Siemens AG

XETRA:SIE

Earnings Call Analysis

Siemens Reports 2024 Guidance and Operational Performance

Siemens saw consistent revenue growth of 6% in Q2 across all businesses. Their Mobility division, despite slower customer progress, maintained a full-year guidance for an 8%-11% revenue growth. Profit margins improved to 8.4%. Siemens' Smart Infrastructure achieved record orders and profits with an expected annual revenue growth of 8%-10%. Digital Industries faced an 11% revenue decline, attributed to lower short-cycle product demand and challenges in China. For fiscal 2024, Siemens expects group revenue growth of 4%-8% and EPS between EUR 10.40 to EUR 11. A shareholder-friendly capital allocation continues with dividends and a new share buyback program.

Revenue and Demand Trends

During the second quarter of fiscal 2024, Siemens faced a significant decline in revenue for its Digital Industries (DI) segment, witnessing an 11% drop. This was primarily driven by reduced short-cycle orders in the automation business. However, software showed strong resilience with double-digit growth. Despite challenges, DI's order backlog remains solid at EUR 10.2 billion. Looking forward, DI expects revenue growth to recover in the second half of fiscal 2024 with an anticipated profit margin between 18% to 21% .

Regional and Sector Performance

The economic activities in key regions like China and Europe have been subdued, impacting DI's performance. Specifically, the automation business in China has seen slower destocking and muted demand. Conversely, Smart Infrastructure (SI) exhibited robust performance with a revenue growth of 6%, driven by a stellar 14% increase in the electrification business. SI's operational margin also hit a record level of 16.6%, and its order backlog continues to grow, benefiting from strong momentum in data center investments in the U.S. .

Software as a Catalyst

Siemens is making a significant push into cloud-based Software-as-a-Service (SaaS), which included the transfer of major software components to the cloud. Annual Recurring Revenue (ARR) from cloud services is on the rise, with a year-over-year growth of 15%, reaching EUR 1.5 billion—equivalent to 37% of the total ARR. This transition underpins Siemens’ objective to achieve a target of 40% cloud ARR soon. Digital transformation initiatives, such as those exemplified by collaborative projects with major clients like Mercedes Benz and Foxconn, are further driving this growth trajectory .

Guidance and Long-Term Vision

For the latter half of fiscal 2024, Siemens has adjusted its expectations to reflect ongoing challenges and opportunities. While predicting a revenue decline between -8% to -4% for DI compared to the previous year, Smart Infrastructure is expected to see sustained high performance with a guidance range for revenue growth of 8% to 10% annually and profitability between 16% to 17%. For the Siemens Group overall, the company upholds a positive outlook with expected revenue growth in the range of 4% to 8%, supported by a solid book-to-bill ratio .

Portfolio Adjustments and Strategic Moves

Siemens is actively refining its portfolio strategy to enhance focus and operational efficiency. Recent actions include preparing for the sale of its Innomotics business to KPS Capital Partners, expected to finalize by fiscal 2025 with an anticipated post-tax gain of EUR 2 billion. This divestment underscores Siemens' commitment to value creation and optimizing its business focus. Additionally, the company plans to leverage further strategic acquisitions, such as the inclusion of ebm-papst's Industrial Drive Technology, to bolster its motion control segment and AI capabilities .

Financial Performance and Shareholder Returns

Despite facing macroeconomic headwinds, Siemens demonstrates solid financial stability with Standard & Poor's upgrading its rating to AA-. A shareholder-friendly capital allocation was evident with a dividend payment of EUR 3.7 billion and the initiation of a new share buyback program worth up to EUR 6 billion, set to run over five years. Furthermore, Siemens achieved a consistent free cash flow performance of EUR 2.1 billion within its industrial business for the first half of fiscal 2024, aligning with its long-term strategic objectives .

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to today's Siemens press conference. Of course, as always, there is simultaneous translation, and you will also find everything under siemens.com/press. There, you will also be able to find the recording of this conference call after the conference call is over.

Now very quickly on the rundown of today's conference call. After the features of our Board members of both gentlemen will be available for your questions. Our conference call will end at 9:00 a.m. German time at the very latest. I would also like to point out the safe harbor statement, as always, which you will find at the beginning of our quarterly presentation.

And now over to Ronald Busch.

[Roland Busch, executive]

Thank you. Good morning, everyone, and thank you for taking time for us today. We delivered solid performance in the second quarter. We are resilient in the time, still impacted by a muted macroeconomic environment with robust top line momentum, which means the demand from our customers remains strong. They trust us to support them in their digital and sustainable transformations.

Our book-to-bill ratio was a strong 1.07 with all businesses, except digital industries coming in above 1. Our order backlog grew further. It's now at an all-time high of EUR 114 billion, an achievement that will support our future profitable growth. Orders totaled EUR 20.5 billion, an organic decline of 12% compared to the second quarter of 2023, which benefited from a major locomotive order in India.

Smart Infrastructure delivered record orders, a double-digit increase and exceeded the EUR 6 billion mark for the first time. Digital Industries was up sequentially, driven by a very strong software business, However, orders in the automation business was slightly lower than in the first quarter of 2024 due to still muted demand.

Stock levels at customers and channel partners remained elevated, particularly in China. We expect things to gradually improve in the quarters ahead, although more slowly than previously anticipated. The key reason is the muted development in China overcapacities in certain customer industries, such as solar and electric vehicles, another reason.

