Good morning, ladies and gentlemen, and welcome to the Siemens 2018 Second Quarter Conference Call. As a reminder, this call is being recorded. 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 uncertain 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. Sabina Raichel, Head of Investor Relations. Please go ahead, madam.
Good morning, ladies and gentlemen, and welcome to our Q2 conference call. Earnings release and Q2 presentation were released at 7 am this morning. You can find everything on our website. Today, our CFO, Ralph Thomas, is here this morning to review the Q2 results together with Lisa Davis, member of the Managed board. Lisa will give you an update about recent developments at Power And Gas.
After Ryals and Lisa's presentation, we will have time for Q and A as always. And with that, we would like to start with Ross.
Thank you, Sabine. Good morning, everyone, and Thank you for joining us for the second quarter results of fiscal 2018. The economic conditions continued to be robust on a global level. Main risks remain geopolitical tensions and protectionist tendencies. Against this background, we delivered another strong operational performance across most of our businesses.
At the same time, go to market approach. Our long term investments in digital leadership across the businesses are clearly paying off. A profitable growth perspective and through excited customer feedback. In addition, Now let me walk you through and a new record backlog of more than 1,000,000,000 in the industrial business with a solid gross margin quality. Comparable orders were slightly lower 1% due to a substantially higher volume from larger orders in the energy related business 1 year ago.
Base orders below EUR 50,000,000 were clearly up 9% on a nominal basis. Organic revenue was overall flat with growth in most divisions driven by an excellent short cycle performance offsetting weakness in power and gas. Industrial Business profit margin was at 11.0 percent, fueled by an outstanding performance at Digital Factory. 6 out of 8 divisions were in or even above the targeted range. Currency effects weighed on margin with 30 basis points For the second half of the fiscal year, we expect an even larger negative impact from exchange rates.
Net income came in at 1,000,000,000, benefiting from a 1,000,000 gain through transferring itosh shares to the German Siemens pension trust. This gain reflects a substantial value generation since 2011 when we started our strategic partnership with Atos. Our cooperation yields great mutual benefits and has been expanded just recently. This share transfer was also a major contribution to the to reduce the pension under funding to 1,000,000,000 equaling a funding level of 79%, the highest the highest level since fiscal 2012 and well above the average of German Dex Companies. We set also a benchmark in ownership culture.
More than 300,000 employees or around 80 percent of our global team owned Siemens shares after paying out the profit sharing pool of 1,000,000. Mostly in the form of free shares to eligible employees. A major milestone was of course also the successful listing of Siemens Healthcare the 5th largest floating in Germany date to date. Before we dive into the details of the second quarter financial I would like to emphasize the strength of the Siemens portfolio. After 6 months of fiscal 2018, the vast majority of our businesses are delivering excellent results Siemens Gamesa has started to execute on its strategic roadmap.
At Product Industries And Drive, many actions to improve the business are implemented. Progress is clearly visible. However, there is still some way to go. As we all know, power and gas reflecting around 15% of our top line operates in a contracting and very competitive market environment. In particular for the new unit business.
Lisa Davis will give you now a more in-depth perspective on how we address these challenges and what the implications are. Lisa, please.
Thank you, Ralph, and good morning, ladies and gentlemen. Our 2nd quarter results fully reflect the difficult market situation we are in. Profit margin reduced to 3.9 percent on lower revenue, declining market pricing, reduced capacity utilization and some operational effects in our new unit business. Service once again held up well and is also growing in importance from a business mix perspective
with
20 program to adapt our organization to a declining market, the accelerated market contraction requires further swift action to optimize our footprint in reduce In addition, we are simplifying our portfolio in order to focus R And D investment to the most promising areas and site's 4.0 offshore digital solution. Key differentiators are digital design and services across the portfolio to reduce delivery times and enhanced 15, sharp unit demand declines, combined with significant price erosion. The good news is that we have significantly increased market share over the last 4 Looking forward, based on our project funnel for large gas, we expect to see less than 100 turbines being awarded in the industry in fiscal 2018. And there are no signs of midterm recovery and moderate recovery in the small and medium gas turbine segment as well as in compression. A higher oil price above 70 U.
S. Dollars is beginning to support investments in upstream and pipelines. However, customers are very cost sensitive and competition is spheres. As I already mentioned, the measures to drive cost out are in place. Let me also give you an update on our service business.
Our installed base from the current backlog of EUR 31,000,000,000, around EUR 25,000,000,000 are related to large gas. And we expect to increase the backlog even further. The service relevant fleet continues to grow as our previously sold units reached their first major outages. This includes our H class units, for example, in the U. S.
And Asia as well as our fast growing base of SGT 800 units in Latin America and elsewhere. We rigorously track our outage activity and utilization ensure constant visibility. As you can see from the chart, gas turbine utilization so far has been moderately up in 2018. And our balanced distribution across Our strategy performance. A good example is a new self learning software tool to optimize plant operations we have introduced at several sites.
This tool allows for analyzing performance data and applying predictive analytics to suggest optimization steps to increase output or efficiency for our customers. I want to reiterate that turbines, among them are the first two H class turbines on the China mainland, which will be part of the most efficient gas fired power plant in China. We have sold now 88 H class turbines of which 65 are already in reliable A key technology for in the UK, fully equipped with software and automation from our digital factory colleagues. We announced that approximately 6100 jobs at the division will be cut worldwide in the U. S.
Where 30% of the the as you might have seen yesterday, we agreed to a framework with the employee representatives. This is an important first step. We expect to conclude negotiations and reach a final agreement in the current fiscal year. As a result, we expect substantial severance charges to Our efforts here are and service network. So how do these actions impact our financials?
As indicated, we expect
revenue
severance to be in the mid to high single digit area in fiscal 2018 and also in fiscal 2019. With that, I hand back to Ralph now to further discuss
Now let's have a look at a real bright spot in our portfolio. Digital Factory delivered an outstanding quarter and showed the value of combining comprehensive software offerings and leading automation competency. Strong top line growth in all businesses is clear evidence for further market share gains. Our automation business performance was excellent, and we achieved remarkable revenue growth in major country China, up 41%, driven by new customers, governmental programs and restocking effects. Germany, up 4% spite less working days.
Italy delivered significant 15% growth. Demand was particularly strong in the machine building industries, while Automotive saw some moderation. The good news is that we see a positive trend also in the third quarter. Towards the second half of calendar 2018, we expect growth moderation due to tougher comps, in particular, in China. We were very stream.
