May 9, 2018
Executives
Sabine Reichel - Head of Investor Relations Ralf Thomas - Chief Financial Officer Lisa Davis - Member of Management Board
Analysts
Ben Uglow - Morgan Stanley Mark Troman - Bank of America Merrill Lynch Andreas Willi - JPMorgan Simon Toennessen - Berenberg Bank Markus Mittermaier - UBS James Stettler - Barclays William Mackie - Kepler Cheuvreux James Moore - Redburn Partners Gael De-Bray - Deutsche Bank
Operator
Good morning, ladies and gentlemen, and welcome to the Siemens’ 2018 Second Quarter Conference Call. As a reminder, this call is being recorded.
Before we begin, I would like to draw your attention to the Safe Harbor statement on Page 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, madam.
Sabine Reichel
Good morning, ladies and gentlemen, and welcome to our Q2 conference call. The earnings release and Q2 presentation were released at 7 AM this morning.
You can find everything on our website. Today our CFO, Ralf Thomas, is here this morning to review the Q2 results together with Lisa Davis, Member of the Managing Board.
Lisa will give you an update about recent development at Power and Gas. After Ralf and Lisa’s presentation, we will have time for Q&A as always.
And with that, we would like to start with Ralf.
Ralf Thomas
Thank you, Sabine. Good morning, everyone, and thank you for joining us for the second quarter results of fiscal 2018.
The economic conditions continued to be robust on a global level. Main risks remain geopolitical tensions and protectionist tendencies.
Against this background, we delivered another strong operational performance across most of our businesses. At the same time, we are setting the course for long-term value creation through launching vertical champions with clear business focus and go-to-market approach.
Our long-term investments in digital leadership across the businesses are clearly paying off from a profitable growth perspective and through excited customer feedback. In addition, our teams constantly improve efficiency and drive productivity across all functions.
Now let me walk you through some highlights of the quarter. We were pleased with a healthy book-to-bill ratio of 1.11 times and a new record backlog of more than €129 billion in the industrial business with a solid gross margin quality.
Comparable orders were slightly lower 1% due to a substantially higher volume from large orders in the energy related businesses one-year-ago. Base orders below €50 million were clearly up 9% on a nominal basis.
Organic revenue was overall flat with growth and most divisions driven by an excellent short cycle performance, offsetting weakness in Power and Gas. Industrial business profit margin was at 11.0% fueled by an outstanding performance at digital factory.
Six out of eight divisions were in or even above the targeted range. Currency effects weight on margin was 30 basis points.
For the second half of the fiscal year we expect an even larger negative impact from exchange rates. Net income came in at €2 billion benefiting from a €900 million gain through transferring Atos shares to the German Siemens Pension-Trust.
This gain reflects a substantial value generation since 2011 when we started our strategic partnership with Atos. Our cooperation yields great mutual benefits and has been expanded just recently.
This share transfer was also a major contribution to reduce the pension under funding to €8.1 billion equaling a funding level of 79% the highest level since fiscal 2012 and well above the average of German DAX companies. We set also a benchmark in ownership culture.
More than 300,000 employees or around 80% of our global team own Siemens shares after paying out the profit sharing pool of €400 million, mostly in the form of three shares to eligible employees. A major milestone was of course also the successful listing of Siemens Healthineers, the fifth largest floating in Germany to date.
Before we dive into the details of the second quarter financials, I would like to emphasize the strength of the Siemens portfolio. After six-month of fiscal 2018, the vast majority of our businesses are delivering excellent results.
Siemens Gamesa has started to execute on its strategic roadmap. At Process Industries and Drives many actions to improve the business are implemented.
Progress is clearly visible, however, there is still some way to go. As we all know, Power and Gas reflecting around 15% of our topline operates in a contracting in very competitive market environment, in particular for the new unit business.
Lisa Davis will give you now a more in-depth perspective on how we address these challenges and what the implications. Lisa, please.
Lisa Davis
Thank you, Ralf, and good morning, ladies and gentlemen. Our second quarter results fully reflect the difficult market situation we are in.
Profit margin reduced to 3.9% on lower revenue, declining market pricing, reduced capacity utilization, and some operational effects in our new unit business. Service once again held up well and is also growing in importance from a business mix perspective with around 55% revenue share in the first half of fiscal 2018.
While we started early with our PG 2020 program to adapt our organization to a declining market, the accelerated market contraction requires further swift action to optimize our footprint and reduce capacity. The team is working hard on a large number of cost-out initiatives for our products and our processes.
In addition, we are simplifying our portfolio in order to focus R&D investment to the most promising areas and to also reduce this spend overall. There is demand in the new market for new offerings such as Power-to-X or our new Topsides 4.0 offshore digital solution, key differentiators are digital design and services across the portfolio to reduce delivery times and enhance customer value.
Looking at three of our main markets, the pattern has been very similar since fiscal 2015. Sharp unit demand declines combined with significant price erosion.
The good news is that we have significantly increased market share over the last four years in both our large gas and small, medium and aeroderivative gas turbines. Looking forward, based on our project funnel for large gas, we expect to see less than 100 turbines being awarded in the industry in fiscal 2018 and there are no signs of mid-term recovery to higher levels.
On the other hand, we expect a bottoming and moderate recovery in the small and medium gas turbine segment as well as in compression. A higher oil price above US$70 is beginning to support investments in upstream and pipelines.
However, customers are very cost sensitive and competition is fierce. As I already mentioned, the measures to drive cost-out are in place.
Let me also give you an update on our Service business. Our installed base is a great asset and our service team is doing an excellent job to make it even more valuable for our customers.
From the current backlog of €31 billion around €25 billion are related to large gas, and we expect to increase the backlog even further. The service relevant fleet continues to grow as our previously sold units reach their first major outages.
This includes our H-class units, for example in the U.S. and Asia as well as our fast growing base of SGT-800 units in Latin America and elsewhere.
We rigorously track our outage activity and utilization to ensure constant visibility. As you can see from the chart, gas turbine utilization so far has been moderately up in 2018 and our balance distribution across the many regions helps to handle any fluctuations.
Our strategy going forward is to continue upgrading our fleet with new technologies and to give our customers a competitive edge regarding an efficiency and performance. A good example is a new self-learning software tool to optimize plant operations which we have introduced at several sites.
This tool allows for analyzing performance data and applying predictive analytics to suggest optimization steps to increase output or efficiency for our customers. I want to reiterate that customer proximity and innovation remain our key success factors.
In the second quarter, we sold six large gas turbines among them are the first two H-class turbines on the China Mainland, which will be part of the most efficient gas-fired power plant in China. We have sold now 88 H-class turbines of which 65 are already in reliable operations.
A key technology for our business is additive manufacturing. We will invest a further €30 million to expand our 3D printing factory in the UK fully equipped with software and automation from our Digital Factory colleagues.
We announce that approximately 6,100 jobs at the division will be cut worldwide. In the U.S.
were 30% of the capacity reductions are planned were already well on track in the implementation phase. In Germany, were around 50% of the capacity reductions are planned, negotiations are ongoing.
