Siemens Energy AG ($ENR)

Good morning, and a warm welcome to the Siemens Energy Q2 and Half Year Results Analyst Call for Fiscal Year 2026. Following the prerelease of our preliminary figures on April 23, 2026, we published our full and final Q2 fiscal year 2026 results, along with the half year report this morning at 7:00 a.m. on our website. Our President and CEO, Christian Bruch; and our CFO, Maria Ferraro, are here with me. Christian and Maria will take you through the major developments during Q2 fiscal year 2026. This will take approximately 30 minutes. Thereafter, Christian and Maria are available to answer your questions. For the entire conference call, we have allowed 1 hour. Christian, over to you.

Thank you very much, and good morning, everyone, and thank you for joining us today. Siemens Energy has delivered another strong quarter, and I'm very proud how our team is executing successfully on the strong backlog, driving capacity expansion and managing through geopolitical challenges day after day. Let me flag up some highlights from the last quarter before Maria dives into the details of our quarter 2 results. We achieved a record order intake of EUR 17.7 billion and with that, a record order backlog of EUR 154 billion. That record backlog comes with increasing backlog margins across all businesses. The demand for our products in the different regions remain strong with good pricing and with Gas services and Grid Technologies contributing materially. We continue to build a diversified backlog comprising different customer segments and regions and I will refer to this later in the presentation. In the last quarter, I also spent time with our teams in the Middle East and seeing how they support our customers while keeping everybody safe in a demanding situation gives me a lot of confidence in our path forward. From a business perspective, the financial impact of the Middle East conflict has been very limited, and we continue to see solid interest in new projects across the region. We achieved broad-based revenue growth across all business areas based on digital execution and increasing capacities coming out of our factories. In line with our expectations, we delivered EUR 10.3 billion revenue in quarter 2 despite FX headwinds. Given the strong momentum, we raised our full year comparable revenue growth guidance to 14% to 16%. Our profitability continues to increase year-over-year, driven by a favorable business mix and steady productivity gains. We delivered a profit margin before special items of 11.3%. Grid Technologies was a key contributor with margins of more than 17%, and we expect margin progression to continue throughout the year. The technology is our fastest-growing and most profitable business area with a broadening portfolio, including more digital solutions. Gas Services once again achieved profitability levels at the top end of the industry. And I would like to highlight the continued progress at Siemens Gamesa, where business is clearly on its planned trajectory to breakeven, reducing losses in the quarter to EUR 44 million. Also transformation of industry continues to execute profitably. Over the past months, I visited several of our sites and was truly impressed by the progress in our factory expansions. As communicated before, we invest more than EUR 2 billion in fiscal year 2026 to build up production capacities across the different regions. And as a result, we expect a clear step-up in revenues over the coming months, particular in Grid Technologies and Gas Services. Our earnings qualities and cash generation remains strong and free cash flow in quarter 2 came in at around EUR 2 billion. Year-to-date, we have in fiscal year 2026 already returned around EUR 2.4 billion to our shareholders through dividends and share buybacks. And we are planning on accelerating the share buyback this year by an additional up to EUR 1 billion. And Maria will afterwards share some comments on that. Across all businesses, we execute our Elevate program to further drive operational excellence and resilience. And I'm really excited about the potential that AI provides us to transform the way we operate. AI is being increasingly embedded into our operations and decision-making, allowing us to get better every day. And it is not just business operations. We're also pushing AI application across all corporate functions, and I'm pleased to see how people take it up. And this will show tangible benefits in future and the teams are really on it. As a global leader in energy technology, we are on track to position Siemens Energy as best-in-class industrial company for the long term. Overall, based on strong demand, improving visibility and disciplined execution, we raised our 2026 full year outlook across all key financial metrics. As mentioned before, the market environment in quarter 2 remained highly favorable, with strong demand for our products across the different regions and continued strong pricing. Growth was again led by the Americas, in particular, the United States. Asia and Australia also delivered solid contributions with strong order intake growth. Revenue comparisons were impacted by strong prior year offshore wind projects in Taiwan. In EMEA, order intake was slightly lower year-over-year, mainly reflecting some shifts in parts of the Middle East. Overall demand in the region remains intact. And Gas Services and Grid Technologies clearly stand out in performance. Let me start with Gas Services. Three drivers underline the strong performance in the second quarter. First, Gas Services remains one of the most profitable players in the industry and is well on track to meet its profitability target. Second, we continue to see strong conversion from reservation agreements into firm orders with a current split of roughly 70% firm orders and 30% reservations. Third, pricing dynamics for new projects remain very attractive, and we expect this to continue for the foreseeable future. In quarter 2, Gas Services delivered another record quarter with EUR 8.9 billion in orders across 12 countries. Demand was strong in the Middle East and Europe. And obviously in the United States. U.S. demand was largely driven by data centers with excellent pricing conditions. The 5 gigawatt of order intake in quarter 2 brings our total data center-related commitments to 24 gigawatts that is orders and reservations. In total, we booked 77 turbine orders in quarter 2, including 26 large, 45 medium and 6 small turbines, resulting in 12 gigawatts of new turbine orders, with the majority linked to traditional applications. We successfully convert reservation agreements going forward. During the quarter, 9 gigawatts were converted into firm orders ending quarter 2 with 27 gigawatts of reservation agreements. Our focus remains on short-term conversion, allowing us to fully benefit from the favorable pricing environment. The margins of new unit and service agreements we booked in quarter 2 improved significantly relative to current backlog margin levels. In total, we now have 87 gigawatts of commitments in place after delivering more than 3 gigawatts during the quarter. By the end of the fiscal year, we expect total commitments to reach 90 gigawatts to 100 gigawatts. Our supply chain expansion is progressing well and supports the already announced capacity expansion in the coming years. Let me now turn to Grid Technologies. Technologies continues to outperform in both growth and margin expansion. And this leads us to upgrade our guidance for the full year significantly. We now expect to reach a profit margin before special items of 18% to 20% already in fiscal year 2026. The level originally targeted for fiscal year 2028. At the same time, we target comparable revenue growth of 25% to 27% for the current year. The business benefits from long-term structural drivers, electrification, large-scale grid replacement, renewable integration [indiscernible] from data centers. Reliable and resilient grid infrastructure is also a critical enabler for data centers. And as a result, demand for grid connections, transformers and grid stabilization solutions is accelerating. In the first half of fiscal year 2026, this translated already into nearly EUR 2 billion of data center orders in grid technologies. Global supply remains constrained supporting pricing discipline and operating leverage. We see stable but elevated prices in Europe, while we observed higher average pricing levels in North America due to increased demand related to data centers. And this underpins our decision to continue investing heavily in U.S. capacity but the demand does not only come from 1 region. The rising demand is visible in many parts of the world. We see an attractive long-term growth outlook well beyond the current investment cycle. To meet this sustained demand, we are expanding manufacturing capacities globally and our transformer and switchgear capacity will increase by around 50% between 2026 and 2030. Looking ahead, we expect a clear acceleration in Grid Technologies performance during fiscal year 2026 driven by, first of all, higher revenue conversion from backlog and second, new production capacities coming online such as in Austria, Italy, Saudi Arabia or China. And third, obviously, the operating leverage and productivity gains we have because of the great backlog. And this underpins our confidence in delivering 18% to 20% margins already in fiscal year 2026. Grid Technologies is now not only the fastest-growing business in our portfolio but also one of the most profitable with visibility extending well into the next decade. And while we are expanding capacity for our products and solutions in Grid Technologies at record speed, we are simultaneously broadening our digital portfolio. The electricity grids in the different regions of the world are transforming, and the electricity demand is accelerating rapidly, driven by electrification, the energy transition and data centers. At the same time, renewable generation is increasing volatility and complexity and power flows. All of this offers us opportunities for new products to help our customers through this transformation. And besides the capacity expansion in our factories, we develop digital offerings to make the grid infrastructure more capable for the future. And we have recently launched our new software suite Noedra for Grid Technologies in the logic that these digital applications create the mind of the grid. Noedra adds a digital intelligence layer that helps customers operate increasingly complex grid systems smarter and more efficiently. It brings together 4 high-value software and service layers, Noedra Shield, which secures the grid end-to-end with cybersecurity and compliance, Noedra Flow, which optimizes transmission with real-time insights and dynamic capacity Noedra Node, which digitizes substations and turning them into intelligent self-monitoring assets; and Noedra Atlas, which supports the strategic grid planning and the energy transition. And together, this is a platform play, moving us towards recurring higher-margin digital revenue while unlocking value from our installed base. And 4 weeks ago, we inaugurated our own grid AI lab in Orlando together with customers and partners like NVIDIA. And this investment accelerates how we apply artificial intelligence across the power grid. The lab combined Siemens Energy's deep domain expertise with NVIDIA's advanced AI infrastructure. It enables us to deliver real-time insights, digital twins and predictive models that address pressing customer needs. And this is where we develop and train the intelligence behind Noedra, turning complex, multi-source grid data into actionable insights across operations, planning and system optimization. Customer feedback clearly confirms tangible value and practical relevance of our digital and AI-driven approach for day-to-day grid operations. Overall, this gives us strong confidence that digital solutions and Noedra in particular, enables the next chapter of the grid digitalization, scalable by design and anchored and clear customer value. And with that becoming an important growth driver for our Grid Technologies business. So exciting times and lots of opportunities ahead of us. And with that, I will hand it over to Maria.

