Siemens AG (SIE) unveiled a 6 billion-euro ($7.7 billion) efficiency push to help get Europe’s largest engineering company back to last year’s profitability, acknowledging that it was slow to react to shrinking demand.
Half of the savings will come from better internal cooperation on production, design and development, with other spending reductions stemming from a review of global activities or improving process quality, Chief Executive Officer Peter Loescher said in Berlin today. While workforce cuts aren’t a driving force behind the plan, some job losses will be an inevitable component, he said.
Siemens rose to a 15-month high on investor optimism that Loescher will use his most sweeping cost purge yet to weed out underperforming assets. The CEO, in his second five-year term, said today he’ll dispose of the water-treatment activities that Munich-based Siemens bought almost a decade ago because it’s the wrong fit, a month after he put solar-power units up for sale.
“Global growth forecasts will more likely be revised downwards, so this is homework we have to do, and we have to do it continuously,” Loescher said as he presented the company’s fiscal full-year earnings at a gas-turbine factory in Berlin. Apart from economic headwinds, Loescher said, Siemens must make up for persistent price pressure and higher costs including wages, making 2013 “very challenging.”
Operating profit as a proportion of sales at the four main businesses fell to 9.5 percent in 2012 from 12.8 percent a year earlier. The savings program has a target of restoring the margin to at least 12 percent by 2014, in the absence of economic growth to provide a lift.
The European Commission said yesterday that gross domestic product in the 17 nations sharing the euro will fall by 0.4 percent in 2012, with near stagnation next year. European Central Bank President Mario Draghi said today that the economic outlook is worsening.
Siemens forecast that profit in the year started Oct. 1 will fall to as little as 4.5 billion euros, held back by about 1 billion euros in costs from the spending-reduction program. Sales may fail to match the 78.3 billion euros generated in fiscal 2012 after new orders that year plunged 10 percent.
One-time costs in fiscal 2012 amounted to about 1.2 billion euros, half of which were posted at the energy business in the fourth quarter, Chief Financial Officer Joe Kaeser said. Siemens booked a writedown of 327 million euros because of stricter European Union rules for trade with Iran, 133 million euros to reduce capacity in power transmission and 106 million euros for a nuclear-power project in Finland.
The charges resulted in operating profit in the energy units plunging 57 percent in the quarter to 346 million euros. Earnings rose at the health-care and infrastructure operations. Profit at the industrial business fell 6 percent to 726 million euros. Siemens faces more charges in 2013, as separate programs to improve performance in health-care and power-transmission units are under way.
Loescher is sticking to a target of increasing sales to 100 billion euros, helped by acquisitions in industries Siemens is targeting for expansion. His track record got another dent as fourth-quarter earnings were held back by about 250 million euros in losses on solar activities, which Siemens plans to divest just three years after building the operations through acquisitions. Siemens has lost more than 500 million euros at its solar business over the past two years alone.
“We will be extremely strict when allocating capital,” Loescher said.
Siemens will acquire LMS International, a closely held Belgian maker of product life-cycle management software, for about 680 million euros, the German company also said today. LMS had sales of 140 million euros in the first nine months of this year, and employs 1,200 people.
Siemens rose as much as 5 percent to 82.78 euros, the highest intraday price Aug. 3, 2011. The stock, which has the biggest weighting on Germany’s benchmark DAX Index, traded at 81.13 euros at 3:34 p.m. in Frankfurt, valuing Siemens at about 71.4 billion euros.
The manufacturer proposed a dividend of 3 euros a share for fiscal 2012 today, unchanged from the previous year. Siemens said it seeks to return 40 percent to 60 percent of earnings to shareholders, a quota that can include repurchasing its stock. Siemens concluded a three-month, 2.9 billion-euro buyback yesterday.
The savings program follows cost-cutting projects at Royal Philips Electronics NV (PHIA), a competitor in lighting systems and medical equipment, and ABB Ltd. (ABBN), which competes with Siemens in power systems. Loescher, who used to work at General Electric Co. (GE), has said he would measure Siemens against its main rivals as he improves profitability at the German company.
“This is not a great new strategy,” Loescher said today. “All our renowned rivals are doing this.”
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