Good morning, ladies and gentlemen, welcome to the Siemens 2018 second quarter conference call. As a reminder, this call is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on page two of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mrs. Sabine Reichel, Head of Investor Relations. Please go ahead, madam.
Good morning, ladies and gentlemen, welcome to our Q2 conference call. The earnings release and Q2 presentation were released at 7:00 A.M. this morning. You can find everything on our website. Today, our CFO, Ralf Thomas, is here this morning to review the Q2 results, together with Lisa Davis, member of the managing board. Lisa will give you an update about recent developments at Power and Gas. After Ralf's and Lisa's presentation, we will have time for Q&A as always. With that, we would like to start with Ralf.
Thank you, Sabine. Good morning, everyone, thank you for joining us for the second quarter results of fiscal 2018. The economic conditions continue to be robust on a global level. Main risk remain geopolitical tensions and protectionist tendencies. Against this background, we delivered another strong operational performance across most of our businesses. At the same time, we are setting the course for long-term value creation through launching vertical champions with clear business focus and go-to-market approach. Our long-term investments in digital leadership across the businesses are clearly paying off from a profitable growth perspective and through excited customer feedback. In addition, our teams constantly improve efficiency and drive productivity across all functions. Let me walk you through some highlights of the quarter.
We were pleased with a healthy book-to-bill ratio of 1.11 times and a new record backlog of more than EUR 129 billion in the industrial business with a solid gross margin quality. Comparable orders were slightly lower 1% due to a substantially higher volume from larger orders in the energy-related businesses one year ago. Base orders below EUR 50 million were clearly up 9% on a nominal basis. Organic revenue was overall flat, with growth in most divisions driven by an excellent short-cycle performance, offsetting weakness in Power and Gas. Industrial business profit margin was at 11.0%, fueled by an outstanding performance at Digital Factory. Six out of eight divisions were in or even above the targeted range. Currency effects weighed on margin with 30 basis points. For the second half of the fiscal year, we expect an even larger negative impact from exchange rates.
Net income came in at EUR 2 billion, benefiting from a EUR 900 million gain through transferring Atos shares to the German Siemens Pension Trust. This gain reflects a substantial value generation since 2011, when we started our strategic partnership with Atos. Our cooperation yields great mutual benefits and has been expanded just recently. This share transfer was also a major contribution to reduce the pension underfunding to EUR 8.1 billion, equaling a funding level of 79%, the highest level since fiscal 2012 and well above the average of German DAX companies. We set also a benchmark in ownership culture. More than 300,000 employees, or around 80% of our global team, own Siemens shares after paying out the profit-sharing pool of EUR 400 million, mostly in the form of free shares to eligible employees. A major milestone was, of course, also the successful listing of Siemens Healthineers, the fifth-largest floating in Germany to date.
Before we dive into the details of the second quarter financials, I would like to emphasize the strength of the Siemens portfolio. After six 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 Process Industries and Drives, many actions to improve the business are implemented. Progress is clearly visible. However, there is still some way to go. As we all know, Power and Gas, reflecting around 15% of our top line, operates in a contracting and very competitive market environment, in particular for the new unit business. Lisa Davis will give you now a more in-depth perspective on how we address these challenges and what the implications are. Lisa, please.
Thank you, Ralf, and good morning, ladies and gentlemen. Our second quarter results fully reflect the difficult market situation we are in. Profit margin reduced to 3.9% on lower revenue, declining market pricing, reduced capacity utilization, and some operational effects in our new unit business. Service, once again, held up well and is also growing in importance from a business mix perspective, with around 55% revenue share in first half of fiscal 2018. While we started early with our PG 2020 program to adapt our organization to a declining market, the accelerated market contraction requires further swift action to optimize our footprint and reduce capacity. The team is working hard on a large number of cost-out initiatives for our products and our processes. In addition, we are simplifying our portfolio in order to focus R&D investment to the most promising areas and to also reduce the spend overall.
There is demand in the new market for new offerings, such as Power-to-X or our new Topsides 4.0 offshore digital solution. Key differentiators are digital design and services across the portfolio to reduce delivery times and enhance customer value. Looking at three of our main markets, the pattern has been very similar since fiscal 2015. Sharp unit demand declines combined with significant price erosion. The good news is that we have significantly increased market share over the last four years in both our large gas and small, medium, and aero-derivative gas turbines. Looking forward, based on our project funnel for large gas, we expect to see less than 100 turbines being awarded in the industry in fiscal 2018, and there are no signs of mid-term recovery to higher levels.
On the other hand, we expect a bottoming and moderate recovery in the small and medium gas turbine segment, as well as in compression. A higher oil price above $70 U.S. dollars is beginning to support investments in upstream and pipelines. However, customers are very cost-sensitive, and competition is fierce. As I already mentioned, the measures to drive cost out are in place. Let me also give you an update on our service business. Our install base is a great asset, and our service team is doing an excellent job to make it even more valuable for our customers. From the current backlog of EUR 31 billion, around EUR 25 billion are related to large gas, and we expect to increase the backlog even further. The service-relevant fleet continues to grow as our previously sold units reach their first major outages.
This includes our H-class units, for example, in the U.S. and Asia, as well as our fast-growing base of SGT-800 units in Latin America and elsewhere. We rigorously track our outage activity and utilization to ensure constant visibility. As you can see from the chart, gas turbine utilization so far has been moderately up in 2018, and our balanced distribution across the many regions helps to handle any fluctuations. Our strategy going forward is to continue upgrading our fleet with new technologies and to give our customers a competitive edge regarding efficiency and performance. A good example is a new self-learning software tool to optimize plant operations, which we have introduced at several sites. This tool allows for analyzing performance data and applying predictive analytics to suggest optimization steps to increase output or efficiency for our customers.
