Q3 2010 Earnings Call
October 28, 2010 8:30 AM EST
Joe Hogan – CEO
Michel Demaré – EVP, CFO, and President of Global Markets
Mark Troman – Merrill Lynch
Andreas Willi – JPMorgan
James Moore – Redburn Partners
Simon Smith – Credit Suisse
Johan Trocme – Nordea Securities
Colin Gibson – HSBC
Martin Wilkie – Deutsche Bank
Michael Hagmann – Nomura
Thomas Baumann – Neue Zurcher Bank
Alfred Glaser – Cheuvreux
Martin Prozesky – Bernstein
William Mackie – Berenberg Bank
Samson Edmunds – Goldman Sachs
Good morning or good afternoon. I’m Stephanie. The Corus call operator for this conference. Welcome to the ABB third quarter 2010 results analyst and investors conference call, hosted by Mr. Joe Hogan, CEO. At this time, I would like to turn the conference over to Mr. Joe Hogan, CEO of ABB. Please go ahead, sir.
Thanks for joining us for our discussion today for the third quarter 2010 results. As always my comments in this call can refer to the presentation that you can download from our website at abb.com.
Please refer to chart two for our Safe Harbor text covering any forward-looking statements made today.
I’ll start with a summary of our third quarter performance on chart three. We continued to take full advantage of the global industrial recovery in the third quarter with excellent orders growth, higher revenues and thanks to our cost takeout programs, strong earnings as well.
Orders for the Group increased by 18% local currency, a clear reflection, a clear acceleration compared to the 5% increase we saw in the second quarter of this year. Both base and large orders were higher in the quarter, including a large multimillion dollar power order in July to connect an offshore wind farm to the German grid. That was by far the largest order won by Power Systems division ever.
Demand for energy efficiency solutions and renewable energy was a notable driver of growth this quarter. The three automation divisions each reported strong double-digit orders growth ranging from 25% in Low Voltage Products to 39% in Discrete Automation and Motion.
The parts of our Power business exposed in industrial production such as medium voltage equipment and distribution transformers also reported higher orders in the quarter.
Utilities spending in power transmission equipment, however remained muted, a trend that we expect to continue into next year. While our revenue growth was modest, it represented a return to positive territory after five consecutive quarters of decline. Furthermore, this growth was generated from a lower fixed cost base as our $3 billion cost takeout plan continued to yield significant benefits, about $350 million in the quarter. As a result, we were able to post an operational EBIT of 14% this quarter compared to 13% a year-ago.
Chart four gives you an overview of the key figures for the quarter. As I mentioned, we saw strong orders increased in the quarter, a good portion of that can be attributed to the offshore wind order I mentioned a moment ago. I’d also like to highlight the operational EBIT which is reported EBIT adjusted for unrealized gains or losses from derivative transactions as well as restructuring related costs.
This quarter, we had a positive impact from derivatives of about $80 million and a small negative of $20 million for restructuring. In comparing our year-on-year performance, remember that we reported a $430 million net gain into EBIT from provisional adjustments to the third quarter of last year. If you exclude that impact, operational EBIT this quarter is up 6% versus the same quarter a year-ago. Those provision adjustments also positively impacted our net income last year, so making the same comparison net income this year is 18% higher.
Let’s move to chart five. Here we see some key data at the divisional level. As I said earlier, we saw some order recovery in the short to medium cycle parts of our Power Products of business. At the same time, it’s clear that globally, utility CapEx for higher voltage power transmission equipment remains at low levels, which is reflected here in Power Products orders. Still it looks like we’ve reached the bottom on the power distribution side.
In the EBIT column, the Power Products margin has declined by about 1.5 percentage points since last year, as volume and price declines could not be fully offset by a favorable product mix in cost savings of about a $100 million. Power Systems continues to work through a solid order backlog and that’s reflected in their revenue growth in the quarter. The EBIT margin of this division however is just below the low end of their target range. This is the result of the price erosion on orders taken last year as well as some negative product mix effects.
We had additional cost associated with our cables business. As we discussed last quarter that these were offset by the release of provisions related to the business in Russia and to the recently announced settlement with the US Securities and Exchange Commission and the Department of Justice.
Turning to the automation businesses, Q3 results are extremely encouraging. Orders were up strongly across the board in our short, mid, and even some longer cycle end markets. With excellent revenue growth on a lower cost base, the Discrete Automation and Motion and low-voltage product divisions, both turned in an outstanding EBIT performance.
Process Automation revenues show who this business is still later in the cycle and it will take some more time for the order growth we’re seeing in the past two quarters to follow through the revenue. However, Process Automation also showed some expansion in operational EBIT margin, mainly on a higher share of product and services revenues, as well as the benefits of cost reductions.
In chart six, you’ll see the development of orders in more detail. These orders were again up in all divisions except Power Products, and were up by 20% or more in each of the automation divisions. Large orders were also higher, up 32% compared to the same quarter of 2009. As a result, large orders accounted for 20% of total orders in the quarter, the highest level since the beginning of 2009.
The increase in base orders in Power Systems is normally a positive leading indicator for utility capital expenditure, but it remains unclear when we can expect to sustain recovery in this area. It was also encouraging to see a 13% increase in service orders in the quarter, led by a 20% increase in the Discreet Automation and Motion divisions.
Turning to chart seven, here are some of the areas where we saw a positive demand developments in the quarter. Obviously, the large wind power order we won in Germany is a big plus for our renewables business and we expect to see more offshore wind projects being awarded in Europe.
We also saw a good increase in solar related orders, especially for breakers and switches, and for control products from our Low Voltage Products division. Emerging markets were another positive when it comes to automation, with orders up 36%, as customers continue to ramp-up industrial capacity and as the construction activities continue to grow. I already mentioned the growth we saw on our short cycle portfolio. And we saw our service revenues outgrow total revenues, up 11% in the quarter.