Siemens Energy AG (ENR) Earnings Call Transcript & Summary

Yes. Good morning, ladies and gentlemen, and welcome to the Siemens Energy's first quarter conference call in 2021. As a reminder, this call is being recorded. Before we begin, I would now like to draw your attention to the safe harbor statement on Page 2 of the Siemens Energy presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mr. Michael Hagmann, Head of Investor Relations. Please go ahead, sir.

Thank you, Yola. Good morning, everyone, and a warm welcome to the Siemens Energy Q1 analyst call. I hope you and your families had a good and healthy start into 2021. As you know, we published our preliminary figures for the first quarter already on January 24, and we confirmed our outlook for the current financial year. Therefore, we would like to use this analyst call to give you some more details on the results. All the documents were out at 7:00 on our website this morning. Here with me are our President and CEO, Christian Bruch; and our CFO, Maria Ferraro. They will review the Q1 results. The duration of the call is limited to 60 minutes. And after that, Christian and Maria will be available for questions -- or after they present, they will be available for Q&A. And with that, I hand over to Christian.

Thank you very much, Michael, and good morning, everyone, and thank you for joining Maria and me to discuss our first quarter results today. I'm very happy to have you on this call, and I hope that you and your families have been well, safe and had a good start into the New Year despite the challenges we all have of the pandemic. As you know from our pre-release issued on January 24, we had a solid start into fiscal 2021. Let me start with some highlights, and I'm on the first page of our presentation. Revenue rose moderately with 3% on a reported base. SGRE achieved a significant increase, while GP posted a moderate decline. And I'm very pleased that adjusted EBITA before Special Items returned into the black with EUR 366 million. As you know, in quarter 1 last year, we suffered a loss of EUR 74 million. Both segments contributed to the significant improvement and both segments are significantly positive. As expected and in line with our usual seasonal pattern, we experienced a cash outflow of EUR 388 million. We saw a decline in orders of 26% in the quarter versus the prior year mainly driven by a sharp decline in Siemens Gamesa Renewable Energy. Our order intake at SGRE reached less than half the level of the strong prior year quarter. Let me highlight 2 important milestones. We are happy that as of the 21st of December, we have been members of the MDAX. And we published our first sustainability report at the beginning of December. As you know, ESG is a pillar of our strategy, and we will continuously work on improving the transparency of the reporting. Looking at our markets, not much has really changed since our quarter 4 call. We see some stabilization in demand. Currencies remain a headwind. But as you know, these play out more in translation than in a transactional mode. We continue to experience impacts due to COVID-19 as we have seen some deferrals of projects and outages. So whilst we are coping well with the situation, we monitor the current resurgence in COVID-19 with some concerns. [ Bounding ] conditions in the energy market are changing, and we see more government initiatives to reduce emissions, which are leading to more green technology funding. As you can see on our quarterly results are solid, and we could improve the bottom line. Still, there's a long way to go before we are where we want to be in terms of profitability. We have presented our levers to improve our profitability during the Capital Market Day in 2020, and we are now entering the next phase of our improvement program and have initiated the discussions with the General Works Council for the regions where such a process is applicable. And I will come to this specific topic in a minute. Let me first provide you an update on how we are managing the COVID-19 situation. As before, the key priority for us is the safety of our employees, our partners, our customers, and we have very diligently implemented all necessary precautions to secure health and safety in our work procedures. The good news is that all fabrication sites are in operation. Only roughly 20% of our sites have slightly reduced capacities. Most office staff, which is not urgently required on locations is working from home, following guidelines from local authorities. As I already mentioned, there is still a continuing impact on our business due to some project delays, and we saw that outages were deferred. Overall, though, the impact of the pandemic on our business was limited, and we furthermore see opportunities for our digital services, what I also introduced during the Capital Markets Day and in the last analyst call. Let's now talk about the progress on our strategy. Following the discussions we had on the Capital Markets Day, where we outlined our strategy, Energy of Tomorrow, a journey where we flagged up 2 phases. In phase 1, what we called accelerated impact. We want to improve our business base step-by-step by 2023. And move into the second phase, leading the energy transformation with an increasing focus to play a leading role in the global energy transition from a higher level of profitability. The cost improvement measures comprise several levers such as procurement cost reduction, simplification of workflows or reduction of nonconformity costs. However, a certain amount of the measures will also lead to a reduction of the workforce. For the implementation of these measures, we have now started the discussions with the employee representatives where this is required for implementation. As outlined at the Capital Markets Day, we are targeting to reach additional savings of at least EUR 