Siemens Energy AG (OTCPK:SMEGF) Q3 2022 Earnings Conference Call August 8, 2022 4:00 AM ET
Company Participants
Michael Hagmann – Head of Investor Relations
Christian Bruch – President and Chief Executive Officer
Maria Ferraro – Chief Financial Officer
Conference Call Participants
Andre Kukhnin – Credit Suisse
Vivek Midha – Citi
Gael de-Bray – Deutsche Bank
Supriya – UBS
Akash Gupta – JPMorgan
Will Mackie – Kepler Cheuvreux
Sean McLoughlin – HSBC
Ajay Patel – Goldman Sachs
Phil Buller – Berenberg
Operator
Good morning, ladies and gentlemen, and welcome to Siemens Energy’s 2022 [Third] (ph) Quarter Conference Call. As a reminder, this call is being recorded.
Before we begin, I would like to draw your attention to the Safe Harbor statement on page two of the Siemens Energy presentation. This conference call may include forward-looking statements. These statements are based on the company’s current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties.
At this time, I would like to turn the call over to your host today, Mr. Michael Hagmann, Head of Investor Relations. Please go ahead, sir.
Michael Hagmann
Thank you, Juliet. Good morning, everybody, and a warm welcome to our Q3 analyst call. As you know, all documents were released at 7:00 on our website. Here with me are our President and CEO, Christian Bruch; and our CFO, Maria Ferraro. They will take you through the major events, as well as the results of the last quarter, that should take approximately 30 minutes. As usual, we expect to have about 30 minutes for Q&A.
And with that, over to you, Christian.
Christian Bruch
Thank you very much, Michael, and also good morning from my side. Thanks for joining Maria and myself for our quarter three, 2022, conference call. I hope that you and your families are well and safe in these difficult times. And we are indeed facing unprecedented times and are going through a challenging and constantly changing environment.
The war on Ukraine, several countries are experienced heat waves, we see still tight supply chain. So a lot of things which we have to manage and the Siemens Energy, we are continuing our journey whilst dealing with these challenges.
Let me highlight how we continue to drive profitability and how we are shaping the company so that we will be able to deliver on our vision to become the most valued energy technology company in the world before Maria will take you through our results. One highlight of this quarter was certainly our Capital Market Day on May 23 and 24 in Berlin. It was the first big event where we were able to meet many of you in person. Thanks for joining at the Capital Market Day. We presented our vision of Siemens Energy going forward. And let me recap the two major steps that we have presented at the Capital Market Day, which will allow us to maximize on the opportunities that come with the energy transition.
First, we are giving Siemens Energy a new structure as of October 1. So you will obviously also see a new reporting structure, then it is much better aligned with the customer needs, and it will make us also more versatile in terms of how we act. It will have a lot less hierarchies and makes us more transparent and faster. The second element, which we presented was the launch of the voluntary cash tender offer for the outstanding Siemens Gamesa shares, with the intention to delist SGRE by the end of the year.
There is a third step we have taken after the Capital Markets Day and which is reflected in our quarter three figures and it comes, obviously, also with a heavy heart, I would say. At our quarter two results, we said that our GP business in Russia is under review, and now we have taken concrete steps to reach an optimal solution by the end of the fiscal year, which I will talk about later in more detail.
Let’s now take a brief look at our overall performance. GP had a very solid performance, despite all the headwinds and challenges in the quarter, while SGRE continues to experience high losses. In the quarter, we had strong orders of close to EUR10 billion, which is up 60% comparable. GP had strong order intake across the board coming in at EUR6.4 billion, and SGRE was also strong. We now have a record order backlog of EUR93.4 billion. Revenue was down 4.7% on a comparable basis, driven by SGRE. Revenue at GP grew. But because of the loss of revenue in Russia and supply chain constraints only slightly, and SGRE’s revenue was down 13.8% comparable.
Our adjusted EBITDA before special items came in at negative EUR131 million, and despite the negative impact from the loss of revenue in Russia and supply chain challenges, GP nearly held last year’s level and came in at EUR212 million, while SGRE’s losses continue to be high at EUR330 million.
Cash flow was roughly breakeven. GP generated more than EUR400 million in the quarter, which makes it a EUR1.4 billion year-to-date, which is really an excellent number and once again, a very strong cash performance. And as expected, SGRE had a cash outflow. Although further negative effects associated with geopolitical and macroeconomic challenges cannot be ruled out. We still expect to achieve the guidance for GP and Siemens Energy which we provided in quarter two. However, for comparable revenue growth, we now exclude effects from lost revenue in connection with our business activities in Russia.
I already mentioned the Capital Market Day and the steps we announced just before the Capital Market Day. Let me briefly reiterate the key messages we gave at the Capital Market Day. Obviously, it is our vision to become the most valued energy technology company in the world, and we have taken major steps towards this vision. It only has been a little bit more than two years since the spin-off, but we have achieved substantial operational improvements and portfolio changes since the start of Siemens Energy.
The market we play in the electricity and energy market is under significant change and will receive substantial investment over the next decade. We, as Siemens Energy, are very well positioned to benefit from these investments. This is also something we see currently, obviously, in our order book and the order performance in quarter three. Going forward, we applied five key levers to create value for our shareholders. The new group structure provides the basis on which the business areas, gas services, grid technologies, transformation of industry and SGRE, will be able to deliver on their targets.
Sustainability, as I always have said, is core of what we do and how we operate across our portfolio and as we obviously strive with our operations for profitable growth. The new group structure, which we announced will become effective as of October 1, 2022. Our new Board members responsible for transformation of industry and the global functions have been nominated and will be officially announced on September 1.