In addition, Europe's key export-driven markets such as Germany are recovering only very sluggishly. We rigorously processed orders leading to stable revenue development on a comparable basis of EUR 19.2 billion. Clear growth contributions came from ability and smart infrastructure, both increased 6%, Siemens Healthineers grew 3%. As previously indicated, Digital Industries recorded a revenue decline of 11%. This decline reflected the effects of a significant drop in digital industries short-cycle product business, while the second quarter '23 was at a record level, the decline was only partially offset by high double-digit growth in the software business.

Semiconductor customers, in particular, showed strong demand for our software. I'm again very proud of Smart Infrastructures electrification business with excellent growth of 14%. It showed great competitive strength. Strong momentum continues at data centers and in the power distribution market. Overall, we recorded profit industrial business of EUR 2.5 billion, close to the prior year level. Increases in Smart Infrastructure Healthineers, which nearly offset current softness in Digital Industries, high-margin automation business translated into a 14% profit margin.

Now after a strong start in the first quarter, we achieved a consistent free cash flow performance of EUR 2.1 billion in our industrial business. As a result, our accumulated free cash flow as of the first half of the year was above the prior year level. After delivering a solid first half year, we'll continue to focus on profitably executing our record order backlog. Therefore, we confirm our group outlook for fiscal 2024 on all metrics. However, we lower our expectations for Digital Industries at this midpoint for revenue growth by 7.5 percentage points and for profitability by 200 basis points.

On the positive side, after a strong first half year, we are narrowing the outlook for smart infrastructure and lifting the lower end by 100 basis points for revenue growth and profitability, respectively. We've again delivered operationally, but we are also making significant progress in executing our long-term strategic priorities, of which portfolio optimization is a key component. In this area, we've taken some large steps. The most important concerns Innomotics, which we've set up as a strong independent company, Innomotics will now shape its future with its new owner KPS Capital Partners. I'll talk about this later.

In addition, we've announced a bolt-on acquisition of ebm-papst Industrial Drive Technology business. Now this move will strengthen our motion control business unit to tap growth opportunities for battery-powered drive solutions, artificial intelligence, or AI, is a super power for all our industries and it's also driving our organic growth in sustainable and digital technologies. I'll go into more detail later about industrial AI, especially at Hannover Fair or Hannover Messe and our EcoTech label as well as our expanded ecosystem.

But here are some more details on our numbers. macroeconomic dynamics were also reflected in our regional revenue growth distribution. With 8% revenue growth, the Americas stood out with strength in the U.S., Europe, the Middle East and Africa or EMEA, was down 2% on weakness in Germany. The Asia and Australia region declined 5%, impacted by the situation in China. Earnings per share before purchase price allocation accounting or EPS pre-PPA came in at a healthy EUR 2.73.

Now let's turn to our portfolio. We're optimizing it further and sharpening our profile as a technology company, we are consistently looking for the best owners for our portfolio companies. In KPS Capital Partners, we've now found a deal ideal by Innomotics. The purchase price totaled EUR 3.5 billion due to KPS very attractive offer, we are discontinuing our preparations for a public listing. KPS has an excellent track record in the acquisition of manufacturing and industrial enterprises in both deep cross-company know-how of manufacturing processes and will support Innomotics in maintaining its industry leadership globally. This move will offer Innomotics and its 15,000 highly motivated people, excellent opportunities to optimally serve their markets and realize their full growth potential. After closing, we expect a post-tax book gain of around EUR 2 billion, excellent proof of how Siemens can successfully improve businesses and increase their value. We expect the transaction to close in the first half of fiscal 2025.

The unbundling of the business activities of Siemens and Siemens Energy in India is making good progress, too. The Supervisory Board of Siemens Limited India has approved the demerger. As a result, the former separation process is fully on track to achieve a listing of Siemens Energy India Limited in 2025. And of course, we continue to work on further portfolio optimization.

Let's turn now to our latest innovations. With the launch of our EcoTech label, we are setting new standards in sustainability transparency. Each product comes with a standardized product data sheet across the key environmental criteria. This data enables customers to make better decisions about their sustainability on the basis of objective criteria that cover a product's entire life cycle. Many Siemens products are already based on our eco-design approach. One outstanding example is the SENTRON ECPD, an electronic protective switching device that is up to 1,000x faster and more precise than conventional switches using modern semiconductor technology for the first time.

SENTRON ECPD can replace more than 10 conventional devices, reducing electronics by 80% and metal used by 90%, while taking up around 10x their space in a switch cabinet it is also an intelligent algorithm if many LEDs are switched on at the same time in a tunnel or a car park, for example, conventional devices will switch off the circuit, but not our new switch, it recognizes the situation and manages the power intelligently and our customers now want to use LED lighting on a large scale will be much easier. Installation requires less effort and above all those have kilometers or miles of copper cables. If you visited us at Hannover Fair, you will have experience for yourself the enthusiasm with which our people talk about our products, the breadth and depth of our domain know-how and above all the intensity of our relationships with our customers and partners, and we demonstrated in many ways that AI is a super power for our industries, together with Rev Lebaredian, the Head of NVIDIA Omniverse, I showed how we are using generative AI to revolutionize product visualization.

It's an important step toward the industrial metaverse an exact representation of the real world in digital space, photorealistic in real-time and physics-based. We've connected Omniverse with team center eggs, our product life cycle management, our PLM software. We've impressively shown just how powerful this AI -- AI-supported technology is. It's enabling engineers at Korean ship builder HD Hyundai to visualize and thus interact with the digital twin of hydrogen power chips that have more than 7 million parts. The technology saves time, cut costs, avoids errors and simplifies work processes.