300 million on top of the planned saving programs, PG2020 and GP2020+ in order to achieve our margin targets as presented at our Capital Markets Day. The new program targets a reduction of the global workforce by 7,800 employees worldwide by the end of fiscal year 2025. Of these, around 3,000 will be in Germany and around 1,700 in the United States, and the rest will be in other parts of the world. The majority of jobs effected are in administration, management and sales. The reductions primarily relates to central functions and the generation and industrial applications division. It represents, obviously, what we have presented as planned already back in September. We expect that the cumulative expenses for restructuring at GP will be in the mid- to high 3-digit million euro range by fiscal year 2023, and that is within the range also of what we had already guided for. This program is a necessary step, seeing also the development of the energy market, but it is obviously also a very painful step for the whole organization. Another important topic on our transformation journey is -- in this regard, obviously, also never to lose sight also of the future activities and technologies we want to go into. And in this regard, we also continue to push for co-creation with customers and partners in the market. In the last quarter, we have started a cooperation with the Russian gas company, Novatek, to reduce emissions and to increase energy efficiency in LNG plants, first the plant for the production of liquefied natural gas. We presented also relatively recently our project Haru Oni in Chile. This is our project with several partners amongst these, for example, Porsche, which will be an integrated plant to produce climate-neutral fuel based on green hydrogen. The synthetic fuel targets, the mobility sector and the project is supported by the German government as part of the national hydrogen strategy. We also launched a larger development and demonstration project to develop hydrogen production offshore with the participation of both segments of Siemens Energy, GP and SGRE. And this project is also supported by the German government, and I will provide some more details in a few minutes over this project. A selection of important orders from the past few months testify the high level of customer trust in Siemens Energy. In Latin America, we received an order for 8 complete topside modules, allowing a more efficient and sustainable operations of a floating production and storage and offloading unit. It is another good example where Industrial Application supports its customers on its energy transition and is fully in line with their strategy. In the U.K., our Transmission business will supply 114 low loss transformers for the Seagreen offshore wind farm, which is Scotland's single largest source of renewable energy. In Germany, Stadtwerke Leipzig ordered the most modern equipment from us for the Leipzig-Süd thermal power station, and the order includes the delivery of 2 highly efficient gas turbines and 2 generators. The new facility is important for the decarbonization of the city's energy supply in 2 ways. On the one hand, the municipal utilities make themselves independent of a district heating from a lignite power station. On the other hand, operation with 30% to 50% green hydrogen is planned just a few years after commissioning. The long-term goal is to operate with 100% hydrogen. And this will then enable a completely CO2-free climate-neutral operation of the system and is obviously in line also with what we presented before in terms of using really natural gas as a bridge in the energy transition, which we deem as extremely important. As I pointed out before, we have launched a new development program targeting offshore hydrogen production. Together with Siemens Gamesa Renewable Energy, we are planning to integrate an electrolyzer that produces green hydrogen directly into an offshore wind turbine. The green hydrogen should therefore be produced directly at the wind turbine and transported to shore through pipelines for further use. We believe that this solution can be more economical, particularly once hydrogen volumes increases and obviously also wind park volume in terms of amount of energy increases. However, also to be very clear, this is really development work of new technology, and we plan to implement a demonstration in 2025. At the end, the challenges of the energy transformation can only be resolved by innovations and engineers, which turn ideas into reality. And on this basis, as mentioned at the beginning, we see ESG a cornerstone of really our strategy and our developments and innovations going forward. We have published our first sustainability report in December. And this was the first step towards our long-term ESG strategy. We contributed to the 17 Sustainability Goals of the United Nations 2030 agenda with a focus on 5 goals, including gender equality, affordable and clean energy and climate action. We take ESG very seriously, which is why responsibility for ESG is anchored in the Executive Board. I have taken on the role of Chief Sustainability Officer, and Maria is Chief Inclusion and Diversity Officer. We have set ourselves clear goals, such as using only green electricity by 2023 and becoming a climate-neutral operating company by 2030. And we will gradually increase the proportion of women in management positions from just over 20% at present to 30% by 2030. Already today, we see more and more product developments in our product portfolio, which will support us to lead the energy transformation. Going forward, it is the intention to update you in the quarterly calls on the progress of our ESG activities. Now I would like to pass over to Maria, who give -- will give us some more insights with regard to the financial performance of the companies, particularly in the first quarter.

