Siemens AG

XETRA:SIE

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Siemens' 2020 Fourth Quarter Conference Call. As a reminder, this call is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens presentation. This conference may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mrs. Sabine Reichel, Head of Investor Relations. Please go ahead, madam.

[Sabine Reichel, Head of Investor Relations]

Good morning, ladies and gentlemen, and welcome to our Q4 conference call. All Q4 documents were released at 7:00 a.m. this morning. You can find everything on our Investor Relations website. I'm here together with Joe Kaeser, Roland Busch and Ralf Thomas, to review the Q4 results and outlook for fiscal '21. With a lot on the agenda, and I would like to hand over immediately to Joe.

[Josef Kaeser, Chairman of Managing Board & President]

Thank you, Sabine. Good morning, everyone, and thank you for joining us to discuss our fourth quarter results in what I will call remarkable times. As you can see, we have a lot on our plate today. So let's start right away. And I'm sure you all agree that we are in the middle of interesting times. This is true for the political environment, the geoeconomic factors as well as technology driving transformation. And on top of everything, the emerging second wave of COVID-19 is a factor, hard to predict when it comes to its impact on the global value chain. Needless to say that the full cocktail of all those matters needs to have the utmost focus of corporate leadership. And I believe truly that these times will determine the future of industries and companies to return intact sectors into structurally challenged businesses, make new sectors emerge faster and accelerate the digital transformation in all areas of doing business. And it will reward these companies which master the crisis well, learn from what they experienced while already getting prepared for the time after the pandemic. In any case, this will drive leadership, focus and attention to its highest levels. And the ability to connecting the dots in a changing ecosystem will determine the winners and the losers in the post-COVID environment. And that's why I am really extremely glad that we have been able to achieve the major milestones of our Vision 2020+ strategic concept. With the creation of 3 strong healthcare companies in their respective sectors, we have laid the groundwork for emerging stronger from the crisis while focused and operating in attractive areas of societal needs. Siemens Healthineers, Siemens Energy and the new Siemens AG are well suited to successfully manage and emerge from the pandemic and actively shape the future of their respective sectors. Needless to say that relentless focused efficient innovation and reliable execution remain the decisive success factors for value creation in the future. In March 2018, we successfully went public with Siemens Healthineers. And with the listing of Siemens Energy in September, we completed Siemen's structural realignment phase to create a powerful ecosystem. And this was a major step into resolving the Siemens conglomerate structure and create ultimate shareholder value. While we are aware that a lot of work still needs to be done, we believe the direction has been clearly set. With refocused entrepreneurial driven and increasingly independent companies sharing a strong Siemens brand, we have initiated the right setup for the future. Another important step to clarify our portfolio intent is depending sale of Flender, a world-leading supplier of mechanical and electrical drive systems to Carlyle. The -- what we call the POC concept -- portfolio company concept -- of fixing businesses by introducing any means of measures such as midsized company structures, has turned out to be an effective way of generating value after all. Siemens Healthineers is well on track to complete its conformative acquisition of radiotherapy leader Varian during the first half of calendar year 2021. Siemens Healthineers has also successfully raised its capital and took EUR 2.7 billion into its pockets. With this first step, the Siemens shareholding was reduced from 85% to 79%, and obviously, subsequently, creating a meaningful rise in free float already, which we believe is important also on where the companies are being included. Ralf and Roland will give you a further update and details on the ongoing execution of the midterm competitiveness programs. Ladies and gentlemen, after what we believe an unprecedented and successful split off process in unprecedented times, we listed Siemens Energy on September 28. This move continued the re-rating of the [ Indiscernible ] shares, which already started after the approval of the spin off at the AGM in July. Not unexpectedly, the Siemens Energy listing posts a huge catalyst with a share price increase of more than 9% or around EUR 7 billion market cap on that date. The following day, the Siemens share price gained further ground and reached a pre-spin off level within 2 weeks after listing. Since then, the re-rating has continued, including, obviously, favorable impact from sector rotation. This development is finally endorsing the strategic direction management took in its efforts to focus and derisk the Siemens company. And therefore, obviously, subsequently creating value for our shareholders. These achievements, in our view, have certainly been the highlights of our fiscal Q4 as well as the whole fiscal year 2020 where we outperformed both Tax 30 as well as the MSCI World Industrial index. Nevertheless, both our operating financial performance in the fourth quarter was quite satisfactory given the circumstances we had to deal with. Our global team has done an outstanding job in handling the pandemic and delivered a strong finish to fiscal 2020. We have recognized this dedication through a special bonus payment to our employees below senior management level. On the numbers, orders were up by 2% to EUR 50.6 billion with a, what we believe, solid book-to-bill ratio of 1.02. Main driver in this aspect as well as, by the way, in revenues, was China with a comparable 22% growth year-over-year and a nominal 7% growth sequentially quarter-over-quarter. As expected, revenues have come down moderately by about 3% to EUR 15.3 billion over most regions except China, which has been advancing 12% year-over-year. We performed also well on the operating industrial profitability with an adjusted EBITDA for our Industrial Business up 10% to EUR 2.6 billion, obviously, including a material valuation gain from our Bentley shareholdings and a divestment gain in Smart Infrastructure. This led to an excellent margin performance of 18.7% as reported, and 13.8%, excluding the Bentley effect and the smaller SI divestiture gain. In our view, it has proven to be a smart idea to have invested into a software company early on and are harvesting the gains from a rich valuation, especially this is a tangible gain where we can have a valuation on the stock exchange for the shares going forward. We are very satisfied with our free cash flow development, which has been reporting EUR 3.8 billion cash into the company's accounts and further building on the strong third quarter performance. So that totals a EUR 6.4 billion free cash flow for the whole fiscal year, an amount we haven't seen in a long time. Our strong finish in the quarter helped us also to achieve our guidance, although have a 6-year in a row, it's been the first time that you need to make a revision during the year due to the obvious COVID-19 pandemic reasons. So all in all, we delivered a really good -- this in our view, really good and especially reliable streak over the years. The team is focused on keeping it that way. No doubt about this one, although the ongoing uncertainties due to the second wave of COVID-19 has not made it any easier to make a meaningful prediction for fiscal '21. So the question is, what is this period of -- means for our shareholders above and beyond becoming a predictable company. So what's been in for them? Well, if you look at the total shareholder return in this period of time, it reached close to 100%, clearly outperforming the German DAX. Question is, could it have been better? Well, absolutely. Could it have turned out to be much worse? Well, certainly, as you know and as other examples show. The shifts from a hard to predict conglomerate into a focused and more transparent company with a clear structure of responsibility and accountability was a relevant need long overdue. Relatively, the 3 Siemens companies, Siemens Healthineers, Siemens Energy and the new industrial-focused Siemens AG, has set the stage [ for answering ] the biggest disruptive transformation of our TAM. While Healthineers is ahead, the 2 other companies have a clear path of priorities in both strategy and performance. The is stage set and building out the next level of creating value so focus on transformation can begin. Seeking the ultimate value creation is still the midterm goal. I'm very grateful for the support of many constituencies, people and particularly close allies, such as my fellow company, Ralf Thomas, Roland Busch and others, to have been able to take it that far. It should have been more, it should have been more, but balancing the desirable versus the doable requires patience and often compromising in order to get anything done. So I chose to get at least something done. And given the circumstances, I'm especially proud of what the entire Siemens team has accomplished over the years. And with that, ladies and gentlemen, I'll give it over to Ralf to give you more insights on the fourth quarter.

