Abb Ltd (ABB) 2004 Q3 法說會逐字稿

Good afternoon. This is the Coresco conference operator. Welcome to the ABB 2004 third quarter results, analyst and investor conference call hosted by Mr. Fred Kindle, CEO designate. [OPERATOR INSTRUCTIONS]. At this time, I would like to turn the conference over to Mr. Fred Kindle, CEO designate of ABB. Please go ahead gentleman.

Thank you very much. Good afternoon or good morning ladies and gentleman. Welcome to our teleconference on the occasion of ABB's third quarter results 2004. This is also my first opportunity to present the company's results. I had the chance to meet some of you at our recent Investor Day in Germany and I look forward to talk to many more of you about ABB over the next couple of weeks and I am quite sure we will get some interest. As you know, I am in the process of getting to know ABB in detail in setting my agenda for the next year. One conclusion I can already draw after only eight weeks in the job is that ABB is a company of enormous substance.

The successful turn around in the last two years speaks for itself, but what I have also seen and experienced in the last few weeks when visiting several operations and markets impressed me and gives me great confidence. ABB has the market position, the technological progress, and above all the people to succeed. Now, I presume you've downloaded the presentation on our results from the Internet, so I will be referring to some of the charts there.

If you turn to chart 3 in the presentation, you have from our website the results of the past quarter on the line this message as well. The third quarter of 2004 was the eighth consecutive quarter of improved performance. After completing the turn around, we now see steady progress and I am convinced that ABB has embarked on a journey to become a very successful company once again.

Chart 4 shows some of the highlights from the quarter. You have all been through the press release already, so let me just mention a few key points. In the third quarter, our order book continues to grow with solid gross margins and demand is improving in most markets. ABB also had higher revenues, earnings, and net income improved by close to $400 million with cash flow of more than 200 million. We reduced debts by almost a billion dollars compared to the end of the second quarter and our gearing ratio is now at 61%, the significant improvement over a year ago.

I now turn to chart 5. In power technologies, we saw a continuation of the good order and revenue growth of recent quarters. China and India developed very strongly again and we saw a very good growth in the key US markets, where orders were up some 50%. Eastern Europe helped us to offset some weakness in Western Europe in the quarter, but we continued to see Western Europe as a promising market, if it was down 13% while we saw improved profitability in many of our product businesses. This was unfortunately modern offsets by a combination of factors partly of a long time nature.

One important element is the under utilization of powerlines business. As Peter Smiths explained last month at the P Today in routing in Germany, this is a low value added EPC that means Engineering Procurement Contracting type of business with revenues of about $200 million. Full capacity utilization is a must for profitability. The market in this particular business has been weak for sometime, but developed below our expectations in the third quarter. We have taken steps to adjust capacity on our currently monitoring the situation, reviewing all possible options.

We also had some remaining under utilization in other parts of this systems business such as the high voltage direct current business related to the lower large order intake at the end of 2002 and the first part of 2003. As we explained that our recent investor events, this impact is decreasing as our plans and engineering centers gear up to work through recent large orders.

We continue to see the negative impact of steeply increasing raw material prices. Again, this is a transitionary effect and we are confident that it will not impact our margin significantly beyond the short term. All of these facts has had added up to hurt our margin this quarter and makes the achievement of our 10% EBIT margin target of 2005 more challenging than we originally thought. We are doing everything we can do to get there.

Now move to automation technology, slide 6 please. Here we have a very encouraging result with improvement across the board. So, let me just highlight the 54% EBIT improvement that brought the EBIT margin just an odd short of 10%. The market has developed well and we have been able to take advantage of that with our simpler organization productivity improvements and strong technology offering.

Looking at EBIT slide 7, I have discussed the core divisions already, which turned in a combined 25% improvement despite the weaker quarter for PT. Our non-core activities reported a small loss, basically the same as in the second quarter. The biggest piece of this is the building systems business in Germany and that is returning to near break-even results. The year-on-year comparison reflects the capital gains we took on the disposal of the Nordic part of the business last year.

Going forward, we expect a negative effect of non-core activities to continue to decrease. Now the corporate line in the PNL is also the start of the disposal Nordic building systems capital gain last year. Adjusted for that $65 million impact, head quarter costs were reduced by 18 million in the quarter. Looking ahead, the corporate cost round the rate will not change significantly over the rest of 2004 and we expect the gradual improvement through 2005. However, we now expect corporate cost for 2005 closer to $US 450 million. Why the change from our earlier guidance. First as you know, some of our corporate costs are linked to our disposal program. We need some people in the field to get these complex projections completed. The delays in completing these disposals have also slowed down our efforts to cause corporate costs. Now the fact which the foreign exchange effect most of our corporate activities are in the Euro zone. In addition, we are now taking a prudent approach when estimating the costs associated with the new regulatory requirements under the Sarbane-Oxley Act. However, despite all of that, despite these higher corporate costs, we reconfirm our group margin target of 8% for 2005.

