Very good, and a very warm welcome from my side to all of you here in Hamburg and everybody on the live stream. Great to have you here on our Capital Markets Day 2023. As you know, Hamburg is a special location for us. It hosts part of our wind business, it hosts part of our marine business, and you hopefully, some of you have the chance tomorrow also to visit the site in Cuxhaven, where we assemble the large offshore nacelles, and it will be an interesting journey to see that. Before I jump into the presentation, let me briefly draw your attention to the disclaimer statement. Michael told me to be very rigorous about it because it contains forward-looking statements, so please take a minute to read it.
We will use this Capital Markets Day really also to help you to address a little bit more the details, the details behind what we announced last week in the quarter four call on the 2023 financial results and also on the 2024 outlook. 2023 has been, for us, a year with light and shadow, really. We have seen successes, great successes, but we also have seen an absolutely unsatisfactory financial performance of the company. We want to use today really to help you to understand better the dynamics between the different businesses, how do we tackle the challenges and the headwinds we have in the wind business, but also on how do we build a solid financial framework in this fantastic energy market which we are facing.
So it will be a long day for all of you, and I'm looking forward really to kick it off with an overarching presentation to explain a little bit the main schemes of the company, followed by Maria explaining the consequence into the financial numbers, and then we dive into the businesses. And obviously, the first business to come is then wind business, with Jochen presenting the path forward. And wind, also explaining what has the quality task force been doing over the past couple of months, and then moving to Gas Services with Karim. And also to compare a bit what has changed since the Capital Markets Day 2022. And obviously, then moving to Tim, explaining on how to address this tremendous growth what we are facing in Grid Technologies.
Laura will share with you the really fantastic turnaround stories of the different businesses. You have to dive deep into the different businesses, because Transformation of Industry is diverse in the set of the individual businesses, containing more mature and more growing businesses, but Laura will help you to better understand it. While we more or less wrap up the day by presenting global functions through Vinod, which is really then presenting the glue between the different businesses. What is consistent? Where are the things we're driving across on how we do things and to improve operational excellence? I will do the wrap up then of the day, and I hope you stay with us throughout the whole day. There's a lot of information, and I'm looking forward, particular to your questions and the discussion.
Let me start really with an overarching picture, and obviously also taking us back always a little bit on what we said in the Capital Market Day 2022, and obviously also talking a bit about the role of Siemens Energy and the energy transition. If you look today on energy transition, we all have to say, it probably looks different than we all expected two years ago. It's more complex, it requires more technology, it will probably cost more money, it will take longer, and these are all things which actually play in our favor, because we are a company, and we will try to explain it to you, which can actually handle complex projects, which is sitting on a base of a big diversity of technologies, which will be required by energy transition.
At the same time, we see obviously a concerning continuation of climate change, a concerning really delay in implementing certain things, and we will also need to discuss on how do we address best the changes in the energy transition. When we started the company, we obviously also started with this, to continue to shape the company alongside the needs of energy transition, and quite a bit has happened, some of it in the foreground, some of it in the background, which has not been recognized by, by everybody. In particular, we'll see it with the global functions, where a lot of the things happened in the background to actually create the foundation for operational excellence. With all the operational improvements, there has been a lot of successes.
As I said, we see it in Gas Services, in Grid Technologies, and Transformation of Industries, but we did not succeed with Siemens Gamesa yet. However, we want to discuss with you, obviously, also on how can we transfer also successes from the one part of the business to the wind business to make sure that at the end, we live up to our mission to support our customers on their journey through the energy transition, which will also continue continuously require us to change and amend to the situation. I would like to highlight throughout my presentation, and you will see it also in the other presentations, three key priorities for 2024 in terms of developing the business. First of all, how do we deliver profitable growth sitting on a backlog of EUR 112 billion?
That's a privilege to have EUR 112 billion of order backlog, but at the same time, it also must convert to profits to the bottom line. You will see the activities on how to manage growth, on how to make sure that also the risk is contained in the execution of that. This is obviously a key if we successfully want to drive profits. There's no question that fixing the wind business is a cornerstone, really, of a financial success of the company. It will—Jochen will deep dive into this, and it will be Jochen's and my key focus area for 2024. Maria will share also more on the financial foundation and framework, which is obviously important to operate as a company.
You have seen in the 2023 quarter four call already that we flagged up the EUR 2.5 -EUR 3 billion proceeds in 2024, which are all driven by a continuous change also of the portfolio, and we will continue to work on it. As bad as the financial headwinds from the wind business are for us, it is for us an acceleration of really making sure that we transform the company to really live up to the needs of the energy transition and the needs of our customers. Allow me to jump back to the Capital Market Day 2022. We had five levers at this time, which we presented to create shareholder value.
Let me start with the four successful levers, which have been implemented since then, and this is roughly 18 months ago, a little bit less than this, where we initiated also the new operating model for what we called at that time GP business, which today is Gas Services, Grid Technologies, and Transformation of Industry. As you may recall, we made the organization broader and flatter, tried to create more accountability, also more transparency for you in terms of the performance of the different businesses, and also to change the customer focus in the organization. I'm super proud that we achieved all the targets on the profitability, overachieved in a strong market, all growth expectations. I'm very, very satisfied that also on the customer satisfaction side, we really improved across all these three businesses, the results.
We measure this in Net Promoter Score, which means, is a customer recommending you, if he works with you? And that is something which really has developed all in the right direction and gives us the base also for a future successful business. We have our headwinds in wind. However, also there, the new operating model which was introduced, which is a little bit different than the operating model in the rest of the business, because this was largely geared around now, since it has been missed in the last years. Now, finally, making sure there's a consolidated technology base, there's a more modular approach on the design. The factories come under one responsibility. So all the right things to be done have been introduced with January 2023.
However, the headwinds coming from the quality side and obviously from the productivity ramp-up and offshore really deteriorated the financial results in 2023, and you will see it, that it reaches out also to 2024. But we can make use of all the positive experiences now in the other businesses to transfer that now also to Siemens Gamesa, and this is happening as we speak, to really make sure that we can drive these five levers successfully forward. We do this in a market which today we see stronger compared to the last Capital Markets Day. We had four structural trends identified when we discussed last time the outlook into the energy and electricity market.
If I look across the different businesses, if I take gas, for example, and Karim will walk you through the details, obviously, the market today, we see longer running and bigger than we originally anticipated in 2022, which gives Karim the opportunity to build a bigger service fleet, to afterwards build a long-term service business on, based also on decarbonization of the fleet and further improvements. On Grid Technologies, I was talking about unprecedented investments into the electrical grid, and all of what we have seen over the last 18 months is more than this. The amount of order intake ramp-up, what we have seen in our own company, the pipeline we are seeing going forward, the needs really by customers to, to really lock in capacities and making sure that the plans even beyond 2030 can be fulfilled, is enormous.
Tim will walk you through this in detail, but also how to ensure that this is not leading to uncontrolled risk. It's an obviously big backlog, which needs to be managed. It's more capacity than there is today in the industry, and this will be key to make sure that the profits also make it to the bottom line. On Transformation of Industr y, you need to look on the different businesses, and Anne-Laure will walk you through that. I have to say, first of all, a super success story of turnaround. You will see it on the profitability trends in the different businesses, but also there, a very sound order backlog basis and a further need to decarbonize. It's a diverse set of customer base, you will see that.
A lot of the decarbonization in the next years will be driven by these type of technologies we offer in Transformation of Industry . On the order intake side, also, wind has been a success story in 2023. They had an excellent achievement, very good order book, let's say more than EUR 16 billion, heavily also driven by offshore. And it is a market where we expect it to be in 2024, going through some reiterations, different terms and conditions, different pricing, re-auctioning, projects. But the overall dynamics in the market is very, very much intact. And you will see it with Jochen, when he shows the market, obviously, an average growth rate of around 9% until 2030. Obviously, offshore even more in terms of four times or 5.X, roughly increasing market volume. So there is...
Fantastic dynamics still in wind. Wind today or in 2022 has roughly 7% of the world electricity production. Coal has 35, and it shows you what is needed if we ever talk about changing the energy or electricity production system. It's a massive undertaking, which is still coming. We strongly believe there are interesting profit pools in wind, but we have to fix, obviously, certain things first. We are super set up with our today's portfolio to tap into the energy market, but it's also important to get ready for the future energy technologies to come. And we have seen, obviously, you all have seen, how long it takes to test a new energy technology to make sure you can commercially earn money. We have seen it with the too early launch of some of the onshore turbines. We have had the experience with other technologies.
If you want to launch innovation into energy, make sure you test it thoroughly and continuously with customers. This is what we do today, and these are largely technologies which you're probably gonna see at the end of the decade or thereafter. However, 45% of the technologies you require to drive energy transition are not commercialized yet, and these are the technologies we are trying to test here. You see it on the examples from the different businesses. You see the fully 100% hydrogen-operated gas turbine. This is in operation today in France. We've just started up the offshore floating wind park. We operate a couple of these wind park. This is one together with Equinor in Norway. Offshore floating wind will be required. If you go to deeper sea levels, then there's no way around floating, but it will take time.
It will be beyond 2030 until this commercially probably gets in, and we want to be ready, tested, and bulletproof to make sure that these technologies can be launched successfully. A little bit closer to the, let's say, markets, really, introduction and really generating value is now the Blue portfolio. We have been talking about this for years, and we launched a new factory there. We are introducing, obviously, the products into the market. Tim will talk about this a bit in his presentation, now positioning it into certain countries. It makes its way into the regulations, and this is a switching product which avoids climate harmful gases. And this is something which we believe will become the standard going forward in the industry, and we are launching and rolling it out today, obviously.
On the right-hand side, you're seeing an example of a technology with direct air capture. That is a technology which extracts CO2 out of the air, which will probably be unavoidable if we want to limit temperature increase. However, it's also a long way to go until this is commercially reliable and tested and long-term in the operability we require. We are testing and piloting at the moment together with Aramco, let's say, a large facility, just to demonstrate it. Getting really the products ready then for later, and a lot of this, as I said, end of the decade, more or less. There are fantastic opportunities in the energy market, and this is also accompanied by a lot of governmental or country-driven investment programs. This is what is driving so much also the order intake up at Siemens Energy.
There's also, obviously, frameworks around it in terms of supporting energy transition. We talk about IRA, but we also talk about packages like the EU Wind Package, or in other areas, we see heavy programs really driving energy infrastructure forward. There's also a much higher sensitivity today to security of supply. What does it mean? What does need to happen with the grid? What do we need to make sure to balance loads? This is something which also drives new products and drives new solutions from our side, which very often combine the different elements from the different business area. It's not just about grid, it's about grid and storage, it's about grid and storage and hydrogen, it's about grid and storage and hydrogen and a gas turbine.
This is something which more and more becomes now evident in terms of building more security of supply. However, one thing we have to be careful about with all the nice growth opportunities is really making sure you can deliver profits on it, and you don't stumble over your feet once you want to grow or grow too fast. There are risks in the market. We still see a constrained supply chain. We still see inflationary elements in terms of cost of suppliers, but we also see clear bottlenecks. This is an industry which not easily grows 4.X, 5.X. It's something where somebody has to build physical infrastructure and grow it really consciously, step after step after step. There's also, obviously, macroeconomic factors, where you see rising interest rates, which are, let's say, obviously difficult for certain projects to get realized.
You see, rising state debts, which will influence certain energy projects. So it's now obviously keeping the balance between tapping into the growth opportunity, but be careful to find the right speed of growth. Also, seeing that we are obviously operating in more than 100 countries of the world and are continuously have to cope also with geopolitical conflicts in countries which are in a difficult situation. So to capture these opportunities, let me go back to the three priorities, what I said before: deliver on profitable growth, fixing the wind business, and maintaining a solid financial foundation. Let me start with deliver on profitable growth. That is about mainly two things, execution... And how do you really bring top line to the bottom line?
How can we, in a growing market, ensure that despite the fact that we have capital constraint because of the financial headwinds we are facing currently, still can reasonably grow the capacity to cope with the growth? I will give you a couple of examples to that. The second element, fixing the business, and obviously, first and foremost, this is about the two elements we flagged up in the quarterly call , the quality problems in onshore and ramping up and really leveraging on our market leadership position in offshore. There's also obviously now the way on to say, where do we go from here? How do we shape the company and growth? What is the right focus to have? What are the profit pools to focus on?
Jochen will walk you through this, but obviously, it's more about also focusing on the right markets with the right products in terms of driving this forward. I mentioned the EUR 2.5 -EUR 3 billion proceeds from disposals for 2024 already, which will help to maintain a solid financial foundation, and we will continue to work on it. It will be a core focus of all of us to make sure that on the one hand, we make or we apply a very active portfolio management to generate proceeds, but also at the same time, are very diligent and strict about capital allocation in our different processes. Let me go through these three points and give you a couple of examples or comments. First of all, the order backlog in the business without wind. Wind, I will address separately.
So that is the former GP business across the three different businesses we show today, which has grown to a EUR 70 billion backlog today. And if I take the two large businesses, Gas Services and Grid Technologies, just for a second, there has been a lot of work being done to de-risk the backlog, to really get the right terms and conditions, pricing, select very carefully the scope, what we are doing in the different projects, making sure we have the safety stocks really carefully managed, standardize our offerings as much as possible to make sure there's as little opportunity for failing as possible. And you see that with this, the service margin backlog and the new unit margin backlog increased over the last two years. And that is a base, obviously, for us, for an increasing profitability going forward while executing through the backlog.
At the end, it's about execution, execution, execution. And that is something where we also used, back in October 2022, the new organizational model to introduce organization, which we called Project Entity, which is really meant to drive project execution excellence. People can talk a lot about technology, but at the end, it's about people delivering projects and do this with all the care which is needed to bring also then afterwards, profits to the bottom line. And, what we are doing there is really looking on the commonalities, what complex project has. And technologies can be different. You see here the examples of the combined cycle gas turbine power plant, you see on the bottom, the HVDC plant, and completely different technologies. But what they have in common, both of them have to do procurement for hundreds of millions EUR.
Both of them have lots of logistic activities. You need to manage big engineering teams. You need to have, at the end, project managers, lead engineers, site managers, to bring this home as an implemented project. At the end, it's a lot about processes and people. This is what we're doing in the project entity, to really harmonize processes alongside the organization, making sure that this flows into an IT infrastructure where there's common tools between the different areas. Making sure that the data formats are consistent to be able to automize afterwards, and also ensuring that we have the people base.
When I joined in 2020, I was concerned about our ability to maintain a strong project execution workforce, because we have to make it attractive for a young person to enter this field, because that is really where you deliver at the end, the projects to the customer. You also have to explain to them, if you start here today, you're gonna have a job in this field also 20 years down the road, even as the technology changes. That is something which the organization has tremendously developed over the last 18 months in terms of training more people, in terms of also starting new competence centers in India, Mexico, and Romania, to get also enough access to young talent pools, where a lot of engineers are available.
And also to make us as easy to interface with as possible, to hook on external partners, such that we can also work with a volatile workload or share, different scope of supply. So at the end, it's about safeguarding execution excellence, and this is now something which will help us also to support the wind business, to get the different projects on track while they have to manage a tremendously increasing amount of projects. And this is obviously something also what we know to talk about. While doing this, obviously, the other question in delivering profitable growth is also how can we make sure that while being constrained in capital, we really build competencies and capacities which are required to cope with the increasing backlog, but also the increasing revenue?
And I would like to give you a couple of examples across the different businesses. You see it on the right-hand side. Maybe you've read it in the press, that we just launched the electrolyzer factory in Berlin, together with our industrial partner, Air Liquide. They are co-investing into our factory. They are also bringing their customer input in certain designs of the product, so there's also competencies coming in.... And they help us really with limited amount of capital on our side, really to build factory capacity, and also the extension is already planned, potentially also with the support of other customers. And the same we do, for example, for additive manufacturing, which are critical components for us in Gas Services .
We will need to ramp up the facilities there in terms of having enough access to additive manufacturing parts, but we do it in the meantime, in a joint venture, where there are industrial companies as well as financial investors supporting this extension of the production capacities. In the areas where we decide to invest really ourselves, and you see here the examples of transformer capacities, that is something which we do carefully at existing sites in environments which are very supportive to help with these investments, like India and the US, which is planned going forward to extend the transformer capacity, which is needed then afterwards for the HVDC project and growth there.
So one other element I would like to highlight. It also comes to the question: how can we continue to build competencies when we do not want to spend too much money on acquisitions? And obviously, partnerships is, for us, a good example, has worked for us well. Tim will explain an example on a grid management software to move this forward. Let me come to wind, and obviously, how do we fix the onshore quality problems? And we have been presenting the quality task force before on the quarterly call. They have three work streams: technology, contracts, operations. They have been working through the technology matters, are now preparing the corrective or containment actions for the turbines, while the contract work stream has reviewed every onshore contract and is defining the priorities of intervention.
As you know, a lot of the turbines are normally operating, so we have time to plan, really, the interventions, and we do it obviously in light of the severity of the financial consequences alongside these contracts, and also operations plan on how to best route it through the organization and through the suppliers. At the same time, we are now in the process to redefining a re-entry into certain markets or into the markets also on the onshore side, trying to select the best countries which offer an interesting profit pool. Jochen will talk about it. What is offering a stable framework where we want to compete? What does fit to our products in terms of market and moving forward? Offshore, it's all about now ramping up, really, the offshore facilities.
Obviously, what we trying to, at the same time, do, is continuously drive the competitiveness of our product. We have a market leadership today, so it gives us an excellent position to build on, but it's also a lot of work continuously to be done to really deliver on the productivity targets going forward. Bringing all this together for wind, and obviously adding to this, a service business which needs to return to the target profitability level. Looking carefully on the new orders, what we take, where I today feel comfortable with the terms and conditions which the organization signs, and really making sure that we drive this operational excellence, which we have been seeing successful in the other parts of the business. Wind is targeted to reach break-even in 2026.
We will still see a potential substantial loss in 2024, but we're gonna work our way through it, and Jochen gonna explain to you in more detail on what is done there. Same element then I would like to address as a third point, really, the portfolio management and the activities, what we are doing there. As I said, there have been a substantial amount of business reviewed, sold, disposals are flowing in, and we continue to do so. We continue to do so in line with two key criteria we're looking on. First of all, it must. Business which fits in our portfolio must reach the 8%+ profit margin target, and it must fit to our understanding of the ESG logic and how we drive energy transition.
These are two key elements we will continue to look in. It's not a time, at the moment, for material inorganic growth on our side, obviously, but it's a time where definitely we will make use of driving, our portfolio going forward for strategic fit. For products where, we sometimes are not the best owner, we still believe it's an interesting product, like distribution transformers, but we would potentially not allocate enough money to make them successful in the years to come. We're selecting, at the moment, different approaches. Here's the minority joint venture example of the distribution transformer, where we target to bring it together with a key industry player, and which is then, at the end, definitely a better setup to also help this business to excel without us having to devote financial resources.
At the same time, it will also be about deploying the right level of capital and do it with rigor. We have very clear principles applied for the spend in research and development, and you will see in the financial framework that we still spend a lot of money in research and development, despite the current financial situation. We do it very carefully in terms of size and growth of the market opportunity and time to profits. Same of extending capacities.
It's an example of Hull, the blade factory, where we have invested a substantial amount of money, but at the same time, we also canceled other investments into new factories, where we said we're only gonna ramp up, at the moment, the existing factories, and until we have not proven that we can do it in the right productivity level, we will not really continue to spend into new extensions, or new factories, but really ramp up the existing factories. As I said, it's not a time for big inorganic growth. If you hook on certain capabilities, like this example here with Pro.Integri s, which is really on the substation side for transmission business, it must be fast accretive, and this is what we have been looking in throughout this year.
I'm super proud with the development what the company took on ESG, seeing where we started, when everybody was skeptical about what this company is about. And if you look today on Siemens Energy, it is a company which drives energy transition, and this makes us all very, very proud. And the ratings since the start of the company have been continuously going up. We are ahead of the targets if it comes to decarbonization, and this applies to our supplier base, this applies to our own operations and even to our scope three targets, so with our customers. I'm not satisfied today with our safety performance. We see obviously headwinds from the massive increasing workload. We have to put a high focus on that one, but I'm overall very proud about this. As much as I'm very proud of our workforce.
I mean, the last three years have been a tremendous stretch on the people of Siemens Energy. And I have to say, it's amazing, and this is what makes me get up motivated every morning, to see this team really working with rigor on all the challenges what we have. And we have been building a team which is resilient, which is capable, and it's really impressive to see that between 2022 and 2023, which probably has been, at least for me, the most work-intensive years of my career, the satisfaction of the employees even going up. And that is something in a company which is so much under transformation, which makes me very, very happy and confident for the future.
And obviously, also seeing on how diversity has been driven along the workforce, gender, internationality, is something which is very, very positive in terms of really building one team who can deliver, and we will continue to have a high focus on developing our workforce. Let me summarize briefly, and as I said, if the undesired financial performance in 2023 has triggered one thing, is for us to be now more rigorous, even on fast accelerating our journey to the energy transition and to create shareholder returns, to make sure that as fast as possible, we come to positive net income to be able to pay dividends.
This is obviously our target: to deliver on the profitable growth by EUR 112 billion order backlog, turn around and fix Siemens Gamesa's wind business and tap really into the profit pools which are available in wind, and we will accelerate on the strategic path. We will be very strict with capital allocation to make sure that we can maneuver this balance between growth, but obviously also shareholder return. And this is where the colleagues now will walk you, first of all, with Maria, through the numbers, and then the different colleagues through the businesses and global functions. Thank you very much for your attention, and I would hand over for the financials to Maria. Thank you.
Hello, everybody. Thanks, Christian, for quite an opening. It's hard to follow, actually, but I'll do my best. It's my pleasure to be here with all of you today, actually, to see a lot of familiar faces here with us in the room. For those of you who are joining us virtually, hello. Yes, I think it's been quite a journey, as Christian has mentioned, in the last three years, and this is our third capital market day. At the same time, I would say we have a lot to be proud of, a lot to work on, but a lot to be proud of.
