Siemens Energy AG

XETRA:ENR

Earnings Call Analysis

Siemens Energy Q1 Earnings Showcase Record Orders

Siemens Energy kicked off the quarter with projects aligning to global energy transitions and sustainability goals, such as gas turbines in Kazakhstan and offshore wind farms in New York, contributing to a significant reduction in greenhouse gas emissions. Financially, they reported record order intake of EUR 15.4 billion, up nearly 24%, taking the backlog to an all-time high of EUR 118 billion. Revenue grew by 12.6% to EUR 7.6 billion, led by the Grid Technologies business. However, profit was mixed, with overall improvement to EUR 208 million, but Siemens Gamesa's losses adversely affected free cash flow, resulting in a seasonal low of minus EUR 283 million.

Outstanding Order Development and Record Backlog

This quarter, Siemens Energy recorded a remarkable order growth, nearly 24% higher than previous expectations, amounting to €15.4 billion in orders for the quarter. The company has reached its highest ever order intake for a quarter, with significant contributions from Grid Technologies and Transformation of Industry. All Siemens Energy businesses, apart from Siemens Gamesa, achieved book-to-bill ratios above 1. Grid Technologies particularly stood out with a book-to-bill ratio of almost 4.

Revenue Growth and Profitability

The company saw revenue increase by 12.6% to €7.6 billion, with each segment contributing to the growth. The largest contribution to this development came from Grid Technologies, which saw a 33% growth. Service revenue across the board improved significantly, contributing to an overall favourable business mix in the first quarter. Profits rose sharply to €208 million, with Grid Technologies and Transformation of Industry showing marked year-over-year improvements.

Special Items Boosting Net Income

Special items, such as the pretax gain from the sale of an 18% stake in Siemens Limited India, resulted in a pretax profit of €1.9 billion and a net income of €1.6 billion for the quarter.

Free Cash Flow and Divestment Program

The company reported a seasonally weak free cash flow of minus €283 million, with positive contributions from former Gas & Power businesses counterbalanced by a negative free cash flow from Siemens Gamesa. Management is focused on bolstering the balance sheet through targeted cash inflows of €2.5 to €3 billion from an accelerated divestment program, confident in achieving the upper end of this full year target and the planned full-year gains from divestments of around €2 billion.

Liquidity Status and Financial Strength

Siemens Energy finished the quarter with a net cash position of €1.4 billion and plans to maintain this net cash position throughout the year. The company has a total liquidity availability of €10.3 billion, underscoring its robust balance sheet and commitment to a conservative financial risk profile.

Outlook for Fiscal Year '24

Looking ahead, Siemens Energy expects the fiscal year '24 to be stable, forecasting a revenue growth range of 3% to 7% and a profit margin before special items between negative 2% and positive 1%. Net income is anticipated to be up to €1 billion, which includes the impacts from disposals. A negative free cash flow pretax of around €1 billion is also assumed, maintaining a cautious yet optimistic projection consistent with full year targets.

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Siemens Energy's Q1 Fiscal Year 2024 Analyst Call. As a reminder, this call is being recorded. [Operator Instructions] Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens Energy presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties.At this time, I would like to turn the call over to your host today, Mr. Michael Hagmann, Head of Investor Relations. Please go ahead, sir.

[Michael Hagmann, executive]

Thank you, Alice. Good morning and a warm welcome to the Siemens Energy Q1 analyst call. As always, all documents were released at 7:00 o'clock on our website. Our President and CEO, Christian Bruch; and our CFO, Maria Ferraro, are here with me. Christian and Maria will take you through the major developments of the last quarter. This will take approximately 30 minutes. And thereafter, Christian and Maria are available to answer your questions. For the entire conference call, we have allowed an hour.So Christian, with that, over to you.

[Christian Bruch, executive]

