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.

Thank you, Roland, and good morning to everybody. Let me share further details regarding our performance in another eventful third quarter. Our key markets for digital industries such as automotive, machine building and electronics showed continued underlying momentum with some signs of normalization. Book-to-bill overall was at a remarkable level of 1.33, further boosting our backlog in digital industries to more than 13 billion euros. Customer cancellations were immaterial. at a level close to zero. This gives us good visibility for the fourth quarter and beyond. All automation businesses showed massive order growth up by 35%. Software was up around 20% with several larger deals in the EDA business. We are very pleased that automation revenue rose 15% on strength and motion control in factory automation. The team did an excellent job to contain the impact from lockdowns in China. Pricing contributed almost 5% to automation growth in revenue. In the third quarter, we saw some component shortages for high-margin products. Our teams worked hard to mitigate the impact. Yet, we expect the situation to ease only gradually and to remain challenging beyond fiscal 22. Revenue in discrete automation was up 16%. Process automation is on a steady onward path and achieved 8% revenue growth. Software revenue was up 3%, reflecting 20% growth in EDA and ongoing momentum of our SaaS transition in PLM. Comparable PLM revenue was 6% lower year over year. As you know, the faster and more successful we are in our SaaS transition, the higher the negative impact on our revenue recognitions. Margin at 18.3% was somewhat lower than expected mainly due to a less favorable business mix due to the mentioned component shortages for high margin products and focused investments. Restructuring charges of 27 million euros for the native margin impact of 50 basis points were mostly related to winding down the Russian operations. Ongoing cloud investments of 76 million euros accounted for around 150 basis points of negative margin impact on digital industries level and will, as expected, gradually increase in the fourth quarter. We are excited that digital industries achieved an all-time high free cash flow of more than 1.2 billion euros, leading to an excellent cash conversion rate of 1.38%. Higher inventories in automation required to secure future deliveries were more than compensated with continuing high level of advanced payments, mainly in China, and stringent payables management. Of course, we expect advanced payments to normalize once we work through the backlog. Looking at our key vertical end markets for the next quarters, we expect continuing growth momentum clearly influenced by price inflations. We closely watch underlying real investment sentiment, which so far remains positive for capital goods. This is based on current market data, but we remain vigilant in tracking the macroeconomic situation. And, as Roland said, remain agile to react swiftly with cost management if need be. Now let me give you the regional perspective on our very dynamic top-line automation growth. All regions showed order growth above 20% with China soaring by 32%, signaling continuing strong demand. Europe was strong with Germany up 22% and Italy even growing by 35%. Expect a sequential normalization of demand for the fourth quarter and a gradual reduction of order backlog in fiscal 23. Revenue growth in automation was broad-based. China delivered an impressive catch-up race with an all-time high revenue level up by 14%. Germany up by 11% was mainly driven by motion control. Italy showed 17% revenue growth across the board, while in the US, motion control and process automation increased double-digit. Although order backlog is at even further elevated levels, the outlook for the fourth quarter is again largely depending on global component availability logistic constraints, and a still fragile situation in China due to its unchanged zero COVID policy. From today's perspective, we assume high single-digit revenue growth for digital industries with double-digit contribution from automation and a flattish development in the software business due to the ongoing SaaS transition. We expect the profit margin for the fourth quarter to be around 20%, highly dependent on the business mix in automation and the speed of the SaaS transition. Pricing will more than compensate for cost inflation in the fourth quarter with a higher contribution than in the third quarter. In a nutshell, we stick to our annual guidance for digital industries. Now, smart infrastructure continues to deliver and achieved a very strong third quarter performance. Top-line growth was excellent in favorable end markets. Margins were up, benefiting from a gain on the SGS diverse map. In total, orders were up 26%, driven most notably by more than 40% growth in the electrical products business and 38% growth in electrification. Both benefited from major orders of leading social media and software companies to expand their data center infrastructure. Buildings was up 11% on balanced growth in product solutions and the service business. Revenue growth reached 10%. with the largest contribution from the electrical product business up by 18%. Supply chains were again successfully managed by the team. Close to 5 percentage points of SI revenue growth is attributable to price increases. Margin performance of 12.9% was up 150 basis points year over year. It benefited from the mentioned divestment gain and higher capacity utilization related to increased revenue, as well as structural improvements from our competitiveness program, which is fully on track. Headwinds from commodity unhedging, as well as component and logistics cost inflation, were to a large degree mitigated by pricing actions. Free cash flow was solid overall with intentionally increased inventories amid tight supply chains to secure production. This is strictly controlled and will unwind in the coming quarters. Looking at the regional top-line development, we saw strong order momentum everywhere except China, led by the U.S. with a stunning 48%. Revenue increased in all regions except for China with impressive 12% growth in the U.S. China is expected to recover in the fourth quarter since key production sites and important distributors in the Shanghai region are quickly catching up for lockdown-related shortfalls in April and May. The service business delivered 6% growth, led by a clear increase in Europe and the Americas. As in digital industry and markets, we see nominal growth in all verticals, however also driven by price inflation. We watch closely underlying demand, particularly in commercial buildings. Other important verticals, such as power distribution, electronics data centers, and healthcare, show robust growth. Based on this, for the fourth quarter, we see the comparable revenue growth rate to be towards the upper end of our full-year growth guidance. We anticipate the fourth quarter margin to be seasonally strong in the range of 13% to 14%. These expectations are under the assumption of stable supply chains. We expect the economic equation to turn clearly positive in the fourth quarter. Again, in a nutshell, SDI, smart infrastructure, confirms its annual guidance despite the current challenges. As Roland mentioned, mobility's financials in the third quarter saw