Siemens AG ADR (SIEGY) CEO Joe Kaeser on Q4 2018 Results - Earnings Call Transcript

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About: Siemens AG ADR (SIEGY)
by: SA Transcripts

Siemens AG ADR (OTCPK:SIEGY) Q4 2018 Earnings Conference Call November 9, 2018 5:00 AM ET

Executives

Sabine Reichel – Head of Investor Relations

Joe Kaeser – President and Chief Executive Officer

Ralf Thomas – Chief Financial Officer

Analysts

Ben Uglow – Morgan Stanley

Andreas Willi – JPMorgan

Peter Reilly – Jefferson

Simon Toennessen – Berenberg

James Moore – Redburn

Martin Wilkie – Citi

Markus Mittermaier – UBS

Operator

Good morning, ladies and gentlemen, and welcome to the Siemens 2018 fourth quarter conference call. As a reminder, this call 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 now like to turn the conference 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 Q4 conference call. The Q4 earnings release presentation and press release regarding our new share buyback program were published at 7:00 a.m. this morning. You can find everything on our Investor Relations website. Siemens President and CEO, Joe Kaeser; as well as Siemens CFO, Ralf Thomas, are here this morning to review the Q4 results and give the outlook for fiscal 2019. After the presentation, we will have time for further Q&A.

With that, I would like to hand over to Joe.

Joe Kaeser

Thank you, Sabine. Good morning, everyone, and thank you for joining us for our fourth quarter conference call. Obviously, we do have a lot to cover, so let’s have a look at the agenda for today. Again, I believe we executed on what we promised and fully reached our guidance for fiscal 2018, which, as you know, we raised during midyear. This show of strength of our global team achieved an excellent operational performance. We delivered these results in an economically sound global environment with dynamic industrial demand, but obviously also continued structural challenges in the power generation market, including what I would sort of call a geopolitical uncertainty.

Siemens is growing, and in many of our businesses, we are stronger than ever. We’re further gaining market share in highly competitive markets such as the industrial, digitalization, automation, building technologies or, first and foremost also, in the mobility sector. And we are rigorously addressing these challenges in those areas where the markets are structurally declining or shifting their center of gravity, for example, from fossil to renewable energy generation. Our disposition of strength, we believe now is exactly the right time to raise the bar with our Vision 2020+. And before Ralf goes into the fourth quarter results, let me maybe highlight a few recent things in that respect.

If you look at the 2018 targets, we said we would actually have organic revenue grew modestly by 2%, and that’s exactly what we achieved on a book-to-bill which was at a strong 1.10. All in all, we saw a strong operational performance with most divisions within or even above the target margin ranges and add that to the Industrial Business margin, excluding severance, of 11.3%, which obviously had also been within our guidance range for fiscal 2018.

EPS, earnings per share, excluding severance were 2% to €7.88 compared to fiscal 2017. And again, also here, where we headed actually also committed it to be. We’ve made excellent, excellent progress on our strategic priorities as you think about the completion of each of megaprojects, which happened in record time of less than 2.5 years after financial close. Each of the three 4,800 gigawatt power plants have become the largest gas-fired combined cycle power plant ever built in one piece and operated in the world.

In total, we added about 14.4 gigawatts capacity to the National Grid of Egypt, which is obviously enough power to serve more than 40 million people to be the backbone, of course, what we believe to lead to economic prosperity. If we really look at it, we not only provide energy, we are also helping the country to save more than USD 1 billion on annual fuel costs compared to what they had in store and operating before the mega power trends triple.

For us, it has also been something to help Egypt’s power grid to be improving. This is also a crucial topic for us when it comes to creating jobs at a sustainable economic development, trained 600 Egyptian engineers and technicians to make sure that they can properly operate and maintain the plants. I also want to highlight three examples out of many their – we try digital business together with our customers and partner ecosystems.

First, we will digitalize the entire Norwegian railway infrastructure into a full digitalized fee-based ticketing system. This work order, which is worth more than €800 million, is a real long-term project which is scheduled to be completed by 2034, and we combined it with 25 years of maintenance agreement. Second, MindSphere, which is the leading edge cloud-based operating system will run on Alibaba Cloud at the end of fiscal 2019. This is a really important step in order to offer a comprehensive IoT service solution to our Chinese customers and manufacturing partners to support their digital transformation all over the country.

Third, our strategic cooperation with Bentley Systems is really, really bearing fruit. We have several new solutions such as what we call PlantSight, which is a digital twin cloud service for more efficient process plant operations all over the world, have increased our 2019 program now up to €100 million, and we intend to continue on that path.

So with that, I’d like to hand it over to Ralf to go through the fourth quarter financial performance, give you a guidance for fiscal 2019, before I’m going to close with a prospective of where we are at in implementing our Vision 2020+.

With that, Ralf, I hand it over to you.

Ralf Thomas

Thank you, Joe, and also good morning from my side. The fourth quarter saw a strong finish with broad-based order growth of 5%, driven by double-digit growth in Mobility, Digital Factory, Power and Gas and Healthineers. Base orders were also up 3% on a nominal basis. Book-to-bill reached 1.05, while order backlog remained at a record high, €132 billion, negatively impacted by exchange rate.

Revenue growth accelerated to 5% with growth in all divisions, except Power and Gas. Industrial Business profit margin, excluding severance, reached 11.3%, up 100 basis points year-over-year. Most divisions increased margins, are well in or even above the margin corridor. This excellent performance was held back, however, by structural challenges in Power and Gas, which weighed on profitability. Our Industrial Businesses margin was also impacted by 60 basis points of negative currency effect. As expected, net income and earnings per share were also burdened by sharply higher income taxes related to carve-out activities at Mobility and severance charges mainly at Power and Gas and Process Industries and Drives. Bright spot was free cash flow of €3.3 billion, up 38% year-over-year, adding up to €5.8 billion for the fiscal 2018 in total.

Let me now highlight the performance of our divisions. As we have mentioned for quite some time, Power and Gas continues to operate in a very challenging environment. Global energy trends towards renewables led to declining market for new units, in particular, for large gas turbine. Demand from oil and gas customers shows some signs of stabilization. We booked orders for five large gas turbines, 11 large steam turbines and 12 small and medium gas turbines in the quarter. The Service business held up again very well and drove order growth of 13%, with continued strength in the digital portfolio. Our backlog for so-called FlexLTPs has grown now to €7.5 billion, while Power and Gas total backlog stands at €40 billion. A significant order contribution came from the contracts already mentioned by Joe to operate and maintain three mega power plants in Egypt.

