Release Date: August 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Siemens AG (SIEGY, Financial) reported healthy growth and margin expansion in Q3 despite a muted macroeconomic environment.
- The company achieved a book-to-bill ratio of 1.05, driven by strong performance in Smart Infrastructure and Siemens Healthineers.
- Order backlog stands at a robust EUR113 billion, setting the company up for future profitable growth.
- Smart Infrastructure delivered an excellent quarter with EUR6 billion in orders, up double digits.
- Siemens AG (SIEGY) achieved consistent free cash flow performance of EUR2.5 billion in its Industrial Business.
Negative Points
- Orders in the automation businesses came in slightly lower compared to the prior year quarter.
- Economic activity was muted, particularly in China and Europe, leading to weak investments and demand in core markets such as machine building and automotive.
- The software business saw exceptional large license contract wins that are not expected to be repeatable to the same extent in the near term.
- The automation business saw a material decline in profitability due to reduced capacity utilization.
- The market environment remained challenging with subdued production output at many customer industries and soft investment sentiment in key regions such as Europe and China.
Q & A Highlights
Q: Hi, good morning. Thank you very much for the time and for taking my question. I wanted to ask on the DI side. Clearly, the inventory challenges are ongoing. But I wanted to ask around underlying demand in both I guess, US, and Europe primarily. One of your competitors was quite vocal recently on customer investment decisions being deferred and delayed. And I'm just trying to understand, is that the primary challenge? Or is it just generally weak underlying sentiment? And if you can kind of wrap that up, I guess, for DI as we look into next year?
A: Well, thank you, Andrew, for that question. Let me put that a bit into the broader picture, if you allow. I mean on the macro environment, it's just the fact that latest economic KPIs and outlook indicates still muted growth momentum for production output and customer demand, especially in our key regions in Europe, where the latest PMIs have been down again. And also in China, where still no incremental positive from PMI, and also the incremental money supply and credit impulses didn't unveil a major impact in the market so far. China as such, the market sentiment is still weak and China structural changes, especially the downturn in the property sector which is extremely important for the country, are having negative impact on the private sector and also on consumer confidence, obviously. So, which actually results then in weak spending and price-based competition leading to downward pressures across the board. I think that's fairly known. So in a nutshell, the latest development of macro KPIs doesn't suggest a major momentum coming up anytime soon. So the current situation for the key verticals in China and also applicable actually for the export-oriented countries in Europe is that, overall, we do see some sporadic positive tendencies in rather consumer-related industries like electronic style, food and beverage. Also in early cycle industries like chemicals, we mentioned that before. But key verticals such as automotive and other OEM industries are still fairly muted. So currently, there is no clear indication for the onset or potential onset of a material recovery. So let me quickly walk you through the different verticals, starting with automotive. I mean, obviously, a sequential decline in global production year-over-year driven by Europe and Japan, while China and the US at least had some positive momentum in the growth path in that industry. We do anticipate further slowdown in upcoming quarters as backlog support has expired, and uncertainties regarding the global economy lead to rather cautious purchasing of new cars. And that implicitly has secondary effects, obviously, on capacity buildup in that industry. On the machinery side, there's further contraction, yes, yet with far less downward dynamics as we saw that before. It's actually slightly stronger in China and it's been stabilizing in Japan, Korea, Taiwan. But the contraction of production has been continuing in Europe. And also to a lower extent, in the US, consumer and building-related machinery fire is suffering from higher interest rates and destocking, while process and project-related machinery seems to be less affected. So assuming rising pressure for European and American machinery builders, machinery manufacturers, due to low prices in Asia as soon as destocking expires and end customer investment demand is to be recovering. So on the short term, we do expect a stabilization of the global production following by moderate recoveries in '25, including also a difference between the regions, where especially Germany seems to face structural adoptions suffering from weaker demand domestically and also from China. Pharma and chemicals, in aggregate, there's a modest positive development. I mentioned that before, chemicals are somewhat better than pharma. And chemicals continued to turn around production as overstocking effects were further melting down in that industry, and China grew in the double digits. Europe, up moderately. US, rather stagnating. So I think that's early indication, but too weak to build a trend on. For food and beverage, the global production is modestly upwards developing, but also not really changing in the greater scheme of things at the moment. Electronics and semi, on a global production, further gaining momentum led by Korea and Taiwan, obviously followed by China. US are also on a moderate growth path and Europe is still contracting. We do expect some delays for new investment activities as current projects have to be finished first, obviously, before new projects are entered. But we do expect a clearly higher level of activity in fiscal '25 in that space. And last but not least, in aerospace and defense, there's positive development, obviously. And we do continue to expect expanding production with some moderation in dynamics as production ramp-up is limited by logistics and quality hurdles, obviously, in a regulated industry, as you do know. So from that perspective, I think it's still a mixed basket, and it would be too early to conclude that there is a sustainable and consistent momentum building up. But the early indicators, like chemistry, do suggest that at the end of the year, we may have a clearer and more reliable picture on the way forward. Then just taking that off the table, also the question of stocking and destocking in China. We have been regularly reporting on that, and I would like to again give you full transparency on the matter. The three layers of stock building, own backlog, distributor stocks, and OEM stock, they all have been coming down slightly. And the latest information I received when I talked yesterday to my Chinese CFO was that the distributor stock has been coming down from between 13 and 14 weeks to 12.5. Does that move the needle? Not yet, I guess, but at least it's an indicator. The outbound sales of the distributors are still on the same levels pretty much so, so too early to declare victory on that trend then. But we were very, very close to it, and we will use each and every opportunity to update ourselves and share that with you. When it comes to our own backlog, compared to the last quarter, that has been coming down by some RMB800 million and is still the same amount over and above, that would be, would consider a normal level to be in. Same thing on the OEM stock coming down slightly, but still some way to go, around RMB1 billion of renminbi still sitting in OEM stocks that typically is close to 0. So in a nutshell, there is another, give or take, RMB4 billion sitting in different stock levels, translating into EUR500 million, that needs to unwind in China before we have a clear and also reliable view on the way ahead. And as we said before, and this is still valid, no material change in that one. We do expect China to come back to normal after the first quarter of fiscal year '25. Mathematically, we end up between end of January and February, but there will be a lot of uncertainty in the statement. So in a nutshell, the big, big question of when does short-turning orders that literally materialize right away in revenues, that needs to be answered before we can give a consistent short-term view on matters.
Q: Good morning, everyone. Thanks for the opportunity. Could I turn to the profitability in DI and the outlook. You've seen nearly 20% for the first nine months, but you appear to be signaling closer to 14% in the fourth quarter. And I understand that we have software
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
