Siemens AG

XETRA:SIE

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Siemens 2018 Second Quarter Conference Call. As a reminder, this call is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties.At this time, I would like to turn the call over to your host today, Mrs. Sabine Reichel, Head of Investor Relations. Please go ahead, madam.

[Sabine Reichel, Head of Investor Relations]

Good morning, ladies and gentlemen, and welcome to our Q2 conference call. The earnings release and Q2 presentation were released at 7 a.m. this morning. You can find everything on our website. Today, our CFO, Ralf Thomas, is here this morning to review the Q2 results; together with Lisa Davis, Member of the Managing Board. Lisa will give you an update about recent developments at Power and Gas. After Ralf and Lisa's presentation, we will have time for Q&A, as always. And with that, we would like to start with Ralf.

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

Thank you, Sabine. Good morning, everyone, and thank you for joining us for the second quarter results of fiscal '18. The economic conditions continued to be robust on a global level. Main risks remain geopolitical tensions and protectionist tendencies. Against this background, we delivered another strong operational performance across most of our businesses. At the same time, we are setting the course for long-term value creation through launching vertical champions with clear business focus and go-to-market approach.Our long-term investments in digital leadership across the businesses are clearly paying off, from a profitable growth perspective and through excited customer feedback. In addition, our teams constantly improve efficiency and drive productivity across all countries. Now let me walk you through some highlights of the quarter. We were pleased with a healthy book-to-bill ratio of 1.11x and the new record backlog of more than EUR 129 billion in the Industrial Business with a solid gross margin quality.Comparable orders were slightly lower 1% due to a substantially higher volume from large orders in the energy-related businesses 1 year ago. Base orders below EUR 50 million were clearly up 9% on a nominal basis. Organic revenue was overall flat, with growth in most divisions, driven by an excellent short-cycle performance, offsetting weakness in Power and Gas.Industrial Business profit margin was at 11.0%, fueled by an outstanding performance at Digital Factory. 6 out of 8 divisions were in or even above the targeted range. Currency effects weighed on margin with 30 basis points. For the second half of the fiscal year, we expect an even larger negative impact from exchange rates.Net income came in at EUR 2 billion, benefiting from a EUR 900 million gain through transferring Atos shares to the German Siemens Pension-Trust. This gain reflects a substantial value generation since 2011 when we started our strategic partnership with Atos. Our corporation yields great mutual benefits and has been expanded just recently. This share transfer was also a major contribution to reduce the pension underfunding to EUR 8.1 billion, equaling a funding level of 79%, the highest level since fiscal '12 and well above the average of German DAX companies. We set also a benchmark in ownership culture. More than 300,000 employees or around 80% of our global team own Siemens shares after paying out the profit sharing pool of EUR 400 million, mostly in the form of free shares to eligible employees. A major milestone was, of course, also the successful listing of Siemens Healthineers, the fifth largest floating in Germany to date.Before we dive into the details of the second quarter financials, I would like to emphasize the strength of the Siemens portfolio. After 6 months of fiscal '18, the vast majority of our businesses are delivering excellent results. Siemens Gamesa has started to execute on its strategic roadmap. At product (sic) [ Process ] Industries and Drives, many actions to improve the business are implemented.Progress is clearly visible. However, there is still some way to go. As we all know, Power and Gas, reflecting around 15% of our top line, operates in a contracting and very competitive market environment, in particular for the new unit business. Lisa Davis will give you now a more in-depth perspective on how we address these challenges and what the implications are. Lisa, please.

[Lisa A. Davis, Member of Managing Board]

Thank you, Ralf, and good morning, ladies and gentlemen. Our second quarter results fully reflect the difficult market situation we are in. Profit margin reduced to 3.9% on lower revenue, declining market pricing, reduced capacity utilization and some operational effects in our new unit business. Service once again held up well and is also growing in importance from a business mix perspective, with around 55% revenue share in the first half of fiscal 2018.While we've started early with our PG 2020 program to adapt our organization to a declining market, the accelerated market contraction requires further swift action to optimize our footprint and reduce capacity. The team is working hard on a large number of cost-out initiatives for our products and our processes. In addition, we are simplifying our portfolio in order to focus R&D investment to the most promising areas and to also reduce the spend overall.There is demand in the new market for new offering such as Power-to-X or our new Topsides 4.0 offshore digital solution. Key differentiators are digital design and services across the portfolio to reduce delivery times and enhance customer value.Looking at 3 of our main markets, the pattern has been very similar since fiscal 2015, sharp unit demand declines, combined with significant price erosion. The good news is that we have significantly increased market share over the last 4 years in both our large gas and small, medium and aeroderivative gas turbines. Looking forward, based on our project funnel for large gas, we expect to see less than 100 turbines being awarded in the industry in fiscal 2018, and there are no signs of midterm recovery to higher levels. On the other hand, we expect a bottoming and moderate recovery in the small and medium gas turbine segment as well as in compression. A higher oil price above USD 70 is beginning to support investments in upstream and pipelines. However, customers are very cost-sensitive and competition is fierce. As I already mentioned, the measures to drive cost out are in place.Let me also give you an update on our service business. Our installed base is a great asset, and our service team is doing an excellent job to make it even more valuable for our customers. From the current backlog of EUR 31 billion, around EUR 25 billion are related to large gas, and we expect to increase the backlog even further. The service relevant fleet continues to grow as our previously sold units reach their first major outages. This includes our H-Class units, for example, in the U.S. and Asia, as well as our fast-growing base of SGT-800 units in Latin America and elsewhere.We rigorously track our outage activity and utilization to ensure constant visibility. As you can see from the chart, gas turbine utilization so far has been moderately up in 2018, and our balanced distribution across the many regions helps to handle any fluctuations. Our strategy going forward is to continue upgrading our fleet with new technologies and to give our customers a competitive edge regarding efficiency and performance.A good example is the new self-learning software tool to optimize plant operations, which we have introduced at several sites. This tool allows for analyzing performance data and applying predictive analytics that suggests optimization steps to increase output or efficiency for our customers.I want to reiterate that customer proximity and innovation remain our key success factors. In the second quarter, we sold 6 large gas turbines, among them are the first 2 H-Class turbines on the China mainland, which will be part of the most efficient gas-fired power plant in China. We have sold now 88 H-Class turbines, of which 65 are already in reliable operations. A key technology for our business is additive manufacturing. We will invest a further EUR 30 million to expand our 3D printing factory in the U.K., fully equipped with software and automation from our Digital Factory colleagues.We announced that approximately 6,100 jobs at the division will be cut worldwide. In the U.S., where 30% of the capacity reductions are planned, we're already well on track in the implementation phase. In Germany, where around 50% of the capacity reductions are planned, negotiations are ongoing. As you might have seen yesterday, we agreed to a framework with the employee representatives. This is an important first step. We expect to conclude negotiations and reach a final agreement in the current fiscal year. As a result, we expect substantial severance charges to be booked toward the end of fiscal 2018.Our efforts here are not only about rightsizing, but also materially changing the setup and responsibilities in the manufacturing and service network. So how do these actions impact our financials? As indicated, we expect revenue in fiscal 2018 to be significantly lower than that in 2017. We expect the margin, the PG margin, excluding severance, to be in the mid- to high-single-digit area in fiscal 2018 and also in fiscal 2019.With that, I hand back to Ralf now to further discuss our second quarter performance.

