Siemens Energy Ag

Good morning, ladies and gentlemen. While we are waiting to begin, may I remind you that the recording of today's conference will be available shortly after the conclusion of the call. The conference call is also being webcast live on the Investor Relations section of the Siemens Energy website. The website address is www.siemens-energy.com forward slash Investor Relations. A recording of the webcast will be available shortly after the close of the call. After the presentation, you will have the possibility to ask questions by pressing star 1. For operator assistance, please press star 0. Thank you. Ladies and gentlemen, welcome to Siemens Energy's Q2 fiscal year 2024 analyst 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 2 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 Hagman, Head of Investor Relations. Please go ahead, sir.

Thank you, Nirav. Good morning and a warm welcome to our conference call this morning. As always, our documents were released at 7 o'clock on our website, I'm very pleased to have our president and CEO, Christian Buch, and our CFO, Maria Ferraro, with me. Christian and Maria, as always, will take you through the major developments of the last quarter. Hopefully, this will take roughly around 30 minutes. And thereafter, as always, Christian and Maria are available to answer your questions. For the entire conference call, we have allowed a little bit more than an hour. And with that, I already hand over to Christian.

Thank you very much, Michael, and good morning, everybody, also from my side. Thank you very much, like always, for joining us for this conference call today. Let me start with the market. We continue to see strong electricity demand. In fact, I have to say the market has exceeded our expectations. And the good start, what we had into our fiscal year, continued also during the second quarter for the majority of our businesses. These are benefiting really from the energy transition. Gas services, grid technologies and transformation of industries have turned now into successful businesses and are all positioned to deliver profitable growth. At Siemens Gamesa, we are working as before through the resolution of the quality matters and the offshore ramp up. We have also used the last couple of months to detail out our way forward. I will provide you with an overview on this a little later. Across Siemens Energy Group, we did a bit better this quarter than expected on key KPIs. Our order backlog grew to a record level of 119 billion euros. Orders in the quarter declined by 22% as we were up against very high prior year order levels at Siemens Gamesa and Gas Services in particular. This said, orders for the half year are still up by 1%. Revenue rose 4% in the quarter and 8% in the first half, in both cases driven particularly by grid technologies, but also transformation of industry. Profit before special items rose from €41 million to €170 million in the quarter. This was also higher than expected, but also influenced by positive currency effects. This means so far this year's profit stands at 378 million euro compared to a loss of 241 million euro last year. Losses at Siemens Gamesa were for the first half somewhat lower than expected. And therefore, we are well on track to stay within our guidance for Siemens Gamesa for the full fiscal year. We continue to execute our divestment programs. Maria will give an update on this. And the solid cash flow development drove our net liquidity higher so that we again have a very solid balance sheet. Based on the positive development during the first half, we are raising the guidance for the full year on several KPIs. We now expect 10 to 12% revenue growth year over year. We lifted the lower end of the guidance for our profit margin before special items by 100 basis points. And we also expect much stronger cash flow, which in part reflects the stronger order pipeline as we see it today. As I said before, the market environment remains strong with electricity market growth exceeding our expectations. On this slide, it is shown that the midterm expectations for electricity consumption have increased over the last two years under the various scenarios. And in order to meet this growing demand, our customers have been placing orders and We expect that they will continue to do so. This means for us that on the one side, gas services will continue to be a very strong pillar. Karim and his team have been improving the size and the quality of the order book, and it will be a predictable, profitable and cash flow generating business for many years to come. And the other thing is the stronger than expected order and revenue growth in grid technologies means that grid technologies is on a trajectory to reach the size and profitability of gas services faster than expected. Booking orders of 12 billion euros during the first half of grid technologies is on track to have higher orders than gas services for the second year running. And the strong orders are now converting into revenue growth and a strong margin improvement. We already started some time ago to increase our capacities to cope with the growth in grid technologies. You may also have seen that we have launched new factory expansions for transformers in the US and in India over the last couple of months. Moving on to Siemens Gamesa, we are working through the quality matters in onshore and see the level of cost which we have been accrued for these quality matters still appropriate. In offshore, our ramp up continues and is progressing as planned in Cuxhaven, Aalborg and Le Havre. I already said in the last quarter that in HAL, we still not have reached the desired output volume. It is improving. We have been able to accelerate the ramp up of the workforce and we have been able to avoid project delays, but also there still needs work to be done. We are not at the productivity level which we aspire. So this will still need some time as well. Obviously, we will need time to work through the quality matters. Over the last two years, Jochen brought many measures on the way to drive really the operational turnaround. And we have also now agreed a long-term strategic