Turning to non-core, slide 8 please, I already described what has happened here in the quarter. This line now represents only 3% of total group revenues. The EBIT impact has stabilized at the low level and we expect that to continue to decline to break-even.

Slide 9, similarly the negative impact from these continued operations continues to decrease mainly because of the improved performance of the downstream oil and gas business. As you will recall that business took a number of project write-offs last year. Since then, they have taken big steps forward and are approaching the break-even line. Asbestos related the costs were all of the $100 million lower with a smaller impact from the mark to market on the ABB shares reserved for the Asbestos PI trust, and the non-recurrence of the provision we took last year for the contingent payments to the settlement plan.

Looking below the EBIT line on the slide 10, our finance net improved and we saw the first positive impact from the change to the terms of the US dollar-convertible bond. So, we only had the small amortization effect here this quarter compared to the large mark-to-market effect that made this item so volatile in previous quarters.

Finance net this quarter was also ahead by one time $70 million foreign exchange adjustment on the value of our equity investment in the shore of lust for power plant in Morocco. We continue to expect our finance net to be slightly more than minus $200 million for the full year 2004.

Just look at cash flow on slide 11; we are up more than $200 million in the third quarter compared to last year, mainly because of a more stable cash flow in the downstream oil and gas business. This is the result of the change in strategy to take lower risk to reimbursable contracts rather than large lump sum orders. That means we get a more regular stream of smaller payments instead of the very large cash advances that create a major cash streams from quarter to quarter. The core division cash flows were basically in line with the earnings development.

As I pointed out earlier, we have continued to cut total debts from slide 12, and are now at $5.2 billion with a gearing ratio of 61%. Net debt has also developed favorably and is now at about 1.6 billion compared to almost 6 billion a year ago. Most of the debt improvement on slide 13 since the end of the second quarter is the result of our successful bonds buyback. This follows the completion of the upstream oil and gas investment in July, and we were able to complete the bonds buyback before the end of September. As a result of the bonds buyback, our debts maturity profile on slide 14 shows that we have about 430 million bonds to repay next year and are looking at levels around 800 million a year starting in 2007. We will be able to handle this debt flow with our normal cash flow from operations.

Let's turn to slide 15 please. Looking at the reminder of 2004, we expect markets to continue the recent growth trend, which has been led mainly by Asia, North America, and Eastern Europe. Western Europe is recovering more slowly, but we see opportunities to grow in both divisions. Our strategic focus has not changed. We will continue to target operational excellence and profitable growth. Further productivity improvement is key for both divisions. We are tackling the under utilization issues in PT and the new organization will support these efforts. We continue to execute our regional strategies for the Americas and Asia and aim for more stable cash flows.

To wrap up here our targets from slide 16, again we are confident that we will reach our group EBIT margin target of 8% in 2005 and the AT margin target of 10.7%. The PT margin target has become more challenging given the current under utilization issue. It is still achievable and every effort is being made to get there. Our debts and gearing targets remain the same and we are well on our way to achieving those.

Now ladies and gentleman, I would like to conclude with a few remarks of my first weeks in the company and to look ahead a little bit to the future. The people of ABB are proud of the successful turnaround they have achieved in the past two years and rightly so, this was certainly a major achievement.

Now, we have entered the stabilizing phase, the phase of steady improvement, a greater focus on normal business so to speak. Our focus will be on making ABB an even better company and this will entail working on three topics. The first one is strategy. We will continue on the path laid out in the last 18 months. You can expect us to continuously examine and fine-tune our strategy, but there is no revolution in the offering.

Second topic is execution. After having gone through a period of emergencies, we need to continue the renewed focus on the regular day-to-day task of running a good company. This means working hard on operational efficiency and cost management. Market proximity, customer access, innovation, and other related topics.

And the third item is people, last but definitely not least. ABB has great people and enjoys an excellent reputation as an employer. We need to take advantage of that, shape our culture in the right way, and enable our people to contribute the best. Included in this is a strong emphasize on integrity and compliance. With this, we will be able to take full advantage of the opportunities in today's market place and there are many.

The current operating performance proves that we are on the right path. Most important now is to continue this fashion and meet our commitments for 2005. I thank you for your attention ladies and gentleman and with that, I would like to open up for questions, however, I need to say that we have, I was told, 170 participants on this teleconference and if everybody uses their right to ask two questions we are never going to end. So, we may have to cut you short when the time runs out after one hour. Anyway I think many of the questions will be related to the same topic. So, lets please go ahead. May I ask the Cores operator to arrange for the Q&A session.

Thank you. [OPERATOR INSTRUCTIONS]. The first question is from Mr. Raymond Greaves from Merrill Lynch. Please go ahead sir.

