May 4, 2017
Executives
Sabine Reichel - Head of Investor Relations Ralf Thomas - Chief Financial Officer
Analysts
Andreas Willi - JPMorgan Mark Troman - Bank of America Merrill Lynch Ben Uglow - Morgan Stanly Simon Toennessen - Berenberg Martin Wilkie - Citi Alasdair Leslie - Societe Generale James Moore - Redburn James Stettler - Barclays Daniela Costa - Goldman Sachs
Operator
Good morning, ladies and gentleman, and welcome to the Siemens 2017 Second Quarter Conference Call. As a reminder, this conference is being recorded.
Before we begin, I would 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 would like to turn the call over to your host today, Ms.
Sabine Reichel, Head of Investor Relations. Please go ahead ma'am.
Sabine Reichel
Good morning, ladies and gentlemen, and welcome to our Q2 conference call. The earnings release and Q2 presentation were released at 7 A.M.
this morning. You can find everything our IR homepage.
Our CFO, Ralf Thomas is here to review the results today. Unfortunately, our CEO, Joe Kaeser cannot participate in the call today because he is attending the World Economic Forum Africa in Durban.
Ralf will now start with the presentation and then we have time for Q&A. And with that Ralf, I hand over to you.
Ralf Thomas
Thank you, Sabine, and good morning, everyone. And thank you for joining us for our second quarter conference call.
We delivered another strong team performance and continue to make progress on all aspects of Vision 2020 to create value. Our strong operational performance is again a clear proof point on this part of building a better and highly adaptive company.
At the same time, we continued to make targeted investments in research and development feet on the street and digital offerings always with a key focus on customer needs. Our goal is to secure profitable growth also in the future.
In addition, we constantly improve efficiency and productivity across all functions supported by our team that is eager to learn, change and deliver. Let me walk you through some highlights.
The acquisition of Mentor Graphics took place at the end of the second quarter, while the merger of our wind power business with Gamesa closed at the beginning of Q3. The teams are working intensively on the integration and I will provide you later with the first view regarding the financial impact of fiscal 2017.
Now let's have a look at the financials. Orders were up 1%, despite tough comps year-over-year due to the €3.1 billion Egypt in prior year's second quarter.
Excluding this mega deal, orders were up 17%. We recorded a substantial volume from large orders in the current quarter.
Also the base orders below €50 million were clearly up 9% on a nominal basis. We were pleased with a healthy book-to-bill ratio of 1.12 in a new record backlog of a €117 billion in the industrial business with a solid gross margin quality.
Organic revenue growth accelerated to 5% with growth in all industrial businesses driven by a strong short cycle performance. Digital factory, building technologies and energy management showed the higher growth rates.
Industrial business profit margin was 12.1%, up year-over-year by 120 basis points on broad based operational improvements across all divisions. Eight out of nine divisions were in or in above the targeted range.
70 basis points of the margin increase were related to a positive effect from a pension plan amendment. All in all, currency effects were negligible for the quarter.
Net income came in at €1.5 billion and earnings per share at €1.79. Finally, I am very pleased with free cash flow from industrial business which was a €2 billion, up 32%.
Let's have a look now at a selection of some large orders we received in the quarter. We saw a very strong order development in Germany, up by 94% year-over-year.
It was driven by the €1.4 billion order for the Hohe See offshore wind power plant solution for EnBW. We will connect 71 of our 7 megawatts turbines for the grid by 2019 followed by a five year service contract.
Another highlight was India. The orders more than doubled over the prior year.
The key driver was a major HVDC order featuring state-of-the-art VSC technology for the first time in India. This project is an important part of the grid expansion program of the Indian government.
We will deliver it together with our partners Sumitomo Electric was in charge of the cable technology. Power and Gas was very successful to gain share in the distributed generation area and both supply 12 industrial gas turbines with a total capacity of 690 megawatts in Argentina.
These orders come with a 10 year long term operational maintenance and service agreement centered on our comprehensive digital service portfolio. Now let's look at some key developments in the divisions.
Power and Gas operates in a very completive market environment. Global energy trends toward reviewable continued to put pressure on customer demand for fossil power generation.
This result is declining new unit business in corresponding price pressure. Due to project shifts particularly in the Middle East, we expect the decline in the large gas turbine market in fiscal 2017.
In total, we shipped 11 large gas turbines in the quarter among those five H-Class turbines. We are pleased with the decent performance of the Power and Gas team.
They continued to executive the backlog in a very stringent way and achieved revenue growth of 4%. Due to the challenging market environment, the key focus remains on driving productivity and innovation.
Profit margin of 11.2% is at the lower end of the target range. Just to put this into perspective, the year-on-year decline is predominantly due to positive one-off effects related to contracts in Iran in the prior year.
Improved project execution in the solution business and the continuing high contribution from the service business drove profit. However, for the second half of fiscal 2017, we expect revenue to be clearly below H2 of fiscal 2016 due to much tougher comps.
We expect to have also some corresponding negative effects from lower revenue on the profit margin. For fiscal 2017, we expect to reach a profit margin at the lower end of the target range.
Wind Power for the last time as a full owned Siemens division delivered an excellent quarter ahead of the merger. Orders growth benefited from a number of larger orders across all geographies lifting order backlog close to €17 billion.
Revenue growth was driven by the onshore and service business. Profit margin reached an exceptional double-digit margin level of 10.3% on higher productivity, higher capacity utilization and strong execution.
Energy Management accelerated top line growth, improved profitability and gained market share supported by several major orders. The largest contract alone, one in the Middle East and the already mentioned HVDC order in India head up to around €1 billion.
Building Technologies lifted its performance on a new level across all metrics. Although the second quarter is seasonally weak, the team delivered 8.8% profit margin excluding 590 basis points effect from the pension plan amendment.
Digital Factory delivered another very strong quarter with top line in all businesses and clearly gained market share. Our short-cycle business performance was outstanding and we achieved double-digit revenue growth in all major countries.
China up 29%, U.S. up 10%, Germany up 11% and Italy delivered 14% growth.
Demand was strong in the automotive and the machine building industries and we saw some benefit from more working days. China was still benefitting from governmental programs and easy comps from prior year which we expect to moderate going into the second half of the calendar year.
We're very pleased that the PLM software license business grew low double-digit organically. This was a good achievement also compared to what we saw in the industry.