Thank you, Christian, and good morning, everyone, from my side. Hope you're all doing well. Thank you for joining us today. We are continuing fiscal year 2026 with very strong momentum. In the second quarter, we delivered another record quarter in orders, continued high profitability and very strong cash flow generation. Now let me take you through the key financial developments for Q2 and the first half of the year. Moving to next slide, looking at the group performance. Q2 was another exceptional quarter. Orders reached EUR 17.7 billion, setting yet another quarterly record for Siemens Energy. The increase was driven by strong demand in the new units business at Gas Services and Grid Technologies. From a regional perspective, as Christian mentioned, the U.S. was a main contributor with order intake more than doubling compared with prior year quarter. Our book-to-bill ratio was 1.72 and our order backlog hit an all-time high of EUR 154 billion. That's 8 billion more in just one quarter, again, giving us excellent visibility for fiscal year '26 and beyond. Quarterly revenue increased to EUR 10.3 billion up 9% year-over-year on a comparable basis, with all segments contributing to the revenue growth, but primarily driven by Gas Services and Grid Technologies. We did experience some foreign exchange headwinds primarily driven by a weaker U.S. dollar. This weighed on the top line by roughly 550 basis points year-over-year. For clarification, currency movements continue to have no material impact on our profitability. This is due to our effective hedging strategies, which leave us with only minimal unhedged exposure and, of course, our global footprint with strong local for local sourcing. Profit for the group before special items was EUR 1.164 billion with a margin of 11.3%. This is up 220 basis points compared to Q2 of prior year. This substantial increase was supported by broad-based improvements across the portfolio and with Siemens Gamesa delivering the most pronounced improvement year-over-year. Again, just a word on the Middle East exposure, as Christian already mentioned, we continue to monitor the situation closely. And to date, the impact on orders, revenue and profitability have been limited. Net income for the group increased to EUR 835 million. This is up more than EUR 330 million year-over-year. Free cash flow pretax was very strong and reached EUR 2 billion. a significant improvement versus last year result. This was driven by the profit of Gas Services and Grid Technologies, customer advanced payments and reservation fees given the high order intake. Now let's take a quick look at our order backlog on the next slide. During the past year, our order backlog grew by EUR 21 billion, again, for that record EUR 154 billion in the quarter. 44% of the backlog is service related, supporting recurring revenues and attractive margin characteristics. Backlog margins continue to improve further across all business areas. In fiscal year '26, we now have approximately 93% revenue coverage for the second half of the year, and we are already just shy of 80% coverage for fiscal year '27. Now let me turn to free cash flow development. So as mentioned, the free cash flow generation continued to be strong in the second quarter, amounting to EUR 2 billion, and we reached EUR 4.8 billion for the first half of fiscal year '26. This performance again was supported by strong profit growth, increased customer advance payments and reservation fees. Driven by our strong order momentum and a positive outlook for the group's profitability, we revised our full year pretax free cash flow guidance upward from EUR 4 billion to EUR 5 billion to approximately EUR 8 billion. The share buyback program announced at the Capital Markets Day in November of up to EUR 6 billion through fiscal year '28, is progressing as planned. Since March 2026, approximately 11.6 million shares have been repurchased at an average price of EUR 157.1 million on May 8. As a result, the first EUR 2 billion tranche of the EUR 6 billion program is now substantially completed. Considering this year's strong free cash flow performance, we are pleased to confirm an acceleration of the share buyback program with additional repurchases of up to EUR 1 billion in our Siemens Energy shares anticipated during the current fiscal year. As a result, we expected total shareholder returns in fiscal year 2026, including the EUR 0.6 billion dividend paid in March will increase to approximately EUR 3.6 billion. So now let me review the individual business areas. Looking at Gas Services. Christian mentioned quite a bit here already. However, Gas Services delivered an outstanding performance and another strong quarter in Q2 of fiscal year '26. Again, orders were EUR 8.9 billion. This is up 32% year-over-year. and the highest order intake ever for Gas Services. The book-to-bill ratio for Q2 was 2.55, again, leading to a record order backlog for gas services of EUR 66 billion. The market for gas turbines greater than 10 megawatts saw remarkable strength during the second quarter. This quarter, Gas Services booked a total of 77 gas turbines for power generation, oil and gas, 26 of those were large gas turbines and 51 industrial gas turbines. Our Q2 market share for gas turbines greater than 10 megawatts stands at 27%. This is the #1 position. Revenue increased 15% year-over-year, the highest ever quarterly revenue in GS. This was supported by strong execution in new units with significant growth of 47% comparable. Service revenue was slightly below prior year. The service share as a percentage of revenue in Q2 decreased to 57% versus 67% in the previous year. This, again, was expected given the very strong new unit bookings in the previous quarters, and the new unit success today, as you know, structurally expands the high-margin service base of tomorrow. Profit for gas services before special items increased to EUR 552 million and the margin of last year's level, again slightly reflecting that business mix effect with a more pronounced share of new units, as I already