Siemens’ Fourth Forecast Cut Prompts Leadership Questions

Siemens AG Chief Peter Loescher’s fourth profit forecast cut in his six-year tenure has investors questioning whether he’ll be able to reach a target for matching profitability at General Electric Co. and ABB Ltd.

Amid rising charges for a failed push into solar energy and delayed train deliveries, Europe’s biggest engineering company yesterday said net income from continuing operations will approach the low end of a previous 4.5 billion-euro ($5.9 billion) to 5 billion-euro target. While Loescher also raised his savings target to cushion the shortfall, investors said he doesn’t have much time left to prove his strategy.

“Shareholders are starting to lose patience with Loescher, and he needs to prove that he can perform,” said Daniela Bergdolt of DSW, Germany’s largest association for private investors which represented more than one million Siemens shares at the last annual shareholders meeting. “The probation period is over and the next few quarters are crucial. He really has to deliver now without any ifs or buts.”

Loescher, an Austrian national who joined Siemens in 2007 from drugmaker Merck & Co. as the first CEO hired from outside the company, started the savings program last year after acknowledging he had been slow to react to the economic downturn. The CEO is also under pressure after some deals that he supervised soured and a push into environmentally-friendly energy led to spiraling costs.

‘Poor’ Margins

His target is to boost the operational profit margin to 12 percent by the next fiscal year. That compares with a 9.5 percent margin in 2012, when rivals ABB and General Electric had margins of 10.3 percent and 15 percent respectively.

“If there’s a risk that the 2014 earnings story doesn’t look as secure, then you need to start criticizing and questioning,” said Credit Suisse analyst Simon Toennessen. Investors won’t be willing to accept the current “poor’ margin performance if it extends into next year, he said.

Loescher told employees that it’s fair to judge him on his efforts to improve profitability at Siemens, which was Germany’s biggest company by market capitalization between July 2009 and July 2012 before it was overtaken by software maker SAP AG.

‘‘Our competitors earned more than we did,” Loescher said in a staff newsletter last month, adding that “we need to do something.” Siemens yesterday increased its savings target to 6.3 billion euros from the previous 6 billion euros.

Solar Failure

Loescher stumbled with his push into solar energy as he tried to promote Siemens as a company with all the necessary offerings for companies, governments and cities keen to use more renewable energies.

Siemens put the solar business up for sale in October, two years after entering the segment with the acquisition of companies including Archimede Solar Energy and Solel Solar Systems. Deteriorating prices for photovoltaic modules have made concentrated solar power less attractive, and the activities have been unprofitable since Siemens bundled the operations into a separate unit in 2011.

Selling the solar business this year is no longer “highly probable”, Loescher said yesterday.

The failure to divest the solar business will contribute to a further 500 million-euro reduction in profit this year, after regulatory requirements mean the unit can no longer be considered under discontinued operations.

While profit in the three months through March was little changed at 982 million euros, it missed the 1.21 billion-euro average estimate of analysts. Revenue slipped 6.7 percent to 18 billion euros, the first decline since the same quarter in 2010.

Loescher says his job at Siemens isn’t made easier by the economic headwind he’s facing.

Economic Headwind

“We are missing a growth engine around the world,” he 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.

Still, the company also had to book charges for several failed projects.

Provisions related to wind transmission networks and delays in train deliveries reached 545 million euros in the first half. The train charges helped drag quarterly profit at the infrastructure and cities division down 90 percent.

“The economy is weaker but that is only part of the story,” said JPMorgan analyst Andreas Willi. The main reasons for the reduced forecast are “the project charges and weak underlying performance in some businesses that have backlog.”

Rival’s Performance

General Electric said April 19 that adjusted profit from continuing operations rose 13 percent to $3.63 billion in the first quarter. Swiss rival ABB, the world’s largest maker of power transformers, said April 24 that its operating margin rose by 1.1 percentage points to 15 percent.

A former management consultant, Loescher spent 19 years in the healthcare industry, including a stint at General Electric, before joining Siemens. Since he started in July 2007, Siemens shares have dropped 25 percent, while Germany’s DAX benchmark index declined less than one percent.

Siemens told investors yesterday that its savings plan, dubbed simply Siemens 2014, is on track. The company will probably exceed its target of achieving 1.5 billion euros in savings this year, Loescher said.

The plan also includes the disposal of parts of a water business and units offering parcel automation, airport logistics and airfreight, units where the margin or growth potential is too low, according to Siemens.

Stephan Thomas, a portfolio manager at Frankfurt Trust, which oversees about $21 billion in assets including Siemens shares, says the pressure on Loescher will continue to increase if he’s not able to present better results soon.

“Shareholders want to see a change in performance,” he said. “Otherwise the shares will underperform, leading to inevitable pressure on the management.”

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