May 4, 2011
Executives
Peter Löscher – President and Chief Executive Officer Joe Kaeser – Chief Financial Officer Mariel von Drathen – Head of Investor Relations
Analysts
Andreas Willi – J.P. Morgan Mark Troman – Bank of America Merrill Lynch Simon Smith – Credit Suisse Ben Uglow – Morgan Stanley Peter Reilly – Deutsche Bank Christel Monot – UBS Martin Prozesky – Sanford C.
Bernstein
Operator
Good morning ladies and gentlemen and welcome to the Siemens Second Quarter Fiscal 2011 Conference Call. The earnings release, the flashlight and other documents were published this morning at 7 AM.
You can download them from our website. This morning's presentation is now online and this morning's call is being webcast via the IR website.
Our President and CEO, Peter Löscher and our Chief Financial Officer, Joe Kaeser are here this morning to review the Q2 results. After an introductory presentation from Peter, both Peter and Joe have time for Q&A.
Given the planned Analyst Call of another European capital goods company, I ask for your understanding that we will have to close the call shortly before 11 o'clock. And with that I would like to hand over to Peter.
Peter Löscher
Thank you, Mary. And welcome everybody to our Q2 Analyst Call.
I will give you a brief update on Siemens performance in the second quarter and our revised outlook for fiscal 2011. During this second quarter, we again achieved outstanding broad-based order growth economic recovery in both the U.S.
and Europe is ongoing albeit on different levels within the various economies. Germany's exports trends delivered a strong growth contribution to our businesses.
And the main growth engines though are the emerging markets, such as China or India among others. We closely watch the potential impact from uncertainties about the political development in North Africa and the Middle East rising prices for commodities, suffering debt worries in some European countries and increasingly credit a view on the U.S.
budget deficit to react flexible, if required and possible. Let me also give you a brief update on the situation in Japan.
As we currently see it from the sourcing point of view, due to the complex structure of the supplier networks there are some specific challenges in the supply chain mostly in the components area, which are adequately addressed and monitored closely. Overall, we still cannot give a final assessment of the potential impact on Siemens operations.
Now let me come to the highlights of the second quarter. New orders substantially increased by 27% fueled by a broad-based growth in industry and significant large order wins in energy.
Revenues were clearly up organically versus the prior-year and also slightly quarter-over-quarter. Overall profitability held up well despite significant growth investments in research and development, engineering capacities and sales resources.
After several quarters of strong free cash flow performance we saw a weaker second quarter. This is mainly due to a buildup of net working capital associated with broad-based growth and lower customer prepayments.
In addition, the current period included cash outflows in connection with personnel related expenses such as the previously announced special employee bonus. Furthermore, we took decisive steps in the second quarter to position this setup and portfolio of the company for future growth.
Second, portfolio activities that sharpen, strengthen our portfolio such as the divestment of our stake in Areva NP or the successful increase of our stake in Siemens India Ltd. from 55% to 75%, which will be cash effective in Q3.
Third, we focus on the growth potential of cities and infrastructure customers to meet their needs of sustainable developments and increasing their competitiveness by setting up a dedicated [Four-Sector]. Strong execution and growth in our end markets lead us to favorable assessment of the development in profit from continuing operations.
Therefore we’re updating our guidance for the year, which I will touch up in later. Let's look briefly at our key figures.
I have already laid out the orders and revenue highlights, which lead to a very strong 1.17 book-to-bill ratio. Total sector profit included strong profit growth in the industry and energy, as well as €1.5 billion gain from the Areva divestment.
Healthcare showed a stable earnings performance.
Looking at our backlog of €92 billion, we can take a lot of confidence into the second half of fiscal 2011. This is a record level despite adverse currency effects.
It was fueled by strong demand in base orders, but also by several large order wins mainly in the energy sector along the entire value chain. Fossil won a major component order of more than $1 billion in Saudi Arabia for the Ras Az Zawr power plant.
In this context Fossil will also strengthen its footprint in the Middle East through a large investment in new gas turbine manufacturing and service facility in Saudi Arabia. Renewables booked several large orders through large three digit million euros offshore orders in Germany such as DanTysk or Borkum Riffgrund and transmission once again proved our successful integrated energy offering by winning the offshore grid connection for the SylWin cluster from TenneT.
Siemens largest order ever in Poland was won by mobility selling 35 metro trains to the City of Warsaw. As I mentioned order growth was broad-based with double-digit increases across all regions.
