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 2 of the Siemens presentation. This conference call may include forward looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties.
At this time, I'd like to turn the call over to your host today, Ms. Sabina 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 a. M. This morning. You can find everything on our website.
Unfortunately, our CEO, Joao Keesa, cannot participate in the call today due to an important customer meeting in Asia. We have 3 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, Claus Helmerich, who is responsible for Digital Industries, will give you an update on the business. We will start with a brief presentation and then followed by Q and A.
And with that, I would like to hand over to Roland.
Thank you, Sabine, and good morning, everyone, and thank you for joining us to discuss Q3 results and the current business environment. While our teams were busy to deliver under the new Vision 2020 plus 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 3 d printing systems with Siemens Digital Enterprise offerings to drive industrial scale additive manufacturing. Another example is the future pact in Gorlitz, where we will set up a joint research and development platform for hydrogen technologies together with the Brown River Institute. And we successfully have ramped up our MindSphere application centers to co create and deliver digital services for 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, MySphere 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 Promoters core in 2019. The NPS is now up by 11% compared to the baseline 2017.
We are well underway to achieve our 20 percent 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. So Siemens Gamesa Mobility and Siemens Healthineers were major contributors to drive order growth. We are very proud that the mobility team booked a €1,200,000,000 follow-up order to expand the high speed Bellavo train fleet in Russia, including a 30 years long term service agreement. SGRE consolidated its leadership in the offshore wind market by winning 2 major projects in Taiwan, totaling to EUR 2,300,000,000 order volume.
Gas and Power posted an order of more
than EUR
200,000,000 for the Mizan 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 road map for electrification. However, geopolitical and macroeconomic risks such as the U. S.-China trade conflict, a raising likelihood of a no deal Brexit and tensions regarding Iran, to name just a few, has 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.
So Claus will now give you the overview of our digital industries and our short cycle business. Ralf will then walk you through our Q3 financial results in detail. So, Tas, turn to you.
Yes. So thank you, Roland, and very warm welcome and good morning to everyone. We successfully launched digital industry OpCo on April 4. And in doing so, we brought this increase in the process industry under one roof. Within the eye, we are combining a leading automation software and service portfolio and in our comprehensive and unique digital enterprise offering.
YEA 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 Sanofa there and our new customer wins are clear EBITDA. 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 Thinumeric 1, the 1st digital native computerized numeric control and furthermore, we are enhancing our digital enterprise portfolio with cutting edge technologies like artificial intelligence and edge computing. However, as Roland mentioned, we operate in a very challenging market environment for our short cycle business. Without 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 design. We already have taken decisive action, which I will discuss in a minute with you. On the other hand, orders in software and process automation were up with decent growth rates. Revenue started to follow soft in order development and decreased by 2%, while software grew mid sizedingledigits. The software business benefited from a sharp growth in China and was negatively impacted
by a quarter
volatile mentor contract renewal. In addition, the lower volume digital net interest profitability was also affected by the following topics: continued OpEx investment into R and D and feed on the street, mainly in software. Furthermore, lower capacity utilization and unfavorable product mix in higher margin discrete automation business broadened the gross margin. And we record a onetime effect from the revaluation of the rental shares and stake, which impacted our margin by around 100 basis points in the Q1. The bright spot was the free cash flow, where an invested side focus on working capital management paid off with a substantially improved cash conversion rate to 1.35% in the 3rd quarter.
Let me now give you a bit more color on our end market exposure with 5 key verticals covering around 65% of the Digital Industries business. For the next 3 to 4 quarters, we see continued cyclical weakness in automotive and machine building. Latest VDMA and iPhone 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 mental software offering where we see good growth opportunities.
We support our customers to deal with rising complexity and new applications for integrated circuits and electronic systems. Now 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 and Italy 5% lower on uncertainty in the domestic and export market. Growth momentum in U.
S. Was driven by strong process automation business. Hence, we have to improve our long term competitiveness and current performance. As I presented at the Capital Market Day,
we
are working the team with employee incentives to execute our €322,000,000 cost optimization program by 2023. Key measures include digital transformation and structural optimization on top of base 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 profitability in short term. We closely monitor some market development and review the investment plan accordingly. The cost control is, of course, a key priority in BI.
