Siemens' CEO Discusses F2Q 2012 Results - Earnings Call Transcript

| About: Siemens AG (SIEGY)

Siemens AG (SI) F2Q 2012 Earnings Call April 25, 2012 10:00 AM ET


Mariel von Drathen – Investor Relations

Peter Löscher – President and Chief Executive Officer

Joe Kaeser – Chief Financial Officer


Andreas Willi – JPMorgan

Peter J. Reilly – Deutsche Bank AG

Martin Prozesky – Sanford C. Bernstein

Simon Smith – Credit Suisse

James Moore – Redburn Partners

Daniela Costa – Goldman Sachs International Ltd.

Timm Schulze-Melander – JPMorgan

Mariel von Drathen

Good afternoon, ladies and gentlemen. Welcome here in rainy London, and welcome to the ones who join us by webcast. And we will present to you our Q2 fiscal year 2012 numbers and outline to you the assumptions for the outlook for the remaining of this year, for fiscal year 2012.

All documents the earnings release, the presentation, the flash slides, and all other documents are on the Internet and you can download them as you wish. And the webcast will be replayed also on the Internet, Investor Relations of Siemens.

We like to refer to the Safe Harbor statement on slide number two of the presentation and would like to ask you to please switch off any BlackBerry’s mobile phones you might have. Also this is being webcast, I would ask you to please clearly state your name before asking the question, we will have ample time for Q&A, after the speech of both Peter Löscher, Siemens CEO and Joe Kaeser, Siemens CFO.

And with that Peter, the word is yours.

Peter Löscher

Thank you very much, Mariel, good afternoon also from my side to the second quarter analyst conference. It appears that we are last on a busy day or you had a very exciting Champions League game and everybody is so exhausted.

Let me summarize the key takeaways. In a nutshell the performance in the second quarter was mixed, with a positive developments particularly regarding revenue growth, but also some disappointments in order intake and transmission we have been putting a lot of emphasis to work on the transmission topics, and I will give you more background in a minute including the implications for the full year guidance.

The macroeconomic environment remains volatile, but the expected softening of growth rates has only materialized in selective regions like China, all parts of Europe while the U.S. and Germany have held up well. For Siemens this resulted in a very robust development of our short-cycle businesses, in Industry where we saw particularly strength in the U.S. business. We may see a slight shift of regional growth dynamics during the second half of 2012. But global GDP growth is still expected to be on a moderated level of around 2.8% for the full year. Overall, our order intake decreased significantly by 16%, mainly due to a much lower number of large orders in energy and transportation and logistics. Due to this fact, our book-to-bill decreased to 0.93 to 0.93, but we see this only as a temporary development.

Our backlog remains at a very healthy level of around €100 billion, we accelerated revenue growth to 7% across all the sectors, driven by continued backlog conversion in energy and above average growth in emerging markets of 10%. Profitability was substantially prudent by further charges mainly for the German offshore grid connections in power transmission.

As indicated, the fundamental restructuring of investment weighted on our equity investments results. This led to a significant decrease of profit from total sectors by 48%. Major part of the difference was also the Areva disposal gain of more than €1.5 billion in the second quarter of last year.

Together with the additional NSN effect is led to a 67% decline in income from continuing operations, we saw some moderate improvement over the last year in our free cash flow, but net working capital stayed on a high level of during Q2, and Joe will discus this topic in more detail.

From a strategic perspective, we continued our selective approach to do bolt-on acquisitions. For example we strengthened our portfolio in industrial software through the acquisition of RuggedCom, specialized Canadian company providing communication solutions for harsh environments such as in electric utility, substations, oil refineries and rail applications.

In oil and gas, we complemented our subsea power grid offering by taking over the connectors and measurement division of Expro Holdings. For records, here you just see as an overview of the key figures of the second quarter, which you have already received this morning. The regional perspective for orders and sales in the second quarter provides a mix picture. The base business in industry and healthcare showed solid growth rates, but we lack large orders particularly in energy, and also in the rail business. For example the decline in orders and revenue in China can be explained by missing business for rail equipment in China due to delays in investment decisions.

In energy, the comparables were particularly tough in Germany where we won three major orders for offshore win parts a year ago. But also in emerging markets like the Middle East where we booked a major combined cycle power plant order in Saudi Arabia in Q2 of last year. The U.S. showed strength both in orders and revenue in a better than anticipated economic environment.

Our sales growth was very broad based with particular strength in emerging markets such as in India with remarkable 48% growth or Brazil achieving 18% increase. For the second quarter, this resulted in a further shift of our revenue distribution towards emerging markets with a share of 32%, up 1 percentage point over the second quarter of fiscal 2011.

What were the key developments in each of the sectors? First sector, energy. As already mentioned, orders in energy went down substantially by 36% due to a broad based decline of large projects in all divisions. The energy market remains highly competitive but our sales funnel for the coming quarters looks promising, and we expect a book-to-bill ratio about one for the full-year.

Intentionally, we were more selective on orders and walked away from low margin businesses. The sector’s backlog was at the healthy €56 billion at the end of the quarter. A major highlight in Q2 was the order for the 834 megawatt combined cycle power plant in Ansan in South Korea, where we will deliver among other equipments to world leading H class turbines to Bosco.

Second quarter revenue rose by 10% on the conversion from energy, strong order backlog with substantial growth in Asia, Australia and a sharp increase of 42% in the renewal business. I want to point out that besides the challenges in transmission, the Sector Energy delivered a very solid quarter regarding profit, and once again proved that our position as the only integrated and energy companies fully intact.

Fossil delivered 17.5% profit margin, and continued its excellent project execution in the solution business, also achieved the strong earnings contribution from the service business. We were very pleased to see renewable energy rebounding from the weak Q1 and also taking our profitability sharply to 8.2%, which was basically volume and top line driven.

Our clear number one position in offshore wind gives us a competitive advantage since we achieved a healthy revenue mix of around one-third of offshore and two-thirds on onshore businesses in the first half of fiscal 2012. We are working hard to maintain the lead offshore wind and stay competitive in onshore to be successful and expected difficult market conditions ahead. Besides ongoing pricing pressure and expected industry consolidation, this is mainly caused by the uncertainty over the extension of the U.S. tax benefit scheme beyond 2012. Power transmission reported a significant loss of €169 million in the second quarter major factors were additional charges of €278 million we had to take mostly related to the grid connections to offshore wind farm projects in Germany.

Let me give you some background about the situation in power transmission. I will touch on the project challenges in Germany as well as how we address this structural margin erosion the entire industry faces in important parts of this business.

During the second quarter we conducted a very detailed and thorough review of all of our offshore grid connection projects in the North Sea. As a consequence we had to rework our installation schedule for Bore Wind 2 and Tail Wind 1 platform whose installation dates are anticipated to be delayed to 2013.

