Siemens Ag Spons Adr

Good morning, ladies and gentlemen, and welcome to Siemens 2024 Second Quarter Conference Call. As a reminder, the call is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on page two of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions, and are therefore subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mr. Tobias Hadler, Siemens Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to our Q2 conference call. All Q2 documents were released this morning and can be found also on our IR website. I'm here today with our CEO, Roland Busch, and our CFO, Ralph Thomas, who will review the Q2 results. After the presentation, we will have time for Q&A. With that, I hand it over to you, Roland.

Thank you, Tobias, and good morning, everyone. Thank you for joining us. We delivered a solid second quarter performance. This proves our resilience in a still-muted macroeconomic environment. And let's begin with the key takeaways. The robust top line momentum of our business highlights the strong demand from our customers to drive their digital and sustainability transformations. Book2Build reached a strong level of 1.07 with all businesses above one, except for digital industries. Order backlog climbed to another all-time high of 114 billion euros, supporting future profitable growth. Orders at 20.5 billion euros were 12% lower organically, materially influenced by the very tough comparable at mobility due to prior years major locomotive order in India. Smart infrastructure delivered record orders up double digit and for the first time exceeding the 6 billion euros mark. Digital industries was sequentially up, driven by very strong software business. However, orders in the automation businesses came in slightly lower compared to the first quarter due to still muted industrial demand. Stock levels at customers and channel partners remained elevated, particularly in China. We expect gradual improvements in the quarters ahead, but slower than previously anticipated. The key reason is unmuted development in China, also due to overcapacities in certain custom industries, such as solar or e-vehicles. In addition, investment sentiment in core European exporter of markets like Germany is recovering only slightly from a wait and see mode. Stringent backlog execution led to a stable comparable revenue development of 19.2 billion euros overall. Clear growth contributions came from mobility and smart infrastructure, both up by 6%, while Siemens Healthineers grew by 3%. As previously indicated, digital industries recorded a revenue decrease of 11%. Automation saw effects of significantly lower book and bill order levels from short cycle business products. Moreover, prior years Q2 marks an all-time high comparable. This was only partially offset by high teens growth in the software business fueled by demand from semiconductor customers i am again proud for the electrification business in smart infrastructure showing great competitive strengths with an excellent growth of 14 strong momentum in the data center and power distribution markets continues solid execution led to industrial business profit of 2.5 billion euros close to the prior year level Increases in smart infrastructure and health in years nearly offset current softness in high margin digital industries automation. This translated into a profit margin of 14%. After a strong start in the first quarter, we again achieved consistent free cash flow performance of 2.1 billion euros in our industrial business. As a result, at half year, our accumulated free cash flow is ahead of prior year's level. After delivering a solid first half of fiscal 2024, we continue to focus on leveraging our order backlog, our record order backlog through to stringent execution. Therefore, we confirm our group outlook for fiscal 2024 on all matrices. However, We lower our expectations for digital industries at the midpoint for revenue growth by 7.5 percentage points and for profitability by 20 basis points. On a positive side, after a strong first half year, we narrow the outlook for smart infrastructure and lift the lower end by 100 base points for each revenue growth and profitability. In addition to delivering on operational performance, we continued to make good progress in driving our long-term strategic priorities. The key area is portfolio optimization with several important steps. Most important, Innomotix has been set up as a strong independent company and will shape its future together with KPS as its new owner. Some more facts in a minute. In addition, we announced a bolt-on acquisition in the industrial drive technology business of EBM Papst. This will strengthen our motion control business to tap growth opportunities in the field of battery-powered drive solutions. We will drive organic growth in cutting-edge sustainable and digital technologies powered by industrial AI. My discussions with customers at the Hannover Fair and elsewhere confirmed our leading technology position and the demand for deep domain know-how. A key success factor is our expanding ecosystem. We are partner of choice for our customers to scale sustainability impact, digital transformation and ultimately competitiveness across all end markets. This is underpinned by the launch of a range of new leading edge products in our Siemens Ecotech label. I will expand on this shortly. Furthermore, 13% revenue growth in digital business during the first half year is clear evidence for a long-term growth engine. I already talked about our key financials in brief. Macroeconomic dynamics were also reflected in our regional revenue distribution of growth. The Americas stood out with 8% revenue growth, with trends in the United States, while EMEA was down 2% on weakness in Germany. Asia-Australia decreased by 5%, held back by softness in China. EPS pre-PPA came in at a healthy €2.73. As I already mentioned, we are very active to further optimize our portfolio and sharpen our technology company profile. A decisive milestone in finding the best owners for our portfolio companies is the announced divestment of Enermotics to KPS for an enterprise value of €3.5 billion. Due to the very attractive offer made by KPS, Siemens has decided not to further pursue preparations for a public listing. KPS has an excellent track record in the acquisition of manufacturing and industrial enterprises. KPS will continue a deep cross-company know-how of manufacturing processes and will support Enermonics and