Thank you, Michael, and a late good morning everybody also from my side. Thank you very much for once again joining Maria and myself for this conference call. We're a little bit more than 2 months ago past our CMD and you are familiar with our guidance and also the targets as well as our key priorities for 2024. And just as a reminder, flagging up the 3 things which we want to focus on in 2024; which is delivering profitable growth based on the record order backlog, fix the wind business and obviously maintain a solid financial foundation. We had explained obviously the different measures on the Capital Market Day in more detail. And I'm glad to say that we are progressing in line or slightly ahead of our plan in respect to the guidance and our objectives and the midterm targets.If you look on the key figures on this slide; order intake, revenue, profit before special items and cash flow; you can see that we had a very solid start to the year and in fact the key figures were better than expected for the quarter and hence we prereleased our results on January 23. Whilst I'm happy with the start to the year, I also want you to understand that we benefited to a degree from project shifts. You know the business is not a month-by-month business, it has its volatility in there that's relatively normal. And obviously in particular seeing the very high market dynamics across all the different businesses and this is also the reason why we still maintain our guidance for the full fiscal year. On the right hand side of the slide, you can see the KPIs for the group. We had a strong growth in order intake, revenue and achieved also a turnaround in our profit before special items.In context of our objective to drive profitable growth, I'm happy to share that order intake of the former Gas & Power business grew by more than 27% on a comparable basis. So the order backlog for those businesses reached another record high of EUR 78 billion with an improving margin quality. Revenue of the former Gas & Power business grew by 15.7% on a comparable basis and profit before special items grew from EUR 478 million to EUR 634 million, which resulted in profit margin before special items of 11.3%, an increase of nearly 2 percentage points year-over-year. I will talk about Siemens Gamesa in more detail in a moment. Sorting the quality problems and managing the ramp-up remain our key focus at Siemens Gamesa and in this context, I'm happy to share that we have not suffered any further setbacks in onshore wind and that the offshore ramp-up is progressing in line with our plans.And this means that no further provisions have been taken in addition to those communicated in quarter 3 fiscal year 2023. On the right hand side, you can also see that we ended the first quarter with a net cash balance including pension obligations of EUR 840 million. This is in line with our objective to maintain a solid financial foundation and reflects a better-than-expected underlying cash flow as well as good progress in the execution of our divestment program, including the sale of the 18% stake in Siemens Limited India. We talked about the guarantees when we reported on the full year. I just want to report here that the EUR 11 billion facility as the bank guarantee is underwritten by 9 key relationship banks based on the bank guarantee by the German government and this additional EUR 1 billion facility has been committed by a group of 3 relationship banks.And we obviously continue to work now on the different matters and obviously try also to get out of this facility as fast as possible because obviously it also costs money for us. The operating environment remains really favorable across Gas Services, Grid Technologies and Transformation of Industry. It's not only good volume demand, but also a healthy pricing environment. In wind, we do see obviously the positive actions in Europe, S.A.U. and various other countries are addressing some of the problems that have haunted the industry over the past 2 years. In January, the energy ministers of the EU member states endorsed the European Wind Charter, which is I think a step in the right direction to strengthen the European wind market. Let me briefly touch on our guidance. We are well on track to reach our targets, but as mentioned before, we are for the time being maintaining our guidance as is.Let's move to Siemens Gamesa. We have said on many occasions we believe in the role of wind for the energy transition and this together with the turnaround program that we have in place gives us the confidence in the value of our wind business. And as presented in the Capital Market Day, there are key strategic decisions regarding product portfolio, market presence, manufacturing strategy and business setup that we'll be sharing with you in the coming quarters with most major communication milestones stretching until end of calendar year 2024. Operationally, the performance during the first quarter was slightly ahead of our expectations. Nothing major that would lead us to change our full year guidance, but certainly a result that shows an increased level of control and management and in context of our objective to stabilize and fix the wind business. This is a positive element.The quality task force is making progress. In 6 months after our announcement, we have not received new data which would point to major deviations compared to our original cost estimate and the offshore ramp-up is ongoing. We highlighted at the Capital Markets Day also that we will take out structural costs at Siemens Gamesa. The plan is under development and we expect that all businesses and the corporate functions will contribute to the cumulative cost savings of EUR 400 million by 2026. And additionally, we continue with the integration of the corporate functions between Siemens Energy and Siemens Gamesa in line with the synergy plan, which has been communicated during the announcement of the transaction. Let me now share some more details first on onshore and afterwards on offshore. We have completed the review of our entire onshore backlog and have started to engage in the customer discussions.We have materially completed the root cause analysis for the Priority 1 quality issues and for 80% of these, we have short-term measures in place. We have already defined long-term corrective actions for half of the quality issues while we continue to implement remediation and mitigation actions. This means also that we progress in line with our plans. Maybe let me say a couple of words on how the process works that this is understood on how normally this works. Obviously first comes the technical analysis of really having an engineering and technology solution available. It's relatively normal that from time to time to relook on the things by also talking then to your suppliers what you need and planning the execution around this. So we're now entering a situation where we do exactly this, converting a technology solution into how do we execute it, which supplier do we need, what is the delivery times and so forth.Such that the implementation of the matter will obviously then come thereafter and this is why we also see the biggest cash outflow next year, which means start of these activities and then working through this over the next years to come. So this is what always has to be understood if you talk about technical analysis complete and then obviously short-term measures defined because this then includes the suppliers and then we go into execution and this will take us some time step after step. And this is just I think important to understand for you. Our analysis at the same time for the future onshore product portfolio goes hand-in-hand with our geographic market analysis and we will communicate the restart of our commercial activity as soon as we have a clear date in place, which is not today. We are working through these elements.And the priority is always first, fixing the quality issues and really making sure that there is a very solid view on how is the availability of the units. And going forward we intend to be clear on this in '24, but please stay with us on that one today. We have no clear statement yet on that one. Let me move to offshore. The ramp-up is ongoing. You recall that we highlighted the 4 factories, which we are ramping up; Cuxhaven, Aalborg, Le Havre and Hull. In Cuxhaven, Aalborg and Le Havre; we are progressing in line or slightly ahead of our plan. This is the intention to show this on this slide obviously with the reduction in routing hours during the first quarter per unit to drive up the productivity. The ramp-up in Hull remains work in progress I clearly have to say because also it's a finalization of the facility, but also then getting the teams up to the right productivity level.We have experienced there a slight reduction in output so that is something where the team is working on to improve this. And keep in mind, the main volume increase in offshore is planned for the second half of this year. Let me, like always, move to a couple of highlights. I'm always pleased, I said it before, that we never have a problem to identify these 4 examples for the different business areas alongside the energy transition which shows that the market is good, but also the portfolio is well positioned in the energy market. The first project I would like to highlight is a new power plant project in Kazakhstan, an example of how natural gas helps in the energy transition. We are delivering 3 gas turbines and 3 generators as well as spares for a combined heat and power project in Almaty, which is replacing a very outdated coal-fired power plant.You may be aware that Kazakhstan committed to a reduction in greenhouse gas emissions by 15% to 25% by 2030 and this project is a cornerstone in that regard. The second project is once again a project in our field for wind, which is the first offshore wind farm in New York for the first utility scale offshore production in the U.S. as such. And we have shipped the first 12 SGT 11-200s offshore wind turbines to the site, which is a good 30 miles out of the coast of Montauk. Once completed, the 130 megawatt offshore wind farm will generate enough renewable energy to power roughly 70,000 households and will eliminate up to 6 million tons of carbon emissions over 25 years. The third project just briefly to highlight is an HVDC link from the U.K. to Denmark. I think what is very positive about this is the execution time of 3 years in terms of then starting and going into operation, which is key obviously to underline that it's possible to build out the grid also at a higher speed.We are still convinced that the electric grid will be the key determining factor in the speed of the energy transition more than the generation side. The last project is around the decarbonization of industrial processes together with BASF. We are building a water electrolyzers plant at their facility in Ludwigshafen. It has an output of slightly above 50 megawatts and a capacity of 8,000 metric tons of hydrogen per year. This is really for demonstration and integration into an industrial process. So a first step to commercialization and obviously also the intention is to use renewable energy sources to ensure that we power this project. Slight comment also to the environment and political environment particularly seeing that we have COP28 behind us, which obviously flags up the transition away from fossil fuels.This also means that at the same time we have to drive really also low emission technologies and improve efficiency measures or double the efficiency measures by 2030. And this means that investment in efficient fossil power plants will continue alongside the buildout of renewables and investment into the grid as well as obviously in the hydrogen economy. And this is what we stand for so I see these market momentums very positive for Siemens Energy. We do see also the constraints we now see on the simply speed up in terms of doing things fast enough. We do see a slight delay on the hydrogen side, which is not unexpected on the green hydrogen side, which I think is also getting to realism what it takes now to build a commercial market and make sure that money is really invested. But as I said, I'm pleased on how we are aligned around the different targets.With this, I briefly want to touch base on our ESG report. We obviously continue to drive our sustainability targets as core of our strategy. It has been overshadowed a bit in '23 by all the other news in terms of attention. But I want to highlight that we issued our sustainability report on December 6, the same day as our annual report, and we outlined there in much more detail what we want to achieve and what we are doing to reach our target. And on this slide, you can see how we are progressing towards our key targets when it comes to emissions, diversity and health and safety. Across our operations, we reduced emissions by 59%. This means we're well on track to meet our climate neutral target in our own operations by 2030. However, given the strong growth trajectory, we need to double up and intensify our efforts here. And green electricity is a major lever to achieve our goal to become carbon neutral in our own operations.Our target of being 100% supplied by renewable energy in our own operations was achieved in 2023 and obviously in this regard, I'm very grateful what the organization has implemented. Because of our portfolio Scope 3 emissions so the emissions our products generate at our customers by far exceed our own emissions and provide the biggest challenge. And here we also made significant progress towards our science based target of 28% reduction by 2030 compared to the base year of 2019. This reduction reflects the fact also that our products, solutions and services are designed to help really our customers to lower their carbon footprint, which is one of the key planks of our strategy. We offer low and 0 emission power generation, we enable efficient transport of electricity and we decarbonize and electrify industrial processes. I'm pleased with the progress we made in women and leadership positions, which is a key KPI for us.I mean we are a strong believer that diversity improves the management of a company. We were able to achieve 28% in the leadership position of female talent. That is something which is obviously very positive, but it will continue to require big efforts to keep this number growing and obviously also to make sure that diversity is understood everywhere across a lot of different matters, let it be ethnicity or religion or whatever we can identify there. Over the last couple of years, our progress has been reflected in improved ESG ratings and just yesterday we received the updated CDP rating and I'm pleased that CDP has acknowledged our environmental transparency and performance on climate action change with an A rating. And being on the A list means a lot to us as an organization because it recognizes really the efforts which we are doing, but also the leadership we want to take in the energy transition.And with this, Maria, I would hand over to you for more details on the numbers.