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

Thank you, Joe. Now let me first walk you through the businesses. At Digital Industries, we again saw excellent execution during the last quarter. Markets stabilized sequentially with manufacturing output rebounding from the low levels we faced in the third quarter. However, we don't expect a return to pre-crisis levels short-term in key customer industries such as automotive, machinery and aerospace. I want to highlight that our software portfolio supports all aspects of mechanical, electrical and electronics design simulation and manufacturing. Many startups and established players, for example, in the automotive and aerospace industries create differentiation through software, electronics and their own integrated circuity signs. Our strengths in these areas gives us a clear edge over competitors with a more limited portfolio. Hence, it's no surprise that our software is used by almost -- by most automotive start-ups, all top 25 automakers, the majority of the electric or hybrid powertrain suppliers too. Also, it has a leading position in the battery market. This is also reflected in our sales activities. In the fourth quarter, orders in our software business were up in the mid-20s over prior year, driven by several large contracts in the Mentor business. Short-cycle automation businesses benefited from an ongoing substantial recovery in China, up by 18%, partially compensating for a decline in all other regions. We saw a similar pattern in revenue development. Revenue decline was sequentially moderating in both discrete and process automation, where we continue to see lower investment in oil and gas markets. Software showed a modest revenue decline on tough comps. Against this backdrop, Digital Industries recorded a margin of 17.9% within the targeted range when excluding the Bentley revaluation effect of 13.7 percentage points. Cloud and integration investments accounted for around 120 basis points in the fourth quarter. This is a real strong performance in a challenging environment and clear evidence for structural improvements and strict cost management in the business. We like very much that Digital Industries generated almost EUR 1 billion of free cash flow. This translated into an excellent cash conversion rate of 1.35x when excluding the mostly noncash Bentley effect. As usual, this page gives you a lot more color on the regional perspective regarding the top line, with strength in China, significant declines in Germany and the U.S. and signs of stabilization in Italy. When looking at our key vertical and market expectations for fiscal '21, we expect further recovery along a U-shaped scenario. However, despite some positive signals, the situation remains ambiguous short-term due to increasing infection rates and lockdowns, particularly in Europe. All in all, we are cautious when looking at the first quarter and expect a material negative currency impact on both top line and margin. For the first quarter, we anticipate comparable revenue growth rate still to be slightly negative and margin below the target margin range. Smart Infrastructure delivered a solid performance despite of soft market environment and executed portfolio optimization as promised. As indicated, Smart Infrastructure saw further contraction in its markets, however, with some specific improvements compared to the third quarter. The picture continues to be diverse, depending on customer vertical and geography. We saw ongoing weakness in nonresidential buildings and industry, a moderate decline in utilities and grids and pockets of growth in health care and data centers. Orders were down 6%, driven by much lower volume of large orders in the Solutions and Services business. The Systems Business was slightly up while the Product Business showed moderate growth. Key driver was low voltage with order growth in the mid-teens. Revenues saw quarter-over-quarter improvement with a modest decline of 2% compared to the prior year's quarter. As expected, Product and System Businesses recovered while the Regional Solutions and Services Business faced a delayed COVID-19 related impact. And Smart Infrastructure makes good progress in executing on its competitiveness program. The sale of a nonstrategic Swiss-based business resulted in a gain of EUR 159 million or 410 basis points while severance charges amounted to a negative 120 basis points profitability impact. British investments burdened margin by around 150 basis points in this quarter. Profitability, excluding the divestment gain at 11%, was within the margin target, a very solid performance in the fourth quarter. Free cash flow performance was again excellent with a substantial reduction in working capital. Smart Infrastructure continues to operate in a volatile market environment. For the first quarter, we expect negative currency impact on top and bottom line. On a comparable basis, revenue is expected to be slightly lower year-over-year, while margin is seen slightly above prior year's quarter. Mobility showed a strong set of numbers in a difficult environment with restricted access to customer sites and lower ridership on public transport. The team delivered on its own ambitions and clearly outperformed competition again. Despite some larger project shifts in rolling stock, orders rose by 17% with strong positive momentum in the rail infrastructure business which we expect to continue. Strong commercial activity makes us optimistic to see sound order momentum in the first quarter. We have already won orders worth EUR 1 billion in October only. This includes, for example, the award of light rail vehicles in Duisburg and in Düsseldorf Germany as well as a major contract for Mireo trains for the network [ DONA ] ISA in Germany, too. The Mobility team performed again very well in keeping its operations up and running. As a result, revenue was stable, driven by the execution of large rolling stock projects. Margin performance in the fourth quarter was, as promised, clearly back in the target margin corridor. The same holds true for full fiscal year 2020, an excellent achievement. As expected, free cash flow came in on a very high level with a cash conversion rate of 1.83x, benefiting from major milestone payments as well as stringent cash collection. We are confident that Mobility will show clear revenue growth in the first quarter. We anticipate margin performance to be on similar levels as in the fourth quarter. Now let's move to Siemens Financial Services, where the entire financial services industry has seen further negative impact related to COVID-19 effects. SFS achieved EBIT of EUR 4 million, resulting in a return on equity of 1% for the quarter and 11.7% for the full fiscal year, very robust compared to the industry average. As indicated, Siemens Financial Services addressed continuing high uncertainty with an impairment of an equity investment in the U.S., partially compensated by a reversal of an impairment in Brazil. Credit risk provisions were elevated. However, actual credit defaults were very limited in the fourth quarter, less than 10% of total credit risk. For the first quarter in fiscal '21, we expect a clear improvement of a strongly affected third and fourth quarter's performance. Let me now point out a few more topics below industrial businesses where we saw major movements in the fourth quarter. Within portfolio companies, the fully consolidated businesses delivered a decent operational performance with Flender standing out. However, 2 major effects impacted bottom line. First, we recorded a goodwill impairment of EUR 99 million within fully consolidated units on Siemens Energy assets, which remained at Siemens. The impairment was mainly related to activities in Asia. Second, we had to take a EUR 