Siemens AG

XETRA:SIE

Earnings Call Transcript 2018-Q3

[Clarissa Haller, Head of Communications]

Okay. Good morning, ladies and gentlemen. Welcome to our joint press and analyst conference here in Munich today. I'm Clarissa Haller, and I'm in charge of Corporate Communications at Siemens. And together with my colleague, Sabine Reichel, Head of Siemens Investor Relations, we will guide you through the event this morning.Yes. We have quite a packed agenda today, and that is why we have decided to have a common event today for media and analysts. Today, we report the third quarter results of fiscal year 2018, and we also want to update you on Vision 2020+, the new Siemens global strategic plan.

[Sabine Reichel, Head of Investor Relations]

Thank you, Clarissa. Also, welcome from my side. We're here joined on stage today with Joe Kaeser, CFO -- CEO of Siemens; our CFO, Ralf Thomas, next to me. As you can hear, the event is being held in English. You can also listen to the German translation with your audio device. Let's have a look at the agenda today. So first, we will start with the presentation Q3, which will be held by our CFO, Joe -- Ralf, sorry. And then we will have a short Q&A afterwards. After that, Joe will lead you through Vision 2020+, and we will have extends Q&A -- time for Q&A session. Before we get going, I would like to give you also a short safety briefing. In case of a fire alarm, please proceed to the nearest emergency exits, which are here on right and the left hand side. I also have some further housekeeping remarks. The event is being streamed live on the Internet. And in both Q&A sessions, you can ask your questions either in English or in German. But to allow simultaneous translation, we will answer all questions in English.Furthermore, I'd like to draw your attention to the safe harbor statements. And last, but not least, please switch off your mobile phones and put it on silent mode. Please also refrain from using the flashlights during this event.So now Ralf, please go ahead.

[Ralf P. Thomas, CFO & Member of the Managing Board]

Thank you, Sabine and Clarissa. And also, a very warm welcome from my side, ladies and gentlemen. To avoid any misunderstandings, we do not have any pirates on our fleet of ship. The fact is that I had to undergo eye surgery just recently, and the eye is still very sensitive to extreme lighting conditions. So please forgive me if I'm looking straight the next place to you when I'm talking to you.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Well, the good news is that Ralf with one eye sees even sharper than most of us with 2, so I'm still very confident that this doesn't really impact in a negative way.

[Ralf P. Thomas, CFO & Member of the Managing Board]

So thank you. Let's have a look at our third quarter's performance, ladies and gentlemen. The economic conditions continue to be robust on a global level, obviously. However, we see potential clouding on investment dynamics due to geopolitical tensions in some areas. In particular, threats to free trade by tariffs are an area of concern. The global supply chains are deeply interconnected, and it's of utmost importance to have reliable framing conditions to foster confidence and economic growth. Against this background, our global Siemens team delivered another excellent quarter with outstanding order intake and strong operational performance across most of our businesses.Let me walk you through the highlights of the quarter. We were very pleased with the strong book-to-bill of 1.11x and a new record backlog of EUR 133 billion for Industrial Businesses. Also, gross margin quality showed solid development. Comparable orders were substantially up by 21% on strong growth in all divisions -- almost all divisions. We had a number of large order wins, especially in Power and Gas, Siemens Gamesa and Mobility. Organic revenue growth was overall flat with solid growth in most divisions, driven by an excellent short cycle performance, offsetting weaknesses in Power and Gas and Siemens Gamesa. Industrial Business profit margin was at 10.7%, supported by another outstanding performance of Digital Factory and operational improvements in many other divisions. Six out of 8 divisions were in or even above the targeted range. As already indicated, currency effects had a significant negative margin impact of 60 basis points. We expect the negative FX headwind to continue in the fourth quarter.Net income came in at EUR 1.2 billion, a decrease of 14% compared to Q3 last year, which benefited from positive effects in CMPA and from a lower tax rate. Free cash flow from Industrial Business increased significantly by 29% to EUR 1.8 billion, driven by better working capital management, especially at Siemens Gamesa Renewable Energy. Our pension deficit was reduced to EUR 7.6 billion, supported by an extraordinary funding to our U.S. plants in the amount of approximately EUR 400 million.Let me now walk you through the divisional highlights. At Power and Gas, competition for orders continues to be very challenging. Despite this tough environment, we were successful in winning several large orders, leading to a strong book-to-bill of 1.25x. Most notably, we booked an order in the U.K. for the first deployment of our 50 Hz HL turbine. In total, we sold 5 large gas turbines during the quarter.We are very proud that we completed the world's largest combined cycle power plants in Egypt in record time. Total capacity adds up to 14.4 gigawatts, supplying over 40 million, 4-0 million people with reliable electricity in the country. However, as expected, profit margin for PG decreased to 5.4% on lower revenue, price declines and reduced capacity utilizations. Therefore, the PG team is working hard, extremely hard, on a large number of cost and restructuring initiatives.On the positive side, the Service business continues to hold up well. It also benefited this quarter from a divestment gain of EUR 80 million. Service continues to show resilience on top and bottom line also for the foreseeable future of the next 12 to 18 months.What to expect in the future? In particular, in the large gas turbine market, we see the volatile market environment to continue over the next 2 years with potentially further declining turbine volumes compared to 2018 with corresponding negative impact on top and bottom line. As a consequence, we expect the PG margin, excluding severance, to be rather in the mid-single-digit area in fiscal '18 with a low to mid-single-digit performance, excluding severance, in fiscal '19.Energy Management saw weaker large orders due to some pushouts of HVDC solution projects into fiscal '19 and beyond. The short-cycle low-voltage product business drove margin up despite material FX headwinds of 100 basis points.The Building Technologies team again delivered excellent operational performance with further margin expansion to 11%. Continued expansion of advanced digital offerings for smart buildings drove margins to the upper end of the margin corridor.Mobility showed strong order momentum, too, and booked Siemens' largest-ever rail infrastructure order in Norway with approximately EUR 700 million.Profit margin was temporarily lower, partly because of focused expenses related to innovation and digitalization. Furthermore, margin was impacted by mix effect, such as the phasing of some large rail projects. We expect the profit margin for the full year on the similar level as we saw it for the first 9 months year-to-date, around 10%.Digital Factory delivered again a world-class performance, winning further market share by outperforming the whole industry. Looking at our short-cycle business, we achieved remarkable revenue growth. China was up 18%, driven by governmental programs still having impact to new customers that we have been winning and restocking effects, to a certain extent. Italy delivered significant 15% growth. Germany was up 4%. Also, demand remained very strong in the machine building industries, while automotive saw some moderation, particularly in the U.S. Given the short-term visibility of this business, from today's perspective, we expect also a positive trend in the fourth quarter to come. However, growth rates will ease, particularly in China, into fiscal '19 due to tougher comps and moderation of the extraordinary business dynamics.We were very pleased that also the PLM software business grew mid-teens organically, fueled by significant contract wins at Mentor Graphics.As indicated before, profitability at Digital Factory is impacted by ongoing investment in MindSphere and integration costs from Mentor. The impact was around 145 basis points and 30 basis points, respectively, in the quarter. Hence, the underlying margin, excluding severance, was again outstandingly strong, close to 23%.Process Industries and Drives seems to have reached the trough, with increasing revenue now in the third quarter. Bottom line was impacted by a material currency headwind of 110 basis points. The team is well on its way to execute its challenging restructuring program. As a majority shareholder, we are very pleased with the positive development of Siemens Healthineers since the listing on March 16. Solid financials for the third quarter were already released a few days ago, with 5% revenue growth and 15.6% margin despite heavy currency headwinds of 140 basis points.Not much to mention today about Siemens Gamesa as they reported their results already last Friday. We were pleased with the strong book-to-bill ratio of 1.54x. Needless to say that the team is working very hard to execute its improvement program to bring margins in a very competitive industry on higher levels.Let me briefly touch now on what to expect below Industrial Business in the fourth quarter. As indicated, we continue to expect volatility in CMPA, with a negative impact due to carve-out-related topics. We expect corporate items to incur significantly higher cost in the fourth quarter compared to prior year. This is, in particular, related to central innovation invest and restructuring costs related to IT transformation mainly.As already mentioned, Q3 tax rate will be negatively impacted by material effects from the carve-out of Mobility. For the full year, we continue to expect the tax rate to be within a 24% to 29% range. For fiscal '18, we see no change in expectations and can confirm our guidance.With that, I'm handing back to Sabine, and Joe and I will be happy to answer your questions.

[Sabine Reichel, Head of Investor Relations]

Thank you, Ralf. We will start the Q&A now first with the analysts, and we will then also move to the website.

[Sabine Reichel, Head of Investor Relations]

But now let's move on to the next topic, to our strategy update. And with that, I'd like to hand it over to Joe Kaeser.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes, thank you. Am I allowed to stand?

[Sabine Reichel, Head of Investor Relations]