Mr. Kindle, it is Raymond Greaves from Merrill Lynch. I will try and stick to the regulatory two questions. So, I think that one thing that lot of people interested in today is the profitability of PT and I must admit I find your explanation for the poor profitability quite difficult to understand versus most people's expectation you seem to be missing about 50 million of EBIT in the quarter and we are well aware of the under utilization of the assets in the US and that has clearly been an issue in Q1 and Q2 as well. So, this is not an incremental problem this quarter. You also find raw material cost being an issue and it would be likely if you could perhaps try and quantify what that has been, but again I could not imagine that being part of the 50 million shortfall. So what I am particularly concerned about here is although other problems within the business which are being uncovered because never we would expect China to made a very strong contribution in Q3 as well. So, you know why the 50 million shortfall? It can't surely be just beyond ongoing under utilization of assets and some increase in raw material costs.

OK. Raymond, thank you for your question and you are absolutely right. This will be of interest of most of the listeners. So, let me try to give an explanation, which shed some more light on the situation. As I mentioned in my speech, it is actually a variety of different factors, so in a combined impact really drove the result much lower than even we expected and I named the power line situation, we also named certain projects, we named the raw material costs, and other under utilization effects. Now without going into very precise figures, let me just mention that the power lines issue, the raw materials issue, those are issues which have impacted the results by a double digit million number in dollars. So, they were quite sizable.

But with the raw materials, I mean, this you know, try and do a back re-envelope calculation you might think $10 or $15 million.

Well that's as you know, we have our figures here, but I am hesitant to share all the details with you, but it is definitely in the double digits and your number may be not too far away from that. But, let's keep in mind, what Peter Smiths said in routing and it is still true. We strongly believe that eventually we can pass on this price rises to the customers or we negotiate some of the raw material prices. We are little bit caught in a temporary dilemma, where he have not been able yet to do exactly that. So, we think in the medium to long term, this issue should actually subside and we have a different situation again.

How many quarters do you anticipate regarding this raw material drag?

I would say this will slow down, the problem will decrease clearly sometime in the first or second quarter next year.

Thanks.

OK. So, that's the raw material situation. Power lines, I have mentioned also in the double digits. Here we speak about a low value added business, its an EPC business size about $200 million, which was operating let's call a kind of OK. In the past years, it wasn't great, it is a cheeky position, it was always a little bit questionable. We were hit by a strong decrease in order intake, corresponding lack of sales volume, and under utilization absorption problems. With a combination of both operational problems at the moment and the strategic question mark in some fashion are all we need to resolve that. And then on top of that, we had a few issues with project management of certain projects, I know on the system side of our PT activities you always have certain problems with projects. It's a question of frequency, it's a question of magnitude and this quarter simply said, you know, the frequency and the magnitude were seem to be too high and we have to intervene. We have to establish good operating procedures, this starts with looking at contracts in a very diligent fashion, it's about project management, discipline, and so forth. There wasn't other thing and then we still are suffering from, that was not in double digits, but also a million dollar amount. And then the fourth one was the under utilization we have been talking about. Due to the fact that in certain systems areas for instance where (inaudible), we simply lack the order back log beginning of the year to keep us busy throughout the year. But, this is improving at this very moment.

Could I just ask you perhaps a comment then, given that you know you clearly have some more risks on projects which were unforeseen and raw material issue that would affect, I mean clearly you know there is a lot of doubt over the 10% margin next year, which I think a lot of people doubt, but anyway could you perhaps give people some idea where the margins may go if you continue to have raw material problems, project problems, under utilization problems through 2005. I mean we are looking at may be 8% margins or 9% what's your feel on that?

As I mentioned, we still speak with the official target of 10%, but from a statistical point of view, you could say the confidence, the confidence into what we have related to this target, has that achieved, that it has become more challenging for us to really reach the 10%, but, I mean, since you have mentioned the figure, I would be surprised very hard if it drop down to 8%. Apart from that, I am shying away from giving any precise estimate.

Not surprised, you dropped to 9% perhaps may be.

Let you speculate on that a little bit, but our ambition is to still bring it up to the 10%.

OK, I also have lot of questions on the corporate, but might be someone else would like to have go.

That's very fair of you. OK.

Thank you. Thank you very much.

Thank you. Other questions please.

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

Good afternoon. I have two questions please, hopefully be quicker to answer. First one is to Mr. Kindle, how much time have you spent validating the business plans and targets of the two core divisions. How sure are you that we don't get a similar surprise there like we got in corporate expense, these results? The second question is on the power systems business. You said you have 200 million revenues, is that the annual basis, if that's the case, then it's pretty small, it's 2% of the PT revenue. So, it must be severely loss making to really have a big impact and what's the outlook in the activation in terms of recovery of orders and getting the top line going again?

Yeah. Let me answer your second question first, which was basically about power lines, if I understand you correctly as the power lines business is a $200 million business. You use the term severely negative and I would even expand the term a little bit, it was really bad performance of that business and which on the one hand is bad news because we were hit by something, which came as a surprise. On the other hand, it's good news because it's a fairly confined area, so once we have resolved that issue we should see a big improvement again.

