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

Siemens AG (SI)

Business Update Call

June 24, 2008 9:00 am ET

Executives

Michael Sen - Senior Vice President, Head of Investor Relations

Dr. Klaus Patzak - Corporate Vice President, Controller

Analysts

[Peter Riley] – Unknown Firm

[Alaver O’Neal] – Unknown Firm

[Mark Trillman] – Merrill Lynch

Tim Adams – Citi

Operator

Good day ladies and gentlemen and welcome to the conference call on the new reporting structure. (Operator instructions) Before we begin I would like to draw your attention to the Safe Harbor statement. This conference call may include forward-looking statements.

These statements are based on the company’s current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. At this time I would now like to turn the call over to your host today, Mr. Michael Sen, Head of Investor Relations. Please go ahead sir.

Michael Sen

Good afternoon to everybody also from my side. New technology has it that Siemens team sits in Munich and in Spain. Welcome to our call on the new reporting structure. I hope you all have received our email where you will also find a detailed letter from Joe explaining the intention on the new reporting structure, basically being the consequence of the new organizational setup.

Today with me on the call I’m glad also that we have Dr. Klaus Patzak who is the Corporate Controller and the one person who signs the 10-F together with Peter and Joe. And after a few short introductory remarks from my side, Klaus will take over and walk you through the technical details of the new reporting structure and the content.

Before we begin may I also highlight a few ground rules. This is a technical call, a mere technical call so we will not be discussing any business strategy or outlook related topics, neither in our presentation nor in the following Q&A. So please bear that in mind also after the presentation enters into the Q&A session that we will focus only on the technical issues coming from A to B on the reporting structure.

Now let’s kick it off, I hope you all have the presentation in front of you on page 3 after the Safe Harbor statement, you are well aware of the organizational setup we have in place as of January 1 and we have been explaining to you whatever has changed there in great detail. Just to highlight again that it is an Operating Board now, running with three Sectors and the Sector CEOs being also part of the Managing Board and you see the Divisions which are now integrated into those three Sectors, highlighted here.

And we also said this is based on the strategy Siemens has been laying out, so it is based on Industry, Energy and Healthcare. We also have two cross sector businesses, this is Siemens IT Solutions and Services and of course the Siemens Financial Services part.

On the next page I would just remind all of us that we have been laying out a couple of points. On November 9 when Peter had his first appearance with the owners and analysts of the company, and we have the main topics on the right side and also please have in mind our key principles which are transparency, accountability and performance. This, the call today clearly is viewed as a building block on transparency.

And on the right side the last bullet point, new reporting structure, we will report in the new structure as of Q3 but prior to the disclosure of that quarter, basically, we are having this call to explain to you what were the content related issues from changing from A to B.

On page 5 you see a little bit form a business point of view what has changed. On the left side you see the old structure, the old Divisions with also grouped, partly grouped with A&D, SBT, Osram, I&S and TS which is basically Industry, Power Gen and T&D in Energy and Med is the easiest one, Med is healthcare.

What changed in Energy is that we now have a division which is called Oil & Gas, the Oil & Gas is basically the industry turbine of power generation and some other businesses from industry solutions, basically catering solutions for upstream and downstream markets and the industry solutions is mainly the rotating equipment for the Oil & Gas industry.

Also out of I&S we took Intelligent Traffic Systems and Infrastructure Logistics, Infrastructure Logistics basically it being postal automation and airport logistics into the Mobility Division so that we have consistent coherent mobility offering from transport Intelligent Traffic System and the underlying logistic solutions.

And also what has been added to Building Technologies which used to be Siemens Building Technologies is out of the former low voltage business of A&D, we took the electrical insulation and equipment part and put it into Building Technologies so that they now also have a comprehensive portfolio.

This is basically the logic of the business which led to that setup again around the strategy on the core businesses of Siemens based on the megatrends or long term secular trends, Industry, Energy and Healthcare. And with that I would like to hand it over to Klaus to walk you through the details of the new reporting structure.

Klaus Patzak

Thank you Michael and thank you all for joining us on the call today. My goal is to give you a preview of the new structure of our financial disclosures beginning in July. Ideally this will help you focus on our performance and progress in the third quarter, rather than on trying to figure out the changes in our reporting structure.

Those changes as you know are part of implementing the sector structure that Michael has just been talking about. I am happy to say that we are right on track in the implementation process and the next step will be to go live with the new reporting structure in July and that’s what I will describe to you today.