453 million impairment relating to the Valeo Siemens joint venture. While top line of the joint venture looks promising, the company is loss-making since its foundation in 2016. Based on our internal assessment, we believe that this is going to last midterm. As a result, we had to impair all our assets related to the joint venture. As of this quarter, we add a new reporting line item comprising the results of our investment in Siemens Energy of 35.1%, which are not in our pension trust. We recorded a loss of EUR 24 million between the spin-off day September 25 and fiscal year-end. A material part of the mentioned COVID employee bonus is reflected in the corporate items too. Finally, let's move on to discontinued operations. Following the listing of Siemens Energy, we realized a pretax spin-off gain of roughly EUR 1.2 billion prior to any related costs, as assumed 1 year ago. This gain approximately offset carve-out cost tax expenses related to the spin-off and group-wide severance charges. The spin-off gain is based on several aspects, which I want to describe to you now. From an accounting and legal perspective, the separation date for Siemens Energy was September 25. At this point, no market price was available as Siemens Energy was not listed yet. For that reason, we asked an independent valuator to provide us with a fair value of Siemens Energy. This expert opinion included all available external and internal information at this stage and was verified also against pre-listing sell-side expectations. Based on that, we see a fair value of EUR 19 billion for Siemens Energy as appropriate. This also reflects current recommendations and target prices from sell-side analysts of Siemens Energy. Let me now emphasize an outstanding highlight in the quarterly performance. After an already strong third quarter, we continued successful working capital management and achieved cash conversion in industrial businesses of 1.199x. For full fiscal year 2020, we exceeded prior year level by 7% with a cash conversion rate of 0.94x. Excluding the cumulated mostly noncash benefit -- noncash Bentley effects and the divestment gain in smart infrastructure reached 1.07x for fiscal 2020, even exceeding the 1 minus growth target. It is also a positive signal that free cash flow on an all-in basis was strong with further positive contributions from the portfolio companies. Free cash flow all in reached EUR 6.4 billion for fiscal 2020, the highest level in the past decade. Now in line with our long standing policy, Siemens will propose to the AGM a dividend of EUR 3 plus additional EUR 0.50 per share in total a dividend of EUR 3.5 per share. This represents a stable dividend compared to last year's EUR 3.9 adjusted for the 10% market value of Siemens Energy spin. The regular dividend proposal of EUR 3 per share equals EUR 0.60 of net -- 60% of net income at the upper end of our 40% to 60% payout ratio. The additional dividend of EUR 0.50 per share will correspond to a rebalancing of our share buyback programs after the Energy spin-off with the beginning of the re-rating of our share. In remarkable times with ongoing COVID-19 uncertainty, we are very mindful about capital allocation priorities and are committed to a well-balanced total shareholder return approach. Next to dividends, the second pillar of shareholder return is our share buyback program. We have so far executed EUR 2.4 billion out of the current EUR 3 billion program of which EUR 1.4 billion have been bought back in fiscal 2020 at very favorable conditions. Altogether, this represents an outstanding total shareholder return with clearly above industry average dividend yield of 3.2%, EUR 1.4 billion share buyback and a re-rating effect of EUR 7 billion at the spin-off day. For our outlook for fiscal '21, we assume that the COVID-19 pandemic will not have a long-lasting impact on the world economy. Given this condition, we expect a fairly robust return to global GDP growth. We do anticipate that important customer industries of Siemens will continue to face challenges related to the pandemic and industry-specific structural changes. This will cause growth in global fixed investments to lag behind GDP growth, and we expect improved conditions, particularly for our high-margin short-cycle businesses in the second half of fiscal '21. Building on our strength in digital transformation, optimizing footprint and tapping specific growth markets, we will maintain high levels in investment in R&D with a strong focus on software and digital technologies. However, each decision will be taken with a strict focus on clear priorities in resource allocation. We assume severance charges on a substantially lower level compared to fiscal 2020 with around EUR 400 million to EUR 500 million in fiscal '21, still above-average going forward. We anticipate material negative effect from foreign exchange to weigh on top and bottom line. Top line effects are expected to amount around 350 to 450 basis points. The negative impact on margin is assumed to be around 40 to 50 basis points. Now let's have a look at fiscal '21 below industrial businesses. Siemens Financial Services will see a significant improvement over fiscal 2020, but it will take more than 1 year to come back to pre-COVID levels. Within portfolio companies, fully consolidated businesses will be profitable, while our equity investment remains negative and volatile. Siemens Energy investment is expected to show a substantial negative amount driven by PPA effects of around EUR 300 million. Siemens Real Estate depends on disposal gains, which will be lower compared to fiscal 2020. For corporate items and pensions, we assume total cost on prior year level. This number includes stranded cost of around EUR 200 million to EUR 300 million for Siemens Energy. Pension therein will be on a similar level as in fiscal 2020 with around EUR 200 million. For PPA, we assume a quarterly run rate of around EUR 150 million. For elimination, corporate treasury and other items, we assume slightly higher costs compared to prior year level. The tax rate is expected to be in the range of 27% to 31%. Flender will become part of discontinued operations in the first quarter. Hence, we anticipate in D/O the Flender disposal gain and related expenses as well as some remaining subsequent spin-off costs from Siemens Energy. As a result, we expect for discontinued operations, a positive result of a mid-triple million amount. Here, you can see the framework for each business and the outlook for Siemens at glance. You can find the details described in the even more comprehensive written outlook section in our earnings release document. Digital Industries expects modest comparable revenue growth. The margin is expected at 17% to 18%. Smart Infrastructure anticipates moderate revenue growth with the margin at 10% to 11%. Mobility is confident to achieve mid-single-digit revenue growth with a margin of 9.5% to 10.5%. On Siemens Group level, we anticipate moderate growth in comparable revenue and a book-to-bill ratio above 1. Please note that we decided to switch our guidance from EPS to net income. Net income gives better transparency for fiscal '21 since EPS will be affected by dilution effects due to the equity issuances of Siemens Healthineers. Taking all this together, we anticipate net income to increase moderately from EUR 4.2 billion in the prior year. Excluding exchange rate effects, this is comparable to a high single-digit growth rate. As always, the outlook excludes charges related to legal and regulatory matters as well as effects related to Siemens Healthineers planned acquisition of Varian. With that, I hand over to Roland to talk about priorities of the new management team in fiscal '21 and update you on Siemens Mobility. Roland, please?