The industrial metaverse provides very specific added value for our customers and building on our successful calibration with Microsoft and our pilot customer Schaeffler. We are now bringing generative AI into factories in on our scale Siemens Industrial co-pilot is now connected through our totality integrated automation or TIA portal. Even without in-depth programming knowledge, customers can use the copilot to generate complex automation code and thus accelerate their development processes enormously and boost their productivity. This is just the beginning. We are working on co-pilot solutions for multiple industries along the entire value chain.

At Hannover Fair, we also presented another building block for Siemens Accelerator Electrification X, a comprehensive application app that can be used to manage energy networks in a variety of industries. Our teams accelerated portfolio now includes Building X, Gridscale X, Railigent X and Industrial Operations X.

The unprecedented growth in AI has also driven a global boom in data centers, and as a result, a soaring rise in demand for electrification. For us, this market momentum is creating a wealth of opportunities with existing customers such as big IT and tech companies, so-called hyperscalers, and increasingly with global data center co-location operators rates. This development shows again how we combine the real and the digital world and help build sustainable data centers. We supply the entire electrification infrastructure for low and medium voltage as well as fire safety and building management we combine this operational infrastructure with digital applications from our Siemens accelerator portfolio such as digital twins and AI-based cooling optimization. We are currently expanding our electrification capacities, a move that will further strengthen our market position in 2025. We grew strongly in the first half of the year with revenue up 25% at a stellar order intake, pointing to further growth in market share. We expect order growth in the 20% range for the full fiscal year 2024.

Regarding sustainability, I'd like to highlight 3 examples. Together with Mercedes Benz, we've created a digital energy twin. As part of our strategic partnership, we are bringing greater energy efficiency and sustainability to the design of new factories and the upgrade of existing production facilities. The digital twin was developed and tested in factory 5, 6 in single thing in Germany. It will now help significantly reduce planning time. I'm very pleased about our new partnership with Foxconn. We've agreed to drive digital transformation and sustainability and work together on the factory of the future. We have built a scalable and seamless ecosystem that combines development and manufacturing with the highest level of automation.

Our long-standing partnership with Brightline is set for a new chapter. Brightline West has opted for Siemens Mobility. We are the preferred bidder for 10 high-speed trains for America's first high-speed rail line. The next train generation will feature the latest digital technologies such as Railigent X. And it will be 30% more energy efficient than other high speed trains.

Our digital business remains on a strong growth trajectory. After the first half of fiscal 2024, we've achieved revenue of EUR 3.8 billion, an increase of 13%. Portfolio expansion for Siemens Accelerator will support cloud-based growth across all our businesses.

Let's turn now to Software as a Service, or SaaS, a key contributor to our digital business. As you know, we are transferring major parts of our software business to the cloud. Growth in annual recurring revenue or ARR reached a very healthy 15% year-over-year. The cloud ARR portion already stands at EUR 1.5 billion, which now corresponds to 37% of our total ARR. Our 40% target is well within our reach. All indicators point to strong momentum and 14,700 customers have now opted for the SaaS business model. The majority of these customers are small and medium-sized businesses.

And now I hand over to Ralf Thomas, who is going to give you more details about our operations. Thank you.

[Ralf Thomas, executive]

Thank you very much, Roland. Ladies and gentlemen, good morning also from my side and a very warm welcome to today's press call from me as well.

Allow me to begin, as always, by briefly referring to our earnings release in that document, you will find the results for all of our businesses, including Siemens Healthineers. I'm now pleased to share further details with you on our solid second quarter and on our expectations for our business performance for the rest of fiscal 2024.

Let's start with Digital Industries or DI at EUR 4.3 billion in total orders for DI were up compared to the first quarter, but they were 12% lower year-over-year. The book-to-bill ratio was at 0.94. DI's automation business saw a slight setback in orders compared to Q1 of fiscal 2024, but was still above the trough level from Q4 from fiscal 2023.

As Roland Busch already mentioned, the market environment remained challenging due to the subdued economic activity and investment sentiment in key regions such as China and Europe. Slow destocking at customers and distributors, particularly in China, combined with a strong local competition in lower and the mid-market segment held back demand. Order softness was most visible in the discrete automation businesses. DI's software business, however, achieved a double-digit growth rate in orders and a book-to-bill ratio significantly above 1, which was driven by high demand for electric design automation or EDA among our semiconductor customers.

Our order backlog at DI decreased further to EUR 10.2 billion. The software business accounted for EUR 5.4 billion of this amount. And as a result, the backlog for the software business exceeded the backlog for the automation business for the first time. The order backlog for the automation business was at EUR 4.8 billion, which was around EUR 600 million lower than in Q1, and it continues to develop in the direction of our pre-pandemic order backlog levels.

Let's now turn to revenue for DI, which was, as indicated, down 11%. In this connection, the automation business were down 20% compared to the prior year's quarter's record level. This decrease involved a 23% decline in the discrete automation business and a 13% decline in the process automation business. Both declines were caused by lower contributions from short-cycle orders that are, so to speak, delivered and charged directly in connection with the order. DI was -- the decline was partially compensated for by DI as a software business, which delivered excellent growth of 19%, driven by an outstanding EDA business, which was up more than 50%.

The product life cycle management, our PLM business increased 5%. DI's profit margin came in at 16.5%, which was a material decline. This development was primarily driven by lower capacity utilization because of lower revenue and by a less favorable composition of the product mix in the automation businesses with a lower share of higher-margin products. Digital Industries recorded a slightly positive economic equation in the second quarter. As already mentioned, effects from the measures implemented to boost productivity will not ramp up until toward the end of fiscal 2024. In line with our expectations, our investment of EUR 64 million in car technologies in Q2 accounted for 140 basis points of negative impact on Digital Industries margin.