Some weeks ago, we agreed to a reconciliation of interest with the Central Works Council in Germany to implement measures to boost competitiveness in Power and Gas. The goal is to save around €500 million globally. For the quarter, we booked severance charges of €301 million. Profit margin of 4.9%, excluding severance, was somewhat better than expected. Revenue and price declined, again, weighed on profitably, while Service made a strong profit contribution again. In addition, we had positive effects from stringent project execution and early closeouts. For fiscal 2019, we reiterate our view of a low to a mid-single-digit margin level, excluding severance.

Energy Management continued its steady improvement path and closed with annual profit exceeding the €1 billion threshold for the first time. In the quarter, all systems and product businesses recorded healthy order growth with a very strong data center business. Orders in transmission solutions were clearly below prior year due to a tough comps. We also saw some push outs into the next year. Our project pipeline looks very healthy for HVDC-related solution projects in fiscal 2019. Profit margin of 9.4% moved towards the higher end of the target margin range with contributions from all businesses.

Building Technologies achieved its best operational year ever, delivering a record margin of 13.7% in the fourth quarter, typically being the strongest quarter of the year. Revenue growth of 5% once again exceeded market growth of around 3%, a clear evidence of consistent market share gain, while increasing profitability. Building Technologies is continuously strengthening its integrated offering in automation and digitalization for buildings, combined with excellent customer proximity to its service network.

Another highlight is the Mobility performance. The team delivered all-time-high quarterly revenue of €2.3 billion, most notably in the rail infrastructure and service business. This came with an excellent profit margin of 10.1%. We also expect double-digit margin level to continue in the quarters to come. Mobility has built a sustainable execution track record, meanwhile. Margin was at, in or above the target margin corridor for 20 consecutive quarters now.

We are very pleased with another world-class performance of the Digital Factory team. Strong order growth was driven by PL software business were we recorded several major orders in the semiconductor space by Mentor. We saw excellent revenue growth of 10%, fueled by mid-teen growth in software and peer growth in the short-cycle automation business, both winning market share. Our short-cycle business in China was again up by healthy 13%, despite tougher comps.

From an end market perspective, automotive demand showed slower growth, while machine building was favorable. Looking ahead, manufacturing production is expected to continue expansion. However, we see a softer pace in growth momentum across many countries and regions such as in China or Europe. We expect a good start for the short-cycle business in the first quarter based on backlog conversion and visibility on demand of three to six months.

Digital Factory’s margin, excluding severance, improved 110 basis points to a strong level of 19.2%. Margin is around 21%, excluding investments to accelerate the adoption of digital offerings such as the MindSphere platform and increasingly also into software as a service. I want to give you some more color on why the fourth quarter of Digital Factory is slightly lower versus year-to-date performance.

Software margin in the fourth quarter is typically lower, reflecting Mentor’s profit seasonality. Mentor’s fourth quarter is typically the weakest and the first quarter is the strongest. Furthermore, we recorded a higher revenue share in solutions business in the quarter, which carries a lower margin. And last, but not least, Digital Factory was burdened by around 80 basis points currency headwind. In a nutshell, Digital Factory delivered another strong operational performance, building on its unique capabilities of combining automation and software.

Process Industries and Drives successfully continued its steady improvement path. Revenue increased broad based, with particular strength in China, growing in the mid-teens. Margin, excluding severance, improved to 6.7%, despite currency headwinds of 70 basis points. Structural improvement and better operational performance makes their way to the bottom line. Severance charges of €85 million reflects the intended major milestone to adjust capacities in Germany.

The Healthineers closed an exciting fiscal year with a very successful IPO and delivering on its financial target. They released strong fourth quarter financial three days ago, with an excellent order growth of 13%, geographically driven by the United States. Operational improvement and productivity gains were more than offset by a substantial currency headwinds of 220 basis points.

Siemens Gamesa completed the initial phase of its strategic road map and achieved its fiscal 2018 guidance. SGRE made significant progress to improve its competitive positioning by diligent execution of the announced cost-out program. Overall, we are very pleased as a majority shareholder with the progress of our strategic company.

Fiscal 2018 was a very successful year for Siemens. We achieved our target and all stakeholders will benefit. Therefore, we decided to raise the dividend for the fifth year in a row. We propose a dividend of €3.80, which is an increase of 3% and equal to a payout ratio of 53%, well within the target range. The dividend yield of 3.4% as of September 30, we offer a very attractive and sustainable return. The second pillar of shareholder return was the successful execution of our €3 billion share buyback. And I am sure you will be pleased to hear that we will start a new share buyback program for up to €3 billion until November 21. And finally, we foster entrepreneurial thinking amongst our employees. We increased the number of employee shareholders to around 300,000. This is a clear sign of confidence and commitment.

Before I come to our assumptions and guidance for fiscal 2019, let me give you some data points on how we lift our performance through rigorous execution. Since starting Vision 2020 in fiscal 2014, we have increased the gross margin level to around 30%, and we intend to improve further. The continuous drive for productivity, digitalization of internal processes and the move towards flexible and adaptive teams is bearing fruit. We achieved another year with total cost productivity gains of around €4 billion. A key driver is the accelerated implementation of cost value engineering in the supply chain, strongly supported by our widely applied own PLM software tools. We are also pleased with our consistent tight grip around project execution.

Now let me share some assumptions with you, which are relevant for our guidance. We assume no material impact for the businesses from geopolitical risks and macroeconomic factors. Top and bottom line, most of our divisions has demonstrated competitive strength and are on a positive trajectory. We continue to expect revenue growth, market share gains and margin expansion in most of our businesses.

However, the positive momentum will be held back, to some extent, by declining power generation markets, as already mentioned. Negative pricing impact is expected to be around 2% to 3% of revenue with stability in the short cycle and ongoing pricing pressure in power generation businesses.

Personnel cost inflation is expected to be in the range of 3% to 4%. And also assume around €300 million to €400 million severance charges as normal course of business. We may see some additional impact from Vision 2020+ related efficiency measures to optimize support functions. We will give you further details at our planned Capital Markets Day. CapEx in the Industrial Business is expected to go up clearly in fiscal 2019, as we have taken some decisions to expand and optimize the footprint in line with market demand.

We expect continuing adverse currency effect. It results primarily from translation effects of businesses in emerging markets such as China, India, Turkey or Argentina. Just as a reference, we recorded revenue of €28 billion in emerging markets for fiscal 2018, thereof €8 billion in China. The negative impact from exchange rates on margin is expected to be limited for 2019. Now what to expect below Industrial Business in fiscal 2019?

Siemens Financial Services will continue to be a reliable profit contributor on fiscal 2018 level. Siemens Real Estate is depending on disposal gain as in previous year. Centrally managed portfolio activities include an equity investment such as Valeo Siemens or Primetals and further carve-out-related items. We expect a significant swing in CMPA and overall negative impact in fiscal 2019.

