Siemens AG

XETRA:SIE

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Siemens 2020 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.All Q2 documents were released at 7:00 a.m. this morning. You can find everything on our website. We appreciate very much that you are joining us today despite a public holiday in the U.K.Our Deputy CEO, Roland Busch; and our CFO, Ralf Thomas, are here this morning to review the Q2 results and will give an update of our Vision 2020 plan. Roland and Ralf will start with a presentation. We will have time for Q&A, and we'll finish the call in about 50 minutes.And with that, Roland, please go ahead.

[Roland Busch, Deputy CEO, COO, CTO & Member of Managing Board]

Thank you, Sabine. Good morning, everyone, and especially, thank you for joining us to discuss our second quarter results on this U.K. public holiday.Today, we remember the 75th anniversary of the Allies' victory over the national socialistic regime in Germany and ending of the Second World War in Europe. We all companies, societies and individuals have a responsibility that this will never repeat. We need to stand up for peace, freedom and tolerance now and in the future.So let's move on with our agenda. First, I will give you my take on the current COVID-19 situation, followed by an update on our progress in executing Vision 2020+. Ralf will then follow with further details on fiscal Q2 financials.Siemens has 3 priorities during this unprecedented time. First and foremost, we implement all necessary precautions to secure employee health and safety in factories, labs and nowadays mostly home offices. Secondly, our crisis-proven leadership teams ensure business continuity, together with our very hard-working and dedicated employees, at Siemens as well as for mission-critical operations and infrastructure at customer sites. On group level, a senior management corporate crisis team prepares overarching decisions and empowers local teams to take appropriate actions. In crisis times, it becomes obvious who is a financial strong and reliable partner able to deliver. Our investments in digital services are now paying off with a significant ramp-up in areas such as virtual commissioning, remote maintenance and data-driven services. We have been very successful to keep our own operations up and running. Factory closures occur mainly in cases when required by authorities and not by disruptions to the supply chain. Our supply chain team monitors more than 6,000 mission-critical suppliers on a daily basis. And at this time, we have 24 factory sites closed, mostly in India, but all main factories are operating at sufficient capacity levels. We use all instruments to flexibly adjust capacities to very volatile demand situation and short-cycle product businesses. In addition, also project and service businesses are strongly affected due to the restricted customer site access and availability. Currently, around 7,400 employees are in short-time work in Germany, and we are prepared to flexibly adjust this number as required. Contingency measures are in place to safeguard cash and protect margins.And third, we are fully committed to support the fight against COVID-19 and its consequences. Just to mention a few examples out of many where we take social responsibility: We support with know-how, such as our software simulation tools, to produce medical supplies like ventilators. Our teams provide access to production capacities and our supply network. And we make targeted equipment and medical supply donations to support communities and health care systems. Our COVID-19 relief fund and corporate citizenship projects total already around EUR 12.3 million.Beginning in January and in February, we saw unprecedented downturn in China, with a clear bounce back in March. Since then, pandemic-related lockdowns have spread around the globe. We see currently a massive decline in economic output and customer demand. Many of our core verticals, like automotive and machine building, are affected. Fiscal Q2 performance was already impacted significantly. However, we expect business momentum to further decline with more negative financial impact in fiscal Q3. Macroeconomic developments and their influence on Siemens beyond Q3 cannot be reliably assessed at this point in time. It is too early to assess the shape and timing of the future recovery. Clearly, it is depending on the speed of easing restrictions, which varies from region to region, and timely implementation of stimulus programs. Another key factor is, of course, the introduction of an effective treatment and vaccination at scale. Thus, we cannot confirm our original guidance any longer. We adjust our top line outlook for the Siemens Group, but given the abovementioned circumstances, we currently refrain from giving guidance for EPS.Despite these current challenges, we also see midterm opportunities for us. We are confident that we will emerge stronger out of the crisis. And why do I believe that? Our core strengths automation and digitalization will play an even more important role in the future. Customers will adjust and localize their manufacturing footprint to derisk highly interlinked global supply chains. This will drive automation to keep the cost base competitive even with smaller lot sizes. As we can already see in China, intended stimulus programs will offer further opportunities for our businesses, be it in modernized -- industrial modernization, IOT, AI applications, energy efficiency, sustainable mobility or improving the health care systems.Let me now give you a quick my assessment of the fiscal Q2 performance, which reflects for the first time that we have classified Siemens Energy in discontinued operations. Siemens is a more focused company going forward.Orders were below prior year mainly due to large -- lower large contract wins in Mobility and tough -- on tough comps. This translates into a solid book-to-bill ratio of 1.06. As indicated, the revenue decline of 1% results from a lower demand in our short-cycle industry related businesses in Digital Industries and Smart Infrastructure. This was partially compensated by revenue growth in Mobility and Siemens Healthineers. This is a clear evidence for resilience in our portfolio.The structural transformation of Siemens is clearly visible in a higher operational margin level. We achieved 12.1%, a strong performance, I will say, considering the adverse environment. And Ralf