Year One Siemens' Unfinished Business

With his first full financial year behind him, new CEO Joe Kaeser has produced a set of mixed financial results at the German electronics giant. While no one expected a miracle, Mr. Kaeser will soon have to start delivering evidence that his turnaround is working.
Holding his head high despite the pressure: Joe Kaeser.

It was a sunny day in July 2013 when Joe Kaeser, the newly appointed chief executive of Siemens, spoke with the press in a courtyard at the German electronics giant's headquarters in Munich. The focused, folksy Bavarian spoke of the future: "This is merely a beginning."

Mr. Kaeser knew the road ahead would be long. His predecessor, Peter Löscher, had been ousted after six years on the job because Siemens could not gain ground on its strongest competitors. Mr. Kaeser's mission was to change that.

When he presents the results of the financial year that ended on September 30 to shareholders on Tuesday in Munich's Olympiahalle arena, it will be clear that the numbers have hardly changed.

Plagued by weak sales growth, high extraordinary expenses and sagging profits, Siemens has made little progress under Mr. Kaeser, at least on paper. But with an infrastructure-focused company such as Siemens, business doesn't just change overnight. Mr. Kaeser is asking shareholders to be patient, noting that Siemens won't outperform its competitors until 2017 at the earliest.

The increase in profits was not organic, but mainly achieved by eliminating extraordinary expenses.

His predecessor Mr. Löscher, an Austrian who was criticized for being remote and unapproachable, would probably have been sharply criticized for the results that Mr. Kaeser plans to present after his first full fiscal year as chief executive.

Start with sales. Siemens is still miles from its goal of €100 billion ($112 billion) announced by Mr. Löscher and since cancelled by Mr. Kaeser. Sales declined by 2 percent, to €71.92 billion, in the 2014 fiscal year. Incoming orders also dropped by 2 percent.

A closer look at the numbers shows that Siemens has a fundamental growth problem.

Of eight new industrial divisions that Mr. Kaeser created under his reorganization of Siemens, only three managed to boost sales on a pro-forma basis: wind power and renewables, the railway division and the digital factory division. But not all of this growth is worth celebrating. The wind division, in particular, was burdened by extraordinary expenses.


-WTB 2014


Most of the other divisions saw sales decline.

The story is much the same with profitability. The 29-percent increase in profits from continuing operations, to €5.4 billion, seems impressive at first glance. Investors will be gratified to know that the goals laid out by Mr. Kaeser were achieved in the last fiscal year – in contrast to Mr. Löscher's tenure, especially the second part.

But the increase in profits was not organic, but mainly achieved by eliminating extraordinary expenses.

Financial results were held down last year by the costs of the so-called "Siemens 2014" austerity program. The program, launched by Mr. Löscher just before his departure, has shown little impact on operations so far.

The company has fallen well short of Mr. Löscher's goal of a 12-percent return on sales. The operating margin in the industrial business, which excludes Siemens Financial Services, was 10.6 percent, versus 8.8 percent in the year when Mr. Kaeser replaced Mr. Löscher.

A comparison with competitors shows that archrival General Electric, in particular, is miles ahead of Siemens.

The energy sector, long the cash cow at Siemens, was responsible for the weak results.

A look at the division's results within Siemens' new structure shows that while sales of steam turbines and compressors remained lucrative, the wind turbine and power transmission businesses were barely profitable amid quality problems, project risks and excess capacity.

Still, progress was made in other areas, with the transportation and automation division reporting a significant jump in profits.

A comparison with competitors shows that archrival General Electric, in particular, is miles ahead of Siemens.

At the end of GE's fiscal year, which also ended on September 30, the Americans reported a net return of 13.2 percent, or almost double that of Siemens. GE is also more profitable on the operational side. Otherwise, however, different fiscal years and key numbers make comparisons between the two competitors difficult.

On the positive side, internal calculations that Mr. Kaeser presented to employees show that the gap between Siemens and its top competitors has become somewhat smaller. But it's still there.

Mr. Kaeser's performance will be judged primarily on how well Siemens is reducing its ongoing extraordinary expenses.

The company has long been plagued by poorly estimated orders and poorly managed major projects, which have spoiled financial results for decades. Some of its biggest headaches have included power plant projects and the poorly designed Combino streetcars.

Mr. Kaeser has inherited a large number of troubled projects from earlier years.

A key factor in judging Mr. Kaeser's success will be whether he continues to boost the company's investment strength.

In recent years, Siemens had on average about €700 million a year in extraordinary expenses, which eroded earnings.

Mr. Kaeser promised to cut this number in half, but he failed to deliver in his first full fiscal year, as evidenced by the reserves reported on the balance sheet. Siemens set aside another €881 million for order-related risks and potential losses associated with connecting offshore wind farms to the power grid, a power line project in Canada and for quality problems with wind turbines.

Siemens still faces the same problems as it did in the past, at least for now.

But Mr. Kaeser also benefits from the company's traditional strengths.

The group is in very good financial shape. It reported a 17.2-percent return on capital employed, which was within the target range of 15 to 20 percent. Despite increasing from €10.6 billion to €12 billion, net debt remains manageable.

This is reflected in another key performance indicator for Siemens: the ratio of industrial net debt to adjusted earnings before interest, taxes, depreciation, and amortization, which was just 0.15 in 2014.

The Siemens target system permits a value of up to 1.0, which leaves plenty of room for more debt. And cash flow, though stagnating, remains strong.

In other words, Mr. Kaeser has some financial leeway to keep shareholders happy with a healthy dividend and share buybacks.

Because 2014 was a transitional year for Siemens, it wouldn't be fair to use it as a barometer of Mr. Kaeser's success.

The same applies to 2015. Sales will likely stagnate. The planned profit increase of at least 15 percent is probably achievable, unless unexpected extraordinary expenses crop up. With a forecast operating return on sales of 10 to 11 percent, however, Siemens is still likely to lag behind its top competitors.

A key factor in judging Mr. Kaeser's success will be whether he continues to boost the company's investment strength.

Siemens hasn't been known for its outstanding technological innovations in a long time. The company is very good at improving existing technologies, such as large gas turbines. But the relatively weak gross margin of 28.9 percent shows that the company is unable to attain the best prices for its products.

Siemens has also fallen behind in patent rankings.

The company slipped from third to fourth place in the number of patents filed with the German Patent Office, and in the United States it slipped from 11th to 13th place. These rankings should be taken with a grain of salt, especially as Siemens wants to focus more heavily on patents that will generate business in the long term. But they are a warning sign nonetheless.

The upshot is that the financial results from Mr. Kaeser's first full fiscal year are mixed. On the other hand, no one expected him to produce a quick miracle. He has deliberately created a long-term framework with his Vision 2020 initiative.


Axel Höpner heads Handelsblatt's Munich office, focusing on the developments of Allianz and the Siemens corporation. Bert-Friedrich Fröndhoff is deputy head of Handelsblatt's companies and markets desk. To contact the authors:;

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