maintain its industry leadership globally. This will offer Enermotics and its 15,000 employees excellent opportunities to best serve their markets and realize the full growth potential. A book gain of around 2 billion euros post-tax expected at closing demonstrates once more how Siemens can successfully improve businesses and increase their value. The closing of this transaction is expected for the first half of fiscal 2025. The unbundling of business activities of Siemens and Siemens Energy in India is making good progress. With board approval of Siemens Limited in India for a demerger, the formal separation process is fully on track to achieve a listing of Siemens Energy Limited India Limited within 2025. And stay tuned, we continue to work on further portfolio optimization activities. Now, let's switch gears to latest innovation progress. With a recent launch of the Siemens Ecotech label, we are pursuing the boundaries and pushing the boundaries for industry-leading sustainability transparency. Each product comes with standardized product data sheet across key environmental criteria. This makes the data relevant for customers' decisions based on objective sustainability criteria covering the entire lifecycle performance. Many Siemens products are already built on our robust EcoDesign approach. A lighthouse example is the recent launch of one of the world's most innovative circuit protection devices with cutting-edge electronic switching technology. It is up to a thousand times faster and more precise for new levels of protection. And it combines multiple product functions in one device. saving up to 90% of the components of conventional devices otherwise required. Our customers show great interest. This isn't just a product evolution, but a game changer in this space. We are the first ones to launch this unique combination of next level low voltage production. Those of you who visited our vibrant booth in Hannover saw firsthand our deep industry expertise and intense customer and partner engagement of the dedicated Siemens team. Together with NVIDIA and chip builder HD Hyundai, we showcased a revolution how products and experiences will be designed, manufactured, and sold. Siemens PLM software Teamcenter X will be powered by NVIDIA Omniverse technologies and generative AI functionality for photorealistic, real-time, and physics-based visualization. Data simulators. HD Hyundai engineers can visualize and interact with an immersive digital twin of hydrogen power chips with up to 7 million parts. This will reduce workflow waste, errors, and save time and cost. The industrial metaverse with real impact. Building on our successful work with Microsoft and pilot customer Schaeffler, we are bringing generative AI capabilities to the shop floor at scale. Siemens Industrial Copilot is now seamlessly connected to our tier portal and enables to accelerate generation of complex automation code in engineering and reduce development times. When this is just the beginning, we are working on Copilot solutions across multiple industries and across entire value chains. Our smart infrastructure team launched ElectrificationX, a comprehensive application suite to manage entire energy networks in multiple industries. This rounds off our offering, combining alongside BuildingX, GridScaleX, ReligentX, and InterCirculationX. Unprecedented growth in AI application drives a massive build-out of data centers globally with soaring demand for power. This market momentum creates an abundance of opportunities for us with existing customers such as hyperscalers and increasingly with global colocation operators. Our comprehensive offering combines the real and the digital world to build sustainable data centers. We cover the full range of low and medium voltage electrification infrastructure, fire safety, as well as building management. This is combined with digital operations and applications from our Siemens accelerator portfolios, such as digital twins and AI-based cooling optimization. Our ongoing capacity expansion for electrification equipment will further strengthen our market position through 2025. In the first half year, we continued our growth path and achieved around 25% revenue growth and a stellar order intake pointing to further market share gains. We expect other growth in the 20s for full fiscal year 2024. Here, you can see some compelling examples how industry-specific know-how in combination with our cutting edge portfolio are crucial to achieving sustainability impact. And let me highlight three examples. As part of our strategic partnership with Mercedes-Benz, we have co-created a digital energy twin to improve the integration of energy efficiency and sustainability measures in factory designs and upgrades. It has been developed and tested in Factory 56 in Sindelfingen and will be rolled out to significantly reduce energy and early phase planning time. I am excited that we agreed with Foxconn to collaborate on driving digital transformation and sustainability across the booming electronics manufacturing industry. The goal is to establish a scalable and seamless engineering and manufacturing ecosystem with a higher degree of automation, the factory of the future. In addition, our long-standing partnership with Brightline is set for an exciting next chapter. Reitle Invest has named Siemens Mobility as the preferred bidder to build 10 high-speed train sets for America's first high-speed rail line. This next generation of trains is designed featuring the latest digital technologies such as RelationX and 30% more energy efficient than other high-speed trains. Our digital business remains on a strong growth trajectory and stands at 3.8 billion euros after the first half of fiscal 2024, up by 13%. Across all our businesses, cloud-based portfolio expansions for Siemens Accelerator will further support growth. A key contributor to digital business is the ongoing progress of transformation, main parts of our DI software business towards software as a service. ARR growth kept its pace on a very healthy level of 15% over a prior year. The cloud portion already stands at 1.5 billion euros, equalling 37% of total ARR. The 40% target is well within reach. All indicators point to a strong momentum, including more than 14,700 customers having signed up on the SaaS business model. A vast share comes from small and medium enterprises. And with that, over to you, Ralf, to give further details regarding our operational performance.