[Roland Busch]

Thank you, Ralf, and good morning, ladies and gentlemen. On first of October, we started a new exciting chapter. Siemens stands for 1 focused technology company, putting customer impact at the very center. We serve our customers to drive their transformation in an ever fast-changing world in key business-to-business areas that form the backbone of our economy. More agile and productive factories, more efficient infrastructure buildings and grids, more reliable and sustainable transportation. With our unique portfolio of products, automation, software, digital platforms and services, we are best positioned to connect the fiscal and the digital world. It is our clear ambition to create value for all stakeholders. For our customers, supporting them in their transformation ensuring them staying relevant in the future. Our strong partner ecosystem where every partner benefits from participating and contributing to a platform, which enables to build tomorrow solutions and [indiscernible]. For enpowered people working in diverse teams who can grow and contribute to their best in our company. For societies, benefiting from sustainable products and solutions as well as the education and training programs Siemens is offering. And all this, ultimately leading to attractive returns and value creation for our shareholders. This new leadership team, we will have strategic dialogues with all businesses, to review priorities and to drive core technologies and platforms across the company. During our Capital Market Day in May next year, we will update you on how we shape the digital transformation and foster high-quality growth in every aspect, more sustainable, more recurring and more profitable. Our sustainability program is highly regarded and we are confident to have achieved an important milestone in fiscal 2020 to reduce Siemens CO2 emissions by 50% as promised. However, we will amplify, for example, on how to even better address sustainability requirements at our customers, how to do more with less. We will continue to drive key initiatives of Vision 2020+ to improve operations through ongoing competitiveness and cost out programs. We will continue to execute a private equity approach to our portfolio companies. And we will maintain a rigorous focus on free cash flow across the entire organization. Let me now give you an update on key topics around ongoing Vision 2020+ initiatives. As I said at the beginning, Siemens AG is one technology company. This is certainly visible in our increased R&D intensity north of 8%. We intend to maintain and even increase this ratio over time due to a further increasing share of software and IoT related revenue. Stringent capital allocation to our key strongholds is fully intact. And these efforts deliver results. As you can see from the examples, we continuously expand our ecosystem with leading companies such as SAP to expand on business. A good proof point is also the founding of Calibrant Energy, a joint venture with Macquarie, which will create energy as a service solutions for corporate and municipal customers in the U.S. And we grow organically through innovative solutions such as the digital process twin for the leading vaccine producer, GSK. A key element of Vision 2020+ is our goal to drive further margin expansion through competitiveness and cost optimization programs. Considering the long-term impact from COVID-19, both Digital Industries and Smart Infrastructure have further stepped up their programs to drive structural improvement. Digital Industries was able to maintain its margin in the target corridor, also by ramping up savings quickly. The team already achieved EUR 240 million savings by fiscal year 2020 through rigorous process optimization, automation, and implementation of digital solutions. We are confident to achieve EUR 420 million, equaling an increase of EUR 100 million by fiscal year 2023 through executing long-term structural improvements on top of regular stock-based productivity. Smart Infrastructure increased its goal by EUR 30 million until fiscal year 2023 to EUR 370 million, and expects to achieve EUR 190 million by fiscal year 2021 already. Key levers are process offshoring and automation as well as consolidation of manufacturing footprint. Across the entire company, we are obviously looking into permanently optimizing office space and occupancy costs through the implementation of mobile working schemes. The Global Business Services team did an excellent job during the crisis to ensure stable operations and resilient IT infrastructure with a high degree of automation. The team is well on track to reach their efficiency targets and will further increase measurable impact for their customers through a recently announced strategic partnership with Process Mining Pioneer, Celonis. The governance functions were busy to execute on the Siemens Energy spin-off in fiscal year 2020. In fiscal year 2021, our key focus continues to be on leaner and simplified governance to achieve our accumulated savings target of EUR 270 million for Siemens AG in fiscal 2021, and EUR 450 million for fiscal year 2023. As Joe and Ralf alluded to, our concept to bundle certain businesses under the umbrella of portfolio companies and give them greater independence and autonomy is working. As we saw with the sale of Flender to Carlyle, also a change in ownership is a viable option. We will continue to execute on the potential plans of the remaining businesses. Our target to achieve at least 5% margin of fully owned businesses by fiscal year 2022 is maintained. And please remember in fiscal year 2018, we reported losses on this business. Besides our operational focus, we will continuously evaluate strategic options on how to further develop these businesses. And as Ralf mentioned, the equity investment value of Siemens will continue its transformation program and business ramp. We announced in May to give a strategic update on Siemens Mobility or how Siemens Mobility is positioned after Alstom Bombardier merger. So let me start with the assessment of our market. Mobility is operating in an intact long-term growth market, secular growth drivers such as urbanization and decarbonization. As of today, we estimate the market to grow nominal by 25% over the next 3 years. After a clear decline in fiscal 2020 due to COVID-19 related order push outs, we expect a strong rebound in fiscal year 2021 and a return to resilient growth thereafter. Stimulus packages, such as in Germany or through the European rescue package will further add market potential. Key market trends are playing to our strengths. Main driver is digitalization across the entire portfolio, which enables new business models such as life cycle service contracts and availability performance guarantees. Our leading integrated set up of rolling stock, infrastructure, customer service and turnkey capabilities, Mobility is best positioned to address increasingly integrated customer needs. Our key differentiator compared to competition is the ability to transform the industry with technology to become more sustainable and leverage the digital transformation. Just to put it into perspective, our R&D efforts are level with combined milestone Bombardier company. In addition, we can also draw on core technologies from Siemens. Good examples are digital twin software capabilities, cybersecurity as well as IoT ecosystem and platform. Just to share 2 examples out of many. First, we are transforming together with our customer, Bane NOR, the entire railway infrastructure in Norway. The goal is to implement 1 digital interlocking architecture as back pound for the European rail traffic management system with the potential to move it into the cloud. The rollout will take until 2034 and will improve reliability and reduced maintenance effort dramatically. This project comes also with a long-term 25-year service contract once the first-line is commissioned. Just a month ago, we received the German Mobility award for the digitally networked Rhine-Ruhr Express. A great project delivered on time, combining 84 of our efficient Desiro trains with an OpEx optimized service contract over 32 years. Mobility is responsible to guarantee almost 100% uptime and has implemented a fully digital service infrastructure. How did we do that? We built a paperless depo and our leading Railigent platform provides advanced analytics and decision set. The RRX order is a clear proof point that we are able to leverage our strength in the digital world to sell more hardware in the real world. The Mobility team has proven its excellent execution capabilities now for many years and developed the business into the global mobility champion regarding profitability and cash conversion. And it comes with an attractive and resilient growth rate. Revenue grew on an average by 5% per annum. The current backlog stood at a healthy EUR 32 billion, with around 85% of fiscal '21, revenue already covered. Our most competitors suffered double-digit revenue declines during the COVID-19 lockdown phase with material bottom line impact. Mobility held up well in top and bottom line. If you take -- if you take the available data for the last half year from our 2 soon to be merged main competitors, we clearly out [ performed ]. We continued to keep our revenues stable while they reported sharp double-digit revenue decline. Despite COVID, we also delivered on bottom line with a margin of 9.1% and excellent free cash flow of almost EUR 900 million in fiscal 2020. Mobility has a clear ambition to further improve performance and outperform the market in leveraging its investment. Midterm targets are unchanged to what we communicated in May with a clear set of measures in place. We drive the shift towards higher-margin and recurring revenue business, such as digital services and signaling in the cloud, platform based products and highly profitable component and platform business. We improve our own operations further through footprint optimization and digitalization of our internal processes. In May, I also talked about selective margin accretive portfolio moves. Today, we see a first step. Around 7% of Siemens Mobility's revenue is in Intelligent Traffic Systems, whose customer base are mainly road operators. ITS has around 5,000 customers [ only ] which is a different client base compared to the rail and rail infrastructure operators for the other Mobility business. The ITS team achieved a remarkable turnaround with strong growth and material margin improvement, albeit from low levels. Over time, the business has built an integrated end-to-end portfolio for its specific market segments. The market is characterized by mostly midsized and regional oriented players. Yet ITS is the only company which will cover all main traffic controller standards, after closing the announced acquisition of ATC in Australia Around 600 cities worldwide rely with their traffic management on Siemens. We took the decision to carve out this business and enable the next development step. ITS requires a higher degree of freedom to focus on its own road traffic focused business model. With a pure-play approach, ITS will get the entrepreneurial freedom to shape digitalization in the industry further and actively drive market consolidation. Hence, the goal is to achieve stand-alone readiness by end of fiscal year 2021 [ pre-conditioned ] for the next level. Consequently, Mobility will focus on the vertical integration along the rail customer value chain, and providing smart and seamless intermodal trafficking, such as through our active market Solutions. Ladies and gentlemen, my competitors are trying to succeed with share size in a market which is characterized by often represented over capacities. We decided to pursue a different path. Our strategy is based on leadership in technology, digitalization and superior innovation. Because we are convinced with the real value our customers are looking for is affordable, sustainable and reliable transport capacity. This is what Siemens Mobility offers. Based on an integrated approach of infrastructure and rolling stock with the most advanced platforms, combining the physical and the digital hold. Our performance over the last years is clear evidence that our strategy works. We deliver value to our customers, which drives high-quality returns for our shareholders. In a nutshell, we have a clear plan going forward to shape the next chapter of Siemens, and we will execute diligently on our milestones. We are particularly looking forward to discussing with you in-depth strategic and operational priorities at our Capital Market Day in May next year. And with that, I hand it back to Sabine. Joe, Ralf and I are looking forward to your questions.

[Sabine Reichel, Head of Investor Relations]

Thank you, Roland. We are now ready for Q&A. I would like to ask you to ask only 2 questions per analyst. I can see that we have a lot of analysts in the queue and unfortunately, limited time. So operator, please open the Q&A now.

[Operator]

[Operator Instructions] And our first question comes from the line of Ben Uglow from Morgan Stanley.

[Benedict Ernest Uglow]

I had 2 questions. The first was really around understanding the Digital Industries guidance. Modest growth does seem a little bit conservative given that you've had a healthy book-to-bill over the course of the year. And what I'm really interested in is the 17% to 18% on the margin, is that just -- is that sort of flat to slightly down on the margin? Is that simply reflecting your expectations around growth or is there anything else going on in there in terms of business mix? For example, any shift between automation and software. So question #1 is, is your margin guidance purely a reflection of your views around growth? The second question is really to understand properly the new base level, if you like, for the dividend. You've got a EUR 3 ordinary dividend, then there's this EUR 0.5 realignment around the buyback, which, to be honest, I don't completely understand. Are you signaling that the new baseline as we go into next year is EUR 3 or EUR 3.50? Those were my questions.