I want to reiterate that customer proximity and innovation remain our key success factors. In the second quarter, we sold six large gas 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 operation. A key technology for our business is additive manufacturing. We will invest a further EUR 30 million to expand our 3D printing factory in the U.K., fully equipped with software and automation from our Digital Factory colleagues. We announced that approximately 6,100 jobs at the division will be cut worldwide. In the U.S., where 30% of the capacity reductions are planned, we're already well on track in the implementation phase. In Germany, where around 50% of the capacity reductions are planned, negotiations are ongoing.
As you might have seen yesterday, we agreed to a framework with the employee representatives. This is an important first step. We expect to conclude negotiations and reach a final agreement in the current fiscal year. As a result, we expect substantial severance charges to be booked toward the end of fiscal 2018. Our efforts here are not only about rightsizing, but also materially changing the setup and responsibilities in the manufacturing and service network. How do these actions impact our financials? As indicated, we expect revenue in fiscal 2018 to be significantly lower than that in 2017. We expect the margin, the PG margin, excluding severance, to be in the mid to high single digit area in fiscal 2018 and also in fiscal 2019. With that, I hand back to Ralf now to further discuss our second quarter performance.
Thank you, Lisa. 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, we achieved remarkable revenue growth in major countries. China, up 41%, driven by new customers, governmental programs, and restocking effects. Germany up 4% despite less working days. Italy delivered significant 15% growth. Demand was particularly strong in the machine building industries, while automotive saw some moderation. The good news is that we see a positive trend also in the third quarter. Towards the second half of calendar 2018, we expect growth moderation due to tougher comps, in particular in China. We were very pleased that also the PLM software business grew double-digit organically.
This was an excellent achievement also compared to what we saw in the industry. As you know, profitability at Digital Factory is impacted by ongoing investment in MindSphere and integration costs for Mentor. For the second quarter, the impact was around 130 basis points and 40 basis points respectively. Hence, the underlying margin of almost 23%, excluding severance, was extraordinarily strong. Process Industries and Drives is making good progress on its restructuring program, achieved clear order growth of 6%. We saw diverging end customer trends. While commodity-related end markets showed further stabilization, the demand for mechanical components, particularly in the wind business, remained weak. Profit margin improved by 60 basis points despite significant currency headwinds of 50 basis points. Just a few days ago, the world's biggest industrial trade fair closed its doors in Hanover.
More than 100,000 customers and industry experts visited our booth, by far the largest and most crowded on the fair. Let me give you some highlights. Siemens is the front runner to shape and drive the digital enterprise. Industry 4.0 is no longer a concept. It is reality with many industry-specific digital solutions. They can be developed in every industry and in companies of all sizes. We showed examples from a variety of industries such as automotive, aerospace, chemicals, fiber, and many more. In our vibrant MindSphere lounge, you could feel the customer excitement from MindSphere 3.0. More than 140 applications are available or under development, 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 OpenSpace challenge drew a lot of interest, where external developers and startups were collaborating openly to craft creative approaches for new customer solutions and business models based on MindSphere. Overall, customer response was excellent with more than 7,400 leads. 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 Teamcenter. The integration of Mentor's electronic design offering is working very well, customer success stories are continuing to build up.
A great example is our recent win at the world's largest supplier of photolithography systems for the semiconductor industry, where we integrated our CAD program, NX, with Mentor's electrical systems and printed circuit board design solution on the Teamcenter platform. One year after closing the Mentor deal, we see impressive results of the integration. The cultural fit is excellent with very high retention rates in a hot employee market. Synergies are ramping up quickly. We expect to achieve our synergy target of around EUR 100 million two years ahead of plan already by fiscal 2019. The acceleration is driven by both cost and revenue synergies. Besides the streamlining of administrative tasks, a key driver is also the optimization of our R&D roadmaps. We have further strengthened the Mentor offering with targeted bolt-on acquisitions such as Solido, Sarokal, and Infolytica to tap growth fields in the attractive EDA market.
The PLM software business is very well on track to achieve its EUR 3.4 billion revenue target in fiscal 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. Large orders were lower on tough comps. We have seen some pushouts of HVDC solution projects into fiscal 2019. The Building Technologies team delivered another excellent operational performance with further margin expansion to 10.9%, up 210 basis points from prior year's quarter that had benefited from a positive one-time pension effect of 590 basis points. Revenue growth was broad-based across all regions. The team also had a very successful appearance at the recent Light + Building Fair.
Mobility continued a journey of continuous improvement, margin expansion, and building up reputation for stringent execution on a consistent path of 18 quarters at, in, or above the margin corridor. The second quarter financials speak for themselves. Strong top-line growth and excellent profitability across all businesses, resulting in industry-leading 11.1% profit margin. There's more to come. A few weeks ago, we announced the largest order ever for Mobility management. Mobility will digitalize the entire Norwegian railway network of 4,200 track kilometers and 375 stations until 2034, including a 25-year service agreement. We will book this EUR 800 million order in the third quarter. We've built a leading portfolio, which we continuously enhance organically and through bolt-on acquisitions with digital capabilities. A good example is the recently announced Spanish company, Aimsun, to simulate and optimize traffic flows.
In the case of the integration of Hacon, which offers planning, scheduling, and information system, we even have to prioritize the measures for sales synergies due to huge customer demand. Several high-profile projects are reaching important milestones, such as the commercial start of the new Eurostar train service from London to Amsterdam, with positive customer feedback. Last but not least to mention here, end of March, we took an important step towards the building of the European mobility champion with the signing of the business combination agreement between Siemens and Alstom. On March 16, we successfully listed Siemens Healthineers for EUR 28 per share, resulting in a placement volume of EUR 4.2 billion. Since then, the share price is up 18%, a strong performance indicating the value potential of the business. Siemens Healthineers has now the entrepreneurial flexibility to execute on its Strategy 2025 and shape the future of healthcare.
