Good morning, ladies and gentlemen.
Thank you for joining our media conference call for the first quarter 2007 results. With me as usual is Michel Demaré, our chief financial officer. I will start by presenting the Group results and say a few words about the divisions before answering your questions.
The first quarter of 2007 was a true success in almost every respect. Our operational improvements and global reach are paying off. We are positioned to capture the strong worldwide demand for technologies to deliver reliable power, increase productivity and save energy. All five divisions and every region, particularly Europe, contributed to our great start to the year.
The very strong demand that we experienced throughout 2006 has continued into 2007, resulting in orders of 8.6 billion dollars in the period, an increase of 20 percent in local currencies compared with Q1 of 2006. The worldwide market situation is excellent. In this quarter, demand picked up strongly in Europe, where markets in the east but also Germany, Spain and Italy contributed most to the increase. At the same time, demand in Asia and the Middle East remained strong but it is the Americas that had the strongest increase in orders during the first quarter, growing 24 percent in local currencies compared with the first quarter of 2006.
Our order backlog grew again in the period and stood at 18.5 billion dollars as of March 31.
The strong order intake from this and previous quarters contributed to an increase in revenues by 15 percent in local currencies to 6.2 billion dollars.
These figures reflect the fact that our businesses command leading technology and market positions in a period of high demand.
Energy is set to be one of the key challenges of the century as the economies of Asia, South America and other emerging regions continue to expand.
This represents a major opportunity for us, as the world leader in power transmission and distribution technology. Emerging markets will need to invest in building their power grids for years to come in order to meet their energy requirements.
More mature markets in Europe and North America, which have neglected power investments in the past, are also opportunities as they now begin to upgrade their aging power networks.
Globalization is another trend that is helping our business. As new markets continue to open up around the world, companies are exposed to more competition and pressure to increase productivity. This is where ABB’s competence to raise industrial productivity is a key asset.
And concern about climate change is raising interest in our energy-efficient technologies. Government legislation on carbon dioxide emissions is a reality or nearly so in many places already.
Many customers are not waiting to be forced into environmental compliance and are now taking measures to become more efficient and reduce their energy bill at the same time.
The support we are getting from the markets is of course very important, but the fact is that we are now much fitter than we were a few years ago and are better able to seize the opportunities offered by these market conditions.
Our structure is leaner and more focused on our expertise in power and automation technologies. We sold the remainder of our Building Systems business in early April and expect to conclude the sale of two power plants this quarter. We also announced that we took a decision to sell Lummus, which is now part of our Discontinued Operations. The first quarter results therefore do not include revenue of 237 million dollars from Lummus. The focus on power and automation has gone hand in hand with a focus on improving the execution of the projects we undertake so that we are capturing a lot more of the growth in our profits.
Earnings before interest and taxes increased 67 percent in the first quarter from a year earlier, to 822 million dollars. The EBIT margin is at 13.2 percent, the highest ABB has ever achieved. And net income is up by 163 percent to 537 million dollars. We are extremely proud of these results and pleased that every region and, above all, every division, contributed to the strong growth.
I’d like to look at the division results a bit more closely:
Power Products increased both orders and revenues by 35 percent in local currencies to 3.3 billion and 2.1 billion dollars respectively. Part of the increase is attributable to higher raw material costs that we have been able to pass on to our customers. Demand has been very strong for transformers and switchgear, resulting in higher capacity utilization in our factories. Operational improvements also helped to raise profits in the division in the first quarter. In the transformer business unit we have already reached the EBIT margin target set for 2009, namely 8%. The divisional EBIT margin increased to a very solid 15.4 percent.
Power Systems had a very strong increase in orders in the period to 1.8 billion dollars, a 30 percent increase helped in particular by demand from the Americas, Europe and Asia, especially India. Revenue growth was at 8 percent in local currencies. EBIT rose and the margin increased to 6.9 percent from 4.7 percent a year earlier.
The Automation Products division increased both orders and revenues by 16 percent, still in local currencies, reflecting favorable markets and solid demand. Orders rose to 2.4 billion dollars and revenues to 1.9 billion. The revenue growth and good capacity utilization led to a further increase in EBIT and in the EBIT margin, to a very attractive 16.3 percent.
The Process Automation division won fewer large orders in the first quarter of 2007 than a year earlier, but this was offset by higher base orders, resulting in a flat order development.
As you may remember from last year, order intake in this business can be volatile and depends on the timing of project awards so quarterly swings in either direction should not be taken as indicative of a trend. As a matter of fact we are still very confident regarding the outlook for this division. Revenues increased 6 percent to 1.4 billion dollars, reflecting the progress made on the execution of large systems orders from the backlog.
Finally for the divisions, Robotics is on the right track and I am very pleased that the business made a positive contribution to the Group results in all measures except revenue, which is still affected by the weak order backlog.
Orders rose 9 percent to 378 million dollars, reflecting an increase in demand from general industry that more than offset lower orders from the weak automotive sector.
EBIT and the EBIT margin improved, partly because last year’s figures were impacted by costs to streamline products and processes and costs related to a project.
The improvement efforts, however, are beginning to show positive results.
Turning back to figures for the Group the balance sheet improved further during the first quarter.
The conversion of most of our 2010 convertible bond into shares during the period resulted in a decline in our total debt by about 650 million dollars. As a result, our net cash rose to 2.3 billion dollars from 1.5 billion at the end of last year. This puts us in a comfortable position when it comes to pursuing possible acquisitions but it does not change what I said in February which is that we are looking for acquisitions that can help plug certain gaps in our portfolio and that we will remain very disciplined about what we bid for and at what price. And let’s face it, prices are very high at the moment.
The rest of the year looks positive. For now at least, we do not expect any significant change in the market situation we have enjoyed in recent months. We are in an unusually strong and long period of growth, and experience tells us it is certain to moderate at some point even if we don’t see the signs of that yet.
However, factors like the enduring demand for electricity, increasing productivity and mitigating the consequences of climate change contribute to the positive market environment even in the long term.
The profitability in Q1 was certainly helped by the absence of any major restructuring costs or other provisions. Nevertheless, as ABB continues to improve its operations we see further potential to maintain the good momentum in profitability. In a purely mathematical sense, it will become harder for us to sustain growth rates as the base from which these are calculated increases. Despite that, we remain confident and look forward to a successful rest of the year.
With that, ladies and gentlemen, I’ll open up now for questions.