Growth was mainly driven by portfolio element such as Tecnomatix and Teamcenter. On the other hand, system integration revenues were weaker leading to overall moderate revenue growth in the PLM business.
Profitability increased significantly in the high margin sort-cycle business on strong earnings conversion. This was partially offset by focused investments to further advancing and rolling out the MindSphere platform as indicated before.
In addition, the closing of the Mentor acquisition incurred some transactional cost already. As a result, we saw profitability of the PLM software business in the single-digit area.
I want to emphasis that the Mentor Graphics integration is fully on its way. We can build here on a wide ranging experience from previous acquisitions such as CD-adapco where we continued to exceed performance of the business plan by winning new customers and through cross-selling synergies with the existing PLM customer base.
Process industries and drives saw a double-digit order growth in the short-cycle process automation business which was offset declines in those business servicing mainly commodity related industries. The team is making operational progress and continuous to execute its restructuring program as planned.
Mobility delivered again industry leading margins and significant top line growth, clear positive evidence of our vertical integration strategy. Successful project execution and a largest share of the high margin rail infrastructure business drove profitability.
After an exceptional performance in the first quarter, we saw a solid set of numbers that helping you. Orders were up in all business with a strongest contribution from the diagnostic imaging in Advanced Therapy business.
Revenue growth was supported by Asia where the largest profit increase came from Advanced Therapies. An important step for the diagnostic team was a final FDA approval of the Atellica solution platform in March.
Let me now walk you through the line items below industrial business where we saw quite some movement and I will also give you some guidance for the second half of fiscal 2017. SFS again delivered a very strong profit of €207 million driven by an equity business including a mid-double-digit million gain from selling a stake in on offshore wind farm.
Centrally managed portfolio activities were in total flat and saw a potential benefit of €314 million from the Hanau asset retirement obligation due to a reduced expected inflation rate. This gain was partly offset by €230 million impairment of Siemens' stake in the Primetals joint venture which continues to operate in an adverse market environment.
For the second half of fiscal 2017, we continued to expect volatility in CMPA. Corporate items were higher mainly due to effects from a bond with warrant as well investment ramp up in next 47, our platform to force the disruptive innovation and growth.
Typically, corporate item is expected to incur a higher cost in the second half year in line with prior year level. Pension has and will continue to develop like planed at a quarterly run rate of around €125 million.
PPA will continue on the first half 2017 run rate. On top of that, our initial and preliminary estimate for additional effect for Mentor & Gamesa is around €300 million for the second half of fiscal 2017.
We will give you an update with our Q4 financials for fiscal 2017. The tax rate of 34% in the quarter has been exceptionally higher mainly related to the non-tax deductable impairment of Primetals.
We maintained the 26% to 30% range for the full year. Having said this, I would like to draw your attention to our strong fee cash flow in the industrial business which improved which improved by 32% to €2 billion.
Major improvements were recorded in power generation on good collection of receivables as well as in building technologies, digital factory and healthcare. Free cash flow outside industrial business was impacted by higher income tax payment.
All in all, I am very pleased that we made substantial progress to achieve a more balanced free cash flow development over the year. After the first half, we improved by almost €1.4 billion over the prior year.
Now let's more to the strategic perspective. We continue to make clear progress in Vision 2020 and I want to illustrate some proof points for you.
With our successful companywide cost reduction program 1.16, we simplified the organization and improved processes. We finished it ahead of time by the end of fiscal 2016.
Its impact was clearly visible in total cost productivity of around €4 billion in fiscal 2016. This equaled around 5% of the total cost base.
But we don't stop with that. In our financial framework, we have set the goal to continuously improve productivity by 3% to 5% very year.
We've moved now to the next level of improving productivity as a rigorous and continuous process across all businesses and functions. After the first half year, we are fully committed to achieve a total cost productivity north of 4% in fiscal 2017.
Further key pillars to drive performance are the fixing of underperforming businesses and sustainable improvement of project execution. Our progress is clearly visible in arising gross profit margin which was up 120 basis points to 31.8% for the first six months year-on-year.
We are also on track to meet our expectations regarding improving performance in our underperforming businesses. Strong operational performance was again visible in the quarter without net charges from project execution, a habit which we want to sustain.
Project business excellent has improved in many ways. We are more selective in the bidding phase.
More than 60 major bid projects have gone through or are in our comprehensive risk assessment process. We made significant process to identify and mitigate risk from areas such as first of its kind technology applications or stringent partner management.
A key leader is that we substantially expanded our community of experience project management and subject matter expert to around 100, the silver bags as we call them. Intensified collaboration across all project businesses is an excellent example for what we want to drive in all key processes such as sales, development or production.
We call this the Siemens operating model which drives the fundamental change towards a more adaptive fast learning and innovative culture. Finally, I want to give you a brief deep dive on the progress regarding supply chain optimization initiatives to drive competitiveness.
Purchasing volume currently is around €40 billion. We make good progress to increase the share of global value sourcing further with a clear ambition to growth this rate to around 35% each points in fiscal 2020.
Our push to rollout our state-of-the-art cost and value engineering approach across all divisions is ramping up quickly. We want to achieve cost optimize design solutions in a very early phase, provide cost transparency and unveil savings potentially along the entire supply chain.
Our success is based on strong collaboration between procurement, R&D, engineering and product or project management. They work together in cross functional teams led by already more than 200 CVE experts globally and the use internally what we sell to our customers.
Digital factory's team center product cost management software which is the IT backbone across the organization. As you can see from the examples, applies methodology successfully throughout our whole portfolio, while product as well as our project business are single components as well as for whole systems for external value add as well as for our own manufacturing cost.
For example, we were awarded a larger order in Bolivia to significantly expand the three power plants with 14 SGT 800 turbines. We use the CVE methodology combined with the e-bidding to substantially optimize the cost position for the heat recovery steam generators during the bid process.
As the third key lever of Vision 2020, we have a clear focus to scale up the business just driven by innovation and digitalization. First, I want to highlight here that we strengthen the Siemens software business across all divisions with smaller bolt-on acquisitions or partnerships.
A few days ago, we announced the small bolt-on acquisition of the highly profitable and well established company HaCon. HaCon generates revenue in the mid-double-digit million range and has around 300 highly specialized and capable employees.
It scheduling and trip planning software will expand our offering towards inter model digital solutions in mobility and opens up new growth opportunities along the customer value chain. More than 100 million passenger trainees are calculated each day.
