ABB Grain Ltd. (ABB)

Q2 2010 Earnings Conference Call

July 22, 2010 09:00 am ET


Joe Hogan - CEO

Michel Demare - CFO


Ben Uglow - Morgan Stanley

Olivier Esnou - Exane

Mark Troman - Bank of America/Merrill Lynch

Andreas Willi - JPMorgan

Axel Funhoff - ING

Martin Wilkie - Deutsche Bank

James Moore - Redburn Partners

Thomas Baumann - Neue Zurcher Bank

Simon Smith - Credit Suisse

Colin Gibson - HSBC

Mark Fielding - Citigroup



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Good morning or good afternoon. I’m Stephanie. The Corus call operator for this conference. Welcome to the ABB Second Quarter 2010 Results Analysts and Investor 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.

Joe Hogan

Hi, good afternoon and thanks for joining us today. Michel Demare is with me here too. We are going to review our second quarter results as you know, and as always my comments in the call refer to the presentation that you can download from our website at Please refer to chart two for the Safe Harbor text covering any forward-looking statements made today. And I’ll start with a summary of our second quarter performance on chart three. ABB delivered a strong quarterly performance as our costs pick up program in June succeeded in keeping our profitability well within our target range.

We saw a further increase in investor demand for ABB’s energy efficiency solutions, and lifted motors in the automation division by more than 20%. As a result, base orders grew by 15% in local currencies compared to the same quarter in 2009 and were 4% higher than Q1 of this year. At the same time, utilities continued to delay many of our investments into power transmission which is reflected in the 37% decline we saw in large orders.

Nevertheless our order backlog is higher than at the beginning of the year. And revenues declined more slowly down 5% versus Q2 2009 in local currencies than in any other quarters since 2008. Both of these are encouraging signs. We achieved more than $400 million in cost savings this quarter, which combined with an increase in higher margin product revenues in the automation divisions, helped us to generate an operational EBIT margin of 14.6% compared to 14.4% in the same period of 2009. This improvement comes despite additional project costs in the power system division that I’ll come back to shortly.

On cash, the timing of the customer payment influenced the performance, so we have lower cash from operations compared to a year ago. But comparing the total first half cash level we are actually higher than last year so we remain confident in our ability to generate cash.

Chart 4 gives you an overview of the key figures for the quarter, I’ve already discussed the main points. So here I’ll just highlight the improvement in services revenues and the restructuring and derivative costs totaling about a $130 million in the quarter. We’ve also added EBITDA figure here because as we explained to you when the Ventyx deal depreciation and amortization related to the acquisition will impact earnings in the coming quarters. We expect the impact to amount to roughly $40 million for the full year of 2010. Ventyx had a small impact on our results this quarter as we've only included June’s result in our numbers. Ventyx contributed about less than $20 million in both orders and revenues and the impact on EBITDA is also not significant.

Let’s move to chart 5. Here you see some key data at the division level. As already mentioned delays in utility spending continues to weigh in on our power orders. The current short cycle investor recovery however has had a dramatic impact on our automation order intake. And in the case of low voltage products where orders are converted quickly into sales, you can already see the positive impact of the order rebound on revenues. Process Automation also saw a significant order increase, a lot of it in the emerging markets including some large orders in the Middle East and oil and gas and also mineral.

On the EBIT margin side, you can see the impact of our successful cost takeout program across the border. We are evenly able to maintain our power products margins despite lower revenues and continuing price pressure. Power systems margins were again hit by cost overruns associated with the cable projects we mentioned in the first quarter. This amounted to about $80 million and follows an intensive review process undertaken in this quarter aimed at fully and to fully (inaudible) this particular risk.

As we said, for Q1 it’s impossible to do well but we have our hands around this issue. We have already taken major steps to make sure this issue does not arise in similar projects in the future. Turning to the automation divisions, EBIT you see the positive impact from the cost pick up. A favorable product mix and especially in low voltage products, strong incremental margins as we increased output from a lower fixed cost base. In chart six, you will see the development of base cost and large orders in more detail. Base orders were up in all divisions expect power products, and were up by more than than 20% in each of the automation divisions.

The more larger order intake brought the share of large orders down to 11% which is the most we've seen since the end of 2008. You have seen already the $700 million order we won last year from transpower in Germany to build an 800 megawatt link between an offshore wind park in the North Sea and the German mainland. This will certainly go a long way to improving our large order performance over the rest of the year. It’s also a reflection of the continuing very high tender backlog in this business and we hope to see additional large orders in the coming quarters. This will depend to some extent on the world economy maintaining its current momentum. If that continues we would expect to see a return to greater utility spending especially in power and transmission.

Turning to chart seven, you can clearly see how differently our power and Automation businesses have developed through the economic crisis of 2008 and 2009. Our automation businesses were the first to feel the downturn starting already in the third quarter of 2008 and declining more or less steadily throughout, through the third quarter of last year. At same time, our power divisions were still enjoying some significant order growth in early 2008 and orders were relatively steady through most of 2009. Now you can see how automation has comeback on the strength of the industrial recovery while power remains under pressure.

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