Good morning, ladies and gentlemen.Thank you for joining our media call for the third quarter 2005 results.With me this morning is Michel Demaré, our chief financial officer.
ABB turned in a very strong third-quarter performance. Operational improvements and our lead position in key markets produced solid order and revenue growth and a group EBIT margin of 8.1 percent.
In view of the positive market conditions and the expected results from our strong focus on execution we’re on track to hit or exceed the top end of our 2005 group EBIT margin target.
Our earnings before interest and taxes increased more than 80 percent in the third quarter and net income rose to 188 million dollars, almost double the level of last year.
Our net income increased despite about 70 million dollars in non-operational charges from Discontinued operations and finance expense.
Cash flow improved as well, as did our net debt. We made further progress towards resolving the asbestos issue and in September, we announced our new strategic direction and medium-term targets to 2009.
So overall, it has been an eventful and very positive third quarter. The third quarter, as you know, is traditionally a quieter business quarter. That fact makes our Q3 results all the more remarkable.
Let me now turn to the results in more detail. End markets continued to develop very favorably for both divisions.
Orders were higher in most regions, and base orders increased at a good pace again, which supported our revenue growth.
Large orders also increased by almost 50 percent as we saw some large power systems projects awarded, mainly in the Middle East.
We continued to see the benefits of earlier cost reduction programs, we intensified sourcing from low-cost countries and we pushed through price increases to offset the cost of raw materials.
With higher revenues and a more competitive cost base, Group EBIT rose 81 percent to 458 million dollars in the quarter.
The Power Technologies divisions showed an 89-percent increase in EBIT while the Automation Technologies division continued its steady improvement, with EBIT up 21 percent.
I’ll come back to these divisions in more detail in a moment.
As a result, the Group’s EBIT margin in the quarter reached 8.1 percent compared to 5.1 percent a year ago.
Looking below the EBIT line, you will have seen that the loss from Discontinued operations increased this quarter. This is because we intend to divest our portfolio of financial leases in Finland.
Therefore, we moved this business to Discontinued operations and booked a charge of 26 million dollars for the anticipated loss on the sale.
Cash flow from operations also developed quite positively in the quarter and amounted to 387 million dollars.
This increase comes despite a negative impact of 246 million dollars from reduced securitization activities. Without this impact, cash flow from operations would have been more that 600 million dollars.
Net debt came in at under 900 million dollars, down from 1.2 billion dollars, thanks to our good cash flow in the quarter.
The repayment of maturing bonds in the third quarter reduced total debt and therefore also our gearing to 56 percent from 59 percent at the end of the second quarter.
Let me now briefly review the key operational developments from the third quarter.
In the Power Technologies division, we saw a 28-percent increase in orders in local currencies in the quarter.
Orders were higher in all regions, and base orders continued to grow in both business areas.
This indicates again that utilities continue to invest in replacing and upgrading their power transmission and distribution equipment.
Revenues rose 13 percent in local currencies, reflecting the steady increase in base orders, the positive impact from the large systems orders we received last year and higher service revenues.
As a result, EBIT in the division increased to 219 million dollars and the EBIT margin increased to 9.0 percent from 5.5 percent a year ago.
Included in EBIT this quarter is a 14-million dollar charge related to the consolidation program in the transformers business that we announced in June.
That brings the total charges for this program so far this year to 80 million dollars.
Moving to Automation Technologies, the division showed another good performance in the third quarter - in fact, its twelfth consecutive quarter of higher revenues and EBIT.
This is a reflection of continuing economic growth and industrial investment in most markets and confirms that we are still in a positive phase of the overall economic cycle.
Order growth in Automation Products and Process Automation more than made up for lower orders in Manufacturing Automation, our robotics business.
Total orders increased by 8 percent in local currencies.
Orders grew strongly in China and India. In Europe, orders were lower than the same period last year, when we booked a large order in Poland. Orders were flat in the Americas.
AT’s revenues grew 9 percent in local currencies, thanks to a stronger order backlog.
Operational improvements in all three business areas, but especially in Process Automation, contributed to a 21-percent increase in EBIT for the division in the third quarter.
AT’s EBIT margin now stands at 11 percent compared to 10 percent at this time last year.
Non-core activities also reported higher EBIT, mainly the result of further improvements in the oil, gas and petrochemicals business, and a smaller loss in our Building Systems business.
Corporate costs decreased as we continued to reduce spending at both the local level and at our Zurich head office.
We continued to move forward on the asbestos front.
We had a positive hearing on September 28th before the bankruptcy court in Pittsburgh.
Following that hearing, we submitted to the bankruptcy court a proposed confirmation order with respect to the plan.
This was done together with all the other parties to the revised plan of reorganization for our Combustion Engineering subsidiary.
We are now waiting for the court to issue the confirmation order, after which the plan would be submitted to the district court for final confirmation.
We cannot yet predict how long this will take. We hope we can finish the process in 2005, but it could also stretch into 2006.
We are also working in parallel on a pre-packaged Chapter 11 plan for ABB Lummus Global.
In a preliminary vote among claimants that was completed in September, 96 percent voted in favor of the plan.
As for the rest of 2005, the market outlook continues to be favorable. Our focus will continue to be on business execution including the transformer business consolidation, further cost migration, and improved project management.
To summarize, we had a good third quarter thanks to our internal efforts to lift profitability and our leading position in key high-growth markets.
Net income almost doubled and we strengthened our balance sheet further.
Cash flow was higher and we made progress on asbestos.
Finally, if markets continue to support us and with our focus on business execution, we’re on track to hit or exceed the top end of our 2005 group EBIT margin target.
And with that, I would like to open for questions.