Thank you, Roland, and good morning to everyone. Let me share more about our solid second quarter and expectations looking ahead. Orders for DI at 4.3 billion euros in total were sequentially up, however, lower year over year by 12% with a book-to-bill overall at 0.94%. The automation business of digital industries saw a slight sequential setback in orders, however, still significantly above draft levels of the fourth quarter of fiscal 2013. As Roland mentioned, the market environment remained challenging with subdued economic activity and investment sentiment in key regions such as Europe and China. Slowly stocking at customers and distributors, particularly in China, combined with strong local competition in lower and mid-market segment held back demand. Order softness was most visible in the discrete automation businesses. The software business, however, achieved double-digit order growth in a book to build significantly above one, driven by high EDA demand of semiconductor customers. Our backlog in digital industries further decreased to 10.2 billion euros there in software with 5.4 billion euros for the first time exceeding the automation backlog. The latter stood at 4.8 billion euros, around 600 million lower compared to the first quarter, further approaching pre-pandemic order backlog levels. Revenue for DI was down by 11% as indicated. Therein, automation was down by 20% against the best quarter ever for the business in prior years Q2. Discrete automation declined by 23% and process automation was down by 13%, both affected by lower contribution from fast turning orders. This was partially compensated by software, which delivered excellent growth of 19%, driven by an outstanding EDA business, which was up by more than 50%. The PLM business increased by 5%. Profitability reached 16.5%, a material decline driven by lower capacity utilization and consequently reduced profit conversion in the automation businesses. This was amplified by a less favorable product mix in automation with a lower share of high margin products. Digital industries recorded a slightly positive economic equation in the second quarter. As indicated, effects from intensifying contingency and productivity measures will ramp up towards end of fiscal 24. Cloud investments of 64 million euros in the second quarter accounted for 140 basis points of margin impact in line with our expectations. Digital industries achieved a cash conversion of 0.76, mainly due to slipping of payments for large software orders into the third quarter, which were booked late in the second quarter. Cash generation in absolute terms was, of course, materially affected by declining profits. Now, let me give you the regional perspective on our top-line automation performance. As mentioned, the rebound of automation orders is delayed due to ongoing subdued economic industrial activity in key regions. Hence, we had to review our scenario regarding the speed of destocking. First green shoots in macroeconomic indicators have not yet translated into actual demand. This continues to be most visible in China, where destocking effects are likely to continue until end of calendar year 24, even with end customer demand seeming to pick up slowly. In other key regions, Europe and the United States, we see stock levels mostly coming back to normal until the end of fiscal 24. In line with lower fast-turning automation orders and further backlog normalization, revenue in all key regions has materially moderated from all-time high levels. Looking at our key vertical end markets for the next quarters, publicly available sources like Oxford Economics still expect muted growth momentum for production output at our end customers, particularly in export-driven industries such as machine building and automotive. Our DI teams continue to see this development as transitional. However, it is taking longer than initially anticipated to return to a balanced growth path with secular demand trends and better investment sentiment beginning to prevail. For the second half of fiscal 24, Digital Industries assumes that demand in its automation businesses will pick up compared to the first half of the fisking year. In the software business, we have a rich funnel and strong customer activity for attractive large license deals. We expect a strong momentum in the second half of fiscal 24. As you know, With this chunky license deals, the exact timing of revenue recognition is difficult to predict, especially the third quarter is currently back and loaded. SaaS as well as cloud ARR are fully on track, with share of cloud ARR approaching 40% of total ARR within the second half year. As a result of all this, we adjust our guidance for revenue growth for fiscal 24 to come in minus 8 to minus 4% below the prior year. Correspondingly, we expect the profit margin to be in the range of 18 to 21%. From today's perspective, a material portion of the previously mentioned software license opportunities will materialize late in the third quarter, leading the eye to a slightly negative revenue growth for the third quarter and a profit margin within the updated annual guidance range. Now let's turn to smart infrastructure, which again delivered like Swiss clockwork with another outstanding quarterly performance. The team achieved strong top-line growth in robust end markets and improved operational profitability year over year for the 14th quarter in a row. In total, all-time high orders were up 10% on contributions from all businesses, leading to an excellent book-to-bill of 1.18%. A major growth engine was the electrical products business, up by a stunning 26%. This business, together with the electrification business, scored major order wins from data centers, customers, particularly in the U.S. In total, both electrification and buildings orders were up by 4%. Record order backlog increased further to 18 billion euros. Revenue growth reached 6%, with the largest contribution from the electrification business up by a strong 14%. On top, we saw some solution projects slipping into the third quarter, leading to slightly lower growth than expected, yet benefiting the business mix. Both buildings and electrical products continued their growth trajectory with 2% respectively. Operational profitability reached a record level of 16.6%, benefiting from economies of scale from higher revenue and increased capacity utilization. Advents from cost inflation, mainly merit increases, were overcompensated by sustainable impact of prior periods, pricing actions, and productivity. We expect the economic equation to remain clearly positive in the second half year, albeit with decreasing benefits from pricing effects. Pre-cash flow and cash conversion at 0.9 were again strong on high levels. As in previous years, cash generation in the second half year is expected to accelerate materially. Looking at the regional top-line development, we saw the U.S. standing out with 38% order growth on high levels, driven by large data center wins primarily from hyperscalers. Europe, excluding Germany, showed strength with double-digit growth in the buildings business, supported by large orders. Key growth engines for revenue were the United States, up by 12% on stringent backlog execution. Revenue in Europe was stable with pockets of growth such as buildings in Germany or in the power distribution vertical across Europe. The service business showed broad-based revenue growth across regions, primarily in Asia, up in the high teens, but was also clearly up in Europe. Business in China continued to show softness on muted demand, especially in commercial real estate. Key demand expectations with growth in real terms across our main vertical show consistent trends with prior quarters, sustainability, Through energy efficiency and decarbonization, as well as optimized asset performance in grid infrastructure and buildings, are secular business drivers in almost every market segment. AI is the supercharger for data center investment for the foreseeable future, also leading to higher power demand. Therefore, accelerated electrification will require further grid expansion and renewables integrations. After a strong first half, we narrow our full year guidance for revenue growth by lifting 100 basis points at the lower end to a range of 8% to 10%. For the profit margin, we now expect an upgraded guidance range of 16% to 17%. For the third quarter, we see the comparable revenue growth rate between 9% and 11%. We anticipate the third quarter margin to be between 15.5% and 16.5%. And we are looking forward to giving you more color on the SI business at the dedicated capital market event in Zug in Switzerland on December 12th. So save the date. Mobility achieved a solid top line and profit performance and delivered a sharp free cash flow improvement. Orders at 3.2 billion euros translated into solid book to bill of 1.12. Unlike the prior year second quarter, there was no mega order. However, a consistent flow of attractive large and medium-sized project wins across the businesses. The backlog increased further and stands at 48 billion euros. Revenue in the second quarter was up 6% on clear growth in all businesses. The prior year quarter benefited from some trailing effect from the Russia wind down. A clear highlight was 9% growth in the service business. In general, Revenue growth for full fiscal year 24 is held back to a certain extent by slower progress of civil works on the customer side in some projects. Therefore, we maintain our full year guidance of 8% to 11% revenue growth, however, rather trending towards the lower end. Higher revenue and strong project execution supported operational profitability improvement to 8.4% since prior year included positive trailing effects from Russia, as mentioned. Mobility caught up materially in free cash flow performance, primarily with a higher level of milestone and down payments in the second quarter as expected. For the second half, we see a further catch-up in free cash flow generation, however, due to the anticipated timing of larger payments heavily skewed towards the fourth quarter. Our assumption for revenue growth for Q3 is mid-single-digit on consistent backlog executions. Profit margin is expected to be in the range of 8% to 9% for the upcoming third quarter. Now let me keep the perspective on below industrial businesses crisp. More details and an updated outlook are on the table on page 27 of the appendix. Siemens Financial Services achieved a solid earnings contribution with stable results from debt business. Portfolio companies continue to deliver robust operational performance. The divestment of Enomotics to KPS is a major milestone to reduce the portfolio company's business as promised. Starting from the third quarter, Enomotics will be reported in discontinued operations retrospectively. We will provide you with comparable key figures with the third quarter's earnings release. Finally, I want to point out a low tax rate in Q2 of 11% due to a non-cash reversal of income tax provisions after concluding a tax audit. The positive swing in discontinued operations is also related to this tax audit. Consequently, now we expect a lower tax rate between 21 and 25% for full fiscal 24. Free cash flow performance in the first half year was up in the industrial business, albeit the second quarter was affected by the profit decline in digital industries and growth-related build-up of net operating working capital at Siemens Healthineers. Our balance sheet continues to be rock solid, which was recognized by the rating upgrade to AA- by Standard & Poor's. We continued our path of shareholder-friendly capital allocation with a dividend payment of 3.7 billion euros in February. Furthermore, We started our new share buyback program of up to 6 billion euros for up to five years as well. Following the first half of fiscal 24 performance and after highlighting the different businesses, let me conclude with our outlook for the group. We do confirm our guidance on Siemens Group level. We continue to anticipate 48% comparable revenue growth and a book-to-bill ratio above 1%. We expect profitable growth of our industrial businesses to drive basic EPS from net income before PPA accounting, excluding Siemens Energy to a range of 10 euro 40 cents to 11 euros. This outlook excludes burdens from legal and regulatory matters and material impairments as always. Despite some macroeconomic headwinds, our direction is clear. We will deliver further value creation by profitable growth and resilient cash generation. That I hand it back over to you, Tobias.