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

Thank you, Lisa. Now let's have a look at a real bright spot in our portfolio. Digital Factory delivered an outstanding quarter and showed the value of combining comprehensive software offerings and leading automation competency. Strong top line growth in all businesses is clear evidence for further market share gains.Our automation business performance was excellent, and we achieved remarkable revenue growth in major countries: China, up 41%, driven by new customers, governmental programs and restocking effects; Germany, up 4%, despite less working days; Italy delivered significant 15% growth. Demand was particularly strong in the machine building industries, while automotive saw some moderation.The good news is that we see a positive trend also in the third quarter. Towards the second half of calendar '18, we expect growth moderation due to tougher comps, in particular, in China. We were very pleased that also the PLM software business grew double-digit organically. This was an excellent achievement also compared to what we saw in the industry.As you know, profitability at Digital Factory is impacted by ongoing investment in MindSphere and integration cost for Mentor. For the second quarter, the impact was around 130 basis points and 40 basis points, respectively. Hence, the underlying margin of almost 23%, excluding severance, was extraordinarily strong.Process Industries and Drives is making good progress on its restructuring program and achieved clear order growth of 6%. However, we saw diverging end-customer trends. While commodity-related end markets showed further stabilization, the demand for mechanical components, particularly in the wind business, remained weak. Profit margin improved by 60 basis points despite significant currency headwinds of 50 basis points.Just a few days ago, the world's biggest industrial trade fair closed its doors in Hanover. More than 100,000 customers and industry experts visited our booth, by far, the largest and most crowded on the fair. Let me give you some highlights. Siemens is the frontrunner to shape and drive the digital enterprise. Even more important, Industry 4.0 is no longer a concept, it is reality, with many industry-specific digital solutions. They can be developed in every industry and in companies of all sizes. We showed examples from a variety of industries, such as automotive, aerospace, chemicals, fiber and many more. In our vibrant MindSphere lounge, you could feel the customer excitement from MindSphere 3.0. More than 140 applications are available or under development, and the ecosystem is growing quickly with more than 40 partners meanwhile. 20 MindSphere application centers worldwide work on industry-specific applications and services. A MindSphere open-space challenge drew a lot of interest, where [ external ] developers and startups were collaborating openly to craft creative approaches for new customer solutions and business models based on MindSphere. Overall, customer response was excellent with more than 7,400 leads, so our sales teams now have many business opportunities to follow up.Another highlight was the showcases around our integrated PLM software solutions to help our customers design evermore complex and smart products with higher quality, efficiency and speed. We combine in a unique way design and simulation capabilities for mechanical, electrical, thermal and software domains on a common data backbone called Teamcenter. The integration of Mentor's electronic design offering is working very well, and customer success stories are continuing to build up. A great example is our recent win at the world's largest supplier of photolithography systems for the semiconductor industry where we integrated our CAD program, NX, with Mentor's electrical systems and printed circuit board design solution on the Teamcenter platform. 1 year after closing the Mentor deal, we see impressive results of the integration. The cultural fit is excellent with very high retention rates in a hot employee market, and synergies are ramping up quickly. We expect to achieve our synergy target of around EUR 100 million 2 years ahead of plan already by fiscal '19. The acceleration is driven by both cost and revenue synergies.Besides the streamlining of administrative tasks, a key driver is also the optimization of our R&D roadmaps. We have further strengthened the Mentor offering with targeted bolt-on acquisitions, such as Solido, [ Servacao ] and Infolytica, to tap growth fields in the attractive EDA market. The PLM software business is very well on track to achieve its EUR 3.4 billion revenue target in fiscal '18 on strong profitability, despite significant investment in MindSphere and software-as-a-service solutions.Energy Management showed broad-based improvement across its businesses, with clear revenue growth and a margin well in the target range. Large orders were lower on tough comps. We have seen some pushouts of HVDC solution projects into fiscal '19. The Building Technologies team delivered another excellent operational performance with further margin expansion to 10.9%, up 210 basis points from prior year's quarter that had benefited from a positive one-time pension effect of 590 basis points. Revenue growth was broad-based across all regions. The team also had a very successful appearance at the recent Light + Building fair.Mobility continued a journey of continuous improvement, margin expansion and building up reputation for stringent execution on a consistent path of 18 quarters at, in or above the margin corridor. The second quarter financials speak for themselves. Strong top line growth and excellent profitability across all businesses resulting in industry-leading 11.1% profit margin, and there's more to come.A few weeks ago, we announced the largest order ever for Mobility management. Mobility will digitalize the entire Norwegian railway network of 4,200 track kilometers and 375 stations until 2034, including a 25-year service agreement. We will book this EUR 800 million order in the third quarter.We're still the leading portfolio, which we continuously enhance organically and through bolt-on acquisitions with digital capabilities. A good example is the recently announced Spanish company, Aimsun, to simulate and optimize traffic flows. In the case of the integration of HaCon, which offers planning, scheduling and information system, we even have to prioritize the measures for sale synergies due to huge customer demand.Several high-profile projects are reaching important milestones, such as the commercial start of the new Eurostar train service from London to Amsterdam, with positive customer feedback. And last but not least to mention here, end of March, we took an important step towards the building of the European mobility champion with the signing of the business combination agreement between Siemens and Alstom.On March 16, we successfully listed Siemens Healthineers for EUR 28 per share, resulting in a placement volume of EUR 4.2 billion. Since then, the share price is up 18%, a strong performance indicating the value potential of the business. Siemens Healthineers has now the entrepreneurial flexibility to execute on its Strategy 2025 and shape the future of health care. And we, as an 85% shareholder, will also benefit from increased accountability. Solid financials for the second quarter were already released last week, with 8% order growth and 16.5% margin, despite significant FX headwind of 50 basis points.Siemens Gamesa reported their results last Friday, with a strong book-to-bill of 1.36. Nominal revenue was sharply up due to the merger, however, clearly lower on a like-for-like basis. The Siemens Gamesa team is executing on its L3AD2020 program, resulting in higher severance charges and integration costs weighing on the profit margin. The recent MAKE study on global market share development in the wind industry confirmed the compelling industrial logic of the merger. Siemens Gamesa took the lead in 2017 with 8.8 gigawatt new installations and 17% market share, an increase of 3.3 percentage points.Now let me walk you through below Industrial Business, where we saw quite some movement. Siemens Financial Services again delivered a very strong profit of EUR 189 million in the second quarter, driven by equity business. We expect the full year result in line with prior year.Centrally managed portfolio activities recognized a substantial gain of EUR 900 million from the previously mentioned transfer of Atos shares. This gain was partly offset by EUR 154 million impairment related to an equity investment. For the second half of fiscal '18, we continue to expect volatility in CMPA with an overall negative impact due to carve-out-related topics.As in previous years, we expect corporate items to incur significantly higher costs in the second half year, in particular on central innovation invest. We expect the fiscal year '18 at least on the level of prior year. Pension impact has been somewhat higher in the first half year, but we expect full fiscal year '18 in line with fiscal '17. PPA will continue on the first half 2018 run rate, so you can expect around EUR 300 million per quarter.The tax rate of 26% in the second quarter was significantly lower year-over-year. Effect from the largely tax-free gain from the transfer of Atos shares and the release of tax provisions more than offset negative income tax effects related to the carve-out of Siemens Healthineers. After 6 months, the tax rate stands at an exceptionally low 17%, also benefiting from the U.S. tax reform effect in the first quarter. However, we expect for the full year the tax rate to be within a 24 to 29 percentage range. The second half, among others, material effects from the carve-out of the Mobility business will negatively impact the tax rate.Finally, I want to point out that net income, which is attributable to noncontrolling interest, will be higher due to the listed Siemens Healthineers stake. Having said this, I would like to draw your attention to our solid free cash flow, which improved by 14% to EUR 1.7 billion after the first half of our fiscal year. All in all, I'm pleased that we made further progress to achieve a more balanced free cash flow development over the year.Following the strong results achieved in the first half of fiscal '18, we raised our guidance for earnings per share. Our updated outlook is as follows: we continue to expect geopolitical uncertainties such as trade restrictions that may affect investment sentiment. We raise our outlook for basic EPS from net income to the range of EUR 7.70 to EUR 8, excluding severance charges, up from the range of EUR 7.20 to EUR 7.70.Furthermore, we confirm our expectation of modest growth in revenue, net effects from currency translation and portfolio transactions, and continue to anticipate that orders will exceed revenue for a book-to-bill ratio above 1 for the full fiscal year. We continue to expect the profit margin of 11% to 12% for our Industrial Business, also excluding severance charges. This outlook excludes charges related to legal and regulatory matters and potential effects, which may follow the introduction of a new strategic program.With that, Lisa and I will be happy to take your questions. And I return the microphone back to Sabine. Thank you.