will give you further details. Despite macroeconomic turmoil, we made significant progress in execution -- executing Vision 2020+. Delisting of Siemens Energy planned for the end of September 2020 is on track. We completed the carve-out by end of March, thanks to an outstanding team effort. Gas and Power and Siemens Gamesa were subsequently transferred to discontinued operations. As next steps, we will publish the spin-off report by the end of May and the invitation for the Extraordinary General Meeting. Starting May 1, the new management team led by CEO Christian Bruch and CFO Maria Ferraro will took -- take over. They will present strategic priorities and execution plans during our Capital Market Day on September 1.Our more focused and simplified portfolio is well suited for cyclical fluctuations and macroeconomic volatility. Our companies offer a healthy mix of short- and long-cycle businesses combined with a growing service and software component. We are leading the digital transformation in our industries. Even after carving out Siemens Energy, with a backlog of EUR 81 billion, the remaining backlog stands at impressive EUR 69 billion. Obviously, Siemens Mobility is the largest contributor. Our Digital Industries software unit is somewhat balancing the short-cycle product business. Its share of recurring revenue stands at more than 60% out of EUR 4 billion in their software sales. Finally, our 85% stake in Siemens Healthineers is another important stabilizing element through its focus on health care providers. As we all experience today, it is an industry with mission-critical role. The market is driven by secular growth trends and a potential beneficiary of future stimulus programs. Siemens Healthineers are well positioned to shape their market.An important cornerstone of Vision 2020+ is our goal to drive further margin expansion. We started early and gave you at our Capital Market Day a comprehensive overview on how we want to improve cost competitiveness and cost position, on top of paced productivity. Considering the impact from COVID-19, both Digital Industries and Smart Infrastructure have accelerated their programs to drive structural improvement. Key levers are intensified internal digitalization, process automation and footprint optimization. Compared to May 2019, we now plan to achieve around EUR 475 million in cost reductions at Digital Industries and Smart Infrastructure until fiscal year 2021. This is an increase of EUR 165 million. Both companies have also intensified a broad range of contingency measures to protect margin and liquidity such as the implementation of flexible short time work schemes across all businesses. Where necessary, we adjust capacity throughout mandatory paid time off. Across all functions, we are cutting back in discretionary spending. CapEx projects are reprioritized in a stringent way. And we focus very closely on securing customer payments and ensuring supplier payments to keep supply chains intact. We are also well on track to achieve our targets for lean and effective governance to reduce costs by EUR 300 million in fiscal 2021.Siemens Mobility is an integral part in Siemens. We have postponed an in-depth strategic update to the fourth quarter. There is no hurry for a strategic decision while we closely watch, and the company, current market consolidation approaches. Our Mobility business has achieved a remarkable transformation over the last decade. They shifted from a "mid-single digit profit" company with occasional profit downturns to a stable profit contributor within their target margin range of 9% to 12%. ROCE was consistently accretive to Siemens targets. Taking the impact from COVID-19 crisis aside, its leadership team has the clear ambition to continuously contribute at least 11% EBITA margin, adjusted EBITA margin, while growing their business with mid-single-digit growth rates.Key improvement levers are active portfolio management with focus on automation, software and services. Thus, we create a leading player with a vertical integrated setup covering the entire value -- its customer value chain. There is a clear customer trend in tenders to request integrated offerings for rolling stock, rail infrastructure and services. This is complemented by the implementation of platform concepts for rolling stock and stringent project execution. Just to mention 2 recent successful examples: First, we achieved homologation of our Mireo platform train in record time of 38 months, which usually takes 6 months longer. And second, our team executed a successful test run on our driverless metro train in Riyadh. Mobility, so far, has managed to keep its customer commitments from its order backlog very well. Even though we see certain short-term impact from project delays and shift of project awards due to COVID-19, the midterm perspective is compelling. Urbanization, decarbonization and sustainable transportation are secular growth trends which we expect to stay. This is also giving us an outstanding opportunity to capitalize on our leading digital portfolio.Another area where we see continued progress are the so-called portfolio companies where full potential plans are diligently executed by the leadership teams. In particular, Flender, our legally separate market-leading mechanical drives company, is now ready for the next level. We have decided to execute a 2-step approach to exit from this business field. First, we plan to integrate the wind energy generators business into Flender. Thus, we complete the mechanical and electrical portfolio as key Tier 1 supplier for the wind industry under its brand name, Winergy. Second, we intend to list the combined company via a spin-off on the stock exchange. The entity has a pro forma revenue of around EUR 2 billion. And we plan to submit this transaction to Siemens shareholders for approval in our next regular AGM in February 2021. Flender is an established, well-known brand with strong reputation in the market and long-standing customer relations across many market segments. Flender is also a technology leader with a global footprint, leading to a highly competitive cost base and attractive service business. The experienced management team made good progress in improving the quality of the business and is fully committed to shape the next chapter in the long history of Flender.With that, I hand over to Ralf to give you more details on fiscal Q2 performance.Ralf, your turn.