Whatever you want.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Thank you. So I like it more this way. Good morning, everyone. Almost to the day 5 years ago, I was standing in the same place at a different way, and I started my post as CEO of Siemens. At a time which has delivered a terrible quarter, I did cut all targets of what used to be named Siemens 2014. Today, we delivered a fiscal Q3 as we had promised to do. Nothing spectacular, but nothing bad. Just an uneventful quarter, which has its moments on, obviously, on the booking side with 21% positive, but it also has its challenges such as power generation and a few others. However, this time, a normalized quarter, almost a boring quarter, uneventful one. We believe it's the perfect moment to talk about the strategic concept which we call Vision 2020+. Our Q3 number, I believe, really shows that Siemens is in great shape. Especially where we invested into our businesses, most of them are doing well. Some are even outstanding. We are heading towards another year with record operating results.[ Communication ] really is -- actually changed and right now, not later. Well, ladies and gentlemen, I believe it's pretty simple. So thanks to a really great global team that has done an excellent job in executing our strategy program which is called Vision 2020, Siemens is in a very strong position right now. And the best time -- the really best time to take that to the next level is when you are doing well. And if you are strong, even Charles Darwin discovered that it's not the strongest or the most intelligent species that will survive and evolve, but those that can best adapt to the ever-changing environment. And that's exactly what we are up to, and that's exactly what has never been more true as today and speaking of that include -- of change are unprecedented. Yet, we believe the more dynamic the change, the more cautious transformation should be because it takes time. And that's why it's so crucial, so crucial to early adapt when there's still enough time to guide transformation and enable stakeholders to embrace it. And that's why I believe now is the right time to make those changes at Siemens.Our aspiration is to create a company that is not only successful today, but is also prepared well for a decade to come. And today, I will explain how we intend Siemens to reach next level. We will provide details on the next-generation Siemens or what we call it officially, Vision 2020+. To be a company that is inspired by its purpose, obsessed with serving customers better in every interaction we have and a company that relentlessly, and I mean relentlessly, drives impact and innovation. A company that is unified by the values and the power of its ownership culture. When we presented Vision 2020 4 years ago, Siemens was not exactly in a great shape. It was a great company, but it was not in great shape, neither strategically nor operationally and certainly not from the point of view of business leadership. With huge uncertainties in the organization and credibility in the market at all-time lows, it was necessary, it was very necessary to provide strategic direction; to rebuild trust and credibility; stabilize the operating system, which some confused as just resting on where we are; and strengthening the [ in-order ] of that company. That's what we said. That's what we did. In that situation, ladies and gentlemen, there was no point, there was no point in taking and delegating more responsibility to the businesses. They were struggling with basic tasks such as selling, developing and manufacturing, and a strong corporate machine was unavailable. Vision 2020 was our plan for addressing these issues and for reorientating the company in terms of purpose and performance.We defined 7 goals ranging from the stringent covenants and strengthening our portfolio to fostering an ownership culture throughout the whole company. For 5 years almost to the day, almost to the day, we worked really hard to achieve our goals, and we did exactly that. We made good on what we promised, many areas even ahead of time, and we did it because we had a great team.We brought growth back to Siemens, and profitability increased by 40%. In most of our businesses, margin quality has improved significantly. And on top of that, we increased our investment in innovation by more than 20%. So we are not in for the short term. We are also investing into the long-term profitability and sustainability of this company. And we managed to increase our customer satisfaction index by what I believe is a stunning 55% over 2013.It's also proven that we can complete large projects on time and even more importantly, in the money. And Ralf has already mentioned the successful cooperation and completion of the world's 3 largest power plants ever built in one place and in one piece. No other company, no other company in the world has ever been able to accomplish that. But we not only made progress from an operational perspective. We also systematically sharpened our portfolio with targeted acquisitions into future growth areas and obviously, a very decisive step forward of the strategic development of our Renewable Energy, our Healthcare and hopefully soon to come, our Mobility businesses. Siemens started early as an early mover, so to speak, and we developed diligently a powerful industry-shaping portfolio, which is fast-growing on the software side. And under the leadership of Klaus Helmrich and his management team, this has become the leading entity for the fourth industrial revolution, a market share by growth and also by reputation. If Siemens says something today in the digital enterprise, the world listens and not just moves on to speak about other topics. These efforts obviously have been paying off in a big way. Our digital business has grown 80% in 3 years. Fiscal 2017, it generated revenues of more than EUR 5.2 billion and expect that to substantially increase in the current fiscal year.Today, Siemens is the leader in industrial software, and Siemens offers the most holistic digital twin along the whole entire value chain, from design to production all the way to service. And we launched MindSphere, our cloud-based system, in the Internet of Things in 2016. A lot has happened since then. 50 MindSphere application centers were already built. We founded MindSphere World, within the meantime 18 partner companies, and more than 1 million assets are being already connected to MindSphere. And our end-to-end security concept protects those assets. It's called defense in depth, a very important matter. It features encryption, protected access as well as a suite of robust industrial security services. And we are actually well on track and very decisive to build out MindSphere, the world's largest industrial Internet platform, by [ facts ]. And the latest deal with Alibaba, I'm sure you remember, will exactly help us in the world's largest manufacturing country, namely in China. But the real customer value will come from the fast and the effective development of applications. That's where everything comes from. That creates values. And our new addition, Mendix, will help us to exactly do that. The acquisition of Mendix will broaden our capabilities in the highly attractive field of local and mobile application development. It will enable us to massively expand the support we provide to customers in the digital transformation of their business. With growth rates more than 40% over the next years, the market Mendix addresses is highly attractive. The company earns margins which are typical to well-run software businesses. And the business model is subscription-based. That means more than 90% of Mendix revenues is reoccurring.So the question is, what exactly does Mendix do? Well, in essence, it provides a platform for developers to create applications up to 10x faster than just the normal traditional way of software coding. The acquisition will add a highly motivated team and especially a highly capable team of more than 400 employees to our software business. And the leadership of Mendix has a pronounced entrepreneurial -- very pronounced entrepreneurial mindset. Their founders, they know how to run the business. And even more importantly, they know how to focus people who have options to a common task. We do plan to merge MindSphere and Mendix platform together, and that will enable us to shorten the release times of the software -- of application development by more than 50%. Also, Mendix, more than 50,000 application developers are obviously a key asset, and we expect the number to double rather soon. Engaging them in the MindSphere ecosystem will deliver huge benefits for our customers and for us. And in return, Mendix will receive access to our global customer base and to our sales channel so the business can scale up in a global sales network.The purchase price of about EUR 600 million, the transaction multiples are in line with peer evaluations if you compare other deals in that space. We expect the transaction to be EPS accretive in 4 -- in year 4 as the transaction is being closed. And then we expect Mendix to be part of our industrial software business headquartered, obviously, out of Texas. Going back to maybe Vision 2020. We've largely met the goals of Vision 2020, in some cases, even earlier than we planned. So I think it's fair to say that Vision 2020 has truly been a success factor. And obviously, the Siemens share price reflects that. And it's a success which results from the hard work of 377,000 people around the world. They made Vision 2020 real. And I probably shouldn't say this, but anyway, they made Siemens great again. So a big thank you to all who have contributed to this remarkable success. When I say our people made Siemens great again, ladies and gentlemen, this is not fake news. All stakeholder, obviously, are benefiting from the success, and this is how it should be. And if we summarize the last 5 years, I believe it's not a big exaggeration to say that we've built a company that is better than it was in 2013, although, obviously, we had some easy comps associated with that comparison. So will that be a good time to rest on our laurels and wait and see as the time go by until we are done? Well, ladies and gentlemen, maybe. Maybe. But honestly, we and the management team made a different choice because we have a different aspirations. We decided that it's time to raise the bar, and we are all well advised to do so because a lot is changing in the world around us: First, the geopolitical arena. Alliances and international agreements have been rock-solid for decades, but they cannot be taken for granted any longer. Second, the resurgence of nationalism and protectionism is affecting our markets. Localization that is creating local value is becoming more and more important. Third, it's likely that the next decade will be marked by the greatest technological and societal transformation the world has ever been experiencing, and their magnitude and speed will be unprecedented. Fourth, global mega trends are causing paradigm shifts that will affect all of our businesses, all of them. And while we have to accept that the future is uncertain, we decided to start shaping it at our area of influence.This is not too difficult obviously to connect the dots between mega trends and Siemens. The global fight against climate change is a big opportunity for our energy businesses. Photovoltaic and wind power generation will increase sixfold by 2050, and Siemens Gamesa Renewable Energy, obviously, will be playing a major role in that space. And even more importantly, the more important opportunity is that Mobility will massively increase as global trade and global populations grow. And at some point in time, ladies and gentlemen, Mobility will be all electric. It will be all electric. And at some point in time, this needs to be a [ feast of ] opportunities for our electrification, automation and digitalization systems of products, solutions and services.All of our markets are affected by those paradigm shifts. Both of them create attractive growth opportunities. And in some areas, obviously, we need to manage transformation challenges. That's exactly what we are going to do. In our Power and Gas business, we see a massive shift of investments from conventional fuel fossil power to renewable sources and distributed energy systems. Yet there are still pockets of opportunity which we are going to capture [ holes ] in that space, and we do expect Power Service to be resilient for the foreseeable future due to opportunities arising from digital services and the modern installed fleet. That's very important, a modern installed fleet as we just see it coming online and being commissioned in Egypt.By 2023, more than 2/3 of investments are expected to flow into distributed energy systems, and that means electrification that opens up a lot of opportunities for us to expand in adjacent areas, such as combined heat and power; energy storage; e-mobility; of course, also cloud management. With more and more infrastructures, assets are being connected. And our new setup will reflect this convergence as we expect to benefit from those growth areas going forward. And there is no factual doubt that Siemens has enlarged its lead in the area of industrial automation and digital enterprise. Our market share gains with the Digital Factory division are compelling, a very compelling evidence of this strength. And obviously, I think it's clear that this market continues to enjoy high growth over the cycle and that we are going to double down on that success story. It is only natural going forward.And in addition to those attractive growth areas, customer demand for IoT integration is huge and is rapidly growing across all our businesses. And the services range from consulting to designing and implementing new applications and platform. And that market is already there today, and it's just about to almost triple by 2025, which is quite a big opportunity and a quite rich profit pool. We intend to participate in that field because we know how to do it. We will concentrate our existing domain know-how and resources in our new unit IoT integration services, and that will give us a head start, a pure head start, and enable us to capture growth in an adjacent field with a very attractive business profile.And I really would like to emphasize that we are not starting from scratch here. We can build our own enterprise, our own experience based on industrial digitization, based upon know-how we have in the physical world. We have very deep vertical domain know-how and a very huge installed base, which will definitely help us with more than 45 million assets in the industrial field alone, which we are connecting as we speak. We can leverage state-of-the-art applications and capabilities into fields like cybersecurity as well as in artificial intelligence.Ladies and gentlemen, that [ much ] where we see rapid growth. That's where we see opportunities. And before I come to the new entrepreneurial concept, let me maybe touch on something that had a considerable impact on our Vision 2020+ concept. It's actually the question, what drives us? What is it? How will a digital world have all things connected? How does it resonate with the analog human world? So in other words, how do we hold together a society that will be divided even more in a digital world? Why is competence in this area so important to Siemens? Is there nothing more than for other people like philosophers? Ladies and gentlemen, no, it isn't. Science and technology will drive and enable change. That's a given, but society will determine whether and how that change is going to be embraced. The changes to and interactions with businesses and society will be fundamental in embracing the benefits of a fourth digital revolution.Climate change, smart grids, smart cities and rising energy demand will enable and accelerate the shift from centralized to decentralized energy. The automation of everything, the so-called Internet of Things, the maker economy and the logistics Internet, will drive industrial digitalization and the connections of IoT devices. Technological unemployment and the need to reskill or upskill our people is an important matter to provide proactive education and reskilling into the labor market. And the aging of the population, longer life expectancy and life extension will not only lead to dynamic growth in health care, but to a complete change in the value system of our society. In fact, enterprise of the future will be characterized by decentralization of everything and especially in an empowerment economy. So ladies and gentlemen, ownership culture will be standard in a modern enterprise that we built. And obviously, as [ millenniums ] and millennials enter the workforce and gain influence, the purpose of a company and the value it creates to serve society determines who win not only the war for talent. So that's where people are being inspired with, and this is what convinces them to give their best every day. Ladies and gentlemen, this is how science, technology and society are likely to develop and interact in the future. And that's why we will fundamentally change the setup of our company. The business of business is to serve society and create value for all stakeholders based on economic benchmarks. That's what we are striving for, and that's what we are going to build the values of these companies on. That's our purpose. And as we fulfill it, we will integrate socioeconomic factors that foster broader acceptance of a best-in-class economic aspiration, and that's important. There is no service to society if we are not the strongest in the industry. And that's very important. We make real what matters, and that is what holds Siemens together at the highest level of acceptable integration.Now obviously, the question is, what does that do to the Siemens structure? We will shift from a one-size-fits-all set-up to a purpose-driven, market-focused and a readily adapted organization for disruption and being able to foster consolidation. All 6 Siemens companies will have full entrepreneurial responsibility, the way they implement, what they will differ about. As a consequence, we will allocate as many support and operational functions as possible to those companies. And we are ready to go. In 2013, the businesses were not ready to take on more responsibility and therefore, accountability. Now they are. And that's why we exactly do this now for that purpose. It's imperative for all Siemens companies to sharpen their focus. And when in doubt, when in doubt, focus takes precedence over synergy. They all have full control in shaping their businesses to achieve superior performance, which will be measured against the best of their respective industries. The future of Siemens will consist of 6 companies. We've got 3 operating ones, Gas and Power, smart infrastructure and digital industries; and 3 major own strategic companies like Healthineers, Siemens Gamesa and Siemens Alstom to be. The regions, that's important. The regions are now part of our business. Not doing a separate thing, but integrating the go-to-market to serve the purpose. But every Siemens company can design on its own on how it goes to market more efficiently and best for their business. For the most relevant markets like China, Germany, India and obviously, the United States, we are establishing so-called corporate countries with a broader responsibility to integrate our market, our socioeconomic and of course, also our political interest in this space. Corporate development contains functions that are relevant to us and to more than one businesses. This is about corporate development that optimizes interests of multiple companies. It is important that it integrates interests on multiple companies based on a defined outcome, not on policies which was once before. It holds the company together as an innovation powerhouse, and its mission is to develop the company technologically going forward. In addition, we will bind lower businesses that require small and medium-sized setup into a unit which we call Small, Medium Enterprises, or SMEs, led by Jochen Eickholt, who, as you know, has done an excellent job in the restructuring and building what we call our Mobility division right now. We've got 3 service companies which will support the Siemens companies: Financial Services, global business services and Real Estate services. The Siemens companies will decide to what extent they will utilize those transactional services. They will make cost more transparent to the business and easier to control. And by the same token, the