Siemens Energy AG (ENR) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Siemens Energy's preclose call group called for the Fourth Quarter and Fiscal Year 2026. Before we begin, please note that today's call is being recorded. The recording will be available on Siemens Energy's website until the fiscal year results are published. Before we start, I would like to remind you that the information and forward-looking statements disclaimer, which applies to the comments made during this call. At this time, I would like to hand over to your host today, Mr. Tobias Hank. Please go ahead, sir.

Thank you so much, Morris. Good afternoon, and good evening to those joining us from Asia and a warm welcome to the Sims Energy preclose call for the fourth quarter and fiscal year 2026. The purpose of today's call is to reinforce our previously communicated guidance and to recap the key messages that we have consistently shared since our Q3 results. We plan to publish our Q4 and fiscal year 2026 results on Wednesday, November 11 at 7 a.m. CET. The webcast scheduled for 10:00 a.m. CET this morning, which will be extended to 90 minutes. We will take you through the major developments during Q4 fiscal year 2026 but also provide you with our fiscal year 2027 outlook and fiscal year 2030 targets based on the individual business areas performance as well as an updated capital allocation framework until fiscal year 2030. As usual, we will share our company compiled consensus week ahead of the earnings release and are quite filing periods will begin immediately after this call. Let me briefly guide you through today's agenda. I will start by recapping the key messages that we have consistently communicated over recent weeks and share our view of the current market environment. I will then review the performance and market dynamics across gas services with technologies, transformation of industry and Siemens Gamesa. I will then address fourth quarter seasonality and cash flow and conclude with a few additional remarks. We will finish with a short Q&A session to clarify statements already made during the quarter. Please remember that we cannot provide information beyond what has already been communicated. Together with our management team, we have held numerous investor meetings over the past few weeks. Let me therefore recap the key messages we have consistently communicated. First, our markets remain structurally strong and diversified. Rising electricity demand, electrification, resilience and infrastructure replacement provide the foundation of the strong markets while data center activities add further upside. Second, execution is becoming a key determiner of value creation. Our focus is on converting our record backlog into revenue, profit and cash, disciplined project delivery, capacity ramp-ups and operational excellence. Third, the profitable growth expansion runway extends well beyond the current order cycle. These benefits from long-term infrastructure investment. More to year visibility and enduring electrification trends. Fourth, stronger earnings and cash generation provide increasing strategic flexibility. We are balancing investments in profitable growth portfolio development and sustainable shareholder returns while preserving the balance sheet strength required for our long-cycle project business. Overall, Siemens Energy is entering its next phase from a position of strength, supported by favorable market fundamentals, disciplined execution, a long-duration growth runway and increasing financial flexibility. Let me now focus on the current environment. Our core message remains unchanged. We continue to operate in structurally growing electricity markets supported by electrification, rising power consumption, the need for reliable and dispatchable generation, grid expansion and the replacement of aging infrastructure. Demand remains broad-based across geographies, customer groups and applications. Data centers are an important additional driver, but they are not the foundation of our outlook. General higher electricity demand, resilient security of supply, regulated grid investment and replacement demand remain the primary structural drivers. In addition, the increasingly frequent periods of extreme temperature experienced across Europe and other regions globally in recent months reinforce our expectation with cooling and air conditioning will account for an increasing share of global electricity demand in the years ahead. Across our markets, the principal constraint is not underlying demand. There's a pace at which physical infrastructure can be permitted, financed, built, connected and commissioned. Across the industry, customer demand continues to exceed the pace at which generation, transmission and supporting infrastructure can realistically be brought to market. We continue to apply disciplined project selection to ensure attractive pricing conditions. Long-term service opportunities and contractual protection. The execution of our record backlog is therefore, a core message as we close the fiscal year. Our priority is to convert backlog into revenue, profit and cash. With disciplined project execution, timely factory ramp-ups and operational excellence. Let's now turn to the broader market environment. For gas turbines, our planning assumptions remains an annual market of around 110 to 120 gigawatts over the coming years with a further 10 to 20 gigawatts of potential upside from data centers. Electricity demand growth, lead replacements, coal-to-gas shift and the increasing need for dispatchable capacity provide a broad and durable foundation for gas tubimarkets and account for up to gigawatts. The remainder of the above-mentioned demand