Good morning, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the Siemens Energy conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may do so by pressing star and 1. Press the star key followed by 0 for operator assistant. It is my pleasure, and I would now like to turn the conference over to Michael Hagmann. Please go ahead, sir.
Thank you, Francie. Good morning, everyone, to this conference call, where we want to discuss yesterday's ad hoc announcement. Here with me are Christian Bruch, the CEO of Siemens Energy, Maria Ferraro, CFO of Siemens Energy, and Jochen Eickholt, the CEO of Siemens Gamesa. Christian will make a brief statement at the beginning, and thereafter, we have time for Q&A. We intend to finish this call by 8:00 German time or 7:00 UK. With that, I hand over to Christian.
Thank you very much, Michael. Good morning also from my side. The reason for this call is very unpleasant. As you saw last night, we withdraw the profit guidance for Siemens Energy Group. This is due to Siemens Gamesa and reflect the outcome of a technical review of Siemens Gamesa's installed onshore fleet and product designs. This review was initiated by the Siemens Gamesa board once we saw a substantial increase in failure rates in the installed fleet in certain components. I told you during the Quarter Two call that SGRE is making progress. I highlighted that we now have more transparency, that we have seen increased manufacturing levels and rotor upgrades. This remains to be the case. Not everything is negative. However, the fact that we have identified more quality problems marks a significant setback for us.
These quality problems go beyond what we were previously aware of. They are directly linked to selected components and a few but important suppliers. The current status of the technical review suggests that in order to reach the targeted product quality, we will incur significantly higher costs than previously assumed. We are currently evaluating the measures to fix the problems and the associated costs. At this point in time, we believe that the costs are likely to be in excess of EUR 1 billion. We only have an initial assessment, and this does not yet include any mitigation measures. We are also reviewing key assumptions critical to the existing business plan, given that productivity improvements are not materializing to the extent previously expected. As already mentioned in the Quarter Two call, we continue to experience also some ramp-up challenges in the business of offshore.
It is too early to have an exact estimate of the potential financial impact of the quality topics and to gauge the impact of the review of our assumptions on our business plans. Based on our initial assessment, as of today, the potential magnitude of the impact leads us to withdraw the profit assumptions for Siemens Gamesa, and because of that, the profit guidance for Siemens Energy Group for fiscal year 2023. We maintain our revenue guidance for the group, as well as our assumptions for the other businesses: Gas Services, Grid Technologies, and Transformation of Industry. We have a joint Siemens Energy, Siemens Gamesa team now set up, validating the figures and findings, as I mentioned, we have teams working on mitigation measures.
At this point in time, however, we need to wait for a more detailed analysis of these findings from the teams to give you a more accurate estimate, and we expect that we will be able to do so at the latest with our Quarter Three results on August 7. Before I hand back to Michael, for the Q&A, let me say a couple of personal words. I have been managing engineering businesses before, and I knew the turnaround of a company the size of Siemens Energy would not be easy, and I knew that we had to expect setbacks. Over the last 3 years, we have made a lot of progress.
You can see the progress we are making in the former GP businesses. I truly believe that the new group structure and the full ownership of Siemens Gamesa will allow us to shape Siemens Energy so that we can capitalize on the opportunities of the energy transition. This setback is more severe than I thought possible. Siemens Gamesa will incur higher losses this year and will take longer to reach an appropriate level of profitability. We also have to see that we have an urgent requirement to fix the corporate culture. Too much has been swept under the carpet. We will use the fact that we will soon own 100% of Siemens Gamesa to drive this change so that it will become a reliable contributor to Siemens Energy's results.
Thank you very much for your attention, and with this, I hand back to Michael.
Thank you, Christian. As the operator said, we're now gonna have a Q&A. Just as a reminder, it's star one to ask a question, star two to withdraw, and if you have problems placing a question, it's star zero to ask for operator assistant. It's a long queue, if anyone could please stick to one question at the time. If there's time at the end, we will, of course, then allow for second questions. The first three questions are going to Gael de-Bray, Vivek Midha, and Supriya Subramanian. Gael, if you would please start with the first question.