mentioned. Free cash flow pretax was EUR 1.8 billion, significantly higher than last year. particularly benefiting from advanced payments on large orders. And overall, for gas services, a very strong quarter, and congratulations to the entire team. So now let's move on to our Grid Technology business. For here, Grid Technologies had a very strong performance in the second quarter. Orders increased to EUR 7 billion, up 42% year-over-year. This increase in order to take -- in order intake was in part driven by solutions business due to a large HVDC project order in the Baltic Sea with a volume of more than EUR 1 billion. In addition, the products business with Transformers recorded substantial growth, mainly by demand from the U.S. Book-to-bill ratio was 2.28 and order backlog also here a record increased to EUR 49 billion for -- good Technologies. Revenue up EUR 3.1 billion represented year-over-year growth of 12%. This was supported by solid execution across both solutions and products. As a result, we've upgraded revenue growth guidance for fiscal year '26 to 25% to 27%. This is from 19% to 21%, and we expect a significant acceleration in revenues for GT in the second half of this year, primarily driven by the increased capacities from our brownfield expansions and, of course, project phasing in the solution business. Looking at profit before special items for GT, this amounted to EUR 524 million, margin of 17.1%. The year-over-year margin decrease was primarily attributable to a one-off timing effects in prior year quarter of approximately EUR 100 million, of course, which positively influenced the prior year results. Therefore, on a comparable basis, the Q2 margin of prior year was actually 16.4% and therefore, an increase year-over-year. So in addition, we have increased our full year guidance for profit before special items for GT from 16% to 18% to 18% to 20%. For the second half of this year, just to repeat, we do expect a notable increase in margin. This is driven by the higher revenues and an enhanced contribution for higher -- from higher-margin products as well as improved project execution. Lastly, free cash flow pretax was EUR 735 million. This was supported by profit and milestone payments and continued [Technical Difficulty] to transformation of industry. Again, this business delivered another solid and consistent quarter. Orders were EUR 1.3 billion, slightly lower year-over-year, mainly driven by timing shifts in the Middle East particularly at compression and our EAD or electrification, automation and digitalization businesses. Book-to-bill ratio was 0.88 and the order backlog at the end of the quarter was EUR 8 billion, unchanged and stable from previous quarter. Revenue increased moderately by 5% to EUR 1.4 billion. Profit before special items improved to EUR 171 million. This resulted in a margin for TI of 12% for the quarter. Of course, this was mainly due to productivity improvements and a higher margin of the processed order backlog. Free cash flow amounted to EUR 46 million. This was lower than last year, mainly due to timing effects. Again, overall, Transformation of Industry continues to deliver reliable profitability quarter-over-quarter. Now moving on and turning to Siemens Gamesa, where we continue to see clear and tangible progress. Orders of EUR 846 million were slightly above the level of prior year quarter, mainly driven by onshore new units business, which also included some SG 7.0 platform orders. That's the successor to the 5x turbine. As anticipated, no material offshore order was booked in the quarter in the recent quarter. Therefore, book-to-bill ratio stood at 0.33 and the order backlog was EUR 33 billion. Year-over-year comparable revenue increased slightly due to the growth in the offshore business. Profit before special items improved significantly year-over-year to negative EUR 44 million. And the margin improved to minus 1.7% in Q2. This is compared to minus 9.2% a year ago or negative EUR 249 million. In Q2, Siemens Gamesa delivered continued financial and operational improvements. The positive development was mainly due to better productivity and increased cost efficiency in offshore as well as progress in the service business across the fleet. Free cash flow pretax was minus EUR 654 million, partly due to planned quality-related cash outs in the quarter. The Siemens Gamesa team continues to work diligently through the matters step by step, and the direction of travel is very clear, and we remain confident in achieving breakeven supported by the operational measures in progress and already implemented. So now let me move on to our revised outlook for fiscal year '26. So based on the positive business development in the first half and the strong market demand, we have raised our outlook for fiscal year 2026 across all key financial metrics. The change in the outlook is due mainly to a stronger-than-expected performance at Grid Technologies. For Siemens Energy, we now expect comparable revenue growth of 14% to 16%, up from 11% to 13%. Our profit margins before special items is now 10% to 12%, up from 9% to 11%. Net income is expected of around EUR 4 billion, up from EUR 3 billion to EUR 4 billion, and free cash flow pretax is now at around EUR 8 billion. This is up from EUR 4 billion to EUR 5 billion. And let me briefly highlight the changes within the business areas. So in Grid Technologies, we now plan a comparable revenue growth of 25% to 27% and previously 19% to 21% and a profit margin before special items between 18% to 20% before this was between 16% to 18%. And in Siemens Gamesa, we now assume a comparable revenue growth of 3% to 5%, which was before 1% to 3%. And of course, we confirm the profit margin before special items at breakeven. Furthermore, one last piece of information that I'd like to share with you is that we intend to provide you with new midterm targets for fiscal year '30 with our full year results in November. So with this, thank you very much for your attention. And I now hand back to Christian for some closing key remarks.

