Siemens' (SIEGY) CEO Joe Kaeser on Q1 2017 Results - Earnings Call Transcript

| About: Siemens AG (SIEGY)

Siemens AG (OTCPK:SIEGY) Q1 2017 Results Earnings Conference Call February 1, 2017 2:30 AM ET


Sabine Reichel - Head of IR

Joe Kaeser - President and CEO

Ralf Thomas - CFO


Mark Troman - Bank of America

Andreas Willi - JPMorgan

Michael Hagmann - HSBC

Ben Uglow - Morgan Stanley

Peter Reilly - Jefferies


Good morning, ladies and gentleman and welcome to the Siemens 2017 First Quarter Conference Call. As a reminder, this conference is being recorded.

Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens' presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties.

At this time, I would like to turn the call over to your host today, Ms. Sabine Reichel, Head of Investor Relations. Please go ahead Madam.

Sabine Reichel

Good morning, ladies and gentlemen and welcome to our Q1 conference call. The earnings release was already published yesterday evening. The Q1 presentation was released this morning and you can download all documents on our home page. Our President and CEO, Joe Kaeser and our CFO, Ralf Thomas are here this morning to review the results.

Since the AGM starts right after this call, we will limit the time to 45 minutes. Joe will start with a brief presentation and then we have time for Q&A with Joe and Ralf. Joe, please go ahead.

Joe Kaeser

Thank you, Sabine. Good morning, everyone and thank you for joining us to discuss the first quarter results for fiscal 2017. Since the main news was already out yesterday, I will keep my introduction short.

We had a strong start into the fiscal year across all our business. I'm very proud of our teams who worked really hard to deliver another strong showing for many quarters in a row now. However, we do not only perform on financial targets, our holistic efforts on sustainability, recognized by the research company called [Prognites], which rate Siemens as number one amongst the world's most sustainable capital societal and environmental needs, resonates well with preferences of the best talent all over the world.

Whether it's quiet a controversial debate about new political leadership or countries going their own ways and where we notice inflationary slide shows about industrial digitization, we focus now customers and diligently execute on our Vision 2020 priorities to further drive performance and foster profitable growth and we made good progress in most areas.

One, we strengthened our portfolio. In December 2016, the Valeo Siemens eAutomotive joint venture closed. It addressed the growing markets for the [indiscernible] power trains and provides significant synergies.

As a result of intense negotiations, we recorded a one-time book gain of €172 million in digital factory leading to about 90 basis points of improvement in the industrial business margin and we announced the acquisition of Mentor Graphics, a key addition to expand our leadership in a digital enterprise. Shareholder vote about our offer will take place tomorrow and we do expect a positive outcome.

Furthermore, this had a new benchmark in turnkey power plant construction, together with our partners in each. Within 18 months, we've built and connected 4.8 gigawatt to Egypt's power grid, 10% more capacity than specified. It's an important milestone for us and demonstrates both, excellent project management capabilities as well as the reliable performance of our well-proven H-Class machines.

Now let me briefly touch on some key developments in the first quarter. As expected, comparable orders were down by 14% on top comp, due to a significant amount of large orders in fiscal Q1 2016. However, our base business was stable in the first quarter and you do see a good order of pipeline for the second quarter in renewables, energy management as well as mobility.

For example, we just recently announced a significant project win such as 1.2 gigawatt power plant project in Thailand or a frame contract for 200 locomotive [structure]. Book-to-bill though remains about one. The revenues out 3%, they continued their own path of comparable organic revenue growth and among other things, this was driven by the energy project businesses as well as building technology and digital factory.

From a profitability and operational perspective, the first quarter was very strong, actually also on an underlying view. Key evidence is a strong gross profit margins improvement by 90 basis points to now 31.4%.

Also, our industrial business margins increased by 260 basis points to 13% on the back of higher profitability in almost all divisions and partially impacted by a one-time gain in digital factory. Eight, out of nine divisions are in or the target range and these imposes industries and trades like brokers in a very difficult market environment.

Net income as well as earnings per share was up 25% and products supported by two positive factors outside the industrial business. Centrally managed portfolio activities included primarily a sharply higher result, due to positive interest rate defect related to the Hanau asset retirement obligation. In addition, we benefited from a reversal of guarantees due to a better performance of a former divestment. This was related to the Siemens appliances joint venture, which we actually eliminated.