We will apply the experience gained from the initial projects to improve and accelerate the installation processes of the following two platforms, but anticipate also a delay for the (inaudible) platform. And we are working very closely together with our customer tenant to ensure that the commissioning dates are delayed as little as possible.

Main reasons for these unsatisfactory developments are, firstly that we underestimated the execution challenges, and the complexity of these projects. I don’t want to sound like providing an excuse. But this kind of offshore grid installations have not been done before. An 800 megawatt platform has a weight of up to 19,000 tons in around 70 meters water depth and 100 kilometers off the coast. The time slot for installation work is restricted to the period from May to September, because of weather conditions. and for all those reasons, it's also much more complex compared to existing AC offshore platforms we have successfully installed already in the U.K.

Secondly, the required authorization and documentation processes turned out to be more complex since they are in parts unclear and not yet [harmonized].

And thirdly, it became clear that our resources have not been sufficient to execute multiple projects in a very timely – time schedule, and mainly these reasons we booked additional charges of €78 million of transmission in the second quarter to cover for the expected extension of project durations, the additional resources and requirements and required material and liquidated damages as consortium leader.

It is fair to say that we now have a better understanding of the situation. and I have put a lot of effort into measures to mitigate and to contain the risks. One example is the setup of a joint working groups with the authorities, with the grid operators and our peers to work on the standardization of the regularity environment and the approval processes. In addition, we have massively ramped up our resources in the offshore group (inaudible) in Hamburg. we feel we get these major mistakes step-by-step under control and can learn from these experiences for the future tenders and future projects.

How we complete the (inaudible) on these topics, I cannot rule out entirely that we will see some more impact in coming quarters. That is certainly should be more limited. One thing is clear, HVDC is a very promising technology and a very promising growth market for us, where we expect globally around 250-gigawatt of new installations in the current decade.

For comparison, the global installed base has been 100-gigawatt so far. In particular, in Europe there will be a number of further tenders of offshore wind grid connections and other HVDC projects similar to the recently awarded Western Link between England and Scotland. We want our fair share in this attractive market, but with a clear focus on risk control and profitability. If the project does not meet these standards, we will have the discipline to walkaway.

Now I want to comeback to the structural challenges in parts of the transmission business. As we all know the margins in the transmission market has suffered across the industry in recent quarters, particularly in the high voltage substations and transformers area due to aggressive Asian competition from China and Korea. Furthermore, there are significant over-capacitors, particularly in the transformers area and for these reasons, we have taken initial steps to improve competitiveness in transmission.

First, as a key assign of accountability, we decided to change the leadership of the division. Yesterday, we announced that Karlheinz Springer will take over the Divisional CEO role with immediate effect. He is a very experienced manager, who was previously responsible for the excellent developments of Instrumentation & Electrical business unit in the Fossil Division. He has experience in project management and project execution and will be of great help in this regard.

Second transmissions, the organization we changed it, we streamlined it from four business units into three. We have created two product business units clearly focusing around substations and transformers and then we have combined a third one into the solution divisions, so there will be a combined effort across different product areas in this division really focusing on the solutions. And therefore, we have also bundled all the relevant project management.

And third, the new leadership team will workout the comprehensive structure concept to sustainably improve competitiveness in the months to come. So Karl Heinz has I think the opportunity within the next 100 days together with his new team to work closely and to identify for us exactly, which type of measures has to be taken, what should be done and how do we move forward.

Let me move onto healthcare. Healthcare delivered a strong operational performance and was diligently executing on agenda 2013 to improve competitiveness and drive innovation or the growth was 1% mainly driven from double-digit growth in Asia, Australia while the Americas were below last year due to some weakness in equipment orders in U.S.

Revenue growth improved to 5% with China showing again substantial double-digit increases also and also strength in Americas. Healthcare is well on track to execute the agenda 2013 as outlined during the recent capital market there. We recorded charges of €38 million to reposition radiation therapy and to improve the cost position of diagnostics and we expect further charges for the program in coming quarters amounting to around €200 million in total for the fiscal 2012 as guided during the capital market there. We continue to launch new competitive mid-range product innovations, so-called SMART products and a few weeks ago, we launched the MAGNETOM Spectra, a three Testa MI system for broad-based clinical use and it’s another product where we fully leverage our globally optimized R&D and manufacturing setup while product ownership lies in China.

Diagnostics contributed to the overall healthcare performance with 3% revenue growth driven also by strength in Asia. As expected the underlying margin saw a decline due to a less favorable business mix. And I think this was also already explained during the healthcare capital market day. Industry showed a very strong performance in a robust business environment.

Revenue in the sector was up 8% year-over-year while orders went down slightly by 1% due to a soft development in Asia. Main revenue driver was the strong increase in the U.S. and healthy growth in Europe, particularly driven by the export driven German machine builders benefiting the motion control business in the strong automotive industry

Profitability in industry automation improved 20 basis points due to the revenue growth related, margin dropped through which overcompensated for increased selling expenses and footprint expansion. The industry automation continues to strengthen its software business and has launched besides the already closed RuggedCom acquisition, a successful takeover bid for German quality management software company, IBS.

As indicated in Q1, drive technology returned to double-digit profitability with 11.5% due to the successful OpEx management over the last quarter. And finally, I want to briefly highlight the key developments in the Sector Infrastructure & Cities. Order volume for the Sector declined by 8% due to fewer large rolling stock orders.

Nevertheless, rail systems was again able to win a contract for 20 to zero regional trains, in the UK, for the customer London Midland for around €170 million. Profit in transportation and logistics distribution achieved 5.3%, 110 basis points below the prior-year level due to lower revenue and some impact from lower margins and long-term contracts.

The Power Grid Solution and Power distribution saw a nice improvement in profitability to 6.1% due to improved revenue growth and drop through in the low and medium voltage business.

Building Technologies, profit margin decreased slightly to 5.3% despite revenue growth of 7% driven by strong U.S. business. It was held back partially by higher expenses for growth initiatives. After six months into the fiscal year, I want to briefly update you also on the performance in our one Siemens operational framework.

Our growth rate of 4.5% is 4.7 percentage points below the 9.2% reported by our peers. And one reason and the major reason is obviously that we have clearly more focused on organic growth versus the acquisition effects by our major competitors, but also on the organic side we are slightly growing slower than our competitors.

Over the last quarters we have taken significant investments in growth. The sales force for additional research and development and it’s our goal to reap the benefits from these investments in the quarters to come and at the same time limit the OpEx increase for the second half of 2012, and also going into 2013, there is a clear focus on productivity, cost control and ensuring that we have set the base for our future growth initiatives and reaping the benefits of it going into the rest of the year and into 2013.

After six months, industry and healthcare are well within the targeted EBITDA ranges while infrastructure and cities is catching up with from the lower end of it’s target range and the energy is also just shy from the range at 9% strongly impacted by the transmission challenges which I have just highlighted.