Furthermore, we assume no material gains from divestment. For corporate items and pensions, you can assume a cross-run rate of around €250 million per quarter. For PPA, you can assume a similar level as in fiscal 2018. The same applies to elimination corporate treasury and other item. The tax rate is expected to be in the range of 25% to 31%. Important to consider is the higher level of minorities in fiscal 2019 due to Healthineers included for the full fiscal year. Now let me summarize the guidance for fiscal 2019.

We expect this continued favorable market environment, particularly for the short-cycle businesses with limited risks related to geopolitical uncertainties. For fiscal 2019, we expect moderate growth in revenue net of currency translation and portfolio effect. We further anticipate that orders will exceed revenue for a book-to-bill ratio above one. We expect a profit margin of 11% to 12% for our Industrial Business based on our current organizational structure, excluding severance charges.

Furthermore, we expect basic EPS from net income in the range of €6.30 to €7, also excluding severance charges. Fiscal 2018 basic EPS from net income of €7.12 benefited from €1.87 per share in portfolio gains related to our stakes in Atos and OSRAM and was burdened by €0.76 from severance charges, resulting in €6.01 excluding these factors. With that, I hand it back to you, Joe.

Joe Kaeser

Thank you, Ralf. Ladies and gentlemen, since 2013, we have made major progress and have achieved strong results by executing our Vision 2020. What’s important, it’s necessary to develop and improve the quality, credit quality and reliability of our compass. And that’s our promise. In our view, it’s a very clear evidence that Siemens is stronger than ever. And over the years, we have invested quite some resources into the future of our company and I just want to highlight maybe a few areas. First of all, innovation has always been a key driver of value creation and profitable growth.

And since 2014, we have constantly ramped up R&D resources in both absolute as well as relative terms. Main driver, obviously, has been the rising share of software, digital and artificial intelligence with applications across the businesses. Those are reflected – these results are reflected in our resource allocation. Our growth and profitability strongholds, such as Digital Factory or health care, are by far the most R&D-intensive businesses, investing more than half of our R&D spend, which obviously in turn which requires margins in those sectors.

If you look at Digital Factory, for example, this provides a leading innovation platform by combining the Digital Enterprise Software Suite, Mendix low-code application platform and MindSphere IoT ecosystem, and that drives quite a massive amount of interest from all our verticals in the market because you’re going to see the benefit in combining those elements to help them improve their efficiency in the market.

For all those customers as it support them of all sizes, from small, medium enterprises, all the way up to big companies such, for example, Boeing or others in that space. In industrial digitalization, we are clearly the number one with our unique combination of automation and software. With 12% organic growth in the industrial software business, we outperformed the sector and we expect to continue this path going forward. Our ongoing investments in this field are paying off, and we’re also very proud, especially about one great team success, which we are proud to celebrate and that was actually that we have been able to cut a deal with Boeing, obviously, one of our lead customers in that area when we talked about the second century partnership of electrical and electronic design.

With Boeing together now, we will significantly extend the partnership by going to standardize the enterprise based on our tools and solutions. And that long-term agreement on how we see it today both has quite a potential for a couple of digit million total contract value. And as mentioned, continue to invest in bringing the bits and pieces together for enterprise solutions, which help the customers benefit in terms of efficiency savings and expansion.

The Mendix acquisition now closed on October 1, and we are starting to use, massively use the low-code platforms to speed up our application development, which obviously again in turn provides customer solutions, which are – make customers willing to pay for a benefit there. The digital transformation is changing, obviously, you know that, whole industries and we are proactively shaping this development in our domains, not just discrete industries where we also see verticalization in electronics, in automotive, in semiconductors and appliances.

And we also see great examples in the smart infrastructure environment, not just limited to digital industries. One example is a recent order we were able to close in Singapore. Our MindSphere application center will develop and manage the comprehensive data analytics solution for the mass transit system. So that actually means that the core mobility in the city or state of Singapore is going to be integrated into one data application center and obviously can be optimized, as we speak. Combined with our commercial information, obviously, we will be able to provide efficient support and guarantee optimized availability and efficiency of the rolling stock and the hardware to save them hundreds of millions of investment into hardware going forward.

As you can see from those examples like in Power Services, Building Technologies, we are continuously expanding our digital portfolio and sales competence, which is an important factor in an organic way but also through some smaller bolt-on acquisitions. The investments are a sound base to raise the bar for Vision 2020+ for higher aspirations and sharpening our purpose. Our team is more than ever impact oriented, and this is aligned across all areas: the customer proximity, innovation efficiency and adaptability as well as the prerequisites of a dynamic organization going forward.

We want to further development what we – further develop what we call ownership culture to the benefit of clear entrepreneurship, responsibility and accountability as the cornerstones of our Vision 2020+ management system. And that management system basically is built on three key principles. First, focus. The focus means that we do whatever the independent and different businesses need as their priority.

They have the entrepreneurial freedom to exactly do what is the best for their respective market. And in case of a conflict, focus matters over synergies, which typically are pretty overrated anyway. The companies will have full control in shaping their businesses to achieve superior performance. This will be measured against the best of their respective industries. Accountability means that each leader owns decisions and actions for the individual businesses and is accountable for achieving the defined targets.

It is overseeing entrepreneurial freedom without a corresponding responsibility that will also offer – will find its way in the long-term incentive systems of the new operating company structure. Finally, very important because that’s true for all the functions in the company, adaptability is absolutely critical in today’s fast-paced complex and obviously uncertain world.

And with Vision 2020+, we will shift from a one-size-fits-all approach to a purpose-driven, market-focused approach. We do what is best for the respective businesses in the company. So as we stand in executing on, first, the organizational changes, we are in the middle of doing that. We are making our way well into what we said we will do. We will be ready with the organizational alignments by March 31.

And beginning with the second – the third quarter of our fiscal 2019, we are going to explicitly and detaily start the optimization of the businesses. And after the release of our second quarter fiscal earnings in 2019, we are going to host a Capital Market Day where the CEOs and the management teams of the operating companies will provide the details on how they are going to secure the growth targets as well as improve profitability target ranges, as we have outlined in our August presentation of Vision 2020+.

Later in the year, we’re also going to have an innovation day, which obviously is going to focus on the latest innovation management tools on where we put our resources to work and where the commonalities are within the company to share with each and every of the operating companies so that we get the best out of what we do in our organization. With that, I believe the goal is clear.

We ultimately want to create value for all stakeholders, for our customers, for our shareholders and last, but not least, also for our people in and outside the company. With that, Ralf and I will are happy to take your questions, and I will turn the mic back to Sabine.