A few weeks ago, Energy Management announced with SAP that our Meter Data Management solution EnergyIP will be combined with SAP software suite for utilities and SAP will sell it to its customers. This will significantly broaden the customer base and bring them a high level of intelligence to make data action level in them more and more distributed energy landscape.
Just a few days ago, the world's biggest Industrial Trade Fair closed its store in Hannover. Above and beyond the visits of many prominent political leaders more than 100,000 customers and industry experts visited our booth by far the largest and most crowded on this year.
Industry 4.0 is becoming a reality and Siemens is the front runner for the digital enterprise. Without comprehensive offering, customers can start the digital transformation of their business at any point of their value chain from product design to service.
I just want to briefly touch on a few highlights. We had a number of customer showcases from different industries for our holistic digital enterprise software suite.
It enables our customers to create a digital twin for the products for the production line and even for the entire plan. The ability to simulate everything virtually before implementing, it was our automation portfolio is unique and is creating significant customer volume.
One of our latest examples is a collaboration agreement with Adidas to digitalize their Speedfactory concept. The goal is to develop capabilities for fast, transparent and individualized production towards individual customer need.
In the MindSphere launch at the Hanover Fair we together with our quickly expanding partner ecosystem showed more than 50 real life mind applications. The global rollout of MindSphere is in full swing and we have around 17 million assets and sensors connected to the platform.
We also drive the global community approach with the creation of a digital part manufacturing platform. It will accelerate the adoption of 3D printing for industrial use.
For example, by linking part buyers to micro factories, the platform would enable members to 3D print production parts on demand where needed across the world. All these efforts will help us to strengthen and expand our leading position in digitalization to faster further growth.
As indicated earlier, I want to give you now an update on our guidance for Fiscal 2017. We confirmed our expectations for fiscal 2017 presented with our results for Q1 Fiscal 2017.
We continued to expect modest growth in revenue, net of effects from currency translation and portfolio transactions and anticipate that orders will exceed revenue for a book-to-bill ratio above one. We expect the profit margin of our industrial business in the range of 11% to 12% and basic EPS from net income in the range of 7.20 to 7.70.
But this outlook now includes portfolio changes already closed by the middle of Fiscal 2017, particularly the acquisition of Mentor Graphics and the Gamesa merger which I expected to burden industrial business profit margin and basic EPS from net income fiscal year 2017. We expect the combined negative impact of both portfolio transactions to be in the area of 30 to 50 basis points for industrial business profit margin will also have a negative effect of approximately €0.40 to €0.60 on basic earnings per share from net income.
Please understand that we cannot give you more details today as the two deals have just closed recently. The teams are diligently working on the integration topic.
Furthermore, Gamesa scheduled its earnings release for May 10th. Therefore, we cannot give any disclosure regarding Gamesa financials before Gamesa has published its results.
Mentor's healthy operational margin will be held back by integration cost and negative effects from a deferred revenue haircut which is typical for software acquisitions. In addition, I want to point out again the PPA effect of around €300 million for both transactions for the second half of fiscal 2017.
Finally, this outlook continues to exclude charges related to legal and regulatory measures as well as potential burdens associated with pending portfolio matters. With that, I'm happy to take your questions and return the mike to Sabine.
Sabine Reichel
Thank you, Ralf. Operator, let's start now with Q&A.
Operator
Thank you, ladies and gentlemen. We will start today's question-and-answer session.
[Operator Instructions] Our first question comes from Andreas Willi of JPMorgan. Please go ahead.
Andreas Willi
Good morning, Ralf. Good morning Sabine.
I have two questions please, the first one on power generation, if you could comment a bit more there on the market dynamics, GE keeps booking material gains in the profits which don't really drop through to the bottom line so that indicates that that it's reinvested into price, maybe you could comment a bit what you see there also in the aftermarket and spares market and also confirm that the kind of 11% margin in that business is not benefiting currently from service agreement revaluations and gains? And the second question, on the wind business, just to clarify the 10% margin you shown for the quarter, that's still on a Siemens accounting in that sense, prior to the standalone adjustment benefit that we will see and prior to a changing and capitalization of R&D and also where will the 121 million standalone adjustment reappear within Siemens if that's taken out of the wind business going forward?
Thank you.
Ralf Thomas
Well, thank you, Andreas for these questions. Let me start wind power.
Yes, there is no impacts yet in the second quarter from the standalone adjustment of 121 million in that what you call Siemens accounting. And you will see of course the benefit from that now in the merge company which we will fully consolidate starting with the third quarter.
With regards to the potential residuals from those standalone savings in our own area in the remaining area of Siemens of course, we have been very intensively working on that. And in each and every space where we do see opportunities to further streamline and adjust capacities for support functions and activities in that area.
We have been starting to implement it already and we will continue doing so over the course of the fiscal year. So with that, I believe wind power and with the - also really strong final quarter, if you will before merging has been reaching a strong value proposition in which - with which it is entering now into a really exciting business environment from just imagine75 gigawatts of installed base.
This is not only providing the Siemens Gamesa renewable energy business with plenty of business opportunities, also in the aftermarket and service environment to come, but it's also allowing Siemens to tattoo on customers which we didn't have access to in the past. So, with regards to the question around PG, I mean the aftermarket obviously is a target for many market participants and we of course are carefully looking into that, can't obviously comment on that what other competitors do.
But we did not benefit from any major revaluation of service contracts in the market so far. We are carefully watching of course what others do and we also see an increasing intensity of competition in markets that used to be serviced always by the former OEMs.
So no revile from our perspective and the 11% margin it's also kind of supported by a very stable and highly profitable service business. As you do know between the lines, I could reach the question whether or not is potential impact from changing accounting guidelines in the area of IFRS 15 and I can confirm there was no impact driven in this figures.
Andreas Willi
Thank you very much.
Ralf Thomas
Thank you, Andreas.
Operator
We will take our next question from Mark Troman of Bank of America Merrill Lynch. Please go ahead your line is open.
Mark Troman
Yes, thank you very much, good morning, Ralf and Sabine. Ralf just a quick clarification on the guidance, I mean implicitly, I guess we should read this as XD integration and PPI as a guidance raise, I suppose of 30 basis points to 50 basis points on the profit margin as you as you hint on the call, what is the driver of that raise, is that short cycle outlook, is that the better all the developments is out of sort of top line driven driver for that guidance raise or is it more on the cost side, I guess with the question number one.