several extraordinary effects. Orders at $2.8 billion were solid, but lower on very high comparables since mobility booked its largest ever rolling stock contract in the U.S. last year in the third quarter. Nevertheless, we again recorded repeated orders for our market-leading locomotives in the United States and in Europe. We have now sold more than 1,500 Vectron locomotives in Europe. Rail infrastructure showed moderate growth, leading to a solid book to bill for mobility of 1.12%. The backlog stands at 36 billion euros with healthy gross margins. And our sales funnel continues to look very promising, especially for fiscal 23. Revenue was up 4% on broad-based growth in the rail businesses. However, revenue recognition was held back by supplier delays in delivering materials and components for high-margin businesses, as well as pandemic-related effects, such as higher absence rates among our workforce. Correspondingly, these effects trickle down to the bottom line. The reported profit margin of 28.7% contains three major one-off effects. First, we recorded a 739 million euros gain on the divestment of Unix, equaling 30.1 percentage points. Second, we saw further mostly non-cash negative effects from the wind-down of the business in Russia of around minus 360 basis points. And finally, An impairment on intangible assets weighed on profitability with minus 180 basis points. Mobility saw some customer payments shift to the fourth quarter and delivered 47 million euros free cash flow. Therefore, we expect a significant catch-up in the fourth quarter. I want to highlight that Unix divestment proceeds of around 900 million euros strengthened our liquidity outside free cash flow. Our assumptions for revenue growth for the fourth quarter is sleddish, still affected by missing revenue from Russian project and supply chain constraints. Fourth quarter margin is seen mid to high single digit under the assumption of gradually easing material supply strains and logistic constraints. Factory productivity is still not expected on pre-pandemic levels in the fourth quarter. With that, we expect mobility to reach 7.5% to 8.5% margin for the full fiscal year. SFS showed an impressive performance, strongly influenced by charges of 123 million euros related to Russia, mainly resulting from impairments on the leasing business. Higher credit risk provisions weighed on profit as well. This was compensated by an outstanding contribution of 128 million from the equity business, driven by gains on selling stakes and investments as planned at the beginning of the fiscal year. Despite the material negative impact from Russia, from today's perspective, we expect SFS to be at the lower end of the target margin range of 15% to 20% return on equity for the full fiscal year. Now, let me keep the perspective on below industrial business crisp. All details are in the earnings bridge on page 29 in the appendix. Value creation at our portfolio companies is in full swing as we speak since we recorded the post-tax gain of around 900 million euros from the sale of the parcel logistics business early in the fourth quarter. Our stake in Siemens Energy resulted in a very heavy non-cash burden of almost 2.9 billion euros in the third quarter. After a further significant decline in the Siemens Energy share price during the third quarter, we had to take a non-cash impairment amounting to 2.7 billion euros on our 35% stake in the company. Technically, the book value was reduced prior to the impairment by the third quarter at equity loss and PPA effects amounting to a negative €152 million. In financing eliminations and other, we recorded significant Russia-related impacts at corporate treasury totaling €442 million, resulting mainly from funding Siemens' financing and leasing business. In addition, we booked a non-cash revaluation loss of 125 million on the stake in ThoughtWorks. For full fiscal year 2022, we now expect a negative amount of 500 to 600 million euros for this line item. Since the net loss was driven by a non-tax-deductible impairment on the Siemens energy stake, the tax rate came in at a mathematically negative 67%. Due to this technical effect, we now expect for the full fiscal year a tax rate between 35% and 40%. Excellent free cash flow performance in the third quarter again highlights our ability to deliver strong and consistent free cash flow throughout the year on stringent working capital management across all businesses. At a time when non-operational impairment effects on our P&L distract, free cash flow is a true parameter for our operational strength. We are very confident to continue this path despite supply chain constraints and a high level of advanced payments. I want to point out and underpin that 2.3 billion euros of investment proceeds in the second half of fiscal 22 are strengthening our liquidity on top of free cash flow. This and the current share price level have been giving us room to accelerate our share buyback sharply with more than 650 million euros buyback volume only in the third quarter. It is totaling now 1.1 billion euros since the start of the program. The non-cash impairment impact on net income weighed also on industrial net debt over EBITDA, which remained stable at 1.6 times. With continuing strong free cash flow and divestment proceeds, our balance sheet is very strong. We will continue the leveraging as promised, and at the same time, we will assure another year of strong total shareholder returns. After an eventful quarter, let me briefly summarize our EPS pre-PPA guidance considerations. At the beginning of fiscal 2022, we started with a guidance range of 8.70 to 9.10 euro. This included an expectation of around 1.5 billion euros in portfolio gains. We now expect to record portfolio gains from divestments of around 2.2 billion euros which is around 700 million ahead of expectations. What we could not foresee at the beginning of fiscal 22 were mostly non-cash wind-down effects from the exit of the business in Russia. So far, we have recorded a negative 1.1 billion euros impact on net income. There are 572 million in Q2 and 558 million in the third quarter. Both higher than originally expected portfolio gains and strong profitable growth in industrial business will help compensating for this impact. This leaves us with a non-cash impact from Siemens energy impairment of 2.7 billion euros, equaling 3 euros and 37 cents on EPS pre-PPA. To sum it up, we adjust our EPS pre-PPA guidance range only for the non-cash Siemens energy impairment resulting in a new guidance range of 5 euros 33 cents to 5 euros 73 cents. Let me now close with all other Outlook KPIs. For the Siemens Group, we continue to expect growth of 6% to 8% in comparable revenue and a book-to-bill ratio above 1%. Digital Industries continues to expect achieved comparable revenue growth of 9% to 12%. Profit margin of 19% to 21% is unchanged, including an expected reduction of up to 2 percentage points from fast ramp-up of the strategic transition to software-as-a-service. Smart infrastructure continues to expect comparable revenue growth in the range of 6% to 9% and a profit margin of 12% to 13%. Mobility continues to expect revenue on the prior year level. Due to the mentioned headwinds, the profit margin is anticipated to be in the range of 7.5% to 8.5%. With that, thank you for your attention, and I hand it back over to you, Aoife.