We, as an 85% shareholder, will also benefit from increased accountability. Solid financials for the second quarter were already released last week with 8% order growth and 16.5% margin, despite significant FX headwind of 50 basis points. Siemens Gamesa reported their results last Friday with a strong book-to-bill of 1.36. Nominal revenue was sharply up due to the merger, however, clearly lower on a like-for-like basis. The Siemens Gamesa team is executing on its L3AD2020 program, resulting in higher severance charges and integration costs weighing on the profit margin. The recent MAKE study on global market share developments in the wind industry confirmed the compelling industrial logic of the merger. Siemens Gamesa took the lead in 2017 with 8.8 gigawatt new installations and 17% market share, an increase of 3.3 percentage points. Now let me walk you through below industrial business, where we saw quite some movement.
Siemens Financial Services again delivered a very strong profit of EUR 189 million in the second quarter, driven by equity business. We expect the full year result in line with prior year. Centrally Managed Portfolio Activities recognized a substantial gain of EUR 900 million from the previously mentioned transfer of Atos shares. This gain was partly offset by a EUR 154 million impairment related to an equity investment. For the second half of fiscal 2018, 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 2018 run rate, so you can expect around EUR 300 million per quarter. The tax rate of 26% in the second quarter was significantly lower year-over-year. Effects from the largely tax-free gain from the transfer of Atos shares and the release of tax provisions more than offset negative income tax effects related to the carve-out of Siemens Healthineers. After six months, the tax rate stands at an exceptionally low 17%, also benefiting from the U.S. tax reform effect in the first quarter. We expect for the full year the tax rate to be within a 24%-29% range. The second half, among others, material effects from the carve-out of the mobility business will negatively impact the tax rate.
I want to point out that net income, which is attributable to non-controlling interest, will be higher due to the listed Siemens Healthineers stake. Having said this, I would like to draw your attention to our solid free cash flow, which improved by 14% to EUR 1.7 billion after the first half of our fiscal year. I am pleased that we make further progress to achieve a more balanced free cash flow development over the year. Following the strong results achieved in the first half of fiscal 2018, we raise our guidance for earnings per share. Our updated outlook is as follows. We continue to expect geopolitical uncertainties, such as trade restrictions, that may affect investment sentiment. We raise our outlook for basic EPS from net income to the range of EUR 7.70-EUR 8, excluding severance charges, up from the range of EUR 7.20-EUR 7.70.
We confirm our expectation of modest growth in revenue, net effects from currency translation and portfolio transactions, and continue to anticipate that orders will exceed revenue for a book-to-bill ratio above one for the full fiscal year. We continue to expect a profit margin of 11%-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. I return the microphone back to Sabine. Thank you.
Thank you, Ralf. Thank you, Lisa. Let's start now with Q&A. First question, please.
Thank you
We will start today's question and answer session. If you wish to ask a question, please press the star or asterisk key followed by the digit one on your telephone keypad. Again, ladies and gentlemen, please press star one on your telephone keypad. Our first question comes from Ben Uglow from Morgan Stanley. Please go ahead. Your line is now open.
Morning. Thank you for taking the question. I guess this is a question for Ralf. On Digital Factory, 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? Also, if you can just give us a sense of what's going on in your CNC and motion control area. That's issue number one. Issue number two, related as well, you had MindSphere and Mentor integration costs of basically 200 basis points. Is that going to be the run rate roughly in the second half of the year?
Thank you, Ben. Thank you also for the question around Digital Factory. 23%, as I said, that was an extraordinarily strong quarter if you take out the MindSphere investment and Mentor integration. From that perspective, I think we need to stay calm and also keep our feet on the ground with regard to future development. If you talk about the pillars of success, first of all, the PLM business has been contributing a lot. We still have some way to go to lead the industry leading margin of one of the competitors we all know very well, but we are on our way to get there.
With regards to the run rate of integration cost, I think we need to take it quarter by quarter, but it's obvious that they have been making very good progress and the fact that they are going to harvest the intended impact by far earlier in terms of synergy is also suggesting that the integration process as such is quicker and therefore less costly. That's my read. I can't give you precise figures yet, but yes, expectations are there that we are not only quicker in synergies, but also quicker and therefore less costly when it comes to the integration cost as such. Some of them, we also need to see as investment, as you know, because they will create then sustainable value propositions in the future, and we wouldn't sacrifice that for a quick win, so to speak.
Talking the sources of success, I indicated that before that factory automation had an excellent quarter. You all know that the margin conversion in that business is fairly high. In some parts of their portfolio, we are talking 60% plus margin conversion. Therefore, 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 further acceleration in dynamics for the next couple of months. The trade tensions that are out there will also have impact.
Volatility may be a bit higher than we saw that throughout the last couple of months. All in all, we assume that the moderate momentum will continue till the end of our fiscal year, maybe even a bit longer. When it comes to the relevant industries in our portfolio, machinery and electricals perform above the manufacturing average. Machinery also holds rank 1 now and has been dominating the micro development, whereas automotive is performing a bit below average but still holding on fairly strong compared to that what the market has been expecting for quite some time. China, I have been pointing out already, a real source of strength, 41% growth rate is something that doesn't repeat itself every quarter, obviously.