As you might have seen yesterday, we agreed to a framework with the employee representatives. This is an important first step.
We expect to conclude negotiations and reach a final agreement in the current fiscal year. As a result, we expect substantial severance charges to be booked toward the end of fiscal 2018.
Our efforts here are not only about right sizing, but also materially changing the set up and responsibilities in the manufacturing and service network. So how do these actions impact our financials?
As indicated, we expect revenue in fiscal 2018 to be significantly lower than that in 2017. We expect the margin, the PG margin, excluding severance to be in the mid to high single-digit area in fiscal 2018 and also in fiscal 2019.
With that, I hand back to Ralf now to further discuss our second quarter performance.
Ralf Thomas
Thank you, Lisa. Now let's have a look at a real bright sport in our portfolio.
Digital Factory delivered an outstanding quarter in short value of combining comprehensive software offerings and leading automation competencies. Strong topline growth in all businesses is clear evidence for further market share gains.
Our automation business performance was excellent and we achieved remarkable revenue growth in major countries. China, up 41% driven by new customers, governmental programs, and restocking effect.
Germany, up 4%, despite less working days. Italy delivered significant 15% growth.
Demand was particularly strong in the machine building industries while automotive saw some moderation. The good news is that we see a positive trend also in the third quarter.
Towards the second half of calendar 2018, we expect growth moderation, future tougher comps in particular in China. We were very pleased that also the PLM software business grew double-digit organically.
This was an excellent achievement also compared to what we saw in the industry. As you know profitability at Digital Factory is impacted by ongoing investment in MindSphere and integration costs for Mentor.
For the second quarter, the impact was around 130 basis points and 40 basis points respectively. And the underlying margin of almost 23% excluding severance was extraordinarily strong.
Process Industries and Drives is making good progress on its restructuring program and achieved clear order growth of 6%. However, we saw diverging end customer trends.
By commodity related end markets, short further stabilization, the demand for mechanical components particular in the wind business remained weak. Profit margin improved by 60 basis points despite significant currency headwinds of 50 basis points.
Just a few days ago, the world's biggest industrial trade fair closed its doors in and over. More than a 100,000 customers and industry experts visited our booth by far the largest and most crowded on the fair.
Let me give you some highlights. Siemens’ is the front runner to shape and drive the digital enterprise.
Even more important industry further there was no longer a concept, it is reality with many industry specific digital solutions. They can be developed in every industry and in companies of all sizes.
We showed examples from a variety of industries such as automotive, aerospace, chemicals, fiber, and many more. In our vibrant MindSphere lounge, you could feel the customer excitement from MindSphere 3.0, more than 140 applications are available are under development and the ecosystem is growing quickly with more than 40 partners meanwhile.
20 MindSphere applications centers worldwide work on industry specific applications and services. Our MindSphere open space challenge to a lot of interest, but external developers and startups were collaborating openly to craft creative approaches for new customers solutions and business models based on MindSphere.
Overall, customer response was excellent with more than 7,400 leads. So our sales teams now have many business opportunities to follow-up.
Another highlight was the showcases around our integrated PLM software solutions to help our customers design ever more complex and smart products with higher quality efficiency and speed. The combine in a unique way design and simulation capabilities to mechanical, electrical, thermal and software domains on a common data backbone called Teamcenter.
The integration of Mentor’s electronic design offering is working very well and customer success stories are continuing to build up. A great example is a reason win at the world's largest supplier of photolithography systems for the semiconductor industry.
Where we integrated our CAD program NX was Mentor’s electrical systems and printed circuit board design solution on the Teamcenter platform. One-year after closing the Mentor deal we see impressive results of the integration.
The cultural fit is excellent with very high retention rates and a hot employee market and synergies are ramping up quickly. We expect to achieve our synergy target of around €100 million two years ahead of plan already by fiscal 2019.
The acceleration is driven by both cost and revenue synergies. Besides the streamlining of administrative tasks the key driver is also the optimization of our R&D roadmaps.
The further strengthen the Mentor offering with targeted bolt-on acquisitions such as Solido [Servacao] and Infolytica to tap growth fields in the attractive EDA market. The PLM software business is a very well and track to achieve its 3.4 billion revenue target in fiscal 2018 on strong profitability despite significant invest ment in MindSphere and software is a service solutions.
Energy management short brought based improvement across its businesses with clear revenue growth and a margin well in the target range. Large orders were lower on tough comps.
We have seen some push outs of HVDC solution projects into fiscal 2019. The building technologies team delivered another excellent operational performance with further margin expansion to 10.9% up 210 basis points from prior years quarter that had benefited from a positive one-time pension effect of 590 basis points.
Revenue growth was broad-based across all regions. The team also had a very successful appearance at the recent light and building fare.
Mobility continued to journey of continuous improvement, margin expansion and building up reputation for stringent execution on a consistent part of 18 quarters at in/or about the margin corridor. The second quarter financials speak for themselves.
Strong topline growth and excellent profitability across all businesses resulting in industry-leading 11.1% profit margin and there's more to come. A few weeks ago we announced the largest order ever for mobility management.
Mobility will digitalize the entire now reach in railway network of 4,200 track kilometers and 375 stations until 2034 including a 25 year service agreement. We will book this €800 million order in the third quarter.
To fill the leading portfolio, which we continuously enhance organically and through bolt-on acquisitions with digital capabilities. A good example is the recently announced Spanish company and found to simulate and optimize traffic flows.
In the case of the integration of HaCon, which offers planning scheduling and information system we even have to prioritize the measures for sale synergies due to huge customer demand. Several high profile projects are reaching important milestones such as the commercial start of the new Eurostar train service from London to Amsterdam with positive customer feedback.
And last, but not least to mention here end of March we took an important step towards the building of the European mobility champion with the signing of the business combination agreement between Siemens and outcome. On March 2016, we successfully lifted Siemens Healthineers for €28 per share resulting in a placement volume of €4.2 billion.
Since then the share price is up 18% a strong performance indicating the value potential of the business. Siemens Healthineers has now the entrepreneurial flexibility to execute on its strategy 2025 and shape the future of healthcare.
And we as an 85% shareholder will also benefit from increased accountability. Solid financial for the second quarter we’re already released last week with 8% order growth and 16.5% margin despite significant FX headwind of 50 basis points.
Siemens Gamesa reported their results last Friday with a strong book-to-bill of 1.36. Nominal revenue was sharply up due to the merger, however, clearly lower on a like-for-like basis.
The Siemens Gamesa team is executing on its lead 2020 program resulting in higher severance charges and integration costs weighing on the profit margin. The recent make study on global market share developments in the wind industry confirmed to compelling industrial logic of the merchant.
Siemens Gamesa took the lead in 2017 with 8.8 gigawatt new installations and 17% market share an increase of 3.3 percentage points. Now let me walk you through below industrial business, but we saw quite some movements.
Siemens financial services again delivered a very strong profit of €189 million in the second quarter driven by equity business. We expect the full-year result in line with prior year.