Thank you, Ralf. We are now ready for Q&A. I would appreciate it if you could limit yourself to two questions per analyst at the beginning so everybody gets the opportunity to raise their questions. Nash, please go ahead and open the Q&A now.

Thank you, ma'am. 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 one on your telephone keypad. Again, ladies and gentlemen, please press star 1 on your telephone keypad. And our first question comes from the line of Martin Wilkie from Citi. Your line is open. Please go ahead.

Thank you. Good morning. It's Martin from Citi. So my first question is on demand in Europe and especially in Germany. And thank you for the detail on your views of the low demand direct risk of potential natural gas shortages, but there's a lot of worry, obviously, about indirect effects from your supplier, your customers, and so forth. You obviously still have double-digit order growth in Germany in the quarter in both DI and SI, and you've kept the growth out the same for these divisions. So what are customers telling you about their own plans to mitigate the risk, and is there risk to your own order conversion? Obviously, I'm particularly interested in energy-intense markets like chemicals, I guess, but we'll continue your thoughts more broadly. Thank you.

Yeah, I mean, you're asking now for the secondary risk, so to speak, because as we elaborated already that we are a low-intensity, energy-intense company, and our exposure is to energy. The energy market, just 1% of our purchasing volume, or gas, is rather low. But let's talk about our customers and their respective risk. And here we talk about energy-intense customers like chemicals, steel, metal, cement, glass. Of course, there could be an impact in their production processes and their output. But since we are active in the investment business, so we are enabling basically our customers to make their transformation to be more sustainable, to be more resilient and to deviate. from gas if they use it into other resources if possible. So therefore, what we see is that if that happens, it triggers basically also some tailwind from us because we help them in their sustainability transformation, making their processes more efficient and again diversifying from energy resources. So therefore, short-term impact, I would say it's more on our customers' processes itself. But we're sitting here really with our portfolio on the answer to the problem.

Great, that's very helpful. And can I ask a second question unrelated on software and digital? You obviously acquired brightly during the quarter. You talked today on MobilityX. It has been a perception in the past that seems very digital industry-centric when it comes to software. So just to get some sense, how integrated are the offerings across the divisions now? And to what extent can SI Mobility benefit from the investments that DI has already made? Or are we going to enter a sort of an investment cycle of software in those divisions as well? Thank you.

The short answer to your question is Siemens Accelerator. What we do here is that we are building basically a platform which covers the whole portfolio. And as I said, it makes our portfolio interoperable modular. So that means if a customer jumps on, let's say, an application on the shop floor, and they want to go carbon neutral at the same time, they can plug and play solutions from smart infrastructure, building X, for example. It's interoperable. We are sitting then on the same database. We have data lake solutions, which enable us to really giving access for applications to all the data in the background. So this is obvious when you talk about, for example, customers like Mercedes, where we go for the most modern digital automated electric car manufacturing plant, which is at the same time carbon neutral. This is exactly where you can pull on our portfolio. So the basic idea is having, number one, a platform where you have modular and interoperable solutions, flexible solutions, including our low-code solutions where you can write quickly applications. Secondly, this is also a horizontal lever and a leverage of our ecosystem because you can imagine that the partners which we are pulling, is it third-party application developers or is it IT companies? They would benefit of, let's say, sitting on a platform which covers industry, which covers infrastructure, buildings, mobility. And the third element, of course, is the marketplace itself, which is not that easy because remember we are going to sell software services, integration services, hardware, IoT-connected hardware services. And this marketplace makes the customer journey easy, again, for solutions, which cutting across different applications, but also the transaction. So we are very bullish in the way that we see a platform that Siemens Accelerator can help our customers to make their transformation even faster, better, and make us scale.

Great. Thank you very much.

We'll take the next question from Ben Oglow from Morgan Stanley. Your line is open. Please go ahead.