We expect a bit of moderation there, and we also are going to face tougher comps then for the rest of our fiscal and also 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. Also the improvement in raw material pricing is a key driver in the U.S. economy, obviously, and that may support our assumptions. European manufacturing showing acceleration and dynamics with moderate growth, as I have been pointing out before, and we expect that this development should also persist for the next handful of months, mainly pushed by good momentum in small and mid-size countries and companies in the southern and middle part of Europe.
Germany has been confirming its moderate growth path despite a softening in dynamics compared to the prior months. We expect continued moderate growth for the rest of our fiscal year for that region. All in all, I think fairly broad-based visibility, as I said before, three maximum six months, and therefore, as I said before, I expect the momentum that has been created, maybe not on the same scale, but continuing for the third quarter, and we'll take it from there then. You also have been asking about our motion control business, and I think it's fair to say that we also have been seeing good momentum in that business.
Not at the peaks that I have been discussing for factory automation, but with a clear trajectory also that this momentum will prevail for the next 3 to 6 months.
That's very helpful. Thank you very much. I'll pass it on.
Thank you. You're welcome, Ben.
Your next question comes from Mark Troman from Bank of America Merrill Lynch. Please go ahead your line is now open.
Yes, thank you. Good morning, Ralf, Lisa, and Sabine. Got a few short questions, please. Firstly, on Process Industries and Drives. The order data there looks quite good for a number of quarters. I wonder, Ralf, 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. That's question one on Process Industries. Maybe one for Lisa on power generation. With all the restructuring measures that you've announced, how much capacity reduction in effect will there be for the large turbine business that you have? Or is a better way to think about just fixed cost reduction? I'm trying to get an idea of the impact of the measures you are taking on your capacities or fixed cost.
Finally, Ralf, I was interested in your comment about FX having a bigger impact in your fiscal second half, and I can see quite clearly why that would be for the next quarter. Obviously, with the dollar strengthening recently, I think the dollar/euro is what? Running at 118 from a peak of 124 not so long ago. Why would the impact still be big in H2? Is it a timing effect and then you'd gain 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. First of all, I maybe should be more precise. We had 30 basis points of negative impact for the second quarter industrial businesses margin. From today's perspective, it won't be an earthquake, but the range may expand to something between 40 and 50 basis points for the full fiscal year. The reason for that mainly, and you touched on that implicitly, is that we are closing all our open positions for the next three to six months, and therefore we have pretty much visibility for the next five months to come now. What we will see is a slight increase on the average for the full fiscal year then.
This is in particular driven by the US dollar, of course, but also by literally a handful of other major currencies, including British pound and also some of the emerging markets that have an impact there. All in all, the third quarter, I would expect the typical suspects, including Siemens Healthineers 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. Tendency-wise, as you said that it should be a timing difference if the current exchange rates, in particular for the US dollar, will prevail for the quarters to come.
When it comes to PD, I think it's a really excellent question, and we have been discussing that back and forth with the management team. As I said in my little introductory speech, we see actually two worlds there. The typical commodity market customers that have been coming back due to higher commodity pricing. They are probably getting closer to that utilization rate in their business when there is more than OpEx on their spend. From that angle, the new order development has been pretty much based on that one. On the other hand, we continue seeing a lot of pricing pressure on the mechanical drives environment, which is mainly occupied by customers from the wind industry, which, as I said before, are also just in the consolidation phase. Pricing in the market is getting tougher due to more and more countries shifting their models to auction from feed-in.
I wouldn't expect any major change in that two-world scenario anytime soon. Still, we got now three quarters in a row with a decent top line in the meaning of new order development. Typically, that is turned into revenue with a lag of some six to nine months. We will see some pick up in the sales growth momentum in the quarters to come. The second half of the year should be stronger than the first. It will not be an outrageous incline in growth momentum. This is going to be step by step. Bear in mind, 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.
They make good progress, and the measures they have been implementing are going to face a high degree of implementation now. I'm quite positive for the continuous development, 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 the question on restructuring and whether we should look at it as % 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. On an overall cost reduction, that's really what we focus on with respect to the restructuring we've announced. I also wanted to add that it's not just about the restructuring that you've recently seen the agreement of yesterday. Also we're obviously continuing to focus on delivering on our productivity gains and reducing our product costs overall through different sourcing mechanisms and such.
We're also not just restructuring our footprint, but also reducing our overhead and support functions in the business. Also looking at how do we better prioritize our R&D spend and reduce it overall by being more focused on the platforms and products that we support. A lot of focus throughout the business on reducing the overall cost base.
Yeah.
Very clear. Thank you very much.
Mark, I guess you see that there's literally no lever untouched, 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 PD question. PD also is benefiting from growth momentum in China. Just to give you a bit of gut feeling, there was north of 20% growth in new orders contributing also to the PD new order development in the second quarter.
Okay, very interesting. Thank you very much.
Thanks.
Thank you. Our next question comes from Andreas Willi from JP Morgan. Please go ahead. Your line is now open.
Good morning, Ralf, Lisa, and Sabine. I have a follow-up question on Digital Factory and then one on Energy Management and one on Power and Gas. On Digital Factory, you mentioned the strong growth in China. Some of your competitors or some Asian automation companies have warned about a potentially weaker outlook for smartphone tech-related spending later this year. Maybe you could elaborate a bit on that. What's your exposure within your Asian Digital Factory business to kind of the tech supply chain and what you're seeing in these markets? The 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.
How sustainable is the 9% margin there now, and what do you see as an impact from raw materials in that division in the coming quarters, given kind of some of the exposure to steel you have? On power, the question on given your resilience you commented on the service business and given the high share that service now is of the total, it looks like the equipment business is losing about a quarter billion EUR this quarter. Maybe you could break that down a bit into the underlying performance and some of these project charges that you have mentioned. Thank you.