Thank you, Maria. And let me brief you wrap it up. Looking back at the targets we set for ourselves at last November Capital Markets Day. I am pleased to say that we are well on track to create sustainable shareholder value. In the first half of fiscal year 2026 has been an excellent start as you saw with our upgraded guidance. And I want to sincerely thank our team purple here at Siemens Energy for their outstanding commitment and performance and our people stand side by side with our customers, doing everything possible to keep critical infrastructure running. The importance of reliable energy in our daily lives has never been higher. I'm proud of what our team has achieved, even more excited about what lies ahead of us. And with that, I would like to hand it back to Tobias for the question and answers.

[Operator Instructions] So Max Yates from Morgan Stanley.

Christian. So my question was really just on the order intake over the next few quarters in Gas Services. If I sort of back out of your comments on the year-end commitments, it looks like you're pointing towards sort of 8 gigawatts a quarter over the next couple of quarters. At the midpoint, maybe 10.5 gigawatts at the upper end. And I guess there's a lot of data that we can see around slot reservations. What I'm really trying to get to is, is there a reason that we're sort of seeing orders level off at those -- at that kind of range? Is this kind of the new normal? And I guess I would interpret your slot reservations in the high 20s or that dictating the next 4 quarters of orders at about 7 gigawatts a quarter. I'm just trying to think about what do we see as a sort of steady state of orders over the next 12 months, over the next 2 years? And should we think about it, that 12% to 13% just truly being exceptional. So any color there on how customer conversations are feeding into that.