[Sabine Reichel, Head of Investor Relations]

Thank you, Ralf. Thank you, Lisa. Let's start now with Q&A. First question, please.

[Operator]

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

[Benedict Ernest Uglow]

I guess this is a question for Ralf. On Digital Factory, you -- I mean, obviously, 23% underlying margin was an eye-opener. Can you just drill down into the sub-divisions a little bit more? Of the margin expansion, how significant was factory automation? How significant was the PLM business? And also, if you can just give us a sense of what's going on in your CNC and motion control area? So that's sort of issue number one. Issue number two, related as well, you had MindSphere and Mentor integration costs of basically 200 bps. Is that going to be the run rate roughly in the second half of the year?

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

Thank you, Ben. And thank you also for the question around Digital Factory. I mean, 23%, as I said, that was an extraordinary strong quarter if you take out the MindSphere investment and Mentor integration. So from that perspective, I think we need to stay calm and also keep our feet on the ground with regard to future development. If you talk about the pillars of success, I mean, first of all, the PLM business has been contributing a lot. We still have some way to go to lead the industry-leading margin of one of the competitors we all know very well. But we are on our way to get there. With regards to the run rate of integration cost, I think we need to take it quarter-by-quarter. But it's obvious that they have been making very good progress and the fact that they are going to harvest the intended impact by far earlier in terms of synergy, so also suggesting that the integration process, as such, is quicker and therefore less costly. That's my read. I can't give you precise figures yet, but yes, expectations are there that we are not only quicker in synergies, but also quicker and, therefore, less costly when it comes to the integration cost, as such. Some of them, we also need to see as investment, as you know, because they will create then sustainable value propositions in the future, and we wouldn't sacrifice that for a quick win, so to speak. Talking the sources of success, I mean, I indicated that before that, factory automation had an excellent quarter. Then you all know that the margin conversion in that business is fairly high. In some parts of their portfolio, we are talking 60%-plus margin conversion. And therefore, if the market hit the sweet spot of our portfolio, that can have tremendous impact, but also difficult to predict the mix of the next quarters to come. What we clearly see, if I may take you a bit through geographies and our read on the market, the world manufacturing is confirming moderate growth path from that what we hear from the markets. Despite high sentiment levels, we don't expect, of course, a further acceleration in dynamics for the next couple of months. The trade tensions that are out there will also have impacts. So volatility may be a bit higher than we saw it throughout the last couple of months. But all in all, we assume that the moderate momentum will continue until the end of our fiscal year, maybe even a bit longer. And when it comes to the relevant industries in our portfolio, machinery and electricals perform above the manufacturing average. Machinery also holds rank 1 now and is dominating the macro development; whereas automotive is performing a bit below average, but still holding on fairly strong compared to that what we expect -- what the market has been expecting for quite some time. So China, I've been pointing out already, a real source of strength, 41% growth rate. It's something that doesn't repeat itself every quarter, obviously, so we expect a bit of moderation there. And we also are going to face tougher comps then for the rest of our fiscal and also on the way forward then. Manufacturing in the U.S. is also reporting modest growth momentum. And we are anticipating a bit of an acceleration of momentum with moderate growth until the end of '18 there, our fiscal year. And also, the improvement in raw material pricing is a key driver in the U.S. economy, obviously, and that may support our assumptions. European manufacturing, showing acceleration and dynamics, with moderate growth, as I have been pointing out before. And we expect that this development should also persist for the next handful of months, mainly pushed by good momentum in small and midsized countries and companies in the southern and middle part of Europe. And Germany has been confirming its moderate growth path despite a softening in dynamics compared to the prior months. We expect a continued moderate growth for the rest of our fiscal year for that region. So all in all, I think fairly broad-based. Visibility, as I said before, 3, maximum 6 months. And therefore, as I said before, I expect the momentum that has been created maybe not on the same scale, but continuing for the third quarter, and we'll take it from there then. You also have been asking about our motion control business. And I think it's fair to say that we also have been seeing good momentum in that business, not at the peaks that I have been discussing for factory automation, but with a clear trajectory; also, that this momentum will prevail for the next 3 to 6 months.

[Operator]

Your next question comes from Mark Troman from Bank of America Merrill Lynch.

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

Got a few short questions, please. Firstly, on Process Industries and Drives, the order data there has looked quite good for a number of quarters. I wonder, Ralf, if you could give some sort of outlook on when we should see stronger sales growth and getting some leverage to get those margins back in the target range. So that's question one on Process Industries. Maybe one for Lisa on power generation. With all the restructuring measures that you've announced, how much capacity reduction in effect will there be for the large turbine business that you have? Or is it is a better way to think about it about just fixed cost reduction? So I'm trying to get an idea of the impact of the measures you are taking on your capacities or fixed cost. And then finally, Ralf, I was interested in your comment about FX having a bigger impact in your fiscal second half. And I can see quite clearly why that would be for the next quarter. But obviously, with the dollar strengthening recently, I think the dollar-euro is, what, running at $1.18 from a peak of $1.24 not so long ago. Why would the impact be -- still be big in H2? Is it a timing effect and then you'd gain something in '19? Or maybe you could explain the FX, please?