Before I leave it to Lisa to answer the PG question, let me just make quickly one remark on the new business in Power and Gas. After Lisa's presentation, 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 the current fiscal, not at all. Maybe this is also kind of new normal. When competition is getting really fierce, sometimes you also have to accept that you can only to a certain extent go for margin.
You also need to look into utilization of your existing capacities, that may drive you, in exceptional cases, also to accept certain orders that are getting their economic rationale only from the combination with a service contract. That means that sometimes you deliberately accept an order that may be even slightly negative in the beginning when you sign the 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 upgrades we provide over the period of time to our fully installed base. Just wanted to mention that in the beginning. Coming to your question on China short cycle. You're absolutely right. We are watching that very carefully.
I look into each and every of the market segments. 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, third quarter. That will not have a material impact. One of the reasons why I said that there is not a lot of visibility beyond those three months is coming from that part of the market. Not repeating what I said before, China manufacturing shipments, they continue to expand with clear growth at the moment. Dynamics showing moderation compared to summer 2017, for example. The growth momentum will not accelerate a lot further. That's what I said. This is also driving our big picture view.
We are not that far that we can conclude how much momentum that this indication for slowing down in the tech area is going to unfold into the neighboring market segments. At the moment, I think it's fair to say, machinery is driving the scene. Automotive, even though with lower momentum, still contributing there. If there was a change in the component and the feeding processes, which these electronic industries reflect more or less, the moderation in the second half of the calendar year, as I said, may be a bit stronger than originally expected. Again, big picture, China, we are penetrating the market very well, including also our industrial software business. I said that in the first quarter's discussion.
It's good to see that now these cross-selling effects that we have been waiting for are more and more materializing. 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-timer like you knows that the first half of the fiscal is fairly slow in that business. I try to understand that for more than a decade now. I have to respect the fact it is that way. It also was always the case that, in particular, the third and the fourth quarter of the fiscal year was fairly reliable then when it comes to volume. We see the margin clearly on that level. From historical experience, the fourth quarter typically was even stronger than the second and the third quarter.
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. That has negative impact, not material for the profitability of the division as such.
Hi, Andreas. 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 the speech itself, we have a number of different factors that are contributing to the resilience of the service business. The first is that our fleet is actually growing. Of the 88 H-class units that we've sold now, 65 are in operation. All of those units have long-term service arrangements on them, so that revenue starts to stabilize our service business even more. Also, as you saw in the charts, our utilization is increasing overall from what we've seen in the past. We continue to upgrade and add technology to the fleet in order to create value, as Ralf said, for our customers.
All of these are contributing to what we see as a very positive and stable service business going forward. On what you mentioned around the losses in the new unit side, Ralf had already commented a bit on underutilization or excess capacity in our manufacturing business. That is contributing. Really, the two predominant contributors to that new unit business performance is really the under-absorption and the lower price point on the sales that we're making in the marketplace, given the pricing pressure.
The contract losses were not a big driver in that sense that you mentioned.
That was the point I tried to make.
Not at all.
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. These projects are always ongoing. We had on a couple of those projects some overexpenditures on cost. Those projects will wind down soon. Again, we have a portfolio of over 30 projects that we're always working. This is a very robust business.
Yeah.
I think it's also worth mentioning that the Egypt projects are very well on track.
Next question, please.
Thank you.
Next question, operator.
Thank you. Next question comes from Simon Toennessen from Berenberg. Please go ahead. Your line is now open.
Good morning, Ralf, Lisa, and Sabine, thanks for taking the questions. Starting with a two-fold question in Power and Gas. You're guiding for, I think, mid-single digits to high single digits underlying margins for the next couple of years, including 2018. Can you share maybe the assumptions with us, how you can get to the low and the high end within that? A more general question on Power and Gas. I guess the outlook for small and medium turbine looks a bit better, there might be some upside from the compressor business recovering, i.e., the Dresser-Rand bit. 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? The next question on Vision 2020+. It looks like you're making some good progress on the Power restructuring.
Is it fair to say that we could expect an announcement as early as August, i.e., Q3 results with regards to Vision 2020+? Lastly, Ralf, just on CMPA, obviously volatility has been quite high there generally, and I know you can't guide that well for the business, but as it stands today, and you probably know some of the carve-out related costs, related to Alstom. How would you guide us for the second half with regards to CMPA? Thank you.
Simon, thank you very much for a really broad portfolio of questions. Let me start with Vision 2020+. The way you have been asking your question has been taking the Power restructuring aspects pretty close to Vision 2020+, which is not the case in the way we look upon it. We made that very clear when we started to discuss and indicate the magnitude of the need to restructure the footprint and address excess capacity in the market. Maybe it was just coincidence that at the same time, we said that we start thinking about and developing beyond Vision 2020, which we then called as a working title, Vision 2020+. Therefore, let me keep the two of them apart.
We very much appreciated that we were able to make an important step yesterday, the night before yesterday, actually, in concluding on a cornerstone paper that is now paving the way to negotiating the details and the locations and the concepts that will finally, hopefully take us to a point that we will be able, at the end of the current fiscal year, to assess the quantity of potential restructuring needs and also book that. In the meanwhile, we have been starting to implement the non-European, non-German part of the exercise. About one-third is U.S.-based, and as Lisa said, this is on a good way, and first measures have been implemented. When it comes now to the savings that we aspire, I think it's good for us and also good for you to hear that we are on the same track.
We just have a different path that will take us to the same amount of savings when it comes to PG and PD restructuring. On the other hand, with Vision 2020+, we are making good progress, and as we develop Vision 2020, which is still a valid and effective strategy in place, obviously also successfully executed on, I believe in the second quarter on which we report now, another proof point that with the exception of PG, the portfolio is very well on its way, and we are far ahead of the needs 2020 as a year would have been suggesting to develop something new. 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.