Despite the above mentioned headwinds, we still delivered on our ambition of capital efficiency by achieving return of capital employed of 16.4%. Our capital structure ratio is with 0.3, still below our target of 0.5 to 1 for adjusted net debt over EBITDA. Although the dividend payment in Q1 and the weaker cash flow development during the first six months brought us closer to the target range. And with that let me now turn over to Joe.

Joe Kaeser

Thank you very much Peter. Hi everyone, very warm welcome also from my side. What I will do now in the next three, four slides is to take you through our cash flow development and move on to the debt bridge, give some input on top line, gross margin, pricing and OpEx development and then obviously, finally last but not least try to shed some light into the so called below the line items of our company’s P&L.

If we take a look on the free cash flow development, if you see here there is a green line. Then I guess, there are a couple of things I want to mention. First of all, in the first six months, we have significantly increased our inventories by 1.5 billion and also the accounts receivables are almost 600 million, in order also to reflect the continued revenue growth and the expected growth, also the revenues for the second half.

And there has been a material decline on the prepayments including the payments in excess and that amounts to 700 million for the first half of fiscal 2012, and the ones who have been following us for a longer period of time, already know and remember that this is being consistently mentioned in our items that there is some behavioral change, if it comes to bigger orders especially from the public sector, as far as prepayments are concerned.

Now obviously looking into the second half of the year, what one could expect from free cash flow is that we assume that we will follow the trend as the second half usually stronger than the first half. and, if I guess, we assume to move along the purple line of the free cash flow developments, I would expect that the, in fact they’re just a bit shy of the purple line for 2012.

Again, we have delivered very, very strong free cash flow in 2010 and ‘11 when bookings have been growing, and so obviously there’s prepayment at that time. now those projects are being called to notice, and we need to ramp up our working capital in order to also fulfill and make good on those projects.

now, that this has a cumulative catch-up. so overtime that they’ll normalize, but for 2012 and likely the first half of ‘13, we continue to expect somewhat free cash flow due to that development. In general, as far as cash outflow is concerned, we also remember that we still expect some cash outflow from accruals taken during the close of the SIS transaction, which we reserved in 2011.

Now if you look at the net debt bridge, obviously net debt has increased from $8 billion, total net debt in Q1 to $10.6 billion. If you look into the, mostly operating activities, you can see that the income development and improvement obviously has contributed by $2.4 billion, and the increase in inventories as mentioned, but also obviously the dividend have contributed to the increase in the net debt, to expect net debt without any major out of topic such as M&A and the like to brought back to levels which we have seen in Q1.

Now that shortly to this one, let me now spend some more time on the topic of what do we expect in the top line, and pricing and at last it’s going forward with we look at a chart that you might remember from our last presentation in November 2011, when we talked about what we expect for 2012 going forward.

As far as customer price change is concerned, in the P&L environment. And in revenues we kind of expect a level of between 2.6%, 2.8% on average. So that comes in as expected in the P&L on revenues. So the pressure what we have been seeing quite for a long time is more on the booking side, and that one predominantly in large projects on infrastructure, and power such as substations as well as in commodity like of product first and foremost in the environment of distribution transformers. And that definitely has become a commodity latest due to the fact that a lot of Chinese players have used these so called financial in the economic crisis to boost their strengths in 2009 and 2010 and you see that now to come to market.

Now on the gross margin for 2012 in the first half you’ve seen that we’ve been having a gross margin of 28.6%, obviously, also negatively affected by the fact that we have to book those charges in transmission (inaudible) due to cost of goods sold.

For the second half one can expect some ease of gross margins that would be stable may be if you ticks up, mostly in energy [important] so in the industry and we expect altogether in the IT infrastructure that just be about flat as far as gross margin is concerned. So we do continue to offset the pricing pressure in the revenue environment by productivity in innovation in our factories and the total, and the logistics all along.

So as far as the underlying gross margin is concerned, we do expect as I said, to maintain the levels in the second half of fiscal year. Revenues will obviously also grow over the first half of our fiscal year, half year over half year, but as we do expect the growth dynamics if you compare first half and second half of the year to slowdown in the year-over-year comparisons.

In the OpEx environment, Peter has mentioned that already. We’ve invested a lot of resources into the go-to-market to strengthen our regional footprint, as well as engineering for (inaudible) for the merchant markets. It’s been a 1 billion during 2012. It’s been a significant amount of money now in 2012 in the first half and we expect now that in (inaudible) to deliver in the second half predominantly also 2013. So what the market can expect is that there will be some OpEx increase in 2012, which is set about below the corridor of 1.1 to 1.3 and that’s what we are targeting for 2012. We also will make sure that there is a quite a focus on OpEx as far as productivity is concerned during the better season for 2013.

On the CapEx you can also see that it’s been investing about $2 billion or expected to invest $2 billion as well maintain that level and that level will be on the lower end of the corridor maybe it’s just a bit shy of the $1.9 million, which we have been setting as a lower target for CapEx.

Now that brings me to the item on below the sectors. If we take a look on our fiscal Q2 below the sector line you can see if you (inaudible) be huge charge we have been taken on our NSN equity investment. NSN had beside some weakness in the operational environment also booked significant restructuring charges of about $770 million about $500 million of that being in Germany.

So the good news on that is, NSN was able to finish the negotiations quicker on the agreements with the union in Germany as originally anticipated so that should save sometime to apply to focusing on the market and the customer environment that was a (inaudible) of about $190 million on tax assets and in some PTI and financial expenses, which all have to – up to about an $1.2 billion in total and obviously Siemens gets just about half of it are we satisfied with that, obviously that’s a (inaudible) question and we made it increasingly clear that the company now needs to step up and deliver on it’s restructuring and refocusing on the market in matter that NSN is now going after broadband mobility and we’ll focus on that one rather than older metal switch or possible in the telecommunications environment

SFS delivered a decent income of $74 million a bit shy of what it had in Q1. It seems some smaller credit hits mostly in the U.S. no reason to be concerned and we to expect the SFS to maintain, its strings on operating performance. The so-called centrally managed portfolio assets are mostly sourced out and some remain this year, and we do not expect any major volatility going forward. The second extraordinary item apart from beyond the NSN charge over the [we have] in the corporate items and pensions with a positive wealth line of 5. If I add everything out which has been some sort of positive run-off, it would literally add up a total of about $150 million, which contributed positively as run-offs in that environment, over the $95 million legal and regulatory matters by positive on our asset retirement application, which we have for a very long time, this also is depending on the development of discount rates in the likes of very difficult to manage this time it was positive, and that even a few other positive impacts, which cannot be expected as underlying contribution going forward.

Our corporate treasury same that obviously this is about interest hedging overlays on currencies and are like, which do not qualify for hedge accounting, so there is quite some volatility of their tax obviously being in terms of tax (inaudible) are rather high because of the NSN losses could not be detected. We do expect the tax rate to be in the 28% to 30% range going forward, so that's with the safe place to add to the model.