As you know, profitability at Digital Factory is impacted by ongoing investment in MindSphere and integration costs for Mentor. For the second quarter, the impact was around 130 basis points 40 basis points, respectively. And the underlying margin of almost 23% excluding severance was extraordinarily strong. Proseas Industries And Drive is making good progress on its restructuring program and achieved peer order growth of 6%. However, we saw diverging end customer trends.
While commodity related end markets showed further stabilization, the demand for mechanical components particularly in the wind business remained weak. Profit margin improved by 60 basis points despite significant currency headwinds of 50 basis points. Just a few days ago, the world's biggest industrial trade fair closed its doors in Hanover. More than 100,000 customers and industry experts visited our booth by far the largest and shape and drive the digital enterprise. Even more important industry for OTO is no longer a concept.
It is reality with many industry specific digital solutions. They can be developed in every industry and in companies of all sizes. We showed examples from a variety of industries such as Automotive, aerospace, chemicals fiber, and many more. In our vibrant MindSphere launch, you could feel the customer excitement from MindSphere 3.0. More than 140 applications are available or under development and the ecosystem is growing quickly with more than 40 partners, meanwhile.
20 MindSphere application centers worldwide work on industry specific applications and services. Our MindSphere Open Space Challenge drew a lot of interest where external developers and startups who are collaborating openly to craft creative approaches for new customer solutions and business models based on MindSphere. Overall, customer response was excellent more than 7400 leads. So our sales teams now have many business opportunities to follow-up. Another highlight was the showcases around our integrated PLM software solutions to help our customers design ever more complex and smart products with higher quality, efficiency and speed.
We combine in a unique way design and simulation capabilities for mechanical, electrical, thermal and software domains on a common data backbone called team center. The integration of Mentor's electronic design offering is working very well and customer success stories are continuing to build up. A great example is where we integrated our COD program and X with Mentro's electrical systems and printed circuit board design solution on the Teams Center platform. 1 year after closing the Mentor deal, we see impressive results of the integration. The cultural outfit is excellent with very high retention rates in our hot employee market and synergies are ramping up quickly.
We expect to achieve our synergy The acceleration is driven by both cost and revenue synergies. Besides the streamlining of administrative tasks, a key driver is also the optimization we our R and D roadmaps. We have further strengthened the Mentor offering with targeted bolt on acquisitions such as SOLIDO, Saracao, and Invalitica. To tap growth fields in the attractive EDA market. The PLM software business is very well on track to achieve its 1,000,000,000 revenue target in fiscal 2018 on strong profitability despite significant invest in MindSphere And Software as a Service solutions.
Energy Management showed broad based improvement across its businesses with clear revenue growth and a margin well in the target range. Barge orders were lower on tough comps. We have seen some push outs of HVDC solution projects into fiscal 2019. The Building Technologies team delivered another excellent operational performance with further margin expansion to 10.9 210 basis points from prior year's quarter that had benefited from a positive one time pension effect of 5.90 basis points. Revenue growth was broad based across all regions.
The team also had a very successful appearance at the recent light and building fair. Mobility continued a journey of continuous improvement, margin expansion and building up reputation for stringent execution on a consistent path of eighteen quarters at in or above the margin corridor. The 2nd quarter financial speak for themselves. Strong top line growth and excellent profitability across all businesses resulting in industry leading 11.1% profit margin. And there's more to come.
A few weeks ago, we announced the largest order ever for mobility management. Mobility will digitalize the entire Norwegian Railway Network of 4200 Trak Kilometers and 375 stations until 2000 and 34, including a 25 year service agreement. We will book this EUR800 million order in the 3rd quarter. We've built a leading portfolio which we continuously enhanced organically and through bolt on acquisitions with digital capabilities. A good example is the recently announced Spanish company AIMSUN to simulate and optimize traffic flows.
In the case of the integration of Hakon, which offers planning scheduling and information system, we even have to prioritize Several high profile projects are reaching important milestones, such as the commercial start of the new Eurostar train service from London to Amsterdam with positive customer feedback. And last but not least to mention here, end of March, we took an important step towards the building of the European mobility champion with the signing the business combination agreement between Siemens and Alstom. On March 16, we successfully per share, resulting in a placement volume of 1,000,000,000. Since then, the share price is up 18% a strong performance indicating the execute on its strategy 2025 and shape the future of health care. And we, as an 85% shareholder, will also benefit from increased accountability.
Solid financials for the 2nd quarter were already released last week with 8% order growth and 16.5 percent margin despite significant FX headwind of 50 basis points. Siemens Gamesa reported their results last Friday, with a strong book to bill of 1.36. Nominal revenue was sharply up due to the merger. However, clearly lower on a like for like basis. The Siemens Gamesa team is executing on its lead 2020 program resulting in higher severance charges and integration costs weighing on 3 confirmed the compelling industrial logic of the merger.
Siemens Gamesa took the lead in 2017 with 8.8 gigawatt new installations and 17% market share, an increase of 3.3 percentage points. Now let me walk you through below industrial business where we saw quite some movement. Demons's Financial Services, again, delivered a very strong profit of 1,000,000 in the second quarter, driven by Equity business. We expect the full year result in line with prior year. Centrally managed portfolio activities recognized a substantial gain of EUR 900,000,000 from the previously mentioned transfer of Atos shares.
This gain was partly offset by 1,000,000 impairment related to an equity investment For the second half of fiscal twenty eighteen, we continue to expect volatility in CMPA with an overall negative impact due to carve out related topics. As in previous years, we expect corporate items to incur significantly higher costs in the second half year, in particular on central innovation invest. We expect the fiscal year 2018 at least on the level of prior year. Pension impact has been somewhat higher in the first half year, but we expect full fiscal year 2018 in line with fiscal 2017. PPA will continue on the first half twenty eighteen run rate so you can expect around 1,000,000 per quarter.
The tax rate of 26 percent in the 2nd quarter was significantly lower year over year. Effects from the largely tax free gain from the transfer of Atoshares and the release of tax provisions more than offset negative income tax effect related to the carve out of Siemens Health And Years. After 6 months, the tax rate stands at an exceptionally low 17% also benefiting from the U. S. Tax reform effect in the first quarter.
However, we expect for the full year, the tax rate to be within a 24 to 29 percentage range. The second half, among others, material effects from the carve out of the mobility business, will negatively impact the tax rate. Finally, I want to point Having said this, we'd like to draw your attention to our solid free cash flow, which improved by 14% to 1,000,000,000 after the first half of fiscal year. All in all, I'm Following the strong results achieved in the first half of fiscal twenty eighteen, we raised our guidance for earnings per share. Our updated outlook is as follows.
