Siemens Energy’s troubled wind unit derails Germany’s biggest spin-out

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Even as groups of teenagers routinely protested climate change in the streets below his Munich office, Christian Bruch struck a defiant tone.

“Everyone is looking for a miracle solution that . . . makes [energy] sustainable overnight,” Bruch told the Financial Times in the summer of 2020, as he prepared to take over Siemens Energy. “[But] over the next few decades, we will need natural gas.

Its old-fashioned stance failed to catch on with investors. A few weeks later, against the backdrop of a resurgent Green Party, Siemens Energy crashed on its Frankfurt stock market debut after becoming Germany’s biggest spin-off. Those who invested in the fossil fuel company were more attracted to its clean energy business alone – the fast-growing Spanish wind turbine maker, Siemens Gamesa or SGRE.

Yet it is this renewables unit – rather than the gas and coal contracts that make up the bulk of Siemens Energy’s balance sheet – that now threatens the company’s future and is causing headaches for its main shareholder, Siemens.

Eighteen months and four profit warnings later, SGRE has erased billions of euros from the market value of its majority owner. Siemens Energy’s 67% stake in the wind unit made it “uninvestable”, according to Bernstein analyst Nicholas Green.

On Thursday, Bruch and the rest of Siemens Energy’s management team will face furious investors at the group’s annual meeting. Shareholders have a long list of charges.

Despite adding €1.4 billion in onshore wind orders as demand for renewable energy surged after the COP 26 climate conference, SGRE recorded a loss of €289 million on its backlog in the first three months of this fiscal year.

Higher raw material costs and expensive last minute modifications to the 5.X turbine – designed to handle large rotors and maximize power output in all wind conditions – have left SGRE with what it calls onerous contracts. The green energy company, which operates in more than 90 countries, is in debt of more than one billion euros.

“At this time, we are no longer putting inventory in your forecast,” Ingo Speich, portfolio manager at Siemens Energy shareholder Deka, told senior company officials at the meeting. “Capital market confidence has been destroyed and now has to be painfully regained.”

SGRE’s problems reverberate beyond the Siemens Energy boardroom. They have raised doubts among executives about whether European and US firms can compete in the wind power business or whether, as with solar, they will eventually be undermined by cheaper Asian imports.

“There is no profit pool today,” said a Siemens Energy insider, referring to the wind sector. Indeed, a week after SGRE’s latest profit warning, competitor Vestas warned of further turmoil after disappointing results, while GE said its wind division posted a loss of $312 million in the first quarter. last quarter of 2021.

“If the market [remains] like this,” the person added, “we won’t have any western companies coming into [wind energy]. The Chinese will eventually succeed with their Belt and Road Initiative, and the next thing they will do is export onshore wind [turbines]whatever the price.

Many problems at SGRE are attributed to chaotic management. Since Siemens’ former chief executive Joe Kaeser led the merger with SGRE in 2017, the company has had four chief executives and five chief financial officers, five onshore directors, five offshore directors and two service directors, according to the analysis. . by JPMorgan

There was “no integration” and a “lack of visibility” of the issues, another person close to Siemens Energy said.

Christian Bruch, CEO of Siemens Energy, warns that making a steady profit from wind power, like fossil fuels, will take time and patient management © Thorsten Wagner/Bloomberg

Some missteps were almost comedic in nature. In January 2020, for example, SGRE had to adjust its profit target after incurring more than €100 million in costs, as projects in Norway were delayed due to “adverse road conditions and the unusually early onset of winter conditions”. The company did not expect snow to fall in the Nordic countries, one person joked.

Supply chain chaos also played a role. Per kilowatt hour, there are 10 times more raw materials in a wind power plant than in a fossil fuel plant – and about 400 tons of steel in a single turbine. Wind contracts are signed two or three years before delivery, leaving suppliers like SGRE vulnerable to recent fluctuations in commodity prices.

These pressures show few signs of easing and Siemens Energy is still evaluating SGRE’s business prospects.

The German group is aiming for a profit margin of 8-10% across all of its businesses, and SGRE’s future hinges on its ability to deliver a similar return, according to people familiar with the matter.

Kaeser, now chairman of Siemens Energy, told the FT that although Siemens “deliberately chose” not to spend the money to buy SGRE in 2017, when the future of the fledgling wind industry was still uncertain, the plan was that Siemens and SGRE “shape the market” and he was “still convinced that renewables will be the energy source of the future”.

Although SGRE’s onshore business has struggled, it has a profitable and growing offshore unit, which investors hope will be a model for a turnaround.

“It probably wouldn’t take much to stabilize the business,” said Vera Diehl, portfolio manager at Union, one of Siemens Energy’s top five shareholders. “Everyone is desperate for renewable energy investments,” she added, “so the expectations are very, very low.”

Getting rid of SGRE entirely would be a step backwards, Diehl added, leaving Siemens Energy the “bad bank” of its fossil fuel business. “The problem is . . . can a fund manager afford to be a loyal shareholder of Siemens Energy?

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Bruch pointed out that despite projections that the market would grow by 250% over the next 30 years, making a steady profit from wind energy would, like fossil fuels, take time and patient management.

“I think at some point [wind] was seen more as a technology stock,” he said, but with on-site blade assembly for each installation, turbines are “still a product, project and service business.”

Its message, as in the summer of 2020, may not be one the market, or society, wants to hear, especially after Germany effectively blocked the development of the Nord Stream 2 gas pipeline from Russia this week. .

“If we think it’s easy to get a cheaper, sustainable energy supply overnight, we’re wrong,” Bruch told the FT.

“That would be a great story. But it’s not true.

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