Abb Ltd (ABB) 2004 Q2 法說會逐字稿

Good afternoon and this is the Coresco conference operator. Welcome and thank you for joining the ABB 2004 second quarter results analyst and investor conference call hosted by Mr. Peter Voser Chief Financial Officer of ABB.

[OPERATOR INSTRUCTIONS]

At this time I would like to turn the conference over to Mr. Peter Voser, Chief Financial Officer of ABB. Please go ahead sir.

Thank you very much. Good afternoon ladies and gentlemen and welcome to the presentation of ABB's second quarter results 2004. Before I take you through the presentation details, I would like to highlight a couple of general trends. First, our order intake continues to grow strongly in both divisions and with good gross margins. The order growth we have seen so far this year, driven mainly by Asia, but in the second quarter also showing an improvement in the key markets of Western Europe and North America, is already having a positive impact on our revenue and EBIT development. So we remain confident that we can reach our 2005 growth and profitability targets.

Second, the impact from our non-core activities and discontinued operations continues to decline. The strategy began in 2002 to focus the business, improve our cost competitiveness and build a strong sustainable capital base is well on its way to completion.

The success of our turn-around can be seen, if you turn to page 3 of the presentation. Seven consecutive quarters of improved year-on-year results shows how we continue to build a track record of achievements. Looking at a few key results for the group, slide 4, we continued to see improved demand in most markets in the second quarter. All those entire technologies and the operation technologies increased by 29% in dollar terms.

Core basis revenues increased 15% and EBIT was 24% higher than in the second quarter 2003. Group EBIT more than doubled to $288 million. Cash flow from operations was lower in the quarter mainly due to costs related to the sale of the upstream oil and gas business.

Our Step Change Program has been substantially completed on schedule lowering our cost base by more than $900 million a year. Debt reduction is on track and our gearing is up 65% down from 67% at the end of Q1. We are set to take it down even further with the bond buyback announced this morning. We saw a net income of $86 million for the second quarter compared to a net loss of $55 million in the same period a year ago. Let's turn to PT, slide 5.

Orders grew 42% in the second quarter, more than doubling in China and India and increasing at a double-digit pace in Europe. We saw the slow beginnings of recovery in North American power markets and an upturn in Latin America. In the Middle East and Africa, orders were stable compared to a strong intake last year and remained at a high level.

The service base order growth, we have seen recently in PG, health list revenue fell off 18% with all business areas except for private systems achieving double digit growth. EBIT was up 8% to $168 million on unchanged fee structuring charges.

The unit margin was 7.4%. Margins continue to improve in the product business as our productivity measures such as our focused factory concept continued to increase our profitability. These solid improvements were largely offset in the second quarter by the low level of project execution in parts of the system business and the resulting low capacity utilization. We do not expect this impact to continue in the second half.

Cash flow was $11 million, down from $243 million in the same period last year. The difference mainly reflects an increase in working capital through a combination of lower customer advances, due to the low level of large orders in the first five months of this year, and higher receivables following strong growth.

Let's turn to AT Slide 6. Orders are up 20% on double-digit growth in all regions except for the Middle East and Africa, which was lower than a year ago. In Asia, China and India were strong, particularly in pulp and paper, minerals and marine. In North America, orders improved for the third consecutive quarter. We see signs of recovery in Western Europe and the trend is stable in Eastern Europe and Latin America.

AT revenues were up 12%, EBIT increased 36%, and the EBIT margin in AT was up from 7.9 to 9.6%, driven by productivity improvement and higher margin products. AT cash flow generation was $225 million, up sharply from the second quarter last year, as they continue to tackle working capital management.

Let's turn to EBIT overview, slide 7. Core division EBIT was up 24% compared to the same quarter last year to $428 million. Non-core activities again had a relatively minor impact on group earnings on a 9 million loss mainly because of costs related to the winding down to small building system business in the US. Building sectors in Germany approach breakeven in the second quarter.

Corporate costs remains at a high levels, some $130 million. As I said previously, we will take these costs down once we have completed the big divestments such as the upstream oil and gas business that we closed on July the 12th. We'll still have floating systems in Germany to go but you can clearly expect to see total cost come down in the second half. And we still forecast total corporate costs of about 220, 250 to 250 million a year by the end of 2005, and approximately 400 million for this year. Group EBIT margin amounted to 5.9% in Q2, a major improvement from a year ago when we had 2.9%.