We continue to expect geopolitical uncertainties such as trade restrictions that may affect investment sentiment. We raised our outlook for basic EPS from net income to the range excluding severance charges, up from the range of $7.20 to $7.17. Furthermore, we confirm our expectation of modest growth in revenue, net effects currency translation and portfolio transactions and continue to anticipate that orders will exceed revenue for a book to bill ratio above 1 for the full skid year. We continue to expect the profit margin of 11% to 12% for our industrial business, also excluding severance charges. This outlook excludes charges related to legal and regulatory matters and potential effects, which may follow the introduction of a new strategic program.
With that, Lisa and I will be happy to take your questions and I return the microphone back to Sabine. Thank you.
Thank you, Ross. Thank you, Lisa. Let's start now with Q And A.
And our first question comes from Ben Douglas from Morgan Stanley. Please go ahead. Your line is now open.
I guess it's a question for Ralph. On Digital Factory, you, I mean, obviously 23% underlying margin was an eye opener. Can you just drill down into the subdivisions a little bit more of the margin expansion, how significant was factory automation? How significant was the PLM business? And also, if you can just give us a sense of what's going on in your CNC And Motion Control area.
So that's sort of issue number 1. Issue number 2 related as well you had MindSphere and Mentor integration costs of, of basically, 200 bps. Is that going
Thank you, Ben. And thank you also for the question around Digital Factory. I mean, 23%, as I said, that was an extraordinary strong quarter. If you take out the MindSphere Investment And Mentor Integration So from that perspective, I think we need to stay calm and also keep our feet on feet on the ground. With regard to future development.
If you talk about the pillars of success, I mean, 1st of all, the PLM business has been contributing a lot We still have some way to go to lead the industry leading margin of 1 of the competitors. We all know very well. But we are on our way to get there. With regards to the run rate of integration costs, I think we need to take it quarter by quarter, but it's obvious that, they have been making very good progress and the fact that they are going to harvest the intended impact by far earlier in terms of synergy. It's also suggesting that the integration process is such is quicker and therefore less costly.
That's my reach. I can't give you precise figures yet, but yes, expectations are there that we are not only quicker in synergies, but also quicker. And therefore, less costly when it comes to the integration cost as such. Some of them, we also need to see as investment, as you know, because they will create then sustainable value propositions in the future, and we wouldn't sacrifice that for a quick win, so to speak. Talking, the sources of success, I mean, I indicated that for that factory automation had an excellent quarter.
And you all know that the margin conversion in that business is fairly high in some parts of their portfolio, we are talking 60 percent plus margin conversion. And therefore, if you hit this, if the market hits the sweet spot of our portfolio, that can have tremendous impact, but also difficult to predict the mix of the next quarters to come. What we clearly see If I may take you a bit through geographies and our read on the market, the world manufacturing is confirming moderate growth paths from that what we hear from the markets. Despite high sentiment levels, we don't expect for the further acceleration in dynamics for the next couple of months, the trade tensions that are out there will also have impact. So volatility may be a bit higher than we saw that throughout the last couple of months.
But all in all, we assume that the moderate momentum will continue till the end of our fiscal year, maybe even a bit longer. And when it comes to the relevant industries in our portfolio, machinery and electrical perform above the manufacturing average. Machinery also holds rank 1 now and is a bit dominating the micro development Whereas Automotive is performing a bit below average, but still holding on fairly strong compared to that work we expect what the market has been expecting for quite some time. So China I have been pointing out already a real source of strength 41% growth rate. It's something that doesn't repeat itself every quarter or bit.
So we expect a bit of moderation there, and we also are going to face tougher comps then the rest of our fiscal and also, for the way forward then, manufacturing in the U. S. Is also reporting modest growth momentum. And we are anticipating a bit of an acceleration of momentum with moderate growth until the end of 2018 there, our fiscal year. And also the improvement in raw material pricing, is a key driver in the U.
Economy, obviously, and that may support our assumptions. European Manufacturing showing acceleration and dynamics with moderate growth as I have been pointing out before. And we expect that this development should also persist for the next handful of months, mainly pushed by good momentum in small and midsized countries and companies, in the Southern And Middle Part of Europe. In Germany, it has been confirming its moderate growth path despite softening in dynamics compared to the prior months. We expect continued moderate growth for the rest of our fiscal year for that region.
So all in all, I think fairly broad based visibility, as I said before, 3 maximum 6 months. And therefore, as I said before, I expect the momentum that has been created, maybe not on the same scale, but continuing for the third quarter. And we take it from there then. You also have been asking about our motion control business. And, I think it fair to say that we also have been seeing good momentum in that business, not at the peaks that I have been discussing for factory automation, but with a clear trajectory also that this momentum will prevail for the next 3 to 6 months.
That's very helpful.
And our next question comes from Mark Traumann from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Yes, thank you. Good morning, Ralph Lisa and Sabine.
I've got a
few short questions, please. Firstly, on process indices and drives, the order data there has looked quite good for a number of quarters. I wonder, Ralph, if you could give, some sort of outlook of when we should see stronger sales growth and getting some leverage to get those margins back in the target range. So that's question 1 on process industries. Maybe one for Lisa on power generation.
With all the restructuring measures that you've announced, How much capacity reduction in effect will there be for the large turbine business that you have? Or is it a better way to think about it, about just fixed cost reductions? So I'm trying to get an idea of the impact of the measures you are taking on your capacities or fixed cost? And then finally, Ralph, I was interested in your comment, about FX having a bigger impact in your fiscal second half. And I can see quite clearly why that would be for the next quarter But obviously with, with the dollar strengthening reason, I think the dollar euro is what running at from a peak of 1.24 not so long ago.
Why would the impact be still be big in in H2? Is it a timing of and then you've gained something in 2019? Or maybe you could explain the FX, please. Thank you.
Thank you, Mark. Let me start right away with the exchange rate issue that you have been raising. I mean, 1st of all, I maybe it should be more precise. I mean, we had 30 basis points of negative impact for the 2nd quarter industrial businesses margin. And from today's perspective, it won't be an earthquake, but the range may expand to something between 40.50 basis points for the full fiscal year.
