Siemens AG (ETR:SIEGn) (OTC:SIEGY (BCBA:SIEGYm)) reported a resilient third quarter in 2024, showcasing growth and margin expansion even amid a challenging macroeconomic backdrop. The company's book-to-bill ratio stood at a strong 1.05, driven by performance in smart infrastructure and Siemens Healthineers, with a significant backlog of EUR 113 billion. Despite a decline in automation orders due to subdued industrial activity, primarily in China, Siemens confirmed its fiscal year 2024 outlook, emphasizing its strategic investments in electrification, decarbonization, and digitalization.
Key Takeaways
- Siemens' book-to-bill ratio reached 1.05, indicating healthy order intake versus billing.
- The company's backlog is robust at EUR 113 billion, paving the way for future growth.
- Smart infrastructure and Siemens Healthineers are significant contributors to the positive performance.
- Orders in automation businesses have dipped slightly, reflecting weak investment sentiment.
- Siemens remains committed to its full-year guidance, with an emphasis on leveraging the backlog for future profitability.
Company Outlook
- Siemens is confident in its financial performance and plans to capitalize on opportunities in key growth areas.
- Full-year guidance for revenue growth is projected at 8% to 10%, with profit margins expected to be between 8% and 10%.
- The company plans to continue investing in smart infrastructure and digitalization, including expanding its switchgear factory and bringing a new data center competence center online in India.
Bearish Highlights
- Automation orders have been impacted by reduced industrial activity, with discrete automation down by 28% and process automation down by 13%.
- The pricing environment in China is challenging due to competitive pressures.
- Digital industries' revenue growth outlook is negative, with expected revenue to be 4% to 8% lower than the prior year.
Bullish Highlights
- Smart infrastructure delivered double-digit growth, with orders up 11% and revenue growth at 10%.
- The data center business is expected to see significant growth, with orders and revenues projected to increase by more than 50% and around 30%, respectively.
- Siemens Healthineers continues to drive growth, contributing to the company's positive book-to-bill ratio.
Misses
- Elevated inventory levels, particularly in China, have led to delays in automation orders.
- The software business is expected to see a softer performance in the fourth quarter compared to the previous year's high comparables.
Q&A Highlights
- CFO Ralf Thomas highlighted the muted growth momentum in production output and customer demand in Europe and China.
- The company is investing in cloud-based activities to improve resilience and profitability.
- Siemens is confident in the structural demand for automation and the growth potential of its DI software business transitioning to SaaS.
- Share buybacks will continue, potentially at an accelerated pace if market conditions are favorable.
- Siemens anticipates better free cash flow performance in Q4, with a 99% conversion rate in Q3.
Siemens AG remains poised to navigate the muted macroeconomic conditions, with strategic investments and an emphasis on smart infrastructure and digitalization leading the way. The company's solid financial performance and robust backlog provide a foundation for future growth, despite the challenges in the automation sector. With a commitment to technological leadership and market exploitation, Siemens is set to continue its trajectory in the electrification, decarbonization, and digitalization landscapes.
InvestingPro Insights
Siemens AG (SIEGY) has displayed a remarkable financial resilience, as evidenced by the latest metrics and insights from InvestingPro. A standout feature for investors is the company's perfect Piotroski Score of 9, indicating a very strong financial position. This score, which assesses the company's financial strength, is a composite measure considering profitability, leverage, liquidity, and operating efficiency.
InvestingPro Tips also highlight that Siemens AG has not only raised its dividend for 3 consecutive years but has also maintained dividend payments for an impressive 33 consecutive years. This consistency underlines the company's commitment to shareholder returns and financial stability. Additionally, Siemens AG is trading at a low P/E ratio relative to near-term earnings growth, suggesting that the stock may be undervalued considering its growth prospects.
From a data perspective, Siemens AG's market capitalization stands at a robust $135.55 billion, reflecting its significant presence in the Industrial Conglomerates industry. Its P/E ratio is currently at 16.95, and the PEG Ratio, which measures the stock's price relative to its earnings growth, is an attractive 0.73, hinting at potential undervaluation when factoring in its earnings growth potential. Furthermore, the company's revenue growth over the last twelve months is at a stable 2.54%, showcasing a consistent top-line performance.
For a deeper dive into Siemens AG's financials and additional InvestingPro Tips, investors can explore the comprehensive analysis available at https://www.investing.com/pro/SIEGY. There, you will find a total of 8 InvestingPro Tips that can further inform investment decisions and strategies.
Full transcript - Siemens AG DRC (SIEGY) Q3 2024:
Operator: Good morning, ladies and gentlemen, and welcome to Siemens 2024 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 harbor statement on page two 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, Mr. Tobias Atzler, Siemens’ Investor Relations. Please go ahead, sir.
Tobias Atzler: Good morning, ladies and gentlemen, and welcome to our Q3 analyst call. All Q3 documents were released this morning and can be found also on our IR website. I'm here today with our CEO, Roland Busch; and CFO, Ralf Thomas, who will review the Q3 results. After the presentation, we will have ample time for Q&A. With that, over to you, Roland.