Digital Industries achieved a cash conversion rate of 0.76. The situation was mainly due to the shift in the timing of payments for large software orders. These orders were not booked until the late second quarter. In absolute terms, DI's cash generation was, of course, materially affected by declining profit.

Now looking at the regional perspective, as mentioned, the rebound of orders in the automation business has been slower than expected due to ongoing subdued economic industrial activities in DI's key regions, and we reviewed our assessment regarding the speed of destocking. Initial weak but positive signs are being seen in macroeconomic indicators but have not yet translated into actual demand in our customer industries. The situation continued to be most visible in China. And from today's perspective, destocking effects are -- they are likely to continue until the end of the calendar year 2024, even with end customers demanding -- demand seeming to pick up slowly. In contrast, in the other key regions, Europe and the U.S., we expect stock levels to mostly return to normal by the end of fiscal 2024. Now in line with the decline in short-cycle orders in the automation business and slowed normalization of the backlog, revenue in DI's key region have materially moderated from all-time levels.

Looking at our key vertical end markets for the next quarter, publicly available sources like the Oxford Economics, still expect a rather muted growth for production output at our end customers particularly, of course, in export-driven industries such as machine building and automotive. Our DI teams continue to see this development as transitional. However, it is taking longer than initially anticipated to return to a balanced growth path with secular demand trends and the better investment sentiment begin to prevail.

For the second half of fiscal 2024, Digital Industries assumes that demand in its automation businesses will pick up again compared to the first half of the fiscal year. In DI software business, we have a rich funnel and strong customer activity for attractive large contract wins for licensees. As a result, we expect strong growth momentum in the second half of fiscal 2024. Now of course, as you know, the closing of license contracts lead to immediate revenue recognition and thus to a chunky "revenue" from a timing perspective. Now allocating to quarters in the second half of this fiscal year is particularly challenging because material contributions to revenue are expected at the end of the third quarter. As a result, we now expect DI's comparable revenue for fiscal 2024 to come in at minus 8% to minus 4% below the prior year. We now expect DI's profit margin to be in the range of 18% to 21%.

Now let's turn to smart infrastructure, which delivered an outstanding quarter. For digital industries, we are expecting slightly declining growth of revenue and also a result margin within the updated annual forecast.

Let's now again move to smart infrastructure, which delivered outstanding performance again in the second quarter. In robust end markets, CSI team achieved strong growth in business volume and improved the operational profit margin year-on-year for the 14th quarter in a row. In total, orders were up 10% on contributions from all SI businesses and thus reached an all-time high. This development led to an excellent book-to-bill ratio of 1.18. A major growth engine in this respect was SI's Electrical Products business up by a stunning 26%. Together with the electrification business, the electrical products business scored numerous order wins from data center customers, particularly in the U.S. In total, orders were up 4% in both the electrification business and the buildings business.

Smart Infrastructures order backlog increased to EUR 18 billion and thus, another record level. SI's revenue growth reached 6%. The largest contributions here came from the electrification business, which was up a strong 14%. On top of that, we saw some projects in the solutions business slip into Q3, which led to slightly lower growth than expected, but it benefited the business mix and thus the margin quality. Both the building business and the electrical products business continued their growth trajectory with 2% each. SI's operational profit margin reached a record level of 16.6% and profit of economies of scale resulting from higher revenue and increased capacity utilization.

Sustainable impact from pricing actions from prior periods as well as productivity increases enabled SI to more than compensate our headwinds from cost inflation which were mainly due to higher wages and salaries. We expect SI's economic equation to remain clearly positive in the second half of fiscal 2024, albeit with a decreasing benefit from pricing effects. Both free cash flow and the cash conversion rate, which came in at 0.9 were again strong on a high level. As in previous years, we expect SI's cash generation to accelerate materially in the second half of fiscal 2024.

Looking at SI's regional development, the U.S. stood out with a 38% order growth compared to a high basis of comparison from the prior year quarter. This development was driven by large data center wins primarily from hyperscalers. Europe, excluding Germany, showed strength with double-digit growth in the Buildings business supported by large orders.

From a regional perspective, the key growth engine for SI's revenue was the United States, which was up 12% on stringent backlog execution. Revenue in Europe was stable overall with pockets of growth such as the Buildings business in Germany or the business with power distribution customers across Europe. SI's service business showed broad-based revenue growth, primarily in Asia, which had a growth rate in high teens, but also in Europe, which saw clear growth as well. Smart Infrastructures business in China continuing to show softness of muted demand, especially in the market for commercial real estate.

Now across our main verticals, SI continues to see growth in real terms as in the prior quarters. Sustainability through energy efficiency and decarbonization as well as optimize asset performance in grid infrastructure and buildings are secular business drivers in almost every market segment. Artificial intelligence will be the supercharger for data center investment for the foreseeable future, which will also lead to higher demand for power. Therefore, accelerated electrification will require further grid expansion and even greater integration of renewables. After a strong first half of the fiscal year, we are narrowing the target range for our full year guidance for SI's comparable revenue growth by lifting 100 basis points at the lower end of the previous target corridor. As a result, we expect a figure between 8% and 10%.

For our profit margin here, we now expect an upgraded guidance range of 16% to 17%. For Q3, we expect SI's comparable revenue growth rate to be between 9% and 11%. We anticipate that SI's third quarter profit margin will be between 15.5% and 16.5%.