Thank you very much, Michael. Good morning, everyone. I have so many questions that it's difficult to pick just one, but, Let's say the negative impact is gonna be around EUR 1 billion. What will be the timing of the related cash outflows? I mean, are we talking about this to be spread over the next 8-10 years or possibly less? I mean, since you cannot really quantify the negative financial impact in total, I guess my question is, at what stage, or, I mean, is there a certain threshold above which, you would actually need to raise equity again to protect the balance sheet?
Do you want to go? You take both, Maria, right?
Yes, correct.
Okay.
Good morning. Good morning, Gael. I have the two questions you've asked. First of all, as you know, we have a very strong balance sheet, and we intend to keep it that way. It's still early days, with respect to, as Christian mentioned, the team is looking into all details. The work is ongoing. And with respect to the timing reference of cash outflows, the cash impact will be spread over the next years. Looking at, let's say, the impacts as such, some will have zero impact if we're looking at impairments, for example, smaller impairments. Others will be over the duration of the contract. In terms of cash relevance now or in the next months, and again, this is preliminary, this is what we see as of right now, we have limited impact this year.
It's a fraction of the effect as such. Again, this is as of today, and this is preliminary, and please allow us the time, as you know, what it takes to go through these complex matters to really look into it. At the Q3 call, on August seventh, we can provide more. With respect to, you know, raising additional capital, et cetera, of course, you never rule out anything, but it's still too early to say at this point, Gael. Again, let us take us the time that we need to go through it. I wanted to make sure that I was able to provide some transparency on the cash relevance, certainly the cash relevance in the short term, and of course, again, it would go over the next years.
With respect to your duration of years, the majority would be within the next 5 years, but again, over the duration of the contracts as well would be a portion of it. Thank you.
Thank you very much, Maria, and I guess I will have to get back in the queue for my
Thank you, Gael. You can always call me later. Next question now goes to Vivek. Vivek, please go ahead.
Thanks very much, everyone. Good morning. My question is on the review process, over the next few years before Q3. What we'd be interested in is, what is your confidence that that will be sufficient, there will be no further need for reviews in the future? Thank you.
Thank you, Vivek, and Jochen, I think this would be good if you explain a little bit what has been done, what has triggered this, and explain a little bit the background of the process.
No, I think. Yes, thank you very much. Good morning. Very good question. Obviously, we had the situation in Q1 where we looked at a variety of components and had to sort of recalibrate, the situation regarding our components. We then have become more sensible, and of course, we then looked at it, and as Christian indicated, we've started a further, more intensive analysis of this, which led then to the observation that certainly on some of the on some of the component failures as such, but more importantly, also on some of the early warning indicators, like abnormal vibration behavior of some components. Those things led then to us having to see that the picture is different.
This is what we now try to compile as information in a couple of rather sophisticated models, and that takes us then to this assumption. This assumption has taken us to, in the end of the day, today's event. We are, in my view, rather systematic here. We are more than systematic here and more sophisticated than probably many others. In the end of the day, it's a picture we have to see, and we have to acknowledge. Going forward, we have to make sure that everything we can make use of in the sense of intelligence to establish the situation, that will be looked at. Going forward, I certainly do believe that we are much clearer than we were ever before.
However, we also have to see that some of the events we're discussing here, are still at a very early stage, and if you can, perhaps appreciate that some of the components show perhaps different behaviors over lifetime, and the lifetime sometimes extends 25 years, then we have to see that, of course, we try to be as close as possible to the situation, but in the end of the day, what's going to happen over the next 20 years is not so easy to predict.
Thank you.
Thank you, Jochen. Next question goes to Supriya.
Morning. Thank you for taking my question. I had a similar question on the review process. Just wanted to get some idea on whether this is, sort of these issues are related to a specific turbine platform, or is it more across the board? Are there any sort of fundamental design issues in these platforms, or it is just, sort of bad components that got supplied? Thank you.
I addressed it briefly in my speech. That is, let's say, related to specific also components. This is not always a full platform, because it sometimes obviously can also be a special supplier with a special turbine, so that is identifiable, and this are not always tackles the whole platform. Jochen, anything from your side to add?
No, I think you're perfectly right, Christian. I think we do see basically two archetypes of things which are happening. One are more related to production processes or specific lots on the component side, and other ones has to do a little bit with the way of how we interact with suppliers, and that needs to be intensified as well. That, second one, obviously then has to do with the cooperation between the suppliers and us. These things are right now in investigation, and for me, it's still too early to say something firm here.
