Siemens Ag Spons Adr

Good morning ladies and gentlemen and welcome to our Q3 conference call. All Q3 documents were released this morning and can be found also on our Ambassador Relations website. I'm here today with our President and CEO Roland Busch and our CFO Ralph Thomas who will review the Q3 results. After the presentation we will then have time for Q&A. This call is scheduled for 75 minutes. So with this, let's jump right in over to Roland.

Thank you Eva. Good morning everyone and thank you for joining us to discuss our third quarter results. I'm very proud that we delivered another outstanding performance. My thanks go to all the Siemens employees worldwide for their strong focus on execution and their commitment to support our customers. We again clearly delivered on our ambition to empower our customers to master their digital transformation and sustainability challenges. We execute on our strategic priorities and targets outlined at our Capital Market Day. And we accelerate high-value growth as a focused technology company. In the third quarter, the strong economic recovery across all regions continued. China was once again a key growth engine, with Europe and the US catching up, supported by ongoing vaccination progress. We expect this favorable macro environment to continue with some growth moderation, especially in China. However, the rapid spread of new virus variants shows us that the pandemic is still not over. Recovery. was also broad-based across our key industrial verticals, such as automotive, machine building, or electronics, and across most infrastructure segments, such as power distribution, data centers, or mobility. Part of this strong manufacturing rebound is due to some stock-building effects at our customers to mitigate their risks from supply chain constraints. Like our customers, we are seeing challenges in our supply chain, such as a tight supply of components like semiconductors. We also see elevated pricing levels for raw materials, transport and components, a situation that will prevail into fiscal year 2022. I'm very pleased how well our teams have handled these challenges so far and have limited their impact. Availability is best possible secured through close collaboration with our suppliers. And we are leveraging our global network of supply chain professionals. In our factories, we are seeking to optimize output without compromising employee safety to match strong customer demand. In certain areas, our factories are operating at full capacity. This leads to extended customer delivery times and clearly higher order backlog, mainly in short cycle automation products. So far, headwind from material cost inflation has been partially mitigated through hedging and long-term contracts. And on top, through timely pricing measures, we have been able to contain bottom line impact. Our top priority is on execution. to build on our strong momentum, strategically and operationally. And we again made great progress. Our portfolio further strengthened with bolt-on acquisitions, mainly in the digital area. Our offering? Highly competitive. Good examples are our large auto events at Mobility. They are based on superior technology and lifecycle cost, combined with digital capabilities. Our sustainability approach, an important business differentiator with implementation in full swing. All this led to an outstanding performance across all matrices in the third quarter. We will pursue this path of rigorous execution to drive profitable growth and steady cash generation. Looking ahead, we expect a further gradual uptick in our discretionary spending in line with opening of economies. In addition, we plan to selectively invest in new applications, sales channels, and additional resources to grasp growth opportunities. Based on our excellent first nine-month performance, we again raise our outlook for fiscal year 2021. We expect our book-to-bill ratio to be above one, As before, we now expect revenue growth for the Siemens Group of 11 to 12% on a comparable basis. And net income is now seen in the range of 6.1 to 6.4 billion euros. Ralph will walk you through the details. Now let me give you some more color on the topics I touched in my introduction. We are actively shaping and strengthening our portfolio with bolt-on acquisitions. As indicated before, a particular focus is on our software and digital service offerings. Just a recap from the Capital Market Day. An important building block is the acquisition of SupplyFrame, which will decisively accelerate our digital marketplace strategy. We closed the acquisition just a few days ago. During the third quarter, Digital Industries has been quite active and has acquired five smaller software companies. We added deep expertise in simulation for the PLM and EDA portfolio. We also added vertical application building capabilities to our Mendix low-code platform. The combined purchase price is just north of 100 million euros. We are very pleased that Siemens' half-year acquisition of Varian is performing well after its closing in April. Both operations and integration are fully on track. Enhancing digital capabilities and driving value creation through resilient business models is crucial for all Siemens units. And it is also crucial for our customers. At the Capital Market Day, we presented an example from mobility. Mobility is building a mobility as a service platform for our customers to enable digital planning, booking, and payment for multimodal travel. Be it by train, bus, or ride-sharing, or any other option. Be it first or last mile, and be it regional or countrywide. With the acquisition of skills, we are now decisively strengthening this software portfolio. Mobility will provide operators worldwide an enhanced digital offering for their core processes, from sales to operations. This will help to increase the usage and convenience of public transport. Together with Harkon, EOS.Uptrade, Weizmark and Padam, skills S3 passenger software will become part of an interconnected software portfolio. This step will bring a wide variety of services together. SKILZ's scalable cloud-based platform enables public