Siemens Ag Spons Adr

Good morning ladies and gentlemen and welcome to Siemens 2022 third quarter conference call. As a reminder, this call is being recorded. Before we begin, I would like to draw your attention to the safe harbour statement on page 2 of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mrs Eva Rizad-Uba, Head of Investor Relations. Please go ahead ma'am.

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 IR 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 up to 90 minutes. Since there's a lot on the agenda with that, I hand over to Roland.

Thank you, Eva. Good morning, everyone, and thank you for joining us to discuss our third quarter results. As we all witnessed, recent months have again been challenging with significant geopolitical and economic turmoil. Our focus has been on successfully managing through a complex environment, and there are many strong points that give us confidence. demand from customers for our technology and portfolio remains strong. As technology leader, we also captured significant market opportunities and continued our top-line and excellent cash generation momentum. Looking into the next 12 to 18 months, we are vigilant and watch developments closely. Our teams are working based on several scenarios to prepare for managing through challenges in an agile way. Be it potential risks from gas and energy availability, be it supply chain constraints from the pandemic, or be it impact from cost inflation and rising interest rates with knock-on effects on the economy. We have also analyzed in depth the risks from potential gas shortages. At present, we see only minor direct effects on our manufacturing locations as our production is not energy intensive. To put it in perspective, direct energy supply is only around 1% of our purchasing volume. Importantly, our electricity demand in Europe is sourced close to 100%. from renewable sources purchased with foresight and hedged long-term. Regarding potential restrictions on natural gas supply, we looked at every site in Europe. We only use natural gas in a few subsectors in our production and have a comparatively low demand for natural gas overall. Take Germany, for example. Siemens had a gas consumption of around 280 gigawatt hours last year, of which only around 10% is used for production and 90% for heating. We have already taken precautionary measures to safeguard our production operations in the event of a gas shortage. And of course, we are focused on operational execution and continue to balance the economic equation of rising costs for labor and supplies with pricing actions and productivity measures. For our short cycle businesses, we continue to expect a positive price versus material cost balance in fiscal 2022. For the months to come, the businesses have a tight grip around OPEX to protect margins. On the positive side, these developments paired with increasing reshoring approaches and labor have a clear mid-term beneficial catalyst effect for our business. The urgency has increased for companies and entire societies to speed up fundamental transformation. Accelerated automation, digitalization, resource efficiency, and decarbonization are a crucial part of the answer to reduce dependency on fossil fuels and increase resilience. These changes are a perfect match with the core pillars of our strategy. Our products, software solutions and service portfolio are geared to address these secular growth trends. Global presence has been a key characteristic of Siemens since its foundation and is fully reflected in our balanced and focused global footprint. We localized entire value chains with local development, procurement, manufacturing, or service delivery around our three largest markets, the United States, Germany, and China. Our concept of twin factories such as Amberg and Chengdu in digital industries with digital transparency on capacities and inventories provides flexibility to shift production between sites in an agile way. This positions us in an optimal way to actively manage geopolitical risks. And we continuously work on further de-risking supply chains through qualifying additional sourcing channels and expanding existing partnerships. Our focus is on mitigating impact on our customers as far as possible. Now, let's look at key operational highlights of the third quarter. As I said, our customers continue to invest in their automation and digitalization transformation and improve resource and energy efficiency through electrification. Book the Bill reached 1.23 times on extraordinary order growth momentum of 2020. 32% in digital industries and 26% in smart infrastructure across most customer segments. Overall, revenue growth was at 4%, led by double-digit growth in digital industries and smart infrastructure, while half in years normalized on lower sales of coronavirus anti-gene tests. As expected, the lockdowns in China in April and May limited output and impacted overall productivity. However, the team did a tremendous job to rapidly catch up during June. We see this to continue in the fourth quarter. I'm particularly proud of our digital industry's automation business. Once again, clearly gaining market share with revenue up by 15%, despite challenges in the supply chain. The SaaS transition in digital industries is fully on track, delivering annual recurring revenue growth of 13% and a share of cloud ARR of 12%. Again, up three percentage points from last quarter. What really matters is consistent and strong free cash flow generation, which differentiates us from our peers these days. As a focused technology company, we achieved a step change compared to the past. Be it in the last quarter, where