Sabine Reichel

Thank you, Joe. Thank you, Ralf. Operator, we will start now with the Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take our first question from Ben Uglow, Morgan Stanley. Please go ahead.

Ben Uglow

Alright, good morning everyone and thank for taking the question. A couple, if I may, obviously, around Digital Factory. I just want to understand, in terms of the margin effects that we saw in the fourth quarter, how many are kind of reversible and how many are ongoing?

So if I look at the margins sequentially quarter-on-quarter, on an underlying basis, we step down from about 21% to 19%, so that’s basically about a two percentage point impact. Within that, as you mentioned, we’ve got FX, we’ve got solutions, and we’ve got the Mentor effect. So how much of this is kind of one-off? And how much can we expect sort of reverses?

And then, obviously, I also noticed from your presentation that we are stepping up some of the investments in that area as well. So can you just give us a feeling for how to think about the margins as we move into 2019 versus the 20% that we’ve achieved in 2018?

And then the follow-up. Joe, you’ve been very sort of candid about this over the years about the drop-through rates in factory automation and motion control in particular. If we are thinking, and I stress, who knows, but if we are thinking about China slowing down, is it natural to expect that those margins in factory automation and motion control would come down as well? Those are my questions.

Ralf Thomas

Thank you, Ben. Ralf speaking. Of course, very relevant questions we have been asking ourselves quite in detail before and let me quickly get you some color on the Digital Factory’s margin in the fourth quarter. As we have been guiding you, we have been spending about 150 basis points on margin impact for MindSphere. We had another, say, around 50 basis points for Mentor integration, haircuts and the like.

And what you may have – not been having on your list is the fact which we indicated that we now start to ramp up software-as-a-service investment. Even though that was in the low double-digit million area in fiscal 2018, this will increase, as we indicated before, to the mid-double-digit million in fiscal 2019. And what we also have been mentioning is the 80 basis points of exchange rate negative impact for the quarter.

So if you take all that into consideration, plus eliminating the restructuring expenses, you will come to a clearly healthy margin level of clearly above 22% again, the mix being even in the fourth quarter, and we also discussed it a couple of times depending on whether or not we execute on what Digital Factory is calling projects means implementation of projects mainly at large OEM customers with a fairly low margin.

Why are we doing that? Because we will tie in their supply base then in the years to come with the Tier 1 and Tier 2 customers of those OEMs. We are quite happy with that investment because we definitely win market share with that and may get sustainable revenues from that on the way forward. The Mentor seasonality, we talked about. I mean, it’s hard to tell and quantify what that will mean in detail in the first quarter to come.

But after all, we saw so far Mentor really has been very quickly integrated and the sales forces are fruitfully benefiting from each other, historical and the new joiners from Mentor. So we are quite happy with the quarter, even from a – even though from a face value, it may have been difficult for you to judge. For the way forward in fiscal 2019, I think we just can repeat and think to that what we have been guiding you before.

Just for modeling the MindSphere impact, we continue investing in the area of €175 million per year, what we said, which was also applicable for 2018. We will ramp up software as a service with some mid-double-digit million amount, so maybe you’ll consider €50 million in your model.

And what we also will see, as always, when you acquire and integrate a software company, Mendix will be in the higher double-digit million area, and we intentionally do that as quickly as – as quick and fast as possible because the faster we move, the better our opportunity to occupy the space in a very interesting environment where we also have quite plenty of cross-selling opportunities in the years to come.

And for Mentor, there will be a residual amount of integration costs in fiscal 2019. There will be associated effects of revenue recognition, as you know that from the past, so that will also be in the mid to higher double-digit million area. So from that point of view, there is a substantial amount of investment included in 2018 actuals, and we will continue being very transparent in what we intend to invest or moving into – more and more into software as a service and also building on the success that we had or have already with our MindSphere applications and to build on that.

With regard to the drop-through rates, of course, we are very, very carefully watching, not only FA and motion control, but all the short-cycle businesses and in particular China. What we have been seeing in China was quite a strong performance in the fourth quarter as we indicated. And going forward, there will be some moderation on the growth pace, most likely mainly in automotive. But we also see strong momentum in machine-building industries as I said before. So from that perspective, we feel quite confident for the first three to six months of the new fiscal year.

And what you also should bear in mind, I have been mentioning that the last quarter and now for the fourth quarter year’s – for the fourth quarter’s end, we even had a higher backlog in the factory automation environment, the highest level that I ever experienced and I’m in the business for more than 15 years now, which is encouraging us that we are doing the right thing, and at least for the next three to six months, see a continuing growth momentum, even though moderating in pace. I hope that has been kind of comprehensively touching on your topic.

Joe Kaeser

Ladies and gentlemen, let me make maybe a general comment about the whole macroeconomic, geopolitical and a few matters. This has been on the agenda for all interviews and all things which we have actually been questioned about and asked about for the last three hours. I mean, obviously, there is a lot of concern about the trade war and behavioral aspects of the main players, questions about - in the automotive sectors and the short cycles reached the peak or not or how close we are. I mean, obviously, if you look at really what has happened so far was that consumers continue to buy almost no matter how big the tariffs are going to be increased upon.

Now the jury is out whether or not there will be a different tone between the U.S. and China. After the midterm elections, we’ll see. But I’m really not that worried about this sector so much honestly. I’m almost amazed about the fact that no one has actually looked at what would interest rates to the business, if they are being raised in a massive way.

Obviously, it’s about inflation, which could be caused by tariffs and the like if consumers have to pay the bill. But I do see, if there is a risk in 2019, I would actually expect the major risk to be coming from a significant interest rate hike in both, in the United States, obviously, killing consumer euphoria in buying stuff and consuming stuff, which is almost unprecedented in the U.S. If interest rates are being raised in Europe, that will definitely spark another debate on fiscal debt and the likes and just more worse it will get.

So that’s much more what we are going to look at on how the sentiment will be affected and some big words on trade and very little actions. So that’s, in our view, the reason why we have actually been flagging that we would not expect major adverse impact from geopolitical aspects. You look at what will interest rates and what they could do if they hike very quickly to consumer confidence. Before that the end customer in a way, very early in the value chain with our equipment for machine builders and carmakers and software producers.

So that’s what we are currently having focus, and then we’ll take it from there. So I think it was important that you understand our thinking here. We cannot predict the future, but we obviously can do everything to perform better relative to competition. That’s the aspiration and that’s what you can take us up on in the end.

Ben Uglow

That’s great thank you very much. I’ll pass it on.

Operator

Thank you. And our next question comes from the line of Andreas Willi, JPMorgan. Please go ahead.

Andreas Willi

Yes, good morning everybody. Thanks for the time. My first question is on Power and Gas. Maybe you could – maybe provide an update on some of these mega projects that seem to dominate now the opportunities in the market. In Iraq, both you and GE have announced some wins. But maybe you could clarify a little bit in terms of what exactly you think will turn into firm orders in the near term.

