Good morning, ladies and gentlemen, and welcome to the Siemens 2019 third quarter conference call. As a reminder, this conference is being recorded. Before we begin, I'd 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'd like to turn the call over to your host today, Mrs. Sabine Reichel, Head of Investor Relations. Please go ahead, madam.
Good morning, everyone, and welcome also from my side. The earnings release and Q3 presentation were released at 7:00 A.M. this morning. You can find everything on our website. Unfortunately, our CEO, Joe Kaeser, cannot participate in the call today due to an important customer meeting in Asia. We have three members of the managing board with us on the call. Our CFO, Ralf Thomas, is joined by our Chief Operating and Chief Technology Officer, Roland Busch, to review the Q3 results. Furthermore, Klaus Helmrich, who's responsible for Digital Industries, will give you an update on the business. We will start with a brief presentation and then followed by Q&A. With that, I would like to hand over to Roland.
Thank you, Sabine, good morning, everyone, and thank you for joining us to discuss third quarter results and the current business environment. While our teams were busy to deliver under the new Vision 2020+ setup, we kept our eyes on the ball on what is essential to be successful also in the future: customer proximity, competitiveness, and bringing innovations to the market. For the latter, it is key to expand continuously our ecosystem for innovation, such as integrating HP 3D printing systems with Siemens' digital enterprise offerings to drive industrial scale additive manufacturing. Another example is the Future Pact in Görlitz, where we will set up a joint research and development platform for hydrogen technologies together with the Fraunhofer Institute. We successfully have ramped up our MindSphere Application Centers to co-create and deliver digital services for our customers from around 20 verticals and markets globally.
Hence, we now have achieved a critical mass to scale up digital applications and services and accelerate growth successfully. The key building blocks are more than 1,000 experts in our MindSphere Application Centers, further developments of the technology stack of our Siemens IoT platform, including our industrial operating system, MindSphere, and expansion of our ecosystem with more than 300 partners. In combination with our IoT consulting and integration capabilities, we are best positioned to support the digital transformation of entire customer value chains. Our innovation strength and customer proximity are clearly reflected in further improvement of the net promoter score in 2019. The NPS is now up by 11% compared to the baseline 2017. We are well on the way to achieve our 20% improvement target, reflecting our ambition to be the partner of choice for our customers.
In Q3, increasing customer confidence and satisfaction is clearly visible in continued strong order growth ahead of market expectations. Siemens Gamesa, Mobility, and Siemens Healthineers were major contributors to drive order growth. We are very proud that the Mobility team booked a EUR 1.2 billion follow-up order to expand the high-speed Velaro train fleet in Russia, including a 30 years long-term service agreement. SGRE consolidated its leadership in the offshore wind market by winning two major projects in Taiwan, totaling to EUR 2.3 billion order volume. Gas and Power booked an order of more than EUR 200 million for the Maisan Combined Cycle Power Plant in Iraq. We will keep you updated on further bookings from Iraq to implement the already awarded phase 1 of the roadmap for electrification.
However, geopolitical and macroeconomic risks such as the U.S.-China trade conflict, a rising likelihood of a no-deal Brexit, and tensions regarding Iran, to name just a few, have led to a clear slowdown in the global economic activity and deteriorating industrial sentiment. This cooling impacted many Siemens customers in core end markets like automotive and machine building. Klaus will now give you the overview about Digital Industries and our short cycle business. Ralf will walk you through our Q3 financial results in detail. Klaus, continue.
Thank you, Roland, and a very warm welcome and good morning to everyone. We successfully launched Digital Industries OpCo on April 4th, and in doing so, we brought discrete and the process industry under one roof. Within DI, we are combining a leading automation software and service portfolio and in our comprehensive and unique digital enterprise offering. DI is driving the digital transformation for companies of every size and from every industry with an end-to-end solution across the entire value chain. We impressively demonstrate this at Hannover Messe, and our new customer wins are clear evident. In the second half of our fiscal year, we will also launch new product generations for automation like SIMATIC PCS neo, a new web-based process control system.
SINUMERIK ONE, the first digital native computerized numeric control. Furthermore, we are enhancing our digital enterprise portfolio with cutting-edge technologies like artificial intelligence and edge computing. As Roland mentioned, we operate in a very challenging market environment for our hardware business. We saw further deterioration, particularly in our core end markets like automotive and machine building industries during the quarter, but most notable in June. This was especially visible in factory automation and motion control, where we saw considerable order and revenue decline. We already have taken decisive action, which I will discuss in a minute with you. Orders in software and process automation were up with decent growth rates. Revenue started to follow soft order development and decreased by 2%, while software grew mid-single digits.