Thank you. Good morning, Roland, Ralph, and Ivo. I hope all are well. My first question is really just trying to get some more color on the situation, particularly for digital industries in China. Can you tell us, and Ralph, you always give us a nice sense of what's going on in terms of the distribution channels So where are we in terms of inventory, sort of restock, destock in China? How was the momentum throughout the second quarter? And obviously we've heard from some of your competitors that things did pick up quite notably into the calendar third quarter. Can you sort of confirm that? And then within China, are there any end markets or any segments which particularly are standing out, either in terms of acceleration or deceleration? Thank you.

Thank you, Ben, for the question. I mean, DI China is definitely one of our strongholds, as you could take from the figures I already mentioned. And I mean, let me first say the strong momentum in the market that we saw in the third quarter when it comes to new orders was really outstanding. That's why I said over time we probably will see some normalization. In terms of the channels, there are no material artifacts that I could observe throughout the third quarter. I mean, they all also struggled with logistical challenges, obviously, and probably made sure that they get as much of meaningful stocks onto their grounds but this was not really a material impact from our point of view over the course of time so what is the most important message maybe is that the factories have been recovering after the lockdown effects in April and May, and they are now in full swing again in June. Otherwise, we couldn't have been making it to that very top of the results in revenue in the third quarter. Now looking at the catch-up in June, did that continue in July? As far as we know, momentum has been keeping up in July. When it comes to revenues, as always, the first month after the quarterly close in new orders is a bit weaker. So there's a kind of quarterly seasonal pattern baked into that one. I would not over pronounce that for the full quarter when it comes to new orders. But as I said, a certain normalization is going to kick in sooner or later and then the unwinding of the backlog, which is not only strong in levels, but also strong in quality. is going to unfold its beauty mostly in fiscal 23 then. The automation remains strong, but I would also like to mention here that from a software perspective, there's also quite some interesting projects out there. Talking About the different verticals, I would not point out anyone in particular. I mean, we do see the high-quality market segments benefiting, obviously, also from the policies of the political scene there. And as always, there's a strong undercurrent when it comes to food and beverage and also other hybrid industries there. that start not from scratch but pretty much from a high-quality level as their capacities expand from the very beginning. So whenever there's greenfield, we are there to make sure they start with the best possible technology on the way forward and that seems to be highly appreciated.

Understood, thank you. One sort of broad follow-up really to Martin's question. about the German gas situation. Obviously, we all understand that no one exactly knows what is going to happen. But could you just give us your broad opinion, not a forecast, on what may happen to German industry? And in particular, I'm thinking about whether the burden of this is going to be sort of equally shared between different sectors and as opposed to concentrated on the more energy-intensive ones we all know well, petrochemical, steel, or whatever it might be. Do you see this being a sort of playing out across auto, machinery, electrical equipment, all of these areas, or do you think it's actually going to be more concentrated in any one area? How are you calibrating it in terms of the whole of German industry?

This is a good question. As you know, if it comes to the contingency plans or measures and if it comes to allocation of gas, first and foremost, it's regulated on a European level and then on a country level. Actually, the plans are not regulated. written yet, so they are sorting it out. If it comes to allocation, who is first to be served and or last to be served? But what I see is that our government is really listening closely to our industries, to our leaders, in order to, let's say, avoid any kind of disruption of supply chains or ramping down any kind of particular market segments, which has a huge impact. And you have always these effects. Let's say, let's take chemicals. Now, chemicals go into so many different products. If you ever stop there, then you have a counter or a follow-up impact, knock-on effects, which is tremendous. So I do believe that we are in a very good and a very solid discussion to sort it out in a proper manner. How it plays out, it really depends on how much gas do we get, how fast are we in saving gas at the end of the day, V means Germany and Europe, and how strong the winter would be. And actually we are talking not only about winter in 2022, but also 2023 looking forward, because if we come out of this winter with a low storage that we have already looked into the next winter. On the positive side is that this diversification of looking now for LNG terminals, floating LNG terminals is ongoing. There are some ships arriving. I think in total they ordered five. Two of them are coming earlier, some later. We are about to build another connection from the harbor to our grid. So that will happen. Last point is in each crisis lies an opportunity to. So I do believe that all the actions which are triggered now in terms of to diversify away from gas wherever we can. Remember I said we are using gas to 90% to heat and only 10% for the process. To diversify, to use technologies in order to really get rid of this dependency and make our industry more resilient is I do believe a positive one. We see opportunities for technologies and Just thinking about the business model of Germany, buying cheap gas, make high value out of it and sell it then in industries. If that is burdened by a higher price of gas or primary energy, it drives innovation all along the value chain. And this is, I do believe, finally makes us stronger. And Siemens has actually technologies in place which helps making this transformation.

That's very interesting. Thank you very much for the time.

The next question from Andrew Wilson, JP Morgan. Please, your line is open.

Hi, good morning. Thanks for taking my questions. Can I start on a... I guess it's a bit of a follow-up to Ben's question on China, but I was just hoping you could try and quantify the impact that the, I guess, supply chain, if we can call it that, disruptions that you had in China in the Q3... What was the impact on sales and margins from that? And it's probably a question for DI, but I'm interested in, I guess, comments across the group.