transport operators to replace their legacy systems with a digital booking system. It covers inventory management, reservation, and ticketing for rail and bus travel. And here is the value for our customers. It increases utilization and availability of passenger transportation by optimizing convenience and yield. This is also a tangible benefit for the environment and for sustainability. Skilled software is already in use across nine countries at 33 transport operators such as SNCF, Irish Rail or ViaRail. The profile of this acquisition is very attractive, scoring high on our strategic imperatives and capital allocation criteria. We are expanding in a fast-growing adjacent market. The SaaS business model delivers fast-growing, resilient recurring revenue with highly attractive margins. We see significant synergy potential to utilize Siemens' global presence. Bringing technological resources together, we will drive growth for combined offerings. The acquisition will be accretive to EPS pre-PPA in year two after closing, which we expect for the first quarter in fiscal year 2022. And the return on capital employed is above our weighted average cost of capital. The agreed purchase price is 550 million euros plus unearned out. Skills forecasts revenue for calendar year 2022 of around 40 million euros with an attractive EBITDA margin. Valuation multiples are comparable with recent transactions for high quality software as a service assets. And there's more good news for mobility. We have a longstanding relationship with Amtrak in the United States. Recently, We were awarded equipment and service orders totaling 2.8 billion euros. Our scope of delivery is for 73 sustainable, efficient and reliable trains. From 2024 onwards, they will replace the aging fleet in eight states with modern dual-powered or hybrid battery trains. This will transform how Americans travel. Amtrak expects to add 1.5 million additional riders annually. How? By offering higher capacity, shorter trip times, and a more comfortable travel experience. Our concept to optimize lifecycle cost convinced Amtrak to take this long-term platform decision. We achieved this through rolling stock platform approach, real-time digital monitoring, and predictive maintenance. We are excited that Amtrak has further ambitious plans for their fleet. Depending on the execution, Amtrak has the option to order up to 140 additional trains and related maintenance agreements. Great potential for additional business. In line with local requirements, the trains will be built at our U.S. Manufacturing and Service Management Hub in Sacramento. At the Capital Markets Day, we introduced our holistic degree framework. It comes with ambitious targets around six core action fields for sustainability. We will regularly report on our progress and see strong implementation momentum. Let me highlight a few examples from Q3. We launched many initiatives to achieve our target of net zero operations by 2030. Among those, our Siemens real estate team has now defined standards to target net zero carbon for all new construction projects. An important part of our ethics approach is the support for international initiatives in the fight against corruption. To support them under the collective action panel. Hence, we expanded our commitment by another 20.5 million US dollars. This brings the total volume of Siemens integrity initiative to nearly $120 million. And we joined the Valuable 500 initiative to highlight our commitment to an inclusive culture. At Siemens, people with disabilities participate fully and are empowered to contribute. On top, we have an even greater impact on sustainability through our customers' operations. Great evidence is again the Amtrak order I mentioned earlier. By using dual-powered and first-of-its-kind hybrid battery trains, Amtrak will be able to significantly reduce emissions by up to 70% relative to today's fleet. Another great example is from the water industry. Swedish water supplier VA Syd operates around 2,000 kilometers of drinking water pipelines. A key challenge is to reduce around 10% of non-revenue water due to leakages. Together with our customer, we are rolling out an AI-based leakage detection system to waste fewer resources. On top, the customer increases productivity by avoiding unplanned service disruptions. So how does all this translate into our financials? Let me give you a brief overview for the Siemens Group in the third quarter. Orders were at 20.5 billion euros, up by a powerful, comparable 44% over the pandemic-hit prior year quarter. The rise was driven by double digit growth in all businesses, leading to a very strong book-to-bill ratio of 1.27. Revenue was up comparable by 21% to 16.1 billion euros now. Increases were recorded in all businesses with strong contributions from Siemens Healthineers, Digital Industries and Smart Infrastructure. Top-line growth was very strong and broad-based. We recorded double-digit comparable growth across all regions. Germany was up 30%, the US grew 19% and China was up 14% on already tougher comps. Adjusted EBITDA for our four industrial businesses rose substantially to 2.3 billion euros. It benefited from strong top-line driven profit momentum. structural improvements are continuing to pay off. As expected, discretionary spending for sales and project-related efforts started to pick up again. Altogether, this led to an excellent margin performance of 15.3% up by 100 basis points. It translates into a strong earnings per share of 1.68 euros, also benefiting from lower income tax expenses. Ralph and I continue to be extremely satisfied with our progress towards achieving a steady free cash flow development throughout the year. 2.3 billion euros of free cash flow all in, in the third quarter, is another proof point, driven by an excellent 2.4 billion euros from industrial businesses. Our strong cash performance is also reflected in our solid industrial net debt over EBITDA position. It stands at 1.9 times, despite material cash outflows of €13.4 billion for Varian. With that, over to you, Ralf, and let's take a closer look at operational performance and financials.

