July 20, 2017 / 11:30 AM / a month ago

ABB CEO faces pressure to improve profitability

FILE PHOTO: CEO Ulrich Spiesshofer of Swiss power technology and automation group ABB addresses a news conference in Zurich, Switzerland, February 8, 2017.Arnd Wiegmann/File Photo

ZURICH (Reuters) - ABB Chief Executive Ulrich Spiesshofer faces pressure to tackle lower profitability at the Swiss engineering company, after higher raw material prices and overcapacity issues dented its quarterly earnings.

The power transmission and industrial automation company reported a smaller than expected increase in net profit on Thursday, taking the shine off an upswing in new orders and stronger sales of its industrial robots.

The downturn in operating profit sent the company's shares down 3 percent to 23.18 Swiss francs in Switzerland, creating a new headache for Spiesshofer who last year pledged to raise ABB's stock to 35 francs.

Spiesshofer said he did not feel under particular scrutiny from investor Cevian, ABB's second biggest shareholder which last year called for a separation of ABB's Power Grids business and which joined ABB's board earlier this year.

"The Cevian relationship is a very good one, we are working very well together," said Spiesshofer, who has been in the top job since 2013.

Cevian declined to comment. It owns more than 5 percent of ABB stock, according to Thomson Reuters data.

ABB, the world's biggest maker of electrical grids, has endured a torrid few months with falling orders and a scandal where a senior executive disappeared from its South Korean operation with $100 million.

Part of the capacity problem has been ABB not reducing production of motors and drives quickly enough in response to weak demand from customers in the energy industry, analysts said.

"The bigger the motor, the softer the market is at the moment," said Spiesshofer.

"Also the bigger the motor the more difficult it is in the short term to adjust capacity because these are highly engineering products.

"We have to be cautious not to cut into the muscle for the time when the market comes back."

The lower profitability in electrification products and robotics and motion businesses was "a glitch" Spiesshofer said.

"The team could have been faster in taking the actions we have initiated... and that is something that will be now be corrected," he said.

INVESTORS' PATIENCE TESTED

ABB, one of the biggest buyers of copper in the world, was also hit by an increase in the price of raw materials which were not automatically passed on to consumers.

London copper hovered on Thursday near its highest since early March, underpinned by brighter prospects for China's economy.

"We have taken swift action, taken costs out and are also making adjustments in pricing," Spiesshofer said. "We expect in the second half of the year this will be addressed successfully."

Spiesshofer was speaking after ABB reported net profit rose 29 percent to $525 million for the three months ended June 30 from $406 million a year earlier, missing forecasts of $580 million in a Reuters poll.

New orders increased by 3 percent, when currency fluctuations were removed, only the second time in the last two years that new business intake has improved at the company, which makes industrial robots used in the car and food and beverage sectors.

However, the earnings shortfall means patience could now be running short with the executive who took over as CEO in 2013, analysts said.

"Investors are getting more concerned about the decline in profitability," said Richard Frei, an analyst at Zuercher Kantonalbank.

"There has been a lot of restructuring at the company, which has yielded results, but now the effects are getting smaller."

Reporting by John Revill; Editing by Amrutha Gayathri and Keith Weir

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