And the first question was, give me the hints again please, what's that, the business plans. Yes, I mean, it won't be presumptuous if I say after eight weeks on the job, if you know, all the insides and feel absolutely comfortable about confirming each and every number. That will be presumptuous. But, obviously I did do quite a bit of pressure testing with certain figures and the way we have phrased it now, I can feel comfortable with. As you said, you know, the 10% target for PT has become more challenging than we thought a few weeks, a few months ago, and that's definitely true. On the other hand, you know, we have seen AT performing very nicely, steaming ahead. We don't commit on any improvement there, but there is potential that we may end up somewhat higher. Altogether, we have reconfirmed the 8% profit target and I think that's still the ambition and for us there is no reason to doubt in that. Did I answer your questions.

Yes, may be just on the power line business, do you expect the top lines to recover or is that something you need to just do purely on the restructuring, it may be exiting the business?

No, the top line is that wouldn't be enough, you know, simply the way for the top line to create more volume and then help us through the problem, we cannot wait for that. So, it's a classic case of restructuring, making sure the capacities are adjusted, and also looking into all other possible options.

So, we should may be expect some charges in the couple of quarters higher than the last couple of quarters in PT?

I can easily say yes with regard to charges because in a study stage situation, if you ask me what is the study stage restructuring charge for all of ABB, I would answer to you. I can easily say yes with regard to charges because in a study stage situation, if you ask me what is the study stage restructuring charge for all of ABB, I would answer to you, company like ours probably spend something like 0.5% to 0.7%, such points will save us on restructuring in a whole year and if you take that figure, we really haven't spent that much for this year and if we think something needs to be done, we are going to do it, and even if they come with reduction charges and that relates to power lines as well.

But your target is for next year of 8% that's after restructuring charges?

Yes, I think my philosophy is, I absolutely understand that ABB has taken the approach of different shape between EBIT B4 and after restructuring charges. When we go through a turnaround, you really have to be very explicit about what this regular basis is, what are specific last restructuring charges, but once you found your way back in to steady state mode, you should get rid of this special line. I think, as I said, you know, the regular restructuring is just a part of the business, if any to be included and absorbed by the EBIT. So, in the future we are going to spell out restructuring as a separate line. We may still talk about it specifically in the commentary or let me talk about 8% EBIT margin that includes the full impact of restructuring.

Thank you.

Welcome. Other questions please.

The next question is from Mr. William MacKay from Commerz Bank. Please go ahead sir.

Yes, good afternoon Mr. Kindle. I have a couple of questions on corporate costs. There seems to be quite a large change in the guidance what you are providing on corporate cost. If I go back to numbers that had been provided, I think the implication was that you talked about a 130 million in HQ and Stewardship, 90 million or so in R&D, and may be 20 or 30 in other costs, so that would lead to a total cost in corporate of some 250 million. You are now guiding 450 million, a 200 million change and yet it can't all logically seem to come from the FX effects and cost linked to Sarbanes-Oxley and most of the disposals are now concluded. So, perhaps you could work us through the quite substantial change in the HQ and Stewardship assumptions that you are now providing for 2005?

Yes, thank you William for the question. I am happy to do that. Your comment is right, I mean, obviously there has been somewhat of a change with regard to the feelings or guidance whatever you call regarding this corporate cost item. Let me start with a very general view, once again if you ask me where do I think should corporate cost end up you know in a steady state mode, then I would like to elaborate this a little bit.

I mean, every company, every corporation of this size has certain overhead cost and the question is what is affordable and what is low rate, what is an expansive rate? And if you ask me I would give you the first thing 1% of total sales, if you can do it as 0.8% you are cheap, if it's more than 1% you are probably on the more expensive side. Let's also keep in mind that some of the companies who run at below 1% they seem to shift some of the burden into the divisions. But if you ask me what is a reasonable run rate for the truly operational corporate cost, I would give you 1%. So that makes more or less 200 million.

Now looking into the actual cost we have, we unfortunately have a few cost items, which we simply cannot move for reasons cost for pension funds. They happen to be around because we had larger businesses in the past, which we divested and these costs are here to stay and they will peak throughout our time, but that will take a quiet a few years.

Here we specifically talk about 50 million, so let's add the 50 million to the 200 million true operating cost. And finally there is corporate R&D and this is a conscious decision any company can take. We could for instance decide the charge corporate R&D fully into the divisions, although the kind of a share deed 50% corporate 50%, divisions we have taken obviously that decision to leave it at corporate in order to free opted divisions from any interference of our corporate R&D rise to still have a very much to say of what is being done there. So, this corporate R&D cost is around 90 to 100 million. If you add all three figures up, you take close to 350.