Slide 8, let me just quickly reiterate that the area, the era when non-core activities dragged down our core businesses is basically over. We have a small but profitable portfolio of equity investments in this line as well as the rest of the building system business. The biggest piece is in Germany, and we have managed to strongly improve its operational results compared to a year ago despite very challenging conditions in the German construction market. Our intention remains to sell our equity ventures and the German building system business, the latter in 2004. So the impact of this line in the future will be even smaller. Let's turn to slide 9.

We had as loss of $41 million in discontinued operations in the quarter down from 71 in Q2, last year. The main factor was the $22 million (inaudible) in costs related to the compliance with you (ph) in upstream which offset a small net income in downstream. Oil, gas and petrochemical orders and revenues were lower due mainly to a more selective pitch process in the downstream area and the revenue peak, which you had in Q2 last year.

In the downstream business, we are seeing improved demand for Ethylene Technologies where ABB Lummus is a market leader and we continue to forecast a break even net results for downstream business for the full year, i.e. this means a positive EBIT. Let me also reconfirm however that we intend to sell this business and remain in close negotiations with a number of potential buyers.

Slight 10, looking below the EBIT line, our finance net improved mainly as a result of the non- recurrence of the loss on the sale of our shares last year in Sinopec. The bifurcation effect from our $968 million convertible bonds, which has historically resulted in quite a bit of volatility in our finance net, was eliminated as of May 28, when Bondro(ph) has agreed to change the terms of the bonds.

As you remember, this means the bonds can now be converted into ADS instead of ordinary shares which eliminates the embedded option in the bonds and therefore the need for the mark-to-market treatment. As a result, the net impact on the profit and loss this quarter was a 3 million expense compared to 12 million in the same quarter last year, and 84 million for the full year 2003.From hereon, there will be still be an amortization impact from the bonds but that will be steady at between $7-$9 million a quarter.

Many of you have asked me about my full-year guidance of finance net of 300 million for 2004. I've told you that while I agreed it was conservative we wanted to move further into the year before changing our approach. Today, I feel more confident that our finance net will come in below the $300 million level, and you should now expect to see it in the range of 225 to 260 for the year.

Let's turn to cash flow, slide 11. We saw a cash out of about 136 million in the second quarter with positive cash of 236 million from the core division, more than offset by cash out from discontinued operations. non-core and corporate. In the core divisions, AT had a good quarter as they continued to improve working capital management. That combined with higher earnings resulted in 225 million in cash generation.

PG's cash flow was down to 11 million compared to the high level seen in 2003. The drop is the result of lower customer advances and projects in the quarter compared to 2003. At the same time, retrievals were quite high. That was primarily a timing issue, related to high levels of revenues in the second half of the quarter. This effect will be normalized in the second half of the year.

ET continues to improve its working capital management, further lowing inventories, for example. And total working capital as a share of revenues, dipped slightly in the quarter, compared to the same quarter last year. In discontinued operations, as we said, when we announced the final closure of the upstream oil and gas sale, we cancelled some 100 million in securitization, which further reduced cash in the quarter. There were (inaudible) cash effect from the cost of the combined CDU before the sale was closed.

Cash in corporates remained close to the last year's level. The outlook on cash flow for the rest of the year remains unchanged. We still expect cash flows from operation in the core division to equally EBIT, minus cash effects of restructuring costs. So you can expect a strong second half in terms of cash.

Slide 12, as a result of repaying maturing bonds, buying back some interest bearing securities before maturity, and the cash outflow for mortgaging activities, cash and marketable decreased by about $400 million, during the quarter. Our net debt decreased slightly to approximately $2.7 billion. This however does not include some $800 million in proceeds from the sale of the upstream oil and gas business. Gearing which we define as total debt, divided by total debt plus stockholders' equity including my mortgage interest, declined to 65% to 67% at the end of Q1.

Slide 13, which deals with the bond buyback. To further reduce our debt, and strengthen our overall capital structure, we announced this morning that we intend to buy back any or all of our outstanding Euro bonds maturing, in 2005 and 2006. After the closure of the Oil and GP upstream service proceeds of $800 million, we feel it is the right time to take this step. Based on June 04 exchange rates, the tendered amounts would be some $750 million.