service companies will provide synergistic value by [ bundling ] similar transaction-based services and a lean, simplified yet robust governance will set frame, for example, from a legal compliance or an accounting perspective.Ladies and gentlemen, it goes without saying that there will be no compromise, and I mean no compromise about compliance. Only clean business is Siemens business, and that applies without an exception.Now let's move on to how we will structure our businesses. The existing 8 divisions will be integrated into 3 operating companies and 3 strategic companies, all of which have the mission to be leaders in their respective markets. And leadership is measured by market share and sustainable benchmark profitability. It goes both ways, growth and bottom line performance. Now let me give you a rundown and the operating companies. Gas and power, it obviously is focused on central power generation, on oil and gas, as well as on high-voltage transmission and the respective vertical associated with that business. The go-to-market approach will consist of a dedicated hub and field service structure, very dedicated go-to-market. And the goals are greater market share in a streamlined support environment. We also combine these businesses to better leverage competencies, such as project management and service, which is in both transmission as in power generation businesses. And there is in no doubt, there is no doubt that the overcapacities and structural changes in those markets are a big challenge for our energy units going forward, but there is also no doubt that we are going to fix that business and right-size as the level a market demands.It will take time. At the same token, we are going to co-innovate with our customers on new business models, as we do it in Middle East or in recently in Brazil already. Unfortunately -- fortunately, I have to say we've been able to earn the trust and attention of our customers in that space, especially in a time when reliable and financially stable partners have become a scarce option in that field. Siemens has positioned itself as a partner of choice in most areas of the gas and power spectrum. And as Ralf obviously alluded to, we do expect a significant deterioration of performance in fiscal 2018 and '19, which we consider to be the, let's say, the base-lining for the restart towards a mid-term 8% to 12% margin goal.And there is opportunities. Time and again, just think about the Memorandum of Understanding, which was recently signed with China SPIC. It calls for a technology cooperation in the development of heavy duty gas turbines for China. And that means that whoever is going to do that is going to set the standard for gas turbines in China. That's what it actually says, nothing more, but also really nothing less. And with the highly capable and committed management team in power generation, with a very robust backup of more than EUR 45 billion, I have no doubt, and I repeat, I have no doubt that this management team will bring that business to a sustainable future by rightsizing in one hand, by creating opportunities in the space on the other.Smart infrastructure company, it's a very different situation. Obviously, it's in a huge growth area environment. It operates in EUR 170 billion market that is expected to grow at a healthy rate of about 5% in the years to come. That's a lot, probably just about twice GDP going forward. The businesses which are involved here have a very, very strong track record of continuous improvement of both the top, and as you know, the bottom line, and we expect that actually to accelerate. At all 3 verticals, power grids, infrastructure and buildings are converging and creating new opportunities in a connected space going forward. Building will become smart spaces, and obviously, the key energy prosumers, as we call them today, are closely linked to the grid, and that's exactly what we are taking the benefits from because we've got distributed energy system. We've got electric charging. We do know how to do energy storage and driving growth by doing just that. And for the first time, and that's important, for the first time, we bring together the product piece with the solution piece, so we can go into the market with a comprehensive offering on a much stronger combined regional footprint. And finally, obviously, when we combine the leading building and grid automation technologies where we are by far #1 in the world, with the basis of the whole enhanced digital services, ladies and gentlemen, that is going to be a massive benefit for the customers, and obviously, also for shareholders by driving margin expansion, and we do have a very experienced team. Matthias Rebellius has been taking Building Technologies from a meaningless contributor to profitability to a highly valued and respected business in the company, and that's exactly what we are going to double down on going forward.Now obviously, the diamond in the whole area here is digital industries. They have an unmatched portfolio. They are trendsetting and a powerhouse in the area of what they do, and there is only natural, clearly natural that we are going to double down on that success, and that include not only the discrete industries, but also the process industries in that organization and make sure they understand of what can be done and what is achievable in growth and margins and market share also in the process industries. That's what they're doing, they're doubling down on transferring our winning formula of the manufacturing to process industries and drive products, [ not ] drive solutions. And this unique combination of industrial software, of automation, will drive end-to-end solutions to our customer, and that is where the value comes from, and that's why we continue to outgrow the market in that space. And if you look at how we have been enhancing the margin goals over the cycle, we also took a very strong commitment on executing on that topic. Now ladies and gentlemen, I come to -- quickly to the strategic companies. Well, obviously, the IPO of our Healthcare business, this was part of Vision 2020 really just when we announced it that we will keep that a more focused freedom. We have maintained our pace also to strengthen some businesses in the other area by combining them with third-party. And the approach here was very challenging because what did we actually want to achieve? We wanted to achieve, to strengthen the business, on one hand side, and keep control with outstanding billions and billions of acquisitions and premium for control, and that's what we did. And in our view, even over time, a liquid traded asset on a stock exchange has a value on its own, has a value on its own, it creates opportunity and it creates optionality. And this could become a really important topic as we move along in focusing our company to an industrial Siemens footprint. While we obviously agree that managing these assets do involve greater efforts, the approach is paying off. We are an active shareholder. But we are not an only active shareholder, we understand the business too, and that's why we have all the capabilities to govern that business, those companies with supervisory board structures. We have knowledge of the strategy. We have knowledge of the organization. We know the performance earlier than most others. And we know our leadership and what needs to be done to optimize those companies. Healthcare, Siemens Healthcare or Healthineers, as we call it, I believe it's undoubted -- undisputed that they really made a strong debut in the marketplace, and I remember some people saying, oh my god, what a big disappointment, that EUR 28 per share. Well, sometimes, we give people the opportunity to win something. To make some profits, to feel good on what they did when they invest it. And ladies and gentlemen, I hope you all are proud shareholders, initial shareholders of Siemens Healthcare.That brings me to the merger of Siemens Wind and Gamesa. I mean we can cut [ it short ]. Just imagine, if we had not done this prior to consolidating markets in that industry. Well, with a market share of 17%, Siemens Gamesa today is the #1 company in the market. Therefore, we achieved, despite a bumpy start, despite issues in the market, but just imagine how we would have done without Michael Sen. You will know him as overlooking both of these assets, and he's a very active shareholder because [ he know ] how to do it despite a obviously somewhat bumpy start that stabilized, that synergies are in place, and they are starting to soon gain traction. The business obviously has a very powerful purpose, has the renewable areas and he attracts a lot of new talents.In Siemens also, we want to create exactly the same thing. Now obviously we have some way to go, but the first results on accepting that merger as a compelling logic, you have seen 95% of Alstom shareholders are voting for that merger. I mean, ladies and gentlemen, what else can we expect as a token of appreciation and acceptance that this has the potential to create real value to the shareholdings going forward.Now ladies and gentlemen, one of the areas which we promised to do in Vision 2020, actually, was to fix underperforming businesses. Some called it the bottom 10. Others said, these are the rest I called the area where we put all the things to rest. Ladies and gentlemen, there are businesses which are challenged, but they are still having customers. They're still having people. They deserve a responsible treatment of those assets, and that's why, at this time, we do it differently. While we kept those businesses, those underperforming businesses in those areas, they were before in 2020. This time, we take them out of the organization. We pool them together, and that has been actively managed by Jochen Eickholt, who has proven what successful restructuring is all about. These businesses typically operate in a highly specialized market, and we believe they're better off in an environment, which support medium-sized and specialized businesses, going forward, to make them faster, more flexible, and last but not least, and ultimately, what is also more profitable.Currently, those small and medium enterprise businesses have a total revenues of about EUR 5 billion and a negative return on revenues of about EUR 300 million. Our goal is to have at least about 5% profitability by 2023. And since this is a long time to wait for, we have already set a goal in between, so that we are going to have breakeven on those businesses by end of 2020. That's the goal, mid-term goal, and then we'll have them at 5% in 2023.Ladies and gentlemen, let me now summarize the intent of what we want to have as an outcome of the Vision 2020+ concept. It is designed to emphasize the focus and the accountability of an enhanced company in order to accelerate growth and achieve higher profitability. The medium term, it's important in the medium term, but it doesn't go overnight. We expect revenue growth of 2 percentage points compared to the current level we are operating in. We will provide our operating and strategic companies with the entrepreneurial freedom, and the flexibility and the power to optimize and focus their businesses with support functions according to their specific needs. The respective CEOs and their management teams are responsible and fully accountable for their companies. This, together with a structurally enhanced portfolio, will lift our current industrial margin by a level of 2 percentage points in the mid-term. Below industrial business, further value creation will result from fixing small and medium enterprises from defined efficiency measures in our global service companies, as well as a significantly streamlined operation of governance and support efforts. And therefore, we obviously do expect our earnings per share growing faster than the revenues in the medium term, and obviously, the respective KPIs in the financial framework will exactly reflect that outcome.Ladies and gentlemen, our updated Siemens financial framework defines our new and what we believe very ambitious mid-term targets over the cycle. Much of that will look familiar to you. And there's one big change, one big change. We are raising the bar for growth, for margin, and especially cash performance. You see the new cash conversion goal here associated with the system, and we believe it's important.A 4% to 5% comparable revenue growth is obviously a highlight of the new growth ambitions for the mid-term. And a margin target range of 11% to 15% for the total Industrial Business over the cycle for our industrial areas will reflect our ambition to raise margin quality altogether. We measure them based on adjusted [ EBITDA ] margin, which equals our current way of defining the profitability going forward, so that means actually before PPA. And our clear aspiration, our clear aspiration is to become to remain the leading company in every business we operate in. For our operating companies, the margin targets are derived from a basket of our main competitors, and the adjusted [ EBITDA ] margin ranges are as follows. For Gas and power, we expect a midterm range of 8% to 12%. And obviously, we are leaving quite a bit of room for further improvement on current levels, and will time -- it will take time to close that gap. For smart infrastructure, the new target range is 10% to 15%. That's significantly above the previous like-for-like targets in the EBIT environment as it used to be for Building Technologies and Energy Management. And target range of digital industry is a record-breaking 17% to 23%, and that's quite an aspirational level. I hope I can assume that you all agree to that when it's an increase of 3 percentage points over the like-for-like reallocated environment. While we are aware of how ambitious our target is, we believe we have the power, we have the strength and we have the will, and especially the team to achieve that. The adjusted [ EBITDA ] margin for our strategic companies obviously do reflect Siemens' shareholder expectations, which we are doing everything through our impact on the board to make those a reality, be it Siemens Healthcare is 17% to 21%; or Siemens Gamesa, 7% to 11%; or the future Alstom, where we have been setting a target margin of 8% to 12% for the foreseeable future. And the reason why we did not put the 11% to 14% here, which we originally announced by the time of the merger announcement, was that we did not even have a company yet. So it will take more time there to go to the 11% to 14%, but the targets still stand but they are more long-term in nature, so that's why now for the time being, we are at actually 8% to 12% and upside for a fully-fledged operating and used-to-each-other company. Our Financial Services, which obviously is always a very reliable profit source every quarter, the target range for return equity after tax is 15% to 22%. So all the Siemens companies, all 6 of them, including also Siemens Financial Services, which makes it 7, have all the freedom, all the power, all the strengths to make good, although the targets are -- and the targets are obviously, that goes without saying, are agreed with the respective management teams. So this is not top-down. This is not something which people may want to call a legacy left behind. This is something we pulled up together as a management team, and that's important for you to understand.So in almost concluding, I know it's been a long time, which I have been taking. Question is, what else is important other than growing it by the number? Well, obviously, Siemens shareholders are important, and they still can expect a dividend payout between 40% and 60%. And capital efficiency has always been clear that this remains a priority, even though we are very well aware that acquisitions do a lot of harm on that in the short term, so we need to have some time to get the ROCE targets back to where we want to have them at 15% to 20%.Ladies and gentlemen, we have defined very clear the measuring of KPIs. It means key performance indicator for implementing Vision 2020+. We will keep you updated as we implement it, and maybe it's about time to briefly explain what we mean. First, I have already mentioned that the medium-term financial ambitions set down in our updated financial framework are the ones we are going after, and our aim is to extend profitable growth. Second, it is set up to create an enterprise that has a clear business focus. And this is about the winning formula: electrification, automation and digital enterprise. Third, customers are first. Their full satisfaction is our first priority. The Net Promoter Score is an indicator of customer satisfaction. In Vision 2020, as you know, our target was to increase by 20%. We ended up at 55%. But today, again, we are going to raise that bar even further, and the goal is to improve it at least 20% further out. And our obsession to win mind share and share of wallet of our customers is not stopping here, and that's why we have actually been increasing the goal line from an already very remarkable level.Fourth, for many reasons, the trend toward more local for local is accelerating in our markets, be it nationalism, protectionism, be it just the real for -- for developing economies to become as wealthy as the developed ones, we need to be clear that this is a trend which is going to last. And actually, as a matter of fact, ladies and gentlemen, it is going to accelerate further. So therefore, we are going to anticipate that. We are going to be closer to our markets, not only by revenues, not only by manufacturing, not only by engineering, but also by decision-making right at the desk of the customers, so therefore, more than 50% of our businesses will be headquartered outside Germany and closer to our key markets in the future. Five, Siemens company will be supported by a lean, but robust governance organization and an effective, but impact-focused and impact-driven support structure.Sixth, highly engaged and motivated, and especially capable people are the foundation of our success. That's why we are very, very mindful about the approval rating of our global engagement survey, where we are going to measure the satisfaction of our people in relevant topics.And obviously, seventh, same is true here. The engagement of our people make a difference in the end. It's not about technology. It's not about only customers. It's about the people who make it work. So therefore, we are very, very engaged to keep our people go the extra mile. The last engagement survey, 90% of our people who responded out of 230,000 said we are actually willing to go the extra mile. But I'm really, really very proud that more than 300,000 people, our employees and our Siemens shareholders, this inspires us, and they give us the full purpose of what we want to achieve.Ladies and gentlemen, we have successfully completed Vision 2020 ahead of time. Most of our businesses are doing well. Some actually are doing really well. A few even set the benchmark in their industry. That's a remarkable accomplishment, considering where we came from when we introduced Vision 2020 in May 2014, and that's what I promised, and that's what I wanted to be measured against, but accomplishing that was only possible with a great team. It's a team that deserves a big thank you. It's a team that deserves the utmost respect.Ladies and gentlemen, the world is not waiting for us till we are done resting and celebrating. We have responsibility for the next generation, and we have a purpose to fulfill, and that time is now to get it started. That's why we are raising the bar, and we have a plan for taking Siemens to the next level, and that plan is called Vision 2020+. We will launch the transformation of the organization on October 1 at the beginning of our fiscal year, and our aim is to complete the whole realignment by March 31, 2019, so that we are able to start the full-fledged new setup by April 1, 2019. Some of the milestones for the implementation of new setup are listed here, and we'll obviously keep you posted on the progress.Vision 2020 is our vision of the future of Siemens. Next-generation Siemens will be a focused and it will especially be an adaptive company, a company united by a larger purpose, a purpose of serving society and creating value for all stakeholders. We have a competent, we have a committed, and especially, a very motivated global team, motivated by the success of Vision 2020, and we are going to build our company to last. That's the plan. That's the commitment. And with that, ladies and gentlemen, Ralf and I are looking forward for your questions. Thank you very much.

