglow from Morgan Stanley. Please go ahead.

Ben Uglow – Morgan Stanley

Good morning. Good morning, Dr. Busch, Mariel and Joe. And I had a couple of questions, and one was just on the Power Grid business? And when I look at the margin, the 7% margin is actually little bit lower than what we’d expected and if I back out low voltage from Building Technologies, it looks as if that is a sort of low single-digit margin business? Is that assumption correct and if so, could you give us a sense of what you can do differently to manage and improve margins within low voltage? That was question number one.

Question number two, just on Building Technologies, this is big, yeah, this is a big block of the new division and the profitability of building technologies have never point matched market expectations? Is there anything about the product portfolio in Building Technologies that needs to change? I guess, what I’m curious to know is, when you look a Building Technologies, is it something where you can improve it just by cost reduction and an organic fix or is it something where in fact you may have to go out and make portfolio change by acquisition? Thank you.

Roland Busch

So…

Hannes Apitzsch

Okay. Good morning from my side. Hannes Apitzsch speaking, CFO in the sector. Maybe I just take the first question with regard to margin, with regard to Power Grid Solutions and Products. And I think and everybody can make the mathematics behind, you pretty figure out that we are not quite happy with the low voltage business at that point of time. I think progress has been made and we are very confident going forward that also with the introduction of a new product portfolio we reaching I think somewhat competitive margins levels going forward. On the Smart Grid side, honestly we are right now in the position where we at a certain point being satisfied with the margin level.

Ben Uglow – Morgan Stanley

So can I -- on this very voltage point, can I just spread you the disparity between what Siemens did having this low voltage business and what competitors are reporting is substantial. Is that because what you’re classifying low voltage is different or how can I explain the gap between low single-digit margin, margins which are well into double-digit territory? What is driving that distinction?

Roland Busch

So let me give you a rough explanation, I mean, number one is growth and scale, we are driving growth our scale and scale is important in that business. We launched growth initiatives in order to serve not only the industrial market, which we are serving successfully, but also the construction markets. This is one of the big levers which we see in low and medium voltage as such also in combining our sales force, low and medium voltage as and Building Technology, number one.

And number two is, it’s we are going to invest it in our product platform, which was urgently needed and we are going to launch this platform in the next year and we use thereafter, but we do believe that we do have highly competitive products to ship into the market.

Last but not least, in this context of low and medium voltage we go for differentiation in the market, in offering total integrated low and medium voltage power solutions for respective markets. So this is in a nutshell, the explanation for the gap.

Ben Uglow – Morgan Stanley

Okay.

Hannes Apitzsch

But maybe it has one aspect as well in the combination of the low voltage and medium voltage as Roland Busch pointed out during his speech. I think we see also some industry potential by combining those activities which finally should beside the growth also have some cost advantages going forward.

Ben Uglow – Morgan Stanley

Okay.

Roland Busch

For the second part of your question, Ben, on Building Technology, well, Building Technology is basically working on the solutions spot, either is building automation, energy efficiency on the one side and maybe other side as explained also earlier that we are combining now Fire Safety & Security to one unit is also providing solutions in respective products therein which is provided by a dedicated business unit, plus of course generating a service revenues. Therefore, we took out this low voltage part and it’s now more solution and services driven business unit.

This in turn has -- is not comparable to let say pure-plays which are making more product business. At the same time we are delivering a good rosy out of that business. The growth drivers and this is important for developing our Building Technology business in the future are in particular energy efficiency in mature markets and I shared with you our example, here we are clear leader in the market but also a strong demand for product business in emerging markets. These are the major areas where we are going to expand and invest.

We are also looking into new markets like sustainability energy management, which is a more comprehensive way where we are invested also in the past or recent acquisition, but also we are providing, ramping up that organically, so therefore we see nice opportunities looking forward coming from these businesses.

Ben Uglow – Morgan Stanley

Very clear. Thank you very much.

Roland Busch

Thank you.

Mariel von Drathen

Next question please, operator?

Operator

And we’ll take our next question from Andreas Willi from JPMorgan. Please go ahead.

Andreas Willi – JPMorgan

Good morning, everybody. Thanks for taking my questions. The first one I have is on your portfolio if you look across your five main segments going forward within Infrastructure & Cities. If you had to pick one where your furthest from the portfolio or technology or product that you would like to have, which one would that be?

And the second question on kind of the overall focus of the new division on Cities & Infrastructure, what percentage of sales of the new sector is actually not going to these kinds of core markets and what’s been the message to those customers and clients? Thank you.