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

Thank you, Roland. And good morning, ladies and gentlemen, also from my side.As Roland mentioned, the financials reflect the new Siemens reporting Gas and Power and Siemens Gamesa in DO. We provided you this morning with comparable key figures in the same format for fiscal '19, for your reference, on our Investor Relations website. Now let me walk you through the businesses.Digital Industries faced an increasingly tough environment in the second quarter, which is reflected in top and bottom line. Increasingly, interestingly enough, order growth of 2% showed a strong diverging trend in the quarter for specific reasons. Main driver were material customer-driven safety stocking effects in automation businesses and several large solution and software orders mainly in the semiconductor space. Order growth was led by China, up by 10%, also due to a bounce back in demand in March after a sharp decrease in February. In contrast, revenue was significantly down in discrete automation on broad-based lower demand led by automotive and machine building. Process automation was clearly down, also suffering from lower investment in upstream oil and gas due to the drop in oil prices. Our software business was down by 3% on tough comps in the Mentor business due to a large deal in the prior year quarter.Against this backdrop, Digital Industries margin of 15.9% and impressive 16.9% without severance held up well, also due to stringent execution of structural and discretionary cost measures. The impacts from cloud invest and Mentor integration costs totaled to EUR 68 million in the quarter, equaling around 180 basis points. Cash conversion was very satisfying. We are pleased by the good results from the ongoing working capital initiatives that have been initiated there, in time.This page gives you some more color on the regional perspective on top line. The widespread corona impact in automation across our key countries and key industries is clearly visible. We anticipate for the third quarter heavy headwinds from COVID-19 related shutdowns and supply chain disruptions at customers over a broad range of our industries. Hence, we expect double-digit revenue decline year-over-year, with corresponding impact on the bottom line. Main drivers will be the short-cycle businesses here.Smart Infrastructure was also impacted in all businesses by COVID-19 effects such as a further cool-down in short-cycle industrial product demand and restrictions to access customer sites. Projects in verticals such as hospitality and public educations are quite often delayed by customers, while health care and critical infrastructure verticals show continued demand. Book-to-bill was solid at 1.08, with weaker orders mainly in solutions and service businesses, while the product businesses showed modest growth driven by low voltage. Revenue was slightly down by 1%, driven by softer revenue in the product businesses. And as expected and indicated before, Smart Infrastructure put -- has been booking severance charges of EUR 103 million after agreeing terms with the workers' council. Hence, adjusted EBITA margin was clearly down year-over-year, impacted by 300 basis points for severance. In addition, continued investments in grid edge applications such as storage, e-mobility and the like continued weighing on margins. We expect for Smart Infrastructure a more intense impact of COVID-19 in the third quarter, resulting in double-digit top line decline and corresponding impact on profitability.After 2 softer quarters related to orders, Siemens Mobility returned to a book-to-bill above 1, driven by commuter rail wins in Germany even though the high prior year level with several large orders could not be reached again yet. However, as guided before, the sales funnel is still strong for the second half of fiscal 2020 even though we must expect some project shifts into fiscal '21. The Mobility team again performed very well in keeping operations running and diligent project execution. As a result, revenue growth reached 6%, including the ramp-up of large rolling stock projects. Margin performance was solid with 9.3%, again within the target margin corridor. And as expected, free cash flow was weak due to timing of milestone payments and lower large new orders. We anticipate a significant improvement in the second half.Let me point out a few topics below industrial business, where we saw in parts considerable structural changes due to the Siemens Energy's reclassification. Portfolio companies include now certain regional assets from Gas and Power which were not carved out to Siemens Energy, mainly due to regulatory matters, totaling around EUR 900 million