On a portfolio basis, as of the end of June and assuming a 100% acceptance of the tender offer, the buyback would improve our gearing further to 62%. This is a significant step, again, to reaching our 2005 balance sheet targets of $4 billion, total debt and the 50% gearing. And of course, to returning to investments grade.

Slide 14. It's a pro forma maturity profile. This is what our long-term debt profile would look like after the tender is completed. As you can see, the repayment requirements until the end of 2006 will be minimal, and easily fulfilled by the cash flow that our operations will generate.

Let me add a remark about our 2005 yen bonds here. As you may have seen, we announced that we officially cancelled bonds with a value of some 26.5 billion yen as of today. The up to 250 million debt, you see maturing in Q3 2005 represents the remaining portion of that bond.

Fifteen, our step change productivity improvement program is now essentially completed. There are a small number of projects to be concluded over the remainder of the year but with the savings achieved in Q2 of $252 million, the total 18-month program has realized annualized cost savings of $917 million and reduced some 9,000 jobs. Restructuring costs of $311 million are significantly lower than the $500 million we anticipated at the outset.

Looking at the rest of the year in slide 16, we expect the market to continue to improve. Asia should stay strong and we see Western Europe and North America continuing the growth strength that we have seen in the first two quarters. There is no change in our focus on operational excellence and our efforts to stabilize quarterly cash flows. We have two divestments left and are in active negotiations on both.

We also expect to close out the asbestos issue. The hearing held on June 3 went as we expected and we continue to be confident in a positive ruling. We can't predict when the court will make its decision but we do not anticipate any delays. And as I just described, we will continue to tackle that though our bond buyback.

That brings me to the last slide, which is the '05 outlook. On that basis, we can reconfirm our '05 targets and here they are again. Large order growth in power technologies remains important for the growth target and we are confident that we will win our share of the projects that we see coming in the second half as we have won them in the first two quarters. Thanks for your attention and now I would be happy to take questions.

We will now begin the question and answer session. [OPERATOR INSTRUCTIONS]. The first question is from James Tettler, Dresdner Bank. Please go ahead sir.

Yes, thank you. First of all, just to back to your 2005 targets, I mean just looking at your EBIT margin targets of 10.7 in AT, 10 in PT and your corporate cost estimates of 250. I mean mathematically that just gives us a higher margin in the 8%. Can you just explain again why that is? And the second question on the working capital, I mean giving this big orders you have been getting in, for example the one in China in PT, why aren't you getting customers advances for those orders?

OK, thanks James. I start with number two, we do get and I remain in the same, they remain in the same ballpark which is 20%. China was not, is not in this second quarter, that will come in the third quarter. So, that's why you haven't seen a boost there. So, you can assume that to be in for the third quarter and any other large projects, which we just recently actually received. So, there is no change in the overall composition and what we get. This time, it was more of a timing issue as we had a few large orders, from both actually divisions, coming in just around the quarter end.

I think to one, the answer has not changed, me being here or not, we are careful, we are conservative and I have always said if you have to think together there is obviously some margin of error in it. We will not change our targets at this stage. We are highly confident to reach them and the longer we can steadily progress and improve the more certainty we have, and there is as I have said before there is some conservatism in this one. And I give you an example, we expected the turnaround of the economy to start in late '04 and we have seen it coming a little bit earlier. That makes us even more positive now reaching them.

And just in terms of your guidance for corporate charges in '04. You gave a range, I think it was 350, 400. Now you are talking more about 400, is that a change in guidance?

Well, I wouldn't say it's a change in guidance. What I am doing is refining the guidance to point you towards more the upper-end than the lower-end and this has to do that we had some cost in the second quarter, which were slightly higher than anticipated. The dollar exchange rate didn't actually help us too much in the same quarter and I just want to be on the correct side on giving guidance and as usual when you actually look at our corporate cost, they do tend to be high in the second quarter and tend to drop off towards the end of the year and I would not see a different pattern this year.

Great, thanks a lot.

The next question is from Mr. Raymond Greaves, Merrill Lynch. Please go ahead sir.