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

Ralf speaking. Thanks for your questions. Let me start with the dividend question that you have been raising. And let me repeat what I said because I believe it's really important to see the total shareholder return as a package, as we said that before. A yield of 3.2% is clearly industry-leading. And also the share buyback of EUR 1.4 billion, matching about 50% of the potential dividend payment in fiscal 2020 is also quite a material amount of money in terms of shareholder return. Plus the revaluation that has been kicking on the day of listing Siemens Energy, I do believe this deserves being kept in the back of all of our minds when we talk. But coming to your question precisely, the policy that we have been applying and that we have been very consistently and transparently mentioning time and again, is clearly taking us to EUR 3. However, we also are mindful of our shareholders, obviously, and also have been asking ourselves how to perfectly well allocate the funds that we have been flagging out for distributing to our shareholders in the most efficient way for the company and also, obviously, for the shareholders. And that has been taking us to reviewing, obviously, after the revaluation, the re-rating kicking in, to the balance that we need to strike between the share buyback programs and the dividend. So for this particular fiscal year 2020, we thought it is a very important matter to prudently assess that situation and then determine what is the right balance between share buyback and dividend. So that has been taking us to the EUR 3.50. So the policy is intact and will remain in place until we change it, obviously, which we don't intend to do. And therefore, it's also very clear for us to the way forward, what we intend to do, applying the policy that is in place, obviously. However, I would also like to kind of anticipate a bit with you, even though it's too early talking about amounts and money, what may happen throughout fiscal '21. Because we have been indicating that we intend to close the transaction with Varian that will anyhow then have massive impact on our net income situation in that fiscal year. And as we said in the past, we will then also take into consideration the big picture, including noncash items on our P&L and that will then drive the decision in '21. Thereafter, I think there will be, again, a lot of clarity in applying the policy way forward. And we just wanted to be transparent on that matter that we do not surprise anyone in that regard. I still believe, and I would like to close that question with that remark, that 2020 was an outstanding year for our shareholders and has been given clear evidence that the strategy that we apply with Vision 2020+ is creating value for our shareholders. Now coming to your first question around the guidance that we give for DI that you consider being conservative. I mean, we have been seeing a lot of volatility and unknowns in the market when it comes to automation business, obviously. And we have been also shedding some light into the geography and the distribution of our sales around the globe and I would like to repeat that also for the way forward. I mean, looking into China, Joe mentioned that we've been very happy with the positioning in China and the growth rates that we could achieve. They're clearly winning market share, which is important also in a growth market. And we anticipate for the first quarter that automation revenue is going to see clear growth opportunities there, too. Talking Germany, the picture is quite different. And we saw that in the last quarter. And even though the fourth quarter has been giving some momentum into the direction of moderation of the decline, and that decline of -- that moderating decline in automation revenue is also expected to continue even though on very low levels in the first quarter for Germany. Italy, as mentioned before, we do see automation revenue with a moderate decline in the first quarter of the fiscal year, very much depending, obviously, on COVID 19 impact. We know unfortunately and sadly, from the past, that there's a high sensitivity in the market and in the related businesses, which are, to a certain extent, then also export-driven from Italy into other growth markets like China. And last but not least, looking into the U.S. and ignoring for a second presidential matter and impact after the President elect has been put in place then, I do believe with the long cycling of businesses, we will still see a quite suffering business environment, and double-digit decline in the automation environment in the first quarter in the U.S. cannot be ruled out. So from that perspective, I agree with you. We are conservatively assessing the situation, but we need to be mindful also of our cost position, of course. And we rather want to tap on upside opportunities determinately instead of then trying to correct what happened in the past. We all know what I'm talking. So therefore, we learned from -- we learned our lessons from that, and getting to the margin impact, there's clear revenue driven development there. There is no extraordinary not mentioned topic that may have an impact on the margin development. The mix, of course, will vary quarter-to-quarter, very much depending on the software impact but we will drive all that very prudently, and we also are determined to make sure that we share each and every information that we really have at hard facts in our hand with you to give the best possible outlook and transparency way forward.

[Operator]

Our next question comes from the line of Andreas Willi from JPMorgan.

[Andreas P. Willi, Head of the European Capital Goods]

I've got 1 question and a follow-up clarification question on what Ben just asked. The question is on the return on capital. This morning in the press call, you made a comment that return on capital may be not a good metric for growth or technology companies. And you clearly see Siemens as a growth and technology company. Could you just elaborate on that? And also what that means relative to your target you have set where you have moved away from, over the last few years, due to some of the acquisitions, mainly on the health care side as well? And the follow-up question on Ben's question. So on software, could you maybe just mention what you expect from the software business in DI as part of your guidance? Obviously, we have seen the good order growth there, very good backlog there after 2020, but maybe on the timing of how that backlog is executed.

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

Thank you, Andreas. Let me start with the software business. I think it's important to mention -- you mentioned the order growth, really impressive. And also the customers that we could win, this is not only just winning that very deal. It's also getting our feet into highly attractive industries, which will also provide further opportunity with resilient business. And also growth opportunities, jointly developing our customers' markets with them globally. So having said that, of course, orders and how they kick in from a quarterly pattern is really difficult to anticipate. And the last thing we want -- and I said that, again, I need to repeat it -- is that we sacrifice content for timing. We have been educating in other industries, our customer base over a decade that is the perfect thing to wait for the fourth quarter, ideally, September 30 to strike a deal with us, and we will not step into that trap again. So therefore, we are not pushing for quarterly development and are not trying to anticipate or pull in too much of a potential business opportunity. With that, in software revenue recognition very much goes with order acquisition in certain areas. So we need to accept, at least to a certain level, that on a quarterly basis, business opportunities are very hard to assess. From a backlog -- from a backlog perspective, we, of course, like the fact that in our EUR 4.1 billion plus software business, which we have in DI, we are benefiting more and more from the visibility of that business. And at the same time, we transition carefully into cloud solution-based services, which will even create more and bigger profit pools for that business. So I would not be surprised if from a quarter-to-quarter perspective, there was continuing volatility in that business. But from a growth momentum, the yardstick we apply is clear, and we said that time and again, and even though one of our competitors doesn't like the statements we make, they are still true. And I would like to use that opportunity also to clarify ultimately that the growth momentum we see in our revenues is not based on internal business. This is less than 3% and this less than 3% internal business, which is in the area of EUR 100 million of revenues last fiscal is an investment, a prudent investment, in strengthening our own efficiency levels in our value chains globally. So that is the #1 point I wanted to clarify, because there's a lot of gossip obviously out in the market on that one, which doesn't hold the water when looking at facts. The second point is, of course, we are looking at market shares. If you just take the last 4 quarters and compare to the highly relevant competitors we do have, in particular, the very one, it's very easy to assess who has obviously outgrowing the market and competition. So the point I'm trying to get to, Andreas, is that assessing the business opportunities to gain market share, to get a resilient business opportunity in place and to then further explore the share of wallet at those customers, ideally, global players, as we have been successfully doing, that is what we are out for. Coming to the first question you have been raising around ROCE. I mean, it's obvious, and you touched on it, it's obvious that when you are out for acquiring assets of the magnitude of Varian, it's easy to understand that ROCE, as such, is going to be affected massively in the first couple of years. We also have been very transparent and it's a task of the Healthineers, of course, to assess that in detail. They will do that once closing is achieved, which they are quite positive to be taking place along the lines that they have been indicating from the very beginning, being the first half of '21. The magnitude of transactions like that raise the question whether or not a certain target corridor for ROCE is meaningful in the short term? Long term, it's obvious we need to clearly outperform our own WACC yardstick, not only once but twice. That's how we have been assessing that. And we need to be head-on-head with best-of-breed in that industry. The point that Joe has been making this morning is very valid, of course, moving into a growth tech-oriented stock pattern, it is evident that we also will have -- will need opportunities and have opportunities to also buy ourselves into very promising spots in the market with high -- big opportunities to increase capital efficiency in the long term. So we will come back and share with you latest when we are talking at our Capital Market Day, which we intend to have in May next year, about what does -- that precisely mean at that point in time. We also hope to have transparency and clarity on the Varian acquisition and what impact that has in the then near future. So I need to ask you for a bit patience with us on that matter when it comes to the numbers.

[Operator]

And our next question will come from the line of Alexander Virgo, Bank of America.

[Alexander Stuart Virgo, Director]

A couple of clarification questions, I suppose, really. The first on the margin guidance, particularly in DI. I'm just thinking about your comment on FX headwinds and also the impact of investment. I think you've been running somewhere around 120 to 130 basis points on margins in the -- for the latter. So I wondered if you could just give us some comments around the color of that margin guidance, does it include the FX headwinds and then the level of investment in 2021. And then the second question, just on cash flow. You flagged a very strong performance in conversion in the core industrial business ex the gains. Just wondering if you can give us any indication of how that might look through the next 12 months as well? That would be really helpful.