The reason for that, mainly, and you touched on that implicitly that, I mean, we are closing all our open positions for the next 3 to 6 months. And therefore, we have pretty much visibility for the next 5 months to come now. And what we will see is a slight increase on the average the full fiscal really a handful of other major currencies, including British pound and also some of the emerging markets that have an impact there. So all in all, the 3rd quarter, I would expect the typical suspects, including the health and years and also PD and to a certain extent, energy management, which have been affected most in the second quarter will again be those with a negative impact from exchange rate on their margin development. We will make that very transparent.
Again, once we are there, but tendency wise, as you said that, it should be a timing difference if the current exchange rates in particular for the U. S. Dollar will prevail for the quarters to come. When it comes to PD, I think it's an really excellent question, and we have been cutting that back and forth with the management team. As I said, in my little introductory speech, I mean, we see a 2 worlds there.
I mean, the 1, the typical commodity market customers that have been coming back, I mean, due to higher commodity pricing, they are probably getting closer and closer to that utilization rate in their business when there's more than OpEx on their spend. So from that angle then, new order development has been pretty much based on that one. On the other hand, we continue seeing a lot of pricing pressure the mechanical drives environment, which is mainly occupied by customers from the wind industry, which, as I said before, are also just in the consolidation phase pricing in the market. It's getting tougher due to more and more countries shifting their models to auction. From feed in.
So I wouldn't expect any major change in that 2 world scenario anytime soon, but still we got now three quarters in a row with a decent top line in the meaning of new order development. And typically, that is turned into revenue with a lack of some 6 to 9 months. So we will see some pickup in the sales growth momentum in the quarters to come the second half of the year should be stronger than the first, but it will not be an outrageous incline in growth momentum So this is going to be step by step. And bear in mind, I mean, the margin of PD had been affected by some 60 basis points of restructuring severance. And at the same time, has been burdened with 50 basis points of exchange rate impact So they make good progress and the measures they have been implementing are going to face a high degree of implementation now.
So I'm quite positive for the continuous development, but as I said, will be small steps. And honestly speaking, from a CFO's perspective small steps, sometimes are more valuable than big jumps.
I'll jump in, Mark, on the PG question, to your to the question on restructuring and whether we should look at it as percent of capacity reduction or fixed cost reduction. We do look at it very much as how we're reducing the cost base of the business. If we were to look at it on a of capacity, it varies by product line, obviously, depending on what's required in the market. So it gets a bit complicated. But on an overall cost reduction, that's really what we focus on with respect to the restructuring we've announced.
I also would wanted to add that it's not just about the restructuring that you've recently seen seen the agreement of last of yesterday, but also we're obviously continuing to focus on delivering on our productivity gains reducing our product costs overall through different sourcing mechanisms and such. We're also not just restructuring our footprint, but also reducing our overhead in support functions in the business. And also looking at how do we better prioritize our R and D spend and reduce it overall by focusing on on being more focused on the platforms and products that we support. So a lot of focus throughout the business on reducing the overall cost base.
Clear, thank you very much.
I guess you see that there's literally no lever untouched. And that's obviously also what it takes. Maybe I can add one data point for you. I didn't particularly touch on when I answered your question. I mean, PD also is benefiting from growth momentum in China.
Just to give you a bit of gut feeling there was north of 20% growth in new orders, contributing also to the PD new order development in the 2nd quarter.
Okay, very interesting. Thank you very much.
Thanks.
Thank you. And our next question comes from Andreas Bouley from VP Morgan. Please go ahead. Your line is now open.
On Digital Factory and then one on Energy Management and 1 on Power And Gas. On Digital Factory, you mentioned the strong growth in China. Some of your competitors or some Asian automation companies have warned about a potentially weaker outlook for smartphone tech related spending later this year. Maybe you could elaborate a bit on that. What's your exposure within your Asian Digital Factory business to kind of detect supply chain and what do you seeing in these markets?
Question on energy management, there was a much better margin this quarter after some mixed quarters. What drove the improvement versus the last quarter? It's been kind of a bit up and down in that division? And how sustainable is the 9% margin there now? And what do you see as an impact from raw materials in that division in the coming 4 just given kind of some of the exposure to steel you have?
And on power, the question on Given your resilience, you commented on in the service business and given the high share that service now is of the total it looks like the equipment business is losing about 1,000,000,000 this quarter. Maybe you could break that down a bit into the underlying performance in some of these projects charges that you have mentioned?
Thank you.
Before I leave it to pleased to answer the PG question. Let me just make quickly one remark on the new business in power and gas. I mean, after Lisa's presentation, I mean, it's obvious that we have a massive and also sustainable impact from the market when it comes to the quantities out there, we said, just setting an example that most likely, we won't see more than 100 new units, large gas turbines per year in current fiscal, not at all. And maybe this is also kind of new normal. And when competition is getting really fierce, sometimes You also have to accept that you can only to a certain then go for margin, you also need to look into utilization of your existing capacities.
And that may drive you in exceptional cases also to accept certain orders that are getting the economic rationale only That means that sometimes you deliberately accept an order that maybe even slightly negative in the beginning when you signed a new equipment order, accepting that you then contribute to an ever more important installed base for future serviceability, where we believe we have a real good positioning due to the strong technology and the technology upgrade we provide over the period of time to our fully installed base. Just wanted to mention that in the beginning. Then, coming to your question on China, short cycle. I mean, you're absolutely right. We are watching that very, very carefully.
I look into each and every of the market segments and the indications that we got from the tech and electrical components is something that we are kind of tailoring into our own expectations, for the short term, I mean, third quarter that will not have a material impact but one of the reasons why I said that, there is not a lot of visibility beyond 3 months is coming from that part of the market. Repeating not repeating what I said before. I mean, China, manufacturing shipments, they continue to spend with clear growth at the moment. The dynamic showing moderation compared to summer 2017, for example, and the growth momentum, will not accelerate a lot further. That's what I said.
And this is also driving our big pictures view We are not that far that we can conclude how much momentum that this indication for slowing down in the area is going to unfold into the neighboring market segments. But at the moment, I think it's fair to say machineries driving the scene and automotive, even though with slower momentum still, contributing there, If there was a change in the component and the feeding processes, which these electronic industries reflect more or less then the moderation in the second half of the calendar year, as I said, maybe a bit stronger than originally expected. But again, big picture, China, we are penetrating the market very well, including also our software business. And I said that in the first quarter's discussion, it's good to see that now these cross selling effects that we have been waiting for a more and more materializing and it's good to have access to that other part of the market. That was mainly covered by industrial software in the past.