Let's now turn to mobility. Mobility achieved solid top line and profit performance in the top -- in the second quarter, pardon and delivered a sharp free cash flow improvement. Mobilities orders came in at EUR 3.2 billion in Q2, its book-to-bill ratio was a solid 1.12. Unlike in the prior year quarter, which included a much higher volume from prominent large orders, Q2 of fiscal 2024 was marked by mobility winning a consistent flow of attractive projects that tended to be of medium size. These orders came from across Mobility's business and the backlog increase further and stands at EUR 48 billion.

In Q2, Mobility's revenue was up 6% on clear growth in all its businesses in the prior year quarter had benefited from some trailing effects from the Russia wind-down, but a clear highlight, of course, was the growth of the service business up 9%. In general, Mobility's revenue growth for full fiscal 2024 is being held back to a certain extent by slower progress of [indiscernible] on the customer side in some projects. Therefore, we maintain our full year guidance for comparable revenue growth of 8% to 11%, which, however, is rather tending towards the lower end of the range for those reasons.

In Q2, higher revenue and strong project execution supported an improvement of Mobility's operational margin to 8.4% because, as I just mentioned, the prior year quarters had benefited from positive trailing effects related to Russia. Mobility caught up materially in the free cash flow performance primarily due to a higher level of milestone payment in Q2 as expected. For the second half of fiscal 2024, we expect Mobility to catch up further. However, due to the foreseeable timing of larger payments from customers, this catch up is expected to be heavily skewed towards Q4. Based on consistent conversion of its order backlog, we expect Mobility's comparable revenue growth for Q3 to be in the mid-single-digit range. Mobility's profit margin is expected to be in the range of 8% to 9% again in Q3.

Let's now look at the activities outside of the industrial businesses. As usual, detailed profit reconciliation and an updated outlook are available in the appendix from Page 27 onwards of the presentation. Siemens Financial Services achieved a solid earnings contribution with stable year-on-year results from the debt business. We're also very pleased that the portfolio companies continue to deliver robust operational performance. The divestment of Innomotics to Capital Partners marks another major milestone in optimizing our portfolio. Now as a result, from the third quarter onward, Innomotics will be reported in discontinued operations.

With free cash flow, we see an improvement in the first half of fiscal 2024 in Industrial Business, although free cash flow in Q2 was burdened by the profit decline at DI and by the growth-related buildup of net operating working capital as Siemens Healthineers. Ladies and gentleman, Siemens' Balance sheet continued to be rock solid, which was confirmed again by the latest rating upgrade by Standard & Poor's to AA-. In addition, we continued our path of shareholder-friendly capital allocation with a dividend payment of EUR 3.7 billion in February of this year. Furthermore, we started our new share buyback program of up to EUR 6 billion, which is to run for up to 5 years.

Let's now conclude our group level outlook. We confirm our guidance for the Siemens Group for fiscal 2024. For the Siemens Group, we continue to expect comparable revenue growth in the range of 4% to 8% and a book-to-bill ratio above 1. For fiscal 2024, we continue to expect profitable growth of our Industrial Businesses overall, to drive an increase in basic earnings per share from net income before purchase price allocation accounting to a range of EUR 10.40 to EUR 11, excluding the Siemens energy investment. As always, this outlook excludes burdens from legal and regulatory matters.

Ladies and gentlemen, despite the macroeconomic headwinds, our priorities are clear. We will continue to deliver further value creation by growing profitably and reliably generating high free cash flows. I thank you very much for your attention and your interest in our company, and we're very much looking forward to your questions.

And with that, back to you, Lynette.

[Unknown Attendee]

Thank you, Roland and Ralph. Now we've got time for questions until 9:00. For technical reasons, English and German questions cannot be mixed. We therefore start with the German questions. So if you locked on to the English channel, then please ask your questions in English and we are going to answer them in English.

And now I hand back to the operator.

[Operator]

[Operator Instructions] First question comes from Axel Hopner from Handelsblatt.

[Axel Höpner]

Just one question at the beginning. How do you see the automation market in general is Siemens losing market share? Or will it go down further? How do you see it?

[Roland Busch, executive]

Well, in general, the automation market is intact. We see the demand for automation in small but also larger companies, Foxconn is one case in point because Foxconn is one of the large estimate to order manufacturer, buying in automation solutions. And they said that they are going to -- or want to cooperate with us in terms of automation and optimization. And they want to reduce their headcount. So as a trend, I can say that this is a kind of blueprint particularly for those who've got automation as a core business. Competition. We can say the hottest market is in China.

Now we know the international competition. Of course, we are well positioned in this respect. We've got aggressive vendors the value for money segment. In that segment, we find one competitor. This company can also control, I don't know, 32 access, but they do not control things with our precision. So the machine too will break sooner because it's got problems when starting up. So there are some disadvantages they have. But we also have local products in the pipeline. And when it comes to drive systems, controllers, we are going to develop local-for-local products which will have similar specifications and can also be sourced locally. So there is competition, which is rising.

But on the other hand, we've got good growth rates. And we always find answers to whoever is going to scare us. Have you lost or have you won anywhere? Well, in total, we won market share. Now the value for money segment. In that segment, [indiscernible] they have process automation systems for drive controllers, et cetera, et cetera. So we've won shares there as well.

[Operator]

Now the next question from Alexander Huebner from Reuter.

[Alexander Huebner]

Can you hear me?

[Roland Busch, executive]

Yes, we can.

[Alexander Huebner]

All right. First, I would like to ask 2 questions with a view to the sale of Innomotics. Now if you draw a line, bottom line, the sales of the portfolio companies, how much money did come in? What was the book wins or gains, so to speak. And if I see it correctly, then you've got the airport logistics? And now what is your position there? Are there any sales processes running at present? Is there an interest? Or is this something which you would like to say, put on the back burner?