Centrally managed portfolio activities recognized a substantial gain of €900 million from the previously mentioned transfer of Atos shares. This gain was partly offset by a €154 million impairment related to an equity investment.
For the second half of fiscal 2018, we continue to expect volatility in CMPA with an overall negative impact due to carve out related topics. As in previous years, we expect corporate items to incur significantly higher cost in the second half year in particular on Central Innovation invest.
We expect the fiscal year 2018 at least on the level of prior year. Pension impact has been somewhat higher in the first half year, but we expect full fiscal year 2018 in line with fiscal 2017.
PPA will continue on the first half 2018 run rate, so you can expect around €300 million per quarter. The tax rate of 26% in the second quarter was significantly lower year-over-year.
Effects from the largely tax free gain from the transfer of Atos shares and the release of tax provisions more than offset negative income tax effects related to the carve out of Siemens Healthineers. After six months, the tax rate stands at an exceptionally low 17% also benefiting from the U.S.
tax reform effect in the first quarter. However, we expect for the full-year the tax rate to be within a 24% to 29% range.
In the second half among others material effects from the carve out of the mobility business will negatively impact the tax rate. Finally, I want to point out that net income which is attributable to non-controlling interest will be higher due to the listed Siemens Healthineers stake.
Having said this, we would like to draw your attention to our solid free cash flow which improved by 14% to €1.7 billion after the first half of our fiscal year. All in all, I am pleased that we make further progress to achieve a more balanced free cash flow development over the years.
Following the strong results achieved in the first half of fiscal 2018, we raise our guidance for earnings per share. Our updated outlook is as follows.
We continue to expect geopolitical uncertainties such as trade restrictions that may affect investment sentiment. We raised our outlook for basic EPS from net income to the range of €7.70 to €8, excluding severance charges, up from the range of €7.20 to €7.70.
Furthermore, we confirm our expectation of modest growth in revenue, net of effects from currency translation and portfolio transactions, and continue to anticipate that orders will exceed revenue for a book-to-bill ratio above 1 for the full fiscal year. We continue to expect a profit margin of 11% to 12% for our Industrial Business also excluding severance charges.
This outlook excludes charges related to legal and regulatory matters and potential effects which may follow the introduction of a new strategic program. With that, Lisa and I will be happy to take your questions, and I return the microphone back to Sabine.
Thank you.
Sabine Reichel
Thank you, Ralf. Thank you, Lisa.
Let’s start now with Q&A. First question please.
Operator
Thank you. We will start today’s question-and-answer session.
[Operator Instructions] And our first question comes from Ben Uglow from Morgan Stanley. Please go ahead.
Your line is now open.
Ben Uglow
Good morning. Thank you for taking the question.
I guess this is a question for Ralf. On digital factory you – I mean obviously 23% underlying margin was an eye-opener.
Can you just drilldown into the subdivisions a little bit more of the margin expansion? And how significant was factory automation?
How significant was the PLM business? And also if you can just give us a sense of what's going on in your CNC motion control area?
So that's sort of issue number one. Issue number two, related as well.
You had MindSphere Mentor integration costs of lately 200 bps. Is that going to be the run rate roughly in the second half of the year?
Ralf Thomas
Thank you, Ben, and thank you also for the question around Digital Factory. I mean 23% as I said, that was an extraordinary strong quarter if you take out the MindSphere investment and Mentor integration.
So from that perspective, I think we need to stay calm and also keep our feet on the ground with regard to future development. If you talk about the pillars of success, I mean first of all, the PLM business has been contributing a lot.
We still have some way to go to lead the industry leading margin of one of the competitors we all know very well. But we are on our way to get there with regards to the run rate of integration cost, I think we need to take it quarter-by-quarter, but it's obvious that they have been making very good progress and the fact that they are going to harvest the intended impact by far earlier in terms of synergy.
It's also suggesting that the integration process is such is quicker and therefore less costly. That's my reach.
I can't give you a precise figures yet. But yes, expectations are there that we are not only quicker in synergies, but also quicker and therefore less costly when it comes to the integration cost as such.
Some of them, we also need to see is investment as you know because they will create an sustainable value propositions in the future and we wouldn't sacrifice that for a quick win so to speak. And talking – the sources of success, I mean I indicated that before that factory automation had an excellent quarter and you all know that the margin conversion in that business is fairly high.
In some parts of their portfolio, we are talking 60% plus margin conversion and therefore if you – if the market hit the sweet spot of our portfolio, that can have tremendous impact, but also difficult to predict the mix of the next quarters to come. What we clearly see if I may take you a bit through geographies and our read on the market, the world manufacturing is confirming moderate growth part from that what we hear from the markets despite a high sentiments levels.
We don't expect of course a further acceleration in dynamics for the next couple of months, the traipse tensions that are out there will also have impact. So volatility may be a bit higher than we saw that throughout the last couple of months.
But all-in-all, we assume that the moderate momentum will continue till the end of our fiscal year maybe even a bit longer and when it comes to the relevant industries in our portfolio machinery and electrical perform above the manufacturing average. Machinery also holds rank one now and it is bit dominating the micro development whereas automotive is performing a bit below average, but still holding on fairly strong compared to that what's we expect – what the market has been expecting for quite some time.
So China have been pointing out already a real source of strength, 41% growth rate should something that doesn't repeat itself every quarter obviously. So we expect a bit of moderation they are and we also are going to face tougher comps then for the rest of our fiscal and also all the way forward then.
Manufacturing in the U.S. is also reporting modest growth momentum and we are anticipating a bit of an acceleration of momentum with moderate growth until the end of 2018 there – our fiscal year, and also the improvement in raw material pricing is a key driver in the U.S.
economy obviously and that may support our assumptions. European manufacturing showing acceleration and dynamics with moderate growth as I have been pointing out before and we expect that this development should also persist for the next handful of months, mainly pushed by good momentum in small and mid-sized countries and companies in the southern and middle part of Europe.
In Germany has been confirming its moderate growth cost despite a softening in dynamics compared to the prior months. We expect continued moderate growth for the rest of our fiscal year for that region.
So all-in-all I think fairly broad-based visibility as I said before three maximum six-month and therefore as I said before I expect to get momentum that has been created maybe not on the same scale, but continuing for the third quarter and we'll take it from there then. You also have been asking about our Motion Control business and I think it's fair to say that we also have been seeing good momentum in that business not at the peaks that I have been discussing for factory automation but with the clear trajectory also added this moment I'm will prevail for the next three-month to six-month.
Ben Uglow
That's very helpful. Thank you very much.
I'll pass it on.
Ralf Thomas
Thank you. You’re welcome Ben.
Operator
Your next question comes from Mark Troman from Bank of America Merrill Lynch. Please go ahead.
Your line is now open.
Mark Troman
Yes. Thank you.
Good morning, Ralf, Lisa, and Sabine. Could a few short questions please?
Firstly, on Process Industries and Drives, the all today as you look quite good for a number of quarters. I wonder Ralf if you could give some sort of outlook when we should see stronger sales growth and getting some leverage to get those margins back in the target range.