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

Thank you, Mark. Let me start right away with the exchange rate issue that you have been raising. I mean, first of all, I maybe should be more precise. I mean, we had 30 basis points of negative impact for the second quarter Industrial Businesses margin. And from today's perspective, it won't be an earthquake, but the range may expand to something between 40 and 50 basis points for the full fiscal year. The reason for that mainly, and you touched on that implicitly, is that, I mean, we are closing all our open positions for the next 3 to 6 months. And therefore, we have pretty much visibility for the next 5 months to come now. And what we will see is a slight increase on the average for the full fiscal year then. This is, in particular, driven by the U.S. dollar, of course, but also by literally a handful of other major currencies, including British pound and also some of the emerging markets that have an impact there. So all in all, the third quarter, I would expect the typical suspects, including the Healthineers and also PD and, to a certain extent, Energy Management, which has been affected most in the second quarter, will again be those with a negative impact from exchange rate on the margin development. We will make that very transparent again once we are there. But tendency-wise, as you said, that it should be a timing difference if the current exchange rates, in particular for the U.S. dollar, will prevail for the quarters to come. When it comes to PD, I think it's a really excellent question, and we have been discussing that back and forth with the management team. As I said in my little introductory speech, I mean, we see actually 2 worlds there. I mean, the one, the typical commodity market customers that have been coming back, I mean, due to higher commodity pricing there. They are probably getting closer and closer to that utilization rate in their business when there is more than OpEx on their spend. So from that angle then, new order development has been pretty much based on that one. On the other hand, we continue seeing a lot of pricing pressure on the mechanical drives environment, which is mainly occupied by customers from the wind industry, which, as I said before, are also just in the consolidation phase. Pricing in the market is getting tougher due to more and more countries shifting their models to auction from feed-in. So I wouldn't expect any major change in that 2-world scenario anytime soon. But still, we got now 3 quarters in a row with a decent top line in the meaning of new order development. And typically, that is turned into revenue with a lag of some 6 to 9 months. So we will see some pickup in the sales growth momentum in the quarters to come. So second half of the year should be stronger than the first, but it will not be an outrageous incline in growth momentum, so this is going to be step-by-step. And bear in mind, I mean, the margin of PD had been affected by some 60 basis points of restructuring severance and, at the same time, has been burdened with 50 basis points of exchange rate impact. So they make good progress, and the measures they have been implementing are going to face a high degree of implementation now, so I'm quite positive for the continuous development. But as I said, it will be small steps. And honestly speaking, from a CFO's perspective, small steps sometimes are more valuable than big jumps.

[Lisa A. Davis, Member of Managing Board]

I'll jump in, Mark, on the PG question, to your -- to the question on restructuring and whether we should look at it as percent of capacity reduction or fixed cost reduction. We do look at it very much at how we're reducing the cost base of the business. If we were to look at it on a percent of capacity, it varies by product line, obviously, depending on what's required in the market, so it gets a bit complicated. But on an overall cost reduction, that's really what we focus on with respect to the restructuring we have announced. I also wanted to add that it's not just about the restructuring that you've recently seen the agreement of last -- of yesterday. But also, we're obviously continuing to focus on delivering on our productivity gains and reducing our product cost overall through different sourcing mechanisms and such. We're also not just restructuring our footprint, but also reducing our overhead and support functions in the business, and also looking at how do we better prioritize our R&D spend and reduce it overall by focusing on being more focused on the platforms and products that we support. So a lot of focus throughout the business on reducing the overall cost base.

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

Yes. Mark, I guess you see that there's literally no lever untouched, and that obviously also what it takes. Maybe I can add one data point for you, I didn't particularly touch on when I answered your PD question. I mean, PD also is benefiting from growth momentum in China. Just to give you a bit of gut feeling, there was north of 20% growth in new orders contributing also to the PD new order development in the second quarter.

[Operator]

And our next question comes from Andreas Willi from JPMorgan.

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

I have a follow-up question on Digital Factory, and then one on Energy Management and one on Power and Gas. On Digital Factory, you mentioned the strong growth in China. Some of your competitors or some Asian automation companies have warned about a potentially weaker outlook for smartphone tech-related spending later this year. Maybe you could elaborate a bit on that. What's your exposure within your Asian Digital Factory business to kind of the tech supply chain? And what are you seeing in these markets? The question on Energy Management, obviously, a much better margin this quarter after some mixed quarters. What drove the improvement versus the last quarter? It's been kind of a bit up and down in that division. And how sustainable is the 9% margin there now? And what do you see as an impact from raw materials in that division in the coming quarters, given kind of some of the exposure to steel you have? And on power, the question on -- given your resilience, you commented on, on the service business and given the high share that service now is of the total, it looks like the equipment business is losing about EUR 0.25 billion this quarter. Maybe you could break that down a bit into the underlying performance and some of these project charges that you have mentioned.

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

Before I leave it to Lisa to answer the PG question, let me just make quickly one remark on the new business in Power and Gas. I mean, after Lisa's presentation, I mean, it's obvious that we have a massive and also a sustainable impact from the market when it comes to the quantities out there. We said, just setting an example, that most likely, we won't see more than 100 new units large gas turbines per year in the current fiscal, not at all. And maybe this is also kind of new normal. And when competition is getting really fierce, sometimes, you also have to accept that you can only, to a certain extent, go for margin. You also need to look into utilization of your existing capacities. And that may drive you, in exceptional cases also, to accept certain orders that are getting their economic rationale only from the combination with a service contract. That means that sometimes, you deliberately accept an order that may be even slightly negative in the beginning when you signed the new equipment order, accepting that you then contribute to an evermore important installed base for future serviceability, where we believe we have real good positioning due to the strong technology and the technology upgrades we provide over the period of time to our fully installed base. Just wanted to mention that in the beginning. Then coming to your question on China, short cycle, I mean, you're absolutely right, we are watching that very, very carefully. I look into each and every of the market segments. And the indications that we got from the tech and electrical components is something that we are kind of tailoring into our own expectations for the short term. I mean, third quarter, that will not have a material impact. But one of the reasons why I said that there is not a lot of visibility beyond the 3 months is coming from that part of the market. Repeating -- and not repeating what I said before, I mean, China manufacturing shipments, they continue to expand with clear growth at the moment, a dynamic showing moderation compared to summer '17, for example, and the growth momentum will not accelerate a lot further. That's what I said. And this is also driving our big-picture view. We are not that far that we can conclude how much momentum that this indication for a slowing down in the tech area is going to unfold into the neighboring market segments. But at the moment, I think it's fair to say machinery is driving the scene. And automotive, even though with slower momentum, still contributing there. If there was a change in the component and the feeding processes, which these electronic industries reflect more or less, then the moderation in the second half of the calendar year, as I said, may be a bit stronger than originally expected. But again, big picture, China, we are penetrating the market very well, including also our industrial software business, and I said that in the first quarter's discussion. It's good to see that now, these cross-selling effects that we have been waiting for are more and more materializing. And it's good to have access to that other part of the market. It was mainly covered by industrial software in the past. The second piece of your question, around Energy Management. Typically, a long-timer like you knows that the first half of the fiscal is fairly slow in that business. I try to understand that for more than a decade now. I have to respect the fact it is that way, but it also was always the case that, in particular, the third and the fourth quarter of the fiscal year was fairly reliable then when it comes to volume. We see the margin clearly on that level. And from historical experience, the fourth quarter typically was even stronger than the second and the third quarter. So everything we know from backlog and everything we also know from the momentum generated in the different businesses, there is quite underpinning that we will continue seeing Energy Management on those margin levels, maybe even a bit above. Raw material pricing is going to have an impact. You can hedge only for a certain period of time, and that has negative impact but not material for the profitability of the division, as such.