in revenue. PPA in continued operations, i.e., without Siemens Energy, were around EUR 180 million in the first 2 quarters, respectively. So expect this level to be indicative for the second half year. In discontinued operations, we recorded a loss of EUR 317 million. While Gas and Power contributed a positive adjusted EBITA, Siemens Gamesa Renewable Energy recorded a loss, as you know from their disclosures. Further effects, including PPA, for the entire quarter of EUR 116 million since the reclassification took place on March 31. Other items were spin-off costs and material, mainly carve-out related taxes. Carve-out related tax effects will continue to materialize in the second half of fiscal 2020, as indicated before. For this reason, the tax rate for full fiscal year 2020 for continuing operations is now expected to be in the range between 22% and 25%.Now as promised before, let me give you a brief deep dive on SFS.Siemens Financial Services was materially impacted by the increase of COVID-19 related credit hits by EUR 52 million. We do not expect credit hit ratios in coming quarters to be on the same level as in the second quarter. Looking at a long-term perspective, Siemens Financial Services has an excellent track record of strong performance and prudent professional risk management. SFS is focused on supporting the Siemens companies and has a highly diversified business mix across industries, products and geographies. Since the financial crisis in 2008, Siemens Financial Services has increased its portfolio share of project and structured debt business. Today, it has less exposure to higher-risk commercial finance and leasing businesses. SFS' footprint is around 80% to North America and Europe and less than 5% in non-investment-grade countries.As Roland already pointed out, one of Siemens' towering strengths is our healthy financial position, with a net available liquidity of EUR 11.4 billion. We expanded our undrawn credit lines and secured even more flexible access to liquidity. Our refinancing volume for the remainder of fiscal 2020 is rather limited with USD 1.4 billion only.Please allow me one important remark regarding our current share buyback program. Until now, we have bought back shares with a volume of around EUR 2.4 billion. Due to the upcoming spin-off of Siemens Energy, we have stopped the buyback in order to keep the number of treasury shares constant. However, we will implement a technical share buyback to compensate for share-based remuneration and employee share programs. After executing the spin, it is intended to continue with the share buyback.Let me finally summarize our assumptions for fiscal 2020.Siemens performed solidly in the second quarter of fiscal 2020 even as the economic consequences of COVID-19 pandemic began to impact our operations and our financial results. We expect even stronger impacts from the pandemic on business development in our fiscal third quarter to come. Beyond the third quarter of fiscal 2020, macroeconomic developments and their influence on Siemens currently cannot be reliably assessed. Therefore, we can no longer confirm our original guidance for fiscal 2020. We now expect a moderate decline in comparable revenue for fiscal 2020, net of currency translation and portfolio effects, with the book-to-bill ratio remaining above 1. The decline in demand most strongly affects our operating companies Digital Industries and Smart Infrastructure.We adhere to our plan to complete the spin-off and public listing of Siemens Energy before the end of our fiscal year 2020. We expect to record a spin-off gain within discontinued operations, the amount of which cannot be reliably forecast. We continue to expect material impacts on net income from spin-off costs and tax expenses related to the carve-out and subgroup creation of Siemens Energy. Given the abovementioned circumstances, we currently refrain from giving guidance for basic EPS from net income for fiscal 2020.Let me conclude in a nutshell. We build on our core strengths in this crisis; a dedicated and experienced team that continues to serve our customers very well; a healthy balance sheet with financial flexibility to act from a position of strength; a sound strategy with Vision 2020+, which we implement in a very stringent way, shaping a more focused and resilient portfolio. We will come out of this crisis stronger by driving structural improvements and adjusting the cost base to mitigate the financial impact. Finally, we build on our leading capabilities in automation and digitalization to drive midterm opportunities arising from the crisis.With that, Roland and I are going to be happy to take your questions. And I return the mic back to Sabine.