The software business benefited from a sharp growth in China and was negatively impacted by a quarter volatile major contract renewal. The lower volume Digital Industries profitability was also affected by the following topics. Continued OPEX investment into R&D and feet on the street, mainly in software. Lower capacity utilization and unfavorable product mix in higher margin discrete automation business broadened the gross margin. We record a one-time effect from the revaluation of the Bentley shares and stake, which impacted our margin by around 100 basis points in the first quarter. A bright spot was the free cash flow where an invested focus on working capital management paid off with a substantially improved cash conversion rate to 1.35 in the third quarter.
Let me now give you a bit more color on our end market exposure with five key verticals covering around 65% of the Digital Industries business. For the next three to four quarters, we see continued cyclical weakness in automotive and machine building. Latest VDMA and ifo numbers underline this development. Food and beverage is expected to continue a steady moderate growth path, and we also see some moderation in later cycle process industries such as chemicals. Our exposure in the electronics and semiconductor market is closely linked to our Mentor software offering, where we see good growth opportunities. We support our customers to deal with rising complexity and new applications through integrated circuits and electronic systems. Looking at the key geographical environment. Softness in the automation business, excluding software, was broad-based. China, with a modest revenue decline of 2%, driven by machine tool systems.
Germany, down to 3% due to discrete automation. Italy 5% lower on uncertainty into domestic and export markets. Growth momentum in U.S. was driven by strong process automation business. We act to improve our long-term competitiveness and current performance. As I presented at the Capital Market Day, we are working diligently with employee representatives to execute our EUR 322 million cost optimization program by 2023. Key measures include digital transformation and structural optimization on top of space productivity. In addition, we started to execute contingency measures for the discrete automation business to address the current market conditions. Focused resource allocation and reduction of temporary contracts are in place to improve the profitability in short-term. We closely monitor the market development and review investment plan accordingly. Strict cost control is of course a key priority in DI.
Going forward, we expect to see already in Q4 a quarter-over-quarter margin improvement excluding severances. We also expect for DI margin for fiscal year 2019 to reach the lower end of the target margin band of around 17%, including severances. This industry is well-positioned to outperform competition in, of course, a changing environment through our unique portfolio of automation software and digital services, our technological leadership.
Match domain and consulting know-how. Of course, I have also to mention our capable and very experienced management team within DI. I would like to hand over to Ralf Thomas.
Thank you, Klaus, for this comprehensive overview on our DI business, and good morning also from my side. I will now give you more details on the third quarter performance across our businesses. Smart Infrastructure delivered modest top-line growth of 2%. Building and grid end markets are growing as expected with around 3%. However, we see some pockets of weakness in industrial end markets linked to manufacturing investment, which is also affecting the control product business. Main revenue growth drivers were distribution system and low voltage products. Adjusted EBITA margin was held back by ongoing investments for the expansion of smart building solutions as well as future grid offerings. The team is diligently working on its Vision 2020+ measures to drive product and system businesses, improve business mix, and achieve a leaner and more agile setup.
Free cash flow was somewhat disappointing, to be honest, since measures to improve working capital have not fully materialized yet. For the fourth quarter, Smart Infrastructure will substantially improve its free cash flow momentum. Orders in Gas and Power were down by 15% on lower large order volume. The market environment remains difficult, particularly for the central power generation business. We booked three large gas turbines in Iraq and Romania, as well as 16 small and medium gas turbines. Our sales pipeline for the fourth quarter looks promising to achieve a book to bill above 1.0 times, such as with the recently awarded Viking Link project. Revenue in Gas and Power declined mainly in the solution business, where the prior year still included a sizable contribution from the Egypt mega project. The Gas and Power margin reached 3.9% ex severance, with a continuing solid contribution from the service business.
As important milestone for the new operating company setup, Gas and Power announced further details for measures to improve competitiveness and increase productivity by EUR 500 million. Key levers are merging and rightsizing capacities, optimizing the regional setup as well as support functions. We are confident to achieve agreements with the workers' representatives in the fourth quarter, and expect to book related severance charges of up to EUR 200 million. Furthermore, the teams are also working hard to drive the carve out of Gas and Power to prepare for the spin-off as planned. All work streams are making good progress according to schedules. A real bright spot, again, was the Mobility performance. The team delivered another excellent quarter with sustainable strong double-digit margin, up 140 basis points year-over-year, including a strong contribution from the service business.
Mobility is well on track to achieve the targets for orders and margin communicated at the Capital Market Day in May. Free cash flow performance was negatively impacted this quarter by delayed ICE 4 train acceptance and correlated payments. This will strongly reverse in the fourth quarter since our customer, Deutsche Bahn, has meanwhile resumed acceptance of the trains based on an agreed reworking concept. Important to note is, that the reworking will be part of the warranty of Bombardier. It will have no negative impact on the Siemens margin. Our strategic companies, Siemens Healthineers and Siemens Gamesa, already reported their third quarter results a few days ago. From a majority shareholder perspective, we saw convincing top-line numbers, however, rather light margins and free cash flows. Let's now have a brief look at the performance below industrial business in our new reporting structure.