[Maria Ferraro, executive]

Thank you, Christian. Hello everybody. I think it's still good morning here and thank you for joining us today. You have all seen our preliminary numbers, which we published on January 23, but allow me to provide some more detail and to explain a little further our quarter 1 numbers for fiscal year '24. So moving to the next slide, you see here the Siemens Energy Group. As Christian already mentioned, we had a solid start to the year. The positive momentum across all former Gas & Power businesses continued and Siemens Gamesa performed within expectation. When it looks at orders, the order development was outstanding, better than expected really reflecting this continuous favorable demand pattern as well as some pull forward effects in certain businesses such as Grid Technologies. We recorded comparable order growth of just shy of 24%.This is against quite a high basis of comparison and that resulted in orders for the quarter of EUR 15.4 billion. This is the highest ever order intake slice in a quarter to-date. While all segments contribute to the growth, the increase was particularly strong at Grid Technologies and Transformation of Industry. The book-to-bill ratio overall was a very strong 2 driving the order backlog once again to a new high of EUR 118 billion. Revenue came in at EUR 7.6 billion, 12.6% increase on a comparable basis with all segments contributing to this growth. The biggest contribution came from our Grid Technologies business, which grew by 33% on a comparable basis. Across the board, service revenue improved significantly and grew somewhat stronger than the new units business. This resulted in an overall favorable business mix in our first quarter.It's also very important to note from a seasonality perspective, we generally do have a strong service season in Q1 and that has held true across all segments. Looking at profit, this improved sharply to positive EUR 208 million with Grid Technologies and Transformation of Industry reporting sharp improvements year-over-year. Gas Services just shy of the strong level of profitability in the first quarter of previous year and, as expected, Siemens Gamesa's losses were below prior year which, if you recall, was burdened by quality related charges; but in line with our overall full year planning. Special items included the pretax gain from the sale of the 18% stake in Siemens Limited India, this has already been indicated, of around EUR 1.7 billion which brings us to a pretax profit for the quarter of EUR 1.9 billion and a net income of EUR 1.6 billion.Free cash flow came in seasonally weak at minus EUR 283 million. Of course this is a mixed picture where we have positive contributions from the former GP businesses. This is supported by the higher profitability. Again we showed that and presented that at the Capital Market Day in November. As well as of course our advance payments from our customers reflecting the very strong order development. This was offset by the negative free cash flow at Siemens Gamesa of negative EUR 1.2 billion as expected. Again the high cash flow at Siemens Gamesa was expected and budgeted for and this is the result of the losses and the seasonal buildup of operating net working capital. This is a bit of a swing back from a strong Q4 last year and, as Christian just mentioned, ramp-up expenses in the offshore business.Now let's take a look at order backlog, please. As in prior quarters, we always like to highlight the order backlog. This is important for us, it provides very strong visibility. And of course given the strong order growth and the order backlog continued to grow, as just mentioned, to a record high of EUR 118 billion at the end of the quarter. Close to 50% of the backlog is service so again service being the recurring, resilient, high margin and cash generating business. And we're also seeing strong growth in our new units business. This is important as new units help us to grow our installed base and create additional service revenue in the future. Apart from Siemens Gamesa, all of our businesses had book-to-bill ratios above 1 and standout is Grid Technologies with almost a book-to-bill of 4.Again, as just mentioned, at the CMD or Capital Market Day in November, we provided you with a deep dive on the order backlog providing additional transparency in terms of reach, expected revenue generation and the backlog margin development by business area. Just to provide a high level update. The positive trends indicated at the Capital Market Day continue with respect to our order backlog quality because, as you know, it's extremely important that our backlog grows. However, we have to ensure that we convert it into profitable revenue and keep an eye on operational excellence. Now let's go to liquidity status and cash bridge, please. But before we do or before I go into this further, let me provide an update on our divestment program.As you know, we decided to strengthen our balance sheet with significant near-term cash measures targeting EUR 2.5 billion to EUR 3 billion of cash inflows by means of accelerating our existing divestment program as well as the sale of the 18% stake in Siemens Limited India to Siemens AG. As mentioned earlier, we closed the sale of that stake early December, which resulted in a cash inflow of roughly EUR 2.1 billion and a onetime P&L gain of approximately EUR 1.7 billion. Now let me give you just a brief overview of the other ongoing divestments. First is Trench. As you already know, we signed an agreement to sell Trench Group to Triton in October 2023. The closing of this deal is expected at the end of the second quarter and this transaction should provide us with cash inflow of low to mid triple-digit million amount.Looking at Windar. In May last year we had signed an agreement for the sale of Windar. This was classified in our annual financial statements as assets and liabilities held for disposal. The closing is now expected in the second quarter. This will also result in a total cash inflow of a low triple-digit million amount and a high double-digit million gain. There are other smaller transactions in progress. So all in all, we expect in the second quarter or let's say the second half of the calendar year, another cash inflow of EUR 600 million to EUR 700 million and more than EUR 300 million in book gains from disposals. Therefore, we are very confident to reach the upper end of the EUR 2.5 billion to EUR 3 billion full year target for cash proceeds as well as the assumed full year gains from divestments of around EUR 2 billion. And we are also confident to reach our target of an adjusted net cash position at the end of fiscal year '24. So a lot of progress there.Now looking at the group's cash bridge as of the end of Q1. Overall, EUR 5.3 billion cash and cash equivalents and EUR 3.9 billion of financial debt, of which EUR 3.2 billion is long term in nature. This brings us to a net cash position of EUR 1.4 billion versus a net debt position of EUR 193 million at the end of Q4. As mentioned at the CMD and as I just explained when I updated with respect to our ongoing divestment program, it is our clear target to maintain this net cash position throughout the year. Again the EUR 2.1 billion proceeds related to the sale of our stake in Siemens Limited India constituted the main cash inflows while we had