ABB Chief to Hone Power-Systems Unit to Stem Margin Declines
ABB Ltd. (ABBN) Chief Executive Officer Joe Hogan said he’s working to improve the power-grid division’s performance following delays in connecting a German offshore wind farm.
The power-systems division booked a $20 million charge and won’t meet a medium-term operating-margin target of 7 percent to 11 percent of sales this year, Zurich-based ABB said today. The unit, which may post a charge of as much as $50 million in the fourth quarter, will be “back in the middle” of the margin target range in 2013, Hogan said on a conference call.
An economic contraction stemming from the sovereign-debt crisis in countries using the euro has held back earnings across the engineering industry, including at Siemens AG (SIE) and Schneider Electric SA. (SU) Hogan has instigated a savings program at ABB’s low-voltage products unit and is being more selective on projects. The CEO predicted today that ABB will exceed a savings plan of $1 billion this year and is targeting a similar goal next year.
“I get concerned that a lot of the macroeconomic signals point down right now,” Hogan said in a video presentation of earnings. “One area of concern is power systems. I expect to see better performance out of that business in the upcoming quarters.”
ABB dropped as much as 2 percent to 17.25 Swiss francs, the lowest intraday price since Sept. 7, and traded 0.9 percent lower at 3:21 p.m. in Zurich. That values the engineering company at 40.4 billion francs ($43 billion). Siemens stock has gained 4.2 percent in 2012, while Schneider Electric has jumped 19 percent.
The power-systems division’s third-quarter earnings before interest, taxes, depreciation and amortization fell to 5.9 percent of revenue from 9.7 percent a year earlier.
Delays to the DolWin 1 offshore wind project led to the third-quarter charge at the business, ABB said in a presentation. The manufacturer has made some “needed” management and organization changes to the unit to improve performance, Hogan said.
Higher-priced large power-transformer orders should show up in sales during 2013, replacing a backlog of lower-priced contracts that ABB is working through, Hogan said.
Third-quarter net income fell 4 percent to $759 million, ABB said. Analysts predicted profit of $738.2 million. Earnings before interest and taxes fell to $1.14 billion from $1.22 billion, short of an analyst target of $1.17 billion. Orders decreased 5 percent to $9.3 billion.
The difference between profit and what analysts were predicting is “modest,” yet power systems and a more negative forecast relative to the second quarter are disappointing developments, Andreas Willi, a London-based analyst at JPMorgan Chase & Co., said in a note.
“We expect some slight downward revision to estimates due to power systems,” said Takis Spiliopoulos, an analyst at Bank Vontobel in Zurich. “However, our confidence level remains high that the first quarter has been the trough in terms of margins.”
Hogan aims for a greater portion of sales from automation and service businesses as uncertainty over wind-farms subsidies threatens new power orders in Europe and the U.S. ABB and Siemens are grappling with issues connecting wind farms to the grid, which contributed to the Munich-based competitor cutting a profit goal earlier this year.
ABB will closely watch economic developments in China, the U.S. and western Europe in coming quarters, Hogan said. Base orders for products under $15 million make up most of ABB’s sales, which increased 4 percent to $9.75 billion.
Hogan, who has led ABB since 2008, reiterated targets for 2015, saying expansion in the U.S. is “paying off” and additional revenue from the acquisition of Thomas & Betts Corp. give ABB reason for “cautious optimism.” At the same time, the stronger U.S. currency cut profit by $100 million in the third quarter.
Cost savings in the first nine months of the year totaled about $820 million. ABB has signaled a temporary freeze on new takeovers until next year as the company digests $10 billion of acquisitions since 2010. The acquisitions of Baldor Electric Co. and Thomas & Betts have boosted the low-voltage and automation units. ABB has said it may spend as much as $10 billion on acquisitions by 2015, mostly in automation.
No major deals are “imminent,” Hogan said today. ABB’s choice of Chief Financial Officer to replace Michael Demare, who is leaving to become chairman of Syngenta AG (SYNN), will be “very clear” in the next few weeks, he said.
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