I would like to highlight the Portfolio Companies' performance. POC, as we call them, consists largely of businesses from the former Process Industries and Drives and Energy Management division. They were complemented with Siemens Logistics and certain equity investments, which were formerly reported in central managed portfolio activities. We achieved operational improvement year-over-year. However, higher profit from fully consolidated companies was partially offset by declines in equity investment, mainly from Valeo Siemens. The framework for our below IB expectations for fiscal 2019 remains unchanged. Regarding tax, we now expect to reach the lower end of the guided range of 24%-28%. Let me conclude with our guidance. The favorable market environment for our short cycle businesses, which was a material basis for our outlook, has significantly deteriorated in the second half of our fiscal year.
Nevertheless, we confirm our financial expectations for fiscal 2019, even though it becomes more challenging to achieve our expectation of moderate growth in revenue, net of currency translation and portfolio effects. We continue to anticipate that orders will exceed revenue for a book to bill ratio above one. We expect that adjusted EBITA margin for our industrial businesses will reach the lower half of the range of 11%-12%, excluding severance charges. Finally, we confirm our expectation of basic EPS from net income in the range of EUR 6.30 to EUR 7, excluding severance charges. With that, I conclude, and now Klaus, Roland, and myself are happy to answer your questions. For that, I'll give it back to you, Sabine.
Thank you, everyone. We will now start with Q&A, and we have all three here, so please ask your questions now.
Thank you. Ladies and gentlemen, 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 1 on your telephone keypad. Again, ladies and gentlemen, please press star one on your telephone keypad. Our first question today comes from Andreas Willi from J.P. Morgan. Please go ahead.
Yeah. Good morning, everybody. I've two questions, one on Digital Industries, one on Healthineers. On Digital Industries, your orders started to turn down in February this year, but you maintained a positive short cycle outlook as late as mid-May at the EPG conference. It clearly looks like the division wasn't fully prepared what happened in Q3. You mentioned in the past that the increased entrepreneurship and freedom should allow the businesses to be more flexible and adjust quicker. We haven't really seen any evidence of this. Why is that? If you look also, at peers like Schneider and Rockwell, they executed much better on profitability, despite also having top-line challenges in that business.
Your comment on the margin in terms of Q3 being the low point, what kind of revenue decline can you absorb with the measures you're implementing now to maintain basically that statement that margins will not fall below the Q3 level? The question on Healthineers, the company spoke to analysts on the 11th of July and talked our numbers which led to a 7% fall in the share price that day. Also, within Healthineers, could you explain the move of the interest expense where it seems like Healthineers gets like a EUR 60 million credit from Siemens in terms of the intercompany debt cost? How does that work and what exactly was done there? Thank you.
Thank you, Andreas. Let me start answering with the second question that you have been posing around the Healthineers. It's obvious that it's their setup that needs to determine when and into which extent they talk to the market. From a board membership perspective, which I hold, I'm chairing the audit committee of Siemens Healthineers. I was not pleased by the fact that there was obviously some puzzling comments being made or misinterpreted. I do not know. We are busy reviewing that, and we will make sure that if there was anything on the company side that could have been done better, it will be improved consistently and very quickly.
With regards to the interest expense, that should be ideally a question for Jochen Schmitz, but I think may say and comment on that the fact that the geographical pattern of their debt structure has been changing favorably from a more dollar to a more European-centric landscape. Before I hand over to Klaus to comment on the DI business, let me quickly shed a word on what happened since the conference that I had the pleasure to attend when you invited me back in June. It actually happened that June was really the turning point from our perspective, and Klaus will elaborate on that more in detail. The agility of the new setup, I think deserves a bit more time than just a couple of weeks to prove that it is effective and efficiently catering for the different needs of a changing market environment.
I do know that you know and we know that Schneider and Rockwell, they both have a bit of a different setup, the one being stronger on the process side, which was typically running later in the cycle. There in the comparable portfolio, I think we are also in quite still a favorable positioning, and Rockwell is definitely benefiting from a strong U.S. footprint, but I'm sure that Klaus is going to elaborate on that a bit more in detail. Klaus.
Yeah. Let me, Andreas, continue here what Ralf is saying. First of all, the exposure of Rockwell is in the U.S. and also stronger in our area when it comes to process industries like Schneider. When I look at our performance, we also could gain additional revenue and new orders in process industry and especially in the U.S. We are here fully in line with the market development. When I look at the performance of DI, when you look at the revenue, we are -1.9% compared to last year. We haven't had any strong order backlogs, so therefore, we need the resources in our factories to deliver the product to our customers. When it comes to the new orders, it was exactly as Ralf said. In June, we saw the turning point.