First question one on Process Industries. Maybe one for Lisa on Power Generation, with all the restructuring measures that even announced.
How much capacity reduction in affect will there be for the large Turbine business that you have or is a better way to think about it about just fixed cost reductions. So I'm trying to get an idea of the impacts of the measures you will taken – you’re taking on your capacities or fixed cost.
And then finally, Ralf was interested in your comments about FX having a bigger impact in your fiscal second half and I can see quite clearly why that would be for the next quarter, but obviously with the dollar strengthening recently, I think the dollar-euro is what, running at 118 from a peak of 124 not so long ago. Why would the impact be still be big in H2 was a timing effect and then you gain something in 2019 or maybe you could explain the FX please.
Thank you.
Ralf Thomas
Thank you, Mark. Let me start right away with the exchange rate issue that you have been raising.
I mean first of all I maybe should be more precise I mean we had 30 basis points of negative impact for the second quarter industrial business is margin and from today's perspective it want be an upgrade but the range may expense to something between 40 and 50 basis points for the full fiscal year. The reason for that's mainly and you touched on that implicitly is that I mean we are closing all our open positions for the next three-month to six-month and therefore we’ve pretty much visibility for the next five months to come now and what we will see as slight increase on the average for the full fiscal year then.
This is in particular driven by the U.S. dollar of course, but also by literally a handful of other major currencies including British pound and also some of the emerging markets that have an impact there.
So all-in-all the third quarter I would expect the typical suspects including in the health and years and also PG and to a certain extent energy management which have been effected most in the second quarter will again be those with a negative impact from exchange rate on there margin development we will make that very transparent again. Once we are there but tendency wise as you said that it should be timing differences if the current exchange rate in particular for the U.S.
dollar will prevail for the quarters to come. When it comes to PG I think it's really excellent question and we have been discussing that back in forth with the management team.
As I said in my little introductory speech I mean we see actually two worlds there I mean the one that typical commodity market customers that have been coming back I mean due to higher commodity pricing. They are probably getting closer and closer to that utilization rate in their business when there's more than OpEx on their spend, so from that angle then new order development has been pretty much based on that one.
On the other hand, we continue seeing a lot of pricing pressure on the mechanical drives environment which is mainly occupied by customers from the wind industry, which as I said before are also just in the consolidation phase. Pricing in the market is getting tougher due to more and more countries shifting their models to auction from feed-in.
So I wouldn't expect any major change in that two world scenario any time soon, but still we’ve got now three quarters in a row with a decent topline in the meaning of new order development, and typically that is turned into revenue with a lack of some six to nine months. So we will see some pick up in the sales growth momentum in the quarters to come.
So the second half of the year should be stronger than the first, but it will not be an outrageous incline in growth momentum, so this is going to be step by step. And bear in mind, I mean the margin of PD had been affected by some 60 basis points of restructuring severance.
And at the same time it's been burdened with 50 basis points of exchange rate impact, so they make good progress and the measures they have been implementing going to face a high degree of implementation now. So I’m quite positive for the continuous development, but as I said will be small steps, and honestly speaking from a CFO perspective small steps sometimes are more valuable than big jumps.
Lisa Davis
I’ll jump in Mark on the PG question. To the question on restructuring and whether we should look at it as percent of capacity reduction or a fixed cost reduction.
We do look at it very much as how we're reducing the cost base of the business. If we were to look at it on a percent of capacity it varies by product line, obviously depending on what's required in the market, so it gets a bit complicated.
But on an overall cost reduction that's really what we focus on with respect to the restructuring we’ve announced. I also wanted to add that it's not just about the restructuring that you've recently seen in the agreement of yesterday, but also we’re obviously continuing to focus on delivering on our productivity gains and reducing our product costs overall to different sourcing mechanisms and such.
We're also not just restructuring our footprint, but also reducing our overhead in support functions in the business. And also looking at how do we better prioritize our R&D spend and reduce it overall by focusing on be more focused on the platforms and products that we support.
So a lot of focus throughout the business on reducing the overall cost base.
Mark Troman
That’s clear. Thank you very much.
Ralf Thomas
Okay. I guess you see that there's literally no lever untouched and that's obviously also what it takes.
Maybe I can add one data point for you. I didn’t particularly touch on when I answered your PD question.
I mean PD also is benefiting from growth momentum in China. Just to give you a bit of gut feeling, there was north of 20% growth in new orders contributing also to the PD new order development in the second quarter.
Mark Troman
Okay. Very interesting.
Thank you very much.
Ralf Thomas
Thanks.
Operator
Thank you. And our next question comes from Andreas Willi from JPMorgan.
Please go ahead. Your line is now open.
Andreas Willi
Yes. Good morning, Ralf.
Now I’ve a follow-up question on Digital Factory and then one on Energy Management and one on Power and Gas. On Digital Factory, you mentioned the strong growth in China.
Some of your competitors or some Asian automation companies have warned about potentially weaker outlook for smartphone tax related spending later this year. Maybe you could elaborate a bit on that?
What's your exposure within your Asian Digital Factory business to kind of the tech supply chain and what are you seeing in these markets? The question on Energy Management, there was a much better margin this quarter after some mixed quarters.
What drove the improvement versus the last quarter? It's been kind of a bit up and down in that division and how sustainable is the 9% margin there now and what do you see as an impacts from raw materials in that division in the coming quarters given kind of some of their exposure to steel you have?
And on power, the question on given your resilience, you commented on in the service business, given the high shares. That service now rates of the total.
It looks like the equipment businesses losing about a [€0.25 billion] this quarter, maybe you could break that down a bit into the underlying performance in some of these project charges that you have mentioned? Thank you.
Ralf Thomas
Before I leave it to Lisa to answer the PG question, let me just make quickly one remark on the new business in Power and Gas. I mean after Lisa's presentation, I mean it's obvious that we have a massive and also sustainable impact from the markets when it comes to the quantities out there.
We said just setting an example that most likely we won't see more than 100 new units large less than per year in the current fiscal, not at all and that maybe this is also kind of new normal. When competition is getting really fierce, sometimes you also have to accept that.
You can only to a certain extent go for margin. You also need to look into utilization of you existing capacities and that may drive you in exceptional cases also to accept certain orders that are getting the economic rational only from the combination of the service contract.
That means that sometimes you deliberately accept an order that maybe even slightly negative, in the beginning when you signed the new equipment order, accepting that you then contributed to an ever more important installed base for a future serviceability. We believe we have real good positioning due to the strong technology and the technology upgrades we provide over the period of time to our fully installed base.
I just wanted to mention that in the beginning, then coming to your question on China, short-cycle. I mean you're absolutely right.
We are watching that very, very carefully. I look into each and every of the market segments and the indications that we get from the tech and electrical components is something that we are kind of tailoring into our own expectations for the short-term, I mean third quarter that will not have a material impact, but one of the reasons why I say that there is not a lot of visibility beyond the three months is coming from that part of the market.
Repeating – not repeating what I said before. I mean China manufacturing shipments.
They continued to expand with clear growth at the moment. Dynamic showing moderation compared to some [2017] for example and the growth momentum will not accelerate a lot further.