operating cash outflow pretax of EUR 283 million as well as cash outflows related to financial interest of EUR 33 million cash tax and minority dividends and some smaller items. Net cash adjusted for pension obligations amounted to roughly EUR 0.8 billion at quarter end.This is an improvement of EUR 1.6 billion versus the end of last financial fiscal year. So at the end of Q1, we have a total availability of liquidity of EUR 10.3 billion with around EUR 5.3 billion in cash and cash equivalents and EUR 5 billion undrawn credit lines. With this, we continue to have a very strong balance sheet as at the end of the first quarter of fiscal year '24, absolutely in line with our commitment of a conservative financial risk profile as well as our commitment to an investment grade rating profile. So moving on, please, to our business areas. Let's start here with Gas Services. So Gas Services had a strong -- again maybe to put it into perspective, a strong prior year quarter as well; but for Q1, we booked EUR 4.1 billion in orders. This succeeds, as just mentioned, prior year by a 13.1% comparable rate.The order growth was driven by a high volume of large orders especially from Eastern Europe and Central Asia, book-to-bill over 1.5 and order backlog rose to EUR 42 billion. In Q1 we booked 22 gas turbines greater than 10 megawatts, thereof 11 large gas turbines and 11 industrial gas turbines. Q1 is characterized by a strong gas market for gas turbines greater than 10 megawatts and in this regard, Siemens Energy reached a market share of 29%. Revenue grew by just shy of 11% versus a high comparable basis and came in at EUR 2.7 billion, again both service and new unit business, which resulted like in prior year's first quarter in an overall favorable business mix in Q1 for GS. Profit came in at EUR 313 million, which is close to the very strong level of prior year's quarter. This is about an 11.7% margin and we continue to benefit from a high service contribution as well as a keen eye on operational excellence and strong execution.Now let's take a look at Grid Technologies. A very successful start for Grid Technologies with significant improvements across all KPIs. Orders outstanding in our Grid Technologies business area was an overall positive market environment for them. Orders in the first quarter exceeded the prior year by almost 33% and rose to EUR 8.2 billion. This development was driven by the product business and HVDC orders in Germany, also in part benefiting from some pull forward effects. The book-to-bill was just shy of 4 as I mentioned earlier and backlog rose to EUR 28 billion. Revenue grew substantially by 33.1% year-on-year and came in at EUR 2.1 billion and again supported by the strong order intake in prior fiscal year and that growth was driven by all businesses with main contributions from both product and solutions. Profit was EUR 213 million or a margin of 10.2% and this is quite an improvement of 310 bps versus last year.Again, this results from the higher revenue and a comparatively higher margin in the process order backlog, but also some timing effects were included therein. So on the next slide, we take a closer look at TI or Transformation of Industry. At the CMD, I think there was really highlighted on our plans forward and what we've done in the past years to really create that solid foundation for our TI business. I think really looking at maximizing service share, selectivity, really a keen focus on this and an improved price and risk profile and I think this is very nicely reflected in the Q1 results. Looking at orders, EUR 1.6 billion. This exceeded prior year by almost 40% comparable. This sharp increase was driven by a large order in our Compression business and a large order in our Industrial Steam Turbines and Generator business. And the book-to-bill came in just over 1.4 and the backlog rose to EUR 7 billion.Revenue 17.8% growth on a comparable basis important across all 4 IMBs really showing double-digit growth and AD and Compression businesses showing the highest growth rates. Revenue growth was also supported by a very strong customer service demand, particularly in our Compression and in our Industrial Steam Turbines and Generator business. Profit nearly doubled, came in at a strong EUR 105 million and this is a margin of 9.2% and of course this is an improvement of 350 basis points versus last year. This increase was driven in part by higher revenue, better pricing as I mentioned earlier, increased service revenue and, like I just mentioned in Grid Technology, some timing issues and project-related issues. And this is influenced for example like timing, as I mentioned, and some currency impacts and a favorable mix.Now let's take a look at our wind business, Siemens Gamesa. Christian earlier provided you with an update on the situation. I mean looking here at the main financial KPIs. Orders slightly above the level we saw in prior year. Again onshore orders as communicated due to the temporary suspension of sales slightly halved due to the cessation of sales activities for 4.X and 5.X. However, we saw growth in service orders and in offshore orders. Order backlog for Siemens Gamesa decreased to EUR 41 billion, just a slight decrease. Revenue grew moderately by just shy of 5%. Increased service revenue more than offset a decline in onshore and offshore businesses. Of course onshore remains and continues to be affected, as Christian mentioned, by the known quality issues and offshore by the ramp-up challenges.Looking at profit, it came in at negative EUR 426 million in comparison to prior year's quarter. If you remember in prior year quarter, it also included charges of EUR 472 million related to quality issues. And I think the recent quarter's underlying performance of course was driven by project margins burdened by higher plan costs due to the quality issues that are quite well known as well as increased product costs and ramp-up challenges in the offshore area. So how do we sum up our achievements in Q1? I think overall solid start to the year in the former Gas and Power businesses and Siemens Gamesa performing in large part as expected. We feel we're on the right trajectory towards our full year targets. Again the first quarter is encouraging, but also benefited from some project shift and timing. Topics again very normal in our business, but certainly even in light of the market dynamics we are currently seeing.This is why we maintain our guidance. Again a highlight was the progress. I think we made really strong progress on our ongoing divestment program and we're confident to reach the upper end of the EUR 2.5 billion to EUR 3 billion year-end target. So let's take a look at the outlook for fiscal year '24, which remains unchanged. So just as a reminder, we continue to expect for Siemens Energy Group a comparable revenue growth in the range of 3% to 7% and profit margin before special items between negative 2% and positive 1%. Furthermore, we continue to expect net income of up to EUR 1 billion. This includes impacts from disposals. And we continue to assume a negative free cash flow pretax of around EUR 1 billion. Overall, the assumptions that we gave per business area remain unchanged.This concludes my part of the presentation. And with this, I hand back to Christian to conclude with our key priorities. Over to you, Christian.