So if you ask me what is the reasonable run rate for this company to show me that the key corporate R&D and corporate level not the divisions, I will give it a 350. Of course, once we have 350, with question ourselves can we drive it down to 300, are we not there yet?. Now, next question is by when can we achieve the 350. In the regular situation, I would have told you that within one year, we should be able to drive it down there, it doesn't mean that we have the full impact, but we could take half of the impact and at the end of the year we should be at the run rate of 350. However, here is where the special factors coming. We do not really have foreign exchange impact and believe it or not, we are looking at the cost of introducing Sarbane-Oxley and it is a huge cost, I can tell you, it's in the order of magnitude as let's say discrepancy in what you expected from PT and this is a cost which has been checked with other market participants even had companies talk about three digit figures, I was really amazed about that, but anyway it comes at a hefty price and is again is related to people who are classical overhead. So, all of these slows us down in reducing the corporate cost and for that reason, I cannot make a commitment that by the end of 2005 the down of 350. But, we will have to try hard to get down there and as you said in the speech 450 that would be a reasonable first figure in the industry in this journey.

Just to follow onto that, then should you have completed the compliance procedures, Sarbanes-Oxley by the end of 2005 and hence that cost that I guess you are employing something about 50 million is one off event and then just moving briefly on my second question was on the interest charge, it was very encouraging to see the operating cash flow begin to improve for the growth in the third quarter and hence the net debt slightly better, given that we can see the net debt now perhaps well below 1.4 billion in 2005, would you venture some guidance on the interest into 2005?

OK. Let me come back first your statement about Sarbanes-Oxley in the 50 million new mentions I would certainly hope that we can do it at lower cost and debts if we try hard. But, as far net debts at the moment it's 1.6 billion and of course, looking at our operating performance and the cash flow, which we are going to produce one could assume that we can drive it down further. But, we do have certain pension cost cash as well, which we need to take care of. Altogether, we feel that our net interest situation will be the order of magnitude to 200 first for 2005.

They are on 2004.

No, it is not flat. This, as such in the speech, I said 200 to 225, we are slightly above 200 we have mentioned.

Thank you very much.

You are welcome. Further questions

The next question is from Mr. James Tettler from Dresdner. Please go ahead sir.

Thanks a lot. Just coming back to the corporate, I mean, we were told at the Q2 stage that over half the charges were payments to third parties and obviously this will start to come down very significantly. I mean, I guess, you already knew about Sarbanes-Oxley, I mean, really it is a very significant change from what you were guiding under 250 you had before included already that the corporate charge as above, the corporate R&D of 90 million. I mean, where this is really coming from, it is a very significant change.

Yes you are absolutely right. This is a significant change, I mean, I don't know what exactly the thinking was in the past, but it is clear that the 250 including corporate R&D that seems to be not achievable, we can't do that because that means corporate operating cost will 160 and we deduct the pension cost which we cannot really change to another 50 we end up with 110 million and that's simply not feasible. We don't even need to discuss that, that's not do-able.

Now what has changed I think -- Sarbanes-Oxley to be honest, I don't think the recognition was around half a year ago that this would create so much cost and to know the longer it goes the higher the numbers get, you know, I told you about some other information we got from other companies. We certainly hope that will happen or we have the factor in that we need to spend a lot of man hours in introducing this new regulatory system.

I mean, given that you can't believe that the path guidance in corporate you feel confident in the forecast together two divisions.

Yes, I do feel confident. I may not run a business before, I always know that, you know, there is uncertainties in the market place which you cannot factoring, they just happen, you know, I don't know how the oil price will look like six months from now. I don't know whether the macroeconomic environment will keep steady and keep improving or let it go down after election. I think we don't know that, but everybody is in the same situation. As it concerns, internal capabilities in productivity management and so forth the order intake we have and lets not forget about that. I mean, the order intake for both divisions was very good and the gross margin is in no way declining or showing that we are running into a problem. If we are able to convert all of that into operating performance, which means EBIT, I should be able to feel confident about the targets and this is for them.

I mean, it's just as strange that we have PT capital markets stay with a slightly different tone it was only a month ago to what we actually saw in the outcome. Do you think there was a communication problem there?

I don't want to argue with you how you perceive what was set there, when I read the analyst report after that day actually you can do in the same exercise if you pull them out of your drawer, you know, you have very mixed picture. Some people are very upbeat and lets not forget that the P Today was not about short-term prospects. It was not really to deliver your guidance for what the expect for 2004, but it was about getting to know the business and being able to assess the strategic outlook of that business and this is where a lot of my confidence comes in irrespective of the current problem. The strategic outlook is very good. I mean, we have just been to China with the whole board, what we have seen there is just amazing. On top of that, we have a (inaudible) in Western Europe and in the US, which is 40 or 50 years old. There is a lot of pent up demand; I am not worried that all that PT will be a good business you know down the line.

Thanks a lot.

Welcome. Any other questions please.

The next question is from Ms. Lisa Rhonda from Lehman Brothers. Please go ahead madam.

