2005 fourth quarter and full-year results

Transcription

1 Fred Kindle President and Chief Executive Officer Michel Demaré Chief Financial Officer 2005 fourth quarter and full-year results Zurich, 16 February 2006

2 Agenda Summary of 2005 fullyear and Q4 results Fred Kindle, CEO Financial overview Michel Demaré, CFO A look ahead Fred Kindle, CEO Q&A Fred Kindle Michel Demaré Dinesh Paliwal Gary Steel 2

3 Successfully moved into a phase of profitable growth Summary of 2005 full-year and Q4 results Financial performance A look ahead Q&A 3

4 Key operational developments in 2005 Strong organic order and revenue growth in EBIT more than $1.7 bn and EBIT margin at 7.8% Net income at $735 million - 1st net profit since 2000; adjusted for asbestos accounting, net income at $858 million Cash flow* tops $1 bn despite securitization and pension effects Non-core activities profitable for the year $393 mill corporate costs ahead of target Transformer restructuring well under way 5-year strategic plan launched New execution-focused organization implemented 4 * Cash flow from operating activities

5 Key financial developments in 2005 Return on capital employed* at 14% Net debt cut by more than 50 percent to ca. $500 million Unfunded pension liability reduced to $837 million from $1,451 million Securitization reduced to level near $300 million Divestments continued (e.g., Finnish lease portfolio, South American Equity Venture investment, most of power lines) First dividend proposal since 2000: CHF 0.12 per share Progress on asbestos Rating agencies lift outlook to positive 5 * after tax

6 Summary of 2005 full-year results ($ million) Nominal Local Orders received 23,581 21,586 9% 8% Revenues 22,442 20,610 9% 8% EBIT 1,742 1,046 67% EBIT margin (%) 7.8% 5.1% Loss from discontinued operations (143) (439) Net income / (loss) 735 (35) Cash flow from operating activities 1, % Net debt (at Dec. 31) 508 1,143 Change Strong top-line growth, all organic core divisions double-digit order growth EBIT and EBIT margin growth show significant progress in business execution, despite $123-million negative impact from transformer consolidation Strong turnaround in net income despite non-operational issues (e.g., asbestos shares) Cash flow at an exceptional level when adjusted for securitization and discretionary pension contributions 6

7 Divisional summary full-year 2005 ($ million) Orders received* Revenues* EBIT EBIT margin Power Technologies 10,714 (+14%) 9,784 (+11%) 789 (+30%) 8.1% Automation Technologies 12,675 (+11%) 12,161 (+9%) 1,312 (+28%) 10.8% Non-core activities 34 vs (62) in 2004 Corporate (393) vs (523) in 2004 * Percentage change in local currencies Lead positions in fast-growing markets lifted top line significantly Operational improvements resulted in higher EBIT margins Non-core activities no longer a drain on Group EBIT Corporate costs on track to reach 2006 year-end target of $350 million 7

8 Exceeded our 2005 targets on a strong second half EBIT margins Original targets Revised targets 2005 Actual 2005 ABB Group 7.7% % 7.8% Power Technologies 10.0% % 8.1% Automation Technologies 10.7% 10.7% 10.8% Revenue growth 3 ABB Group 4.0% 6.0% Power Technologies 5.3% 6.9% Automation Technologies 3.3% 5.9% Balance sheet Gross debt $4 bn $4.1 bn Gearing 50% 52% Non-core activities break even $34 million Corporate costs $450 mill or less $393 million 8 1 Set in November 2002; 2 Revised in 2004 to reflect reclassification of downstream oil and gas business into continuing operations; 3 Compound average growth rate, excluding major divestitures and acquisitions, local currencies

9 Orders by region 2005 vs 2004 Orders received in $ million and percent change, nominal Europe 11,006 10,933 Unchg. Americas 3, % 4, ,980 Asia +16% 5, Middle East and Africa 1, % 2, Non-core activities Automation Technologies Power Technologies

10 Shift in geographic order mix away from Europe Share of total orders received (nominal) 2004 vs 2005 Asia Middle East & Africa 23% 9% 51% Europe Asia Middle East & Africa 24% 10% 47% Europe 17% 19% Americas 2004 $21,586 million Americas 2005 $23,581 million 10