[Christian Bruch, executive]

Thank you very much, Maria. I mean I said it at the beginning, now just to repeat it. The 3 elements, which we continue to hammer on; deliver on profitable growth, fix the wind business and maintain a solid financial foundation. This will always be our mantra throughout all the quarterly calls.And with this, I would hand over to Michael to lead the question and answers.

[Michael Hagmann, executive]

[Operator Instructions] The first 3 questions go to Vivek Midha, Max Yates and Supriya Subramanian. So Vivek?

[Vivek Midha, analyst]

My question is on the orders. So at the Capital Markets Day, you suggested that at the group level this would be down meaningfully. Since then, we've had the announcement on Hornsea 3 and you've obviously had excellent orders in the quarter. So could you maybe quantify how large the pull-forward effects in Grid Technologies were and how much of a downturn at group level is likely in order intake this year if at all?

[Christian Bruch, executive]

Obviously I have to say in the current dynamic market environment, it's a little bit a challenge to project it. Definitely I would continue to say, I would say we do see a stronger quarter 1 compared to all other quarters very clearly. So don't project this going forward. We also believe that we are largely in line with our statements we made on the Capital Market Day with an uptake on Grid Technologies. I think this is where we are very confident that we will probably exceed our own projections coming from there on the rest of the business. It is largely in line. Wind, we also have to clearly say that we obviously had a good quarter and '24 will be weak. So all in all, we will definitely not be short of orders I would say in '24, but also don't expect that momentum to continue. Some of these were particularly on grid, also now some of the call-offs are of the frame contracts we communicated before. And now everybody is obviously pushing, pushing, pushing because they see the grid really being a shortfall. But there is a limitation to that also in terms of execution capacities.

[Vivek Midha, analyst]

Understood. One very quick clarification. Should we expect the Hornsea 3 firm order to come in Q2?

[Christian Bruch, executive]

The Hornsea 3 order to come, no.

[Michael Hagmann, executive]

Next question now goes to Max Yates.

[Max Yates, analyst]

The question I had was just on a couple of the 2025 cash building blocks and I guess the 2 things I'd love to understand. Firstly, just on the sort of wind repairs, you showed that chart that shows kind of the max or the highest cash outflow being in 2025 for the onshore repairs. So could you give us a feel for roughly what you think that number will be? And then I guess the other part of the cash question is when I look at your grid business and the level of orders and I think about sort of some of the other parts of the supply chain, say, the sort of cabling, they have relatively large kind of ongoing investment plans there. So I guess my question is a little bit around your kind of CapEx line in 2025. When you look at your backlog, do you see the requirement particularly in Grid Technologies of a sort of step-up and major investment plan there?

