Siemens Plans $5.4 Billion Buyback as Chief Sees Recovery

Siemens AG, Europe’s largest engineering company, will buy back as much as 4 billion euros ($5.4 billion) of shares as Chief Executive Officer Joe Kaeser bets that an efficiency push will boost profitability next year.

Siemens, which today reported fourth-quarter earnings that beat analyst estimates, intends to raise its profit margin to about 10 percent of sales next year from 7.6 percent in 2013, Kaeser said at a press conference. The Munich-based company had earlier this year abandoned a target for 12 percent profitability. The stock rose as much as 2.7 percent.

“Results are better than expected and the buyback is at the upper end of market expectations,” said Ben Uglow, an analyst at Morgan Stanley. “This looks to us like a new CEO ensuring Siemens does not repeat past mistakes.”

Former finance chief Kaeser became CEO after predecessor Peter Loescher slashed a profit target five times in his six-year tenure. To match the profitability of rivals such as ABB Ltd. and General Electric Co., Kaeser also needs to reduce charges for mismanaged projects that have weighed upon Siemens’s earnings in recent years. The German company today forecast a minimum 15 percent jump in net income in fiscal 2014.

“We need to execute well on projects and get our operational profitability and excellence back in line,” Kaeser, who took over in August, told Bloomberg Television in an interview. “That will give us about a 200 to 300 base points improvement of operational margins.”

Job Cuts

Income from continuing operations fell 13 percent to 1.08 billion euros in the fourth quarter, Siemens said in a statement today. Analysts surveyed by Bloomberg had on average estimated 997 million euros. Revenue declined 1.3 percent to 21.2 billion euros.

Kaeser is picking up the mantle left by Loescher, who started a savings plan aimed at shaving 6.3 billion euros from costs by the end of 2014. The benefits didn’t trickle through in time to save his career at Siemens, and Loescher was ousted in July after saying margins would miss the 12 percent target.

The German company’s 9.5 percent margin last year lagged the 10.3 percent and 15 percent of ABB and GE, respectively.

The arrival of Kaeser and the bet that he can tackle the sprawling 82 billion-euro company has helped boost shares of Siemens 19 percent year to date. It has 60 sub-units that make products including trains, gas turbines, medical scanners and factory-automation gear. ABB is up 23 percent this year.

Siemens gained as much as 2.47 euros to 93.90 euros and was up 2.2 percent as of 9:34 a.m. local time, valuing the company at 83 billion euros.

Buyback Proceeds

As part of a slimdown, Siemens earlier this year sold a stake in Nokia Siemens Networks for 1.7 billion euros. Kaeser is selling assets as he focuses on businesses he deems to have better growth prospects. Yesterday, Siemens said it agreed to sell part of its water-technologies division to AEA Investors for 640 million euros.

“Siemens had proceeds from the NSN sale, which gives some room for a buyback, as well as about 4 billion euros free cash flow,” Frankfurt-based Commerzbank analyst Ingo-Martin Schachel, who rates Siemens hold, said by telephone. Operational improvements and higher volumes in volatile sectors such as wind power contributed to the better-than-expected profit, he added.

Energy Leads

Siemens proposed leaving the dividend steady at 3 euros per share. The company incurred restructuring charges totaling 1.3 billion euros as it drove ahead with its efficiency plan. About 15,000 jobs, or 4 percent of the workforce, will be eliminated.

Charges for metals technologies projects and delays in wind-transmission installations topped 89 million euros in the fourth quarter, adding to 115 million euros in impairments at units it has sold or plans to divest and a 30 million-euro impairment at the low and medium voltage unit.

The energy sector was the only division to improve profitability in the fourth quarter, posting profit of 564 million euros, compared with 163 million euros a year earlier, on sales of 7.4 billion euros. Profit declined 4.8 percent to 601 million euros at the health sector, 61 percent to 278 million euros at the industry unit, and 60 percent to 166 million euros at the infrastructure and cities unit.

Identifying Markets

The CEO said last month the infrastructure division, the least profitable at Siemens, needs to better identify the markets it wants to target. The division has faced investor criticism since it was carved out by Loescher from existing units in 2011. Kaeser is considering disbanding the sector as soon as next October, Germany’s Manager Magazin reported Oct. 17.

Siemens should sell the division’s transportation unit, adding to already planned divestments of postal and baggage handling businesses, while reshaping the company structure over the next five years, Societe Generale SA analysts including Gael de Bray has said. Spinning off the healthcare sector could also unlock value of 6 euros a share, the analysts added, questioning whether the division fitted into Kaeser’s attempt to focus Siemens “along the electrification chain”.

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