Andrew, I think that's really hard to tell because there is temporary effects that are compensated then quickly and there is a kind of sustainable impact for more than a quarter than maybe. What is important, however, is that we are winning in new orders, occupy the marketplace. and then have an opportunity to deliver and convert into revenues and finally into profit and cash. I think we have been demonstrating impressively that we can manage that. So give or take, having a lower profile business mix for a week or two is nothing that we would track. Overall, I think capacity utilization has been fairly high. The mix in DI has been not the best we could have in the first two months of the quarter. We even had standstills on the SI factory side, as mentioned before, that had to come back then. But then it's about catching up and getting that program that you can manufacture in the the best possible format to catch up quickly, also acknowledging our customer needs and making sure that we stick to that what we promised as soon as possible. So therefore we don't look at that number of potential opportunity costs or opportunity losses which are temporary in nature. But the fact that we stick to our full fiscal year guidance in margin, despite of all that, what I mentioned should give you confidence that we will bounce back as quickly as possible. And we are determined and prepared to do so.

Thank you. That's helpful. And maybe unrelated, but just to try and, I guess, follow up on the additional Russian charges and

accelerated program there is this the end of the the charges and the cost related or should we expect more to come at some point it was from russia yes you can refer to russia yeah yeah um i mean first of all uh i think we have been very transparent on what happened in the second and the third quarter and just to repeat the numbers and run them again We had 89 million on a pre-tax basis charges on mobility for Russia. We had another 24 for the other businesses which are core in our portfolio. The SFS impact on the Russian leasing company was 123 and for treasury which is financing that and we have been very transparent also in the second quarters with the very derivatives for ruble hedging. had a negative impact of 442 in the third quarter. All that grand total after tax was then the 558. On the way forward, in a nutshell, the residual risk is in Russia all about unwinding our leasing business. As I mentioned before in the last quarter and also earlier today, this is a regulated industry. We need to adhere to the rules of the regulator and we are working on a very meaningful solution. Unfortunately, I cannot share details with you at that point in time without harming that solution. Therefore, you need to be patient. But you can be confident with me that the remaining exposure is rather small in nature and if at all neutral or close to neutral to cash flow. And from that perspective, I think we have been digesting the biggest part of the challenge. If and when there will be incremental P&L impact, I can't predict properly because the triggers for that are not under my control. And therefore, I think it's fair to say that there is a residual potential P&L risk, mainly non-cash, of low to mid triple-digit million. And that is then, I think, the last step to conclude on the chapter in Russia. Beyond that, also technically speaking, if you ask me, I'll give you the full nine yards, of course, there is a potential OCI recycling because historically exchange rate impact does not go through P&L but is ending up in equity when it refers to the assets in the country. After a longstanding history of 170 years in the country, you can imagine there's quite something happening potentially in store, but if and when that would materialize, again, non-cash is completely out of my control, because eventually that comes with a deconsolidation of a company, and in times when you need to think about expropriation and the like, you speculate on timing.

Thank you very much for the detail. Very welcome, Andrew. Next question, please.

The next question we will take Alex Virgo from Bank of America. Operator, please open the line for Alex Virgo.

Thanks very much. Morning, Roland, Ralph, and Eva. Hopefully you can hear me. I had a couple of questions, please, one on free cash and one on SaaS development. I think on free cash, the development there has been very strong. I wondered, Ralph, if you could just give us a little bit of color around the positives and negatives here. I imagine strong orders being a pretty good tail. wind, but then inventory and networking capital management may be a little bit more of a headwind. So I wondered if you could do that for us. That would be very helpful, particularly in reference to DI. And then second question, probably more for Roland, on SaaS development. I'm curious there, seeing that SMEs are now close to 70% of customers. I think it was more like 50% last quarter. and your new customer share is now close to 60%. So I wondered if you could just talk a little bit about the dynamics around existing customers versus new as we think about how to model and think about the growth in that business over the next 12 months. Thank you.

Yeah, Alex, thanks for giving me an opportunity to talk about 3K Flow. We are really thrilled by the development, and we hope you are too. First and foremost, I think this is now paying back what we have been investing for for many years now. I think it was three or four years back when we started to talk with you about the fact that we have been investing really getting grip around our operating working capital in a way that we never had before. We have been putting incentive schemes in place to underpin that momentum and I think we are now kind of reaping the fruits of that very hands-on kind of asset management that we now believe is best in class. Where are the extraordinary momentums coming from? I mean, first and foremost, I think we are mindful of having the best possible inventory levels to serve our customers. So therefore, there is a tendency to have more inventories on board that you would typically have in a steady state, all normal surroundings. But we also in particular in DI are in a very favorable position because there's a relatively high level of advanced payments being made. In particular in China, 30% give or take is the normal there, which has not been ever seen in the industry over a longer period of time. So that is kind of compensating for that and is paying for the higher inventory levels, if you will. We are also working with accounts payable, talk to our suppliers and get a double win situation with meaningful financing in place for them. And therefore, I think we have a very mature process in place at the moment. Way forward, of course, we are not naive and we do not expect the high advance payment levels are going to be there for good. So therefore, there will be an unwinding. I mentioned that in my speech. And that's going to take place when the backlog is unwinding, which we do foresee to happen to a large extent in fiscal 23. But for the current fiscal, I think it's fair to say that we are very confident to keep the high momentum that we have in place for free cash flow from operations in place, not only but also for DI. So, yeah, I think that's in essence what we do and what we are building our views on. But let me also use the opportunity to once again stress that the proceeds from the divestments that we make are not showing up in the free cash flow, but are still there. very much strengthening our balance sheet and therefore we can very consistently, I think, say that we have a firm grip around the balance sheet as well and can therefore pay for investments like Brightly from those proceeds without harming the structure and gearing of our balance sheet at all.