Roland Busch: Yeah, thank you, Tobias, and good morning, everyone, and thank you for joining us. Before I discuss our financials, let me briefly touch upon yesterday's decisions of the Supervisory Board. The extension of Cedrik Neike's contract will allow us to build on our strength in the digital industry business, and it underscores the confidence of the Supervisory Board in Cedric and the Siemens Managing Board. The appointments of Veronika Bienert and Peter Koerte to the Managing Board are an important step forward. They will contribute an impressive experience in finance, strategy, and technology to our team. And I'm also delighted that Jim Snabe plan to continue to serve as our Chairman of the Supervisory Board for another two years, of course, subject to approval in the next AGM, his continued support in executing Siemens’ strategy is vital to the entire team. So now let's continue with our Q3 performance. We delivered healthy growth and margin expansion in the third quarter, despite a muted macroeconomic environment. Let's begin with the key takeaways. The robust top-line momentum of our business shows the continuing demand from our customers to drive their digital and sustainability transformations. Book-to-bill reached a positive level of 1.05 driven by smart infrastructure in Siemens Healthineers. Our backlog stands at a strong EUR 113 billion, setting us up well for further profitable growth in the future. Smart infrastructure delivered another excellent quarter with EUR 6 billion in orders up double-digit. Digital industries was sequentially up, driven by exceptionally strong software business where we very successfully executed in our rich sales funnel and recorded several large license contract wins. Yet orders in the automation businesses came in slightly lower compared to prior year quarter. The economic activity was still muted, particularly in China and Europe, leading to the weak investment sentiment in core markets, such as machine building and automotive. Recent macro indicators point to continuing challenging conditions for industrial demand. On this basis, we expect demand to develop slower than previously anticipated. Stringent backlog execution led to clear revenue growth of 5% to EUR 18.9 billion overall. The largest growth contribution came from smart infrastructure up by 10%, while Siemens Healthineers grew by 4%. Digital industries revenue was on par with prior year with very distinct developments. Automation saw a lower contribution from order backlog and soft demand from fast turning short cycle product orders. This decline was offset by the exceptional large license contracts in both PLM and EDA. These wins, which will not be repeatable to this extent, drove revenue in the software business up by a stunning 82%. I'm again, very proud of the electrification business in smart infrastructure, showing great competitive strengths with an excellent growth of 21%. We are benefiting from AI-driven momentum in the data center market, as well as great expansion from the accelerated transition to renewables. Strong execution led to industrial business profit of more than EUR 3 billion, equaling 110 basis points of margin expansion over prior year. All businesses improved profitability with the largest contribution from smart infrastructure and Siemens Healthineers. We achieved consistent free cash flow performance of EUR 2.5 billion in our industrial business. After delivering robust performance in the first nine months of fiscal year 2024, we will continue to focus on leveraging our order backlog through stringent execution. In short cycle automation businesses, we continue to drive sales efforts, targeted product development, and rigorous cost management in a challenging environment. Therefore, we confirm our group outlook for fiscal year 2024, and Ralf will give you further details on the individual businesses. In addition to executing on operational performance, we continue to make good progress in driving our long-term strategic priorities. Our smart infrastructure offering is at the core of driving sustainable infrastructure transformation. We will foster organic growth through targeted investments in production capacity and manpower with industry-specific know-how. We are a key player for our customers to scale sustainability impact. This was recognized for the first time award of the Platinum medal by EcoVadis for Siemens. I already talked about our key financials in brief, and I'm pleased that the team delivered strong financial performance across matrices. The decline in orders is predominantly influenced by the very tough comparable mobility due to prior year's record high order intake. Macroeconomic dynamics and exceptional software license wins were also reflected in our regional revenue growth distribution. The Americas were strong with 11% revenue growth driven by the United States, while EMEA was down 3% on weakness in Germany. Asia-Australia increased by 12%. EPS pre-PPA came in at a healthy EUR 2.66. Well-known secular trends of electrification and decarbonization drive the infrastructure transformation. A tripling of electricity demand by 2050 through the electrification of everything, mobility, heating and industry requires large-scale renewable power for decarbonization and puts immense pressure on aging grids. Besides investments in products and systems, grids and buildings are undergoing a digital transformation through software and digital services. Customers are investing to leverage large amounts of data and advanced analytics to optimize asset operations. This is supercharged by the AI-driven demand for computing power and data center capacity. With exposure of around 60% to grids and around 40% to buildings, our smart infrastructure business is perfectly geared for these secular growth opportunities. This is clearly visible in its impressive top-line development with consistent book-to-bill ratios well above 1. Therefore, we will further invest to match rising demand. On top of material investments in the United States for electrical equipment capacities, which will start production in the next quarters, we are again expanding our switchgear factory in Frankfurt. With a high degree of automation and digitalization, we will ramp up our capacity for our SF6 blue-GIS medium-voltage switchgear portfolio. Supporting continued soaring demand, we are bringing a third center of competence for data centers online in India for the Asia-Pacific region. This complements our existing centers in the Netherlands and in the U.S. We bring execution competence and the latest technology close to our customers. It will host more than 200 experts co-creating scalable and modular power distribution and automation solutions, which can reduce installation and commissioning time by up to 60%. More than 90% of our business enables positive sustainability outcomes for customers. A great example for driving this circular economy is our collaboration with BASF. In this case, the plastics which we use for circuit breakers is made from biomethane, derived from recycled bio-waste instead of fossil feedstock. The material changeover for this product alone avoids 270 tons carbon dioxide equivalents per year. We will expand this approach to other product lines, supporting our customers to decarbonize. This Siemens EcoTech labeled product is also in wide use at BASF. So it's a clear win-win cooperation. Our Siemensstadt Square (NYSE:SQ) project in Berlin is a blueprint for the effective design of urban brownfield development projects. We