[Maria Ferraro, executive]

Max, I appreciate the question on cash and relating to the building blocks. If you recall at the Capital Market Day in line with the cash out curve that we also showed today, it obviously clearly shows the cash out in '25. We did not provide a '25 figure per se. But what we did say is between '24 and '25, this is where we see the majority of the cash out and then of course over the 2 years of '25 and '26, then we expect the cash out of EUR 1 billion to EUR 2 billion. So that would be cumulative over '25 and '26. Just to be clear, EUR 1 billion to EUR 2 billion generated between '24 and cumulative '25 and '26. We did not give a cash outlay target for '25.

[Christian Bruch, executive]

Max, let me comment on your question with regard to the capacity. The answer is yes. I mean obviously we intend to extend the capacity particularly on the Grid Technologies side. This particular 2 locations, which we are intending to build out from existing sites. This allows us also to do it on a manageable CapEx level I would call it. So important steps, but also in our current plans all considered, I think that is important. But obviously we will continue to build out the capacity in Grid Technologies.

[Michael Hagmann, executive]

Next question goes to Supriya Subramanian.

[Supriya Subramanian, analyst]

I just wanted to check on Siemens Gamesa since you said that a majority of the root cause analysis is now done. If you could share some key findings from that in terms of are we confident that the issues are now limited to the identified fleet? What is needed to fix the issues, whether it's design versus supplier quality? And when do you think you can reenter the 4x and 5x turbine market?

[Christian Bruch, executive]

Thank you very much for the question. I mean first of all, we have not seen any new root causes. So the question in terms of did we see it on the main causes, my answer is yes. I think this is from all the data what we have available as of today that has been analyzed. Obviously the key thing now is, as I said, to identify the planning going forward. In terms of what we have seen, sorry to be a little bit not as simple, but it's a combination of matters, right? Very often it is a certain design with certain suppliers. We definitely have seen an influence on suppliers, which doesn't mean it's solely the supplier and I think this is obviously also something. But we see this as an element of combination combined with the load on the turbine in terms of wind conditions and so forth.So it means that it gives us multiple opportunities to fix the problem. One thing is a renewed design, one thing is some slight design changes with a new supplier and these are the elements that we're working through now. But what we definitely have seen is, let's say, a variety of reasons coming together. This is why it's unfortunately not so simple. And keep in mind, there's also one thing which is not to be overlooked is also then how was the installation quality, right, in terms of the different regions and making sure that this is all aligned. So we are seeing a diversity and I think this is why we have our challenges to put it in simple words on how to do it. But in terms of the mechanisms coming together, I have not seen any new things over the last couple of weeks and months. So that is a positive.

[Supriya Subramanian, analyst]

Okay. Maybe just a very quick mechanical question. So the guidance for financial results just changed from negative EUR 150 million to negative EUR 300 million last quarter to this quarter. Just wanted to check sort of what's changed underlying there?

[Maria Ferraro, executive]

Thank you for the question on that. So yes, there's a few factors that have been included now that led to the increase of the EUR 150 million. One is there were some changes in terms of rates on warranty that have been included. And secondly, we have properly included of course the additional costs for the bank guarantee facility. So that is why we've updated accordingly there the amount.

[Michael Hagmann, executive]

The next 3 questions go to Alex Virgo, Sebastian Growe and Gael de-Bray. So Alex?

[Alexander Virgo, analyst]

I wondered if you could just give us a sense of your response I guess from a big picture standpoint with respect to this root cause analysis. I asked the question I think at the CMD. It's the same sort of question again. I'm just wondering it's all very well to establish and work out or identify the symptoms and I appreciate you've done all of the work around the installed base. And just making sure or trying to understand if you've changed anything in the way you design these turbines, in the way you interact and operate with the suppliers? Because I guess ultimately that's really what we want to hear or want to see with respect to what you then go forward and change even if it's a bit too early to talk about what you're actually doing to fix this. Does that make sense as a question?

[Christian Bruch, executive]

Absolutely, Alex. And the answer is yes, right? I mean if you wouldn't do something different, obviously we are absolutely disappointed with the surprise we had to present last year. And one thing which has been introduced is obviously different design methods largely also leveraging our offshore capabilities very clearly to say plus externals. And one key thing which comes really out for me is really with the introduction in particular of new designs, how shall I call it, combination of manufacturing readiness level together with supply chain readiness level. And the diversity you see on certain suppliers, for example for a specific item like a bearing, is stunning. And then it's about how do you ensure the quality control, how do you make sure that you really understand it and this does require extra rigor.This is also why, to be honest, we push out the date for the announcement when to reintroduce the new sales on 4.X and 5.X because these processes we want to have implemented as well as leveraging our processes and supply chain management from the Siemens Energy side and bringing these groups together. That is a key underlying factor. Fundamentally, I would say there's nothing where you would say you cannot do it right to the expectation to the market. So that all would work out. But definitely, there are things where we have to say this cannot continue as is and this has to change and this is what we're doing at the moment.

[Alexander Virgo, analyst]

Okay. And as a follow-up question, could I ask if you could comment, please, on the pricing environment specifically in gas turbines and in grid? Clearly a tight market is generally helpful from a supplier perspective and given the history in both businesses with respect to pricing discipline, I wondered if you might just -- or any comments you might be able to make on these 2 businesses would be helpful.

[Christian Bruch, executive]

Let me come to grid and gas for a second. I've seen there were some, let's say, question marks also around the pricing environment in wind. And just also to put that one in perspective because there was, let's say, lowest ASP price shown in onshore wind in the first quarter, which is driven by the fact that we're not selling 4.X and 5.X, but repowering solutions and India at the moment, which is a very limited scope and that has a different price just to put that into perspective. So also I would see in wind, the pricing environment, I mean that is something just as on the sidelines. Grid remains pricing-wise a favorable environment, clearly to say it's a very tight market. At the same time, we have to get ready for making sure that we do not take this as granted, right? Because at the moment it's a very good environment. Maria indicated that the order backlog margin goes up despite the fact that we get more and more new units. I mean so this is a mix effect even overcompensated and also gas services show still good behavior in the industry. I really have to say I feel comfortable with that. It's not as strong as in Grid Technologies logically, but it's a good pricing environment.