SRE has been also at zero due to the lack of disposals. We continue to dispose of items, which are not needed in the company. However obviously we also need to look into the market environment as it develops going forward.

Now, if we look what to expect in the second half of the fiscal year, obviously on NSN we do expect similar repositioning charges that over to the majority has been done in Q2. That's been a few areas outside (inaudible) that still need to be agreed upon was that the union to make sure as I’ve said already it has been done. Bosch appliances will be somewhat flat-ish, so one could expect a significant ease as compared to the first half, but still NSN given the market remains to be volatile overtime.

As far as savings of the NSN are concerned, they will kick in at a very late stage of calendar year 2012. So it could easily be that we – in our fiscal year, which probably ends in September 30, there will be some of that early returns. So this would actually be coming by the end of the calendar year 2012 and positively affecting the NSN cost structure as we move along.

On (inaudible) and CMPA showed pretty much to be actually inline with fiscal 2011. So I would not expect any major deviations on those two items as compared to 2011, as it might be deduct maybe the CMPA rebound, but all in all that should be a good product to assume SRE obviously dependent on the disposal of real estate, we should see some gains mostly in Q4. So someone put some 80,000 million into that bucket that should be a decent way of looking at it.

The most volatile topic obviously are the pensions and the asset retirement obligations because that could go both ways. So for the reminder of 2012 second half with our fiscal year, if someone puts about $200 million on average in to each quarter should be on the pretty safe side, Q3 almost being a bit less in cost and the Q4, year-end usually is a bit higher to 200 million each quarter for the remainder of fiscal should actually play pretty safe. As far as this is concerned corporate treasury, again, if someone puts in 15 million, expected run rate on cost for interest hedging overlays depending on the currency goes should also be a decent way to cover up for that item. So that’s pretty much, (inaudible) if the market in terms of disclosure on those items.

And I hand it back to Peter for the final remarks.

Peter Löscher

Thank you, Joe. Let me finish off with the revised guidance. For this year, we confirmed the moderate growth in revenue also in terms of order intake being above one in relation to turnover, so a positive book-to-bill. We continue to anticipate strong earnings performances in most of our businesses. And last but not least, in November 2011, if you remember, it’s the height of the European crisis; we set out an ambitious, but at that time realistic target of €6 billion for our income from continuing operations. And due to the challenges mostly in our power and transmission business, the level we have – we are reducing this number by €600 million to €800 million.

So with this, Joe and myself are happy to take your questions.

Question-and-Answer Session

Mariel von Drathen

So, we will start the Q&A. Right in the middle of this room. So you can have (inaudible).

Unidentified Analyst

Good afternoon, gentlemen. It’s Frederick with UBS. I have two questions on transmission. Is there a positive given what’s happened in the business in the last two quarters, is there a positive impact on how you run other project related businesses across Siemens, is there reason for you to review the operations elsewhere, because of what’s happened in transmission?

The Second question is, I understood from some of your customers that, there is a trend now from among buyers of grid operators to split up or separate the tendering process, so you for example you would have a tender for the substation, you would have a tender for the cables, rather than just have one large tender for the whole package. Is that correct and is that well, is that something that you are seeing in your markets right now?

Peter Löscher

Yeah, let me make one thing very clear, I mean this is if you remember first of all Siemens has not project issues across the Board, because obviously one concern could be a Siemens now having not learn enough from during the 2008 when we talked about the Fossil Power issues. Clearly when you’re talking in terms of execution of big projects. We are doing extremely well and if we take learning’s from the Fossil Power division, one of the reasons why this business has actually accelerated.

In terms of earnings power was not just a mix effect, but also in terms of how it is executing. So we are doing and we are executing outside this business. Unfortunately, this is a very specific issue, which we quite frankly we have underestimated the complexity. We should have clearly looked into the issues, that this type technology was never implemented even the regularity authorities are learning along the way.

So we are not talking in terms of executing against a very clear cut, regulate the environment, we have under estimated that roughly 50% of the value add of this business is actually outside of our own competency, so we’re really talking about highly complex shipyard type of building in terms of platform building and on top of it you have integrate actually our own business and equipment on to these platforms. So the challenge is the integration of it and therefore we have made all the assessments. And it’s a combination of picking the right partners, it’s a combination of how you share risks among the partners and then ensuring that from a competency profile, we ensure that we are successfully implementing this project. So this is a highly specific issues, which we are addressing.

And quite frankly, in hindsight, but if I share with you the learnings, one of the learnings is we should have taken one project. Unfortunately, the first one was won by ABB then we have won four in a row in a very, very short timeframe basically in the window of 12 months and then the last one was again won by ABB. So in the ideal scenario, we should have taken one, learn from it, taking the best practice sharing with it and then move on to the second one. So this was one of the key learnings of it and we will certainly benefit from it.

In terms of the additional projects, which will be there in Germany because the first four when you think about in terms of that at least 16 to 20 of these type of projects coming on the northern shore of Germany in the upcoming years. So and we are certainly using this as a very expensive learning experience for the company.

In terms of the issue of splitting it up, we don’t see this that this is actually split up in terms of splitting up cables versus [software]. We rather see – first of all, there is no blueprint, I mean each customer and each project are different. And having said this there is certainly an issue in terms of joint in several, so you have to very carefully look into contractual issues, which should take on and the liability having Siemens as a partner is in the ideal case for many customers and more integrated one.

And we have to very carefully assess, and this is what I said earlier. When we bid for such projects, we have to ensure that we perfectly understand the risk reward profile of such project, carefully assess it, heading the right competences to really assess it carefully and then make sure where to repeat and where do we refrain from bidding, that’s the core issue here.

Mariel von Drathen

Okay. We’ll continue with Andreas Willi, and then Peter Riley.

Andreas Willi – JPMorgan

Good afternoon, Andreas from JPMorgan. I would like to follow-up on transmission more on the underlying business, but I’m still a bit puzzled about the margin decline over the years, given that you were probably the first and most consistent in terms of highlighting the price pressure in this area. Why did it take so long and to basically hit the 3% margin before we have the small structural review, and why didn’t that come early, because this was a known issue to the company given you’ve always highlighted the problem.

And the second question on pension and IFRS 19, all the companies have started highlighting the negative impact from that for 2013, really implemented in ’13 or ’14, and what’s the impact for Siemens mainly on the P&L?

Peter Löscher

Yeah, thank, Andreas. I mean on the rest of transformers, if I may, we definitely have been highlighting the math of pricing issues on substations predominantly, and also continued pricing pressure on commodity transformers like the distribution ones, which face significant competition from China, and I mean that was related to the backlog.

