Germany: Double-Digit Order Growth for Siemens

Siemens, German multinational engineering and electronics conglomerate company, released a half-yearly report.

Peter Löscher, President and Chief Executive Officer of Siemens AG commented:

“Results for the second quarter show a mixed picture. While we were able to clearly increase orders, we still have challenges regarding revenue and profit. Even more we’re focusing on the factors that lie in our own hands: we’re rigorously executing our company-wide Siemens 2014 program.”

 Double-digit order growth, book to bill above

While macroeconomic conditions remained challenging in the second quarter, Siemens won major long-cycle contracts for wind power and trains that drove a 20% increase in orders year-over-year. In contrast, revenue came in 7% lower compared to the prior-year period. On a comparable basis, excluding currency translation and portfolio effects, revenue was 6% lower. The book-to-bill ratio for Siemens was 1.19, the order backlog (defined as the sum of the order backlogs of the Sectors) increased to €101 billion.

 Broad-based revenue decline

Weaker investment sentiment in recent quarters was evident in second-quarter revenue, which declined in all Sectors and reporting regions. On a regional basis, revenue declined significantly in the Americas and moderately in the region comprising Europe, the Commonwealth of Independent States, Africa and the Middle East (Europe/CAME) and in the Asia, Australia region. Emerging markets on a global basis declined 4% year-over-year, and accounted for €5.938 billion, or 33%, of total revenue for the second quarter.

 Orders climb on large contract wins in Europe

The Energy and Infrastructure & Cities Sectors both won a pair of major orders in Europe/CAME that drove their double-digit order increases compared to the prior-year period. Healthcare showed moderate order growth year-over-year, while orders fell at Industry on weaker demand for its short-cycle businesses and renewable energy offerings. On a geographic basis, Europe/CAME and the Americas showed double-digit increases due to higher volumes from large orders. Emerging markets on a global basis grew faster than orders overall, at 24% year-over-year, and accounted for €6.795 billion, or 32%, of total orders for the quarter.

 INCOME AND PROFIT

 Profit declines at Industry, Infrastructure & Cities

Total Sectors profit declined to €1.374 billion from €1.929 billion in the second quarter a year earlier. Industry profit declined to €350 million from €662 million a year earlier, due mainly to more challenging market conditions for its short-cycle businesses. Profit in Infrastructure & Cities fell to €27 million from €270 million a year earlier, due largely to charges of €161 million related to high-speed rail projects. Energy delivered €551 million in profit, down 4% compared to the prior-year period. Charges related to grid connection projects totaled €84 million in the second quarter compared to €278 million a year earlier. Healthcare contributed €445 million in profit, up 5% year-over-year.

Total Sectors profit included charges of €104 million for the “Siemens 2014” productivity improvement program: €49 million in Industry, €23 million in Infrastructure & Cities, €20 million in Energy, and €13 million in Healthcare. The program is expected to generate substantially higher charges in the second half of the fiscal year.

 Stable income from continuing operations

Income from continuing operations of €982 million was slightly above the prior-year level, as lower Total Sectors profit was offset by improvements outside the Sectors. Above all, Equity Investments posted a profit of €8 million in the current quarter compared to a loss of €594 million a year earlier. Basic EPS from continuing operations rose to €1.14 from €1.08 a year earlier, benefiting from share buybacks between the periods under review.

 Discontinued operations turns positive

Second-quarter net income was up 10%, at €1.030 billion. Corresponding EPS rose 17%, to €1.20 from €1.03 in the prior-year period, due to share buybacks as mentioned above. The increase in net income was due primarily to discontinued operations, which contributed €48 million in the current period. A year earlier, discontinued operations posted a loss of €41 million, due mainly to a burden of €142 million (pretax) from a settlement related to Greece. Income from discontinued operations related to Siemens IT Solutions and Services in the current period was a negative €9 million compared to a positive €42 million a year earlier. Income from discontinued operations related to OSRAM rose to €57 million, up from €25 million a year ago. OSRAM reported a 3% decline in revenue compared to the second quarter a year ago (0% decline on an organic basis). Additional information regarding OSRAM is on page 13.

