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Siemens Windmill Woes Clip Investor Return as Delays Persist

Siemens Windmill Woes Clip Investors’ Returns
The EnBW Baltic 1 offshore wind farm. Photographer: Siemens AG

Siemens AG Chief Executive Officer Peter Loescher lent his face to a company advertising campaign last month that promoted a greater focus on renewable energy. Investors are still waiting for evidence the foray will pay off.

Siemens may have to lower its full-year profit goal when it reports earnings next week. Analysts surveyed by Bloomberg predict net income of about 5.57 billion euros ($7.32 billion), compared with Siemens’s own target of 6 billion euros. The power-transmission unit may book a charge of 200 million euros for last quarter, Andreas Willi, an analyst at JPMorgan, said.

Loescher’s bid to wean Siemens off nuclear power and generate 40 billion euros in sales from environmental products has suffered setbacks as the German engineering company struggles to connect offshore wind parks to the electricity grid and prices tumble for turbines. An earnings revision would deal a blow to Loescher, who in five years built his reputation on stabilizing Siemens’s historically volatile earnings.

“The industry and Siemens need to become more efficient, cut costs, industrialize processes and try to manage capacity as tightly as they can,” said Martin Prozesky, an analyst at Sanford C. Bernstein in London, who has a “market perform” recommendation on the stock. “In wind, offshore is still the best place to be.”

Declining Stock

Siemens fell as much as 1 percent in Frankfurt trading to 71.04 euros, its lowest price in almost four months. The stock was down 0.5 percent at 10:50 a.m. The engineering company has a market value of 65.3 billion euros.

Udo Niehage, who leads the transmission business, will leave the company, Financial Times Deutschland reported today, citing unidentified people familiar with the plan. Siemens will cut its earnings guidance and make provisions against potential losses from delays at the wind-park projects, the newspaper also said.

Linking offshore wind farms to the power grid has been a challenge for Siemens and competitors including ABB Ltd. because of a shortage in suitable undersea cables, specialized personnel and resources at grid operators who commission the connections, said Fraser Johnston, the lead offshore wind analyst at Bloomberg New Energy Finance.

Siemens has declined 25 percent in the past year, compared with a 16 percent drop for Zurich-based ABB and a 37 percent decline for Alstom SA in Paris. General Electric Co., which competes with Siemens in areas including transportation and health-care equipment, has dropped 5.7 percent.

Siemens booked 203 million euros in charges in the prior quarter at the power-transmission division amid delays connecting offshore wind parks to the onshore power grid. The company will unveil a reorganization of its renewable energy and power-grid operations when it reports fiscal second-quarter earnings on April 25, Euro am Sonntag reported April 6, citing an interview with Chief Financial Officer Joe Kaeser.

Ambitious Targets

The Munich-based company may say net income in the three months through March 31 fell to 1.24 billion euros from 2.79 billion euros, according to the median estimate of five analysts surveyed by Bloomberg. Sales probably rose 6.3 percent to 18.84 billion euros, the survey showed. Philipp Encz, a Siemens spokesman, declined to comment ahead of the release.

Siemens has seen its profit target called into question amid writedowns and an economy in Europe that is struggling to recover. In January, Kaeser told the Wall Street Journal that the company profit forecast for 2012 is “very ambitious.”

Loescher may also unveil charges at the diagnostics business, for job cuts at its networks venture with Nokia Oyj, and for reductions at Osram, the lighting unit that Siemens wants to spin off later this year. Nokia said on April 12 that the network unit had a negative operating margin of about 5 percent in the first quarter, citing preliminary figures.

Underestimated Complexity

Siemens, which employs about 360,000 people globally, cannot simply fire German employees or close sites in the country because it’s bound to an agreement with trade unions from 2010 that only permits cut jobs on a voluntary basis by offering incentive packages.

The delays to connect the wind parks are affecting the company’s transmission, renewable energy, and drive technologies businesses, and may also hurt future sales of wind turbines, said Thomas Langer, an analyst at WestLB AG.

“Siemens underestimated the size and complexity of the regulatory framework in offshore wind,´´ he said. ‘‘Loescher has been very eager to lead in the German energy transformation.´´ Langer has a ‘‘neutral’’ recommendation on Siemens shares.

The wind power industry is struggling with low margins and investment risks that are being exacerbated by cuts in European subsidies, Felix Ferlemann, the head of Siemens’s wind-power division, said at a conference in Copenhagen yesterday.

Nuclear Retreat

Loescher announced in September that Siemens would abandon a planned return to the nuclear-power industry, following the German government in its retreat from atomic energy in the wake of the reactor meltdown last year in Japan.

In his ad campaign to commemorate the first anniversary of the catastrophe, Loescher said the energy switch would ultimately be a success, while cautioning that it would require ‘‘tight’’ planning, relevant incentives, close coordination and broad acceptance ‘‘everywhere in the country.’’

Siemens’s power-transmission subsidiary makes high-voltage power systems, transformers, substations, inductors and switchgear with about 20,000 employees at 51 sites. Siemens said last year that it will reduce manufacturing at sites in Germany, the U.K. and France, without providing details. In recent years, Siemens has bolstered its network of factories in lower-cost countries including Russia, India and China.

‘‘Both renewable energy and power transmission are suffering from intense price pressure,’’ said Ingo-Martin Schachel, an analyst at Commerzbank. ‘‘ABB and Alstom both said pricing in this area remains not satisfactory, so that theme is here to stay for another couple of quarters.’’

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