The second piece of your question around Energy Management typically, a long time, I like you knows that the first half of the fiscal is fairly slow in that business. I try to understand that for more than a decade now. I have to respect the fact it is that way, but it also was, always the case that in particular, the 3rd and the 4th quarter of the fiscal year was fairly reliable then when it comes to volume. We see the margin clearly on that level and from historical experience. The fourth quarter typically was even stronger than the second, in the third quarter.
So everything we know from backlog and everything we also know from the momentum generated in the different businesses there is quite underpinning that we will continue seeing energy management on those margin levels, maybe even a bit above. Raw material pricing is going to have an impact. You can hedge only for a certain period of time. And that has negative impact, but not material for the profitability of the division as such.
Andreas. So I'll make a few comments just on the questions on PG and maybe a comment about the resilience of our service business that you mentioned. As I mentioned in my my, in the speech itself, I mean, we have, a number of different factors that are contributing to the resilience of the services business. The first is that our fleet is actually growing. Of the 88 H class units that we've sold now all of those units have long term service arrangements on them.
So that revenue starts to stabilize our service business even more Also, as you saw in the charts, our utilization is increasing overall from what we've seen in the past. And then we continue to upgrade and add technology to the fleet in order to create value as Ralph said for our customers. So all of these are contributing to what we see as a very positive and stable service business going forward. It a bit on underutilization buters to that new unit business performance is really the under absorption and the lower price point on the sales that we're making in the market given the pricing pressure.
So the contract losses were not a big driver in that sense, that you mentioned.
That was the point I tried to make.
Yes, not at all.
Yes. And are they finished or are these projects basically near completion or is that something that will continue or could continue?
Well, we have a portfolio of over 30 projects that we're always implementing So these projects are always ongoing. We had, on a couple of those projects, some will wind down soon. But again, we have a portfolio of over 30 projects that we're always working. So this is a very robust business.
Yes. And do you
think it's all also worth mentioning that the Egypt projects are very well on track. Next question.
Next question operator.
Thank you. Next question comes from Simon Thomas from Berenberg. Please go ahead. Your line is now open.
Yes, good morning, Ralph. Lisa and thanks for taking the questions. I'm starting with a twofolded question in PG. You're guiding for I think mid single digits to high single digits underlying margins for the next sort of couple of years, including 2018. Can you share maybe the assumptions with us what how you can get to the lower and the higher end within that.
And then a more general question on PG, I guess the outlook for small and medium turbine looks a bit better. And there might be some upside from the compressor business recovering, are you the plus around bit? But if we look beyond the restructuring measures, what are your arguments as to why financially you would hold on to this business in the long term? Then the next question on Vision 2020 plus, it looks like you're making some good progress on the power restructuring. So is it fair to say that we could expect an announcement as early as August AECL results with regards to vision 2020 plus.
Then lastly, Ralph, just on CMPA, obviously, volatility has been quite high there generally. And I know you can't guide that well for the business, but as it stands today and you probably know some of the carve out related costs related to Alstom. How would you guide us for the 2nd half with regards to CMPA? Thank you.
Simon, thank you very much for a really broad portfolio of questions. So let me start. With Vision 2020 plus. You have been the way you have been asking your question has been taking the power restructuring aspects pretty close to 2020 plus, which is not the case in the way we intuitive the need to restructure the footprint and address capacity, excess capacity in the market. And, maybe it was just coincidence that at the same time, we said that we start thinking about and developing beyond vision 2020, which we then call this a working title 2020 plus.
And so therefore, let me keep them those the 2 of them apart. I mean, we very appreciated, that we were able to make an important step yesterday, the night before yesterday actually in concluding on a cornerstone paper that is now paving the way to negotiating the details and the locations and the concepts that will finally, hopefully, take us to a point that we will be able at the end of the current fiscal year to assess the quantity of potential restructuring needs and also book that. In the meanwhile, we have been starting to implement the non European non German part of the exercise. I mean, about 1 third is U. S.
Based. And as Lisa said, this is on a good way. And first measures have been implemented. So when it comes now to the savings that we aspire, I think it's good for us and also for you to hear that we are on the same track. We just have a different path, that will take us to the same amount of savings when it comes to PGMPD restructuring.
On the other hand, with 2020 plus, we are making good progress. And as we develop Vision 2020, which is still a valid and effective strategy in place, obviously, also successfully executed on, I believe, in the second quarter on which we report now another proof point that with the exception of PG, the portfolio is very well on its way. And we are far ahead of the needs, 2020 as a year would have been suggesting to develop something new, but we want to use that period of time that we now have been saving, so to speak, and are ahead of the curve to create additional momentum for the new Siemens, as we called that. And I'm very positive that we are going to be in a position to also make announcements once we have been concluding. And once we have discussing that with the internal stakeholders, including supervisor report, and then we'll share with you, but bear in mind, these are 2 different working streams and they are not interdependent.
So therefore, we have not been sitting idle in the Managing Board waiting for the negotiations to think about what the future Siemens may look like. Apart from that, the NPA, yes, I explicitly said volatility will be there also in the second half of the year. I mean, we, of course, have quite some understanding about what's ahead with regards to the carve out of the mobility business prepare it for the joint operations with Alfstone. There is a part in it that is more tangible single aspects that just where you just run the math. And there's other aspects where it deserves a lot of good thoughts to optimize, that part is including also taxation.
And as I said in November, when we have been guiding you the way we did, that we will, at the end of the year as soon as we have final results at Fingers Tip share with you also what the pros and the cons are. So with respect to the second half, I said that in my presentation, that we now have been guiding you for a lower tax range, effective tax rate. We said in the beginning of the year, 27% to 33%. Now it's 24% to 29%, including the positive of the U. S.
Tax reform, which we 1,000,000 positive impact, but it will still be a material amount. And as long as there's still uncertainty there. And sometimes you also address and see the receiver of revenues and the tax authorities in some jurisdictions discuss with them. As long as I'm not done with that one, I'm asking for your understanding that we are not quantifying things in that area. But the higher tax rate in the second half of the year will be driven by residual uncertainties, mainly in the tax area.
So I need to ask you for patience there.
I guess, future attractiveness of the PG new unit business. And maybe I'll break it down into 3 distinct areas because there are 3 distinct markets within the business. The first on small and medium, gas turbines, really this business is, is driven very much by centralized energy systems and the growth in decentralized energy. And so we do see this still being a very attractive business going forward. For the use of small and medium gas turbines.