Furthermore, I have to say I’m very satisfied with the current structure — current status of the preparation phase of the new group structure. The project is well on track. Most of the management positions have already been defined and filled. So we are fully on track to achieve the new structure in October 1, with, as I said before, Clear structures, unified go-to-market approach and also more financial transparency for you to understand the different businesses.
Let me now give you a quick update on SGRE. As you might have read before, I joined the Board of Directors of Siemens Gamesa on June 24, replacing Tim Dawidovski after he became the COO of SGRE. SGRE now has a record order book of EUR34 billion, and this is a result of the strong orders. And what is important here is the fact that SGRE managed to push the average selling price for onshore wind turbines, up again as we are seeing a sequential recovery in onshore.
Losses at SGRE continue to be high. This is a reflection of poor underlying profitability for reasons discussed before, such as the ramp-up of the 5.X platform, supply chain conditions, and costs driven by component failures and repairs, mainly in legacy onshore wind turbine platforms. The good news is that Jochen is taking decisive steps to achieve the turnaround. You may recall that the initiated mitral program is now addressing short-term challenges and helps deliver long-term profitable growth. Staffing and footprint optimizations have been launched and now he is planning as of January 1, 2023, to go live with a new operating model, which we presented in his analyst call last week. The new operating model is designed to have a simplified and leaner company structure. Therefore, there will be one technology development team under the CTO and one manufacturing team under the COO across offshore, onshore and service.
While businesses focus on sales, projects and the product road map and keep full profit and loss responsibility, there will be one standardized regional setup across businesses. Procurement contracts of direct material will be transitioned to mid to long term, and there will be a stabilization of the product development and quality processes, which is a key lever really to turn around the company. Taking the impact of higher costs from component failures and repairs, mostly in legacy onshore platforms in quarter three supply chain-related costs and 5 times ramp-up challenges into consideration, SGRE GE provided an outlook update for fiscal year ’22 and is now expecting a comparable revenue decline of negative 9% and an EBIT margin pre-PPA NIR of negative 5.5%.
Let me come to Russia. It is now six months since the war in Ukraine started. And as you know, we immediately stopped all new business activities in Russia. And as of July 10, we stopped almost all business activities in Russia. And I told you before that we are reviewing our business in Russia in light of the sanctions, and we have now decided on restructuring measures for our business in Russia. And we have taken concrete steps to reach an optimal solution by the end of fiscal year.
We have pre-agreements in place and are currently finalizing required legal steps in Russia really to conclude the business, which means also obviously a discontinuation from our side. However, we might continue some existing activities in accordance with elements like, for example, the North Stream one maintenance pieces, what has been in discussion each and everywhere to ensure also secure gas deliveries to Europe.
Let me take you through the financial impact. We already gave guidance regarding the impact on our ongoing business with quarter two results. Revenue impact this year will be around EUR400 million and the associated negative impact on our adjusted EBITDA before special items will be low triple-digit million euro. The special items related to the restructuring in Russia amount to around EUR200 million.
Looking forward, based on our current assumption, we currently do not expect any major negative impacts from Russia in the next fiscal year. I think that is always important to underline, that is something why we are trying to get everything done in fiscal year ’22. And for quarter four, there might be smaller impacts, but the big impact we have seen now with quarter three.
Let me talk briefly to the gas situation, which is also the other subject, which keeps us very busy in terms of reduced gas flow into Europe and Germany and what impact this may have on our operations, on our suppliers and on our customers. As a company, we ourselves, we do not require much gas during our own production. We mainly use gas for heating and testing purposes. Obviously, we’re trying to save as much as possible. And we also expect that some of our suppliers will be impacted.
What helps us here is that we have a broad supplier network globally. We’ve already taken risk mitigation measures and route, if it is possible, sourcing outside of Europe for gas-intensive products. And in case this is not possible, we have been building up safety stock. This said, we have experienced rising raw material costs due to high energy and electricity prices since February. This is obviously reflected in our costs.
And if you look at our customers, we see that the fleet utilization, interestingly enough, so far remains stable in all regions, which is a positive sign for our service resilience. We have not yet seen any signs of change in customer behavior, when it comes to gas turbines. We see, however, upgrade opportunities because our customers need to increase efficiencies, reduce gas consumption or consider a fuel switch, which is obviously now happening, particularly in Europe that people switch back from gas to oil, for example, which is currently happening in a lot of installation.
When it comes to current orders, let me highlight just the selection of project wins in this quarter, like always, which demonstrate that our customers need our solutions today more than ever and which once again cuts across excellent, always about across our three pillars, which we always are underlining. The first project on the left-hand side, in Mexico, we were able to secure four orders from CFE, one of the largest energy companies in the world. Siemens Energy will deliver four combined cycle power plants located in different regions of the country. And these additions to the power grid in Mexico are key to reinforce the power generation assets in areas with energy deficits, increasing the installed capacity by 2,600 megawatts.
In the middle, you see the announcement with Amprion, they just awarded us a turnkey installation for the converter stations and the service for what is called DolWin4 and BorWin4. We are talking here about the largest grid connection order in our history with an order value in the high three digit million euro range. DolWin4 and BorWin4 will be able to transport up to 1.8 gigawatts of green wind energy from several wind farms into the German North Sea to land with low losses. And the capacity of those two grid connections is equivalent to the demand of a major city like Hamburg with 1.8 million inhabitants.