Let me come to your question on SaaS. We are very pleased with the progress which we made here. And as you said correctly, we are pleased our strategy plays out of having now expanding our customer base into small and medium-sized customers, also new customers. And in order to give you a little bit of an idea of the momentum which we have here, Let me share with you a couple of numbers which might be helpful. Let me talk about the customers. We started in Q1 with 450, Q2 with 800, and now we're up at 1,100. And to add orders, we started in Q1 with 550. We climbed to 1,300 and now 1,500. And similar goes with the contracted value for hybrid SaaS or SaaS business, which is coming from 88 million to 150 million to 170 million. So we see that we are really picking up momentum. The strategy plays out. and the attractiveness of our business model of, number one, reducing the entry barrier for getting into the new business, getting access to the best technology which we have on the market with lower pre-investment, and expanding our customers' place out.

Thank you, Tobias.

Thank you very much. Our next question comes from Gail Deprey from Deutsche Bank. Gail, please go ahead.

I have a couple of questions, please. Firstly, could you elaborate on the pricing dynamics in orders in SI and DI, and in particular, how these pricing dynamics compare with the 5% or so price increases we've seen in revenue so far? And then secondly, on the high level of advanced payments in China, I mean, it is something new because I have not often heard about prepayments in the factory automation market before. So I guess it's largely because of the extended delivery times, which certainly give you better negotiating power now. But my question is, do you think these more favorable payment terms will actually remain structurally more favorable in the long term as your products appear to be in such great demand, at least vis-a-vis competition today.

Thank you, Gail. I mean, the advanced payment situation, as you rightfully pointed out, is extraordinary in nature and was unseen in that market also to me as a long-timer. I think it has been kind of implemented at a period in time when new orders with relatively long delivery time had to be underpinned somehow with also – Let me call it confidence, that we are sure that there is no artifacts in it. And once I think that situation is going to normalize, that delivery times are coming down again and we get back to normal, there's a high likelihood that this special moment in the history books of short cycle business may disappear again. It's hard to predict whether this is going to be a long-standing pattern in the market. If it would be so, we'd be happy to have it. And we also think that only an industry leader in technology can kind of enforce and keep that up and running for a longer period of time. But in essence, we don't speculate on that. We just take it as we go. And that's why I mentioned that the results in our free cash flow that you see now is not driven by advance payments only. This is kind of paying for the higher inventory levels at that very point in time. And once we normalize and unwind that special situation, also inventory levels will go down again correspondingly. So the net impact in total on free cash flow momentum may kind of be a wash at that point in time then with give or take timing differences. That was also the reason why I pointed out that the whole system that we established around managing our working capital and the assets therein has been developing really very successfully and we believe we are on a high level of maturity in that regard and can build on that. This is one of the pillars why we believe that we may say that we have been shifting paradigm and we shared figures with you. Our cash flow on sales is really impressively increasing over the last two and a half years and that is one of the sources why we are so confident that we can afford also accelerating our buyback program at the same time being active in portfolio management also on the buying side like Brightly and Boldon's and still can promise our shareholders a total shareholder return and sticking to our dividend policy way forward. So pricing in new orders is relatively easy compared to that. I think what you see at the moment in terms of revenue is the result of pricing action we took before. We are actively managing what we call the economic equation and the whole team in each and every business is committed to compensate potential cost inflation, be it labor or material, by incremental productivity and pricing power. And this is the moment of greatness. That's what we call it when we talk to our teams. Then there is a real proof point in the market. whether you are leading in technology, are an enabler for your customer, both in digitalization, productivity on their end, and sustainability. And therefore, we are very encouraged by the momentum that has been created, and pricing power is just an indicator for the strength of our portfolio.

Okay, that's great. Just maybe on the... on a separate topic. I mean, do you have any update on the spin-off process for the large drives business?

No.

Okay, very clear, I guess. Thanks very much.

Thank you, Gail. The next question comes from Andre Kugnen from Credit Suisse. Andre, please go ahead.

Yes, good morning. Thank you very much for taking my questions. I want to start with one on mobility, where you talk about fundamentally this being firmly a double-digit margin business. Obviously, your Q4 guidance does point to a healthy degree of improvement from the kind of slower Q3. But do you think 2023 will be the year when this business does hit that double-digit margin mark?