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

Thanks, Alex. Let me start with the latter one. I mean, cash flow will be and continue to be on top -- very top on our agenda. We will continue also with the incentive scheme and everything we described for senior management. It obviously paid off to very much focus on the matter, and we also are very happy that we see also, let me call it, behavioral patterns now getting to new normals, being mindful of cash positions whenever you go out talk business with the entities. And even in the factories, the first thing people are touching on is how they can improve cash conversion, unwind operating working capital that has been accumulating over the last couple of years. And therefore, I think we may say we changed the mindset in that regard. Obviously, that doesn't mean that each and every quarter is on the same high levels, but we are very happy that we could kind of break the pattern to only be great in the last quarter. Third quarter was strong already, and we are really very much appreciating that the fourth quarter has been building on that third quarter instead of bouncing back. So still there will be seasonality, it would be naive to believe that the first quarter will continue like that. But the point I'm trying to make, it's more than just having reached a KPI. We are in for changing the mindset of not only senior management, but the whole crew around the globe, and we do believe that we are consistently on the right way to do that. For core IB, I think it was an outstanding year and an outstanding quarter, in particular. We do see different dynamics in the businesses. Obviously, I'm not worrying about the DI conversion rate, even though each and every major contract in software that we acquire has its own dynamics, yes. Software revenue recognition also takes a toll on free cash flow. It's delayed then, if you will. So growing over-proportionally in software implicitly means there's a drag on cash conversion rate for the full entity of DI, obviously. Secondly, we do see that the growth opportunities that the market is providing for our Mobility business is also giving us opportunities to continue collecting advanced payments even though the industry has been changing in some geographies, the pattern in advanced payment, hopefully not for good, but in some areas that may prevail for a certain period of time. And In SI, I think the management team is doing a very, very good job, a great job, to be honest, to apply the same rigor and prudence in getting processes into a new steady state as they did at building technologies. So I'm confident this will go on. However, there will be also certain elements that you just can't ignore if you have been putting restructuring, severance charges on to your balance sheet. It's obvious that there will be cash outflow in the year thereafter to the largest extent. We also will not be able to maintain in each and every year the payment ratio for taxes, for example. So the point I'm trying to make is we will continue with a 1 minus growth target. There is no discussion around this in the whole company. This will directly impact the achievement rates on the incentive scheme. So I'm quite positive the momentum is being kept alive also in '21. But there will be also extraordinaries, obviously, from topics, as I mentioned that before. Now coming to your question about the margin guidance in DI. Yes, we are guiding as is, as reported, and that is including also a negative margin impact from exchange rate in DI, that may be in the same area as indicated with the 40 to 50 basis points on IP margin in total. It will vary quarter-over-quarter, obviously, because it's referring back to the then existing exchange rate averages of the prior year's quarter. And we will be very transparent on that one, but very clear answer. Yes, it is included when it comes to margin guidance, and we also will continue investing into cloud transitioning. There was also a smaller and smaller amount of impact for integration costs around Mentor and Mendix, and we have been very transparent on that in the past. 1.1 percentage points in the last quarter, as mentioned before, and we will continue being transparent. But yes, all that is included in the margin guidance we gave.

[Operator]

Next question comes from the line of James Moore, Redburn.

[James Moore, Partner of Capital Goods Research]

I have 2 questions. Firstly, Pete, you're welcome. On R&D, you talked about maintaining or even increasing the R&D over time, and I understand the mix of software and IoT, but just when we think about the digital investments in DI and SI, could we assume that those are heading to 0 in a few years' time away from the core R&D? And my second question is, within DI, could you talk about the software margin? And could you quantify how it compares to the overall DI margin, say, for last year? And what you see as the key margin levers in the next few years? Am I correct to assume that SaaS depressed the margin will help going forward and any other topics we should think about on software profitability.

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

Thanks, James. Let me start with the software aspect. And even though I know I will disappoint you, we still will not disclose the margin development for 2 reasons as mentioned before. On the one hand side, we are still on our way closing the gap to the best of breed, and we will continue doing so. We are on the very right way in that regard. And the Mentor growth momentum is clearly, clearly taking us into the right direction. So there is no doubt that we will be very, very competitive in that, the more we grow the software business, which stands at EUR 4.1 billion plus in fiscal 2020. And what we also do see the resilience of that business and also the opportunities to acquire accounts that takes time. But once you're in, you have a perfect opportunity to expand there and this is giving us incremental momentum also in grooming the growth momentum, which we do. And at the moment, if I had the choice to reinvest into further growth instead of profitability at software at this very point in time. This is very easy to answer for me, because we have such a tremendous opportunity to grab market share from former market leaders, and we will make best use of that opportunity, no doubt due to the profit pool related to that one. So I would like to hand over to Roland talking about R&D.

[Roland Busch]

So I don't know whether I got your question right. But of course, where we continue to invest in the software organically and as well as IoT Solutions. For example, edge solutions, edge device in DI, one of the big things where we believe that a lot of the load which goes currently to the cloud will go and stay at a shop floor level, which plays in our hands. And of course, there will be investment. If it's about the cloud development itself, that will also contribute. If the background of the question was on MindSphere, we're reducing that level in MindSphere investment because that goes into the -- as you said, I think with normal operations, of course, definitively because that was kind of a push in the beginning, we are leveling down. But as we said, the intensity goes up and the focus is really to invest into those areas where we can then benefit from a higher revenue from software, digital services, which is high quality revenue.

[Operator]

Our next question comes from the line of Martin Wilkie from Citi.

[Martin Wilkie, Managing Director]

It's Martin from Citi. Just a couple of questions on end markets. You've talked about automotive and some sequential stability. In your outlook, it looks like you still expect automotive to be flat or now expect automotive to be flat next year. One of your U.S. peers are pointing to growth of up to 10% in that market. I'm just wondering what's driven your view that automotive doesn't see a sharper recovery in 2021. And the second question was also end market related. You called out nonresidential inside SI. There is a lot of debate as to whether the nonres is going to have a bit of an air pocket in growth following COVID before we start getting the green deal and other [ subsidies ] start kicking in. Just to give some sort of sense as to how you're thinking about non res within SI into next year?

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

Yes. Let me start on the automotive. We saw definitively, and as you know, in China, has a momentum, and there's a still a strong momentum, Automotive and electronics. United States also was significantly improving as well as we have bounced back in Germany as well. The question is -- we are planning a U cycle overall, and this holds true also for automotive from the low level, they are increasing. But we don't believe that this market goes back to the level where it came from until 2022. So therefore, I would say it's a flat, maybe a flat upside due to the strong decline in the previous quarters, but we see a -- kind of a recovery there, alongside with some machines businesses or markets, too. So therefore, cautious positive outlook, so to speak. I'd have to make a disclaimer here. If COVID goes for another kind of lockdown and so on, we'll see that automatically in the automotive business, too. We don't plan for that, and we don't see that. The second one was on nonresidential. Yes. The nonresidential market, we saw a drop indeed. I mean, this is a market which has a little bit of a lagging. It's a lagging market. We are planning here also a U cycle. Yes, the dip was not that deep. I mean the DI market was dipping by 9% in 2020 and maybe only by 3% or 4% for SI. This includes also the commercial market, commercial buildings market. And it's -- but it will still drop, go flat or even drop a little bit in 2021. Not that steep. So therefore, it's not a deep U, but it's a U. And we have -- so we are expecting this market also not to recover until 2020 from the level which we saw in 2019. So there will be a little bit of headwind still in this market for the next fiscal year.

[Operator]

Our next question comes from the line of Simon Toennessen, Jefferies.

[Simon Toennessen, Equity Analyst]

Two questions, please. Firstly, on the net income guidance? And then secondly, on cash usage. Firstly, on the net income guidance. You're obviously guiding for no leverage in the group really for '21 by forecasting the same revenue and net income growth. You said R&D should remain roughly at the sort of 8% plus, but SG&A is supposed to be flat. So one would think that SG&A costs by volume growth you anticipating an improved energy performance should more than offset the FX drag and thus create some leverage in the business. If you could just elaborate a bit more on drivers that maybe I'm missing here. And secondly, on cash usage. Your free cash flow surprises to the upside, up 10% year-over-year or EUR 600 million. You're receiving EUR 2 billion from the Flender sales. So how should we think about cash usage weighing up a potentially higher cash return to shareholders, potentially higher buyback versus your M&A agenda going forward? And maybe as an add-on to the latter on M& A, what were your thoughts on not buying Bentley before the IPO?