[Michael Hagmann, executive]

Next question goes to Sebastian Growe.

[Sebastian Growe, analyst]

The first one would be a follow-up on the free cash flow bridge for '24. Maria, you had pointed earlier to a free cash flow of positive EUR 1 billion or around that level for ex-GP versus around EUR 2 billion negative for SGRE behind the about EUR 1 billion negative at group level. In wake of the stronger than earlier order pipeline at ex-GP, can you help us understand what would drive really 0 free cash flow for the remaining 3 quarters as per the guidance framework?

[Maria Ferraro, executive]

Sebastian, thank you for the question on free cash flow. Look, clearly it is a strong start to the year and as you know, this is driven by a multitude of factors, things like seasonality volatility. But of course with stronger demand and higher order intake, then of course that has an impact on our cash. Q1 was strong and we indicated that momentum at the Capital Market Day and we saw that still happening and of course this is only Q1. We have other forces. There's puts and takes, as I always say, in each and every quarter and I think now that we are committed to a net cash position, I think you saw some of the progress that we've made there. We make cash generation a key priority. However, you may have noticed that of course as we execute through this backlog, we do need things like inventories and so on in terms of operating working capital to kind of progress accordingly. We see that all in hand and so of course we are monitoring that very closely. However, at this point in time, we confirm our cash flow guidance for the year because of some of these puts and takes. Again I think it's important to note that we're still just in Q1.

[Sebastian Growe, analyst]

Okay. Fair enough. The second one is just on the order pipeline at SGRE for Christian. One large offshore customer has lowered its CapEx plan for the period through 2030 just today. And against that backdrop, can you comment on how you see the offshore volumes over time?

[Christian Bruch, executive]

Yes. I mean we always said offshore is going to be delayed and then you can debate whether it's 2 to 3 years or how long it is, but we said it's after. Let's say it starts with '25 to pick up again and then it is starting from there. Keep in mind we always have looked on the volume we assume for our business case with the announcement with the kind of lower levels. So we always expected -- we never calculated with a full market which was announced, let me put it this way. And obviously then from '25 onwards, we expect it to recover. But it will take some time now to get the things in place, to get the auction mechanisms refurbished. But in that regard, we do believe that for example '25 in offshore is for us stronger than in '24 just to keep that in mind. And also obviously we're sitting at the moment also on a backlog for the next years to come, which we also have to work off first. So the current situation is not unexpected, let me put it this way.

[Michael Hagmann, executive]

Next question goes to Gael de-Bray.

[Gael de-Bray, analyst]

So I have 2 questions, please. The first one relates to Gamesa. Since the root cause analysis of the quality issues is essentially completed now and with Q1 looking a bit better than expected. I mean would you agree there now appears to be some upside risk to the EUR 2 billion loss expected for the full year? That's question number one. Question number two is well, look, GE Vernova will shortly become an independent company out of GE and I was curious to see if you had any commentary, any thoughts on that either positive or negative?

[Christian Bruch, executive]

On the performance with Siemens Gamesa throughout the year, I would stay of what we have said in the Capital Market Day. And obviously also keep in mind that because also of not going into a sale, we also have to manage the structural cost and that is something where I would stay with what we have said if you look on the numbers back in Capital Markets Day in November. On Vernova, no, I mean I would never comment on a competitor. But I wish really Scott and the whole team all the best ready to make it happen. I think he knows and we know how challenging it is to set up a separate company. I'm very glad at the end to have a relatively comparable peer in the market also for ourselves and I think we are looking forward to a healthy competition in that regard. But I really wish the team around him really all the best for getting it done now.

[Michael Hagmann, executive]

As a couple of people have just recently registered, the list has been growing again. So if you could now stick to 1 question, please. Next 3 questions go to Sean McLoughlin, Phil Buller and Ajay Patel. Sean?

[Sean McLoughlin, analyst]

Just digging back into Gamesa. Will you need to redesign the 4.X and 5.X before rereleasing to the market? I note comments that you'd let the original design team for these turbines go. I mean if you're to fix all the quality issues first, what's the risk that you're actually out of the market for another year or more before you step back in?

[Christian Bruch, executive]

First of all what we are looking is, how should I say, refurbished version or improved version of the 4.X and 5.X because fundamentally also there's a lot of good things about the turbines, but there's obviously fixing on the current base design. That is the assumption and obviously this is what we're working through. If there would be anything else, we would communicate it throughout '24. But at this point in time, we are really working in a refurbishment or a retrofit you would say type of program. This is where we are at the moment. What we had done in terms of the design teams, we obviously wanted to have people on it with a fresh pair of eyes. But obviously they're identifying the things which need improvement and others which have worked. But that is still my planning in terms of the retrofit solutions. I cannot really tell you what the exact timing is, but the base is 4.X and 5.X.

[Michael Hagmann, executive]

Next question goes to Phil Buller.

[Philip Buller, analyst]

Can I follow up on that same question, please? I guess if I'm reading the slides right, we're going to have a portfolio decision by the end of 2024, but we're going to be doubling the number of 5.X installations in 2025. So do we not need to start bidding almost immediately, i.e. before a technical solution is fully in place? And if so, is that because we'll be in a position where we're fully comfortable with the scale of corrective costs that we'll need to absorb down the line, which you can maybe price in, so to speak?

[Christian Bruch, executive]

I'm not sure, Phil, whether I understood the full connections between the different statements what you made.

