Good morning, ladies and gentlemen.
Thank you for joining our media conference call for the first quarter 2008 results.
ABB experienced a very good start in 2008 across all businesses and regions. Demand from utilities and most of our major industrial markets remained strong around the world, especially in emerging economies, but also in the U.S. The results show that ABB is in excellent health and has a balanced portfolio with very good prospects. Global growth of power infrastructure, new industry capacities mainly in the emerging markets and the need to save energy and energy costs are powerful forces. They are combining to generate strong demand for power and automation solutions that increase productivity and reliability while lowering environmental impact.
Customers continued to invest in areas where we are market and technology leaders, like power infrastructure, energy efficiency and productivity. As a result, we saw orders increase 16 percent in local currency terms to almost 11 billion dollars. This is the first time that ABB books more than 10 billion dollars of orders in one quarter. It is also the ninth consecutive quarter of order growth of more than 10 percent, a track record that clearly demonstrates how well we are positioned in the global power infrastructure and industrial automation markets. These markets continue to show a very positive development and we have both the technology and the geographic presence to take full advantage of them.
Revenues grew 17 percent in local currencies to just under 8 billion dollars. At the same time we significantly improved our profitability, reflecting not only the strength of our markets but also our continuing strong operational performance. Lower cost sourcing, footprint optimization, better project execution and risk management, and more efficient capacity utilization all contributed to our improved results. Our net income in the first quarter reached 1 billion dollars, mainly the result of our excellent earnings performance but also reflecting a substantial improvement in our finance net result and a slightly lower tax rate. Cash from operations continued to improve, despite the need to increase working capital to fund our rapid growth. Finally, we began the 2.2 billion Swiss franc share buy-back program that we announced in February and we repurchased just over 9 million shares during the first quarter.
We also had a very good quarter for EBIT, which hit a record 1.4 billion dollars, and EBIT margin at 17 percent. I’d like to point out that the EBIT in this quarter had a positive impact of 85 million dollars from the mark-to-market treatment of some of our hedging transactions an unusual high amount which results from the unprecedented weakening of the US dollar, adding on to the ever rising prices of copper, steel and oil. This hedge accounting impact improved our EBIT margin by approximately 1 percent, and was spread across all our divisions. It is obviously not an upside that we expect to see each quarter.
Return on capital employed after tax, meanwhile, increased to 32 percent from 23 percent in the same quarter a year ago. And looking below the EBIT line, our balance sheet continues to strengthen. Our net cash position improved by about 200 million dollars during the quarter and gearing decreased further.
Let me point out a few highlights from the divisional results.
Starting with Power Products, the market remained very favorable, with both orders and revenues growing at a solid double-digit pace.
Orders were higher in all regions, led by Asia and the Middle East. Orders were slightly higher in the Americas due to a modest increase in the U.S., while in Europe, orders grew 6 percent in local currency terms, led by Italy, Russia and Turkey. The EBIT margin rose to more than 20 percent, reflecting to a very large extent the excellent demand situation we have seen in the past several quarters and the resulting impact it has had on the margins in our order backlog. Utilities in all regions continued to invest in new and upgraded infrastructure. As a result, the pricing environment has been very supportive and we have again been able to pass along raw material cost increases to the market. Low-cost sourcing played a strong role in this division as well, and we continue to take down our cost base. Furthermore, de-bottlenecking our plants in the mature markets has helped optimize our capacity utilization meaning that, while capacity is tight, we can still continue to increase output from a more or less steady base of fixed costs. The story is similar in the other divisions.
In Power Systems, the overall market situation remained positive in the quarter, even though orders were only 4 percent higher in local currencies. This is mainly a reflection of fewer large orders taken in the quarter. As always in this division, quarterly swings in order intake can be quite significant, depending on the timing of large project awards. Revenues jumped by more than 30 percent in the quarter as we continued to successfully execute the very strong order backlog. The margin here also developed very well, reflecting the improving margins in the backlog from better project selection and execution. The tight focus the division has put on managing general and administrative expenses also contributed to the margin improvement.