[Sabine Reichel, Head of Investor Relations]

So first question, Simon Toennessen.

[Simon Toennessen, Analyst]

Can you just talk a bit more about the Power and Gas margin in the quarter? It seems it's another step-down if you take the divestment gain out versus previous guidance. So excluding all the one-offs, what's happening in the underlying market in terms of pricing? What are you seeing there?

[Ralf P. Thomas, CFO & Member of the Managing Board]

Yes, thank you for that question. As I have been touching on a bit already, we had an extraordinary gain from a divestment in our Service business of around EUR 80 million, and this will obviously not repeat itself. On the other hand, we also have been starting to book restructuring charges there to the extent of around EUR 20 million. And as I have been guiding also into fiscal '19 already, I think the new normal is rather between low and mid-single digit. But it is important for you to understand that we very, very carefully are tracking our backlog and our Service activities. And as I said several times before, we see there's very strong resilience on both top and bottom line. I do know that not all competitors reporting that way. That's why I'm stressing it. And what we also do see is that there is no higher level of cancellations. Pricing pressure is in place, in particular on the new product side, but that's why we are also opening up the way for our new business models that we are developing together with customers. And we will tip on all these opportunities without taking too much risk on board.

[Sabine Reichel, Head of Investor Relations]

The next question goes to Mr. Flämig, please.

[Michael Flämig]

Flämig, Börsen-Zeitung. Could you give us an amount for the restructuring cost and the carve-out cost in Q4 and maybe a breakdown on the several items?

[Ralf P. Thomas, CFO & Member of the Managing Board]

I apologize. I can't do that today. We are still in the process of negotiating, and we do one step after the other. But if you consider the restructuring charges that we have been booking current quarter, third quarter, that was EUR 138 million in total. We had some EUR 160 million in the second quarter of this year. The amount will clearly be higher.

[Sabine Reichel, Head of Investor Relations]

Next question, Peter Reilly.

[Peter Reilly, Head of Capital Goods of Equity Research]

It's Peter Reilly from Jefferies. Can you give us some more color on what's happening in the PLM business? You talked about mid-teens growth. What's driving the growth? Is it integration benefits from Mentor Graphics? Are you winning share at Saudi Automotive base with your -- it's historically very strong. So please some more color on what's happening there.

[Ralf P. Thomas, CFO & Member of the Managing Board]

Thank you for that question, Peter. I think PLM is really an outstanding example. What can be accomplished if joint forces do the right thing at the right time, I mean, we are definitely capitalizing on the different customer bases and also on that one that Mentor has been bringing. Mentor is a real success story for us in integration and also in top line development. So the teams are very well and -- are very well cooperating. And they get in touch now with customers that they wouldn't have been able to reach on a stand-alone basis. We see lot of momentum also outside the automotive business. And I hope that in the future, we may be allowed also to share some names of key customers that we acquired. At the moment, we can't.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Maybe one more word about the more entrepreneurial approach and why we believe this has been not only now a good idea, but going forward, will even be accelerating. If you look at what we have done with Mentor Graphics, it was nothing but combining the mechanical simulation with the electrical simulation. And that's actually been the glue about the whole matter. And now more and more customers see how beneficial it is to have those 2 things combined in the product life-cycle management environment, mechanical and electrical together to make the system. And this, we can also see it from, let's say, from the pipeline to the way people talk to us, customers talk to us about this one. This certainly has sparked the interest, and there is nobody else than us who is able to do that, firstly. So very positive in terms of lasting, underlying and growing, and we actually expect that to accelerate going forward because that helps you miniaturize systems. And the whole name of the game going forward is miniaturizing industrial systems. So that's the good part. The other thing I want to caution a bit about is greatness of the numbers. As you know, Mentor is also in the semiconductor design business, and semiconductor typically is ahead of peaking of most industries. We're not saying anything negative, just saying that the sky sometimes has a few clouds before the sun comes out even stronger than it used to.