Thank you Roland, also good morning everybody. Let me share further details regarding our excellent performance across all businesses. Our key markets for digital industries in automotive and machine building continued to recover at a strong pace leading to very dynamic order activity by our customers. The surge in demand was partially caused by customer concerns about component shortages leading to extended delivery times. All automation businesses showed massive order growth, with discrete automation sharply up and process automation being substantially up. Software was softer overall on tough comps in the EDA business, while PLM clearly recovered. European countries contributed with record growth rates to automation growth, albeit on easy comps. Italy more than doubled. Germany was up 65%. And China continued its strong momentum with further 56% order growth. Here we expect a normalization of growth going forward. We are very pleased that automation revenue rose 23% year-over-year and also achieved clear sequential growth over the second quarter. Discrete automation was up in the mid-20s with broad-based demand across regions. Process automation saw continuing recovery in demand, achieved growth in the mid-teens, and was also up sequentially. Revenue growth in automation was broad-based with double-digit increases across all major regions. Strong momentum in China continued up by 27% year-over-year and with further sequential growth. Software was up modestly by 2% with a heterogeneous picture in the segments. As indicated, EDA business is somewhat lumpy depending on revenue recognition from large contracts and it did not reach the high level of the prior year. However, our PLM business saw further improving investment attitude among its customers and is back on a clear growth trajectory. Mendix continued its strong mid-to-double-digit growth momentum. In line with our expectations, digital industries reached an excellent 20.3% margin performance. This is an operational improvement of 150 basis points over the prior year quarter, which benefited from an effect related to the revaluation of the stake in Bentley in the magnitude of 570 basis points back then. Margin improvement benefited from strong profit conversion on higher revenue in short cycle businesses combined with prior measures to structurally improve the cost base. As indicated previously, Cloud and integration investments accounted for around 100 basis points of negative impact similar to prior quarter's levels. We are literally thrilled that digital industries achieved more than 1.1 billion euros of free cash flow in the third quarter. This truly exceptional performance with a cash conversion of 1.32 times is based on hard and consistent work on stringent working capital management across all businesses. Now let's have a look at our market segments and geographies. I already highlighted the key developments from a regional perspective. Looking at our key vertical and market expectations for the next quarters, we see a continuing recovery along broad-based positive sentiment in a wide range of industries. Even demand from aerospace and defense industries is bottoming out now. As Roland said, our team is extremely dedicated and determined to mitigate risk from supply chain shortages in areas such as electronic components. And we expect a rising impact from higher commodity prices in our assumptions. Nevertheless, for the fourth quarter, we anticipate for DI, from today's point of view, further high single-digit comparable revenue growth, reflecting continuous sequential growth momentum. Given the well-managed ramp up in discretionary spending and investments to leverage the strong growth opportunities, we expect the profit margin for the fourth quarter for DI to be slightly below the very strong third quarter. Now let's move on to smart infrastructure. The team delivered very convincing top-line growth in improving end markets and provided further evidence for a clear margin expansion trajectory. In total, orders were up 24%, driven most notably by a sharp increase north of 40% in the electrical products business, benefiting from very strong industrial demand. The solutions and service business showed clear growth, benefiting from several large orders, for example in Germany. Revenue growth of 15% was broad-based across all major regions, with strength in Europe, excluding Germany, but up by 20% in the United States, up by 16%. China increased by 4%, a kind of normalization on tougher comps. Product businesses were up substantially by 29%, whereas systems showed a significant recovery from a low level in the prior year. As expected, the late-cycle solutions and services business returned to mid-single-digit growth and will continue to recover in the quarters ahead. Margin performance of 12.1% benefited from higher capacity utilization related to increased revenue, as well as structural improvements from its competitiveness programs. On the other hand, there was some headwinds from commodities, pricing, and currency effects. On this slide, for smart infrastructure, you can see further details for the regional top line development, which I already touched upon. We expect the momentum in our short-cycle electrical product business to continue in the strong end markets and our solution business to pick up further in line with the improving growth perspectives in the late-cycle buildings market. The electrification market is on a solid growth trajectory with accelerating renewables integration and the trend towards electrification in areas such as transportation. And we see for the fourth quarter comparable revenue growth rate to be high single digits. As Roland and I already highlighted, smart infrastructure has done an excellent job of mitigating the impact from strained supply chains. However, as indicated before, we see stronger headwinds coming up from higher raw material prices, which cannot be fully compensated by hedging and pricing actions. In total, we expect the fourth quarter margin to be slightly above the level of the third quarter. Roland already talked about the strategic progress being made at mobility. Looking at the numbers, order growth obviously stands out, driven by the Amtrak order and several large contracts in rolling stock and rail infrastructure. And our sales funnel looks pretty promising for the quarters ahead. Revenue grew 5% in line with expectations driven by rail infrastructure, while rolling stock was soft due to project phasing. Service business is moderately up by 4%, still somewhat impacted from lower ridership. Mobility did an excellent job compared to the competition of delivering resilient revenue growth throughout the pandemic period. Profit margin was again within the target range based on stringent execution and benefiting from fewer pandemic-related restrictions on accessing sites. Our assumption for revenue growth is expected to continue to be in the mid-single-digit quarter in fiscal 2021. Fourth quarter margin is sequentially higher compared to the third quarter, getting closer to double-digit performance. As indicated, free cash flow is expected to rebound and catch up materially in the fourth quarter, closely linked to the timing of down payments. At this point, let me briefly highlight the excellent operational performance of the Siemens Healthineers team, who disclosed financials last Friday. Since then, their share price reached a new all-time high, now reflecting a market cap of around 65 billion euros. As majority shareholder, we are also very pleased with the upgraded operational outlook in total, and in particular at Varian, as well as with the stringent and well-prepared integration approach. In the appendix of the presentation, we have incorporated the relevant outlook slide, the update on variant performance and integration status, as well as the profit bridge from Siemens Healthineers to Siemens AG. The anticipated negative impact of the variant transaction on Siemens net income was 177 million euros in the third quarter and is expected to reach close to 350 million euros for the full fiscal year. Next, I want to touch upon a few important topics below our industrial businesses, including an updated assessment for full fiscal year 2021, now including all variant effects. SFS delivered another consistent performance in the third quarter and is well on track to achieve a significant improvement over fiscal 2020. However, not at pre-COVID-19 levels yet. Our portfolio of companies returned impressively into top-line growth territory and the fully owned businesses achieved margin improvement. As indicated before, we continue to expect for the full fiscal year ongoing losses at Valeo Siemens to overcompensate for the positive contribution from the fully consolidated businesses. Siemens Energy Investment, as you already know, suffered a setback in the third quarter. For fiscal 21, we expect now, in addition to PPA effects of around 200 million euros, a deteriorated net income contribution attributable to the Siemens AG stake to weigh on our results. Siemens Real Estate will not see any further material disposal gains this year. Therefore, profit will be well below the prior year at a high double-digit million amount. For fiscal 21, we now expect corporate items and pensions to fall below prior year level and reach around 900 million euros due to numerous smaller factors with positive effects. Among them, of course, are cost savings from the corporate 2020 plus program. PPA on intangible assets now includes variant effects in the area of around 200 million euros and is expected around 800 million euros in total. Elimination corporate treasury and other items is now seen slightly below fiscal year 2020 level. due to lower interest expenses on debt. After we recorded lower income tax expenses in the third quarter, due mainly to the reversal of income tax provisions, we now expect the tax rate to be around 25% for the full fiscal year. In discontinued operations, we recorded a material positive impact from the reversal of income tax provisions as well. For the fourth quarter, we still see some minor remaining subsequent spin-off costs from Siemens Energy to come. As the overall result for discontinued operations for fiscal 21, we expect a close to 1 billion amount driven by the slender gain. As mentioned, free cash flow performance in the third quarter was again brilliant. Our continuing focus on working capital management delivers impressive results for steady cash conversion. A free cash flow of more than 6 billion euros and a cash conversion rate of 0.92 times for the industrial business after the first nine months is truly remarkable in the light of double-digit top-line growth. Strong cash focus across the entire organization is also clearly visible, an excellent cash conversion rate of 1.54 for free cash flow all-in in the third quarter. Our financial strength was also recognized by Moody's upgrading the rating outlook to stable and affirming our A1 rating last week. Given the strong performance in the first nine months, We do not expect another September wonder, but rather assume continued steady performance, including the mentioned catch-up by mobility. Now, as Roland already highlighted, the raised outlook for the Siemens Group, with revenue growth of 11% to 12% and net income of €6.1 to €6.4 billion, including effects from Varian, I will give you the updated framework for the businesses. We assume that our businesses do not experience significant supply chain constraints during the remainder of the fiscal year. Furthermore, we see our fourth quarter as a continuation of clearly easing negative currency translation effects on our top line. Digital industry now expects 10 to 12% comparable revenue growth. The margin expectation continues to be at 20 to 21%. Smart infrastructure now anticipates 8% to 9% comparable revenue growth and confirms a margin of 11% to 12% expecting to reach the upper half of this range. Mobility continues to anticipate mid-single-digit comparable revenue growth with a margin of 9.5% to 10.5%. With that, I hand it back to Eva.