Okay. Got it. Thank you.
Thank you both. The next three question go to Alex Virgo, Sean McLoughlin, and Akash Gupta. Alex, if you please go ahead.
Thanks, Michael. Morning, Christian, Maria, and Jochen. I'm afraid I'm gonna ask the sort of pointed question in the room, which is, if the review's been going on since, I guess, December time, which is when you took the first charge, why give guidance five weeks ago? To what extent did this review, I guess, encompass the reference that you made, Christian, in your prepared remarks about things being swept under the carpet? I mean, what exactly are we dealing with in terms of culture here? How confident are you that you haven't had anything else swept under the carpet?
Yeah. Thanks, Alex. I mean, first of all, I think we have to see that we obviously. As Jochen pointed out, we see a much tighter control. We see new people acting, pulling everything out, and in this regard, I do believe that is something which, let's say, has changed really over the last couple of months. Keep in mind, first of January 2023, the organization has changed, people have changed, systems have changed. Still, I'm very disappointed to see it at this point in time, coming in this order of magnitude.
What you have to see, Jochen pointed it out also in terms of the process, some of the things also come with runtime and certain components when you see increased vibrations, at the end, you always have to be aware then, this is an effect which then goes out over multiple years, is what Maria said. I think it is, we really have to dissect it in terms of the details to give, let's say, a decent view on it, this is why I also said, it's not that everything is bad, right? The effect here, particular on the installed offshore fleet and some of the product designs and components, is absolutely disappointing. Let us dissect it for the call in quarter three to give you more of the details.
I think otherwise, it's not substantiated enough. Give us that time to do that. I think it's also clear that, as Jochen said, there is also, I think, the most rough and different approach to that. Obviously, I mean, I had, when I gave the views a couple of weeks ago, a different view on the situation of the year, and so this cannot be satisfactory, also not for me, rest assured on this. Let's further discuss details on this in quarter three call. I think this is much more solid than speculating now.
Okay, I guess the question remains, you know, the timing of this, given the guidance that you gave five weeks ago, right? I mean, it's a, it's gonna really call into question the reporting lines and, yeah, how quickly these things get escalated, isn't it?
Well, I think it's about, let's say, recent failures. In failure rates, what you see in increasing, and that is not the same components as before, right? This is why I'm saying it's also linked then to certain as monitoring systems and reviews, which then alert, and then obviously, to understand the full impact of this is also what requires the analysis. I would not relate this to the five weeks ago.
Okay.
Right. Thank you. Next question goes to Sean McLoughlin. Sean, please go ahead.
Good morning. Thank you for taking my question. There are two more components of this profit warning that you talk about, specifically about the productivity improvements not materializing and also ramp-up challenges with offshore. I mean, at you had guided to an implied, kind of, close to breakeven profitability in the second half at the last quarter. I mean, how should we think, the EUR 1 billion costs aside, about how that looks, given these productivity improvements not materializing and the ramp-up challenges in offshore? If I may also just, is selling the wind business still something that you would consider?
Let me start with the second part first, and then Jochen can give some details on the productivity and also the ramp-up pieces, which obviously on the ramp-up, we also discussed briefly in quarter two, and obviously, a lot of the lift up was supposed to come now, and we see it slower, but Jochen can give more details on this. I think the other question in terms of what's going forward and how do we look on it, look, I think we went early out to the market to flex this up, to show the impact. That's not the day-to-day to do such speculations based on the current amount of information.
I'm convinced still that obviously, energy transition without wind will not work, and wind needs to be profitable, and I also believe one can do that. We will review all assumptions really obviously triggered by that. That is now too early. Also once again, clearly underlining, I see also positive elements happening in the organization and in the wind business over the really last quarters. This is what I said before. Taking now stock of each and everything is what we're doing, and then we will discuss it in more detail in quarter three call. Jochen, would you want to comment on the productivity briefly and the ramp-up?
I can quickly do this. Now, here when it comes to these factors, like productivity, we have to see that there is a couple of elements of influence in there. What we need to observe is that with all manufacturing sites in offshore, we are currently in a heavy ramp-up. All of them. Heavy ramp-up means substantial extensions of capacity, sometimes of buildings, sometimes of further infrastructure, all of this. Now, what we do see is a phenomena regarding the delay of construction elements, like the manufacturing hall is delayed. We do see then, as a consequence, sometimes the prolonged qualification of manufacturing processes. We do then see delays in manufacturing tools as well, and sometimes also the headcount ramp-up is on delay.