Hi Peter. Just couple of questions, first of all relates to the PT enology (ph) business. I just want to understand the margin development little bit better. From what I can see, the underlying margin in Q2 was about 8.3%, which is not really much change on a 12 month view. And I just want to understand a, why is there really no momentum in that margin particularly given that the Chinese components to those revenues have been growing quite rapidly and is clearly at higher margin than the rest of division. If that's going up, then what else is going down? And on that basis, given the sort of momentum in those margins, why do you still think you can do 10% in that business in 2005? That's question one. The second question is can you just clarify the disposal profits and losses and the timing of those relating to Sirius and upstream OGP please?

OK, let's start with the first one. I think the A3 the underlying margin, I would assume you took the margin and added back restructuring that were about, right?

Yes.

And you have to take PT apart into the two components, which is the product component and which is the system component. On the product side, we had a very strong growth, which was in the local currency wise in the order of 17%, 18% and we have actually increased further our margin there. I am not going to give you the exact margin, but today it would be certainly be above what you said your base margin on the product side. So, that with the full order book we have, that gives us quite a bit of a positive prospect going forward.

Now on the system side, you know that over the last 3 to 4 quarters, we had obviously on the large project side, quite a different picture to the product side. So, we had very much reduced large order intake because the bigger projects were not talking off. That automatically actually led to some under-absorption, under-utilization of some of our factories and plants.

Now, we did not react to that as fast as you maybe normally would do because given the tender pipeline, which we are moving ahead of us on some of these bigger ones that now have come in. We will need this capacity at it's full strength to cope with our now increased large project order book. So, from that point of view, you had less revenues in those power systems and utilities automation system businesses but you had obviously more cost to that, i.e., we had lower margin and that was driving us down in the first quarter as well in the second quarters.

Now, we know that the Chinese contract, for example, and most of the other large contracts will actually start to generate revenue already in 2004. Therefore, you get this capacity utilization problem out of our way, which will automatically then increase the margin to the higher levels, which gives all the confidence that we will reach 10% next year.

Very clear. Thank you.

OK. Now the other one is Sirius, it's fully accounted for. That's closed. That's in the book of Q2 and we had another 7 million, if I not mistaken, to take in terms of charges for the closing balance sheet.

In terms of the upstream business we have accounted for all the potential costs. We have accounted for the compliance review. We have accounted for the securitization effect but we have not accounted for the 800 million cash coming in and some bookings regarding the closing balance sheet because that closed on the 12th of July. So, you will get that in the third quarter, and hence also in the balance sheet, assets held for sale and liabilities held for sale will only change in the third quarter, which hen will only reflect, more like downstream, by the end of September. And we have always said the impact you can expect from all these transactions on the profit and loss side will be I think a positive zero I would call it.

OK. Thank you.

Yes. OK.

The next question is from Mr. Andreas Willi, JP Morgan. Please go ahead sir.

Good afternoon. I have just two questions, please. The first is on your guidance for financial net, you made this 225 to 250. Does that include the convertible amortization and option accounting costs for this year? And second question is on restructuring charges, you have said you've basically more or less completed the step change program, it cost less than you planned for. What should we expect for restructuring charges for the second half of the year in the two core divisions, non-core and corporate?

OK. First one is yes, it does include it. Second one is, we stick to the 200 as total restructuring cost. It is indeed, we have practically finished the step change round. We declared the program as closed but certain actions will still be taken, but as I said in the previous quarters as well, we have already started early in 2003 some other actions, which will generate some restructuring costs and they will come in the second half. And therefore that's the reason why we are not changing our guidance for the 200 in this year. So, I think we are at 72 in six months, if I am no mistaken and therefore there should be other 120-so to come in the second half.

Can you tell us bit about the divisional split or is it again across both AT, PT and a bit in non-core?

Yes. It's obviously spread around, I would say the majority we will see most probably in PT followed closely by AT and then there will be some in core product as well. I would assume that non-core shouldn't actually have too much. You may have a few millions there only.

Thank you.

The next question is from Mr. Michael Hackmann (ph), UBS. Please go ahead sir.

Good afternoon. It's Michael Hackmann. I have two questions, if I may. The first one is just going back to those corporate cost, which we already had almost 250 million cost in the first half. You are now guiding us to about 400 million for the full year. That would basically mean this the corporate cost will fall by about 50 million per quarter. I was just wondering if you could give us little bit more color, you know, what is this 50 million per quarter that is going out? And the second question rather unrelated, and I don't know if you are right person to ask but can you tell us where we are in terms of finding a new CFO for the company?