What I see in the business, and you can see the exposure, it comes mainly from the automotives and the machine tool area, where we have a strong decline, which was not visible before. You can also see it here also, statements from end customers in the automotives area, what they are doing and how they are reducing out their forecast, and this is now visible in the order books of the OEMs, and this is also impacting us in our new orders. When it comes to investments, we are now have, of course, to fulfill our R&D roadmaps. As I said, we are launching new products, and this gives us a stronger
Position come now the time to talk with customers about innovation plans, and we have a very powerful portfolio now available, which was visible, also at Hannover Messe. I think we are now entering in a period where we talk to the customer about their innovation plans, and we have a very powerful portfolio available for doing that. Where I see what is also impacting our profit is, of course, 100 basis points coming from this Bentley, which will later on, Ralf will explain to you what is so systematic about this. I'm 100% convinced that we, as I said in my short speech, will improve the margin in the fourth quarter and we will stick in the margin band at the lower end in 2019.
Thank you. Next question, please.
Thank you. Our next question comes from Ben Uglow from Morgan Stanley.
Good morning, everyone, thank you for taking the questions. I guess the first one, then I did want to follow up, was just to understand the cadence of the margin in the quarter. I mean Klaus, when a public conference is in a different communication with the company, I think that when we were looking at April and May, the feeling was that there would be some slight sequential softening in the margin, maybe sort of 17%-18%. Clearly the exit margin on the quarter must have been much, much lower than the quarterly average by definition. If that original communication is correct, is it fair for us to assume that in June you were seeing margins comfortably below 15%?
Hello?
I think the next question will come later. Yeah, okay. We will answer that one first.
Yeah, I just wanted to get that one out of the way if I could.
Yeah. Ben, talking about the sequential development of the market, I think it was also in the second quarter's disclosure and at the Capital Market Day that we said that March itself, in particular in China, was fairly strong, also from a macroeconomic perspective, and we have been participating from that. Therefore, from a March second Siemens quarter's perspective, I think there was plenty of, from today's perspective, different indicators, but there was also, I think, quite an encouraging impact, in particular in China from the governmental stimulus programs at that point in time.
Sorry to interrupt, Ralf. I didn't really make myself clear. I was trying to specifically refer to the margin, the operating margin in Digital Industries. I guess what I was trying to say is on the operating margin, not the top line, not the orders, did the margin weaken significantly during the quarter?
That was what I was trying to get to, Ben.
Sorry.
In the second quarter, good top-line momentum. March was developing quite favorably, that was the exit month for the second quarter, so to speak. From that perspective, we had plenty of data points there we have been referring to with the statements we made. During the beginning of the third quarter, I think there was plenty of different momentum from different sources. We discussed all the different geopolitical ups and downs and the in and outs on the trade war aspect. Only by June, then the business development top line has been also then with a strong and high margin conversion, as you do know from factory automation product business, that has been then indicating that trend that we just saw then. At the same time, and also after the first signs have been materializing, the management team of DI has been preparing for that.
The point that Klaus wanted to make is that it just doesn't happen in the course of two or three weeks, because first of all, they still had to execute on the existing book. Deliver on that. Secondly, in the area of industrial software and investment, what we call cloud investment, they continue and will continue investing because that's a huge opportunity for them going forward. The software piece, in particular around Mentor, that has its seasonality, give or take, third and fourth quarter. There will be a better, by far better development in the fourth quarter for Mentor. We can already see that. In regards to executing also the existing orders that are on our books, we still do see that there's also positive momentum on the process industry side, and that's what also Klaus has been alluding to.
We see a mixed basket, but the agility to react to those challenges is there. The team is dedicated, and you know they did it in the past. It would be just naive to believe that you can turn that around within a framework of a couple of weeks. We do see and expect and have good reasons to believe that we are on the right track after all what we know about July. It is obviously not done yet, but we are on a daily basis reviewing the incoming orders, of course, and also reviewing what is the output of the factories, how much is going to the channel, what is staying there, and what is finally dropping through to the end customers. We believe that we are on a firm trajectory according to the forecast that we have for the fourth quarter.
There will be surprises obviously to come, but we are prepared to take care of them, and the team is very close to that.
Understood. Thank you, Ralf. I did want to ask one follow-up for Klaus. I guess what I want to do is just step back. If we think about what industrial automation or automation and drives, the division, used to do in terms of margin, if I go back through 5-10-year history of Siemens, and we can go back further than that, this is a business that was typically doing 14%-15% margins. We've made this point several times. If I go back to the trough, and obviously nobody expects 2009 again, but we're looking at 11%-12%. What gives you the confidence structurally around automotive or any of the end markets that we're not looking at a shift down toward the old margins that this business used to do?
Yeah. First of all, as you said, I was also one of these members who have experience in 2008, 2009, and many of my management people have selected the same experience. We know what we have to do when the cycle is going into the other direction, it's weaker. What is different to 2008 and 2009 is first of all, that we expand our business in a direction where first of all, we are putting more effort to the food and beverage and customer and OEM segment. Secondly, we have more software in our portfolio, and we've been strengthening also our activities in the process industry arena. Therefore, we have a much broader and brighter mix in our portfolio and in our customer landscape. Of course, it's now on us to do two things.