During the quarter, we also announced that Air Liquide will take a 25.1% stake in our electrolyzer factory in Berlin. And this joint venture is dedicated to the serious production of industrial scale renewable hydrogen electrolyzers in Europe. Production is expected to begin in the second half of 2023, with a view that we will ramp up the factory to an annual production capacity of 3 gigawatts by 2025, and we believe that this joint venture is really beneficial to both of us, Air Liquide gains access to production capacity.
And we have a major hydrogen player dedicated to ramp green hydrogen capacity up as a joint venture partner. And obviously, with this, we will be jointly a major force driving sustainable hydrogen economy in Europe and fostering a European ecosystem for electrolyzers and hydrogen technology.
And with this, I would hand over to Maria to give us an overview on the financial numbers.
Maria Ferraro
Thank you, Christian, and good morning, everyone. A very warm welcome also from my side. I’m very pleased to share with you our Q3 financial results, as always, for the group, Siemens Energy and the segment Gas and Power and happy to take any questions you may have afterwards.
But before we start into the financials as such, let me give you a quick overview of where we stand regarding the voluntary cash tender offer and the related funding. So if you go to the next slide, Slide 12, please. As you know, on May 21, we announced our intention to launch a cash tender offer to acquire all outstanding shares in SGRE, approximately 32.9%, of which we do not already own. Since then, we have subsequently submitted the necessary documents and have been and continue to be in dialogue with the Spanish stock exchange regulator, the CNMV.
The CNMV must now confirm the offer. It’s not possible to say exactly how long this will take or how long they will need to do their proper due diligence. However, we are and have a very constructive dialogue with the CNMV and expect, as per our tentative timeline, a decision post the summer holidays. Once we get the approval, the acceptance period will start essentially pretty much right away, and we intend to keep it open for approximately 30 days. However, again, this will depend somewhat on the approval or take up. If we achieve our first threshold of more than 75% of the shares by the end of the acceptance period, we would then call an extraordinary general meeting or an EGM to start the delisting process.
So up to now, everything is progressing as planned so that we should be able to keep the tentative timeline and close the transaction before the end of the calendar year as planned. In the meantime, as part of the transaction, we have provided EUR1.15 billion cash collateral to the CNMV. This is as expected and part of the transaction to guarantee the offer. This collateral, which represents the cash portion we have anticipated to use for the offer, has been provided before the end of the quarter. You will see this when I talk to you — or when I talk you through the balance sheet a little later, that now accordingly, we have a lower cash balance.
As a consequence, however, the guaranteed bridge facility then was reduced to EUR2.9 billion. So we believe that the offer price of EUR18.0 per share is fair and equitable and attractive to the SGRE shareholders and in the market — current market environment, we expect this to be the case when looking at the acceptance period. All of these steps are part of the process, and this is reflected in our planning. We have consistently said that we are and remain committed to a solid investment-grade credit rating and the financing package, which we also have discussed and prealigned with S&P, is designed to support this key objective.
The funding of the acquisition is fully underwritten by Bank of America and JPMorgan and the guaranteed bridge facility is in place for up to two years. Assuming a full acceptance of the offer, we intend to replace the bridge facility and raise up to EUR2.5 billion in equity or equity-like instruments. So that’s the update thus far. As mentioned, everything is progressing as planned. And so now I’d like you to take you through the financial performance in Q3. Today, again, as mentioned, this will go through the group level first and then go to our reporting segment, Gas and Power.
So starting October 1, we will report in our new structure, so therefore, providing the increased transparency. But starting now with an overview of SE Group today, I think we’ve achieved a solid performance overall and especially in Gas & Power. Orders on SE level continue to be very strong with a remarkable growth of 60% year-over-year on a comparable basis.
What’s also very positive is that both segments contributed to this increase with GP and SGRE contributing there. And this results in third quarter orders of almost EUR10 billion — EUR9.8 billion, which then drives the order backlog to another record of EUR93.4 billion. Again, this is also supported by some currency translation headwinds of around EUR1.9 billion versus the end of Q2.
But please remember this extraordinary amount of EUR93.4 billion, this backlog represents a bit more than three years of our revenue, which provides a very solid foundation to deliver and underpin the profit improvements we are striving for. So now it’s key to execute and execute with excellence, and this is and remains our priority. Looking at revenue in the middle of EUR7.3 billion, this was moderately down by 4.7% on a comparable basis, as growth at GP was more than offset by a decline at SGRE. At SGRE, the significant revenue decline compared to prior year’s quarter was due to continued in-house quality and operational problems as well as supply chain constraints and disruptions.
Across the SE level, the decline was driven mainly by new units, while service revenue rose year-over-year by 5% on a reported basis. Book-to-bill for Siemens Energy, again, very, very strong at 1.35. This reflects a book-to-bill of 1.31 at Gas and Power and 1.45 at SGRE. So very positive on both segments.
Adjusted EBITDA before special items, this was negative EUR131 million. As in the past quarters, the significant loss at SGRE outweighed a strong contribution from the Gas and Power segment. Gas and Power reported a positive adjusted EBITDA before special items of nearly EUR212 million, which is essentially on par to prior year’s quarter’s level. I will talk about this just in a moment.
At SGRE, the EUR330 million loss was due again to continued operational problems, as well as pressure on material and logistics costs. Free cash flow, pretax came in at negative EUR25 million, but again, diverging developments between the segments, on one hand, a very solid and good performance at GP with a free cash flow pretax of EUR432 million, which was more than offset by cash outflow pretax of EUR514 million SGRE.