forecast is driven by the build-out of data center infrastructure. The gas market remains supply constrained as industry capacity additions continue to be orderly. Smaller players and small to midsized trains are benefiting from the current market opportunity but this does not alter the structural market balance for large gas tier ones, which dominates the market due to their efficiency and lower life cycle costs. Pricing and gas services remains very strong. Attractive delivery windows continue to command the premium, especially in the United States and elevated U.S. pricing also supports other regions. At the same time, order intake per gigawatt should not be used as pricing indicator because frame size, geography, earth trading, scope and the new unit and service mix can materially distort that metric. During our Q4 earnings call, we will provide, as usual, the dynamics of the backlog margin improvement year-over-year. Ingrid Technologies, pricing trends are slightly differentiated by region. In the U.S. market, we continue to see premium pricing overall and especially the delivery slots are available. While the pricing dynamic in regulated markets, such as Europe have stabilized at a high level. Going forward, margin expansion will increasingly be driven by backlog conversion cost management capacity utilization and operational excellence rather than further broad-based price increases. Let's now have a deeper dive into gas services. MOP continues to be exceptionally strong and diversified. Contraction of terms and conditions remain favorable at the fiscal year 2027 project pipeline provides strong visibility. As communicated, the fourth quarter order intake is expected to be below the exceptionally strong levels for the first 3 quarters. This reflects normal project phasing and the large project nature of the business, not a change in the underlying market. Order intake should therefore be assessed on a full year basis rather than on a single quarter. Lot reservation agreements remain an important part of our commercial process. They are structured commitments rather than speculative reservations and are generally intended to convert into firm orders within a defined period, typically around months. Reservation fees and advance payments provides economic protection and our project selection process remains highly disciplined to ensure that the projects we select are viable and can support 15 to 20 years of long-term service revenues. We have not seen any delays or cancellations of previously signed lot reservation agreements or orders. During the first 3 quarters, we booked around 40 gigawatts of firm gas Tier 1 orders, including 15 gigawatts in Q3. Total customer commitments, including reservation agreements stood at 95 gigawatts and are trending towards our communicated approximately 100 gigawatts at fiscal year-end. Our capacity discipline remains unchanged. We continue to target approximately 30 gigawatts of annual delivery capacity by 2030. The focus is now on executing the capacity expansion announced at the Capital Markets Day, including strengthening critical supply chain through vertical integration and expanded in-house manufacturing capabilities. In parallel, we are unlocking additional capacity and efficiency from our existing gas Tier run facilities through automation, robotics and continuous productivity improvements. This approach allows us to support growth while maintaining disciplined capital allocation and attractive returns. During previous quarters, there have been many discussions about the industry supply of plates and pains. We are strengthening vertical integration and have signed framework agreements with our suppliers to support deliveries into the 2030s. All key components are multi-sourced to avoid dependency on individual suppliers. Our investment, the in-house blades and veins production capabilities position as well, particularly as a long-term service business requires around 70% of blades and veins. The new unit production capacity itself, however, it's usually not shared with the service business as the inspections typically take place at the customer side. Medium-sized gas teeline capacity has increased from around 50 units in fiscal year 2025 and around 80 units this year. The large gas turbine expansion from 35 to 50 units remains fully on track and will contribute from fiscal year 2027 onwards. As we experienced in the third quarter, revenues were positively impacted by higher medium-sized turbine capacity. For this quarter, we expect this to remain at similar levels. Our profitability and unit margins continue to expand. Orders booked today carry better margins than both. The backlog executed in the past and orders signed in the first half of the fiscal year. Margins embedded in current slot reservation agreements also continue to be higher. Backlog conversion over the next 2 to 3 years and over longer periods for larger gas turbines therefore, support further sustainable margin progression. Service remains highly attractive and recurring part of the business. Long-term service agreements averaged around 17 years and at last year's CMD, we have communicated that the lifetime service opportunity is around EUR 400 million per gigawatt. The service benefits follows the delivery, installation and warranty phases which means the full contribution from today's new unit orders develop gradually over time. Please consider that depending on the frame size, installation takes 12 to 24 months and the warranty phase normally lasts another 24 months. This means the first long-term service revenue streams typically start 3 to 4 years after our products leave the factory. While modification and upgrade