But with particular strength in emerging markets, which accounted for 36% of total orders in the second quarter. Also Germany was clearly standing out due to strong industrial demand and large offshore wind orders.
Revenues grows in all the three regions led by the Americas above average growth of 18% in China and 19% in India. Looking at the industry sector, we saw a continued strong growth momentum high-capacity utilization and dropped through off profitability in our early cycle businesses like industry automation and motion control.
Mobility again executed well on its current projects and has a strong sales funnel ahead. A major highlight is the principal decision of Deutsche Bank AG to purchase up to 300 ICx high-speed trains until 2030 and this would be the largest single order Siemens ever received.
Another record is the all-time high quarterly order intake in the energy sector. Underlying profitability in Fossil reached an extraordinary high-level, due to excellent project execution and a favorable business mix with high margin products and service businesses.
These factors more than offset further project charges of €87 million related to the Olkiluoto-3 project. Profitability in renewables is still held back by further investments in the international expansion of the wind business, in emerging markets and substantial expenses for the ongoing development of the solar business.
Transmissions are good underlying profitability, excluding some charges associated with the optimization of its global manufacturing footprint. As expected the investment and ramp-up costs for new technologies such as smart grid applications impacts some what the profitability in the distribution division.
Going forward, the energy sector expects the pace of order intake to slow in coming quarters following several consecutive quarters of particularly high market demand. In the healthcare sector, we recorded strong order growth in the region Asia and Australia.
The overall revenue growth was led by a strong performance from the imaging and therapy business. Healthcare profit achieved a good earnings conversion almost to the prior year level, which was strongly supported by pension curtailment gains.
Let’s have a look on our performance in the context of the One Siemens financial target systems after the first half of fiscal 2011. Our nominal revenue growth of 7.6% is slightly below the defined main competitor basket.
All three sectors are clearly within the top cycle EBITDA margin ranges through this. All three sectors are clearly within the full cycle EBITDA margin ranges and prove a consistent delivery on profitability.
ROC performance of 33.3% is positively affected by the Areva disposal gain. But even without this effect ROC of 23.6% for the first half of fiscal 2011 is clearly above the target range and shows our commitment to capital efficient growth.
The capital structure has turned now into a positive 0.1 net debt over EBTIDA multiple, reflecting to positive impact on cash following the Areva disposal. We will use this strong position to pursue all options to grow our business in a capital efficient way.
Let me now come to the guidance update. Not surprisingly given our strong operational performance to date we have increased our expectations for the full fiscal year 2011.
We expect organic order intake to show a significant increase compared to fiscal 2010, supported also by our already strong order backlog we expect mid single digit organic revenue growth. We further anticipate income from continuing operations to be at least $7.5 billion and this outlook excludes effects that may arise from legal and regulatory matters among possible effects from an ongoing arbitration proceeding between the Siemens and Areva SA.
And with this Joe and I are happy to take your questions on the Q2 performance and our outlook for the fiscal year 2011.
Operator
Our first question comes from the line of Andreas Willi from J.P. Morgan.
Please go ahead.
Andreas Willi – J.P. Morgan
I have three questions, please. The first one on your profitability in the Industry sector where you mentioned investments, we have seen quite a big step up in Q2 versus Q1, what should we use as a run rate for the year in terms of higher sales, higher R&D investments in the Industry sector, particularly in Industry Automation and Drive Technology?
Second question, just following up on that, Building Technologies’ profitability was quite weak; maybe you could give us some indications there. And last question on the renewables’ investment, you continue to push to build out your wind business in emerging markets, we continue to see negative news in the industry from fierce competition pricing and all of that, maybe you could elaborate why do you invest money into onshore wind?
Thank you.
Peter Löscher
Well, Andreas, good morning. On the industrial sector as far as the run rate is concerned (inaudible) company, still we do expect to have the OpEx development in 2011, still within the range I had given in the explanation for the 2011 outlook in November.
And there won’t be any material adverse development there. We too continue to invest into areas, which are close to revenue and bookings environment that means applications and the likes.
And it is also true on the R&D, which has a clear focus on engineering. And as far as the run rate is concerned I think if you kind of use about a 5% R&D and about 13% SG&A or run rate going forward, it will be okay on the industry sector.