[Lisa A. Davis, Member of Managing Board]

Andreas, so I'll make a few comments just on the questions on PG and maybe a comment about the resilience of our service business that you mentioned. As I mentioned in my -- in the speech itself, I mean, we have a number of different factors that are contributing to the resilience of the service business. The first is that our fleet is actually growing. Of the 88 H-Class units that we've sold now, 65 are in operation. All of those units have long-term service arrangements on them so that revenue starts to stabilize our service business even more. Also, as you saw in the chart, our utilization is increasing overall from what we've seen in the past. And then we continue to upgrade and add technology to the fleet in order to create value, as Ralf said, for our customers. So all of these are contributing to what we see as a very positive and stable service business going forward. On the -- what you mentioned around the losses in the new units side, Ralf had already commented a bit on underutilization or excess capacity in our manufacturing business. That is contributing. Really, the 2 predominant contributors to that new unit business performance is really the under-absorption and the lower price point on the sales that we're making in the marketplace, given the pricing pressure.

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

So the contract losses were not a big driver in that sense that you mentioned?

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

That was the point I tried to make.

[Lisa A. Davis, Member of Managing Board]

Yes, not at all.

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

Yes. And now they are finished? Or are these projects basically near completion? Or is that something that will continue or could continue?

[Lisa A. Davis, Member of Managing Board]

Well, we have a portfolio of over 30 projects that we're always implementing. So these projects are always ongoing. We had, on a couple of those projects, some over-expenditures on cost. Those projects will wind down soon. But again, we have a portfolio of over 30 projects that we're always working. So this is a very robust business.

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

Yes. I think it's also worth mentioning that the Egypt projects are very well on track.

[Operator]

Next question comes from Simon Toennessen from Berenberg.

[Simon Toennessen, Analyst]

Starting with 2 follow-up questions in PG. You're guiding for, I think, mid-single digits to high single digits underlying margins for the next sort of couple of years, including '18. Can you share maybe the assumptions with us what -- how you can get to the low and the high end within that? And then a more general question on PG. I guess, the outlook for small and medium turbine looks a bit better. And there might be some upside from the compressor business recovering now you [ did the ] Dresser-Rand bit. But if we look beyond the restructuring measures, what are your arguments as to why, financially, you both would hold onto this business in the long term? Then the next question, on Vision 2020+, looks like you're making some good progress on the power restructuring. So is it fair to say that we could expect an announcement as early as August, i.e., Q3 results with regards to Vision 2020+? And then lastly, Ralf, just on CMPA, obviously, volatility has been quite high there generally, and I know you can't guide that well for the business. But as it stands today, and you probably know some of the carve-out-related costs related to Alstom, how would you guide us for the second half with regards to CMPA?

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

Simon, thank you very much for a really broad portfolio of questions. So let me start with Vision 2020+. You have been -- the way you have been asking your question has been taking the power restructuring aspect pretty close to 2020+, which is not the case in the way we look upon it. I mean, we made that very clear when we started to discuss and indicate the magnitude of the need to restructure the footprint and address capacity -- excess capacity in the market. And maybe it was just coincidence that, at the same time, we said that we start thinking about and developing beyond Vision 2020, which we then called as a working title 2020+. And so therefore, let me keep them -- the 2 of them apart. I mean, we very much appreciated that we were able to make an important step yesterday, the night before yesterday actually, in concluding on a cornerstone paper that is now paving the way to negotiating the details and the locations and the concepts that will finally, hopefully, take us to a point that we will be able, at the end of the current fiscal year, to assess the quantity of potential restructuring needs and also book that. In the meanwhile, we have been starting to implement the non-European, non-German part of the exercise. I mean, about 1/3 is U.S.-based. And as Lisa said, this is on a good way, and first measures have been implemented. So when it comes now to the savings that we aspire, I think it's good for us and also good for you to hear that we are on the same track. We just have a different path that will take us to the same amount of savings when it comes to PG and PD restructuring. On the other hand, with 2020+, we are making good progress. And as we develop Vision 2020, which is still a valid and effective strategy in place, obviously, also successfully executed on, I believe in the second quarter on which we report now another proof point that with the exception of PG, the portfolio is very well on its way. And we are far ahead of the [ niche. ] 2020 is a year we have been suggesting to develop something new, but we want to use that period of time that we now have been saving, so to speak, and are ahead of the curve to create additional momentum for the new Siemens, as we called that. And I'm very positive that we are going to be in a position to also make announcements once we have been concluding and once we have discussing that with the internal stakeholders, including supervisory board, and then we'll share with you. But bear in mind, these are 2 different working streams, and they are not interdependent. So therefore, we have not been sitting idle in the managing board waiting for the negotiations to think about what the future Siemens may look like. Apart from that, CMPA, yes, I explicitly said volatility will be there also in the second half of the year. I mean, we, of course, have quite some understanding about what's ahead with regards to the carve-out of the Mobility business to prepare it for the joint operations with Alstom. There is a part in it that is more tangible single aspects that just -- where you just run the [ mark. ] And there's other aspects where it deserves a lot of good thoughts to optimize. That part is including also taxation. And as I said in November, when we have been guiding you the way we did, that we will, at the end of the year, as soon as we have final results at fingertip, share with you also what the pros and the cons are. So with respect to the second half, I said that in my presentation that we now have been guiding you for a lower tax range, effective tax rate, we said in the beginning of the year, 27% to 33%. Now it's 24% to 29%, including the positive of the U.S. tax reform, which we quantified also in the first quarter, a EUR 437 million positive impact. But it will still be a material amount. And as long as there is still uncertainty there, and sometimes, you also address and see the receipt of revenues and the tax authorities in some jurisdictions and discuss with them, as long as I'm not done with that one, I am asking for your understanding that we are not quantifying things in that area. But the higher tax rate in the second half of the year will be driven by residual uncertainties, mainly in the tax area. So I need to ask you for patience there. Lisa.