Maybe I'm just gonna build on what Christian mentioned regarding delivering on profitable growth and why that is so important for us within our financial framework, of course, and that we have to do this month by month, quarter- by- quarter. Also, looking at fixing the wind business, of course, this is imperative. I mean, we have to do this, and we have a plan to do so. Christian mentioned it, and Jochen will build on that. And then maintaining, because I do believe we have maintained solid financial foundations, and how do we do that not only today, but tomorrow? So maybe going back in time a little bit and looking at perhaps some of the highlights and perhaps areas of improvement or lowlights. Certainly, we've had a challenging fiscal year 2023, no doubt. However, you see that there's light.
The light is the orders, the tremendous amount of order intake that we have had not only in fiscal year 2023, but each year since the inception of the company. We've had a book-to-bill greater than 1. That has also translated itself into higher than expected revenues since inception. But of course, it needs to hit the bottom line, as Christian mentioned, and it has not done so, whether, of course, here in net income, and also we endeavor to be a net cash company. Here you see we've gone from a net cash to a net debt in the fiscal year of fiscal year 2023. Now, perhaps that was the dark, but the light is here. Over 70% of our businesses really have had an excellent progression in the last years overall.
Whether it's Gas Services , and we don't show you fiscal year 2020. If you know, if you remember, 2020 would have actually been even lower. But Gas Services , year by year, have continued to progress and really capitalize on some of the measures that have been taking place in the past, and also driving top line performance, which converts into a very strong bottom line performance. A tremendous, excellent year for Gas Services in fiscal year 2023, and Karim will go through it. But what's important is not only fiscal year 2023, but our guidance for 2025-... or '24, excuse me, and then our target for 2026. You see that progression upward.
Also with respect to Grid Technologies, this year, if you think back to our 2020 Capital Markets Day, in terms of the growth and the revenue growth foreseen, we're now at a double-digit growth, and Tim will go through that in a moment. But still, we had a bit of a dip in fiscal year 2022. Just to remind you, we had some headwinds with supply chain. We also had the impacts of Russia in fiscal year 2022, but certainly right back to where it deserves to be in Grid Technology and continuing to improve year-over-year to the fiscal year target of 9%-11%. Then looking at Transformation of Industry, as Christian said, it's the turnaround story for us, and that was not by accident, not at all.
There was a lot of hard work that was put into ensuring that all of those four businesses within TI show progress and really cumulative improvements year-over-year, and Laura will go into that in a moment, but certainly a success case across the board in all business areas. What's important is exactly that it has progressed year-over-year, but also that for Grid Technologies and Transformation of Industries, we're actually upgrading their targets for fiscal year 2026 and also fiscal year 2025, and this is confirmed for Gas Services for 2025, 10%-12%. So again, yes, some dark, but certainly a lot of light and a lot of hard work has put into it to get there. And maybe to bring you back a little bit more in time to the last Capital Markets Day, where we talked about the Accelerate Impact Program.
If you recall, there were some legacy productivity programs that we, let's say, we're continuing to work through upon the inception of the company. But then we also added to it a EUR 300 million additional Accelerate Impact Program, productivity, program, which focused exactly on those businesses that needed to look at their structure and ensure that they were fit for future. And that hard work has paid off. Whether it was footprint, whether it was looking at the operational and project excellence that Christian referred to, and that Vinod will go into a little further, in the presentations. It's really about ensuring that day by day, we execute with excellence, and I think those hard measures have translated themselves into the progress that you see in front of you.
Not only is it progress for one year, this is important, it's sustainable savings that we foresee underlying in the operational performance of those businesses, whether it's Gas Services or the two that we highlighted here from Transformation of Industries with Compression or Industrial Steam . That's important because that's a check. That's what we committed to, and we delivered. Also, something that we have committed to, of course, very important to us, are the integration synergies upon completion of the transaction of Siemens Gamesa integration. That was EUR 300 million, if you recall, and that had a focus of procurement and logistics, over half, 60%, and other synergies, whether it's looking at functions, as Christian mentioned, and that we've done immediately wherever possible and wherever it made sense.
We immediately started to work together to help Siemens Gamesa, and also to ensure that we set ourselves up for these synergies going forward. However, it is clear to say that we do that in a very calculated and, let's say, progressive manner, to ensure that we allow for Siemens Gamesa's priority to be the stabilization and the turnaround. Also, included in those savings, you see a timeline. So again, the transaction was closed in June, so we foresee that in fiscal year 2024, 2025, and then 2026 and 2027 is when those integration synergies will come to fruition. Vinod will go into that a little more in detail later, and we've indicated what those savings look like, but certainly, we're on the path to create those synergies step by step. Order backlog. I think, Christian mentioned it.
It's so important for us, and I wanted to ensure that we go through that in a bit more detail today because it's so important to us in terms of transparency, in terms of ensuring that what is in our backlog will be executed with the financial profile that we mandate. And that, of course, with respect to some of the challenges we've experienced, some of that onerous backlog needs time to get through the system as we execute step by step. So what you see is the EUR 112 billion backlog. What we've provided in terms of extra transparency today is the reach of that backlog year by year, and what the reach is, means how much of the revenue is in-house for that particular fiscal year already. So for fiscal year 2024, you see the reach on top is 90%.
What that means is in the EUR 112 billion backlog, we already have visibility on 90% of our revenues that will come to fruition as we execute through those projects and contracts, and orders, into fiscal year 2024. And you also see the composition therein from the various businesses to say, "Hey, is it GS, GT, TI, and SG?" And what is important is perhaps to highlight, and I will look at that in a bit more detail in a moment, is that that is pretty equal for the years, and then you get to the reach in fiscal year 2026 and onward. And what's important there is you see a large block for GS and a large block for SG. And included in both of those businesses, notwithstanding the other businesses, we have the long-term service program.
I think that is what you see there, is those contracts that are quite lengthy in duration, that continue to provide, certainly, we say that all the time about GS, really foundational, recurring, resilient, strong, profit, revenue, and profit, and cash... That's the way, if you'd like, at least the reach progresses until fiscal year 2026. What's also something that we provided, Christian provided the split in terms of new unit and service, in terms of the project margins and how those have progressed, in the backlog. Here, I give it to you by business area, and you see that all of them really with that momentum, because it's not just quantity, it's really about the quality that's in the backlog that matters.
So therefore, I can clearly show you that each of the business areas have increased their backlog margins, which is great, GS, TI, and GT. For SG, it has decreased, of course, on the back of the quality issues that we experienced in Q3, but also prior to that, we did have some onerous contracts in the backlog. I'll show you in a moment how that translates into the next couple of years, but certainly overall, you see that we have a positive progression in our project margin backlog. Also important is the 51% resilient service share that I just mentioned, and I think that that certainly provides that foundation, that stable foundation that we need for our business. That is encompassed in the EUR 112 billion backlog.
So moving on a little bit as to how does that backlog actually affect the balance sheet and also the strict allocation criteria for resources that Christian alluded to. Well, of course, we have a very, a peak, actually, with respect to order intake, and you see that on the left-hand side. What you also see is that the book-to-bill is clearly over one in all of the years. So this is really that positive momentum that we referred to. And what you also see in the middle is the operating working capital. We do have a level of pre-financing. That is the nature of the business model. That is actually a positive thing. This is what we want. And when we look at taking on contracts and orders that are longer term in duration, we look to ensure that those cash curves, et cetera, are included.
What is also a question that I am often asked is: Maria, how does that relate to any potential backswing? Is it going to level at this? You know, how does it work? And what I would like to say to you today is, of course, it has a few determinants. One is that we continue to see the backlog develop positively, so a positive book to build, which we do foresee. Two is that, of course, when you look at it, and we've done some stress testing, that's why I have this little bit of markings there into fiscal year 2024 and 2025. When you stress test up and down in terms of some order intake, we still are around the -EUR 2.6 billion that you see there.
And in addition, our backlog should level at this point with a book to build at one or greater. So this is why we don't see this operating working capital going off a cliff or any potential real strong backlash at this point in time. So I wanted to make sure that we highlighted that for you because this seems to be a question that we receive quite often. And then, of course, looking at CapEx. With such a volume that you have, as you see on the left-hand side, with that type of volume increasing, there will be the necessity to invest in our business. What we do is this, with a very strict allocation policy, looking at exactly that, the CapEx, for example, CapEx in general, are only for two things: either customer requirements or growth.
We make sure that that is looked at for each and every CapEx request. As you see, it is increasing somewhat, and that's in light of, of course, our volume increase. There's a few things dynamic, let's say, embedded in that, not only in SG, which is the majority of the CapEx. It is over 60% of CapEx today is for the Siemens Gamesa business, but of course, also in the other businesses. But the colleagues will tell you in a moment, it's actually CapEx light. We make sure that wherever there is a CapEx spend, that the ROI makes sense, and that it's exactly like I said, either for growth or for customer requirements. Here you see that it does peak in 2024 and 2025.
That is, essentially due to Siemens Gamesa, as we then continue to, increase capacity across all of the facilities, as Jochen will show you in a moment, and as alluded to by Christian. We do see this leveling off, of course, after the peak in 2024 and 2025, and this is where we see a normalization thereafter. Again, now looking at the balance sheet and what does it mean? Of course, the provisions have increased with the recent developments, and we wanted to give you this insight here today, which shows that we have onerous provisions and warranties. And for the last two years, prior to fiscal year 2023, that's exactly where the normalization of the normal level was.
Of course, with the Q3 impacts, where we have additional necessity for warranty, but also for the onerous contracts, that's mainly driven by SG, then, of course, that has increased by the EUR 1.3 billion that you see here. But what's important about that is all the costs so far that we know are now considered. So the question then becomes, when is the cash out relating to those provisions which are on our balance sheet today? And the cash out, as mentioned also in Q3, really does follow the curve at the bottom left of this slide, where you see it really does go into 2024, 2025, peaking, and then settles as it goes to the end of the decade. And I think that's really important because the cash out of those provisions is important to know when do those unwind.
And what you see is it's about a 45-55 split till the end of the decade. So the other, the cash flows then continue well beyond 2030, in line with warranty and so on. This is what we mentioned already, that we want to ensure that those repairs and so on continue with the warranty schedule as expected, so well beyond 2030. Here you see, with respect to our free cash flow overall for Siemens Energy, we are a company that does deliver free cash. You see it since the beginning. Actually, in fiscal year 2020, there was also another EUR 1 billion of free cash flow. So we foresee in the timeline here depicted, between EUR 5 -EUR 6 billion of cash still coming and being generated as a company.
However, with the cash requirements that I just mentioned, whether it's CapEx, et cetera, and the issues that we have in Siemens Gamesa, we did foresee a dip in the cash, or the free cash flow for 2024. This is what you see in front of us. This is what's included in our guidance, the -EUR 1 billion to EUR 1 billion. However, over fiscal year 2024, 2025 and 2026 rather, we continue to see that we get out of this trough of 2024, where the major cash requirements are for Siemens Gamesa, and then get back on to that positive cash flow trajectory that we need, and we will have in 2025 and 2026, back up to the level of the EUR 1 billion to EUR 2 billion, between those two years. So again, 2024 is the critical year.
2024 is where we see the dip, but then we see that we come out of it thereafter into 2025 and 2026 and onward. Our commitment as a company to a prudent financial policy, this has remained, let's say, very steadfast since the beginning of the company, and we need to. This is part of our business model, and we need to ensure that our balance sheet is commensurate with an investment-grade credit profile. When we saw that, of course, the cash needs for fiscal year 2024 would be greater than expected, we immediately put into place proactive measures. We knew that we had... We ended the year ultimately with EUR 0.8 billion. We knew that the free cash flow pre-tax would be around -EUR 1 billion. Of course, we have another -EUR 1 billion in cash needs. That's nothing out of normal.
These are really normal topics. We've highlighted them at the bottom. And then, of course, that would have put us into a net debt position, which was unacceptable for us. So proactively, we put measures in place in terms of the acceleration of our portfolio, as Christian mentioned, and ensured that we have proceeds on disposals to the tune of EUR 2.5 -3 billion to really put us right back up to that net cash position, as expected for fiscal year 2024. And this is really important for us to have that solid, strong liquidity, which we have already in-house, as you can see, with EUR 9.6 billion between cash and cash equivalents and our revolving credit facility. But certainly then, of course, also with this, to have a net cash position ultimately for 2024, that was our goal.
Now, moving into Siemens Gamesa, how are we gonna do it? And I mentioned to you earlier, how are we able to see in the backlog to ensure that we can say, "Hey, in fiscal year 2026, we do see a break-even for Siemens Gamesa." Let me take you to the left of this slide. So with our transparency, with our order backlog, we absolutely know what the project margins look like for each of the businesses. It's really just accumulation of the projects in the backlog. For here, you see we have onshore, offshore, and service, and the project margins. For onshore and offshore, that has been impacted by the quality issues, of course, and also, don't forget, by the rising costs on the offshore business. And what you see at the bottom is a snapshot.
That's a snapshot of the backlog that we have in-house at the end of fiscal year 2023 for Siemens Gamesa. And what's important is, and we mentioned that already in previous quarters, is how long will it take for us to convert through the backlog? Because it is onerous in onshore, for example. And here you see exactly the transparency that shows us when we will convert through that backlog and execute to where we see the new normal and the light, if you'd like, at the end of the tunnel with fiscal year 2026. So you see fiscal year 2024, the composition, then 2025. You see the onerous backlog in onshore. We had previously said that we would get through that in 2024 and the beginning of 2025, but now we see that it's going to take 2024 plus 2025.
But you see at the end of 2025 into 2026, no more of that onerous backlog from the onshore business within Siemens Gamesa. And what's important there is that you see in 2027 and onward, what's remaining is service business, that long-term service program that exists also within Siemens Gamesa. And why is that important to see how this develops? Because the assumption is, and we know that, and Jochen will talk to you about it in a moment, that within Siemens Gamesa, contracts now going forward have the terms and conditions and the cash curve and the profitability and the risk and sharing profile that we need for the future. So this shows you exactly how the curve will happen and the execution that needs to happen in the next 2 years of that backlog. But then we get back on track, and there's improvement measures behind this.
I think Jochen will go through it in a moment. Some affect the project margin in terms of, of course, fixing the quality issues, looking at fewer variants, et cetera, but also at the structural costs and efficiency improvements below that with respect to the ramp-up progress in offshore, looking at the portfolio, making sure that we're streamlining wherever possible, looking at synergies within Siemens Energy to ensure that we capitalize on that. And I think that's important, which is now going to get us to that 2026 break-even point that you see on the right-hand side. So we have that visibility that allows us to dig, to say this at this point in time. So all of this put together looks at the future, and how do we, as Siemens Energy, what kind of targets would we like to have in place for us in fiscal year 2028?
And you see, based on, of course, the targets that we've put out for fiscal year, the guidance for 2024 and the targets for 2026, we see the growth, still strong growth at a mid-single digit in revenue in the midterm in 2028. We see profit margin as reported at the greater than 8% level all in. We see this is the first time we're introducing a capital efficiency target with ROCE at 15%. And then the capital structure, again, really underpinning our commitment to an investment-grade profile and a balance sheet, a solid foundation and a solid balance sheet. And our dividend policy remains unchanged at the 40%-60%. What are the key messages? I think building on what Christian was saying, talking about the fact that we do, yes, we have our challenges, but we also have a lot of opportunities.
We have the excellent turnaround of our businesses. You saw that at the beginning of my presentation, and really with upgraded expectations for those businesses into the future. We have and will continue to have a great market momentum behind us to support that, as well as we've done a lot of the hard work in parts of the business already to ensure that we continue to capitalize that into the future. We have prudent resource allocation and selective investments in how we do that already. We will continue to do that, where we're focusing either on growth or customer requirements. Of course, we commit ourselves to a solid balance sheet and solid investment grade. Last but not least, we will ensure that we continue to have those targets in place to create sustainable shareholder value creation.
With that, I think we are at the Q&A. Thank you very much for your patience and for listening.
Right. Thank you, Christian. Thank you. Thank you, Maria. We will take some questions from the room, but there are also people dialing in. They, they are asking questions. That's why I have my laptop with me. The lights are very bright, so I may not immediately see when you raise your hand. I think I saw one here. So, first to Akash, and then the second one to Gael. Akash, if you start.
Yes. Hi, it's Akash from JP Morgan. I have two, if I may. The first one is on this price cost improvement that you've shown in the backlog. Will it be possible to split this into pricing action and cost action? Because you also show us that your cost has been lower through the productivity plan. So maybe if you can help us breaking down this improvement in backlog margins into pricing and non-pricing. And the second one is on normalization of orders that you expect for fiscal year 2024. Is this based on your pipeline, where you have seen maybe the level of activities coming down? Or is this based on your prudence that interest rates are higher and therefore, the customer decision-making could be a bit different? So maybe if you can in...
If you can provide some color on what are the factors behind, what are you seeing exactly right now, which is leading to, normalization in orders? Thank you.
Yeah, maybe I take the question on pricing and also cost measures, where I will not dissect it. I will try to give it to you qualitatively a bit, right? Because obviously, what you have seen on the pricing side, particularly in a booming market like Grid Technologies , obviously, the pricing element has a, let's say, more pronounced role, and in this regard, obviously, helped also to build the uplift in the margin, notwithstanding all the activities around cost, but this has been obviously well captured also by the team. What I think is more important than pricing, and I always say it also with wind, is the terms and conditions which come with it, right? Because we shouldn't get carried away too fast by pricing.
At the end is a question, how sure you are that you're gonna deliver it. So it is always a combination by pricing plus terms and conditions, which protect really the risk. Gas Services has been, and also, Transformation of Industry. Gas Services has been a lot also about this coming through of all these AIP measures, which Maria said that really have created, let's say, a very competitive cost base, including new products which have been launched. HL, obviously, new updates of new frames coming into the market, which helped a lot, obviously, to build this. In Transformation of Industry, it's a bit a mixture because it's different businesses, but the team has, apart from a tremendous turnaround job, and you see steam today really as a really very successful business.
This is not cost alone. There's also pricing elements and selectivity in it, for definite. On the second point, I now have to, Akash, now you have to help me. The second point was?
Normalization.
Yeah. Thank you very much. First of all, it's a mixture of these different elements. We do see still a strong pipeline in terms of orders. If we look across the different areas, we are very careful also seeing the load we have in the factories and making sure that we have the teams available and so forth, and making sure that we don't overeat ourselves in terms of backlog. And this is obviously a careful choice on how to do it. I see the market intact as such. I mean, you see certain elements, and this is why I was raising it, particularly on the wind side, where you really see a reshuffling, where I see there's also the market itself.
I mean, you, you see the re-auctions, which need to happen, more time required, prices have to come up, where we still see a 24 lower market area, particularly in the, in the offshore side, which will recover then thereafter. But I think by and large, it's really a careful application of our selectivity, making sure that we also reflect the load, what we're having in the organization.
Yeah. I was going to make the selectivity point. I think this is very important, in terms of how we actually actively normalize the backlog.
Thanks. Gael, over to you. What I forgot to mention, if you mention your full name and institution, that may help.
Thanks very much. Good afternoon, everyone. So Gael de Bray from Deutsche Bank. I apologize in advance, not for asking directly longer term strategic questions, but, I'd like to start with a couple of questions on the balance sheet. So I guess from Maria, really. I mean, last week you did announce some kind of a rescue package to maintain the solid financial foundation of the group. There were a number of things announced with Siemens AG, in particular. So what I'd like to understand is from an accounting perspective and from a credit rating perspective, how do you expect the deferral of the payments to Siemens and the use of the 5% stake in Siemens India as a collateral for the guarantees to be treated?
And then I have sort of a similar question, this time related to the commitment to buy a majority stake in the demerged energy business of Siemens India in around five years. Again, from a balance sheet perspective and from a credit rating perspective, how will that be treated, I guess, in fiscal Q1? And if I may, perhaps on the free cash flow, the guidance that you provided for the group, I think, you said in the call last week, more or less EUR 2 billion of free cash flow negative for Gamesa, which is more or less in line with the operating loss. And this is what I don't fully understand, because, I mean, the CapEx is expected to be greater.
Orders are expected to be down, so I would expect some negative working capital swing at Gamesa. Then you also have the usage on some of the provisions you've booked so far. If you could provide a bit of color on the dynamics there for Gamesa specifically, it'd be great.
Sure. Maybe let me dissect this question. So first of all, in terms of the measures that were announced last week with respect to SIL. So again, this is just an acceleration of a transaction that was envisioned in the midterm, in the future. And in terms of the now, like you're saying, for Q1, I think that was pretty clear as to what the impact will be. We'll have proceeds from the disposal. We'll have a gain on that disposal as well, and that's something that we see pretty imminent. I think the T's and C's and everything is well in hand. With respect to the future, and this is also what I mentioned last week, is of course, this is a transaction that will happen well into the future.
Today, what happens is the demerger happens essentially upon sale, and then we wait for a couple of years, there's reasons for that, where then there becomes a swap into the NewCo , and that's another 3-year wait period. So it's essentially 4-5 years into the future in which this happens. And that's why at that a nd there's different factors to think about. There's many steps between now and then. And so therefore, from a balance sheet perspective, there isn't a liability there. There's also, because there's a company that's not even there yet, there's multiple factors, the GP versus non-GP valuation, all of these are certainly well set into the future. With respect to the collateral, I think that was the second one. I mean, this is in progress as well.
I mean, essentially, it's the shares that are there, that are put into a vehicle, let's say, and that are used as direct collateral. Full stop. It's not more complicated than that. And the last question was on free cash flow?
I think it was a free cash flow and the dissection of the EUR 2 billion and the profit loss to the-
Which I just mentioned.
Yeah.
Yeah. So that's how the free cash flow is. I mean, look, we essentially took, again, those proactive measures in light of the fact that we actually did see that the cash needs at Siemens Gamesa were higher, and that was foreseen to a certain degree, because in Q3, we indicated there would be a quality issue, the provisions would be booked, but we also indicated that there will be impacts in fiscal year 2024, and that there's additional, let's say, consequential impacts that end up coming into fiscal year 2024. Because even if the onerous contracts and whatever was booked could be booked in Q3 of last year, we would see a diminished profit profile for some of those contracts as well into the next fiscal year.
It was almost like there was additional consequential impacts that resulted in the amount that we discussed last week, Gael.