They have a natural home in decentralized energy systems of the future. If we look at the compression business, really this a bit of a discussion about oil and gas. And as you've seen in some of the comments, we do see this business starting to find stability and cover, and we do see this market very much intact longer term. We also see quite an opportunity in the oil and gas business around our ability to bring digitalization into an industry that has not advanced nearly as much as other sectors or other verticals have. So an opportunity that's unique to Siemens to be to leverage our digital capability with our rotating equipment in that industry.
So growth opportunity there as well. And even in the large gas turbine business, even though this has obviously gone through structural change and will be a smaller market going forward. We do see a need for large gas turbines in the energy systems of the future, if not for anything else, but for security, the ability to bring large volumes of power in the system quickly. And for this reason, we do see a large gas turbine market going forward, albeit much, albeit much smaller than what we've seen past. And therefore, the need for us to really restructure and right size our business to match that market as a future.
So all in all, still some optimism around all three key areas of the business and the business overall going forward.
Simon, I owe you one last part of one answer to, a last part of your question, and that is about modeling CMP. I know how difficult that is. And I can't really help you with concrete figures on that one. But if you look into the first half, that was obviously very much driven by the extraordinary impact of Ostrand and now from Atos. If I look into the second half the fiscal year, I would see a more normal course of business being driven by a carve out related expenses and alike.
And if you model in a high double digit negative number for both of the quarters, you probably will not be that wrong.
Question comes from Markus Mayer from UBS. Please go ahead. Your line is now open.
Yes, hi, good morning everyone. My call just few minutes. So apologies if you addressed some of these questions already. I have one on digital factory, one on PG and one brief one on the framework agreement from yesterday. If I start with Digital Factory, please.
23% underlying margin. How should we think about that in terms of your I would say bread and butter short cycle business versus a number that you've recently been talking about on cloud and SaaS based software. Targets that you have by 2022, 1,000,000,000. Is there any meaningful part of that cloud and SaaS revenue already in the revenue mix today that could explain some of that very strong margin. And more long term, what is the margin ballpark that you are thinking of for that incremental revenue I assume most of that 1,000,000,000 will be incremental, if not, would be interesting to figure out how much of that is incremental versus cannibalizing your other license business.
And then on power and gas, for Liza, if I, look at your backlog and the, sort of service relevant fleet growth that you've mentioned in the presentation, To what extent is in the backlog still time and material as the, as the way you charge your clients versus long term service agreements. So that's the 1st major overhaul timing matter. More for the backlog than for new business. That's question 1 and question 2. Some of your competitors, I think, are increasing the service intervals quite a bit in, in their long term service agreements.
How comfortable are you there, in terms of provisioning going forward and that there's no risk. If you assume that, pricing year stays flat, there's no risk from, on the service margin. And then very briefly on the framework agreement, how would you say the reception or the level of agreement in the Workers Council is on your view, an outlook for the power business.
So Marcus, thank you. And indeed, you missed a bit on the Digital Factory side. So I hope you forgive me that I'm a bit short and sweet on that one. Sure. We discussed the 23%.
The main driver of that was twofold. 1 Mantor and the PLM business did had an outstanding good quarter. We are making very good progress with the integration of Mantor means the synergies are ramping up by far quicker than originally expected and we will be there with the $100,000,000 target already by 19 instead of 21. So that is an incremental support of that margin. And the other big pillar 23% underlying, based on is growth momentum and high margin conversion, mainly in the factory and automation environment, by a fairly big portion, driven by China, where we have been growing more than 40% in the second quarter.
And I have been running your colleagues in the audience through a detailed regional analysis, what we expect to happen in the different geographies and relevant business sectors, we are in. So if you don't mind, take the details of that one, from the tape later on. But, the question about, how material is the impact on MindSphere and Co already on the way to that 1,000,000,000 incremental that you have been addressing. Of course, it's not material at the moment. That we are still in investment mode.
And as we have been guiding you, and that's, I think, really, is still worth being mentioned time and again, I mean, we are investing substantially in mine sphere with a yearly investment of around EUR 175,000,000 plus have all the integration efforts for Mentor being done and still grow margins in a highly competitive environment. That definitely has an underlying rationale from our customer's perspective they got the point and that they invest in digitalization. Also, the number of leads we have been creating at the Hanover Fair 7400, I mean, figure itself doesn't mean a lot, but the level of quality these leads have very specific ask very specifically asking for challenges in new projects. I mean, we have a very detailed analysis of these 7400 and typically, you would have some 10% that are relating to a concrete project that the customer interested and addressing the lead is dealing with. This was more than 20% this term.
So there's massive momentum being created and we are not only seen as a thought leader in that field, but we also can help with up and running applications. I have been elaborating in my speech on that as well. Now, when it comes to the framework agreement, I really think this was a big step forward. And the way we have been discussing that was open and, of course, also with different points of view. But the alignment on the need to act and also the, the magnitude and the broadness of the act was required that it's absolutely shared.
No one is left behind in La La Land and is believing there is an easy way out. Because the root cause of the situation in the market is so obvious. So therefore, there is no room for any misunderstanding that it takes what it takes, for the way forward. And also, we discussed that in another question before, Lisa did And it's just about very carefully observing the market and looking for opportunities, yes? Because there are new business models coming up.
And there's also plenty of challenges, in footprint and reorganizing that. So for the way forward, we spent many hours with the members of the supervisory board and also with the representatives of labor not only in the negotiations. So there's absolute transparency on what is required to take that business forward.
I would just add to that, Marcus, that the discussion and the framework agreement that you saw yesterday is really discussion that led to that was really a discussion about how and not necessarily what. So the, the understanding of the need in the marketplace as Ralph said, is fully shared. And it's just a discussion as to how to get those cost savings in the business, that led up to the framework agreement that you saw advertised yesterday. To your questions on PG And Service, maybe I'll start first with the comment about competitors are increasing their service intervals. We also within Siemens are increasing our service intervals well.
How does this how do we manage that? So it doesn't impact the value of our service business, where we're also bringing new offers to our customers at the time when we do look to increase intervals. And then new offers are by bringing new technology to our customer help them improve efficiency or overall capacity, are also bringing digitalization and new service capability to them at the time where we're renegotiating potentially on service intervals. Going forward. And then your question about backlog, obviously, when we do our service business, it's a combination between long term service agreements and what you mentioned as time and materials or what we would call book to bill.
And these are both balanced in our business going forward.
Thank you. Great.
Thank you very much.
Thank you. Our next question comes from James Moore from Redburn. Please go ahead. Your line is now open.
