Good morning, ladies and gentlemen.
Thank you for joining our conference call for ABB's second quarter 2008 results.
I will start by presenting an overview of the Group results, then say a few words about our divisions and the outlook for the rest of the year.
I am happy to say that our excellent start to the year has continued with a record quarter for ABB. Global demand for our market-leading technologies in power infrastructure, energy efficiency and industrial productivity remained at high levels. Our strong market positions in both emerging and mature economies continue to provide us with excellent organic growth opportunities. At the same time, we continue to improve our profitability and total return on capital through measures such as better project execution and risk management, lower cost sourcing, and footprint optimization
Orders were up 19 percent in local currencies to more than 11 billion dollars, a single-quarter record. Revenues rose 15 percent, also in local currencies, to 9 billion dollars - another record. I am pleased to report that the second quarter of 2008 is the tenth consecutive quarter of double-digit organic growth for ABB. This confirms our view that today’s markets provide us with significant opportunities to grow our top and bottom line within our existing businesses.
In another milestone for ABB, in this quarter orders from emerging markets exceeded those from mature markets for the first time. Demand was again driven mainly by power utility investments to replace or upgrade aging infrastructure build inter-regional power links and, especially in emerging markets, install new power infrastructure. On the automation side, sustained high demand for raw materials and commodities to feed the rapid economic growth in countries like India and China resulted in further customer investments to expand capacity.
In addition, high energy costs continue to drive demand for more efficient industrial systems and equipment. Demand for automation was mainly driven by the oil and gas, marine and minerals sectors. Our healthy revenue growth in the second quarter largely reflects our progress in executing the strong order backlog.These very good growth rates and the high levele of capacity utilization helped us to lift profitability at the EBIT level by 42-percent .
At the same time our ongoing internal improvements are paying off. I am very proud that despite strong order growth and the ongoing increase in new capacity, we were able to keep our costs under tight control, and to further improve our own productivity and project execution. Progress in low-cost sourcing, removing production bottlenecks to generate higher revenues and earnings from the same base of fixed costs better project execution and other operational improvements also contributed.
I would also like to highlight the very good cash flow development this quarter. Our cash flow more than doubled to $978 million which is due to both the solid increase in earnings, and the success of our ongoing efforts to improve working capital management. We continued our share buyback program during the second quarter and have now spent close to 500 million dollars out of the total 2 billion dollar program.
Finally, we have made two important announcements since the end of the first quarter. First, we have agreed to acquire U.S. transformer company Kuhlman Electric, in line with our strategy of making bolt-on acquisitions that complement our product lines and geographic presence. Kuhlman will give us a broader product scope in the important U.S. market. At the same time, Kuhlman will benefit from our leading global business infrastructure and power industry expertise.
Second, we announced the appointment of a permanent CEO, Joe Hogan from GE Healthcare, effective at the beginning of September.I have already spent quite some time with Joe and I’m confident that both his personal style and his management philosophy will fit very well into ABB’s culture. I will continue in my role of Chief Financial Officer. I am confident that Joe and I will complement each other very well, and I look forward to working with him to take ABB to the next level.
On a divisional level, I would like to point out a few highlights for this quarter.
For Power Products the markets remained very favorable, and both orders and revenues showed solid, double-digit growth.Transformers again led the growth and orders were higher in all regions except the Middle East and Africa, mainly the result of fewer large orders in Saudi Arabia. Germany, Russia, the U.S., Brazil, China and India all contributed significantly to the order growth in Power Products. The EBIT margin improved by more than 2 percentage points compared to a year ago to 19.4 percent.
Power Systems orders increased 8 percent in local currencies and the overall market situation remains positive based on continuing investment in power infrastructure, in both emerging and mature markets. Revenues continued to develop as expected, given the very good order backlog, and were up by 21 percent in local currencies. The margin in Power Systems was lower in the quarter compared to a year ago, mainly because we saw a high proportion of relatively low-margin projects in the mix this quarter. That means, for example, that we booked more lower-end substation orders compared to last year, when we had a higher share of high-voltage type projects, which typically have higher margins.