My question was perhaps more on how to reconcile the EUR 2 billion of operating loss with-
Mm-hmm.
EUR 2 billion of outflows
Mm-hmm.
-for Gamesa in 2024, given the expected higher CapEx-
Yeah.
cash usage on the provisions and very likely a negative working capital change. So maybe I missed that, but-
Yeah, and I think it's also don't forget, the business isn't stopping, right? I mean, there's still top line coming in for next year and other things that are adding to cash, as well as the development of the balance sheet in accordance with what we've seen from the businesses.
Okay. There's one actually, one interesting question coming in for Christian, which I would like to take before we take the next question. And that's in relation to SGRE, and it's a strategic question, otherwise, please have the questions for SGRE for, for Jochen. But the question is: What are the upsides and downsides of having SGRE as part of Siemens Energy? And a small addition, if you want to that one, is if we are considering to integrate solar into our renewable product offering. But I think the first one-
Yeah, I mean, first of all, I mean, let's be clear, I mean, all the different businesses have to generate a profit pool, right? I mean, it's – and this is why fixing the wind business, as was alternative, and they have to generate profits. But there is, and execution is one of that, but there is a lot more commonalities what ones believe really between the different businesses, and I see it today. The quality task force, as an example, is composed by 50% of the people coming from Siemens Energy, and they're helping a lot. We are doing at the moment, Maria showed it in the trajectory on the, on the savings in terms of procurement alignment, which is, at the end, managing suppliers, creating transparency.
And it's also about a way on how do we make sure that we have the right people to execute projects, run engineering. So despite the fact of needing domain know-how, our business is about on how you do things. And this is, at the end, also on how risks are managed. And if you see where things went wrong, how are factories managed? How are these ramp-ups done? How is shop floor management happening? How do you actually report transparently project risks? That is not really related to turbine or wind turbine technology as such, is about on how you do things. And I think where we can work better as a group is really making sure that we have this operational backbone available to help the different businesses, let it be gas, let it be, grid, let it be wind, excel.
However, I mean, at the end, still, also, the products have to be designed diligently, qualitatively, in the right spot, and we have to tackle the right markets. But definitely, there is synergies from the other areas in Siemens Energy. Solar is, for me, a little bit an arm's length element. We are looking into this continuously. There had been a, let's say, smaller part of solar business done in Siemens Gamesa, which we actually disregard going forward. But, we continuously looked in opportunities, whether or not solar is interesting, but it is on an exploratory mode. It's not a business, what I would talk about business today.
Thank you. Over there.
Thank you. Good morning. Nick Green here from Bernstein. Sorry to return to the same question that Gail's asking. It's about the EUR 2 billion loss for wind next year. It's not the provisions you take in the 2.2, 'cause they're at zero margin. I think your chart indicated that the project business would be positive margin next year. So it sounds like you've got an additional EUR 2 billion of turnaround costs that you're guiding to, maybe a bigger number if the project business is positive. Can you give us details on what that turnaround is, what that turnaround cost is? 'Cause I think in substance, it feels like you committed to EUR 2.2 billion provision a few months ago, and you've just increased it to EUR 4.2 billion provision. In other words, it's another large hit to the business.
Can you give us the details of why it is gonna be a EUR 2 billion loss? 'Cause it's not, it's not fully clear to me. The second question is just on the commitment to the investment grade rating. Just to be clear here, are you confident this means you won't go sub-investment grade? Or are you just telling us that if you do go sub-investment grade, you'll get, you'll become, you'll be, promoted again in future? Thank you.
Yeah, first of all, maybe let me... I'm not getting your logic there, I have to say, right? So there's no additional provisions, there's no additional things what we see, but what you maybe have to take into account is there's an element on under absorption in the organization-
Right.
which comes obviously there.
Offshore.
And this is also offshore, right? Because still, with the improvement in productivities, we still see an under absorption element in terms of ramping up the factories. Not sure whether you have the right metrics on what is a gross profit and what is the total cost, because there is onerous, let's say, the onshore business is onerous in 2024. Let's say completely what you work through, you have the whole structural cost. You may have a, let's say, different view on the structural cost, what you have to-
Mm-hmm.
See, because, I mean, there's the onshore business, but there's also obviously the factories and the, let's say, the corporate functions and so forth, which I think your logic on the cash flow, I'm not following you. So what I can confirm, there is no extra hit or any hidden thing in terms of extra provision. This is not there.
No, exactly.
And do you... Sorry, Nick, the second question.
The investment grade rating.
Oh, yeah. Thank you. Thanks, Nick.
When it comes, I mean, look, again, I'll say what I said last week, I'm saying it again: We saw that the cash needs were greater than expected for this coming year, based on Q3 and the work that was done thereafter. We proactively took measures to ensure that we have the, let's say, net cash position based on the proceeds from disposals and others. I mean, we've got lots of things that we can do to further strengthen, if need be. And I think that's exactly what we wanted to do, to come back to a net cash position, to have a solid balance sheet. Full stop.
I'm sorry... Thank you, sorry. If you happen to be downgraded to sub-investment grade-
Mm-hmm.
Should we be worried about that? Because that isn't what you're telling us right now. Or are you saying, "No, it's okay, we may get downgraded, but over the next three or four years, we plan to end that in an investment-grade position." 'Cause you're only just above investment grade at the moment, or just at it.
Well, I can't comment on, you know, how S&P will conclude their credit watch. I think we've been working with them very closely. They have given credit to a lot of what we have done. That's a process that's in progress, as we speak. With respect to, again, what I said in terms of how the balance sheet looks like, the various levers that we have, we'll do everything and anything to maintain that solid balance sheet. And you can see that with what we've already done so far. I think that's our commitment: to ensuring we have a balance sheet that is commensurate with an investment-grade profile.
Go first, Danny, and then Ben. Danny?
Thank you. Danny van Doesburg APG, Asset Management. A simple question to Maria. Looking into the future, and you mentioned already new projects already hitting some of the milestones and credit terms you want to see.
Yeah.
And also referring to slide 41, I think it was, where you say, where you show the 10 percentage points improvement on the margin of project margins.
Mm-hmm.
Is that indicating that future new projects could be maybe even above 10% profit margin? Well, that's a bit of a guess. And then, the other thing, if I would buy a Siemens Gamesa turbine from you, the, let's say, the new one, the, what kind of security or sort of guarantee you I can buy from you in terms of how long the product will last, like the blades, the nacelle, et cetera? So in order for you and us to know how, how much horizon you have to confirm to your clients, and when you're off the hook, so to speak. So to give us some security about... Because it's a relatively new business, so we don't have much track record about how long turbines in offshore, harsh conditions work.
So that's a bit of the question behind that.
I can take the first one. Thank you, Danny, for that question regarding the uplift that we see in the backlog margin. The answer to your question is yes, we do see that. And in the past, we used to say, or if you recall, at the inception of the company, we also had some toxic backlog on the new unit side. That's fully gone. So now the conditions, terms, and conditions on all of the businesses, as we demonstrated, have indicated that, yes, those project margins continue to increase into the future. So, yes.
Maybe I'll take the second one. And just to put it also into perspective, to make it also clear, we have roughly installed and operating 50,000 turbines. 4% of that, right, is the 4.X and 5.X, which create the pain. 96% of that, let's say, fleet is operating fine as expected since years and decades. And just to put that into perspective, not to create the wrong perception. But the logic is always similar to gear services. You sell a new unit, and you sell a service contract with it. So the service contract describes on what are you giving guarantees on, and how this is related to wear and tear, operating conditions, and so forth.
Offshore normally is a service business which is less pronounced than in onshore, simply because there are more self-performers , and then it's more about parts and providing services, which comes also with different liabilities. But generally, I mean, the industry is running on, let's say, contract durations on the service side, with 15, 20, sometimes even up to 25 years in terms of operation. That doesn't mean that it always covers the full turbine. It's a question of the terms and conditions on how you design it. And that is something what Jochen and the team is rigorously working on, to make sure that the customer feels comfortable to operate long term and understand the lifetime.
At the same time, obviously, certain things will be wear and tear, harsh conditions, and so forth, which cannot be part of the product liability as such, but more from a service and maintenance contract. And that is obviously where the reshuffling in terms of how this is best done is happening also at the moment in the industry. But that is a relatively... I mean, even so, so you say, new product, it's a relatively established model which operates very positively for the vast amount of the fleet, and don't take the current challenges in 4.X and 5.X to apply it to all, all the rest of the components.
Could you give an example, like, on the blades? Like, do you have to design them for at least ten years without a problem, and then afterwards, the client-
No, the blades are normally designed for the lifetime, right? This is on how you, how we test it, and then if you have not done so, I would be happy to invite you to Aalborg, also, to see on how these things are tested-
Mm-hmm.
In terms of making sure that they can withstand these conditions, which is also the normal experiences, as long as the fabrication process doesn't reveal any quality issues, wrinkles or whatever. I think Jochen will talk about that, which then harms the blade. But generally, this is a component which you can easily design for the lifetime. Not easily, but you can design for the lifetime.
So just we extend the Q&A a little bit so that we can take Ben and Delphine. So many hands, but let's start with Ben, please.
Yeah, thank you. Thank you for taking the question. So I had a couple, Slide 41 was a very busy slide, and then moving parts and project margins and cost savings, and this, that, and the other. If I step back and try to dumb it down, what, what you're really saying is that in particular, that EUR 5 billion of onshore backlog, you think that you have a line of sight on the phasing of that backlog, and basically that runs off, and that's why we get there. I mean, I just want to make sure I'm not missing the point.
Yeah. No, exactly, Ben.
Okay.
Exactly.
So to play, and I hate to do this, not-- You know, I realize this was not a problem of your creation, but the-- your confidence in those backlog assumptions, right? Let's be honest, we've been here before on those backlog assumptions. What incremental testing since the last, you know, the big warning at the mid-year, what gives us that confidence that those are the right margins? Is it around cost? Is it around the sample? Can you help us there? So that was question number one. Question number two, my numbers are clearly wrong on your free cash flow slightly, and I didn't realize that your tax and other items, with a little footnote, was going to be as big as EUR 1 billion, to be honest.
Yeah.
Can you just run us through that EUR 1 billion? There's, there's other in there, there's interest costs in there.
Right.
What is-
Taxes.
What's going on in that line? Because it actually only just gets us back into a positive cash position.
Mm-hmm.
I thought it was going to be over EUR 1 billion. So that's the second question. The third question is just governance.
Mm-hmm.
I guess this is a question for Christian. Since you bought out the minority, right? Since that, let's say, big governance structure change, how does your day-to-day interaction with Siemens Gamesa change? Used to be run as two separate companies. Is this one company now?
Maybe I start with the last one, and then you-
Sure.
You take the other ones. First of all, no, not yet, not everywhere, right? But we. So we still have a very minimal board. My, my, my interaction have changed on a, let's say, also driven by the quality task force, by a much deeper involvement into the operational stuff. And obviously, this business is... I said it when I started with this company, is about passion for detail. You have to dig deep on how things get done. And obviously, Jochen and myself take a lot of time to reuse the quality task force, the root cause analysis, the corrective measures, how do we plan the, the ramp-ups in the factory, how many blades go out next week? And on a really operational level, to force the organization to, to be KPI driven.
So it's different than reporting to a board as before on how we run it. What we have not done yet, and this is why you see delaying also synergies, we have not integration of legal entities, so we cannot easily say everybody is part of the same group. So we still run, let's say, in certain areas, the parts of the organization. What we have started to do is now to bring groups together under leadership. What we started to do is to roll out procurement tools. But a lot of these things going to come throughout 2024, and this is where I also do expect obviously, benefits coming from in terms of getting our arms around this and helping Jochen and the team really to get the things fixed.
But today, we're really also still in a lot of areas two legal structures, but with a lot leaner governance in terms of bureaucracy, I would say, and much more operational deep dive really into the different problems.
Do you feel happier with the information you're getting?
Yes. I mean, I feel satisfied with the information from the quality task force and the level of rigor in terms of what we're going through. To your first question, also, why do I believe I feel more comfortable? I think this is the most extensive, most rough analysis of what we have done. And keep in mind, this will always be a business where you let's say get some unexpected. Because you have long-term operations, you will see a turbine, let's say, having some failure here and there. But I think the big tickets, right, these blades, the bearing, really the very prominent things which cost these hundreds of millions EUR, this is something where I'm strongly convinced we have our arms around.
It doesn't mean that sometimes something unexpected cannot happen, but also keep in mind, the service business actually meant to actually cover exactly these things. But, we have never, and Jochen can best comment on it afterwards, we have never had such a transparency and openness. And this business, at the end, is not about avoiding problems, it's about seeing problems early enough, and it doesn't cost so much money to fix them. And, and this is where I think, there is a new view in this business. It will still be a lot of hard work, but I feel comfortable with the way on, on how things are done, and this gives me more comfort compared to six months ago.
With respect to the transparency, so you're right. I mean, there's the financial result, interest, et cetera. There's also things like share-based compensation that we need to purchase shares for. That goes into that number, and other topics, and it's up to EUR 1 billion. Let me just make sure that... So certainly, those are—it's the normal topics that happen below the line, pension, et cetera, that goes into that EUR 1 billion. Yeah, perhaps.
Okay. We're already 10 minutes over time, so Delphine, if you just have one, and then maybe we can also kind of try to, Christian Maria can try to answer the questions over the coffee-
Yes, happy to.
Coffee break. So Delphine, please.
Yes, thank you. Good afternoon. Delphine Brault from Oddo BHF. Well, only one. You mentioned the need for expanding capacities. Can you maybe quantify by how much capacities will need to increase in the coming years as compared to your current install base? And, yeah.
I would, if you're okay, Delphine, it would hint to Tim's presentation because he will talk about the factory expansions, what we do in transmission. I think this is what you were referring to, right?
Yes. Okay. Then I ask another one, if I may.
Okay.
Thank you. How much of your backlog is protected by price escalation clauses? I suspect it's 100% of your service contract, but how much is it for the remaining part?
Uh.
The long-term service program is 100%.
100% protected-
Yes.
From most of the rest, it depends, really, because you also have some short cycle running products. Also, if you just ship a transformer as such or so, which would then be on rather a fixed price, not,
I know.
Not a, not an escalation scheme, but I think every multi-year running project would have price escalation in it. And also in wind, as we discussed, it was not the case in the past. It is the case absolutely today for new orders, what we take in. So I would say there I feel comfortable in terms of being protected against-
Yes.
inflationary elements. The one thing what you have to see, and this is why I set the constraints in the supply chain. Very often, I mean, what you can index is elements like, whatever, steel, copper, indexes, right? Where it's getting, where you need to be a bit more careful, it's about if you really run into bottlenecks in the supply chain, which limit the capacity of suppliers. Certain parts are not available and drive, apart from indexation, certain suppliers up. And this can only be covered by procurement activities, increasing the supplier base. This is something what you obviously cannot tackle in indexation. But generally, I think on the indexation and the backlog, I'm comfortable.
Cool. We've overrun a little bit, just a bit. Anyway, so I would suggest that Jochen will start at 2:40 PM. instead of 2:35 PM., gives us a little bit of chance to get a coffee break. One thing, the toilets are downstairs next to the reception, and if you could please wear your badges, that would be quite helpful. So thank you.
Please hold the handrail-
Absolutely.
If you walk down the stairs, right? I have no interest in a safety incident. Thank you.
Cool.
Thank you.
Thanks, everyone.
Thank you.
Whilst there's no rush, I think it would be good if we all come back, and then we give Jochen the opportunity to talk about Siemens Gamesa. We wait another 15 or 20 seconds until everybody is seated and settled. Settled with cake and dough balls. Right. Happy to introduce Jochen, and, Jochen, right to it. Is everybody there? Is that- Everybody now? Yeah. Well, go ahead. Okay. Over to you. Thanks. Perhaps a couple of seconds waiting is better.
Good. So good afternoon from my side as well. A very warm welcome to the world of wind. As you can imagine, oftentimes I'm supported by a very strong team in management around me. In the preparation of this meeting, we thought we may also be discussing things like gusts or stronger gusts, or strong headwinds, or turbulence in general. But on a more serious matter, it's been very intense weeks, and we're happy to today, here, now, share the plan on what we intend to do going forward. We sometimes refer to a couple of details around our business. I think in this context, it is very helpful to remember a couple of core fact factors, to core facts around our business, as it stands.
So, in the last fiscal year, we had a revenue of slightly more than EUR 9 billion. As you can imagine, that was also impacted by the overall findings, which were then later on published, that the whole thing led them to an order backlog of almost EUR 42 billion. That's quite a lot, also, in my view. I think we are now, in our sector, number two, as far as the size of the backlog is concerned. In the last fiscal year, we had some EUR 16.8 billion order entry. We sometimes refer to numbers of turbines. Perhaps in this context, it is beneficial to see, we've got installed some 4,600 offshore turbines and almost 60,000 onshore turbines.
Yeah, coming not only from Siemens, also coming from Gamesa, also coming from the various, let's say, merger-oriented activities which there were in the past. In total, we find installed some 137 gigawatts of power generation. And also, here in this context, not everything is under maintenance, and therefore is not in our obligation, but there's also only a part of that. We have some 82 gigawatts of maintained fleet, if you wish. Something which is also sometimes forgotten is we understand ourselves as really a true leader in sustainability. Out there on the booth, you can see what we have developed around the RecyclableBlade . The RecyclableBlade , in our view, going forward, cannot be just landfill if it's kind of taken off from the wind farm.
There's also information around what we call the GreenerTower , so the big, heavy metal part, which then can be manufactured in a way which is much more or much, much more CO2 neutral. We find ourselves in a market which I have to say, looking at some of the data, is an environment which I would very seldom have the chance to work in from the positive size of the numbers. I mean, if you look at the sheer overall growth of 9%, then you will see that obviously it's different in onshore and offshore. We have a CAGR of more than 30%, sorry, more than 20% in the field of offshore.
And with these numbers, we typically follow more, you know, the market research than, for instance, just adding up the political targets, which are out there. They are even higher. Also onshore, due to the sheer size of the market, in my view, is a very attractive market and needs to be seen like this. We have, of course, then, to answer the question, where and why is such a market attractive? And there we see that markets are not alike across the globe. We see, obviously, in onshore, the ongoing, let's say, rollout difficulties when it comes to the installations and the permitting and all that stuff, and discussion, also, most recently, had led to the activities in Brussels.
We also see on the onshore side an increasing influence of Chinese players, especially when it comes to, for instance, regions like Latin America or the Middle East or Southeast Europe. On the offshore side, the expected growth is massive, and that is despite the fact that we've seen recent turbulences in North America. So there was a couple of discussions around some of our customers, as you know, but we also had a lot of discussions. I had a lot of discussions with our customers around the UK business, for instance. And end of last week, I was very happy to learn that for the auction round, for the upcoming auction round six, in the UK, there is a substantial change in the conditions for the developer to actually start and run projects successfully.
So in total, in my view, still massively attractive, and we need to make sure that we get the best out of this. Now, if I look at the situation, we find ourselves in the Siemens Gamesa. There's always this discussion around external and internal factors. The overall price level, in my view, has come down too fast and too much, which now makes it very difficult for all the players, not just us, for all the players to lift prices again. We've seen cost increases around the various, let's say, things which did happen over the last years. COVID, we had geopolitical difficulties. We had then the additional shortages coming from closures of harbors and so on and so forth.
Christian and others did refer also to the T&Cs situation, in my view, on the standard T&Cs, if we could say it this way, we are by far away from what should be the market standard. We've been extremely generous in the past to accept T&Cs, which going forward may hit us. And we had the previous discussion here, that sometimes in the field of service, we are bound by some, let's say, 25-year or so LTP contract. So if I then would say, well, this may be an onshore project, so it takes us some 18 months or let's say 24, then I have the warranty period, and after that, I have my service contract, then I'm kind of bound by these T&Cs for some 30 years.
That as such, oftentimes, is not so easy to handle under the given circumstances. Quality issues, I come to that a little later, hit us to an extent which is certainly beyond what at least I experienced. That is, of course, a tricky thing. But and that was also very clearly communicated on, there were also operational challenges. Operational challenges have to do with an overall, let's say, attempt to master the growth. To master the growth in our offshore business, we've been slower or slower than anticipated, slower than planned, on ramping up capacities in different of our plants, and I will come to that as well. These are issues which I would attribute more to our, let's say, internal situation. I think this is then the right discussion.
Going forward, it's perhaps worth mentioning that, you know, things in such an enterprise will not change overnight. So we do have a backlog, and that backlog sometimes has the conditions it was acquired to accordingly. And that means we have to now work off that backlog. And you see with this little graph, that we expect, of course, on the service side to be, you know, long bound to our to our backlog, but also on the new unit side, we have substantial effects on our revenue generation up to 2026. Yeah?
So it does mean that if we, for instance, per today, establish that something is not necessarily positive, specifically in offshore, where we have a contract which is not really good, it was fixed in its T&Cs and pricing in 2021, but it takes us in our revenue into 2026. Yeah? So things on that front cannot change overnight. Of course, we've done a couple of things to optimize the business, and we've been, and that was recently announced further, but also over the last actually quarters, we always spoke about being more selective. So market share as such has not really become a target anymore. We wanted to make sure that we actually can manage our business.
The new operating model was just talked to, was talked about by Christian a little earlier. Of course, we've done some activities to focus on our core, on what we understand our core, and the integration into Siemens Energy is ongoing. Five things, five things we want to do in order to rectify our business, in order to fix our business. This is a program we've developed. We call it the Master Plan, and it contains the following elements. First of all, we want to fix the onshore business. So, we would like to make sure that we can maintain our activities around the 5.X, but also from a regional perspective, we potentially, potentially want to narrow down our activities. On the offshore side, we would like to make sure that the growth can be mastered.
This has the effects of wanting to make sure that the ramp-up works, but also the cost out needs to happen. The service business needs to be further strengthened, but also we want to be more selective. We would like to make sure overall that the order intake we're looking at is healthy, and then in the end of the day, we want to reinforce operations, towards something which we would call operational excellence. Now, the quality issues sometimes are extremely relevant for many of us. What happened? We did see deviations on the performance side, on some 4.X and 5.X turbines. Out of the overall 65,000 turbines we have installed, these represent approximately 2,800-2,900 turbines, and only a very small number of those got affected.