are transforming an historic industrial site into the city of the future, digital, sustainable, and competitive. Technologies from the Siemens accelerator platform such as digital twins and AI, combined with our intelligent hardware solutions will drive productivity without emissions. Our continued progress in sustainability management has brought us into the top 1% out of 73,000 companies assessed worldwide based on the EcoVadis rating. Here, you can see some compelling examples of how industry-specific know-how and a cutting-edge portfolio are crucial to achieving customer value. Let me highlight three examples. As part of our strategic collaboration with LG Energy Solutions, we contributed to a smooth start of mass production of batteries in April. The Ultium factory in Tennessee is one of the first factories of LG to be fully equipped with our automation technologies such as PLC, channel motors, and the TR portal. It will produce millions of battery cells for channel motors e-vehicles. Second, our leading SF6 gas-free switchgear is gaining traction in the market. Norwegian grid operator, Norgesnett, will be the first to deploy it across its entire grid to reach its sustainability goals. And we will support customers in Switzerland with this technology too. The largest mobility order in the quarter comes from Berlin, where the first two metro lines will be equipped with a CBDC system. Our state-of-the-art technology will enable our customer BVG in their plans to increase capacity by 30%, and it's future-proof for ridership increase further. As you know, a key strategic initiative is transforming a significant part of our DI software business towards software as a service, and we keep the momentum. ARR growth continued at a very healthy level of 15% over prior year. The cloud portion already stands at EUR 1.7 billion, equal to 39% of total ARR, already close to the target of 40%. All indicators point in the right direction, including more than 16,500 customers having signed on the SaaS business model. A consistent 85% share comes from small and medium-sized enterprises. And with that, over to you, Ralf, to give further details regarding our operational performance.
Ralf Thomas: Thank you, Roland, and good morning to everyone. Let me share more about our third quarter expectations looking ahead. Orders for DI at EUR 4.5 billion in total were sequentially up and increased year over year by 21%. As indicated, the software business delivered an exceptional quarter by winning several large software license contracts. This achievement will not repeat itself in the near term on this level. These wins boosted orders, revenue, and profitability extraordinarily. The automation business saw sequentially softer orders slightly below prior year level. However, as expected, orders remained above the trough levels of the fourth quarter fiscal ‘23. As Roland mentioned, the market environment remained challenging with subdued production output at many of our customer industries and soft investment sentiment in key regions such as Europe and China. We saw still slow destocking at distributors and customers, particularly in China. Our backlog in digital industries further decreased to EUR 9.7 billion there in software with EUR 5.4 billion. Automation backlog stood at EUR 4.3 billion now closer to pre-pandemic level. Revenue for DI was flat year over year. Therein, the software business showed stellar growth of 82% driven by large contract wins for licensed software in both PLM and EDA. On the other hand, automation was down by 25% against a strong quarter for the business in prior year's third quarter. Discrete automation declined by 28% and process automation was down by 13%, both affected by lower contributions from fast turning book and bill orders. Profitability reached 22.9%, up on a sharp increase due to extraordinary conversion in the software license business as mentioned. The previously announced sale of the gas chromatography business supported the margin with 140 basis points as well. Profitability in automation saw material decline driven by reduced capacity utilization outweighing broad-based contingency measures which we have ramped up further in the third quarter. Cloud investments of EUR 60 million in the third quarter accounted for 120 basis points of margin impact in line with our expectations. Digital industries achieved a solid cash conversion of 0.85, yet below prior year due to higher receivables mainly related to the large software license contract. Now let me give you the regional perspective on our top line automation performance. As indicated before, the rebound of automation orders is delayed due to ongoing subdued industrial activity in key regions and elevated inventory levels. The speed of de-stocking is sluggish weighing on our top line. This continues to be most visible in China where de-stocking effects are likely to continue well into fiscal ‘25. At the end of the third quarter, distributor stocks levels were still elevated in China. Orders stabilized in China and were up on a very easy comps from the prior year with only slow pickup of customer demand. However, the pricing environment was more challenging due to competitive pressure. In other key regions, Europe and the US, we continue to see stock levels mostly coming back to normal by the end of fiscal ‘24. In line with muted fast turning automation orders and further backlog normalization, revenue in all key regions was materially moderated from high levels most pronounced in our stronghold of Europe. Looking at our key vertical end markets for the next quarters, official sources continue to expect muted growth momentum for production output at many of our end customers. This is most pronounced in export driven industries such as machinery and automotive. As positive signals are coming from chemicals, as a very early cycle industry, it seems to be mostly through overstocking effect and starting to recover. Our DI teams continue to see this sluggish development as transitional. However, it is taking longer than initially anticipated to work through the imbalances of stock levels and until we see a broader recovery of investment sentiment among our customers. In addition, the later than expected easing of interest rates weighs on investment climate as well. Nevertheless, the fundamental trend for automation and digitalization in industry is intact. Now offerings are essential to drive sustainability and mitigate labor shortages. We expect digital industries to achieve its fiscal ‘24 outlook for revenue growth to come in at minus 8% to minus 4% below the prior year. For the fourth quarter, we continue to see limited momentum in our automation business. Since the large-scale software license contracts materialized mostly in the third quarter, the software business will see a softer performance in the fourth quarter compared to tough comps. The prior year, fourth quarter had benefited from several large and highly attractive EDA license wins. From a full fiscal year perspective, the software business will deliver a very strong performance, both in EDA and PLM. SaaS as well as cloud ARR are fully on track with a share of cloud ARR certainly achieving at least 40% of total ARR in the fourth quarter after 39.3% in the third quarter. In the fourth quarter, soft capacity utilization in automation with corresponding missing conversion and combined with a less favorable product mix will weigh on margins. The contribution from the software business will be below prior year level in line with the