And also, you mentioned that you would have signed a €20 billion contract or a framework agreement in Saudi Arabia had you gone to the summit. Maybe you could also elaborate a bit on that in terms of timing, what it is and what’s happening now.

And to follow up on the guidance and your earlier comments, you seem not that worried about short cycle or the tariff impact. But how do I reconcile that then with the €6, the lower end of the EPS guidance in terms of the kind of the spread of assumptions you make, particularly for Digital Factory in the upside case and downside case? Thank you.

Joe Kaeser

Yes. Thanks, Andreas. I mean, obviously, we agree with you that the power generation market will be impacted quite a lot by issues of rebuilding economies, which have obviously been suffering from a lot of external impact. When it comes to Iraq, a lot has been written about it in the media, and what we do is we focus on our customers and focus on who can build the better concept for what is being needed from the customer side.

And that’s all what we do. We presented that concept. It has been listened to. The MOU (44:24) has been signed, we understand, and the rules have also been signed, and that’s as much as we can tell at this time. And if we have an order, we will book it and report on it. And other than that, we’ll now be focused on our customers and the solutions, but we, of course, expected a level playing field from any of the constituents, let’s say, involved in the matter.

And that’s all we ask for. And we have a lot to offer in the United States, almost 60,000 jobs, which take another 150,000 to 200,000 indirect jobs. We’re paying a lot of taxes still despite the fact that the tax reform, which I believe is a good thing if it creates more jobs and increases the substrate associated with that.

So we are a global company. We can offer a lot in many countries, and I think that’s why I believe also all governments will advise to have a look at that multilaterally and not just have a narrow focus on nationalistic views, although people commit to being nationalistic. So that’s as much as I can say. Everything else, people rely on financial sustainability, sustainability on innovation on executing big projects, which we have quite a nice track record in Egypt.

And that’s what we want to speak for us, if not some other, let’s say, matters which are outside of our control. On Saudi, therefore, they’ve been a very long-term committed partner, and that continues to be the case. We believe the Vision 2030, which has been outlined by His Highness Mohammed bin Salman and his team is a wise, compelling strategy to develop kingdom output of oil.

We support that. We have – if you look at what’s being needed and what’s being addressed there, almost recycled description of business of Siemens from generation to natural resources to digitalization, industrial build of modern cities and infrastructures, all the way to building digital twins by software and, of course, health care. We have the whole spectrum. We’re a natural partner, and that distorts then capacity to change.

And obviously I made myself known. There has got to be a few topics which need to be clarified. I did extension – extensively describe my views, which I think are much more differentiated than most others have reflected on it. Can read it in the LinkedIn post, and that’s as much as we can say. So we look to the future. We cooperated – worked together, but also we believe it’s only natural that developed economies have a certain way of dealing with fatalities, and that also has been said. And other than that, we’ll work it from there. And also here, like Iraq, we look at projects at customer benefits. And if there is orders, we book them into the pot.

Ralf Thomas

Yes. And with regards to your second question, Andreas, around the guidance and the confidence, I think what’s the word that you have been using, I mean, what we said is – what we try to express is, at the moment, we have fairly good visibility for the first six months of the fiscal year in our short-cycle business. We don’t see – we don’t have any indicators that clearly would tell us anything else than just assuming that the momentum, yes, is obviously not burdened by all the geopolitical tensions we saw in the past.

So why would we have a reason to anticipate that to change if we don’t have a trigger. And as I answered to Ben already, when it comes to the short-cycle element of digital factories portfolio, we also have a very tangible and firm backlog in our hands at the moment, also the start into the new fiscal was really quite promising.

So in a nutshell, we don’t have a negative indicator, so the assumption we said, and that’s what the guidance is supposed to express this – that this is something we expect to keep on with a momentum that may decrease a little bit compared to the growth – the pace of growth we saw in the past, including China.

And with regard to the tariffs, I think Jochen Schmitz has been mentioning in the Healthineers Q&A that the impacts for the Healthineers was something between €30 million or 40 – and €40 million. For Siemens in total, it’s really hard to tell because you would have to get into each and every single declaration between all those payers of countries where we are trading between. But if you assumed a high double-digit number for that one, that’s what we would also presume from today’s perspective. Of course, not a good thing to have but also not really material from a corporate perspective and from a company’s perspective in total.

And with regards to the Digital Factory and the margin conversion in the year to come, as I indicated before, we will continue to invest in MindSphere, as pointed out before. This is going to be 150 to 200 basis points in fiscal 2019 again, equaling around €175 million for modeling that. We will continue and increase our investments in Software-as-a-Service, as indicated before.

And if you then add also what I said about the Mendix integration and the residual on Mentor, you end up with some 300 basis points of upfront investment. That will be burdening the margin of fiscal 2019, but it’s, I think, one of the best investments we can make those days. I also have been indicating that there will be a basic and regular restructuring of €300 million to €400 million on an annual basis.

As normal course of business, a portion of that will also be in the short-cycle business where we continuously drive our value chain closer to the growth markets. And I also talked about the incremental impact of exchange rate, which will not be material in total but also will be rather a drag on margin. And also on a nominal basis, when it comes to EPS, I mean, that’s a different story, obviously.

Joe Kaeser

I mean, you’ll know how quickly short-cycle chain moves. Otherwise, it wouldn’t be short cycle. So we also are aware of the impact of what revenue growth or contraction pass-through to the bottom line gets them to reach gross margins which we have in that business. What I also, however, would like to draw your attention to is that we are – since we’re on quite a growth path, we also own an investment path.

So we are planning to incrementally spend money and allocate resources to the business. The good news to that is, should that be any adverse impact on top line based on markets or other things, we have the freedom to choose and decide whether or not to spend that money. But these are fundamentally different situations than if you have spent the money already, and we could deal with fixed cost, which hardly go away over time, talking about margin.

So I think if I would probably guess that we are planning to spend a mid-three-digit million amount of OpEx in 2019, around about then you see that we have a lot of leeway to decide whether or not to extend it if we believe market conditions will unexpectedly change, which is quite an important factor to know. So we have flexibility also in OpEx spending, and we will do that very meaningfully related to what we believe the marketplace will do and develop going forward. I think it’s a very important aspect you ought to consider.

Andreas Willi

Thank you for the clarification. But on Page 19, the slide where you talk about the investments in Digital Factory over the next two years, does this already include the 10,000 implementation engineers you want to hire over time for the kind of driving further down into the vertical integration to deploy software solutions?

