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Siemens €2 bln procurement savings expected

Analysts expect German industrial giant Siemens to reveal next week what a company source said was a new program to cut €2 billion ($2.6 billion) in purchasing costs.

Siemens has already said management board member Barbara Kux, who handles procurement, will unveil a purchasing initiative on April 29 when the company discloses its fiscal second-quarter results.

And though one company source said Siemens would not put out concrete figures next week, another said it had set an internal target to generate gross savings of 5% of the company's annual €40 billion global purchasing volume.

“The 5% (goal) was the size of the target Mrs Kux has communicated internally, and discussions are on just how that could be achieved,” the second company source told Reuters.

Siemens declined to comment.

“I think that they will make a big splash about this purchasing initiative next week. Siemens has told some of the buy-side analysts about a 5 percent adjustment or an equivalent of €2 billion adjustment on its supply chain,” according to one analyst who declined to be named.

Kux, who was hired from Dutch rival Philips for the new position on purchasing, has been mostly shielded from the media since she joined the company in November but will make her news conference debut on April 29. “That event - that PR stunt, let's put it that way - may help dilute the guidance adjustment effect,” according to the analyst.

Siemens, which makes a range of products from power plants to light bulbs and high-speed trains to hearing aids, is widely expected to slash its key profit target for the fiscal year to end-September 2009.

Like its US rival General Electric Co, Siemens is regarded as a barometer of Germany's economy - Europe's largest - for the breadth and depth of its products.

Even though it saw new orders decline early this year, it has stuck to profit targets it set last July.

GE last week reported better-than-expected quarterly profit, with net income dropping 36%, but warned of some signs the economy may be continuing to deteriorate.

Siemens has so far said it wants to buy more from low-cost countries, where only a fifth of its €40 billion annual procurement volume was sourced last year.

In a rare interview last month, Kux said Siemens had 370,000 suppliers and would cut the number by 20%.

“This circa 20% cut could yield savings of 5%. This would imply over €2 billion of purchasing savings,” Credit Suisse said.

Credit Suisse said €2 billion in procurement savings would add to an ongoing €1.2 billion of cuts in sales, marketing and administration costs.

The cost cuts, launched months before the global financial crisis deepened late last year, were meant to bear fruit this year and next. Siemens has not launched any cost-cutting measures to specifically address the recession impact.

Roland Pitz, analyst at UniCredit, said he believed Siemens had to cut about €1 billion to €2 billion more on the cost side to offset declining new orders.

“You see the GDP is decreasing and the company has to be more concrete on what kind of cost cutting they want to do and how much these cost cuts would be,” Pitz said.

WestLB said it expected Siemens to link new profit guidance to cost advantages from the procurement optimization program.

“This would allow the management team to demonstrate that it is actively doing something to combat the looming pressure on earnings,” WestLB said.

Analysts polled by Reuters expect on average Siemens to downgrade its fiscal year outlook for total sectors profit, which serves as operating profit for all its three divisions, to €6.8 billion. Siemens' guidance so far has been €8 billion - €8.5 billion. (Reuters)