Thank you. Good afternoon. I just want to come back on to the corporate cost again sorry. You said that the 250 million was never the level that you would have endorsed, are you saying then that the target was signed of by the outgoing CEO, the CFO who is now left, and also by the two heads of the respected divisions, was never achievable and if so which aspects of the plan were never achievable.

Lisa thanks. No, I mean, I would never say something like that. Lets face it, unless the mistake, you know things correct with the mistake, but I don't think that this guidance, this famous corporate cost guidance was ever an official target in the press release on the statement. I think, it came of in the conversation in Q2 and Q1 and obviously there was quite a bit of communication, but it was never really set as an official target.

I think I have to cut here some , it was presented in February 03, I think literally and that it has been cost consuming, is there in the original presentation of the new 2005 plan and then obviously it was just updated as we went through the quarter.

OK, I mean, I wasn't around so I don't know exactly what was all set in return. But, clearly mean when I came in or still coming in I do look into all the figures and I have to come to my own conclusion do believe in these figures or do I need to deviate. This was the question before. I am going to go through the corporate cost we have clearly seeing the impact now. I do deviate with the previous guidance. My feeling is and my experience tells me that we need to go for different target, this is not the lack of being ambitious, please don't look it at that way. It is a simple fact that when you look at the different layers of our corporate cost some of them we can move, some of them we can drive down and some of them you cannot.

Could you extrapolate on that bit a more because that would be the interesting bit to understand why you considered, perhaps, the previous plan was being too ambitious.

Why? You would have to ask the people who communicated that before, but I think it was ambitious target assuming that a lot of the things necessary to drive on the cost could happen faster. What exactly the thinking was you know I don't know, but in the mean time, we have also had changes in our environment, I mentioned the foreign exchange, I mentioned Sarbanes-Oxley, I mentioned the fact that we have not been able to execute all of the divestitures for instance due to the Asbestos stall at the moment. That keeps, hinders us in our efforts to sell off the downstream portion of the (inaudible) business and that all leads to the fact that the corporate cost have not gone down as quickly as we felt in the beginning.

OK, thank you.

Welcome. Other questions please.

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

Good afternoon. I have two questions please. Firstly, you have given us no guidance at all for the fourth quarter 2004, although you are reiterating your hopeful guidance to 2005. Can you outline what you expect in the fourth quarter and do you expect the prior margin to come back strongly in the fourth quarter after what is normally a weak third quarter.

No, I mean, unfortunately I cannot answer your request. I don't think ABB has given any guidance for the year 2004 apart from the fact that we definitely want to come back to the black figures as it concerns the net income and it would be wrong you know for me the incoming CEO after eight weeks to give you guidance for the fourth quarter that's asking too much Peter, I'm sorry.

Secondly, on (inaudible) question you had a very strong order intake in the automation business in the US and at the third quarter. What's happening there you are seeing large projects coming through or is it just pick up in maintenance business as it an unusually good quarter.

No its not necessarily large orders, but I would say a well spread out development with regard to base orders, which typically is actually a better development and if you increase just hinge of one or two large orders. So, we are really hopeful that there is a pickup in demands in that region as well.

Thank you.

Welcome. Other questions.

The next question is from Mr. Julian Beer from Enskilda.

Good afternoon. I would like to ask a couple of questions. Firstly, going back to the power in Q3 and the one off issue, which I think was relating to certain projects. Could you say which projects did cause you problems and what do you expect them to cause your problem during the fourth quarter as well and secondly I would like to look at automation which seem to have performed extremely well during the third quarter apart from an order and margin perspective and I would like to ask you if you think there is any scope it will actually beat your 2005 margin target in that business if the current market conditions persist into next year.

OK. Thanks Julian for your questions. As it concerns, the PT projects, I don't think it would be wise if we have handed our specific names of projects or even customs. That wouldn't help our business. But, there was several projects not all the same business units, but few of them with I would say a magnitude of impact, which was not acceptable relating to project management issues. Some of them also know contractual issues, things which you need to clean off by installing the right district cleaner, the right project management procedures. Do expect this to be repeated, no. As I said before you all have some issues no doubt about that, but the question of frequency and magnitude and so part of it really can be contributed as one off.

As for your question regarding AT, lets put it this way. We do have a hope that the continuous performance which is actually based on a pretty good momentum because the performance is based on most of the business areas of the AT. As the momentum carries on well into 2005 and we do see continued improvements and of course, everybody hopes in ABB that improvement will lead us even beyond the target, but it would be wrong to commit at this point to a target higher than the 10.7, which was stated before.

OK thanks and really just the second part of that question. Without good performance coming in part from the process automation area, what sort of production assistance are shifting best they have done earlier in the year and how do you see that market developing during the next six months.