That's what I said and this is also driving our big pictures view. We are not that far that we can conclude how much momentum that this indication for slowing down in the tech area is going to unfold into the neighboring market segments, but at the moment, I think it's fair to say machinery is driving the scene and automotive even though with slower momentum still contributing there.
There was a change in the component and the feeding processes, which these electronic industries reflect more or less then the moderation in the second half of the calendar year as I said maybe a bit stronger than originally expected. But again big picture, China we are penetrating the market very well, including also our industrial software business and I said that in the first quarters discussion, it's good to see that now these cross-selling effects that we have been waiting for a more materializing and it's good to have access to that other part of the market.
It was mainly covered by industrial software in the past. The second piece of your question around Energy Management, typically and longtime like you would knows that the first half of the fiscal is fairly slow in that business.
I try to understand that for more than a decade now. I have to respect the fact.
It is that way, but it also was always the case that in particular at the fourth quarter and of the fiscal year was fairly reliable then when it comes to a volume. We see the margin clearly on that level and – from historical experience; the fourth quarter typically was even stronger than the second and the third quarter.
So everything we know from backlog and everything we also know from the momentum generated in the different businesses. They have is quite underpinning that we will continue seeing in energy management on those margin levels maybe even a bit above.
Raw material pricing is going to have an impact you can add only for certain period of time and has a negative impact but not material for the profitability of the division is such.
Lisa Davis
Hi, Andreas. So I’ll make a few comments just on the questions on PG and maybe a comment about the resilience of our service business that you mentioned.
As I mentioned in my - in the speech itself and we have a number of different factors that are contributing to the resilience of the services business. The first is that our fleet is actually growing of the 88 H-Class units that we've sold now 65 are in operation all of those units have long-term service arrangement on them.
So that revenue starts to stabilize our service business even more. Also as you saw on the charts our utilization is increasing overall from what we've seen in the past.
And then we continue to upgrade and add technology to the fleet in order to create value as Ralf said for our customers. So all of these are contributing to what we see as a very positive and stable service business going forward.
On the - what you mentioned around the losses in the new unit side Ralf had already commented a bit on underutilization or excess capacity in our manufacturing business that is contributing related two predominate contributions to that new unit business performance is really the under absorption and a lower price point on the sales that they were making in the marketplace given the pricing pressure.
Andreas Willi
So the contract losses were not a big driver in that sense that you mentioned.
Ralf Thomas
There was a point I tried to make.
Lisa Davis
Yes, not at all.
Andreas Willi
And are they finished or these projects basically near completion or are that something that will continue - will could continue?
Lisa Davis
Well, we have a portfolio of over 30 projects that we're always implementing. So these projects are always ongoing we had on a couple of those projects some over expenditures on cost those projects will wind down soon, but again we have a portfolio of over 30 projects overall is working.
So this is a very robust business.
Ralf Thomas
Yes, it's also worth mentioning that the Egypt projects are very well on track. Next question please.
Lisa Davis
Next question, operator.
Operator
Thank you. Next question from Simon Toennessen from Berenberg.
Please go ahead. Your line is now open.
Simon Toennessen
Yes, good morning, Ralf, Lisa and Sabine. And thanks for taking the questions.
I am starting with a twofold question in PG. And you're guiding for I think mid single-digits to high single-digits on the line margins for the next couple of years including 2018?
Can you share maybe the assumptions with us what how you can get that low and the high end within that. And then one general question on PG I guess the outlook for small and medium term looks a bit better and it might be some upside from the compressor business recovering are you depressed around that.
But if we look beyond the restructuring measures what are your arguments as to why financially you would hold on to this business in the long-term. And then the next question on Vision 2020+ it looks like you're making some good progress on the power restructuring.
So is it fair to say that we could expect an announcement as early as August ITC results with regards to Vision 2020+. And then lastly, Ralf just on CMPA obviously volatility has been quite high to generally and I know you can't guide that well for the business.
But as it stands today and you probably know some of the carve-out related costs related to Alstom. And how would you guide us for the second half with regards to CMPA.
Thank you.
Ralf Thomas
Simon, thank you very much for really broad portfolio of question, so let me start. With Vision 2020+ you have been - the way you have been asking your question has been taking the power restructuring aspect pretty close to 2020+ which is not the case in the way we look upon it I mean we made that very clear when we started to discuss and indicate the magnitude of the need to restructure the footprint and address capacity, excess capacity in the market, and maybe it was just coincidence that at the same time we said that we start thinking about and developing beyond Vision 2020 which we then called this a working title 2020+.
So therefore, let me keep them – the two of them apart, I mean we very much appreciated that we were able to make an important step yesterday, the night before yesterday actually in concluding on a cornerstone paper that is now paving the way to negotiating the details and the locations and the concepts that will finally hopefully take us to a point that we will be able at the end of the current fiscal year to assess the quantity of potential restructuring needs and also book that. In the meanwhile, we have been starting to implement the non-European non-interim in part of the exercise.
I mean about one third is U.S. based, and as Lisa said, this is on a good way and first measures have been implemented.
So when it comes now to the savings that we aspire, I think it's good for us and also good for you to hear that we are on the same track. We just have a different path that will take us to the same amount of savings, when it comes to PT restructuring.
On the other hand with 2020+, we are making good progress and as we develop Vision 2020 which is still a valid and effective strategy in place, obviously also successfully executed on. I believe in the second quarter in which we report now another proof point, but with the exception of PG, the portfolio is very well on its way and be far ahead of the need 2020 is a year would have been suggesting to develop something new, but we want to use that period of time that we now have been saving so to speak and are ahead of the curve to create additional momentum for the new Siemens as we call that.
And I'm very positive that we are going to be in a position to also make announcements once we have been concluding and once we have discussing that with the internal stakeholders, including supervisory board and then we'll share with you. But bear in mind these are two different working streams and they are not dependence, so therefore, we have not been sitting idle in the managing board waiting for the negotiations to think about what the future Siemens may look like.
Apart from that CMPA, yes, I explicitly said volatility will be there also in the second half of the year. I mean we of course have quite some understanding about what's ahead with regards to the carve out of the mobility business to prepare it for the joint operations with Alstom.
There is a part in it that is more tangible single aspects that just -- where you just run them up and there's other aspects where it deserves to a lot of good thoughts to optimize that parties including also taxation. And as I said in November, when we have been guiding you at the way we did that we will at the end of the year and soon as we have final results at fingers tip to share with you also what the pros and the cons are.
So with respect to the second half is that in my presentation that we now have been guiding you for lower tax range, effective tax rates we said in the beginning of the year 27% to 33%, now it's 24% to 29% including the positive of the U.S. tax reform which we quantified also in the first quarter of €437 million positive impact, but it will still be a material amount and as long as they are still uncertain to you there and sometimes you also address and see the receiver of revenues and the tax authorities in some jurisdictions and discuss with them.
As long as I'm not done with that one, I'm asking for your understanding that we are not quantifying things in that area, but the higher tax rate in the second half of the year will be driven by residual uncertainties mainly in the tax area. So I need to ask you for patience there.