Thank you, Ralf. We are now ready for Q&A. Please limit yourselves to one question per person. We want to give as many of you as possible the opportunity to raise your question. Operator, please open the Q&A now.

Thank you, ladies and gentlemen. Anyone who wishes to ask a question may press star followed by one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. Now, first question comes from the line of James Moore, Redburn Atlantic. Please go ahead.

Yes, good morning, everyone. Thanks for the time. Question one. is on the DI profitability, both a bit below what you expected in the quarter and for the full year. I wondered if you could talk a little bit about what changed. And it does point, after 18 in the first half, to quite a wide range of 18 to 24. Could you say anything about whether you think you'd be in the upper or lower end of that? Can you talk about any of the bridge components in the second half? And I guess the key question is, longer term, forgetting software, I sense the automation margin last year was materially above the pre-COVID level and a clear record. Even with the pressure this year, do you think that this new automation profitability is a good guide for a new normal? or can we lift back up or do we have to yet normalize further?

James, thank you for asking a question that is obviously close to our heart. We have been debating DI profitability quite intensively and I'm very happy to share with you what has been driving profitability for DI and also what the impact and decisive factors are going to be for the second half and in longer term when it comes to the profit pool of automation businesses. So first, Let me tap on the second quarter. I mean, as indicated on March 19th, we have been expecting a slower automation business and that materialized in the negative low teens as expected. What we haven't expected at that point in time was that with a lower volume, there was also a clear bias to against the high margin products that we had been expecting for the last couple of weeks in the second quarter. So means the mix wasn't as expected in the second quarter. And that, to a large extent, is driven by destocking activities. We have been touching on that quite frequently. And I want to use the opportunity to quickly give you an update on that. I mean, if you look at it, and particularly in China, we have been sharing information with you about the channel transparency that we do have. Distributors stocks did not come down compared to the first quarter. We are still sitting there on give or take 14 weeks of inventories. And there's also no material incremental momentum that we can see when it comes to end customer inventory. So these are the two decisive drivers. And this is also implicitly then driving the relatively low demand on fast turning orders as indicated in the presentations by Roland and myself. So that does not mean that there is any structural change in the market that we would see at the moment. But as I said in London on March 19th, we do see China coming back later. than we originally expected. And I don't want to get into the geopolitical piece in it, but in a nutshell, the latest statements on tariffs from China is also not really helpful. That's why we took a conservative stance on the matter and tried to guide you as best as we know at this point in time. For the second half, and this is now referring to how is that backlog going to unwind? We have been reviewing our expectations when it comes to the three different layers. Again, I would like to tap on the example of China because that's the most material contributor when it comes to that delay on the one hand side. The backlog we hold there has been developing slower than we expected. So there's still quite a material amount sitting on our books that is waiting to be delivered. Second, the stocking of the channel I mentioned already and also when it comes to the end customer inventory level, there wasn't a lot of move. We do expect that to materialize with the weak positive signals that we sense. However, we don't see them translating into tangible demand yet. So we did see a shift of another quarter give or take out in our expectations of normalization taking us to the end of calendar year rather than to the end of our fiscal year in September. So the second half is also providing plenty of opportunities on the software side to us. I had been mentioning that also before. And they are quite tangible. They are literally at fingertip. And most of them are in the area of EDA and license deals. And as I said in my presentation, the nature of these deals is that they materialize and then immediately unfold their beauty on the revenue recognition and income side. The downside is this is hard to predict when it comes to days or weeks. So therefore we are heavily backloaded. We see them and we are in intense discussions with our customers in that field. And we do see also quite a material amount of those deals materializing in the third quarter and also for the full fiscal year. So to a certain extent, we do see major opportunities on the software side making good, if you will, for the softness of automation. Longer term, I think there is no doubt that automation is providing globally opportunities when it comes to digitalization, when it comes to making best use of scarce resources and so on. We do not see any change in that picture and therefore I also would dare to say that there is no material pressure on the margin corridor for automation and implicitly for DI on the way forward. We said from the very beginning when we disclosed our financial framework that there is a fairly large corridor over a full cycle between 17% and 23%. And unfortunately, we are exploring rather the lower half at the moment, but it's also obvious if and when, and there is no doubt from our side about the if, it's rather the when. When momentum is kicking in, particularly in China, we will be one of the biggest beneficiaries of that momentum. So therefore, I do not see ourselves in a position that we should reverse or downgrade the overall profit pool of that extremely exciting and growth-oriented industry.