Thank you, Rob. We are now ready for Q&A. So, operator, please open the Q&A now.

Thank you, ladies and gentlemen. We will start today's question and answer session. If you wish to ask a question, please press the star or asterisk key followed by the digit 1 on your telephone keypad. Again, ladies and gentlemen, please press star 1 on your telephone keypad. And we'll now take the first question from Ben Uglos of Morgan Stanley.

Good morning, everyone. I hope all are well, and thank you for taking my questions. First of all, I guess for Ralph, can you just talk us through, it was very nice to get a projection for digital industries in the quarter. Can you just sort of walk us through what you're seeing in terms of the short cycle trends by region? So obviously China still good momentum in the quarter, but you seem to be, you know, saying that that's going to sort of moderate. But then are you seeing a compensating kind of acceleration in the US and Europe? And when I look at the kind of revenue projections or what's happened to digital industries, you know, so far, we've grown kind of sequentially 5% each quarter. So we've just come up to 4.2%. My takeaway from your kind of comments is that we still see a decent kind of moderate uptick in sequential growth into the second half. Is that a fair assumption?

Ben, let me start. Thanks for the question. I mean, obviously, one of my favorite topics to talk is the regional split and also the dynamics of the short cycle businesses. I mean, talking China and momentum way forward and sequential growth, we need to bear in mind that prior year, the second quarter was heavily impacted for China, the third one for Europe and also for the US to a certain extent. That baseline effect will be less relevant and material on the way forward. So we must not be naive and believe that we see the same levels of growth. However, However, the momentum is kept alive. I used the opportunity last night talking to my Chinese team, of course, as always. And, I mean, they saw quite a strong momentum continuing into July when it comes to top-line momentum. Of course, too early to conclude from that for the rest of the fourth quarter. But I think it's still a very relevant data point that we can contribute here. And even though knowing that some of the metropolitan areas in China are now seeing also impact from COVID again, we do not consider that being material for China in total for our activities. But it's still something to watch carefully and diligently throughout the next weeks and also months and quarters to come. So talking the revenue, the big picture of the third quarter, I think we have been walking you through a lot of details there. China was up 14%. I would definitely expect them to continue growth momentum. But as I said, comparing to prior year's baseline, that will moderate definitely. Then the U.S. also was strong, 19% for Siemens Industrial Business in total. that may also moderate now on tougher comps of prior year, but still I would consider having a good opportunity to again grow double digitally here. And the same is in principle applicable for Germany and the rest of Europe. So I think it's also important to mention that when we talk about growth momentum in these regions, to see the different go-to-market on the one hand side and also the inventories that have been building up because that may have a major impact on the way forward. Of course, at the moment, we do see fairly high levels of inventories at our customers. So they have been probably trying to contribute and incrementally increase their buffer stock to be on the safe side. We also do see that the delivery times have been going up and extending. So for us, that means we have more visibility than we typically have in this field. The unwinding of, if I may call it an artifact, the inventory levels that will definitely continue far into fiscal 22 before we come back to new normal, always assuming that we have a stable scenery when it comes to the development of the COVID impact. So channels themselves in China, for example, are not inflated. No wonder because all the end customers have been pulling through if there was extraordinary stock available in the light of the supply chain challenges. And one last point. I mean, we also shouldn't underestimate the uncertainty coming from the fact that a lot of inventory that we see as part of our sales is still on ships waiting to be delivered to our end customers. There's also a fairly high level of uncertainty. I think the average number of days before unloading a ship have been doubling throughout the last three months, and that's an effect that must not be underestimated. I hope that's contributing a bit to shed more clarity and light on the picture.

That is very helpful indeed. Thank you. And one quick follow-up, if I can, just on the smart infrastructure margin at 12%, can you just Explain what's driving that. Is that a mix effect from the product business picking up? And is it correct for us to assume that that product margin is still low relative to the divisional average? So is this basically due to better volume coming through on the product side? How far has it gone?

Thanks, Ben. So actually, I'm very happy with the development of smart infrastructure, and it's not only the product business. And let me start with their solution business. It's picking up. It's taking momentum now. Still coming from Europe because we still have in the non-residential market in the United States, they're still weak. But they're growing and growing again and improving their margin. On the systems business, we see a significant growth. and also improving of the margin. But the most happy we are really about the substantial growth of 29% of our product business, which comes with a very good margin, which is a creative to smart infrastructure. So actually we do what we said in the capital market day, that we are continuously improving our margins there and shortening the gap to our competitors.