So this is why we sometimes have to deal with statistics in our discussion. What happened? We did observe material-related issues, for instance, on bearing components. We did see process-related issues, like, for instance, on the manufacturing of a blade. The manufacturing of a blade is, in my view, a very complex process as such. And we also saw product-related issues around various parts of the turbine, and they also, you know, can be seen as a combination of other effects. So we've seen a couple of effects. Statistics then led to the numbers which we look at. We wanted to respond as systematically as possible with the help of a so-called quality task force. The quality task force has three work streams.
We're working on the technology side, we work on the contract side, and on the operation side. And I'm happy to say that the analysis, of course, is for the onshore activities or for the onshore deficits, is finalized. We've made big progress, and in that sense, the development of the measures going forward is ongoing, not finished, but ongoing. But of course, in Q4, there were no additional charges coming from that. The whole thing is complex because we also have to deal with, in the end, on the new unit and on the service side, in total, more than 300 contracts. Those were looked at in a very critical manner, and we started finding agreements with the first customers in relation to those contracts.
Obviously, that's sometimes, customer-specific and cannot really be generalized all over the place, but, but it's relevant, really, that we, really are in close contact. And the operations are about rolling out the corrective action, which is in its starting phase. If you see that on the long- and short-term remediation measures, not everything is finalized yet. So the target, really, the target is to come back to the market with something which we would understand as a reliable product. Nothing else can be sold, nothing else shall be sold. So that means, that yes, indeed, for instance, in the previous quarter, we did have the issue that everything was finalized, the contract was ready to sign.
We were sitting at a desk, you know, opposite to each others, and we could not sign because we could not guarantee, we could not stand behind the requested delivery date because of the situation. So I have reasons to believe our offering, as such, continues to be attractive, and we will be successful in the market. However, we need to be able to confirm, let's say, the entirety of the agreement, which includes then, obviously, the delivery date, and that was the difficulty. Second point is that also in onshore, the markets are not equal across the globe. We've developed a very clear set of criteria to drive us to what we want to serve in the market in the future. Four main criteria are derived.
We want to have a stable regulatory framework. We would like to make sure that, there is a profit pool which is central in the market. We would like to have a customer landscape which is not only price down-oriented, but also sees a little bit the perspective behind the green energies in this context. And it is relevant for us that, of course, we also have some appropriate offering for these specific market segments. And one clear confirmation for that, is that in Europe, we find, these conditions, and for the other regions, we are assessing that right now, the attractiveness in that sense. It potentially could lead to, as I was trying to indicate, narrowing down our activities from a regional perspective.
Offshore, the growth is substantial, and it was mentioned before that we found ourselves, of course, really a little bit in the sweet spot of all this growth. When it comes to future technologies like floating, but also when it comes to the managing the overall growth as such. In this context, it can be seen such that our manufacturing capacities need to be ramped up. The growth rate, which we predict here from 2025 to 2026, sorry, is around 3.5 times, perhaps a little bit more going forward. That is not exactly the market growth. So implicitly here, we say that we also want to become more selective and try to make sure that we actually get the more attractive parts of the market.
To make this happen better than in the past, we've developed dedicated cross-functional team approaches at every site below the level of the plant management. We focus on the net output, so we want to reduce really, tech times, idle times, what have you, for people who are a little bit closer to manufacturing work. And in the end of the day, there's also one core element of it, and that's the better preparation for new product introduction, NPI, because this ramp up as such is really determining the success, success of our related activities. Since we have the pleasure to be close to Cuxhaven, Cuxhaven will be the plant where I think many of the audience will be going to tomorrow.
So, there's, of course, then also specifics, which have to be considered here in the case of Cuxhaven, also there. You know, we started hiring earlier. We provided more manufacturing stability via a rather strict engineering change management. We have introduced a different warehouse buffering concept, and we also had to balance better the work per station. You know, if you look at the nacelles, they work or they find their way through stations in the manufacturing, and the whole timing around this, that needs to be pretty much balanced. So in the end of the day, we are very rigorously following up on the targets we've given ourselves towards something which we call standard cost, and I believe that will be very successful going forward.
Then there was another element mentioned, that is the cost out. Cross-functional teams have been working on a couple of ideas, and the couple of ideas is more than 500, because a turbine is a complex thing. So, 200, in this case, 200 cross-functional team specialists, worked on developing around 500 ideas, detailing them, making sure that they are being put in place, and then later on, also rigorously, executed on. That covers the entire scope of any one project we're delivering on. So it includes, for instance, the possibility of, upselling the turbine in the sense of additional value coming out. But it also, has the element of, let's say, sheer cost reduction on the components like the nacelle and the tower.
On the service side, we have to say that we also got hit by the quality issues to a large extent. The result typically, or oftentimes, and the way of how it's accounted for does depend on, obviously, the profitability in those projects. But since many of these projects are not onerous, there is still the effect that we see, you know, the quality hit as part of the P&L going forward, which then translates into the need on our side to make sure that, you know, productivities are being developed to come back to the original profitability levels. That is what we are working on. On top, it was mentioned that, I believe we still have very risky T&Cs in there, in our service conditions as such.
So service conditions are not always like service conditions. Sometimes the detail matters. And as far as the productivity is concerned, there will be a clear streamlining on our side to make sure that productivity, productivities are lifted, not only on the new unit side, but also on the service side. That, as such, is not so different. It's probably different to the extent by which we are going to do this. Then there's another thing, and we would like to make sure that this comes across also with relevance. We would like to strengthen the focus on the aftermarket. The aftermarket is going forward for us a very attractive market. And it has to be sure that we are offering more of our services around, you know, the, this specific element of the market.
Since, for instance, in offshore, around 50% or so of the customers are what we sometimes refer to as self-performers. So also, although they are self-performers, they also want to be helped with, on certain parts of the service activities of a certain portfolio, and this is what we're trying to do there. The order intake, in my view, still has to change going forward. We spoke about the fact that in offshore we are not necessarily following the market growth in total, so that implies a certain selectivity. And for us, it means that we have, of course, then, to look at, wherever that is possible, improve profitabilities, and also sometimes introduce scope reductions.
If I would be requested to define the core of our activities, I would rather say it goes on to the exit or the gate of the factory. But things like transportation from the factory to elsewhere, or sometimes also erection activities, don't necessarily have to be part of the core of our activities. And this then translates, for instance, in the onshore field, to the fact that although a so-called ASP, sometimes they are the average sales price per unit or per megawatt, may be rather low, it is not indicative for the profitability behind it. We have on low ASPs, sometimes the highest profitabilities. So, I spoke about the risk sharing and the limit of liabilities.
On the liability side, we still have to mention, see that, if I compare what I find here in Siemens Gamesa with my personal past, for instance, from the Gas Services or the turbine businesses, but also from grid, we see that our liability profile is much worse. And in my view, there has to be a trend going into the direction of, let's say, standard, industry-typical terms and conditions, also, when it comes to these liabilities. This is specifically the case when we talk about customers, which sometimes are the same. Please remember that oftentimes, industrial customers, like the big developers, like RWE or the other Europeans or North American ones, the same customers procure lots from us, but also lots from the other elements of our portfolio.
So the question is, why do we suffer from worse T&Cs? And obviously, in this context, I have to follow also the market, because, obviously, I mean, if we're the only ones to do this, and then everybody else is not following, then this is perhaps not the most healthy solution. But in general, I continue to advocate for this more rigorous application of T&Cs in the given trend. And I believe I can say that even, even sometimes our competition or my competition is saying the same thing. So we need to come to a T&C profile, which allows us a healthy business going forward over longer periods of time. Operations. Operations is always where the money is spent, is also where the, the benefits of cost out can happen. It's not so easy, though, to achieve a profile which is adequately attractive.
I think, when we look at our footprint situation, we started in optimizing it, we started to reduce the footprint. In my view, we will continue to do that. That means specifically, for regions outside of Europe, that we will closely monitor where capacity reductions can be introduced. It also will mean that on the other side, because we are a little bit, you know, in the mix, we have, we have the onshore business with perhaps too high capacity levels, and then we have the offshore business, where we are actually suffering from too few capacities right now. So it means on the other side, that we still have to focus on those things I mentioned in the course of offshore.
And that is, you know, for us as a management team, also sometimes not so easy to handle, but we're confident that we can manage that. We've had, in some areas, I think the need to rebalance our make or buy strategy. So sometimes the standard approach, in many cases around manufacturing, was to just make everything in-house. And I think in many cases it doesn't make sense, so we will re-emphasize that. And we will also go for, an outsourcing of components to strategic partners, where that makes sense. And there's quite a number of cases where this makes sense. We spoke earlier. Maria spoke earlier about the structural cost reduction by EUR 400 million.
We've given ourselves that target, to reduce our structural costs by EUR 400 million until 2026, and this is part of the plan to be, then, on a positive track. We continue to simplify the technology portfolio across the business units, but then also, across different components. Perhaps worth mentioning here is that we also have substantially reduced the variance, the variance of what you can buy as a customer, because we simply felt that not all of those variants actually lead to revenue. So then we've clearly introduced a certain, revenue threshold for any one variant to be approved as a variant going forward. But we've also, focused on extending the life cycle.
And perhaps one of the more prominent examples there is, the upcoming Mark Six turbine, in the field of offshore, where we are, actually, you know, making for 30% more or so of the output, use of existing investments and capacities in order to make sure that, we are much more stable and are much more profitability generating. We spoke about the organizational setup. It was meant to sort of strengthen the product development setup, and that's clearly making progress. And one specific element, which is very close to my heart, also, is to ensure manufacturing readiness once day zero of production is coming. And that is a tradition which is not so, how shall I say?
Not so, not so often seen in our business space, because perhaps also the industry as such is rather new. But I'm, as a person, also coming a little bit more from the, you know, automotive field of thinking, and that typically leads to the point that start of production is start of production, and then, and then from then on, we go. Yeah? So that means for me, I would like to make sure that together with a strong team, of course, that we return to profitability. The next big milestone is 2026. It's a break even, and there's five things we would like to focus on. It's the product quality, of course. We would like to fix the quality issues in onshore.
We would like to make sure that we focus on attractive markets, and we would like to also make sure that a lot of the growth which is foreseen for us in the business, in the round, in the field of offshore, that we are able to, you know, benefiting from this in a, in the most adequate way, which typically means capacities up, ramp up faster, learning curves shorter, manufacturing readiness addressed throughout the product development, and then obviously also cost out. That is of very high priority. I spoke about the service business and that we have, after the quality hit, specifically, lost a little bit of profitability there, so that needs to go back to old profitability levels. Otherwise, it will not be easy to maintain our, you know, target profitability levels.
In general, I believe that we all, actually, not only us, perhaps, but, but certainly us, need to make sure that the order intake, which we then at the end of the day have, is sufficiently healthy. And I spoke about the relevance of the pricing, but also about other things like liabilities, time, the inclusion of certain elements into maintenance services, and so on and so forth. And in the end of the day, operational excellence is something which we have taken on board as internal homework. We would like to make sure that we live this, and, frankly speaking, specifically with this one, also, I'm, as a person, happy to be able to say that this is not entirely new for me.
I was happy to do this also in the past in Siemens Energy. In my first years in Siemens Energy, with our friends from in those days the gas turbines, so generation, it was called then, and also industrial applications. I think the fruit of some of what we did there is clearly observable right now. On top, in my view, we in Siemens Gamesa have the management team, probably stronger than ever. And it's really a pleasure for me to work with my colleagues to drive these ambitious plans forward. I'm very optimistic that we will be successful. Thank you very much.
Yeah. Thank you, Jochen. We've got plenty of questions coming in, but of course, I still need to look at that side of the floor, because there, we didn't allow the questions earlier. So, who wants to start the questions? So Phil, over to you.
Thank you. Yeah, it's Phil Buller from Berenberg. On the topic of onshore, sounds like we're 100% committed to being in that end market, but at the moment, we're, we're out of commercial activities. So I guess the question is: When will the technology be ready to start bidding again on 5.X programs or order potential? And do you think that the financial terms and conditions that you referred to will be in the right place by the time, you know, the technology's ready, I guess? Because it is a very fixed-cost business, and it's still, you know, competitive. That's question one. Thanks.
Well, thanks. We're working on that with utmost focus, as you can imagine. Outside of commercial activity, perhaps it's a little bit broad. In my view, it's just not signing contracts right now, which we would be prepared to sign, because everything else is negotiated. But that, unfortunately, is the case, because as I said, we cannot really confirm delivery dates. My hope is clearly that, well, we come to that as quickly as possible. The bidding, in my view, is very likely from today's perspective, that in the course of the current fiscal year, we will be in that phase again. And then, you know, the rest, I may understand as a technical consequence.
Okay, thank you. And then, in terms of the make, buy decision, that, that's quite an important topic, I guess, because some of the issues we've seen on the 5.X appear to be more from what we've bought in rather than manufactured in-house. But from what you presented, it feels like there's more of an emphasis on buy rather than make. So what systems are going to be in place to ensure that we have better control of the quality coming through the supply chain? Thanks.
Yeah. So if you refer to the quality, then of course the buy can only come from established and qualified partners, so in that sense, does not provide an additional quality risk. Yeah. And I think in the market, we have had the experience that in some plants and some lots, we did have difficulties. Yes, I agree. But also there was a learning curve, and in my view, there are adequate partners around.
Vivek, over to you.
Thanks very much, everyone. Good afternoon. Vivek Midha from Citi. So I have two questions, one on onshore, one on offshore. So similar question on onshore: could you just give us a sense of the longer term for the technology? I think this, the wording on the slide was the 5.X is the mainstream platform. So how confident are you that once you've stabilized the quality issues, the 5.X is the longer term solution, or are you still open to a new platform to replace it? And secondly, just on offshore, to help us understand, you know, could you give us any indication of how much of the offshore backlog is now onerous? And with those problematic contracts, have you seen any deterioration, or is it stable within the last few months? Thank you.
Thanks. So first of all, onshore, a platform on our side is something which is following release concepts. So, there is typically a couple of milestones where we follow improvements, power up, power optimizations, other details, sometimes also longer rotors. Being active with the 5.X in the market, for me, implies this. So going forward, once we have, once we have fixed the situation, the intention is to have a complete roadmap in that sense. Yeah? Offshore, onerous projects, there are some... Over the last months, I did not see any deterioration, I have to say. Over the last months, I did not see any deterioration. However, I did see a deterioration, obviously, when it comes to the entire fiscal year and what our plan was prior to that, yeah?
So these effects are there, and this is what led then to all this communication, also in Q3, for instance.
Alex, please.
Thanks. Yeah. Alex Berger, Bank of America. Thanks for the presentation. I wondered if you could just develop this, this point on the manufacturing processes. Which sites were there problems at? Are you happy that you've identified all of the problems? And I guess the time to fix those is what you're doing over the next two years, and, or next year, a year to two years. I'm just wondering, can you give it a little bit more color and detail on exactly what the problems were, where they were, and, I guess, why did you get to that place in the first- why'd you get to that position in the first place? Have you worked out what that, what caused that? That's the first question.
Well, I mean, if you're now talking onshore?
Yes.
Yeah. So if we're talking onshore, the problem with the problem is that it's not so easy to detect. If you follow the timeline back, we had obviously the Q3 profit warning with a capital market communication. But if you follow them back a little further, you saw that we have prior to that installed quality task force elements with the help of Siemens Energy and also on our side. And prior to that, we also had internal task forces, yeah? So the problem is, it's not like somebody gives you a presentation, and from then on, you know you have a problem. We were trying to identify these issues.
It has to do with the new setup in the organization, where we also had changed responsibilities, and suddenly people were more doubtful about what their outcome in the work was. Oftentimes, it's not so black and white. This is how it developed. It developed over the portfolio of 4.X and 5.X, which then did materialize, as far as manufacturing is concerned, in the sites of Vagos i n Portugal, and in Ágreda, in Spain. But I think it would be too short-sighted to look at those sites, because sometimes, for instance, for the 4.X issues, we also had manufacturing coming out of China, and we also had blades coming from Mexico.
So there is a more complex situation behind this, and that all in overall developed into this picture, and this is what it also makes so complicated. Perhaps it's not so easy to understand it either, but it's also complicated that, you know, we still, until today, had a rather limited number of failures. So a lot of these numbers we are referring to in the sense of accounting. They are around probabilistic assumptions on how things develop over the time of our responsibility, which is then the LTP duration. So it's not so that I can say I know everything by now, as far as the failure of any one turbine is concerned. What I can say right now is that we don't have new intelligence to change our assumptions, which we have taken in Q3.
This is why Q4 did not deteriorate. But technically speaking, we still operate a lot with probabilistic approaches.
I guess that's what I'm trying to get at, right? We, I accept the probabilistic point. I totally understand that you don't have any more data to change your views on what might or might not fail. It's more about understanding where you feel the problems have been, and why we should have confidence that you've got confidence that you've identified them, that you can fix them. Because I think that's the bit we're trying to understand here. 'Cause there's a lot of numbers flowing around-
Yeah.
in terms of cash out to fix
Yeah.
and expectations of when you're going to get back to
Well, the answer today, the answer today is simple. Everything we know of is analyzed. The priority one analysis are completed, and out of that, we have a certain understanding that we can fix those issues. It's just such that not in every case we do have the final plan yet. So, for instance, if the final plan includes a component coming in from China, then this is a discussion we didn't have yet. This is where it comes from.
Okay. Thank you. And then second question. I guess part of the disappointment, if I might, phrase it that way, over the last couple of quarters, has actually been the lack of achievement of your ramp-up in offshore.
Yeah.
And the lack of traction you had on the productivity improvements there, which I think are all within your power and were always within your power. So can you explain a little bit about why that hasn't really delivered according to expectations? And when you, within the context of the time frame over the next couple of years, how you'd expect that to come back in? Thanks.
Yeah. So there were... It's a combination of things, all of them not so complicated as such, but the combination and makes then the completeness of the view. We did have some wrong assumptions on our side in the planning in the first place. We then did see delays, for instance, in the civil works of the plants, because please remember, I mean, with this growth, every manufacturing site also is a construction site. So there were delays, like on, the roof was not finished on time, or the crane was not commissioned on time, or the paint booth was delayed.
As a result of that, we then saw that, in some cases, the process qualification, which is needed and which is more emphasized on going forward, the process qualification was delayed, not done on time. Then in some areas, we did see that, our recruitment was late, because the number of qualified employees were also not there. I think all these things, as such, combine the picture that we are not wanting to see, and I fully agree with you that this is a thing which is hurting us extremely badly, but we need to get ourselves around this.
We've now identified teams in each and every site, cross-functional teams, who look at the setting to work, who look at things like preventative maintenance, who look at the work planning in a way of tackling the work steps through. We look at the material flow, we look at the quality and its combination. And this is what gives me confidence that going forward, we will be able to come back on plan, however, not overnight. Yeah. But as far as numbers, for instance, are concerned, for the six sites we have this, I think in total, we are having more than 50 people or so just working on this right now, and specialists.
Cool. Sean?
Thank you. Thank you. Sean McLoughlin at HSBC. A couple of questions from me.
Mm-hmm.
Just building on the previous point, I get the priority one analysis is complete. Can you give us an idea of the 1,100 turbines that you'd originally indicated you have now completed inspection on? Just give us an idea of where you are in that overall process. And again, just trying to understand your level of confidence about no new issues coming out. The second question is more around the onshore strategy. You've talked about adjusting capacity, but there's no—I understand that maybe you fix the problems first, and then you figure out where you want to compete. I mean, does exiting the 4.X actually exclude you from certain markets? Just thinking about competitiveness, particularly in the U.S.
Well, so first of all, as I said, the sheer number of product failures on the turbine side is rather low, and that is why we have to operate on statistical models oftentimes. Going forward, we try to validate those numbers, but again, I mean, we typically look at times of responsibility over up to 30 years, and that then does not lead to too many high numbers either.
So this is why we, not only with us, but, you know, our quality task force not only consists of us, it consists of Siemens Energy, it consists of a team of AlixPartners , and we have a kind of assessment layer of the rigidity and of the correctness of the work being introduced also, which is done by the help of TÜV NORD. TÜV NORD, TÜV is a German test organization. Yeah, TÜV NORD is one of those. So this, in my view, guarantees the utmost level of, how shall I say, diligence in all these discussions.
And as I said, everything we know of, we analyze clearly and rigorously, and not everything is priority one, because sometimes also the, you know, there are discussions around, the distance between two cabinets or something, which is not the same thing, basically, in this discussion. Yeah? So, so, in my view, what we can do, we do. Yeah, what we can do, we do. And in my view also, as I said, the Q4 numbers confirm that to some extent, and also our work confirms this. Yeah, so this is, this is my, my, my opinion. Yeah. Then later on, on the markets, yes, we do see, a variety of differences between the different markets.
It's so that we have, with all the work which we have on our plate, not been able to take us through all the related questions and to the appropriate answers. So this is why those more strategic questions are planned for us to be tackled then in the near future.
Does this mean effectively that you're not speaking actively, or you're not bidding actively on any onshore projects at the moment as you've?
No. We, for instance, we continue to sell some turbines in Asia. We continue to sell turbines in India, and we also continue to sell turbines in the United States, but not on the basis of the 4.X, but rather repowering projects on the variant, which we call the 129s. Yeah? So there are, there is also order intake in Q4, but not coming from those turbines, 4.X and 5.X.
I need to take some questions from the web, and one actually fits with Sean's first question, and that was, if it's correct that the majority of the turbine breakdowns, so going back to onshore, would happen after 2030, and therefore, the cost of fixing the problem could also actually be lower than we have assumed.
Well, this is so first of all, there is a large portion of that happening at that point in time, indeed. This is what we have to assume. And secondly, this is also part of the ongoing investigations with the quality task force.
One more question.
Yeah. But is it... I mean, so obviously we try to react adequately to the timing effect of this. So if a repair or corrective action needs to happen in 35, then this is, of course, adequately considered in our numbers.
Okay, one more question from the web, which I really liked, and which was basically coming back to offshore. If you look at the demand picture going forward, the person was asking, "Shouldn't you price up much more aggressively in offshore?