I'm very positive that we are going to be in a position to also make announcements once we have been concluding and once we have discussing that with the internal stakeholders, including supervisory board, and then we'll share with you. Bear in mind, these are two different working streams, and they are not interdependent. Therefore, we have not been sitting idle in the managing board waiting for the negotiations to think about what the future Siemens may look like. Apart from that, CMPA, yes, I explicitly said volatility will be there also in the second half of the year. We, of course, have quite some understanding about what's ahead with regards to the carve-out of the mobility business to prepare it for the joint operations with Alstom. There is a part in it that is more tangible, single aspects where you just run the math.
There's other aspects where it deserves a lot of good thoughts to optimize. That part is including also taxation. As I said in November, when we have been guiding you the way we did, that we will, at the end of the year, as soon as we have final results at fingertip, share with you also what the pros and the cons are. With respect to the second half, I said that in my presentation, that we now have been guiding you for a lower effective tax rate. We said in the beginning of the year, 27%-33%. Now it's 24%-29%, including the positive of the U.S. tax reform, which we quantified also in the first quarter of EUR 437 million positive impact.
It will still be a material amount, and as long as there is still uncertainty there, and sometimes you also address and see the receiver of revenues and the tax authorities in some jurisdictions and 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. The higher tax rate in the second half of the year will be driven by residual uncertainties, mainly in the tax area. I need to ask you for patience there.
Let me address your question, Simon, on the, I guess, future attractiveness of the PG new unit business. Maybe I'll break it down into three distinct areas because there are three distinct markets within the business. The first on small and medium gas turbines. This business is driven very much by decentralized energy systems and the growth in decentralized energy. 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, this is a bit of a discussion about oil and gas. As you've seen in some of the comments, we do see this business starting to find stability and recover, and we do see this market very much intact longer term.
We also see quite an opportunity in the oil and gas business around our ability to bring digitalization into an industry that has not advanced nearly as much as other sectors or other verticals have. An opportunity that's unique to Siemens to be able to leverage our digital capability with our rotating equipment in that industry. Growth opportunity there as well. Even in the large gas turbine business, even though this has obviously gone through structural change and will be a smaller market going forward, we do see a need for large gas turbines in the energy systems of the future, if not for anything else, but for security. The ability to bring large volumes of power into the system quickly. For this reason, we do see a large gas turbine market going forward, albeit much smaller than what we've seen in the past.
Therefore, the need for us to really restructure and right-size our business to match that market of the future. 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 answer to a last part of your question, that is about modeling CMP. I know how difficult that is, and I can't really help you with concrete figures on that one. If you look into the first half, that was obviously very much driven by the extraordinary impact of Osram and now from Atos. If I look into the second half of the fiscal year, I would see a more normal course of business being driven by carve-out related expenses and the like. If you model in a high double-digit negative number for both of the quarters, you probably will not be that wrong.
Thank you both.
Welcome. Next question, please.
Next question comes from Markus Mittermaier from UBS. Please go ahead. Your line is now open.
Yes. Hi, good morning, everyone. My call just dropped a few minutes, so apologies if you addressed some of these questions already. I have one on Digital Factory, one on PG, and one brief one 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, EUR 1 billion. Is there any meaningful part of that cloud and SaaS revenue already in the revenue mix today that could explain some of that very strong margin? More long-term, what is the margin ballpark that you are thinking of for that incremental revenue? I assume most of that EUR 1 billion will be incremental.
If not, would be interesting to figure out how much of that is incremental versus cannibalizing your other licensed business. On Power and Gas, for Lisa, if I look at your backlog and the sort of service relevant fleet growth that you've mentioned in the presentation, to what extent is in the backlog still time and material as the way you charge your clients versus long-term service agreements? Does that first major overhaul timing matter more for the backlog than for new business? That's question one and question two. Some of your competitors, I think, are increasing the service intervals quite a bit in their long-term service agreements. How comfortable are you there in terms of provisioning going forward, that there's no risk if we assume that pricing here stays flat, that there's no risk on the service margin?
Very briefly on the framework agreement, how would you say the reception or the level of agreement in the Workers' Council is on your view and outlook for the power business?
Markus, thank you. Indeed, you missed a bit on the Digital Factory side, 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. One, Mentor and the PLM business had an outstanding good quarter. We are making very good progress with the integration of Mentor. Means the synergies are ramping up by far quicker than originally expected, and we will be there with the EUR 100 million target already by fiscal 2019 instead of 2021. That is an incremental support of that margin. The other big pillar, 23% underlying are 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 and the audience through a detailed regional analysis, what we expect to happen in the different geographies and the relevant business sectors we are in.
If you don't mind, take the details of that one from the tape later on. The question about how material is the impact on MindSphere and co already on the way to that EUR 1 billion incremental that you have been addressing. Of course, it's not material at the moment, but we are still in investment mode, and as we have been guiding you, and that's, I think, really still worth being mentioned time and again. We are investing substantially in MindSphere with a yearly investment of around EUR 175 million, plus have all the integration efforts for Mentor being done, and still grow margins in a highly competitive environment. That definitely has an underlying rationale from our customers' perspective that they got the point, and that they invest in digitalization. The number of leads we have been creating at the Hannover Messe, 7,400.
The figure itself doesn't mean a lot, the level of quality these leads have very specifically asking for challenges in new projects. We have a very detailed analysis of these 7,400, and typically you would have some 10% that are relating to a concrete project that the customer interested and addressing the lead is dealing with. This was more than 20% this term. 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. 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.