Next, I’d like to take you through the group cash bridge, which, as I just mentioned before giving the overview of the transaction, has been impacted by the EUR1.15 billion cash collateral transferred to the CNMV.
Looking at the left-hand side, we have EUR4.4 billion in cash and cash equivalents and EUR107 million receivables from Siemens Group for a total liquidity of EUR4.5 billion. We have EUR4.1 billion of financial debt, of which EUR2.2 billion is long-term. This is EUR720-odd million higher than at the end of the second quarter, and this reflects a rise at SGRE, which accounts for the majority of our long and short-term debt. We have a financial liability to Siemens for EUR76 million for a net cash position of EUR422 million, which is EUR1.2 billion lower than at the end of the second quarter.
During the quarter, our provision for pensions and similar obligations decreased from EUR725 million in last quarter to EUR623 million in this quarter, driven by higher discount rates. Credit guarantees remained at the same level and again, refer no change there to a bank financing of an associated company for which Siemens Energy has issued credit guarantees.
Taking into account pensions we have, a net debt position of EUR273 million, this is the first time that we’ve had a net debt position and is EUR1.1 billion lower than after Q2. As mentioned before, this is mainly a reflection of the EUR1.15 billion cash collateral transfer to CNMV. And the fact, of course, that the free cash flow generation at the SE Group overall was basically flat in the quarter.
Overall, we also continue to have a very sound liquidity. As per the end of the third quarter, Siemens Energy Group had a total available liquidity of EUR9.3 billion, again, comprising of the EUR4.4 billion of cash and cash equivalents and EUR4.8 billion undrawn credit lines. Furthermore, we have a EUR2.9 billion remaining guaranteed bridge facility, of course, related to the cash tender offer.
Next, please, let’s look at our Gas and Power segment in Q3, which has been and continues to deliver in line with our expectations. I’m very pleased to say that Gas and Power continues to be resilient, despite a variety of headwinds, macroeconomic issues, including supply chain disruptions and geopolitical difficulties. I always say we’re not immune to the challenges also in GP. However, we continue to take advantage and fare well of the growing demand for our energy and technologies that facilitates the energy transition, and this is demonstrated by sharply higher order volumes.
In the third quarter in Gas and Power, we booked EUR6.4 billion, an almost 37% increase comparable. For the first nine months of the current fiscal year, we also see an increase in orders of 25 — just over 25% comparable and almost 30% on a reported basis.
To again, to put these numbers into perspective, rather, in the first three quarters of fiscal year ’22, we won orders almost EUR19 billion, which equates to approximately one full-year of revenue for Gas and Power. This strong growth resulted in a strong and healthy order backlog of almost EUR60 billion, EUR59.6 billion to be exact, again, exceeding previous quarter end record. This remarkable order growth at GP in Q3, which is also important, was supported by double-digit increases across all businesses and across all reporting regions. And what’s also very positive is we saw increases in both the new units, as well as the service business.
When it comes to gas turbines and to provide a little further insight, we booked in the third quarter, 22 gas turbines greater than 10 megawatts. There are seven large gas turbines and 15 industrial gas turbines in the range between 10 and 100 megawatts, so that’s for orders. Now looking at revenue. Revenue remains on a growth track and grew by 0.7% comparable and just over 6% on a reported basis. This is despite the sanctions against Russia and continued supply chain constraints.
As mentioned, the negative revenue impact from the sanctions against Russia was around EUR170 million in Q3. However, the nominal growth benefited in the third quarter from FX tailwinds in the magnitude of approximately 5.6 percentage points. This is mainly due to the strengthening of the U.S. dollar. From the disaggregation of revenue table, you can see that in Q3, all businesses contributed to growth, as I just mentioned. Generation increased by 2.6%, IA by just over 10% and transmission by 7 — just over 7%. For the first nine months of the current fiscal year, revenue development was basically flat on a comparable basis and grew moderately on a reported basis.
Now looking at book-to-bill for Gas and Power, as I mentioned earlier, again, very strong at 1.31 and particularly strong in all businesses, but particularly in transmission. Adjusted EBITDA before special items came in strong again at EUR212 million, nearly on prior year’s level or 4.4% margin. And I think we can all be very proud of this achievement that took a lot of hard work.
Please remember, in Q2, we have highlighted that we are confronted with significant challenges, such as the war in Ukraine, where we indicated high double digit, low triple digit impact and supply chain constraints, roughly EUR100 million or so headwind on profitability, which predominantly burden our adjusted EBITDA before special items in the second half. The adjusted EBITDA before special items impact of sanctions against Russia in Q3 amounted to EUR55 million in the third quarter due to the loss of revenue based on the sanctions and other operational effects. We managed to mitigate most of these headwinds with a strong operational performance and to continually and very prudently deliver on our cost savings programs.
This is hard work, as mentioned, across all divisions. For the nine months or year-to-date, we are now at an adjusted EBITDA margin before special items of 5.4%, which is an improvement of 20 bps versus the 5.2% in fiscal year ’21, again, despite the headwinds from the war in Ukraine, for example, which burdens the profitability in the first nine months by about 60 bps, and of course, notwithstanding things like the supply chain constraints and disruptions they’re in.
For special items, as Christian mentioned, we have started to restructure the business activities in Russia. So therefore, the recent quarter reflects this, in total, approximately EUR200 million. And also as a reminder, this is reported as a strategic portfolio decision under special items. So therefore, has no impact on adjusted EBITDA before special items.