Yeah, well, I mean, on those discussions, there's typically a couple of parties involved. Allow me to reference to the customer. I'm not sure. I mean, we tried this at various times. Many of you will see tomorrow presentations of Mark Becker, our Head of Offshore, who's sitting over there. Unfortunately, sometimes this doesn't really resonate well with the customer, so they still are interested in pricing from their side.
Right. Alex, over to you.
Thank you. A question from the buy side, for once. No, yeah, we haven't also been talking much about the service side, and I suppose, given the length of that backlog, it's a, yeah, an interesting perspective for the long-term margins. So I've got two sides. One, just to help us understand why it has been in such a difficult position. I mean, given the indexation that we've talked about in previous presentations, the fact that this should be a profitable business, I can't explain it just by the 4 and 5.X issues, especially given the provision should have taken out the negative costs. And the second is, you know, you've. I think in the previous presentation, it talked about project margins in the backlog in the high teens.
I presume there's sort of non-billable costs in gross margin that aren't, and that's where gross margin is maybe below that. I mean, so that's a huge delta, even to the, you know, EBIT margins you're targeting, that must be very difficult to cover just with productivity as you're talking about. So I suppose I find it difficult to reconcile that. How can you get from that sort of backlog margins to your target EBIT?
So let me try to answer the way I understood your question. We, of course, are hit by quality issues. Quality issues as such lead to additional effort, which cannot be compensated by additional income on the service side. So that as such is there. The effort sometimes is increasing substantially. Yeah, so it's sometimes even more than well, what can I say? I think sometime it's significant. I think in percentage, it's difficult to express from the offhand, but it's significant. So what we need to do is, we need to optimize our structures, try to get more productivity out of the entire spectrum of the LTPs, and by this, try to alleviate the effects.
In the sense of the quality issues, we're discussing 4.X and 5.X, and there, we're discussing a limited number of turbines in relation to, you know, the onshore part of the 82 gigawatts I'm referring to. Yeah? So therefore, I think, first of all, there are big effects, and the big effects regarding the corrective action, which happen shortly or in the near term, those effects are there. And then going forward, in my view, only productivity measures will take us back to those areas, and we have good ideas to do this. Yeah?
Will, you haven't had a question yet, so over to you.
Yeah. Thank you. Will Mackie, Kepler Cheuvreux. A couple of questions. Firstly, the investment plans. At the time that Siemens Energy bought the minorities, there was an independent study which provided a number of projections for investment across Siemens Gamesa in the offshore and onshore business. The backdrop to your world for the future now has dramatically changed. How have your investment plans changed? We've heard that it's a significant part of the group's CapEx, but how do you see that profile over the next three years? Where are you allocating the CapEx, and where have you, more importantly, pulled back from the CapEx? That's the first question.
Well, thank you very much for that. Yes, this is correct. In the past, we actually did have further plans for other parts of the world, actually, to first of all, develop new products and then also prepare for manufacturing. So that, as such, typically is quite considerable and needs to be looked at with a view on the current situation. So after Q3, the world did change, obviously, in that sense. Secondly, we have put much more focus on optimizing our CapEx spend as such. We've given ourselves a couple of challenges, and we should reduce the CapEx spend in relation to previous planning also. So that's also in there. And certainly going forward also, we will follow the guidelines, which, by the way, were mentioned by Maria.
So where do we actually spend money? And we try to reduce that to the minimum. And also, we've become much more explicit in the sense of requesting external support for investments where that's applicable. Yeah. So for instance, in parts of the world, there are structurally weak areas where, you know, for the generation of labor, additional support can be given that we focus on much more. So, in total, we have reduced basically the portfolio by a number of elements and variants. On the side of onshore, we are now readdressing the market correctiveness in various areas which we mentioned. In the field of offshore, we're clearly focused on the Mark Six.
In this context, we intend to increase, however, the needed capacity so that has a little bit of a counter effect, but these are the major points around the CapEx.
Coming back to the make-buy decision, which is the second question. You consider you have a reasonable amount of vertical integration across the business. You've made some steps to exit parts of it through the sale of Windar and the Towers business.
Correct.
But when you look across the rest of the portfolio, realistically, in this situation today, what scope is there for you to contribute to the group's objective of targeted divestments to release capital?
Well, the good news is that we typically discuss it slightly differently. So there is no such thing like you have to invest for that revenue or that many people, yeah? Because that wouldn't make sense, I believe, in that sense. But going forward, we continue to have a look at first of all some of the capacities we have. Secondly, we also, in our value chain, have a couple of activities where we feel that once they could be combined with, let's say, globally active players in that field, that would be more elegant. And that is what we continue to look at.
Um-
Yeah, so that is around the electrical business and the gearbox business.
We've already overextended, and we need a little bit of a break before Karim and Tim will talk about Gas Services and Grid Technologies . So I suggest that we cover the questions that you may have during the break with Jochen, and reconvene at four o'clock or maybe a minute or two before four o'clock, and listen to what Karim and Tim have to say then. Thanks very much.
Right. Everybody getting ready to sit down for the next session? Right. My great pleasure to introduce Karim Amin, our head of Gas Services . Karim, come on.
Thank you so much, Michael, and good afternoon, ladies and gentlemen, and welcome to the Gas Services session in today's Capital Markets Day. In the next 30 minutes, I would like to share with you how we see the development in the gas market and also provide you with some insights into the Gas Services business. And I think I want to start by looking at what has changed over the past year. And I looked at... I mean, a lot has changed. I mean, it was a very intense year, but I looked at the key factors that were important, externally and internally, that really shaped our business environment. And let me start by the external factors, and we look at security of supply.
I think there was no doubt that the war in Ukraine and, before this also the COVID pandemic, had made it very clear that we must balance the energy trilemma between affordability, sustainability, and security of supply, rather than focusing only on one aspect. And I think this has been very clear, and we believe that there is a renewed focus on the security of supply that has changed the way our customers, governments, and key energy players are planning their future energy strategies. This has resulted in a revised gas additions demand when you look at the estimations of this year compared to last year. So that's factor number one.
Factor number two is, when we're looking at gas turbines and energy transition scenarios, we have also observed that there is a change in the understanding of how our customers and the various stakeholders are looking at gas turbines as part of the energy transition scenarios. We believe that now gas turbines is rather part of the solution, rather than being part of the problem in all energy transition scenarios. Especially when you look at the accelerated introduction of alternative fuels or green hydrogen, for example, as an alternative for natural gas in the future. So these two, I would say, external factors really played its impact on the last year. Internally, and I will go into more details later into our slides.
Internally, we have really increased our portfolio competitiveness in very attractive key segments of the gas market. We have deployed a focused customer-focusing organization in an operating model that really prioritizes end-to-end accountability and helps us to be more efficient and more responsive to our customers. If we look at these four factors, and we try to see how they influence our business, operations and results, and we look in this slide at the results of fiscal 2023. But first, let me recap, what did we promise in last Capital Markets Day? This is what you see on the left-hand side of the slide. We promised that we will drive growth, that we will add new units to our fleet, building on the strong technological leadership of our portfolio, and also our hydrogen co-firing capabilities.
We promised that we will be selective, and we will focus on quality of the margin, quality of the orders. We would put focus on our service business. We will continue working on our productivity and cost out measures, and we introduced also last Capital Markets Day, our Volt organization, with reduced layers, faster response to the customers, and also harnessing synergies between the central part of the business, distributed part of the business, but also between new units and service. And that's exactly what the team did, and it worked. If you look at the numbers on the right-hand side, I'm really pleased today to show you that on the orders side, we have reached EUR 12.9 billion of order entry, and this is coming from all across the board.
We have very important contracts on the new unit side in all regions, in North America, in Latin America, in Africa, in the Middle East, but also a lot in Europe. We have also managed to renew a lot of our existing LTP contracts and added new contracts to our portfolio and to our backlog. This trickled down into the revenue, and we almost reached the EUR 11 billion, so crossed by far the EUR 10 billion mark on the revenue line. I think this puts us in a new projectile for the future as well. When you look at the profit, I think this is a great development, crossing the EUR 1 billion and reaching the 9.5% profitability coming from 6.5% the year before.
Cash has also followed, 0.9% cash conversion ratio, delivered around EUR 900 million of free cash flow. I mean, when you compare it to the last year, you see, of course, that there is a contrast, but last year had a very exceptional one-time effects with cash conversion ratio of 3.3. A lot of advanced payments were in there, but also deferred payments from special contracts. So I think on the cash side, we are also delivering ahead of our plan. I want to take really this opportunity to thank the entire team in Gas Services, but also across Siemens Energy, for delivering this amazing results. It was certainly not easy, and a lot of people have been working day in and day out to deliver this result. So thank to everybody who contributed to this.
In the next slide, I want to take you a little bit deeper and show you what exactly came out of these bookings and how it will impact our business beyond 2023. This is an overview of market share, focusing on new units of gas turbines, which is the majority of our business. And you look 2021, 2022, 2023, and when you look at 2023, market is kind of flat. But we have gained solid market share in very attractive market segments. We've sold in total 69 gas turbines, but when you look at the breakdown, 32 gas turbines we sold in large gas segment, and you see that on the HL-class or H-class , there is 12 units that has been sold in this segment. And when you look at the industrial, a lot has been sold into the SGT-800 range.
What does this mean, you know, going forward? I think we look at profitability right now at the top end of our peer group. The 9.5% that I showed you in the previous slide is the top end of our peer group in the industry. So the market share is not coming from gaining order entry without having clear focus on profitability. We continue to improve our gross margin and decide on which contracts we take and which contracts we don't take, based on the quality of the gross margin.
This high order intake you see on the H-class and HL is actually a very important aspect for us, because this is the advanced frames where barriers of entries are high, and where the reach of these units in terms of their lifetime and the service revenue that they will generate for us extends for 15+ years. So this secures our business also into the future. The units that we sold in fiscal year 2023 comes also with service potential. We did not book most of these LTTs in the same year because they take some time until you build the power plant and then get the service contracts connected to it.
But, our estimate, and some of these contracts are being planned for fiscal year 2024, more than EUR 2 billion of service potential is connected to these new units that we sold in fiscal year 2023. I think another important message is 70% of the volume of these new units is either product or system, and not turnkey, which is a very important aspect for us, because what is important is that we sell the gas turbines, we increase our fleet, and we take the service revenue out of it. Turnkey typically adds a lot of volume, but it also brings with the volume, lower margins and certain exposure to risk, especially when you look at civil and construction in high inflation, markets like we see today.
What you don't see from the number of units, but it's very, very important message that I want to give to you, is the digitalization part of our business. We booked the largest contract in digitalization that we ever had in Mexico. You will see more details about it in our booth, where we are covering more than 23 power plants in Mexico for the Mexican utility, with 60 gigawatts of asset management, and cybersecurity. So, this is going to carry us well beyond 2023 into a much better position for Gas Services going forward. But 2023 did not happen only in one year. I think to understand the results of 2023, we need to look at the context and what has been happening even before 2023.
With this, I would like to take you to the next slide, where we'll look at a couple of years. So this is a slide where we look at how we laid the foundation over the past couple of years to strategically position our business for solid profitability, midterm and long-term. We built this on three pillars. The first pillar is leading technology. I'm really happy to announce today that we believe we have best-in-class gas turbines in very attractive and key market segments. If you look at the top part of the slide, our 9000HL is the world's most powerful gas turbine. It has been recognized by the Guinness World Records, and it's running right now in Duke Energy and in Keadby, in the U.K., as the fleet leader for both 60 Hz market and 50 Hz market cycles.
This is a very important segment in the market and in high demand, and I will show you in a while why. When you look at the medium gas turbine, our SGT-800 is by far the market leader, with 75% market share in this segment. That's exactly where distributed energy plays a role. Most of the countries that are trying to ramp up quickly their energy systems, think about reconstruction of Ukraine, think about building capacities in the Middle East, think about industrial customers looking at decarbonization and combined heat and power, it's the SGT-800 that they look at. Then Christian talked about our project in France, HyFlex, where it's the first time we've had 100% green hydrogen production, storage, and then 100% firing of this green hydrogen into our SGT-400 gas turbine.
The amount of learning we got from that, and it's the first time in the world that this application is being happening on industrial scale, on a paper mill, will open a lot of potential for us also for the entire frames. So the leading technology is really allowing us to create value for our customers, and by creating value for our customers, we are also sharing the benefit and getting our share of pricing power out of that. The second pillar of this foundation is growing our service business. And in the last two years, we have added more than 150 units to our fleet. So more than 150 units have been added to our service backlog. This creates, right now, a backlog of EUR 41 billion. That's what you see on the slide here.
So we stand at the end of fiscal year 2023, at EUR 41 billion backlog. 80% of this backlog is service, and 20% of it is new units. And when you look at the service part, in the last two years, we have increased this backlog by EUR 2.5 billion. Not only that, but it was accretive to our backlog. We improved our gross margin by 1.5 percentage points in the service side. So this brings us in a very good position to look at the long-term revenues from service that is more and more developed, and also at a better position in terms of profitability. The service new units mix is very important to reach our profitability targets, and also over the last couple of years, we increased our absolute revenue from service by 16%.
So right now, we have 16% more revenue from service compared to the beginning of 2021. Once again, this will help us to reduce some of the turnkey revenues I talked about, which are more on the lower side, and replace it with service revenues, which are more predictable, long term, higher in profitability, without impacting our top line too much. The center pillar for us has been always operational excellence. There we talk about productivity. We have delivered more than EUR 800 million of productivity measures and cost out measures gross to our business. Capacities, we have our new units turnaround is on track. You remember when we talked a year ago, there was a lot of discussions about right sizing our footprint, taking some of our capacities down.
So our new unit turnaround is on track, and it's actually right now being more and more flexible to allow us to manage load swings and market dynamics. So when there is more opportunities in the market, we are able to tap into that without building fixed cost structures that would penalize us if the market scenarios goes down. Selectivity remains to be the rule of everything we do. We typically look at profitability, but also at risk exposure, and most important thing for us is the service relevance. We look at contracts that provide us with more service opportunities, better operating profile, more favorably than contracts that does not have the service relevance aspects. And customer satisfaction is our license to operate.
Christian talked about Net Promoter Score, and we are very, very encouraged to see that our Net Promoter Score improved by 25%, compared to last year, actually. Which means that our customers appreciate our products, but also appreciates the way we deliver our service and we execute our projects. So now, if we look at future... So this was 2023, 2022, and how we strategically positioned our business, for the future. But now let's look at how the market is, developing for the future. The slide is, in front of you, is split into two parts. The left-hand side is the, energy consumption, so in thousands of terawatt-hours. So this is basically looking at the existing installed fleet and how it's running. And the right-hand side is looking at gas additions, new gas additions per annum.
And of course, we have the actuals, and we have the way looking forward from 2023 until 2030. So if you look at the left-hand side, you see that in 2022, there was around 29,000 TWh, and gas was around 6. The future looks at two scenarios. We normally follow the IHS or the Standard & Poor's. Inflection case and or inflection is the base case and Green Rules . Inflection is basically looking at gas will continue to increase until mid-2020s, 2025, 2026, and then will go down, and by 2050, we'll see the lowest emissions, CO2 emissions from fossil ever. The Green Rules is more aggressive in terms of rapid adoption of renewable energy and faster exit from fossil. Both scenarios, until 2030, does not really change much.
In terms of gas, we see that gas will be utilized between 6,000 and 7,000 TWh per annum. As a matter of fact, if we look at our own fleet, the utilization of our fleet in fiscal year 2023 was slightly better than that of fiscal year 2022. So, that's when it comes to the utilization of existing units. When we look at the additions, I think you see a step change from the levels of 2020 and even 2021 at around 42 GW per annum of gas additions. And you see now 60, and then, by 2030, we're looking at anything between 57, if you-- 56, sorry, if you look at the Green Rules scenario, or 72, if you look at the inflection.
So within this range, this is what the market models expect gas additions per annum would look like. We have sized our organization to manage this swing. So we are not having capacities on the top, and we are not having capacities on the bottom. We are having the agility of our organization to be able to manage that through measures around our temporary work and also around our supply chain and so on. But what I want to share with you is our view on how these gas additions break down. So you look at four trends. You look at conventional gas additions. So these are countries building capacities because of GDP growth, because of urbanization, whatever, and that's in 2030, the 40% part you see in the bar. And then 60% of the new gas additions is split between three other trends.
It's the decarbonization of coal and oil assets into gas. It's the largest part, 40%. 50%, as—excuse me. And then you have building capacity with hydrogen or green fuels, around 40%. And then you have gas additions for peaking applications to complement the fluctuations of renewables. So these are the four trends we see in the market that impacts the new gas additions. And if we take that and try to just have a global view of what is happening where, right? On the conventional gas additions, of course, China remains to be the single largest market, around 35%, 30%-35% of the market, and they are adding more than 200 gigawatts of gas in the next five years.
But not only China, I mean, we see now Saudi Arabia building 40 gigawatts of gas as well, and some other parts of Asia, especially in growing economies. So there are focused markets in this area, where we just follow, you know, the demands of the countries. Coal to gas or oil to gas shift is the second trend, and there you see it very clearly in Europe. You see it in Germany, you see it in Eastern Europe, you see it in the U.S., you also see it in Korea. And you see some numbers in Europe, we expect more than 35 gigawatt of coal to gas shift, as well as half of the capacity of Korea is announced already to follow this trend. And then there are certain...
The third trend, there are certain countries that really adopt the hydrogen economy. Germany is clearly one of them. Germany announced, and is already tendering and awarding anything between 15-20 gigawatts of combined cycle power plants that needs to be hydrogen-ready by 2030, 50%, and 100% hydrogen-ready beyond 2032. Also U.K. is following the same track and having a strategy with regards to hydrogen-based gas turbines. And last but not least, is this renewable integration. You see it in the U.S. big time. You see it also in Ireland, in the U.K., and other parts of Europe. These five trends, four trends, service gives a service volume, maybe let me finish there. Gives a service volume with new demand, but also with longer reach.
These opportunities, we look at them in this slide and see what should we do to make sure that we maximize our benefit out of these opportunities, but also manage the risk associated with it. Clearly, on the growth on gas, we see step change, especially in the large gas, moving from 70-80 units per annum to more than 100 units per annum. And this is really a topic of how do we manage capacities? How do we manage risk exposure? How do we improve our supply chain resilience? Topics like dual sourcing plays a role, technical validation plays a role, safety stocks. So management priorities are very clear around these topics for managing the gas growth. Service is the second opportunity we see, and there is an increased demand for modernization, for lifetime extension, and for digitalization.
There, we need to look at how our customers are making their money now, and this model has changed. Cyclic operations provide different opportunities for our customers to charge, you know, as operators to charge their customers, and we need to provide them with new service models that takes into consideration stop and start cycles, lifetime extensions of nuclear power plants. In many parts of North America, there is an extension of more than 40 years of existing nuclear assets, and this needs modernization upgrades, also digitalization and asset management. Then decarbonization of power and heat. Hydrogen, I talked about, but also heat pumps and district heating. There, we are looking at focusing our R&D investment, and Christian talked about how we allocate our R&D investment with time to profit, size of the market, et cetera.
But we have very focused investment in R&D, and we will continue to do so, to do so, to provide technologies for the energy transition, to expand our service capabilities, and also to tap into the heat pumps market that is exponentially growing. I want to give you, like, 3 quick examples of these opportunities that I showed you, turned into real business in fiscal year 2023. First one is Mintia, a power plant in Romania. It's a coal-fired power plant, 1,700 MW, but we turned it into gas. It's under construction right now, booked in the beginning of fiscal year 2023. It's going to be one of the most efficient combined cycle power plants in Europe, saving more than 6,000 tons of CO2 per annum.
We sold in fiscal year 2023, more than 21 gas turbines for coal to gas applications, and in their life cycle, they will reduce the CO2 footprint by more than 500 tons of CO2 over their life cycle. Hillabee is in U.S. It's the first large gas turbine that fires up to 38% of hydrogen for Constellation. This is more than 10 years old. It has been built in 2010, and it really opens the potential for us to upgrade many of our fleets with hydrogen co-firing. We have more than 1,600 gas turbines in the world, in countries where hydrogen strategies and regulations is being adapted to be used for co-firing. And last but not least, we have Castlelost in Ireland with our SGT-800. I talked about this machine.
5 units has been put there for peaking application. As I said, it also opens for us new horizons in terms of our service models and so on. When we look at all these opportunities, and we look at where are we going for 2025 and 2026, I think it's very clear we have made a step change in our top line. We crossed the EUR 10 billion+ in revenue. We intend to stay flat there and improve our profitability by improving the new unit service mix. We are on our track for the 10%-12% of profitability in fiscal year 2025, but we intend to reach this and stay there. We are still working on key focus areas to ensure that when we reach this box, we stay in it, and these are the 5 focus areas you see in front of you.
It's growing our service backlog, it's increasing the competitiveness of our portfolio and cost out. It's the operational excellence and managing our productivity, as well as our capacities, remain very focused on selectivity and offer top-notch decarbonization, innovation, and technology, to our customers, especially in the area of, green fuels and carbon capture, as well as, heat pumps. In a nutshell, I want to conclude by saying, we believe that, we are well on track to achieve our 10%-12% profitability by fiscal year 2025. We are, seeing a robust gas market with stable long-term prospects. We have leading technologies that enables us to perform in terms of efficiency and power output, but also in terms of hydrogen co-firing capability, better than many of our peers, and we will continue to grow our service backlog and decarbonize our fleet.
With this, I would like to conclude my presentation and invite Tim to take us through the Grid Technologies. After his presentation, we'll have the opportunity, both of us, to take your questions. Thank you for your attention. Thank you so much.
So also a warm welcome from my side, and I will start a bit differently with a short video that shows the journey of an electron, and gives you a bit of a glimpse of what we do in Grid Technologies. The video, please. The light is on. So what I want to do in the next 30 minutes, take you on an equally exciting journey on Grid Technologies. I can really tell you, the whole team and myself are really energized about the opportunities we see. Just to start off, a lot has changed since the last CMD, a year and a half ago. Grid Technologies used to operate in a market that was growing 3%, 2%.