[Sabine Reichel, Head of Investor Relations]

Next question to Mr. [ Harker ], please.

[Unknown Analyst]

[indiscernible]. Can you elaborate a little bit on Siemens Alstom? Maybe when do you expect a decision of the EU? And are there any conditions you expect from the commission?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes. First of all, the fact that the commission was entering Phase 2 did not catch us by surprise. It was very clear that this is something very important for everybody because the first time, there is a question about how global are our markets while they still are local. So how should future development be anticipated? Because the biggest competitor in the world has not arrived until late when Deutsche Bahn was actually ordering locomotives. So things happen and things are coming. So the question will be how that can be integrated. Other than that, we are looking, and I'd always, emphasize that we're working really diligently on the joint approach to make it understandable, what we want to create and why this is so good, not only for us but especially for our customers. And that's exactly what we are going to do also in the future.

[Sabine Reichel, Head of Investor Relations]

So next question, Mark Troman.

[Mark Antony Troman, Head of the Pan Europe Capital Goods Research]

Maybe we could just get a bit of clarification please on the short-cycle outlook. We've heard Joe's comments, obviously, on Mentor and semiconductors. And I think in Ralf's address, he talked about China comparatives, which we -- we will understand. But more broadly, what about the short-cycle outlook in Europe, in the U.S.? How do we see that panning out? And where do we see it stabilizing?

[Ralf P. Thomas, CFO & Member of the Managing Board]

Well, with regard to China, I think we have been discussing that a bit already in the second quarter. The further we go in our fiscal year, the tougher the comps. So therefore, we must not expect miracles. I mean, we had an outstandingly strong growth rate on our short-cycle product business in China in the second quarter. I said it won't repeat itself from that level. We are still in the high teens, which is quite remarkable, and a driver of that growth momentum was again machinery and not automotive. So therefore, as we speak, I think we will see continuing moderation of growth, but with declining rates. It also, as always, is a big question, how long the momentum of governmental stimulus will hold, in which industries? But due to the fact that we are fairly broad-based in high-quality industries, which is the centerpiece of the government's program, it won't drop dead overnight. From a factual basis, and we do that very diligently on a continuing basis, we look into the orders in our books. And our product business, in particular, for China, there is a backlog which is quite untypical for that type of business, which is still on a high level. So in a nutshell, anytime soon, I don't expect any cliff type of thing, but there's definitely a moderation in terms of growth momentum. The other hand, talking automotive, of course, in the U.S., this is an extremely important industry also with the second and third tier elements in the marketplace. They have been moderating their momentum already quite a bit, definitely also driven by discussions and speculations about further tariffs or what the landscape is going to be there. But we also do see a quite nice momentum in other industries like food and beverage. And also, the commodity industries have been bouncing back quite decently. Not making a fully-fledged spring or summer, but there is development. So there's a multitude of different impact. And what we see is that for the next 1, 2 quarters, there's a moderation of -- on fairly high levels of the past. And what we also do is we, of course, prepare ourselves with the signals of early indicators, for example, some semiconductor businesses and so on, to be prepared and not surprised if things happen.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes. I believe there is no reason to be concerned, but I want our organization to be mindful about what we do and what markets can develop. I believe we have developed a more resilience -- a more resilient model in the digital factor environment by adding businesses like Mentor with the PLM, which is much more resilient in terms of reoccurring revenues and obviously, still the CapEx related to factory automations. With that, as I said, no point to be concerned, neither relatively nor absolutely. So what do I mean with that? If you compare our numbers with the others in the space, there's really no need to be concerned. But there is a need to be mindful about being arrogant on success. And that's what I want the organization to understand, that we serve customers and not ourselves. And in the -- on the topic of trade and political impact, there are 2 theories. The first is, well all that -- all the noise will actually scare away the confidence of our customers to invest more. That's one theory. And there is a meaning to that because investment is about trust, the environment, predictability and stability, traditional way to look at it. Well, I can make another argument and say with all our trade stuff. Actually, companies are being forced to more localize. So as you localize more, you build more local capacity. So as the latter one will be to prove adoption. But we are so strong right now that the biggest factor for impeding success is ourselves, and that's why I want our people to be mindful about what's doable and desirable, focus on our customers and focus on winning market shares and build out the profitability of the business, which, obviously, is remarkable.

[Sabine Reichel, Head of Investor Relations]

The next question from Oliver Sachgau, please.

[Oliver Sachgau]

Oliver Sachgau from Bloomberg. Mr. Thomas, I have one question for you. You alluded to this before, the moderation in the automotive sector. I'm wondering if you can give us a little bit of an idea of how you expect that sector to develop in the next couple of quarters. And also maybe a little bit of color, is it just the U.S. market that was really affected here? Or are you seeing moderation broad in the automotive sector?

[Ralf P. Thomas, CFO & Member of the Managing Board]

Well, thank you for that question, Oliver. I mean, hard to tell with all the areas of impact from tariffs and the like. We don't have a crystal ball, of course. But what we saw so far wasn't an earthquake. I mean, there was a moderation that was taking place -- has been taking place in a fairly smooth way, but it had a clear trend. And depending on where you're coming from, of course, the trend had different angles. And I mean, still, Italy and China, for our customer base in automotive area was growing in the mid-teens, yes, while the U.S. still has been ordering on the level of high single-digit growth rate. So that's what I consider being moderation. We are not talking massive declines. But as we move on, and Joe has been explaining that perfectly well, it depends on where the footprints are going to be changed on a large scale that would potentially create incremental demand for our industries or whether there is just a wait-and-see mentality kicking in, in the capital goods in that field. But the fact that we do offer productivity opportunities for our customers, some of them may also be inclined to use that period of time to grade-up their systems and take them to higher grounds for the next cycle ahead. So that's something that will be very specific, but moderating momentum does not mean decline.

[Sabine Reichel, Head of Investor Relations]

The next question, Ben Uglow from Morgan Stanley, please.

[Benedict Ernest Uglow]

I had a couple. The first one, Joe, you, in the opening remarks, mentioned global supply chains being very interlinked. Are you aware -- or are you hearing either at Siemens or anywhere else of disruption to those global supply chains? And particularly, I'm thinking about component shortages in low-level items which can trickle through those supply chains. That's question number one. Question number two for Ralf. I'm really trying to understand the nuance of the low to mid-single-digit comment in Power and Gas. If I think about where Power and Gas is roughly this year, I would say it's kind of mid-single digit. Are you kind of trying to say to us that there is the potential for that margin to go down as we move into 2019 on an underlying basis? And how should we reconcile that with 8% to 12% Vision 2020 targets?

[Ralf P. Thomas, CFO & Member of the Managing Board]

So let me start with the second question then, Ben. Thank you for that one, giving an opportunity to clarify. I mean, first of all, we said that with low to a mid-single-digit margin, we don't see a recovery of the marketplace anytime soon. That means new product business will still be very much suffering from overcapacities in the marketplace, price and pricing that needs to be very competitive. But still, as I said, I think we are very, very convinced that the service model that we have to offer is giving us quite some visibility for the next fiscal year, too. So there will be resilience on the service end, and there will be continuing pricing pressure and undercapacities -- overcapacities in the market. And therefore, underutilization will continue. So therefore, it very much depends. And we are very, very intensively looking into all opportunities to accelerate. It very much depends on how quickly we are in a position to take out cost in that field. So we are not naïve. We know how to handle that. It won't happen in a quarter. It won't happen in 2 quarters. It will take probably quite some time before that is kicking in. So in a nutshell, the point I was trying to make, so trough is not done in that field because many of the cost measures will only kick in on a full basis beyond 2019. And we see a continuing very intensive competition in that marketplace. How does that relate to the 8% to 12%? There's a midterm target over the cycle for the new set-up of Gas and Power. And therefore, 2019 and the implicit guidance I gave are not related to that figure, obviously.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes. So the target margins are after restructuring, obviously. When the rightsizing is done, that's what we believe that business can yield in a globally rightsized capacity environment. But what we see in the marketplace seems that the anxiety has eased as compared to the last couple of years, where people got really anxious about getting their manufacturing filled, but it's still a market where capacity exceeds demand. And this always creates special moments, special times. Maybe then back to the global supply chain. I mean, obviously, the global supply chain in most very disparate, discrete industries have been almost put to perfectionism over time, getting the cost down and of course, the productivity, which has become a very sophisticated system in the meantime, which cannot be explained into other [ data ] characters. So that's why, I guess, no is not the right answer. I believe at the end of the day, I would rely more on responsible and competent entrepreneurs to figure it out than on, let's say, the legislative side, which is still debating on what should be and cannot be and whether people still need to be asked about what they really meant. So I'm very calm on the whole noise about those trade wars and things. In material terms, nothing really much happened at this time. And you can see that more and more responsible people come out and say, "Look, we've got a job to do. We've got jobs to secure. Are you really sure of what you do and what you talk about?" So I'm reasonably confident that the dust will settle in a much meaningful -- more meaningful way than people try to make us believe at times. Because at the end, if jobs are being lost, that's what everybody hears and sees and acts upon. And so as I said, I'm still confident that at the end of the day, the wisdom of common sense will prevail.

[Sabine Reichel, Head of Investor Relations]

Yes. Thank you very much for your questions so far. We will have time for more questions later on.

[Sabine Reichel, Head of Investor Relations]

Yes. We are now proceeding with the Q&A, and we will again take it in turns, and this time start with the journalist here. Angela Maier, first question, please.

[Angela Maier]

I would like to start with the question on the new structure, which reminds us a little bit the structure you eliminated 4 years ago. Four years ago, the argument was that the sectors lead their own lives, and you wanted to streamline the company and accelerate decisions by centralizing support functions. And now you go back to a quite similar structure with 3 operating companies with -- See you also are a member of the [Foreign Language] again. And now you're saying you will then decentralize support and operating functions, so -- and to give the businesses more entrepreneurial freedom. But exactly this entrepreneurial freedom was 4 years ago the reason for the new structure. So is the new structure -- if this is the structure for the long term, so why did you change the structure for you now?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes. Well, thank you for the question. I mean, I actually have been alluding to that in the speech. A business need to be ready to take on responsibility. It doesn't do any good to overload the system, which is not capable of doing the primary functions, first of all, as a general remark. But now they are ready to do that, and we have the right people who know how to manage that. Secondly, while it may look familiar, if you only look at the spectrum of the 3 operating companies, you must not forget that the other 3 strategic companies have been part of those 3 or we need another sector for another managing board member newly elected, 3 or 4 sectors. Now we have 6 operating -- 6 companies in Siemens who run different businesses. There's Healthcare, as it used to be, admittedly, but in a different environment, and more than successful than ever, just go by the numbers. Then we have our mobility companies, which is soon to be strengthened by a very, very meaningful merger obviously. 95% of Alstom people believe that too. So Mobility was someplace else, which Roland and Jochen Eickholt brought to life from a nonprofitable loss-making enterprise to a very powerful business. So it's somewhere else, not in the 3 operating companies. And then Siemens Wind, as you know, was in the power sector. Now it's completely elsewhere, has a much stronger enterprise shaping the consolidation of a young market. So it has some meaning to what we did, and not just distributing Siemens businesses by the number of managing board members who need to get employed, and that's in essence, what it was. Of course, that was infrastructure sector which got everything which was left out, and what -- people tells [ her ], "That's not the way you run a business, honestly and frankly." This time, it makes sense from the go-to-market point of view, and those management people, whether managing [ progress ] or not, the success factors of how to run the business are not attached to whether your management board or not, is attached to what you're capable of doing. And so we have a very strong feeling that this is a completely new setup at the right time, by focusing the business on the markets, and not on internally-driven decisions.