So let me give you a little bit of background why we're saying that this is fundamentally a double-digit business. Let me start with our order backlog. We are sitting on a 36 billion order backlog. And the gross margin quality, which we are tracking here, is higher in this quarter than it was all the six quarters before. Secondly, obviously, you recognize that we have a lot of one-time effects. I mean, Russia, which hits us in Q3 with 360 base points. Then we have our... impairment of intangible and intangible asset, which is due to activated R&D. This is not normal practice. This was more an exception. So thirdly is that the supply chain topics, they hit now our high margin business infrastructure, which is impacted. You can see that clearly. And then obviously we have COVID, which hopefully is fading away as we speak. Next thing is we are in a technological leadership position. Infrastructure where we have the only company has a proper signaling in the cloud offering. highly cyber secure? Is it rolling stock where we have the most successful high-speed platform but also the most successful locomotive in the world? Then we have a great manufacturing footprint. That means less sites which large scale, which allow us to really play on the volume. Then we are diversifying. I mean, of course, the Russian market is down now, but we are making strange progress lately in the United States and North America. You saw that. but also in India and in Egypt, so North Africa. And then last point is that we are working actively, our management works actively on the business mix. So gearing for high margin business, which is rail infrastructure, again, taking supply chain topics aside. It's product and component business, including locomotives. We treat locomotive as a product because it's just standard. Is it increasing our service share? Also the digital revenue, digital business, but also working out of platform, which comes with lower engineering costs and less risk on any kind of non-conformance. And of course, we want to combine it with a high-margin service business, which is also taking care for recurring revenue. So therefore, we are quite confident and have in mind that we are sitting with that business on a secular growth trend. in order to decarbonize the mobility sector. So all in all, we believe that this is a business which has a lot of potential.

Great, thank you. And if I may, a second question is kind of much broader. It's kind of going back to China and digital industries or kind of automation space specifically. We have seen some push for localization recently. over there and some evidence of market shares of Western players starting to erode in maybe more sort of simple products like servers and inverters. We see your market share continue to hold up at a remarkable high level for large PLCs, but obviously the local players continue to try to address that space. What I wanted to ask about is what are you doing to future-proof that business, and would you go maybe as far as developing a secondary brand in China specifically?

So good point. Obviously, and rightfully so, we are taking the local Chinese competitors serious. So we look very closely to them, how fast they grow, what kind of product they launch. And maybe we look even closer to them than to the international ones, because here we do strongly believe that we are capturing market share again and again and again. So what is our answer to that? Number one is we are, since many, many years, we are already really deeply embedded and localized. We have local engineering, we have engineering sites, research sites, we have manufacturing sites, supply chain. Then I would not think it's a good idea to go with another brand. Because our brand is really, really, really strong, in particular in the DI space. And then comes a very important point to highlight here. Whereas many competitors, they come from a kind of a low-end kind of technology. And we started off there too. So it means decent functionality, but lower in price slash cost. We started early off also in really going into the Chinese market with top technology. So let's take PLCs on the one side, but really AI-enabled PLCs. This is really technology which is now demanding the market. So it's not a, let's say, low-price, low-functionality market anymore. It's really an innovation-driven market. And we have the right team locally in order to revive this innovation. I would not say that we are looking for another brand, but we're looking for eventually also dedicated products which we develop there in China for China with our local team and that make us, stick us out compared to the competition. It's also, it's a credit for the 150 years of history which we are celebrating currently in this very same year in China.

Great. Thank you very much for your time.

Thank you, Andre.

Looking at the time, we still have four analysts in the queue, and I would really like for everyone to be able to ask one question. So could we please switch to one question at this point? And the next question will come from Simon Tennyson from Jefferies.

Yeah, good morning, Roland, Ralph, and Aoife. On your DI backlog, you said, I think it's 14 billion plus, I think it says in the slide. And tell me if I'm wrong, but I would say automation would be close to 10 billion, maybe 9 or 10. That's more than two-thirds of this year's automation revenues. You said cancellations, I think, were close to zero in the quarter. There just seems to be a huge disconnect between where we'd likely be heading in developed markets, many calling for a recession, next year and your likely revenue growth over the next 12 months, unless we obviously see huge cancellations. Supply chain easing obviously should help you a lot as well. I know you won't give guidance yet, but in your view, Ralph, you were CFO for my industry business back I think from 2008 onwards, i.e. through the financial crisis, and you've seen downturns in the cyclical businesses. and seen when cancellations can build up. What's different today would be appreciated.

Simon, thank you for that question. As you rightly stated, having experience with downturns and backswings and the like, you start thinking about that before it happens, or at least you try to. Let me go through your line of arguments one by one. First and foremost, you're not far away from reality with the 10 billion automation backlog out of 13 that we have, 13 plus in DI at the moment, so very strong and extraordinary. extremely high and also high quality. I would like to underpin that again. We are very intensively tracking any cancellations. If there is any, as I mentioned, close to nil, and if any, that is not extraordinary in nature or there's no trend or something that can be seen around that and then you start thinking what could potentially happen how to unwind that backlog and when does it happen and how i mean obviously at some point in time new orders will be lower than sales then over a certain period of time that will then be just normal and we are prepared for that and i'm sure you also are prepared for that unwinding the backlog in terms of coming back to that what is normal is implicitly asking two questions. One of them being what is the new normal thereafter and also what is the dynamics of the unwinding that will also be driven to a certain extent by scarcity of critical components from our suppliers and If I try to get all the complexity out and look through what's going to happen, I think it will not completely unwind throughout fiscal 23. We will carefully watch all aspects, indicators, early warnings, if there would be cancellations. But the big, big difference between now and post-Lehman is is going to be around the way our products and solutions are embedded in our customers' business plans and cases. With the offering we have now, we are deeply embedded in their new business models. which includes huge transformative action on their end as much as on ours, is implicitly critical for their success in their changing markets and is driving digitalization and sustainability at the same point in time. That wasn't on the plate back then. Then it was more opportunistically changing and adding capacity, if I may take it to a black or white mode now, We are by far more embedded in the value chain and in the strategic framework of our customers. And that, I think, is going to make a big difference in how the unwinding process is going to materialize. That doesn't mean we are naive and leaning back and watch what happens. We are close to our customers, and the more we feel that we are seen as partners and the more we are partnering with them in more holistic solutions for new challenges in their markets, the better we feel on the way forward. This is going to materialize and is making a double win out of that, what looks like an artifact in the books as of today.