And question number two, the pace of the gross margin improvement looks to be accelerating at least in Q1, I think it was 190 basis points or so versus 100 basis points for the full year last year, what is the main driver of that Ralf, is that supply chain mix better volume or is it fixed cost reduction maybe a few clues as to the drivers of that gross margin improvement how that can evolve? Thank you.
Ralf Thomas
Thank you, Mark. It's really relevant question, I believe.
So let me start with the gross margin improvement, I mean what we have been sharing with you also for quite some time, is that already three years back we have been starting to increase our investments in R&D on the one hand side, but also in feet on the street and we have been literally shifting the footprint closer to those markets where we see sustainable growth opportunities, which are profitable by the way obviously. So from that perspective we now also see the first sign of that is really kicking in from a bottom line prospective.
So we are quite happy also that's why I indicated that also in my speech that productivity after that strong development in the last year, which has been benefiting from one by 2016 obviously does not go down substantially and we clearly will be in the area of the above 4% across the board, I mean what changed there, we have been discussing that in the past while in prior years. So in last decade we more have been focusing on the factory environment when we have been talking about productivity, we have been expanding our view even into corporate governance processes and so the full cost base is covered with that and what's happening now in the third year of that after the initiative had been launched as we see momentum kicking in that the different owners of the cost base are driving productivity by themselves instead of waiting for corporate initiatives and that is making things not only sustainable, but it's getting them into a continuous improvement mode.
On the other hand, of course, I mean the margin improvement is also benefiting from the fact that we have an opportunity now to expand our short cycle business, I mean that the margin conversion is substantially in that environment will come to that also in a second when we talk about the guidance in the second half of the year. And last but not least, I mean the fact that gross margin improvement are all over the place literally each and every division is participating in that shows that there has been momentum created and I personally believe this is also the outcome of that what we call ownership initiatives, because what we see is people really taking care and action, and don't wait for central or hierarchical instructions to get things going and that has been unleashing momentum on a broad basis, which is not to be underestimated.
And the second and the third pillar of the success of grooming the gross margin of course, is that we have been making substantial progress in the area of underperforming businesses. I mean there's still a long way to go to get them on those levels where we need to see them in the mid and long term, but you should also of course, you do not underestimate the impact of that continuous improvement, so that all pointing to the same direction.
And last but not least my favorite six order in a row without net charges, which is also which used to burden historical gross margin substantially on a broad basis. So these are - it's not to the key driver and root cause, it's really a set of initiatives that we have been seeding for quite some time, and that is now making the improvement also sustainable.
So from the perspective of the short cycle business, I think you also have been carefully watching the marketplace last week already when other players have been indicating that there is momentum obviously in the marketplace, and we are really impressed about the growth rates particularly when it comes to the digital factory 29% revenue growth in China, and also remarkable double digit 10% in the U.S. 11% in Germany and 14% in Italy, which is important, because I mean Italy you do know the machine building environment this is also an indicator for potential export business from there, and also for the packaging industry this is a heavyweight in that area all that indicates that now for the next two quarters, we feel quite comfortable with the visibility we have in that area.
And that also has been driving our considerations when we have been abandoning the disclaim under guidance for the outlook that originally had been saying that we are not sure about the second half of fiscal 2017 when we gave the original guidance back in November and we maintained that from today's perspective, I think the third quarter is well on its way. Nevertheless I also mentioned that there were more working days in the second quarter compared to the prior year second quarter that matter in that environment of course, and it's also a matter of fact that prior year second quarter in China was not really strong, so it was bigger easy comps.
So I would expect the effect and the magnitude moderating in the third and fourth quarter, but we are quite confident that momentum is keeping up there, where does it come from normally running you through the different verticals, I mean you have been hearing me saying that automotive to high levels we don't expect incremental additional momentum from that industry, but it's still holding strong for quite some time now, and the machine builders coming back is a very important segment of the market for us of course, so therefore we are - we have been in that position to also remove that concern from our considerations in formulating the guidance and that's why we now are in a position to allow ourselves the negative impacts from the integration of mentor and that results from business combination with some ease up being reflected already in the guidance, which we nominally have been keeping at the same level. Talking via that point and what has been changing in terms of expectation, short cycle costs are top line improvement with new orders, just to get that into the sequence of priorities may be first and foremost, I mean before we have been closing these two deals we were pretty much depending on generally available information, and you don't like to put your opinion on things that are not current maybe and also are not really comprehensive from the view of the future owner or the maturity shareholder of that business Gamesa.
But now having closed them we had a first you on that and we feel quite comfortable now with the impact for the second half of the year and these €300 million additional PPA they may sound a bit high, but if you consider that I mean typically in these three areas, I mean you have backlog technology and customer relations more or less and in that particular case, we see about two third of the effect in the backlog area, which is amortizing in a relatively short period of time of say up to two years or something, while the other assets you typically get on your balance sheet would by the amortize over 10 years plus. So therefore that front loading if you will is driven by this structure of the industry specifics in particular of the Gamesa merger.
Mark Troman
Thank you, Ralf, very clear.
Ralf Thomas
Very welcome.
Operator
We will take our next question from Ben Uglow of Morgan Stanly. Please go ahead.
Your line is open.
Ben Uglow
Morning Ralf and morning Sabine, thank you for taking the questions. I had two, the first was Ralf, could you - can you give us just a bit more clarification on digital factory and the sort of short cycle operating leverage.
If I look at the first quarter and strip out the one-off gain, you operating at about 19.6% and now we're down at around 17.8%. You mentioned in your opening comments that they were effects from the P&L business.
Can you sort of elaborate on that? Is that a sort of one-off effect, is it integration costs and if these sort of margin effect going to be ongoing over the remainder of the year?
So was question number one. Question number two, I noticed from the press call that the language around Healthineers isquite careful.
I think you mentioned that there were three options, one was merging Healthineers with another company and also I think you made the comment that in IPO is not the same as the listing? Can you - I realize you can't give us any specifics here, but can you tell us just strategically how you are thinking about that business.
And obviously, we've been hearing about paradigm shifts for long time, when do you think that this review process might actually be over? Is that something that could occur in the current financial year i.e.
the review process being completed? Thank you.
Ralf Thomas
Thank you, Ben for these questions. And let me start with the digital factory and comparing the underlying as you did that already.