[Ralf Thomas, executive]

We haven't got these back burners anymore, and we try to tackle things right away head on, so to speak, and handle them experientially but also with poise and serenity. But nevertheless, I believe that was one of the points addressed in the industrial question, there is a series of changes, which have taken place with a view to our portfolio, I really want to avoid to offer you or face you with a data battle. I would like to ask you to read up on all the things that we said about this or that transaction, which has taken place in the past.

I think if you go through the numbers of the last quarters, then you will see that each and every transaction has happened on a level that means that we can the private equity model, that was approach, which was used, and I can only say we did not give away anything. Also, the Innomotics. Our approach was like we always did in the past. We looked at what is a meaningful solution for the company. i.e., to continue to develop outside the group. We've got the buyers' universe. This includes a series of companies and there were speculations in the media in this respect. We can assume that these are companies, which will end up on a long list. So we have a look at these companies, not only in monetary and profitability terms, but we have -- from our point, Siemens, giving off this company, we just meant to see what we can offer when carving out such a company, we can say that this is an experience company. They have got a management in place who knows a lot has gained experience of many decades, and they've got a track record, which is really worthwhile looking at. I can say we are quite comfortable.

You might say, we try to take into account all the interests high on the agenda. You know the interests of our employees. We want to make sure that we can implement everything in the right way and this, of course, will end up -- will lead to a good purchasing price. And of course, we've got a very experienced say M&A team and headed by Mr. [indiscernible], but we always try to find the best solution. But once we found the best solution, then, of course, we professional experience in order to implement everything put everything into practice properly.

So from my point of view, this is a milestone. Roland Busch mentioned it, EUR 3.5 billion that's the company value, so to speak, I can say that this is an attractive price for an attractive company. As you know the result, which will be reflected in -- when we have closed our books next year. So of course, there are upstream things which will have to be done. But a carve out, i.e., taking out the company from a larger, say, glomerate then, of course, we will incur transaction costs. We have all this in mind, but at the end, we will have an attractive result. We were able to achieve this attractive result actually. Surely, if you look at the retails, the cash situation, we always have to look at these details at closing.

Now looking into the -- or looking at the real view without listing all the retails, I can say that our ad hoc activities in '23, we were able to generate EUR 0.5 billion of contribution of -- profit contributions. And this means that in total, we are going to have EUR 2.5 billion extraordinary earnings from these transactions, and I hope that this answers your question.

[Operator]

Next question, Michael Flamig, Brsen-Zeitung.

[Michael Flämig]

I've got 3 questions about the numbers. The growth -- sales of growth, 3% and you want to achieve 8%. Now to what extent is it realistic that you will end up at the lower end of the bandwidth to the operational earnings margin. This is certainly not one of the key margin figures. So do you think that everything that you planned for November, will you be able to reach this? And then Mr. Thomas talked about certain developments at DI. So what has to be changed in order to get -- you see the support of your customers?

[Ralf Thomas, executive]

Mr. Flamig, that was an interesting and yes, exciting cannon of questions so to speak, sales, first, second half, 4% to 8% on a group level. Yes, you are right. We will end up at the lower end. But nevertheless, we've got a wide range, which we announced in the beginning of the year. We also pointed out that the expectations are like this, particularly the automation business when it comes to the short-cycle business models in China, this situation has to improve in order to reach the upper end of this bandwidth. So your conclusion that we are going to end up at the lower end, 4% to 8%, this is certainly right.

The earnings margin, I'm sure you're talking about the industrial business in this respect and the quality of their margins, I can say there what on track, they will end up in the range, which we announced at the beginning of the year, but the structure will be different. And I can say that the second quarter, you might say that we have more headwinds in the automation business. And I think that was clearly presented. We also reported on this.

In addition, we also see further opportunities for smart infrastructures, we were able to make use of these opportunities. That was quite say positive. We had 14 quarters and improved the situation per quarter. We have a track record in this respect, which is unprecedented. We can only say that measures which have been introduced several years ago with lots of tranquility, still are bearing fruit, so to speak. So we want to give SI an opportunity that is on the 12th of December, we are going to organize a special event in Switzerland to sharpen -- so that they can sharpen their profile, and we will be able to hear their ideas about their business possibilities.

Now the third question, do we need something in between? So you see -- DI has undergone a wonderful transformation towards this new business model. And Mr. Busch mentioned this, we -- the cloud share and looking at ARR that is -- all this was better than expected 40% cloud contribution ARR. So we believe that we will have reached our destination or target a year earlier than planned. I can say that software is really doing very well. This also means that at the beginning of the year, we have seen that we are still on a way to normalization of business.

We've got an extraordinary high demand, longer delivery times, very high order backlog. We've taken them or we've carried them over, so to speak, from the coronavirus pandemic times. And we were clear that we cannot keep this up. We had to reorient ourselves time and again because the Chinese economy, as you know, has not developed as was expected in the beginning of the year. And we had to find out what is necessary in order to improve matters. Surely, we need some time. And we said in China, at the end of the calendar year, we hope that this normalization process will have come to an end in inventories at distributors.

Here, the situation is difficult. Geographies, other geographies like the United States, discrete automation areas. Now the process industries in Europe, we also assume that normalization will occur earlier compared to China, maybe by the end of our fiscal year at the end of this September, inventories warehouses. We are talking about free value added levels our own. And here you see that we make progress when it comes to normalization, i.e., automation here backlog down to 4.8. Now if this is the normal development speed, then the distributor inventories or warehouses, for instance, in China, usually, we've got 7 to 8 weeks of the time needed to handle an order hardly anything has changed in this respect compared to the previous quarter.

