Siemens AG (SI) Q3 2012 Earnings Call July 26, 2012 4:30 am ET Executives Mariel von Drathen Peter H. Loescher - Chairman of Managing Board, Chief Executive Officer, President and Chairman of Equity & Employee Stock Committee
Peter H. LoescherThank you, Mariel. Welcome, and good morning to everybody. Before I walk you through Q3, let me give you a brief perspective on key macroeconomic indicators relevant for our business. Overall, the near-term global GDP growth expectations have come down and are somewhat sluggish, with growth rates around 2.7% for 2012 and 3% for 2013. We have seen quite a cooling down in demand in important end markets that are driven particularly by the export-oriented German industry, as you can also see from the current IFO level or VDMA numbers. The investment climate in our -- in a number of Western European countries remains very weak due to the ongoing austerity measures and restricted access to and high cost of capital. In addition, important emerging markets, like Brazil and India, have lost speed as well. The lower growth level of industry value added in China points also weakening investment in certain customer industries in China, like machine tool builder, rail equipment or automotive. We don't expect any recovery in our end markets in China in 2012, but we believe that growth could resume in the course of 2013. All in all, we expect economic environment for Siemens to be challenging over the next couple of quarters, and thus, cost efficiency and productivity need to be in the forefront of our management approach. This leads me to the performance in this third quarter, which was mixed with, on the one hand, positive developments such as continued revenue growth and on the other hand, some disappointments in order intake and profitability in some businesses. The macroeconomic environment has weakened in a number of our key markets during the current quarter, which clearly affected our bookings. Growth rates have softened now also in Germany, while the BRIC countries are increasingly impacted by a lower demand from the worldwide customers. As already indicated, this has had a subsequent negative impact on the structural mix of our short-cycle businesses.
Our order intake decreased substantially by 27% from an extraordinary high level of last year, where we booked a much higher volume of large orders in Energy and Transportation & Logistics, including the, if you remember, the EUR 3.7 billion ICx order in Germany. Therefore, our book-to-bill decreased to 0.91, but we expect to see a rebound to above 1 in the fourth quarter. Our backlog remains at EUR 100 billion, supported by translation effects of the weakening euro.We achieved moderate revenue growth of 3%, driven by continued backlog conversion in Energy and impressive competitive strength in our Healthcare sector. Profitability clearly exceeded the prior year level, which was substantially burdened by the Areva arbitration decision and the particle therapy reevaluation. Fossil and DX delivered strong earnings, however, profitability was impacted by higher OpEx in all sectors and significantly lower contribution from the industrial sector. As for OSRAM, we stick to our original plans to deconsolidate the asset but changed our primary plans. Since market conditions continue to be highly volatile for an IPO, we decided to pursue a spin-off to our shareholders as the most probable part of divestiture. This option requires shareholder approval at the next AGM in January 2013, and Siemens still intends to remain an anchor shareholder in OSRAM. Though our strategic intent remains the same from an accounting perspective, this results in a significantly negative noncash P&L effect in discontinued operations through a so-called cumulative catch-up of depreciation and amortization related to OSRAM. For the record, here is the overview of these key figures for the third quarter. These challenges are reflected in our regional split of orders and sales in the third quarter, the lack of large orders, particularly in Energy and the Rail business, compared to a strong prior year weighted on growth rates in Europe and also the U.S. The major driver behind the 28% order decline in the U.S. was the expected expiration of the U.S. tax benefit scheme on renewables, which led already to a sharp decline in new wind orders.
In transition -- in Transmission, we are intentionally more selective and focused on profitability. The decline in orders in Europe is broad based across all businesses but clearly dominated by tough comps due to the ICx order of EUR 3.7 billion booked in Q3 last year.The emerging markets held up well with a stable development year-over-year despite the 5% order decline in China. For example, Russia was up 24%. Middle East and India both grew by 7%. As a consequence, the share of the emerging markets in order intake reached a high level of 38%. Our sales growth was very broad based, with particular strength in the U.S. showing a 10% increase. This was mainly driven by Energy recording to high double-digit increases in the wind and Transmission business. While we saw some weakness in revenues in China and India, other emerging markets, like the Middle East or second wave countries, compensated for this and held the share of emerging markets constant at 32% of revenue. Read the rest of this transcript for free on seekingalpha.com