lower top line. For digital industries, we expect the profit margin for fiscal ‘24 to be at the lower end of the range of 18% to 21%. Now let's turn to smart infrastructure, which again delivered outstanding execution leading to another excellent quarterly performance. The team achieved double digit top line growth by grasping many customer opportunities and improved operational profitability year over year for the 15th quarter in a row. In total, orders were up 11% on contributions from all businesses leading to a healthy book to bill of 1.11. A major growth engine was the electrification business up by 14%. This business, together with the electrical products business scored major order wins from data center customers, particularly in the US on dynamic AI driven capacity build out. Our teams were successful in a highly competitive environment, even winning new customers over from relevant competitors. We expect to grow the data center business more than 50% in orders and around 30% in revenues in fiscal ‘24. Building orders were up by a strong 12%. Record order backlog increased further to EUR 18.6 billion. Revenue growth reached 10% with the largest contribution coming from the electrification business up by an outstanding 21%. Electrical products continued its growth trajectory with 7%. Buildings was up with 5% on strong service business. Operational profitability reached a record level of 17% benefiting from economies of scale from higher revenue and increased capacity utilization. The economic equation remained clearly positive supported by pricing and ongoing productivity improvement. Pre-cash flow exceeded the EUR 1 billion mark and cash conversion at EUR 1.09 billion was consistently strong on a high level which we expect to continue. Looking at the regional top line development, we saw Europe excluding Germany standing out with large wins for data center in renewable electrification project. The U.S. continued its growth path with 4% order growth on very high levels driven by large data center wins primarily from hyperscalers. Key growth engine for revenue was the U.S. up by 19% on stringent backlog execution. Revenue in Europe was driven by electrification and buildings offsetting a softer development in the electrical products particularly from the distribution channel partners. The service business showed broad-based revenue growth across regions primarily in Asia, up in the low teens and it's also high single digit growth in Europe. Business in China continued to show softness on muted demand, especially in commercial real estate. The next step in portfolio optimization and technology focus is the divestment of our wiring accessories business in China to ABB (ST:ABB) after signing in May, closing is expected within 12 months. Key demand expectations with growth in real terms across our main verticals show consistent and resilient trends based on secular drivers as Roland discussed earlier. As I mentioned, stellar revenue growth in the data center vertical driven by digitalization and AI increases its relative weight for smart infrastructure quickly. After strong first nine months, we confirm our full year guidance for revenue growth in a range of 8% to 10%. For the profit margin, we expect to achieve the upper end of the guidance range of 16% to 17% in fiscal ‘24. Just a reminder, we are looking forward to a dedicated SI capital market event in Zug in Switzerland on December 12th. Mobility improved its bottom line despite revenue being held back by a temporary decline in its rolling stock business. In the third quarter, we recorded orders of EUR 2.4 billion on very tough comms year over year, primarily consisting of many smaller and mid-sized orders with very attractive gross margin. After a series of quarters with order intake driven by large contract, the book to bill of 0.92 is only a temporary picture. We see a well-structured and attractive sales funnel ahead. The backlog stands at EUR 48 billion. Revenue in the third quarter was up 2% below our expectations. Mid-single digit revenue growth in rail infrastructure and a strong service business were largely offset by a moderate revenue decline in rolling stock, mainly impacted by a temporary production slowdown resulting from supplier quality issues. Good news is that production has been resumed in the meanwhile. Profitability improved in most businesses led by rail infrastructure. Margin expansion of 60 basis points to 8.7% was supported by a more favorable business and project mix. Mobility recorded a weak free cash flow performance in the quarter with a low level of milestone and down payments in the third quarter as well as inventory buildup. As indicated, we expect a material catch up in the fourth quarter with strong cash collection and major payments based on project milestones. Looking ahead, despite the setback on the top line in the third quarter, we maintain our full year guidance of 8% to 11% revenue growth due to an anticipated very strong finish with stringent project execution and catch up in deliveries. For profit margin, we confirm our fiscal ‘24 guidance of 8% to 10%. And on a side note, we are also looking forward to meeting you at our booth at the InnoTrans Fair in Berlin in September. Please reach out to our team if you intend to participate. Now, let me keep the perspective crisp on below industrial businesses since we simplified the reporting in line with portfolio optimization. Innomotics was moved to discontinued operations and the remaining portfolio companies activities are now part of financing eliminations and other items. Closing preparations for the Innomotics sale are progressing very well and we now expect closing in the first quarter of fiscal ‘25. An updated outlook on the related topics is in the table on page 23 in the appendix. Siemens financial services achieved a solid earnings contribution with strong performance of debt business on lower credit risk provisions, reflecting the well-balanced profile of our investment portfolio. Finally, I want to point towards a tax rate in the third quarter of 24%. We narrow our expectations for full fiscal ‘24 tax rate now to 20% to 23%. Free cash flow performance in the first nine months was at a solid level albeit the third quarter was affected by a sharply lower volume from advanced payments at mobility and higher year over year tax payments of EUR 0.5 billion, a lumpy line item by nature. We work hard and re-emphasize our focus on free cash flow across the entire Siemens team to strive for the fifth year in a row with a double digit return of free cash flow on revenue. And we continued our path of shareholder friendly capital allocation by accelerating our current share buyback program since its inception in February, almost EUR 700 million have been spent. Following the nine months ‘24 performance and after highlighting the different businesses, let me conclude with our outlook for the group. We confirm our guidance with comparable revenue growth expected at the lower end of the respective range of 4% to 8% and the book to bill ratio above 1. We expect profitable growth of our industrial businesses to drive basic EPS from net income before PPA accounting, excluding Siemens Energy to a range of EUR 10.40 to EUR 11. This outlook excludes burdens from legal and regulatory matters and material impairments as always. Despite persisting macroeconomic headwinds, our ambition is clear. We will deliver further value creation by profitable growth and resilient cash generation. With that, I hand it back to you, Tobias.