Thank you very much, Christian. Hello, everyone. [Audio Gap] pleased to share with you our Q1 results and what I think is important. And as always, happy to answer any questions you may have. But before we start, I want to draw your attention to our new disclosure level. During my discussions with the capital market over the last couple of months, there was a recurring request from investors and analysts alike to increase our transparency. Today, I'm happy to share with you, in addition to the past: one, comparable numbers. So now we have comparable numbers on the top line for revenue and orders, i.e., adjusted for FX and portfolio effects; two, a revenue split into service and new units at SE and GP level and a disaggregation of revenue showing the nominal top line development of our businesses within GP. You will find this breakdown in the financial results section as a backup slide in our earnings release that was issued today. To be precise, it's the very last slide. For us, this is a major step in our communication. I trust you find it very useful in better understanding the dynamics within our GP segment. So let me take you back again to where I finished at the CMD. On my very last slide, I showed what we think is important to create shareholder value, talked about things like our strong business foundation, built on our large order backlog and our resilient recurring service business or our path to margin improvement with our ongoing cost programs as well as the announcing of the additional cost-out program, our accelerated impact program. And of course, lastly, but certainly not least, spoke a lot about asset excellence and our rigorous working capital management. I will address all of these areas, and we'll do so consistently and show you the progress we have made in the last quarter. As you know, some of our key figures were already released on January 24. So now I would like you to walk you through the overall Q1 financial figures for Siemens Energy and the Gas and Power segment. So now I'm on Page 15. As Christian already mentioned, looking at Siemens Energy Group, orders at the group level came in at EUR 7.4 billion, which was as expected, substantially below the high basis of comparison in the first quarter of the prior year. Nevertheless, we finished the quarter with a very strong quarter backlog of EUR 79 billion, close to prior year fiscal end, in spite currency translation headwinds, which reduced our backlog by more than EUR 0.5 billion versus the end of Q4 fiscal year '20. Book-to-bill for Siemens Energy was a strong 1.1, and it was even higher at the Gas and Power segment at 1.2. Revenue was moderately up on a reported basis. SGRE achieved a significant increase, while GP posted a moderate decline. Excluding currency translation and portfolio effects, total revenue rose by 7.7%. As I mentioned, we have introduced a revenue split into service and new units. Service revenue came in slightly below the prior year quarter due to a moderate nominal decrease at GP. Looking at adjusted EBITDA before Special Items, this came in at EUR 366 million, back in the positive range. Q1 of fiscal year '20 was negative EUR 74 million with a margin of 5.6%. This is a substantial improvement versus the prior year quarter. I will give you some more insights on this in just a moment. Free cash flow pretax was negative at minus EUR 388 million as expected, and this is in line with our seasonal pattern. We did have improvements at GP, which were more than offset by a strong decrease at SGRE. So please moving on to the next page where we're looking at the quarterly development and some more insights on those developments. Orders were down 21% on a comparable base, which was, as mentioned, mainly driven by the sharp decline at SGRE. Order intake at SGRE was more than 50% below the strong prior year quarter, which was due to very large orders that were booked, including large orders for offshore wind farms and service in Taiwan, the U.K. and the Netherlands. Orders in the GP segment showed a solid development despite COVID-19 shifts in FX headwinds. Revenue was 8% higher in Q1 on a comparable basis. At GP, we see a stable development with a return to moderate growth on a comparable basis of 3%. In SGRE, the significant revenue growth was driven by the offshore and service business. On a comparable basis, revenue for SGRE increased by 18.9%. Looking at EBITDA before Special Items, this was higher than expected. And that was the reason why we published our preliminary results on January 24. The recent quarter benefited from operational improvements in both reporting segments and savings from restructuring measures driving lower costs, however, included also positive temporary effects. Such effects are resulting in GP from lower discretionary spend, hedging gains, positive onetime customer settlements