Good morning ladies and gentlemen.Thank you for joining our media conference call for the first quarter 2005 results. With me this morning is Michel Demaré, our chief financial officer.
As you will have seen in the press release we have made a strong start into 2005. Favorable market developments along with our ongoing focus on execution, improving operating efficiency and cutting corporate costs have boosted our overall profitability.
Our top line growth continued steadily. Orders and revenues grew in both core divisions Power Technologies and Automation Technologies by 11 percent in local currencies.
Our Group EBIT improved by more than 50 percent to 391 million dollars.This was led by a strong performance from the Automation Technologies division and also from lower Corporate costs and lower losses in our Non-core activities.
Our Group EBIT margin went up from 5.5 percent in Q1 of 2004 to 7.7 percent this year. Net income increased to 199 million dollars compared to a break-even result last year.
Besides a higher EBIT, lower net financial costs and reduction in losses from discontinued operations also contributed to this improvement.
In the first quarter, we took another important step towards a final asbestos resolution with our term sheet agreement that we announced in March.
So overall it was a good - if not a very good - start for the year. We are committed to achieving our 2005 Group EBIT margin target of 7.7 percent.
However, we see some challenges ahead in 2005. Despite a robust growth in orders and revenues, the EBIT margin in the Power Technologies division suffered from some operational issues, mainly the extremely volatile raw material costs.
I’ll come back to this in a moment. As a result, the 10 percent EBIT margin target for Power Technologies in 2005 can no longer be reaffirmed. We are not providing a revised target at this time.
The volatility in the transformer business is too high right now for us to provide new guidance at a confidence level we are comfortable with. We intend to provide a new EBIT margin target for PT after the second quarter.
Corporate results in the first quarter on the other hand also developed favorably.That said, we will need to keep a tight focus on this area through the rest of the year.
It is worth pointing out that the Q1 results do not reflect the costs we expect to incur later in the year to get our Sarbanes-Oxley program running at full speed.
We also expect further costs for productivity improvements, as we have said, at around zero point 5 to zero point 7 percent of revenues.
Let’s cover another subject quickly - the asbestos issue. I assume you have heard about the new settlement agreement that we concluded in March. We will continue to push for a timely settlement of this new asbestos plan. And we are making progress. Next steps in the court proceedings are already lined up but we cannot predict when we will complete the process. Nevertheless, we look forward to bringing this saga to an end.
Let me now review the key operational developments from the first quarter. In the Power Technologies division, orders were up 10 percent in local currencies. The strongest improvement came in the U.S., the Middle East, and Asia, especially India.
Orders were lower in China in the quarter compared to the very strong first quarter in 2004. Despite this lower order intake, we do not see any significant change in the overall demand situation in China.
Revenues in the Power Technologies division were up 12 percent in local currencies. Both the products and systems business areas reported higher revenues on the strength of their solid order backlogs. The good revenue improvement led to a 12 percent increase in EBIT for the PT division.
However, as I mentioned earlier, rising raw material costs especially for oil and electrical steel reduced the EBIT in the transformer business by 15 million dollars.
We will continue to push through higher costs to the market, hedge our costs where we can and try to lock in manageable prices through long-term supply contracts.
We are also sourcing more materials from low-cost countries. But raw material costs continue to rise faster than we can adapt.
There were also some other operational issues in the first quarter in the transformer business. In particular, we had an unfavorable product mix in the quarter in a couple of our larger markets.
This is an extremely competitive market at the moment - and it is again difficult to predict what the situation will look like in the coming months.
Taken together, these negative factors more than offset higher EBIT in the medium-voltage, high-voltage, and systems businesses and the lower restructuring costs we had in the first quarter of this year compared to last year.
As a result, the PT EBIT margin fell to 7.6 percent compared to 8 percent in the first quarter of 2004. Under these circumstances, the 10 percent EBIT margin target for 2005 is no longer realistic and we can no longer reaffirm the target.
We will come back, as I said, with a new target when we have enough clarity and reliability once the raw materials markets are stabilizing.
