Siemens' energy push challenged by fewer turbine orders

Siemens energy push challenged by fewer turbine orders

ALEX WEBB

BERLIN (Bloomberg) -- Siemens AG Chief Executive Officer Joe Kaeser’s plans to be the “go-to” company for energy generation and distribution, as he put it in July, may have to wait.

Profit at the energy division, led by board member Lisa Davis, plunged by more than 25%in the three months through September. Profitability of gas turbines, one of the manufacturer’s biggest sales contributors, will fall further, compounded by an expected decline in orders, she warned today.

“We certainly have some work to do to ensure our success in this business environment of today and tomorrow,” Davis, who joined Siemens in August, said at a Berlin press conference.

Kaeser admitted in May that Europe’s biggest engineering company, which has 60 units that make everything from trains to medical scanners, had been slower than competitors to make the most of the boom in U.S. shale gas. While he spent 6.8 billion euros ($8.5 billion) this year to buy Rolls-Royce Holdings Plc's energy business and oil-and-gas equipment maker Dresser-Rand Inc., analysts say the performance of Siemens’s energy business was still disappointing in the fourth quarter.

“Our bottom line on the results is that we are disappointed by the inability to manage the contract issues in energy,” said Morgan Stanley analysts including Ben Uglow.

More Charges

Siemens booked charges of 264 million euros at its energy business for unexpected repair and maintenance costs related to wind-turbine projects and delays to power-transmission deals, resulting in a 29% profit drop to 403 million euros. The company’s overall profit rose 28%, helped by surging earnings at Siemens’ infrastructure and industry operations.

While the company should be able to fix the problems in the wind business “relatively rapidly,” Siemens may struggle to increase profitability at its power and gas operations because of declining prices and the company’s small service business, said Gael de Bray, a Paris-based Societe Generale analyst.

“The real issue is related to the core profitability, which comes from power and gas,” he said. “Price pressure and an unfavorable mix with a lower service business are going to weigh it down.”

Adjusted earnings before interest, taxes, depreciation and amortization at Siemens’s energy operations totaled 1.99 billion euros in 2014, or 8.1% of revenue. That’s less than the company’s margin target of between 10% and 15% of sales.

Industry Overcapacity

The industry as a whole has overcapacity in manufacturing large gas turbines, and Siemens is evaluating how to reduce its production capacity, Davis said today. Her comments contrast with competitor General Electric Co. (GE), whose European head Ferdinando Beccalli-Falco said Oct. 8 it didn’t plan to cut gas turbine output capabilities.

The rising revenue share of Siemens’s wind operations also threatens to reduce profitability, whose level was “disappointing” in 2014, Davis said.

GE’s planned acquisition of Alstom SA (ALO)’s energy assets may reduce margins and prices, she said, adding that prices slipped 4% in the 12 months through September and will continue to fall in fiscal 2015. GE increased its forecast Oct. 17 for the number of gas turbines it plans to ship this year to 105 from the earlier 85 to 90.

Now 98 days into her job, Siemens’s Davis today laid out a plan to try to stifle these rising challenges. As well as the intended capacity cuts, the smaller gas turbines acquired in the Rolls-Royce and Dresser-Rand deals should reduce Siemens’s dependence on the large turbines which will bear the brunt of the cost pressure, she said. To lower costs at the wind division, the company is boosting automated manufacturing.

Still, Kaeser said last month that Siemens wouldn’t be able to match the growth of its main rivals until at least 2018. Today, he predicted revenue will remain flat in 2015 as it will take time to rectify operational shortcomings.

“That’s the thing with Siemens, you always have to wait a bit too much,” said de Bray.

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