Our Automation divisions also turned in a very strong quarter.
Automation Products recorded a 20-percent increase in orders in local currencies reflecting continuing investment in products and systems that increase productivity and energy efficiency. Orders were up in all regions, including growth of more than 20 percent in the U.S. While the economic outlook in the U.S. remains unclear, we have not seen a significant downturn in industrial demand there, and our direct exposure to the turbulent U.S. housing market is very limited.
In Process Automation, demand from the oil and gas, marine and minerals sectors was the key growth driver in the quarter. Customers in these sectors continued to expand capacity to meet increasing demand. They are also investing in more energy efficient technologies to meet the challenges of high energy prices. The margin improvement in Process Automation in this quarter mainly reflects improved project execution and risk management.
Finally, we have Robotics, where both top and bottom line continue to go in the right direction. General industry remained a solid market for Robotics as customers in metal fabrication, consumer electronics and packaging, for example, look for new ways to improve process quality and flexibility by using industrial robots. Combined with benefits from our product redesign, operational streamlining and cost improvements the shift to higher-margin general industry orders has helped lift the EBIT margin in robotics by more than a percentage point year-on-year.
ABB's geographic diversity is an important way to reduce volatility in order growth as well as hedge against the possible impacts of an economic downturn.
In Q2, we had good order growth across the board with the exception of the Power Systems division in Europe, where we didn’t match the 350-million dollar order we won in Q2 last year to link the Netherlands and the U.K. with an HVDC connection. Orders almost doubled in the Middle East and Africa, mainly because of demand in the oil and gas sector. Asia also continued to do well, mainly in China, where orders were up 19 percent in local currencies. The Americas recorded a solid increase in orders, including 16-percent local currency growth in the U.S.
Brazil and Canada also recorded good double-digit increases, driven by investements from the mining and minerals sectors.
As I mentioned, orders in emerging markets exceeded orders in our mature markets for the first time this quarter. This should come as no surprise given our strong local positions in high-growth markets like China, India and eastern Europe but there is still more to do. We can be even stronger in South America and in the Middle East and Africa, and have room to grow in mature markets like the U.S. or Japan. But overall, we are capturing the strong worldwide demand for technologies to deliver reliable power, increase productivity and save energy.
Again, there are plenty of organic growth opportunities for ABB and we are in the right markets with the right technologies to take advantage of them. Strong demand, favorable pricing, high factory loadings, low-cost sourcing and footprint initiatives have all contributed to our higher EBIT and EBIT margins.
This was an excellent quarter, with record orders, revenues and EBIT. We generated almost one billion dollars in cash from operations during the second quarter, despite the increased need for working capital to support growth. Our challenges for the remainder of the year are unchanged. Executing the backlog, on time and to our usual high standard of quality, remains priority Number One. Supporting this will be significant capital expenditures to ensure we have the capacity to deliver on the order backlog and investments in R&D to protect our leading technology positions. This is critical to further build our competitive advantages and capture the organic growth opportunities that lie ahead of us.
I would like to share now the outlook for the reminder of the year.
Our macro-economic assumptions for the rest of the year. This has not changed since we first presented it in February. We believe the demand for improvement to power infrastructure will continue in all regions. Energy efficiency, productivity and renewable energy will all remain key themes going forward, even in the event 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 going forward. 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. Based on this outlook, and barring an extended recession in the global economy, we confirm our expectations of growth rates in our the power-related activities for the full year 2008 of about 15-20 percent. As a result of the very satisfactory growth recorded in the first half of the year, we now expect full-year growth in our automation activities to be clearly above the 10 percent guidance we gave you in the first quarter.
With that, ladies and gentlemen, I’d like to thank you for your attention and open the line to questions.