Well, we have not disclosed in the past any figures relating to the business areas and this may change, but I am not promising, just thinking about this. Let me just in a qualitative way give you a little bit more information about these businesses. If you look at the AT division, very broadly or roughly speaking you have three business areas one is called automation products, which is some four-and-a-half billion and this is very heterogeneous business area including lots of different stuff from small components you know brake, switches, low voltage components, tin grade components up to motors, drives, and engines and so forth. They have been doing very well, a very strong performance based on lot of products being sold and shipped this is the unit where we ship something like one million products a day and so it's statistically on a very solid basis, we expect this unit to continue with a very strong performance into 2005. This is a $4.5 billion business and EBIT margins are very attractive which means that they are clearly above 10%. And then we have the manufacturing automation, which in other words is the robotics business, which includes everything the products system sales and services. This is more volatile because one or two large system orders can make a difference and you may have read our press release about the large order regarding the price of which we got around summertime and also here we do see improvements.

Unfortunately, this unit is not performing on the same level as the first one, it is clearly below 10%, but it is making necessary improvements and we hope that we are able to continue in the fashion. The third one is process automation, which is more or less a four billion unit, which is about custom made or engineer to order complex control systems, the systems used around steel factory, cement factory, a cotton paper plant and so forth, so it is a very diverse kind of applications were the application know-how and the basic technology to control system use are very important. You have heard us mentioning the new system the 800XA that is giving us of lot boost, we actually issued the press release mentioning a few important projects we got, so this business area is also improving, it is also not exactly the same level as the first one, but it is forging ahead, its improving every day and we are hopeful that this will continue.

OK, thanks a lot.

You are welcome.

The next question is from Oliver Esmerald BNP, please go-ahead sir.

Yes, good afternoon. My two questions will be referring first on disposal, may be you can share with us your view on the remaining disposal that previous management had committed to when do you think that they can happen and are you also committed to them, secondly on the level of net interest into next year, I am a bit surprised that this would not decline much below 200 and you mentioned pension as being an issue, can you may be update us on the current level of funding in your pension fund and how much you want to contribute to that this year.

You know I was waiting for that pension question. I am a great expert in pension account, but fortunately I have an expert seating right next to me putting together the figures. Let me first talk disposals therefore. As for the disposals lets mention the most important ones. One is the down stream portion of our OGP business, which is the Lamaz operation and the other is building systems with major operations in Germany, but no only also in the States and some other small countries. The OGP downstream portion that disposal had been planned already months ago, but lets face it as long as the asbestos ruling hasn't arrived yet, we are more or less stopped, because that business is linked to that ruling and as long as that ruling not round it will be very difficult for us to find the purchasing partner. So that they were dependents, but as soon as that is done and the verdict is here, it is hopefully going to be a positive verdict or ruling then we can proceed with the transaction.

As for building systems we have sold a very large portion in the past. The Nordica building system, but also the Swiss portion and of course we are continuously working on sending the rest of that business as well and that all depends in our negotiations on receiving the right financial configuration for divesting. So you could say our commitments where it was the previous management for the today's management, it is still there. We are committed to moving forward and cleaning up of our portfolio. However we will not do something, which is economically not meaningful, meaning at the end of the day that proceeds again from divestituting must make sense and apart from that there is all the things which will be disposed off in the future. There are smaller scale, that are equity ventures, participations and stakes and so forth and you will see us working on that diligently throughout with the next month and years. So hopefully one or two years for now this whole discontinued operations line is really not of any interest anymore.

Yet another question regarding interest net and the pension plan. The interest net I mentioned, the number of minus two hundred million; that will be the maximum. It's interest cost obviously from our borrowings net of the interest income we have in the balance sheet, and also the famous amortization of the bonds where we changed the structure. If this happens in summertime as a consequence that we have every quarter a charge of $7 million or anything like that and that is obviously all is included in that interest net.

Now as for the question regarding pensions we had 1.6 billion in un-funded amount a year and the cost we expect for every year are about two hundred million. That is not going to be a large change to what we have seen before. Now does that cover your questions?

Thank you very much, may be, just one last. What is your view on ABB's ability to offer dividend this year and next.

Well, obviously proposals for dividend is in the discretion of the board, as the incoming CEO you all should be careful in prejudicing whatever the board wants to say. But let's face it, we want to clean up our balance sheets we have to improve our cash flow position, then of course we have not only the wish, but even the obligation to at some point pay dividends to our shareholders once more.

When that will exactly happen, we'll see, but of course we will take every effort to make sure it happens as quickly as possible.

OK, thank you.

You are welcome.

The next question is from Mr. Tim Adams from Citigroup. Please go ahead sir.

I just want to come back on two issues, the first is the 50 million or so pension cost that you alluded to in you discussion about the corporate line. Can you just tell us what that relates to, I mean, is that the cost of running schemes for business that have left group and said that or it is really a sort of discontinued costs as it were or is it a part of the ongoing cost or where does that come from, we had never had that number before.

And secondly I will just come back to this power lines issue, a $200 million a year turnover business. I mean you are suggesting this is having a double digit, you know swing impacts on the number. I mean, clears $200 million not $200 million per quarter. It seems enormous impact and you know I am quite surprised if the impact was that big, that it was not something you know you perhaps would have chosen to flag up when giving us the two Q numbers. I mean, presume that this something that would be foreseeable, because it must have a order book.