Before we go to the next slide, let me pause here and say that if you need to dig into the business descriptions for the three sectors of 15 Divisions, you have a couple of options. One is to read the description that we published today and that also will be filed with the SEC on form 6-K. Otherwise, Michael and his team are happy to help you after the call.

So let’s take a basic look at the financial reporting structure that goes with the new organizational structure. The first point is that we have left behind our component model which divided Siemens to Operations, Financing and Real Estate and the third component that took care of everything else.

Instead we will focus on Siemens as a whole and our fit for 2010 targets as well as on the performance of our sectors, divisions and cross sector businesses. We are looking for a way to make a complex company a bit simpler for our investors and to increase transparency as you will see later.

A couple of years after our listing in the United States, the good news is that Siemens is indeed simpler. We are no longer in semiconductors, electronics components and automotive electronics, even telecommunications is almost a thing of the past. The main improvement which you can see now in the slide is that instead of 12 reportable segments, we will now have six.

As I will show you a bit later, this doesn’t mean less but more transparency, taking into account the supplemental data we will provide quarterly. Three of the segments are the sectors Michael just talked about. In addition, Siemens IT solution and services and SFS continue to be reportable segment.

The sixth reportable segment is our set of strategic equity investments. The three sectors have their own CEOs who serve on the Managing Board and both of the cross sector businesses have also a CEO as well as designated oversight from a member of the Managing Board.

The Corporate Executives Committee is dissolved, so we are clearly following the principles of accountability and responsibility which Peter Loescher has established since he came on board.

Other operations will also continue to be reported separately as before. The only difference is that instead of including it in a special category called Total Operations Group, we will simply reconcile it to profit in our segment reporting.

As we explained on prior occasions, Siemens is actively streamlining the businesses reported under other operations. We are taking the same approach with our real estate activities which contribute to our profit in most quarters and which involve substantial assets.

You also don’t need to worry about the definitions of profit and assets in our segment reporting. We made the names shorter and simpler compared to the old structure, but we kept the same definitions. This goes for the operating businesses as well as for the financing and real estate businesses.

In other words, SFS and SRE will still use income before income taxes as their relevant profit measures and the divisions within the sectors will still calculate their profit as earnings before financing interest, certain pension costs and income taxes and may exclude other categories of items, for example, restructuring expenses following our SG&A program which are not allocated to the divisions since the Managing Board does not regard such items as indicative of the divisions operational performance.

So there is no change in the definitions and all the profits come down to the same bottom line in the segment table. Now let’s see what that looks like in the table itself. First, look at the column headings. You will see in July. As you can see, the change here will be minimal, we will continue to report the same figures as in the past.

The two footnotes in the slide cover the same point I made a moment ago about the definitions of profit and assets. We didn’t change them, we just adopted new names that are simpler and more direct.

Now let’s look at the line items in the new segment table. This gives you a good picture of how much simpler things will look. Here you can see the six reportable segments. Three sectors, two cross sector businesses and strategic equity investments.

Because the three sectors are clearly the drive of Siemens financial performance, we will include a subtotal called total sectors. The remaining four categories are separately reconciled to the result for Siemens as a whole. As mentioned earlier, here you will find separate data for other operations and Siemens real estate in addition to the important line item, corporate items and pensions.

Now you may be wondering where to find all the performance data that we used to provide for the operating groups in the segment table. The principle we have followed is to reduce complexity, not disclosure, so we will report relevant information together with our earnings release.

Let’s look briefly at what that means. Each quarter we will give you five key metrics for all three sectors and the 14 externally reported divisions. You are already familiar with all of these metrics. As in the past we will give you both order and revenue data and we will also provide both absolute and comparable figures.

The adjustment in the comparable figures will be the same as always, the net effect of currency translation and portfolio transactions. You will also see figures for profit and profit margin for all the sectors and divisions along with our fit for 2010 targets for the margins.

And you will also see a reconciliation of profit to EBIT and EBITDA. You will have this reconciliation on a sector level, on a divisional level and of course also for Siemens as a whole.

At this point, you may be wondering whether the figures for the sectors will be a sum of results for the respective divisions. To save a little time during the Q&A I will tell you now that the financial data of the sectors will not be a sum of the financial data for the divisions. This is due to consolidation and with respect to profit, also due to minor sector related income or expenses that cannot be meaningfully allocated to the divisions.

