Changing Focus

Goodbye Consumer, Hello Energy

Kaeser and Davis2 dpa
Joe Kaeser will be relying more and more on his new energy division head, Lisa Davis.
  • Why it matters

    Why it matters

    Joe Kaeser is facing some pressure to ensure a quicker turnaround at Siemens amid stiff competition.

  • Facts

    Facts

    • Siemens’ fiscal full year profit rose 25 percent to €5.5 billion ($6.9 billion) due to lower write-offs than the previous year.
    • A 2014 operating profit margin of 8.1 percent at Siemens’ energy business is below the industry’s benchmark of 10 to 15 percent, Siemens said.
    • For the energy operations, Siemens warned there was pressure on sales growth and profits due to high competitiveness.
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    Audio

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Joe Kaeser can breathe a sigh of relief – at least for now.

The Siemens chief executive on Thursday announced solid results for the German conglomerate and raised profit expectations. Europe’s largest engineering company also said it will sell its hearing aid business, which will bring in extra cash of more than €2 billion, or $2.5 billion, in the coming quarters.

The move confirms that Siemens is progressing in its transition towards the lucrative energy market and away from its consumer goods business. The higher profit figures, which were in line with analysts’ expectations, will also buy time for Mr. Kaeser to continue his restructuring plans for the company, and to improve the prospects for its struggling energy division.

“Siemens has said it wants to exit the end-consumer market, and the sale is in line with this strategy,” Ulrich Trabert, analyst at Metzler Bank in Frankfurt, said about the sale of the hearing aid business.

“You might think we should have started these changes sooner, but it takes time to change.”

Joe Kaeser, Siemens CEO

Despite a slight 2 percent fall in annual revenue to €71.9 billion, Siemens reported higher earnings for the past fiscal year, which ended in September. Profits rose from €4.4 billion to €5.5 billion due to lower write-offs for projects that had been unsuccessful. Siemens is now aiming for a 15-percent rise in profit per share for the new business year.

But while the lower write-offs have generated profits for the books, Siemens has barely made any progress in completing the restructuring program “Siemens 2014,” which was already started by Mr. Kaeser’s predecessor, Peter Löscher. The program originally intended to generate a 12 percent return on sales, but Siemens has only been able to achieve 10 percent so far.

Clearly, the company is still in the midst of transition. This starts with the recently announced sales of additional consumer divisions.

Investors gave Siemens the benefit of the doubt on Thursday, pushing the stock up 0.5 percent to €89.54 by noon.

Siemens has agreed to sell the hearing aid business to finance investor EQT and the Strüngmann family, which owns Hexal, for €2.15 billion. With sales of €700 million, the hearing aid business is a leader in its sector and Siemens recently launched a product which improves users’ spatial hearing.

 

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The supervisory board has also agreed to take steps to spin off the medical technology business, which is also expected to generate a significant profit, sources familiar with the matter told Handelsblatt. Siemens has already agreed to divest its hospital IT business, which unlike hearing aids had never been a strong earner, and sold Siemens’ share in the Bosch-Siemens home appliances business.

Siemens needs to pivot to new growth areas if it wants to raise its stagnating revenues. With consumer goods largely gone, the focus will turn to Siemens’ troubled energy business, which makes up about half of the firms’ profits and is being counted on to revive the company’s fortunes over the long term.

This will not be easy. Competition in the energy sector is only likely to get tougher after Siemens’ chief U.S. rival General Electric acquired the French energy firm Alstom.

“It remains a very competitive market. In the wind energy sector there is strong demand but there are also margin problems. There is also pressure in other energy fields – it remains a difficult business. Management has also said that margins will remain under pressure due to overcapacity, possibly beyond 2015,” Mr. Trabert of Metzler Bank said.

The pressure will be on Lisa Davis, who was brought earlier this year from the Dutch oil firm Shell to turn around the fortunes of the energy division. Having spent her career in the oil industry, the company is looking for her to lead a push into the booming oil and gas market in the United States.

One sign of this: Ms. Davis will be leading the energy division from the company’s U.S. headquarters in Houston, Texas. Her predecessor, Michael Süss, had resisted making the move to the United States, according to company sources.

The refocus on the United States has also been helped by the purchase of U.S. compressor manufacturer Dresser Rand only a few weeks ago, marking the largest acquisition in the company’s history. Mr. Kaeser defended the purchase as a “very, very good addition to Siemens” that will help the company save as much as €150 million through synergies.

Siemens Energy-Siemens
Siemens is staking its future on wind parks like this one. Source: Siemens AG

 

These savings will be needed. A closer look at the energy division shows that all is not well. Net income for the fiscal year ending on September 30 fell to €2 billion from €2.6 billion the previous year. The division’s profit margin for the year was only 8.1 percent, and fell even further to 5.7 percent in the final quarter.

There are a number of special factors that led to this decline. One is that Siemens long profited from a boom in large gas turbines, only to more recently find that smaller, decentralized solutions are in demand. Ms. Davis noted that many manufacturers are now trying to work off overcapacity, which is putting pressure on prices and profit margins. Ms. Davis has announced increased investment in research and development to stem the decline, but this will take time.

There are more home-made problems. Siemens’ wind power division posted a loss in the last quarter of €223 million amid quality control problems. Siemens has been forced to install additional parts on wind turbines that have been wearing out more quickly than expected. Ms. Davis argued here, too, that this is a problem for the entire industry.

The energy transmission business also posted a loss. While the company is doing a better job of cutting its losses in connecting wind tubines to the wider electricity network, additional problems have arisen here. One example is trouble with an energy transmission project in Great Britain.

For a conglomerate like Siemens, such “special factors” within certain divisions have always been a part of the revenue story. One year it was problems in the construction of trams, another year it’s troubles at a power plant project. Lately is has been problems in the energy division – troubles in connecting offshore wind parks to the energy grid alone has cost the company nearly €1 billion over the past few years.

Such special factors have seen Siemens write off around €700 million in past years. This year it was €900 million. Joe Kaeser said the company needs to do better here, and has set a goal of having the average losses related to special factors.

It will be down to Ms. Davis to see that these problems are held in check – and see that Siemens can expand its footprint in the energy sector. Only if Ms. Davis can turn around the energy division will Mr. Kaeser’s overhaul of the whole company really prove a success.

Critics say that taking on so many new things – a new external manager for the energy business, a new location and a new focus – all at once is a risky strategy. But Mr. Kaeser’s progress has bought him time to continue his strategy of honing the business.

Responding to questions at a press conference Thursday, Mr. Kaeser told journalists, “You might think we should have started these changes sooner, but it takes time to change.”

 

Axel Höpner has closely followed Siemens as the head of Handelsblatt’s Munich office since 2008. Christopher Cermak, Gilbert Kreijger and Allison Williams contributed to this story. To contact the author: hoepner@handelsblatt.com

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