UPDATE 1-ABB flags $350 mln charge to revamp power systems unit

Fri Dec 14, 2012 6:31am EST

Related Topics

* Power Systems is ABB's least profitable division

* Plans to pull out of low-margin contracts

* Raises power systems' margin target to 9-12 pct vs 7-11 pct (Adds details, background, shares)

By Caroline Copley

ZURICH, Dec 14 (Reuters) - Swiss engineering group ABB is dropping low-margin projects at its power systems business in an attempt to make the division more profitable, resulting in a fourth-quarter charge of $350 million.

Tough price competition in Asia and delays in connecting offshore wind farms to power grids have hit margins at ABB and German rival Siemens' power businesses.

ABB flagged a review of its power systems unit, its least profitable division which makes subsea cable systems and power links to connect renewable energy to the grid, in October.

In November, Siemens announced a 6 billion euro savings drive over the next two years, more than half of which will come from its energy business.

ABB Chief Executive Joe Hogan said on Friday that the power systems unit's poor performance was disappointing.

As a result, ABB is pulling out of low-margin engineering, procurement and construction operations in more than 10 countries including the Czech Republic, Lithuania and Nigeria. It plans to shift its focus to higher-margin software and systems activities.

"Power systems has not generated consistent returns. This is not acceptable," Hogan said.

REPOSITIONING BUSINESS

As part of the overhaul, ABB has raised the division's margin target on earnings before interest, tax, depreciation and amortisation (EBITDA) to 9-12 percent and expects the business to reach the new target by the fourth quarter of next year.

The unit's third-quarter operating profit margin of 5.9 percent fell short of the group's mid-term target range of 7 to 11 percent. By comparison, ABB's most profitable division - which makes circuit breakers and enclosed switches - had a margin of 19.5 percent.

"We welcome the measures, that should raise ABB's profitability and make the portfolio less risky," ZKB analysts said.

Shares in ABB were flat at 18.77 francs by 1123 GMT compared with a slightly firmer European industrial goods and services sector.

The company said the overhaul will reduce earnings before interest and tax by roughly $350 million in the fourth quarter, of which $100 million is related to restructuring expenses. It expects the costs to yield results in two and a half years.

ABB has been cautious in its outlook in recent months due to the euro zone crisis and slackness in other major economies, which translated into a fall of third-quarter orders.

Quarterly profit dipped 4 percent to $759 million, while orders slid 5 percent to $9.3 billion.

Fourth-quarter results are scheduled for Feb. 14. (Additional reporting by Katharina Bart; Editing by Erica Billingham)

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