So then there is the final stage, i.e., the final -- the end customer in the various markets, and they are still reducing their inventories or rather warehouse stocks. So it is not so easy to look through the entire value chain, look through the 3 stages and come up with good forecast, also taking into account dynamics in the various markets. So please bear with us, have some kind of patience that will improve matters, but we are absolutely convinced and my colleague said so that the structural long-term demand for auto against the backdrop of sustainability and other aspects. This development will be strengthened and this is just a matter of time until things will come back to normal.

[Michael Flämig]

Just a subsequent question, software transformation. You said things were that faster than planned. Now you see the special costs will fall by the wayside earlier than expected. Could you comment on this, please?

[Ralf Thomas, executive]

This is also something I mentioned before, and thank you for giving me the opportunity to give you more details. The cost, EUR 64 million second quarter, and we announced a similar amount. This is what we wanted to invest. We believe that this is positive for us. Sometimes it's a bit difficult to say so. This investment will generate an enormous momentum with a very good perspective, profitability perspective, so to speak. Now if there is a possibility to increase this momentum strengthen it, then we are going to do so. And here, I'm fully with you, so to speak, in the fiscal 2025, and this is something which we call fish.

We've got the business model, lower revenue generated, higher costs, et cetera, et cetera. This is the end of the fish. And we are going to see that, and this also means that we are going to give you say clear and transparent answers. I hope that we could be investing more, but looking at these, say, advanced investments and drawing the conclusions, we believe that this is -- will show positively in 2025. So the bottom line is that we've got a profitable business model.

[Operator]

Next question, Angela Maier, WirtschaftsWoche.

[Angela Maier]

Yes, I've got a few questions. It's about Innomotics. Did I understand correctly that there will be no effect on the results, and that this will reflected in the books next year. Is that correct? Then industrial industries and Smart Infrastructure next. You see quarterly revenue and margin, it is higher this quarter at Smart Infrastructure compared to Digital Industry. My question is, is this the first time that this unit generates higher revenue and higher margins, is that the first time?

And then automation. You said there is quarterly revenue digital industries EUR 4.5 billion and EUR 1.4 billion for software, based on that, we will have factor to revenue of EUR 1.3 billion and last quarter, EUR 4 billion, this means we have got a reduction of 22% with a view to factory automation. First question, did I calculate things correctly? And two, how do you arrive at, say, the gains you made, you see we've got a revenue decline of 7% compared to the 22% I came up with. Could you give us some evidence or proof? And last question, there were some, say, consequences, the CFO of the company is gone because he failed to deliver properly or did some things which were not good.

[Roland Busch, executive]

Well, thank you very much. Let me start with Innomotics. I can say that at closing, the earnings or the profit or the gain, which we will make as a result of the sales process. This means at the end, we are going to see earnings or a profit as a result of the transaction, and this will be reflected in the books next year. Surely, we have to take this into account, carve-out competition, transaction costs. All this has to be taken into account carve-out costs per se. So we have to apply for licenses, et cetera, et cetera.

Now all these costs will -- have been incurred in the fiscal years this year and will occur next year, and this means there will be no large burden on our numbers. So if you want to look at the balance, then you always have to look at the development over many years, and then you will end up with the figures at closing, and then you will understand what can be realized margins, revenue, the questions you asked in this respect. And if you disregard any one-off or extraordinary effects, restructuring within businesses, et cetera, et cetera, then it is really like this.

SI is the first time leading the pack so to speak, in terms of profitability, looking at growth, I can say that were erratic patterns, let me put it like this. And I must say, I hadn't had a complete overview of everything. I'm sure there were some quarters where SI was growing faster and better than DI. But this would be speculation on my part now. Automation and your calculation. In principle, yes, you have to take into account that you compare growth rates, including portfolios, including currency of foreign or FX issues, we had a revenue decline of 20% compared to the previous year.

And here, we have to take into account comparability currencies, but also the carve-out, i.e. removing things and you know this is the situation we are in with a view to Innomotics. So the 22% you calculated [indiscernible] 20%, so I can only say that in terms of your calculations are correct and also your train of thought. Market shares. Well, as you know, the EUR 4 billion, that was really a high amount compared to the EUR 3.1 billion. So you see we have got rolling 4 quarters, and this is how we take into account these changes.

So sometimes it goes up and sometimes it goes down. We have a close look at this and the statistics, which we looked at meant that over the last 4 to 8 quarters, we've seen this. And compared to the competitors, which you mentioned, I can say we gained market shares but also there are market segments like China, for instance, the value segment here. And here, [indiscernible] won some market shares. But internationally, we did not lose. What are the consequences? I can say that our people are doing a very good job. Please do not forget after COVID, there was a shortage of semiconductors. We were up on a rollercoaster. We have had a lot of momentum which is also reflected in the inventories and the distributors, I should say, have been too aggressive. So we try to look through things. We manage our costs in this respect. And I can say there will not be the consequences you addressed.

[Operator]

My next question is from [ Wilfred Ectona ], Bloomberg News.

[Unknown Analyst]

I have one short question. What you did mention at all, Mr. Busch. You've already alluded to the fact that you could imagine larger acquisitions, now we were talking specifically about sell-offs, also Innomotics. So maybe you can talk about what you think about the potential for acquisitions this year, specifically in the area of AI. This is, of course, one of your main drivers when it comes to revenue. So especially when it comes to the data centers and the Smart Infrastructure division. Maybe you can talk on that?

