ABB Ltd. will undertake a $350 million overhaul of its power-systems business to eliminate low-margin contracts in solar-energy and sewage as it follows competitor Siemens AG in purging costs.
Performance at the business has been below expectations, even with significant investments over the past three years, the Zurich-based company said today. Power systems will book $100 million of restructuring expenses in the fourth quarter.
“Power systems is not generating consistent returns at the level we expect - this has to change,” Chief Executive Officer Joe Hogan said on a call. “We are being more selective on projects, which also means raising prices.”
ABB and Siemens are reassessing the profitability of big-ticket grid projects as delays connecting offshore wind parks and price-competition from Asian rivals eat into margins. Siemens said Dec. 11 it will cut 1,900 job cuts in power transmission by 2015 as it seeks 1.1 billion euros ($1.4 billion) of savings.
“Power Systems has been the division with the lowest margins,” said Panagiotis Spiliopoulos, an analyst with Bank Vontobel in Zurich who has a buy rating on the stock. “We hence welcome this step and will review our estimates.”
ABB shares were little changed at 18.78 francs as of 4:06 p.m. in Zurich. They’ve gained 10 percent this year, giving the company a market value of 43 billion francs ($47 billion).
The world’s largest power-grid makers are grappling with issues tying offshore wind farms to the grid, which contributed to Munich-based Siemens cutting a profit goal earlier this year. Charges linked to ABB’s Dolwin I offshore wind connection may rise above the $50 million earlier forecast, Chief Financial Officer Michel Demare said on the call.
Hogan promised Oct. 25 to revive Power System’s flagging performance after saying the unit wouldn’t meet meet a medium-term operating margin target of 7 percent to 11 percent of sales this year as he forecast more project-related charges.
The world’s largest maker of power transformers expects $350 million less in earnings before interest and taxes in the fourth quarter as it scales down projects in markets from the Czech Republic to the Philippines, ABB spokesman Thomas Schmidt said by telephone.
ABB had previously pursued these orders as an opportunity to also sell its own motor-drives and control systems, he said. Many emerging markets contracts “depended on teams to execute contracts that didn’t have the experience or capability to do it,” Hogan said on the call. ABB will continue to look at projects if the risks are acceptable, Schmidt said.
ABB will pull out of risky projects dominated by sub-contractors and may exit this power systems segment in some countries altogether, Hogan said.
ABB raised the unit’s medium-term operating-margin target to 9 percent to 12 percent from 7 percent to 11 percent, and expects the division to reach the lower end of the new target by the fourth quarter of 2013. At the same time, it cut a sales growth target by 3 percentage points to 7 percent to 11 percent to reflect increased project selectivity.
Associated costs will be paid back within 2 1/2 years and the group’s 2015 targets remained unchanged, ABB said.