ABB Profit Meets Estimates as Savings Offset Weaker Pricing

ABB Profit Meets Estimates as Savings Offset Weaker Pricing
The logo of ABB AG sits on display above the company's offices in Baden, Switzerland. Photographer: Gianluca Colla/Bloomberg

ABB Ltd., the world’s largest maker of power-distribution equipment, reported first-quarter profit that matched analysts’ estimates after pushing through cost cuts to counter weaker pricing.

Earnings before interest and taxes rose to $1.05 billion from $1.01 billion a year earlier, Zurich-based ABB said today. Analysts predicted $1.04 billion. Orders increased 2 percent in local currencies, with the company highlighting improved profitability in some businesses. The stock fell as much as 4.2 percent after ABB said Chinese orders declined.

The Swiss manufacturer of factory robots and transformers is working through a near $30 billion backlog of orders and riding out a slowdown in purchases of big-ticket items like power grids. Chief Executive Officer Joe Hogan has also forged ahead with $10 billion in acquisitions since the start of 2010, outspending competitors Siemens AG and Schneider Electric SA.

“Price pressure and unfavorable mix present a headwind,” said Mats Liss, an analyst at Swedbank. “It is expected to disappear gradually. Sales are expected to grow within its early cycle business; the mid- to later cycle will be supported by the order backlog.”

Sales rose 6 percent to $8.9 billion, also in line with estimates. Hogan warned investors in February that price pressure and a change in order patterns would hurt margins in the first quarter. To counter that trend, ABB is implementing $1 billion of cost savings in 2012.

China Slowdown

ABB shares fell as much as 4.2 percent after the company said orders declined in Asia, mainly in China, citing “weaker demand in key end markets, such as construction and transportation,” and an unfavorable comparison after booking several large power orders worth more than $300 million a year earlier.

The stock traded 3.8 percent lower at 17.68 francs at 9:07 a.m. in Zurich.

More than half of ABB’s profitability decline from the first quarter of 2011 was attributable to the challenging environment in China, the company said.

“The Chinese transportation market may pick up from the second half, as projects which were delayed by a change in government are re-started. The construction market is more worrying,” Zuercher Kantonalbank analyst Richard Frei said by phone.

“ABB is still on target to meet its operational Ebitda targets. The business goals have not changed, but they might reach the lower end of those targets,” Frei said.

Momentum Building

“We saw improved profitability in several businesses compared to the end of last year, and we intend to build on that momentum to tap the many opportunities we see for profitable growth over the rest of the year,” Hogan said in the release.

There are clearer signs of recovery in North American markets, though budgetary restraints are hampering demand in nations like Italy and Spain, ABB said. Base orders, valued at below $15 million, increased 4 percent. By contrast, large orders decreased 11 percent, ABB said.

ABB’s view mirrors that of Schneider Electric SA, which earlier this month said the European debt crisis is weighing on sales. Schneider reported a better-than-expected 9.4 percent gain in first-quarter revenue and predicted an improvement in western European markets later this year. Siemens AG, Europe’s largest engineering company, lowered its full-year guidance today after booking charges on offshore wind-power projects.

American-born Hogan, 54, joined the company in 2008 from General Electric Co. with a track record in mergers and acquisitions. Hogan has said that while the company must digest its recent purchases, the company still has capacity for more deals.

Software, Low Voltage

The bulk of Hogan’s acquisition spending has centered on the U.S. and markets such as software, helping the company offset pricing pressure in power transmission and distribution gear. ABB announced in January plans to acquire low-voltage equipment maker Thomas & Betts Corp. for about $3.7 billion, giving it a larger U.S. customer-base and new revenue from low-voltage products.

ABB’s cash flow in the quarter was weaker than expected, Swedbank’s Liss said in a note today. The company reported a decline in its net cash position to $1.4 billion from $1.8 billion.

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