As far as Industry Automation is concerned, I mean first of all even though I’m aware that the expectations in the market had been somewhat more demanding for Q2, we still should not forget that year-over-year we made quite a significant progress versus a huge drop to the bottom line. We expect that year-over-year improvement to continue in Q3 in terms of margins in Industry Automation and also I would not be too surprised if the underlying margins in Q3 would also then improve quarter-over-quarter.
So there is still some way to go there, but we should be aware of the fact that is catch up effect, which we have always discussed when we were explaining this steep ramp up of recovery. This recovery in supply chain sitting effect is over and that also of course will in some way effect the mix outcome of the revenue structure.
But then again, it’s still operating in an improving environment, but it’s going to decelerate. Now, obviously it’s not what we wanted, I think I mentioned that it has got some potential, predominantly potential for improvement especially in the low voltage area.
There is a restructuring and improvement program ongoing. So, one should expect some recovery quarter-over-quarter and also year-over-year in the quarters to come.
But don’t expect miracles here also in the short-term. That covers industry and BT.
The renewables investment, we clearly need to differentiate between the wind and the more solar related environment. We’re still making good progress in the offshore environment and if you look at the top line development on bookings and compare numbers in the industry, I think its got to say that Siemens is still making good progress in that segment, but the same token, which has have to recognize on the wind business that this has been now moving from craftsmanship to industrialization.
And we do see first signs of consolidation methods coming along that will also mean that in the foreseeable future the margins we had in last year are not sustainable. And we still believe the margins we currently show in Q1 and Q2 have potential to improve over the quarters, in Q4 and ongoing.
On the solar method, we just have to say that timing wise the solar environment has been hit most by the austerity programs and the uncertainties especially the economies which are closer to the Sun Belt and this is something we’re currently suffering from at least to an effect that currently the losses in solar are higher than the revenues. And this something we expect to continue for a while.
And as far as I can tell that also (inaudible) we will certainly look into that and see how we move forward on the sector. So, that pretty much I think covers the three topics here.
Mariel von Drathen
Next question please.
Operator
We’ll now move to our next question, this comes from Mark Troman from Bank of America Merrill Lynch. Please go ahead.
Mark Troman – Bank of America Merrill Lynch
Yes, good morning Peter and Joe. This is Mark here from Bank of America.
Just three questions, please. Firstly, one for Joe.
Joe, could you explain as simply as you can how Siemens is affected by FX, in particular the dollar/euro? I know it’s a complicated subject, but if you give us some sort of guidelines how that might impact profits one way or another, or sensitivity to the dollar, that would be very helpful.
Second question, could you just outline where you see the pricing situation across your businesses, where you’re seeing still pressure, where you’re seeing improvements, particularly in the context of raw material costs rising, or potentially rising more? And finally, maybe one for Peter, if you could just go through the outlook for Healthcare and how you feel about that market.
Performance looks to be solid, and I guess likely to continue to be for some time, but in terms of order development, do you see ongoing positive trends or flattening out or what do you see in healthcare? Thank you.
Peter Löscher
All right. Hi, Mark.
Mark Troman – Bank of America Merrill Lynch
Hi.
Joe Kaeser
It’s as simple as possible. In the short-term, for the remainder of the fiscal year, we are fine.
We have hedged most of the exposure to the dollar which didn’t really matter in Q2 and Q1, but it obviously will matter in -- with 146 or 148 or whatever the numbers will be. So to give you some flavor, in the project (inaudible), as you know we hedged by the time the order is booked, so therefore there is as a cumulative catch up a zero exposure one way or the other.
In the products business, industry for the remainder of the fiscal year is basically the products business industry is hedged by close to 80% at about 131 and achieved product business at 135, actually 133 on average on the products business fully. And also healthcare is fully hedged at 133 for the remainder of the fiscal year.
So we took advantage from what people thought there will be a one-to-one relation in 2011. And I believe we did a descent job here.
So that’s as quick as one. And in the mid-to-long term aspect, obviously, as you know, as we made that clear, a strong dollar is better for Siemens than a weak one.
So we will see how methods go over the quarters and it is always difficult to measure and comment the strategic impact of how competitors would move in pricing, taking advantage of the dollar if they operate out of U.S. dollar environment.
So we take it as it comes quarter-over-quarter. And I think clearly as Peter and I repeatedly said our desire is to have a natural hedge by being close to that where our customers are and this is also why we invest in to go-to-market expenses also.
So that much to physics (ph). Outline on pricing.