First of all, that we manage our costs, and this is what we are doing, and it has already initiated. Secondly, that we are very close to our customers, that we focus to those customers, we can also gain market share in this time period. This is what we are doing.
Very well answered on. Thank you.
Ben, just to complete the picture, I mean, I still owe sorry, a remark on the Bentley shares. What we do there is we just follow the rules of the newly implemented IFRS 9 for financial instruments. We have been indicating and sharing with you that since November 2016, we have been given the opportunity to buy shares from the private end of Nasdaq at the end of the day with regards to employee shares that have been distributed by Bentley to their management team. The more, in particular, people retire there, we have been given the opportunity to actually buy those shares from them. Therefore, on average twice a year, we will be given the opportunity to do that.
There is a valuation obviously done by Bentley, to assess what the fair market value is at that point in time, and we then just take that and apply it to the meanwhile around 12% shareholding we have in Bentley. That's it. On a net basis for the current fiscal, we are still slightly positive. There was a positive in the first quarter, in the mid double-digit EUR million area. There is a decline a bit smaller than the original uptick in the first quarter. On a net basis, it's pretty much of a wash. Yeah.
Just a last remark also on the history and the comparison, how did former Process Industries and Drives deal with downturns and how agile and responsive have we been to the market? We always said that typically it takes about two quarters to adjust OPEX and like spending. Discretionary, of course, is impacting a bit earlier. What we also will see is that the measures that Klaus has been sharing with you in the Capital Market Day for the next two, three years to come are going to be gaining ground slowly but steadily over the course of next quarters. From that end, we also do see that there are measures prepared that are going to help stabilizing the bottom line.
Last but not least, the cloud investment, as we call that, being MindSphere, being software-as-a-service investment, and also Mendix offerings being developed and integrated into our portfolio. They still are at around 200 basis points of impact for the third quarter. We had 50 basis points of severance in there and also still some 40 basis points of integration efforts for Mentor. As Klaus said before, we will see definitely a stronger fourth quarter for Mentor. A couple of projects have been shifting out there. I have been looking in very much detail into the development just last earlier this week with our whole Managing Board. The team knows exactly what they do, and they are standing on firm grounds with their initiatives and measures.
It does need a pickup, Ralf, right? I mean, to come back to what I originally asked, which was the exit rate on the quarter. The exit rate on the quarter has to be significantly below the average. My assumption is margins do need to improve even ex the Bentley effect quite significantly in the fiscal third quarter. Sorry, fourth quarter.
Yeah. Absolutely.
Understood.
Thanks, Ben. Next question.
Thank you. We'll go to our next question from Alexander Virgo from Bank of America Merrill Lynch.
Thanks very much. Good morning, everyone. Perhaps we could shift to SI and GP. First question on SI. Margins just below 10% in the quarter. I guess it's typically a seasonally weaker quarter. Presumably we would expect to see that materially improve in Q4, as you commented. I wonder, could you talk a little bit about what will drive that? I think from the Capital Market Day, you talked about the cash conversion ratio improving to one minus the growth rate. Obviously, we deteriorated a little bit in the quarter. Perhaps you could talk a little bit about that. Then on GP, you called out, I think in the first half, about EUR 100 million of benefit from savings initiatives already in place. Perhaps you could update us a little bit on the progress here.
I think margins were flat year-over-year if you exclude the gain from Q3 last year. Maybe just give us a little bit of an update on the margin progress there. That'd be helpful. Thank you.
Thanks, Alex, for those questions. We have been very much focusing on GP so far. I thank you for giving the opportunity to also put that a bit into the bigger picture, including SI. From current year-to-date performance, I am now talking about the full portfolio of industrial businesses, we stand at 11.3% pre-severance. That is clearly demonstrating that we are in the area where we belong to. All the different operations, Opcos and Stratcos, do have a fourth quarter ahead of themselves in which measures that have been implemented before are going to materialize. Most of them are going to face better top-line development revenue and margin conversion. We do have a very stable Mobility business, as I have been pointing out. This is giving us confidence that we are standing on firm ground.
The teams are prepared for that, what's ahead of themselves. We do also see from a very diligently follow up on what we call degree of implementation in our Puma web-based productivity system, that we anticipate what's happening when. This is under control. Now getting to the SI performance of the third quarter, we need to remind ourselves that the new target margin corridors are complete over the cycle margin corridor, which is referring to full 15 years, of course. This was now for the first time we applied the more ambitious margin target levels. Still would have been better to be in there, it's also naive to believe that all that is happening from one quarter to another after announcing the new organizational setup. Nevertheless, for the fourth quarter for SI, we do see revenue momentum picking up.