So the main take away from this slide is that you will have all the same performance measures as in the past but for an extended set of divisions within three sectors. Remember that excluding Siemens IT solutions and services as well as SEI, we reported eight operating groups under the old structure, whereas the new structure will comprise data for three sectors and 14 divisions.

Now I would like to move to an aspect of our reporting that we have not commented on that much before today which is information on new orders and revenue from a regional perspective. We have been reporting new orders and external revenue for five different geographic categories.

Beginning in July, we will report on three regions and we will offer break outs for important national markets. These are Germany, the United States, China and India. There are a couple of factors behind this change, one is the new composition of our Managing Board since last year. The new regional structure gives us better alignment with the specific regional responsibilities of the Board members.

The other factor is the changing world economy. In recent years, Asia and the Middle East have become powerful growth engines for Siemens. Many of the cultural and logistical challenges of doing business in those regions are similar, so we are recognizing these trends in the new structure.

At the same time, Europe has become a more mature market in which Germany is a big player, but not as dominant as in the past. So while we will offer you a break out on new orders and revenue in Germany, it is now folded into a region that combines Europe, the Commonwealth of Independent States and Africa.

Our plan going forward is to give you data on new orders and external revenue according to this new structure on a quarterly basis. Further, we intend to provide you with data on external revenue for each of the reportable segments for the three regions plus Germany, every six months, at the half year point and at the end of the fiscal year.

Earlier this year we gave guidance that group profit from operations for fiscal 08 would match the prior year level. As you will have recognized on the respective slide illustrating our new structure for segment reporting, we will no longer report a subtotal for group profit from operations. However, we are enabling you to reconcile the data provided in our new structure, our new segment reporting to group profit from operations.

That’s why we prepared this slide, it reconciles the profit of the three sectors to group profit from operations, thereby only using information that you can find in our new segment reporting.

The new presentation might make you think about Siemens in some new ways, particularly regarding the sectors. The most obvious point is that Siemens is an industrial powerhouse. When you roll up the numbers of the industry divisions, you have a pretty substantial business that is making a major contribution to Siemens.

As I am sure you will understand, we will not comment further on the guidance we provided earlier this year. At this moment you can work out your own conclusions from the data we have provided in the internet and of course we are working on our side to do what we say we will do. I will now turn the call back over to Michael who has some concluding remarks. Thank you for listening.

Michael Sen

Yes ladies and gentlemen, the last couple of pages, according to our usual flashlight format, is to provide you with a few information that you’re able to also historically determine the so called clean margins. So we spelled out the PPA and the OTCs for 07 mainly where we had acquisitions and obviously also for 08 for the individual divisions.

You can see here Industry Automation and Drive Technology, those two were the former A&D group. Therefore we now differentiate it in those two divisions. Also Industry Solutions and Mobility on the right side, you see what we have been also disclosing on the charges.

I would like to highlight thought that these are the quantified charges, PPAs and OTCs we have been mentioning in the earnings release sometimes in the past and this was the feedback given by you, there were verbal descriptions of special effects as of November, Peter promised you that you will get hard quantifiable data which is the case as of Q1, Q2 and going forward.

So what you see here is basically a history out of the former earnings releases. On the next slide you have Energy and Healthcare and Healthcare obviously because of the diagnostics piece and I think this should be the basis for your models to come up with an underlying operational power for the individual divisions.

On the last slide and I would like to conclude with this, page 14, just to highlight again and we have received a lot of very, very positive feedback from you guys, thank you for that one, this was very helpful in terms of being a road map being laid out by management so that you can measure us against what we’ve been laying out and whether we do or don’t do what we’ve been saying beforehand.

And I think up until now everything worked fine, although we also had some challenges. The only thing I would like to highlight and this is based on the tremendous feedback we’ve been receiving form you and two weeks ago Peter and Joe and myself were also road showing and we’ve received a lot of feedback on the guidance for next year.

So therefore we now say we will give you an operational guidance for next year, many of you told us stay away from EPS guidance if you have a ten page disclaimer, if you have a lot of moving parts where it is worth nothing basically to have a range which you cannot control, please give us some let’s say operational guidance or tell us the assumptions which you have in giving those forward-looking statements.

So from that point of view we will come up with the most meaningful way, we haven’t made our minds up completely or we do have but we have to discuss it again in the Board and then decide upon it. But we heard you, it will be something operational and it will be something with underlying assumptions so that everybody can understand how we got to those numbers.

