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The Key Takeaways From ABB’s Q2 Earnings

August 08, 2014 | About:

The power conglomerate, ABB (NYSE:ABB) reported its second quarter earnings on July 23, and though the second quarter was a better one for the company, it did miss on profit estimates which were significant from its growth perspective. Let’s read further to find the key takeaways from ABB’s second quarter.

A quick glance into the numbers

Revenue fell 1% with Power Products down 3% and Power Systems down 7% this quarter. The discreet automation and low voltage operations showed slight improvement signals, with 3% growth witnessed in each sector. Only 2% negativity was noticed in the Process Automation segment this quarter, in comparison to the similar quarter of last year.

Operational EBITDA declined 15%, missing analyst expectations by 10% and operating income went down 20% much below analyst expectations by 12%. Net profit also fell to $636 million, 17% down from the year-ago period mainly hit by depreciation and amortization.

On the contrary, the cash from operations swelled 64% to $888 million for the group from $543 million reported last year in the similar quarter. This upswing in operational cash was a bright spot in ABB’s earnings report.

Order intake remains a plus

This quarter, ABB reported 13% organic growth in orders, with a 7% increase in base organic orders and 70% rebound noticed in large orders. The continuous order growth has been seen in the Discreet Automation segment and the Process Automation segment which went up by 7% and 16% respectively. These segments were truly benefitted by the strength in the oil and gas industry as well as general industry demand that helped immensely in building the order book close to $10.6 billion.

The strong order intake has resulted in a positive book-to-bill ratio of 1.04x. The order book has shown mixed response from various geographies. In Europe, orders rose in Russia, Germany and the Netherlands and declined in Norway, the U.K. and France. The large power transmission order of $400 million for Maritime Link power project bagged in Canada helped to sustain the strong order development in North America. Also, order intake in U.S. exhibited double digit growth. Remarkable enough, China led the order race in Asia and showed double digit growth in the Power Products and Discrete Automation segment.

Source: ABB Presentation

Even the CEO, Ulrich Spiesshofer, stressed on the importance of U.S. and China during the earnings call stating –“Our focused actions are paying off and support overall increased order momentum. In the second quarter we saw encouraging growth in our two largest markets, the U.S. and China.”

China is the focal point

ABB realized the huge potential in the Chinese market back in 2005 when it opened its research unit at Beijing headquarters with a branch in Shanghai. By June 2014, ABB has already built a strong network in 100 Tier 2 and Tier 3 cities and has covered around 500 cities along with its partners.

This year in May, ABB did hold the 6th annual “ABB Automation World” in Guangzhou where it presented to more than 4,000 global customers leading automation solutions. Spiesshofer has been proud of ABB’s strategies for China being in line with the customer requirements. He has further added that industrial transformation and urbanization in China have served as the major economic drivers.

ABB expects to expand in newer segments with over 500 standard service products, from spare parts to energy efficiency and predictive maintenance. The company hopes to have over 200 service locations in China and above 2,000 dedicated staff. ABB will also launch its PCS100 medium voltage uninterruptible power supply series claimed to be 99.5% efficient first in China, and then plan a complete global launch of the new product.

Cash position is rock solid

ABB has successfully generated cash from operations which was up by more than $300 million this quarter. The net working capital (NWC) for the last three months ended June declined by $7 million which means that ABB has been operationally highly efficient.

Through the NWC, ABB was able to generate cash for its shareholders which showed an increase by 64%, even though the revenue had slid 1% this quarter. Also, the company is taking up cost-cutting initiatives to hold its cash position firm.

On September 9 this year, ABB would communicate its new financial targets and priorities for value creation and capital allocation to its shareholders. Spiesshofer states that the management is confident that such balanced growth would positively impact stockholders’ wealth.

Final conclusion

ABB’s second quarter might not have shown all the bright numbers, but in the long term the company seems well-positioned. The strong performance in the U.S., Europe and China do serve as positive economic indicators impacting its revenue chart in the next quarters. The management’s key strategies of market penetration, introduction of new products and expansion in attractive market segments augurs well for ABB. So we need to stay tuned and keep watching.

About the author:

We are a group of analysts exploring and analyzing different domains of business and writing reviews based on information available in public domain web portals. We do not hold any stock or investment position in any of the companies that we write for.

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