Two capital market days in the space of a week have offered a forensic look at wind turbine supplier Siemens Gamesa and its new parent company, Siemens Energy. The latter’s initial public offering is now just weeks away, planned for September 28, and after much speculation, guesswork and a change in leadership, Siemens' wider role in the energy transition is becoming clearer.
The new company brings together Siemens' gas turbines and power transmission units as well as Siemens Gamesa, which was formed when Siemens merged its wind turbine business with Spanish rival Gamesa in 2017. Siemens AG continues to own 67 percent of Siemens Gamesa.
This month's IPO will see Siemens Energy floating 55 percent of its shares. Siemens and its pension trust will initially retain a 45 percent stake, but it will sell that down to 25 percent over the next 12 to 18 months.
It's expected to be one of Europe's largest IPOs of the year, let alone in the energy sector.
The hard sell is now underway convincing potential investors that it's a good idea to house all of Siemens' energy businesses — clean and less so — under one roof. Here are four takeaways.
1. New company still has a foot planted in fossil fuels
Cleaner coal, more efficient gas, hydrogen conversions, modern grids and lots of renewable (wind) capacity: This is Siemens’ interpretation of the energy transition, it would seem.
Siemens Energy CEO Christian Bruch has defended the firm's ongoing activity in fossil fuels, stressing that it must remain committed to its customers during the transition to renewable energy.
“What we therefore need is the courage to find interim solutions that make us better today, based on available technologies, such as increased efficiency or the use of clean fuels,” Bruch said in a statement. “At the same time, we must continue to use innovative technologies to ensure that we do not get stuck in intermediate solutions.”
The service order backlog for Siemens' legacy gas and power business stands at a whopping €35 billion. For the 2019 financial year, those gas and power services would make up 27 percent of Siemens Energy’s revenue.
Aside from keeping existing clients' coal and gas plants running, Bruch’s point on helping them transition to cleaner energy sources looks reasonable, at least so far.
Siemens already has an arrangement in place with German utility Uniper to develop a decarbonization strategy, including coal plant conversion, retrofitting gas turbines to accept “green gases” such as hydrogen, and rolling out power coupling for transport and industrial users.
It’s not difficult to envisage further opportunities for growth in those areas, especially in markets like Germany where the fossil fuel phase-out is less mature.
2. Expect Siemens Gamesa to turn it around
Even before the coronavirus outbreak, Siemens Gamesa looked set for a few difficult quarters. The past year has seen a management shakeup, job losses and substantial financial hits from delayed onshore wind projects. The company held its own capital markets day last week as new CEO Andreas Nauen sought to set out his plans for the firm.
Streamlining costs, including its manufacturing footprint, and targeting profits — not volume — are at the top of Nauen's agenda.
Judging by Siemens Gamesa's stock price after the plan was revealed, investors weren’t blown away. But the wind company has huge opportunities ahead, thanks in large part to its leading role in the global offshore wind market. As things currently stand, Siemens Gamesa will account for around one-third of the new company's total revenue.
“They cannot change the fact that in the near term they're going to bleed,” said Shashi Barla, Wood Mackenzie's principal analyst for the global wind supply chain. “If I were to look at this in the medium to long term, I think there is a tremendous value that Siemens Gamesa could generate because of the contribution from offshore wind and services."
Siemens Gamesa is targeting an earnings before interest and taxes (EBIT) margin of 8 to 10 percent by 2023. Nine months into this financial year, that figure stands at negative 4 percent.
There are still plenty of questions regarding SGRE’s longer-term future: How long will the Gamesa brand survive? Will SGRE be delisted at some stage? How long will it take to become profitable again?
That latter goal won’t be helped by SGRE paying up to 1.2 percent of its revenue to Siemens AG in order to license the brand.
3. Hydrogen, hydrogen everywhere
As it tends to in economywide net-zero plans, hydrogen features frequently across Siemens Energy’s strategy. The 2020s, have, after all, been dubbed the decade of hydrogen.
The role in taking carbon out of existing power generation infrastructure is only part of the story for Siemens. Its electrolyzer business will also be part of the new company and the prospect of grabbing a chunk of the green hydrogen supply chain, from the wind turbines that generate the power and onward, is a compelling one.
Major green hydrogen projects in Europe, Australia and Saudi Arabia all have concrete plans for the power generation involved. In Europe, offshore wind dominates. A recent tender in the Netherlands asked bidders to integrate a hydrogen offering into their offshore wind project plans.
Last month, Siemens announced its first megawatt-scale green hydrogen project in China. The deal is part of an ongoing partnership with the State Power Investment Corporation, which has more than 150 gigawatts of installed generation capacity.
Unlike most of its electrolyzer competitors, such as Nel, ITM Power or even Thyssenkrupp, Siemens has a presence up and down the power value chain.
4. Cost cuts await
None of the constituent parts of Siemens Energy have been setting the world alight recently. It’s not surprising, then, that planned cost-cutting is not restricted to Siemens Gamesa.
Plant closures are coming, and speculation about where and when these will happen remains rife. Trade unions are already preparing a robust response.
Siemens Energy's recent presentation discusses “ambitious cost-out programs, footprint consolidation, portfolio streamlining and service-led growth.” Both manufacturing and research and development facilities are targeted for closure. The company has 75 factories and 90 R&D locations.
Siemens Gamesa has already started that streamlining process this year: Its recent deprioritization of the Indian onshore market and its growing offshore business could provide an indication of what that reshaped footprint will look like.
As with many typical mergers, the coming together of Siemens AG’s energy units will also see “selling, general and administrative” savings.
Siemens Energy will undoubtedly have a significant portion of the energy transition covered, and its business units overlap with many of the decarbonization strategies laid out by firms like BP and Iberdrola.
“Siemens Energy is a mirror of today’s energy world," said Bruch. "This puts us in an ideal position to support our customers with the energy transition.”