[Philip Buller, analyst]

I guess it's to do with the fact that if we are needing to bid near term if you're assuming that we're going to double the number of 5.X installations in 2025, it feels like we might need to start that bidding process imminently. Maybe that's wrong and if we are, we've got a retrofit type solution near term, I wonder if we'll be bidding with pricing in mind to support the bridge so to speak, which will be unfavorable?

[Christian Bruch, executive]

Just to be clear, I mean the installations which are shown on the slide are backlog work-off, right? This is what we have in the books, what we are doing and that is the rotor update, right? And just showing how we continue to do it and obviously we are at the moment deciding do we do the certain fixes in the factory? Do we do it in the field and how we do it and balance it also there with the customers? That has nothing to do with new orders, I hope that's clear. New orders obviously has to do something then, how do we look on more or less '26 and beyond, right? And how is then the load in the factories and how do we balance this? And this answer comes later. But this is really -- if you refer to the slide, that's really existing orders in hand, which we're still going to execute.

[Philip Buller, analyst]

Yes. I assume that part of the '25 bridge on Slide 6 would be predicated on orders that might need to be sooner, but that's [indiscernible] backlog?

[Christian Bruch, executive]

It's all backlog

[Michael Hagmann, executive]

Right. So we've got 3 more people in the queue as I previously mentioned. Ajay Patel next, then Akash Gupta and then Will Mackie. So Ajay?

[Ajay Patel, analyst]

Just wanted to carry on the train of thought that we've just been discussing. So what I wanted to understand is that has the range of costs -- the EUR 1.6 billion provisions that you highlighted, has that narrowed in terms of the potential possibility of the range of it given the assessments you're making? And would you be able to make a full -- once the assessments are finished, would you able to be more definitive about that EUR 1.6 billion of incremental cost? And does any of this plan have any cost for a new blade or any development needs to happen on turbines if you would need to go back out in the market or is that all additional? Just wanted to differentiate the cash flows there for Siemens Gamesa.

[Christian Bruch, executive]

I mean first of all to the cost level, I mean we reconfirm it because -- we reconfirm it, it is obviously a very detailed picture now on what's allocated where. What you have to keep in mind that the biggest chunk of the cost is really either related to installation or cost things, which occur at a later point in time, which is very much also on how we organize execution and this obviously will be only later judged on this because you need a crane, you need a team at site and so forth. And the other thing is customer negotiations, LDs and these type of payment, which is also influenced a bit by the mitigation plan and the negotiation with the customers, which is still to come. And this is why at this point in time, it's too early. The smallest part of the cost, which we put is the part itself. That is actually not my major concern. And it's really about all the installation related costs and customer elements and this is why you're going to see that number not changing fast in terms of it because this is where we'll see once we execute through the backlog.

[Michael Hagmann, executive]

Next question goes to Akash Gupta.

[Akash Gupta, analyst]

My question is on Siemens Energy as not Siemens Energy, but Siemens India. So we saw in last quarter Siemens India announced their plan to consider a separation of energy business. And the question is that at what stage do you need to recognize the liability in your balance sheet to execute the plan to buy back majority stake in energy business of Siemens India from Siemens AG?

[Maria Ferraro, executive]

Akash, maybe I'll take that one. So you're absolutely right. That's absolutely in line with our plan that that announcement was made. So essentially now we're doing the demerger and carve-out process. This is something that will take -- I mentioned this at the CMD. This is something that will take a number of years and a number of milestones. We anticipate at least 2 years' time for this part of the process and then there's a number of steps after that that will at that point in time determine how we do swaps and so on for the new Siemens Energy India Limited setup. So again I think it's too early at this point in time, but we're on track. I'm happy that announcement was made because it shows that we're progressing and this was always the plan.

[Michael Hagmann, executive]

Will, last question goes to you.

[William Mackie, analyst]

My question is can you help me understand again the dynamics within the onshore business at SGRE, Specifically, you're booking solid revenues better than expected. What's in there and what are you selling with regard to the orders that you're taking at the moment? And then when we look at the predictions you've given us for production rates for 4.X and 5.X in 2024, when will the 4.X and 5.X be contributing to the revenues within the onshore business or are they already?

[Christian Bruch, executive]

First of all what are we selling and executing and this is I mean for example, as I mentioned before, one thing was repowering solutions which is U.S. market and the other thing was for example India, which is a smaller onshore unit and keep in mind there's also service business continuously running and executed. We serve 85 gigawatts I mean in terms of onshore wind installation still and this is ongoing. On the execution -- the question was revenue recognition. Boy, this is getting now in detail. So we recognize the revenue while executing, it's a percentage of completion approach and in this regard, it's already considered now, right? It is in the numbers and we'll continue to do so in line with the outlook for the next years to come. That was the intention actually to show this slide. The intention was to show we continue to execute the project around the 4.X and 5.X. Yes, we are shifting this a bit depending on do we want to do things in the factory or in the field, but it will continuously generate revenue out of the backlog.

[Michael Hagmann, executive]

Right. I think in the interest of time and as we had other companies report as well, we now close the Q&A. Christian, if you want to have a final remark before we close the call.

[Christian Bruch, executive]

Yes. I mean, as I said, I think we'll probably see a relatively similar picture hopefully over the next quarters to come, which is a very dynamic energy environment which is a positive and working through the matters at SGRE. I can understand that you will love to have much more specific and detailed answers. Unfortunately, the world is very complex for me. It's important that this really go step after step. I mean we have to rebuild trust into that business. That's what we're trying to do in that regard. Many thanks for the discussions and the questions also and I hope we step after step can give you more comfort around what the organization is doing. Thank you.

[Michael Hagmann, executive]

Thanks, everyone. Bye.

[Maria Ferraro, executive]

Bye bye. Take care.

[Operator]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. A recording of this conference call will be available on the Investor Relations section of the Siemens Energy website. The website address is www.siemens-energy.com/investor relations.