Roland Busch

I will take the first one, talking about this portfolio gap, I mean, we feel rather comfortable, I have to say with our portfolio and in all of our respective divisions. We are in many areas we are market leader in our certain portfolio elements, if you want me to pick maybe one of the gaps which we see is, it’s rather portfolio gap, it’s more a channel gap, which is particular the construction channel for low and medium voltage or products into this industry channel, this particular channel. Maybe are transitionally strong in the industrial channel, construction channel is maybe one of that which we are going to expand.

Hannes Apitzsch

On a question regard to the percentage I think we have to make clear that when we talk about cities question is, are we talking about the city as a customer or are we talking about the business basically within the, yeah, within the city and therefore also some infrastructure elements will be part businesses also, the question is somewhat difficult to answer depending on why you pull the shuttles.

And secondly also we should keep in mind that you saw on the, I think first slide, Roland Busch showed that we also will be talk about the city market we excluded in our definition the parts which are power generation and which is also healthcare, because we just wanted to make sure that those are regarded in a different way than would be now described as the IC – relevant IC market for us.

Andreas Willi – JPMorgan

Thank you.

Mariel von Drathen

Next question please?

Operator

We’ll take our next question from Peter Reilly from Deutsche Bank. Please go ahead.

Peter Reilly – Deutsche Bank

Good morning. I got two questions please. Firstly, I can see if all was a major city I will be very interested in receiving consultancy and some feasibility studies from Siemens on the various things you can offer. But can you get pay for that, you mentioned that there is a sustainable urban infrastructure study for London. I’ll be very interested to know where do you go pay for that, what the Siemens had to fund it, because you also went on you mentioned that when put this go after tender you step back from attending process, I presume they get awarded independently if you done the consultancy work? So will you get paid for the design work?

And then secondly, can you tell us or can you quantify what additional short-term extra costs are from a P&L point of view from the price of this division, you will always have new head office, you are increasing various people to setup these center of competence, so almost even that is going to be a significant increase in costs for the new divisional structure. So please could you give us some assistance in what this cost will be?

Roland Busch

So, I’ll come back to your first question, regarding the consultant selling, this will be a blend, we will do see some consultant selling which we consider really as a sales efforts, so it is costs and there will be consultant selling which we get paid for. To give you some examples on recent examples where we got paid for, for example is, we are the company within Siemens bundled in our Smart Grid division able to lay our the whole grid transmission grid with distribution grid and their customers will highly interested in getting consultancy from our side, how to laid out and they are indeed going to pay for that, this is high competence. And we see that in other areas as well, and again, it will be a split in some cases we just take this as self consultant. For the second question maybe Hannes you?

Hannes Apitzsch

Yeah. I can take the second part on the additional costs, so expected additional costs due to the creation of the new sector. It was right from the beginning our target to know at any G&A expenses to the P&L and also we did pretty good on that, we aimed really making no additional costs, operating any additional costs for the sector headquarter that means including all the support functions like IT, accounting, HR and so on.

And by doing so we were very careful in trying to maintain working relationships with the other sectors. We signed a number of service level agreements. We focus on shared services, where we can share competences and workload with other sectors. We did so and by doing so, we again, kept the sector headquarter very lean.

But on the other hand side we also committed ourselves to invest in areas where we see need to basically ensure our growth going forward. So we invested in the center of competence in London, we invested in some R&D activities and so I’m really to make sure that we don’t miss the boat on growth opportunities going forward.

Peter Reilly – Deutsche Bank

It sounds excellent that you been able to have net neutral effect for the additional head office. But I’m assuming there is still some ongoing additional costs for the investment. I mean, even if we won’t see the number going forward, would help us understand, how seriously taking the whole opportunity, if you give some idea of, you are talking €10, €50, €100 million of additional annual investments in the competence centers and the other areas?

Hannes Apitzsch

I think all the number is roughly, yeah, small, yeah, a three digit million we invested going forward, as well and R&D like, the investment in the center of competence and other activities.

Peter Reilly – Deutsche Bank

Okay. That’s very helpful.

Hannes Apitzsch

Basically number we probably won’t maintain going forward, this is really as a kind of jumpstart we wanted to make sure that we setup the sector in the right way.

Peter Reilly – Deutsche Bank

That…

Roland Busch

Go ahead.

Peter Reilly – Deutsche Bank

Of which, I mean, thank you for the answer, wasn’t that I expect you get the disclosure going forward, just help us understand, what you see the opportunity being, because clearly that discretionary investment that you only making if you are going to get the return?

