ABB's CEO Hosts Q&A Session on the Proposed Acquisition of Power-One (Transcript)

Apr.22.13 | About: ABB LTD. (ABB)

ABB LTD. (NYSE:ABB)

Q&A Session on the Proposed Acquisition of Power-One

April 22, 2013 9:00 am ET

Executives

Joseph M. Hogan - Chief Executive Officer

Richard J. Thompson - Chief Executive Officer, President and Director

Ulrich Spiesshofer - Head of Discrete Automation and Motion Division

Eric Elzvik - Chief Financial Officer and Executive Vice President

Analysts

Brian K. Langenberg - Langenberg & Company, LLC

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Garland Buchanan - Legal & General Investment Management America Inc.

Chris Godby - Stephens Inc., Research Division

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Media and Analyst Conference Call. I'm Goran, Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Mr. Joe Hogan, CEO of ABB. Please go ahead, sir.

Joseph M. Hogan

Hi. Thanks for joining us. I'm sitting here with Ulrich and Eric, and what we want to do is try to move to questions as quickly as possible. And so there's a podcast available from this morning's call that you can access on our website and you can also access on -- access it on Power-One's website also.

And so I just want to open up by saying we're excited about this deal. I think we've given a good overview in the sense of the logic behind it and the strategy behind it, and we're looking forward to your questions. But before we get started, I'd like to turn it over to Richard, and Richard has a few words from the Power-One side.

Go ahead, Rich.

Richard J. Thompson

Great. Thank you, Joe. First of all, I want to introduce myself again, Richard Thompson. I'm the CEO of Power-One. I think it's really appropriate that we announce this transaction today on Earth Day. I think it has a great meaning and a great start for our combination.

As you have just heard, ABB and Power-One are joining to form the most comprehensive equipment, software and service supplier in the solar PV industry. Our customers, from the residential user to the largest utility, will benefit from this unique combination. We believe the strength of each company in the solar PV space are highly complementary, thus creating a win-win transition for both companies. ABB benefits from Power-One's strong reputation as a technology leader and innovator in the solar inverter space, as well as acquiring the most comprehensive portfolio of inverters in the industry.

Power-One benefits through ABB's global strength and significantly expanding our total addressable market with immediate access to new geographies, including high-growth emerging markets and by leveraging ABB's well-established global sales and service network. Both companies benefit from combining the broadest solar inverter portfolio with state-of-the-art transformers, switchgear and control systems into the leading balance of system offering to the utility sector. We both will have much growth opportunities on a combined basis than we would have as separate players in the global PV market. Likewise, Power-One's traditional power supply business fits well with ABB's power conversion electronic resources, particularly in industrial applications.

Finally, our shareholders will receive a significant cash premium to the existing share price, in essence, being compensated today for some of the growth opportunities that will be realized as becoming a part of the combined company. ABB's shareholders benefit from the economic reward, sustaining a much larger and stronger competitor in the attractive solar PV market with a complement of product offerings, service capability in every market around the world.

Our management team is excited to join ABB, and we share Joe and Ulrich's vision of creating the strongest offering in the solar PV market, a market that is ready for exceptional growth as PV-generated power rapidly reaches great parity in many countries. Power-One's leadership team across the globe is pleased to have the opportunity to work with the ABB team and is committed to bring our customers, employees and investors exceptional products, opportunities and returns. Thank you.

Joseph M. Hogan

Richard, thanks. And with that, I'd like to turn it over to any questions that people on the phone may have.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Mr. Brian Langenberg from Langenberg & Company.

Brian K. Langenberg - Langenberg & Company, LLC

This deal makes perfectly straightforward -- looks like it makes sense for both parties. Just one question. Last couple of years, obviously the solar end market's been down. Dick, you mentioned the whole revenue's flat, which is heroic. Just walk me through the change in cost of goods sold over the last couple of years and how that gets back to, maybe let's call it, the historic norm above and beyond cyclical issues, if you can address that, too, please.

Richard J. Thompson

All right. Great. As you – I’m sorry. Go ahead, Joe.

Joseph M. Hogan

No, no. It’s all yours.

Richard J. Thompson

Okay. Great. As you look at the PV industry, and particularly for the inverters, the price declines over the last few years has averaged 8% to 10%. So that's an environment we're used to working in and working in successfully. We do this through superior design to reduce manufacturing cost and particularly, a very robust supply chain. That allows us to still bring to market great products for our customers with a reasonable profit. As you mentioned, the ups and downs of the industry are there. They're real. Some of them are cyclical. Most of them are tied to change in feed-in tariffs, and that's why this transaction is so important. As we look forward to parity in 2015, we will have the most -- the strongest PV set of resources in the total industry. That will give us great growth opportunities and certainly, by merging together today, it will give us a one-up, certainly at least one up over the rest of the industry. So we're really excited, we think it brings great opportunity to both companies.

Operator

The next question is from Mr. Joe Maxa from Dougherty & Co.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

I just wonder if you could give us a little more information on the deal protection mechanisms in place.

Joseph M. Hogan

[indiscernible]

Ulrich Spiesshofer

Okay. On the deal protection, basically, we have a voting agreement from the largest shareholders, which is Silver Lake, the Silver Lake teams. We have a break-up fee of $20 million. We have matching rights -- unlimited matching rights if somebody else would come into the transaction.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Okay. Very good. And then I'm just thinking about your focus on the various segments of the inverter market. Is this going to be more of a -- did ABB acquire Power-One more for to get a better presence in North America utility as well as the Asian market? Or is it going to be really broad-based, go after micro inverters and the whole works? I mean, what's the strategy?