[Lisa A. Davis, Member of Managing Board]

So let me address your questions, Simon, on the, I guess, future attractiveness of the PG new unit business, and maybe I'll break it down into 3 distinct areas because there are 3 distinct markets within the business. The first, on small and medium gas turbines. Really, this business is driven very much by decentralized energy systems and the growth in decentralized energy. And so we do see this still being a very attractive business going forward for the use of small and medium gas turbines. They have a natural home in decentralized energy systems of the future. If we look at the compression business, really, this is a bit of a discussion about oil and gas. And as you've seen in some of the comments, we do see this business starting to find stability and recover. And we do see this market very much intact longer term. We also see quite an opportunity in the oil and gas business around our ability to bring digitalization into an industry that has not advanced nearly as much as other sectors or other verticals have. So an opportunity that's unique to Siemens to be able to leverage our digital capability with our rotating equipment in that industry. So growth opportunity there as well. And even in the large gas turbine business, even though this has obviously gone through structural change and will be a smaller market going forward, we do see a need for large gas turbines in the energy systems of the future, if not for anything else, but for security, the ability to bring large volumes of power into the system quickly. And for this reason, we do see a large gas turbine market going forward, albeit much smaller than what we've seen in the past, and therefore, the need for us to really restructure and rightsize our business to match that market of the future. So all in all, still some optimism around all 3 key areas of the business and the business overall going forward.

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

Simon, I owe you one last part of -- one answer to a last part of your question, and that is about modeling CMPA. I know how difficult that is, and I can't really help you with concrete figures on that one. But if you look into the first half, that was obviously very much driven by the extraordinary impact of Alstom and now from Atos. If I look into the second half of the fiscal year, I would see a more normal course of business being driven by carve-out-related expenses and the like. And if you model in a high double-digit negative number for both of the quarters, you probably will not be that wrong.

[Operator]

Next question comes from Markus Mittermaier from UBS.

[Markus Mittermaier, Co]

My call just dropped a few minutes, so apologies if you addressed some of these questions already. I have one on Digital Factory, one on PG and one brief one the framework agreement from yesterday. If I start with Digital Factory, please. 23% underlying margin, how should we think about [ that internal loss ]? You have, I would say, bread-and-butter short-cycle business versus a number that you've recently been talking about on cloud and SaaS-based software targets that you have by 2022, EUR 1 billion. Is there any meaningful part of that cloud and SaaS revenue already in the revenue mix today that could explain some of that very strong margin? And more long term, what is the margin ballpark that you are thinking of for that incremental revenue? I assume most of that EUR 1 billion will be incremental. If not, would be interesting to figure out how much of that is incremental versus cannibalizing your other license business. And then on Power and Gas, for Lisa, if I look at your backlog and the sort of service-relevant fleet growth that you've mentioned in the presentation, to what extent is in the backlog still time and material as the way you charge your clients versus long-term service agreement? So does that first major overhaul timing matter more for the backlog than for new business? That's question one. And question two, some of your competitors, I think, are increasing the service intervals quite a bit in their long-term service agreements. How comfortable are you there in terms of provisioning going forward that there is no risk, if you assume that pricing here stays flat, that there is no risk from -- on the service margins? And then very briefly on the framework agreement, how would you say the reception or the level of agreement in the Workers Council is on your view and outlook for the power business?

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

So Markus, thank you. And indeed, you missed a bit on the Digital Factory side, so I hope you forgive me that I'm a bit short and sweet on that one. We discussed the 23%. The main driver of that was two-fold. One, Mentor and the PLM business had an outstanding good quarter. We are making very good progress with the integration of Mentor, means the synergies are ramping up by far quicker than originally expected. And we will be there with the EUR 100 million target already by fiscal '19 instead of '21. So that is an incremental support of that margin. And the other big pillar, 23% underlying are based on its growth momentum and high-margin conversion, mainly in the factory and automation environment by a fairly big portion, driven by China where we have been growing more than 40% in the second quarter. And I have been running your colleagues and the audience through a detailed regional analysis, what we expect to happen in the different geographies and the relevant business sectors we are in. So if you don't mind, take the details of that one from the tape later on. But the question about how material is the impact on MindSphere and co. already on the way to that EUR 1 billion incremental that you have been addressing. Of course, it's not material at the moment, but we are still in investment mode. And as we have been guiding you, and that I think really is still worth being mentioned time and again. I mean, we are investing substantially in MindSphere with a yearly investment of around EUR 175 million, plus have all the integration efforts for Mentor being done and still grow margins in a highly competitive environment. That definitely has an underlying rationale from our customers' perspective that they got the point and that they invest in digitalization. Also, the number of leads we have been creating at the Hanover Fair, 7,400, I mean, the figure itself doesn't mean a lot, but the level of quality these leads have very specific -- are very specifically asking for challenges in new projects. I mean, we have a very detailed analysis of these 7,400. And typically, you would have some 10% that are relating to a concrete project that the customer, interested and addressing the lead, is dealing with. This was more than 20% this term. So there is massive momentum being created. And we are not only seen as a thought leader in that field, but we also can help with up and running applications. I have been elaborating in my speech on that as well. Now when it comes to the framework agreement, I really think this was a big step forward. And the way we have been discussing that was open and, of course, also with different points of view. But the alignment on the need to act and also the magnitude and the broadness of the actions required, that is absolutely shared. No one is left behind in la-la land and is believing there is an easy way out because the root cause of the situation in the market is so obvious. So therefore, there is no room for any misunderstanding, that it takes what it takes for the way forward. And also we discussed that in another question before, Lisa did, and it's just about very carefully observing the market and looking for opportunities, yes, because there are new business models coming up, and there is also plenty of challenges in footprint and reorganizing that. So for the way forward, we spent many hours with the members of the Supervisory Board and also with the representatives of labor, not only in the negotiations, so there is absolute transparency on what is required to take that business forward.

[Lisa A. Davis, Member of Managing Board]

I would just add to that, Markus, that the discussion in the framework agreement that you saw yesterday, it's really the discussion that led to that was really a discussion about how and not necessarily what. So the understanding of the need in the marketplace, as Ralf said, is fully shared. And it's just a discussion as to how to get those cost savings in the business that led up to the framework agreement that you saw advertised yesterday. To your questions on PG and service, maybe I start first with the comment about competitors are increasing their service intervals. We also, within Siemens, are increasing our service intervals as well. How does this -- how do we manage that so it doesn't impact the value of our service business? Well, we're also bringing new offers to our customers at the time when we do look to increase intervals. And the new offers are by bringing new technology to our customers to help them improve efficiency or overall capacity or also bringing digitalization and new service capabilities to them at the time where we're renegotiating potentially on service intervals. So all of this continues to provide stability in our service business going forward. And then your question about backlog. Obviously, when we do our service business, it's a combination between long-term service agreements and what you mentioned as time and materials are what we would call book-to-bill, and these are both balanced in our business going forward.

[Operator]

Our next question comes from James Moore from Redburn.