We continue to expect volatility, however to remain in CMPA in coming quarters. Significantly higher net income also transcended into a strong return of capital employed of 18.9% while in the upper range of that area of the targeted range. Free cash flow surged to a positive €740 million. I think we need to go back many years to find a similar topic, which provides us a positive swing year-over-year of more than €1.4 billion. This was mainly due to improved working capital performance in Energy Management, Mobility as well as Wind Power.

Finally, we recorded a significant decrease of €2.6 billion in provisions for pension and similar obligation due to higher discount rates for future liability. Based on our strong showing, fiscal Q1 and I believe also somewhat better visibility for the quarters to come we raised our outlook.

While we anticipate increasing headwinds from macroeconomic growth and investment sentiment in our markets due to the complex geopolitical environment, and that's not the first time we mentioned that. We continue to expect modest growth in revenue, net of effects from currency translation and portfolio translation.

We further continue to anticipate that orders will exceed revenues for a book-to-bill ratio above 1.0. We raised our previous expectation for a profit margin of our industrial business from a range of 10.5% to 11.5% to the range of 11% to 12.0%.

Furthermore, we raised our previous expectation for basic EPS from net income from a range of €6.80 to €7.20 to the range of €7.20 to €7.70. This outlook assumes a continuing stabilization in the market environment for our higher margin short cycle business. It excludes charges related to legal and regulatory methods, as well as potential burdens associated with the pending portfolio matters.

Now let's look at the key developments in our divisions. The market environment in power and gas continues to be tough due to slow demand and continued overcapacities in the market. The team continues to be focused on the opportunities in the market and our new H-Class design is very well underway. In total, we recorded 11 orders for large gas turbines and delivered 12 turbines during the quarter.

Revenue growth was mainly driven by backlog execution in particular from the Egypt projects. PG achieved a margin improvement of 230 basis points or 11.8% due to a smooth project execution and reliable contribution from the service business. Wind has prepared itself well for the planned merger with Gamesa. Book-to-bill was about one driven by more than €700 million offshore from an order at Rentel in Belgium and is more promising the order funnel for the second quarter looks really strong.

Profitability emerged through the upper end of the target range on a very solid execution on all levers. You may remember that hasn't been the case in prior quarter. So, we are very, very proud of those improvements here.

Energy Management continued to be a reliable contributor and inched out a few improvements in almost all business areas. Profitability was at target range on the back of stronger profit contribution from the high voltage businesses and the transmission solution area.

Another great quarter was delivered by the Billing technologies in both, driving growth and improving profitability at the same time. Order growth was broad based with double-digit increases in the U.S. and in Asia. Margins are clearly up by 200 basis points due to higher revenue and successful productivity drive in the product business.

Digital factory delivered an excellent and I really mean it, excellent operational performance compared to both year-over-year and competition. Order revenue growth was broad-based across all businesses and regions. Topline growth was particularly strong in the short cycle businesses, which converted nicely to the bottom line.

Revenues in China was up in the higher teens with strength, particularly in automotive. The U.S. and Germany also showed moderate growth in the short cycle business, while Italy was modestly negative.

The PL software business showed a clear comparable order growth. Siemens PL signed a multi-year contract with a value greater than US$100 million with General Motors. This new agreement validates the strength of our partnership helping GM to leverage digitalization. Ladies and gentlemen this certainly is industrial digitalization network.

Project industries benefited from the strong order in wind power components, which was still more than offset by weaker demand from the commodity-related industries. PD executed to structural program as planned. The tinted material part of the research alignment is in Germany. This may take time beyond fiscal 2017 to convert into P&L savings.

So now let’s move to mobility, which delivered another quarter of strong profitability taking them at the upper end of the target range. Book-to-bill was at what we believe impressive 1.19 with some major orders for [commuter rating] and from San Diego Metropolitan Transit, our largest customer for lightweight vehicles in the United States and you may see more good things here in fiscal Q2.

Our revenue was driven by timing effect related to the execution of large rail project. That actual means that there is some POC backlog on projects which will accelerate in the quarters to come. So therefore, we expect mobility to achieve clear revenue growth in the remaining quarters of fiscal 2017.