[Sabine Reichel, Head of Investor Relations]

So we will go now to the analysts' side. A lot of hands. So maybe [ James ], first question.

[Unknown Analyst]

Two questions, if I could, on central costs, when you get the starting 2017 margin for the 3 operating companies, how much of the central costs that were previously below the line in either corporate items, pension or eliminations have you already allocated to the 3 units? And the second question is, whilst I'm sure you're going to provide some pro forma numbers at some stage, what's the starting HQ and services profit for 2017? And basically, how much can you reduce the HQ? Because you've given targets on almost everything else, but that remains the one gap where -- and an important piece of the jigsaw that you haven't talked about.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Thanks, James. Well, thanks. Thank you, all, for the patience for a very long explanation of a comprehensive thing. But sometimes, things take time to explain it, and cannot be always reduced to, as I mentioned, duly to unrelated characters. And then on how much costs are being allocated, basically, most of them are which govern, support to the business. And you can expect a much smaller corporate allocation as it used to be. But again, this is a growth-driven efficiency-driven entrepreneurial approach which will take time, and we deliberately have been putting growth in the market and customers as a #1 goal and not doing another one by '20 or one by '22 sort of thing. It's a different approach. It's an approach from the area of strengths and a gradual incremental shift of resource optimization over time. So -- and I obviously do know that the model you are trying to build is not really complete is what I said, and I'm very aware of that. Maybe just give you a bit of a color on what the intent actually is. The intent was that, today, we said this is where we are going to go, clearly, and who are the people to make it work. And what does the structure look like and the new Siemens is going to go into because people need to know. There is still a Q4. There are still customers. [ I'll tell who ] obviously need to be served. Last thing we want is an inward orientation, that 377-odd our people do nothing, but ask and talk, look where the new boxes they are going to likely be. It was important. And this time, we have a meaningful, for the most part, a well working business. So it take time to bring that over to the new structure. And that's why we say, we are going -- we decided yesterday, together with the Supervisory Board, with a unanimous vote about what needs to be done. That's important. And now we said from now onwards till October 1, we set up the teams, and look what else need to be done in what area of that work streams. Then from October till December, we're going to do all the necessary fine-tuning with the workers' representatives, not in general, because they have their voice yesterday, and eventually, obviously agreed, but on site level, so that we have a very cascading down process that people don't get scared and get hassled into that. And once that is done, we do the whole transfer. That will be done by March 31. And then we are fully operating in a new reporting structure, in the way we work together, in the way we count our numbers. People, obviously, profitability and things like that, so that's how we do it. And then later in the year, there's no time yet set, maybe in May, maybe April, maybe June. There's going to be a Capital Market Day, and then we are going to present very decisively who is the new management team of each of those businesses, what exactly are we going to do, how do we do it, what our numbers is going to be look like, what's the transformation by the numbers, and then new models, which will be more complete as they will be at this point in time. All right?

[Sabine Reichel, Head of Investor Relations]

Thank you. The next question comes from Mr. [ Whitner ], please.

[Unknown Analyst]

[Foreign Language]

[Sabine Reichel, Head of Investor Relations]

So apologies, if you take the questions in -- if you answer them in English, because otherwise, the translators, the interpreters will run that. Thank you.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

All right. So then we do it in English. What is the freedom of the businesses? Look, I think that freedom correlates 100% of the performance and the promises they make good on. That, in essence, is what it is. That will be the maximum now on how we're going to get started. For now, they have all the trust, all the trust and all the credit it takes to get the job done, and I'll take it from there. The small and medium enterprises, first of all, as you remember, Vision 2020, so-called the underperforming businesses, we made good on most of the promises we made at that space, but we did not 100% succeed. It was around about 80%. We're about 85% even. We'll, that's still 15% missing. It didn't 100% succeed contrary to many other targets we actually achieved or overachieved or at least achieved them earlier. So it was not that great. 85% is okay, but it's not good. There have been a few things we learned from that. The first one was, why do you need -- where do you leave those businesses in those sort of organizations which didn't get the job done in the first place? All right? Could have seen that earlier, but it's never too late to learn. Secondly, maybe the nature of that business is not exactly in the focus of the rest of our global enterprise. Thirdly, we put in somewhere at so-called corporate managed portfolio assets at CMPA activities. So you can see already by the name that this sort of just asks for more attention. And so at this time now, we put them together as SMEs, and with Jochen Eickholt to actively manage and run it. It's a different approach as to what we used to do last time. We are fully confident that we get the job done, what we intend to do to make them, not only technology-wise, solution-wise, customer value, but also a value for shareholders. So are they up for sale? No, they're not, because it will be treated differently in the balance sheet. Can you rule out that one or the other will be given a further perspective somewhere else? No, we can't, and we don't, and we shouldn't, because our goal is to create opportunities for people and assets and businesses and to serve our customers in a committed way, and that's exactly how we go about it. And getting breakeven in 2020, now that is something as a start. 2020 is around the corner. It's not that far away. 2023, obviously, a 5% profitability. If you get the first one, I'm sure we get the second one too. So very straightforward, very clear, very dedicated, very open, and again, stakeholder oriented.

[Sabine Reichel, Head of Investor Relations]

Thank you, Joe. So next question with Exane, please, first row, Jonathan?

[Jonathan R. Mounsey, Analyst of Capital Goods]

Yes. Jon Mounsey from Exane. So unlike Vision 2020, there's no group-wide cost saving program attached to Vision 2020+. I'm sure you'll still be looking for savings. But I guess, under the new operating structure, will Siemens ever announce a single program again? Is it now the job of the individual operating companies to define their own strategies, their own savings programs rather than programs, say, imposed by management as may have happened in the past? And also, if that is the case, how will they be held to account? Why haven't you chosen to list the operating companies in the way that the strategic companies are listed? Isn't that a good way to get external shareholders to hold these companies to account rather than the Siemens board?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

[ Foreign Language ] you've seen that, right? That's right. There is no global restructuring program. There is no one by something, and it has a reason to that because you also learned that it's not so much relevant to control the input, but rather rely on the output. And now we've been so great in [ 1 by 16 ], but why then didn't the administration cost not go down. So that will be something else then we need to take care of. This time, it's a -- we have end results. We are going to grow the business by 2 percentage points more in growth, and they're going to enhance the quality of margins by 200 basis points in obviously the mid-term. That's what we're going to do, and there's a series of enablers to get us there. Am I ruling out restructuring in particular areas? Absolutely not. But the approach this time is result-oriented and not so much enabling and input-oriented. That's very important. So why didn't we list or, whatever, do stand-alone stuff? Well, first of all, if you have done this one, there is no point of me sitting here today because, actually, I'm not up to doing the job of buy-side people managing portfolios. So that is one too many. I will leave that up to the ones who do better than that. So what I'm trying to do, together with our global management team, was Vision 2020+, is leaving behind the company because you are so much up to legacy, leaving behind the company, which got options, which creates optionality. So if you really want to look for some legacy stuff, then the intent is to create optionality that we are -- that can act at any given point in time in any different space. That's what Vision 2020+ is all about, creating optionality. And while doing that, we enhance the operational businesses and the earnings and the growth, and the customer satisfaction and the well-being of our people all together.

[Sabine Reichel, Head of Investor Relations]

The next question from [ Mr. Hefner ], please.

[Unknown Analyst]

Is there a plan that the operating companies will become in the next step real companies with a legal form?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Well, we have -- look, we have a lot to do to form out those operations in a meaningful way, align the resources and build a meaningful robust economic system centered around customers, employees and shareholders. That's what we do. A legal entity by itself doesn't create any value. It's more what you have in there, and should there be any necessity to do so because this is going to enhance a sustainable stakeholder-oriented value, then we are ready to be good, to be -- [ consciously creating ] optionality. But that's certainly not the first priority to look after while we develop those businesses in those companies.

[Sabine Reichel, Head of Investor Relations]

Thank you. So next question, Simon Toennessen?

[Simon Toennessen, Analyst]

Two questions, please. Firstly, Siemens has, on average, created pretty decent value for its own companies when it split up the businesses, in particular, if you take Healthineers now into account, but also OSRAM at the time. Yet your own share price doesn't reflect that. It's sort of flattish year-to-date, obviously, with Healthineers being up quite strongly, even SGRE being up sort of mid-single digits. What are you telling investors when they ask you what they're missing right now in terms of the Siemens share price alone? And second question on Power and Gas, you provided a lot of detail. If I take the split of the business into account, and obviously, high-voltage goes into this, it still seems large gas is about 30% to 40% of that business. So apart from probably the small and medium and [ aerial ] business, none of the other subdivisions are even close to the range right now. So I would assume you need to get large gas up towards that range. Apart from the headcount reduction savings that you're anticipating, what else do you need to see to get that business up there? Is it pricing improving or anything else?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Thanks, Simon. I mean, on the first question, I mean, a lot of the strategic companies are up in share price, so that the residual seems to be quite an attractive buying opportunity. So if you ask me what I'd tell shareholders, I will tell them, if you believe in management, you got to buy more. If you don't, then obviously, there are options. But on a more serious note, I mean, we've been aware of the discrepancy there that the residual business is valued quite attractively. I believe it's important that we show the market that we can run a company without adding complexity to the business, and 2020+ is also targeted to make it close to clear and clean on the structure how we operate the business. And from what I hear feedback from investors is, tell us exactly what the end game is, and I see their point. But sometimes, the end game is being created by letting parts and pieces fall into place as if that was happening by accident, but it was planned long time ago, and that's why the market in some areas needs to figure it out what that could be going forward. So we execute well on what we said we will do, and this is what we want to continue to do. Now on power gen, Ralf, maybe you put a color on what the new thing will look like? Any wisdom?