as well as cost phasing. This is where costs do not develop in a linear fashion. For example, projects -- for example, in IT that were shifted to the following quarters. In total, these effects have a magnitude of a very high double-digit amount. Furthermore, from SGRE's perspective, they benefited from provision reversals. This was driven by the positive effect of innovation and productivity gains on product failure rates and service costs relating to their warranty provisions. But even against this background, I am pleased with the development, and this does indicate a good start to reach our full year guidance. Moving on to Special Items, please, on Page 17. You see here for Siemens Energy in total, we ended up at $123 million in special items in Q1. The increase compared to prior year's quarter was mainly due to stand alone costs, which makes sense. Expenses -- those expenses associated with the setup of the stand-alone company, within, of course, GP. And in SGRE, we had restructuring and integration costs. Just as a reminder, stand-alone costs pertain to those costs associated with the spin-off and include, for example, nonrecurring costs for the spin-off incentive. The remainder are for things like various IT costs, as we're migrating across the organization to SAP to unify our systems and other similar items. In Q1, the stand-alone cost amounted to EUR 53 million, and we expect this number to gradually come down in the following quarters. Restructuring costs as well as strategic portfolio decisions reflect the actions we have taken in order to deliver that step-up that we've committed to in the CMD in operational performance. In Q1, we booked EUR 26 million related to the streamlining of our aeroderivative at small gas turbine portfolio. Now moving on to the next slide. I'd like to cover the net income transition. As you know, a profit and loss statement does not stop with EBITDA. It stops at net income. So please let me take you through the below line items here on Page 18. You see that PPA is slightly lower, driven by the impairments associated with the strategic portfolio decisions that we made in the prior year in our Gas and Power segment, if you recall, the write-downs of intangibles related to our AGT or aeroderivative gas turbines. The financial results from operations is mainly driven by FX effects and is part of our adjusted EBITDA. So here, we need to adjust it in the bridge as a -- from a P&L perspective because it's included in our financial results. Accordingly, our financial results in Q1 fiscal year '21 came in at EUR 37 million, similar to prior year quarter. The financial result is impacted by interest expenses, which were lower than prior year and currency effects. In the current quarter, we had a negative currency effect in the magnitude of mid- to high single-digit million euro amount. Last, but certainly not least, we had an effective tax rate of 22%. This is slightly below the expected medium-term rate of 25% to 30%. So now if we move on, please, to the next slide, the cash flow for the group. As indicated, asset managing cash is at the top of my agenda, but this is something that we really need to work on each and every month, every quarter. It's a marathon and not a sprint. So the entire team continues to focus on this with diligence. And given the seasonal pattern that we inherently have experienced, Q1 did reflect a slow start in cash flow generation. But I am quite satisfied with the results as we really need to distinguish between our reporting segments here, and I'll get to this in just a moment. But just currently, for CapEx, it rose from EUR 144 million in Q1 prior year to EUR 188 million in the current quarter. GP was flat, and the increase is exclusively driven by SGRE. In GP's cash flow, pretax, it was above prior year's quarter level at EUR 101 million. This was supported by project-related cash inflows and, of course, the ongoing focus on asset management. In SGRE, free cash flow pretax was significantly down year-over-year as the prior quarter strongly benefited from customer advanced payments due to its high order intake. There's nothing more that I wanted to point out here. I think it's quite clear. So now we can just move on to the net cash position slide, please. Next slide. So it is logical, given what I just said, we had a negative cash flow in the quarter. So our net cash position is somewhat weaker at the end of the quarter than it was at the end of September. Here, you see we have EUR 4.4 billion in cash and equivalents and EUR 119 million receivables from Siemens Group for a total liquidity of EUR 4.5 billion. We also have EUR 2.7 billion of financial debt. And of that, EUR 1.6 billion is long term. We owe Siemens EUR 133 million for a net cash position, as you see here on the right-hand side of the screen, of EUR 1.7 billion. During