Joe Kaeser

That’s a different aspect, Andreas. This is supposed to be IoT space. That’s the IT nucleus we have been talking about, so that happens in the corporate development. It’s got nothing to do with Digital Factory at this time. And up to 10,000 in total. First of all, that will be all low cost, like India, Romania, Egypt and the like. Secondly, this is something which we may or may not invest.

This is based on the use cases. We’re providing the customer framework we work together with so that would be – it’s like all incremental spending covered in the Corporate Development in the IoT space. It’s got nothing to do with the short cycle industrial vertical. That’s one big keeper within the digital industries because it’s a very specific IoT use case in the digital industrial field and not in infrastructure, such as smart cities or mobile infrastructure or charging infrastructure in eMobility.

Andreas Willi

Thank you very much.

Operator

We will now take our next question from Peter Reilly from Jefferson. Please go ahead.

Peter Reilly

Two questions, please. Can you give us some more detail on the Boeing Mentor win? I’m interested to know whether you think you would have won that contract if Mentor hadn’t been part of Siemens, whether it was an example of revenue synergies. And more broadly, you talked about winning large projects of OEM customers.

Are they still mainly in the automotive space? Or are you managing to be more successful now in nonautomated customers, and Boeing’s just a very public example of that? And then secondly, I’d like some more color if you can share it on way you guys may with the Building Technologies.

Had a very successful few years now. You’re above the margin quarter range. It’s growing nicely, but it’s still, I would argue, probably smaller than a lot of its peers. So do you see the need of the scope to expand the business more rapidly or aggressively by doing some larger deals, or are you happy with the organic development?

Joe Kaeser

So thank you, Peter. Talking Building Technologies. I think this is a true success story because, now for many, many quarters in a row, they have been continuously improving both their top and bottom line. three, four years back, it was still quite a material gap between best-in-class in terms of profitability, and that’s what we can contribute and they have been consistently closing that gap between then and now. They have been very much focusing on growth markets and have been concentrating also their resource allocation into those markets and benefit from that now, very much though also in the U.S.

And of course, and therefore, they are very punctually adding incremental investments from an M&A perspective as they did with the ones we have been mentioning. I think that makes a whole lot of sense in that field. And what they also have been very much driving in the past is that they consistently have been increasing the portion of product business. And now also earn a premium on their digitalization efforts of the past. For many years, it was a kind of paradigm that has been set that you only can increase your margin to a certain level if you have at least 2/3 if not more of your revenues in product.

And now Building Technologies has been delivering proof point after proof point that they can do that also by occupying the digital space with a higher portion of service activities and operate, et cetera. So it was quite a healthy development. And what I like best to be honest about BT is that, for many, many years, looking at the cycle, they have been converting their profit also into cash, which is encouraging because, I mean, that also shows that they don’t tie tons of money into their asset management or working at net working capital. So they are quite strong, and we will continue on that path.

Ralf Thomas

And absolutely. Absolutely, as you may recall, our discussion we had on the 2020 plus operating company structure, talking about smart infrastructure, the way you look at it, the nucleus of that smart infrastructure is nothing but Building Technologies. And we add now the decentralized energy systems, yes. We add a whole method of pushing the eMobility infrastructure.

This is also sort of a decentralized concept into that. You also add the investor communication piece from the Digital Factory over to digital to the smart infrastructure. So we don’t want to overload it. The reason why we did it, though, is that Building Technologies has been extremely successful in that building the go-to-market channel and to manage local solutions on a smaller scale, firstly. Secondly, one of the major reasons why BT has actually been outperforming even the bigger peers was that they continuously now have been investing into solutions in combining fragmented islands of services in a building.

And if you anticipate that whole method further, assuming that building technology will benefit like no one else from our cloud-based digital platforms and the knowledge for application centers, you can actually make a case that all those product-related services and buildings, which are completely isolated from each other, taking a ton of money out from the customers with that razor-razorblade concept. And this could be quite a focus point on getting that profit pool handed over to the once we integrate the solutions and hand part of it back to the customers and keep the other part of it. And that’s only a natural – that’s only a matter of time due to this will be natural develop into that, that building operators are determining when they need service and not the product that we are telling them when they need to pay another horrendous amount of money for people coming in and do a job, which the others could actually determine.

We call that demand response integration, which we do already a long time ago in the areas like power generation and associated grid things. And that’s exactly the focus point. So expect more intelligent smart approaches to profit pools we believe should actually be ours and the customer’s. Secondly, expect that BT will use its remarkable performance to make decentralized Energy systems and power infrastructure a success and then definitely with busy doing that. There’s no point in going after overrated targets which are out there for quite some time in the water share and the likes.

Operator

Next question please. We will now take our next question from Simon Toennessen from Berenberg. Please go ahead.

Simon Toennessen

Yes good morning every one. My first question is just on Digital Factory in the U.S., more broadly. China has been strong for Digital Factory for quite some time, and you seem to be gaining share. In the U.S., you’ve struggled for quite a few years, not necessarily to grow but to gain share against some of the established competitors there.

I think you flagged you’ve been growing double digit in the U.S. in the fourth quarter. So looking at some of the peers that have reported, for example, yesterday, it seems that you are gaining share in the U.S. as well in the automation channels.

Can you just talk a bit more about competitive dynamics there, your distribution setup? Obviously, software plays a key element when you flagged obviously Mentor in the presentation as well. Obviously, some of your competitors are waking up a bit more now to the digital angle via partnerships, et cetera, and that they need to offer bundles. Just would be interested to hear your view as to how you can really continue that market share dynamic in the U.S. Second question, just on the balance sheet.

Free cash flow has been again strong, even with the buyback taking into account, your balance sheet is probably still quite ungeared also for fiscal 2019. When I look at the new divisional structure, so obviously, digital industries and smart infrastructure being kind of the key areas, where do you see a bigger need in either of the two to potentially do a larger deal, i.e., Mentor size or even slightly bigger? And do you think there is the potential to do a larger deal in the next 12 months here? Thank you.

Joe Kaeser

Hi Simon, maybe Ralf goes into the money – abundant resources of cash, which is a good thing to have, I believe. Then we may be protected a little bit on the U.S. So we’ve been booking quite some growth, and it’s true that we have not been really that great on earning market share over the years. Now however, I believe there is an inflection point, I would say, in the next 24, 36 months. And the inflection point comes from the fact that people more and more understand how powerful the integration of mechanical analytical simulation actually is for future application on gross markets, such as autonomous driving, cars and other areas, growing over it being and over aerospace and automotive driving innovation, in that order.

People now, all of a sudden understand how powerful that integration is, electrical and mechanical simulation. And as you mentioned, competitors seem to wake up. I would not have minded to keep them there. But from their actions, you see that there’s got to be something to equal what we have done years ago and have been developing.