[Ralf P. Thomas, CFO & Member of the Managing Board]

I mean, first of all, there is plenty on our plate to execute on. As we said, we are just in the process of finalizing the implementation of that what needs to be done, a lot of costs that needs to be taken out. And as I said before, that's going to keep us busy for more than one quarter literally. On the other hand, we are also looking into new business models when it comes to LNG and the like, so that will open doors. And of course, we also stand ready for further momentum being created in the oil and gas environment. So as Joe said before, when we talk about the new margin ranges, it's over the cycle, yes. And as I indicated before, 2019 will not be part of those years where we can accomplish that percentage range.

[Sabine Reichel, Head of Investor Relations]

Next question please from Mr. [indiscernible].

[Unknown Analyst]

[Foreign Language]

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes, thank you for the question. I mean we have an area which we call Corporate Development, and that Corporate Development is something which holds the company together in a more narrow way because it provides value for more -- for 2 or more businesses, like Corporate Development task for -- in software area, cybersecurity area, where the others can benefit, and this is what Corporate Development is all about. And it also provides an area where we have a company interest, which we want to fulfill, and that is fixing businesses which come from all different places. So corporate technology stays where it is, and it does -- for the most part, the same as it does. But I think it's a more impactive approach. Our corporate development will be significantly streamlined and focused on what the businesses need. Now the new Siemens had -- it has more or less people. You'll see that something the customers typically decide. The task we have is to create options and opportunities. They can be inside the company. They can be outside the company, and that's what we do. So let's focus on the business. The more market share we win, the further we grow, the more, obviously, valued people we need.

[Sabine Reichel, Head of Investor Relations]

Thank you. So Alfred Glaser, please, next question.

[Alfred Glaser, Analyst]

Yes, Alfred Glaser from ODDO BHF. First, I wanted to ask you on growth. You said that you do 2% higher growth in the future. But fundamentally, what has really changed already? Before you wanted to go for more digital, more automation. This is still the same topic in the new strategy. How do you produce to growth, 2% growth in addition? And my second question is on shareholder return, more precisely, return on capital employed. Joe, you mentioned before that it's going to take time before you get back to the 15% to 20% range. Why not put some target into the new strategy? Why not go into more details explaining how you're going to get to the 15% to 20% range?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes. Thank you. [indiscernible] question on the details. As I mentioned earlier, the process is that we now set the framework, so that people know where we are going. Secondly will be now to convert the details into the conversion, and then you're going out to the markets, all 3 of them, to explicitly and detailedly explain on what are we going to do when, with what outcome. Okay? Where does the growth come from? I mean, you remember early the slides in the areas where we are going to invest and put emphasis to, like in Mobility infrastructure, the IoT area and other places, to double down on the Digital Factory, those are the areas of growth, which we are going to see incremental quality growth from. And there are a few others obviously, but those are the most relevant ones in the space.

[Ralf P. Thomas, CFO & Member of the Managing Board]

And maybe to add a bit on our R&D activities over the last couple of years. I mean, we have been substantially beefing up our R&D activities throughout the last 3, 4 years. Since 2014, we have been adding some 25% until fiscal '18. We have been doing that in a very focused way, and have been also identifying opportunities to now combine those specific R&D activities in the different market segments we are in with digital opportunities, so we create a really comprehensive offering for our customer. That is also reflected in the substantial improvement of growth rates in the digital place, as Joe has been showing on one of the slides.

[Sabine Reichel, Head of Investor Relations]

The next question from Mr. Kukhnin, please.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

[Foreign Language]

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes. Well, thank you for the question. I mean, obviously, on the headcount side, from a business point of view and see that the businesses are growing and how they're being combined, there is no massive divide in it. So business units will mostly move as a whole unit. There are a few areas where we divide them. For example, the transformer area, where we divide in utility, transformer and distribution transformer, and a few other areas, but not too many. So it's more about combining the assets we have in SBU into a meaningful entrepreneurial system of the operating companies. Obviously, that more people are going to go to the business. Look at it from the other side. If we have a more focused approach, if you're a member of a business, you run after every day, trying to convince your customer every morning. It makes -- there is a lot of fun to be part of that business community rather than be busy with a lot of policies and things the like that. So there is a lot of value for our people. We've been asking our people too, and say, "What is it that you feel comfortable for?" And most of them said reduced bureaucracy, and that will get a few levels out, so that I understand better what actually I'm supposed to be doing. So it has -- will have a lot of benefits for the ones who want to be part of a fundamental change and improvement of the business. Now the other topic, which obviously is an interesting topics. And I think, of course, shareholder activism has increased and has got more prominent, especially also in Germany and in Europe. It has seemingly increased. They've always been there elsewhere in the world, so there's nothing new. But I think your analysis of root causes for having activists take an active stand is not because you structure the company so that they can take some. It is underperformance. If a company underperforms consistently, there is no point in telling the world how great you run your business. Somebody else will tell you how to do it, and that's typically the root cause of that one. So it's a natural gift. Then companies who perform, well, according to their industry, there is a lower push on that topic. So we take that very seriously. The -- many, many of those actions have created value, so it's not the dark side and the beautiful side. It is a part of the ecosystem we live in, and we better take it seriously and perform well in the industry.

[Sabine Reichel, Head of Investor Relations]

Thank you, Joe. So next question, Markus Mittermaier, UBS, please.

[Markus Mittermaier, Co]

Two questions, please. One on Digital Factory or Digital Industries as it's called now. The 17% to 23% range, you had previously commented that in the cloud base, the software-as-a-service revenues, you anticipate or aim to add another EUR 1 billion top line by 2022. Would the drop-through to profitability from that already be in that range? Or would that be incremental to that? That's question #1. And question #2, sorry to belabor the PG topic, but maybe a little bit more granularity on where that pricing issue is, because if I remember correctly from the last quarter call, the service of the fleet growth over the next 3 years is 20% on the gas side. I think it was 10% on the industrial side and 5% on the steam side, if you remember, so a flat pricing. I'm a bit surprised that sort of the step-down in margin guidance that you implied for next year. Or at least in our service pricing pressure as well?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Let me start with your second question on PG maybe. So what I said in the last quarter is that we do see substantial pricing pressure across the board when it comes to new products. I said that from all that what we see on our existing backlog for service, which is about 80% of the total backlog of Power and Gas. There, we don't see any major cancellations. And whenever there is pricing pressure, and it is there, our positioning in terms of technology is allowing our customers to improve their business case by higher levels of productivity by the means of our technology upgrades which we provide to counteract. So I didn't ever say there is no pricing pressure in the marketplace. But up to now, we could fairly well act in that environment without finally ending up with price erosion. I think that makes a big difference, and that may also align different perspectives from different players in the market. So that picture did not change. And the fact that we have a very clear view on the backlog and how that's going to be executed for the next 6 quarters on the product side and in terms of serviceability is taking us literally to the conclusion that what we see now underlying, yes, as I described that, we're taking out the extraordinary impact of the divestment gain for the third quarter of fiscal '17. It's most likely to be the new normal for the quarters to come when we execute then on the backlog that we see at the moment. So it's no incremental change in my view, our view on the service business as such.And on the IoT range, with the EUR 1 billion we've been setting as initial target, it's probably too aggressive to associate that with the margin range of digital industries because there could also be some systems integration activities associated with it to glue together the IoT and the OT space at the customer area. So if assume about 15% lower end of the range, you should be reasonably suited.

[Markus Mittermaier, Co]

The lower end of the...

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Of the range.

[Sabine Reichel, Head of Investor Relations]

The next question from [ Mr. Mack ], please. Then from Mr. [ Bozo ], please.

[Unknown Analyst]

[ Stephen Bozo ] from Suntech. [Foreign Language]

[Ralf P. Thomas, CFO & Member of the Managing Board]

[Foreign Language] Sorry, sorry. What I said is that we will continue reporting on Siemens Financial Services, obviously, and also introduce reporting from it for the SMEs, the small and medium enterprises, in a condensed version, so there will not be any lack of transparency in that field.

[Clarissa Haller, Head of Communications]

All right. I think the other question was if we are already in the margin bend, but we are -- yes. Okay.

[Ralf P. Thomas, CFO & Member of the Managing Board]

So obviously, as has been discussed before for the GPPs, we are not in the margin -- in the future margin ranges. And therefore, the others, we are.

[Clarissa Haller, Head of Communications]

Next question comes from Alasdair, here in the middle. Please raise your hand.

[Alasdair Leslie, Equity Analyst]

Alasdair Leslie from Societe Generale. So the digital industries, obviously, you brought together discrete and process automation now. And within Digital Factory, previously, you really differentiated for the early move into industrial software, already integrating that with the factory automation piece. So is the plan to replicate a software strategy now more broadly across the entire automation spectrum? And how will that work? Do you need a sort of foundation acquisition like EGS was or good deals in the process software space where you'd be added onto the existing platform that you have much in the same way I guess the CD-adapco and Mentor have been?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Yes. I know the -- great question. I mean, as I mentioned earlier, doubling down on success is typically a very reliable and attractive model to do, and that's what we're exactly doing. So we are transferring the end-to-end solution piece from PLM software service design and manufacturing now into the space of process industries, that's the first area. And secondly is that we invest further into building a robust application ecosystem on top of it, because this is where customer value is actually being generated. So first of all, the new digital industries is DF plus industries, and that drive products, the products are still part of it. The solutions are out. So that's important to notice for the sake of completion. Do we need big acquisitions? No, we really don't. We have quite a remarkably well-performing joint venture or cooperation agreement with Bentley on the 3D side, which works out actually very well and complements the systems in the space. So that is -- at this point in time, there is no interest in bigger acquisitions and no need to fulfill the targets by not doing so.

[Clarissa Haller, Head of Communications]

So then Mr. [indiscernible] Next.

[Unknown Analyst]

[indiscernible]. [Foreign Language]

[Josef Kaeser, Chairman of Managing Board, President & CEO]

[Foreign Language]. I'm sorry, I'm sorry. There is no plan in place at this time to get any of the 3 on the stock market at this time. So the second topic is how many jobs are being affected? I would rather call it, how many new opportunities we create for people to be part of 3 very focused companies and a robust governance system in place. That's actually the question we are going to have answers for in the next 6 months when we roll over and focus the details on those targets.

[Clarissa Haller, Head of Communications]

Thank you. So next question, Ben Uglow from Morgan Stanley?

