Siemens Aktiengesellschaft (SIE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Siemens combined Press and Analyst 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 Siemens' presentation. This conference call may include forward-looking statements. These statements are based on the company's current explanations and certain assumptions and are, therefore, subject to certain risks and uncertainties. At this time, I would like to turn the conference over to the host today, Mr. Tobias Atzler, Siemens Investor Relations. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and thank you for joining us on our combined analyst and press call regarding the acquisition of Altair Engineering on short notice. The press release and the presentation were released last night. As always, you can download the files on our website. Today, our CEO, Roland Busch; our Digital Industry CEO, Cedrik Neike; and our CFO, Ralf Thomas, are on this call to review the announcement. Afterwards, we will have time for Q&A. We will answer the questions from analysts and from journalists. Please note, this call is in English only. And with that, over to you, Roland.

Thank you, Tobias, and good afternoon, everyone, and thank you for joining us on short notice for this call. Siemens has been on a journey for more than 15 years to create a world-leading industrial software portfolio. Today, we are very pleased to announce the acquisition of Altair Engineering, Inc., a global leader in computational science and artificial intelligence. This strategic investment marks a decisive step to strengthen our leadership in industrial software and help our customers to build the most comprehensive physics-based digital twins. The combination of our strong Siemens accelerator portfolio, with Altair's capabilities in simulation, high-performance computing, data science and artificial intelligence will create the world's most complete AI-powered design and simulation portfolio. We are fully convinced that acquiring this great company will create significant value for customers and shareholders, strengthening our position as a leading technology company. And let me highlight the key reasons before Cedrik and Ralf share the details. We add a highly complementary simulation portfolio with strengths in mechanical and electromechanical simulation and AI-based data analytics as well as high-performance computing. This enables our customers to build and leverage the potential of the most comprehensive digital twin based on a full suite physics-based simulation portfolio. This transaction reinforces our position as a leading player in the combined high-growth PLM and EDA simulation market. Their customers demand more and more holistic solutions to drive smarter decisions and compete more effectively. Altair's strong high-performance computing, data science and AI powered simulation capabilities will accelerate the broader use of democratization of simulation beyond specialists. And we will leverage our domain expertise and the immense amount of data captured in all Siemens accelerated applications with Altair's data science capabilities for scalable industrial use cases. All these market and technological opportunities underpin the compelling strategic fit and we expect to achieve significant cost and revenue synergies. Our stringent approach to capital allocation is directed towards sustainable value creation. We are confident, we can make this bold move successful based on a strong cultural fit and building on the excellent track record of our very experienced software leadership team. This acquisition is a great proof point of our investment strategy to support our leading position in combining the real and digital worlds to support our customers with their digital and sustainability transformation. Since Altair is a public listed company, you are probably already familiar with the profile. Here are some highlights. Altair has a broad customer base with more than 16,000 customers globally, providing leading-edge software and cloud solutions in 3 major areas: Simulation and Analysis Tools account for around 70% of total revenue of around USD 650 million, while solutions for data analytics and AI as well as high-performance computing has a 15% revenue share each. Since its IPO in 2017, Altair has achieved an impressive 14% annual growth rate in software revenue, of which more than 90% is recurring. Adjusted EBITDA margin is expected to be around 21% with further upside potential. And now let me hand over to Cedrik for further details.