Going forward, we expect to see already in Q4 a quarter over quarter margin improvement excluding severances. Furthermore, we also expect 4DI margin for fiscal year 2019 to reach the lower end of the target margin band of around 17%, including 7%. This industry is well positioned to outperform competition in, of course, a challenging environment through our unique portfolio of automation software and business services, our technological leadership and as well our matched domain and consulting know how. And of course, I have also to mention our capable and very experienced management team within BI. Now I would like to hand over to Ralf Thomas.
Thank you, Claus, for this comprehensive overview on our BI business, and good morning also from my side. I will now give you more details on the Q3 performance across our businesses. Smart infrastructure delivered modest top line growth of 2%. Building in 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 EBITDA 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 plus 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, the measures to improve working capital have not fully materialized yet.
For the Q4, 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 3 large gas turbines in Iraq and Romania as well as 16 small and medium gas turbines. Our sales pipeline for the Q4 looks promising to achieve a book to bill above 1.0x 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. Gas and power margin reached 3.9 percent 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 €500,000,000 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 Q4 and expect to book related severance charges of up to €200,000,000 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 Cheviot.
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. Hence, Mobility is well on track to achieve the targets for orders and margin communicated at the Capital Market Day in May. Retail flow performance was negatively impacted this quarter by delayed ICE4 train acceptance and correlated payments. This will strongly reverse in the Q4 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 company Siemens Healthineers and Siemens Gamesa already reported their 3rd 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 company's performance. POC, as we call them, consists largely of businesses from the former Process Industries and Drive and Energy Management division. They were complemented with Siemens Logistics and certain equity investments, which were formerly reported in Centro Managed Portfolio Activity. We achieved operational improvement year over year. However, higher profit from fully consolidated companies was partially offset by declines in equity investments, mainly from Valeo
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% to 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 1. We expect that adjusted EBITDA margin for our industrial businesses will reach the lower half of the range of 11% to 12%, excluding severance charges. Finally, we confirm our expectation of basic EPS from net income in the range of €6.30 to €7, excluding severance charges. With that, I conclude. And now Claus, Roland and myself are happy to answer your questions.
With that, I'll give it back to you, Celine.
Thank you, everyone. We will now start with Q and 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. Our first question today comes from Andreas Willi from JPMorgan. Please go ahead.
Yes, good morning everybody. I have two questions, 1 on Digital Industries, 1 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. And 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, but we haven't really seen any evidence of this.
Why is that? And 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. And the question on Healthineers, the company spoke to analysts on 11th July and talked down numbers, which led to a 7% fall in the share price that day. What's your view on a listed subsidiary talking to analysts 1 by 1 during the close period of Siemens AG?
And also within Healthineers, could you explain the move of the interest expense where it seems like Healthineers gets like a €60,000,000 credit from Siemens in terms of the intercompany debt costs? So how does that work? And what exactly was done there?
Thank you,
Andreas. Let me start answering with the second question that you have been pausing around the health and health. And it's obvious that it's their setup that needs to determine when and to which extent they talk to the market. From a board membership with I hold, I'm chairing the audit committee of Siemens Healthineers, I was not pleased by the fact that there was obviously some cuddling 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's 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 Schmidt, 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 Claus to comment on the DI business, let me quickly shed a word on what's 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 Claus will elaborate on that more in detail. So 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.
And 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 a still a favorable positioning. And Rockwell is definitely benefiting from a strong U. S. Footprint, but I'm sure that Claus is going to elaborate on that a bit more in detail.
Claus?
Yes. So let me continue your hypothesis today. So first of all, the exposure for Fabry is in United States and also stronger in our area when it comes to process industries like Schneider. When I look at our performance, you also could gain additional revenue and new orders in process industry and especially in United States. So 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 minus 1.9% compared to last year. We haven't had strong order backlogs. Therefore, we need the resources in our factories to deliver the product to our customers. So when it comes to the new orders, it was exactly as Rolf said. In June, we saw the turning point.
And what I see in the business, and you can see the exposure, it comes mainly from the automotive and the machine tool area, where we have a strong design, which was not visible before. And you can also see it here also statements from end customers in the automotive area, what they are doing and how they are reducing how they 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 and D roadmaps. And as I said, we are launching new products.