[Sabine Reichel, Head of Investor Relations]

Thank you, Roland and Ralf.Now we start with the Q&A. Operator, please take the first question.

[Operator]

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

[Benedict Ernest Uglow]

I was hoping that we could get a little bit of a deep dive or more color around software. The first point was just a clarification on the order growth. I may have misheard over the line, but did you say that it was down a couple of percent? Because my impression from the press release was it was the other way. So just a clarification. Secondly, could you talk about the industries and the end markets that you are seeing particular software demand? So in terms of the contract wins that you're getting at the moment, can you just give us a bit more feeling, qualitative sense on what's driving that? And where are you seeing a change in terms of that demand? And then final point is you mentioned in the remarks about recurring revenue stream being 60-odd percent in software. Just in broad terms, I realize you can't give a forecast, but how do we think about software margins over the balance of the year? Obviously, we understand the operational leverage in factory automation, but how should software trend in principle?

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

Ben, thank you for your questions. I mean with regard to software and order growth, I hope I didn't confuse anyone here. What I said is that we saw in the second quarter for DI a growth in new orders, yes, of 2%, which was mainly driven by restocking effects. And in particular, in China, in March, we saw quite some upswing, but that was for DI and product business in general. On the software end, we have been seeing quite some good momentum coming from the semiconductor business. I also mentioned that in the press call that this is certainly not a reaction to the COVID circumstances, but these projects are looked into, negotiated and discussed for many, many quarters. Sometimes, it takes years to come to that point to have then a potential customer changing their software backbone. So this is long-term negotiation ahead before, and therefore it's hard to predict when they will finally materialize. That had impacts, in particular in prior year second quarter. So the growth momentum on new orders was a bit positive but very modestly in the first quarter for software business. We do, however, expect in the third quarter some of these major projects, larger orders to materialize. And for the full fiscal year, as we said, we intend to outgrow the market. So it means north of 8% is continuing to be our target. With regard to revenues on the software side, the second quarter was rather soft. We had a moderate decline. So maybe that has been the point you have been addressing, but also there, for the third quarter, we have scheduled clearly visible elements in our portfolio that are going to be materializing on the revenue side. So for the full fiscal year, modest growth momentum, catch-up in the third quarter. And with regards to profitability in that field, I would expect that for the full fiscal year we will continue constantly, after the given circumstances, what we have been accomplishing in the first half of the year, give or take 1% or 2% volatility, which is always our revenue recognition is taking place in that field. With regards to the industries and the end markets, I would like to hand over to Roland. He can, by far better than I, give you some color on that.

[Roland Busch, Deputy CEO, COO, CTO & Member of Managing Board]

You touched -- so I mean it's a mixed bag. Maybe on the highlights, it's clear. Semiconductor business is likely to recover faster because obviously they have a strong pull in ramping up on any kind of data center and the like to keep home office up and running. So -- and we are strong there due to Mentor. On the lower end, you'll see definitely free -- and I think you know it already, it's all across automotive and aerospace where we have tendency to -- caution us, so to say, regarding software spendings, too. Technically, on [ CRD ] and cPDm, we are outperforming. That's what we see. And also in our strong recurring revenue, where we see we are ahead on competition. So that's a rough view on this.

[Operator]

We'll take our next question from Andreas Willi from JPMorgan.

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

Thank you also for the update on SFS that you provided. Maybe you could talk a little bit how this is going to work going forward with the spin-off of the SFS works, at arm's lengths policies with the divisions, but in terms of the funding which is provided by Siemens and then, in the future, kind of different shareholders that benefit and carry the risks. So what's the framework for how SFS is going to finance projects in energy markets? And maybe in that sense also, what's going to change in terms of the bid and performance bonds that Siemens AG historically has provided or SFS has provided for the energy business?

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

Yes. Thank you, Andreas, for the questions. For SFS, as promised, we wanted to give you a bit more color on SFS. And also, I mean, before I start entering into answering the center of your questions, maybe I should add a bit more on the SFS performance. I mean first of all, I would like to repeat that the current level of return on equity they have been performing on is still remarkable with 13%. You'll remember prior year's quarter was heavily positively impacted by an extraordinary gain from an equity divestment, which of course didn't repeat itself. And as I mentioned in my presentation, the declined COVID-driven credit hit impact was about EUR 52 million, mainly from small-ticket leasing activities, which is typical for a downturn of that size. And we also are quite happy that we have been grooming SFS' portfolio into the direction of more diversity of their assets, in particular getting down the high -- relatively high share they used to have back in the -- post-Lehman crisis in leasing activities. So therefore, the portfolio shift has been helping them. And also, indicating for the way forward, the second quarter's level of credit hits, we do not expect to continue on that level and see positive signs for that confirming our assumption already in April. So talking about the spin-off and the way of interaction between Siemens Financial Services and Siemens Energy to be: You have been making the decisive point by yourselves. This is going to be at arm's length. It always was at arm's length, by the way, because it's a regulated industry. We are holding banking license, therefore fully under the regulators impact in that regard. And therefore, there is no change in contracting or going to market in that field. I have to ask you for patience for more details of the contract itself. There will be a lot of additional color being given in the spin-off report that we are going to present and share with you on May 26, when it's going to be public, and you will not see any major surprises there. There will be a preferred financing agreement in place that is taking care of the needs of that business. So there will be continuing alignment in the same way of cooperation. We had that in the past. And the big towering strength of that setup is that we can cater for the needs of our customers from the very beginning. Many, many projects are developed at an early stage from an investor's perspective, so it happens quite frequently that SFS is entering the customer's space even before the industrial businesses. And that, of course, will remain a towering strength of that joint setup we have. No need to repeat, but I still use the opportunity to say that. We are really professional at SFS in risk management. That's also why their margins are very stringent and continuously developing way forward.With regards to bonds, performance bonds, and guarantees being given. The magnitude has not been changing materially throughout the last couple of quarters, as you do know. There is also arm's length in place, and we will not be in a position to continue issuing PCGs from Siemens AG, by the way, to Siemens Energy to be, but as indicated before, they will be very solidly set up with their balance sheet in a way that they can cater for their own needs way forward. I hope that's giving you a bit more color, as far as I can talk about that from today's perspective.