Roland Busch

I mean, picking out taking out the city account management and competence center, this will be in the low digit – low double-digit million area and just to take that particular part out, the other part is really comprehensive an approach which is not only in the competence center and city account management but also investment and sales channels, different sales channels, as I said before, construction channel, but also into, selling into new verticals which we are going to address even stronger in the future.

Mariel von Drathen

Thank you, Roland. Thank you, Hannes. We go for the next question?

Operator

We’ll take our next question from the line of Simon Smith from Credit Suisse. Please go ahead.

Simon Smith – Credit Suisse

Hi. Thank you for taking my questions. I have two questions. First one is on growth, I think you mentioned that, you saw the growth rate has been CAGR 3% to 5%, I just wondered given that a lot of the interesting trends you are talking about there small grid to increased urbanization to product opportunity in commercial construction side low voltage why maybe that growth rate wasn’t higher and what your calculation within that?

And my second was really coming back to the low voltage product side and I guess, you mentioned there the disappointment of sort of low margins relative to competitors and highlighted your biggest gap being your channel to the construction market.

And just in terms of how can you address that channel, it just seem to me looking at the low voltage market that it’s an area where you have people generating products since manufacturers making product and selling product again really going through distributors, so not really having control over that channel, obviously, you’re looking to create a product or have created a product, which are now looking to loop, so if you’re not looking to buy product, just wondered, how you could possibly address that?

Roland Busch

So for the first one, this was the figure I mention was the mid-term market growth expectations and this is band how we see it, it’s after it’s plan of the three market areas which we are serving, it’s very difficult to come up with other numbers, we do not include in these numbers any major recession that’s for sure, and in certain areas, I mean, taken this market areas, we see higher growth rates for traditionally transportation of the rolling stock market is maybe on the lower side but this is a long-term trend of that market, so it’s planned and in certain areas we definitely do see also higher growth rates.

For the low voltage business, I mean, this is, it’s also taking the next problem that if you do have the right products then you have can address that bad time get a better access to that one. We are present in this channels, I’m not saying that we have no access, we do have an access and in bringing us, bringing a new portfolio, competitive portfolio, we believe that we can see a definitely for upside in our topline here as well as in our process.

Mariel von Drathen

And I’m sure we’ll have the opportunity in the next capital market into next year to spend a little bit more time on that topic especially also with the divisional CEO. And we’ll go for the next question.

Operator

We’ll take our next question from the line of Olivier Esnou from Exane. Please go ahead.

Olivier Esnou – Exane

Hello. Good morning. Maybe just one question, you mentioned the use of SFS to developed business especially on energy performance guarantee, can you give some idea of to kind of use of SFS yesterday already in the new setup and where you think that could go and what kind of advantage you expect to gain here? Thank you.

Hannes Apitzsch

Yeah. Thank you for the question. Financing solutions already play an important role in our transportation and logistics business and on our Building Technology business as well. I think in the coming years we plan to further expand our finance offering increase the finance volume at a rate above the business volume growth.

SFS is working along side our operating divisions to leverage this opportunities and I think right now we already working also in the past on a numerous of cases where we use the advantage, the competence, the strength of SFS to our advantage in the competition, and for sure going forward we will further work on new business models, product offerings, in close corporation with SFS. So, yeah, I think there is benefit in different shade having FSS -- SFS as a partner for us.

Roland Busch

I’ll give you some maybe more details on that, for example, in high volume infrastructure projects, take example of [Sam’s Link], London Midland, their SFS was highly engaged, another examples, this is one of the smaller size, it’s Building Technology, we go along with our Siemens financial colleagues in offering energy performance contracting, that means we are taking care for the investment in building automation and optimizing the energy efficiency in building sharing, as I said the reduced bill -- power bill, but we also looked into the Power Grid Solutions and Product businesses where we believe that we can much more extensively use SFS financings offering.

Olivier Esnou – Exane

Just as another one, is there specific benefit in emerging countries you see here or that’s mostly in either geographic approach to using SFS as well, and maybe…

Hannes Apitzsch

Honestly, I would limit, sorry, go ahead. Sorry for interrupting. Honestly I don’t see any regional differentiator here, I think it really depends on the project, on the actual case itself independent where the case are in the world.

Olivier Esnou – Exane

And emerging market exposure today for IC, how much is it, please?

Mariel von Drathen

You’re talking about SFS, now you’re talking about the IC sector as a whole?