So with that, operator I would like to start with the Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Peter Riley – Unknown Firm.

[Peter Riley] – Unknown Firm

Firstly am I right in saying on the new segment reporting structure there will be essentially no interest expense identifiable anywhere, so we can’t see what Siemens is paying in terms of interest expense and interest income?

And the second question is coming back to the point that was made about the divisions not adding up to the sectors. I haven’t had time to go through and check all the math myself, are we talking about small trivial differences or are we talking about quite bit mismatches between the sectors and the divisions? Because obviously it’s going to be a big mismatch it’s going to devalue the whole idea of getting the divisional disclosure.

Dr. Klaus Patzak

First in regard to interest expense. From our point of view anyway, this line which we previously had in the segment reporting cannot be analyzed by itself because it has such a close relation with the result of our treasury and what is on the one hand interest expense is on the other hand interest income of treasury. So I think that putting that together is even more meaningful.

Of course you also have further information with regard to interest in for example the cash flow statement. And you will also find information in the notes to the financial statement. With regard to your second point, Peter, of course we also discussed it internally and I would expect that the income effect which is kind of held centrally on a sector level is not more than 1% of the sectors, 1% point of the sectors group profit.

[Peter Riley] – Unknown Firm

Which does raise the question though why you bother having a mismatch at all, if it’s going to be that small, you might be better off adjusting a couple of divisional numbers so they add up.

Dr. Klaus Patzak

That is true, however on the other, I can follow that thought, but on the other hand there are some kind of also sector corporate expenses like for example a sector compliance officer where we think that allocating that in a meaningful way is just given the small amount not worth the time. So we just say, this is, as long as it’s small we can have that on a sector level centrally.

[Peter Riley] – Unknown Firm

And if I could just come back on the interest expense and this is not me trying to break your guidelines and ask for any guidance but I look at this line, eliminations, corporate treasury and other reconciling items, is that going to be entirely unforecastable?

Dr. Klaus Patzak

It is forecastable. Of course we do forecast that line internally.

[Peter Riley] – Unknown Firm

The corporate items and pensions, will that no longer have any eliminations in there?

Dr. Klaus Patzak

It will have the same eliminations in there as in the past in principle. As course there are if you talk revenue there is more elimination on the sector level in the future, right. We show the sector numbers on a consolidated fashion. But in principle we had in the past we had several lines where we had consolidation effect and we made the [toes sing] simpler by offering just one elimination line.

In the future the other eliminations is already within the sectors and that is also another reason why we with regard to revenue of course the numbers for the revenue of divisions does not add up to the number of the, for the revenue number of the sector.

Michael Sen

Peter the other answer also would be from a business point of, think of our SG&A program, now to the question of division and sectors, we do want to cool specific functions on sector level, therefore you will have a reconciliation basically next to the elimination from some of divisions to total sector.

Operator

Your next question comes from [Alaver O’Neal] – Unknown Firm.

[Alaver O’Neal] – Unknown Firm

I have two questions, when I was looking at the breakdown on the quarterly basis of the EBIT within Energy Sector and Healthcare, there are some volatility with the margin and I wanted to have your view on whether it’s a seasonal effect that we’ll need to be aware of in the future or something specific.

More precisely, I noted that the renewable energy division had a decline in the margin in Q2 2008, 8.4% compared to 12.1% Q2 2007. And well flow solution had a significant jump in the margin in Q2 2008 compared to Q2 2007, so is it purely seasonal, is anything specific going on so as we can look at it in the future?

Michael Sen

I’m afraid to also come back to what I’ve been saying beforehand, this is really meant to be a mere technical call so we would not comment now on business related issues what is the underlying business of renewables. By the way you will have the opportunity to talk to the guys next week anyway on the energy day and then you can ask them everything, why their margin developed in direction X, Y, Z and therefore I would leave it with these remarks unless Klaus has a technical remark.

Whenever we have the Q2 call you can ask Peter, Joe and myself or even after that call as to what happened business wise here there, there and here but this should be limited now to really only technical issues like the ones Peter had.

Operator

Your next question comes from [Mark Trillman] – Merrill Lynch.

[Mark Trillman] – Merrill Lynch

To what extent has as a result of this whole exercise, to what extent has reporting changed internally if at all or is this purely a change of how you present your numbers to the market. What I’m trying to get at I understand this has been an internal adjustments, obviously there’s the structure and the new management team I get that but what are the internal implications of this reporting?