Our Automation divisions also turned in very strong results this quarter. Automation Products recorded a 15-percent increase in orders in local currencies with all regions and end markets stronger, except for the construction-related areas. Orders in Europe grew 8 percent in local currencies in the first quarter. Germany led the improvement in Western Europe while Russia was the main growth driver in Eastern Europe. It’s encouraging to note that orders grew at a double-digit pace in the U.S. in the first quarter. While the economic outlook in the U.S. remains unclear, we have so far not seen a significant downturn in industrial demand there. Order growth for Automation Products was also very good in the emerging economies in the quarter – up more than 20 percent in local currencies in both Asia and the Middle East and Africa.
In Process Automation, demand from the metals, mining and marine sectors was the key growth driver in the quarter as customers in these sectors continued to expand capacity to take advantage of high commodity prices and sustained demand. The margin improvement reflects not only excellent project execution but also a larger proportion of higher-margin service and product revenues compared to system revenues.
Finally Robotics, where some increase in demand for painting robots in the automotive sector combined with continued growth in general industry to produce a 10-percent local currency improvement in orders. The increasing share of higher-margin orders from general industry is having a favorable impact on the division’s EBIT margin. We feel we’re on the right track in Robotics and we expect to see a steady improvement in profitability as we move forward.
In geographic terms, orders were higher in all regions in the quarter, once again led by Asia. Orders in both China and India were up more than 30 percent in local currencies and were higher in almost every business. Customer investments in metals and mining – especially aluminum and cement – helped lift orders in the Middle East and Africa. A 9-percent order increase in the U.S. in the quarter, with increases in all divisions, drove the overall order improvement in the Americas. And in Europe, orders were higher in all divisions and grew 13 percent in local currencies. The Power Systems, Process Automation and Robotics divisions showed the largest gains in Europe as customers increased investments for electrical equipment in power generation as well as for oil and gas and minerals development, and general industrial automation.
Outlook
Looking ahead our macro-economic assumptions for the rest of the year have not changed since we first presented them in February. We believe the demand for improvement to power infrastructure will continue in all regions. Energy efficiency, productivity and also increasingly renewable energy will all remain key themes, even in the case that there would be a broader economic downturn. Capacity constraints in raw materials and the availability of qualified people will also continue to be factors in our business development. As for the issue of decoupling, we do not yet see any impact on emerging market economies from the slowdown in the U.S.
When it comes to the outlook more specifically for our businesses we see the power sector continuing to develop favorably while economic growth in the emerging economies and further investments in the raw materials processing sectors are expected to fuel growth on the automation side. We forecast housing-related activities to weaken further, but from already low levels. And our exposure in this sector is limited, in fact it is less than 5 percent of the total ABB business. If we see a broader economic slowdown, the impact would most likely first affect delivery terms. Pricing impacts would only come later. Based on all of these factors, then, we reiterate the guidance we provided in February that we expect order and revenue growth rates in our power-related activities of 15 to 20 percent in 2008, and around 10 percent in our automation activities.
In summary, our operational improvements and global reach continue to pay off. We are capturing the strong worldwide demand for technologies to deliver reliable power, increase productivity and save energy. In the first quarter, strong demand, favorable pricing, high factory loadings, low-cost sourcing and footprint initiatives all of these have contributed to our higher EBIT and EBIT margins. The strong devaluation of the U.S. dollar resulted in mark-to-market gains which produced one-off positive impacts to our EBIT margin that are not likely to be repeated.
Obviously, we also have some challenges to manage over the rest of 2008. Most important is executing the backlog, on time and at our usual high quality standards. Supporting this will be significant capital expenditures to ensure we have the capacity to deliver on the backlog and investments in R&D to protect our leading technology positions. This is critical to further building our competitive advantages and capturing all of the organic growth opportunities that lie ahead of us. The opportunities are indeed very promising.
We have further scope to improve our business processes and operations, and our markets are being supported by long-term factors. These include rising growth and living standards in emerging markets, rising competitive pressure to increase industrial productivity, and the growing use of renewable energy sources. There is no doubt that efforts to combat climate change, the world’s energy needs and concern about access and affordability of supplies will dominate public debate and support our business for years to come.
ABB is ready, and we are multiplying the initiatives to capture an increasing share of these market and technology opportunities.
With that, ladies and gentlemen, I’d like to thank you for your attention and open the line to questions.