Then, if this now is applied, you know, as a, as a thing, if we are now looking at the entirety of our situation, and if we now see that we want to extend capacities in basically all of our sites, it's perhaps not so surprising that, in some cases we do see delays. That is what we currently observe. We're trying to tackle that. In the end of the day, the effect of all these delays is not zero, and this is what we're trying to express. There is nothing really outstanding as such, and if you look at these things which are behind those elements, there is no single thing which is specifically concerning.
Of course, the entirety of the picture does have an effect, and this is what we're discussing.
Thank you both. Next question goes to Akash.
Morning, Christian, Maria, and Jochen. I appreciate this is all in very early stage, probably you decide to come out with ad hoc, given the magnitude of the warning, which exceeds any of the previous one. The question I have is there any potential to recoup, some of these, losses from your suppliers, given it looks like some quality issues where maybe as suppliers could have some liabilities?
Thanks, Akash. Jochen and the team is looking into this. We're jointly looking into this. There is possibilities, but it's also too early to quantify this. Absolutely, component suppliers are included in this process. This has not been considered as of today as a contribution or as a countermeasure to that.
Thank you. Next three questions go to Ben Uglow, Nick Green, and Sebastian Growe. Ben, if you go ahead, please.
Yeah, morning, all, and thanks for taking the question. I guess two interrelated things. First of all, either Christian or Jochen, can you give us a sense of just how pervasive the issue is in terms of the component failures? If we had to put a number on it and think about it in terms of the overall fleet, is this impacting 10%, 20%, 90%? Can you give us a sense of how endemic the issues are? That's the first one. The second one is, in terms of the, let's call it the compensation to customers, is all of this covered at the moment by your existing performance guarantees, or have you seen any customers at this stage seeking compensation over and above the amount of their normal guarantees? Thank you.
Maybe on the, on the second point, I already can say, no, this is nothing what is at the moment I seen or considered.
Maybe Jochen, on the, on the fleet extent, you may want to comment a bit, but it's also very clear it's not the full fleet. It's a fraction of that. Let's say it's probably too early on detailed numbers, but, Jochen, maybe you can put it somewhat into perspective.
Yeah. I mean, this is really part of the modeling we are doing, and it's not very simple, question as such, and not very easy to answer. For many of the turbines we are discussing, we are still in the beginning of the lifetime. We
... see, typically a handful of events, and from those handful of events and some other, measurement data, we try to derive a picture of the future. In all cases, we are not really discussing things which happen to the entirety of the existing fleet, but we typically talk a fraction of that. Let me say, for a start and for an assumption like between 15% and 30%. Those have indications between 15% and 30%, that is going then over lifetime. This is quite an extensive period of time. Then we have start again with the picture we have right now, means we have to project the future, and that is very difficult as such. The thing is a little bit complicated.
We're looking at trying to refine our modeling, but, to go more into detail at this point in time, for me, is not really possible.
understood. I think I'll pass it on in the interest of time, but yeah.
Thank you. The next question goes to Nick Green. Nick, please go ahead.
Good morning, all. Thank you for taking my question. Christian, you made an interesting comment that you had costs in excess of probably EUR 1 billion, but I think you said it didn't include the remedial action . Just to clarify that a bit, is the cost here, following on from Ben's question, is it a cost, the penalty of missing performance guarantees, the penalty of missing uptime targets, or is the cost you're referring to the cost of intervening and sticking in the replacement parts? Connected to this, you've got something like EUR 18 billion service order book. The margin isn't always clear on it, but if it was a 15% margin, that's about a EUR 2.6 billion profit pool, which it looks like about 40% of that, EUR 1 billion, has just evaporated.
Should we be thinking that a portion of this order book is now loss-making, and that's why you've taken the hit today? I guess more fundamentally, is the rest of this order book actually a liability now, as you continue your review and you continue these components, the review of the components? Thank you.