And maybe one point to add, Ben, I mean, don't underestimate the momentum created by their cost-out program, which is gaining ground now. You said when we introduced the program SAC at the CMV in 2019 that DI will be first and SI will be late in impact, and we can clearly see and expect further contributions to their margin from the momentum that is now in implementation. under these measures that have been taken successfully.

That is super helpful. Thank you very much, gentlemen, and I'll pass it on to the next question. Thank you. Thank you, Ben. Thank you, Ben.

And our next question comes from Martin Wilkie of FITI.

Yeah, thank you. Good morning. It's Martin from Citi. Just to come back to DI and the drivers of growth within that. There's quite a big gap between the order growth and the revenue growth. And it's not obvious from last year that the decline was so different between orders and revenues. Just to understand what's driving that. Is it larger projects that don't convert into revenues? in the same quarter? Is it because of some of these constraints that you mentioned that things are getting perhaps delivered a little bit longer or later than they might be otherwise? But just understand why order growth is so far ahead of revenue growth. So that's question number one.

Martin, thank you. I mean, it's really also for a long time, I like myself amazing to see how quickly that scenery has been developing. I mean, first of all, there are no major order in that completely changed the pattern of the past. It's exactly along the lines that you indicated. I mean, first of all, we do see ourselves at a really high level of capacity utilization. I mean, you typically have about 61,000 working hours in a factory a year. If you're really doing a great job in exploring these opportunities, you may end up with some 55,000 hours that are really available with maintenance and also changing the equipment for other products time and again. And sitting on that level is really requiring an organization and a process framework that works like a Swiss clockwork, and this is actually what we do at the moment. At the same time, the capacity constraints that we do see every now and then is around availability of critical material, but so far we could manage that. The impact of that, however, is if you have to change the production program time and again due to availability or bottlenecks in availability, that's also dragging a bit. And therefore, delivery times have been extending massively. And we sit on a backlog in short cycle business that I never, never, ever saw in my whole business life. It's around three times as high as you would typically have that. And it's hard to predict, of course, how much in that incremental demand, which is reflected in those high new orders, is then going to be leveling out over the course of time when our customer base is coming back to normal. So high backlog, which is good for visibility, reaching into fiscal 22 on the one hand, sign delivery times up. That will change again in optimizing the capacity program that we run in our production sites will also be affected and needs to be as flexible as it is, thanks God. And it has been mentioned often that we eat our own dog food and drink our own champagne, and thanks God we are fully automated and digitalized in our factories, allowing us to flexibly change if we come into situations that require action swiftly.

That's great. If I can get one follow-up, just good to see you raising guidance for the year, but some quick math suggests that the net income guidance actually looks a little bit prudent given what you're doing to corporate costs, the good outlook on the division, the tax rate and so forth. Just to understand if there are other below the line items we should think about and one in particular, what sort of losses should we be thinking about portfolio companies that are embedded inside your new guidance? Thank you.

I mean, thank you for appreciating the level of detail we provide here. I think about how many years, eight years, I had the pleasure of talking to you in that function. I never have been giving so much details on below the line development. And I think we are as crisp and clear as we can be. However, we also respectfully need to adhere to the fact that we talk about legal entities that are not under our control, like Siemens Energy, and therefore we stick to their guidance the same way as you do. I do not have superior knowledge, and I may not have superior knowledge on that one, so I can provide more clarity on that one. What we did share, however, is what we can foresee and share, and that is PPA effects, of course. So with that, I think the rest of the equation you need to figure out yourself. Sorry for that.

No, that's great. We certainly appreciate the increased clarity over the years. So thank you for that.

And our next question comes from Andreas Willi of JP Morgan.

Good morning, everybody. Thanks for the time. I've got a couple questions on DI. On the order momentum, maybe you could give a bit more information on the order growth and software you've seen, and particularly on EDA, where you noted the tougher revenue comp and the lumpiness, but has EDA then basically recovered or shown growth on the order side? And maybe you could share if you have some first customer feedback and reaction to your earlier announcement to transition to software as a service in your software business next year in terms of their feedback relative to what you expected to hear from them about their willingness to move to this new model.

Let me start, Andreas, let me start with the customer feedback. I mean, you know that we have been talking to our customers before we started launching our SaaS transformation. And we got a good feedback, and that continues. The customers are very interested. I think they appreciate what we can offer in terms of fast innovation speed, bringing more options, bringing solutions to the cloud. But at the same time, remember also that we don't push our customers. So this takes a little bit of time in order to really transfer. So, therefore, good feedback from the market. We see really interest, very strong interest. And then we are looking forward to really make our transformation moving as planned.

And with regards to the software top-line momentum, I think this is one of those areas where we really continually look into the funnel and also want to make sure that we are not pushing too hard, as Roland said, because the last thing you want to have is artifacts from pull-ins that are not sustainable in the long run then. And what we see and what we also, I think, brought across at the Capital Market Day is that last year, Andreas, the second half of the fiscal year was extremely loaded with large orders on the EDA side. We said that explicitly. We had a fairly weaker first half of fiscal year in 2020. And this year, the pattern is completely the other way around. We did indicate that hopefully to a certain extent, and we do expect that to continue in the second half of fiscal year. But on a grand total for the full fiscal year, we are feeling very well and doing very well with the EDA business, which is also a very margin-rich business. And we are very carefully also addressing software as a service in that field, as we have been flagging out. So from a top line perspective, I think the fourth quarter will be, again, not a strong EDA one, but for the full fiscal year and also for the incremental development years over year, we see a rich funnel in that field, which we will tap on, but we won't push and we will definitely not trade time for content.

Thank you very much. I just wanted to clarify a comment you made in the press call this morning where you talked about an 8 percentage point or roughly that benefit from pre-ordering that could have happened as an indication. What does it relate to the 8%? Is it a percentage point of the order growth or 8% of the total orders?