So to be crystal clear, the negative impact relating to the restructuring in Russia is part of the special items and the negative impact related to lost business in Russia is not part of special items. The restructuring activities are expected, as mentioned, to be concluded by the end of the fiscal year without further significant impact, i.e., the majority of the impact is already included in our Q3 results.
Switching a little bit to free cash flow pretax. Again, very strong at EUR432 million and slightly above prior year’s quarter’s level, supported by a strong top line development. So therefore, advanced payments from customers, and of course, but unfortunately, this was more than offset in light of higher outflows from inventories and inventory and GP went up in part related to the buildup of safety stock, I mentioned that already in Q2 in certain areas where necessary and where appropriate, we are building up safety stock to ensure that we limit disruptions and are able to meet customer requirements, and I think this is exactly what we continue to do on an exceptional basis going forward.
So therefore, to sum up, in Q3, GP progressing absolutely in line with expectations, very strong order momentum with growth on the top line, strong profitability and cash flow and the measures that we’ve taken to improve the operational performance as well as our cost-out initiatives are showing effect, and therefore, we are on track to reach our fiscal year ’22 and fiscal year ’23 targets.
Last, but not least, let’s take a look at the financial outlook, which remains unchanged for GP and Siemens Energy. For the Gas and Power segment, we still expect comparable revenue growth and adjusted EBITDA margin before special items towards the low end of the guidance ranges of positive 1 to positive 5 and positive 4.5% to positive 6.5%.
For the comparable revenue growth effects related to the restructuring of the Russia are excluded. According to SGRE, just to reiterate, for fiscal year ’22, the company now is working to achieve a comparable revenue growth near the low end of the previous target range of negative 9 to negative 2 and an EBIT margin pre-PPA and integration and restructuring costs of approximately negative 5.5%.
So therefore, for Siemens Energy, we expect results still towards the low end of the guidance ranges for comparable revenue development, again, negative 2 to positive 3, but excluding the Russia-related effects and adjusted EBITDA margin before special items, which is positive 2 to positive 4.
We now expect the net loss for Siemens Energy in fiscal year ’22 to exceed prior year’s net loss approximately by the impact from the restructuring of business in Russia that is currently reported as a special item. We still assume free cash flow pretax to be in the range of positive to mid triple-digit million.
So with that, I now hand back to you, Christian for final remarks.
Christian Bruch
Thank you, Maria. And let me conclude with our key short-term priorities, in particular. And Siemens Energy success obviously is built and has been built on the fact that we support our customers, especially in this challenging time. It is, hence, key for us to support our customers as they navigate through the current market challenges and geopolitical tensions. We are experiencing similar challenges and is also key for us that we manage these challenges in our own organization that we deliver on the fiscal year ‘22 targets and that we execute our cost-out programs and that we build the foundation for a successful start until fiscal year ’23.
Our new group structure and the delisting and integration of Siemens Gamesa Renewable Energy is key to our vision to become the most valued energy technology company in the world. And the successful implementation of the new operating model and the successful execution of the cash tender offer are also on our priority list.
With this, I hand over to Michael again, and Maria and I are looking forward to your questions.
Question-and-Answer Session
Michael Hagmann
Thank you very much, Christian, and thank you very much, Maria. We now come to the Q&A. We’ve got about 25 to 30 minutes. [Operator Instructions] The first three questions, so you can prepare, are from Andre Kukhnin, Vivek Midha and Gael de-Bray, and we start with Andre Kukhnin from Crédit Suisse. Andre, over to you.
Andre Kukhnin
Good monring, eveyone. Thank you very for the [indiscernible] question. I’ll stick to one. For me, really, the key one is that margin bridge to the 6% to 8% that you upheld for the fiscal 2023, could you just walk us through some of the key moving parts there? I guess there’s EUR300 million from the current restructuring program but maybe how much should we expect from the new simplification kind of management role reduction program in there? And then should we think about that 60 basis points for Russia for full year and as a complete nonrepeat as well?
Christian Bruch
Maybe — thanks, Andre. I start and Maria, maybe you also chip in there in terms of the outlook. And obviously, at the moment, we’re all missing the guidance for 2023 of Siemens Gamesa. We obviously have to clearly state this. What kicks in, in ’23 is still a lot from what we call accelerated impact program. This is still obviously under delivery. The new operating model, I just would like to highlight that is not assuming at the moment additional contributions there. This is more to make the company clearer also to tap into the growth elements. There might be here and there are potentials for further savings, but this is currently not reflected and considered. And also Russia is, for us, something which we target to digest in 2022 and do not expect a negative impact in 2023.
That said, we are obviously also still expect the supply chain constraints to continuing in 2023, and this is what is the underlying base for assumptions. Maybe, Maria, any additions from your side?
Maria Ferraro
No, I think very well summarized, Christian, that, of course, the margin bridge does have the remaining portion of the Accelerate Impact program. This is very important for us. And of course, we still see supply chain headwinds and those are needing to be compensated, of course, with our ongoing mitigation measures, which are proving to be quite successful, but we do see those, let’s say, continuing into ’23, but also the new operating model. It wasn’t meant to be a cost-saving program. It was really meant to ensure that we become quicker, more agile, flatter within the organization, and this is exactly what Christian has outlined. Nothing further to add.
Andre Kukhnin
Thank you.
Michael Hagmann
Thank you, Christian, Maria. And the next question goes to Vivek Midha at Citi. Vivek, please go ahead.
Vivek Midha
Thanks very much, everyone. And good morning, I just wanted to follow up on the cash tender offer, if I may. So the greatest extent can comment at this stage of the process. What is the latest color you can give on the timing or milestones for your equity raise or raises to fund the cash tender offer? Thanks very much.