Thanks, Max. Great to hear you. Let me give you a free remark. We have to keep in mind, this business is still, let's say, not a quarter-by-quarter business. There is certain obviously lumpiness in that and not get too fixated [ on the quarter, ] we said it before, and I would repeat it, we feel comfortable with this elevated level of the gas turbine market and we see this continuing. And you will see also going forward quarters on a good level, then on a lower level a little bit, but you have to look really on a year-by-year basis. And in this, we would continue to repeat that we see sufficient opportunities to believe that this elevated level is going to continue. What we have seen also now in the last quarter, we always try also to balance out really the segment. how much data centers. And I think with the 25% to 30%, that is something which we enjoy. But at the same time, we balance out. So we also now you've seen some quarters coming in and you will see it coming in also classical operations, Asia and really balancing out. And we are trying to steer smartly through it to build a great portfolio on projects. But as I said, elevated level, we believe this is going to prevail and don't get too fixated on the quarter. And for us, it's really about diversity of the backlog in segments and in regions. Thanks.

So the next question goes to Gael de-Bray from Deutsche Bank.

Yes. Could you tell us what was the book to bill of the Service segment for the Gas division in the second quarter, please? And I'm actually wondering why the service revenues of the Gas division have been kind of muted over the past couple of quarters, even slightly down this quarter. I mean -- does it mean that eventually the Gas division will rather be trending towards the low end of its targeted revenue range for the year?

I'm not sure whether I heard everything correctly. I mean -- sorry, again, the quality was really bad revenue development or what...

Do you need me to repeat the questions?

just a second. I would honestly say, I mean, you always have, let's say, mixed elements in terms of how you look on the different quarters. But I would not overly interpret it. I would have to say, I don't know, Maria, how you look on this?

Gael and maybe just to reiterate, what I meant by we have, let's say, a different mix is that, of course, the new units is more pronounced in the quarter. But if we look at it from a slice, it's really, we said level, slightly down, but level from last year. And again, looking at this from a quarterly basis, there are puts and takes that come in that affect that quarter-over-quarter. But we're not at all worried about it or concerned about it. And when it comes to the book-to-bill, just overall, again, for Gas services is 2.55. So you can interpret that with new units and service, both of those book-to-bills were very strong, well above one. And this is not -- we don't disclose it by units and service, but I can assure you that this was very positive on both counts for the quarter.

The next question goes to Sebastian Growe BNP Paribas.

One on free cash flow. I was wondering if you could help us how we should think about the cash generation beyond '26 in the wake of both positive commentary on the market outlook, particularly at GT, for which the order momentum appears to further build up here. And also SGT, in particular, has reached the '28 target margin level of 18%, 20% 2 years ahead of plan. So if you could comment on that, please?

Sure. Thank you, Sebastian, for the question. Maybe let me start with the free cash flow first. And I think this is like we mentioned, we have excellent cash generation. Clearly, cash conversion rate is above 1. And as I mentioned, looking at our -- for this year alone, we have roughly -- if you look at the EUR 8 billion that we're anticipating, roughly EUR 5 billion of that cash flow comes from operational profitability alone in that regard. And like we said at the Capital Market Day, and I showed that I do not expect that cash flow would reduce in years to come, not at all with a book-to-bill greater than 1 across all businesses anticipated. And overall for Siemens Energy, we still see that positive free cash flow generation continuing but beyond 2026, not only for Grid but also for the other businesses.

So the next 3 questions go to Ajay Patel, Phil Buller and Alex Jones. So Ajay Patel from Goldman Sachs. Please go ahead.

Mine's on Grid Technologies as well. Just thinking about the margin expansion for this financial year in terms of the guidance. How much of this is operational leverage into higher volumes? And how much is actually driven by mix effect? Are there components here in the business that are better margin that are growing faster that could be relevant for when we're forecasting the margin evolution of this business.

Thank you for the question on the profit for GT. Look, it's a great development, right? I mean, we're really reflecting strong execution momentum. And as Christian mentioned, this is also on the back of some of those brownfield expansions and just normal project phasing. We have high visibility there in terms of security materials. They're already in-house. Manufacturing is on track. A lot of the projects are in final assembly stages and we look also at commercial terms. But in terms of what you mentioned about mix, look, there is project phasing driven by our large HVDC projects, Normally, those reach milestones under the POC method and sometimes that is lumpy. But don't forget, underlying in our GT business is a very well-running what we call product business, which is really our large power transformer business, which is -- we showed you that on our backlog margin, right? The backlog margin in GT increased, and some of that is attributable to the large power transformers and that's kind of that underlying growth, if you'd like, that steady portion of the profit that we see in GT. And what the team has done really exceptionally is not only have they brought new capacity online they've done that with very little additional what we call nonconformance cost. So that's why you're seeing a lot of that profit dropping. So to answer your question, yes, some of that is related to pricing, but a lot of it is related to operational execution and operational excellence in the factories.

So the next question goes to Phil Buller from JP Morgan.

I have just a couple of follow-ups on cash, if I can. It's great to see the Gamesa P&L loss is now at about EUR 100 million, but you still have the EUR 1.2 billion cash outflow. Has your breakeven time line changed at all on the Gamesa topic and then in terms of CapEx outlays, again, that's also been quite low in the first half of the year at around EUR 700 million. What is holding that back? Because it doesn't seem to be impacting your growth at all and are you considering any additional capacity expansion plans from here?