[James Moore, Partner of Capital Goods Research]

I wonder if I could focus on Power and Gas. Firstly, could you comment whether the service margin was stable year-on-year in the first half? If you already did, apologies. And secondly on that, could you say how low the Dresser margin has got? You gave a number of high single digits 2 years ago. I just wonder now that we've had the oil pain, where are we? Has it bottomed? What's the potential? Secondly, if I could turn to free cash flow. I think the PG free cash margin was minus 5% in the quarter and 1% in the last 12 months, it's materially below your P&L margin. Do you have any visibility on whether conversion can normalize -- free cash flow conversion can normalize in the coming year? Or will we still see a difference there? And finally, can you expand a little on your new PG margin outlook, particularly on what the phasing of the savings is? And you say you expect a material impact on the bottom line in the 2020 year. Can we think about getting back into the 11% target corridor in the 2020 year?

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

So that was indeed a bit of questions on PG. As you indicated, James, let me try starting taking you through there a bit. I mean, with regard to the margin level in service, we said yes, we see a fairly stable margin development in service, not only in the first half year, but also in the backlog that we see ahead of ourselves. And visibility, that didn't change. We have been discussing that a couple of times that, typically, for the next 18 months, we have quite a good visibility on the deployment of services and resources for that one and also on the quality of the backlog margin, if you will. So with regard to Dresser, I mean, we said that also a couple of times, I mean, when we acquired the asset, we have been reporting on the development now being combined with the former Siemens part in what we call a Dresser unit. There has been substantial challenges in the market development. And even though the team has been taking cost out, they could not completely decouple from the movements of the markets. Including the service business, they are in the low single-digit margin environment, and we are very carefully assessing opportunities and take them as they arise. But we are not done there in that market segment. When it comes to free cash flow, I really like your question. Analysis is pretty sharp. That's what we have been asking ourselves, too, very intensively. And I think we need to keep 2 or 3 aspects a bit apart from each other. The first one being, how does PG deal with the declining business volume? I think that is a very, very challenging task for them because, on the one hand side, they need to make sure, and they do, to avoid any inventory obsolescence risk. We are very intensively looking into that matter. On the other hand, you need to be ready to deliver quickly if timing is part of the tendering process and your customer is prioritizing that. So walking a thin line has been working out very well in the Egypt projects, I think. I mean, this is going to be delivered on record time schedule and still quality on high levels. I mentioned that before that we don't see any major negative impact compared to the plan we made. Absolutely on track there. And by the same token, we see, with the declining new orders, also a lack of advanced payment. So this is a different regime system, if you will, that is establishing itself as new normal in the market. And we are carefully watching that. Operating working capital needs to be reduced. The team knows that, and they are busy working on that. It's also -- it will also be affected by the consolidation of sites and the footprint because the more sites you have, the more [ whip ] you have on the road at the end of the day. And last but not least, free cash flow will also be affected by payments being made for severance and the like. So therefore, your question, when are we going to see new normal and when is it going to be in steady state? Then it's not that easy to be answered. We are tracking all the different components, but the result of that will only be seen once we know the timing of the payments in the severance arena. That's pretty much the big picture on that one. And with regards to the margin outlook, before I will ask Lisa to add, if need be, the margin outlook, I mean, we clearly have been assessing the current situation very thoroughly with all the aspects that Lisa has been explaining. We have been guiding you since the London conference into mid-digit margin before severance payments. And Lisa mentioned in her presentation that this guidance is also relevant for fiscal '19. It's not only for '18. If and when after all the savings of the framework -- of the measures that are going to be agreed right now kicking in and materializing 100%, whether then in 2020, definitely beyond when they will be fully materializing, we also need to observe where the market goes until then. From today's perspective, I don't think we should discuss too much about the when, but more about how well can we cope with the challenges until the savings are fully materializing because time is of the essence. We need to be determined, and we also need to consistently implement those measures. And as I said, before 2020, I think there is no need to discuss any margin target above mid to high single digit.

[Sabine Reichel, Head of Investor Relations]

We have a few more questions on the line. [Operator Instructions] So next question now.

[Operator]

Our next question comes from William Mackie from Kepler Cheuvreux.

[William Mackie, Head of Capital Goods Research]

I will just concentrate on Process Industries and Drives. You have been kind enough to structure the discussion around current and midterm margins in PG. But could you do the same thing for PD, given that it is currently out of margin target? You have an ongoing restructuring plan. You have some framework agreements in place and a shift in some market dynamics. But when should we expect PD to start tracking back into its midterm margin corridor?

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

Thank you, William. So first of all, I don't know whether you heard me explaining a bit the margin quality for the second quarter. If you adjust for severance and then know that there was a drag of 50 basis points on exchange rates for PD in the second quarter, you end up pretty close to the margin -- to the lower end of the margin band. I don't want to overemphasize that, but this is just finding the right basis for the discussion. I mean, with the measures being on their way and the additional ones being planned and finally determined now throughout the next couple of weeks and months, I feel PD, all others equal, being in a position to reenter the margin corridor latest by 2020. Now as we said before, we don't want to discuss and figure in and figure out severance and the like because there's always a baseload of measures you need to take to take your business forward. You need to invest at that end. So we like to still continue the target margin corridors as reported, including a certain part of severance and restructuring work that needs to be done. And if you then add the fact that this is a late-cycle business typically, to a large extent, with all the artifacts around mechanical drives and wind power that I mentioned before, so there is quite 0.5 year, 9 months of lead time required between new orders being booked and then turnover being recognized. So that's why I think it will take also some time to finally find ourselves in a new normal. And that's why I would like to repeat what I said before, I prefer consistent and constant steps into the same direction instead of one-time wonders that then leave volatility behind. So I have quite a good feeling for PD being on the right trajectory. And whether it's a quarter more or less, that's not really relevant for the long-term perspective of the business. On top of all that, the markets, if and when it's recovering when it comes to commodity pricing and also the ability to tap on the potential of new technologies, including digitalization in that field, then we will be perfectly positioned to participate in upswings. And I gave the data point before that in China, for example, where some of the companies, or customers there kind of quantum leap one technology level, if you will. We saw tremendous growth opportunities and have been adding more than 20% of growth in PD in China in the last quarter. So there is opportunities out on top and bottom end. And I think it's fair to say that the team is doing a tremendous job implementing all these measures, at the same time, being challenged by the market. The way they have been challenged, I think they deserve respect and appreciation.

[William Mackie, Head of Capital Goods Research]

Quickly, could I follow up on the FX comment you made for the division? You've highlighted it in a number of divisions. Can you scale the FX impact for the group in Q2 and the expected increased headwind that we might see for Q3?

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

As I said, we had 30 basis points on Industrial Business' margin negative impact from FX in the second quarter. That -- we see that developing for the full fiscal year rather into the area of 40 to 50 basis points negative in total for all exchange rates. We have been hedging, as we always did, for the next 6 months. We have about 85% of our open positions being hedged, so not a big surprise from that perspective. And the divisions that are going to be affected have been, to a larger extent, in the second quarter, the Healthineers, PD and Energy Management, and this will remain pretty much the same. Second quarter, that was 50 basis points negative for the 3 entities being mentioned, and that will increase in the third and fourth quarter, that direction I described for the full fiscal year for the group.

