Siemens Profit hurt by Weak Economy, Oil Prices

Big 5

Siemens AG has stuck to a forecast for improved earnings in its current fiscal year despite a 25% fall in first-quarter net profit, held back by Europe’s sluggish economy and lower oil prices.

Net profit in the three months to Dec. 31 fell to EUR1.08 billion ($1.21 billion) from EUR1.43 billion in the same period last year, Siemens said on Tuesday. Revenue rose 5% to EUR17.42 billion, helped by the euro’s weakness against major currencies.

An 11% decline in new orders to EUR18.01 billion underscored the pressure Siemens is facing as customers placed fewer large orders at its mobility, wind power and renewables business as well as its process industries and drives unit.

Profitability at Siemens’s power and gas business, its biggest by sales, came under particular pressure, hit by lower margins in the large gas turbine and steam businesses, the company said. Cutbacks in investment by European utilities and lower energy prices have squeezed profitability in the sector. The division’s profit margin shrank to 11.3% from 18.2% in the same period last year, Siemens said.

“No other business in the company has such a pronounced need for action, ” said Chief Executive Joe Kaeser of the power and gas division. “This is partly because we didn’t adequately recognize the signs of the times, such as rising price pressure and over capacities,” he added.

Siemens hosts its annual shareholders meeting Tuesday, where its power and gas business is expected to come under heavy scrutiny. Investors are likely to voice concerns over the high price Chief Executive Joe Kaeser agreed to pay in September to acquire U.S. oil equipment maker Dresser Rand Group. Inc.

Those worries have been amplified in recent weeks as oil prices have plummeted to below $50 a barrel.

Investors have largely supported the Dresser acquisition from a strategic perspective, allowing Siemens to take advantage of the U.S. shale gas boom and to leverage a new product portfolio in the oil sector, but have criticized the high price and fretted over the inopportune timing. The deal, at $83 a share, values Dresser at roughly 58 times the past year’s earnings. Rival U.S. oil-services companies FMC Technologies Inc. and Dril-Quip Inc. trade at less than 16 times earnings.

Mr. Kaeser, who said the low oil price is “a result of oversupply” rather than reduced demand, reiterated that the acquisition of Dresser would allow Siemens to achieve synergies 30% higher than forecast when the deal was first announced. In September, Siemens said it expected to achieve EUR150 million in annual synergies by 2019 as a result of the deal. Mr. Kaeser added that the acquisition would also allow Siemens greater market access and opportunities to expand its automation-technology business.

The deal is part of a larger effort by Mr. Kaeser to streamline the company by shedding noncore businesses and focusing more on energy operations.

The deal is part of a larger effort by Mr. Kaeser to streamline the company by shedding noncore businesses and focusing more on energy operations. Last month, Siemens closed a deal to acquire Rolls Royce Holdings PLC’s civilian energy operations for $1.3 billion.

On the other hand, Siemens earlier this month closed the sale of its hearing aid unit, a division of its lucrative healthcare business, for EUR2.15 billion to private-equity firm EQT Partners and Santo Holding.

Analysts have expected Mr. Kaeser could dispose of the rest of Siemens Healthcare, which he separated operationally from the rest of the company last year, through a spin off to shareholders, an initial public offering or an outright sale. The profit margin in the health care business dropped to 14.5% in the first quarter, compared with 17.6% last year.

Source: MarketWatch