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

Yes. That is helpful. Maybe you could indicate what kind of balance sheet energy will have. Obviously, we have seen some cash disappear in that sense in the balance sheet that has been presented, but it's quite hard to figure out what it actually means for the opening balance sheet. I mean you have given the pension EUR 1 billion, that goes, but what goes on the cash side?

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

Yes, I can't share numbers today, but let me put it that way. Compared to other spins that had to be canceled, there will be a very solid structure on Siemens Energy's balance sheet to be and enough cash to cater for the needs and volatility of the markets as we see them developing. So 26th of May is going to be the day of further transparency. Apologies, Andreas.

[Operator]

We will take our next question from Simon Toennessen from Jefferies.

[Simon Toennessen, Equity Analyst]

My first question, Roland, could you talk a bit more about the Mobility performance and how you see this developing through the downturn? Competitors of yours have been highlighting severe revenue impact from lack of rolling stock production; and also IFRS 15 impact from not being able to book revenues in line with costs; and also lack of, I guess, service business due to trains being service based on mileage. It seems there was no impact at all for you in this quarter given the revenue growth performance, but maybe a bit more color how you could see this developing going forward. And then the second question, on cost measures, Ralf. You gave an update on the overall time line and what's changed, but is there any way to give us a bit more guidance on the path of those savings maybe even in the second half versus the first half of next year? And particular color on DI and SI would be appreciated. I was a bit surprised that DI -- or positively surprised, I guess, that the DI drop-through margin was only 36% in Q2, which was much lower than I had expected. Is it fair to assume that some savings have already come through in Q2 there?

[Roland Busch, Deputy CEO, COO, CTO & Member of Managing Board]

So let me start with your question on Mobility. So what we see in term -- in revenue, we have a very good performance in the revenue in Q2, blend of strong performance in rolling stock. This is now projects which we are shifting to the pipeline as expected but also very, very strong service, what we are very happy about. There is, of course, a problem in getting access to sites regarding service. We do that using technologies. We have people running with classes. And they get instructions, for example, but that will be a problem if it takes longer. So at -- so but at -- and on the top line, the order intake, that's here we definitely see a shift of projects, of decisions, where it's hard to judge now how that will go through the fiscal year. The revenue performance, we see still quite okay for the -- also for the rest of the year. So we -- this is now out of the backlog, so to speak. And from the order intake, it's really hard to say. It's more back-end loaded now for the fiscal year, again depending on projects and how they pull it through also through the crisis. In the midterm, we see a problem regarding the operators. They have to operate at sometimes full capacity or 78% capacity, but they are loaded only very limited. So there's the cash constraints for many operators. And we'll tell how that works.

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

Yes. And I think there's nothing to add with regard to Mobility, except maybe one topic. I mean we have been indicating before, when we have been guiding you for fiscal 2020 last year, in November, that Mobility will be a bit back-end loaded with their new orders. That was foreseeable, so to speak. And with regards to the ramp-up of the projects on the train side in particular, they have now been initiating momentum and are doing very well, 6% growth. And that's going to be continuing for the second half of the year as the momentum. However, we, of course, have to acknowledge the fact that in some areas, customer site access is restricted, and therefore POC milestones may not be officially be reached. So from our performance side, we are absolutely on track. Customer site access is something beyond our reach, so therefore -- there is uncertainty out there, but that will sooner or later be catching up then as the mechanics of POC are kicking in then.With regard to the cost measures, we are really proud that there is additional momentum created, has been created at DI at a very early stage already. And the incremental additional savings and the acceleration delivering already by '21 incremental EUR 130 million roughly, that's quite an accomplishment. That couldn't be accomplished if they were not already up and running, with those measures building up in -- we measure that by degree of implementation. We have quite an elaborated system in place that gives us transparency. And we have been benefiting also in the second quarter already. So the lion's share of that incremental increase in savings, however, we won't see before the beginning of fiscal '21, but we have been putting in place additional discretionary savings that are supporting the bottom line both in DI and SI and also in Mobility, by the way. And that is going to help out stabilizing margins as good as it is possible. Top line decline in factory automation with a high-margin conversion, as you know, will definitely have impact also on the bottom line in the third quarter, but the initiatives that we have been taking to soften that as much as we can, I think they are quite effective. And one of the most tangible proof points for you probably is also the strong free cash flow and conversion rate DI had in the second quarter. We have a very experienced team in place. I know most of them in person from my time as industry CFO back then after Lehman, and they are just doing what they have been doing before and are clearly having a firm grip in the driver seat.