As far as cash flow is concerned, the rapid growth in orders and revenues, has increased the division’s net working capital requirements.
However, careful management of working capital has led to a reduction in net working capital as a percentage of revenues.
I now move to the Automation Technologies division which showed a strong first quarter performance. Orders were up 11 percent in local currencies with increases in both base orders and large orders.
Revenues were seven percent higher. As in the PT division, the U.S. continued to perform well. The push in the Middle East to broaden the industrial base beyond oil and gas has had a positive impact on demand for Automation Technologies.
In Asia, increased orders from India more than made up for lower orders in China compared to the very strong first quarter of 2004 when AT orders in China grew by more than 50 percent.
For that reason, we do not see this quarterly development as indicating any change in underlying growth trends in China.
AT’s higher revenues, lower restructuring costs and improved efficiency all led to a 42-percent growth in EBIT and a margin increase to 10.9 percent from 8.6 percent in the same quarter a year ago.
Cash flow showed the usual seasonal trend as net working capital requirements increased to support the rise in orders and revenues.
AT also reduced net working capital as a share of revenues in the first quarter compared to the same quarter last year.
Turning now to non-core activities. Non-core activities also reported higher EBIT in the quarter mainly the result of a better performance from the oil and gas business.
In Building Systems we have most or our remaining activities in this business in the German market. And that market remains difficult. That, along with further costs to wind down the business in other countries, is why we did not see an improvement in this line.
Corporate costs developed favorably in the first quarter at 88 million dollars versus 115 million dollars in the first quarter last year.This reflects some encouraging progress in reducing headquarters spending and a 17-million dollar capital gain on the sale of real estate.
However, when our Sarbanes-Oxley program is up to full speed …we expect increased outlays for that, and it is not certain that we can maintain the current low level of corporate costs.
Losses from Discontinued operations were lower this quarter. This was mainly the result of the non-recurrence of the 30-million dollar loss last year on the announced sale of the reinsurance business.
The asbestos costs related to the mark-to-market treatment of the 30 million shares that are reserved for the asbestos trust amounted to 18 million dollars in the quarter compared to 24 million a year ago.
Cash flow from operating activities decreased by just over 100 million dollars in the first quarter of this year compared to the same quarter last year.
The net working capital requirements of the core division have increased as orders and revenues have risen strongly in recent quarters.
However, with continued careful working capital management, we have been able to reduce net working capital as a percentage of revenues in both divisions versus the first quarter of 2004.
In Non-core activities, we had some cash payouts related to provisions taken in Q4 2004 and a 21 million dollar payout on the settlement of the upstream oil and gas divestiture. These cash outflows increased our net debt by about 180 million dollars in the first quarter compared to the end of the fourth quarter last year.
However, we reduced total debt and improved our gearing further. We’re now at a gearing level of 61 percent compared to 64 percent at the end of last year.
Our gearing target of 50 percent has become much less important since it was first set in 2002. We could achieve it today by buying back some bonds, but that would not create value for the company. But we will certainly continue to reduce our financial obligations, including our securitization activities.
I now return to asbestos. As you know, we announced in March that we have reached an agreement with the representatives of the asbestos claimants and with the other parties on a term sheet to amend our plan of reorganization for Combustion Engineering and ABB Lummus Global.
The amended plan will bring us into conformity with last December’s ruling from the U.S. Third Circuit Court of Appeals. Under this agreement, we will pay an additional 232 million dollars to present and future asbestos claimants.
We took that additional provision in our fourth quarter 2004 results. We had the status hearing before the bankruptcy court on April 5th and we are working with the other parties to have submission ready for the court in June.
Ladies and gentlemen: To wrap up, the outlook for the rest of the year looks favorable from a market point of view. Especially in the Americas and Asia, we expect continued demand growth in both core divisions. AT is developing on track for its 10.7 percent EBIT margin target and we will come back with a new PT EBIT margin target after the second quarter.
Finally, the good start of the year gives us confidence that we can reach our 2005 group EBIT margin target of 7.7 percent.