Whereas the backlog in Q1, someone who is asking, what are the areas that you are mostly concerned about, and it’s out of the knowledge of the platform in the North Sea is well that division and that at some point in time, this margin pressure in the backlog has materialized should one have been doing the structural changes earlier, definitely could have done in a way better than now, and the revision has been quite successful in getting a lot of productivity out of the resources still over the last two, three quarters but at some point in time, working hard and working more comes to an end it doesn’t incrementally help to bring down the cost and bring up the margin. Then you need to go into structural changes and this is where we are at this time.

As far as the substations, and it’s distribution transformers where pricing pressures and margin deteriorations have happened in the division. Pensions definitely – IFRS 19 will affect the company during 2013, on the other hand, obviously, the counterparty is always expected to return on pension assets so we need to see our – the guidance we’re going forward when we come to close to 2013, but this is definitely is a topic which needs to be addressed at a time.

Mariel von Drathen

Okay, we have in the second row Peter Reilly from Deutsche Bank.

Peter J. Reilly – Deutsche Bank AG

Good afternoon, it's Peter Reilly from Deutsche Bank. Peter, 18 months ago you sat here and told us Siemens is not a normal company. Since then you’ve had the Particle Therapy, you have the Areva fine and Areva Power Transmission. These are not things I would associate with a normal company. And they’re all in someway issues of management judgment.

Two questions really. How can you reassure that there aren’t further surprises in the backlog? And secondly, you were talking about a target of a €100 billion of business volume. Did that somehow encourage excess of risk-taking inside the company in order to grow the business faster than it’s really capable of being growing?

Peter Löscher

Yeah, Peter, thank you for these questions, because I want really to clarify. What we have said all along the way is capital efficient growth, and for this reason we have actually developed the cockpit and we go through every six months where do we stand in terms of in relation to this cockpit, one.

Second, there is a good reason why I have never specified a specific date for the €100 billion. So what we have communicated to the teams is that, there is ambition level that we have to grow and that we have to capital efficient, out grow our competitors. But we are not running against a wall of a certain year or a certain quarter where we should hit precisely to avoid what you have insinuated, but all of a sudden you have basically the idea within the businesses that we just have to drive our growth, exactly to avoid this.

Now there is always an issue, I mean you have different issues in terms of what is – the question is what is the normality of a Siemens organization, the size we represent, and the scope we represent and the global aspects of the company we represent.

We are a 400,000 employee company, an €80 billion, almost €80 billion company. So we will always have in some businesses issues which we have to deal with. And the key issue is, do we have the accountability in place, that we identify the strategic issues and if you have to correct the accountability that you take absolutely all the right measures to correct that.

Now, unfortunately be assured that this is not the proudest moment where I sit in front of viewers representing our shareholders, well Joe and myself and Josef and explaining a situation reigning in this businesses. Unfortunately, we are and then the question is what do we do about, and how do we drive the accountability. And how do we make sure that we correct it and this is done from a strategic perspective and long-term perspective. And this is how we now try to drive the transmission areas.

But at the end of the day, we will always have businesses which we’re doing extremely well, businesses we are – basically we are, where dynamics are changing in the other two businesses for our sub-stations and transformers, in detail what (inaudible) had said earlier, we have blocked this issue already since several months that the underlying and then the assessment comes – the underlying competitive dynamics of Asian competitors going for aggressive market share strategies, is this a long-term trend or is this a short-term trend, and then you have to contact.

And we came to the conclusion, we clearly have to structurally look into these businesses and to reposition these businesses for the defending our strong position that we have and to making – and to ensuring that we have a capital efficient growth element in this business, long-term footprint wise, standardization issues, supply chain, so there are of many, many aspects were [Collins] and his team are addressing and as soon as we have it we’ll have it. But we will never, I think it would be unrealistic if I would stand in front of you say a Siemens company means that we will have no surprises. Hopefully, we are much more credible in terms of how we drive a performance culture across the business and I don’t like this surprises and I certainly share the sentiment of your question very much, but the issue that we are taking action and that we drive the changes necessary.

Mariel von Drathen

Okay. We will continue with the last row Martin Prozesky.

Peter Löscher

And maybe before I move on to the next one, the other one is, obviously, I mean I think the company, the size that we have and the leadership that we have, we also have to have innovation leadership. We always headed and – so we always have to go for our way out of boundaries in the businesses we are operating in. And this is always a question how far can you go and how fast can you go. In terms of moving technologies from a research technology environment into a pilot environment and then from a pilot environment into a first application and than basically a complete rollout and this business had and I have to say it very frankly and very openly didn’t have the competency in house to really fundamentally make a complete judgment about the complexity of this project.

And unfortunately all four orders all four tenders were won subsequently business felt very good and now we realized that implementation is very different. So it’s also an aspect of having made the wrong judgment, so we will always, but we have to preserve an innovation culture in the company, but not forfeiting profitability aspects as we implement the first role out of it. And I think a great count example of this is in another part of the business is [eight frame].

In the eight frame we clearly have decided actually strategically we will do this with one customer here in using (Inaudible) we will gain all the experience and as soon as we feel comfortable with the performance of this frame we then if you remember rolled out six selling to the United States and now we have sold another three in Korea and we continue to roll this technology very successfully out, but you could never completely avoid making misjudgment in a situation like this, but we should not have done what we have done.

Martin Prozesky – Sanford C. Bernstein

Good afternoon Martin Prozesky from Bernstein. Two questions on energy southeast but in different divisions, if you can you give us a bit more guidance on renewables, and renewables has been very volatile and what I understood was that mix has been very important solar versus off shore versus onshore in terms of the disappointing margin we saw in Q1. Now this margin was much stronger. Can you give us a sense is it mix, is it execution, is it better projects being booked in the quarter, and doesn’t mean margins are going to be volatile from (inaudible) was it going to be at a higher level. And then the second in terms of fossil for Q1 calendar, which is quite a big service quarter, the margin was a bit weak is that because there was more turnkey in that mix or and how should we expect the margin to develop for the rest of the year? Thanks.

Peter Löscher

Yeah, thank you very much. Look, I would like to contact your key argument to say that Fossil Power margins are weak. I mean, go back into – this is a cyclical business environment, go back only a couple of years where we would be extremely happy to having achieved the double digit or 10 to 12 or whatever in margin used to be. And we have actually had now a period of time where we have actually, but we were able to execute exceptional margin quality.

And you heard me saying a couple of times when we were talking about the 20 plus or whatever it was 21, actually that all stars were aligned to really make this possible. So it was clearly execution product mix and obviously you have a margin quality in the Fossil business of 17.5% is an extremely good margin. So, the key focus right now is how do we sustain the margin quality, because at the same time, we gain market share. So this is not actually, so this is a combination of gaining market share, having the right technology having a good mix and therefore we have targeted overall to say we want to have one third solution, one side products and one-third services, and you have a combination of it. So I would say this was a pretty good performance of the fossil business.

