ABB Profit Drops 21% Amid China Slowdown, Drop in Oil Prices

  • Third quarter results reflect challenging markets, CEO says
  • Profitability improved 50 basis points on cost measures

ABB Ltd, the power-grid maker that has activist Cevian Capital as a shareholder, said third-quarter margins improved on cost cutting even as profit dropped 21 percent amid a slowdown in China and feeble demand from oil and gas customers.

Net income declined to $577 million, the Oerlikon, Switzerland-based company said in a statement on Wednesday. Earnings before interest, taxes and amortization fell 9 percent to $1.08 billion while a savings push lifted the operating ebitda margin 50 basis points to 12.5 percent.

“ABB is fighting an uphill battle on several fronts,” said Panagiotis
Spiliopoulos, an analyst at Vontobel Holding AG. Challenges include slowing growth in emerging markets, sustained soft commodity prices, uneven industrial production growth and currency volatility.

Shares rose as much as 2.9 percent before paring gains to trade at 17.63 Swiss francs at 2:08 p.m. in Zurich. The shares have dropped 17 percent since the start of the year.

Like peers General Electric Co., Rexel SA and Colfax Corp, ABB is grappling with a weakening Chinese economy and a U.S. oil and gas industry that’s curbing investment after crude prices slumped to below $50 a barrel. While the Swiss company has bolstered orders with a high-voltage cable contract in China, it’s the backbone of smaller sub-$15 million bookings that continue to languish, falling 3 percent on a like-for-like basis. 

Mixed Picture in U.S.

Orders declined in all but two divisions in the third quarter, with the steepest fall recorded in the process automation division that supplies controls and equipment to the oil, gas and mining industries.

“It’s a mixed picture in the U.S. oil and gas industry,” Chief Executive Officer Ulrich Spiesshofer said on a call with journalists. “It will stay subdued on the upstream side. On the downstream side, the reallocation of subsidies might open certain opportunities for us going forward.”

A mining industry downturn is bottoming out, although demand will remain weak for some time as U.S. customers remain cautious about investing, the CEO said.

ABB earned almost one fifth of its total revenues in the U.S. in 2014, while China contributed 13 percent of annual sales.

The CEO will also be looking to satisfy Cevian Capital, which has so far said it’s in “listening mode.” He’s already announced a portfolio review to zero in on high growth businesses and make $1 billion in added cost cuts to raise profitability.

The restructuring plan is the “right approach,” Vontobel’s Spiliopoulos said.

ABB’s portfolio review in the newly-formed Power Grids division is on track and will be completed in 2016, Spiesshofer said. The company will “not be pushed into or rushed” in this process, he said.

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