Now finally ladies and gentlemen, and this is also in the end, let’s move on to Siemen’s Healthcare. We have directly -- and what you saw in the first quarter, moderate growth in orders of 4% driven by a double-digit increase in China has been topping even tough comps. The U.S. and Europe also supported the reported growth rates. Profitability improvements were distributed broadly, because the Healthineer businesses did by diagnostics imaging.

With that, thank you for listening and I turn it back to Sabine and we're happy to answer your questions. Thank you.

Sabine Reichel

Operator, let’s start the Q&A.

Question-and-Answer Session


Thank you, ladies and gentlemen. We will start today's question-and-answer session. [Operator Instructions]. We will take our first question from Mark Troman of Bank of America/Merrill Lynch. Please go ahead.

Mark Troman

Yes. Thank you, good morning Joe, Ralf and Sabine. I have two questions please. Firstly, the 170 basis points industrial margin improvement, ex the eCar gain, I am just trying to understand Joe what drove such a step change in profitability particularly for Q1? I think I understand volume in Digital factory and execution in power, but is this about cost out, is it productivity, is it supply chain.

Maybe if you could just give a little bit color of what’s really been achieved to deliver this 170 basis points and also if you could comment on where are you on this journey? Is there a lot more scope longer term to improve Siemens further given this big jump already this 170 basis points?

And the second question, the guidance 11% to 12% industrial margin, it looks though you've done 12% or so in Q1 ex the eCar gain again, 13% all in. I'm just wondering what degree of conservatism you're baking into that forecast if you could give us a few thoughts on that? Thank you.

Ralf Thomas

Thank you, Mark. If you allow, I take that first part of your question, referring to where does the improvement come from beyond the extraordinary impact of the step up for the eCar assets while merging that into the JVs.

First of all, as you rightly have been stating, there was a tremendous shift into the direction of high margin businesses in terms of digital factory, but also building technology has been doing an outstanding job and so did healthcare.

As you realized all of them, all of the businesses, all of the divisions and I never realize that before to be honest on that level have been improving their gross margins substantially quarter over prior year's quarter and that definitely is the impact of a consistent cost out and productivity improvement activity that we have been implementing and started to implement three years back and that is now kind of maturing and creating momentum.

It's also to a certain extent, not a lot, but something around 10, 20 basis points driven by improving the underperformers in the portfolio as we have been flagging them out for that part of the revenue stream, the improvement quarter over prior year's quarter was more than 200% -- sorry, 200 basis points.

So, they are heading now into the direction of 4.5% at the moment which is a good sign. Nevertheless, it's not done yet. We have been sharing with you that there is still about 15% of that relevant portfolio in terms of revenue that meet and will get further management attention.

So, that's important to understand and what we also see again and I'm touching at the moment as a result of hard and consistent work there was another quarter without net charges literally.

So now what is making us positive and on the other hand is also requiring and requesting respect that is the development in China. Both digital factory and healthcare have been very much benefiting from the development in China. Visibility in these businesses does not go a lot beyond one or say maximum two quarters in a row.

Therefore, we are looking at that and we need to see how sustainable that is. And also, though you didn’t ask for that, just let me tell you that exchange rate didn’t play a major role. There was 20 basis points of impact for the industrial business, positive impact in the first quarter.

So, all in all, this also is kind of indicating the answer to your second part of the question, the guidance of 11% to 12% that we have been sharing now with you. I would not consider that being conservative. I think for the time being we just may say that we had a strong start into the fiscal year.

We have quite some visibility for project business of course, but also for the high margin short cyclers for the first half of the fiscal year, but we also have a lot of respect for the increasing level of geopolitical question marks out there. Therefore, I consider that very consistent and also appropriate in terms of guiding you for the full fiscal year.

Joe Kaeser

Hi, Mark. It's Joe. Ralf went for the rundown, I think it was pretty well explained where they are and what work, so your question also where are we on the journey? I think we are a bit ahead of schedule in terms of executing on what we said we would is clearly the case. As I've already mentioned, the guidance of 11% to 12% and associated matters.

Look, there are still couple of $100 million for example, which we have been reserving for R&D projects like NEXT47 and the like. So, there is ongoing restructuring topics. There is still need to do things on a continued basis. What it actually shows is it shows the potential of Vision 2020 and the management team, what can be done, but on the other hand, we must not go aboard just too quickly in now writing the next paragraph on the journey.

