Good afternoon, ladies and gentlemen. Thank you for joining our analysts conference call for the first quarter 2006 results. With me this afternoon is Michel Demaré, our chief financial officer.
We’ve made a great start into 2006. We delivered strong profitable growth in the first quarter thanks to our leading positions in fast-growing markets and our sharp focus on improving operational performance. The accounting treatment of the asbestos shares which amounted to almost 90 million dollars dampened an otherwise solid growth in net income.
We saw continued strong organic growth in orders and revenues. Orders received were 21 percent higher in local currencies compared to the first quarter of 2005 and revenues were up 13 percent in local currencies, with double-digit growth in all divisions except Robotics, which was basically flat.
Our EBIT increased 30 percent to more than 500 million dollars. Higher volumes, combined with price increases related to high raw materials costs contributed to the increase. We also continued to improve factory loadings in our products businesses.
Our ongoing focus on business execution and operational improvements, along with better project selection and execution, also lifted our EBIT margin. It increased to 9.4 percent in the first quarter compared to 7.7 percent in the same period a year ago.
In addition, improved cost controls in our Corporate activities also helped lift EBIT in the quarter. However, these volume and operational improvements were not fully reflected in our net income because of the 89-million-dollar effect of accounting for the asbestos shares.
Nevertheless, our net income increased compared to the first quarter in 2005, reaching 204 million dollars.
Cash flow improved by almost 250 million versus the same quarter last year. I’ll come back to that in a moment.
Finally, the Plan of Reorganization for our U.S. subsidiary, Combustion Engineering, became final at the end of March bringing to an end a long and difficult chapter in the company’s history. We have transferred various assets to the trust fund set up under the plan and we made the plan effective on April 21st.
The expected impact on our balance sheet is explained in Appendix I to the press release.
We also moved ahead with our Lummus asbestos plan when we filed a pre-packaged Chapter 11 in a U.S. bankruptcy court a few days ago.
As a result of these positive developments, we also received upgrades to our credit ratings earlier this month from both Moody’s and Standard & Poor’s. Let me also highlight the capital markets transaction we announced this morning.
We have started a process to incentivize holders of our 968-million dollar convertible bond due in 2007 to convert their bonds into the underlying American Depositary Shares.
If successful, this transaction will lower our debt and increase equity. Together with our recent credit rating upgrades and our strong first-quarter results this will put us in a stronger position to carry out our medium-term strategy of profitable growth.
Slide 4 shows you the key results in the first quarter that I’ve just described. On the cash flow line, let me add that the biggest improvements came from the Power Products division as the result of higher earnings and higher customer advances compared to Q1 in 2005.
Also, cash flow improved in the oil and gas and Building Systems businesses.
This quarter continues the track record of growing profitability that ABB has established over the past two years. We have clearly benefited from our lead positions in some key markets and regions. Demand continues to be robust in the power transmission and distribution sector where we are by far the market leader.
Our strong presence in most industrial sectors also positions us to benefit from the need for efficiency improvements in industry and rapid economic expansion in emerging markets.
Adding to these market drivers is our ongoing focus on operational improvements. We continue to enhance our production efficiency and make our cost base more competitive. The result has been a steady increase in profitability.
Regionally, we also saw a very favorable development in our orders received.
Europe showed a good development – up 12 percent in local currencies – which is very encouraging as growth has been flat or modest in recent quarters. Higher customer spending in Europe was led by the two power divisions and Automation Products.
The Americas grew 13 percent in local currencies, mainly driven by a strong U.S. market environment for both power and industrial automation.
In Asia, with a 32-percent increase in local currencies, China again led growth.
All divisions reported higher orders in China in the quarter. India was also higher in local currencies, led by Process Automation and Power Systems.
Finally, the Middle East and Africa again showed very strong growth.
High oil prices have fuelled increased spending in the region on power and industry infrastructure to expand not only oil and gas production but also general industrial and residential development.
Looking at revenues, the recent trend of Asia increasing as a share of total sales continued in the first quarter. As you will have seen in the press release, Asian revenues were up 32 percent in local currencies compared to the first quarter of 2005. This growth clearly outpaced the more modest 4-percent local currency revenue increase in Europe. Revenues from the Americas were up 21 percent in local currencies, reflecting the good order growth we’ve seen there in recent quarters.
I will briefly review the main results for each of the divisions. Starting with Power Products in Chart 8, I would just remind you here that included in EBIT this quarter is approximately 17 million for the transformer consolidation program we announced last June. As we have already said, we expect these charges to amount to approximately 50 million dollars in 2006.