11 Key developments in Q Top-line growth continues Q3 trend, with combined orders from the two divisions up 19%* (12%**) and revenues up 12%* (8%**) Group EBIT more than doubled, despite transformer consolidation charges of $43 million Net income at $222 million despite $72-million expense from markto-market accounting of asbestos shares Stable cash flow when adjusted for discretionary reduced securitization and higher discretionary pension funding (total negative impact of ca. $210 million) Positive asbestos ruling in December from U.S. Bankruptcy Court, District Court date set for Feb. 28, * local currency change ** (in US$)

12 Summary of 2005 Q4 results ($ million) Q4 05 Q4 04 Change Nominal Local Orders received 5,571 5,200 7% 14% Revenues 6,062 5,937 2% 7% EBIT % EBIT margin (%) 8.6% 4.2% Loss from discontinued operations (63) (309) Net income / (loss) 222 (223) Cash flow from operating activities Market growth maintained positive Q3 trend DiscOps loss in Q4 05 includes $72-million expense to account for asbestos-reserved ABB shares; Q4 04 includes $223-million asbestos provision Cash flow decline reflects higher discretionary pension funding and further reduction in securitization 12

13 Divisional summary Q ($ million) Orders received* Revenues* EBIT EBIT margin Power Technologies 2,587 (+23%) 2,875 (+16%) 271 (+64%) 9.4% Automation Technologies 2,925 (+15%) 3,266 (+9%) 349 (+25%) 10.7% Non-core activities 24 vs (35) in Q4 04 Corporate (124) vs (159) in Q4 04 * Percentage change in local currencies PT showed a clear EBIT improvement and an EBIT margin almost 3% higher than Q4 04, despite a $43-million charge for transformer consolidation Volumes, factory loading and project selection lifted AT EBIT Significant operational improvements in oil and gas and Building Systems led to profit in Non-core Lower Corporate costs made a major contribution to improved group profitability 13

14 Orders by region Q vs Q Orders received in $ million and percent change, nominal Europe 2,537 2,564 Unchg. Americas 998 1,002 Unchg. Q4 04 Q4 05 Q4 04 Q4 05 Middle East and Africa % Asia 1, % 1,380 Q4 04 Q4 05 Non-core activities Automation Technologies Power Technologies Q4 04 Q

15 Asia again led geographic shift in order mix Share of total orders received (nominal) Q4 04 vs Q4 05 Asia Middle East & Africa 21% 11% 49% Europe Asia Middle East & Africa 25% 11% 46% Europe 19% 18% Americas Q4 04 $5,200 million Americas Q4 05 $5,571 million 15

16 Innovation key to competitive advantage Total 2005 R&D and order-related development spend in two divisions and corporate of ca. $960 mill 6,000 researchers and developers worldwide Recent cost and productivity enhancing innovations: PSGuard wide area monitoring to prevent blackouts Fibre optic high-current DC sensor for industry World s 1st offshore platform powered from shore using HVDC Light, new high-voltage motors, no transformer required on platform 16

17 Update on asbestos ABB s revised Chapter 11 Plan of Reorganization for U.S. subsidiary Combustion Engineering approved Dec. 19, 2005 by U.S. Bankruptcy Court, with no appeals filed District Court hearing date set for Feb. 28, 2006 Judge has indicated he will issue confirmation on that date if no objections filed by Feb. 21 Ruling to be followed by 30-day appeals period Total provision remaining on balance sheet = $1,128 million Separate solution being considered for ABB Lummus Global Inc. Senate approval of asbestos legislation a positive sign, but many hurdles remain 17