I mean the first quarter has been very much benefiting from the one-off the sale, the step up of our assets has been brought together in point of that and their underlying comparable with that regard is around 19%. My math is a bit lower than yours, just to let you know in that regard.
So assuming 19% margin for the first quarter, you should look upon the performance in the second quarter as following on the one hand sides and we have been indicating that before we are intensively beefing up ourselves in terms of rolling out Mindsphere and investing into apps in that field. I don't know whether you had an opportunities just to be 100% care of - it's really I believe and hope it's also it's impressive for you guys how far we are in that area compared to the competition.
I mean we have tangible cases out there where we can really show the customer value and those 50 use cases that have been demonstrated across all industries is actually what we are investing in. So we are getting closer to end customer market segments and that is defect to an investment that I would match and I would suggest you take into your modeling with an effect of around 100 basis points on margin for the second quarter, maybe even a bit above.
Then on the other hand, I think when it comes to the transaction cost, I mean this was –of Mentor Graphics, this was only the first step, obviously I mean the closing was on March 30. And so it's also an impact of say about 50 basis points.
I mean if you take those two together, you see that we are pretty much on par with the first quarter and in a sequential order, you also have in the back of your mind of course that Q2 typically is not a strongest quarter of that business. We of course to keep on investing in R&D and also in sales force would be just naive to imagine that we will not now use that opportunity of gaining momentum in the marketplace, to also address our sales force into those markets where we see the biggest momentum.
And I have been pointing them out for you explicitly before. So from that perspective, I believe that the digital factory is very well on track and consistently developing the case around our digitalization and around PL.
So there is investment needed. And the second part of your question was around how is that going to develop in the second half of the fiscal year.
When it comes to the transaction cost, we will keep you updated i.e. will - and the integration costs, I mean we are of course are very much into it already and we try to push for quick integration.
So that better we get momentum into that one and the better we make progress in that area. The more the impact will be in the short term of course.
So it's rather positive I believe when we keep you of course posted in that area. With regards to the ramping up of investing in MindSphere and the rollout and the apps, I would rather see an increasing momentum for the second half of the year.
So I would for the modeling on your end rather see that between 100 and 200 basis points for the next two, three quarters to come and then we'll see. Around the Healthineers and the three options, I was almost care you guys will be bored because that question being raised I think 10 or 12 times in the press call.
What I said is I mean there are three, there is a difference in German language between that what you would call it - what we would call an IPO and having a listed company. The way to get them, they have various options and we are of course looking into that and some of these options may also not be under our own full control.
So from that perspective, selecting the best opportunity also requires the best timing if you will. And from that timing onwards, as soon as we have been finally determined meaning the best opportunity for us and for the business for the way forward, we have a very, very clear and precise understanding of the potential scheduling.
So we are not in a hurry. We do see opportunities for us of course to find the best solution and we will not trait timing for giving up opportunities that would be anyway disappointing for all of us and for you too.
So thinking about the business itself and how it is developing into that you framework, I think they are intensively focusing on gearing up for new opportunities in that race for relevance as we have been describing that already. So we are continuing our investment in R&D and also in sales force at the relevant places, our growth momentum is generated.
And from that perspective, I would say they are on a very, very good trajectory to meet the expectations that we have in them under the company in the company framework.
Ben Uglow
And the actual review itself is something that could be finalized, okay, even if you don't enter into a transaction or enter into an IPO, the actual review process itself should be completed fairly soon, is that fair?
Ralf Thomas
Hey, Ben, the nature of some of these options require certain input and that input if that was not in our hands only it would be naive to describe potential options in that field. So everything that we can contribution is well advanced and on a maturity level that we can swiftly execute on all the options we are pursuing.
Ben Uglow
Thank you very much for the answers.
Ralf Thomas
You're welcome, Ben.
Operator
We will take our next question from Simon Toennessen of Berenberg. Please go ahead.
Your line is open.
Simon Toennessen
Yes. Thanks very much.
Good morning, Ralf and Sabine. My first question on digital factory, I mean it looks pretty clear that you're taking share in the business and your leverage obviously on the growth, but could you talk a bit more about how software grew relative to the rest of the business, obviously quite a few of your competitors don't have as big of a software business as you have in that area.
So for us to compare that better how maybe also that the other bid of that, I think you would be interesting to see and whether you could elaborate a bit more on that? And secondly, in terms of the integration costs and what you guided for Mentor and Gamesa in the second half, how should we view this also in relation to fiscal 2018?
And I know you're not going to comment much on 2018 yet, but is it fair to say that you're taking kind of the lion share of the hit now in the second half and we should see then potentially depending on cyclicality obviously a clear sort of financial improvement in 2018? Thanks a lot.
Ralf Thomas
Thank you, Simon. Let me start with the question around the integration costs and what we've foresee from today's perspective.
I mean it's obvious the quicker, the better because, it's not only about the cost, it's also by the progress, but about the progress you make and what we learn from prior integration processes and we are fairly familiar with that after the string of acquisitions we made in the software arena, the quicker you are aligning the sales forces giving them, it's giving each other access to the existing customer base. The quicker the team building in terms of understanding what the other part of the former portfolio or future portfolio can contribute the more momentum you generate.
And since we are the only player having now that comprehensive offering in software, this is the opportunity for us to speed up and also take additional share in the markets because I mean that the comprehensiveness of the offering is a quality per se. And again, I would like to point out, our offerings that we have demonstrating at the Hannover Fair, I mean no one else is at that tangible point as we are.
So every month that we can accelerate the integration, every month will be to the benefit of the business case and that will be sustainable because once you occupy the space of the customer in software, you typically stay there, which takes me to the first part of your question about what role this - the PL business, the software - industrial software play in the growth momentum. I mean what we say was a bit biased in the second quarter.
I mean on the one hand side, we have been very, very pleased with the fact that we have been outgrowing competition clearly when it comes to license business and that's the relevant part now because license at the end of the day is the sticky part of the business. We hitch low double-digit growth rates with a strong focus and momentum in China and also in Germany, so that is quite promising because as I said if there is momentum generated in the automation market, that's also when you need to be ready to invest in the software backbone, so this is a unique opportunity and timing in that regard.
So the software, the license piece in software growing double-digit is very, very promising. I believe and you also heard competitors reporting about clear single-digit figures in that environment.