Let me start it with maybe Gamesa. And so like we mentioned, we remain committed to breakeven for this fiscal year. Absolutely. We remain very confident in that regard. The team is working diligently to ensure that we achieve that. With respect to free cash flow, I've already indicated that the Gamesa free cash flow will remain negative in fiscal year '26. We see that also in Q2. Likely in the 4-digit arena is how we've messaged this. However, better than fiscal year or on level with fiscal year '25. And there's 4 reasons why really you see this free cash flow, if you'd like, trailing the profit development. One is the quality cash-outs. And we provide transparency on that quality cash out and again, as we've said before, the largest cash out is in the years of fiscal year '25, so prior year and this year, where we've indicated around the triple mid-digit around EUR 400 million, let's say. Then secondly, of course, we're working on many project improvement, risk mitigation and cost out measures and those will also have perhaps a delayed cash effect due to the phasing of percentage of completion or POC. Then don't forget, we do continue to have CapEx related to the offshore ramp-up that continues to go through and has cash impacts, of course, this year. And last but not least, this is something that's near and dear is the reduction in contract liabilities. If you recall, we even mentioned this at the Capital Market Day. What we're trying to do is look at phasing of orders, of course, and deleveraging, shifting and prefinancing towards, let's say, other parts of our business, and we continue to optimize the prefinancing on a group level, considering opportunities, risks, et cetera. So Phil, and looking at those 4 items, of course, we do expect a negative free cash flow here. And as we mentioned at the Capital Market Day, we expect free cash flow to be positive in fiscal year '28 for Siemens Gamesa.

Yes. Maybe let me comment briefly on the CapEx piece. I mean this will be, let's say, higher in the second half. And obviously, this is more booking things. The factory expansion, as I said, are running well and are ramping up. And so that is not any major thing. It's really more or less on how it is booked. With regard to additional capacity there, I would say stay tuned and call in, in quarter 4 when we want to give more new midterm outlook. We are reviewing these things. We see fantastic growth momentum that's very positive, and we will share more insights in the quarter 4 call.

So the next question goes to Alex Jones from Bank of America.

Great. I guess, over the past 2 quarters, you've signed 19 gigawatts of new slots, whereas your U.S. peers signed 40 gigawatts does that reflect your efforts to balance out customer mix and therefore, you're happy to see some market share on U.S. data center deliveries towards the end of the decade. Or is there anything else we should consider to explain that divergence like a greater focus on firm orders from you rather than new slot reservations?

Yes. I mean I wouldn't compare myself against somebody else, we just can say on how we look on it? Absolutely. What we're trying to do with the reservation agreements is to keep, I would say, a decent time line in terms of also how fast we convert them. And that is obviously an important element in terms of this ratio between reservation agreements and firm orders. And also keep in mind that -- I mean, majority of the business still is obviously classical utility business. Not each and every order comes with a reservation agreement. So we have to avoid that we draw this conclusion immediately. Some of it is classical business, also particularly in other regions. And as I said, we had the quarter-by-quarter trying to balance it out a bit, see Asia coming up again. So that is nothing, let's say, particular to interpret into this in this logic, but it's obviously for us an element to have a short-term conversion on the reservation agreement.

So the next 3 questions go to Vivek Midha, Chris Leonard and Ben Uglow. Vivek Midha from Citi.

Thank you very much, everyone, and good morning. I hope you can hear me well. I'd actually like to follow up just on that specific comments. You mentioned about having a short-term conversion. Are you referring to short-term conversion of the slot reservation into firm orders? Or is it more about the lead times on the projects? I'm curious as to how you're treating the question of reservations and orders for delivery slots post 2030. When do you expect to start having more conversations with your customers about those kinds of slots how are you thinking about that longer-term project pipeline?

No. The statement was meant really to reservation agreements into firm orders. That is -- I mean, in terms of the timing -- we are having discussions now for obviously, projects in the early 30s. That is developing and will continue also going out. But as I said, for me, it's obviously something where we still try to convert it then in a decent time frame from orders. That's it, right? And I mean question was a bit also, can you read anything into it? And I'm struggling to say sometimes I have to say it's a great market. It's a broad interest. We see also now customers, which are not all of the data centers coming back and obviously realizing activities. Interestingly enough, I think despite high oil and gas prices, we see across the board, also the interest into LNG-based facilities continuing. So that means also the market believes that midterm, it will play out. And that's it, right, in that regard.

So next question goes to Chris Leonard from UBS.

So can you just speak to the evolution that you've seen in order dynamics for gas turbines through Q3 to date? And whether or not you're also seeing continuing momentum in that backlog margin for the turbine business, and you've also been clear that you expect a slowing order intake into the second half of the year. Would you still expect to have the 70% split on firm orders to be sustained into full year '26 for that total commitment of sort of 90 gigawatts to 100 gigawatts that you've guided to.