[Operator]

We'll now take our next question from Alexander Virgo from Bank of America.

[Alexander Stuart Virgo, Director]

A couple of, I guess, small clarifications really. I wondered, on the power side or energy side, if you could just tell us the -- talk a little bit about the SEA assets and why you've kept them. What is it that has meant that you need to keep those in the portfolio? And on Flender, the announcement there on the spin, is the intention for that to be a 100% spin? Or will you likely retain a stake as you are planning on doing at some level with energy? And then the second question was just around SI. And I wondered if you could talk a little bit about customer behavior in respect of construction projects, decisions around solutions and services you flagged as impeding some of the order intake in the quarter. I'm just wondering what that might mean for the prognosis over the next 12 to 24 months or so.

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

Thank you, Alex, for your questions. Before Roland is talking about Flender and the customer aspects of the SI business, let me try to give you a bit more color on the Siemens Energy assets, as we call that, and the way forwards. I mean we have a clear time plan out there. We have been sharing that with you in the presentation before. We are fully committed. And due to the change in legislation in Germany, we now are in a position to have the Extraordinary General Meeting early in July, not only feasible but confirmed also in terms of technical preparation and so on. So we will do that. And therefore, we are highly confident, as mentioned before, that we will complete getting the assets into the market before the end of our fiscal year. It means late in September. We still can't share more than what we shared with you at that point in time about how much of Siemens Energy shares we are going to keep. What we said from the very beginning and what we will do and will execute on, we may start with a bit higher portion of shareholding, but we are committed to dilute that over the course of time, making sure that everyone understands that we are in the process of stepping down from ownership there. But we do that in a prudent and well-planned way to also make sure that the flowback management is decently done and well prepared from our end. So unfortunately, you do know I cannot talk about the KPIs of GP at that point in time and of Siemens Energy to be, and this is a legal restriction we have. We will share with you in the spin-off report on the 26th of May more details. And therefore, I apologize for that, but if I had to fill your models, I would consider, of course, the performance of Siemens Gamesa as disclosed. And for GP, I would probably put in double-digit increase in new orders for the second quarter, which is quite positive. I think mid-single-digit revenue increase, also not a bad thing to have. And profitability at the lower end of the guidance, we gave for the full fiscal year, between 2% and 5%. So more details are subject to the spin-off report.On top of that, of course, you may ask yourself what else is discontinued operations implicitly disclosing. And there are 3 components. I mean one, I talked about. That is the operational piece, where we have year-over-year clear decline obviously. Then there is spin-off costs. If you had to put a figure into your models in that regard, it would be low-double-digit million for the DO part, but also of course, there is a cost component remaining at Siemens AG, certain costs are supposed to be borne by the Siemens AG mother company, so to speak. So I would put pretty much the same amount into my model in that area. And then a big topic, of course, is taxes, which has 2 categories obviously, 1 for operations and 1 for just spinning off and carving out the activities. And so we said that there would probably mid-triple million amount for the full exercise. And we have been starting to see the impact in the area slightly above EUR 100 million in the second quarter, on top of operational taxes that had to be paid, of course. So another thing you may consider for your models is that the second quarter did not have any impact from quitting depreciation yet, but the third quarter and quarters to come will have an impact from that. And we will, of course, then inform you as we go about the actuals in that field. I hope that is helping you out a bit with modeling. As I said, if I was in your shoes, I would probably do it that way. With that, I would like to hand over to Roland talking about Flender and SI.

[Roland Busch, Deputy CEO, COO, CTO & Member of Managing Board]

Yes. On Flender, we didn't decide it yet, but the likelihood that we retain a share in Flender after the spin is quite high. It makes sense because when we have a positive impact on our P&L, we would have anchor shareholder from the beginning in the game, so I think it's a scenario which is quite likely, but we are open regarding the decision we took to go in a range, even to 100%. On SI, so what I am saying, having in mind there's a lot of volatility in the market, it's not like compared to any other crisis before. We know that the cycle for construction is a little bit later cycle, so 9 months delay normally, but in this time it's somewhat different what we see. If you talk about on a GDP projection, the nonresidential construction market is supposed to go down by 1.6% in the year 2020. That's at least the prediction of IHS. We see -- we had some good progress, very good progress, in United States in revenue. And order intake in our solution and service business was down moderate in Q2. So we see it's hard to predict. Site access is a problem on the one side, and delayed CapEx spending obviously is another one. Yet on the other side, on the upside, we see that a lot of critical infrastructure needs to run, also demand from our service business. It's hospitals, data center or any kind of critical infrastructure, where still the investment will go. And that will keep on running. So I hope that answers your question. China, China is difficult to say, I have to say.