So we are quite convinced. We are gaining round and gaining share in that environment.
On the other hand, we will carefully look into the solution piece of the business because whenever installations are taking, typically you also have partners that are participating in that one. And there the growth momentum wasn't on the same levels and that's why we will need to review the split of our share in that piece and that what we are going to cover with partnering.
Simon Toennessen
Prefect. Thanks a lot.
Operator
We will take our next question from Martin Wilkie of Citi. Please go ahead.
Your line is open.
Martin Wilkie
Thank you. Good morning.
It's Martin from Citi. Two questions in different areas.
First one is on Mentor Graphics, when you bought the company, it was doing roughly 20% margin on its definition and you said you could stay around that and obviously you are going to have integration cost, some differed revenues and so forth. But obviously your definition of margins is a bit different than Mentor, they excluded XE compensation things like that.
Not only your only business, I wonder if you could let me know a bit more about the underling margin level of a Siemens definition at Mentor, so we can how it looks once we get beyond these integration costs? And the second and related on orders in healthcare, it looks from your text that diagnostic imaging is better suggesting that the lab business was potentially flat year about, you mentioned Teleca launched from an FDA perspective in March, does that mean there is an ear pocket in orders there and that should start picking up over the next couple of quarters?
Thank you.
Ralf Thomas
Thank you, Martin. Well, let me start with healthcare part of your questions.
First of all you are right, I mean we have been gaining momentum on the top line and the imaging piece of the portfolio has been driving that. It's also right that we said that Teleca now getting final FDA approval has been meeting a very important milestone for the commercial rollout and commercial use of the instrument on a broader basis.
I also had been mentioning in the past a couple of times that the instruments before that really has material impact for our diagnostic imaging part. Yeah, on a broader basis that will take a while, so we talked about so called feeding period and before that is filtering through to bottom line, you should easily a year or maybe even 15 to 18 months in between the start of commercial deliveries in the marketplace and that when we really see material penetration of the marketplace that is then also shaped by that new instrument and then the reagent business is kicking in as we do know.
From that perspective, yes, we have been investing intensively. We have been reaching a very important milestone now the Teleca, but we - as you also not be naïve and be a bit more patient before we see the full impact in that area.
On the other hand, I would like to draw your attention also to the extremely strong growth momentum we had in the first half of the prior business year. And if you look back into the growth rates of the Healthineers, new orders in the first quarter last fiscal year that was 8% on a comparable basis.
And for the first half of the year something in some areas also for - with regard to revenues. Yeah, so that were really tough comps, so therefore we have not been surprised with the top line development.
But what we do see and we appreciate that is that growth momentum has been kicking in particularly in China again and that's very important markets because there are the install base is growth substantially while raw material markets already have large install based that is making things sometimes a bit more difficult. You also have been elaborating on what - does the Mentor Graphics pro form 20%.
I mean roughly, I mean what we will of course keep you updated with this when we have been fully integrating them also into our systems and like. Bear in mind closing at March 30 means more or less that you have to balance that assets on your balance sheet but not real impact from P&L and therefore also deep understanding in revenue recognition and what that finally means that will keep us busy for the next quarter.
And we will come back with more details throughout the course of next year.
Martin Wilkie
Okay, thank you very much.
Operator
We will take our next question from Alasdair Leslie of Societe Generale. Please go ahead.
You line is open.
Alasdair Leslie
Hi, good morning. Couple of question.
Firstly just on Digital Factory, you called out automotive strength again. I think U.S.
automation competitor commence that the areas they actually had the highest visibility on with still automotives. I was wondering given some concerns about the production cycle and yet that ongoing transition to hybrid, just wondering the kind of confidence you have around investments in autos over the next say six to 12 months, do you see that momentum as sustainable?
And just a follow-up question, can you clarify the contribution to group margins in Q2 from the improvement on the performing business, I think you said that was 20 bps in Q1? Thank you.
Ralf Thomas
Thank you for those questions. With regards to the impact of automotive sector, to automation business for the next six to 12 months, I mean as I said before we have been seeing quite some momentum for quite some time now.
Therefore we drive the conservative with expecting even more momentum but we also do not have any reason to believe that at any time - any point in time throughout the next say three to six months that there will be disruptive development in that marketplace. I mean in the long term, so 12 months, longer end of the corroder you have been describing, it's hard to tell, because it's also a question of how much momentum are going to be generated in certain markets like China.
And therefore visibility for the next six months would be rather positive not meaning that this is necessarily then a juncture to which dynamics would decrease but it would not be the right thing to make statements beyond that point in time of our own visibility in that area. And what is impressive is the auto cycle is keeping up for quite some time now and therefore we are carefully watching that.
And can you please repeat the second part of your question?
Alasdair Leslie
Yeah, it's just on the performing businesses improvement, so step up in margins I think…
Ralf Thomas
But you said something about Q1, I didn't understand that.
Alasdair Leslie
Yeah, I think you said in Q1, it was a 20 basis point contribution to the group margins from the improvement in the underperforming business, just wondering if you could comment on that for Q2?
Ralf Thomas
Yeah, I mean we have been again having momentum from that area and in terms of quantifying that, it was pretty much around that Q1 levels.
Alasdair Leslie
Okay. Great.
Thank you.
Ralf Thomas
For us it is important to, do you mind if I elaborate on that one for a second. For us it is important that this improvement is sustainable.
And therefore we just wanted to give you milestones if you will where we are because that has been frequently asked question, that's why we said we entered into the year in which that is going to count in terms of achieving the 6% for 85% of the portfolio that is relevant in that area. And therefore, the momentum is on the same level but there is still quite some way to go in the second half of the year.
Alasdair Leslie
Got it. Thank you.
Ralf Thomas
Thank you.
Operator
We will take our next question from James Moore of Redburn. Please go ahead.
Your line is open.
James Moore
Thanks. Good morning, everyone, and thank you for taking my questions.
I got three. I wonder if I could start with the power and gas business.
You talk about the tough energy trends globally declining unit price pressure and previously you talked about the shift to decentralized power. Can you perhaps elaborate a little on your strategy either organically or inorganically but you believe Dresser Rand access the decentralized well sufficiently or whether you need to add new technologies or different power rangers to address it?
The other two are more straightforward. Could use a little about the FX impact in margin in the second quarter and the second half at current rates?
