Siemens Energy rethinking its business strategy after facing heavy losses related to ongoing problems with turbines and booking $2.4 billion in costs due to quality-control issues at its wind turbine unit.
The spinoff of the former gas and power division of German conglomerate Siemens roughly quadrupled its expected annual losses to $5 billion in its recent third-quarter report, which follows further details of future expenses on Aug. 7.
However, the $2.4 billion loss is well short of worst-case estimates, but still raises doubts over whether it will keep its struggling wind business.
Siemens Energy to Restructure Wind Turbine Business
“It has been a very demanding quarter,” Siemens Energy CEO Christian Bruch told Bloomberg Television.The German firm also scrapped its sales outlook from June, and lowered its expectations, after withdrawing earlier estimates in the wake of the disclosed technical problems with its wind-energy products in Spain.
This includes wrinkles in rotor blades and faulty gears at its newer onshore turbines from its Spanish subsidiary Siemens Gamesa that could cost more than $1.1 billion to fix.
The crisis at Siemens Gamesa, one of the world’s biggest wind-turbine makers, came just weeks after it managed to fully acquire the business it formerly only partly owned.Shares are 30 percent lower than from before the June disclosures, following setbacks in fixing the turbines.
Siemens Energy said it would cost $1.76 billion to fix flaws in Gamesa’s onshore turbines, the bulk of which will be spent over the next two fiscal years, according to the updated report.Turbines in Spain Fail Due to Defects
Only a limited number of onshore turbines were affected and most were still operational, according to Siemens.“The quality problems really result from the past, but I think we have too fast rolled out platforms into the market,” Mr. Bruch told CNBC’s “Squawk Box Europe” during an interview.
“That is not a cost issue per se—that is really a quality issue in terms of going too fast with new products into the market.”
“The other thing is obviously now stabilizing the business in terms of ramping up new factories, he added.”
The equipment and service provider to the German manufacturer told Bloomberg that only some of the 2,900 turbines of its most recent 4.X and 5.X models were affected by the problems, but declined to give a specific number.
Quality problems occurred in “certain rotor blades and main bearings in the 4.X and 5.X platforms,” according to a statement.
Siemens Energy is trying to delay delivery of new wind turbines from its troubled 5.X platform by as much as seven months, Bloomberg reported.
German Firm Sees Gains in Quarter Despite Losses
The third-quarter results for Siemens Energy showed a record order backlog of $116 billion due to strong demand.
The company saw a “favorable market environment” with gains in orders worth $16.4 billion for the quarter, reflecting 54.2 percent year-over-year growth, primarily driven by orders at Siemens Gamesa and Grid Technologies.Revenue for the German gas turbine and grid technology maker rose 8 percent, to $8.25 billion, but missed an average analyst estimate of $8.65 billion.
“I still believe the market itself, and you see that with the $7.5 billion orders we’ve got in the wind business this quarter is a very interesting growth market,” Mr. Bruch said.
“However, obviously, it has to be set up in a way that you can run a profitable business, and obviously making sure that we slow down this fast rollout of new products is a key element in this.”
Higher product costs and ramp-up challenges in Siemens’ offshore costs also hit the firm for $660 million during the fiscal third quarter through June, which means that it is taking a loss on certain contracts if customers take delivery.
Net losses soared more than five-fold, to $3.22 billion, as as the costs of fixing issues at its Spanish subsidiary lower earnings.
In addition to the expected annual net loss is a $770 million write down of deferred tax assets during the fiscal year through September.
However, despite those extra charges, Siemens Energy still has liquid assets of around $4.73 billion.
Deutsche Bank Says That Siemens’ Stock Remains Strong
On Aug. 7, Deutsche Bank maintained its hold rating on Siemens Energy stock, noting that commercial dynamics remained strong.“Operationally, all divisions performed well, with the exception of Gamesa. In particular, Gas Services beat on revenue and profit by 5 percent and 25 percent, respectively, with a solid margin of 10.9 percent, 170 [basis points] above consensus,” said Gael de-Bray, European head of capital goods research at Deutsche Bank.
Siemens Energy posted a negative free cash flow of $60 million for the fiscal third quarter, including a pretax outflow of $432 million at Siemens Gamesa, which was not as bad as had been expected.
“The cash-out related to Gamesa issues is, however, expected to materialize in the next few years. At June-end, the group’s adjusted net debt (including pensions) rose to €919 million,” Mr. de-Bray said.
“Given the inherently risky nature of the business ... and remaining uncertainties regarding the turnaround of Gamesa, we continue to believe that a 10% capital increase could be needed to keep the group’s finances on the safe side.”