Yes, good morning, everyone. I wonder if I could focus on power and gas Firstly, could you comment whether the service margin was stable year on year in the first half, if you really did, apologies? And secondly on that, could you say how low the dresser margin has got? You gave a number of high single digits 2 years ago. I just wonder now that we've had the oil pain, where are we?
Has it bottomed? What's the potential? Secondly, if I could turn to free cash flow, I think the PG free cash margin was minus 5 in the quarter and 1% in the last 12 months is materially below your your P and L margin, do you have any visibility on whether conversion can normalize free cash flow conversion can normalize in the coming year or will we still see a difference there? And finally, can you expand a little on your new PG margin outlook, particularly on what phasing of the savings is? And you say you expect a material impact on the bottom line in the 2020 year.
Can we think about getting back into the percent target corridor in the 2020 year?
So that was indeed a bit of questions on PG as you indicated, James, and let me try starting taking you through that a bit. I mean, with regard to the margin level in service, we said, yes, we see a fairly stable margin development in service, not only in the first half year, but also in the backlog, that we see ahead of ourselves and visibility that didn't change. We have been discussing that a couple of times that typically, for the next 18 months, we have quite a good visibility on the deployment of services and resources for that one. And also, on the quality of the backlog margin, if you will. With regard to Dresser, I mean, we said that also a couple of times, I mean, when we acquired the assets, we been reporting on the development now being combined with the former Siemens part in that, what we call, a dresser unit there has been substantial challenges in the market development.
And even though the team has been taking costs out, they could not completely decouple from the movements of the market, including the service business, They are in the low single digit margin environment, and we are very carefully assessing opportunities and take them if they arise. But we are not done that done there in that market segment. When it comes to free cash flow, I really like your question. Analysis is pretty sharp. That's what we have been asking ourselves to very intensively.
And I think we need to keep 2 or 3 aspects a bit apart from each other. The first one being, how does PG deal with the declining business volume. I think that is a very, very difficult, very very challenging task for them because on the one hand side, they need to make sure and they do to avoid any inventory obsolescence risk we are very intensively looking into that matter. On the other hand, you need to be ready to deliver quickly if the timing is part of the tendering process and your customer is prioritizing that. So walking a thin line has been working out very well in the Egypt projects, I think.
I mean, this going to be delivered impact compared to the plan we made. We absolutely on track there. And by the same token, we see with the declining new orders, also a lack of advanced payments. So this is a different regime system you will, that is establishing itself as new normal in the market. And we are carefully watching that, operating working capital needs to be reduced the team knows that and they are busy working on that.
It's also it will also be affected by the consolidation of sites, yes, and the footprint because the more sites you have, the more whip you have on the road at the end of the day. And last but not least, free cash flow will also be effect it by payments being made for severance and alike. So therefore, your question, when are we going to see new normal and when is it going to be in steady state then? It's not that easy to be answered. We are tracking all the different components but the result of that will only be seen once we know the timing of the payments in the severance arena.
That's pretty much the big picture on that one. And, with regards to the margin outlook, before I will ask Lisa to add if need be, the margin outlook, I mean, we clearly have been assessing the current situation very thoroughly with all the aspects that Lisa has been explaining. We have been guiding you since the London Conference into mid digit margin, before severance payments and in her presentation that this guidance is also relevant for fiscal 2019, not only for 2018, If and when, after all the savings of the framework, of the measures that are going to be agreed right now, kicking in and materializing 100% whether then in 2020, definitely beyond when they will be fully materializing, we also need to observe where the market goes. Till then, from today's perspective, I don't think we discuss too much about the win, but more about, how well can we cope with the challenges until the savings are fully materializing because time is of the essence. We need to be determined and we also need to consistently implement those measures And, as I said, before 2020, I think there is no need to discuss any margin target above mid to high single
should. Very helpful. Thank you.
Thank you. We have a few more questions in the line. Could you please submit the number of questions give everyone a chance to ask further questions. So 1 or 2 questions each, please. So next question now.
Thank you. Our next question comes from William Mackie from I
will
rate on process industries and drives, you have been kind enough to just structure the discussion around current and midterm margins in PG, but could you do the same thing for PD given that it is currently out of margin target. You have an ongoing restructuring plan. You have some framework agreements in place and a shift in some market dynamics but when should we expect PD to start tracking back into its midterm margin corridor?
Thank you, William. So first of all, I don't know whether you heard me explaining a bit the margin quality for the second quarter, if you adjust for severance and then know that there was a drag of 50 basis points on exchange rates, for PD in the second quarter. You end up, pretty close. To the margin to the lower end of the margin band. I don't want to overemphasize that, but this is just finding the right basis for the discussion.
I mean, with the measures being on their way and the additional ones being planned and finally determined now throughout the next couple of weeks months. I feel PD All others equal, being in a position to reenter the margin corridor, latest by 2020 Now as we said before, we don't want to discuss and, figure in and figure out severance and the like because there's always a base load of measures you need to take to take your business forward. You need to invest end to end. So we like to still continue the target margin corridors as reported, including a certain part of severance and restructuring work that needs to be done. And if you then add the fact that, this is a late cycle business typically, to a large extent with all the artifacts around mechanical drives and wind power that I mentioned before.
So there is quite half a year, 9 months of lead time required between new orders being booked and then turnover being recognized. So that's why I think it will take also some time to finally find ourselves in a new normal And that's why I would like to repeat what I said before. I prefer consistent and constant steps into the same direction instead of one time wonders that then leave volatility behind. So I have quite a good feeling for PD being on the right trajectory. And whether it's a quarter more or less, that's not really relevant for the long term perspective of that business.
On top of all that, the market, if and when it's recovering when it comes to commodity pricing and also the to tap on the potential of new technologies, including digitalization in that field, then we will be perfectly positioned to participate in upswings. And I gave the data point before that in China, for example, where some of the companies, our customers there, kind of Quantum Leap, one technology level. If you will, we saw tremendous growth opportunities and have been adding more than 20% of growth in PD in China in the last quarter. So there is opportunities out on top and bottom end. And, I think it's fair to say that the team is doing a tremendous job implementing all these measures at the same time being challenged by the market, the way they have been challenged, I think they deserve respect and appreciation.
Thank you. Quickly, could I follow-up on the FX comment you made for the division? You've highlighted it in a number of divisions. Can you scale the FX impact for the group in Q2 and the expected increased headwind that we might see for Q3.