the quarter, SE's provision for pensions and similar obligations decreased from EUR 1.057 million as of the end of September, to EUR 1.026 million as of the end, mainly due to positive planned asset performance. So I think that comprehensively wraps up the SE Group's financial overview. So please, let's take a look now at the financial segment Gas and Power on Page 20. In GP, order showed a solid development and were moderately down compared to prior year, but this is only due to headwinds from currency translation. Otherwise, it was flat -- better. Revenue was down nominally year-over-year, but up 3% comparable. Service revenue was down 2%, while new units revenue was down 4% nominally. However, excluding negative currency translation effects of 5.5 percentage points, revenue was up by 2.6%. Service revenue was down, but also slightly up, excluding currency translation effects to approximately 1%. It's important to note also that we do currently continue to experience impacts, both on new units and service due to COVID-19 disruptions. It has led to deferral projects, site closures, as you know, prolonged site closures in some cases and outages. Orders exceeded revenue, resulting in a positive book-to-bill of 1.2 and leading to the order backlog of EUR 49 billion. This is slightly above prior year's fiscal end, including negative currency translation effects. Adjusted EBITDA before special items was sharply up. I will discuss this further in the next slide. And we had a significantly improved free cash flow pretax of EUR 101 million. So looking now at the quarterly development of the GP figures, please, on Slide 21. Here, you see the quarters, last 5 running. We see a slight comparable growth in orders, plus 0.3% versus prior year quarters and a sequential improvement versus quarter 3 and quarter 4. The order development was supported by a significantly higher volume from large orders, including an Industrial Applications project in Brazil and a Generation project in Libya, which totaled more than EUR 0.5 billion combined. All 3 businesses posted a reported order decrease with prior year Q1 fiscal year '20 with the strongest decline in Transmission, given very difficult -- high comps or very high basis of comparison. In our rotating equipment, new unit business, we were, in Q1, at a low level for our large gas turbines. Those are greater than 100 megawatts with 3 booked units. Whereas for our industrial-sized gas turbines, we were able to confirm, again, our strong competitiveness with 23 gas turbines sold in the range between 10 and 100 megawatts. For revenue, this was moderately down year-over-year as a slight increase in Generation could not offset decreases of the 2 other businesses. Negative currency translation effects impacted the top line with 5.5 percentage points this is mainly due to the U.S. dollar. If you exclude the negative currency translation effect, revenue for GP was up by 3%. So adjusted EBITDA before Special Items, this increased our -- across all of our 3 businesses year-on-year, Generation, Industrial Applications as well as Transmission. As I mentioned before, it is really a combination of operational improvements, such as savings from restructuring measures, ongoing programs, et cetera, leading to lower costs as well as positive temporary effects, as I mentioned. In terms of the temporary effects, for example: One, we have hedging transactions; two, lower discretionary spending, which was prominent in Q1. Because remember, it compares to a pre-COVID quarter in 2020. We see a decrease accordingly of travel and entertainment due to ongoing travel and overall restrictions. Four, onetime cost customer settlements, which, again, to mention they're onetime in nature; and again, cost phasing. So this, again, relates to timing differences and internal spend to come later, which are cost to come, but not necessarily delinear in nature. So before I hand over to Christian, please let me summarize all aspects, which I think are in the 3 key focus areas. In SE, we had a strong book-to-bill of 1.1 in Q1 and finished with a strong order backlog of EUR 79 billion, with a strong balance sheet providing our solid business foundation. Both at the group level and in the Gas and Power and SGRE segments, we showed a strongly improved profitability even when you adjust for temporary effects. We continue to take measures to improve our margins, as Christian explained earlier. We made further progress in our asset management initiatives, notably in the Gas and Power segment. So overall, once again, I'd like to point out this, I think, was a very solid first quarter, is another signal that we deliver on what we promise, even in a market environment that does remain challenging. And so with that, I'd like to say thank you for your attention and hand it back over to Christian. Thank you.