Thank you, Rob. Thank you very much. The next question comes from Phil Bala from Barenburg.

Yeah, hi. Good morning. Thanks for taking the question. Obviously, there's a lot of challenges out there which you're navigating well, and I know the focus is on execution. But from a shareholder standpoint, clearly, it's difficult to focus just on the underlying when there's a big impairment and the shares are up 30% or so year-to-date. Ralph? I think you said, you know, you'll ensure that this is another year of strong returns to shareholders. I know we've already seen the accelerated buyback. I was wondering if you could comment on thoughts in terms of increments or anything else that would support your shareholders in the near term, perhaps in relation to the health and ears holding, for example.

Well, Phil, first of all, I appreciate that you appreciate that we have been making strong statements on total shareholder return that we will live up to, certainly. As I said, we have been coming out with a new dividend policy which we feel completely committed to. We also have been accelerating the share buyback, which is also, I think, a very meaningful component of the TSR policy. And we are delivering on a profitable growth path, including portfolio management on an activity level that has never been seen at Siemens. I think you agree upon that as well. So the priority to execute consistently on our strategy and also on making our businesses more successful means outgrowing competitors and improve margin quality also mid-term. We are financing a really comprehensive SaaS transition without any harm to our shareholders. And I think that is really a quite strong equity story for the time being. I know that you guys would love here talking to us about the health in years and also maybe other elements of our portfolio. We believe that we have a portfolio in place that is really outstanding. They're connecting dots also into the fields of the health and years at a certain point in time. I'm sure we will discuss that. But at the moment, we are focused on executing in a very, very challenging business environment. And we believe we are doing this outstandingly well. We are extremely transparent on matters. And I know we are kind of challenging you a lot with the many moving parts we have. We didn't choose them. But given the fact they are there. It will take time to digest them on your end, but we have been providing all the ingredients to do so, I believe. And I'm very confident that over the next couple of hours and days, the market will look through that based on the transparency we have been providing. And there's no way around making Siemens an even more valuable asset in the portfolio of your investors.

Thanks.

Thank you very much. The last question comes from James Moore from Redburn. James, please take us home.

Thanks, Eva, and good morning, everyone. Thanks for taking a question. I think all of mine have been asked, so could I switch to DI software? You mentioned the 20% growth. That's a pretty strong number, but you mentioned very strong in EDA. I wondered if you could give us a flavor for EDA versus PLM and... Any other dynamics you're seeing within the software order environment?

Thank you, James. I have been literally waiting for that question. I mean, first of all, the 20% EDA growth, I mean, that's quite something. And, you know, this is chunky business. It doesn't repeat itself quarter over quarter. So therefore the time horizon to look at that meaningfully is rather a year than a quarter. So we are quite confident that we are getting onto those accounts which are really helpful for us in EDA. And we are also looking forward to a relatively strong pipeline that we foresee for the fourth quarter and the quarters thereafter. As I said many, many times, this is an underlying paradigm and really key principle for all of us. We don't push customers. Customers call, and we provide solutions according to the lines of their call. Pull-ins and things like that may be an artifact for a quarter and a single event, but it's not a strategy. Therefore, we wait for the customers, and those customers we are addressing on the PLM side with the SaaS transition, as Roland has been, I think, very impressively explaining, with 70% of small and mid-sized companies embarking on a change journey with Siemens. This is a high level of trust. confidence and we are building on that and we see that as a point that we are doing the right thing at the right time there's momentum created with the SAS transition we have been transparent with the investments we make the 76 million I mentioned it will be even higher in the fourth quarter we said that Those transitional years, 22-23, is an investment period. It won't hit more than 200 basis points to the overall P&L margin of DI. I think that's also very transparently made. And therefore, the momentum on the PLM side's top line is really difficult to assess in a comparable manner. Therefore, we just share the numbers as recorded with you. Minus 6% I think is good, even though it sounds sarcastically. And the fact that we are winning new customers exactly along the lines of the structure we intend to do. getting more access to SMEs and still have access to the large caps and having a strong pipeline for EDA way forward. This is an ideal mix. Next year or for the next year, we may be in a position to share more details with you then on our expectations. But at the moment, just let's reconsider together that this is only the third quarter of implementation and all the KPIs we use to steer and run the business we are sharing with you. I can't add anything at that point in time and I need to ask for your understanding.

Thanks a lot to everyone for participating today.

As always, the team and I will be available for further questions. Until we talk again, enjoy your summer and please stay healthy and goodbye.