[Operator]

Next person from the queue is James Stettler from Barclays.

[James Edward Stettler, Managing Director]

Just looking at your EPS guidance. When you set out the guidance in November, what were you including, because we've now had 3 very significant gains? Because clearly, the operational performance has been very solid, especially in Digital Factory. So when you raised the guidance today, I mean, what's your thought process? And what should we think about any future gains in H2? That's my first question. And then one for Lisa Davis. Service was 55% of revenues, as you mentioned. Where should we see that going forward? Could this become a business which is much more service-driven going forward and, as a result of that, potentially much more profitable?

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

So the EPS question is a very relevant one, obviously, and I would like to go back to our November announcement. What we said then is, a, we exclude severance and restructuring because we just can't know at that point in time; and b, we also said that due to the fact that there will be substantial impact from carve-out activities for both Healthineers and Mobility to prepare them for the merge with Alstom, we will have substantial impact and particularly on the tax side, have been elaborating on that a little bit already. We saw some of that, pretty much half of that from a [ content ] perspective in the first half of the fiscal year, including the second quarter where our effective tax rate has been benefiting, a, from the low tax rate being applicable for the sale and transfer of Atos shares. That is close to tax-free, if I may summarize it. And secondly, also, we're in a position to release material tax provisions in the second quarter. Against that, there was impact from the Siemens Healthineers carve-out being completed. But I also mentioned that there is still uncertainties in the final tax assessment because you can imagine magnitude and broad impact in many different jurisdictions in that way, doesn't -- you put into a position that you send out one tax file and that's it. So there is still a couple of things that are uncertain at the moment. We are working on them. And we are confident that we can conclude them over the course of the next couple of months and maybe quarters. And we are now entering into the final stage of carving out and building a subgroup for our Mobility business that will then be brought into the joint activities. The same in principle is applicable there. So from the tax side and also from other carve-out-related expenses, we are not done yet. Yes? But the assumptions that we made when we discussed with you in November are pretty intact from today's perspective. And as I said then in November, I will share with you numbers when they are solid and firm. And in that particular part, it also takes third-party, the tax authorities view on that one. So you need to be a bit patient, I said that before. But the rationale that we will have substantial material impact from the carve-outs and that being kind of compensated by extraordinary positives is still intact.

[James Edward Stettler, Managing Director]

So just following on to that. So I'm just -- underlying, how does the business performed versus your expectations? Because we knew there were going to be all these costs, but if you just look at x gains and carve-outs, how is that looking?

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

I said as planned, and we will share with you when we're done with it.

[Lisa A. Davis, Member of Managing Board]

So let me now address your question on our service business in PG and the fact that it's 55% of revenue now and your question of whether that would go higher in the future. Well, it really depends very much on the market and where the market goes for new units, whether it be large gas turbines or small and medium. We are, as I mentioned in my comments, increasing our market share, so we're gaining market share in both the large gas business as well as the small and medium gas turbine business. So it's this combination between us gaining market share and then what the overall market is going forward, so that would depict what the percent revenue is for service.

[James Edward Stettler, Managing Director]

But based on your outlook, that's going to be smaller. One would expect then service to be larger.

[Lisa A. Davis, Member of Managing Board]

It depends on what your outlook is on the market going forward, really.

[Sabine Reichel, Head of Investor Relations]

So looking at the time, we have only one more question, please. Last question, operator.

[Operator]

The last question comes from Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

The first question I have relates to the Mobility division where the profit contribution was clearly stronger than expected. And it increasingly seems that you will contribute a bigger share of the profit to the combined entity with Alstom than the 50% you will get eventually. So the question is, are you still happy with the current terms and conditions of the merger? So that's question number one. And then question number two is, I think you mentioned some push-out of HVDC projects to 2019. Could you elaborate on this and say basically what's driving those further delays in those projects?

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

Thank you, Gael, for 2 interesting questions. Let me start with Energy Management and HVDC. I didn't say further delays. What I said is that from the perspective that we take as a potential supplier, you have to, I mean, be ready when the customer is calling for a quote, and you enter into a tendering process whenever timelines are set. What you typically see in that business environment, that you have a kind of density of large-scale projects for a certain period of time, as we had that in last fiscal year '17 where substantial large projects have been awarded, not only, but also to us, was EUR 1 billion in the second quarter only last fiscal year. And then you go through kind of dry periods, and this is no surprise and it just happens. And if you look into history and learn from that, you shouldn't overemphasize the fact that there are sometimes 3, 4, sometimes 6 quarters with no awards being made in terms of large-scale tendering processes. So this is not concerning. I just wanted to make sure that this is not misunderstood in the meaning of that we lost out on opportunities. So the markets didn't provide opportunities, and we will stand ready and be available, and this is most likely in fiscal '19. Again, that's my view on it. And pushout means that expectations for certain timing for a certain project has been pushed out, not delayed in the meaning of that a customer cancels a project at a certain point in time and has been rescheduling that. Maybe I was not precise enough on that one, I apologize. Then with regard to Mobility, I think this is, first, great statement that you made, that we had an extra -- is it outstanding profitability level? I agree with your assessment. And there was one little tiny thing I need to correct because you said our 50% share, it's 50.7% that will be Siemens' share in joint activities. And that's important to remember and to remind ourselves time and again. There was a mechanism agreed upon for the valuation assessing them and coming to that 50.7%. And that goes pretty much along the lines that Siemens is the more profitable business and Alstom is a bit bigger, also in terms of the backlog being brought in to the joint activities. And then there were a couple other balance sheet items that had to be reflected and have to be taken into consideration. But the profitability development is a very good one for Siemens Mobility and will allow us to enter from a position of strength into these joint activities. We also very much appreciate that we hear that Alstom is doing fairly well with their financials and delivering on their projects. So it will be a merger of 2 strong companies in which Siemens is holding the majority.

[Sabine Reichel, Head of Investor Relations]

Thank you. So thank you, Lisa. Thank you, Ralf. Thank you, everyone.

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

I would like to make a last statement, quickly. I know that quite some of you have been taking the time to visit our booth at the Hanover Fair. And I also very much appreciated your comments on what you saw. And you also should know that we consider that these statements you have been making about how impressive the event was also is an obligation for us to implement and execute. Thank you.

[Sabine Reichel, Head of Investor Relations]

Thank you. So with that statement, I think we can now conclude. If there are further questions, please reach out to the Investor Relations team. We will be around. Thank you, and goodbye.

[Operator]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.Please let me advise you on the instant replay numbers. Participants in Germany, please call the replay number [phone], access code 3250549#. Participants in Europe, please call the replay number [phone], access code 3250549#. And participants from the United States, please call the replay number [phone], access code 3250549#. This replay service will be available until tomorrow night. A recording of this conference call will also be available on the Investor Relations section of the Siemens website. The website address is www.siemens.com/investorrelations.