   ENERGY SECTOR

 Profit near prior-year level, double-digit order growth

Energy reported second-quarter profit of €551 million, down 4% year-over-year due mainly to lower revenue. Power Transmission narrowed its loss due largely to substantially reduced project charges. Fossil Power Generation contributed lower earnings than a year earlier, but still accounted for most of the Sector’s profit and was the highest profit performer among all Siemens Divisions. Profit at Wind Power fell compared to the strong second quarter a year ago, while earnings at Oil & Gas came in close to the prior-year level. Siemens’ solar business was reclassified from discontinued operations during the second quarter, and its results are reported within Energy. The business posted a loss of €21 million, nearly unchanged from the second quarter a year earlier. Additional information regarding the solar business is on page 13. Energy recorded €20 million in charges under the “Siemens 2014” productivity program.

Second-quarter revenue declined 9%, including lower revenue at Fossil Power Generation and Wind Power. On a geographic basis, lower revenue in the current period was due primarily to the Americas region, where Wind Power orders were strongly influenced in the second half of calendar 2012 by uncertainties in the U.S. market. Orders for the quarter jumped 46% year-over-year, due mainly to two large offshore wind-farm orders at Wind Power. Order intake remained close to prior-year levels at Fossil Power Generation and Oil & Gas, while lower orders at Power Transmission were influenced by more selective order intake. On a regional basis, orders rose sharply in Europe/CAME and the Americas but fell in Asia, Australia. The book-to-bill ratio for Energy was 1.35, and its order backlog was €58 billion at the end of the quarter.

 Lower revenue reduces profit contribution

Second-quarter profit at Fossil Power Generation came in at €431 million, including a strong contribution from the service business. The main factor in the Division’s profit decline year-over-year was significantly lower revenue, resulting mainly from declining order intake for turnkey projects in prior quarters. Orders for the current period were up 4% year-over-year, with increases in the Americas and Europe/CAME more than offsetting lower orders in Asia, Australia.

 Sharp order growth, revenue and profit down

Second-quarter profit at Wind Power was €53 million, down from €130 million in a particularly strong quarter for revenue-driven profit a year earlier. Key factors in the change included lower revenue and a less favorable revenue mix. Revenue declined 19% due to the onshore wind farm business, where the U.S is the largest national market for Wind Power. New projects in the U.S. were halted or postponed in late 2012 due to uncertainty regarding continuation of production tax incentives. The resulting order gap led to a steep drop in second-quarter revenue in the Americas region compared to a year earlier. In contrast, orders in the current period climbed sharply due mainly to the off-shore wind farm business, which typically has longer lead times between orders and revenue recognition. The Europe/CAME region posted the two large orders mentioned above as well as a major service contract in Germany, and led strong order growth for all three reporting regions.

 Stable profit contribution

Second-quarter profit atOil & Gas was €125 million, compared to €131 million in the same period a year earlier. Revenue and orders for the Division were close to prior-year levels.

 Grid connection charges fall, though challenges remain

Power Transmission reported a loss of €49 million, compared to a loss of €169 million in the same quarter a year earlier. The improvement is due primarily to substantially lower charges related mainly to grid connections to offshore-wind farms, totaling €84 million in the current period. A year earlier, these charges totaled €278 million, partly offset by the release of a provision of €64 million related to a successful project completion. Second-quarter revenue for the Division was close to the prior-year level, while orders came in 9% lower in part due to more selective order intake in Europe/CAME. The Division expects continuing challenges in coming quarters, including the transport and installation of platforms for grid connections to certain offshore wind farms.

OUTLOOK

In fiscal 2013, Siemens is implementing “Siemens 2014,” a company-wide program supporting our One Siemens framework for sustainable value creation. The goal of the program is to raise our Total Sectors profit margin to at least 12% by fiscal 2014.

For fiscal 2013, we confirm our expectations of moderate organic order growth. With continuing challenges for our businesses whose results react strongly to short-term changes in the economic environment, we now anticipate a moderate decline in revenue on an organic basis compared to the prior year. Charges associated with the Siemens 2014 program in the Sectors are expected to total up to €0.9 billion for the full fiscal year. Given these developments and financial results for the first half, we expect income from continuing operations in fiscal 2013 to approach the low end of our original expectation, €4.5 billion, before impacts related to legal and regulatory matters and significant portfolio effects which we expect to burden income by up to €0.5 billion due primarily to the solar business.

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Press release, May 9, 2013; Image: siemens