Thank you, Maria. And to close it out for today. So what is important really for the fiscal year 2021 and just leave you with a couple of key messages. Key message, obviously, is also we confirm our targets for 2021. And as you pointed out also in the earnings release that we did not account for COVID-19 recovery nor a deterioration. So we look on the situation as it is today, more or less, and this is what we take into account. And this is also on how we judge there on our guidance. We will execute our accelerated impact program and take the respective necessary measures to achieve a step change in operational performance. This follows really everything what we have explained to you on the Capital Markets Day. This goes step after step. I always said it. It's really a long-term process, but I have to say, I'm very pleased on how the organization is coping with this very challenging situation, managing so many different things, driving for profitability. It will take time, but I'm very confident that step after step, we really build here a fantastic company. And we are committed to keep the lights on. With this, I would hand back to Michael.

Thank you, Christian. Thank you, Maria. Yola, as you know, we would like to open for questions now. [Operator Instructions] And with that, I would hand over to Gael de-Bray.

Good morning, everybody. So 2 questions, please. The first one is really on the cost-cutting program. If I do some simple math, I think the 7,800 job cuts alone should probably deliver about EUR 400 million, maybe EUR 500 million of savings. So I was wondering why the group's cost-cutting objective is not bigger than what you officially announced in total? And in addition to the personnel reduction, I mean, that would be great if you could help us quantify to a degree, the gross savings potential you see in areas like optimized logistics, centralized purchasing, portfolio streamlining, all what you've been talking about and also including the reduction of nonconformance costs. And the second question is about the kind of one-offs you mentioned for the quarter. So it seems that you perhaps had about EUR 50 million, EUR 60 million of lower discretionary spend this quarter. So how, firstly, does it compare to the prior quarter? And then how much of that would you expect to come back once the traveling environment gets back to normal? I mean is this really a one-off? Or have you been able to learn new ways of working and interacting with customers during the pandemic?

Thank you, for the questions. And I will take the first one, Maria will take the second one. On the reductions for the 7,800. Obviously, we accounted for these measures when we were planning also for the guidance, also back in the Capital Markets Day, with details now of the plans. Never forget, there's obviously also headwinds in the industry, which we need to compensate. And what we communicated on the Capital Markets Day is that we have, from the additional programs, EUR 300 million impact really on the bottom line really goes through. This obviously requires that the cost measures are higher than this because we also have to compensate for additional headwinds. However, as you rightly also indicated, there's a lot more actions that we do. Procurement is one. The nonconformance costs are the others. So roughly, roughly a rule of thumb, you could say that the personal measures roughly represent 20% to 25% in terms of the overall cost-reducing measures, and -- which we now bring to deliver. And just to remind you from the discussion we had at the Capital Markets Day. We said, we're going to deliver EUR 500 million from the old programs and EUR 300 million from the new program. And this does not change. This is really what we reflected also in the current improvement program. Maria, do you want to take the second one?

Sure. Thank you. Gael and thank you. Let me unmute myself now. Thank you for the questions regarding the one-offs for the quarter. So as I mentioned, I mean, there's multiple facets to that. Of course, there is, as you said, the lower discretionary spending, I'll get to that in a minute. Of course, as I mentioned, we did have a positive customer settlements, hedging gains and also costs that are going to come, it just didn't come in Q1 as expected and that were shifted into -- to next quarters. But talking about specifically the discretionary, I think Gael, your estimate is a little high. But certainly, we do see 2 things. One is, of course, the comparison to Q1 of last year where it was pre corona and everything. We do have a high level -- a high basis of comparison. And we see that essentially pretty much half of what we saw, if you'd like, for last quarter in terms of those discretionary costs. However, and this is something that goes to your second part of the question, in terms of learnings and assumptions based on that. You're absolutely correct. I think now in terms of how we are, the ways of working within Siemens Energy is working very well in a virtual environment. Some of those assumptions were taken into this year, knowing that we would come out of COVID, let's say, in a stagnated manner. This is what we also said both at the Capital Market Day and last time we spoke. So of course, Q1 was anticipated that this would happen. But I think the fact that certainly, prolonged closures, additional travel restrictions, this was something that, of course, was a bit of a positive surprise. However, I do want to state that we do not expect this to continue. We don't think this is sustainable also for us as a company. And travel for us is not just -- it's customer related. It's actually driving revenue on the service side. So this we foresee increasing in the next quarters, and certainly also to take into effect that -- or impact that, of course, in December. We have Christmas, et cetera. So I hope that answers your question. And thank you for the question.