We have a very solid and long-standing track record for our former building technology business. You do know from the past that the fourth quarter time and again, even though we would appreciate having a more equally distributed pattern throughout the year, the fourth quarter was always the strongest one and is going to continue doing so. The new elements that have been merging into the SI operations from the former Energy Management are going to have a strong year-end fourth quarter. You can also take that from historical track record, and we do have also more visibility there from the backlog that this business has been bringing. As I said, low voltage was an opportunity in the third quarter already, and if you take out the industrial piece of the control products, they are also developing quite nicely. With the volume, margin conversion is what we expect.
At the same time, also, the SI management team has been implementing austerity measures, has been making sure that temporary work is brought down and that all investments, each and every single of them, is reviewed again under the new scenario as long as the short cycle elements we discussed are having impact on that business. Very diligently thought through, single measures being followed up with, and also the initiatives that we shared with you with regard to our savings program in Vision 2020+. They are slowly but steadily gaining momentum. Just to share with you for the fourth quarter, we do expect a total of around EUR 300 million of severance charges being booked for the company in total, which takes us close to EUR 600 million for fiscal 2019. This is exactly along the lines we shared with you on the Capital Market Day.
Cash flow for SI. I mentioned that before, and I also have been commenting in the press call. We are not happy with the third quarter there. We need to be fair. The management team, as far as they are on established grounds, namely in building technology, is making good progress, and they always have been converting their bottom line into cash on a ratio of around one in the past couple of years. I'm very confident that the knowledge how to handle that is also now spreading to the new portfolio element in SI. They have a commitment out there that cash flow momentum is substantially going to increase in the fourth quarter. We took it that far to discuss the matters even in our supervisory board meeting yesterday.
It's definitely well organized plan and that is going to be executed better, by far better than in the third quarter for the existing, for the running quarter, fourth quarter of the year. With regard to GP, you rightly have been stating, we shared with you the EUR 100 million in the first half of the fiscal year of savings that have been kicking in. We will continue with that pace roughly for the second quarter, give or take. That will be pretty much the same area of magnitude. Now, as I said, we also are in the process of finally straightening out with the workers' council and the representatives of labor, how to implement in detail, and that's going to be booked then with up to EUR 200 million in the fourth quarter and will then also unfold its impact on bottom line in the quarters to come.
We are well set in terms of a committed team, a detailed plan, which we follow through in detail, as I said, thanks to tracking systems we do have, and we are confident that the teams are going to accomplish their commitments in the quarter to come.
Thanks, Ralf. Very clear.
Thank you. Next question.
Have a good summer.
Pleasure. Same for you, Alex.
Thanks. Thank you. Our next question today comes from Michael Hagmann from HSBC.
Thank you very much for taking the question. If you look at the quarter, I think, it is, broadly speaking, a disappointing performance outside of Mobility. If you look at SGRE, if you look at SIPGDI, we've talked about all of them. I was just wondering, beyond just saying, okay, the operating environment has been deteriorating, it's difficult to believe that this is just a construct of coincidences. I was just wondering if you think that there is something more to it, i.e., is there an underlying problem? Is it maybe a hangover of the old too centralized structure of the company? Is there something else to it? Thank you very much.
Thank you, Michael, for that question. You may assume that we have been asking ourselves probably 100 times whether there is a potential underlying problem, as you have been calling it. There's definitely no underlying problem. I mean, what we need to respect is, we have been seeing, I think, a very strong second quarter, and it's a hell lot of effort that has been taken to now transition into the new format. I cannot exclude that that transitioning may have been distracting a handful of people and their teams from focusing on relevant matters at the right point in time. I do not know that, but I can't exclude it. Now everything is set. Things have been falling into pieces again.
They are up and running, what we are dealing with is the market, the customers, and the technology that is putting us into a favorable position way forward. I can't confirm that there is any underlying problem or pattern or something. You also need to review historical seasonality, and I'm sure you did. Third quarter, on top of that, what I said, was never really outstanding in terms of performance. All I can just reiterate is, after all we know, including July performance of our digital short cycle business, we stand on firm grounds for the way forward. Measures have been taken where possible. We can't do a lot around the market development and our customer investment behavior in some geographies that has been beneficially contributing to our business development throughout the last couple of years.
We are as close as possible to customers and markets and introduced and implemented the relevant decisions. I'm very confident.
Thank you.
Cheers, Michael.
Thank you. Our next question today comes from James Moore from Redburn.
James?
Can we take the next question, please?
Thank you. We'll move on to our next question from Jonathan Mounsey from Exane BNP Paribas.
Hi, good morning. Thanks for taking my question. On Digital Industries, obviously you see the software still growing. I was reading the transcript from one of your French competitors' conference call, just from about a week ago, and they were claiming that of 31 PLM customer awards, where they'd gone up against you, they'd won the last 26. How do you respond to that? In terms of PLM, how are you seeing their market share progressing at the moment, please?
What we are reporting is our complete software business. When I look specifically to the PLM progress, we have a double-digit growth in the quarter. Therefore, we are aligned with the market and also with our competitors.
In terms of order wins, Sorry.