we delivered excellent 2.3 billion euros free cash flow, and even more important for the full fiscal year 2022, where we expect to achieve again more than 11% free cash flow in the percentage of sales around the level of fiscal 2020. In addition, we received 2.3 billion euros proceeds from divestments by early July, which enabled us to accelerate our share buyback program and provides ample liquidity. Following the 2.7 billion euros non-cash impairment on our stake in Siemens Energy, we adjust the group guidance accordingly for this accounting-driven earnings impact. Excluding this, non-operational impairment, our original commitment remains intact. This is quite an achievement considering that we have accelerated the wind down in Russia, which resulted in further write-off effects of almost 600 million euros in the third quarter. Russia effects were seen mainly related to Siemens financing and leasing business and in mobility. Looking at the backlog quality, I'm confident mobility is fundamentally a double-digit margin business. The combined effects of the Russia exit, pandemic, and component shortages require us to adjust our margin expectations for mobility for the fiscal year, and Ralph will give you more details. I'm particularly pleased with the progress of our strategic initiatives to drive digital and sustainable business and simplify our portfolio. We deliver tangible proof points in execution even in challenging times. All in, we saw a solid operational performance with continuing growth momentum. As indicated, orders reached an impressive level of €22 billion, up organically by 1%, leading to a record high-quality backlog of €99 billion. Revenue grew 4% to almost 18 billion euros. Main contributions came from the Americas up 10% and Asia-Australia up by 7%, led by India and Korea, while China was flattish due to the COVID-19 lockdowns. Softness in Europe was solely due to declining sales of COVID tests. Industrial business profitability of 17% included a 440 base points again from the sale of Unix by the mobility business. EPS, 3 PPA came in at €1.52 excluding the impact from Siemens energy impairment and all in amounted to a negative €1.85. A core strategic lever for value creation is our goal to grow the digital business annually around 10% until 2025. And we are on a strong growth trajectory, already achieving 4.7 billion euros year-to-date and well on track to exceed 10% growth rate in fiscal 2022, despite the ongoing SARS transition in digital industries. To further fuel high-value growth, our smart infrastructure team took an important step with the acquisition of the software company Brightly, a US-based leader focused on asset and maintenance management solutions. Brightly will add around 180 million US dollar revenue, mainly from software as a service, with 800 employees serving around 12,000 customers in an attractive double-digit growth market. Together with our existing portfolio, we are a frontrunner for digital buildings and built infrastructure operations. The grid software business in smart infrastructure teamed up with Esri to bring grid planning and operation to a new level. We will complement Esri's rich source of geodata with our grid modeling and simulation software to boost the creation of a holistic digital twin. Customers will benefit through much better grid models, more reliable data exchange, and more effective grid management. Technology to accelerate the energy transition. Another compelling example for the power of ecosystems comes from mobility. A partnership network launched by Siemens Mobility facilitates collaboration between different stakeholders to reduce complexity for mobility as a service solutions, making integrated transportation simpler in cities around the world. As a significant next step in the implementation of our digitalization strategy, we launched Siemens Accelerator together with customers and partners end of June. This reaffirms our high-value digital growth targets and will enable even faster innovation. Siemens Accelerator is an open digital business platform to enable digital transformation for our customers of all sizes in industry, buildings, grids, and mobility. Easier, faster, and at scale. Now what makes Siemens Accelerator unique? It comprises three main building blocks. First, a curated portfolio of IoT-enabled hardware, software, and digital services. from all Siemens businesses and certified partners. They cover a rich offering from connected sensors and field devices, edge computing cloud services, software, and applications. Step by step, we will transform our entire portfolio to become modular, cloud connected, and built on standard APIs. Our offerings and those of our partners will adhere to the same design principles of interoperability, flexibility openers, and as a service. The recently launched new grid software suite and the smart building suite Building X are built on these design principles. Mobility will follow soon at the upcoming Innotrans with a renewed Mobility X software suite and Religent X applications for digital services. The second building block, is a strong and growing ecosystem, building on existing partnerships with IT companies, including Accenture, RTOS, AWS, Bentley, Microsoft, and SAP. A further pillar are also industrial partners, as well as small and medium-sized companies. More than 50 partners were certified at the launch and the network is growing fast. The third building block which will evolve over time is a marketplace to facilitate interactions between customers, partners, and developers. A great example of how the Siemens accelerator is a tectonic shift in what can be achieved in