Thanks Michael. I start with the second which is interesting for me answer. I think the search process, obviously, has started, it's well advanced. We are down to a short list and my boss said this morning to the media, around seven potential candidates and he is hopeful and positive that over the next few months and he did not except any further limitations in terms of months of Q3, Q4 in the few months. He is hopeful to announce the new person.

So, that's number 2 and number 1. I think on the corporate cost site, as I've said, we had a few increased costs in the second quarter, which are non-recurring costs in that sense. So, from that point of view, the second quarter was actually overstated by some, at least 15% in that sense. So, that you can take out and then actually the reduction you need in the quarters will be already substantially down and I think what you will see is that across the board now as we have sold, apart from the German building systems, which we will still need to solve, sell but that's only affecting Germany in that sense.

You would see now that we can move across the board with the reductions and you have seen already last year in the fourth quarter how long we go in corporate cost, which is a tentative movements we have normally towards the end of the year and the numbers you have mentioned excluding the 10%, 15% or the 15%, I already mentioned, which were non-recurring will give you're a good indication that we actually can move the cost down in such area. So, I think it's difficult to say, it's department x, y or z or country x, y and z. We are now, we have been preparing these and the teams are in place in order to execute as fast as possible.

So, can you just explain maybe a little bit more what these extra costs were in the second quarter.

Yes, we had some costs, which were related to some additional activities, which we were conducting over the last three to six months and they gave us some additional costs, which are non-recurring. For example, a small part was something related to strategy work, which we have done and some other projects, which we are running.

Fine, thanks a lot.

The next question is from Mr. Charles Boorady Goldman Sachs, please go ahead sir.

Good afternoon Peter. And just a couple of points on power technologies further to Ray's question. You, obviously you have finished your step change program, you got a lot of cost savings and notwithstanding the comments about the utilization in part of the business, surely those cost savings should have been able to offset that and you would have, as you have a higher margin business in the products, you should have had a positive mix effect. So, still the decline in margin there doesn't quite add up unless there was an absolutely collapse in the utilization of the systems part of business.

OK. Is that all you want?

Yes.

OK. Let's dive a little bit deeper into this. I described to you the biggest effect, but there are also with the other effect, which we have seen, which do eat up some of the step change savings, which are cost savings in general. Some, if I am not mistaken, some 10% of our cost side are, for example, exposed to some of the raw material price increases, which gives you an effect. We have got, as I said last time already, that in certain business areas, some of the price pressure is obviously there and that we always said that we need to keep constantly improving our cost position in order to actually remain competitive.

Now, that we have hold on, we have increased our product margins through all of our actions in terms of taking costs out, losing some due to price erosion, raw material increases, but on the other side then we could just not cope with the product mix, which was defined on the safety side with the lower utilization etc. And that has given us the effect.

Now, you will see in the second half, a clear and significant improvement in this as we are changing out of the current situation, which is very much driven by the order intake of the last 12 to 16, 18 months and you will see that this would improve our cost or margin competitiveness even further. So, I am not shying away at all to say that there was pressure on pricing, normal pressure, I would call it.

There were after the fact that we had three to six months, we could hold the raw material prices down at a very low level. Now, we have some impact. We have, by the way, also increased our end prices to customers. So, that will give us the positive effect in the second half in most of divisions areas again.

So, I think this is a rather longer answer to explain to what exactly has happened in the second quarter. But, we are actually not concerned about the effects if one does compared our numbers to our budget. We are actually at least, in all the areas, we are at least at budget and in most areas actually ahead of the budget.

So, this kind of, let me call it a crunch in the second quarter was foreseen to come and that's why we pointed out in the first quarter that we really need between the first quarter and somewhere in the middle of the third quarter. We need the bigger orders now to start to come in because otherwise this crunch would actually have been a little bit longer. So, therefore our situation has tremendous improved in the second quarter. We see projects coming in and that's why we are rather positive looking forward into the second half.

Well, obvious to clarify that. I mean we should see a step change in PT margins then from Q3?

You know me by now quite a bit, I am always hesitating to say it comes to immediately today or tomorrow. Let me stick to the second half.

OK. Thank you.

The next question is from Mr. Peter Riley, Deutsche Bank. Please go ahead sir.