Olivier Esnou – Exane

No. IC, please, yeah, yeah.

Roland Busch

Under same level as Siemens total.

Olivier Esnou – Exane

Okay. Thank you very much.

Mariel von Drathen

Thanks.

Roland Busch

Thanks. Yeah.

Mariel von Drathen

Next question please?

Operator

We’ll take our next question from the line of Fredric Stahl from UBS. Please go ahead.

Fredric Stahl – UBS

Yeah. Hi. Good morning, Roland. And I have question on the, it’s very clear the change you’re making from a disclosure perspective, on the reporting perspective, what I was wondering was if you can give us some color, if there is a meaningful operational changes underneath as well, where are these changes are, and what type?

And then, the second question following on that would be you talked about synergies in putting together low and medium voltage, Fire & Security and I’m sure the other areas, where you see synergies from this change and I was wondering if it’s tell us about you to quantify these synergies at all? Thank you very much.

Hannes Apitzsch

The last one, sorry, I can make other thought we would not quantify at this point in time, and in synergies, I mean, we are working on that, we might come with some insights in our Capital Market Day later that in the year 2012. Let me just to have a better understanding, what do you mean with operational changes?

Fredric Stahl – UBS

If you are merging organizations so putting together…

Hannes Apitzsch

Yeah.

Fredric Stahl – UBS

For example sales forces moving assembly or manufacturing things like that?

Hannes Apitzsch

Yeah. Exactly. I mean, as I just mentioned, these are the topics which we look for in particular as I said in low and medium voltage where we are really bringing two product businesses, business with, let say, similar product types manufacturing related together. Yeah, indeed looking for operational changes but also synergies in particular as we wrote in our page in way how we are manufacturing assembling – assembly lines, so that there we see opportunities in order to manage our global footprint better, this is meant for growth and really in order to get higher volume out of the existing portfolio from one side.

Another one, to give you an example is taking if you go for mobility and logistics, we have clear inside in how we drive the IT and software related businesses. I mean, Roland mentioned software and IT related, our traffic management software and IT related e-car as well.

So and we see that we can combine that also in kind of platform approach because the basic ideas also for packaging being basic ideas of managing logistic flows is all the same. So we are looking here forward in order to really have a better setup and leveraging the capabilities and capacities we have in this areas even better in the future, just to give you some examples.

Fredric Stahl – UBS

Okay. Great. Thank you very much.

Roland Busch

Okay.

Mariel von Drathen

Next question please?

Operator

We’ll take our next question from the line of James Moore from Redburn. Please go ahead.

James Moore – Redburn

Good morning, everybody. Yeah. I’ve got three questions, if I could, would it be possible to say, what proportion of the $17 billion of sales in IC was made by mayors or cities that have an urban budget to buy from all three of the new IC divisions and what proportion you think that can move to?

Secondly, I think, there are around 15 business units across the five divisions in IC, would it possible just to walk through each of the five divisions. I mentioned, which business unit is the relative underperformer, where you see the mostly favorable margin development?

And thirdly, are you saying you can’t put any numbers on the cost savings and synergies that you mentioned?

Roland Busch

What was the third one, sorry?

James Moore – Redburn

Okay. Is it possible to present any numbers on the costs savings and synergies you mentioned for the whole of IC, you mentioned you cant’ exactly (inaudible), are you able to give that the whole sector level?

Roland Busch

So, for the first one, the share of the $17 billion done by mayors and cities, this is, we’ll not give you a share in particular because we it’s our accounting that really differentiate. The point is that you do have a blend of businesses, one is where really the city is that pays the bill and another one is, and this is actually equally important whether city is working with EPC for example, and then with us in turn.

And third one is really where the cities influencing the decisions. So therefore and to put a number here is really, I mean, maybe not even worth looking into because it’s really about how to leverage and get more volume into this particular market.

For the second one, I suggest to come back with this question in our Capital Market Day, we would run you through it, division-by-division and give you an idea on that. And for the last one in synergetic number, again, we are not releasing any numbers here. We would also propose to discuss that then in our Capital Market Day.

James Moore – Redburn

Sure. But just getting back to the first question.

Roland Busch

Yeah.

James Moore – Redburn

Is it that you see from putting these businesses in IC a significant increase in the proportion of business coming directly from mayors and cities, whether through any of those three channels, is that really one of the key aspects of the growth synergy here?