Thank you, Roland. And let me start by giving you some more color on our industrial software business that we have been building organically and inorganically, since we acquired UGS in 2007. We believe then what we actually believe today, Siemens is uniquely able to combine the real and digital world to create a sustainable industrial innovation across a wide variety of industries. It's why we have built and acquired software companies across multiple domains from mechanical to electrical to software to manufacturing that helps our customer create the most comprehensive digital twin of headsets, automobiles, airplanes, batteries or even electronics, you name it. The value of simulation and analysis is that it brings the digital life, the digital twin to life by predicting how a product behaves under real-life situations. Now speaking of simulation, let's look closer at Altair's highly complementary simulation portfolio across the full range of EDA, PLM and manufacturing process simulation. Altair's hyper work platforms offer a comprehensive suit -- suite of design, modeling and visualization tools, allowing for advanced attributes to be modeled. Core strengths are in the mechanical and actually also in the electromagnetic disciplines. Combined with Siemens core simulation capabilities in EDA, computational fluid dynamics, heat transfer and mechatronic systems, we will be able now to offer unmatched customer value. Users can simulate complex physics-based models with precision across many, many industries, including automotive, aerospace, electronics and manufacturing. The result is that customers can efficiently virtually optimize and validate products and manufacturing processes end to end. With the acquisition of Altair, we significantly expand our total addressable market in PLM and in EDA simulation now covering a broad range of disciplines. As software-defined products and the ever-growing importance of advanced electronics drive the convergence of PLM and EDA, the simulation capabilities must be seen in combination as well. Our combined simulation portfolio will allow us to uniquely serve these integrated domains, giving Siemens a competitive advantage. The combined market is highly attractive with EUR 16 billion in size and 11% of compounded annual growth. With the transaction, we reinforce our leading position in this key market, driving consolidation Furthermore, it adds around 8 percentage points of growth to our digital business revenue, which approaches EUR 8 billion on pro forma fiscal 2023 basis and expands our #1 position in industrial software. Now Altair is a frontrunner in embedding easy-to-use AI capabilities in its physics simulation software suite during all phases of product design. As you can see from this chart, simulation has until recently been the core domain of advanced experts. This is actually changing now. The combination of physics and AI simulation has a massive impact to democratize the simulation process by expanding access to design engineers and R&D generalists at scale. The benefits will be substantial, reduce time to market, faster design cycle iterations and more intense use of virtual optimization, and a business opportunity for us to provide simulation to new users driving higher growth rates. Now we see a unique opportunity to accelerate the digital transformation of our customers, enabling them to make better decisions and drive efficiencies across industries. Altair's RapidMiner brings powerful tools for machine learning and artificial intelligence to Siemens that will enable our customers to unlock new insights from their product and manufacturing data in Siemens accelerator and expands the use of data science across organizations. Building low-code applications based on our Mendix platform will leverage insights from the data and enable engineering AI models. Now looking at our 6 strategic imperatives, this acquisition is a perfect fit. We strengthened our position in a high-growth market with attractive profit pools, providing the opportunity to achieve significant margin expansion in the midterm. The portfolio is highly complementary and drive sustainability impact for our customers. We see material revenue synergies from cross-selling and from providing Altair's full access to Siemens direct and indirect sales footprint. In addition, we have identified near-term and very tangible cost synergies, for example, through the delisting of Altair, optimized go-to-market and alike. Another piece of good news is we've already done this when we integrated Mentor Graphics. Our digital industry software team led by Tony Hemmelgarn has a profound understanding and execution experience to drive synergies and to retain talent. As I previously said, we have been building the leading industrial software portfolio, since 2007 through a visionary and well-executed strategy via 4 large acquisition in more than 30 bolt-ons bolstered with our continuous organic investments. Acquiring Altair will boost our comprehensive digital twin with a full suite simulation [ and IR ] portfolio to the next level. With that, I hand over to Ralf to give you an overview of the financial implications.

Thank you, Cedrik. Ladies and gentlemen, I think it's important to mention that we will execute this highly synergistic acquisition from a position of financial strength, which will be again reflected in our upcoming fourth quarter's disclosure on November 14. It underpins our stringent capital allocation, balancing investments and shareholder returns based on a very strong balance sheet. You can rest assured that we will continue to commit to our progressive dividend policy and share buyback program, providing strong cash returns to shareholders. Both share buyback and dividend policy will not be affected by the transaction. We are fully committed to maintaining our excellent financial position, recognized with our industry-leading credit ratings. The acquisition will be fully cash financed from Siemens' existing resources and its strong financing capacity from our balance sheet. Our capital structure will definitely remain clearly in the target corridor after closing the transaction, which is expected to take place in the second half of the calendar year '25, and is subject to customary closing conditions. Preemptive deleveraging is supported by significant cash proceeds from the already closed Innomotics divestment in the first quarter of fiscal '25, based on EUR 3.5 billion enterprise value. In addition, we have substantial financing potential from the sale of shares in listed entities. And of course, we will be mindful of protecting the share price of these companies as we go. Let me give you a couple of further key transaction highlights. We will acquire 100% of Altair for USD 113 per share, implying an enterprise value of approximately [ $10 billion ]. The offer price represents a premium of 19% to Altair's unaffected closing price on October 21, the last trading day prior to media reports regarding a possible transaction. This translates into transaction multiples of 14x sales based on fiscal '25 consensus revenue estimates and 31x adjusted EBITDA, including highly executable near term cost savings. Near-term cost synergies are expected to reach more than USD 150 million per annum by year 2 after closing. Revenue synergies are expected to accelerate significantly as of year 3, reaching USD 500 million midterm and growing to more than USD 1 billion long term. Our key M&A deal hurdles are fulfilled. We expect the transaction to be EPS pre-PPA accretive by year 2 post closing and substantially accretive thereafter. Furthermore, the deal is accretive to Siemens revenue growth target and performance is expected to be above Digital Industries target margin range by year 1 after closing. With that, I give it back to Tobias, and we will be happy to answer your questions.