Christian Bruch
Yes, maybe upfront where the offer stands, I mean, first of all, we are still on the time line, which we laid out, right? So everything as planned. And on the equity raise, maybe Maria, you want to comment also there. It will obviously depend on the market conditions, but —
Maria Ferraro
Yes, absolutely. And no, thank you, Vivek, for the question because this is exactly what we indicated when we announced the transaction is that, of course, we would look to be perhaps doing an equity raise in a couple of steps. And even one, let’s say, in short order, but of course, this was underpinning the market conditions. So we have all options available to us. We continue to look at that, let’s say, in the next windows as such, and that’s clearly our intent. So it’s progressing as planned, but of course, market conditions continue to be a bit erratic.
Vivek Midha
Of course. Thank you very much.
Michael Hagmann
Thank you both. And the next question goes to Gael de-Bray at Deutsche Bank. Gael?
Gael de-Bray
Yes. Good morning, everybody. Thanks very much for the time. How can I reconcile the 2% to 4% margin guidance for the group with the other indication according to which GP margin will be at the lower end of the 4.5% to 6.5% range? I mean because if I do the math, you need GP margin to be at least 5.5% to deliver the group’s guidance. So what am I missing here? And if I may, can I squeeze in a second question on gas?
Christian Bruch
Of course, go ahead.
Maria Ferraro
Of course.
Gael de-Bray
Yes. Thanks very much for this. Well, I was just a little bit surprised by your comment that fleet utilization was stable in all regions. So is this really the case for Europe, too? And could you give us some color — a bit more color on the shift from us to all and the implications on your business? Thank you.
Christian Bruch
Yes. I mean — thanks, Gael. I’ll take the second one, and Maria then obviously give the margin arithmetics explanation. First of all, yes, I confirm that, I mean, let’s say, in light of the normal fluctuations which you have between the quarters, the utilization rate is relatively stable. And this was also during the time when the gas price since the gas price is relatively high. You have to keep in mind that only roughly 20% of the gas consumption goes into power and half of it or more than half of it goes into combined heat and power plants. So actually, there is a high need to run these units and this, I believe, also will continue to prevail. We also have seen, even in the last quarter, good orders coming in from Europe in the gas side. These are areas in Europe, which have good access to LNG potentially then also.
But in this regard, yes, this is what we are seeing. And if we talk to our customers, obviously, it depends on where the units are placed, but we get still, I would say, a resilient feedback from the market on the usage. The other element, what you have to keep in mind in terms of service in the gas turbine, there’s a decent amount of activities, particularly in Germany ongoing at the moment to refurbish gas turbines to different fuels, like, for example, switching them from gas to oil. And that is obviously an additional revenue stream, which comes in on the service side. So, so far, the answer is yes, I would confirm this.
Maria Ferraro
Yes. No, hello Gael from my side. And thank you for the question. I think — if we look at this quarter by quarter even perhaps to the nine months year-to-date, we’ve had three solid quarters for GP. We sit at a nine month year-to-date EBITDA of 5.4%. And you’re absolutely correct in terms of Q3, this actually was even better-than-expected. There’s a few reasons for that in terms of the underlying business mix. We had a strong service contribution, a strong outage season, not only in the long-term program, but also on the transactional side. We see this also, again, picking up. So you’re right, we have a Q3 solid showing, if you’d like, on GP. And we would expect, with some of this volatility — and by the way, some of that service that we saw even in Q3 was preponed a little bit, so I would expect a bit of a landing into Q4 in line with what I said at the second half, which was we will have a more challenging last six months. But again, we do see seasonality and some volatility, but we’ve had a solid nine months so far for the year. So that’s a good basis to go into Q4 with.
Gael de-Bray
Thanks. Well, maybe I should rephrase the question, if I can?
Maria Ferraro
Michael?
Michael Hagmann
Sure.
Maria Ferraro
Yes. Michael is the referee. So yes, Gael, go ahead.
Gael de-Bray
Thanks. No thanks very much. I was just — the question was obviously on why you stick to the 2% margin guidance for the Group and still see obviously a pretty low margin for GP for the full-year? But maybe if I try to rephrase the question, I mean, does the guidance includes the negative impact of the exit from Russia, both on — or does it exclude it both on the revenue side and on the EBIT side or only on the revenue side?
Maria Ferraro
Yes. No. So to be very, very clear, the restructuring activities from Russia are excluded on the revenue side and on the EBITDA side. So it was a very precise question with a precise answer. So therefore, as mentioned, that is looked at as a special item and the majority of that has already been taken in Q3.
Gael de-Bray
The restructuring aspect of it, yes, but the negative impact on EBIT coming from the lost revenue in Russia is within the adjusted EBITDA, right?
Maria Ferraro
Correct. And it’s been addressed.
Gael de-Bray
And do you [Multiple Speakers] for the guidance or not?
Maria Ferraro
Yes. Sorry, what — let’s — Gael maybe to be very precise, the ongoing operations of Russia is included negatively in our operating results for the nine months ended to this date. The restructuring activities, so the EUR200 million, and the revenue that’s related to that, are excluded from our guidance due to it being classified as a special item.
Gael de-Bray
Okay. Thanks very much.
Maria Ferraro
Thank you.
Michael Hagmann
Right. The next three questions go to Supriya Subramanian, Akash Gupta and William Mackie. We start with Supriya at UBS. Supriya, please go ahead.