We focus more on our customers because we know what needs to be done and not so much on the competitors. But they too believe they have quite a unique window now the next two to three years to correct the current share deals in that economy, especially with the rise of eMobility and autonomous cars also with the aerospace, quite a lot.

There will be a lot of companies who have been committing to invest in the United States based on encouragement and economic firms and tax reform and what have you. And there’s also huge, big companies that are investing there. This is a new field on a greenfield. And greenfield obviously always is very courageous in getting the latest and the best solutions. In brownfield, sometimes, not that simple. But it’s also tough to – from just recently in Shanghai to Tom Brody, who manages the biggest car company in the United States.

Those talk about the electrical and mechanical simulation and has that all together with the automation piece, including even the manufacture execution system, which is the link to logistics in warehousing, and you can tell how massive the interest was to have that go out of one hand out of obvious reasons.

So we believe we have a window if we still need to fully get the door open, so you need to cross that door, and I’m sure that we have strong competitors that as you can see how we do it. We feel pretty good about what we have in the offering and how we need make the growth here. Had a good start in 2018. We need to continue to explore – those opportunities. In either, that’s exactly what we are planning to do.

Ralf Thomas

And taking the part of your question around our balance sheet. I of course like to hear that you appreciate the strong cash flow that we have been able to generate while being on a growth path and investing also substantially but also in a very focused way. And the fact that we have an industrial net debt over EBITDA that is clearly below the threshold that we have been setting ourselves does not implicitly mean that we are in spending mode. I have been answering that question also in the press conference. And we will be very consistently reviewing, of course, opportunities when they arise. But the fact that we have a strong balance sheet does not necessarily mean that we need to change that.

Simon Toennessen

Okay thanks.

Operator

Thank you. We will now take our next question from James Moore, Redburn. Please go ahead.

James Moore

Yes good morning everyone, thanks taking my question. I’ve one on outlook, one on charges and gains, and one on investment. I was interested in your comment that you were expecting favorable short cycle markets in 2019, and I listened to your answers earlier, but I was wondering if you might quantify your first half – or your first half visibility sales, your U.S., European, China short-cycle revenue growth will be around the different regions. Secondly, just on housekeeping.

Was there a provision release in PG in the fourth quarter? And if so, could you quantify it? Can you put a rough size on any likely Alstom merger or Vision 2020 plus charges? And just on the PPA guidance of flat. I would have thought you might have a 200, 300 drop from Mentor-Gamesa backlog amortization dropping out.

And if that’s not the case, is there an offset? And finally, sorry for these, on the investment slide where you’ve raised your guidance to €380 million and €220 million for the next two years, I’m wondering whether that’s really going to be the case. And will it drop to nothing in 2021? Or will we be here in 12 months where we acknowledge IoT cloud means that these numbers will just keep staying quiet high?

Ralf Thomas

So James, let me start with your first question around the outlook. I mean, what we said is that, from today’s perspective, and I think that’s important, we don’t see any tangible indicator that would suggest that the short cycle business is harmed or somewhat materially impacted by geopolitical tensions and the like. I also said that we have a very strong backlog in our short-cycle business compared to that – what we saw in the past. I mean, this is not billions, obviously, like you know that from project business.

But a couple of hundred of millions, and that is allowing us to have a very good view on the first three to six months of the fiscal year. It definitely would be too early to quantify by regions, and it also would probably not help you a lot because the dynamics or so has been pointing out they can change fairly quickly, and we don’t want to speculate.

You’ll get all the details and the regional split as we do that once we had been completing the quarter, and as we, you have to be patient with that split for the first quarter and the second quarter then. But the momentum – and that’s what I said a couple of times, and the pace of growth will moderate, but it will not materially impact from today’s perspective the growth trajectory for the Digital Factory, even though the growth rate as such may not be on exactly the same level but moderate a bit.

In terms of PG, as I said, we have been successfully reaching a couple of important milestones, in particular around the Egypt projects, the mechanics of POC, of percentage of completions, are known to you. And whenever you reach a milestone and execute flawless, of course, then you will incrementally recognize revenue and also profit, accordingly, we will not start to discuss the margins and the POC milestones and the impact on margins on a project-by-project basis.

With regard to PPA, if I got your question properly, I said in the guidance for the next fiscal that you should assume pretty much the same level for fiscal 2018. And on the one hand side, we now see from our very first acquisitions on industrial software companies like UGS more than 10 years back now at the end of the amortization period for some of those assets, at the same time with Mendix and also with smaller acquisitions like we had done in Building Technologies, we add. So the level will be pretty much the same. So from modeling, I think you would just straightforward take the figure of fiscal 2018 and you will be safe.

James Moore

There was one on the Alstom merger and Vision 2020+ charges, whether you could quantify it and whether the investments will really come down as we go forward.

Ralf Thomas

So what we said is that, of course, we will keep you posted on the impact of the carve-out activities and the related taxes associated. I think it’s fair to say that we have been digesting a big part of that with regards to Mobility, but we are not done yet. And it also makes a lot of sense. I think we discussed it the last time we met already.

In particular when it comes to taxes, it’s not much to move ahead too fast too early because this is immediately triggering cash-out obviously when the taxes are supposed to be paid. So some of those carve-out steps intentionally saved for a later point in time but fully under our control and definitely not keeping us away from moving ahead as fast as we can with regard to the content of the merger.

So there is some residual left for fiscal 2019, and I can’t quantify at the moment, but you saw from the high tax rate of the fourth quarter, that obviously, that period of growth, we then carve out and try – start to organize a group also tax-wise for Mobility. We are entering the last couple of yard.

Sabine Reichel

It’s still a few people in the line, so maybe we limits to one or two question to get more people. Because we have only 15 minutes left. Next question please.

Operator

We will now take our next question from Martin Wilkie from Citi. Please go ahead.

Martin Wilkie

Thank you. It’s Martin from Citi. I’ve just a couple questions on some of the longer cycle markets. Firstly, in process and drives, order growth slowed. I know it was a high base of comparison. But just to check, has there been any sort of change in what customers are doing in those processed markets?

And secondly, in Power and Gas, if we ignore the large gas business, obviously, there are the old Dresser-Rand business, things like that. If you could just let us know where’s the book-to-bill on the non-large gas business, which is presumably a little bit earlier cycle and, therefore, could give us some indication as to how that business might progress over the course of 2019.

Joe Kaeser

Thank you, Martin. Let me start with the process and drives. I mean, as indicated before, we saw that some of the commodity market’s coming back, but it’s too early for you for real, of course, because many of them are still not making full use of existing capacities, in some areas, driven by commodity pricing. There have been incremental investments that we saw. Probably one of the single-biggest changes compared to prior year’s quarter is the fact that wind has been coming back to a certain extent.