Tobias Atzler: Thank you, Ralf. We are now ready for Q&A. Please limit yourself to one question per person. We want to give as many of you as possible the opportunity to raise your question. Operator, please open the Q&A now.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Andrew Wilson, JP Morgan (NYSE:JPM). Please go ahead.
Andrew Wilson: Hi, good morning. Thank you very much for the time and for taking my question. I wanted to ask on the DI side, I mean, 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 wrap that up, I guess, for DI as maybe as we look into next year. Thank you.
Ralf Thomas: 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, with 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 weakened. China's structural changes, especially the downturn in the property sector, which is extremely important for the country, 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 electronics, textiles, 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's no clear indication for the onset or potential onset of a material recovery. So, let me quickly walk you through the different verticals and starting with automotive. I mean, obviously, a sequential decline in global production year over year, mainly driven by Europe and Japan, while China and the US at least had some positive momentum in their 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 built up in that industry. On the machinery side, there's further contraction, yet with far less downward dynamics as we saw that before. It's actually slightly stronger in China and it's 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 further is suffering from higher interest rates and the stocking 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 the stocking expires and end customer investment demands is going 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 adaptions suffering from weaker demand domestically and also from China. Pharma and chemicals on aggregate, there's a modest positive development. I mentioned that before. Chemicals are somewhat better than pharma and chemicals continue to turn around of 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 upward developing but also not really changing 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. The US are also on a moderate growth path and Europe is still contracting. We do expect some delay for new investment activities as current project 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 an expanding production with some moderation and dynamics as production ramp up is limited by logistic 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 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, too early to declare victory on that trend then but we are 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 RMB 800 million and is still the same amount over and above that what we would consider a normal level to be and same thing on the OEM stock coming down slightly but still some way to go, around EMB 1 billion still sitting in OEM stocks that typically is close to zero. So, in a nutshell, there is another give or take RMB 4 billion renminbi sitting in different stock levels translating into EUR 500 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.
Andrew Wilson: Thank you very much.
Tobias Atzler: Next question, please.
Operator: The next question comes from James Moore, Redburn Atlantic. Please go ahead.
James Moore: Yes, 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 margin volatility which I presume is extraordinarily nice in the quarter and will be less in the fourth. But what I'm really trying to get to is the pure automation profitability. I know you don't want to give a number here but it's just about the momentum there and whether the number behind what you're signaling for the fourth quarter is a normal quarter and indicative of the kind of sales and margin that we could see in automation next year or whether it has anything exceptional in it by way of mix or price-cost topics that are not so relevant for what it could look like next year.
Ralf Thomas: Yeah, thank you, James. I mean, you may imagine that this question has been keeping us busy for quite a couple of months meanwhile and let me share with you. I mean, it's obviously too early to really look into the next fiscal year but the dynamics are as you described. Let me just once again touch on the software impact in the third quarter. I'm sure you remember the second quarter's disclosure. We have been indicating that there's a very rich funnel in software with an abundance of huge opportunities that doesn't accumulate typically in one quarter and it did. So we had outstanding projects, seven of them double and triple digit million that didn't ever happen at least in my business life as CFO so far. I would wish it repeats itself quarter over quarter but it won't most likely. So therefore on the software side there're still opportunities our team is going forward and we really, really are very happy that they are so close to their customers and continue also winning over customers from competition. But also bear in mind the fourth quarter last fiscal year was a record revenue quarter for our software business with EUR 1.6 billion that won't repeat itself. So in the implicit guidance we gave for the fourth quarter and saying that the DI margin is going to be at the lower end of the corridor, there's also a software element baked into that. And now turning to the center of your question, I mean, is there a new normal establishing itself? That was my translation of your question with regard to the automation margin. And let me start with again repeating that we have been initiating measures that are meaningful both short and long-term. We absolutely convinced that we continue sitting on a very stable trajectory when it comes to mid-term perspective of electrification, digitalization, automation and all that supporting sustainability. So there's no reason for us at the moment to review the investment case we have in our automation business globally. For sure, we do see a mix in our portfolio with give or take three quarters discrete and one quarter process and a fairly relevant exposure to China with give or take 23% to 25% of revenue in China. We are more effective than some of our peers are, but we also are very convinced that there will be opportunities coming up again. And therefore it is important for us. And we discussed that intensively in our managing board and also with our Supervisory Board that we do not overreact. So therefore applying measures and maybe accelerating them, the entire spectrum of options and tools we hold in our hands from short time work through just increasing productivity, all that is going to be executed. You do know, as we know as long timers that this is not materializing as quickly as we wish for. We are working on that and it's developing the way we expect that to happen but it will not unfold its complete beauty and impact before early next fiscal year at the soonest. So that's just a fact. A fact is also that to a certain extent we also would like to use that opportunity to further improve the structure of our organizational setup, go-to-market accelerator, all that what Roland said before, this is a secular investment case and we need to find the best possible balance between short term profitability and midterm opportunities. So there's no reason for us and I would like to underpin that again to believe that the strategic perspective that we took for this business is still valid. Structural demand is intact. I do not know anyone questioning that. We do feel the heat of the kitchen in some markets. We talked about the Chinese market and intensity of competition there. Yes, we are aware of that. We are counteracting with measures that are investment case for themselves but we built local for local and also are moving our cost base into those interesting and highly competitive markets. So that is creating dynamics that are making the fourth quarter somewhat special. Too early to talk about the development into ‘25 but we are very mindful of investments and contingency measures. Investment case is intact. Contingencies will be accelerated and also further increased if need be but we will definitely not sacrifice our investment opportunity in a highly attractive market in which we are owning a lot of space, pricing power, technology leadership and we will not give that up and sacrifice that for quarterly profitability.