Yes. Thank you. I have to see on how to best frame it. I mean if I look on quarter 3, I mean, it looks still very good, right, in terms of all what I see coming. I cannot tell you how much is no reservation agreements then and all this because -- this is then, I mean, tight planning. But quarter 3, it looks good. I would believe quarter 4 will be a little lower. But keep in mind, we are now ready at what is it, EUR 17.5 billion from -- EUR 17.6 billion in GS. And we were last year at EUR 23.5 billion in the total year. So obviously, seeing the ramp-up of capacity, it will not every quarter be EUR 10 billion or EUR 8 billion or EUR 9 billion, and this is why this will balance out. And this is why I would always warn on this quarter-by-quarter. And if you look beyond '26 also '27, all what we see looks like a good pipeline. And in that regard, on the order side, works all out. And we will every year until 2030, increase our capacity in the factories on the gas turbine side in terms of coming with additional capacity in, and that helps us, obviously, to generate the revenue. Pricing is good and still continues to contribute positively to the backlog margin, and I see that also for the quarter 3.

Yes. Ben, unfortunately, just skipped over the line. So the next 3 questions will be going to Sean McLoughlin, Richard Dawson and Vlad Sergievskii. So Sean, please go ahead.

A question on Grid Technologies. You've highlighted the digital aspect. I'm just wondering, but it does sound like the core transformer business is really the part of the business that's driving most demand. Just where are we in terms of digital percentage of overall sales or orders and where do you see that progressing over time? And is digital more about getting a customer in the door rather than improving the margin? Or is digital also a margin accretive component.

Thank you for this question. First of all, absolutely, right. If you look on our revenues and orders to [indiscernible] driven by, as Maria said, the products, the transformers, the solutions business and digital is just coming up. What I wanted to flag up that is really coming up and that will, over the next, let's say, 5, 10 years, become a substantial business, and we are working on it on all ends. And it will be decisive to use this infrastructure, which we now physically build as most effective as possible. And we believe this can be an enormous value contributor. It will take some time to ramp it up also in terms of margin. So a lot of these things are developments money and investments, which we are currently doing. Also, we have done some smaller bolt-on acquisitions on little things here and there. And we believe very much in really the -- how should I say, autonomy of the asset to a certain extent. Yes, because we installed so many transformers, you would want your transformers to operate in a certain way, even so -- to not, let's say, controlled by a human or whatever. And this is what we're working on. But it is more to give you the outlook in terms of what next is to come until 2030 and beyond. And going forward, I do believe the average, it will be accretive to the margins. But it's a ramp-up curve, and it's a new business to be built up. But when I see what has happened in the last 12 months on the AI side and what were you able to do on really new applications, which are not part of an overarching software suite and so forth. That's super interesting.

So the next question goes to Richard Dawson from Berenberg.

Just one on the orders for Gas Services. So clearly, very strong demand from the U.S. data center vertical, but have you seen any of the data center customers starting to cancel projects due to objections at the local level, So, really issues around energy availability or water supply, for example. And if this had any effect on reservation agreements.

I wouldn't call it cancellations in particular. No, not like this, but what we do see is that customers trying -- particularly bigger customers trying to shift between sites where they see, let's say, different time lines on regulations or approvals in terms of permits. And that is an element in terms of saying where can they get whatever air permits quicker and how do they shift it around. But so far, these customers have a portfolio of different sites and projects where they then want to deploy the assets too. But this is more or less it. Fundamentally, that you would say you see bigger amounts of cancellations, no.

So the next question also Vlad Sergievskii from Barclays.

Will ask also about Gas Services orders, I'm afraid, trying to look at the big picture here. In the last 2 quarters, you booked 25 gigawatts of firm orders. This is 50 gigawatts annualized just for Siemens Energy versus your Capital Markets Day estimate of the entire market being around 100 gigawatts per year going forward. Is it underlying market demand so much higher than you thought back in November or is it particular phasing of orders than this 100 gigawatt number for the markets you hold?

I hope that I heard everything correctly. I'm not 100% sure, but I mean, on average, as we indicated -- I mean the picture has substantiated from the Capital Markets Day. It has not fundamentally changed. And already at the Capital Markets Day, we indicated this around 100 right, 100 gigawatt type of market, which we also see going forward with obviously a certain portion in this coming from data centers, which we will see continuing, which we believe. But that is pretty much in line, obviously, with what we said on the Capital Markets Day with a slight note on a bit more positive and substantiated now really coming through.

Thanks a lot. So Ben Uglow is back in the line and then afterwards comes Alex Virgo and then Lucas Ferhani, so Ben, second try, please.

I just wanted to get a kind of qualitative sense of feeling for what you're seeing in terms of the data center market, the 5 gigawatt order number is obviously pretty noticeable. But in particular, I'm interested in your portfolio. And in terms of where you are seeing the greatest strength in demand. Has there been any change at all in the last 3 to 6 months. And the reason I ask is that we've got a lot of new companies or new capacity, I should say, in all kinds of different areas from gas, diesel, even fuel cells, et cetera. And what I wanted to know was, have you seen any kind of shift in the type of units that are being requested from Siemens Energy.

Yes, it's not a shift. Hi Ben, first of all. It has not been a shift in the request as such. It has been a shift in what we sometimes put together or offered for customers with a certain need in terms of the different frame sizes. And looking really on what we can do and obviously also we also try sometimes to find really workaround solutions like redeploying units from elsewhere and trying to build bridges for customers, which are obviously an urgent need. So it's more around this. And obviously, yes, we also see the different applications, including fuel cells, which is more driven by elements. How fast can you get an air permit and how fast can you deploy certain things. But it's more really from a perspective, what can you do and not so much in terms of I want. We fundamentally, and I shared that before, have obviously took an extra effort to expand our midsized gas turbine capacity, which is increasing faster than the large gas turbine capacity and this has obviously helped also on the data center markets then to come with, whatever, 5x SGT-800s or so type of solutions. But that was more driven by what is -- what can be made fast available.