Last year, we have already seen the increase to 5, and now we see the long-term potential on the Grid Technologies market of 10% CAGR until 2030. So market has doubled since last year, and you can also see it in the achievements that we have had since the last Capital Markets Day. We had a doubling of the order entry since 2021. You see, we started at EUR 7.3 billion. We finished the last year very strongly at EUR 15.8 billion order entry. And it's not just the large HVDC projects that you read about, the TenneT frame contract, the Amprions, and so on. We have seen an equal increase in orders on the product side and on the service side, so growth throughout the whole portfolio.
And you see that in the doubling of the order entry backlog, but you also see that the revenue has been growing much faster than we anticipated. And we've seen that double-digit order growth, and you see that also in the outlook that Maria has presented. And of course, we're not just doing this for orders or revenue. Also on the profitability side, we're very close also to reaching the 25 profit margin guidance. And also equally important, we're raising the target for 2026 to 9%-11%. And if you look on the right-hand side, this also comes with a really nice development on the free cash flow. You see the CCR, and this is also driven by the large project business, but you also see it in the product business.
We have customers in the US that are paying reservation fees for transformer deliveries in 2-3 years out just to secure their slots. So really strong momentum, and we want to capitalize going forward on that. Just a bit of deep dive on the market, and why do we have the 10% CAGR market growth in the next years till 2030? One, and we've talked about it, the grid in the developed markets is getting old. The majority of the grid is older than 20 years, and it needs upgrades, replacement, in order to cope with the big influence of renewables. We used to have grid investments of about $300 billion a year, and that hasn't changed the last 10 years.
But you also know we have added massive amounts of renewables to it, over 2,000 gigawatts in the last 10 years, and now the grid has to cope with it, has to connect these offshore wind farms, has to transport the electrons over large distances, and you have to keep the grid stable. And then you look at the projections, 200 gigawatts of offshore wind that needs to be added, quite also onshore wind, solar, and so on, and the grid has to keep pace with it. I think the last Capital Market Days, we showed a slide on the investments in Germany, the TSOs. And back then, I said, TenneT is increasing the CapEx from EUR 2 billion a year to EUR 3 billion a year to EUR 5 billion a year. A year and a half later, they're at EUR 8 billion a year investment.
Similar National Grid in the U.K., GBP 42 billion grid investment by 2026. So the numbers, also from the customer side, the CapEx plans support that long-term growth that we see. And if we unpack that a bit, so the graph shows you how we look at our addressable market based on the products and, solutions that we have. And you see that big increase from 2022 to 2023, largely driven by the European market, but you also see the long-term growth. And it's not just Europe, where we see a lot of activity, it's also the Americas and APAC. A bit different focus on what's driving it. In Europe, very much on the offshore and onshore HVDCs and the grid stabilization. The U.S., a lot is driven also by the aging infrastructure, but also grid stabilization and the first HVDC projects that we see.
And then APAC, a bit of a different picture. India is starting, Australia is starting. You have the offshore markets in Taiwan and Japan that are coming, and all supported by policy. And we have the European REPower EU Act, we have the IRA, where we believe Americas will come now very strongly, but also in APAC, the underlying policies. So if you look at the current revenue, yes, Europe is leading, but with what we see also in the other regions, we're gonna expect much more balanced picture going forward, also from the Americas and APAC. Equally important, in order to manage that growth for Grid Technologies, what we started to do is, how do we do the portfolio measures to make our portfolio future-proof? And there's three parts to it.
We looked also at exits, and you can say, why would we divest part of the portfolio if there's such a strong growth projection? But we also looked at the lower end of the portfolio. We looked at, is there a strategic fit, as Christian described in his opening speech, and we also looked what are the profit contributions. So the first one, and we have been working on this over a year, was the divestment of the Trench and HSP portfolio. Very fragmented market, over 300 competitors, medium-sized companies that we work with, and also from a complexity in terms of technology engineering, probably not the same level that we have with the large power transformers. The second, and we just signed the term sheet two weeks ago, is the distribution transformers. Also a market that's very fragmented, smaller size, much shorter cycle times.
We hope that in our next six months, we're gonna finish the JV contract and have that up and running, the next fiscal year, so October first, 2024. So that also that part of the portfolio will be, no longer with us, but managed by a joint venture. That will reduce the number of factories we have in the portfolio by 50%. So we wanna go—we will go from 43 factories to 22 factories in the network. Less complexity, less investment needs, much more management focus on driving the growth in the large and medium power transformers and the switchgear. The middle box is all about how do we invest? Christian already talked about the acquisition of Pro.Integris , which is a substation automation company, engineering company. It's one of the bottlenecks, where do you find these qualified engineers?
It closes a gap on our digitalization portfolio, and it also helps our customers. The other one, equally important, was Mitsubishi Electric on one of the future technologies, the DC grid, where we're gonna do a joint development on DC breakers and DC switching in order to also be prepared for the second stage of the HVDC build-out. And then the right-hand side is about partnering. One is, how do we expand our portfolio on the software side, the grid control software side? PSI, a leading software company in that field in Europe, where we use their core software and then build on it with value-add services, and we're gonna enter the US market jointly in order to also have that offering. The second is a bit more on the supply chain.
It's about decarbonization of the grids, and we have more and more requests, what are you doing on your scope one? How do we make sure your transformers are greener, where we work with ThyssenKrupp on the green steel, also to take the carbon out of our products. So if you look ahead in terms of what portfolio do we need to tackle the energy transition and the grid opportunities, and it's all about how do you manage a grid that gets more complex and that gets more instable? You can see the splits between product, solutions, and our services and digitalization. On the product side, clear focus. On the transformers, both large and medium size, highly engineers, highly complex products. It's about switching, and I will go a bit into it on one of the next slides.
Also, on the Blue portfolio that takes SF6 out, and of course, on the converter towers that are needed to drive the HVDC connections. On the solution side, the focus clear here is on HVDC, both onshore and offshore, and at the same time, on grid stabilization, including our storage technologies. And then last but not least, it's about services and digitalization. Services, really driven by the high refurbishment need that we see in the grid. The HVDC build-out, that comes also with service frame contracts, the customers that don't have the service teams to do the service, and then also more industry players coming in that don't wanna do the service. So also, here, a clear focus on those service activities. Not as big as Karim's, but also growing with a nice margin.
And then the last, one of the smaller businesses, digitalization, but it's all about how do we help our customers to get more transparency on the data, on the operations they have? How can they control the grid better? How do they also get more out of the assets without adding necessarily more products, more solutions? And I talked about the switching part, and here, a big need of our customers is also how do you decarbonize the grid? And the one part that's a main concern is the SF6 they use in their switching equipment. SF6 is a greenhouse gas that's 24,000 times more harmful than CO2, and it's a huge issue. We have talked a long time about substituting the Blue portfolio. Had discussions with some of you that always said, "Yeah, you always talked about it," but the market is ready for takeoff.
We have seen, and Christian presented it, the orders that are coming in the US, even China, but also with the ban in the EU on SF6, starting in 2028, that market will take off. It's a EUR 7 billion market, and we have the technology that has zero greenhouse gases, zero SF6 in there. We have competitors who have a bit of a different solution, but they're not zero, and it comes also with other drawbacks, like the PFAS discussion that we have. So overall, also on the switching side, which is a very competitive market, we have the technology to finally make it happen. Then the other big part is HVDC. We talked a lot about these large projects. I think the important part that I want you all to take away, that market is gonna increase sixfold till 2030. Sixfold.
It's gonna be a EUR 38 billion market. Now, the question is: How do you tackle the market? It's a market that currently in the US, EU, has three major players. So it's a very limited market. Lots of customer demand, but it's also, how do you tackle that demand with the right risk and reward balance? One thing I wanna make sure everybody understands, in those projects, over 50% is actually products and software that, that we do. It's not all these big projects, these big platforms, these big converter stations. A big portion of that is proven products. It's transformers out of our factories in Europe. It's switchgear out of our factory in Berlin, and the software and converter towers that come out of our factory in Erlangen. We also have-...
An extensive experience and a learning curve that we went through, and we'll come to that on the offshore side. But we have done over 70 projects already, over 115 gigawatts of connections that we did, different countries over a long time. So a proven team that is implementing those projects. And over the last year and a half, we have worked on the terms and conditions. If you compare a contract we took 3, 4 years ago, to a contract that we're taking nowadays, you will see much more balanced contract conditions in terms of LDs, warranties, and so on, that we take. And this is also something that we're very selective.
One is pricing, but the other one is also terms and conditions, because with that order growth, we need to make sure we have contracts that we can execute on, and that don't expose us to major risk. The other big part, of course, in the growth is the offshore platforms. Over 200 gigawatts of wind that needs to be connected. And as you see on the left side, this big yellow box, the offshore converter platform, the 2-gigawatt, that's the new standard in the industry. And in order to connect all the offshore wind, we will need over 100 of these platforms till 2030. Three major players in the industry. The platform overall is about EUR 2.6 billion. Half of that is Siemens scope.
This, in order to tackle this, this is all about how do we do industrialization of the industry. Started also in very close collaboration with our customers. We set the standard on the 2 GW in Europe. The U.K. is on 1.8, but we also said we're only gonna do certain technologies, certain sizes, in order also to manage the growth and to get it done. The second piece, equally important, is how do we select the right partners? We have worked with two yards, one is Dragados in Spain, the other one is Aker Solutions in Norway. With the growth that's coming, we're looking at three more partners, but this is also in conjunction with our customers.
They understand qualifying a new yard requires a ramp up, and that's also reflected in the contract conditions, how we look at timelines, how we looked at delivery dates, equally important. So de-risking that approach, and at the same time, also making sure we only take the scope that we understand. And you see that on the right-hand side. Those are standard products that we do. It's the transformers that we have been producing for a number of years in Nuremberg. It's a converter towers that we built for a number of years in Erlangen. It's a switching, both AC and DC, all proven technology, and that's the learning curve that we also had from the excellence projects from 2010, that we only do the scope that we understand and that we're comfortable with. The other exciting part, and we talked about it earlier, is on grid stabilization.
And it's not just about connecting the renewables, it's also about how do you keep the grid stable? And I think there we have a unique product offering that I don't see any of our competitors have. It's a market, by the way, that grew in the last two years fourfold, and the projects are also getting bigger. And you basically have two options how you do grid stabilization. You do it with STATCOM, which is based on power electronics, on converters, or you do it with a SYNCON. And a SYNCON is a large rotating mass that actually Karim is building in Mülheim, which is a large generator. The innovation that now comes is that if you combine a SYNCON with a battery storage, you actually meet the customer demand and can not only do the stabilization of the grid, but also the energy storage.
We just booked the first order in Ireland, Shannonbridge , EUR 80 million, but it's also a unique combination because Hitachi doesn't have business that manufactures generators. So the combination also allows us, together with the ability to integrate and do the grid integration on the software side, to also participate in that market that we believe is equally big, has equal growth rates going forward, than the HVDC. So at the end, it's not just about all that opportunity in the market, but also how do we execute on it? How do we make sure we have that stable, reliable, operational approach? Left-hand side of the chart shows you our order backlog, EUR 23 billion. It grew EUR 8 billion from last year. And you see that large portion on the left side, the light blue, which is grid solutions.
Keep in mind what I just showed you on the earlier slide, 50% of that is products and software. So at the end, it's about how do we ramp up capacity on the factories? How do we scale on an industrial level to make sure we can implement all these projects, and how do we get the headcount on board? And we have done on the expansion of the factories, three things. We look, how do we get more through the factories without major CapEx? Introducing new shifts, optimizing the flow, and that's one of the areas that we tackled early on. Then it's about de-bottlenecking factories, where, for example, adding a second test field in our factory, transformer factory in Mexico, because that was the bottleneck.
The rest, and then we can increase the output significantly by just adding one off or removing one of the bottlenecks. And then the last one is adding new capacity. And we will build a new factory for large power, power transformers in the US, and we're expanding massively in India, together with Siemens on our Indian factory for the export business. The other one is, you will ask, where do we get all these qualified engineers? Where do you get the headcount? We have about a need of 3,000 people until 2026, qualified engineers, and here also, we're ramping up in all our major locations, Germany, UK, US.
At the same time, also using India as a competence hub, and Vinod will touch on it a bit later, as well as working with partners like Quest that can also ramp up quickly on engineering resources. And with all that, we're very confident that we can participate in the 10% growth of the market. It's really about how do we focus on these attractive markets, what I just showed. Exit, where we believe we don't have really that competitive advantage, and concentrating on the parts that are growing rapidly. It's about scaling, it's about maximizing the capacity, and it's also keeping the focus on the operational process improvements. Also, we're very confident by 2026, we have the double-digit revenue growth. Already talked about the margin rates for the midterm target to 9%-11%.
At the same time, we'll also increase our R&D to 2% in order also to develop the technologies that are needed, for the future, and about EUR 600 million in CapEx to expand the capacity in the factories throughout the network that we have. And with that, I would ask Karim back on stage for the Q&A. Thank you.
Right. Thank you. Thank you, both of you, Tim and Karim. I think I'm right?
Mm-hmm.
Yeah. Shall we?
It's Sebastian from BNP. It's a question on grid technologies and the growth path ahead. So you guided for the double-digit growth through 2026, and you have also introduced the 20% organic growth for 2024. So how should we interpret this very growth rate of the double digits? If you could qualify that, especially in wake of the doubling in the total addressable market. You have also then been talking about the EUR 7 billion order intake in 2021, up to EUR 16 billion in 2023. So if you could also comment on your pipeline to just better understand where you could take the business more structurally.
Yeah. I think it's a bit of a function of when is what growth translating into revenue, and we're gonna see that earlier on the product side. A lot of the big projects where you see the announcements, they are coming at a 2026, 2027, 2028 time frame. But you will also see that for next year, when we have the margin range at, you know, around 20% plus/minus. I think at the end, it's all how that translate into revenue and kind of in that range, that based on timing, when the big projects come, and with the underlying very solid product growth. So kind of keep it in that range compared to what we... in relation to what we showed for 2024, for this year, for revenue growth.
You are talking of 20% also going forward?
I think it's a bit lumpy because the big projects are in there, so some years it might be a little less, some years might be a little bit more, and it depends also on the momentum and how fast we can expand capacity.
Cool. Ben, Will, and then Phil. So Ben, Ben, Will, Phil.
Two, two questions, both kind of about capacity. And Karim, we spent the last 10 years right-sizing the power gen business for about 70-80 units and 35 GW, and now suddenly, we think that the market might be 100+ units and 60 GW. I'm assuming that you and your competitors are not about to turn around and start adding capacity. There's only so many shifts and all that stuff that you can do. So, so at what point do you get into a volume bottleneck situation, and, and what does that mean for your, for your margin progress? And I guess there's a sort of similar, slightly related question for Tim. The last time we had a big power wave in transformers, in high voltage transformers-
Mm-hmm
T he Chinese companies were basically nowhere. They couldn't do 900 kilovolts-
Mm-hmm
Plus. Now they absolutely can.
Yeah.
If you don't add capacity and others don't add capacity, what's the risk that these things start arriving on boats, and we actually begin to see proper, 'cause it, we were all worried about it last time, proper competition from the Chinese?
Let me start quickly. Absolutely right, and I mentioned this: we don't want to build fixed capacities, and then if the market, you know, turns after 2030, then we restructure again. So, we actually introduced certain level of agility and flexibility in this 70-80. So, and it's about supply chain. And you're right, it, it reach a certain point where the supply chain can only do so much, and then comes the element of selectivity. Then you'll just select the best, out of these contracts, which gives you the service relevance. I mean, some contracts have, very good operating profile for service, and some contracts don't, right? So we look at that, and, and we put this into consideration. Christian talks about terms and conditions, so we just go into selectivity, this way. Yeah.
Tim?
So really good question. That's also, you know, the Grid Technologies team is—we're looking at it. How fast can we expand in order to also meet a customer demand who is very reluctant to buy from China? So in the U.S., it's a no-go, certain parts of Europe as well. But as you said, if there's no option, they have to look elsewhere, and that's why we're so much focused on how do we work in the network and how do we also, for example, channel some of the slots out of the European factories that go in other markets to China. One example is out of our own Chinese factories, to the Middle East markets and keep our slots for Europe and the U.S., and then the rapid expansion. We can do it fairly quickly in India.
We have an existing operation at U.S., but we also have, for example, in our other factories like Brazil, we have more slots. It just takes a bit of convincing for the customers to feel comfortable not getting everything from Nuremberg, but also some of the others. So we're watching this closely. We're keeping our customers in a close dialogue to make sure delivery times don't get too long. And so far, with the plan we have laid out, I don't think that's gonna be an issue.
Thank you, both. Will?
Thank you. Two questions on Grid Technologies, please. The first, just to help us understand how we should think about pricing.
Mm-hmm.
Certainly, large elements of your portfolio have high content of electrical steels and-
Mm-hmm
O ils. So what contribution was the price across the group of the 17% growth that you achieved?
Mm-hmm.
When we look at your growth projections, what are your working assumptions for, you know, that going forward? If there's a large deflation of some of your input costs or inflation, how will that affect your-
Yeah
P rojections?
So pricing, probably say it's about a third of it, that affected it, and we've seen it on the large projects, and that's driven by also the cost increase. We don't see... I mean, and a lot of it is also now going forward index on commodities, copper, steel, and so on. But we also have the discussion, when is it gonna come down? And the question, we don't really see, with the scarcity in the market, the prices will come down significantly. We still have a bottleneck on engineering. We, our supply base, isn't adding that much capacity that you see an oversupply. So we expect pricing to be stable or even going up a bit further on what we see.
Thanks. And the second is, on the operational gearing aspects of the business, you're making a very positive growth projection against an extremely positive marketplace, but your margin expansion is only, you know, 150 to whatever that is, 250 basis points against that growth. So where is the operational gearing in this business in areas like HVDC, where you have a duopoly, stroke, oligopoly, and it's exceptional technology?
Yeah.
Yeah.
I mean, one, as I said earlier, projects are longer term, so, I mean, what you see in there is 2026 targets. And a lot of the projects we've been taking now, even the TenneT projects, the Amprion projects, they come twenty – they're starting in 2026, 2027. Second piece is we're operating in a regulated market. I mean, it's – there's also so much, you know, you can push pricing where you see pushback in terms of the regulator and our customers. So it's a bit of a balance. But overall... And then also the CapEx, the investments. For example, on these big projects, we're gearing up our project implementation teams, the engineers, and for time being, we have basically teams running in double the size in order to get the experience base through.
So there's a couple things in there that we need in order to manage the growth. And, I mean, margin expansion at this growth rate, I think that's pretty good. Normally, you see growth rates and very little profit, right? So.
Cool. Phil?
Yeah, great. Thanks. One for Karim, one for Tim, please. Firstly, 10%-12% margins is obviously progress from here, but it doesn't necessarily feel like a ceiling from the outside, given all the work that you're doing from a selectivity side on the OE side. So is there a reason why 12% is a ceiling? Is there upside risk to 12%? Yeah. I think we again, it's a time, it's a time horizon, right? So we look at 2025, 2026, and that's where the guidance is. The business mix between units and service plays a major role in how you step up into this profitability. And we've seen the order entry in 2022 and 2023 has been EUR 12 billion plus.
So we need some time to get this service backlog I talked about really turned over, and then reduce bit of this revenue that comes from turnkey, and then you, you are really flying in this flight level of 10-12%, and then you add, let's say, the next level of performance. Part also of the restructuring, I think, Ben talked about is still not yet done. So Maria explained the AIP, and big part of this AIP is still happening. Cost is coming out of our organization in 2025 and 2026, so we are still sitting on, on this cost. I think that's the guidance right now. We'll see how the market goes, and I think we are constantly, of course, monitoring this.
Okay, thank you.
Yeah.
The next one, obviously, there's a lot to be excited about in grids. Backlogs have grown massively, but the fiscal reality is pretty tricky, I guess, for a number of governments. Is there anything in that backlog that is not firm or cancelable or anything that we should think about from that standpoint?
No, and, I mean, you heard about Ørsted in the US. We're actually doing a project with them, Sunrise. It's, you know, they're now starting to build the platform, so that's gonna go ahead. You heard about the Vattenfall, and maybe you've seen it. We just signed the order, not for the first layouts, but the Vanguard East and West. So it's moving ahead. So we haven't seen it, and you can almost say sometimes what we see in the US is actually good for the market, because right now, when we look at slots, they are twenty. For HVDC offshore grid access, it's twenty, thirty-two and beyond. So little bit less pressure on the market actually helps all of us to build up the necessary capacity and fulfill what's already in the pipeline firm and in active bidding stage.
I'm not worried. It's as we said, there's so much that didn't get invested in the last 10 years, and there's so much of a catch-up just to get the existing projects connected and the power delivered, that we feel very comfortable with the visibility we have.
Thanks.
Akash, over to you. Let me just-
Yes, hi. It's Akash here from JP Morgan. I have two questions on Gas Services , please. The first one is on your flat growth target in the medium term. You presented your outlook on the in new equipment, which was arrow going upwards, backlog in service is going up, and there will be some inflation adjustment to service contract, and nobody expecting inflation to go negative. So why you are not targeting more, like, low single digit growth and instead targeting flat growth? And second one, on Gas Services , Karim, at a couple of times, you mentioned about new service models. Can you elaborate on-
Sure
what these new service models are and how big driver
Sure
For growth and margins they could be?
Sure.
Okay.
So I think on the flat, we are looking at a new level of revenue line. I mean, we have been around EUR 9 billion in 2021, and now we are EUR 10.9 billion, right? So at this level, it is flat, right? Because, again, of this mix. I mean, we can add, we can get more contracts on. I mean, Ben talked about the market and so on. But the more you get from the new units, the more you press, you don't get it on the same levels of service.
So it's really a balance between you want to keep the new units running into your fleet to make your fleet younger and longer and so on, but you also want to observe, you know, this mix. I also want to caution everybody, there is also a lot of cost increase in the gas market, right? So when you look at supply chain and you look at the aviation industry and so on, there is a lot of bottlenecks in the supply chain, and it also pushes the cost up. So we are also careful with this aspect as well.