Michael Sen

I would like to highlight again and you said it yourself, this is basically structure follows strategy and reporting follows structure. So we have this new sort of organizational setup with the clear accountability and when you have listened to what Klaus has been laying out on the sector level but even on the regional level, this really mirrors our new sort of governance model and clear accountability.

So from that point of view, this is what changed on a let’s say macro side. But what has changed on the reporting side and I do think this is a lot because it’s also about accountability on the sector level and Klaus can walk you through that one.

Dr. Klaus Patzak

Just to add on that, it was actually quite an effort and you do not see that from what I presented because the most important effort is on the business unit level where we also had some changes and also where we had new management, [average of cost can re-classed] also comparable data for their new business units. So that was an important topic which we had to fulfill.

And the other thing is also from a regional point of view we also have of course not only numbers for the regions but also for the [claftas] and you know that we brought together a lot of countries to [claftas] and that also had some reporting implications.

So all in all, I think the ground principle is that as Michael said, we have a new organizational structure and according to that new structure, we [inaudible] the triggers to provide the management not only with the [inaudible] but also with comparable data and also of course this forecast and planning data.

[Mark Trillman] – Merrill Lynch

On the SG&A program, as in when you take the costs that may be associated with that, am I right in thinking that, but did you say that would not be taken in the reported divisions, that would be put somewhere centrally?

Michael Sen

No you did get that wrong, we were not talking about where the restructuring charges would occur, that’s not what I said, what I said is that given that we do bundle for example in industry we had five groups and now we have one HR department, one shared accounting department and so on and so forth.

You do pool functions and therefore you have specific functions on the sector level and that is the reason and this is what we have been telling you what we are doing on the SG&A front and this is the reason why some of the divisions do not add up to the sector because there are some shared service functions on the sector level. This also coincides with what we’ve been saying on the reporting side, i.e. meaning the sector had a lot of accountability now for the validity and also integrity of its numbers.

Dr. Klaus Patzak

If I may add there, when I referred to that, this was a potential example for something which according to also IFS and US GAAP guidelines, you could take centrally a restructuring expense. No decision made, if of course if we would go down that path then that would of course be followed with a reasonable disclosure.

But this was an example and just to make clear what I’ve said means that according to the segment reporting guidelines, certain topics for example out of corporate programs could taken out of the sectors and divisions and shown in one place. One example for that also is the expense for our consulting with regard to the investigation. Again here we take this kind of centrally and of course that is followed by a disclosure.

[Mark Trillman] – Merrill Lynch

So as of yet, there hasn’t been a decision made as to how the charges will be allocated or reported I should say between the divisions or central have yet to be decided?

Dr. Klaus Patzak

Let’s put it this way, you know there was a discussion, right now we do not have any expenses or it’s not today that we have to answer that question but I would not rule out that this topic will then come in the first quarter.

Operator

Your last question comes from Tim Adams – Citi.

Tim Adams – Citi

Can I just qualify two things with you? The first is that the other operations line that you were presenting, reconciling to Siemens PBT is exactly the same as the other operations line that we’ve currently got within the total operations number.

Dr. Klaus Patzak

Yes that is of course true, however of course going forward that line will kind of get thinner and thinner since we are in the progress of streamlining other operations. But form a definition point of view the answer is a clear yes.

Tim Adams – Citi

On Oil & Gas, the line went a bit crackly at the point when you were explaining, what would you say is the Oil & Gas business is the small turbine business plus the Oil & Gas piece that came out of I&S?

Michael Sen

Yes.

Tim Adams – Citi

Does that therefore include turbo compressors and that sort of thing?

Michael Sen

Yes. And again you will have a great chance next week to see the full sort of portfolio strategy and operational performance of Oil & Gas at the energy day and there we will lay out what the individual components were. But in principle you are right, yes.

Operator

There are no further question at this time.

Michael Sen

Since we do not have any questions at the very moment I guess you all need some time to digest what we have been presenting and also emailing out to you. It’s a lot of information. Klaus mentioned already that it was also a huge task for Siemens so probably will be a huge task for you as well to understand and to adjust your models and to get the gut feeling for the numbers.

As already mentioned beforehand, the team is ready to take your questions to give you some insights and to guide you through the process. And then I would say I am looking forward to seeing most of you at the energy day next week and therefore I would like to conclude this session. Thank you very much.

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 Business Update Call Transcript
This Transcript
All Transcripts