Already I think we executed well for many quarters in a row. Our reliability is up. That's doesn’t mean that things can't happen. So, I'm very satisfied with what we see. I am proud of the team. So, we're working diligently one thing at a time, quarter-by-quarter, operationally, and we have the endgame and the midterm aspect remains when we look at strategic efforts. So, as we said, you can see that potential. You can see the management team is able and committed to execute and we take one thing at a time.

Mark Troman

Thank you very much, Joe and Ralf.

Joe Kaeser



We will take our next question from Andreas Willi of JPMorgan. Please go ahead.

Andreas Willi

Yes. Good morning. It's Andreas here. On the healthcare profitability where you commented that it's relatively broad based, maybe you could elaborate a bit on that given obviously, the margin improvement was very strong given the flat topline growth, was FX particularly positive here in terms of the 20 bps you saw for the overall group and maybe you could give us some more details on the large imaging versus diagnostics versus ultrasound.

You had earlier commented that diagnostics should see growth from the new platform, but that may be margin dilutive. Did that come through in the quarter or is that still something to come for the rest of the year and better we're trying to figure out what degree are these very strong Q1 margins kind of indicative what we should expect for the rest of the year.

And second one on the renewable on the wind's business, in terms of the market share in the U.S. in the last quarter, maybe you could comment on that in terms of the PTC orders that maybe others had secured and you had a weaker market chain in the U.S. in a critical quarter given the PTC clarification and also in terms of the Gamesa deal closing hopefully soon.

If we adjust your current profitability for the adjustments you are going to make ahead of the contribution to Gamesa, what kind of the level this business route goes into the new company in terms of margins then? Thank you very much.

Joe Kaeser

Thank you, Andreas. Let me start with the healthcare piece, in terms of the profitability level that has been accomplished first of all, there was hardly any impact from exchange rates in the first quarter on the healthcare profitability. It was pretty much around mill.

So, the underlying business mix was the driving force of profitability in that field, what we saw and you have been kind of indicating that with the way you have been phrasing your question, we had a very strong impact from the larger modalities as we call magnetic resonance and computed tomography. Of course, they have been making very good progress in particular in the comparison to their competitors.

What we do know from official statistics so far, it looks like we have been gaining market share including the U.S. which was quite nice because it was very important competitors last quarter obviously. What we also saw from that high profit part of the portfolio compared to the others is that the momentum that has been accomplished there will also since it's driven by its gross margin, be there also for the quarters to come.

We saw a strong improvement in the performance all over the portfolio in China, which is important market not only for growth, but also for the upper end of the portfolio. And therefore if you want to have it in a black or white mode, I would say that about 50% of the impact margin improvement was from mix.

The other 50% was very much driven from getting their cost competitiveness on higher grounds, have been introducing and work on productivity scheme that should sustainably groom the margin into the right direction.

Mentioning the other parts of the portfolio, all of them have been improving including ultrasound. Nevertheless, bear in mind that this is rather a minor element of the portfolio that does not really have an overarching impact on the Healthineers profitability in total.

And with regards to launching the new instrument Teleca in the marketplace of course R&D and developing activities are coming down as the product is seen maturity levels being ready for market introduction and being rolled out.

On the other hand, as you do know this is the razor, razor blade model and therefore we need to seed first as we mentioned a couple of times before we start harvesting. So, the contributions on the profitability side from that part of the portfolio will rather be immaterial for the time being on the positive side that will take a year before we see material impact.

Joe Kaeser

Andreas hi. On renewable market share, absolutely right, the quarter Q1 was a bit weak. On the other hand, as you know this a large-scale project business. We have quite a decent order intake in fiscal Q4 in the U.S. and too also intend to significantly increase order intake in Q2 and Q3 as compared to Q1. So, it has brought us 600 megawatts onshore business in the U.S. So, we actually feel pretty good about it and we have a solid market share and expect that to hold.

On the Siemens-Gamesa merger, and as you know we are in the middle of finalizing the deal in terms of all relevant matters associated with the merger. So, that's why we are better advised to not really comment on content, which may be too premature, but our view about this value of the merger hasn't changed independently of what we see now in the short-term marketplace.

