Good morning, ladies and gentlemen.
Thank you for joining our conference call for the third quarter 2008 results. With me today is Michel Demaré, our Chief Financial Officer. Over the next few minutes, I will provide a brief assessment of the financial results before discussing the outlook.
I’m delighted to have a strong set of results to present on my first quarterly conference call with you. ABB had a very good third quarter, with an excellent operational performance. Our solid revenue, earnings and cash flow growth in the third quarter demonstrate our ability to successfully execute across all of our businesses.
Revenue remained positive in most markets and we continue to benefit from long-term trends to expand and upgrade power infrastructure, improve industrial productivity and lower environmental impact. We reported double-digit revenue and EBIT growth in four out of five divisions, led by Power Products and Automation Products and with the U.S. and Asia leading the growth. We increased EBIT despite a $100-million negative impact from hedge accounting, or the equivalent of 1.1 percent. On that basis, our true operating margin was 15.8 percent and we converted more earnings to the bottom line.
Net income increased 26 percent to $921 million, an increase of 16 percent in local currencies, and we generated in excess of a billion dollars in cash from operations. As a result, our balance sheet remains rock solid.
Orders were basically flat in the quarter, but before I get into the orders in a bit more detail let me touch on some of the highlights of our divisional performance in the quarter.
For Power Products, the story is the continued very strong market demand and the excellent execution of the order backlog to generate 20-percent local-currency revenue growth and almost a half a billion in cash flow. Their earnings were negatively impacted by the valuation of forex and commodity hedging activities in the quarter which reduced their margin by about 1.5 percentage points.
Power Systems orders are down by a third despite good growth in Asia and the Americas. This is the fourth consecutive quarter where Power Systems had either single digit or negative order growth.
However, we still have the largest tender backlog in the history of the business. The other point to note is the EBIT margin which, as in Power Products, was hit by hedge accounting about a one percentage point negative impact. Adjusted for that impact, the margin is closer to the levels we said we expected to see in the second half of this year.
It was another good performance for Automation Products in Q3. Orders were strongly higher in every region except Europe, where they were flat in local currencies. Europe is also AP’s largest exposure to the construction industry, which remained weak. Their 12-percent local-currency revenue growth reflects the successful execution of the order backlog. More than 500 million dollars in cash from operations during the quarter is another very positive result.
Process Automation was a mixed bag on orders, with marine, turbocharging and after-sales service growing but largely offset by lower large orders in oil and gas and metals. Revenues grew at a record pace in the quarter, up 20 percent in local currencies, thanks to good execution of the backlog as well as higher product and service sales. The margin continued to increase, reflecting the ongoing improvements in project execution.
Finally, Robotics achieved modest growth in orders, despite very weak automotive markets. That reflects our successful efforts to diversify our customer base into general industry. Also, Asian orders again grew strongly as we continued to build our presence in that dynamic market. That helped to offset weaker markets in Europe and North America. Revenue and EBIT developed on target as new products and operational improvements paid off.
Clearly, everyone is wondering about the impact of recent events in the global financial market. Overall, Q3 was the first quarter out of the last 11 where we failed to post a double-digit increase in orders received. Orders were up 7 percent in dollar terms and 1 percent in local currencies. We saw some further weakening in our short-cycle businesses in Q3, related mainly to construction. In the U.S., for example, we saw further declines in orders for some construction-related distribution transformers. Orders for automation products used in building ventilation and heating systems in the U.S. also decreased slightly.
However, both Power Products and Automation Products could make up for those decreases with higher orders in most other businesses in the U.S. market with total orders in the US up over 30%.
In Europe, orders for wiring accessories used in the construction industry were significantly lower in the U.K. and Ireland, and lower in Germany, Switzerland and Austria.
Again, however, we were able to make up for that decrease with stronger orders for drives and other energy-saving products which allowed AP to drive a 12% orders gain
So total orders for the products divisions grew at a double-digit pace.
Orders in our systems businesses were down overall due to a lower volume of large order closes.
Part of this decrease can be attributed to a challenging comparison with a strong quarter last year …
As I said earlier, Power Systems still has the largest tender backlog in the history of the business …
… but with the current economic crisis we think that many customers will have to confirm their financing requirements before moving forward with these large projects.
As far as the geographic split for orders is concerned, we had excellent growth in the Americas, up a third in local currencies, mainly on the strength of power investments to upgrade grids, refurbish substations and replace aging equipment. We grew our orders at a healthy rate in the U.S., despite the tougher economic environment that has emerged there in recent quarters. That was mainly thanks to a sharp order increase in both power divisions, confirming that utilities continue to invest in upgrading their grids. Orders also increased in Automation Products and Process Automation in the U.S. The 20-percent growth we saw in Asia was mainly on the automation side, with automation orders up 30 percent in local currencies. I’ve already talked about order development in Europe related to large orders. It was a similar picture in the Middle East, where strong growth in the two product divisions couldn’t offset lower large orders, mainly in oil and gas and the minerals business.
About two-thirds of our portfolio serves either the power utility or the process industry markets where demand is driven primarily by longer-term trends such as emerging market growth and the need to refurbish and upgrade power infrastructure also in the mature markets.
Nevertheless, shorter-cycle markets are feeling some recessionary pressure. That impacts primarily Automation Products and Robotics. We’re also seeing some smaller industrial customers who are being squeezed by high input costs and concerns about financing. That has resulted in some delays in taking decisions on their capital expenditure programs. As always, the visibility on timing of large project awards is low and the additional uncertainty created by recent market events makes that only more difficult. It’s too early to say exactly how this will affect our later-cycle businesses but we can say with confidence that we are well positioned to handle tougher markets.
On the positive side, we’ve seen that our diverse end markets and regional scope have provided us with some buffer against volatile economic conditions. Strength in North America in Q3 and continued growth in emerging markets helped offset weaker order growth in Europe and the Middle East. Demand for power equipment remains robust in every region. And on the automation side, orders for energy-efficient equipment such as motors and drives continue to grow. In addition, we have a 27-billion order backlog that will support revenue growth in 2009 and beyond.
Our balance sheet is strong and we have the cash to easily pay down our debt as well as grow the business further. Our cost base continues to improve through measures such as low-cost sourcing, footprint migration, control of administrative costs and measures to streamline internal processes. We’ll drive further growth in our service business, taking advantage of the huge opportunities in our market-leading installed base. And we will continue to support our R&D investments to make sure that we can build our technology lead and the competitive advantage we have in this area.
In summary, Q3 was a great operational performance, with revenue, EBIT and cash flow all strongly higher. It is the strongest third quarter in the history of the company in terms of profitability.
We continued to improve our cost competitiveness. Our service business grew well in the quarter, which is a trend I want to see continue.
Our order intake was impacted by a lack of large orders and the continued weakness in the construction sector but showed continued strength in the product divisions. We have the balance sheet, global diversity and further cost potentials that make us confident in our ability to deal with whatever challenges the future may bring. With our strong third-quarter performance, we are on target to meet our full-year growth guidance.
With that, ladies and gentlemen, I’d like to thank you for your attention.