All right. Next question, please.

The next question comes from the line of Alexander Virgo, Bank of America. Please go ahead.

Yeah, thanks very much. Morning, Roland. Morning, Ralph. I wondered if you could just touch a little bit on the color that you gave there on the automation business. Ralph, I'm thinking more really about how the order momentum looks as we look through the second half and into 2025 because obviously, the destocking is only a part of that. And I'm wondering how we should be thinking about the progress of the business through the various end markets that you flagged. Obviously, machine building is the material headwind. But I'm wondering if you can just give us a little bit more color about how that looks regionally and by end market as we try and, I guess, calibrate the slight decline that you've guided for in Q3, which I think is actually a better number than I would have anticipated. So I'm just trying to get a sense of automation versus software within that mix and how we think about the second half. Thank you.

Thank you, Alex. Let's have a short ride through the different verticals, as we call them, and start with automotive, which is still an extremely important one for our automation business. At the moment, there is still some sluggishness in particular in the European market, namely in Germany and Italy. US seems to be rather flattish and China is slightly moving up, but still not the momentum that it would take that we believe we can benefit on a large scale. It seems that catching up of production due to supply chain shortages has come to a meaningful end for the next quarters. We do anticipate a bit of a slowdown as backlog driven production has expired and rising uncertainties, as I named them before, might lead to cautiousness on the purchasing behavior of the decision makers there. You mentioned machinery. There's some stabilization supported by slightly stronger China. But as I said, green shoots that you cannot really build on at the moment, we need more tangible data points while Europe is further contracting in that field and on the export driven businesses there. And U.S. is pretty flattish from our point of view. Consumer and building related machinery is suffering from higher interest rates, of course, and they are desperately waiting for the moves in that field. And also, the stocking is probably rather shaky at the moment in that field as well, while process and project related activities seem to be less effective on the machine building side, we assume. rising pressure for the European and the American machinery due to low prices in Asia to a certain extent, as we mentioned that before, especially as soon as the stocking expires and customer demand may recover then. We also expect continued stabilization in short term following by a then moderate recovery in fiscal 25. That's my view on machinery at the moment. When it comes to pharma and chemicals, the overstocking effects are receding, with China driving growth, U.S. modestly up, and Germany stagnating on low levels, as also many other companies are reporting on. Pharma is rather modestly negative at the moment, but we expect that to recover in midterm. When it comes to food and beverage, the tendency to soon return to normal development I think is pending and out there. It may be a question of months, give or take, but this is not really worrying us. When it comes to electronics and semis, we do expect increasing investment activities, as mentioned before, and the currently running project facing the end would implicitly lead to higher activities in 2025. which can be quite favorable for us being in the sweet spot of matters in that field and aerospace and defense, the positive momentum persists and it's not really moving the needle for us on a global basis, but still a valuable contribution when it comes to picking up momentum and also seeing some resilience over the course of time because that field typically has a longer cycle time than others. So having touched on China beyond the current situation that we do see there, I mean in the recent years we have been witnessing tremendous investments in the automotive industries there battery and electric vehicles have been making the CN's PV contributing also quite meaningfully. Currently, we do observe overcapacities in these domains. Nevertheless, they structurally are going to remain gross drivers in the future in China and also globally. So we do continue to see the need for further digitalization and automation in Chinese manufacturing given by demographics on the one hand side, but also the vast number of small and medium companies in the country is literally... asking for further productivity and therefore with momentum kicking in, this will be a driving power when it comes to accelerating the automation business. There's no doubt on that one. And just doing the math, I mean, even if China would grow only by three to four percent in the future. The nominal growth is still extremely strong and above many other geographies. So you better don't miss that bus. And therefore, as hard as it may be at the moment, this is a long term opportunity that we pursue very successfully for many years. And again, taking the trends in auto industry, extending towards electric vehicles, great opportunities to participate in those investments and adding new production capacities once they are on at our customers and we still see also high potential when it comes to EV and battery verticals. That's where we are very well positioned and we will definitely grab the opportunities as they arise. So the eye positioning in the Chinese auto market and in China in general is extremely good, even though challenged at the moment by macro and the underlying trends. Positioning ourselves as a leader in these emerging verticals of EV batteries and the like is definitely a solid position strategically on the way forward. Hoping that helps Alex.