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

Well, Simon, thank you for the questions. Let me start in the same sequence as you have been raising them. When it comes to net income guidance next year, I think it's important to see that there will be a tremendous improvement in operations in Industrial Business. Just making good for the foreign exchange challenge that we have been putting out there that needs to be emphasized time and again, because it's going to be material. Plus we also will not have the extraordinaries of the disposal gain nor of the revaluation of the Bentley shares. So this is quite a challenging outlook, I believe, taking that into consideration. And it makes a whole lot of sense to therefore, allocate our investments deliberately and very selectively, and that's exactly what we did in our budgeting process. We haven't allowed for one size fits all across the whole portfolio, but have been clearly flagging out where we intend to make best use of growth opportunities. And then also don't shy away from adding incremental sales resources but also have clear expectations in terms of returns and top line development with profitability associated. So I may say, I think that we never have been spending and will continue spending time on making selective decisions on where to put our investments, be it in OpEx or Capex. And even more though in potential M&A, which I don't see major things to happen to just repeat what we said before a couple of times. So having said that, I also would like to mention that the exchange rate impact is going to filter through to the very bottom line. And I said that in the press call that the 40 to 50 basis points of Industrial Businesses margin will translate at the end of the day to a net income impact that may have the dimension of EUR 500 million, which is massive and is also tailored into that outlook that we gave. So please bear in mind that this is not going to be a walk in the park, but we will master that. The second part of your question about cash usage. Of course, we will be very mindful in that regard. We also have been exchanging thoughts with you throughout the last couple of quarters on that matter, in particular, when we have been coming out with the news of the Varian acquisition. We also said that there will be opportunities and need to also deleverage thereafter. So the whole system, if I may put it that way, needs to strike very well and prudently thought for balance, which it will. And in that, the Flender proceeds are going to play a role, obviously. But again, as I said, since timing of closing for both Varian and also the Flender divestment will have an impact also on the overall big picture for how our liquid assets are going to develop throughout the next fiscal '21. I would like to get your patience for thinking that through and assessing the facts and then talk quantitatively to you most likely in the second quarter of fiscal '21.

[Simon Toennessen, Equity Analyst]

And on Bentley?

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

Well, Bentley was Bentley. Bentley is a listed company now, which has quite its challenges. Obviously, after the latest disclosure, just the other day, there was quite some volatility in the asset. I'm just talking facts. And we are very happy that we have been obviously investing at a very good point in time. From our perspective, Bentley is a very interesting company. But we also need to see that the market, obviously, also is struggling with assessing the right steady state valuation for it. From our point of view, we have been clearly expressing ourselves, and there's nothing to add.

[Operator]

Our next question comes from the line of Guillermo Peigneux-Lojo of UBS.

[Guillermo Peigneux-Lojo]

Maybe a question or a couple of questions on mobility. First, obviously, and I can see that you said that there were some shift in orders from 4Q to the fiscal year, first quarter. And also, I see your mid-single-digit growth guidance on, on -- for 2021. But I'm more interested about the level of activity from a tendering perspective, from an order perspective, because you see, obviously, your customers on one side have been very weak cash flows. And at the same time, obviously, the European Union calls 2021 the year of railway. So can we continue to see a good operating environment when it comes to invest in, in 2021, despite the deep cash flow problems these companies are facing as we speak? And then the second question is when you look at the projects from a green deal perspective, and railway combined, they basically, in a way, touch up on hydrogen and also a lot of signaling and systems. And I wonder what does it imply for your mix of businesses and also margins overall, if I may?

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

Well, so there's indeed a load issue with the operators. Obviously, they keep their capacities up and running and the load factors low. At the same time, we see -- but at the same time, we see that there is a strong willing -- and not only in Europe, in other regions too -- to invest in this infrastructure. Because it's green transport, a lot of connections between cities, which used to be served by airplanes. It would be replaced by rail bound traffic and transportation. So we see that investment level. There's a reason why we said that we see a strong increase in the market. We talked about more than 20% growth over the next 3 years. And this investment goes into infrastructure. So signaling -- because laying new railway lines is time-consuming and costly. But if you deploy modern ETCS technologies, you can increase capacity by 20% plus without new lines. So that's the investment. And, Simon, if you talk about the Digital Lachine at Deutschland, so the Digital Rail Germany, where a package, which is supposed to release soon. And then we have also some push out orders. So we see 2021 is a strong year for us in order intake, but also for the market. Remember, there's also a decision to come on high-speed too in United Kingdom, and in many, many other areas. So therefore, this is a market which is intact, and we will have a strong tailwind going forward. Again, if the load is lower on that level, some, particularly private operators might run into topics because they will not get that cash return. The public ones, the government supported ones they will. They will be pulled through, so to speak. On the other topic -- and this -- and coming back to the implication on the mix, that we see a strong shift into signaling infrastructure for the obvious reasons, which I explained, which helps us because we are clear number one. Again, I have to say that in Q4 made a record order intake on rail infrastructure business. And -- but there's also something on green, on more green transport. Believe it or not, even in Germany, a big chunk of the lines are not electrified yet. So we have still these locomotives running around may be replaced by either these electric or hydrogen. We believe more in a first wave of diesel or electric, so that they run partially on electric. This is where we also made our first project wins in the market. H2 was our competitors see that and recently announced that they will come a little bit later, because you need an infrastructure of hydrogen. So therefore -- and we serve both -- both these technologies in our portfolio. So regarding that one, I think it's also very supportive. Last point, what we believe is that -- and we always talk about new orders in terms of CapEx. We do believe that more and more customers are really looking into the life cycle value. So that means it goes along also with service with maintenance cost. And that is really very much supporting also our mix because we have a very, very strong digitally enabled service business where we can have a lot of value for our customers using these technologies. And we can prove that. I mentioned in my presentation, RRX, I can also mention other lines where we are in Germany and Russia, where we're operating our trains with the highest level of availability, and that's highly appreciated by our customers.

[Sabine Reichel, Head of Investor Relations]

We still have a few questions in the queue. So please limit the number to only 1 question. Next question, please.

[Operator]

Next question comes from the line of Daniela Costa, Goldman Sachs.

[Daniela C. R. de Carvalho e Costa]

I wanted to go back to the comments you gave during part of the Mobility presentation, where you said selective margin accretive in the portfolio would still be possible and extended sort of ask you to extend rather to the Group and particularly in with -- is the fleet of ship ideal mostly realized now? Or what shall we expect going forward? And if you give similar comments to what you said that would be very helpful.

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

So Siemens is now quite a focused company. We are a focused technology company, which we are leveraging, the technologies which we have in the areas of industry, of infrastructure, buildings as well as transportation. We have in all these areas, a strong intent to increase our return into more recurring revenue and more sustainable, but also profitable revenue. We have good ideas. Since we talk about tunability. So the mix in terms of -- we talked about that higher profitable and recurring service revenues increasing, which grew, by the way, also in Q4 nicely, but also in rail infrastructure, cloud-based, where this technology is really something which is a transformative move for the industry. And we made a first step in Norway, and that we see a lot of interest in other countries, too, but also in the other areas. So therefore, I think it's a quite a comprehensive portfolio, which we have geared for interesting -- very interesting growth markets. We see this growth momentum also picking up in the areas we talked about software before, but also in other areas. So therefore, I think it's a very good value proposition for Siemens to go in this growth direction.

[Operator]

Our next question will come from the line of Gael de-Bray, Deutsche Bank.

[Gael de-Bray]

Can I ask why you expect the tax rate to go up so much in 2021? I mean, 29% at the midpoint, it looks well above the tax rates that we typically see elsewhere in the industrial sector. So I just wanted to get your thoughts on that.

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

Thank you, Gael, for that question. I mean, it's very relevant. And as always, in tax, we don't speculate. We had the benefits of a couple of extraordinary events throughout the last 2 years, mainly we may not expect that repeating itself. We also need to be mindful to potential tax regimes changing under new precedents around the globe. And therefore, this is just the regular flat tax rate that we would expect in a nonextraordinary year. We also, of course, do have a couple of effects that are related to the past, whenever tax audits are completed in certain jurisdictions, you have extraordinaries into the one or other direction, all that is kept neutral. So don't worry please too much about our tax rate. I do believe that Siemens has one of the best tax teams in global players existing at the moment. So I'm very confident that we will do the best possible, but always stay on firm grounds when it comes to legal and regulatory frameworks.