[Roland Busch, executive]

Well, first off, we are, of course, always looking at the markets where trying to fuss out potential acquisition candidates across all areas, of course, specifically in the area of software, but also intelligent hardware. We're doing this both for smart infrastructure as well as for digital industries. We're basically across all areas. Speaking of AI, we will not be carrying out any acquisitions on generative models. I think other people or other companies are better than this than we do if it's about finding specific models that you can actually train with specific data.

However, in the area of AI, and also when it comes to the start-up market, I don't really see the focus on that. It's more on industrial software and operational software. In intelligent devices there in the shop floor, that generate data that's to a big point right, AI strategy doesn't work with our data strategies and data access. So we're looking at that very closely. But of course, also in electrification. You know that 2 or 3 years ago, we bought Siemens in India. We are very pleased with that. So of course, yes, we are looking at that as well. But still, when it comes to M&A, we do want to be active. So we're keeping our eyes open.

[Unknown Attendee]

Thank you very much. We still have questions from the English line. The operator is now going to switch over to the English conference. Please bear with us.

[Operator]

[Operator Instructions] We have a question from Mr. John Revill from Thomson Reuters.

[John Revill]

Just a couple if I may. I was wondering, Mr. Ronald and Ralph, could you just clarify the thing about the extraordinary earnings in the EUR 0.5 billion contributions from staff this year or when and the EUR 2.5 billion moving forward, is that from selling of portfolio companies, the EUR 0.5 billion went and the EUR 2.5 billion went altogether, when you get Innomotics? And what other things could you ever be selling off? Could you just tell us there? I'll just get a bit more sort of detail on that one.

And then secondly, you mentioned, obviously, there's been a big slowdown in order growth because of the destocking trend. I wondered is -- a concern at this moving forward? I mean, do you expect it to improve? And do you think with China being particularly weak, does that increase the kind of the impetus to move into other markets, a bit more like India and other parts of Asia to kind of spread the risk perhaps are you looking to sort of spread do more outside of China in the future?

[Ralf Thomas, executive]

Thank you, John, for coming back on the question around our portfolio companies. When I answered the other question, there was 2 different legs to that answer. The one about Innomotics, this is the current situation where we have a signing, not a closing yet. So the ultimate profitability driven by the closing is going to happen in fiscal '25. However, there is, of course, cost arising to facilitate that transaction to happen. And most of that has been materializing and will materialize in the current fiscal year and even in the prior years. A carve-out of that magnitude doesn't happen overnight. So you should expect costs arising and also taxes being paid have been ongoing in fiscal '22, '23 and now '24, the ultimate result of the transaction will materialize in '25 only.

So if you look upon it from a '25 perspective, there's, give or take a EUR 2 billion after-tax profit expected, and Roland said in the beginning, if you look at the overall all-in total period, it will be about EUR 500 million give or take of taxes to prepare the carve-out of transaction costs and so on. So grand total net all-in over the full period of time that we dealt with the matter is rather to be lower than.

The second leg of the question was how was the historical impact of other portfolio transaction out of our [indiscernible] line portfolio companies and what I said is we had, give or take, about EUR 500 million, EUR 0.5 billion of profitability coming in fiscal '23 from portfolio companies and another EUR 1.5 billion in fiscal '22. That's what I said. So two different aspects of the same matter. So your second question around destocking, yes, you are right. It's hard to anticipate and properly predict how the dynamics of those destocking activities are going to be.

I had been explaining in another question that there's 2 layers in the value -- 3 layers in the value chain. One is our own order backlog, which is coming down now. I said we have been decreasing that backlog in the second quarter, for example, by EUR 600 million for automation. Then there is stock levels in our distributors shelfs, where we do not see any major move. There is still the same level of reach, give or take 14 weeks of stock levels in the distributor shelves in China, for example. And that needs to unwind. And then last but not least, there's also sitting some inventories at the end customers, then also is going to come down again. All that together makes us believe that we see a normalization period in China until the end of calendar year '24. And in other important markets like Europe and the U.S., this is going to be completed earlier. We expect end of our fiscal year, which is September. Is any option for us to move from China to India? No, it's a both end and not an either or.

[John Revill]

Excellent. Okay. I just go back on the thing on the Innomotics. So the 2.5%, the profitability was -- could you repeat the profitability thing for me again. It was EUR 2 billion of profitability in '23 or what was the portfolio thing or the contribution to...

[Ralf Thomas, executive]

John, there is no profitability thing from Innomotics in that magnitude in the current fiscal year, not in the prior one. We expect at closing, which will not materialize in fiscal '24, but in fiscal '25. In closing, we will receive the proceeds and, at the same time, realize profit. That profit will be realized in the area of EUR 2 billion after tax fiscal '25, and there is negative impact to prepare the transaction over the course of the last 3 years, including this fiscal year, give or take, EUR 0.5 billion. That's what I said.

[John Revill]

Excellent. Okay. But the portfolio companies in total, they brought in profitability of what you said fiscal EUR 500 million at fiscal...

[Ralf Thomas, executive]

Portfolio companies and the profitability impact of the transactions we have been having from portfolio companies was in fiscal '22, around EUR 1.5 billion, in fiscal '23, around EUR 0.5 billion means grand total up to now EUR 2 billion, give or take. There will be another EUR 1.5 billion grand total net overall years from Innomotics. So overall, the big takeaway for you should be it's a hell lot of success.

[Unknown Attendee]

We have to close the conference call now. Thank you very much, ladies and gentlemen, for your interest and for participating in today's press call, 9:30. The analyst call will be broadcast live at siemens.com/analyst call. You'll hear from us again at the very latest on August 8 when we'll release our third quarter results. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes our conference call. Our recording will be posted at siemens.com/conference call. We thank you very much.