If I may add there, I don't know, we don't know how our French peers are counting, but we don't count the number of orders, but the impact that it makes.
Yeah.
Therefore, we are quite confident that we are winning market share in the relevant fields. You can't exclude by definition that also competitors with their offerings are winning some accounts. What historical track record has been telling us is that we are making good progress in relevant industries and also without speculating, of course, if you look into the M&A steps that those competitors take, they obviously reach out for market segments in which we are established for 50 years plus already. I think it's not a bad idea for them to do something that we are already working with for quite a long time.
Maybe a follow-up, in terms of the U.S. and probably broader for Digital Industries than just PLM, but obviously at the beginning of the year, you guided to take or invest more money in the U.S. to, I guess, try to take some share off of Rockwell. Are you still making the investments at the level you thought you would at the beginning of the year? Have you pared them back and are you already seeing any benefits versus Rockwell in the U.S. or is it too early to say?
As I said at the Capital Market Day, our growth reaching in addition to China and Europe is definitely U.S. We are working on plans and we are in the execution phase, but it's much too early to say that we have achieved our, I would say, target and definitely not we are in the way to execute further in U.S. and it's much too early to say it in talking about the outcome and the results. When you look at the revenue growth in U.S., which is also shown on the slide, we've grown in U.S. by 9% for DI in the previous three quarters.
We've a couple of questions left, but only 10 minutes. Now each analyst please only one question and we give short answers then. Next one, please.
Thank you. We have James Moore from Redburn. Please go ahead.
Yes, good morning, everyone. Can you hear me now?
I can hear you, James. Go on.
Yeah, sorry for earlier. My first question, I guess my only question is on the Digital Industries order decline of 5%. By the way, thank you very much for slide six, very helpful with all the detail. Can you size the percentage growth and declines in orders for Process versus software versus discrete? I know you said Process and software are up, obviously discrete is down a lot. I'm just trying to scale that if you can help us there.
We'll be happy to do so, James, because I've been looking into the matter, as you can imagine, in depth. Software, we do have mid-single digits up. That's what we shared already. On the discrete manufacturing side, it was high single digit down, and we also have been benefiting from process industries momentum in the high single digit growth area.
May I just quickly follow up on Mobility? I gather that we have had the Deutsche Bahn restarting. Your revenues have been down 1% to 2% for the last nine months, but orders have been much higher. Can we now assume that invoicing can start to normalize from the fourth quarter, or have I read that incorrectly?
Yeah. James, that's also a matter which has been keeping us busy, obviously. We of course regret that there was a hiccup with Deutsche Bahn in accepting deliveries. We overcame that. We have been catching up and delivering six train sets already, and we will catch up on that completely. That will also have substantial impact, of course, on revenue recognition as you may imagine, and even more though on cash. I'm quite positive that the company Mobility as a strategic company is going to catch up on that effect till the end of the year. Maybe Roland, can give you a bit more color on where we stand in catching up and cooperating with the customer in that regard. It has been developing out in a very satisfactory way, I think.
Yeah, I think this was a point with the authorities, in Germany. They were insistent to make a formal check on whether there's any impact, which is not, so we can run this train safely. Finally, they're accepting now that we can bring these trains into operation, which helps us tremendously on cash flow. Again, as Ralf said, catch up. On your observation revenue, this is due to phasing. We were foreseeing that from the very beginning, that this will be a year where our revenue is flattening out while we have a very strong order intake, and we will see an uptake on the revenue in the next fiscal year.
Thank you.
Thank you. Next.
Thank you.
You're welcome.
Our next question today comes from Guillermo Peigneux Lojo from UBS. Please go ahead.
Hi, good morning everyone. It's Guillermo Peigneux Lojo from UBS. I wanted to come back to DI margins, if I may. I'm taking a look excluding Bentley and the OPEX investments and the mix, if I may. I guess I'm trying to overlay the strong free cash flow 18% increase in the quarter and the weak operating margin performance, and I wanted to ask if there is any particular cautious approach to inventory this talking probably overheating margins at this point, and if not, how do you feel about your short cycle inventory levels as we speak? Thank you.
Thanks for that, Guillermo. We of course are reading those patterns as well as you do. First of all, I consider that to be a strong proof point for the capability of the management team, to really get a grip around the relevant operating working capital drivers. They have been clearly getting a firm grip around their supply chain. I mean, we need to look back a bit to be fair with the management team there last year. That was rather driven by the question of whether there is material available to cater for short-term upticks in the market, and now to get the supply chain into a new steady state that is rather taking care of a more moderating top-line development and a decline in some areas that takes some time.
They have been taking out buffer stock very successfully, and they also have been managing, I think, the last year very favorably when it was more around allocation of certain suppliers in that regard. We are very intensively looking into accounts receivables, obviously, because in each and every downturn you have to manage that line item, of course, but you also need to look into the quality of your accounts. Therefore, we are very much focusing on collecting, in particular, overdues, which they have been successfully doing. Klaus has been elaborating on that matter in the Capital Market Days, and the team is absolutely up to speed on that one and will continue doing so in the fourth quarter.