Thank you, Ralf. We are now ready for Q&A. Please limit yourself to 1 question per person. We want to give as many of you as possible the opportunity to raise questions. Operator, please open the Q&A now.

At this time. Our first question comes from Alexander Virgo from Bank of America.

Yes. I guess the primary question and in some respects, quite a short one, would be why now? I think that the -- some of the rationale you've obviously explained. But I guess the timing is the real question given the richness of the multiple. And if I could squeeze a slight follow-up in there. Ralf, you talk about substantial financing available from potential state sales. I'm just wondering if that's a signal from the perspective of credit rating agencies or whether that's a more of a shift strategically.

Yes, let me start with the first one. And it's obviously, the space, the software space, industrial software and simulation space is quite overseeable. And we were looking into Altair and others for a long time, but then it's all about availability. And the founder -- CEO and founder finally decided that he wants to have another destiny for his baby. And this was the point, where we got in contact and we found out that this is a perfect fit. and the rest is what you see.

Yes. And with regard to your second question, Alex, I mean, first, let me just quote from Moody's, who have been issuing, viewed this morning, they said that they consider the acquisition to be strategically sound. We hope for that. And they also mentioned and I think that's remarkable that this is going to be credit positive as it further supports the reduction of cyclicity at Siemens and that AA3 rating and the stable outlook are going to remain unchanged. So from that perspective, I think we can tick that off and expect a similar reaction from the other rating agency. When it comes to have an opportunity to structure the financing of the transaction in different ways. I think this is a real privilege that we have at this point in time. And therefore, we need to ask some patience before we finally nailed that down given the fact that we expect the transaction to close in the second half of calendar '25, would be premature to throw out numbers and then regret, but we will pull all these levers without changing the strategic perspective of what we said before. We have the privilege that we can build on the proceeds of the Innomotics transaction with an enterprise value of EUR 3.5 billion, as you know. And we do have listed companies, actually, 3 of them: Siemens Healthineers, Siemens Energy and also Fluence may play a minor role in that game. We will be mindfully addressing that as we always, did when we sold shares of listed companies. And I hope you agree there was never any major noise when we did so. And this will be also the rule of the game, if we proceed. We always said that we will sell down over the course of time, the Siemens Energy shares, and we will make another step in that regard throughout the next couple of months. This is definitely not a surprise to you guys. We know that. And we always said that we are not religious about 75% shareholding in Siemens Healthineers. So give or take, 5% would be a meaningful assumption for a sell-down in that regard without prejudicing strategic opportunities on the way forward. We said we look into that thoroughly and diligently, and we will do so, as you know us.

The next question comes from Andre Kukhnin from UBS.

I really wanted to ask about the very ambitious revenue synergies target that you put out with EUR 0.5 billion in the midterm, which we incorporate is about 5 years and EUR 1 billion longer term, which I guess is closer to EUR 10 billion. Could you please talk about the key pieces behind this, whether it's kind of geographically or customer segments, where you can really introduce Altair to new customers? And I guess, secondly, on that, do they truly come on top of the underlying market growth? Or should we think about those as accelerators to what is already a healthy underlying growth in this industry. And I guess, to really drive it home, like should we think about Altair business as a kind of EUR 1 billion business in 2030 as it would have been if it just grew with the market or EUR 1.5 billion with the EUR 500 million synergies that you target?