James Moore: Thank you very much, Ralf.
Tobias Atzler: Next question, please.
Operator: The next question comes from a line of Andre Kukhnin, UBS. Please go ahead.
Andre Kukhnin: Good morning. Thank you very much for taking my question. I wanted to ask a bit more about the DI software, please. Could you help us with understanding what the underlying revenue run rate is for this business? We've obviously seen quite a variation of anywhere between 1.2 to 1.6 and now the new high of 2.1. I appreciate the Q3 being very special with those multi-orders that you mentioned but with the ARP throwing, what is kind of the underlying run rate? And additionally to that, do you expect this business to still grow in 2025 given the very high comp that you've just created?
Ralf Thomas: Yeah, thanks very much, Andre. For sure. This is a real investment case for us and also the SaaS transition is such as an investment case as we have been discussing several times. So for sure, our expectation and we have good reasons to have that is that this is going to continue growing. I mean, you asked about ARR, obviously 15% growth with an extremely well-developing cloud-based share of 39.3% approaching the 40% definitely in the next quarter, one year earlier. I mean, all the KPIs we are sharing also the quota of new customers and small and medium businesses is underpinning clearly that our strategy is working out perfectly well. Still, it's an investment case. The fish is not swallowed completely yet. So we shared also our investments in cloud-based activities and the 250 million grand total for fiscal ‘24. We will continue investing in that one. And this is going to make the entire business more resilient and more profitable and also easier to be predicted. On the other hand, some part of our software portfolio, EDA and also large license deals in PLM, they will occur time and again. So it's hard to predict them. It doesn't make sense to try smoothening that out over quarters because we would completely mislead you with that. So I indicated before for the fourth quarter, we will most likely not be in a position to reach the prior year's fourth quarter and then back record level of 1.6 billion that we had. So this is giving you some indication what the funnel looks like at the moment. There's always pull in and outs. And as I said many times, I don't want to bore you with that, but the customer is ruling the timelines and we will never try to push anyone into a different timing pattern than they wish for because that would backfire in many regards. So therefore, underlying I think will continue being based on an even higher rate of ARR business, a higher quota of ARR business and the cloud portion in that. And that's essential for the way forward because it's creating this double win situation with customers being updated continuously and ourselves being in a better position to anticipate what the customers are going to need the day after tomorrow. So all that is making us believe and we see that also being kind of underpinned by that what other players in the market say and do that the SaaS transition as such is a quality per se. And we on top of that are sitting in a very nice place, potentially capitalizing on large EDA momentum also on the way forward. I mentioned that in my presentation that at the moment, there's an execution of existing projects. So new projects typically are filling the pipelines only after the old ones being completed. So for ‘25, we do see momentum building up again in the funnel and in the pipelines. And therefore we are very much looking forward for this business developing into an ever stronger part of our portfolio.
Andre Kukhnin: Very clear. Thank you very much. And yeah, I completely agree on timing. Thank you.
Tobias Atzler: Next question, please.
Operator: The next question comes from the line of Gael de-Bray, Deutsche Bank (ETR:DBKGn). Please go ahead.
Gael de-Bray: Thank you very much. Good morning, everybody. I'm sure that there are still plenty of questions around DI but let me rather ask about SI. 50% of all the growth in data centers is truly impressive, I guess. But generally there's been a growing debate in the market on the cost of AI and its revenue generating potential with investors now starting to be concerned that AI investments might not pay off as much as previously anticipated. So I'm just curious to hear how you see that internally. Thanks very much.