They remember that when we explained our forecast for 2011 in the November 2010, we set a pricing and growth for the company would be about 3% to 3.5% points year-over-year. We do see some easing here so that we would actually feel more comfortable to mark the lower end of that range as a safe bet going forward for the fiscal year.
So the ease mostly comes from the industry sector in the short tech environment obviously there is strong demand and some market power. Energy is at or actually slightly below the pricing as compared to November.
So, overall if you put a 2.8% to 3.0% price decline on your tech you will be okay. And as far as the market is concerned on the supplier side, we continue to make good progress in the design win environment, but the low hanging fruits in terms of negotiation powers have gone.
So we would expect, still expect some adverse impact between the supplier markets and the customer markets. The number I said about billion difference year-over-year, I would say this is probably something like 800 million now.
So, slightly – overall if we put it together, overall slight improvement but not a one-to-one conversation from the suppliers in to the sellers environment.
Peter Löscher
And, Mike, in terms of the healthcare environment, I would foresee the U.S. on a growth trajectory.
We are very satisfied with the share development what we see there. China now, for us being the second biggest equipment market, so the emerging economies particularly China very important on the growth mode.
The most difficult market environment currently is in Europe and not surprisingly because obviously this impacted by fiscal consolidation measures what we see across governments. Pricing pressure continue in the same way and therefore the two or the three key success practice continue to be very relevant, continuously to drive productivity for the business what we have done since many, many quarters.
Investing in innovations and expand your product portfolio more tailored towards the need also of emerging economies and offer broader customer base. So having said this (inaudible), if you remember as we have communicated, the team is now executing against the plan, but we just need some patience because as we have communicated no short term fixes.
But they are executing against it and the business is basically implementing now the restructuring program according as we have planned. So, overall, the healthcare environment continues to be a solid environment and a business sector, which is probably currently below trend line what we have seen historically, but no major change in terms of the competitive dynamics.
Mark Troman – Bank of America Merrill Lynch
Okay, thanks very much. Very clear.
Mariel von Drathen
We’ll take the next question please.
Operator
Certainly. We’ll now move to our next question, which comes from Simon Smith from Credit Suisse.
Please go ahead.
Simon Smith – Credit Suisse
Hi, thank you for taking my question. I had two quick questions.
The first one was in terms of Building Technologies. Obviously, you've had a tough quarter here, and you're highlighting an acceleration in investment, and I take on board your comments of expecting improvement going forward, but I think at the Industry Capital Market's Day a little while ago you actually outlined quite a brave strategy that you had within this division, which was to look to innovate a much broader range of products and try to really accelerate the penetration of that division into more areas of commercial construction.
And at the time, it seemed that you were looking for a major overhaul of the product and really quite a big push. Is this movement we've seen in margin here the cost of that?
And is there any kind of total value you can put on what that project would be, and how long it would take? And the second question was just on Renewables.
You made a comment there about opportunities for consolidation, I'm not quite sure if I heard you correctly, but was that suggesting that you were looking at strategic opportunities in the Renewable division?
Joe Kaeser
Well, the second one is quick, the answer no. We do not really want to consolidate capacities, which are not used.
I think we made that repeatedly clear and there is no plan for that. We do not comment on type of regulated matters, but this one is so I guess important that it should be mentioned.
What I meant by consolidation is that that capacities have been raising quicker than still increasing demand. And that’s now, the industry moves from a more hand-selected project environment into an industrial environment that means that we do expect consolidation in the market.
And we do not intend to be an active consolidator by M&A or rather than organic growth. On the BT, obviously there has been some cost here associated to the development product development towards energy efficiency.
And also we have to say that on a low voltage, we are not yet where we want to be, but the plans and the targets remained in tact in an actually very positive market segment. Obviously, this foundation of the four sectors which says, it is an infrastructure of course also you know we are focused on energy efficiency.
And what you have see now in the first stage was basically a list of announcement that we said there will be certain divisions in the new sector. What we obviously have not yet announced and disclosed that this will be at the time and the new sector will also communicated to the markets.
What the change element will be on the process lift up change in the foundation of the new sector. You can be rest assured that the building technology matter energy efficiency will play a major roll in the reassessment and the refocusing of the market.
So, that much to the energy efficiency focus of the company.
Mariel von Drathen
We’ll take the next question please.
Operator
We move to our next question, which comes from Ben Uglow from Morgan Stanley. Please go ahead.
Ben Uglow – Morgan Stanley
Good morning. I had a couple of questions on energy and one on strategy.