And I just want to be clear when you talk about 100 to 200 bps for Digital Factory for MindSphere and investing in the apps in the coming quarter. Is that to say that the PLM unit bears all of that so that saying 400 to 800 bps of margin have probably investing and is that totally clean of Mentor?
Thanks.
Ralf Thomas
Let me start with the second part - with the second question you have been raising, exchange rate didn't play any major role in the second quarter, it was 10 basis points that we have been benefiting from that. And I would expect I mean I mean all others equal that the rest of the 50 year is not affected on a higher level when it comes to bottom line.
We have been discussing quite frequently the hedging regime we have in place for our product business and from that perspective the next two quarters we are sitting on a fairly balanced hedging pattern that allows us to anticipate that. As I said all others equal what we see from the current exchange rates.
There shouldn't be more than these 10 basis points of impact for the rest of the fiscal year either. Talking Digital Factory and the quantification of the impact here, there are two things that we really need to keep apart.
I mean one of that, being that we have with Mentor and like integration affect that of course are hitting and are directly booked at the PL business itself. Then PL being at one of the centerpieces of digitalization, they too have their own efforts and on cost related to ramping up MindSphere and getting the apps on a broad basis and rolling them out and the like.
But we have a really comprehensive offering across the board of our portfolio in terms of digitalization. So therefore, all the divisions will of course be impacted by their individual and specific efforts when it comes to addressing their specific markets and their specific customers.
So in a black or white mode, you would say I mean the generic work that is kind of sharing things across the whole company that's mainly done in the Digital Factory environment at the moment. While the specific, market specific applications and how to address that in the market including sales and all the related R&D activities that will be done by those relevance entities - relevant divisions by themselves.
So at the moment, we see a strong focus in the Digital Factory that was what was I tried to address for the second half of the year and we will keep you posted. This is a substantial investment in the company's future of course.
And as I said before, I think in terms of timing, we are perfectly positioned at the moment to now really push the pedal and get the best out of that advanced positioning we have at the moment. Talking PG, yes, it's a tough place to be in at the moment.
And also when it comes to pricing pressure, this is maybe even a bit higher than we saw that last year in the area of 4% to 5% that's what we discussed the other day. And as a shift to a de-central, I mean on the one hand side of course with our H-Class we are still one of the leading providers and we do also have a very, very strong offering with regards to distribution.
What can be accomplished I think was impressively shown in the Egypt mega orders and the fact that we have been executing within 18 months from scratch literally Greenfield, it wasn't even green to be honest to an operating access to the grid that was even 10% higher than originally planned for in January. I think that's quite impressive and that is making us confident that we are able to compete in a very tough market because we can deliver and we have a strong showing in the marketplace.
The expectations for the large turbines that have been kind of indicated by some of our competitors in the past, we don't see that at the moment, but we also do have a strong offering with regards to those turbines then rather in the area of 20 to 60 megawatts and that is one of those areas that is addressed with the de-central power generation approach. And from what we know from market share we have been able to win in that area.
This is really impressive. We're talking around 45% from that what we know for the second quarter and that is something I would rather see being an opportunity for the way forward.
Still also there a very tight market place with over capacities and the fact that the oil and gas industries are still at a point where they haven't been coming back to old strength. So it's a place to carefully watch.
But we see ourselves being very well prepared for the de-central approached and that's why we have been investing in the Dresser activities and also in the aero derivative business from Rolls-Royce.
James Moore
That's a very helpful, very clear. Thanks, Ralf.
Ralf Thomas
Thank you, James.
Operator
We will take our next question from James Stettler of Barclays. Please go ahead.
Your line is open.
James Stettler
Thank you. Good morning, all.
Two questions for me, just excluding power and gas, can you talk a bit about the pricing trends you're seeing and how the interplay with raw material inflation? And then secondly more longer term, if you look across the portfolio, you've obviously done a very good job in improving profitability.
Where do you see the gaps, where do you think you're still under earning, where is the big upside if you look across the divisions? Thank you.
Ralf Thomas
Yeah. Thank you, James.
Let me start with the second question you have been raising. I mean it's obvious with eight out of nine divisions being in or even above the target margin range, we feel that we are not only on the right track but also have been making a lot of pace in to the right direction in that field.
The contributions to where that success is coming from manifold I have been also indicating that before. In a nutshell did our homework.
Yeah, we have been taking cost out. We are continuously looking at high levels of productivity.
We have been eliminating the project charges and we are happy that we could report the six quarter in a row without net impact from that area. And we are addressing the underperforming businesses as I said before or as we said before at several stages, we cannot and will not share with you who they are, we have been spelling out some of them.
And therefore you do know that in the former in the energy management, there used to be critical areas in the past, but we have been substantially improving and we said that you also heard us saying that ultrasound is not in a leading role yet. Therefore, there is also an element in that environment.
But talking on the big picture and that was the way you framed it, I think we are at a point in time where we need to make sure that we are really balancing the opportunities between growth momentum long term highly profitable growth momentum and capital efficient investments and that's what we do. So we have a very clear and deep capital allocation in place in all our investment decisions, we're doing that consistently along the strategic rationales of those five strategic imperatives, and we are also very, very strictly prioritizing in terms of where we are locating our funds.
So it's not only about underperforming in the meaning of the original yards to get also is about using opportunities, where we can really use the momentum in the marketplace, and also with the technology and go to markets we have in our hand and the strong brand Siemens, must not be forgotten these are opportunities all over the place and with regard to the typical underperforming businesses as we keep find them, I think for fiscal 2017 we are perfectly on our way there will be two or three of them we are taking a more intensive look at also for the next six months. But in general I would not see any of the divisions being left behind when it comes to catching up.
You also can see that from the figures, I mean the margin improvement was also eight out of nine businesses have been improving their margin, in the second quarter we had a very, very strong margin conversion when it comes to gross margin development in the first half of the year. And as I said before this is more the result of that what we have been seeding years back then a surprise to us.
So the market now allowing obviously to speed up in the short cycle business is also an excellent opportunities to us. So in a nutshell, I wouldn't see that there's a particular division having a weakness or something in that regard.
And as I also described before the process of defining the margin ranges is a continuing process, which we do on a continuous basis, and that's also including the performance of the best in class competitors in the marketplace, so it will evolve overtime and we feel more and more kind of confirmed with the actions we took and started with vision 2020. Now in terms of pricing in the marketplace, I already mentioned that power and gas is definitely one of the toughest places in the market to be also wind power and renewable has been on pretty much the same level.
