Siemens AG ADR Earnings Call Nuggets: Stabilizing End Market Demand and Imaging Order Trends

Siemens AG ADR (NYSE:SI) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Stabilizing End Market Demand

Ben Uglow – Morgan Stanley: A couple of questions. First of all, on the short cycle businesses and particularly Industry Automation, I was trying to get a sense, I mean, I see where the orders are down roughly 12% year-over-year and sequentially down about 9%, but what I’m curious to understand Joe just in a qualitative sense, when you look at that business and I am maybe little bit of (indiscernible) as well. Do you get the sense that the end market demand is stabilizing, and can you give us a sense of what happened during the quarter, particularly in the big markets like Europe and obviously China. So that was question number one. Question number two, I mean what an unexpected surprise to see a €51 million profit from NSN below the line. Can you give us a sense of what is driving the improvement there? Is it simply cost reduction or is the pricing in the end market little bit better and how sustainable is this situation within NSN and does it at all change your ability or your desire at some point (offload) the asset?

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Joe Kaeser – CFO: We basically start answering the question of Ben, let me maybe summarized the way I have seen Q1 developing, we believe overall it’s quite an uneventful through quarter, which we like at this time because obviously there are some uncertainty out there and we are overall satisfied with the quarter and there have been quite a serious of excellent achievements if you just look about for south Industry Automation and also Imaging. (indiscernible) also to recognize our areas that we need to step up our efforts. We have been somewhat slow on the transformation charges which in a way would suggest that we are obviously slow in ramping up the productivity as a matter of fact is not true. As many of you know that Siemens conservatively booked the charges mostly only if there is agreement with the workers representatives, so one should not assume that slow start of transformatory charges would suggest any delay in our efforts to step-up precocity and cost out, and obviously we do know that there are some areas where management will be focusing on since they continue to trend unfavorably. That is the transmission area that they could access in the North Sea. There is some challenges in solar and obviously we deal with the trends. As I said in the summary, we are satisfied with the quarter and we work diligently on improving our profitability as we move along. Now, then let me come back to your questions on the short-cycle environment, we had – what do we see; I mean obviously our three areas, which we look at that’s China, that’s United States and that’s Europe and predominantly in the German environment that (there we see) tool making, and automotive working from a very high level and we do not expect that high level to increase; it’s actually more a downward trend slightly in Germany and also in the Northern part of Italy and the tool making environment. So that’s where in a way also some weakness has been shown in terms of bookings in industrial automation. So now United States is still pretty strong. We do expect that to continue. Now, the question really remains when will China kick in and provide some necessary relief and growth by year end. If you look at China, we do see some signs of encouragement, especially in the CPU environment of industrial automation, which would actually suggest that manufacturing activity picks up, but then we also do see that there is still some volatility in the sell-through from (disti) sell-in to end market sell-out. So it remains quite an area of focus as we talk about China. On NSN, and obviously it’s true, we’ve seen decent profit and the majority of that profit has its root cause by these significant restructuring, which NSN has been going through. Remember, we – NSN announced job cut of 17,000 people; more than 11 of that have already been leaving the company. So there is quite a cost reduction here, which also drives profitability, but a same token, I have to say that the focus NSN now is providing towards mobile broadband also helps the mix because as low margin value-add services have been pretty much cut down and that will also provide a decent mix improvements. So is that sustainable? Well, I mean the overall market conditions in that area have not changed. It is a complicated market from both the operator, as well as the OEM. NSN has cut the window now, because they have been ahead of the curve in terms of cost reduction and this is what NSN needs to use to foster its position.

Imaging Order Trends

Andreas Willi – JPMorgan: Two questions please, first one on imaging, in terms of the order trends there. Obviously you have some – you are exiting some businesses overall in healthcare and have some other items in there, maybe you could give us some indication of what the order trends where just in the imaging business and how you expect that to develop in ’13? The second question on Transmission, ABB has kind of more formally announced that they are going to exit from basically the lower margin contracting business, because there is just not enough margin in these business anymore. What should we expect from Siemens in terms of kind of the impact from being more selective, what’s kind of the amount of revenue you could lose while you improve profitability in that business.

Joe Kaeser – CFO: Thanks, Andreas, on imaging healthcare. I mean, obviously, we are very satisfied with the performance, especially in that the division. If you look at orders and revenues, I would not be too surprised if we see another strong quarter in fiscal Q2. Reason being that the division is highly competitive in terms of its offering. Secondly, the China strengths, which the division has been building up years ago by local design and local manufacturing, now is bearing fruit. We continue to see a very robust growth in China and associated economies in the region on the back of an extremely weak order intake environment in Europe, especially in Germany. So that’s what we see in healthcare. As I said, we like what we see in imaging compared to what we have achieved in Q1, and we would also like to see (in order) like what we see in terms of our competitive behavior in this space. This is somewhat different if it comes to transmission. Some of you might have heard me say that we believe – I believe that transmission will not be a great place to be for several quarters in row. That’s first of all has got to do with our challenges in the wind grid access in the North Sea that we are operating at obviously gross margin zeros with that real dilute earnings as we move along until the orders are being fully finished. Secondly, there is a lot of overcapacity in the transformer environment predominantly in the distribution transformer environment. The pricing issues continue also the substation environment. So that’s a complicated space. We like the announcement of the market leader to look into pricing and if this pricing would be a feasible option and the market accepted that Siemens certainly would not be in the way to get more profitable orders rather than many orders. So, profitability is here in the focus and the top line growth at this point in time has got second priority. The transmission division needs to fix its challenges which we have in projects and then also make sure that there is enough consolidation in the transformer environment and that’s what we see and that’s what we do.