Well good afternoon. I am afraid, still coming back to the power technology business. You do warn that you need continued large order growth in power technologies during 2004 to hit your targets in 2005, which is something you mentioned at the Q1 stage. Well, are these large orders is coming in inline with your expectations? I get impression that they are proving slight slower to land, than you anticipated three months ago.

I think you are re right and you are not right. Let me put it this way, Peter. I think, if you just concentrate on what we called the three potential projects, we were aiming at. We quoted China, we quoted something in Eastern Europe and one in the US. It's right, there was one landing, which was a big one, the one in China. 395. The other two's are still open. But that's where you are not right.

There's actually the fact that we had other projects coming in. We had, for example, one in Mexico, we had other ones in Algeria ,for example, which are somewhere between $45 million and $70 million, $80 million. So, from that point, our large order position is actually much improved and from that point of view, we are not concerned about our long-term development on PT.

You can actually look at our backlogs and that can give you the number. We are somewhere at the backlog of 82% now, which really gives you the right impression to go forward at 2004 and that the '04 and '05 will develop in the right way. So, less concern, we are still in the game for most of these and we will catch a few more.

Just on the same division, North America, you talk about signs of recovery. It is quite a difficult market to read with various suppliers giving out different signals. Can you give us some more flavor on what's happening in North America, whether you feel it's just you doing well in certain areas or whether the broader market is starting to come back.

Yes. I would say you can call it the broader market, but I would not call it a broader market including the large projects, which is now means the really large ones, which are the 50 million, 100 million plus because that we have not seen that too much happening is so far. What we're seeing is quite clearly the base. The base load is increasing. So, the base orders, on the one side on the product side, we have in the America as you know or can see from the numbers, 8% increase. So, we are getting up in that sense, but it is still on the orders below 15 and it is more on the product side.

So, in that side, I think we do not change our view on the energy bill, in that sense that is certainly at one stage necessary to kick start some of the large projects. As I said last time some projects will come irrespective of the energy bill, but I think that is still not with us. There will be another, I would say, three, six, nine months before we see really the large, large projects coming in.

Thank you very much.

OK.

Next question is from Mr. Julian Beer, Enskilda Securities. Please go ahead sir.

Hello, Peter. Firstly on the cash flow issue. Without the working capital and receivables variation, how much larger do you think the cash flows would have been from power and automation in the second quarter? And then the second question is really on the target development. Your top line growth targets are looking at a very strong expansion in the next 18 months and my question is do you expect the balance between base orders and large orders or invoicing of the large orders to vary between now and the end of 2005? And how do you see the margin in the large order backlog compared to the margins currently being achieved in the product business?

OK. Hello, Julian anyway. On the PT side, I think we have the customer advances between the two quarters are roughly a 100 million bucks and I would say the rest of the working capital, which is really receivables less the payables and inventories and some other effects roughly 200 million on a net basis and that gives you then the total number. So, you could add easily some 300 million there, which would have been a very good cash flow performance. On the other side, I must say, I rather prefer at this stage the revenue growth because we will deal with the receivable issue later on.

On the balance of the orders, I think you have to split it a little bit. I think the more interesting part from this, the PT side because that's where the bigger ones are coming. I would say you can, there will be definitely a change over the last 18 months. I think you will get to heights of 12% to 15 % in that sense and from a base order,, total large order component compared to the base orders, which is normally, which at this stage is actually slightly lower than what we have had over the last few months. On the margin side, what was your question exactly there?

Yes, I am just thinking that historically you had very good product margins and suddenly in the late 90s, early 2000 your large systems orders tend to be lower margin. Is there going to be any difference going forward?

I think I can go as far as current large order backlog including the last big ones would be above current average PT margin. So, in other words there is a trend to what you are used to from the past.

OK, that's --.

Same change, yes.

OK, that's good. And just verifying the corporate cost, you said the 200 to 250 guidance. Was that for the full year 2005 or was it the run rate at the end of 2005?

Its 220 to 250 and I think at the run rate at the end of the year.

Thanks, good luck Peter.

Thank you very much Julian.

The next question is from Lin Lipin (ph) Stanford Bernstein. Please go ahead.