In Power Systems, we saw higher orders across all regions and a doubling of large orders in the quarter. EBIT in this division benefited from the higher capacity utilization of engineering resources on large projects, as well as improved project risk management and execution.
Improved capacity utilization was also a major contributor to higher EBIT in the Automation Products division in the first quarter. As a result, we were able to lift the EBIT margin above 14 percent. Orders were up almost 30 percent in local currencies and revenues were 17 percent higher reflecting favorable industrial markets in the quarter.
A strong increase in base orders in Process Automation offset a decrease in large orders in the first quarter. This business continued to benefit from the robust development in the oil & gas, marine and minerals sectors. Better execution of large projects in this division also contributed to a higher EBIT margin, up 1.6 percentage points from a year ago.
Lower investments in the automotive sector, mainly in the U.S., resulted in a 15-percent local currency decrease in orders in our Robotics division in the first quarter. Revenues also slipped, partly due to the winding down of a multi-year order won in 2004. The biggest impact of course in the quarter is the lower EBIT and EBIT margin.
This is the direct result of our decision to accelerate the operational improvement measures needed to make this business more competitive. This includes, for example, stepped up R&D expenditures to improve product design. There are also ongoing consolidation costs associated with our cost migration efforts in this business. And we took additional provisions for loss orders in the backlog.
Below the EBIT line, our finance net is down slightly, partly as a result of lower securitization costs. Minority interest is higher, reflecting in large part the growth in our joint ventures in China. The big item is in Discontinued operations and that’s the 89-million mark-to-market expense to account for the change in value of the 30 million shares transferred to the asbestos PI Trust. Because we transferred those shares on April 20th, we will see this mark-to-market effect one more time in the second quarter results. That will amount to approximately 25 million dollars.
Looking at the balance sheet development in the first quarter, the positive trends we saw in 2005 continued. Gearing and net debt decreased for the fifth quarter in a row, and our equity ratio is approaching the 20 percent level. This will improve significantly as the result of the adjustment in our balance sheet for the transfer of the asbestos shares.
The fair value of the shares on the date of the transfer some 407 million dollars will move into shareholders’ equity.
In addition, if the capital markets transaction we announced this morning is successful, these ratios will again improve significantly.
So we are well on track to having a much stronger balance sheet in 2006.
As I mentioned at the beginning of the call, we have now made the Combustion Engineering Plan of Reorganization effective which brings to a close a long period of uncertainty for ABB.
This will have some impacts on our balance sheet in the second quarter and, to a lesser extent, on our income statement moving forward.
And of course, there will be certain cash flow implications over the next few years as we make the payments required under the plan.
However, I think it’s safe to say that the financial uncertainty surrounding our asbestos issue is now behind us.
The remaining asbestos liability in ABB Lummus Global is being handled through a separate pre-packaged Chapter 11 plan that we filed on April 21st.
We expect this to be finalized before the end of the year.
Finally, here is our outlook for the rest of 2006.
Not much has changed since we reported our full-year 2005 results in mid-February.
Market conditions remain very favorable, with continued strong demand for our power and automation offerings. We think the strong oil price will continue to spark customer investments in oil and gas production and marine shipping, as well as in power infrastructure.
On the other hand, we don’t see any improvements this year in the construction industry or in the North American automotive sector.
Regionally, we expect continued solid growth in Asia and the Middle East and Africa.
North America should stay positive in most sectors, and we think the growth in Europe should continue, although at lower levels than in other regions.
There are, however, some risks to our business in the current environment. One is the instability surrounding developments in the Middle East. Another is the uncertain impact of the current record high oil prices on the overall global macro-economic development.
If the oil price results in a general industrial and GDP slowdown, then we will feel those effects, most notably in our Automation Products and Process Automation divisions.
At the moment, however, the effect is still positive for us and we are assuming this won’t change in the next couple of quarters.
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To wrap up The first quarter was a great start to 2006.
Our leading positions in high-growth markets combined with our continued focus on business execution resulted in a strong improvement in orders, revenues, EBIT and EBIT margin compared to the first quarter of 2005. Net income increased to 204 million dollars despite an 89-million dollar expense related to the accounting for ABB shares transferred to the asbestos trust.
Cash flow improved by 249 million dollars in the quarter and we have now put the asbestos story basically behind us.
Finally, we have launched a capital markets transaction that, if successful, will strengthen our balance sheet and put us in a better position to pursue our medium-term strategy of profitable growth
With that, ladies and gentlemen, I’ll open up now for questions.