And this gives us a stronger position, can 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 our Nova Fair. And 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 benefit, which will later on, Ralf will explain to you what is, say, systematic about this. But I'm 100% convinced that we, as I said in my short speech, will improve the margin in the Q4, 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, and thank you for taking the questions. I guess the first one, and 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 May, the feeling was that there would be some slight sequential softening in the margin, maybe sort of 17% to 18%. But 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. Yes. Okay. We will answer that one first.
So Ben, I just wanted
to get one out of the way, if I could.
Yes. So 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. So therefore, from a March second quarter's 2nd Siemens quarter's perspective, I think there was plenty or 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, Ralph. I didn't really make myself clear. I was trying to specifically refer to the margin, the operating margin in Digital Industries. And 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. So in the second quarter, right, good top line momentum, March was developing quite favorably. So that was the exit month for the Q2, so to speak. So from that perspective, we had plenty of data points, yes, we have been referring to with the statements we made. Then during the beginning of Q3, 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. So only by June, yes, 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, existing because, first of all, they still had to execute on their existing book, yes, deliver on that. Secondly, in the area of industrial software and investments, what we call cloud investments, 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 kind of seasonality, give or take, 3rd Q4.
There will be a better by far better development in the Q4 for Mentor. We can already see that. And 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 cloud has been looking for. So 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. But 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, yes? It's 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 Q4.
So there will be surprises to come, but we are prepared to take care of them, and the team is very close to that.
Understood. Understood. Thank you, Ralph. I did want to ask one follow-up for Claus. 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 to 10 year history of Siemens and we can go back further than that, this is a business that was typically doing 14% to 15% margins. We've made this point several times. If I go back to the trough, and obviously, nobody expects 2,009 again, but we're looking at 11% to 12%. So 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?
Yes. So first of all, as you said, I was also one of these members who have experience in 2,008, 2009. And I have many of my management people are selected to experience. So we know what we have to do when the site is going into the other direction is weaker. So what is different to 2,000 and 8, 2009 is, first of all, that we expand our business in the direction where, 1st 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. So therefore, we have a much broader and brighter mix in our portfolio and in our customer landscape. Of course, it's now enough to do 2 things. First of all, that we manage our costs. And this is what we are doing and have already initiated.
And secondly, that we are very close to our customer and that we focus to those customers where we can also gain market share in this time period. So this is what we are doing.
Ben, just to complete the picture, I mean, I still owe sorry, a remark on the Bentley shares. I mean, what we do there is we just follow the rules of the newly implemented IFRS 9 for financial instruments. And 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. And the more, in particular, people retire there, we have been given the opportunity to actually buy those shares from them. So therefore, on average, twice a year, we will be given the opportunity to do that.
And then there is an evaluation, 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 Q1, the mid double digit €1,000,000 area. Now there is a decline a bit smaller than the original uptick in the Q1.
So on a net basis, it's pretty much of a wash, yes. So just a last remark also on the history and the comparison how to form a automation and drive steel, the downturns and how agile and responsive have we been to the market. We always said that, that typically it takes about 2 quarters to adjust OpEx and like spending discretionary, of course, is impacting a bit earlier. But what we also will see is that the measures that Claus has been sharing with you in the Capital Market Day for the next 2, 3 years to come are going to be gaining ground slowly but steadily over the course of next quarter. So from that end, we also do see that there are measures prepared that are going to help stabilizing the bottom line.
And last but not least, I mean, 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 Q3. We had 50 basis points of severance in there and also still some 40 basis points of integration efforts for Mentor. And as Claus said before, we will see definitely a stronger Q4 for Mentor. A couple of projects have been shifting out there. So we have been looking in very much detail into the development just last earlier this week with the whole managing board.
So the team knows exactly what they do, and they are standing on firm grounds with their initiatives and measures.
But it does need a pickup, Ralph. 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. So, my assumption is margins do need to improve, even ex the Bentley effect quite significantly in the fiscal Q3 sorry, Q4.
Yes. Absolutely. Understood.
Thanks, Ben. Next question.
Thank you. We'll go to our next question from Alexander Virgo from Bank of America Merrill Lynch. Perhaps
we could shift to SI and NGP. First question on SI. Margins just below 10% in the quarter. I guess it's typically a seasonally weaker quarter. But presumably, we would expect to see that materially improve in Q4, as you commented.
I wonder if could you talk a little bit about what will drive that? And I think from the Capital Markets Day, you talked about the cash conversion ratio improving to 1 minuteus the growth rate. Obviously, we deteriorated a little bit in the quarter. So perhaps you could talk a little bit about that. And then on GP, you called out, I think, in the first half about EUR 100,000,000 of from savings initiatives already in place.