So Andre, I'll take this one. And I mean the first thing we have to understand that the portfolios are very complementary, and that's important, and this will bring important synergies and value to our customers. And as you correctly pointed out, there are significant revenue synergies of EUR 500 million midterm and EUR 1 billion on the long term. This is a lot of cross-selling. You have to understand that the revenue from Altair is mainly in the simulation business in the U.S. with more than 50% and less in Asia and Europe. We are very strong with our simulation business, which is roughly of the size also of Altair's business. We're very strong in Asia. So there is a geographical footprint, which helps us to actually cross-sell across geographies. And we're also more on the channel business than they are. And we have, of course, elements like the SaaS transition, which we've done already. So the combination of the geographical aspects, the portfolio will enable us to drive the synergies across the simulation business, but also across the complete PLM business, which we have as more and more of these simulation tools actually go into EDA, you've seen the acquisition that some of our competitors have done in our EDA competitors in simulation basically shows that there's a new market. So to your point, we want to grow faster than the market. We want to take market share, and that's the ambition of doing that. And we've proven this with prior acquisitions such as CD-adapco, that we're very capable of doing it. Now coming to the revenue synergies. That's the second aspect. That's the ones which are going to come first. We addressed elements of -- I mean, there's the classical things we're doing with delisting IT tools, tools in general, but we will also look at what else we can do. We will be very careful because there's key talent on how we're going to do the right sort of environment, but we're going to look at the complete aspect to see on where and what we would cut overall to be able to get those revenue synergies. We feel very comfortable doing it because we've done this also before when we delisted and took over Mentor Graphics. So both of them are ambitious but feasible and are very much with the ambition to take market share.

The next question comes from Alexandre Hübner from Reuters.

Can you hear me?

Yes, we can.

I've got just 1. Well, 1 question on the structure of the deal. In Altair's press release, they say it's $10.6 billion for the equity value, and you have an enterprise valuation of $10 billion. Can you explain where the difference is this would assume that there is cash on their balance sheet that you would take over?

You hit the nail Alexandre. You're very right. There's give or take, EUR 0.5 billion of cash that needs to be deducted and also a smaller portion of unvested equity awards that are going to be rolled into Siemens programs that makes the difference.

Next question comes from Jeffrey Sprague from Vertical Research.

Yes. Just back on the strategic big picture here, right? You've been strategically building out the software platform for a long period of time. Obviously, a big investment here, I think the rub for investors, right, is that you've got a very high-value software business already that arguably trades at a low teens EBITDA multiple and maybe the same happens here, right? A great strategic fit, fits your strategy, but in many respects, perhaps there's risk Siemens shareholders don't get "paid for it" through valuation. So you did mention maybe selling down Healthineers 5% or 10%. But what is your tolerance really for kind of the valuation disconnect in the stock and sort of the time that you're willing to let play out to see if this manifest an evaluation improvement over time.

Yes. Thanks for raising that question again and giving us an opportunity to shed a bit more light into the development of our software portfolio. I mean, in the meantime, including the current deal, we will have been spending, give or take, $23 billion in software companies and the like over the course of the last 15 years or 17 years to be accurate. And I think we have been building up a massive broad and very comprehensive software suite that is going to be even more relevant on the way forward, allowing to profitably and fast-growing development of our portfolio on the 1 hand side and at the same time, paying into the sustainability solutions that we are providing to our customers. So we are literally made for the moment, and we feel very much encouraged to capitalize on that what has been accomplished so far. We are also -- we also have been a good breeding ground, obviously, for digital business in the past. As you may remember fiscal '23, we didn't complete '24 yet. Therefore, I'm referring to '23 figures, $7.3 billion of digital business, adding the $600 million give or take and assuming double-digit growth opportunities on the way forward, this will make us one, if not the relevant player in that field on the way forward. There's a massive consolidation going on in the market, obviously, and we consider ourselves to be a spare head and front runner in shaping that market and also reaping the fruits of being the provider of relevant solutions for both automation, electrification, sustainability and digitalization for our customers. So there's a massive paradigm shift going on, and we are clearly leading in that field. We have been mentioning also time and again that we are not only investing in a really highly attractive and highly logistic company with Altair. But at the same time, we are preparing the grounds for a massive acceleration of our digitalization initiatives within the company organically, so to speak. So I need to ask you for a bit more patience, patience on November 14, we're going to share a bit more of that. But the point I'm trying to make, this is not the only cylinder we are firing on. We make sure that we are providing a comprehensive suite of portfolio opportunities to our customers, and we will be super relevant for the future development in this important field.

Let me add 1 more element to that. You recognized also that Altair has a certain strength and investments in AI capabilities, high-performance computing as well. So do we. AI comes off, obviously, develops its value, in particular is in access to data. So the combination of the data, which we generate from our harder portfolio sitting on the shop floor, the domain know-how we have in combination with the simulation suite, the software suite on the 1 side, and AI supported? Is it designs, engineerings, any kind of less complex products is a huge lever for our customers to drive their development of products, they are shortening the cycle time, driving productivity and manufacturing or leveraging the value of assets in using software.

Next question comes from James Moore from Redburn Atlantic.