[Operator]

Our next question will come from the line of Jonathan Mounsey, Exane.

[Jonathan R. Mounsey, Analyst of Capital Goods]

So just the 1 question then. If you look across the releases of ABB, I think they're heading for a headcount now at the center of less than 1,000 and I know after Vision 2020 and the plus version as well, the strategies have significantly simplified the center of Siemens. It's come down a lot. People have been moved into the businesses. I would guess though that you still screen as relatively top-heavy from that perspective when compared to some of these peers. And is there further to go there? Could we be traveling towards a sort of center of Siemens, which ultimately looks more like the kind of structure that ABB is planning, where control is fully handed over to all the businesses, and you've got a little more than a central HQ, maybe in a few years' time?

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

Thank you, Jonathan, for that question. And I mean, first of all, I would like to repeat what Roland said, we're absolutely committed to reach and even exceed in most areas, the savings potential that we have been promising and committing ourselves to. This is absolutely on track, and that is also applicable for the headcount of the central departments and the governance functions in the company. When we talk headcount, I mean, this is a very important matter, but it also depends on where these headcounts are when it comes to flexibility and cost efficiency. And I would also like to just refer back to the fact that we said from the very beginning that getting the transitioning of Siemens Energy smoothly and consistently done as priority #1. That's why in some areas, we haven't been stalling the progress in these areas, but we had prioritized substance over headcount management, if I may put it that way. So in '21, just to use that opportunity, you will also, of course, see some redundancies or temporary redundancies when it comes to resources, and that is kind of anticipating, because I do know that many of you are a bit thinking about how are the energy stranded cost to interpret. And that's pretty much around this. We said safety first, smooth transitioning that is applicable for the balance sheet, which we have been putting out with EUR 2 billion of cash for Siemens Energy. By the way, those who have been looking into their balance sheet as per September 30, so that they do have EUR 4 billion plus of liquid assets on the balance sheet. So means that has been working well and is also confirmed via the ratings that they got from the rating agencies. And on the operational path for the move to get them independently and on strong feet, we also allow deliberately that there are some redundancies in place. There is a lot of activities in IT environment, decoupling systems is leaving stranded costs for a certain period of time, obviously. And what we also said is that we will be very transparent on the cost associated. So having been guiding you for the equity income and related PPA of EUR 300 million in fiscal '21. It's important for you to know that it will -- that -- that this will not remain on that level. There will be a substantial decline in that Siemens Energy investment reporting line in fiscal 2020 or 2022, already, we will see a massive decline to roughly half of that amount when it comes to PPA effects. And what we also will see is a rapid decline when it comes to those stranded costs for fiscal '22. For example, we do see already around 1/3 of the amount that we have been planning and indicating for fiscal '21. So this is unwinding and letting the Siemens Energy activities go without taking operational risk, and that is also reflected, of course, in the support and governance functions and the related headcounts with that. So there will be a steady state way forward that will be very cost efficient. And as Roland said, lean governance is what we are out for, and we will definitely accomplish that.

[Operator]

Our next question comes from the line of Andre Kukhnin, Credit Suisse.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

I'll focus on SI and the portfolio of pruning potential there. I think on the past calls, you said that there's kind of a detailed review, and you're getting close to finalizing that. Maybe you could lift the covers on that a little bit? Or is this something that we're going to talk about at the May Capital Markets Day?

[Roland Busch]

Well, I mean, you saw the first move, which we did in divesting the Uber business, which was the first step. And we are looking carefully into that portfolio. We have organic investments, which are still laying on our bottom line. We are reviewing that also in detail, which one to continue, which one1 to stop. And I would say that this is a very good discussion for the Capital Market Day.

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

But rest assured, Andre, I mean, what we will consistently do as we promised and committed ourselves to, we will continuously review our portfolio, will assess what is core, what is no longer core or what was never core and hasn't been divested, and we will clean up that consistently.

[Sabine Reichel, Head of Investor Relations]

Thank you. I can take 2 last questions. So the last 2 questions, please.

[Operator]

Our next question will come from Wasi Rizvi of RBC Capital Markets.

[Wasi Rizvi, Analyst]

A question on the margin impact you're talking about. I mean, it's obviously not small a number, and we've just had quite a lot of restructuring at DI and SI, it's still ongoing. And it looks like you still got a mismatching costs and then revenue. Is that something you will address? Or if you care to not address it, why you see the benefits of keeping that mismatch and whether it's just something you have to live with going forward?

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

No. Thanks for the question. We have been starting to review that, and we will continue doing so. Obviously, top line and OpEx and also CapEx spending needs to be aligned stringently way forward. As I mentioned before, we are going to be very selectively spending incremental investments there. We do that on a business unit and even business segment level. And therefore, you may expect that we will consistently manage along these lines, and the results are going to be reflected then, of course, in their operational margin way forward. But again, please bear in mind, '21 will have massive exchange rate impact.

[Wasi Rizvi, Analyst]

Sorry. But then just to be clear, the FX mismatch, so the transaction impact you get on the margin, that's not -- you're not structurally changing to match your revenues to your cost more closely, so you don't have a big margin FX impact going forward.

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

I said that before, we do expect for fiscal '21 impact from FX on margin development that also is affecting DI and SI. The dimension, we have been indicating is 40 to 50 basis points on the margin. And of course, for the way forward and where we allocate our resources in terms of footprint, we anticipate that value-add is going to be directed into those areas where we see top line improvement, so that we are heading for a natural hedge.

[Operator]

Our last question comes from the line of Phil Buller, Berenberg.

[Philip John Buller, Research Analyst]

Just a quick one on the Valeo joint venture, please. It's a very large impairment today. And you mentioned also that, obviously, there's a lot of growth here. I believe there's a very large order book as well. But I think you said the value of the assets have now been written down to 0. Is that a current accounting requirements, one where there's a possibility to see a meaningful revaluation down the line, let's say, and if you're now assigning a value of 0 to your assets here, is it something that you're still motivated in supporting? Or how should we think about your commitment to what looks to be a pretty attractive JV from a top line perspective going forward?

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

Indeed, a material impact on the fourth quarter with the EUR 453 million of impairment, we had to take -- and you're right -- we have been writing that down to 0 when it comes to the book value. But also bear in mind, this is an equity investment. We participate on a pro rata basis also in the quarterly performance. So therefore, we been guiding you that there will be negative impact also in the year to come, '21 on that matter. We are intensively discussing, of course, the way forward, and we have been also sharing our views with some of the constituents also on the Valeo side. There is a contract in place that is giving a certain framework to maneuver in. But you are right, from a strategic perspective of this joint venture, they are definitely better positioned than the impairment is suggesting at the moment, and we are thriving also into the direction of value creation there. We just respect the accounting rules, obviously, which has been not leaving any room for maneuvering different than taking the impairment at that point in time.

[Sabine Reichel, Head of Investor Relations]

Thanks a lot, everyone, for participating today. As this was my last earnings call as Head of Investor Relations, I would like to thank you all for your trust in a very close collaboration during the last year. I would also like to thank Joe, Ralf and Roland, who always supported me. And I think we went all together through a very exciting time of transformation at Siemens. At this point, I would like to also welcome my successor, Eva Riesenhuber. She will take over the Head of Investor Relations at the first of December and will also participate during our virtual roadshows. Thank you, everyone, and stay healthy. Bye.

[Operator]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. Once again, let me repeat the instant replay numbers. Participants in Germany, please call the replay number [phone] access code 617-3888#. Participants in Europe, please call the replay number 44-207-660-0134, access code 617-3888#. Participants from the United States, please call the replay number 1 [phone] access code 6173888#. This replay service will be available until tomorrow night. A recording of this conference call will also be available on the Investor Relations section of the Siemens website. The website address is www.siemens.com/investorrelations.