As I said, we had 30 basis points on industrial businesses margin negative impact from FX in the 2nd quarter. That we see that developing for the full fiscal year rather into the area of 40 to 50 points negative in total for all exchange rates. We have been hedging as we always did for the next 6 months we have about 85% of our open positions being hedged. So not a big surprise from that perspective. And the divisions that are going to be affected have been, to the largest extent in the second quarter, the health in years, PD And Energy Management.
And this will to remain pretty much the same 2nd quarter. That was 50 basis points negative for the 3 entities being mentioned. And that will increase in the 3rd fourth quarter, in that direction I described for the full fiscal year for the group.
Thank you very much.
You're more than welcome, William. Next one please.
Thank you. Next question from the queue is James Sachler from Barclays. Please go ahead. Your line is now open.
Thank you. Good morning, all. Just looking at your EPS guidance, when you set out the guidance in November, what were you including? Because we've now had 3 very significant gains because clearly, the operational performance has been very solid, especially in digital factory. So when you raise the guidance today, I mean, what's your thought process and what should think about any future gains in H2?
That's my first question. And then one for Lisa Davis, service was 55 percent of revenues as you mentioned. Where should we see that going forward? Could this become a business which is much more service driven going forward? And as a result of that potentially much more profitable?
Thank you.
James, the EPS question is a very relevant one obviously would like to go back to our November announcement. What we said then is, A, we exclude severance and structuring, because we just can't know at that point in time. And B, we also said that due to the fact that, will be substantial impact from carve out activities for both health and year and mobility to prepare them for the merge with Alstom, we will have substantial impact, in particularly on the tech side. Have been elaborating on that a little bit already. We saw, some of that, pretty much half of that from a content perspective.
In the first half of the fiscal year, including the second quarter, where our effective tax rate has been benefiting, a, from the low tax rate, being applicable for the sale and transfer of Atos shares that is close tax free, if I may summarize it. And secondly, we also were in a position to release material provisions in the second quarter. Against that, what's impact from the Siemens Health And Years carb out being completed But I also mentioned that there is still uncertainties in the final tax assessment because you can imagine magnitude and broad impact in many different jurisdictions. In that way, doesn't you put into a that you send out one tax file and that's it. So there is still a couple of things, that are uncertain at the moment.
We are working on them and we are confident that we can conclude them over the course of the next couple of months, maybe quarters. And we are now entering into the final stage of carving out and building a subgroup for mobility business that will then be brought into the joint activities. The same in principle is applicable there. So from the tax side and also from other carve out related expenses, we are not done yet, yes? But the assumptions that we made when we discussed with you in November are pretty intact from today's perspective.
And as I said then in November, I will share with you numbers when they are solid and firm and in that party part, it also takes 3rd party, the tax authorities view on that one. So you need to be a bit I said that before, but the rationale that we will have substantial material impact from the carve outs And that being kind of compensated by extraordinary positives is still intact.
So just following on to that, so I'm just underlying, how does the business performed versus your expectations? Because we knew there were going to be all these costs, but if you just look at X gains and carve outs? How is that looking?
I said it's planned and we will share with you when we're done with it.
So let me now address your question on our service business in PG and the fact that it's 55 percent of revenue now and your question of whether that would go higher in the future. But it really depends very much on the market and where the market goes for new units, whether it be large gas to urban small and medium. We are, as I mentioned in my comments, increasing our market share. So we're gaining market share in both the large gas business as well as the small and medium gas turbine business. So it's this combination between us gaining market share and then what the overall market is going forward.
So that will depict what the revenue is for service.
Based on your outlook, that's going to be smaller. One would expect end service to be larger?
It depends on what your outlook is on the market going forward really.
So looking at the time, we have only one more question, please. Last question, operator.
Thank you, ma'am. The last question comes from Gilde Debris from Deutsche Bank. Please go ahead. Your line is now open.
The first question I have relates to the Mobility division where the profit contribution was clearly stronger than expected. And it increasingly seems that you will contribute a bigger share of the profit, to the combined entity with Alstom than the 50% you will get eventually. So the question is, are you still happy with the current terms and conditions of the merger? So that's question number 1. And then question number 2 is, I think you mentioned some push out of HVDC projects to 2019.
Could you elaborate, elaborate on this and say basically what's driving those further delays, in those projects? Thank you.
Two interesting questions. Let me start with Energy Management and HVTC. I didn't say further delays. What I said is that from the perspective that we take, yes, as a potential supplier, you have to, I mean, be ready when the customer is calling for a quote, and you enter into a tendering process whenever timelines are set, What you typically see in that business environment that you have a kind of density of large scale projects for a certain period time as we had that in last fiscal year 2017, where substantial large projects have been awarded, not only, but also to us, was 1,000,000,000 in the second quarter only last fiscal year. And then you go through a kind of dry period, and this is no surprise.
And it just happens. And if you look into history and learn from that, you shouldn't overemphasize the fact that there's sometimes 3, 4, sometimes 6 quarters. With no awards being made in terms of large scale tendering processes. So this is not concerning. I just wanted to make sure that This is not misunderstood in the meaning of that we lost out an opportunity.
So the market didn't provide opportunities and we will stand ready and be available. And this is most likely, in fiscal 2019. Again, that's my view on it. And push out means that expectations for certain timing for certain projects has been pushed out not delayed in the meaning of that a customer the project at a certain point in time and has been rescheduling that. Maybe I was not precise enough on that one.
I apologize. Then with regard to mobility, I think this is first great statement that you made that we had an extra out is it outstanding profitability level? I agree with your assessment. And there was one little tiny thing I need to correct because you said our 50 percent share, it's 50.7 percent, that will be Siemens's share in the joint activity and that's important to remember and to remind ourselves, time and again. There was a mission mechanism agreed upon for the valuation assessing then and coming to that 50.7% and that goes pretty much along the lines that Siemens is the more profitable business and Alstom is a big bigger.
Also in terms of the backlog being brought into the joint activities. And then there were a couple other balance sheet items that had to be reflected and have to be taken into consideration. But the profit ability development is a very good one for Siemens Mobility and will allow us to enter from a position strength into these joint activities. We also very much appreciate that we hear that Alstom is doing fairly well. Their financials and delivering on their projects.
So it will be a merger of 2 strong companies in which Siemens is holding the majority.
Thank you. So thank you, Lisa.
I know that quite some of you have been taking the time to visit our booth at the Hannover Fair And I also very much appreciated your comments on what you saw. And, you also should know that we consider that these statements you have been making about how impressive the event was, also as an obligation for us to implement and secute. Thank you.
Thank you. So with that statement, I think we can now conclude If there are further questions, please reach out to the Investor Relations team. We will be around.