We are having more than 70 gigawatt installed base that gives us an incredible installed base for service-based improvements that we can apply our data analytics and predictive service maintenance. There is no one else whose got that big of an installed base. So, we feel good of what we see. If you look at the profitability of both Gamesa and Siemens for the quarter and what we also see as projections for the year is actually something what you really like.

Andreas Willi

Thank you very much for the detailed answers.

Joe Kaeser



We will take our next question from Michael Hagmann of HSBC. Please go ahead.

Michael Hagmann

Good morning. Thank you very much. I have two questions please. The first one, if you look at the launch of Teleca you've already been talking about the impact that that is having on marketing cost and so on. I was wondering given the significance of the product launch, how has it been received? Is it going ahead of your expectations, below expectations, if you could give us a little bit of color around that, that would be great?

And then the second one, if you look at the guidance, if you look at the windfall of €172 million, if you look at the very strong result in CMPA, which I also consider windfall, one could argue look at those numbers post tax and that gives you already $0.50 per share. So, I'm trying to work out a little bit what are the risks and here you have been highlighting specifically CMPA that, that kept you from raising the guidance even further? Thank you.

Ralf Thomas

Thank you, Michael. With regard to the guidance, of course you're right. The €172 million an extraordinary, which is quite nice to have and can be easily translated into incremental EPS potential. With regard to CMPA, there are two elements in that one and Joe has been pointing that out in his presentation.

On the one hand side, we have been substantially been benefiting from the higher interest rate means higher discount rates, which has a huge impact on an asset retirement obligation, which is reaching out for another 60 years roughly. You may imagine what discount factors may have an impact and therefore we are rather cautious because that is on the one hand side driven by policymakers and there is always uncertainty in that field.

On the other hand, there is also that we -- and we have been discussing that in the past, there is no instrument in the marketplace that allows you to fully hedge for the interest volatilities. So, we have been putting together a scheme that is providing a certain extent of hedging opportunities in that field, but also has its own dynamics.

In a nutshell, that part which is about three quarters of the impact in the first quarter will remain volatile than the beneficial impact we had from reversing a provision for prior disposal effects on the guarantee. And that will remain so one quarter if you will is going to be sustainable and not subject to volatility in that field. This is true and this has been guiding us in putting the new guidance together.

But I also would like to ask you bearing in mind is last year's tax rate in the first quarter was a bit more favorable for us and we also see in that field, couple of question marks going ahead not only, but also in the policymaking environment around the globe. So, lower tax rates may also have an impact on tax assets, which must not be underestimated, but we will not speculate. We will just let you know as soon as we have clarity once the politicians have been making up their mind in that field.

And last but not least, the discontinued operations have been contributing quite a lot last fiscal year and as we have been guiding you and would like to reconfirm at that point in time, don't expect any major positive impact from discontinued operations in fiscal '17.

So, taking all that together, we see that the momentum from operations is the driving force that includes of course in terms of IB margin the €172 that you have been mentioning below the line, we are rather cautious in front of the backdrop of potential volatility also on interest rates.

Joe Kaeser

Yes, Michael on the Atellica, the launch was very successfully. We have a lot of customer interest and hits on what's next. So, it's been quite well received. If you do know we have -- for now we do have the best system out there. Our competitors will not just sit there and wait, but this is from the machine standpoint in terms of speed, in terms of space and workflow, we have very good product. So obviously as you know this is what we call razor blade type of business model.

So, there will be some cost for the machine placement associated with it. Still the consumables will make up on the margin side. So, as I said the service cost will be significantly improved. We've got a good product. We got a good interest. We are on time with the rollout. So, that's all fine, but then again there will be some quarters there is a structural impact on the higher machine selling rather the consumables, but in the mid and long term, we're well underway.

Michael Hagmann

So, are you confident that you're going to return to solid growth in diagnostics?

Joe Kaeser

We have the best machine in terms of things like speed and space and workflow, those are areas which met to customers, you should assume that and we provide clarity of customers that is also good for our business.

Michael Hagmann

Thank you.


Our next question comes from Ben Uglow of Morgan Stanley. Please go ahead.