18 2005 Q4 and full-year summary Power Technologies $ millions Q4 05 Q4 04 Change Change Nominal Local Nominal Local Orders 2,587 2,208 17% 23% 10,714 9,304 15% 14% Revenues 2,875 2,550 13% 16% 9,784 8,675 13% 11% EBIT % % EBIT margin 9.4% 6.5% 8.1% 7.0% Cash flow from ops % % Double-digit order and revenue growth, with strongest demand in Asia and Middle East; product orders up in the U.S.; European growth still modest but improved in H2 EBIT margins higher in both business areas on operational and productivity improvements, higher factory loading/capacity utilization, and better project selection and execution; 64% improvement in Q4 vs year-earlier period EBIT includes transformer consolidation charges of $123 million (Q4: $43 million) Full-year cash flow up on stronger earnings; Q4 lower than same quarter in 2004 due to more even distribution of project milestone payments over the year 18

19 2005 Q4 and full-year summary Automation Technologies $ millions Q4 05 Q4 04 Change Change Nominal Local Nominal Local Orders 2,925 2,715 8% 15% 12,675 11,301 12% 11% Revenues 3,266 3,158 3% 9% 12,161 11,000 11% 9% EBIT % 1,312 1,023 28% EBIT margin 10.7% 8.8% 10.8% 9.3% Cash flow from ops % % Strong markets in 2005 supported higher orders and revenues, with growth in most industrial sectors, led by marine and minerals; orders up in all regions except Middle East, where several large orders were booked in 2004 Q4 was 13th straight quarter of higher revenues and EBIT EBIT lifted by higher factory loading in Automation Products and better project selection and execution in Process Automation; Manufacturing Automation EBIT lower due to restructuring costs Cash flow impacted by a negative $386 million from reduced securitization (Q4: $66 million); higher full-year earnings offset by higher working capital requirements to support growth 19

20 Contents Summary of 2005 Q4 and full-year results Financial performance A look ahead Q&A 20

21 Non-core and Corporate EBIT ($ million) Q4 05 Q Oil, gas and petrochemicals 12 (8) 49 (4) Building Systems (5) (23) (37) (70) Equity Ventures Other (16) (26) (47) (57) Total Non-core activities 24 (35) 34 (62) Headquarters / Stewardship (95) (135) (304) (438) Research and development (19) (24) (90) (91) Other (10) Total Corporate (124) (159) (393) (523) Turnaround of OGP leads to a profit of $49 million Building Systems losses reduced despite further restructuring Stable returns from Equity Ventures, including gain on sale of South American power plant investment (Termobahia) 21

22 Further reductions in Corporate costs expected Corporate costs , $ millions $ mill Target: annualized run rate of $350 million by end of

23 Clearer business focus, higher EBIT Steadily reducing profit drain from Non-core activities and Corporate $2,135 2,000 Noncore Corp -$393 $1,631 EBIT contribution ($ mill.) 1,500 1, $946 AT Corp -$747 $1,333 AT Corp -$976 AT Corp Noncore Noncore Noncore -$585 AT 0 PT ABB PT ABB PT ABB PT ABB

24 Below the EBIT line ($ million) Q4 05 Q EBIT ,742 1,046 Finance net (49) (62) (246) (209) Provision for taxes (134) (65) (482) (331) Minority interest (47) (37) (131) (102) Income from continuing operations Higher full-year finance net caused by a number of one-off items: litigation-related interest cost, bond repurchases, replacement of credit facility, gain on sale of financial assets Tax rate for 2005 at 32% Minority interest continues to grow, reflecting strong earnings from JVs and non-wholly-owned subsidiaries in emerging markets 24

25 Discontinued operations Net income impact ($ million) Q4 05 Q Income from continuing operations Asbestos (78) (223) (133) (264) Power lines 0 (47) (9) (73) Finnish leasing portfolio (6) 0 (28) 22 Other 21 (39) 27 (124) Income (loss) from discontinued operations (63) (309) (143) (439) Changes in acct. princ. net of taxes (5) (5) Net income (loss) 222 (223) 735 (35) 2005 asbestos expense mainly reflects the mark-to-market of the shares reserved for the asbestos trust 2004 asbestos expense included additional provision of $232 million Power lines units in South America and Africa divested in 2005 Finnish lease portfolio divested in 2005, transaction loss incl. in 2005 results 2005 Other includes a gain on the disposal of a valves unit in Japan; 2004 loss related to divestments of reinsurance and upstream oil and gas 25