Perhaps you could update us a little bit on the progress here. I think margins were flat year on year if you exclude the gain from Q3 last year, I'm sorry. So maybe just give us a little bit of an update on the margin progress there. That would be helpful.
Thanks, Alex, for those questions. I mean, of course, we have been very much focusing on DI so far. So I thank you for being given the opportunity to also put that a bit into the bigger picture, including SI. So from current year to date performance, and I'm now talking about the full portfolio of industrial businesses, we stand at 11.3 percent pre severance. And that is clearly demonstrating that we are in the area where we belong to, yes?
And all the different operations, OpCos and StratCos, do have a 4th 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, and we do have a very stable mobility business, as I have been pointing out. So this is giving us confidence that we are standing on firm ground. The teams are prepared for that, what's ahead of themselves. And 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.
So this is under control. Now getting to the SI performance of the Q3. 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. And this was now for the first time we applied the more ambitious margin target levels, still would have been better to be in there. But it's also naive to believe that all that is happening from 1 quarter to another after announcing the new organization, Alceda.
Nevertheless, for the Q4 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 4th quarter time and again, even though we would appreciate having a more equally distributed pattern throughout the year, the Q4 was always the strongest one and is going to continue doing so. Also, the new elements that have been merging into the SI operations from the former Energy Management are going to have a strong year end Q4. 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 3rd quarter already. And if you take out the industrial piece of the control products, they are also developing quite nicely. So with the volume, margin conversion is what we expect. At the same time, also the SI management team has been implementing austerity measures, the the short cycle elements we discussed are having impact on that business.
So 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 plus they are slowly but steadily gaining momentum. And just to share with you, for the Q4, we do expect a total of around €300,000,000 of severance charges being booked for the company in total, which takes us close to €600,000,000 for fiscal 2019. This is exactly along the lines we shared with you in 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 Q3 there. Also, 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 1 in the past couple of years. So I'm very confident that the knowledge how to handle that is also now spreading to the new portfolio element in SI. And they have a commitment out there that cash flow momentum is substantially going to increase in the Q4. We took it that far to discuss the matters even in our supervisory board meeting yesterday. So it's definitely a well organized plan and that is going to be executed better, by far better than in the Q3 for the existing for the running quarter, Q4 of the year.
Then with regard to GP, you rightly have been stating, we shared with you the €100,000,000 in the first half of the fiscal year of savings that have been kicking in. We will continue with that pace roughly for the Q2, give or take. That will be pretty much the same area of magnitude. And now, as I said, we also have been are in the process 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 €200,000,000 in the 4th quarter and will then also unfold its impact on bottom line in the quarters to come.
So 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, Ralph. Very clear. Have a good summer.
Pleasure. Same to you, Alex.
Thank you. Our next question today comes from Michael Hochman from HSBC.
Thank you very much for taking the question. If you look at the quarter, I think it's fair to say that it is, broadly speaking, a disappointing performance outside of Mobility. If you look at SGRE, if you look at SI, PG, DI, we've talked about all of them. And I was just wondering, beyond just saying, okay, the operating environment has been deteriorating, It's difficult to believe that this is just a context of coincidences. So 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? Or 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, I mean, we do 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 exclude it. But now everything is set. Things have been falling into pieces again. They are up and running.
And what we are dealing with is the market, the customers and the technology that is putting us into a favorable position way forward. So 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 Q3. On top of that, what I said was never really outstanding in terms of performance. And 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 do a lot around the market development and our customers and our customer investment behavior in some geographies that has been beneficially contributing to our business development throughout the last couple of years, but 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.
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 if 31 PLM customer awards that they've gone up against you, they'd won the last 26. How do you respond to that?
In terms of PLM, how are you seeing market share progressing at the moment, please?
So what we are reporting is our complete software business. And when I look specifically to the PLM progress, we have a double digit growth in the quarter. So therefore, we are aligned with the market and also with our competitors. But in
terms of order wins, is that sorry?
See, 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. And therefore, we are quite confident that we are winning market share in the relevant field. You can't exclude by definition that also competitors with their offerings are winning some accounts. But 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 and A steps that those competitors take, they obviously reach out for market segments in which we are established for 50 years plus already.