Hello, this is Lipin Lin from Stanford Bernstein. A quick question on the North American action you have been taking to send (inaudible) to improve the profitability there and if I remember correctly you have lost double digit million dollar in North America in '03. Can you give us some flavor what you have done there in Q1 and Q2 and do you have any guidance or the target for that region?

OK, I will answer this one and I think I heard you have two questions. So, you can ask the other one later on because there is a lot of noise in the line when you talk and in the US, I can say, if I have understood the question correctly about the progress there, at the half year we are still at a very slight loss but we expect the year to be profitable. So, we have turned that quite substantially around already in the first half and we are hopeful for the second.

And my second question is on the AT, 800xA. Just want you have an update on this. You said you had good customer recognition there and I am wondering whether you can give us some number for them for like percentage of revenue number, number of systems sold and etc?

Yes, Lin just give me a second here. I think I can confirm that the overall reception was very positive and from that point of view the sales have actually increased substantially. If you just give me 10 seconds I can give some more details. OK, the orders in the process industry product business increased by some 20% for the first half. Much of that, or substantially that success is attributable towards the system 800xA. So, the product launch has been extremely positively received and have generated the necessary orders.

OK, that's all my questions, thanks.

The next question is from Alessandro Folesi (ph) Lombardi Dariall Hench (ph). Please go ahead sir.

Yes, good afternoon Peter. Just a technical question, we have seen some bad news lastly with respect to accounting, the Italy story, the other one in Germany, the bribery in the oil and gas, etc. So, as far as my understanding you have an ongoing internal due diligence process, which is basically the reason why you are discovering all this. Can you tell us where you are with that process; is it finished, if there are more things coming up?

Thanks, Alessandro anyway, hello. You mentioned the three. All these elements are gong back to previous years and substantially back in most cases even as early as '98 in that sense. So, what we have done is, we are not running an exercise to find these things. What we have done over the last two years, we have improved our assurance process, we have improved the console framework, we have improved the risk management, we have intensified the financial control audits through our own internal audit and that's why some of these things have come actually up by doing our internal audit and obviously this is a program, which continues over years.

We are strengthening our processes and if we find something, we deal with it in always the same manner. We are very transparent to investors, to shareholders. We are very cooperative and transparent to whatever authorities and we take the necessary action, fast and zero tolerance actions to deal with the issue. So, that's the only thing I can tell you what we are doing. We are certainly not aware of anything else because otherwise we would have to follow our principles, which means transparent disclosure but we have strengthened, we are further strengthening our assurance processes, risk processes and that will continue.

So, I understand you correctly, if I say that you have basically looked at the past. Now the past is cleaned up and if something comes up, if some thing that is running from today on a running basis?

No, you cannot say it this way? Because you can never cover everything 100%, that's quite clear. So, if something would come up in the future, it still can actually relate to the past. I think what we do is walk to talk, the tone from the top is very different maybe to some years ago and there is zero tolerance and therefore we just follow up what we find and what we see but I will not put my hand into the fire that there is nothing wrong in the past. I think that's just impossible.

Yes, OK, thank you very much. I have a second question regarding automation technology. I think you wrote in your slides that there was favorable product mix in this quarter. Can you give more detail, in that is there something exceptional in it or is the margin just normalized now?

I think there is still a certain tendency in the second quarter towards the automation product side and that has to do with the cycle. Typically in the early part, the early middle cycle you have got the automation product being the real driver behind the growth and during the second quarter we have seen now that the large projects are coming in and order growth also starts to come in in some of the other areas, which is a typical sign towards the mid part of the cycle but we are today in a position that this from a margin point of view will not give us a big difference in future. But clearly there were some positive product mix numbers in the first and the second quarters due to the automation product, which tends to have the highest margins in our portfolio.

OK, thank you.

The next question is from Mr. Oliver Esno (ph), BNP Paribas. Please go ahead sir.

Hello good afternoon. I have two questions. Please, can you just update us on the percentage of revenue from service in the information division in H1 and secondly regarding corporate cost, you said that the decrease here is somewhat dependent on progress on disposals. I would like to get a better feel for, I think, to what extent corporate cost are actually linked to you selling building system and the downstream OGP business this year. What is the amount of corporate cost linked to these two business?

