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Siemens Gamesa bases its 2020 strategy on an ambitious cost cut

Siemens Gamesa launched on Thursday a new strategy to 2020 that seeks to recover the lost confidence of investors, with an important commitment to reducing costs that will improve margins thanks to an integration that until now has given major pains head to its shareholders.

On its first day of the investor after the merger, the Spanish-German giant of renewable energies announced a reduction of costs of 2,000 million euros that will lead to improving the Ebit margin to a maximum of 10 percent.

After two profit warning in 2017 that lowered their quotation more than 40 percent since the merger, the group wants to squeeze an operation that places it as one of the world leaders of the sector growing even more than the rest of its competitors, both in sales as in volume.

“In the current market context, you need to scale (…) This company, Siemens Gamesa, has created the necessary scale to distinguish us and move forward,” said the company’s CEO, Markus Tacke.

The initial stock market reaction was up, leading the Ibex-35 rallies, although it finally ended in a draw, after the strong rises of the day before, when it announced a mega contract for a project in British waters.

Siemens Gamesa explained that it will save costs by focusing on a single technology per segment, increasing production in low-cost countries and optimizing its workforce by outsourcing services.

“Due to the transformation that the sector is undergoing, we must transform ourselves with the sector,” explained the director of strategy and integration, David Mesonero.

TOWARDS A NEW MODEL

The transition in several key markets from a subsidy-based model to a power auction has turned the entire wind sector upside down, causing a strong erosion in the prices of the entire value chain.

The new group has set targets for 2020 to achieve an Ebit margin (excluding the cost of PPPs and integration) of between 8 and 10 percent compared to the current 7-8 percent. The net benefit will be positive as early as 2018.

These goals will be achieved thanks to the savings and the significant synergies obtained with the integration of the wind business of Siemens and Gamesa, almost double the initially planned up to 400 million euros and a year ahead, until 2020, the achievement of this goal.

“The increase in margins will be in principle mainly” due to cost savings, explained the financial director of Siemens Gamesa, Miguel Ángel López.

Siemens Gamesa wants to have the debt and working capital under control, with investments below 5 percent of sales, a working capital of less than 2 percent and net financial debt totaling once Ebitda.

It expects to pay 25 percent of its net profit to its shareholders and generate ROCE returns of between 8 and 10 percent, with a CAPEX of less than 5 percent of sales.

The strategy also includes a positive cash flow throughout the plan, despite the cash outflow of Adwen, the joint venture between Gamesa and Areva before its merger with Siemens.

“There will be a rather high level of cash out in the next four or five years and from year six the cash outflows will decrease due to the issue of Adwen”, explained the financier, who said that they have provisioned 860 million for this participation and that in the first fiscal quarter of 2018 came 49 million euros.

Barclays analysts stressed that “the objectives of income and profit are reasonably ambitious, while those of free cash flow and ROCE are to a lesser extent”.

TRANQUILIZING IBERDROLA

One of the objectives of this new strategic plan will be to appease the spirits of Iberdrola, the company’s second shareholder, who has publicly shown his dissatisfaction with the German management of the company.

“We have many shareholders, what we talk to them we have to ask them,” said Tacke asked about a supposed meeting between the president of Iberdrola, Igancio Sánchez Galán, and the president of the German, Joe Kaeser.

To reassure investors, Gamesa will seek to capitalize on an expected recovery in the market, which will grow by 5 percent on average annually in GW installed onshore until 2020, 13 percent in the most modern marine wind technology and the market for maintenance continues to rise 11 percent per year.

 

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