Yeah, I was not clear on that and I apologize. What I said is if you had a 100% growth momentum up to 10% My gut feeling, because you don't have hard data on that one, up to 10% of that momentum can be or could be attributed to extraordinary impact from orders that are more for buffer stock at the customer side than for the normal course of business. So inflated by 10% growth rate, that's what I wanted to say.

Thank you very much.

You're welcome, Andreas.

And our next question comes from James Moore of Redburn.

Good morning, everybody. Roland, Ralph, Eva. Thanks for taking my questions. I've got two. Thank you from me as well on the ever-increasing color around all of your businesses. But I wonder if I could try a little further on software. You're very clear on the impacts of EDA. I wondered if you could talk a little bit more about the speed of orders and revenues in the core PLM side of software, where it sounds like things are getting a little bit better. And I wondered if we're yet seeing any early impact from transitioning to SaaS at the revenue level. And my second question is a general question, Roland, for you, as lots of my other questions have been answered. Can you comment on your longer-term vision on the portfolio? Siemens has done a lot in the last decade to reduce complexity, but you still have a number of businesses below the line and above the line. And whilst you've been clear on your health and estate for the next five years, as you think out beyond that, for those investors who feel that Siemens still has some complexity, do you continue to see Siemens becoming less complex over the longer term?

Thanks, Chaim. Let me start with the first part of your, with the first question you have been raising on software. And there you wanted to know whether the transitioning to SaaS is having impact on the top line development. Not yet. And we are still very busy discussing and talking to our customers as we did before the Capital Market Day and sharing with you. But no material impact on the top line yet. We are preparing, of course, and that has bottom line impact reflected out again. 100 basis points give or take have been contributed to preparing ourselves for the transition in that regard. And when it comes to the PLM momentum on top line, yes, you are right. We have been very happy with the third quarter's top line performance and also bottom line on PLM side. They have been entering the double digit area in that field and we would love to keep them there.

Yeah, James, and on your portfolio question, I mean, I can reiterate what we said before. Talking about Siemens Healthineers, I mean, we talked about the huge potential, which we do see in that business in particular after having this acquisition, which was supported by us also helping in financing it. And we see it works, and we want our shareholders to participate. Let's take this as one point. The other one, coming to Siemens Energy, Very clearly, we stick to what we said. We want to dilute our share going forward. It has a link, of course, to our current company guarantees, which are going down even faster. And you're going to see that complexity reducing and fading away. And for our portfolio companies, I think the first step we made in Flinders, which we're very happy about, this is something which you could see going forward as a pattern. So we will reduce complexity here as well. And on the other part of Siemens, if you look at Siemens as a company who is really doing that what we are really good at, combining the real and digital worlds as a whole, because that is required from any kind of market we are serving. Is it industry? Is it infrastructure? Is it mobility? If you do that as a whole, then complexity reduces, because that's the pattern that we do, which provides value to our customers, is it in terms of situation, also helping there in the sustainability agenda, And we do that together and in very good examples where we have our smart infrastructure and digital industries coming together, fighting together, SI and mobility, as well as don't forget about the technology backbone which we have, our IoT platform which we are using and scaling across these markets. So when you look from that perspective, complexity goes away. And you see, I hope also going forward, you see a great company performing on what we are good at, which is technology with great people.

Thank you very much.

And our next question comes from the line of Alexander Virgo of Bank of America.

Thanks very much. Good morning, everybody. Just do well. A couple of quick follow-ups, I think, on DI from me. So the first question is on the margins. Just wondering if you could talk a little bit to the mix because I would have thought, given how strong the product and hardware side of the business has been relative to software in the quarter, that the margins would have been a little bit higher. So if you could comment a little bit on that, it would be helpful. And then second one, just on the color around process, it's really good to see the strength in that business coming through so early in what's typically a longer cycle business. So I wondered if you could just talk a little bit to the dynamics of that. Thank you.

Yeah, thank you, Alex. Let me try to give incremental light on the margin development for DI. I mean, first of all, as we said, we are happy with the top line development and we hope you are happy too on that one. At the same time, we do see that we need to make specific and dedicated investments into growth fields. We said that OPEX would go up as we see opportunities to keep the growth momentum going. That is something we indicated and we said before. We also said that we will not be able to maintain the extreme low level that we saw in discretionary spending in the past. We are doing and allowing a change there only very moderately and well thought through. So it's our intention, it's not our intent to allow bouncing back to the pre-COVID levels, but there's also ramping up. And we also continue with our investments into SaaS and also into cloudification there. This is obvious. And so from that perspective, the margin conversion that we do see at the moment, we are happy with that. We also must not underestimate keeping the supply chain stable, as we said, It's a price tag. I mean, price costs have been going up in a double-digit million amount. That's obvious. And that won't go away anytime soon, but we will not sacrifice top-line momentum and margin conversion to try being cost-effective in the wrong place. And also, for the time being, Stabilizing supply chain means also that you need to go extra miles and go into the sport market where you don't have the same pricing power that you typically have with long-term contracts that we have. And on top of that, and I'm not talking DI grand total, but more motion control and like the commodity pricing. So far, we have been not suffering a lot from that increase on pricing levels there. because we were hedged quite well, but that is also something that is going to fade away slowly but steadily, and we need just to accept that the incremental margin opportunities we have are still very favorable, but don't have the same magnitude as we saw them in the second quarter, for example. And with regard to the process industries, I mean, Obviously, this is also driven to a certain extent by geographies. I mean, we said that the U.S., they have been coming back and also did Europe in terms of macroeconomic momentum. And in that field, process industries are benefiting more than in China, for example. And that momentum is going to continue from that what we see and saw also in the third quarter. we do expect further opportunities in that field. And that's also, I think, something, as you rightfully said, typically in a late cycle industry, you would expect that momentum to build up with a delay of some two, three quarters, typically, even though the timing patterns are changing massively under the COVID impact that we saw. Also, including the COVID baseline of last year. I mean, we had a third quarter 2020 that was heavily impacted in the Western Hemisphere by COVID. Therefore, that was fairly easy comps and we would be naive to expect the same growth momentum in percentage points in the quarters to come.