26 Cash flow from operating activities Cash provided by operating activities Cash (used)/provided by Non-core and Corp.* Cash flow from operating activities in core divisions ($ million) 777 (82) (84) (378) (686) 902 Q4 05 Q cash flow includes negative $489 million from reduced securitization and ca. $130 million from higher discretionary pension funding 26 * incl. Treasury activities

27 2005: Strengthening ABB s financial foundations Higher operating cash flows used mainly to reduce ABB s financial obligations (on- and off-balance sheet) Divestments were continued, e.g., Finnish lease portfolio, Termobahia, other non-core and financial assets Repayment of two maturing bonds ($384 million) and repurchase of CHF 390 million Swiss franc bonds Securitization obligations reduced by $600 million Discretionary pension funding of ca. $400 million Leasing obligations winding down New $2 bn credit facility signed in July at investment-grade terms Rating agencies lifted outlook to positive 27

28 Key financial data: On the way to investment grade Gearing 82% 87% 71% 63% Net debt 52% 6,033 4, Equity/Total assets 10% 7% 4% 16% 11% MUSD 2,444 1,

29 Optimize off balance sheet obligations MUSD Total gross obligations 1 15,000 12,500 10,000 7,500 5,000 Leases Pensions Securitization Total Debt Unfunded pension liabilities 1,680 1, end 03 end 04 end 05 Securitized receivables (global and local securitization programs) 2, end 03 end 04 end Total gross obligations = Total debt + securitization funding + pension underfunding + total future lease payment obligations

30 Return on capital employed ROCE 3% 8% 14% WACC EBIT 1,742 Capital employed 8,089 8,217 8,444 1, after tax 2 Weighted average cost of capital

31 Dividend recommendation ABB Ltd Board of Directors proposes a dividend for 2005 of CHF 0.12 per share First dividend proposal since fiscal year 2000 Based on current share count and year-end 2005 exchange rate, the proposal represents 26% of ABB s 2005 net income Subject to approval by Annual General Meeting on May 4, 2006 Assuming approval, the ex-dividend date would be May 9,

32 Financial strategy 2006 Continue 2005 strategy: Opportunistic debt reduction Discretionary pension funding Optimize off-balance sheet obligations Increase focus on balance sheet structure, promote ABB to the first league Reduce net finance expense Extend maturities of debt portfolio Continue securing flexible sources of financing and recover investment grade status in

33 Contents Summary of 2005 Q4 and full-year results Financial performance A look ahead Q&A 33

34 2005: Starting the profitable growth phase * 10% 30,000 8% Revenues in $ million 20,000 10,000 6% 4% 2% EBIT margin (% revenues) % Post-merger acquisition drive New Economyrelated portfolio transactions Crisis and Turnaround 34 Source: and as per respective annual reports; as per 1997 annual report; 2000 to 2004 as per the 2004 Form 20-F filing with the U.S. Securities and Exchange Commission. * 1999 EBIT includes major gains from divestitures

35 2005: Starting the profitable growth phase 30,000 * Profitable growth 10% 8% Revenues in $ million 20,000 10,000 6% 4% 2% EBIT margin (% revenues) % Post-merger acquisition drive New Economyrelated portfolio transactions Crisis and Turnaround 35 Source: and as per respective annual reports; as per 1997 annual report; 2000 to 2004 as per the 2004 Form 20-F filing with the U.S. Securities and Exchange Commission. * 1999 EBIT includes major gains from divestitures

36 Shifting focus in value creation Value Creation Growth Operating Margin Capital Efficiency Credibility/ Consistency Focus 1990s: Superior growth through acquisitions Operating profit propped up by nonoperational items Very high debt leverage to drive ROE Extreme decentralization as corporate architecture Focus : Drive operating margin, consistent EPS growth Maintain organic growth momentum Improve capital efficiency via operating measures Disciplined acquisitions approach Focus corporate architecture on execution 36

37 Shifting focus in value creation Value Creation Growth Operating Margin Capital Efficiency Credibility/ Consistency Orders 1 Group +9% AT +12% PT +15% Revenues 1 Group +8% AT +9% PT +11% EBIT Group 7.8% AT 10.8% PT 8.1% despite significant special charges ROCE Pre-tax 20% After tax 14% ROE % Adjusted communication strategy to enhance transparency reliability consistency 37 1 local currency change 2 Net income / avg. shareholders equity (incl. minority int.)