Next question. Next question, please. Sorry, Alex.

The next question comes from the line of Andre Cognin, UBS. Please go ahead.

Good morning. Thank you very much for taking my question. I'll switch to smart infrastructure, if I may. I guess the 10% order growth in Q2 and the 8 to 10 guidance for the whole year, you're kind of now in the best class on electrification and also a bigger contributor to either than GI. So I guess what I wanted to dig into a bit more is the Q2 orders performance. You've highlighted electric products up. 26%. Could we just dig into that a little bit more? How does that break down? Maybe you could single out data centers and grids performance particularly within that. And could you give an update on the relative sizes of those segments for you as well, for SI? And thinking about second half, you are implying some acceleration second half, and I guess that's still with a couple of segments still cyclically depressed. So should we be carrying that into 2025 as well?

Well, that's a whole bunch of questions, André. Let me first say thank you for the appreciation of the performance of the SI team. I mean, allow me to look back to the capital market day in 21 for a second when SI has been starting out on their growth and margin journey. In fiscal 20, they had a margin of 9%, 9.1%, and now even exceeding the upper part of the margin corridor they have been committing themselves to. I mean it took a lot of different levers and I would like to point them out quickly because they are going to continue being relevant on the way forward. I mean first and foremost The productivity improvements and the improvement of internal processes has been playing a major role. Hundreds of measures have been taken. Internal digitalization of processes, internal strengthening of the manufacturing footprint, all that has been put together in a very ambitious program that seemed to be impossible to materialize in the given time frame back then. But it worked, and this has been giving us confidence that they also can and will pursue also ambitious targets on the way forward. But let me also quickly point out that they are continuously working on portfolio optimization, as they did in the past. And they have been also very selective with their investments. So structurally, that what we call economic equation with a clear net positive is the result of a lot of hard work and a lot of diligence in pursuing each and every of the targets and goals being set in that field. And this has been eventually the driver of excellence on top line and bottom line. I mean, looking at electrical products as an example, which is now about 60, 70% bigger than it used to be in fiscal 2020 with tremendous opportunities to harvest economies of scale. That's actually happening. So I also understood you asking for the current trading and how does the second half of the fiscal year going to unfold? I mean, the orders and revenues that what I saw in April and the first couple of days in May. is clearly supporting the third quarter's expectations as indicated before. Growth momentum will be even over and above the median of the annual guidance we gave. Order growth is driven by strength in the US to a large extent. While growth and revenue is very much driven by electrification, executing on a very strong backlog, which is extremely tangible, and they have been consistently delivering along the lines of their forecasts, I have no doubt they will continue doing so. For how long? That's the other part of your question, the way I understood it. For how long do we expect that robust demand in the environment to stay and how long are we also going to benefit from the consistency of execution and again, adding new measures and new momentum into driving a bottom line with that underlying momentum in the market? I mean, it's obvious that digitalization and AI Plus, the net zero commitments around the world are going to drive demand for electrification across the energy-intense industries like data centers, semis, battery manufacturing, and all that with a heavy focus in the U.S., where we are extremely present and successful, obviously, as numbers show. In Europe the regulatory changes to tackle climate change as well as the increased foreign investment support growth quite a bit and we don't see that momentum expiring rather building up and driven by these very positive dynamics we do expect an ongoing high demand as expected for the second half of this fiscal year, but also going clearly beyond that. So when it comes to the next quarter, to be a bit more precise, the top line is going to be clearly driven by electrification, but also by solid contributions by our EP and buildings businesses and margin is definitely benefiting from economies of scale of EP, but also solid contributions in electrification and buildings. That's obvious. So we are very confident looking into the business development here. And as I mentioned in my presentation, we will invite you for a dedicated event to Zug in Switzerland and Matthias and Axel and their teams are going to present you then their way ahead and what the next steps are going to be. So in a nutshell, this is A wonderful development over the last couple of years with an extremely dedicated and capable business leadership team full of innovational power and also delivering on their plans and having a very solid track record. 14 quarters in a row over and above prior year's quarterly profitability. That's something to be proud of, I guess.

Thank you.

Next question, please.

The next question comes from the line of Bax Yates. Morgan Stanley, please go ahead.

Thank you. Good morning. I wanted to go back to digital industries and really ask a question just to understand kind of how de-risked the guidance is for this year. So I guess what I'd really like to understand, if I look at your revenues in the first half and I look at what you need in the second half to get to your guidance, it implies you need about 500 million more revenues in the second half than the first. So I guess my question is, could you give us a rough feel when thinking about the kind of makeup of that revenue improvement? Are you broadly assuming that the hardware business stays flattish and the software business delivers all of that revenue step up? Are you thinking more about the hardware business maybe catching down towards where the orders are now and then even more of a step up in software? just maybe giving us a feel of whether you see second half hardware flat or getting worse and how we're thinking about kind of the software, any magnitude of software step up in second half revenues versus first would be really helpful. Thank you.

