Joe Kaeser had a clear vision when he took over as Siemens chief executive in July 2013. In his first speech after replacing the hapless Peter Löscher, he said: “The best way forward is growth: controlled, focused, achievable, value-creating growth.”
Having previously served as the company’s finance director, Mr. Kaeser also wanted to close the profitability gap that had opened up with Siemens’ competitors. But his key theme was the company’s chronically weak growth rate, and how to overcome it.
On Wednesday, three and a half years later, Mr. Kaeser will present the company’s 2015-16 figures at the firm's annual general meeting in Munich. The verdict can only be an overwhelmingly positive one, with Siemens having made real progress on his watch.
Not everything is perfect, with the company's Process, Industries and Drives division, or P&D, showing a drop in revenue by 4 percent.. But on the whole, the company is displaying far fewer weaknesses last year than in previous years. A host of key indicators show things are going in the right direction. This could mean added value for shareholders: a year ago, Siemens share price was under €90, or $96.5. It has since shot up, and is currently valued at €119, the highest it's been since Siemens’ boom year of 2000.
Siemens' growth figures look even better when compared to the company's main competitors.
Strong growth is the major reason – which is particularly impressive in a difficult economic climate for all capital goods manufacturers. In the 2015-16 business year, earnings adjusted for portfolio changes climbed 4 percent to €79.6 billion. If adjusted further for currency fluctuations, the overall earnings increase is actually 6 percent.
The biggest growth driver was Siemens' Power and Gas division, which posted revenue figures up 12 percent to a total of €16.5 billion.
The growth figures look even better when compared to Siemens’ main competitors. In 2016, rival General Electric saw revenues in its industrial businesses stagnate at $99.5 billion when adjusted for exchange rate shifts and portfolio changes. And in the first nine months of 2016, Swiss rival ABB saw earnings fall 1 percent to $24.8 billion.
Siemens has said the current business year could be marked by “headwinds to further growth.” Nonetheless, the company is predicting another increase in revenues for 2016-17. Healthy order books suggest this is likely, with new orders climbing 4 percent to €86.5 billion. Indeed, new orders now are higher than earnings, which would point to further growth.
At the end of the 2016 business year, current orders stood at €113 billion. In this area too, the competition appears weaker. In 2016, GE showed no growth in orders, measured on a like-for-like basis. For Swedish-Swiss multinational ABB, orders in the first nine months of the year slumped 11 percent, to €25.1 billion.
But Siemens’ growth has not come at the expense of profitability. On the contrary, as a percentage of revenue, costs for production, sales and administration were all down. Here, the key indicator are the results of the industrial business: this rose from €7.7 to €8.7 billion, representing an improvement in operating return on sales from 10.1 to 10.8 percent. Under Mr. Kaeser’s predecessor, operating return had fallen significantly below 10 percent.
Pre-tax profits fell 24 percent to just over €5.6 billion in 2015–16. However, the previous year’s results had been improved by disposal proceeds amounting to €3 billion. In fact, if compared like-for-like, 2015–16 saw a 28 percent increase in pre-tax profits. This is one major reason for the substantial fall in return on capital employed (ROCE).
The other major reason is Siemens’ acquisition of drilling equipment maker Dresser Rand, which pushed up its capital expenditures. The acquisition failed to bring in as much revenue as hoped thanks to weakness in the oil and gas market.
Unlike past results, this year saw strong performance across almost every division. Previously, there had been a variety of stand-out performers: Power and Gas one year, Medical Technology the next. But in 2015–16, seven of eight business segments — Siemens has seven divisions and the now-separate Healthineers business — beat medium-term targets for improving margins.
The strongest returns came from Healthineers, the medical technology division, which posted profit margins of 17.2 percent. The Digital Factory division was also highly profitable, with margins of 16.6 percent. Wind Energy and Renewables nearly tripled its operating profit to €464 million. In its core business of factory technologies, Siemens saw profits increase to €1.9 billion, albeit with margins of 11.4 percent – considerably down on previous best performance.
