Earnings Surprise

At Siemens, Signs of Turnaround As Problems Loom from Energy Business, Russia Sanctions

Kaeser
Joe Kaeser presented Siemens' financial figures this morning.
  • Why it matters

    Why it matters

    Siemens restructuring plan to improve profitability is slowed down by its energy operations. Sanctions against Russia might also hurt.

  • Facts

    Facts

    • Siemens energy operations may pose problems “well into 2015”, chief says
    • Operating income jumped 36 percent to €1.4 billion ($1.9 billion) in the April-to-July period
    • Siemens CEO concerned about Russian developments.
  • Audio

    Audio

  • Pdf

Siemens, while reporting better-than-expected quarterly earnings amid a far-reaching restructuring, warned on Thursday that problems in its energy businesses, and the consequences of western sanctions against Russia, could weigh on its profit well into next year.

In a conference call, Siemens Chief Executive Joe Kaeser said several energy projects such as its offshore wind parks in the North Sea posed “potential risks going forward.”

“It takes time for it to grow out of the backlog of legacy issues,” Mr. Kaeser told analysts and journalists. “We’ll have some more quarters where we’ll have challenges. It may well go into 2015.”

When taking Siemens’ helm last year after serving as its finance chief, Mr. Kaeser initiated a divestment program to exploit the company’s most-profitable businesses, and set in motion plans to eliminate a management layer.

“It takes time for it to grow out of the backlog of legacy issues. We’ll have some more quarters where we’ll have challenges. It may well go into 2015”

Joe Kaeser, Siemens Chief Executive

Mr. Kaeser gave the warning as Siemens reported an 27 percent increase in net profit in its fiscal third-quarter, which ended on June 30, to €1.4 billion ($1.9 billion), as sales fell 3 percent to €18 billion.

In the conference call, Mr. Kaeser said his cost-savings programs were working but were being held back by the lackluster performance of its energy business.

“Continued challenges in the energy business held back an even stronger profit improvement for Siemens as a whole,” Mr. Kaeser said.

He acknowledged that profitability in energy had been disappointing and said competition would remain strong in the business.

But he underlined that structural changes to Siemens’ energy business would eventually pay off.

“We are looking at how we organize the whole sector from transport to distribution,” he said.

The challenges facing Siemens in energy are significant.

The company’s profit margin for wind power is just 2.7 percent, far below the potential the business offers, Mr. Kaeser said.

Siemens had been successful in improving its offshore business, he said, adding: “We have to bring down the cost-per-megawatt but we are the market leader for gigawatts and we want to hold onto this.”

In its power transmission business, Mr. Kaeser said additional costs for offshore activities remained a challenge.

“There is no fast solution for that, we are continually working on it,” he said. Transformation and restructuring of the business continued, he said: “We have a clear plan and will continue to improve.”

 

 

Siemens CEO Joe Kaeser July 2014 Source Süddeutsche Zeitung
Siemens CEO Joe Kaeser. Source: Süddeutsche Zeitung

 

Mr. Kaeser stated that it had taken time to improve partly because of Siemens’ reliance on suppliers. “We could not achieve all the improvements we wanted as it wasn’t all in our own hands.” Now, lessons had been learned, he said. “We have looked very closely at our implementation processes and identified some no-gos,” he said.

Mr. Kaeser said that the energy business continued to be affected by legacy projects but that much of these had been completed and he was unconcerned.

Looking ahead, he said, “we will invest strongly in our technical performance and continue to improve our innovation and our efficiency.”

Russia has little effect on our business for 2014 – we will deliver what we can – of the contracts we have they are form our plants in Russia to local customers in the country but we will watch developments closely.

 

The newest challenge for Mr. Kaeser goes beyond the energy business and restructuring the group. Germany supports increased sanctions against Russia, which could affect Siemens’ business in the country.

Operating income jumped 36 percent to €1.4 billion ($1.9 billion) in the April-to-July period, the company third quarter of fiscal year 2014, compared the same period one year ago. Analysts had on average an operating income of 1.3 billion euros, according to a Bloomberg poll. Third quarter sales were down 3.7 percent to €17.9 billion. Excluding currency effects, sales were up 1 percent.

Siemens took charges of €102 million related to its energy operations.

The newest challenge for Mr. Kaeser goes beyond the energy business and restructuring the group. Germany supports increased sanctions against Russia, which could affect Siemens’ business in the country.

On Tuesday, the European Union decided to block future defense exports to Russia, the sale of certain high technology equipment to the Russian army, and special technologies for oil extraction. In addition, it will become harder for Russian companies and banks to obtain finance on European capital markets. The United States announced similar sanctions on Tuesday.

The Siemens chief executive expressed concern about developments in Russia, whose economy is expected to suffer from the sanctions.

“Obviously we’re very concerned about the development, which is terrible. We’ll have to see what happens. It is more a humanitarian affair than a business affair,” Mr. Kaeser said.

The Ukraine-Russia crisis will not impact Siemens’s 2014 guidance, Mr. Kaeser said, declining to give a prediction for next year.

“If it comes to sanctions and escalation of course the business will be affected,” he said.

He noted that Siemens sales in Russia were relatively small – about €2 billion compared to total 2013 annual sales of €75.89 billion, or less than 2 percent – and that part of the sales were produced locally in Russia and not affected by sanctions.

The firm employed 3,100 people in the country, comparing with 362,000 employees in total, according to data from 2013.

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