Very helpful. Thank you.

You're more than welcome, Alex.

And our next question. It comes from the line of Simon Tornesson of Jefferies.

Yes, good morning, everybody. My first question is, can I just get a bit more color on why you didn't raise the margin guidance for DI and SI on the back of the higher growth line? supply chain constraints for the year. Is it simply the roadmap situation that you explained, that the incremental headwind here for Q4? Maybe you could also give us some numbers around versus roadmap in Q3 and how you expect that to change in Q4. And then secondly, I'd quite like a bit more clarification on Siemens Energy, if I may. So can you confirm if your commitment to sell down, which you reiterated a few times now, is basically unrelated to the share price now being, or I guess that they're being below the spin-off price, and whether there are any limitations in terms of stake reduction with regard to guarantees, for example, going forward. And also maybe as a follow-up, on the back of your interview, Ralph, in the Handelsblatt, where you said you wanted to be an Encore shareholder for Siemens Energy. What's the timeline on this and maybe an update whether you still expect an anchor in the kind of mid to long term? Thank you.

Thank you Simon and let me start with the last question, the latter one with our shareholding in Siemens Energy. I mean first of all what I wanted to express also in that interview you're relating to is that we are not opportunistically trying to get the best out of the share price and its volatility that is fairly high at the moment, not only at Siemens Energy, but in the whole sector, obviously. And I reiterated then the rationale that we applied when we have been putting together the prospectus and the consequences of that, being that we do not intend to sell down quickly, and we always said 12 to 18 months, if market conditions allow. We are also obliged and dedicated to value creation to our shareholders and therefore I think we will take a prudent decision on the timing that includes the interests of Siemens Energy but that is dominated by the interests of Siemens AG shareholders. So that's the first and foremost. Then secondly, I mean a lot has been said about the unfortunate events at Siemens Gamesa. On the other hand, it's obvious that this is a market segment that has still a lot of potential in the years to come with all the stimulus programs that are going to be implemented in the decade to come with all the ambitious targets on sustainability. And I could go on and on in that field, which I won't do. But at the end of the day, it's still a highly attractive asset to be in for Siemens Energy. And we, of course, take that into our considerations when we talk about shareholding. Anchor does not mean that we need to keep a blocking right vote at Siemens Energy for good, but the driving force there may be that we see unwinding the amount of guarantees that we still hold. It has been coming down substantially by one-third compared to the situation when we have been deconsolidating Siemens Energy, but it's still in the double-digit billion area and therefore no point to discuss at this point in time. But it will come down along the lines that we have been describing, so we need some more time to address and also define in more detail what shareholding we consider to be meaningful at which point in time. So your first question was around the margin guidance and raw material pricing. I have been elaborating on already, won't repeat all that. It has a massive impact. And I mean, for Siemens in total in the third quarter, the net negative impact from changes in that field has been going up into the mid double digits million area. And that may increase Moderately in the fourth quarter, it's not material on company level, but as I said, it has impact on motion control to a certain extent. And therefore, we are mindfully reflecting that in the guidance. And as the guidance is still fairly wide on top line and on bottom line, I think there's also room if performance and market allows to be at the upper end if need be.

Thank you, Rob.

You're welcome.

And our next question comes from the line of Camille Debray of Deutsche Bank.

Oh, yes. Thanks very much. Good morning, everybody. The first question I have is on the revenue guidance for DI. which implies that you don't really expect any sequential increase in organic revenues in Q4 compared to Q3 adjusted for seasonality. I'm really talking about the sequential development here. So how shall we interpret this in light of the outstanding backlog you've just described for the short cycle industrial businesses? And then the second question is, still around DI, but on the impact the technology you have at DI can have on the other businesses. I mean, it's pretty clear, I think, to all of us that DI has a pretty unique expertise in some key technologies like digital twins, IoT, 5G, cloud, cybersecurity, just to name a few. So my question is, What's been put in place to enable all the different business lines to access and leverage these expertise from DI to boost their own digital positioning and offering really across the entire company? So if you could just talk a bit more about the cooperation and the coordination between the various business lines around technology specifically.

Thank you, Gil. Let me take the first question before Roland will be definitely the better one to answer the second one. When it comes to your conclusion that the fourth quarter in revenue on DI cannot be a sequential improvement, I disagree. You may consider in your modeling also the exchange rate impact that I have been flagging out. If you do that nominally, I do not know. On a comparable basis, there will definitely be opportunities to further increase. I'm not indicating that it shall happen, but the target range we are indicating will definitely include an opportunity to sequentially grow revenues for DI in the fourth quarter. But, I mean, let me take it away from the pure numbers. I mean, I said that we are mindful of potential bottlenecks in supply chain on the one hand side, and we also are at capacity limits in our production facilities and the automation part of the portfolio. We, of course, will optimize as good as we can, but there's also technical and physical limits, right? when it comes to the availability of the existing capacity. We are working on that and then it's also about making best use of the technical capacity and having the best possible production program that is on the one hand side reflecting customers and orders and delivery times but also on the other hand reflecting the fact that we do optimize the contribution margin there. And therefore, I think it is fair to say and to expect that we will again see a comparable growth of high single digit, maybe even double digits on revenues in the fourth quarter on a comparable basis compared to prior year's quarter. And that implicitly would mean that we also will grow sequentially modestly.