However, as you probably also took from the disclosures of Siemens Gamesa, there is quite an intense pricing pressure in that market in particular in the onshore piece of it, which is then filtering through to the suppliers, of course. And so therefore, there’s still a high demand for productivity gains. That’s why I also have been mentioning that we will continue doing that, and we will use our own tools with the cost value engineering toolbox, of course.

On selected customers, there is momentum that we sense, and as I said, too early to say this was it. I mean, typically, this is not only a long cycle but also late cycle. So we may expect another two, three quarters in which that – that being late in the cycle, stabilizing the top line. That’s what I also mentioned in my presentation. And the other part of your question referring to the book-to-bill. Outside of large gas, the book-to-bill ratio is still below one.

Martin Wilkie

Okay. Thank you.

Operator

Thank you. We’ll now take our next question from Markus Mittermaier from UBS.

Markus Mittermaier

Yes. Hi, good morning everyone. Quick question on guidance. Again at a group level, if I look at your more late cycle businesses, Process Industries wins Mobility, et cetera. And look at the exit margin this year versus 2017 levels, and the order intake you’ve had throughout the year, I’m just a little bit puzzled how you only can get to sort of a 20 basis point at the midpoint margin improvement guidance for next year.

Maybe you can comment to that. I think your top line language from modest to moderate is becoming a bit more positive. Your positive on short cycle for the first six months, so just how we get to an essentially flat to only slightly up margin guidance. That’s question number one.

And number two, on PG specifically. In the backlog, if I look at FlexLTP and large gas service, I wonder if you can comment on specific projects. But can I assume that the margin profile and margin levels in that FlexLTP and SaaS service business remain at roughly historic levels, or has there been a change? And if you allow just on very brief housekeeping on CMPA, why was there this negative swing versus I think consensus had €100 million positive for next year.

Joe Kaeser

Thank you, Markus, for those questions. Let me start with the quickest one on CMPA. I mean, I don’t know of how the consensus has been finally shaped, obviously, but it was very clear and evident, and we have been also very transparent on the extraordinary gains that have – we’ve been benefiting from in fiscal 2018 with Osram and also with Atos. And if you just take those out, you will pretty much conclude that you can’t expect under the – in the absence of major divestment gains, as I said, that you can’t come to that plus €100 million of what the consensus has been suggesting.

So this is obvious. With regards to the FlexLTPs, yes, you’re right. We are very carefully watching that. It’s a very important indicator for us also. And as I said before, the service business from a top line and also from a profitability perspective, is standing strong, probably also driven by the technology that we can provide. We discussed it at several stages that whenever there’s a renewal upcoming, we may or different providers may be in a different position when it comes to be under pricing pressure as we can provide productivity gains with new technology to our customers.

We are very happy with the development of the FlexLTP and also with the total backlog for PG of €40 billion, I think it’s also good to know that a bit more than 80% of that is service related in which, again then, the FlexLTPs are playing a major role. So service is a very consistent and strong pillar of our business model there, and we do not have an indication that this is going to change throughout the next 1.5 years. As we said before, four to six quarters is the typical visibility we have prenotice of renewals coming up.

And I’m not sure whether I completely got your question around the guidance around late cycle and so on. But what I took from it is the fact that we do have very limited impact on the industrial businesses margin from exchange rates, of course, does not implicitly mean there is no impact on EPS. We said that’s, in particular, due to the fact that we have a growing business in emerging countries as a result of moving to those growth markets, the big part of our value chains, of course, there is also impact from those currencies, and I have been spelling out China, India and also Argentina, obviously, from a nominal perspective on EPS basis that have an impact. And I also would like to reiterate that we have been guiding you to low to mid-single-digit margins for Power and Gas for fiscal 2019.

Ralf Thomas

Maybe since that’s been – since we have been shifting a bit from the short cycle to the more long-cycle environment outside the payments large turbine generation, I just want to make sure that the records are straight. I mean, you asked about PT on – said the orders are slow. Well, we do see – we tend to see that in the commodity-related environments, such metals mining, obviously, oil and gas, there is some signs of life, particularly, of course, in the LNG environment.

If you look at what we believe will happen in 2019 on the, let’s say, the big metals mining, oil and gas related businesses and the solutions, we actually do see clear order growth coming along with the bigger projects, the same kind of ways we do it in oil and gas. We expect clearly a plus one, but this is only orders. So it may take some time till we see it in the P&L, and that’s why we are a bit more careful about deal dell related metals. But in terms of bookings, both in the large solution PT environment related to what it is to ask us oil and gas. We do see big order growth.

Markus Mittermaier

Maybe – you misunderstood my question. That’s exactly my point. If you look at mobility wind PD, you had significant order growth throughout the year, and your exit margins are very much higher than sort of where we started the year, right. So I would have expected that, that backlog that you’ve accumulated in those longer execution cycle businesses is significantly higher margin than what we would have seen maybe even on the 2017 print. So hence, my thought whether the 20 basis point at the midpoint improvement to guidance on margin is actually a bit conservative.

Joe Kaeser

Look, it is what it is. If we had to predict the future, we would have been more precise. You could see that we opened the corridor a little bit to 70 basis points instead of the typical 50 basis points. Yes, we do see favorable conditions in some areas. But there’s other risk, and what we come up with what will be a balanced way of risk and opportunities to make a meaningful guidance, but we’ve been meeting the original guidance all through the risk guidance is now five years in a row.

So there’s a track record at stake – that why we keep the guidance as we did it. I think we’re pretty, pretty well aligned with the investor community on the sell side. It’s a chance to top line engagement signing book-to-bill as well as industrial motion to have a bit of clash in CMPA. The market expected us to produce better one-offs as a leverage of last years. Well, one-offs are called one-offs because they don’t happen every year, and that’s why we have been guiding the market now the way we believe is more probable.

We feel good in what we said we want to achieve altogether the top of Norbert Reithofer business. We also do a realignment of our company so we can sell one in the future where we need to do what at the better time, and that’s exactly how we wanted the guidance to be understood in a balanced way with upside, and some of these coming over from macroeconomics interest – what we believe actually interest rate movements [indiscernible]. But that’s in essence why we wanted the market to understand it. We are well underway. We know what we’re doing. We have a microtiter plate with Alstom. We do have good cash flow. We have options. We can activate them at a different point in time if we wanted to and other than that to serve our customers. So that’s – the year being developed. Thank you very much. I’ll hand it back to Sabine.

Sabine Reichel

Thank you. We will conclude now. Thank you, Joe. Thank you, Ralf. Thank you, everyone, for your participation today in the call. The team and I will be available for further questions. And with that, we will conclude now the call. Goodbye.