Supriya Subramanian
Yes, hi. Good morning and thank you for taking my questions. I just wanted to elaborate a little bit on the margin and the guidance into — or the outlook into ’23 for the Gas and Power business. Wanted to get your thoughts on what is the underlying assumptions here, really? Because you’re talking about if we reach the lower end of 2022 guidance 4.5 to midpoint of next year guidance to be 7%, so 250 basis points improvement. And what are the drivers for this? From an external environment perspective, what are your assumptions going into from a costing as well as a supply chain perspective? Yes, I just wanted to get your thoughts on that.
And quickly, maybe just on the previous point, again, just reclarifying. So the guidance that we have for the full-year, that is the low end, 4.5%, that includes the negative impact from Russia business from the business perspective, but not the EUR200 million restructuring? Is that correct, from the EBITDA guidance? Yes.
Maria Ferraro
Yes. Let me just answer that one very clearly. Yes, because you said it clearly and let me make sure. And then maybe I’ll start on the first one regarding the guidance again. Maybe to be clear, we also have had headwinds from supply chain this year. And I think we talked about that in previous quarters that it was mainly related to transmission, not also in the other businesses, but mainly related to transmission and mainly related to their short-cycle business.
So on top of our cost-out programs that we continue to see, of course, having the effect that we require for fiscal year ’23. On top of the ability for us to continue to execute on our backlog again, with a step-up in margin quality, as I’ve indicated in other quarters, as those legacy projects, as you will, are — will be converted completely, then assuming that the majority of that supply chain, although it still carries into ’23.
But a lot of this on the short cycle business has now been remedied, if you’d like, either with different suppliers or with price escalations, et cetera, this we see still having an impact, but a smaller net impact in ’23 and then in ’22, all things remaining equal. So hopefully, that further let’s say, underpins at least for your question regarding supply chain and the impact for ’23, how that is factored into our guidance.
Supriya Subramanian
Okay, great. Thank you very much.
Michael Hagmann
Right. If we can really stick to one question from here onwards because we’ve got five more callers with questions. So Akash, if you please stick to one and it’s Akash Gupta, of course, at JPMorgan.
Akash Gupta
Yes. Hi, good morning, everybody. And my one question is on gas and electricity prices and maybe if you can talk about the headwinds that you see on the margins? Can you talk about how you are hedged? And if you have any contracts where you can pass through these high energy costs to your customers, given the increase we have seen in German power prices? But I guess, it’s not in Germany, it’s also as well in Europe as well.
Christian Bruch
Thank you, Akash. No, I think across the board, across all business areas, the pricing regime has been good, positive. I mean price increases really across the board, also, from our perspective, reflecting what we have seen in the inflation environment. And this really holds true for generation, as well as industrial application and transmission.
And in this regard, at the moment, in terms of the price increases, even so painful, I clearly have to say. Currently, we also see that it’s possible to forward this into the market. The element we are looking into very carefully at the moment if it comes to gas particular, obviously, in Germany, as I said, is mainly about general availability because we have some testing facilities here in Germany, which need to operate on gas and to have workarounds around that. But in terms of pricing environment, this has been positive across really the different product areas.
Akash Gupta
Thank you.
Michael Hagmann
Thank you. And the next question goes to Will Mackie at Kepler Cheuvreux. Will, please go ahead.
Will Mackie
Good morning. Thank you very much. My question relates to the order trends across transmission generation industrial applications. After you strip out a number of the major orders that you called out in the slide deck, could you just talk to the underlying demand trends you see in each of the business segments? And perhaps discuss what level of pricing you’re able to incorporate to mitigate the pressures through the supply chain?
Christian Bruch
Yes, happy to do so. Maybe on generation, if you take — which is obviously strong across the board, I mean, they’re on a trajectory, which we would not have expected beginning of the year, and this is really also cutting across different regions: China, Asia, you have seen in Central America and the DAC. Europe has been a strong contributor to generation order intake and also widely spread in terms of customers. So really a healthy base.
And as I said before, also price-wise, we do see the increases, which reflect the inflation environment into the end prices, so that is positive. On industrial applications, a key driver, I see two key drivers at the moment. The one thing is LNG. The one example was LNG, but they have been more than this, and it’s not just large-scale LNG, it’s also a lot of mid-term LNG, which we — sorry, mid-sized LNG plants where we provide either the boil-off gas or the main refrigerant compression side.
And the other element in industrial applications, what I do see is obviously everything around, what I would call, optimization of industrial assets. I always mentioned heat pumps. We see, let’s say, a couple of success stories there and further electrification elements, which cut across there. Also there, pricing environment is intact. It’s possible to increase prices. Obviously, also in this area, it’s very often based on the SGT-800 and 700, and these are very, very good products, which allow also a strong pricing environment.
On transmission, the outstanding element on transmission really has been HVDC over the past couple of months and also continues to be so going forward. The demand is really substantial. And also there, the pricing has been increased to reflect really the developments in the market. And in this regard, very successful, and I expect this for some more years to continue, and this is really sticking out compared to the rest of the business.
Will Mackie
Thank you.
Michael Hagmann
Right. And the next question goes to Sean McLoughlin, followed by Ajay Patel and Phil Buller. Sean, over to you.
Sean McLoughlin
Thank you. Good morning. If I could just build on Will’s question and just thinking about the visibility you have now on your backlog and your comments around pricing, and clearly, the volume has been very strong. I mean looking beyond 2023, in terms of midterm target, I mean, is it — do you see a clear path to continuing margin expansion or should we take the 6% to 8% as a steady-state normalization range going forward? Thank you.
Christian Bruch
First of all, I would always say a step after step, right? I think it’s important that we deliver what we promised, but I’m, let’s say, confident about the GP side. And I’m more confident than I used to be when I started here at the company. Order book looks really good. Backlog is healthy. So there’s a lot of good things in it. In terms of the mid-term expectation of this business, I think it is more a question on how do we finally shape the portfolio? What elements we pick? There’s definitely enough elements in the portfolio, which also justify a higher margin range. It is the question, how do we shape it gradually year-over-year? But I would say, let’s take it when we get to this point.
First of all, I think it’s really important to deliver on 2023. But what I really like about the business is what you do see at the moment across the board, how the different type of technologies step into the energy transformation or energy transition and why it’s needed? And the other piece is really you recognize that this ability to convert technology into projects and product is really appreciated by the clients. And in this regard, I think we have an, actually, a very good market and portfolio to be active in and we will continue to fight to get the margins up, but I would not promise anything at this point in time.
Michael Hagmann
Right. And the next question goes to Ajay Patel.
Ajay Patel
Good morning. Thank you very much for the presentation. I guess my one question just on the order backlog as well. Is there any indication you can give of what percentage of that EUR60 billion order backlog for GMP is consistent with the 6% to 8% margin? Or maybe to put it another way, what percentage of that backlog is below that level? Just trying to understand how much work has to happen on the cost-cutting side and other parts of the business to kind of drive those margins up?
Christian Bruch
No. Let me maybe make it much simpler, right? I mean, we feel confident with the targets we have put out, supported by the backlog, what we’re seeing. It fits together. There is, let’s say, not an additional cost-cutting program required other than what we anyway do with the productivity increases and the implementation of AIP. We are on track. That is the key message here on the GP side. And obviously, also quarter three, particularly if I look also on the generation side, has been margin-wise extremely good, right? And this is something where I feel comfortable with the current backlog in its entirety.
Maria Ferraro
Yes. No. And Ajay, maybe just to — because this is something we talk about quarter-over-quarter is the selectivity. Don’t — I mean, just because we don’t always mention it, it still continues that we have very high thresholds within gas and power, specifically when it comes to projects, we look at that with a high level of scrutiny to ensure, as Christian mentioned, that we feel very comfortable with the backlog as such.
And again, coupled that, Ajay, with what I’ve been talking about in the last quarter is also with those legacy projects where we really do see the tail end of that in this fiscal year. So hopefully, again, having that step-up that you would expect, couple that with the selectivity processes that we have in place, this is what makes us confident with the order backlog going forward.
Ajay Patel
Okay, thanks. Very clear.
Michael Hagmann
Right. And the last question goes to Phil Buller at Berenberg. Phil, over to you.
Philip Buller
Yes, thanks. Good morning. Thanks for the question. Obviously, the GP order momentum is very strong. I just want to ensure we’re not over extrapolating. So what of that growth is coming from price, please? If you can disclose that? And how is the funnel looking? Do we expect a continue book-to-bill above one in the coming quarters? And just slightly broader, I was hoping you could talk about the opportunity embedded in the U.S. climate bill as it pertains to your business? Thanks.
Christian Bruch
Yes, thanks. Maybe to the U.S. climate bill, I think it’s a good starting point now and other things have to fall in place as well, right, to really then make — bring project to the ground because also there, like in Europe, approval periods on project have to accelerate and that really things are invested. But I think it’s a good step, and it will, for us, particularly interesting in terms also there of the transmission environment. There’s also obviously certain gas investments still happening in the U.S., so that is positively.
In terms of mid-term growth expectations, I would go back to the Capital Market Day, what we said. It is not our expectation that we continue to drive the gas turbine business to the utmost. We have not said it. We have an extraordinary good year in ’22. That’s positive. This gives us a lot of freedom for the years to come, but we expect it to be flat. So I would not expect that to continue into 2023 in the same order of magnitude. That’s not our aspiration because we — as we said, we rather want to keep it stable and push the margins.
On industrial applications. I think it’s a little bit mixed picture, because I do see LNG investments. But I think in everything related to oil and gas, we’re looking into a high volatility, which is a little bit unpredictable. You have a lot of companies earning a lot of money, but you have an unsecured investment environment. So I would also caution there a little bit. Where I’m really confident on the midterm growth year after year is really on the key portfolio elements on the transmission side, things like HVDC, as I said before; facts so grid stabilization, because the demand is just absolutely needed in the next couple of years to reach the change until 2030.
And a lot of these revised infrastructures do not work without the grid. So I think there is no other opportunity, but to invest. So in this regard, I would still see this positive. But as I said, particularly on generation, I would see it for ’23 not continuing on the same growth path and that’s absolutely okay. This is what we have planned for.
Phil Buller
Thanks very much.
Michael Hagmann
Right. Thanks, everybody. So that concludes the Q&A. Some closing remarks from Christian before we let you go into holiday season.
Christian Bruch
Yes, for those of you who have not been on holiday, I wish you really a nice holiday season. For those of you who have been already on holiday, I hope you got back really fully recovered and recharged. I look forward to the next quarterly call. Stay healthy, first and foremost, and safe and looking forward to speak to you in the next quarterly call. Thank you very much for your time.
Michael Hagmann
Thank you, Christian. Thank you to everyone on the call. As always, do reach out if you have further questions. And yes, happy holidays. Bye.
Operator
That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. A recording of this conference call will be available on the Investor Relations section of the Siemens Energy website. The website address is www.siemens-energy.com/investorrelations.
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