So 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 carved 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 Capital Market Day, our growth region in addition to China and Europe is definitely U. S. And 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 more to say in talking about the outcome and the results. But 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% by 9% for DI in the Q3 quarter.
We've a couple of questions left, but only 10 minutes. So now each analyst, please only one question and we
We have James Moore from Redburn. Please go ahead.
Yes. Good morning, everyone.
Can you hear me now?
I can hear you, James.
Sorry for earlier. My first 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. So 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 9 months, but orders have been much higher. Can we now assume that invoicing can start to normalize from the Q4? Or have I read that incorrectly?
Yes. James, that's also a matter we had which has been keeping us busy. Obviously, we, of course, regret that there was a pickup with Deutsche Bahn and accepting deliveries. We overcame that. We have been catching up and delivering 6 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. So I'm quite positive that the company Mobility as a strategic company is going catch up on that effect till the end of the year. But maybe, Roland, can you give us 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.
Yes. I think this was a point with the authorities in Germany. They were insisting to make a formal check on whether there is any impact. It is not so that we can run these trains safely. And finally, they're accepting now that we can bring these trains into operation, which helps us tremendously in cash flow.
And again, that's why I 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. Our next question today comes from Guillermo Peigneux from UBS. Please go
It's Guillermo Peigneux from UBS. I wanted to come back to DI margins, if I may, and 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 destocking probably overheating margins at this point? And if not, how do you feel about your short cycle inventory levels as we speak?
Thank you.
So thanks for that, Roni Ramon. 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 enough and 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 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, 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, overviews, which they have been successfully doing. Claus 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 Q4.
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. So 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 Alastair Leslie from Societe General.
Hi, good morning everyone. Thank you. Just a quick question on Digital Industries and the strategic investment there. So I think you were originally targeting €300,000,000 of cloud investment in fiscal year 2019, so MindSphere, Mendix, but the Mentor integration. So wondering if you could confirm how much you've spent year to date.
And just to be clear, you're not stepping away from that full year target and already raining back investments as well. That's fair to say. And then more broadly, how much of the cloud investment you're making would you say is truly discretionary now, just 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. Just think about your targets for next year as well.
Elisa, I mean, 1st of all, thanks for the question, and I would like to repeat what I said before. We are we will not sacrifice. We will not sacrifice great opportunities we have to further establishing unique selling propositions in that field for a quarter or 2. 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. So in total, these investments have been making up exactly the 200 basis points of impact in the 3rd quarter, as I discussed it with you in the prior quarters. To repeat what I said then, last quarter, Q2, it was 210 basis points cloud investment and the prior one, first one of our fiscal year was 220 basis points. So 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 that it will not be a sacrifice occasion of future business opportunities because I mean that's the core of our selling proposition we have and we will defend and extend that competitive advantage in the quarters to come 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.
Just again on 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 and whether we've already had any change in inventory levels or whether that might come further down the line? And then again, on those industries, your view that they're going to be slow for the next 3 to 4 quarters, How do you come to that? Is that just based on your own internal analysis or based on conversation with customers? Just interested to know how you've arrived at that.
Before Claus 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. And with a cash conversion rate of 1.35 in the 3rd quarter, I think this is a very, very valid proof point that the team does a great job in that field.
Yes. Sorry. When it comes to
yes. Just is that on customers' inventories as well, where my question is more focused, whether you've got to be aware customers' inventory levels are and whether they need correcting?
Sorry. Claus is going to talk about the customer interface in a second. That's what I said.
Yes. So on the customer side, yes, you know that I'm very close to many, many customers on the international scale. So the feedback is that, obviously, I have not so strong pipeline coming from the end customer. As I said, the exposure comes from automotive industry. Therefore, I see that we have the next 3 to 4 quarters, as I said, designing and we will see how we go on.
So I misunderstood your question. Apologies for the inventory levels in the channels, yes? We don't see any extraordinary pattern at that point in time, but we are carefully monitoring them. And what we saw in the past, in the past two quarters, beyond Chinese New Year, there was no artifact that you wouldn't have been knowing about.
So you're talking about the disputed channels, yes, no unusual behavior,
Yes. All right. So thank you, everyone, and thank you also for all analysts to participate in the call. So we will now close the call. The team and I will be available for further questions, and I wish you a wonderful summer.
Bye.
You too. See you, Bert. Bye bye.
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