Ben Uglow

Good morning, everyone. I had a couple around power and gas. I don’t know whether this is for Joe for Ralph, but first of all just on the step-up in the margin, can you talk a little bit more around what you're seeing in power service that took my attention this morning, so that was issue number one.

Issue number two, I don't know how much visibility you've got over the course of the year, but how should we think about the sequential evolution of the power and gas margin, are there drivers in there, that might lead to a higher margin by year-end?

And then finally, IC's make reports, independent reports about large tenders and contracts out there. Can you say a little bit about potential large contracts in the current year? What do you see is the pipeline there and in terms of relative market share, how do you think that Siemens could do in the next year or so?

Joe Kaeser

Well Ben, you gave us the choice, let me give it a try to answer your question. First of all, it's obvious that we were just on thought with initiating the cost out measures well ahead before the market as being becoming really tight.

Lisa and her team have been doing a really outstanding job in not only anticipating, but also consistently managing the cost position and at the same time, investing into large projects like Egypt ahead of time being ready for fast track execution without that combination of really well balancing consistently managing cost down and on the other hand, also very focused -- in a very focused manner investing into future business opportunities. I think that was a great contribution in getting the margin to the levels where we are.

Talking 11.8% there was a strong contribution from service business obviously, but also Egypt order, I remember we have been discussing that at the Morgan Stanley Conference intensively last fiscal year, roughly one third of the product business being turned and fiscal '17 will provide another 40% of revenue contribution from those large orders that helps of course factory utilization and also in terms of getting supply chains in place, having opportunities on the procurement side and alike and on top of that, the productivity measures now kicking in on a broader scale.

When we look into the marketplace, in terms of the funnel and the opportunities on large-scale projects, I think we may say we never have been experiencing such an intensive competition in that field. It's literally each and every project that gets -- large project that gets even Board's attention and we are discussing of course risk and opportunities intensively there.

So, the intensity of pricing will not go away anytime soon and therefore would be early to speculate on potential market shares. We are very carefully selecting and we are also applying the opportunities that we have in terms of technological opportunities in our existing portfolio and also in the portfolio.

I hope you heard Lisa saying in the press conference that we are intensively investing into higher efficiency level. So, 63% is what we literally see at finger's tip and we will continue doing so in our H-class, which is a well-established machine in the marketplace with a high level of reliability, 99.5% availability is quite something and is also appreciated by our customer base.

So, the opportunities are there. There is a funnel. It is not as broad as it used to be. Therefore, competition is intense and when I listen to my colleagues Lisa, Joe and the other colleagues on the Managing Board that are traveling and talk to decision-makers around the globe, I have the feeling that they see the same individuals in different boardrooms time and again. So, I would not foresee what you have been asking that we would rather see higher margins at the end of the fiscal year.

I think we need to take it step-by-step and everything that is under our control means competitive products of the future being cost competitive in terms of our cost base that we hold in our hands and making sure that services making best use of the opportunities and digitalization. this is the mix that will shape our future margin.

Ben Uglow

So, is there any reason to think that the service portion, that the service margin could actually get better gradually over the year?

Joe Kaeser

What we see Ben, sorry I missed to comment a bit on the quality of the backlog. You see the backlog growing. We extended PG €44 billion at the moment and the share of service is continuously increasing.

On the other hand, the reach of that backlog is longer than the product obviously, the product share. So therefore, the momentum I think is indicating into the right direction. We also see gradually increasing margin levels in the backlog there, but that will not materialize in short-term. It will rather take enough time to turn that, but it's still good because we have a lot of visibility there. We have opportunities to apply our technological progress and we also benefit from the cost position that we are continuously shaping into the right direction.

Ralf Thomas

So, Ben you can see that there's a lot going on, on the operational side. We are very close to this. So, it is obviously important and obviously also attractive business because the world still needs a lot of electricity. What it will see so in the mid and long term run is that things are changing there.

There is a significant shift from more mono sourcing to multi sourcing of energy, which means for central big to de-central flexible. You can also see if you look at the amount of gas for large turbine market in 2016, there was flattish -- I know there are some more optimistic views out there, but the facts are what the facts are.

So, we are looking much more into things, which are changing in trends. So, we do see in the long-term, we have more flexible machines associated with renewable energy combined and with an optimized mix. We do see that there is more and more IPPs out there who are after the business model of the establish utility model. We see more and more guaranteed outcome rather than how great any percentages and efficiencies are. Who cares if the outcome is not secured.