Well, thanks for the question. Some of the answers I really can only provide in quarter three calls. Yes, I mean, some service orders will be onerous. I mean, that's how I look on it. I'm not seeing it or saying the whole backlog or so. This is a portfolio element, and then obviously you have to grow out of certain things. As Jochen indicated, there's a fraction of the platforms impacted, but it still is a substantial and significant impact, but not the whole backlog at all. Obviously, we now have to, yeah, understand it better and work through it. What's the sorry, yeah, you mean the cost elements? It's a mixture at this point in time.
Obviously, the main costs are really the intervention cost of this in terms of fixing the problems and achieving the targeted product reliability we grant in contracts, and this is something which is the biggest contributor by far.
Okay. Thank you.
Thank you.
Thank you. Next question goes to Sebastian Growe . Sebastian, please.
Yeah, thanks. Good morning, all. Thanks for taking my question. From the outside, it appears to me that the quality issues go back to the industry earlier, race to the bottom strategy, with the sector now ahead of relatively strong growth and about 10% volume pay go. How can one be comfortable that these issues will not repeat going forward, given that new products have been launched, new suppliers have been probably qualified? That would be my first one. The second one, it's more than shifting to offshore, where the potential damage could be materially higher going forward. I would just be interested in your thoughts around that matter, and if there's any sort of risk around component failures eventually, at some point.
I would start, I would ask Jochen then to add. I mean, on the, on the quality-related measures, really, I mean, one thing is clear: I think there, a lot of the things have been introduced by Jochen and the team in terms of changing the T&Cs on the contract. That is for a reason. I believe a lot of the things which have been done in the past are not the base for running the business. This is the achievements of what the team has done around Jochen is not to be seen in the numbers today. They're only going to be seen later. It also shows that the ... I think the industry has driven, in certain parts themselves, to a business model which needs to be reworked, this has been started.
It also important to underline, if you want to achieve this growth, what you need to drive an energy transition, you have to have this proper risk and reward balance in your business models. That is something which I think, Jochen and the team has been very vocal about, we will continue to be vocal about, and we will also be very selective on projects, and this is what you also have seen in some parts of the order intake. You obviously cannot avoid that, let's say, you cope with the past while you're building the future, and that is something which is super painful today, it is not to be extrapolated going forward, to say, and that is the logic of the industry.
This is where I would refrain from, but definitely, this will also, once again, task us with saying, "Hey, what else really has to happen?" Offshore, I think it's really just showing that ramp-up of an industry which does something physically is always a challenge, and we have to be respectful for this. It's a super opportunity where I'm convinced about, but obviously also building up or getting up a couple of factories at the same time is not a piece of cake. It's a big challenge, and I think we have to also make this clear in terms of stability of product designs, in terms of repeats, in terms of what speed can we do. I think Jochen has been one of the most outspoken voices in the industry about this, and I hope everybody understands it.
We really, we, as Siemens Energy and Jochen as Siemens Gamesa, will drive this change. Jochen, anything to add from your side?
I think it's very correct, very correct what you say. Ramping up the offshore business as such, in such an order of magnitude is a difficult thing. You perhaps remember that in the course of Mistral, we introduced a verticalization of the technical functions, so on our side, the CTO function and the COO function. This certainly has helped to be much more stringent and much more systematic in our approaches to the issues. Of course, there is the element also that we are more rigorous now and looking a couple of internal parameters here. That then means that things are also being looked at perhaps in a slightly more rough manner. Still, there is a challenge, and the growth rates we're discussing sometimes exceed 30% per annum.
Such a thing, typically, when it comes to the extension of existing facilities, has challenges and contains elements which are very difficult to predict, and this is also what's happening.
Right. Thank you. Unfortunately, we've just passed the hour, so we have to c all an end to this conference call. As always, we and I are available for questions, so do please reach out. Last word from Christian.
Yeah, first of all, thanks very much for joining for early morning start, which I would have loved to be for you in a better circumstance and better way. It is obviously our job to fix the problems here now. We're working on this to provide you also the transparency, what you need to judge on the potential of the business and the way on how we mitigate the measures in that regard. I look forward for a detailed discussion, even so, definitely not easy in the quarter three call. Stay healthy until then. Thanks very much for your attention.
Thank you, Christian. Thank you, Maria. Thank you, Jochen. Thanks everyone on the call. All the best. Bye.
Ladies and gentlemen, the conference is now concluded. You may disconnect your telephones. Thank you very much for joining. Have a pleasant day. Goodbye.