Ulrich Spiesshofer

Look, if you look at the combination here, this is really close to the perfect marriage. If you look what Power-One brings, it's a wonderful product portfolio: from micro inverters up to micro utility scale turnkey stations. They have European certification. They have UL certification, which I think is something which is pretty strong here. What we are bringing is the global service capability. We also bring some very important markets. If you look at India at the moment, Richard and us have been competing in the last couple of years. We are #1 now in India in solar inverters through our organic start-up organization. So if you look at it from a reach perspective, from a product perspective, this is a really great fit. And then if you look -- and it will be a global combination. We will not just single out 1 or 2 markets to go after. From a service perspective, the attached rate of Power-One is about 1/2 to 1/3. We have, with our average in the division on an attached rate, there's a fantastic service capability, and we have the platform on service basically in 100 countries all around the world. We got the execution capability. We got offering like remote condition monitoring, which will really make a big key difference to our customers. So if we'll take that one from a content perspective, really well balanced, very nice reach and then even better if you look at the culture of the 2 teams: Power-One's focus on rapid market penetration, very strong customer focus, fast time-to-market, combined with our strength in power electronics where we have -- after the deal, we will have about $5 billion packaged power electronics offering in ABB. This will be a pretty strong capability and platform that allows us to grow all around the globe.

Operator

The next question is from Mr. Garland Buchanan from Legal & General.

Garland Buchanan - Legal & General Investment Management America Inc.

Could you please provide a little more detail on the funding? The slide says that this deal will be cash funded. Is that coming from cash on the balance sheet? Are you looking to issue new debt? And then lastly, how does the financing for this deal tie into your view on the debt ratings that you want to maintain?

Eric Elzvik

Yes, we will clearly maintain our financial strategy, which we have communicated a few times already this year. So the financial writing of single A is a core part of that strategy. The funding will come out of existing cash and credit lines that we have, so we don't foresee any specific funding for this deal.

Garland Buchanan - Legal & General Investment Management America Inc.

And just maybe on the credit line funding, are you looking to essentially increase debt for the funding? Or is this really all cash out of the balance sheet?

Eric Elzvik

We ended last year with quite a lot of debt and cash on the balance sheet. And with that gross cash position that we have, we should be able to fund this transaction to a large extent. But it depends exactly when it closes, the positions at the end of the quarters going forward this year.

Operator

[Operator Instructions] The next question is from Mr. Chris Godby from Stephens.

Chris Godby - Stephens Inc., Research Division

It sounds like this deal has been in the works for a while now, I guess, from both the Power-One and an ABB perspective. What made you decide to go ahead and pull the trigger now?

Joseph M. Hogan

It's really Earth Day more than anything. We followed this and worked this with Richard for a couple of years actually and decided to market together. I think -- took our time to really understand both companies and the cycle of the industry, and we really feel that you can never consider yourself smarter than the market. I think that's ridiculous to do that. But when we look at what the position in the industry is today, we look at the momentum that Richard and his team has and the momentum that, frankly, we've gained internally in understanding this market with different people. All that coming together, we felt this was the right time. We think waiting longer didn't make a whole lot of sense. It didn't mitigate any risk at all, and we think really getting started on this and realizing the synergies and the opportunities we have beginning now really goes in mind with the direction of the marketplace. I mean, Uli, you've been part of this whole thing, [indiscernible] driving this whole thing. What do you think?

Ulrich Spiesshofer

Look, I think this is a really, really good time to get together. In the last couple of years, on the ABB side, we have done a lot of homework in this field. We got our own startup business up and going. So we really understand this market pretty well today. With that understanding, we were even more convinced that Power-One is the right partner for us out of the choice that we could have had in terms of considering other alternatives. We got to know each other. We competed against each other, and there's nothing better than getting together with a strong competitor that you have already seen acting in the market. If somebody acts very [ph] strong technology, great integrity with a great team, now and then you lose against them and then you get together ultimately as a team. There's a high level of mutual respect, and there's a lot of enthusiasm at the moment, getting together. I can tell you, we have teams today in the different countries getting to know each other, naturally, within the limitations of the regulatory consideration that we are in because the deal is not close yet. And there's a very, very high level of enthusiasm of the teams that think they fit very well together.

Chris Godby - Stephens Inc., Research Division

Okay, great. And then Rich, maybe some thoughts from your perspective?

Richard J. Thompson

Yes. Thank you. I agree with what Ulrich said. We've studied this for quite some time. Power-One, as you know, is entering into new geographies. Each time we entered into the new geography, we had approximately 1 to 1.5 years to profitability as we set up legal entities, hired a staff, created a service organization within that country. All of these elements are now mitigated through this transaction. Once we merge together, ABB is in over 100 countries. They have substantial service resources. This will allow us to get to market much, much quicker than what we could today. Additionally, the entry into these new markets particularly help in markets in South America, in Africa, and other parts of Asia that we haven't penetrated, will allow us to take our initiatives forward more quickly.

Operator

[Operator Instructions] Ladies and gentlemen, there are no more questions at this time.

Ulrich Spiesshofer

Okay. And let me just quickly reiterate what this team, this combination and why we think this makes sense at the current time. If you look at Power-One and ABB, we will create together a very strong global leader in solar inverters. The comprehensive offering for solar inverters and solutions that come together by combining the 2 companies, the competencies that we have on the power electronic side, on the innovation side, on the service side and the bankability that ABB combines with Power-One's very strong innovative approach and the global reach that we will have as a combined entity positions us extremely well for profitable growth in attractive industry long term. So thank you very much to all of you for joining us. Look forward to talk to you soon again.

Richard J. Thompson

Great. Thank you.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

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