So, we are at the last digit by the way on what proven machines are really all about. In 18 month, we've been providing 4.8 gigawatts, which is actually 10% more -- megawatt more than originally committed based on an outstanding reliability of our machine and the site conditions. It doesn’t do a lot of good to produce a lot of paper about idle conditions. You need to go there where customers are and take the machines to where the conditions are.

So, we are very close to it. We look at customer benefits and this is what matters most to us. So, we feel comfortable in what we do. It's not a simple business, but no one said it will be simple.

Ben Uglow

Thank you very much.

Sabine Reichel

We take the last question please.


We will take our final question from Peter Reilly of Jefferies. Please go ahead.

Peter Reilly

Good morning, everybody. Two questions, firstly just coming back on to PG, you mentioned the record backlog and the fact that more and more of it is service. Can you talk a bit about whether you have any gap or hole in 2018? You had a couple of quarters of weaker order intake. The backlog obviously is very long duration. This is a PG of Egypt delivery. So, are you a bit nervous about the prospects for 2018?

And then secondly, on mobility, another quarter of very high and stable margin, but with ongoing quite volatile organic sales growth, is it fair to assume that the vast majority of profit now in mobility comes from software and services and ongoing activities and that the profit contribution from revenue stock is really quite a small part of the plan now?

Ralf Thomas

Well Peter thank you for two interesting questions. Of course, we are carefully watching the backlog development not only at PG, but also at PG in terms of quality and of timing and we are also balancing the filling of the factories with the well establish planning pattern both beyond 2018 by the way.

So, the way you have been phrasing the question whether Joe and myself would become nervous, if we would become nervous. If we would become nervous easily, we would probably not be here. But of course, it is definitely, it is definitely something we are intensively focusing on, because not only about filling existing capacities, but also shaping the future capacities in the mid and long-term according to the needs in the different market segments.

And with that regard of course we are extremely, extremely interested in anticipating the future requirements of our value chains around the globe and we are also looking into any opportunities to shape that in a way that the risk associated is becoming smaller and we are becoming more flexible in responding to market demands.

Again, Lisa and her teams are doing an excellent job there. Too early to talk about how much will be covered in which quarter, but as I said, we have quite good visibility for the next fiscal year after the existing -- after the current one always. So, no need to become nervous, but respectfully managing that I think is the right term.

With regard to mobility, I think we have been discussing that a couple of times on different roadshows when we met and of course mobility is one of those businesses where decision-making and getting new orders is not only driven by customer's decisions, but also by specifications and the way whether and when we get permit to do certain things.

As always, rolling stock matters. The existing portfolio in our backlog, which is also quite strong €27 billion and therefore quite relevant for the company in total, is suggesting that we have a very good opportunity to have stable revenue streams current fiscal year on clearly higher levels as we saw that in the first quarter, that's also a question of which projects at which levels of maturity in terms of POC revenue recognition.

The portion of the non-rolling stock is of course growing. However, it's still not the case that we can ignore the impact of the typical rolling stock and so I would still have -- I always have a strong focus in my assessment on existing large orders, speeds, than you asked for the Deutsche bond and executing on projects of utmost importance for us.

We are really very proud of our mobility team that they now for two years in a row are very consistently delivering without major flaws and this is having the biggest -- the highest priority for us. We are striving for grooming the portfolio into the difficult environment making use of the service opportunities there, but we do that consistently and step-by-step and don't try to rush and push the teams too fast.

Sabine Reichel

Thank you, everyone for participating today. Unfortunately, we have to finish the call now because we have the AGM and the team and I are of course available for further questions. Thank you.


That will conclude today's conference call. Thank you for your participation ladies and gentlemen. Once again let me repeat the instant replay numbers. Participants in Germany please call the replay number +49 692 000 1800; access code, 5253417#. Participants in Europe, please call the replay number +44 207 660 0134; access code, 5253417#. And participants from the United States, please call the replay number +1-719-457-0820; access code, 5253417#.

This replay service will be available until tomorrow night. A recording of this conference call will also be available on the Investor Relations section of the Siemens website. The website address is

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