New service models, typically, in the past, you run base load, and any contract that runs, like, 8,000 hours a year is a great one for, for service, and then you charge your customers accordingly. This is how the customer used to get paid in their power purchase agreements. Today, you have a lot of peaking, you have a lot of stop and start. You have a lot of anticipation of how the renewable, load profile is gonna look like, and those customers who are available and ready with their capacity to dispatch when, the opportunity comes, they really make a lot of money. And we've seen this happening, by the way, in the UK, big time, you know, when, you had the low wind times, a year ago and so on. So we...
The new service models is to try to enable our customers to anticipate when these windows of opportunities will come, make sure that their machines are available and dispatchable, and also align how we are charging our service fees in sync with how they are making money in this new environment. That's the new service models.
Gael, you had a question?
I have several, actually. So maybe two for, for team to start.
Mm-hmm.
What's today the size and the profitability, roughly speaking, of your distribution transformers business that will end up in a minority JV for you? And secondly, how confident are you you're not gonna end up in a kind of a growth crisis, echoing the one we've just, I mean, we are seeing at the moment in offshore wind, especially perhaps around the challenges you may have-
Mm
on recruiting talent. So I guess my question is to try and understand the fundamental differences between, you know, wind and offshore and perhaps if you are actually in competition, you know, the two of them, to attract the talent to your respective businesses.
Mm-hmm.
So, first one, about EUR 500 million of revenue is gonna go into the joint venture on the distribution side. What we're not gonna do, is put our traction and the fluid immersed transformers into it, which we use on offshore wind. Also, was a clear focus because I think it's also important to keep that in the family. Profitability in that segment, if you look at McKinsey, it's about, you know, 5%-7%, going forward. And of course, I mean, it depends also in the joint venture, it's a, it, it's a large industrial partner that we seek, very lean, very little cost structure. So I think that's also compared to what we now make in a market with a lot of tailwinds, even ahead with a lower structure.
I think it's a market that's still very attractive and for a very entrepreneurial player, maybe we can even get up to double digits. Second one, I guess I didn't do such a good job in explaining what we're trying to do to industrialize it. And that was the purpose why I showed you the offshore substation. What we put in there is not new, it's not new technologies. It's existing transformer designs, it's existing switching products, it's existing converter technology. At the same time, I talked about software. We upgraded the software platform, but we're implementing it right now. So Viking Link, which connects Denmark and the U.K., is actually one of the first projects where we use that software platform. It's in the commissioning phase. The software is running stable.
So what we're gonna do going forward is existing technology, existing platform, software that we put in there, with very carefully selected partners on the yard side, and everybody does their scope. We push some of the scope out to the customers, like installation, which we don't take, but the customer takes, and at the same time, also being very strict about what T&Cs we accept. So that's the mitigation strategy, and a lot of copy and paste. We just signed an order on one of these onshore HVDC links in Germany. It's basically a copy and paste of a previous one. So also they are very much coming from a customized approach, where each platform look different, where each HVDC connection look different to copy and paste, and just using the same technology.
In terms of talent, I think it's a bit of a different profile that's needed on the wind side versus the grid side. I mean, a lot more controls and protection we do. I think Vinod can answer the question on the project implementation later on in his presentation. How do we look at talent on the execution side? But currently, we don't really see it, and that's also why... I think what concerns me much more is the war of talent between us, our competitors, and the customers, because the customers are equally ramping up. And that's why we concentrated also on partners like Quest and India, to build up really the competence. 'Cause the European market is pretty empty for these type of skills that we need in order for the grid built out.
Okay, we're running over again, but two questions. One goes to Sean, and then the next to Alex. So Sean, maybe if you start, so we sweep across the floor. Getting Mike.
Thank you. Thank you. Two questions for me. Firstly, Tim, where was I? Oh, yeah, sorry. Reservation fees, that was the point.
Mm-hmm.
So it's remarkable that you're getting such upfront visibility and such appetite from customers to reserve ahead. We're seeing this in other high voltage segments as well, in cables, for example. I mean, is this... Is this a peak of the market? Are we looking at a, I guess, a little bit of just a fade next year in terms of order flow? Or is this, you know, such a strong structural move that whatever new capacity you build-
Yeah
A nd you have such confidence in the pipeline that, that, that's great to work with.
Yeah. I could let Ben answer that because he talked about the super cycle last time, but so I stole it. Now, we see that. I think it's the limitation I have with capacity and capacity ramp up, because I think at one point, delivery times just get too long, where customers get either very nervous or they look for, you know, elsewhere. And that's why we want to give them confidence with the ramp up and the discussions we have with them. What do we do in debottlenecking, getting more capacity through, and the additions? So overall, with the project pipeline we see, and at the end you have to connect all these renewables, and you have to keep the grid stable.
I don't think there is another option, because the electron has to go from A to B. And it's not only Europe, the U.S. is coming, we see it in India, we see it also in other parts. So for me, it's a structural shift in the market. It's catching up to the investment levels needed, plus what goes on top of it in order to build the foundation for all these renewable additions.
...Thank you. And a question for Karim. On the hydrogen-ready turbines, it is quite a large proportion of the 2030 market size.
Yeah.
We know that hydrogen has struggled a little bit, you know, to accelerate. I mean, how concrete do you think that market segment looks? Or is hydrogen-ready actually just a switch that you can flick on an existing gas turbine, that allows you an easy, an easy retrofit? Just any color on that.
It is an easy retrofit, right? So it's not a switch that you flip because you also need to look at the balance of plant, not only the gas turbine, but all the systems and how, I mean, hydrogen is highly flammable. But it's not really something that you would need to think about. It's prohibitive or something. We have already reached levels of hydrogen readiness that the industry is not able to cope up with. So constantly, we are asked the question of: How much hydrogen can your gas turbine burn? And we only always answer and say: How much hydrogen do you have? Or whatever you have, tell us, and we can burn it, right? So, I think that's not an issue.
Okay, last question goes to Alex.
Thanks. Yeah, Alex Berger, BofA. Tim, I wondered if you could just dig a little bit into the distribution transformer JV point. I'm quite intrigued by that because the growth that we're seeing on the medium voltage end, the distribution end, is as strong. And is that just a question of we want to focus on the power end and the transmission end, and we're not the best owners of that technology? I'm just trying to understand the dynamics 'cause-
No, it, it's one part, and also, if, if you look, go back a bit on the history, 3.5 years ago, when we did the carve-out from Siemens, we got the distribution transformers. Everything else, distribution, stayed with Siemens, and, and also the parts are even a bit more profitable than the transformers. So for us, it was much more... We needed on certain industrial applications. I think traction is one where we feel we have a very strong position, also on the wind side, but doing pad-mounted transformers , for example, to connect small solar fields, it's, it's, it doesn't fit our approach, and we're missing all the other pieces that would make it worthwhile from profitability and solution approach.
Thank you very much. Thanks, everyone. If you reconvene at 5:30 for the last session with Anne-Laure and Vinod, so we've got 10 minutes break. Thanks, everyone. Thank you both.
Thank you.
Right. We're now heading into the last session. I'm trying to get Anne-Laure's attention. So, yeah, so off to the last session, we're gonna have the session on Transformation of Industry , Anne-Laure de Chammard . She will start before Vinod will be talking about the global functions. Thank you, Anne-Laure.
Thank you, Michael. So hello, everybody. I'm very happy to be presenting Transformation of Industry, and I will first take a little bit of time to present who we are and what we do, because I know we are a very diverse business. So we support industrial process decarbonization through three levers: energy efficiency, which is tackling the need, the brownfield need of our customers to be able to consume less energy. Electrification, which is the conversion of our processes from fossil fuels to electricity, and hydrogen. This is more specific for the hard-to-abate sectors, where the processes cannot be easily electrified, and there, they convert the fossil fuels to hydrogen and e-fuels. So we have four businesses to address these levers. First one is steam turbines and generators, STG. There, it is tackling the efficiency topic by, for example, converting the heat back into electricity.
We have electrification, automation and digitalization, which is electrifying the industrial processes in maritime, offshore, and process industries. We have sustainable energy systems, which is producing the electrolyzers and the Power-to-X systems to be able to produce green hydrogen and e-fuels from the green electricity. And we have compression overall, which is spanning across the three decarbonization levers, which is transporting and storing the fuels, be it natural gas, heat, hydrogen, or compression. And it's important to note that compression has today the largest fleet in hydrogen compression, hydrogen compressors and CO2 compressors. So overall, it makes up for EUR 4.4 billion revenue and EUR 7.1 billion backlog, with four balanced businesses, with SES really poised to grow. Let's see now what has happened since the last CMD, two years ago. We've been through a huge turnaround.
We've been going from -2% in 2021 to +5.1% in 2023, ahead of plan. And this has been possible through the huge work and structural transformation that has happened and that the teams have been able to lead. We've been able to save EUR 570 million of structural changes that will continue year-over-year. What are the three drivers for this transformation? First, footprint optimization. We've closed and right-sized 11 manufacturing production sites and service workshops. Second, portfolio streamlining. We divested from underperforming or non-core businesses, such as water solutions or our engine business. And third, operational excellence by improving productivity, quality, and delivery time.
This huge transformation has really enabled a step-by-step continuous improvement in our profitability of more than 700 basis points ahead of plan, and this is securing the fact that we will reach our target in 2025 and even raise it further in 2026. Let me now zoom in each of the four businesses, 'cause I think it's important to give you, as Christian and Maria were saying, that businesses are very different, so it's important to give you the right level of details to understand how each of them behave. So first of all, you have STG and CP. These were true, true turnaround cases, 'cause you see they started in 2021 with very low or even negative profitability. There, the turnaround was massive. STG was able to grow its service share up to 60%.
It has achieved its turnaround while exiting from coal since 2020, and it is now the most profitable steam turbine OEM outside of India. Compression has reduced its footprint by 30%. Because of the booming market that is happening today, was able to now be extremely selective and focused on the right type of profitable markets, such as electrified LNG, for example, and has been growing its service share. And then you have EAD and SES. There, they are focusing on growth. EAD was able to exit its non-core businesses and really realign its portfolio to where the nice, attractive, profitable, process industry markets are, as well as maritime and offshore, where it has a very well-positioned portfolio.
SES, with the huge hydrogen mega trend that is starting, is among the top three in order intake, with 1 gigawatt of order backlog expected by the end of this year, and it just opened its gigafactory, producing 1 gigawatt of electrolyzer capacity per year today and scaling. This profitability is going to continue further. How? Through three drivers: we're gonna focus on increasing the service share, on selectivity, and on operational excellence. First, increasing the service share. We have a huge fleet, 85,000 installed units. This fleet, plus the digital offering that we have, is going to continue to grow our service further. We plan to maintain more than 50% of service share for STG and CP while growing in new units.
It's also important to note that we have a very strong service backlog that we've been able to increase by more than 50% in 2 years, while at the same time increasing its profitability by 250 basis points. This has been possible by different things. First of all, a very high demand for profitable modernization and upgrades. Second, the fact that we've reorganized our setup to allow for better synergies between new units and service, and therefore to better penetrate our fleet. It's also important to note that the very strong service network that we have in Siemens Energy is also going to enable us to be really to have a key differentiator for our electrolyzer business, that we are going to be able to serve as it kicks in. Second driver is selectivity.
There, we have a very, very nice growing and favorable market, and at the same time, as I was telling you, we've been able to reduce and really have our capacity that is now optimized. Because of that, we are now able to be extremely selective in the type of project that we take to improve both our price and our risk profile. And this you can see in the fact that our orders but the gross margin of our orders have improved by 400 basis points, and this will trickle into our profitability as our projects get executed and go into revenue. And finally, operational excellence, where we're gonna focus on on-time, on-quality delivery, supply chain resilience, improving our customer satisfaction, that we've already improved by 32% last year, and this we will continue.
Focusing on streamlining our overhead costs, as well as being super focused on CapEx-efficient growth, with a CapEx intensity below 1%, although we're growing our hydrogen factors. I've talked about the turnaround, what's happened and what is coming. Now I'd like to focus on our market. The market for industry decarbonization is huge. 30% of the emissions come from the industry. The companies are right now pledging to drastically reduce their emissions, most of them before 2030, and they're investing huge amounts in brownfield for energy efficiency, electrification, and hydrogen. This is happening now in this current decade. What does this mean for TI? This means overall, an 11% CAGR growth in the coming decade that will be driven by three things.
You see, the conventional part will remain stable as energy efficiency is going to grow, and this will fuel the growth of our service business. Then you have electrification, which will grow by 9% as the industry is shifting from fossil fuel to electrification. And this is going to also be fueled by the whole electrification that is happening, growing from 22% to 50% globally. And finally, hydrogen is gonna grow by 37% there, as we said, because the hard-to-abate sectors are going to shift towards e-fuels. How are we going to adapt to that? We are actively shifting our portfolio towards clean tech to be able to adapt to this rising demand in decarbonization.
First, in terms of market segment, we're gonna go from transition from oil and gas to diversifying to more and more process industries, because this is really showing the journey that these hard-to-abate sectors are going through, to achieve 65% of process industry in terms of market segments. We will still also continue to address the oil and gas sector, as they are also decarbonizing through energy efficiency, electrification, and hydrogen, which, for example, the big surge in electrified LNG that is happening right now. Then across all these markets, we will shift our offerings from conventional to decarbonization, electrification, hydrogen. And there, too, we're going to reach by 2026, 60% of decarbonization offerings. This is electrification, like offshore electrification, low-carbon maritime, electrified LNG, heat decarbonization. And in hydrogen, this is our electrolysers or our hydrogen and CO2 compressors.
We will be able to manage the shift by investing EUR 500 million in R&D in the coming three years, with 80% of it dedicated to this future decarbonization portfolio. Let me now give you a little bit of examples of how this... Our portfolio serves this demand for industrial decarbonization, both in electrification and hydrogen. I'm gonna start by the hydrogen part. When we produce hydrogen, our SES business is providing the electrolyzer to be able to produce the green hydrogen from water and green electricity. This hydrogen is then transported and stored using our compressors. You can then, if you want to produce e-fuels, you can use our steam turbines, that can help produce the steam that will help for the carbon capture, and this carbon will then be transported by our compressors, be added to the hydrogen to produce e-fuels.
This whole process also has a lot of waste. 25% of it is waste heat. There, too, you can reuse our steam turbines to be able to convert this waste heat back into electricity and increase the efficiency. And overall, EAD is providing the electrification, the automation, and the digital solutions that go around it to be able to operate this plant. Another example is industry electrification and decarbonized heat. Most of the energy-intensive industries need to have a lot, to produce a lot of heat in their process. And to produce their heat today, they mostly use fossil fuels, and there, our offerings enable to electrify and decarbonize this heat production, and this is something that is growing a lot in the industries. And we do that by providing tube heaters, steam compressors, waste heat solutions, waste heat recovery solutions, or heat pumps.
So these are examples of how our products come into play to help the industry decarbonize, and this is really happening now. A few examples of current projects that are happening on electrification, carbon capture, and hydrogen. In electrification, we're providing electrically driven compressors for a gas processing facility, and by doing so, we're reducing by 80% the CO2 emissions of the process. In carbon capture, another example that is producing blue hydrogen and ammonia, there we provide the steam turbines in the steam methane reformation process to be able to produce the ammonia, or in hydrogen, we provide the electrolyzers, the compressors, and all the electrification, automation, and digital twin system around the plant to be able to provide the e-fuels that will decarbonize the maritime sector. So these are concrete examples that are happening today.
So I was telling you about how we did our turnaround, how the market in industry decarbonization is booming, and how we are adapting our offerings and our portfolio to be able to capture that. Let's now see how this translates into numbers. By 2026, our four businesses are poised to continue this profitable growth journey. STG and CP will continue to focus on profitability to reach 9%-11% profit margin. They will do that by continuing to grow into service and focusing on fuel shift and decarbonization. This is through biomass, waste heat recovery for steam turbines, for example, and through hydrogen and carbon capture compression for CP. And CP even plans to reach 50% of its portfolio, which will be decarbonization portfolio. EAD and SES will continue to focus on growth.
They're gonna be, you know, capturing the mega trend of electrification and hydrogen that are happening right now in the industrial sector. EAD will focus on the key sectors that need to be electrified, such as process industries, offshore and maritime, and it will continue to improve its profitability through selectivity and a higher service mix. SES will continue to scale up its factory to reach more than 4 GW capacity per year in 2026, and as it scales, it will become profitable in 2026. If you sum it up in a nutshell, for Transformation of Industry , our turnaround is ahead of plan with more than 700 basis points of profit improvement in two years ahead of plan. We have a very strong foundation to further expand this profitability through service growth, through selectivity, operational excellence, and through low capital intensity growth.
We are in a tremendous market that is happening right now of industry decarbonization, and that will drive at 11% market growth through the need for energy efficiency, electrification, and hydrogen. Therefore, we're shifting our portfolio to reach more than 60% in clean tech by 2026, shifting towards process industries and decarbonization. Because of that, we raise our target for 2026 to reach high single-digit revenue growth and a profit margin of 7%-9%. I will now give it over to Vinod to present our global functions.
Hi, and good evening to all of you. I know it's been a long day of getting a lot of information, so I appreciate your patience and attention as I present global functions. Earlier today, Christian talked about global functions being the operational background, or the backdrop and the backbone of Siemens Energy. So what does that really mean? So what I want to do today is to do three things. One is to introduce you to what global functions is all about, because it's a new organization that went live on October first as part of the new operating model. The second is share some of the achievements that the global functions team from around the world has worked really hard over the past year, together with the business areas, so that you get a feel for what are the sorts of impacts we are having.
The third is to end up with an outlook on how we see us as global functions, supporting the business areas in achieving their targets that my colleagues just presented. So when we talk about global functions, we group it into three clusters of functions. These are a total of nine functions, plus two strategic enterprise-level projects, and the three competence hubs in Mexico, Romania, and India. These nine global functions have been grouped into three areas: a set of functions that support execution. These are the functions of Project Entity, which drive all the project execution around the world, procurement, logistics, quality, and safety. The second cluster is what we call the digitalization cluster of functions. These are primarily IT, cybersecurity, software, and enterprise data and analytics.
The last function is the function of innovation that develops the technologies of the future that can then be picked up by the business areas and taken to the market as the technologies mature. So when we talk about the main targets of global functions, is these five things you see on the screen. One is to make sure that the growth that you saw Tim, Karim, and Anne-Laure talk about, to make sure that we are supporting this growth in the business areas through execution and supply chain. You heard a lot about supply chain in the course of the day, and our job is to make sure that the resiliency of the supply chain and the availability of the supply chain is there.
The second is to make sure that as we get more and more digital as a company, to leverage AI, data, and automation to drive up business performance... The third is to make sure that we transform the enterprise. I have a couple of examples on how we are bringing in innovation, new ways of working, and also the ERP system integrations to drive up the operative performance of the businesses. It's really important to make sure that we are really differentiating on the way we do things in terms of our processes. How do we create a simple, harmonized, consistent process landscape across the company?
Last but not least, it is laser-focused on cost savings, both functional cost savings within these functions that I talked about, as well as trying to make sure that we really drive home and bring home the synergies together with the integration of SGRE. When we talk about global functions, this is just to give you a sense of the size and scale of the organization, and in each of the cases, it's really about making sure that we have the right people with the right skill set available at the right time, where the business needs them. It's about capability deployment across the businesses. It's also about providing world-class infrastructure of services, be it IT infrastructure, be it procurement support, be it logistics.
The global functions, and this is what I talked about last year in the Capital Markets Day, is also about driving innovation, being the anchor point of innovation. To do this, we have launched, in the course of 2023, innovation centers around the world. We have four innovation centers, one in Orlando, the other one in Berlin, the third in Abu Dhabi, and the fourth in Shenzhen. These innovation centers work hand in hand with the experts from the business and the region, together with customers, to develop and scale up new technologies by being close to the customer. I talked about software and data, so we have this group that takes the requirements from the businesses on what they need for their digital products, and then bring them into software application processes, and then deploy them back into the markets through the business areas.
Last but not least, making sure that we have a strong process excellence and governance model across the company, so that we do everything right in the proper way. So now I'm gonna go into a few deep dives. I'm gonna deep dive a bit into Project Entity, into procurement, and so forth. Let's talk about Project Entity. Christian had said earlier today of how he sees the relevance of Project Entity. I'm not gonna repeat what he said, but I want to highlight a few things. One is, as of today, Project Entity is responsible for the execution of all the large, complex projects on behalf of the business areas across the world.
So today, we are responsible for 104 projects, and as you can see, that number is going to increase by 30% over the next years as the grid business, the gas business, and the TI businesses grow. Project Entity is also involved from the whole process from the start, from the tendering side, because that's also where a lot of the project risk assessments have to happen, a lot of the costing has to be laid out, and to make sure that the senior project directors, who have a lot of experience from site, are working hand in hand with the sales and proposals teams upfront to have the right sort of bids out there.
In terms of execution, it's really about top-notch project management, engineering, execution, civil, and all of that, to make sure that we also deliver these projects in the right way, and then making sure that as we go into the warranty phase, interfacing with the service organization and managing the customer expectations as we transition the project from the new unit into service. We want to make sure in Project Entity that we look at five things, always. The first is around setting up the standardized tools and processes so that we can have a consistent way of doing large projects. Here is where there is a lot of best practice sharing that Project Entity enables between Gas Services, Grid Technologies, and also looking at now the emerging projects on the hydrogen side.
Another very important point, Christian talked about this, and I just want to highlight this, is about career development. We have today already cross-trained about 10%, and we'll get to 20% by 2024, of senior project managers, directors, and experts from working on gas service projects to Grid Technologies projects. This serves two benefits. One is you're able to make sure that the best practice, adoption, and transfer takes place. Second is you also can then build up the careers so that people have perspective, and this whole project execution area becomes something that's attractive. The other thing we look at very strongly is NCC reduction and improving productivity.
Because as you see, as the projects scale, we need to make sure that we can get more productivity out of the teams, and by using the right sort of standardized methods and tools, digital simulations, modeling, we are able to really improve this productivity, and this is a key area of focus for us. And then, of course, it's also about how to manage partners. We are developing a global partner network so that we can work with the cost-effective, capable resources from different parts of the world to handle this ramp-up in projects. Another deep dive is around supply chain. So to give you a sense of what are the sorts of things we are looking at in the procurement and logistics functions. As the markets grow and as the businesses grow, we want to make sure that our supply chain is resilient....