Lisa?
Lisa Davis
So let me address your question Simon, on I guess future attractiveness of the PG new unit business and maybe I'll break it down into three distinct areas because there are three distinct markets within the business. The first on small and medium gas turbines, really this business is driven very much by decentralized energy systems and the growth in decentralized energy.
And so we do see this still be in a very attractive business going forward for the use of small and medium gas turbines. They have a natural home in the decentralized energy systems of the future.
If we look at the compression business, really this is a bit of a discussion about oil and gas. And as you've seen in some of the comments, we do see this business starting to find stability and recover and we do see this market very much intact longer-term.
We also see quite an opportunity in the oil and gas business around our ability to bring digitalization into an industry that has not advanced nearly as much as other sectors or other verticals have, so an opportunity that that unique to Siemens to be able to leverage our digital capability with our rotating equipment in that industry, so growth opportunity there as well. And even in the large gas turbine business, even though this has obviously gone through structural change and will be a smaller market going forward.
We do see a need for large gas turbines in the energy systems of the future, if not for anything else, but for security. The ability to bring large volumes of power into the system quickly, and for this reason we do see a large gas turbine market going forward, albeit much smaller than what we've seen in the past and therefore the need for us to really restructure and right size our business to match that market as a future, so all-in-all, still some optimism around all three key areas of the business and the business overall going forward.
Ralf Thomas
Simon, I want to one last part of one answer to last part of your question that is about modeling CMPA, and known our difficult that is and I can't really help you with concrete figures on that one, but if you look into the first half that was obviously very much driven by the extraordinary impact of Alstom and now from Atos. If I look into the second half of the fiscal year, would see a more normal course of business being driven by a carve out related expenses and the like and if you model in, high double-digit negative number for both of the quarters you probably will not be that wrong.
Simon Toennessen
Thank you, Ralf.
Ralf Thomas
Next question, please.
Operator
Next question comes from Markus Mittermaier from UBS. Please go ahead.
Your line is now open.
Markus Mittermaier
Yes. Hi, good morning, everyone.
My calls have stopped a few minutes, I apologies if you had that some of these questions already. I have one on the Digital Factory, one on PGE and one brief one on the framework agreement yesterday.
If I start with Digital Factory please, 23% underlying margin, how should we think about that in terms of your – if I would say bread and butter short-cycle business versus a number that you’ve recently been talking about on cloud and SaaS-based software targets that you have by 2022 $1 billion. Is there any meaningful part of that cloud and SaaS revenue already in the revenue mix today that could explain some of that very strong margin and more long-term, what is the margin ballpark that you are thinking off for that incremental revenue?
I assume most of that $1 billion will be incremental, if not would be interesting to figure out how much of that incremental versus cannibalizing your other license business? And then on Power and Gas, for Lisa, if I look at your backlog and the sort of service relevant fleet growth that you have mentioned in the presentation, to what extent is in the backlog still time and material as the way you charge your clients versus long-term service agreements?
So that's the first major overhaul of timing matter and more for the backlog than for new business? That's question one.
And question two, some of your competitors, I think increasing the servicing about a bit in the long-term service agreements. How comfortable are you there in terms of provisioning going forward that there's no risk if you assume that pricing year-to-date is flat that there's no risk from on the service margins.
And then very briefly on the framework agreement and how would you say the reception of the - the level of agreement in the workers council is on your view and outlook for the Power business.
Ralf Thomas
So Markus, thank you and indeed you missed a bit on the digital factory side. So I hope you forgive me that I'm a bit short and sweet on that one.
We discussed the 23% the main driver of that was twofold. One, Mentor and the PLM business had an outstanding good quarter we're making very good progress with the integration of Mentor means the synergies are ramping up by far quicker than originally expected and we will be they have with 100 million target already by fiscal 2019 instead of 21.
So that is an incremental support of that margin and the other big pillar the 23% underlying based on is growth momentum and high margin conversion mainly in the factory and automation environment. By a fairly big portion driven by China where we have been growing more than 40% in the second quarter and I have been running your colleagues in the audience through a detailed regional analysis board.
We expect to happen in the different geographies and relevant business sectors we are in so if you don't mind take the details of that one from the table later on. But the question about how material is the impact on MindSphere and coal already on the way to that 1 billion incremental that you have been addressing of course it's not material at the moment that we're still in investment mode and as we have been guiding you and that I think really is still both being mentioned time and again I mean we are investing substantially in MindSphere with a yearly investment of around 175 million plus have all the integration efforts form enter being done and still grow margins in a highly competitive environment that definitely has an underlying rationale from our customer's perspective.
That they got the point and that they invest in digitalization also the number of leads we have been creating at the Hanover Fair, 7,400 I mean the figure itself doesn't mean a lot but the level of quality these leads have very specifically asking for challenges in new projects and when we have a very detailed analysis of the 7,400 and typically would have some 10% are relating to a concrete project that the customer interested in and addressing the lead is dealing with. This was more than 20% this turn.
So there's massive momentum being created and we are not only seen as a thought leader and that field but we also can help that up and running applications and I have been elaborating in my speech on that as well. Now when it comes to the framework agreement and I really think this was a big step forward and the way we have been discussing that was open and of course also with different points of view.
But the alignment on the need to act and also the magnitude and the broadness of the actions required that is absolutely shared no one is left behind in La La land and is believing there is an easy way out. Because the root cause of the situation in the market is so obvious.
So therefore there is no room for any misunderstanding but it takes what it takes. For the way forward and also we discussed that in another question before Lisa said and it's just about very carefully ops serving the market and looking for opportunities.
Because there are new business models coming up and there's also plenty of challenges in the footprint and reorganizing that. So for the way forward we spent many hours with the members of the supervisory board and also with the represented tips labor not only in the negotiations.
So there is absolute transparency on what is required to take that business forward.
Lisa Davis
And we just add to that market that the discussion and the framework agreement that he saw yesterday it's really the discussion that led to that was really a discussion about how and not necessarily what. So the understanding of the need in the marketplace, as Ralf said, is fully share and it's just a discussion as to how to get those cost savings in the business that led up to the framework agreement that they saw advertised yesterday.
To your questions on PG and service, maybe I'll start first with the comment about competitors are increasing their service intervals. We also within Siemens are increasing our service intervals as well.
How do we manage that? So it doesn't impact the value of our service business, while we're also bringing new offers to our customers at the time when we do look to increase intervals.
And the new offers are by bringing new technology to our customers to help them improve efficiency or overall capacity or also bringing digitalization and new service capability to them at the time where we are renegotiating potentially on service intervals. So all of this continues to provide stability in our service business going forward.
And then your question about backlog, obviously when we do our service business, it's a combination between long-term service agreements. And what you mentioned is time and materials, what we would call book-to-bill and these are both balanced in our business going forward.
Markus Mittermaier
Great. Thank you very much.
Ralf Thomas
Thank you.
Operator
Thank you. Our next question comes from James Moore from Redburn.
Please go ahead. Your line is now open.