Let me come to your second question. I'm more than happy to talk about this one. Of course, we're using our technologies and the competencies which we have within DI, but also in other businesses, and leverage that across the company. And I'll give you a couple of ideas what we do here. Let's start with the digital enterprise, where we are really deploying our software capabilities in our own sites, manufacturing sites. We do that. We have a rollout, and this is regardless what kind of manufacturing site it is, what kind of It comes from digital twins. We're using that technology wherever we can. It's starting, and you see that, for example, also in our supply chain management. We are developing a digital twin for a digital cost twin, a digital CO2, carbon footprint twin, which we are using then, of course, across our businesses. We have, as a company, core technologies. which is it's anything around edge devices, AI competences, central twins, but also any kind of automation technology, future of automation. We talk edge devices. We are leveraging the edge competence within DI and SI as well, depending on the applications for hardware and services. The services are really laying across so you can leverage it. We have machine learning core, which allows also mediocre developers to really lose machine learning competencies to develop great applications in the company. We have AI experts, which we are deploying in different areas. So we are working on improving our IoT platform. We are developing microservices and APIs, which we are leveraging across our different applications. And talk about marketplaces, for example. This is something you don't want to develop one by one by one. This is something that we are leveraging also with the acquisition of supply frame to use it for our different businesses. I mean, I get really excited with this question. I can go on and on. 5G technology is another one where we have a very great way how we are deploying now for industrial applications, 5G. We're working on that for the hardware and the related services and using it in different areas as well. So... we do leverage our capabilities across the company.

Thank you, Gary. Thanks very much for this.

Looking at the time, we have three more analysts in the queue, and I just checked with Ralph and Roland, we can go five minutes over time, and I would suggest that everyone limits themselves to one question so we can have everyone really ask what's most urgent for them. With that, operator, please take the next question.

Thank you. And our next question comes from Daniela Costa of Goldman Sachs.

Hi, good morning. Hope you can hear me well. Thanks for taking my question. I'll keep it to one then. And you mentioned in the beginning about supply frame that it was a strategic acquisition for you. I wanted to understand it a little bit better on whether how does that conflict in any sense with your distributors and also sort of what's the forward from here? Is this a one-off or something? that you would consider building on more in terms of portfolio allocation?

So actually, we don't see any conflict with distributors at that point. Actually, I don't have that on the radar. Unlike, it really helps us also in complementing our EDA competencies with the respective marketplace where we're connecting the supply and demand and can multiply that obviously highly. We want also, we are looking into multiplying that coming from the electric-electronic space to really other spaces, mechanical space, and use their platform to really leverage across the company. So therefore, and marketplaces are a very interesting platform because it really plays the whole scaling and networking economy of ecosystems. So therefore, as I said, and as we said in the Capital Market Day, It was a first step, buying our house with an unorganic move into a new market, which is a very interesting market. It is a market which supports our strategic ideas of going for more SaaS business. It's an economy of scale business, and it really supplements also what we are doing in our core businesses like EDA, like software, but others as well. So we are very happy about it, and it developed so far. at or even above expectations.

Got it. Thank you very much.

Pleasure.

And our next question comes from the line of Andrea Kuckner of Credit Suisse.

Good morning. Thank you very much for taking my question. I'll stick to one. And can I ask a broader question on M&A? There seems to be an acceleration in deal flow from your side, and we see that broad across the sector as well. So I wonder if you could comment on the pipeline and whether we could imagine this to be a beginning of more of a trend across the quarters to come. I appreciate it's highly uncertain to come on timeline of closing deals, but if you could talk about the kind of supply and the intensity of M&A. to introduce an offering process. That would be great. Thank you.

Well, first and foremost, let me reiterate what we said regarding M&A deals. What is our guidelines? We have a strategic frame where we want to invest in growth markets, in good profit pools, synergetic, but also supporting our technology innovation as well as sustainability targets. And we also said that we are very careful about... how much money we spend on targets, whether we have the right return two years after, without PPA after closing. So the pipeline, I think we are constantly watching the market. We are looking particularly, of course, as you know, in the digital space and SaaS space, and our skills acquisition is one example, which fits absolutely nicely to exactly what we laid out, adding already on top of a couple of acquisitions we did in mobility in the past. It is supporting our customers' demand, so providing capacity at the end of the day, make it easy to book, bring in more people on public transport, very helpful. And so, therefore, we have a pipeline of targets. We're looking very closely to the market. We have a very active and super, super competent M&A department. I mean, really kudos to whatever they do. But at the end of the day, the headline is focus and discipline.

Thank you, André. Operator, please take the last question.

And we'll now take our last question. It comes from the line of Jonathan Mountsey of Exin, BNP Paribas.

Hi, thanks for fitting me in. So just one question. I'm looking to try to value the portfolio companies and specifically the value JV. So as I understand it, it consists of both put and call options with you and value respectively. I think those options expire at the end of the year. And as I understand it, you then have to calculate the EV. I think it's seven times EBITDA according to value and obviously after debt. and with the loss-making situation, and that within the equity value could be materially negative. And I'm just wondering, you know, if you have to pay to exit the JV with the ongoing cash losses and the final payment, you know, what's the real value here? Is this actually, you know, negative $2 billion or even more that we should be sticking in some of the parts? Could you give us any help there, please?

Jonathan, this is an excellent question and you have been touching on the agreement we have with Valeo and of course we cannot discuss that publicly how we or who is potentially executing the clauses of that agreement. But talking about the real value, I mean, look at the multiples of the very few pure plays in the market. If that is the real value, we are looking to a happy future. The contract may not give the full room to maneuver in that regard and we will, of course, adhere to the legal framework we are under. But the real value of that business is just in the beginning, I would say. The market is building up and there is only very few pure plays in place. Some have been capitalizing on SPACs just lately, getting assets into the market and therefore it's hard to assess. For us as Siemens, the value in there is to a certain extent driven by the execution of the contract you have been referring to, and this cannot be discussed and speculated about in public. I apologize.

Understood. Thank you.

Thank you, Jonathan. Still a very important question, also for me.

Thanks a lot to everyone for participating today. As always, the investor relations team is available for any further questions. To anyone who is on vacation or about to go on vacation, we wish you a relaxing, wonderful summer holiday.