Roland Busch

The key aspect is really and as I explained it, is really to get a focus on this market to learn earlier in the process much early before the tenders out, to learn what -- where our cities going and by the way, I had a tremendous feedback from mayors and I was talking to in the last couple of months, they are indeed very much interested in talking to us and to find what technology can do in order to improve the situation the city, it is either on energy, providing energy, having an ever increasing share of decent power, is it about transportation, logistics, and so on.

And this is exactly where we have a strong discussion, getting a better understanding. And finally and this is very important, I mean, city are not that innovative customer. I mean, they benchmark each other, they copy each other, they really want to see, where is the solution which works, which I can look at and this is a tremendous potential for Siemens. We have countless of good solutions and in advising our customers to look at those, they really, they go there, they look at it and really then bring this kind of solution, again to another place, this is the big lever which we do have.

James Moore – Redburn

Okay. Thank you.

Mariel von Drathen

Thank you, Roland. Next question please?

Operator

We’ll take our next question from the line of Daniela Costa from Goldman Sachs. Please go ahead.

Daniela Costa – Goldman Sachs

Good morning. And one quick question on follow-up on the question on SFS and then anther question on power transmission. Basically on the SFS question, I just wanted to clarify, is the 3% to 5% medium-term growth, does that include already some potential outperformance versus your competitors because you have disadvantage of having SFS behind it?

And then on power transmission, it seems to be right on the sweet spot of infrastructure than city and not only that, I know, you’ve mentioned power generation for example why it was out. But that one in particular seems to have a lot of synergies and cross-selling potential with a smart grid. So I was just curious on why, why was it not included and how do you, how will you ensure that this cross-selling opportunity is still reached? Thank you.

Hannes Apitzsch

Yeah. Maybe on your first question was regard to the 3% to 5%, and as Roland mentioned, this is the expected market growth. And for sure, we’re trying whatever we can do to outperform the market and hopefully, the contribution of SFS is one lever to outperform the market.

Roland Busch

And for the second one, thanks, and very good one, power transmission and our new divisions, low and medium voltage smart grid. They are working -- they are continuously working in a very close collaboration as they did before. That was a clear and this is regarding, is it addressing the customers, is it the sales force which we are using so we don’t destroy any synergies which we had before and I’m fully aligned with our management of division and sector level, so therefore there is no change.

And power transmission per say is something which is on this high voltage which is more connecting and transmitting the power when we are getting closer to consumers like cities, then you go into the distribution level and then to the low voltage thereafter. So therefore, this is a clear, split so to speak, our power transmission is basically addressing more utility part. We are addressing more the municipal and distribution system operator’s part.

So therefore, we’ve, again, clear assignment of customers also which is just described between the divisions and just to give you an idea, we didn’t split our sales forces, in some countries, the transmission -- transmission management is running the sales force of transmission and low and medium voltage in smart grid and other countries we do that. So therefore, this is a really a clear also signal to our customers that we have go and face to the customer and that we do not destroy any synergies and benefit which we had in the past.

Daniela Costa – Goldman Sachs

Thank you.

Roland Busch

Pleasure.

Mariel von Drathen

Next question please?

Operator

We’ll take our next question from William Mackie from Berenberg Bank. Please go ahead.

William Mackie – Berenberg Bank

Yeah. Good morning. My first question again relates to footprint, you’ve mentioned that you contribute across the sector to about a third of the smart initiatives. Now many of the businesses in Building Technologies or in low voltage and medium voltage have about developed markets and yet the growth opportunity is in emerging markets. How to what extent do you think over a three to five year period, your footprint will need to migrate to be far closer to your market opportunities?

And the second question relates to software competences across the division, you highlighted the core competences within the mobility in the software field, but I think smart grid is certainly an area where there was a wall of data that needs to be addressed and manage, what are the capabilities…

Roland Busch

Yeah.

William Mackie – Berenberg Bank

… you have in house to manage that ending challenge?

Roland Busch

Yeah. So regarding the footprint, I’m pleased haven’t understand that we do not mentioned any quantified numbers there, I would again, say that we have some more insights later, 50 out of 100, 60 of these smart products or entry level products are coming out of the new sector. So we are very strong there. We have some examples from Fire and we have a separate product developed in for Fire Safety. We have developed that in China launching that globally, we have example for gas insulated switches, for example, low and medium voltage in China developed there.

So there is also in the rail automation area low cost products developed in India. So we have a broad range, and again, this is one of the tasks really to capture the potentials in emerging markets better where we are going to intensify this development of entry level products.