And the next question goes to Ben Uglow. Ben?

Yes. I had a couple. The first one was for Christian. First of all, we very much appreciate the revenue breakdown. And if I look at service, if we exclude FX and Gas and Power, it's basically stable to slightly up at about EUR 1.7 billion. I was hoping that you could give us a little bit more color, as you did at the Capital Markets Day, in terms of utilization rates and unit growth in the sort of thermal generation area, how have those been trending over the quarter? And if there is any sense you can give us on the service margin, I would appreciate that very much. For Maria, I guess my question is really in terms of just qualitatively understanding working capital, and I guess the working capital issue this time is around SGRE. I take on board the fact that this is -- there is seasonality here. But at the same time, we've got this issue of customer prepayments and then a ramp-up of work in progress at Siemens Gamesa. In simple terms, Maria, is this going to be the sort of peak working capital requirements over the year? Or how should we think about the cadence of working capital over the balance of the year?

Thanks, Ben, for your questions. And we do the same procedure. I take the first question, and Maria tackles the second one. Thanks, first of all, to your comment with further disclosure. As we always said, we want to give you gradually more transparency that you understand the businesses. So we are working on this, and -- to provide you more insight. With regard to utilization on, let's say, our fleet slightly up in every region, except Europe. That is more or less a key statement on how I would put it. So in this regard, obviously, for us, a positive development in terms of the unit count. I think I've said it also in the last analyst call that we have still currently, obviously, unit count going up. And which obviously also supports the service. The service margins turn out to be stable, also in line with what I said in the recent calls. The team is doing an outstanding job really on compensating for headwinds and keeping the margins stable currently. Maria, and you would tackle the working capital.

Yes, please. So first, relating to your question regarding SGRE, I think you're right. I mean, of course, Q1 of last year -- versus Q1 of last year, this was expected for SGRE with the order decline, of course at quarter-over-quarter. Yes, your thought on whether we see this as a peak? I would say, no, we don't see this as a peak as such. But rather that this is something they're executing through, and this will be stable for the year. Remember, and I just want to remind everybody, our guidance in the annual report was regarding free cash flow. We foresaw some of this for the entire group, SGRE included that we would be sharply down from last year in free cash flow. With respect to GP, I think also, we expect to remain stable or in line. Of course, we continue to work on the regulars, if you'd like, AR, AP and inventory. But I have to say we've made really good progress as has SGRE, by the way, in terms of overdues. And I know that SGRE, for example, is working on payment terms on their payables, and they're making good progress as well. In both cases, you know contract assets and liabilities. They work against us, but this is something that is part of the business model. But I do not see a peaking as such. I just see that this is -- has as anticipated, this is the stability that we see for the year in working capital.

Thank you, Maria. Next question goes to Simon Toennessen.

Yes. I was wondering if you could talk a bit more about the development in the Transmission business? Orders were down double digits. I'm sure there was a comp effect here. But from a capital markets perspective, Transmission was always seen as a kind of structural growth area for you around grid connections, smart grid, et cetera. And wondered what other -- what are the drivers been in the quarter? And whether there's been any development around orders and why they've been down at this level? And then secondly, Maria, on cash. And obviously, I appreciate the comments on working capital so far. Obviously, Q1 was down a lot more than last year. And you mentioned last year already that inventories might come back and some working capital movements. But is it fair to assume that free cash flow could still be positive for the year? Or is that going to be quite an ambitious target from a Q1 perspective?

Thanks, Simon, for your question, and we stay with the work pattern here. I start and Maria then continues. On Transmission, always keep in mind, I mean, our business is a project business, which obviously is not running exactly stable over the quarters. There is a volatility in this. You recall that by the end of 2020, we had, in Transmission, some larger orders. I stay positive really on the total fiscal year '21. In terms of the Transmission business, we are currently biddings in the making where the question is, okay, when it's finally going to be decided? So I think this is rather a normal development, which is classical in the project business. You should keep in mind that in Transmission, in particular, obviously, the orders, especially if it comes now to the high voltage, direct current or the big renewable parks and so forth, equipment are bigger orders. And then obviously, this is a little bit more bumpy. So Transmission, I stay confident on. It is more than the quarterly distribution of the order intakes. Maria?