On wind, this definitely is – there is no change to the underlying dynamics and you know this and see this through other companies. This is an environment where our margins are impacted, where our aggressive pricing is happening, where our projects are taking, where you have different dynamics in different parts of the world, in terms of pricing pressures. You have highly competitive Chinese player are now going global.

I mean you have an onshore environment in the United States, which is now benefiting from the PTC and the key question is, when and how long will PTC last. Should PTC not being continued, you would have a totally different dynamics in the United States for this type of business. And so therefore we as a company being in this business, we have to prepare ourselves for different scenarios, because there is no clear-cut answer. Nobody knows exactly will it continue, won’t it continue. So you have to prepare yourselves for the different scenario.

So I would therefore continue to state, we have to absolutely execute what we said ourselves. And this is industrialization of this businesses, standardization looking for productivity, looking for costs, looking for core platforms within the business and having the right mix between off and onshore, and then we should do well, so. But we cannot expect this will not – this will be a highly dynamic environment going forward in an environment where consolidation will be happen, who will pick up, which company and changing the overall dynamics. Who is able to do this organically? We clearly have said out we have the technology, we are sitting in the right project offshore and being the market leader they are. But, this should be an interesting dynamic environment and we are very happy that we will be able to turn it and this was a volume effect. I mean that in Q1 and in Q2 it was slightly mix, but mainly it was also driven by volume, and then having obviously the impact on the manufacturing margin.

Mariel von Drathen

Okay, we have on the second row in the middle (inaudible).

Unidentified Analyst

(Inaudible), Morgan Stanley. I have three questions. One was from Friday last week GE on their conference call sounded extremely enthusiastic about their gas business for the first time in a while. I think the call was all [readily] to gas. Can you just talk very generally about tendering activity that you see at the moment. And over what timeframe could we begin to expect some improvement in the pricing environment for Fossil Power. So that was question number one.

Second question, Joe on your slide on OpEx I couldn’t completely understand exactly what you were signaling. It sounds like you are saying OpEx should slowdown in the second half of the year. And it was a point 6 number out of 1.2. My question is culturally, philosophically is seen in the changing direction on OpEx. Are you now trying to get a handle back on the businesses and get the margins back up, a simple question there.

And final question it is really just on the actual guidance what I wanted to make sure was within that $600 million to $800 million of lowered guidance have you made additional provision in that number for any further bleed either in transmission or even there I’ll say it, I don’t want to mention it, but I will the operating side in NSN. So do we think that, that takes care of all business for 2012?

Peter Löscher

So I'll start with the first one, not commenting on – obviously on other companies. But the statements, all roads lead to gas is, and this will be an exciting environment, this is certainly what we also share for sure. And for this reason we have actually globalized our footprint. If you remember now, we have to benefit, we have a U.S. operation, we can access export, import funds in from the U.S. for overseas market, and this is now a platform which we can use not just for the United States, but also for overseas market.

So in the United States, shale gas and everything else, I mean the key question is only how quickly will the economy pickup, and the reserve margin which exists in United States below what, because currently – I mean this is the major determining factor, but that this business grow for example in the United States is picking up in the near future, there is no time, the question is actually when. So U.S. – Europe is actually really impacted by the financial crisis.

So here we see clearly delays happening in terms of – this is a pure replacement investment market. And then we see actually new capacity in the emerging markets, and obviously you have highly interesting, but also highly competitive markets like Saudi Arabia where we’re building our manufacturing footprint, you have – I think we will be very nicely be able to leverage the footprint what they’re building in Russia.

So the set up what we have now is set forth for a growth market environment of gas. Now on the short term, 2011 was a good market, and we anticipate probably 2012 being a similar market environment overall. And the two companies, the other company and ours what you have mentioned are having theirs fair share of successes. So with having the right products, we don’t see an increased pricing pressure in this environment, but we see selectively very interesting competitive moves.

So the funnel is there, you have different market dynamics in different parts of the world which we have to consider, and you have on a project basis, sometimes different behavior by different companies. Not necessarily, the two what you have mentioned but there are few others also in the game. It’s an interesting market environment.

Unidentified Analyst

Then on the – sort of a clarification on the OpEx slides, you remember that slide was saying that OpEx shall increase between 1.1 and 1.3, between ‘11 and ‘12 that’s what the original assumption was and the latest guidance now is – we expect to be below the lower end of the corridor. So that actually means it should be less than 1.1, and that means that there will be a significantly slower growth in this second half as compared to the first half. So if you have to slowdown the massive approach, you’ve got to give them some room to break.

So that’s the first thing, and for clarification as far as to all of us concerned for 2013, we actually do believe we have spend enough credit for the businesses now, and they need to deliver first and then we’ll take it from there. So if you remember, we increased our OpEx SG&A mostly application based footprint, engineering as well as R&D by about $1.2 billion from ‘10 to ‘11. So that comes twice ‘11 and ‘12 then we got another let’s assume I don’t know let’s assume $1 billion or maybe $900 million in 2012, up to $3.2 billion. It’s been $1.6 billion and $1.9 billion on CapEx. So to we have as a resource allocator to the business have given the business about $5 billion to get something meaningful down in great value.

And we say that along capital efficient growth in the short-term doesn’t like this has been achieved. We did not expect that to be achieved in the short-term because obviously if you invest into R&D it takes time. We believe the time has come now in 2013 for our businesses to show us the money. That’s what (inaudible) actually mean that the assumption for our budget process, which starts as only as in May, June in the region and then we’ll be added up to corporate, could as well mean that it will be extremely tight OpEx increases if not freeze them. So that basically means now it’s deliver time and we expect the business to show us (inaudible) from what we have allocated in terms of resources. That’s not as easy as that. At this stage there is something on top of it, which changes the (inaudible) lead to gas and penalty is not that long. I mean they as well continue to invest selectively other than picking our places. Where, we continue to invest and increase the OpEx.

So now in the (inaudible) anything in. I think obviously, if there was anything which had to considered, we would have considered that in our fiscal Q2. What we have been adding mentally was a ballpark number of about $100 million for the structural realignment of transmission. That’s not been set in terms of content, but it has put a number in for (inaudible) to get some, we have someway of being quick and do the right things quickly. On NSN, when we are explaining the assumption on the guidance in November, we said we put $500 million charge for restructuring that appears to be a bit more than that is covered. There will be some, as we said some ease in some areas in the second half. So all in all, we feel comfortable with what we’ve been putting into the market. And we look on it as we speak.

Mariel von Drathen

Okay, we will continue the Q&A from the right side with Simon Smith second row and then James Moore.