OK, thank you. On the service side, I give you both numbers, PT is around 12% and AT is around 21, 22%. On the cost side, as I said earlier in the call, for us the important further divestment was the upstream business. So, that's behind us. In that sense, the German building system doesn't influence the corporate worldwide too much. So, I would now say it is no longer dependent on the divestments. We can now start then to move. And therefore I would not allocate any costs to those two businesses left because it doesn't actually matter any more.

OK thank you.

Then next question is from Mr. Matt Nicole (ph), Lehman Brothers. Please go ahead sir.

Good afternoon, Peter. Couple of quick questions, first one. Could you tell us what the currency impact was on the corporate cost for the second quarter? And also could you just update on the market share position in the second quarter for the manufacturing automation area? Please.

Yes, I think we have announced, I will start with the second one. We have, on the manufacturing automation, we have announced or we have included in our second quarter a large order, which will give us actually a significant market share increase once it becomes revenue. So, I think, a general comment I have, in the past that we have stopped our market share loss is absolutely correct and we have started to regain and once this order actually becomes into revenue, we will regain quite significant market share.

And as far as I remember, in the AT, they actually, the head of the manufacturing automation quoted that as being, as much as maybe 3% market share once this order comes in. So, that gives you a flavor on that one. I think, on the exchange rate effect for the quarter itself on corporate, that is around 5%.

OK thank you.

The next question is from Alok Chopra, Think Advisors (ph). Please go ahead.

Good morning Peter. Alok Chopra, from (inaudible) Equity New York. I guess this is probably going to be the last quarter you will be on this call. So, I wanted to congratulate you on a superb job you have done and let's say, I am sorry to see that you are leaving. My question is just pertaining to power technologies. What sort of bid activity or interest level are you hearing or seeing from American utilities, if any, in terms of upgrading the transmission grid in the US. This is been talked about for a long time and we keep hearing about it but when do you think this will translate into orders?

OK. Thanks, good afternoon, good morning actually to you. Thanks for your kind words at the beginning. I think if Peter Smith would sit here and regarding your question on PT, he would say he sees increased activities in United States and I think it is more than in Q1. So, you see a, let's say, an increase over time. So, from that point of view, that is a positive sign but I would not say that it is something like maybe some have expected to have happened after the blackout and certainly not something which is now just starting to boom.

We stick to our views then, this will be something if it comes, which will generate revenues in the year '05, '06, '07 and not this year. So, your question about when do orders start to come in, there is a chance that some large projects will come somewhere in the second half of this year but we would still look much more to '05, '06 for these things.

OK thank you very much.

OK, let me take the last question now.

The last question is from Mr. Matt Lee (ph), Swedbank. Please go ahead sir.

Thank you. Matt Lee, Swedbank. Just have a couple of questions, first regarding automation. You reached 10.2 operating mark in the second quarter and I was just wondering if you felt that you are ahead of your 10.7 target or in line?

I think you know me by now most probably. I would just say we are happy with where we are today. I think you are never ahead of something, we are on line, we are on a good way to get the 10.7.

And then just a couple of more. About the corporate costs again, you mentioned that the run rate towards the end of 2005 would be some 225 to 250. Does that mean that for the full year we should expect some 300 or?

Yes, that's a little too early to say. I think we will guide you in more detail towards the end of the year. Personally, I don't think we will be that far away from the 225, to 250 even as a mid-year, as atotal year run rate in that sense. But we will guide you further if you want to know exactly how much we have achieved by the year-end.

OK and then finally just about minority interest and the tax rate during the end or balance of the 2004. What we should expect?

On the tax rate, we have said medium long-term to 35%. We say clearly that this year is going to be slightly higher. It will be, we had 39% in the first quarter, we had 37% now in the second quarter. So, I think between 35% and 39% in the middle is a good assumption for this year. As I said, long-term, we certainly would like to target the 35% level.

And on the minority, that's a difficult but one to forecast. I would say given our success in those countries where we have minority, that something which will increase over time and I wouldn't say it will increase exactly in line with our growth rate in those countries because we have started to counteract this by actually buying out some minorities and specially China we are successful at very reasonable prices. So, I think its slightly increasing compared to the past but it will not increase in line with growth rates of those countries like India or China.

OK, thanks a lot.

Thank you. OK and thank you very much for calling. As usual it was a pleasure, wish you all the best and I am sure we will see each other somewhere again. Thank you very much. Bye, bye.