February 15, 2018 / 11:13 AM / a year ago

Chasing Vestas, Siemens Gamesa targets $2.5 billion in cost cuts

MADRID/FRANKFURT (Reuters) - The world’s No. 2 maker of wind turbines, Siemens Gamesa (SGREN.MC), flagged 2 billion euros (1.78 billion pounds) in cost cuts by 2020, hoping to close a margin gap with bigger rival Vestas (VWS.CO).

The Siemens Gamesa logo is displayed outside the company headquarters in Zumudio, near Bilbao, Spain, November 28, 2017. REUTERS/Vincent West

Wind turbine manufacturers are facing relentless pricing pressure globally, as governments slash subsidies for renewables to force them into competition with conventional energy sources, including coal and gas.

Siemens Gamesa, the result of a merger between Siemens’ (SIEGn.DE) wind power business and Spain’s Gamesa completed last year, is betting on size and a more focused product portfolio to weather the crisis.

It increased its estimate of synergies due to the merger on Thursday to more than 400 million euros by 2020, from 230 million by 2019, given when the merger was announced in 2016.

“Scale is the matter of importance in that market,” Chief Executive Markus Tacke told journalists on Thursday after presenting the company’s three-year plan. “We are in a competitive industry.”

Under the plan, the company set a target to increase its EBIT margin to 8-10 percent by 2020, helped by the cost savings, from 7-8 percent expected this year.

Denmark’s Vestas unveiled its own ambitious outlook last week, forecasting an EBIT margin of 9-11 percent in 2018, with a mid-term target of 10 percent.

Shares in Siemens Gamesa, in which Siemens has a 59 percent stake, were up 2.4 percent after the announcement, which also included reaching a dividend payout of 25 percent of net income by 2020.

The company said restructuring efforts, including up to 6,000 job cuts already announced, as well as fine tuning of its product portfolio and procurement would also form the backbone of the cost cuts.

The company also announced in November that it would only use more expensive direct-drive turbines in offshore wind projects, where Siemens Gamesa is the market leader, and use cheaper geared turbines in onshore.

“We welcome the platform rationalisation based on the legacy Gamesa onshore technology, the improved synergy target,” analysts at Barclays said in a note.

Siemens Gamesa, in which Spanish utility Iberdrola (IBE.MC) holds a 8.07 percent stake, had an order backlog of 21.3 billion euros at the end of December, with offshore accounting for more than a third.

Additional reporting by Angus Berwick and Gdynia newsroom; Editing by Julien Toyer and Susan Fenton

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