opportunities arise only after 6 to 7 years. More broadly, each unit delivered today expense installed base, and that will generate recurring service revenues, cash flows and customer engagement opportunities for decades to come. Let me now turn to GRI Technologies. The market environment remained strong, supported by regulated grid investments, the replacement of 30- to 40-year-old assets, interconnection, grid stabilization and resilience. Data centers are additive to the story, but they are not the foundation. Our momentum continues to be led by the product business, particularly large power transformers, but Europe and North America remaining the strongest regions. Visibility is structurally long and large power transformers provide multiyear visibility into the early 2030s. While switchgear is more transactional are supported by predictable it investment plans. As expected, in the fourth quarter, we did not book an HVDC projects, so order intake remains similar to previous quarters, without any large project one-offs. We are happy to report that the first brownfield expansions for large power transformers and gas-insulated switchgear started to come online in Q3 We are also expanding our solutions and EPC capacity, particularly in the fast-growing U.S. market. The U.S. continues to deliver strong growth driven by new generation, a center demand and the need for stronger connections and grid reinforcement. The brownfield expansions are supporting a further increase in fourth quarter revenue and higher profitability, consistent with the grid technologies guidance upgrade announced in the second quarter. Profitability development continues to be driven by higher volumes, a better margin profile and the executed backlog and disciplined execution. Pricing and an elevated level, operational excellence, capacity utilization and cost management will become even more important drivers for further improvements. Europe continues to be a strong and attractive market for grid technologies. The significant growth opportunities driven by sustained interconnection and grid investment needs. Following a period of substantial project awards in HVDC, customers and the industry are actively advancing execution and position the supply chain for the next phase of growth. We remain confident in the long-term demand outlook and in our planned execution capacities. As previously communicated, we expect to book the next HVDC order in early fiscal year 2027. Our digital grid strategy is deliberately focused on intelligence, digitally enabled equipment rather than a broad software platform. Hamlin and Neds capabilities, combined with our collaboration with NVIDIA, strengthen and accelerate this focused approach. Let's continue with transformation of industry. Transformation of industry continues to be a strong and reliable earnings and cash contributor, supported by a balanced new units and service portfolio as well as attractive end markets. As communicated, Siemens Energy is preparing the legal and operational separation of the business. The objective is to establish a self-sustaining industrial energy solutions company with greater strategic and financial flexibility. The range of options includes co-investors or private ownership as well as capital market transaction. Siemens Energy intends to deconsolidate transformation of industry by retaining a meaningful minority stake. This would support continuity and customer trust in businesses with long-term service commitments by preserving participation and potential future value creation. The strategic rationale remains clear. The electricity business have increasing capital requirements by transformation of industry, serves different markets, customers and investment priorities with limited customer and sales synergies. Stand-alone setup with sharpened strategic focus and provide greater flexibility and access to capital. No final decision is expected before around mid-calendar 2027. We are initiating the process from a position of trends. The business is profitable, cash generative and has a good order book, giving us flexibility to pursue the option that creates the greatest value. Now let's move to Siemens Gamesa. First positive quarterly results in the fourth quarter of fiscal year 2022 marked a significant turnaround milestone. Our full year breakeven target remains firmly on track. Turnaround is not yet complete and execution discipline, quality management and cost efficiency will make key priorities. In offshore, fiscal year 2026 order intake has been below our expectation as project decisions have shifted to the next fiscal year. The underlying opportunities remain intact with many projects now positioned to support order intake in fiscal year 2027. The current European offshore buildout of around 4 to 5 gigawatts per year remains below the level required for a more sustainable markets, which would be closer to 8 to 9 gigawatts annually. We will book on large offshore order this quarter, but do not expect a good catch-up for the offshore orders that have been pushed out for fiscal year 2027. In onshore, our approach remains selective and service ledge were rather than volume-led. Building a structurally attractive margin profile takes time because new unit deliveries are first expand and installed base and the future service portfolio. Longer term, the margin potential remains attractive, particularly in offshore, supported by longer product cycles, better industrialization and sufficient annual market volume. In parallel, our immediate priorities are to derisk execution, reach cash breakeven and improved market visibility. Let me now briefly address fourth quarter phasing. Following an exceptionally