Good morning, ladies and gentlemen.
Thank you for joining our media call for the third quarter 2007 results. With me is Michel Demaré, our chief financial officer. I will start with an overview of the Group’s performance and then move on to look at the regions and divisions, before opening up for questions.
I am very happy to say that a combination of strong market growth and operational discipline has once again paid off for ABB. Our market and technology leadership together with performance improvements are helping us to reap the full benefits from continuing global growth and the heightened concerns about climate change and energy efficiency. Our customers continue to invest in energy efficiency, power infrastructure and productivity improvements.
As a result, Group orders increased by 25 percent in local currencies to reach 8.3 billion dollars. It was the eleventh consecutive quarter of double-digit order growth for the group. Revenues grew by 19 percent to 7.2 billion dollars, reflecting our very strong order backlog - now valued at 22 billion dollars – and some further price increases to offset higher raw material costs.
Our very positive revenue growth and our ongoing performance improvements allowed us to generate earnings before interest and taxes of 1 billion dollars up 55 percent versus a year ago and an EBIT margin of 14.4 percent compared to 11.8 percent in Q3 last year. Included in EBIT this quarter is approximately 30 million dollars in restructuring costs.
Net income rose 86 percent to 738 million dollars. In addition to the higher EBIT, our net income benefited from our lower debt levels and a low tax rate in the quarter just 22 percent compared to 29 percent a year ago. The biggest change in our key balance sheet ratios is our net cash position which improved by about 1 billion dollars compared to the end of the second quarter of this year and which now stands at 3.3 billion dollars. Our return on capital employed in the third quarter increased to 28 percent after tax up from 18 percent a year ago.
And in August, we announced an agreement to sell ABB Lummus Global, our downstream oil and gas business for 950 million dollars.
This essentially brings to an end our program to sell non-core businesses.
Taking a closer look at the regions I am pleased to say that orders grew in almost all of our key markets. Asian orders increased by 35 percent in local currencies, as China and India maintained their long-term growth trends. In the Americas, order growth slowed to 5 percent as a result of a reduction in U.S. power grid investments from very high levels in recent quarters.
We do see a certain slowdown in housing-related power distribution activities in the U.S. but since it concerns only 1percent of the Group’s total business volume, the impact will be limited at the Group level. In the meantime, we continue to see double-digit growth in the U.S. on higher industrial demand, especially in Process Automation.
In Europe, we saw significant investments in automation products and power infrastructure such as the 400-million-dollar order to link the world’s largest offshore wind farm to the German grid leading to a 36-percent rise in orders in the region, in local currencies.
In the Middle East, the two power divisions saw orders more than double in the third quarter. On the automation side, however, orders were down because of a reduction in large oil and gas orders in North Africa.
I’d like now to look at the divisions in more detail:
Power Products had a successful quarter with orders rising 30 percent and a 26-percent increase in revenues in local currencies. The strong EBIT margin mainly reflects high factory loadings although productivity improvements also supported the margin.
Power Systems had another sharp rise in orders during the quarter. The 63 percent increase was driven largely by power interconnection projects in western Europe, and investments in the Middle East. Revenues grew across all businesses and were up 22 percent in local currencies, as a result of solid execution of the strong order backlog. EBIT in Power Systems rose by almost 60 percent and the margin increased to 8.6 percent from 7.1 percent one year ago.
Order growth in the Automation Products division returned to higher levels in the third quarter after single-digit growth in Q2. Demand was up in all businesses and regions and orders grew 18 percent in local currencies. Revenues increased 22 percent, still in local currencies, as a result of higher volumes and price increases to cover higher raw material costs. Revenue growth and high capacity utilization led to a 42-percent increase in EBIT and an EBIT margin of 17.4 percent.
In Process Automation, demand remained strong in metals and minerals, driven by high copper and steel prices. However, orders were down in pulp and paper and we received fewer large orders from the oil and gas industry in the third quarter which resulted in the 2-percent decline in total orders in local currencies. Revenue growth of 7 percent mainly reflects the timing of the execution of system orders. EBIT in the Process Automation division grew in line with revenues and the EBIT margin remained at almost the same level as a year ago.
Finally, Robotics recorded a 19-percent increase in orders, mainly the result of continued strong demand from general industry and our successful efforts to develop the non-automotive robotics market. The automotive sector remained weak in the third quarter a trend we expect to continue. Growth in automotive-related orders is also being affected by our greater focus on project selection. On the other hand, we’re pleased to see the 16-percent increase in revenues in the Robotics division. This is the first upturn in revenues for the division since the first quarter of 2006. It is a result of the steadily growing order backlog finally flowing through to revenues. Consequently, EBIT quadrupled and the EBIT margin reached 5.8 percent as cost efficiency and improved project management measures continued to pay off and as the project costs taken last year were not repeated.
To summarize this has been another very good quarter with strong organic growth and excellent EBIT margins. So long as market demand remains at current high levels, we expect to further improve our performance in the future.
Our global markets remain healthy and continue to be driven by several long-term factors.
In the U.S. and Europe, considerable investments are needed to upgrade aging power infrastructure and to integrate power from renewable sources into the grid.
Major investments in power networks are continuing in emerging markets, including China and the Middle East, to support rapid economic growth.
Global GDP growth, the need for more energy efficiency, and the resulting focus in industry on increasing productivity and competitiveness are the forces supporting demand for the products, systems and solutions of our automation divisions.
In the drive to cut costs, businesses are increasingly paying attention to their energy costs as oil prices remain high.
ABB is not a very energy intensive company but we help our customers save considerable amounts of energy.
Reducing energy costs and addressing widespread concern about climate change are factors that we expect to continue supporting demand in both the power and automation divisions.
We released our new mid-term strategy and financial plan in September for the period 2007 to 2011 and one of the key conclusions from our strategy review, which is supported by our third-quarter results was that we are in the right businesses – with the right people, market positions and technology – to extend our record of profitable growth.
We have the market positions, people, technology and brands to take advantage of the positive environment and generate further organic growth and a steady improvement in profitability.
Our sizable order backlog, gives us continued confidence about revenues looking ahead into 2008…But we must ensure quality and timely delivery, which remain key challenges for the Group. We remain positive about this as we still have the potential to increase capacity at many of our plants and to quickly build up additional capacity, if needed, in emerging markets.
These will remain operational priorities for the foreseeable future.
We’ll also continue to examine strategic acquisition opportunities.
For the rest of 2007 and into the first half of 2008 we expect business conditions to remain positive, as they have been in the first nine months of this year, in all regions. Automation-related industrial investments are expected to continue at a high level in most sectors although below the growth rates seen in 2006. I would like to point out that there is a certain pattern to our EBIT margins, with Q4 values typically somewhat lower than those in Q3. We are happy to see that our Q3 margin this year remained at the same high level as the Q2 margin but we do not consider quarterly variations in these values to be a meaningful measure of our business performance.
Finally, ABB is well-positioned to benefit from customer investments to reduce costs and mitigate climate change by using more energy-efficient products and systems.
This plays to our strengths in both power and automation and we continue to see this as a key growth driver for the future.
With that, ladies and gentlemen, I’d like to thank you for your attention and open the phone to questions.