38 Making profitable growth happen Strategy Execution People Strategy is sound, no big fix needed Portfolio in the right businesses Product/market lead positions, technology Geographic priorities in the right markets Acquisitions more important long-term Highest priority Maintain attractive organic growth market-driven company, technology, service Drive operating margins cost and productivity, risk control Execution framework processes, business reviews, flat organization, Global Markets & Technology, compliance Good foundation, further development Quality attractive employer, focused development Attitudes values, leadership, business ethics Corporate culture execution focus, learning better 38

39 Strategy is sound no big fix needed Portfolio strategy ABB has the right set of core businesses (growth/profit) Long-term: How to go beyond current scope? Product/market strategy Great leadership positions Continuously expanding technology portfolio Geographic priorities Leading global player Strong positions in new markets (e.g., China, India, Middle East) Role of acquisitions Acquisitions of major size are not necessary at the moment Starting 2007, more focus on external growth 39

40 Execution: Highest priority Organic growth Excellent double-digit organic growth in 2005 ABB: One of the most market-driven engineering companies Continue to invest massively in technology (> $900 million per year) Stronger emphasis on service activities Operating margins EBIT margin up by 2.7% in 2005 Cost/productivity management: Economies of scale, global footprint, reduce Cost of Poor Quality Risk control: Order selection, contract evaluation, project management Execution framework Structure, processes, systems, tools Role of business reviews Flatter hierarchy Importance of Global Market & Technology function Continue to improve compliance performance 40

41 People: Good foundation, to be developed further Quality of people ABB is a very attractive employer (global, modern, dynamic) Focused selection and development process (quality, ambition, values) Attitudes/behavior Values: Performance, drive, competence, team spirit, ethics Leaders must set examples, demonstrate right behavior Business ethics: Need for improvement Corporate culture Strengthen execution focus ( getting it done ) Learn better from each other 41

42 Targets 2009 versus actual 2005 performance Group targets 2009 Target 2005 actual Revenue growth 1 > 5% 9% 2 EBIT margin > 10% 7.8% Net margin > 5% 3.3% ROCE 3 Mid-teens 14% Free cash flow (FCF) as % net income 100% 123% Divisional targets Revenue growth 1 Growth EBIT margin 2009 EBIT margin 2005 Power Products > 6% 12% > 11% 9.4% Power Systems > 5% 9% > 6% 4.6% Automation Products > 5% 9% > 14% 13.9% Process Automation > 5% 8% > 9% 8.0% Robotics > 4% 23% > 9% 5.4% 1 Compound average growth rate (CAGR) at constant exchange rates and excluding major acquisitions and divestitures 2 Revenue growth 2004 to Return on capital employed (after tax) 42

43 Outlook for 2006 (and 2009) ABB backlog: Better start than a year ago Trading environment in line with H2 05 Overall favorable markets Only a few sectors with low activity Some regions with upside potential Europe finally growing again? North America with pluses and minuses New markets strong Special risk factors Middle East, oil price, terror, avian flu Impossible to forecast Use scenarios Likelihood of a downturn in as above-average period? ABB-specific factors Globally diversified Partly dependent on industrial GDP development Long-term outlook in power sector is attractive Positive outlook 2009 targets remain, outlook somewhat more favorable 43

44 Transition to revised divisional structure Power Technologies 2005 sales*: $9.8 bn High- and medium-voltage switchgear, breakers, transformers, etc. HVDC and HVDC Light, FACTS, power plant and network automation, substations, etc. Mostly for utilities and industrial plants Automation Technologies 2005 sales*: $12.2 bn Low-voltage products and systems, drives, motors, power electronics, etc. Automation solutions for the process industries, such as oil & gas, chemicals, pharmaceuticals, pulp & paper, metals and minerals, and marine Robots, robotic systems and services for the automotive industry and other segments 44 * Including internal sales to other divisions