ecosystems is the enablement of the industrial metaverse together with our partner, NVIDIA. We share the same vision as NVIDIA. By connecting Siemens' holistic physics-based digital twin models with NVIDIA's photorealistic visualization and AI competence, we can create immersive simulations in real time. People can collaborate across the globe in the industrial metaverse to solve real-world problems such as underperformance of production lines in the virtual world and in real time first. This results in faster and more confident decision making through digital twins and provides productivity and sustainability across production and product life cycles. It is the ultimate combination of real and digital worlds. When looking at the strategic transition of our DI software business, mainly for our PLM business towards software as a service, I'm pleased with the progress. As I mentioned in our highlights, the transition is fully on track, which is clearly visible in the financials. Looking at customer acceptance, we saw a high flip rate of 76% of PLM renewables, covering almost 80% of the total contract value. As anticipated, the change in accounting towards recurring revenue translated into lower PLM revenue and profitability in the current quarter. Around 2,350 customers have signed on to the Software as a Service business model in the first nine months of the fiscal year. So far, almost 70% of customers were small and medium enterprises, among them many new customers in line with our ambition to expand our customer base. In addition, we ramp up our customer success management activities to drive revenue with the adoption of further functionality and applications. To sum it up, our own digital transformation, as well as the digital enablement of our customers, suppliers and partners, is fully on track. As I said at the beginning, sustainability impact is a core driver for investment decisions of our customers. A landmark example is the signed contract for the new 2,000 kilometer rail system in Egypt. This fully integrated system of trains and rail infrastructure for high-speed commuter and freight lines will strengthen the economy through safe and reliable transport with less travel time. Compared to previous passenger travel and freight transport, more than 1 million tons of CO2 per annum will be saved. Further benefits are the creation of 40,000 jobs and local skill development. Execution of this major project with 8.1 billion euros total contract volume has started. So far we recorded around 300 million orders and down payments year to date. The remaining order booking depends on the timing of financial closing and is expected for the vast majority during fiscal 2023. Across all businesses, we have great examples how customers built on our technology and industry-specific expertise to transform their businesses and drive sustainability. The Digital Industries team is implementing a holistic, fully automated, fully digitalized approach for the Skeletons Greenfield project to produce next-generation supercapacitor cells, a crucial component to reduce emissions and save energy. This strategic partnership has potential for even more. With the newly acquired SenseEye team, we enhance our service for SaaS solutions for AI-based predictive maintenance to reduce downtime and optimize efficiency. The education sector is a crucial vertical for smart infrastructure. Among several high-profile projects, we have started a partnership with the University of East London to collaborate on their net zero carbon aspiration by 2030. It will optimize energy efficiency and build up renewable energy infrastructure. Data captured across the campus will serve as living lab for researchers and students. Siemens Financial Services invested equity together with Volkswagen to support Electrify America's expansion plans for its North American ultra-fast public charging network. With charging stations and the grid management software portfolio of smart infrastructure, we are well suited as a technology partner for Electrify America. Our mobility solutions are, by definition, sustainable, so I briefly mention only two highlights. A multi-year rail infrastructure project came to a successful close with the opening of the Elizabeth Line in London And we received the first commercial order for our game-changing hydrogen trains. All these examples demonstrate how sustainability creates significant business momentum for us. In addition, we made further progress in implementing our degree ambitions. And I want to highlight two topics. In the last customer sustainability rating from Ecovades, we made clear progress compared to 2021 and positioned ourselves amongst the best 4% within the industry peer group. Equally important is the report card from our own employees. People Net Promoter Score reached with 37, the highest level ever at Siemens. And in general, scores above 30 are excellent and reflect a strong bond between employees and Siemens. Finally, I want to emphasize that we executed all actions to optimize our portfolio by finding stronger buyers while creating substantial value and cash for the company. The carve-out process process for large drives applications is in full swing, and we continuously evaluate our portfolio if a better owner can develop a business in a better way. A further recent example is the divestment of NEMA low-voltage motors to ABP. With KILS and Brightly and several smaller bolt-on acquisitions across the company, these trends in software and digital service offerings and we expect to continue this path. With that, over to you, Ralph. Let us take a closer look at operational performance and further financial details.