And on the energy side, I understand from the press release that you are now expecting the energy orders to sort of hold back over the next couple of quarters from the $9 billion level, which is very high indeed. I guess what I waned to understand Joe, are you signaling going to back to the sort of pervious level of the last few quarters around say $6 billion or are you actually signaling a sort of weaker market than what we’ve actually seen in the last few quarters?
So that was issue number one. Issue number two was on this phenomenal Fossil Power launch and 24% underlying.
What I was hoping to understand, where is that coming from? Is that due to the service business?
Is that due to particular projects? Could you just give a bit more color on how we got to 24% and what we should think about in Fossil Power going forward?
And then finally, I guess some more sensitive topic acquisition strategy. Joe, I know you gave a press interview with the Financial Times talking about acquisitions of up to several billion euros and I think there was a lot of commentary in the market about whether several billion euros was a large acquisition or bolt-on.
Could you just sort of give us a sense of what Siemens is a normal type bolt-on transaction and what would be considered a large deal?
Joe Kaeser
Yeah, I’d be happy to be. On the acquisition side, at that time and the reaction in the markets actually hindsight shortages was necessary.
The Financial Times interview was poised to basically clarify that if Siemens talks about bolt-on acquisitions that could also be in the range in the (inaudible) range and not as a couple of hundred million. And I believe the company that size should actually have that view in general.
That doesn’t mean that we execute on this, we just have just a clarification for what we had been talking about for quite some time.
Ben Uglow – Morgan Stanley
Sorry Joe, I’m being stupid, when you say less four digit, is that four zeros, or are you talking about billion dollar transactions or $10 billion transactions?
Joe Kaeser
Four digits mean, four digit millions, between billion and around 3 billion.
Ben Uglow – Morgan Stanley
Okay.
Joe Kaeser
Low single digit billion transactions would be considered those as the bolt-on and large, this is what Peter and I repeatedly said large acquisitions in the area of what was video at that time or other not meant to be, but that is the company, because anyway we would explain it to the market why that made sense to be clear with you. That was a clarification on energy.
I mean obviously we are also very pleased and satisfied with the energy market share development, obviously because this is a matter of market share. The market does not grow or has not been growing in the first half of our fiscal year as our bookings have grown, we’ve seen that comparison to other numbers which had been announced, I believe.
And we do not intend to lose market share in the second half of our fiscal 2011. What we believe though is that the majority of orders in terms of timing had been placed in the first half.
So we would actually see some ease of bookings for the second half and it remains our view that this is market and not a loss of market share or a loss of market power of our company. As far as the Fossil Power execution is concerned, I mean the recipe here has clearly been an outstanding execution and an outstanding execution on the projects also help us to release contingencies, which had been obviously considered in the projects and are not needed and that now goes on for some quarters and we obviously are pleased that that’s the recipe, there is no other secret behind it.
It is a favorable execution. On the other hand, I would just caution to kind of add up, as far as the new business is concerned not the installed base business from service and so on and so forth, we believe that this is industry benchmark on new business and we would not feel compelled to see not much room to grow that further, because there is also a limit to our customers’ business plans, which still need to be favorable otherwise they wouldn’t do the project.
So I think if one assumes that to be peak margin, this is certainly something which people would be well advised.
Ben Uglow – Morgan Stanley
Okay. These contingencies that are being released, Joe, should we think about in the several tens of millions of euros in the next couple of quarters.
Joe Kaeser
As I said, I mean Fossil is outstanding in execution, outstanding in performance given the percentage of installed base and if we assume moderate growth in revenues based on a solid backlog and then I would be happy if the margin would be sustained over the quarters.
Ben Uglow – Morgan Stanley
Thank you very much.
Mariel von Drathen
Next question please?
Operator
We’ll move to our next question, which comes from Peter Reilly from Deutsche Bank. Please go ahead.
Peter Reilly – Deutsche Bank
Good morning, I have got three questions, please. Firstly on renewable, Joe you commented that the previous margins were probably unsustainable.
You used to have a 12% to 16% margin target for the renewable business, you are now saying you can’t do a double digit margin in the future, maybe you could help us understand exactly what you meant? Secondly, I’d like an update please on the timings hitting your capital structure target.
Since the capital structure target was set last year, you’ve had the proceeds from the Areva divestment, (Inaudible) coming up later this year, does this mean that two to three timetable for achieving the capital structure target is being pushed back or you’re just going to have more capital deployed in the same time period? And then lastly if you could provide a bit more color on what’s happening in power transmission.