45 Transition to revised divisional structure Estimated 2005 revenues* Power Products Sales: $6.4 bn Power Systems Sales: $4.0 bn Automation Products Sales: $5.9 bn Process Automation Sales: $5.0 bn Robotics Sales: $1.7 bn High- and mediumvoltage switchgear, breakers, transformers, etc. HVDC, HVDC Light, FACTS, power plant & network automation, substations Low-voltage products and systems, drives, motors, power electronics, etc. Automation solutions for process industries Robots, robotic systems and services Previous business areas promoted to new divisions Same scope of business, no reorganization required Greater transparency internally and externally 45 * Including internal sales to other divisions

46 ABB Executive Committee 2006 Fred Kindle CEO Michel Demaré CFO Gary Steel HR Ulrich Spiesshofer Corporate Development Dinesh Paliwal Global Markets & Technology Bernhard Jucker Power Products Samir Brikho Power Systems Tom Sjökvist Automation Products Veli-Matti Reinikkala Process Automation Anders Jonsson Robotics 46

47 Key divisional data Supplemental estimates ($ million) Division Revenues EBIT EBIT margin Power Products 6,434 5,727 12% % 8.6% Power Systems 4,041 3,717 9% % 3.2% Automation Products 5,900 5,394 9% % 12.4% Process Automation 4,993 4,629 8% % 5.9% Robotics 1,699 1,382 23% % 5.8% 47

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49 Employee numbers shifting to high-growth markets Share of total employees by region 2003 vs 2005 Asia Middle East & Africa 13% 10% 61% Europe Asia Middle East & Africa 18% 7% 57% Europe Americas 16% Americas 18% , ,500 49

50 2005 revenues by region Power Technologies 7,524 8,675 9,784 13% 14% 13% 24% 25% 28% 24% 22% 22% MEA Asia Americas Asia up, driven by strong revenue growth in China, India MEA revenues impacted by timing of project billings 39% 39% 37% Europe

51 2005 revenues by region Automation Technologies 9,628 11,000 12,161 5% 6% 5% MEA 16% 19% 20% Asia 18% 15% 17% Americas Asia increase driven by strong revenue growth in India Strong growth in both North and South America 61% 60% 58% Europe

52 Maturity profile of debt securities Total debt securities of ca. $3.7 billion as of Dec. 31, ($ million) % US$ convertible bond (conversion price: $9.03) 3.5% CHF convertible bond (conversion price: CHF 9.53) * based on December 31, 2005 FX rates 52

53 Composition of short-term debt * Total short-term debt of $169 million as of Dec. 31, Other short-term debt Maturing long-term borrowings * Short-term debt represents debt maturing prior to Dec. 31, 2006; All figures based on Dec. 31, 2005 FX rates 53

54 Asbestos trusts cash payments* ($ million) 400 Total paid so far: $447 million Still due: $454 million + $100 million contingent payments Sale of ABB Lummus Global in 2006 or '07 to trigger early payment CE PI Trust contingent liabilities CE PI Trust contingent liabilities (already provisioned) CE PI Trust payments CE Settlement Trust payments 54 * Assuming CE Plan becomes effective in Q Note: Cash payments and asset transfers to CE PI Trust start when CE Plan becomes effective

55 Safe-harbor statement This presentation includes forward-looking information and statements that are subject to risks and uncertainties that could cause actual results to differ. These statements are based on current expectations, estimates and projections about global economic conditions, the economic conditions of the regions and industries that are major markets for ABB Ltd and ABB Ltd s lines of business. These expectations, estimates and projections are generally identifiable by statements containing words such as expects, believes, estimates or similar expressions. Important factors that could cause actual results to differ materially from those expectations include, among others, economic and market conditions in the geographic areas and industries that are major markets for ABB s businesses, market acceptance of new products and services, changes in governmental regulations, interest rates, and fluctuation in currency exchange rates. Although ABB Ltd believes that its expectations reflected in any such forward looking statement are based upon reasonable assumptions, it can give no assurance that those expectations will be achieved. 55