Here too, Siemens outperformed the competition. In 2016, GE saw profits fall from $6.3 to $3.7 billion, although it has currently undertaken wide-ranging restructuring, which has impacted the figures. ABB showed some growth in operating Ebitda, earnings before interest, taxes, depreciation and amortization. But net profits fell 15 percent to $1.5 billion.
The comparatively strong performance of Siemens' digital divisions will especially please management. Siemens is a market leader in industrial digitization solutions, particularly industrial automation and software. Revenues for software rose 12 percent to €4.3 billion. Here, Siemens faces tough competition from GE, whose automation software platform Predix is a strong rival to Siemens’ Mindsphere.
The difficulties in the P&D division — which saw profits fall 58 percent to €243 million and profit margins to just 2.7 percent — are partly internal. This is due to unproductive manufacturing structures. But its problems ultimately lie with a general weakness in the global oil and gas markets. In an effort to cut costs, Siemens has announced 1,700 job losses in Germany. Mr. Kaeser has also brought in new executives to run the division.
One striking feature this year is the absence of a long-standing Siemens problem: there are no one-off charges because of badly managed major projects. In the past, the company has taken expensive hits thanks to badly built railways, faulty connection of wind farms to the power grid and delayed delivery of trains. In 2012, costs like these totaled €1.2 billion. But the company has cleaned up its act, and in 2015, it lost just €200 million. Last year, Siemens eliminated these losses entirely.
Recognizing there is still room for improvement, Mr. Kaeser may feel motivated to extend his contract beyond 2018, especially when considering the personal implementation of his “Vision 2020”. A decision on a contract extension will not be made until this summer, at the earliest.
With cash flow in good shape, jumping from €5 billion to €5.5 billion in ongoing business, Siemens operations are looking healthy. This has enabled the company to increase its dividend slightly for the third payment in a row, up 10 cents to €3.60.
Debt presents a more complex picture. The company’s overall debt rose around €4 billion last year to €10.5 billion, like many other large firms currently taking advantage of low interest rates. The key metric in this regard for Siemens is the number of years’ operating profit needed to pay off current debt levels.
Traditionally, Siemens has kept this value below 1.0. Last year it came close to that level, rising from 0.6 the previous year. The expensive acquisition of U.S. software firm Mentor Graphics may push the figure above the 1.0 level, although divestitures could help keep it lower.
Siemens has demanding goals for this business year, with spending on research and development to climb further to €5 billion. The target for operating profit margins is now between 10.5 and 11.5 percent. Pre-tax profits are also predicted to rise further. However, this will only happen if there is an anticipated stabilization of market conditions in high-margin, short-cycle businesses.
Company holdings continue to evolve. Among other acquisitions, last year Siemens bought the software specialist CD-adapco as well as Mentor Graphics. Siemens' renewable energy business is scheduled to be merged with the wind energy division of Gamesa, a Spanish manufacturer.
But the biggest change will come with the flotation of Healthineers. Handelsblatt has learned the float is likely to occur in the second half of 2017. The medical technology division is currently the most profitable in the company, and the sector is widely seen as set for spectacular growth. The value of a spun-off medical technology company, say observers, could reach €30 billion. Siemens says it will maintain a majority stake in the new company.
In the coming months, Siemens will celebrate its history in events marking the 200th birthday of founder Werner von Siemens. But Mr. Kaeser has made history of his own. “For this birthday, we have posted our best ever operating results,” he said at the preliminary presentation of the figures. “We are working hard to make sure that they stay just as good going forward,” he added.
Axel Höpner is head of the Handelsblatt office in Munich, focusing on the state of Bavaria's companies, including Allianz and Siemens. Bert-Friedrich Fröndhoff leads a team of reporters covering the chemicals, healthcare and services industries. To contact the authors: [email protected], [email protected]