Yeah, thank you, Max. And let me try to give even more color on top of that, what I said. I mean, First and foremost, as discussed before, we do not see any material momentum building up in particular in China when it comes to selling out of the channels and customer demand. still is fairly muted. Of course, I have been observing very carefully in particular the Chinese market, but not only there. And April was not delivering incremental momentum over and above that what we saw before. So I would rather expect a flattish development give or take in that field. Bear in mind, as I said before, we have three stages of the value chain that we need to observe. One being our own backlog, which is still fairly high and not back to pre-pandemic levels that also implicitly translates into delivery times and all that what has been discussed before. Second, it's the destocking exercise at our distributors. And thirdly, it's the inventory level at end customers. I do know it's not satisfactory and I wish I could provide more details and have an even better grip around matters. But these three layers are not that easily anticipated each and every for themselves, but also in combination with each other because there's dynamics between the destocking of the distributors and the end customer levels. All that what we know from customers and we talk to hundreds of them, obviously, we collect data points like hell. And we also are looking into this not only in China, but also in other geographies. All that is suggesting that we do not see a quick recovery at the moment in the product automation business at this point in time. We do see momentum in some pockets, in particular in the US, rather process-driven than discrete, but also with discrete opportunities, which are not building up material momentum anytime soon. So for the third quarter, to be precise, I do not think that automation is going to move the needle to the better, but this is why I have been touching on and elaborating a lot on the very tangible funnel in our software business. Again, I would wish I could tell you by week what is materializing when, but the golden rule of dealing with customers, you never push your customer. You follow his and her voice, and that's what we do. Therefore, we see that material funnel being loaded and will be tapped on. It's going to be a question of when and not whether. Therefore, we are very optimistically looking into a very strong third and fourth quarter in that field. It may happen that one or two of those deals are shifting for a week and will have an impact on the quarterly development in the facing, but it will not have an impact on the full fiscal year. That's what we are quite confident about. To answer your question in a nutshell, automation is rather muted at the moment on levels. It will not fall back. below the levels that we saw in the fourth quarter of a prior year when we had the trough. Obviously, at that point in time, we do see the momentum building up in some pockets that do not have a material impact on global figures at the moment. So it's going to be back-loaded for automation. But what we clearly do see is the long-term need for automation and digitalization in key markets. We are looking close to being paranoid at market shares and Roland has been elaborating on that. Of course, there is quite some pressure in pricing in the market, in emerging markets, but also in major markets like China. When it comes to the low end of the spectrum, when it comes to the high quality industries, where all the investments that we see driven by governmental stimulus are going to happen, we are clearly very well positioned. So it's a question of timing. And therefore, also looking into 25 without talking numbers, we do believe from a structural perspective, we are sitting in a perfect market. From a dynamics point of view, it's hard to predict at the moment. That's why we took a conservative stance on matters. But we are looking at the innovational power of our businesses. We are looking at the moves of our peers. We are looking at innovations that only we bring to the market. And we are also seeing that the macroeconomic environment, once the world-famous steps are going to be taken, for example, on interest rates, will create a better sentiment for investment in the market, and then we talk.

Thank you very much.

Next question, please.

The next question comes from the line of Simon Turleson. Jeffrey, please go ahead.

Yes, good morning, Roland, Ralf, and Tobias. I've got one on allocation and just cash returns. You've got still three and a half billion sitting in Siemens Energy, and maybe you can touch on your timeline and urgency here and whether this has changed, but you're also getting obviously three and a half billion from Enermodics, 45 billion in Healthineers. Unless you wanted to share an update on Healthineers, I'm going to exclude it for now, but it's basically around seven billion in the near term. top of what is already pretty ungeared balance sheet. And if I take out health and the net cash, the nine billion of free cash flow, unless your guidance has changed, I think that was your previous guidance, Ralph. Just talk a bit more about whether are we close to doing larger M&A in the near term? What's your thinking in terms of capital allocation? You're obviously starting with six billion buyback, but even cover your free cash flow generation. And on top of that, making a lot more cash in now as well. So just your general thoughts on this. I know we'll talk about it every quarter, but given net cash you're becoming, it becomes more of a topic for investors. And is a special dividend something you would consider, or are we more talking M&A and buybacks?

Thank you, Simon. First of all, thank you for the positive feedback that at least I read into your words about that we really have been unleashing cash generation at Siemens on levels that no one, at least I, didn't dream of 10 years back. You're right. There are tangible assets on our balance sheet at the moment that have a tendency to be turning into liquidity over time. And when it comes to energy, maybe that didn't catch a big attention in media just lately. We have been selling down below the 25% Siemens AG total ownership in Siemens Energy shares. I think the timing wasn't that bad. I guess you would agree that it was meaningful to do it also via that pension trust process that you are well acquainted with and you may rest assured this is a process that will continue obviously We cannot share timing, and I also need to underpin again that the Siemens Pension Trust is acting on itself. We are not in control of their decision-making, and it needs to be that way. So, therefore, it's hard to predict. But as said before, this is going to unwind over the course of time. Also, the underlying interdependencies with guarantees and the like are moving into the right direction. We are continuously getting on lower levels there and also the fact that Siemens Energy's businesses, which I don't want to discuss here, seem to be stabilizing also in some areas under new management. When it comes to Enermotics, I hope you agree this is a very meaningful deal for all stakeholders, in particular for Siemens AG shareholders. We are going to see three and a half billion of proceeds and Roland has been mentioning and touching on the profitability at closing. It's going to be 2 billion give or take on after-tax basis. And in a nutshell, we have all the levers in place to allow shareholder returns. We have a progressive dividend policy in place and I think we didn't disappoint you in the past in that field. We also have a large share buyback program, and it has been intentionally built up at that point in time, anticipating that we will have room to maneuver. And I also agree with what you say to a certain extent that our gearing doesn't need any trending into the other direction so all that is providing us a lot of freedom and I mentioned that also in my presentation we are fully aware of the interests of our owners and they will get their fair share in it you said is it either or and before I hand over to Roland to talk about M&A activities or thoughts that we have. It never was an either or, it's always on both ends and the fact that also our rating is giving us quite some room to maneuver. I don't feel that we would be restricted by one or the other means. We will provide meaningful total shareholder returns and at the same time have all the freedom to invest in into relevant profitable growth opportunities and also groom our power of innovation at the same time.