Pricing power in the meaning of really being in a position to maintain levels or even having potential to upgrade pricing, we see only at the digital factory at the moment all the others - the other divisions I didn't mentioned are between 2% and 3% and quite normal compared to that what we saw in prior years. Raw materials, I mean you mentioned that I mean everything that is related to commodity related businesses on the customer, and of course is still in troubled waters when it comes to pricing because there's plenty of capacity out there, and even if our customers reach then 70%, 80% capacity utilization again that would not immediately trigger an incremental investment from, which we would benefit, so therefore pricing will remain and issue in that field and we are fully aware of that.
James Stettler
Thank you.
Ralf Thomas
You're welcome.
Operator
We will take our next question from Jonathan [indiscernible]. Please go ahead.
Your line is open.
Unidentified Analyst
Hi, good morning, and thanks for taking my questions. First of on Egypt power and gas in particular, as we look out to 2018, when I look at the consensus going in today's print, 2018 people offer revenue pretty much well they've got for 2017, I just wonder obviously this contract has such a big impact positively over the last 12 months or so on revenue.
How realistic it is that we can deliver revenue number somewhere around the 2017 level and 2018 and how maybe the outlooks address around and Rolls Royce area derivative maybe contribution on the other side to sort of help to offset well lines be declines in Egypt as we move towards the end of FY 2018. And the second question, on building tank, I think we've seen a material acceleration in order intake in the last 12 months, which I guess will start lapping next quarter, just want to understand what's really driven that acceleration, as we look, as we lap those does it comes whether or not we'll start to see a slowdown from here in terms of the rate of order intake acceleration?
Ralf Thomas
Thank you, Jon for these questions. I mean with regard to building technologies, I think you share my view that this business has been developing really tremendously throughout the last three, four years and it was quite difficult asset for some time to be honest, and throughout the last three, four years that has been stabilizing that I only can say support that management team did a great job, what did they do, I mean what they have been doing, they have very consistently focusing on growth markets with a strong footprint for us, and also have been focusing on - and balancing and striking the right balance between product business, service business and solution business in that field, solution business in the past used to be rather and margin drag to be honest, on the other hand in the solution business you learn what your customer base really needs.
So from that perspective it's kind of artwork in each and every market these patterns are different what it takes to really gain market share. So now after two, three years of consistently allocating resources and addressing the right patterns in the meaning I described there seems to be a very steady development now in that business that is showing very consistent growth part also extraordinary element like funding and earning out models for energy efficiency in the U.S.
have been playing a major role. So the key message is each and every market all regions have their particularities in terms of how to address growth momentum, and the managing team is doing that very well, and is also more and more closing the gap to the main competitors in that field.
So they are in a very stable trajectory in terms of growth momentum, you as an observer of the scene have been realizing that the second quarter typically was weak quarter for the BT business in the past, but even now with 8.8% before the impact of that pension curtailment gain this was a very strong one and 10% growth momentum, I wouldn't have seen any other player in the market being on that level. For sure next year with tough comps the picture is of course a different one, but what I would like to express is, we have a lot of confidence in the set up that has been chosen now for a sustainable development that is well balancing these two different pillars of future success and also in BT we do see opportunities to utilization and this is a typical example the digitalization and the opportunities arising from that show that there is a good reason to have things combined under one roof with the strong brands and excellent channels to the markets.
Talking Egypt and the impact for PG obviously there's no doubt, I mean this was an exceptional projects actually three of them hence you don't repeat that not every quarter and also not every year. But the fact that we were able to deliver consistently in such a short period of time, and also be on plan and on budget with those deliveries that has been encouraging us to also address other markets maybe not with that's protector the volumes, but if there is opportunities arising makes pretty sure we are there and we are able to capture those opportunities without putting risk onto our portfolio.
So that is kind of that's been building confidence what we can accomplish if we are really hanging in for it and executing accordingly then in terms of what does that mean and with regard to the portions of revenues, I think last year we have been mentioning that a couple of time was about one third that had been turned when it comes to the product part of those projects, we would see the lines we are now being turned into revenue in fiscal 2017 hence for the product piece in fiscal 2018 and it will be only a very small portion less than a 10% or so. And with that I think it's obvious that we also need to look at how other projects that we have been acquiring are going to fill that gap, but it would be naive to not believe that there will be impact in terms of problem development after that.
Sabine Reichel
Operator we take our last question now.
Operator
We will take our final question from Daniela Costa of Goldman Sachs. Please go ahead.
Your line is open.
Daniela Costa
Thank you very much for taking my question. And I just have one follow-up, can you talk about on the short cycle development in particular like a very strong numbers that you mentioned in China and the U.S.
whether you think this is just sort of the underlying market trends are really getting better the underlying demand or do you see some restocking sectors and impacting this at the moment? Thank you.
Ralf Thomas
Thank you, Daniela, for that question. Of course, we have been looking very intensively in the channel aspects, I mean in particular in China this is playing a major role, and we didn't see any artifacts in that environment means the sell into the channel is pretty much the sell out, so there seems to be nothing getting stuck, which is always at least something to think about in particular for China as year-end when things are happening every now and then.
So artifact in that regard it was market driven and that has been also taking me to the conclusion that we are fairly positive for the next one or two quarters to come in terms of visibility of that what's going to happen them for the U.S., of course the picture is different, but the go to market is also a bit different for us in that regard so not that many question marks around channel policies in that environment. The nature of the short cycle business suggesting of course that each and every region is going to have their own dynamics, so with regard to of the double digit growth rates, I mentioned for China, for the U.S., for Germany and in particular also for Italy with the correlation to packaging industries and machine builders that is a level that I would not expect this to be the same for the second half of the year, but the momentum that has been driving us to that level will certainly be there for the next quarter at least.
Daniela Costa
Thank you.
Sabine Reichel
Thanks a lot to everyone for participating today. As a reminder, I would like to invite you also to join our Siemens Healthineers - Teach-in call on Monday 15th of May.
We have already sent out the invitation and all details can be found on our IR website. As always, the IR team and IR available for any remaining questions today and during the next weeks.
Thank you. Bye, bye.
Operator
That will conclude today's conference call. Thank you for your participation ladies and gentlemen.
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Thank you for your participation ladies and gentlemen.