James Moore
Yes. Good morning, everyone.
I wonder if I could focus on power and gas. Firstly, could you comment whether the service margin was stable year-on-year in the first half?
And secondly on that could you say how low the Dresser margin has got? You gave a number of high single-digits two years ago, I just wonder now that we've had the oil play and where always has it bottomed, what's the potential?
Secondly, if I could turn to free cash flow. I think the PG free cash margin was minus 5 in the quarter and 1% in the last 12 months is materially below your P&L margin, do you have any visibility on whether conversion can normalize – free cash flow conversion can normalize in the coming year or will we still see a difference there?
And finally, can you expand a little on your new PG margin outlook particularly on phasing of the savings is? And you say you expect a material impact on the bottom line in the 2020 year, can we think about getting back into the 11% target corridor in the 2020 year?
Ralf Thomas
That was indeed a fitness question on PG as you indicated James. Let me try starting taking you through that a bit.
I mean with regard to the margin level in service, we said yes, we see a fairly stable margin development in services not only in the first half year, but also in the backlog that we see ahead of ourselves and visibility that didn't change. We have been discussing that a couple of times that typically for the next 18 months.
We have quite a good visibility on the deployment of services and resources for that one and also on the quality of the backlog margin if you will. But with regard to Dresser, I mean we said that also a couple of times, I mean when we acquired the assets we have been reporting on the development now being combined with the former Siemens part in what we call a Dresser unit.
There has been substantial challenges in the market development and even though the team has been taking cost out they could not completely decouple from the movements of the markets. Including the service business they are in the low single-digit margin environments and we are very carefully assessing opportunities and take them if they arise, but we are not done there in that market segment.
When it comes to free cash flow, I really like your question, analysis is pretty sharp that's what we have been asking ourselves to a very intensively. And I think we need to keep two or three aspects a bit apart from each other.
The first one being how does PG deal with the declining business volumes. I think that is very, very challenging task for them because on the one hand side, they need to make sure and they do to avoid any inventory obsolescence risk, we are very intensively looking into that matter.
On the other hand, if you need to be ready to deliver quickly if timing is part of the tendering process and your customers prioritizing that. So walking a thin line has been working out very well in each of project I think.
I mean this is going to be delivered on record time schedule and still quality on high levels that I mentioned that before that we don't see any major negative impact compared to the plan we made. We’re absolutely on track there.
And by the same token, we see with the declining new orders also a lack of advanced payments. So this is a different regime system if you will that is establishing itself as new normal in the market and we are carefully watching that.
Operating working capital needs to be reduced. The team knows that and they are busy working on that.
It's also – it will also be effected by the consolidation of heights and the footprint because the more sites you have, the more with you have on the road at the end of the day. And last, but not least, free cash flow will also be effected by payments being made for severance and the like.
So therefore your question, when are we going to see a new normal and when is it going to be in steady state? Then it's not that easy to be answer.
We are tracking all the different components, but the result of that will only be seen once we know the timing of the payments in the severance arena that's pretty much the big picture on that one. And with regards to the margin outlook, before I will ask Lisa to X and if made be the margin outlook I mean we clearly have been setting the current situation very thoroughly with all the aspects that Lisa has been explaining.
We have been guiding you, since the London conference into a mid digital margin. Before severance payments and Lisa mentioned in her presentation that this guidance is also relevant for fiscal 2019, not only for 2018.
If and when, after all the savings of the framework of the measures that are going to be agreed right now, kicking in and materializing 100% whether then in 2020 definitely beyond when they will be fully materializing. We also need to observe where the market goes.
Still then from today's perspective, I don't think we should discuss too much about the wind, but more about how well can we cope with the challenges until the savings are fully materializing because time is of the essence we need to be determined and we also need to consistently implement those measures. And as I said before 2020 I think there is no need to discuss any margin target above mix to a high single-digit.
James Moore
Very helpful, thank you.
Lisa Davis
Thank you. We have a few more questions on the line.
Could you please submit the number of questions to give everyone a chance to ask further questions? So one or two questions each please; so next question?
Operator
Thank you. Our next question comes from William Mackie from Kepler Cheuvreux.
Please go ahead. Your line is now open.
William Mackie
Yes, good morning. Thanks for taking the question.
I will just concentrate on process industries and drives. You have being kind enough to structure the discussion around current and midterm margins in PG.
But could you do the same thing for PD, given that it is currently out of margin target? You have a ongoing restructuring plan; you have some framework agreements in place and shifting in some market dynamics.
But when should we expect PD to start tracking back into its midterm margin corridor? Thank you.
Ralf Thomas
Thank you, William. So first of all, I don't know whether you heard me explaining a bit of the margin quality for the second quarter?
If you adjust for severance and then know that there was a drag of 50 basis points on exchange rates for PD in the second quarter. You end up pretty close to the margin – to the low end of the margin band.
I don't want to overemphasize that, but this is just finding the right basis for the discussion. I mean with the measures being on their way and the additional ones being planned and finally determined now throughout the next couple of weeks and months.
I feel PD all others equal being in a position to reenter the margin corridor latest by 2020. Now as we said before we don't want to discuss and figure in and figure out severance and the like because there's always a base load of measures you need to take your business forward to invest end and end.
So we like to still continuing to target margin corridors as reported including a certain part of severance and restructuring work that needs to be done. And if you then add the fact that this is a late cycle business typically to a large extent with all the artifacts around mechanical drives and wind power that I mentioned before.
So there is quite half year nine months of lead time required between new orders being booked and then turnover being recognized. So that's why I think it will take also some time to finally find ourselves in a new normal and that's why I would like to repeat what I said before.
I prefer consistent and constant steps into the same direction instead of one-time wonders that then leave volatility behind. So have quite a good feeling for PD being on the right trajectory and whether it's a quarter more or less that's not really relevant for the long-term perspective of that business on top of all that the market's if and when it's recovering when it comes to commodity pricing and also the ability to tap on the potential of new technologies including digitalization in that field then we will be perfectly positioned to participate in upswings and I gave the data point before that in China for example were some of the companies our customers they are kind of Quantum Leap one technology level.
If you will we saw tremendous growth opportunities and have been adding more than 20% of growth in PD and China in the last quarter. So there is an opportunities out on top end and bottom end I think it's fair to say that the team is doing a tremendous shop implementing all these measures at the same time being challenged by the markets the way they have been challenged I think they do so respect and appreciation.
William Mackie
Thank you. Quickly could I follow-up on the FX comment you made for the division.
You've highlighted it in a number of divisions? Can you scale the FX impact for the group in Q2 and the expected increase headwind that we might see for Q3?
Ralf Thomas
As I said, we had 30 basis points on industrial businesses margin negative impact from FX in the second quarter. That we see that developing for the full 15-year rather into the area of 40 to 50 basis points negative in total for all exchange rate.
And we have been hedging as we always did for the next six months we have about 85% of our open positions being hedged. So not a big surprise from that perspective and of the divisions that are going to be effected have been for the largest extends in the second quarter the Healthineers.