Ralf Thomas: Yeah, that's a very interesting point because you know that there are studies that it's a EUR 600 billion revenue, high quality revenue required to justify the investment which went into data centers triggered by AI. So therefore, I do believe there's a certain hype in it. On the other side, you see there's a huge competition in developing the next better model, a large language model using even more parameters and giving better results. This is one trend that might leveling out as these models are digesting all the available data over time. Yet on the other side, you see other developments which is really then models which are tuned for specific industrial applications, smaller ones. They come as well and they will trigger on demand. Yet the demand for energy and green energy in particular is raising so high that there are huge efforts in order to get the costs down slash the processing you need down for tuning or inferencing or developing new models. So all in all, I do believe there's a certain hype in this in the past quarters since OpenAI and ChatGPT launched or put their model on the market for everybody. I still believe there's a growth in it because the amount of data is growing, the amount of necessary number crunching is growing and maybe not in that steep way as we see it but keep on going. So therefore our projection is that the electrification markets, it's really on a super cycle. But here's one more point. This is not only driven by data centers. Electrification, renewables, energy transformation is another area, including the impact on the grids and all the way downstream to the consumers. So therefore the mix is not sitting on the demand for our electric product business is not only driven by data and AI but also by other elements. So all in all, a super cycle, the high, high, high growth rates and data center might leveling out a little bit but have in mind the amount of data we are creating and we want to make great value out of it is still increasing.
Tobias Atzler: Thank you very much. Next question, please.
Operator: The next question comes from the line of Max Yates, Morgan Stanley (NYSE:MS). Please go ahead.
Max Yates: Thank you. Just before I ask my question, could I just have a clarification on the comments on the software orders or the software business is expected to be lower year over year. Is that both on orders and revenues or is that just a comment on orders?
Ralf Thomas: I was talking revenues.
Max Yates: Revenues, okay. And I guess my question is just on smart infrastructure. You've obviously delivered significant margin improvement here. You're at the upper end of the plan guidance. I guess my question is we're hearing some other companies talking about the need to now ramp up investment, ramp up sort of capacity investments. I know you're making significant investments in the US. Do you see as we go into 2025 margins plateauing from here because we need to make some of these investments in people and capacity or do you still see pockets within that business where you think margins can squeeze higher going into next year as you continue to grow the business on what looks like a very healthy backlog? Thank you.
Ralf Thomas: Yeah, thank you, Max. And I mean, thank you also for appreciating the great performance of our SI team. I mean, they really did a fantastic job and therefore they deserve respect. And part of that respect is that I don't want to steal their thunder for December 12th when they will talk about the way forward. But if you look at matters, I mean, they have been very consistently applying all levers and tools throughout the last three years. I mean, 15 quarters in a row improving the level of profitability over prior year's quarter. This is, I think, speaking for itself and all that converting into cash. First time they have been exceeding the EUR 1 billion per quarter free cash flow. This is a very ambitious team that does definitely not stop at 95%. So they will go all the way. I do not see them being in a desperate need to further increase capacity and sacrifice margin development for that. Of course, they do have their opportunities. They have a very strong economic equation. I mentioned that before. They do have pricing power, which is baked into the backlog. We have clear visibility on that one. There's also a very high-end, long-reaching ambition in providing incremental productivity. And they are also very cost-conscious in that what they do. So I do see further momentum, whether there is another 15 quarters that they will improve their profitability. This is not what we are debating today, but they are definitely not stopping at the 17%. That's what I would expect. But we also need to be mindful because what we don't want them to do is being overambitious and having this one trick pony that is doing it. Once they are tapping on tangible market opportunities and they are very quickly developing them. So allow me to express that I'm really proud what they accomplished in the data center, not for the magnitude, but for the speed of ramping up a business. Who would have been thinking that Siemens can do that within three years? I didn't, to be honest, when I took over in 2013 in that role that I have. And now this is something that we believe can reiterate time and again, because scaling is of such utmost importance in these businesses. We can do that fast. We can do that without sacrificing margin. And I think the team has been earning itself trust that they can very well balance growth needs with profitability and cash conversion. And therefore I'm very consistently and confidently looking forward to further improvement on top and bottom line, but please allow that I will not try to quantify or give indications. There will be a very interesting session on December 12th in Zug.
Max Yates: I know it's a number I'm sure you're quite keen to give. On my numbers, it looks like you're annualizing about 3 billion of data center orders. Is that correct?
Ralf Thomas: Yeah, I mean, it's a highly attractive field. And at the moment, I think the 50% plus of new orders that they intend to accomplish and will, and also a growth rate in revenue over and above 30% is indicating that 3 billion is not necessarily a ceiling.
Tobias Atzler: Next question, please.
Operator: The next question comes from the line of Phil Buller, Berenberg. Please go ahead.
Phil Buller: Thanks for the question. It's on free cash flow. The 99% conversion in Q3 was pretty good, I think given the consumption in mobility. It sounds like you're expecting a better Q4 there. So are there any other cash dynamics we should consider in Q4 for DI or SI, or are you trending perhaps ahead of plan on free cash flow? And given the health of the balance sheet, should we be assuming that the buybacks are continuing to be at this accelerated pace in the coming quarters or faster, perhaps even given the value of the shares? And if not, I guess, why not? Are you accumulating perhaps the M&A that you have in your sites?