[Benedict Ernest Uglow]

A couple of questions. First of all, on this kind of definition of operating and strategic companies. As far as I can see, and tell me if I'm wrong, that the big differentiator is optionality. Is that fair? And can you give us some thoughts about what you mean by optionality? Optionality could mean we want to issue equity and bulk up to large-scale M&A. It can mean we're going to go into joint venture partnerships. It can mean that we're going to seek to divest businesses over time. So what does optionality mean in practice when we think about these businesses? Second question is this Memorandum of Understanding with the State Power Corporation in China, in my view, was a very big deal that got slightly overlooked. Is there a scenario where that extends beyond the simple memorandum of understanding when we get into kind of more permanent financial relationship?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Thank you, Ben. I mean, you actually gave the answer yourself to describe the examples of optionality. So there was a Q&A sessions where we did both at the same time. Yes, but it depends. And on the China technology agreement of large gas turbines, it creates optionality, and it creates, first and foremost, opportunities. And that's why it is important to us to serve our customers well and make sure that they understand that if Siemens commits to something, we are making good on that what we promised. And that track record has increased, and I suppose you do know that what was meant to be really dead serious is that we made Siemens great again, is about -- is exactly that reliability, and then we make commitments that we're very good on them. But this is -- operation is good, which is on the line every day. I don't intend to lose it.

[Clarissa Haller, Head of Communications]

Next question please from Mr. [ Reiker ]

[Unknown Analyst]

Two questions, please. The first question, how do you provide leadership and control in that with your operating companies? So are there certain criterias when you intervene when they are not doing well? And second question, what synergies does Siemens achieve in this actual more centralized structure? And can you plan with those synergies in the future? Or do you plan with those synergies?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

So first one is a good CFO question, because you're holding the money together, which is probably one of the most prominent items to -- be careful about right now/

[Ralf P. Thomas, CFO & Member of the Managing Board]

Should I start with that one? So [ hard ] to provide leadership and control on the operating companies, that was what you have been asking for. I mean, first and foremost, I mean, this is part of Siemens AG, and therefore, the responsibility for allocating capital properly, executing controls and making sure that we comply with all relevant aspects of compliance, not only the legal format, but also when it comes to taxation, when it comes to accounting standards and, and, and. That, of course, is still in the hands of the same set of individuals, means, the member of the Managing Board, which is a group of individuals, that cannot be singled out for certain areas. What we accomplished with the operating companies is that we give all levers that are relevant to shape the best company in a specific market environment into the hands of the CEO of that relevant operating company. So I think it's important to understand that being part of Siemens AG, the same [ queries ] apply. And we will have a very, very steep capital allocation, of course, means, that we will nurture and feed businesses that have opportunities for profitably growing capital efficiently. And there will be also a difference between those who can use -- make best use of those opportunities and those that can't. So controls in the meaning of legal framework, that's why we have been putting governance aside with all what it takes, and there will not be any compromise on books and records or compliance rules that we have in the company. But at the same time, giving up entrepreneurial freedom within the given format of capital allocation to those businesses resides completely within those entities. And this being the purpose, there is no intent to overrule them, of course. So they are master of their own fortune. If and when there would be worries arising, whether things are done diligently, the corporate responsibility in total kicks in of the Managing Board in total.

[Josef Kaeser, Chairman of Managing Board, President & CEO]

To your second question, the synergies, there are synergies. For the most part of synergies today are actually the shared service environment. And the second topic is in areas of corporate development. For example, if we develop joint platforms, if we have -- if we are building efficient cybersecurity codes, applicable for more than 2 businesses and things like that. And if you look at the structure of the company, we have a business service company, which we're going to build, which exactly bundles those synergistic values on the transactional part of the services. And we built the corporate development, which is exactly and more efficiently -- while impact isn't -- is actually bundling those matters, which we believe, are of value of the 3 plus x operating companies. Even Healthcare, we're not going -- and already intentionally, Siemens Alstom are looking into the digital application and saying, man, yes, this is really good. And okay, do you -- can we go get something from that, so that we don't need to create it and build it on our own. So that's why we've been so mindful about this model of -- there is a purpose to fulfill. There's a business which has the purpose. There is regions which are on the customer and the part of it. And we have those 2 side elements which seamlessly go together like corporate development and shared services. That's been the model all along, not to lose too many of them yet keep the company focused on their competitors and the performance of that space they are doing business in. That's been the whole meaning all along.

[Clarissa Haller, Head of Communications]

Thank you. Mark Troman, please.

[Mark Antony Troman, Head of the Pan Europe Capital Goods Research]

Joe and Ralf, I've got a question on cash. I mean if you do your targets, 4% to 5% organic sales growth through cycle, 15% to 20% ROCE, 95%, let's say, cash conversion, you will have a lot of cash. You have a strong balance sheet today. You talked about dividend payouts. Where is this cash going to go? Are we talking more share buybacks, a special payouts? Are we talking more M&A in the software and digital space, which I guess you alluded to in the presentation. Maybe you could talk about be -- how you're going to spend what looks or what could be considerable cash that Siemens will generate?

[Ralf P. Thomas, CFO & Member of the Managing Board]

So for good reasons, Mark, we have been putting that into our financial framework, because we believe, first of all, we are doing fairly well in most of our businesses. I mean, just think about Building Technologies, who have been contributing cash with high conversion rates for years, so did Digital Factory and also many others. But what we want to make sure with that KPI taking into perspective the free cash flow and also the growth opportunities that we do have a midterm trajectory that is baked into the business plans of those companies. So a part of that entrepreneurial freedom that we have been discussing. But at the same time, making sure, that we are also heading into the right direction, keeping the balance sheet strong, as you have been putting it, and providing us opportunities to make sure that our shareholders and also other stakeholders are having a perspective of participating in that move. But honestly speaking, for a decision on and how and when, and with which machine we would potentially apply other share buyback programs and as such, we should first generate the cash and then distribute it. So you need to give us a bit more of time to be more precise on that one. But in a nutshell, we deliberately have been choosing that focal area of cash flow to make sure that also the independence of the new entities completely is embracing a mandate for cash generation and not only for growth and profitability.

[Clarissa Haller, Head of Communications]

Next question from Mr.Revill, please.

[John Revill]

John Revill, Reuters. Mr. Kaeser, I must have seen it written somewhere that this could be at your last chance to sort of significantly alter or affect the strategy of the company before you stand down and retire. I was wondering, looking back on that, what would you like your legacy at the company to be in sort of by 2021, looking back over the years? And also, does this new strategy today, does this kind of stop your successor coming up with a new strategy, because this will still be kind of going then. That's my first question. And the second one is, conglomerates generally are not very kind of popular with investors right now. And then looking at the share price, reaction today has been quite negative. So I was just wondering, what are you going to do to kind of reassure and convince investors that remain and keeping this conglomerates structure is the best for Siemens? And how long before we're going to see some kind of results?

[Josef Kaeser, Chairman of Managing Board, President & CEO]

Thank you. Well, I think people never know what their last chance is, so that's why I wouldn't jump to conclusion too quickly. And even though there is a probability, nothing is certain. That's what the future is all about, except demographics. So if you turn 52 this year, it's not a probability that you turn 51 next year. But other than that the future is hard to predict, and that's why I think it's premature to think that this is an endgame. What you see today and what we intended to provide you today is creating a concept which provides optionality, which leaves -- which create a frame of options to do exactly what we are paid to do, at the end of the day, creating stakeholder value. And if you -- and should it have been the last chance assuming that for a while, the intent would have been creating optionality, and not pushing my successor, be it male or female, into a corner which is hard to get out of if something turns out to be different than I thought it would be, firstly. Secondly, by creating optionality, you always have to ask the end in mind. That's not the end of a merger and a sector endgame. This is something you ought to have in mind when you think about last chances. And obviously, conglomerates are neither in fashion nor are they typically are effective. And you could even where we see it today on a share price reaction that another part of the stakeholder community has maybe expected more than other stakeholder communities did. And then we have 2 of them today in this room, maybe 3, you never know. And so therefore, at the end of the day, if you want to do a meaningful long-term-oriented business, you better not forget that performance is the only one way to survive. Yet secondly, I understand that there is sometimes a balance to strike between what you can do and what you want to. Difficult balance to strike between the doable and the desirable. Sometimes the speed to go to the desirable has got to be slower because the doable will otherwise not be accompanying you. So there is more to it than just go out and say, this is how we're going to push the share price up. There's more to it than just look at one or single items, as but -- at least, there are few customers around who put their confidence to us every day. So it is that -- doing responsible management that at end of the day, is being inclusive of interests and still get the job done based on outcomes, and that's why Vision 2020+ is what it is today. You create optionality, and understands that at the end of the day the only one secure place anywhere in any business is performance. But there is no point in striving for performance, which is desirable, if the speed of the ones who need to get along does not allow that to be faster. And that's been the intent of the message we wanted to give you today as a management team. There is no point in not understanding that results matter in the end and that they will be better than the ones people have options against. We have that very well in mind a detailed Vision 2020. We are going to do that as Vision 2020+. Are we going to do it our way? There is no point in laying out big targets, pleasing one without having the other one coming along. If I had told you today we're going to get rid of power train, we spin it off and the future will be bright, we probably would have created another EUR 1 billion or EUR 2 billion in market shares. But if you were a customer and hear that, what you actually think? You've got a [ strapping ] 800-pound gorilla in that space already. Do you need another one? Probably not. So you need to understand that running a company is more than just optimizing one single piece of interest in a very well network community. I'm too old for pushing one side and neglecting the other. I guarantee you, what we are going to do is better than most people think at this time. We'll do it together, and we'll do it in a balanced meaningful way to take most of the ones along who have an interest in the area, and that's exactly what they're going to do. I do appreciate that maybe the quality of detail has been insufficient for some, but obviously, have been more than to be able to digest for others, so we need to find a way to bring things together because we got a company to run every morning, every week and every month, and that's exactly what we do. So that's what you need to understand if you put something out there, where we say stakeholder are important. But at the end of the day, the only one relevant topic also [ Mr. Kurt ], what you've been mentioning to scare away maybe more one-sided short-term interest is to perform as well as others do, preferably better, and that's exactly the aspiration. And if we don't tell you everything today, but we know already how to do it. It's got nothing to do with not being -- with not having a plan. It's got to do with the fact that it's good enough if we know it. And with that ourself we measured against results every quarter and every year, how we do it. And that's been important to understand. It's been the whole intent of 2020+, to integrate the interest in an ever more divided world. That's what the whole matter has been all about.

[Clarissa Haller, Head of Communications]

Thank you. I think this was very good closing remarks. Looking at the time...

[Josef Kaeser, Chairman of Managing Board, President & CEO]

That's what supposed to be.

[Sabine Reichel, Head of Investor Relations]

It's 11:00. Clarissa?

[Clarissa Haller, Head of Communications]

Yes. Then thank you very much to all of you for coming and for all your questions and your interest. We wish you all a very nice hot, but also rainy summer from time to time. And hopefully, we will see you again latest for our annual press conference on November 8.

[Sabine Reichel, Head of Investor Relations]

Thank you also from my side. We will now conclude the webcast. Thank you for joining us here. We would like to invite you also for a light snack in the foyer of this building together with Joe and Ralf. Thank you, and goodbye.