With regards to adjusting the cost base, we discussed that every lever is taken into consideration, be it from hiring freeze to temp workers, discretionary spending, and also now waiting for the measures to kick in that have been brought on their way and elaborated already on the fact that we have been making progress with the workers' council. We do the bookings and get the impact done in the quarters to come.
Thank you. Next question, please.
Thank you. Our next question comes from Alasdair Leslie from Societe Generale.
Hi. Good morning, everyone. Thank you. Just a quick question on Digital Industries and the strategic investment there. I think you were originally targeting EUR 300 million of cloud investment in fiscal year 2019, MindSphere, Mendix, BirdX, the Mentor integration. I was wondering if you could confirm how much you've spent year to date. Just to be clear, you're not stepping away from that full year target and already reigning back investments as well, that's fair to say? More broadly, how much of the cloud investment you're making would you say is truly discretionary now? Thinking about certain strategic tie-ups, such as with VW for the industrial cloud. I imagine there might be a certain commitment from your side to ensure rapid deployment. Thinking about your targets for next year as well. Thank you.
Alasdair, first of all, thanks for the question, and I would like to repeat what I said before. We will not sacrifice great opportunities we have to further establishing unique selling propositions in that field for a quarter or two. That's what we said, and I have been discussing the details already a bit. To repeat them quickly, we have been spending 200 basis points in cloud investments in the last quarter, of which about half of that was dedicated to MindSphere. We continue building up our software-as-a-service business models and investing diligently and also in an adequate manner not to sacrifice unnecessarily margin in that field. We do continue integrating Mendix opportunities into our overall offering, which is also in the area around 40, 50 basis points in that quarter.
In total, these investments have been making up exactly the 200 basis points of impact in the third quarter, as I discussed it with you in the prior quarters. To repeat what I said then, last quarter, second quarter, it was 210 basis points cloud investment, and the prior one, the first one of our fiscal year was 220. You see a slight decline. Of course, we also don't consider anything being sacrosanct in that field, so there may be a slight delay, but it will not be a sacrifice of future business opportunities. That's the core of our selling proposition we have, and we will defend and extend that competitive advantage in the quarters to come. It would be completely naive to do anything else.
We will now take the last question, please.
Thank you. Our last question today comes from Wasi Rizvi from RBC Capital Markets.
Hi, thanks for taking my question. Just again, on Digital Industries. I was trying to understand in the markets where you're seeing a slowdown, have you got a view on the supply chain and where inventories are there? Whether we've already had any change in inventory levels or whether that might come further down the line? Again, on those industries, your view that they're going to be slow for the next three to four quarters, how do you come to that? Is that just based on your own internal analysis or based on conversations with customers? Just interested to know how you've arrived at that.
Before Klaus is going to comment on the customer talks he has, let me quickly repeat what I said. Inventory and supply chain, we have a firm grip around that. The company and the management team is very experienced in doing that, and therefore, no worries on the inventory side. I said we now are putting even more focus on the accounts receivable end, where we do need to collect as quickly as possible. With a cash conversion rate of 1.35 in the third quarter, I think this is a very valid proof point that the team does a great job in that field.
Sorry.
When it comes to the--
Is that on customers' inventories as well? Was where my question was more focused, whether you've got a view on where customers' inventory levels are and whether they need correcting.
Sorry. Klaus is going to talk about the customer interface in a second. That's what I said.
Yeah. On the customer side, you know that I'm very close to many customers on the international scale. The feedback is that all say I have not the most strong pipeline coming from the end customer. As I said, the exposure comes from automotive industry. Therefore, I see that we have the next three to four quarters, as I said, declining, and then we will see how it will go on.
I misunderstood your question, apologies. For the inventory levels in the channels
Yeah
We don't see any extraordinary pattern at that point in time. We are carefully monitoring them. What we saw in the past two quarters, beyond Chinese New Year, there was no artifact that we wouldn't have been knowing about.
You're talking about the distributor channels?
Yeah.
No unusual behavior. Yeah.
All right. Thank you everyone, and thank you also for all analysts who participate in the call. We'll now close the call. The team and I will be available for further questions, and I wish you a wonderful summer. Bye.
You too. Be well. Bye-bye.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. Once again, let me repeat the instant replay numbers. Participants in Germany, please call the replay number +446920001800. Access code is 1232597, followed by the hash key. Participants in Europe, please call the replay number +442076600134. Access code is 1232597, followed by the hash key. Participants from the United States, please call the replay number +17194570820. Access code again is 1232597, followed by the hash key. This replay service will be available until tomorrow night. A recording of this conference call will also be available on the investor relations section of the Siemens website. The website address is www.siemens.com/investorrelations. Thank you and have a good day.