The alignment on the need to act and also the magnitude and the broadness of the actions required, that is absolutely shared. No one is left behind in Lala Land and is believing there is an easy way out, because the root cause of the situation in the market is so obvious. Therefore, there is no room for any misunderstanding that it takes what it takes for the way forward. We discussed in another question before, Lisa did, and it's just about very carefully observing the market and looking for opportunities. There are new business models coming up, and there's also plenty of challenges in footprint and reorganizing that. 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.
There's absolute transparency on what is required to take that business forward.
I would just add to that, Markus, that the discussion and the framework agreement that you saw yesterday is really the discussion that led to that was really a discussion about how and not necessarily what. The understanding of the need in the marketplace, as Ralf said, is fully shared, and it's just a discussion as to how to get those cost savings in the business that led up to the framework agreement that you saw advertised yesterday. To your questions on PG and service, maybe I start first with the comment about competitors are increasing their service intervals. We also within Siemens are increasing our service intervals as well. How do we manage that so it doesn't impact the value of our service business? Well, we're also bringing new offers to our customers at the time when we do look to increase intervals.
Those new offers are by bringing new technology to our customers to help them improve efficiency or overall capacity, or also bringing digitalization and new service capability to them at the time where we're renegotiating potentially on service intervals. All of this continues to provide stability in our service business going forward. 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. These are both balanced in our business going forward.
Thank you.
Great. Thank you very much.
Pleasure.
Thank you. Our next question comes from James Moore from Redburn. Please go ahead. Your line is now open.
James.
Yeah. Good morning, everyone. I wonder if I could focus on Power and Gas. Firstly, could you comment whether the service margin was stable year-over-year in the first half? If you already did, apologies. Secondly on that, could you say how low the Dresser margin has got? You gave a number of high single digits two 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 -5% in the quarter and 1% in the last 12 months is materially below your P&L margin. Do you have any visibility on whether conversion can normalize, free cash flow conversion can normalize in the coming year, or will we still see a difference there?
Finally, can you expand a little on your new PG margin outlook, particularly on what the phasing of the savings is? You say you expect a material impact on the bottom line in the 2020 year. Can we think about getting back into the 11% target corridor in the 2020 year?
That was indeed a bit of questions on PG, as you indicated, James. Let me try starting taking you through that a bit. 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, we said that also a couple of times.
When we acquired the asset, we have 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. Even though the team has been taking cost 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. We are not done there in that market segment. When it comes to free cash flow, I really like your question. Analysis is pretty sharp. That's what we have been asking ourselves, too, very intensively. I think we need to keep two or three 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 challenging task for them because on the one-hand side, they need to make sure, and they do, to avoid any inventory obsolescence risk. We are very intensively looking into that matter. On the other hand, you need to be ready to deliver quickly if timing is part of the tendering process and your customer is prioritizing that. Walking a thin line has been working out very well in the Egypt projects, I think. This is going to be delivered on record time schedule and still quality on high levels. I mentioned that before, that we don't see any major negative impact compared to the plan we made. We're absolutely on track there. By the same token, we see with the declining new orders also a lack of advance payments.
This is a different regime system, if you will, that is establishing itself as new normal in the market, and we are carefully watching that. Operating working capital needs to be reduced. The team knows that, and they are busy working on that. It will also be affected by the consolidation of sites and the footprint because the more sites you have, the more WIP you have on the road at the end of the day. Last but not least, free cash flow will also be affected by payments being made for severance and the like. 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. With regard to the margin outlook, before I will ask Lisa to add if need be, the margin outlook, 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. Lisa mentioned 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 should discuss too much about the when, but more about how well can we cope with the challenges until the savings are fully materializing because time is of the essence. We need to be determined, and we also need to consistently implement those measures. As I said before 2020, I think there is no need to discuss any margin target above mid to high single digit.
Very helpful. Thank you.
Thank you.
You're welcome.
We have a few more questions in the line. Could you please limit the number of questions to give everyone a chance to ask further questions? One or two questions each, please. The next question now.
Thank you. Our next question comes from William Mackie from Kepler Cheuvreux. Please go ahead, your line is now open.
Yes. Good morning. Thanks for taking the question. I will just concentrate on Process Industries and Drives. You have been kind enough to structure the discussion around current and midterm margins in PG, but could you do the same thing for PD, given that it is currently out of margin target? You have an ongoing restructuring plan, you have some framework agreements in place and a shift in some market dynamics. When should we expect PD to start tracking back into its midterm margin corridor? Thank you.
Thank you, William. 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 lower end of the margin band. Don't want to overemphasize that, but this is just finding the right basis for the discussion. With the measures being on their way and the additional ones being planned and finally determined now throughout the next couple of weeks and months, I feel PD, all others equal, being in a position to reenter the margin corridor, latest by 2020.
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, and. 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. 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. There is quite half a year, nine months of lead time required between new orders being booked and then turnover being recognized. That's why I think it will take also some time to finally find ourselves in a new normal.
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. I have quite a good feeling for PD being on the right trajectory. Whether it's a quarter more or less, that's not really relevant for the long-term perspective of the business. On top of all that, the market, if and when it's recovering, when it comes to commodity pricing and also the ability to tap on the potential of new technologies, including digitalization in that field, then we will be perfectly positioned to participate in upswings.
I gave the data point before that in China, for example, where some of the companies or customers there kind of quantum leap 1 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. There is opportunities out on top and bottom end. 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.