You had very good orders for the last couple of quarters and maybe talked previously about strong rising competition especially from the Chinese in that market, so is the market turning, is pricing power raising, or the Chinese getting less aggressive, could you maybe give us just some color on what’s happening in that marketplace or why you are able to be so successful in the winning orders?
Peter Löscher
If I try to step in with the first one, in terms of, you’re rightfully referring to a target margin which is no longer valid because if you compare, because we have just added up now at the sector level. If you look into really and this is valid today as it probably was yesterday and it will be tomorrow, the offshore market environment is a better one.
So we clearly anticipate that this is a very good environment because they have higher entry barriers. But you can already look into current announcement of competitors who have mainly onshore businesses, there is no doubt that there is a double digit market you cannot expect for onshore businesses.
So the mix of onshore/offshore will basically define how high the margins will be in different companies. And I think we continue to be benefiting from our mix, which is two-third, one-third and therefore relatively speaking we are outperforming also from an overall margin performance.
But as Joe is highlighting, this is a business which is in the early phase of maturing, of industrializing and the competitive dynamics are clearly now driven also by the effect that capacity is higher than demand. So on a sustainable basis, you should not expect and I do not believe that this is a business which can drive basically similar margins than we would have set for the Fossil business, which has a totally different entry barrier scenario being relative to wins.
But having said all of this, the opportunity what we see for this business is clearly; A, we have a very good installed base, we continue to have a very favorable mix onshore/offshore and its also business which is in the early cycle of serviceability relative to our other energy businesses. So you should expect from us relatively speaking to our competitors in this business healthy and good margins.
Peter Reilly – Deutsche Bank
Okay, thank you.
Joe Kaeser
Peter, on the transmission, we have booked good orders and we believe we continue to be well positioned in the transmission environment. One of the reasons being is that we win most of the connection orders if wind parks are being placed.
Its not natural that the good connection and the wind park are being rewarded within one contract, but there is a high connectivity to those two areas and we continue to benefit from that service offering out of if you want one shopping but one stop shopping and that has also been one of the major elements why we use so good order intakes and good growth of orders in transmission. As far as the traditional transmission environment is concerned, as it’s obviously transformers, validity strong local competition arising out of the whole programs at that time.
We’ve seen some easing in pricing, the competitive environment is still strong, but the pricing has been easing. So we still face pricing pressure, but it’s being easing over the quarters in the last two quarters.
On cable structure targets, there will not be a new target. We set out our one Siemens as an operating model how we managed the company and as a communication through the shareholders.
But as I am talking, we said this capital structure of 4.5 to 1.0 net debts over EBITDA. It happens net debt over EBITDA needs to be over a longer period of time.
But we stand to the targets, which we issued and then when there is time to discuss the actions then we will do so. But now we believe it’s a bit too early to discuss those topics.
Ben Uglow – Morgan Stanley
Okay, thank you very much.
Mariel von Drathen
Next question please.
Operator
We’ll now move to our next question, which comes from Christel Monot from UBS. Please go ahead.
Christel Monot – UBS
Hi good morning Peter, Joe and Mariel. I have three questions, please, and I'm going to come back quickly to what Ben said earlier.
In terms of the orders in Energy, can you bit more specific in terms of what you are expecting for the different businesses when you talk about growth moderate? If you could be a bit more specific whether this is going to come from Renewable, Fossil, or Transmission, in particular.
And second element, you're saying basically that you would be happy if margins were sustained over the next couple of quarters when you, I think, while referring to Fossil. I remember that in previous call you were talking about more realistic margin, somewhere around 17%, so are you actually talking about the fact that you think you're able to maintain a margin above 20% for Q3 and Q4?
And the last question would be on EUR125 million charges for capacity adjustments that you booked in Q2. I see some from Transmission, but can you be a bit more specific on where the rest came from?
Thank you.
Joe Kaeser
Hi, Christel. On the orders, obviously in energy this has mostly been about the Fossil environment and this is also better comments are related to its mostly on the traditional energy environment that we expect the market to seasonally ease in terms of growth.
But then again, obviously are going to lose share in the markets. So if the market – so a better than anticipated growth can be certainly would claim our fair share and our current position as a target.
In terms of Fossil, thank you for asking that question again. In terms of Fossil, so what I have on my records here is that we do have a margin of Q2 of over 80.7% that’s basically with the 1.520 billion gain on the Areva matter.