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

So maybe one last hint with regards to how to deal with DO matters in modeling. I'm sure you didn't have the time yet to look into all the documents that are -- which are issued today, but the interim report will definitely be also a valuable source of incremental information for that.

[Sabine Reichel, Head of Investor Relations]

Okay, I think we have time for one more question. Of course, the team will be available then. Also I know there are more questions in the line, but unfortunately we have to finish on time, so last question, please.

[Operator]

We'll now take our last question from Guillermo Peigneux from UBS.

[Guillermo Peigneux-Lojo]

I guess, 2 additional incremental questions. One is regarding Mobility. And thanks for the comments before, but I wanted to ask whether most of your sites, if not all of your sites, have been open throughout your fiscal third quarter; and whether you will be able to meet milestone payments, critical milestone payments, thanks to that activity. That's the first question. And the second question is regarding China. I guess sharp decline and then a recovery that was as sharp, if not sharper, which ended up with China growth in the quarter. I was wondering whether you could give us any information about how China is doing for you as we speak.

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

Yes. Thank you, Guillermo. And I mean, first of all, as I said, Mobility, it's of course hard to predict to what extent we can accomplish site access for those projects, where this is crucial to -- then to the documentation and all the customer acceptance procedures that finally take you to the milestone accomplishment then triggering payments, but it's a delay of, I would say, weeks, not quarters. So therefore, we expect a substantial strengthening of the free cash flow for Mobility in the third quarter and in particular in the fourth quarter then, but you can predict that site by site, so to speak, so I -- we have been looking into that also from a statistical perspective. And that is giving us quite some confidence that we will see a pickup there in the second half of fiscal year already. And also new orders coming in, being signed are also bringing the opportunities to collect advanced payments then on higher levels again. And therefore, the second half of the year will be substantially improving the picture with regard to free cash flow in Mobility. Assessing China is hard to do these days, of course. And we need to do that industry by industry, vertical by vertical, so to speak. Automotive and machine building, as Joe has been commenting before in the press call, they have been picking up activities. There are also programs the government has been initiating. They are mainly directed into midsize companies, so therefore, I would expect a maybe 6 months delay before we are benefiting from that with our offering in the market. The March -- the month of March in the short-cycle environment was quite favorable in China, but we also had a very steep decline before that in February. So it's all kind of correlated to the timing of the shutdowns in the different geographies, and China and also South Korea are clear front-runners in that regard. The April picture is quite promising. But I mean, after we see literally every day several different views from pandemic experts how that is going to develop and whether or not a second wave is going to be expected later in the year, whether temperature has an impact on infection rates or not, there are too many question marks out there to build or anticipate a trend from a 1-month or 2 months development. So as I said before, we are driving on site. We are carefully watching the different market segments in China and also in other geographies. And thanks, God, we have very stable supply chains on our end, so we don't see restrictions neither in our factory setup nor in our logistic chains. So everything that we can contribute is well prepared and ready for execution.

[Roland Busch, Deputy CEO, COO, CTO & Member of Managing Board]

Let me add on this Mobility just on our own operations. Out of all of our sites, we had only 2 closed. One is in India. One is in South Africa; India rolling stock, South Africa on rail infrastructure. And our -- overall, our factories are running at 81% capacity.

[Sabine Reichel, Head of Investor Relations]

All right. So with that, we are now at the end of our call. Thank you for joining us again. We very much appreciate, as I said at the beginning, your time. And I wish you now a nice, long weekend. And the team is around for further questions.

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

Stay healthy. Thanks from our end. Bye-bye.

[Sabine Reichel, Head of Investor Relations]

Stay healthy, everyone. Bye. Bye-bye.

[Roland Busch, Deputy CEO, COO, CTO & Member of Managing Board]

Stay healthy. Bye-bye.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.Once again, let me repeat the instant replay numbers. Participants in Germany, please call the replay number [phone], access code 5971618#. Participants in Europe, please call the replay number [phone], access code 5971618#. Participants from the United States, please call the replay number [phone], access code 5971618#. This replay service will be available until tomorrow night. A recording of the conference call will also be available on the Investor Relations section on the Siemens website. The website address is www.siemens.com/investorrelations.