strong third quarter, we are confident that fourth quarter group margins will remain around the solid first half level, fully in line with our consistent communication. This reflects the expected business mix and project pacing, normal service seasonality and gas services, planned corporate costs and the anticipated year-end ramp-up in capital expenditure. The improving margin quality in the backlog, higher volumes and continued operational excellence support further progression over time. Capital expenditure is back-end loaded into Q4. However, lower than communicated at the CMD and consistent with the typical fiscal year pattern, including the ramp-up of our capacity expansion programs. Overall, we confirm that we expect group profitability to be at the upper end of the guidance range. Let me briefly touch on cash flow and capital allocation. Fourth quarter includes back-end loaded capital expenditure and the usual working capital phasing. It's also important to distinguish between cash items and noncash accruals. Q3 other line included reservation piece as well as personnel-related accruals that affected profit but were not cash effective. Growing profitability and disciplined cash conversion are the structural foundation of our cash generation. Reservation fees provide additional support while we continue to target cash conversion above throughout the cycle to remain a net cash company. On 24th of September, we started the third tranche of our previously announced share buyback program of up to EUR 6 billion. This tranche comprises a volume of up to EUR 2 billion and is scheduled for completion no later than March 31, 2027. Our dividend policy remains unchanged and with a payout of 40% to 60% of net income attributable to Siemens Energy shareholders. For fiscal year 2026 total shareholder returns of more than EUR 3.6 billion include the fiscal year 2025 dividend paid this March and the 2 share buyback programs tranches of EUR 3 billion, which have been concluded in fiscal year 2026 plus we lately initiated to its share buyback tranche. We continue to review our capital allocation framework. A more comprehensive update together with the full year financial framework and our midterm ambitions will be provided with fiscal year results in November. Finally, a few additional remarks. In the United States, demand remains strong, and projects continue to advance as permitting, interconnection time lines and EPC capacity progress. We have seen no data center project cancellations and our reservation fees, advanced payments and termination provisions provide robust economic protection. The U.S. but power equipment executive order is targeted rather than the blanket ban with key implementation details still to come. Against the backdrop of strong U.S. transformer demand that exceeds current domestic production capacity, the orders of parent focus on equipment, components and digital access from sanctions or security sensitive jurisdictions to strengthen the position of trusted suppliers and create additional opportunities for Siemens Energy. Across all businesses, value over volume remains our guiding commercial principles. We continue to apply strict project selectivity, pricing discipline and close customer engagement. Let me conclude with the key messages. First, demand across our core markets remain structurally strong, global and diversified. The gas market continues to be supply constrained. Grid technology continues to benefit from multiple long-term growth drivers and data centers provide additional upside without being the sole foundation of either growth story. Second, execution is a key priority. Capacity expansions are progressing as planned. Backlog quality continues to improve, and the disciplined conversion of backlog into revenue, profit and cash underpins the next phase of value creation. Third, our business-specific investment theses remain unchanged. Gas Services continues to benefit from strong demand, attractive pricing and resilient recurring service revenues, where technologies deliver sustained growth and margin expansion through operational execution. Siemens Gamesa remains on track to achieve full year breakeven. The transformation of industry continues to perform well as we prepare the business for a potential separation from a position of strength. Finally, we reaffirm our upgraded fiscal year 2026 outlook. We continue to expect comparable revenue growth of 14% to 16% and the profit margin before special items of 10% to 12% trending towards the upper end, net income of around EUR 4 billion and free cash flow pretax of around EUR 8 billion. With that, we will start today's question-and-answer session.

[Operator Instructions] With that, I will just call right now next Yates from Morgan Stanley for the first question.

Tobias. I guess just my first question is on the market outlook could clarify. You talked about 10 to 11 to 120 megawatts that you sort of 10 to 20 gigawatts of additional demand on top of that I guess.

Sorry, the connection was quite bad. I know it's just a...

I was just saying, so you map that you've talked about is 100 to 110 gigawatts. But I thought you also said that maybe there was an additional 10 to 20 gigawatts of demand on top of that, which handed to me. But I was just checking that I have heard that over or is that not right?

That's thanks a lot, Max. Then I heard it correctly. So we continue to say that we have now increased the market from the last capital market view to 110 to 120 gigawatts, but we see additional potential upside from data centers of gigawatts. That means potentially it might be a market of roughly 130 to 140 depending on how the data center demand will be turning out.