So next question goes to Alex Virgo from Evercore.

Christian and Maria, I wonder if you could just talk a little bit to GT for us. I guess what I'm just trying to reconcile here is the visibility that you have in that business versus the significance of the upgrade and the phasing through the year. That would be super helpful. And Maria, I could squeeze a [ chief ] on tariff framework changes. Any comments on that would be really helpful.

Okay. No. Sorry, Alex, it's the audio quality is medium. No. I mean, what we are seeing, obviously, and I hope you said GT business, right? I heard you correctly. What we're seeing in GT going forward is obviously, a strong transformer business continuing. We see this demand obviously on the [Technical Difficulty] centers activity. Keep in mind, if I have it right from the top of my head, I think 2,000 gigawatts of capacity globally are waiting for grid connection, something like this, right? So it's an enormous amount of strengthening grid infrastructure. And we'll continue to prevail. So the visibility going forward is good in terms of the demand needs. And we always have said, obviously, certain of the solutions business and project business will be more bumpy in terms of getting into rest of big HVDC. But also there, I would say, let's take an example in Europe. We see this continued planning being executed. So in that regard, visibility going forward is good. This is why we're expanding so much capacity. I mentioned the 50% capacity expansion between '26 and 2030. And we believe the market will still be, let's say, tight at that time. So I would say so far, so good.

And yes, let me make a brief word, Alex, on your question regarding tariffs. So I mean, of course, you know we booked around the EUR 200 million or so tariffs of last year. We've included -- fully included tariff impacts that are expected for this year. And as you know, this situation remains slightly volatile. And of course, we don't expect significant impacts on new orders and/or our margin expansion. Maybe let me put that out there to start. Secondly, when it comes to the new, let's say, the tariff and the refunding, if you recall, one of the reasons why we're so resilient with respect to [Technical Difficulty] really on to our customers. We haven't had to loose anything with respect to refunds or anything like that. And of course, should that be the case if and when, then of course, we would [indiscernible] back to the customers accordingly. But nothing really to report on that side at this point in time, Alex.

As we have 3 more questions on the line or 2 more questions online, please really quick Q&A now. It's Lucas Ferhani now from Jefferies, please.

Just one on wind. You see there were some one-offs in Q1. The margin was slightly better. And then you pointed that Q2 could be kind of similar to slightly worse Q-on-Q, eventually, it's better again. So just the path there, how do you see the second half and the improvement do you have extra confidence in getting to that breakeven.

Maybe just to clarify to make sure that, of course, you saw for this quarter, we have a negative EUR 44 million for Siemens Gamesa. And what we always said is we want to be breakeven by the end of the fiscal year which means we said that we would progress profitability through Q3 and Q4. So we expect the profit -- slight profit to come in both of those quarters to ensure that we have that breakeven, which we remain committed to for the fiscal year.

So now the last question goes to Alex Hauenstein from DZ Bank, please?

Looking into SGRE, I'm wondering if there is a good chance to see a speed up of the ramp-up for the formerly 4x and 5x turbines, which have been overhauled here. So I'm wondering, at the end of the day, what could be a level in terms of gigawatts that you might reach, let's say, looking into 2030 plus/minus, what do you think here? And at the end of the day, how big in comparison to how big you have been, you might end up in terms of what you see currently and what you're planning.

Thanks for the question. I mean, first of all, we will have to see now how this ramps up. It will be in a couple of gigawatts type of range, and this will also depend in terms of would be on onshore reenter U.S. or not. And there's another thing which is coming, which is all the repowering, right, which is obviously contributing in onshore also in Europe at one point in time to that. The onshore business for us will be always smaller than the offshore business going forward. I mean this is in terms of size on how I would look on it. And keep in mind, the thing what we're trying to do is to have, let's say, a decent enough flight level that we can entertain in a profitable service business and really make sure our infrastructure, which we entertain is loaded. It is not my major growth engine in the company. That's not the desire. But I would say at the end, a couple of gigawatts coming, but let's see on how the next particular 12 and 18 months develop it, we see a good interest in the units. That's positive. It just takes time because of the process, particularly in Europe, to get this then afterwards into the projects committed. I'm more obviously now look in particular with regard to '27 on the large orders on the offshore side.

Thanks all for the extra time. If there's any additional questions, you can always reach out to the Investor Relations team. But with that, Christian, do you want to conclude the call with some extra comments.

I mean, first of all, thanks very much for your time and all the questions and your interest in the company. I have to say -- I can only repeat it. It's a great time to be in the energy industry. There's more to build and more to come. And I'm really pleased also to see that the people are able to execute. I mean, this is what Maria mentioned with the capacity expansions. I had big concerns at the beginning of the year in terms of, okay, is it really all coming in terms of getting the factories up and running. That's positive. And we take it from here and take it forward.

Thanks, Christian. So everybody, have a great day, and talk to you soon.

Thank you. Bye-bye.