But when I talk about being happy to sustain those margins, I was basically saying that I would be happy if we maintain say 18% type of environment on a reported basis and that would certainly be something that we’ll be happy within. And Peter said, it could be dropping to 17, that’s why said you, I would be happy if it was 18.
So I think to be serious again, an environment within 17, 18 with some outstanding performance on projects may be a bit above, that’s the levels we’re currently operating at and that’s why this is our activation to maintain that level, but that would be very cautious about seeing incremental potential on the margins.
In terms of Fossil, thank you for asking that question again. In terms of Fossil, so what I have on my records here is that we do have a margin of Q2 of over 80.7% that’s basically with the 1.520 billion gain on the Areva matter.
But when I talk about being happy to sustain those margins, I was basically saying that I would be happy if we maintain say 18% type of environment on a reported basis and that would certainly be something that we’ll be happy within. And Peter said, it could be dropping to 17, that’s why said you, I would be happy if it was 18.
So I think to be serious again, an environment within 17, 18 with some outstanding performance on projects may be a bit above, that’s the levels we’re currently operating at and that’s why this is our activation to maintain that level, but that would be very cautious about seeing incremental potential on the margins.
Peter Löscher
This was on the Fossil margin, I mean if I try to draw a picture, it was an all-stars-aligned quarter.
Christel Monot – UBS
I think you said that in the previous quarter, which is the issue.
Peter Löscher
Okay, but look into what Chris just compared with our competitors saying and then I think then you…
Christel Monot – UBS
Absolutely. And quickly, on charges from 125 million charges for capacity adjustment?
Joe Kaeser
As we already said, the majority has been in T&T environment where we are realigning our geographic and global foot print. so all those charges which are really very minor per divisional of their business unit, they add up to some meaningful number, but if you look at the, the incidences it goes all across the company to small to report them by division because they’re completely immaterial.
All about we were saying is that, even though we’re still we’re on the growth agenda and invest into SG&A predominantly of course sales and R&D, we do not forget that are topics which need to be solved in terms of global regional footprint and this although this has a token to basically disclose that, we continue to work on optimizing our footprint and our productivity while even though we’re growing in the business.
Mariel von Drathen
And we’re rapidly coming to the end of the Q&A session. I think there is couple of people still in the queues, so I’d ask may be if you can just reduce the number of questions to may be one, maximum two, and then we’ll go for the next question, please, operator.
Operator
Certainly, we’ll now move to our next question, which comes from Martin Prozesky from Sanford Bernstein. Please go ahead.
Martin Prozesky – Sanford C. Bernstein
Good morning. It’s Martin from Bernstein.
Two questions please. On free cash flow, it was clearly much weak in the quarter, can you just give us a sense for in which businesses this was kind of most pronounced?
Was it due to more buffer stocks? And is this going to be a one-off adjustment?
Will it reverse? Or how should we think about it going forward?
And then on just getting back to Fossil, in the medium term, given the expansion you're doing in Saudi Arabia and North Carolina, are there new fixed costs we should expect to see in the Fossil Power division in the coming quarters?
Joe Kaeser
On free cash flow, it should actually have come, not come as a surprise, it’s been flagging there for quite sometime. We had outstanding cash conversion rates with the last quarters out of several reasons, which we have explained.
We did see a material decrease of customer prepayments given the strengths on our orders, and that’s been about 800 million to 900 million effect already of the total if you compare that year-over-year. So, it doesn’t catch us by surprise.
That free cash flow was relatively weak on the quarter. We should see some improvement again in Q3 and Q4, but way below last year’s numbers.
And as I said it doesn’t come as a surprise, it’s been calculating that in our liquidity and other areas as we move for long and oversea. If you just compare the financial discussion you see we are the majority of the reduction of free cash flow has been by division.
Martin Prozesky – Sanford C. Bernstein
Thank you.
Mariel von Drathen
Okay. I would like to conclude the Q&A session here.
I would like to thank everyone for participating today. Please note on page 10 of the presentation, we have our financials calendar with a number of upcoming events, especially like to draw your attention to the Capital Market Day centers around the emerging markets, which is going to take place end of June in Shanghai and we’re looking forward to meet you at these different occasions.
I know there is still couple of people who wanted to ask questions. The IR team is available throughout the day today, please do give us a call and we’ll help you with these ones.
Thank you very much. Bye.