Yeah
in a number of-
Yeah
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 second quarter. We see that developing for the full fiscal year rather into the area of 40 to 50 basis points negative, yeah, in total for all exchange rates. We have been hedging, as we always did, for the next six months. We have about 85% of our open positions being hedged, so not a big surprise from that perspective. The divisions that are going to be affected have been, to the largest extent in the second quarter, the Siemens Healthineers, PD and Energy Management, and this will remain pretty much the same. Second quarter, that was 50 basis points negative for the three entities being mentioned, and that will increase in the third and fourth quarter in that direction I described for the full fiscal year for the group.
Thank you very much.
You are more than welcome, William. Next one, please.
Thank you. Next person from the queue is James Stettler 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? We've now had three very significant gains. Clearly, the operational performance has been very solid, especially in Digital Factory. When you raise the guidance today, what's your thought process and what should we think about any future gains in H2? That's my first question. One for Lisa Davis. Service was 55% of revenues, as you mentioned. Where should we see that going forward? Could this become a business which is much more service-driven going forward, and as a result of that, potentially much more profitable? Thank you.
James, the EPS question is a very relevant one, obviously, and I would like to go back to our November announcement. What we said then is, A, we exclude severance and restructuring because we just can't know at that point in time. B, we also said that due to the fact that there will be substantial impact from carve-out activities for both Healthineers and Mobility to prepare them for the merge with Alstom, we will have substantial impact in particularly on the tech side. I've been elaborating on that a little bit already. We saw some of that, pretty much half of that from a content perspective, in the first half of the fiscal year, including the second quarter, where our effective tax rate has been benefiting, A, from the low tax rate being applicable for the sale and transfer of Atos shares.
That is close to tax-free, if I may summarize it. Secondly, we also were in a position to release material tax provisions in the second quarter. Against that, there was impact from the Siemens Healthineers carve-out being completed. 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, and that way, doesn't you put into a position that you send out one tax file and that's it. 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.
We are now entering into the final stage of carving out and building a subgroup for our Mobility business that will then be brought into the joint activities. The same, in principle, is applicable there. From the tech side and also from other carve-out related expenses, we are not done yet. The assumptions that we made when we discussed with you in November are pretty intact from today's perspective. As I said then in November, I will share with you numbers when they are solid and firm. In that particular part, it also takes a third party, the tax authority's view on that one. You need to be a bit patient. I said that before, 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.
Just following on to that. I'm just underlying how does the business performed versus your expectations? We knew there were going to be all these costs, if you just look at ex gains and carve-outs, how's that looking?
I said, as planned, we will share with you when we're done with it.
Let me now address your question on our service business in Power and Gas and the fact that it's 55% of revenue now and your question of whether that would go higher in the future. It really depends very much on the market and where the market goes for new units, whether it be large gas turbines or small and medium. We are, as I mentioned in my comments, increasing our market share. We're gaining market share in both the large gas business as well as the small and medium gas turbine business. It's this combination between us gaining market share and then what the overall market is going forward that will depict what the % revenue is for service.
Based on your outlook, that's going to be smaller. One would expect then service to be larger.
It depends on what your outlook is on the market going forward, really.
Fair enough. Thank you.
Looking at the time, we have only one more question, please. Last question, operator.
Thank you, ma'am. The last question comes from Gael de-Bray from Deutsche Bank. Please go ahead, your line is now open.
Yes. Thanks very much, and good morning, everybody. The first question I have relates to the Mobility division, where the profit contribution was clearly stronger than expected. 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. The question is, are you still happy with the current terms and conditions of the merger? That's question number 1. Question number 2 is, I think you mentioned some push-out of HVDC projects to 2019. Could you elaborate on this, and say basically what's driving those further delays in those projects? Thank you.
Thank you, Gael, for two interesting questions. Let me start with Energy Management and HVDC. I didn't say further delays. What I said is that from the perspective that we take, yeah, as a potential supplier, you have to be ready when the customer is calling for a quote, and you enter into a tendering process whenever timelines are set. What you typically see in that business environment, that you have a kind of density of large-scale projects for a certain period of time, as we had that in last fiscal year 2017, where substantial large projects have been awarded, not only but also to us, was EUR 1 billion in the second quarter only last fiscal year. You go through a kind of dry period, and this is no surprise, and it just happens.
If you look into history and learn from that, you shouldn't overemphasize the fact that there's sometimes three, four, sometimes six quarters with no awards being made in terms of large-scale tendering processes. This is not concerning. I just wanted to make sure that this is not misunderstood in the meaning of that we lost out on opportunities. 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. Push out means that expectations for certain timing for certain projects has been pushed out, not delayed in the meaning of that a customer canceled the project at a certain point in time and has been rescheduling that. Maybe I was not precise enough on that one. I apologize.
With regard to Mobility, I think this is, first, great statement that you made, that we had an outstanding profitability level. I agree with your assessment. There was one little tiny thing I need to correct because you said our 50% share, it's 50.7%. That will be Siemens' share in the joint activities. That's important to remember and to remind ourselves time and again. There was a mechanism agreed upon for the valuation assessing then and coming to that 50.7%. That goes pretty much along the lines that Siemens is the more profitable business and Alstom is a bit bigger. Also in terms of the backlog being brought into the joint activities. There were a couple other balance sheet items that had to be reflected and have to be taken into consideration.
The profitability development is a very good one for Siemens Mobility and will allow us to enter from a position of strength into these joint activities. We also very much appreciate that we hear that Alstom is doing fairly well with their financials and delivering on their projects. It will be a merger of two strong companies in which Siemens is holding the majority.
Thank you.
Okay.
Thank you, Lisa. To Paul. Thank you, everyone.
I would like to make a last statement quickly. I know that quite some of you have been taking the time to visit our booth at the Hannover Messe, and I also very much appreciated your comments on what you saw. You also should know that we consider these statements you have been making about how impressive the event was also as an obligation for us to implement and execute. Thank you.
Thank you. 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.