Even though this was a question on M&A in particular, it was also one on capital allocation. Let me start in saying a capital allocation in organic product development quite often gives a higher return on the investment than M&A. We do M&A because we want to speed up if we see products within the market, which we want to redevelop in order to accelerate, obviously. So this is maybe my first point that we do have. And you see that also compared to other companies, higher R&D spending. We are driving the automation digitalization. transformation, also sustainability in our markets. This requires particular investments. We talked about our investment in software-defined automation, which is a game changer for new customers. We have high demand on flexibility, agility in the markets. There's a strong feedback also from interest from customers. Also, for example, when I talk to customers at the Hannover Fair, in particular US customers, we are investing also in our portfolio in the, we call it value for money segment of automation. I mean, there's no doubt that in this, let's say higher segments, performance sectors, we are absolutely clear leader in technology and market, but also to really take the local competition as early as possible to say we defend and expand our market share and want to do that also there. This is where some money goes and you see that in our organic investment. If it comes to M&A, We definitely is screening the market on software or any kind of connected hardware. We are looking into all hardware. which creates data, generates data, and hence also contributes to our Siemens accelerator portfolio. This is our strategy. So that means in both areas, we are looking very much on the market. We are, and if you talk about recent acquisitions done, in particular in the EDA and simulation space, these are tremendous multiples which we see there and premiums. We have to be also careful with our shareholders' money when it comes to M&A, so we don't do too stupid things there. At the end of the day, we are ready to strike also in a space where eventually multiples are higher if it comes to high-growth software. We see an unbroken trend in the growth of the software markets, which we estimate to be double-digit and more this is where you see opportunities and It's it feels good. And I'm saying that also always derive. It's this good to have a good net cash position By the way, also, it's good to feel to have a see if always a tight hand on the balance sheet So that we are we are ready to strike whenever we see a good opportunity Operator we will take one last question

The last question for today comes from the line of Gal Debray, Deutsche Bank. Please go ahead.

Thanks very much. Good morning, everybody. Unfortunately, I think I wanted to go back to DI and especially regarding the automation performance within DI. So I think you had about 2.5 billion of automation orders this quarter, a bit down sequentially. But what I'm interested in is your thoughts estimate or assumption of what the impact of this talking actually was this quarter. I mean, some of your peers are talking about a negative impact of up to 30%. Would you share that view? I'm actually trying to get a sense of what orders in automation will look like on a normalized basis once this talking is over. Is it $3 billion? Is it 3.5 billion, potentially more? I think that's quite important to assess if DI will grow next year or not. Thanks very much.

Thanks, Gail. One of the questions that is keeping us busy anyhow. As much as I can share at that point in time, of course, with all that what I said and which I won't repeat, unfortunately, destocking in the channels did not play a role in the last quarter because it stayed on a very high level. I gave you the example of China where we still see 14 weeks give or take on stock levels in the distributor channels in China. So normal would be between seven and eight. So we are far away from that normal. That's why it's hard to anticipate how long it's going to take, in particular as there's a corresponding end receiving customers, end customers, which also are still sitting on a bit of an inflated inventory level. Again, taking the example of China, you would typically expect in a steady state that they are close to nil with their inventory levels because deliveries should be in time and on time and therefore the two months that we estimate that are still sitting on the shelves of our end customers in terms of inventories are coming on top of those destocking. Trying to look through that, that's your question, I guess. I do expect at the end of calendar 24, those artifacts and the uncertainties between the different layers of the value chain, as I described it, is going to be gone to the largest extent in the major countries which are relevant for us, including China. I will try to be fast forward and take myself to that point in time January 1st next year. I'm absolutely convinced that momentum is going to kick in until then because we do also see, I mean beyond geopolitics which we cannot anticipate, There will be a clear or more tangible answer with regard to interest rates till then, and this will allow investment sentiment in many of our customer industries to be, if not better, at least stable and with a clear view on matters. The second one, there will be a destocking exercise, as we called that, It will be fairly completed at that point in time. I'm quite optimistically looking at that. Whether it's a month later or sooner, I can't tell at the moment. But even in the pessimistic scenarios that we have been running, this would have been gone up to 80-90% by the end of the year. So transparency will be there. So the best I can share with you at the moment in terms of tangible numbers for next year is, is definitely not good enough for your models. It's going to be a qualitative statement only, but we are very positive when it comes to giving clear guidance at the end of the year to what extent the overall trend in the relevant markets we are in is going to get back to normal. And when I look into the rearview mirror and you allow me doing that as a veteran in the industry, I saw Lehman and I saw all the other ups and downs. There's always an incremental momentum then whenever it's starting over. And therefore we will be prepared and ready to participate over proportionally into that incremental momentum. So therefore, we are standing ready, as Roland said, and even though we don't know about the timing, we are absolutely convinced we are in the right spot. And if you look at the secular trends we are building our strategy on, in particular countries like China, will not be able to deliver on their own plans without tapping on the technologies that we can provide only.

Thanks very much.

Thanks a lot to everyone for participating today. As always, the IR team will be available for further questions. We are looking forward to meeting you on our road shows over the upcoming weeks. Have a wonderful day and goodbye.

Ladies and gentlemen, that will conclude today's conference call and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.