Siemens’s Software Push Makes Up for Underperforming Energy Unit

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Siemens AG’s push into manufacturing software helped prop up quarterly earnings, providing a lift for Chief Executive Officer Joe Kaeser, whose deeper foray into the energy business has been hampered by a slumping oil price.

The stock rose the most in more than 1 1/2 years. The digital factory division, which makes software for product design and manufacture, on Thursday reported the highest profitability of Siemens’s eight divisions, helping push quarterly profit above analyst expectations.

“The numbers are good, given the low expectations,” said Ingo Schachel, a Frankfurt-based Commerzbank analyst who has a hold rating on Siemens. “The margins were better than expected, particularly in the digital factory.”

The earnings are a boon for Kaeser after his near $9 billion layout on acquisitions of oil and gas equipment specialist Dresser-Rand Inc. and Rolls-Royce Holdings Plc’s energy business have come under investor scrutiny amid the drop in oil prices. A tailwind from the strong dollar, which appreciated by almost a quarter in the 12 months through June 30, also helped third-quarter earnings of Europe’s biggest engineering company.

Profit from industrial operations increased 0.9 percent to 1.82 billion euros ($2 billion). That beat the 1.74 billion-euro average estimate of seven analysts in a Bloomberg survey. The stock rose as much as 4.2 percent. Before today, Siemens has risen 12 percent in Frankfurt trading since Kaeser took over, while Germany’s DAX index gained 17 percent.

Dollar Boost

Excluding adjustments such as currency effects, Siemens’s sales would have dropped 3 percent in the three months through June. As it was, reported sales increased 7.6 percent to 18.8 billion euros.

Revenue at the power and gas division, the unit most starkly affected by oil’s tumble, would have fallen 15 percent were it not for the dollar’s gains. That currency advance meant reported revenue climbed 0.9 percent to 3.2 billion euros. Profit at the unit fell 47 percent to 289 million euros.

Just three of Siemens’s eight operational divisions reported profit within the Munich-based company’s target margins in the third quarter.

Only the building technologies, which makes fire alarm systems, the digital factory, which provides manufacturing software, and the medical scanner-making health-care division met the profit margin target range set by the CEO. Of the three tenets of Kaeser’s growth strategy -- “electrification, automation and digitalization”, the latter is the only one comfortably meeting its goals.

Digital Factories

“Positive news was the materialization of the anticipated margin recovery in the core businesses digital factory -- orders up 6 percent -- and health-care -- orders up 4 percent,” Munich-based Baader Bank analyst Guenther Hollfelder said in a note to clients. “Power and gas was responsible for the declines.”

Digital factory sales reached 2.5 billion euros, making the business the fifth-biggest operational division. The power and gas business was the second-largest unit with 3.2 billion euros in revenue, after health-care sales leapfrogged it in the past year.

Siemens is open to divesting a minority stake in the health-care division, which reported the second-highest profitability, either to a strategic investor or in a partial stock-listing, someone familiar with the matter told Bloomberg News in March.

Job Cuts

Sales on a comparable basis also declined at the wind power, process industries and mobility unit, which builds trains. Process industries chief Peter Herweck bore the brunt of the 12 percent profit decline at his unit, and will be replaced on Oct. 1 by Juergen Brandes, a 25-year Siemens veteran.

The decline in the price of oil has led some analysts and investors to question Kaeser’s strategy. The executive has responded by cutting further jobs at Siemens’s power and gas division, bringing the company-wide reductions announced since December to 13,100. Kaeser, who also started to weed out underperforming units, has said he doesn’t expect Siemens’s growth to outpace that of competitors until 2016.

The company confirmed its full-year forecast of earnings per share to increase by at least 15 percent, and profit from the industrial business to represent between 10 percent and 11 percent of sales. It reached 9.5 percent in the third quarter.

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