Simon Smith – Credit Suisse

Thank you, Simon Smith with Credit Suisse. I had two questions; the first was with regard to the balance sheet. We obviously are in a – even after paying the dividend and financially very strong position. And I wonder now isn’t the time to start considering the return of capital to shareholders. I think would you, all the discussions we’ve had here point a plenty of challenges for the management team with the existing assets of the group. I think strategically there is not from what you described clearing strategic holds that you are looking at. And from the last time you consider it your full year, the crisis has eased in terms of financial markets considerably. So I just be interested on your thoughts on that? Second question is with regard to China and with three supporting season, we are getting some very diversion trends for companies in China. I know also you showed that sort of orders and sales down, but we are very interested to hear how that varies across your groups automation compared to construction compared to power et cetera, so I just wonder if you give us any further insights into that region?

Peter Löscher

So, let me start with China first. I mean China obviously is a, number one is slowing down from a very high level. So this and China has always proven that they manage stores when they set out goals that they achieve goals. So and my first assumption is the 7.5% overall GDP growth is something what the government is targeting until we’ll probably be a number very close to it. What China will achieve?

Now on the short term basis, ours environment for our business, we see an extremely overall you have the numbers in our books, so you clearly see also that our orders are down, reason being – main reason being that obviously the rail component business is today very different than it used to be last year with all the reasons, which you probably know as good as I know. So, we see certainly a slow down in the rail environment in China also on the energy front, this is certain slow down, we see a very good environment for our healthcare business growing very strongly. The industry automation business has a very good environment in China. And due to the fact that productivity is very important and industry automation business for the upgrading of productivity and counter acting high labor and increased labor cost is something where the business is perfectly positioned in China. So that’s kind of on the short-term basis for this time gap, and so I continue to stay optimistic about China, and we continue invest in China.

Joe Kaeser

Yeah, somewhere on the return on capital, maybe if I move to that front, and not a consideration on China, obviously being slow but one should always have in mind that China almost completely has relent its public and political and government environment.

So everyone now is in your place and they literally have been starting new era of leadership, which has been uncertain for many, many months because no one really knows exactly where he or she would be at, now this is clear, and I will not be too surprised – because I also work – resume activities on the either such an infrastructure than the like.

If we look at the growth to come from in the near term in China, the resumption of growth, I would rather point to automation more than anything. China has deliberately said that they want to go into high level manufacturer. And this is about automotive tools, it’s about automotive parts, not so much – there you have a 5% or 10% failure rate (inaudible). Regarding the automotive OEM parts, manufacturing, it’s five to ten parts per million, and automation, high end automation means high end quality, high end quality means, definitely again automation, and this is where we are just thoroughly could at. If you haven’t had the change to go to the Hanover fair, really should go have a look, because then you will be able to see what Siemens industry is all about. And compare – of course everyone is there so you can compare note within a mile and a half round trip.

Now let me move to the return on capital. Obviously, as Peter said earlier, and whole-heartedly agreed to that, One Siemens is our operating model and One Siemens has a very clear notion about what to do with capital or if over a long period of time, we are up or below certain targets we have set for ourselves. Now it’s a clear commitment that we will do so. On the other hand, obviously, you really need to hunt a bear first before you do like to throw, and that’s what we are focusing on, now that we’ve had some bumpy roads in execution as you obviously all know. We need to go to fix that, and we continue to year-end causing our – achieving our new framework on profitability, and then we’ll take that one for as a focus.

Now, obviously no one has – surprisingly has the (inaudible) maybe it’s coming, I mean that’s very, very clear commitment, it has no change that it will float the asset, sooner rather than later from what we assume is too little in the best interest of the company, the shareholder and all the stake holders within area like later summer, early fall. If for some reason that window was not to be taken, we definitely would seek for other matters to dispose off the assets and products in the market. and that maybe also be a good idea to help the shareholders receive what we believe is their own.

Mariel von Drathen

Okay. we will continue next to (inaudible).

James Moore – Redburn Partners

Couple of questions on margin if I could, and also a question on one-offs, it’s James Moore at Redburn. You’ve given us a clear view on the transmission side as to what the issues are with tenant. And I just want to be clear on my mind where we are on other one-off risks. Am I right in saying that particle therapy is now fully ring fenced. Am I right in saying that a row three is largely built, and therefore the risk is quite low. And should we worry about ICx, are seeing some press reports talking about delays, could that be the next project based issue. And are there any other long cycle project base contracts in your backlog at the moment that you worry about?

In terms of margins, I wondered if you could help us a little on the good industry margins in IA and DT, is that just volume or is that a mix issue there between the chemical drives, large drives, et cetera. And then the rail business, there’s slightly lower margin you explained, but how should we think about that going in the transportation business, in the rail business, how should we think about that going forward in the coming quarters?

Peter Löscher

James, thank you. I mean obviously, as I said earlier if you had seen any risk which was not (inaudible) we would have put it into the – in our quarter, in our quarter close. So obviously there is to the best of our knowledge and judgment, there is no open risks in the company in either in execution or in the backlog.

Now PTE definitely is ring fenced, so there should not be any charges coming from that, and for the Lotus 3, as always seeing good for surprises, as you know that and if I tell you today, it would be the same as if I told you that a year ago. So we are diligently working on our part, we know what we're doing. So once we've received this team, we’ll be fine, we’ll be fine on the conventional that it, will be fine.

And the unknown obviously is that when are we going to receive the steam because that needs to start earlier than – steam turbines, well that is certain, has a certain unknown here. On the other hand in searching the timeframe we’ve been somewhat more conservative in our current results as the one’s who had still reputation to build it.

So therefore this is as much as I can tell you on this one. Obviously, the final debate will be with the customer order and the liquidated damages, how does that all go. We used to believe that, we have a good stand here and there is also a lot of potential counter flames but that is just an unknown which definitely will also be part of the legal proceedings just as it’s been a – as a disclaimer, even though we do not believe it’s probably more in that particular aspect.

I think we’ll have our customers, so sometimes we also do respect criticism which may not necessarily be de-factoring based. So therefore it is what it is. We are also working harder on it, de-factoring the increase in living on this position very well. I just lost our – well there are people in place, the results in place, it’s all there. So that seems to be doing all right, serve to the best of our knowledge. I mean the most unknown definitely is still that, unfortunately I’ve mentioned it for the fifth time now, is that matter in the North Sea because, average percent for completing of about 30%, 33% goes through that projects. It still means have 70% outstanding to complete. And I mean obviously, this is something to always consider once you go down the learning curve.

On the margins, industry automation is doing well. We have been benefiting a bit from the very, very active business development in the German high-end tool maker environment more than the Chinese. If you look at this regional spread, Chinese business hasn’t been that strong in industry automation, the German business was stronger. This is usually an indication that there is some positive mix impact here. Interestingly enough, late in March, and now in April we do see some decent pickup in China on industry automation.

We do expect, this to be a follow through from the fact that there was some distribution destocking happening in the end of 2011, early 2012 in China that Siemens now, through and that this will start again to restock. So there has not been particular projects, in OEM it’s been mostly point-of-purchase.