So to do this, we are focusing, for example, in these six areas on how to make sure that we are creating and building a resilient supply chain. Supplier risk reductions. Over the past 12 months, as you can see, we were able to reduce the number of risks, high risks in the supply base by 30%. Making sure that we are multisourcing key components so that we are not bottlenecked. Introducing new suppliers, for example, in Mexico or India, to be able to provide us a cost base that is much more competitive. Also making sure that with the right sort of stocking concepts and capacity reservations, so that we are also making sure that the material that the businesses and the factories need are available at the right time. And that also means building up strategic partnerships.
So this procurement team, together with the logistics team over the last 12 months, has been putting a lot of these fundamentals in place on the enterprise level that then provides the backbone, as Christian talked about, to be able to support the business, business areas. And you see some of the examples of how this has been resulting in bottom-line impact. Speaking of bottom-line impact, it's also important to give you a sense, and these are some of the savings that have also been showing up in the business areas that has been supporting the margin expansions you have seen. In 2023, about EUR 400 million of savings through procurement has been delivered to the business areas.
As you can see, it's split between material costs, productivity, which is around, for example, design to cost, standardization, material substitutions, and purchasing price changes, more e-auctions, process improvements, and so forth. So this is also something that we track very carefully within global functions to make sure that year-over-year, we are able to bring savings that then get passed into the business areas in order to help them meet their targets. One area that we are really focusing on today and going into 2024 is this whole field of cost-value engineering. This is an area where very often we don't spend enough time upfront. So what happens is you get market requirements, you design a product, and then as the product is launched, you go into your cost out cycles.
But with the proper Cost-Value Engineering methods, some of which are listed over there, involving the suppliers early, doing a lot more should costing, building into your design process, workshops together with partners, you're able to build into the design of the product, the right sort of cost focus, so that at the end of it, when the product is introduced to the market, you're either at product, at the target cost or you're very close to it. And this then avoids rework cycles later. And as you can imagine, with the market growth that we anticipate, we don't have the time to have too many rework cycles. So trying to do things right the first time is an important part of what we do in procurement, so that this Cost-Value Engineering capability becomes really a company standard.
Switching from the execution side to a bit of a snapshot on digital. So you heard, and Anne-Laure talked about it, Karim talked about it, and Tim talked about digitalization becoming more and more relevant in their respective business areas. So we now have a group of software engineers and data analysts who are providing the software factory for the businesses and looking at three main things: How do we build and deploy software-defined AI products? How to make sure that these products are available and deployable through the cloud, and also bringing in a lot more automation and analytics. Today, we have over 30 digital products in our portfolio, and that number keeps growing. We also try to make sure that we deploy these products across the enterprise.
So while there might have been a product for power plant optimization that was developed in Gas Services , that is a product we could also use in TI, when we talk about, for example, a hydrogen plant. And so this sort of a cross-company application of digital products, together with the development of new products, is a key part of our digital team. And here you see an example of how we are able to use modeling, AI, and automation to be able to predict. And this is also what Karim talked about in terms of the new business models, to be able to help our customers anticipate operative cycles and use that to actually either improve performance, reduce fuel consumption, or tap into the price spikes in the market.
And this requires a lot of digital capabilities that we are continuing to develop and also will be key to the grid business, as Tim talked about. In the same area, there is also another topic which is front and center for global functions, which is around the standardization of our ERP landscape. At the carve-out from Siemens AG in 2020, we had 23 ERP systems across the company. This comes from the various legacies that the Siemens Energy company was combined from, and now the goal is to reduce this complexity and bring it down to a company-wide ERP architecture and platform based on S/4HANA. And we have made good progress over the past 18 months, and actually last month, we went live with the first rollout, where we have implemented the first application of S/4HANA in the electrolyzer factory in Anne-Laure's business in Berlin.
And over the course of the next years, we will continue to roll out the S/4HANA platform across the company so that we can create few benefits. One is financial transparency, to be able to have one source of enterprise data that can be used to make better business decisions. The second is to make sure that as we transition to this S/4HANA platform, we can also simplify and automate our processes. And the third is to make sure that by having all of this in a single source of truth, you're able to also optimize planning and other operative activities. This topic of processes is also very important for global functions, and this is something that's what I would call the blocking and tackling that happens behind the scenes to make sure that the operations are performing at a high level.
This is an example of how we are going about this. Today, in Tim's business, we have over 20 factories that are operating as a network. In order for Tim and his team to be able to provide the products they need to provide, it is about load-leveling between the factories to be able to optimize information flow and material flow so that this network of factories and Grid Technologies can increase their overall output. To do this, we have actually also installed, across the company, a global process owner network. We have defined 30 global process owners, who are 30 business leaders at the N minus one or N minus two level, who are responsible for developing an end-to-end process.
So we have global process owners for manufacturing, as an example, global process owner for service, global process owner for procurement. These 30 global process owners, their job is to develop this enterprise-wide process landscape that can allow us to do things like load-leveling across factories. By doing that, we are also able to simplify the company. We were, in the last financial year, able to reduce process complexity and process documentation by over 20%. We were able to reduce IT applications by over 20%, and this all adds up. Maria talked about step-by-step. All of this adds up step-by-step every year in terms of how we can improve the overall performance of the company. From digital, I want to now switch to innovation. Last year, when I was presenting, I was talking a lot about the innovation strategy, and we talked about a few things last year.
One was we talked about developing a new R&D allocation and tracking model based on clear KPIs. We also talked about launching the innovation centers, and I'm happy to report that as of now, we've had good progress on both. We were able to achieve all our main R&D KPIs for 2023. All four innovation centers are up and running, working on customer projects in the different regions. In addition to that, we were also able to follow through on shifting more and more of the R&D to be service relevant, and that's also what you heard Karim present in his presentation. And you also heard from Tim and Anne-Laure about how the investments towards future technologies is also increasing.
So we are well on track to make sure that we are investing our EUR 1 billion-plus R&D more wisely in a portfolio approach with clear KPIs and driving it close to the customer, so that it's not only the efficiency of the R&D that goes up, but also the effectiveness. And this is just a snapshot to give you a sense of how we manage this R&D portfolio. We look at things in three horizons of time. The first is what we need today to be able to deliver customer value today. And you heard those examples, and I just want to pick up one of them because it is relevant from a service perspective, mods and upgrades. We are deploying today technologies into the large gas turbine fleet, where, for example, in this case, we are improving the efficiency and power output of the F-class and H-class units.
That is a fleet of over 500 relevant units that can then allow Karim to drive up the competitiveness of the fleet and also the margins on the service side. In the midterm, we are also looking at things that will come into the market over the course of the next 3-5 years, and Anne-Laure briefly touched upon this, is the hydrogen compressors. This is where, as the hydrogen market grows, we need to be able to develop high-efficiency compressors that are able to move hydrogen fluid, which has got a totally different dynamics, and this is also what the teams are building up. And then in the long term, the markets are still pretty early, but we are starting to look into it, for example, our inductive heaters or CO2 electrolyzers.
One important point I want to bring to your attention here is we are trying to leverage our core competencies from one area into a new area. So when you talk about these inductive electric heaters, this is a decarbonized way to produce industrial heat. These heaters can operate up to 1,000 degrees centigrade, and they are based on the knowledge we have gained from our electric generators business. So we are able to use the electromagnetic capabilities and expertise in generation and use it for industrial inductive heating. Another example is CO2 electrolyzers. We are working right now in partnership with an oil and gas major, where we are looking at combining direct air capture, that Christian talked about, with our knowledge in electrolysis to do conversion of CO2 to ethylene in one step.
And if this technology hits the ground, and we are able to get through the maturity levels, then this could be a big step for the oil and gas industry. And this is why we are already in early partnership with a European oil and gas major, who's very interested in working with us over here. We have over 50 base patents on this, so we also, from an intellectual property point of view, are pretty well protected. So this is just to give you a sense of how we will continue to focus on innovation and make sure that this innovation is managed in an effective manner and also very much customer-centric. Switching gears again, I want to talk a bit about costs and synergies.
So Maria had presented this in her presentation, that as part of the Siemens Gamesa, Siemens Energy integration, we have synergy targets out there. As you can see, about 80% of that synergy target is coming from the global functions area. So this is something that I, along with my global functions team, is very much focused on to make sure that over the course of the next 2-3 years, we are successfully delivering on the synergies. And you can see in terms of our timelines, what sort of targets we have set. Another area where we believe there is opportunity that we will continue to drive is around procurement and logistics. If you look at some of the main commodities, and you see four of them here, around field services or machine parts, or large steel fabs or cabinets and low voltage switchgear.
When you combine the procurement volumes of Siemens Gamesa and Siemens Energy, of the approximately EUR 20 billion total, there is a 45% slice that is combined in terms of overlaps. Here is where we believe that we can really make sure that with the right sort of optimized sourcing methods, supplier capability assessments, and also demand bundling, we will be able to produce bottom-line impact. This is something that we will be very much focused on in the course of 2024. With this, I want to bring my presentation to a close and highlight a few things. One thing is global functions as the operational backbone is off to a strong start, and we will continue to work hand in hand with all the business areas to make sure that we have this operational infrastructure to support their growth.
We will make sure that there will be a financial focus, a strong financial focus on this, to deliver our synergies and cost savings, so the business areas can also achieve their margin targets. Second is to support growth. As the businesses grow, the projects have to be managed in an effective manner, and this is going to be an area where we really put our focus on. Third is continue the transformation journey of the company. We talked about ERP integration. We talked about innovation. These are things that we have to make sure that we keep driving. Last but not least, also in innovation, it's about creating customer-centric innovation.
And one area I want to highlight over here is not just working with customers, but also with governments and other agencies to leverage our R&D funding, and we were able to make some good progress over the last year. So all in all, I just want to get across to you that global functions, while it may not be on front stage, is absolutely active in the backstage and giving all the operative support the business areas need to be able to meet their respective targets, and by doing so, provide the right sort of customer value creation. Thank you very much for your time.
Yeah, thank you, Vinod, and thank you, Anne-Laure. I think it was because Anne-Laure was so succinct, so that we are so good on time and have plenty of time for questions, and we'll still probably be a little bit early. So, who wants to start? Danny, over to you.
Yes, thank you. Vinod, for you, the question to understand how your role is in the company and to how it works in practice. Because it looks that you could be both restrictive and both as an opportunistic kind of catalyst for the business units. And then, of course, as within Siemens, as a bigger brother, and maybe you as well, that cash conversion is really important. So if business unit managers go for their sort of targets of, on achieving these targets on the cash conversion and margin targets, how should I look at it? Because it can... I can imagine from your pictures, that 60%, let's say, on projects, is coming from Gas Services and maybe 10% of only transformation of industries. But is there also an internal competition?
Because I imagine if I'm a gas service business manager and you're doing a good job for me, Anne-Laure will be quite envious and say: "Well, you have to do a bit more for me." How do you, how do you struggle with this sort of balance, yeah, this balancing act, I guess, and-
It is a balancing act, and I would call it constructive tension.
Yeah.
Because I do believe it is important, and we have to look it from two sides. The one is, also the project managers, the good ones, also want to have the opportunity to be able to work in new areas. So what we have done is we have created a pool of project experts who are actually not going to be the full-blown, the full-blown population. So we will still have in the full-blown population, a group that is dedicated to Gas Services , and that will be based on the load plan we get from Karim's team. There will be a group that is based on Grid Technologies , and there will be a group that is supporting the TI business as it grows. We will be hiring a lot of these future project resources in our competence hubs, be it in Mexico or Romania or India.
There's also the cost-effective ramp-up of resources. We'll have a pool of experts who could move between projects.
Mm.
So it's not too much of a, I would say, deviation, that we are in a place where. It's just a few project managers that everybody's going after, so we try to balance it in that sense.
Do you share maybe some responsibilities with the CFO in the terms that in a normal company with a big diversified portfolio, of course, it's very important that those business units who generate above group average returns get the best capital allocation, and those who have a bit of underperforming have to reduce costs before they can maybe get more capital allocation? Is that something?
Yes.
You get a sort of framework for the running year, which is allowing you to, yeah, to organize your own work? Or do you sometimes also advise CFO to say on, during the year, it's better to trim transformation of industries and maybe give a bit more power to the Gas Services industries?
No, I think we, we don't, we don't try to trim anything, because I think it's also important that the long cycle business, like hydrogen and so forth, we have to give it the right resources so the market also develops. But to be quite honest, as of now, we haven't gotten to those volumes where we are really having a massive competition between hydrogen projects competing with gas. So I think right now, we are still in a place where, with the growth in gas and the growth in grid, that is covering 90% of what we do. And then over the course of the next two, three years, as the hydrogen business grows, we will look at it.
But I can also assure you that we have very clear cost targets in terms of costing rates, productivity, that we also tailor to the businesses so that we don't overburden, for example, a new business project, which is an early tech, with a cost structure that may not be right for it. So we also have different costing rates that we try to manage. Thank you.
Well, I think we should stick to the pattern and go from right to left to Akash.
Yes. Hi, Akash from JP Morgan. I have one question to each of you. Starting with Tim: so my understanding previously was that you have four businesses which are independently managed, they have their own P&L. And today, the new learning was that there are projects out there where all four of them could have something to add to those. So the question I have for you is, more about go-to-market strategy for such projects. Like, which business takes the lead, or do you have a team at a Tim level, which basically goes and identify these projects where all four expertise, or maybe in some projects, outside Tim expertise can be used? So that's one. And for you, Vinod, obviously, this sounds quite interesting in terms of the role that these, global, functions are playing.
My question is more for incentive schemes, like, depending on how people under you deliver the job, a project can be a good project and a project can be a bad project. So how do you incentivize to make sure that they are motivated to deliver the best returns for the company? Thank you.
So thank you very much for this question. First, I mean, the four businesses are indeed, there are, demands from customers, for example, to have electrolyzers and compressors and different components. It's not only within TI, it's also typically, we would have requests, from Grid Technologies for our electrolyzers, or we would have requests between steam turbines and gas turbines, for example, for some industrial customers. So there we have a year ago, reorganized completely the group to be able to have a very strong regional organization. This is the go-to market, which is cross-business areas, cross-businesses, cross-P&L. And their job is really to address the customers with these different needs to be able to propose the right type of offering in the go-to market.
And then, in terms of having the technical support and resources for that, we also use the project entity, which have all the different types of experts as well, to be able to provide these offerings to our customers that are transversal.
Yeah, and I think on the incentive, there's always a mixture. We have roughly half of the targets are corporate targets, and half of the targets are individual by the function linked to who their main interfaces are. So in the case of project entity, the colleague who runs project entity, Hussein Shoukry, he has got individual targets that are very much linked to the performance of project entity, but on his team, he has people who are more geared towards Gas Services or Grid Technologies or TI. So it's a combination of corporate targets, plus business or function-specific targets, that then allow us to do that refinement so that people have to be able to support the businesses that are their primary interfaces.
In procurement, for example, there are people assigned to the different business areas as business partners, and their targets are pretty much the same as the business area targets. So this is a sort of a combination. We have a hybrid, corporate targets and individual targets aligned with the businesses. Thank you.
Okay, one more from here before we go over there. Vivek?
Thank you very much, everyone. Vivek Mehta from Citi. One question each, please. Firstly, on the Transformation of Industry business, just a follow-up on the STG business. So you, you're effectively in the margin corridor you've indicated for 2026. You highlighted, for example, service growth. So even if you had a good year for, you know, outages and so on in 2023, you're still indicating you're growing that, but the margin isn't really changing. So could you maybe talk about the, sort of the drivers from here? And then a question for Vinod on global functions. So I think in your backup slide, there's the indication about-
ERP harmonization within Siemens Gamesa. I mean, can you give any indication as to, by 2026, how far are you in that journey, and how do you navigate, I guess, the nuances of Siemens Gamesa selling very different biz, you know, products? How do you adapt to that? Thank you. Mm-hmm.
So for STG, the overall, I mean, the growth margin, the operational margin is going to continue to grow slightly. We are maintaining the service share. We're also shifting the portfolio towards more and more decarbonization to be able to make this portfolio future-proof. And this year, we did have a small foreign exchange effects that make this margin actually, the operational margin will continue to grow. That's, I think, the main example, the main topic.
And I think on the, ERP harmonization, that's a good question. Because actually, in this case, SGRE had started on their ERP harmonization a couple of years before us. So what we are doing there is we are actually taking the best practices on the SGRE side, on their SAP journey, and then we're bringing it in, so it will end up with probably two, two systems. One is going to be more for the regions, that is coming from a different, background, coming from the SGRE side, and one for the operations, that's coming more from the GP side. But the intent would be to then take the best of both worlds when it comes to the ERP systems, because I think over there we have some good examples to learn from.
Okay, Nick?
Thank you. Nick Green here from Bernstein. Vinod, question for you here. You've run through various techniques, should cost, should cost procurement, Six Sigma, Smart Factory, global process owners, et cetera. To what extent have these functional techniques been deployed with Gamesa for the last couple of years? Just help us clarify if this is a brand-new thing that you're taking to Gamesa, or whether you've been working through the difficulties in the last couple of years.
Yeah. So, in terms of Siemens Gamesa, right now, from a global functions point of view, we are starting out. So we are starting in the area of procurement to start bringing some of these methods in. And also, as Jochen mentioned, even on the Siemens Gamesa side, they have started that. So now we have put together technical teams for the product development process to see how can we bring in much more should cost. So that's happening as we speak. This is not, this is not something that we had, let's say, two years ago. But now, since the, integration has started, we are now starting this off now. So procurement is act- as we speak, building in those CVE methods together with SGRE.
And the second area is also we are looking at the whole PLM process for SGRE, and we have our experts working together with the experts from Jochen's team to bring in a much more rigorous process around the product development process, that now, for example, when you talk about manufacturing readiness, a part of that is also what you saw in CVE. Because you're bringing into the early development, the needs of manufacturing, so that you can actually have it much better costed out later. So that's going on as we speak right now. So this is early, early months.
The decisions over buy versus build decisions about operational footprint rationalization, again, is that being led by your team effectively as the procurement function, or are you just supporting Jochen's team?
On the manufacturing side, it is Jochen's and Jochen's team's responsibility. When it comes to procurement, that's where we are getting more involved and developing a joint operating model. That is something we're doing right now.
Yeah, thank you.
Okay, any more questions to the left?
Hi there, Kalen Little from the buy side . Just a quick question for you, Vinod. We heard from Jochen on these probabilistic models as it relates to the contract liability, et cetera. Does your team have a role to play there in sharpening these, given the analytics and... Or is that a bit out of scope for your team?
So exactly. In the task force, as Christian mentioned this morning, we have a lot of experts from Siemens Energy who have been staffed or delegated on this task force, and there is a team from data analytics that is part of this quality task force. So they are supporting the teams here.
Okay. Any last questions before I would-
There's 2 there.
Oh, Danny. Sorry. Oh, yeah, then Will, after Danny.
No, quick one. We haven't talked this day about guarantees or, all these, well, tropical topics, we've seen over the last weeks. But is it also the procurement department, if you know, you're playing a role there as well for, let's say, on, on securing the guarantees and, and, and performance bonds and all that stuff on the projects, the one on for you, you're managing?
Not, not right now.
Are you involved in that as well?
Not right now.
Not at-
Not-
Not right now, but-
Not right now.
You will?
We will see how we develop the procurement operating model first, and then, because on the guarantee side, it's coming more from the commercial side. So at this point in time, we are not actively driving that. But I can let Christian, if he wants to add later in his closing comments, he can add to that.
Okay, Will.
Thank you. Question about the group. To what extent do you review and consider the real synergies that exist from a cost perspective or a revenue perspective, or even a capital perspective, with the rest of the group and within the division? How do you rank them? And I suppose ultimately, you know, to what extent do they exist as you being the best owner rather than somebody else being the better owner?
It's a very fair point, a very fair question, and it is something that, I mean, as any businesses, we're constantly evaluating you know, is it the different optionalities on it to saying, "Okay, are we the best owner or not?" Today, we believe that for the different businesses, for hydrogen, there's a lot to leverage from, for example, the whole organization in terms of leveraging the project execution teams, the procurement bandwidth of the group, for the supply chain, the service as well. So today, we believe this is something that we need to scale in-house and keep in-house. EAD for electrification, same thing. We see a lot of synergies with the rest. Compression, we also see it as still in a ramping up phase in terms of profitability.
So we really see all these different businesses as today having a real meaning within Siemens Energy. But of course, it is options that we can always consider, that we review. Yes.
Cool. With that, I think we are closing that round of Q&A. Thank you, Anne-Laure. Thank you, Vinod.
Thank you.
And, uh-
Thank you.
Christian is coming back to the stage.
Yeah, thank you very much. Is it on? Thank you very much, Michael. And thanks very much to you here in the room, and thanks very much to everybody, really, on the live stream of being with us, really, the whole day. I think this has been a dense afternoon, and I hope you could take from it, let's say, a lot of new information, which help you obviously to understand our company. You have seen that lots of things have been going on, lots of things have been happening since the last Capital Markets Day. You also have seen a leadership team here, which is fully committed to do three things: deliver profitable growth, fix wind, and maintain a solid financial foundation.
In case there are still questions open, please, I mean, like Michael always says, we have a very approachable investor relations team and helping you to really understand how the company is moving forward. As I said at the beginning, 2023 has been a year of light and shadow. A lot of good things have been happening. A lot of headwinds have hit us, but I hope you have seen also the energy which sits in the company in terms of really turning it around. You also hopefully have seen how relevant the company is in the different fields of the energy transition, and what potential is there also going forward in terms of driving the businesses. So once again, many thanks for staying with us the whole day. Thanks for all the questions and the interest.
We highly appreciate, appreciate this, and I'm very much looking forward to continue the discussion with you in the weeks, months, and years to come. Energy transition only goes step after step. That is sometimes painful, but it can be a lot of pleasure. And as I said, we are fully committed as a leadership team to deliver this profitable growth, to fix wind, and maintain a solid financial foundation. And with this, many thanks to all of you. Thanks to everybody on the live stream, and thanks to- everybody here in the room. Stay tuned, stay healthy. Thank you very much. Thank you.