German engineer Siemens scraps key target for operating margin

Siemens has dealt a big blow to investor confidence by scrapping a key target that the German engineering company had hoped would show it was closing a profitability gap with competitors.

The announcement is set to pile further pressure on Peter Loescher, chief executive, who has faced sustained investor criticism for a succession of profit warnings and one-off charges.

Siemens said on Thursday it no longer expects to raise its operating margin from 9.2 per cent in fiscal 2012 to 12 per cent in 2014 and blamed “lower market expectations” for its decision to abandon the target.

The company said cost-cutting and portfolio optimisation measures are “largely” on track, a qualification that also unsettled investors. A Siemens spokesman declined to elaborate on the reasons for the announcement.

The Munich-based maker of trains, gas turbines and industrial automation equipment, set the operating margin goal in November as part a €6bn cost-cutting plan via which it hoped to reverse a slide in margins.

Investors, who are typically sceptical of cost-cutting announcements, had applauded the specific margin goal as a firm commitment by the company to boost its return on sales.

Although many investors had already revised lower their expectations for Siemens’ profit growth in the coming quarters because of the weak economic environment, the timing of the announcement, less than half way through the two-year cost-cutting programme, came as a shock.

Before Thursday’s announcement analysts were forecasting Siemens to achieve around a 11 per cent-11.5 per cent margin in 2014.

“Given the target is for 15 months out it would suggest that the miss would need to be more substantial to cut guidance at this time,” Mark Fielding at Citi Research, told clients, adding that a profit margin of about 10 per cent in 2014 may now be more realistic.

“This miss . . . will probably create further investor uncertainty over the future evolution of Siemens and the ability of management to drive progress,” he said.

Ingo-Martin Schachel at Commerzbank, said: “It definitely undermines confidence as it was a very important element of the Siemens equity story over the last months.”

The stock closed down 5.9 per cent at €78.62 on Thursday.

Siemens has won an unfortunate reputation for scrapping guidance and booking one-off charges in various parts of its portfolio such as offshore wind grid connections, solar and German high speed trains.

Mr Loescher, who took over the reins at Siemens in 2007, was criticised by investors for setting a target to increase revenues to €100bn (compared with €78.3bn in 2012) which critics say caused divisional managers to lose sight of profit margins. The €100bn goal also looks increasingly unachievable.

“This raises huge question-marks about the CEO,” said a London-based analyst, who was not authorised to speak on the record.

Another analyst, Andreas Willi at JPMorgan, said: “The market may speculate that this could trigger further structural changes at the group. There was significant pressure on management to achieve these targets.”

Siemens was counting on moderate volume growth to achieve its margin target. Like other industrial companies it has a fairly good insight into the coming year’s revenues because of its order backlog.

Analysts speculated that management had looked at the quality of these orders and concluded the 14 per cent target would not be reached.

Siemens is facing headwinds in its profitable gas turbine business as cheap coal displaced from the US because of the shale gas revolution is being burnt in Europe instead, causing gas plants to be mothballed and projects scrapped.

Meanwhile, analysts expect a slowdown in China to impact demand for Siemens industrial automation equipment. Siemens is set to report fiscal third-quarter figures on August 1.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.