Ralf Thomas: Thanks for those two questions and for the latter one, clear no. I think we do have quite transparent track record with regard how we execute on our share buybacks. And it's obvious that we are accelerating. We have a grid out there with our banking partners who are doing that for us. And we will definitely use that opportunity at the moment to accelerate the buyback on the one hand side. On the other hand, we said, and I hope you confirm that what I see is the EUR 700 million under the given circumstances throughout the last six months is quite a remarkable amount. And we did that meaningfully. We will continue to do so. And we also said that the fact that the program is tailored to up to five years doesn't necessarily mean that we will use the full-time span. So we will have a combination of consistent execution and also opportunistically using certain momentum in the market that is literally inviting us to further speed up in that exercise. We do have a very solid balance sheet. We do have an outstanding rating in our sector of the market. And therefore, if and when need would be to make funds available for a transaction, this would definitely not be to the negative or downside for the share buyback. We do not and did not combine these two instruments. The one is to make sure that our shareholders are really understanding that we take care of them, the total shareholder return and buyback. I think in dividend policy, this is quite a unique historical path of success that we have been paving and we will continue to pave on the way forward. So with regard to the operational free cash flow, I mentioned that we are very proud that SI is consistently converting profitability into cash. And if you look into the long-term track record of SI and prior building technologies, the handwriting of the existing leadership team of Matias and Axel is very consistently underpinning the fact that they never give themselves a break. So I think SI will continue on that path. I mentioned that in my speech. On DI, I had been flagging out the fact that the large software deals didn't immediately turn into cash. Obviously, payment terms are a typical pattern that we see there. Therefore, the cash conversion rate at the moment is burdened by that delay, if you will, or that discrepancy in timing. Profitability against free cash flow, that is not surprising. And we are very, very confidently looking into converting that into cash, no doubt on this one. We also do see that typically for the fourth quarter, there is operating working capital building up. We have always been successfully managing that. And I continue to believe this is going to be the case again in the fourth quarter. And we are committed to continuing our strong track record of having double-digit return free cash flow over sales for the full fiscal year. And last but not least, I also would like to point out again that below the line tax payments, this is something you can't avoid, unfortunately. Whenever that is kicking in, you just have to do what you have to do. So therefore, there's an erratic pattern below the line that we don't have influence on. And therefore, it's exactly as you do, focusing on operational generation of free cash flow. It’s that what our team is focused on. And they do that very successfully. And we have no doubt they will do it again.
Tobias Atzler: We will take one last question.
Operator: Last question for today comes from the line of Alexander Virgo, Bank of America (NYSE:BAC). Please go ahead.
Alexander Virgo: Good morning, Roland and Ralf. Please one, and I guess just on software (ph), we talked about the strength of the pipeline, the EDA. I'm pleased to see that they're giving us a little bit more in terms of innovation versus (inaudible) in PLMs. The growth in the 2025 is more than the EDA, maybe strengthen PLM in the quarter. So that's where (ph) I was expecting it to be there.
Ralf Thomas: Alex, I'm sorry, we couldn't hear you very well, but I guess I heard you asking what the software, what the strength of the third quarter in software was and what we do expect on the way forward for ‘25 with a rich funnel. So let me try to answer that. I hope I have been receiving that well. First, it's not only EDA. We also had PLM license deals of extraordinary nature. And I mentioned before, I don't know whether you heard that, that grand total was seven deals with double digit and triple digit million. That doesn't repeat itself, obviously on a quarterly basis on the EDA side and on the PLM side, large license deals is difficult to plan, but we saw them coming. That's why we indicated to you with the second quarter's disclosure that there will be potentially an extraordinary third quarter for our software business. Midterm and looking into ‘25 and ahead, I mean, we are spurred up for completing the transition to the SaaS model. And with all the KPIs we share with you, I think they are speaking for themselves. We are making good progress. We get onto those higher grounds we are aspiring. We are literally conquering the small and midsize market where we want it to be and expand our offering in that field. We also are successfully expanding our cloud-based offering and the acceptance rate is high. We are making better progress than originally planned, completing the 40% target already, most likely the next quarter or definitely next quarter. And then we'll be at that point one year earlier. We will not sit then with our hands idle. We will continue shaping that path and therefore would like to repeat what I said a couple of times, as long as this is an investment case, we will continue investing and we'll put market exploitation over and above the cost level of a single fiscal year. So the EUR 250 million being spent on cloud investments, current fiscal 120 basis points, this is exactly what we said before and what we now intend to harvest. I do think we are making good progress in the SaaS transition. And at the same time, the EDA market is developing quite nicely. We are a very relevant player there and therefore with the potential pickup of that market, we also do see opportunities. Will they be evenly spread in ‘25? Definitely not. Will they be front-loaded or back-loaded? Too early to tell. But the PLM business is going to find more resilience and stability on the way forward. That's why we are investing in SaaS. We'll be more sticky, we'll have higher level of profitability and we'll be more consistent. And on the ADA side, it's about winning customers over. And that's why I mentioned that in my presentation, it's not only having a great top line, it's also winning from competition. And winning from competition means that a huge entrance barrier for them to change needs to be crossed. And if customers do that, this is the best possible compliment you can get from the market that your technology is relevant for the future. And that's why we are confidently looking to the future development of the software business. The portion is getting bigger. It's transitioning well, as we said, and we also share the big backlog that is developing at the moment. So we are quite happy with that business and we will give you more color on the matter with our annual outlook for ‘25 in November.
Alexander Virgo: Thank you very much.
Tobias Atzler: Thanks a lot to everyone for participating today. Apologies, we couldn't take all of your questions. However, as always, the IR team will be available for further questions. We wish you a relaxing summer break and look forward to meeting many of you as possible on various occasions in September. Have a nice day and goodbye.
Operator: Ladies and gentlemen, that will conclude today's conference call and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.
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