forward-looking plan to bring finally the business back to the desired double-digit operating margin. Let me on this way forward share a couple of key points. First of all, an important message is we will be active in onshore and in offshore. In Onshore, we have defined a more focused approach to the market. We will develop new Onshore business based on, first of all, selected regions and second, based on revised 4X and 5X platforms, but with a heavily reduced number of variants. This is what Jochen and the team has been also driving over the past couple of months to already simplify the product structure in our company. We mentioned at the Capital Market Day that we will only focus on attractive markets where we have a stable regulatory framework and attractive profit pool and a value-based customer landscape and where there's a match between the market requirements and our offerings. Europe offers these characteristics and therefore is a core market and we intend to restart sales activities in Europe with the 4X towards the end of the fiscal year and for the 5X platform next year. We see similar characteristics also in the US and will therefore also remain active in the US based on existing products and intend to launch a revised product at a later stage. We may also serve other market opportunistically, but only if it makes real commercial sense. And for the new business, please keep in mind, the volumes will not come back immediately. We still have a big plan to work through. And we also have still the quality matters. But we are confident that we are able to rebuild a strong market position over the coming years. But it's really a long-term trajectory. Our service business in Onshore remains an important pillar, given that we are servicing one of the largest fleets in the market, and we will continue to do so. Based on the focus strategy and the reduced workload in Onshore we have because of the interruption of the sales activities, we are adapting our manufacturing footprint and optimize our structures. In offshore, As a market leader, we have been building a track record with the SG14 platform, which will be our volume product at least under the end of the decade. This is something which we see growing. So we're trying to balance, obviously, the two things. We have for offshore received more orders in gigawatt for the SG14 platform than for any of the previous platforms. This year, you also might be aware in offshore, the auctions account for around 40 gigawatts of capacities, which marks a major restart of the offshore bidding activities for us in the coming years. And that obviously we want to capture with our volume product. We are also progressing now the integration of Siemens Gamesa functions into Siemens Energy. By 1st of June, we will start to integrate major central functions. And as I said before, over the last two years, Jochen has done a tremendous amount of difficult work and laid the foundation for the operational turnaround and how to integrate the business into Siemens Energy. We are currently initiating now together with many measures which will determine the long-term improvement in our wind business. This is obviously also where Jochen and I discussed how can we ensure a smooth generational change in the leadership at Siemens Gamesa now, while we take so many long-term decisions. We decided that Jochen hands over the leadership from Siemens Gamesa on August 1st from himself to Vinod Philipp. which is, I would say, probably a bit earlier than we actually wanted it to do. But it's really due to the fact that we're saying, hey, we are now embarking on all these long-term things. The good thing is Jochen committed also to stay around as long as needed. He is a fantastic turnaround manager and has done a really good job. We are not through with the turnaround, also clearing status. And this is why we have to make this balance wisely. At the same time, It is something where, obviously, the long-term things we do not want to see, and this was our agreement, a leadership change in one and a half years from now when we are in the middle of the ramp-up. That is a bit the logic case. A question, Vinod Philip, obviously, with his background in running the service operations, in being the strategy head, in running central functions, and being a lead person in the integration of these functions in Siemens Energy is interesting. a very capable and helpful manager then to drive the journey from Johan forward. Let me give you some highlights of projects of this quarter. Like always at the CMD, we highlighted that roughly 30% of the new gas fired power plant installation will be driven by the coal to gas shift. Poland today is still generating 60% of its electricity from coal, but it is committed to phase out coal by 2049. We just won our third big coal to gas project in Poland. The power plant in Adamow will emit 50% less CO2 than the coal-fired one, which it is replacing. Positive news on that one. Last quarter, I also talked about the first installations of our SG-11 turbine in the US. This quarter, I'm pleased to be able to announce that we have started the installation of the first 60 Siemens Gamesa SG-14 wind turbines at the Moray West offshore wind farm in Scotland with a rating of up to 14.7 megawatts. The total capacity will be close to 900 megawatts, enough power to supply 1.3 million homes in the UK. The third project is Adriatic Link, one in a row, I have to say, which is a bidirectional underwater cable with a total transmission capacity of one gigawatt developed by Terna. The project will connect Italy's north and south regions over a distance of 250 kilometers via the sea. After Tyrannian Link, which we booked last year in quarter two, this is now our second HVDC project in Italy. And as you know, we also have set up a partnership with Erlikit and Hydrogen. And I've said before, that brings really the best of our perspectives together. The tangible outcome is a 20 megawatt hydrogen electrolyzer, which we have installed at the site in Oberhausen in Germany with Erlikit. And it's a step into the hydrogen business. But obviously, there's a long way to go also there to make it really