So that's an indication of a more broad-based potential recovery. DT definitely has been benefiting from our slow motion control, definitely over compensating some weakness in the so-called energy environment of that aspect. And then rail and logistics, I mean this being pretty successful in getting new orders, decent orders in terms of margin, now at the time of execution will have a few slower quarters still to come, but we do expect rail to be decent if not strong in revenue growth in 2013. So this is that a bulk. Now we think coming in terms of executing on the backlog. So that much in a nutshell on (inaudible) in the industry.

Mariel von Drathen

Okay. We’ll continue with the last row (inaudible), and then we’ll move over to the middle to (inaudible).

Unidentified Analyst

Thank you. (Inaudible) two question, please. I want to come back on the cost-by-cost even when I backup the unusual positives it’s still almost in profit for the first half, which is quite a challenge compared to history. So I was wondering is there anything structured which has changed in the way you allocate profit between corporate and the division. Or is it still an underlying run rate of $800 million charge per annum, and that’s the first question. Secondly on M&A, and we start to see a Chinese companies emerging players in general trying to moving to Europe with some acquisition strategy. Are the Siemens view that I mean to some extend, do you feel you have a role of – or is there a possibility for you to take defensive action in protecting your competitive landscape by chasing suppliers or smaller competitors to protect the competitive landscape in Europe as well, thanks

Peter Löscher

Let me start with China first, quite frankly, we welcome China going global, because it’s an industrial maturity of a big nation like China. It would be totally unheard off that a given country would not try to also expand the global businesses. In part of expanding the global business is in part of expanding the global business is obviously that you look for organic growth, and then you look for M&A opportunities. So there is no specifics of competing for M&A targets. We are competing for M&A targets everywhere. So this is rather normal thing and this is happening, there is no question. There is strategic intend of go out, by the government and by strategic industries and Chinese players that they also want to participate in M&A activities globally and certainly in Europe as well. So I see this rather relaxed and nothing special to a given country, so and now over to you.

Joe Kaeser

On a corporate cost dynamics, obviously it has been a positive [105] as we can see on the chart. And as it could be as much as 150, which you could consider it to be a positive one off, so obviously if you consider that there will be a negative for the (inaudible) so there hasn’t been any hit and positives in there, which or to continue I mean it is what it is, we disclosed the regulatory and legal methods to do with Greece and release of reserves on a legal case, so that is not going to happen again, that we had to change the approach on a quick settlement from continued to discontinued that was a technical method since all the allocations the company has been faced with Greece were related to communications businesses.

So we needed to move that so we had a communication business that was considered to be going. So that was a pure technical item and as I said, going forward if we consider together with the pension matter which is usually also negative at this time it has to be about plus one or flat, zero. If you consider, 200 for both difference in Q3, and a bit more in Q4 for those two items together it will be on the safe side. It should be bit more aggressive if you pick to a little bit – if you probably, and we’re cautiously used to 200 and there will okay for the remainder of the year. And we will be updating you on that item again in November for 2013.

Mariel von Drathen

Okay, we’ll continue with Daniela Costa. And then next with (inaudible).

Daniela Costa – Goldman Sachs International Ltd.

Thank you, Daniela Costa from Goldman Sachs. Two questions, one on the rate of decline on the prepayments which you’ve talked for a while that there is a structural decline, and is it all an industry trend or is there perhaps that you’re willing to take up a faster rate of decline there because you have a bigger balance sheet than others, and have FFS, you then could use that to gain some market share at the expense of the immediate impact on a prepayment? And the second question is, there were some news on the FPN, so the enterprise networks on the press a couple of weeks ago offer potential IPO. Does that, how realistic is that? Do you have any comments and what could be the eventual size or timing? Thank you.

Peter Löscher

So, thanks Daniela. The second one is, the question was, do I have any comments, the answer is no. We will take that along as we go. We are minority shareholder and we welcome every meaningful, sustainable forum of exits. The business has been well structured. The gentlemen who is running it from a number two (inaudible) come with a hell of the job because we’re not yet very well positioned and we look forward to what they see.

On the prepayments it has not been technical in nature, this was not meant to be stimulating orders or giving to some unreasonable expectations of our customers. We do see that cash still has its meaning, the public sector interestingly enough is more up to accepting capital cost charges in the order intake calculation rather than do the – if you want the historical, the historical way of financing definitive assets for the project.

So I would expect – given the development of public debt and the likes, I would expect that to continue. Now, obviously as I said €700 million down in the first half, we had two effects. First is the structural change on customer behavior, and the other obviously is if bookings are down, so you will get relatively less bookings on top of it as compared to what you’ll lose, if you went in the back of – to the revenue side. So if you were actually were able to scrutinize, and probably like 50/50 as a (inaudible). But we definitely do see an infrastructure, this is happening, prepayments are less as compared to how it used to be – that definitely will mean and the decision to make more money on profits in order to cover up for deal for the return on capital employed.

Mariel von Drathen

Okay, we’re getting to the end of the conference; I still have Timm, anyone else, any questions. Timm will finish…

Timm Schulze-Melander – JPMorgan

A lot of responsibility, it’s Timm Schulze-Melander from JPMorgan. Two questions if I could, one for Peter and one for Joe. Peter, you had the recent growth agenda, I heard Joe talk about 2013 is the year that will show us the money. And I think investors be curious, does that mean that we should be thinking about an OpEx [platter] or could we be talking about maybe a swing back at the primary focus towards maybe back towards cost and efficiency maybe a new cost-saving program that would sort of signal that should have shown us the money it was next year. So that’s sort of bigger picture question. Now the question for Joe is really sort of bit of a housekeeping, an update question (inaudible). Could you just give us an update in terms of some of the puts and takes in the operating margin and what do you see as the outlook for the second half of the year?

Peter Löscher

I’ll start with the first one. It’s obviously what Joe was highlighting and what we have discussed already intensively with all the operating Board members is that we will ensure that we drive continuous growth and that we have an extremely tight operating budget. So relatively speaking, we’re asking the operating units to really show us the incremental growth path and the incremental margin in a very different context and we have seen it there over the last couple of quarter. So that’s the notion of it of the direction that we are taking.

Joe Kaeser

And second on (inaudible) the revenues on a comparable level had been up about 2%; the nominal level obviously much higher because of the help of the currency, as well as some acquisitions in this space. Operating profit is somewhat difficult now to really compare because we have this vote if kind of thing, if we hadn’t had that in discontinued what would have happened, so it’s very difficult to really compare like-for-like and not mix up apples with oranges. But if we kind of are looking for a underlying margin, operating underlying margin what one could expect on the ordinary course of business, would that consider being in the area of 5% to 6%, EBIT, not EBITDA, EBIT.

Mariel von Drathen

Okay. Well, that ends our Q&A for the Q2 fiscal 2012 earnings release. We will be present in the next couple of weeks and months in number of conferences. We look forward to you there. Thank you very much for your attendance. Thank you.

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