Yes, thank you. Of course, relating to free cash flow. And yes, you're correct, Q1 versus last year. And hopefully, I gave some color around the working capital, as you mentioned. Again, we do see -- we see it as we guided in our annual report. So we do see that free cash flow will sharply decline versus last year. And everything we see at this point confirms that guidance.

And the next question goes to Alex Virgo.

I guess I wonder if you could talk a little bit just around the headcount and the phasing, I think, more than anything else. I'm just trying to understand, if I look at the headcount numbers end of '19, end of '20, and today, it doesn't look like there's an awful lot of movement, if I've got my numbers correct. So I'm just wondering how we can see the phasing out of the -- I guess, the original 9,000-or-so originally started in the context of the first EUR 1 billion of savings, and then the new 8,000 that you've outlined this morning. Just so we get a better idea, I suppose, of the trajectory of the margins. Because it feels to me like the margin strength that we've seen so far is being very much driven by the underlying margin improvement in equipment, Generation equipment in particular, I guess. So just wondering if you could give us a little bit more color around the dynamics of that. It would be really helpful.

Yes. I start and Maria, if you want to add anything, then -- thanks for the question. And you're absolutely right. I mean if you look on the numbers '19 versus '20, you see that the headcount, total headcount number has been relatively stable, impacted, obviously, by the carve-out and transitions, obviously, also of people of what has been not flagged up really there before. So this is also why with the headcount reductions, and you may have seen it in the press release. We also tackle, in particular, the administrative areas in this regard, where we obviously try to get across competitive setup. So you will see that is our expectation the largest impact of the programs until 2023. That is really the target by and large. And obviously, really, as a net impact, there are at the same time, obviously, yes, in certain areas happening relocations of work that is definitely having to better cost regions. But this is the smaller amount of this. So I do expect the net number on a same business level to reduce. That is our current assumption. Maria, anything to add?

No. Nothing to add. That was perfectly stated.

So the next question comes from Supriya Subramanian.

Just a couple of questions from my end as well. One is on the growth trends, especially on the subdivisional basis for Gas and Power. So in the 2% to 11%, let's say, revenue guidance for FY '21, how do you see contribution from the Transmission, Generation, and Industrial Application business? As well as maybe over the next 2 to 3 years, how do you see these markets trending? And second was on raw material costs. Given the inflationary trends we've seen in underlying materials, any impact on costs or margins? Or is it all hedged out for this fiscal? And if so, then any implications for margins for next fiscal?

I'm so sorry, Supriya, there was a technical issue. We couldn't hear your questions. If you can please repeat? We do apologize. I only caught the tail end of your second question regarding the raw material costs. We do apologize. Can you repeat?

No worries at all. The first question was around end market trends, especially for Gas and Power. So in the 2% to 11% guidance for the year, what do you see -- or how do you see trends within the Transmission, Industrial Applications, and Generation businesses? And also the same over the next 2 to 3 years, that is through to FY '23. And the second one, as we said, is basically, given the underlying of movement of inflationary trends that we've seen in raw materials over the past few months. How do you estimate that likely to impact your cost or margins? Or is it all hedged out? And if so, potential implications for FY '22?

Thank you. Okay. So Christian, you take the first I'll take the second one.

Yes. I think the -- I hope that we understood your question correctly because it's continuously interrupted the connection. It's very difficult to hear. I heard that you asked for the trends in the different businesses in terms of Transmission, Industrial Applications and Generation. It's actually, from what I can say today, very much follows what we had set at the Capital Markets Day. And what we also had said in the same -- in the last analyst call. We do see, obviously, let's say, going forward, a slight growth in the Transmission business. We see a stable business in -- also in Generation. They have started well into the year. Industrial Applications, since if you recall, this is a business with the largest service portion, will obviously depend on how is now the service piece coming back. I think in general, I would also be positive on a stable development in Industrial Applications. I think there's a lot of signs also what you hear from others that -- I mean, the industry itself is intact. We obviously have a transformation there, but the order intake level will depend very much on how the service business now develop dependent on the pandemic going forward. And Maria, on the second question?