Siemens AG, Europe’s largest engineering company, cut its full-year forecast after quarterly earnings missed analyst estimates amid charges for failed wind energy transmission projects and the delayed delivery of trains.
Net income from continuing operations will approach the low end of its 4.5 billion-euro ($5.9 billion) to 5 billion-euro target, the Munich-based company said today. Siemens now also predicts a “moderate” decline in organic sales, after a previous forecast for stable sales.
The reduced forecast is a setback for Chief Executive Officer Peter Loescher, who is implementing a plan to trim costs after acknowledging in November he had been slow to react to the economic downturn. The CEO, in his second five-year term, has also come under pressure to refocus Siemens after deals that he supervised soured and profitability trails that of rivals ABB Ltd. and General Electric Co.
“The economy is weaker but that is only part of the story,” said London-based JPMorgan analyst Andreas Willi, who has a neutral rating on Siemens. The main reasons for the reduced forecast are “the project charges and weak underlying performance in some businesses that have backlog.”
As a result of the worse-than-expected economic conditions, Siemens today increased its savings target to 6.3 billion euros from the previous 6 billion euros, with lower raw material costs helping facilitate the deeper cost reductions.
The stock rose 0.6 percent to 79.81 euros in Frankfurt trading. Before today, the stock had declined 3.5 percent this year, while ABB gained 12 percent and General Electric rose 5.5 percent.
Net income from continuing operations climbed to 982 million euros in the three months through March from 979 million euros a year earlier, Siemens said today. That missed the 1.21 billion-euro average forecast of six analysts surveyed by Bloomberg. Revenue fell 6.7 percent to 18 billion euros.
Costs relating to train delivery delays and energy projects reached 245 million euros. The worse-than-expected economic conditions mean that Siemens has increased its original savings target by 300 million euros, it said today.
Profit tumbled 90 percent to 27 million euros at the infrastructure and cities sector, more than at any of the company’s other units. In the industry sector, profit fell 47 percent to 350 million euros while slipping 3.8 percent to 551 million euros at the energy sector. The healthcare division reported the only profit growth, with an increase of 4.9 percent to 445 million euros.
Loescher put the solar energy unit up for sale in October, two years after its founding through acquisitions including Archimede Solar Energy and Solel Solar Systems. Deteriorating prices for photovoltaic modules have made concentrated solar power less attractive, and the activities had been unprofitable since Siemens bundled the operations into a separate unit in 2011.
Siemens said today that the solar business, which had to be reincorporated into continuing operations for regulatory reasons, may trim the full-year earnings forecast by an additional 500 million euros.
The planned disposal of the solar business is “not easy due to the problematic market environment, and its handling on the balance sheet must be reviewed,” Chief Financial Officer Joe Kaeser said last month.
Solar Sale Delay
Loescher said today Siemens no longer sees the sale of the solar business this year as “highly probable”.
The company today said it also booked charges of 84 million euros in the quarter for its offshore wind business and Loescher said he can’t rule out further charges.
“We are missing a growth engine around the world,” Loescher said in a Bloomberg Television interview. “China is at the lower end, Europe is in a recessionary environment and there is the sequester environment in the U.S.,” he said in reference to mandatory U.S. budget cuts.
Siemens’ 9.5 percent profit margin in its last fiscal year lagged behind the 10.3 percent at ABB and 15 percent at General Electric, its two biggest competitors. The savings plan is intended to boost Siemens’ profit margin to 12 percent of sales.
The fiscal second-quarter charges add to 300 million euros of provisions in the fiscal first quarter.
The industry unit will bear the brunt of the job cuts, with 4,000 positions set to go, while Siemens’ energy division will contribute the greatest financial share of the savings, at 3.2 billion euros. The healthcare division and infrastructure unit will meanwhile contribute 800 million euros apiece, with 1.1 billion euros stemming from the industry division’s savings, Siemens said today.
Profit at the industry automation unit, where orders are more short-term than elsewhere at the company, declined 40 percent to 201 million euros. Company-wide orders increased 20 percent to 21.5 billion euros.
“The order number looks good, but it has a few large what I’d call low quality orders because they’re in rail and wind, so not their best businesses,” Martin Prozesky, a London-based Sanford Bernstein analyst who rates Siemens market perform, said by phone. “The core businesses around fossil, industrial automation and health-care, there the orders were quite a lot weaker.”
Profit at the Osram lighting unit, which shareholders have agreed to spin off, more than doubled to 57 million euros from 25 million euros a year earlier. The company plans to list shares of Osram, which it values at 3.23 billion euros, in early July, it said today. Osram will shut or sell a further six plants for a total of 11 divested by the end of 2014 as it targets one billion euros in savings by 2015.
The company is also seeking to offload water technology, airport luggage system and mail automation units as it focuses on sectors with higher margins and growth potential.