PD and energy management and this will remain pretty much the same second quarter this was 50 basis points negative for the three entities being mentioned and that will increase in the third and fourth quarter in that direction I described for the full fiscal year for the group.
William Mackie
Thank you very much.
Ralf Thomas
You’re more than welcome William. Next one please.
Operator
Thank you. Next question from the queue is James Stettler from Barclays.
Please go ahead. Your line is now open.
James Stettler
Thank you. Good morning all.
Just looking at your EPS guidance, when you set out the guidance in November what were you including now are three very significant gains. Because clearly the operational performance has been very solid especially in digital factory.
So when you raise the guidance today I mean what's your thought process and what should we think about any future gains in H2. That's my first question.
And then one for Lisa Davis services was 55% of revenues as you mentioned. Where should we see that going forward could this become a business which is much more service driven going forward and as a result of that potentially much more profitable?
Thank you.
Ralf Thomas
So the EPS question is a very relevant one, obviously, and I would like to go back to the November announcement. What we said then is a) we exclude severance and restructuring because we just can't know at that point in time, and b) we also said that due to the fact that there will be substantial impact from carve out activities for both Healthineers and mobility to prepare them for the merge with Alstom, we will have substantial impact in particularly on the tax side, have been elaborating on that a little bit already.
We saw some of that pretty much half of that from a content perspective in the first half of the fiscal year, including the second quarter where our effective tax rate has been benefiting, a) from the low tax rage being applicable for the sale and transfer of Atos share, that is close to tax-free, if I may summarize it. And secondly, we also were in a position to release material tax provisions in the second quarter.
Against that, there was impact from the Siemens Healthineers carve out being completed, but I also mentioned that there is still uncertainties in the final tax assessment because you can imagine magnitude and broad impact in many different jurisdictions and that way doesn't you put into a position that you send out one tax file and that’s it. So there is still a couple of things that are uncertain at the moment.
We are working on them and we are confident that we can conclude them over the course of the next couple of months or maybe quarters, and we are now entering into the final stage of carving out and building a subgroup for our mobility business that will then be brought into the joint activities. The same in principle is applicable there.
So from the tax side and also from other carve out related expenses, we are not done yet, yes, but the assumptions that we made when we discussed with you in November are pretty intact from today's perspective. And as I said then in November, I will share with you a numbers when they are solid and firm, and in that particular part it also takes the third-party, the tax authorities view on that one.
So you need to be a bit patient. I said that before, but the rational now that we will have substantial material impact from the carve outs and that being kind of compensated by extraordinary positives is still intact.
James Stettler
But just following on to that, so I am just underlying, how does that business performed versus your expectations because we knew there were going to be a lease cost, but if you just look at x gains and carve outs how is that looking?
Ralf Thomas
I said as planned, and we will share with you when we are done with it.
Lisa Davis
So let me now address your question on our service business in PG and the fact that it's 55% of revenue now and your question of whether that would go higher in the future. But it really depends very much on the market and where the market goes for new units, whether it be large gas turbines or small and medium.
We are as I mentioned in my comments increasing our market share, so we're gaining market share in both the large gas business as well as the small and medium gas turbine business. So this combination between us gaining market share and then what the overall market is going forward that will depict what that percent revenue is for service.
James Stettler
But based on your outlook that's going to be smaller. One would expect then service to be larger.
Lisa Davis
It depends on what your outlook is on the market going forward, really.
James Stettler
Fair enough. Thank you.
Lisa Davis
Looking at the time we have only one more question please. Last question operator.
Operator
Thank you. The last question comes from Gael De-Bray from Deutsche Bank.
Please go ahead. Your line is now open.
Gael De-Bray
Yes. Thanks very much and good morning everybody.
The first question I have related to the mobility division where the profit contribution was clearly stronger than expected. And it increasingly seems that you will contribute a bigger share of the profits to the combined entity results and the 50% you will get eventually.
So the question is, are you still happy with the current terms and conditions of the merger? So that's question number one.
And then question number two is, I think you mentioned some push-out of HVDC projects to 2019. Could you elaborate on this and say basically what's driving those certain delays in those projects?
Thank you.
Ralf Thomas
Thank you, Gael for two interesting questions, let me start with Energy Management and HVDC. I didn't say further delays.
What I said is that from the perspective that we take as a potential supplier, you have to I mean be ready when the customer is calling for a quote and you enter into a tendering process whenever timelines are set. What you typically see in that business environment that you have a kind of density of large scale project for a certain period of time as we had that in last fiscal years 2017 were substantial large projects have been awarded, not only, but also to us was $1 billion in the second quarter only last fiscal year.
And then you go through kind of dry periods and this is no surprise and it just happens and if you look into history and learn from that, you shouldn't overemphasize the fact that there's sometimes three, four sometimes six quarters with no awards being made in terms of a large scale tendering processes. So this is not concerning.
I just wanted to make sure that this is not misunderstood in the meaning of that we lost out on opportunities. So market didn't provide opportunities and we will stand ready and be available and this is most likely in fiscal 2019 again that's my view on it and push out means that expectations for certain timing for certain projects has been pushed out not delayed in the meaning of that a customer cancels a project at a certain point in time and has been rescheduling that, maybe I was not precise enough on that one, I apologize.
Then with regard to mobility, I think this is first great statement that you made that we had an extra – is it outstanding profitability level, I agree with your assessment. And there was one little tiny thing I need to correct because you said our 50% share, it's 50.7% that will be Siemens to share and trying to activities and that's important to remember and to remind ourselves comment again.
There was a mechanism agreed upon for the valuation assessing then and coming to that 50.7% and that goes pretty much along the lines that Siemens is the more profitable business and Alstom is a bigger. Also in terms of the backlog being brought into the joint activities and then there were a couple other balance sheet items that add to be reflected and that have to be taking into consideration, but the profitability development is a very good one for Siemens mobility and will allow us to enter from a position of strength into these joint activities.
We also very much appreciate that we hear that out some is doing fairly well with their financials and delivering on the project. So it will be a merger of two strong companies in which Siemens is holding the majority.
Gael De-Bray
Thank you, Lisa.
Ralf Thomas
Thanks.
Lisa Davis
Thank you, everyone. End of Q&A
Ralf Thomas
I would like to make a last statement quickly. I know that quite some of you have been taking the time to visit our booth at the Hanover Fair and I also very much appreciated your comments on what you saw and you also should know that we consider that the statements you have been making about how impressive the event was also as an obligation for us to implement and execute.
Thank you.
Lisa Davis
Thank you. So with that statement, I think we can now conclude.
If there are further questions, please reach out to the Investor Relations team. We will be around.
Thank you and good bye.
Operator
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Participants in Germany, please call the replay number +49 692-000-1800, access code 3250549#. Participants in Europe, please call the replay number +44 207-660-0134, access code 3250549#.
And participants from the United States, please call the replay number +1 719-457-0820, access code 3250549#. This replay service will be available until tomorrow night.
A recording of this conference call will also be available on the Investor Relations section of the Siemens website. The website address is www.siemens.com/investorrelations.