Siemens Profit Beats Estimates on Power Plant Demand

By Sheenagh Matthews

July 30 (Bloomberg) -- Siemens AG, Europe's largest engineering company, reported third-quarter earnings that beat estimates on increased orders for power plants and generator upgrades in the U.S. and China.

Siemens rose as much as 6 percent in Frankfurt trading. Net income through June 30 fell to 1.37 billion euros ($2.1 billion), or 1.54 euros, from 2.03 billion euros, or 2.18 euros, a year earlier, when Siemens booked a gain from a venture with phone maker Nokia Oyj, the Munich-based company said today. Analysts predicted 967 million euros.

Chief Executive Officer Peter Loescher forecast operating profit from the biggest units will increase a minimum 20 percent in 2009 from last year after quarterly orders jumped 21 percent to 23.7 billion euros. Siemens has sold telecommunications divisions to focus on power networks, electronics and scanners used in healthcare. Hired a year ago after a bribery scandal, Loescher is cutting 16,750 jobs to match the margins of of General Electric Co. and ABB Ltd.

``With Siemens it's positive if they don't have negative surprises,'' said Thomas Wybierek, an analyst at Norddeutsche Landesbank, who has a ``hold'' rating on the stock. ``The numbers are really positive. I think we'll see a plus in markets today.''

The maker of trains and Osram lightbulbs climbed 4.4 euros to 77.62 euros as of 9:20 a.m. local time, the steepest increase since March 18. Prior to today, the stock had dropped 33 percent this year, reducing its value to 67 billion euros. GE has fallen 23 percent in U.S. trading and ABB is down 14 percent in Zurich.

Accountability

Loescher is the first CEO hired from outside of Siemens. He took over from Klaus Kleinfeld, who left amid allegations employees bribed clients to win contracts. The uncovering of 1.3 billion euros in ``unclear payments'' made from 2000 to 2006 also prompted the exit of Chairman Heinrich von Pierer. Bribery probes have spread to more than a dozen countries and Siemens said yesterday it aims to claim compensation from von Pierer, Kleinfeld and other executives who failed to stop corruption.

To improve accountability and cut costs, Loescher bundled nine units into three -- Industry, Energy and Healthcare. Siemens presented earnings under its new structure today for the first time.

Energy and healthcare led growth, reporting an advance in sales of more than 10 percent. Orders for factory-automation gear and power-transmission equipment in Asia, Europe and Africa helped counter the impact of a weaker dollar on U.S. sales.

Energy Boom

Sales added 10 percent to 19.18 billion euros. Analysts in a Bloomberg survey estimated 18.6 billion euros, according to the median of 11 estimates. Operating profit advanced to 2.05 billion euros, also exceeding estimates.

``Automation and drives is going excellently. When not now, then when,'' said Juergen Meyer, a fund manager at SEB Asset Management, with the equivalent of $2.2 billion under management. ``Energy is also going really well. The boom in power plants will probably continue for a decade thanks to the high energy prices. The rising orders are encouraging.''

Like rivals GE and ABB, the German company won contracts to replace obsolete U.S. substations and supply coal-fired plants to China, which is investing $150 billion in grid expansion.

Siemens, the world's biggest supplier of turbines for high- wind locations, won an 800 million-euro contract to supply Scottish and Southern Energy Plc with 140 turbines for the largest offshore wind farm. U.S.-based Portland General Electric Co. and Cannon Power Corp. earlier placed orders for $1.1 billion in wind turbines.

Legal Burden

Earnings this year have been dragged down by a legacy of delayed and cancelled projects. A revaluation of orders led Siemens to book 857 million euros in writedowns in the second quarter, causing profit in the period to slump 67 percent.

Legal costs associated with the bribery probes cost the company 421 million euros in the first nine months, with 119 million euros booked in the third quarter, Siemens said in a release yesterday.

Loescher, 50, a former head of U.S. drugmaker Merck & Co., will probably book as many expenses as possible this year as he strips 1.2 billion euros in selling, general and administrative costs by 2010.

Siemens follows other European engineering companies in reducing jobs to boost profitability. ABB cut more than 45,000 jobs from 2003 to 2005 after asbestos lawsuits pushed it to the brink of bankruptcy. The Swiss company's operating margin stood at 13.79 percent last year, more than double the ratio at Siemens, according to Bloomberg data.

``We shifted Siemens into a higher gear in the third quarter, reaching important milestones on our reorganization path,'' Loescher said in the statement. ``We are becoming faster, more efficient and more focused.''

To contact the reporters on this story: Sheenagh Matthews in Frankfurt at smatthews6@bloomberg.net