We have to say that currently amongst the Siemens divisions, low and medium voltage is one with a higher share of value added in emerging markets. And again, we will provide you with some more details in our Capital Market Day and this is a share which we are also in going forward we are going to increase, where we do believe that we have footprint wise biggest levers here.

For the second part you’re completely right, the smart grid part is really a software and IT driven business by the way, when we talk about IT, we talk -- typically we talk vertical IT it’s not the IT which is really addressing the core processes of customer, which requires a deeper understanding of their processes.

So and we do have a number one position in energy automation for example globally, as I said, before we have -- we are one of leading companies who is able to really layout the whole grid for transmission and to distribution of whole countries and all areas. And we are also investing in particular in this area when we go for smart grid, we talked also about smart metering whether gathered and this brings me back to the announcement of about the acquisition of eMeter.

This is one of the key points where all the data we are running into. We are run into a meter data management system before they got distributed they will also pre-analyze there in some pre-processing will be done there. For us, it’s a strategic important factor in the whole chain of gathering data in the smart grid and here we have clear focus and as we said we are investing here as well.

William Mackie – Berenberg Bank

Great. Thank you very much. Could I just follow with the last quick question, a high proportion of the revenues maybe dependent on governmental budgets, especially within Europe? How do you see, perhaps the risk of emerging or austerity measures impacting the division within a one to two year timeframe?

Hannes Apitzsch

What we see is, first of all, we are acting globally that means we, I mean, we are obviously going in active in all countries in the material markets, which are interesting because of the legacy infrastructure which we have to upgrade but, as well as the emerging markets. So we are so to speak and addressing the growth product range, firstly.

Secondly, there will be spending in infrastructure because and as I expressed before what we learn in talking to cities that they are competing against each other for jobs, for people, moving there. And so there is a certain pressure also to raise finally spent money in order to stay competitive.

And therefore we believe there is money all there you just have to find the projects which have a high probability of being executed. This is a reason why we have also SFS competence in our competence centers. So we have very early engagement in our SFS people to find out which projects have high realization probability and which not, in order to but really that we can focus our activities and our forces on projects to be executed and finally executed. So there will be kind of headwind but we don’t see that this is something which was really let say critical from that perspective.

And maybe one addition to this IT part and you also know that we have a strategic partnership with Atos Origin. We are tryingly discussing projects where we have together with the more ERP focused IT company and our vertical IT expertise to really putting together value proportion for our customers where we believe that we can also leverage this strategic partnership and grow faster from there…

Mariel von Drathen

Very good. Operator do we have any other questions.

Operator

We have a follow-up question from the line of Andreas Willi from JPMorgan. Please go ahead.

Andreas Willi – JPMorgan

Yeah. Andreas here again. Just a quick follow-up, Aim could you give us some indication how material, how big this business is either in terms of revenues they have achieved or employees they have, so we have some reference for that one? Thank you.

Roland Busch

I would leave that to our press release which is going to be shoot out.

Mariel von Drathen

Actually, Roland, was mentioning this in the call but it the press release is only till this afternoon. So we will make sure that you all get it.

Roland Busch

Yeah.

Mariel von Drathen

And you will have more details in that in that, we are just in a way short pre-announcement from including from Roland in this call today. So just bare with us couple of more hours on that.

Andreas Willi – JPMorgan

Thank you.

Mariel von Drathen

Okay.

Roland Busch

That’s for your understanding Willi.

Mariel von Drathen

Operator, do we have any other questions.

Operator

We have no further questions. Ladies and gentlemen that will conclude today’s question-and-answer session. I’d now like to turn the call -- the meeting back over to Mariel von Drathen. Please go ahead.

Mariel von Drathen

Yeah. Thanks everyone for participating in the call today and as Roland mentioned earlier and several times during the Q&A, we will hold the Capital Market Day specifically on Infrastructure & Cities at the end of June the next year and was probably in London, you will get all the details in due time and you will have then the opportunity to talk to Roland, to Hannes and to the divisional CEO and ask further questions. Yeah. For those of you I won’t speak anymore in the next couple of days. I wish you all happy holiday and a great start into the New Year. Thank you and goodbye.

Operator

That will conclude today 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 +496-922-222-236, access code 1477403#. Participants in Europe, please call the replay number +442-071-111-244, access code 1477403#. Participants in the United States, please call the replay number, +1-347-366-9565, access code 1477403#. This replay service will be available for 48 hours. A recording of this conference call will be available on the Investor Relations section of the Siemens’ website, the website address is www.siemens.com/investorrelations.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Siemens AG CEO Hosts Infrastructure & Cities Conference - Event Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts