Siemens Energy Ag

Good morning, ladies and gentlemen, and welcome to Siemens Energy's 2023 fourth quarter conference call. As a reminder, this call is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star followed by one on your telephone. To withdraw your question, please press star followed by two. 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. The 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 Hartmann, Head of Investor Relations. Please go ahead, sir.

Thank you, Alice. Good morning and a warm welcome to our conference call this morning. As always, all the documents were released at seven o'clock on our website. I'm here with our president and CEO Christian Bruch and our CFO Maria Ferraro. Christian, Maria will take you through the major developments of the last quarter. This will take close to 45 minutes. We've got a bit more than an hour for the entire call. As Alice just said, there will be a Q&A. As always, I would like you to stick to one question at the time. And if there is more time, we will of course keep the Q&A open. With that, over to you, Christian.

Thank you very much, Michael, and also good morning, everybody from my side. Thank you very much for joining Maria and myself for this conference call. I will briefly take you through our quarter four and the outlook for fiscal year 2024, as well as our discussions with the German government, which have been covered by the media quite a bit. and obviously including the agreements with the banking partners and Siemens AG on project guarantees. I will also walk you through the performance of the former gas and power business and give you an update in respect to the developments at Siemens Gamesa since the last quarter. Our results for fiscal year 2023 are fully in line with our recent guidance for the Siemens Energy Group and our business area targets, seeing obviously also our quarter three update what we gave. All former gas and power businesses exceeded their fiscal year 2023 revenue growth target and achieved profit margins before special item, in line or above guidance. All of these businesses are well on track to reach their midterm targets. At Siemens Gamesa, growth was lower than expected, but profitability was in line with what we communicated in our quarter three call. This also means no further provisions have been taken in addition to the 1.6 billion previously communicated. Siemens Energy Group generated 0.8 billion euro in free cash flow pre-tax, and this was significantly better than originally expected. And you see that afterwards in Maria's numbers also in a better net financial debt as the outcome. After constructive and intensive calls, the German government, Siemens AG, and our banking partners agreed on a guaranteed facility of 12 billion euros. At the same time, Siemens Energy agreed that it will sell an 18% stake in Siemens India Limited to Siemens AG. And beyond the execution of the existing divestment program, including, for example, the trench portfolio, we intend to accelerate the portfolio transformation and to raise more proceeds out of these discussions. I will give a more elaborate account of the progress at Siemens Gamesa in a moment, but as a key message, I want you to take away that the quality task force is now fully operational and that the ramp up of the offshore factories is continuing and that we are stabilizing the operation and apply strict selectivity when it comes to orders. I have previously been saying that we need to review the scope of our activities and this review is ongoing. Let me briefly touch on our guidance going forward and driven by grid technologies and transformation of industry. We expect comparable growth of 3% to 7% in fiscal year 2024. And despite the high losses at Siemens Gamesa, I have to say, we expect a group margin of negative 2% to positive 1%. Grid technologies and transformation of industry are expecting higher margin ranges in fiscal year 2024 compared to the targets for fiscal year 2023. On an underlying basis, we expect a net loss of 1 to 1.5 billion euro. But obviously, you have to see also then the positive proceeds getting into this. And Maria will talk about this. And obviously, then also on the net income side, a positive effect there. Obviously, because of this divestment, acceleration portfolio transformation, it will be a net income around 1 billion euro positive net. I would jump over this slide more or less in the details. As I said, we're also going to discuss the details result with Maria Numbers. But let me comment briefly on this guarantee discussion, which to a certain extent might have confused also a lot of people and about the talks between Siemens Energy, banking partners, Siemens AG and the German government on establishing a guaranteed facility. And there were a lot of misleading reports to understand what it's about. So allow me a bit to address the background. As you know, Siemens Energy is one of the leading players across the entire value chain of energy and therefore a key facilitator of the energy transition. And you see it obviously in the rise of our order books to 112 billion euros by the end of fiscal year 2023. The issuance of guarantees to customers is in our business standard market practice. Banks or other financial institutions provide these guarantees against the fee, what we pay. And industry-wide, the default rate for these guarantees is very, very low. And Siemens Energy is even below the industry average. Still, the access to bank guarantees capacity is a core requirement in the energy business, and due to the increasing amount of projects, we will see an increasing demand for guarantees also on our side. We have now, for a certain part of our required guarantee capacity, reached an agreement with the German government, as well as with our banks, to secure access to a growing guarantee volume through a back guarantee structure. So as part of this guarantee scheme, we also have agreed with Siemens AG, an additional recourse scheme for loss protection of these guarantees, and this will allow us to continue to grow and to facilitate the energy transition. Just to avoid the misunderstanding, it is not, let's say, a state aid or these type of things. It's a guarantee or insurance type of mechanism where we pay a fee, to the banks as well as to the government. And because that is a commercial fee, this is also nothing under EU state aid or whatsoever. So I think this has to be clear because there were a lot of reports in press that taxpayers' monies or whatsoever. So I clearly would like to stress here that this is not the case. It's a different mechanism. However... It still leaves us obviously with a task to fix the wind business as fast as possible. But these guarantee schemes are also meant to support the growth in the other businesses. And that is always what is, I think, important to underline, because I think we created a bit of a confusion with this discussion. Let me briefly talk about the performance of the former gas and power businesses. And I'm proud that we achieved the targets we set on the first Capital Market Day in September 2020, despite COVID-19 and despite the war in Ukraine. And you may recall that at Capital Market Day, we said we want to achieve a profit adjusted EBITDA margin before special items of 6% to 8% in fiscal year 2023 in gas and power. And we ended up right in the middle of this range at a margin of 7.1%, which compares to a margin of just 1.4% in fiscal year 2020. And this marks an improvement of almost 6% percentage points compared to where we started in 2020. That is an excellent example how to turn around troubled businesses. And the key drivers for the improvement were our focus on selective bidding, cost out and operational excellence. Capitalizing on the quality of our products, our global reach and the opportunities created by the energy transition, we booked orders of 3360 billion euros in this area last year. And revenue in the former gas and power businesses grew by 18% on a comparable basis to 22 billion euro, representing more than 70% of our total revenue. Gas services, grid technologies, and transformation of industry are therefore well on track to reach the mid-term profitability targets we have set at the Capital Market Day in May last year, and we expect them to continue to thrive thereafter. Maria will share their new mid-term targets in a couple of minutes, such that you can better understand the improved outlook. Let me now talk about Siemens Gamesa and how we are progressing with the quality task force and onshore and the ramp up of the production in the offshore business. In onshore, the data patterns we received from our installed fleet during the fourth quarter of fiscal year 2023 support the findings published with Siemens Energy quarter three results. And as you know, We have assembled a task force which brings together the expertise from Siemens Gamesa, Siemens Energy, Alex Partners and TÜV Nord. And this task force is working through the quality topics. The quality issues assessed as major based on their technical and financial impact, which we define as high impact, have been identified and The review is there completed. The technical analysis of the failure modes in the onshore 4X and 5X is largely done. There are certain reports which are really under closeout where it's lower or less impact matters. And the progress has been made also in the definition of the remediation measures. We have communicated also in parallel that we have halted the commercial activity for new projects based on the 5X platform during this review phase of the quality matters. And based on the status of the reviews, we are now defining a timeline and approach how and when to resume commercial activities with a design incorporating the respective corrective measures. We're still defining the exact date because in certain areas, we also obviously have to make sure that we line up the suppliers, that we can commit to hard delivery times. But I would say we know what we would want to do at this point in time. And I think this is important. So gradually, stepwise, we will move this forward. But we also said we will make sure that we have properly worked through the quality matters. In light of this, also the review of the product portfolio and the focus on core markets in order to stabilize the business is ongoing. We will discuss this in more detail during our Capital Market Day next week. In offshore, Siemens Gamesa is focusing on the ramp-up of its factories and the new product generation as well as the execution of the order backlog. And offshore has been making progress in the ramp-up across the different factories. Output has been significantly increased compared to fiscal year 22. I mean, this is really with new nacelles coming, tripling for the nacelles, roughly one-third for the blades. So the things are going in the right direction. Not as fast as originally planned when we had the transaction business case. So we have still homework to do, right? And this is also why you see for 2024 still numbers which are not there where we would like them to be in terms of improving this. But I would say a lot of good progress made in the different factories and in the execution for the SG11-200 direct drive output in Cuxhaven. This now has more than doubled and weekly production could be respectively increased. So this is good moves. This was obviously also driven a lot by hiring new people, training them and so forth. So the required hiring and training in major plants has progressed and will continue also throughout fiscal year 2024. And this refers to all our offshore production sites, Cuxhaven, Hull, Le Havre and Aalborg. And these activities support also the ramp up of our next generation blade for the SG14 and with blades 222 and 236. Executing on the record order backlog in offshore is taking a very selective approach for us now also on new orders with a focus on orders with an attractive risk and reward profiles. You have seen a good order intake in quarter four of fiscal year 23. This gives us obviously also the freedom of selectivity. We expect in light of this and potential delays in certain offshore projects, the order intake in offshore for fiscal year 2024 to be low, obviously combined with the fact that we are sitting on a large backlog also to execute. Despite the progress we are making, we are expecting for Siemens Gamesa a loss of approximately 2 billion euro in fiscal year 2024. And this is a reflection of the low margin profile in the backlog as almost all of our onshore revenues will be onerous and go through the profit and loss at a zero project margin. The revenue conversion in offshore will also have a low project margin of the backlog because of the product cost increases communicated in quarter three. And in addition, we expect a higher impact from underabsorption our onshore and offshore factories due to lower revenue. Given the effectiveness of the stabilization measures and considering a higher revenue in the second half of fiscal year 2024, We expect a positive trend in profitability through the year. We now have a step plan in place to turn around Siemens Gamesa. Target is to reach break-even in fiscal year 2026 and to restore an adequate level of profitability thereafter. I have just mentioned that the turnaround at the former gas and power business was based on our focus on selective bidding, cost out and operational excellence. And these measures we are also taking now for the wind business to make it successful. And from the moment Jochen joined, he applied already strong selectivity with a focus on price, terms and conditions. And these measures will address the cost base and will improve operational excellence. Jochen will talk about more of these elements next week on the Capital Market Day, so I hope you can join. In onshore, we will focus on key markets and serve those with a much smaller number of turbine variants. And in offshore, we will focus on our flagship, the SG142036. And we will optimize, obviously, also footprint and operations continuously, which allows us to increase also the offshore output significantly. The integration of Siemens Gamesa into Siemens Energy will help also to strengthen the processes and to realize synergies, and we are on it while I speak. Let me, like always, give you a couple of examples out of the last quarter explaining the positioning along the value chain of energy transition. The first project is a great example that hydrogen can be used as a flexible energy storage medium combined with a gas-fired turbine. and to operate either on natural gas or with renewable hydrogen. And this is a project in France on the left-hand side where we produce through one of our electrolyzers hydrogen. We can operate a gas turbine on 100% renewable hydrogen there and actually demonstrate on how a future energy system gonna look like if completely decarbonized. While there has been a lot of discussions on cancellations of future offshore projects in the media lately, I'm proud to announce that the world's largest offshore wind power project has been inaugurated, which is using Siemens Gamesa wind turbines. This is the Holland's KustSüd project, which is really a pioneering achievement for our industry, owned by Vattenfall, BASF and Allianz. In total, 139 of our 11 megawatt turbines with a total capacity of 1.5 megawatt. gigawatts have been installed and now it's fully operational and can supply around 1.5 million Dutch households with renewable energy. Another milestone for Siemens Energy will be the delivery of the first ever hybrid grid stabilization and large scale battery storage at Shannon Bridge in Ireland. And this is the first time that these two technologies have been combined into one single grid connection to stabilize the grid and make better use of renewable energy. So these concepts, which you're going to see more and more coming into the grid, and obviously also in combination with elements like a large-scale battery energy storage, we can really handle a very volatile power generation and stably supply the grid with energy. Last but not least, I'm proud to announce that we are making great progress with our hydrogen offerings. We have inaugurated our new factory in Berlin together with our partner Air Liquide last week. Siemens Energy is supplying 12 electrolyzers out of this factory to an Air Liquide project in the north of France to produce around 28,000 ton of renewable hydrogen. And obviously, we are very proud that we are really continuing also the commercialization of this technology now together with them as a partner. And we have a good pipeline filled there. These, for example, show on how to be positioned along the value chain of energy also for the future. And with this, I hand over to Maria for the numbers.