Siemens Energy CEO Christian Bruch stated on Monday that the company is planning to adjust its new product rollout strategy due to quality issues that resulted in costs of 2.2 billion euros ($2.4 billion) at its wind turbine unit.
Siemens Energy made the decision to abandon its profit forecast in June and warned that the problems at its wind turbine subsidiary, Siemens Gamesa, would continue to affect its performance for years to come, leading to a sharp decline in share prices.
The board of Siemens Gamesa is currently reviewing the extent of the quality issues, which some analysts believe may be widespread in the industry.
During an interview with CNBC’s “Squawk Box Europe,” Bruch explained, “The quality problems stem from our previous actions. We have rolled out new products into the market too quickly. It’s not just a cost issue, but a quality issue in terms of the speed of new product launches. Additionally, we need to stabilize the business by ramping up new factories.”
Although the 2.2 billion euro cost is lower than predicted, it will result in a net loss of around 4.5 billion euros for Siemens Energy this year, significantly worse than initially anticipated.
A Siemens Gamesa blade factory on the banks of the River Humber in Hull, England on October 11, 2021.
PAUL ELLIS | AFP | Getty Images
Shares in the company initially dropped by 5% when the Frankfurt Stock Exchange opened, but quickly recovered and traded 2.6% higher.
On a positive note, Siemens Energy, which emerged as a spinoff from the gas and power division of German conglomerate Siemens, reported strong growth in orders and revenue. It also achieved a record order backlog of 109 billion euros in its third-quarter earnings report released on Monday.
Bruch expressed his belief in the growth potential of the wind business and said, “The market itself is very interesting, as evident from the 7.5 billion euros worth of orders we received this quarter. However, we need to set up the business in a way that ensures profitability, and slowing down the rapid rollout of new products is a crucial aspect of this.”
Siemens Energy reported orders of 14.9 billion euros for the quarter, reflecting a 54.2% year-on-year growth, primarily driven by large orders at Siemens Gamesa and Grid Technologies. Revenues increased by 8% on a comparable basis to 7.5 billion euros. However, the company’s net loss for the third quarter was 2.93 billion euros, compared to a loss of 564 million euros in the same quarter of the previous year.
The company attributed the loss to “negative tax effects from valuation allowances on deferred tax assets in connection with the charges at Siemens Gamesa.”
Bruch announced that Siemens Energy intends to focus on fewer product platforms and specific regions for development. A detailed strategy will be unveiled during the company’s capital markets day in November.
Deutsche Bank reiterated its “hold” rating on Siemens Energy stock and acknowledged the company’s strong commercial performance. Gael de-Bray, Deutsche Bank European Head of Capital Goods, highlighted the solid performance of Gas Services, which exceeded revenue and profit expectations.
Siemens Energy reported a negative free cash flow of 55 million euros for the third quarter, including a pre-tax outflow of 393 million euros at Siemens Gamesa. However, the situation was not as dire as anticipated.
De-Bray added, “The cash-out related to Gamesa issues is expected to occur in the coming years. As of the end of June, the group’s adjusted net debt (including pensions) rose to 919 million euros. Given the inherent risks in the business and the remaining uncertainties surrounding the turnaround of Gamesa, we believe that a 10% capital increase may be necessary to ensure the company’s financial stability.”
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