OK, Thanks for you question. As for the pension question, yes, the 50 million do relate to mainly the rest of businesses. As you know, ABB sold in the past two large businesses of ours that was transportation in one hand and power generation on the other hand due to that we have this cost. This cost is to a large extent based in Germany, but it is not the only there are also some other countries involved. So at the moment it is a kind of a fixed cost, we cannot change it; it would change only our long term.

But is that 50 million you are paying to those schemes, or is it the administrative cost of the schemes or ..

Its funding, it's funding cost. As for power lines, you are right, I mean the impact has been substantial, somebody has used the word severe before. I would call worse than severe, it was really a dramatic situation and this dramatic situation came into being because of adverse trends, accelerating all at the same time. You could say order intake dramatically going down and the remaining orders still around with dramatically reduced prices, lack of absorption and at the same time, also negative margins on the (inaudible), really near catastrophic situation. The business was never a group business. It was strategically exposed before, there's been discussions within ABB years ago what to do about this business. Unfortunately its still around and unfortunately it was hit this year, the worst ever in the last few years. Why we have no talks about it earlier, I don't know why. I think it is not really helpful to speculate about the past too much.

I mean I'm less in saying its $200 million turnover business per annum.

Yes

So I mean how this whole lost $20 million on fifty or something in the quarter?

Well, its probably not far away from the truth.

OK.

So it was really severe.

Thank you.

Welcome.

Our next question is from (inaudible).

I have to come back that is corporate overhead cost guidance for next year. When you set this targets before you look at the dollars situation and look it now, how much would you say is the currency related for your new guidance. Could you just mention if that how much in terms of money.

Its again you know I do not want to become too precise, but if you talk about currencies again, a drop of each million figure is a significant one such currency. Because most of our overhead is not in the dollar zone it is in the Euro zone or other currencies. Any other questions.

Thank you.

Welcome.

Other questions?

The next question is from Mr. Charles Burrows from Goldman Sachs. Please go ahead sir.

Good afternoon, two questions please. Just going back to the painful subject of the power lines. You said that it is an area, which you are going to have to review, does that mean that this is something which will likely to see one way or the other you need to close the business or whatever in Q4. It is something that is to be dealt within the near term, always there is something that may take a year to resolve. And secondly with subject of limits in the down stream operations, they have been sitting and discontinued items for nearly two years now and obviously , we don't when the appeal court is actually going to finally give it's judgment. But it is not worth to go into 2005, would you have to bring that back into the normal numbers or can you keep it in discontinue.

Let me start with your second question Charles, it is actually a good point you are making, from a regulatory point of view, accounting point of view there is the issue how long can you keep something in discontinue. But lets face it, we clearly earmarked that for the divestiture, we are still committed to divesting it And I think the likelihood is that we would have been able to divest it if it hadn't been for the asbestos issue, so these two things are linked to each other. Our strategic intent has not changed a bit. We are just waiting for the asbestos issue to be resolved, so that we want to move forward with the divestiture. So I think the case has a argument to make sure that this continues on the discontinued operations, but I am not the expert and will see what the account, auditors and so forth will have to say with regard to that.

As for power lines, yes I mean with explanation I gave before about the operating performance, we must be open to any or all options possible. I would refrain from just straight closing down, that usually value destroying. There are established customer relationships, even if it is low take there are some operations which are of value. I would say it's the solution of last resort, but confident to be confined to other ways to improve the situation.

If you look at the order book, which we presume is also low because of orders coming in. The high level of cost is likely to remain with you during Q4, and possibly Q1; how much cost can you take out by restructuring. I am just trying to think about how long (inaudible) this would be.

I mean we clearly believe that this dramatic situation which was seen in the third quarter won't be repeated in the next quarter, irrespective of whether we have full volume in our P&L or not, but this is unacceptable and the measures taken by management will make sure that the loses or the situation we will be seeing in the future don't look the same as in the third quarter.

So there might be lower loss while you sort out longer time issues.

Not only might be, there actually must be a lower loss.

Thank you.

You are welcome.

The next question is from Mr. Alexander (inaudible). Please go ahead sir.

Yes good afternoon I wanted to ask you what is your view on asbestos, I mean you have been clearly changing the guidance and corporate cost and - I mean, we are obviously today doubting basically everything. How can you be so sure that asbestos is going on as you wish.

Thanks for your question, but let me correct that impression a little bit. Lets take two steps distance I think the over all situation of ABB is still a success story. If you look at the order volume in both divisions, if you look at the operating performance of AT that really was good news to talk about. I do realize that most of you are focusing in now on PT power lines and corporate overhead issue, I do understand it. It is also a fact oriented, it's also partly an emotional issue. So don't want to down rate the importance of all of them, but let's not you know skew the picture too much in the negative way, and of course as asbestos is an item by itself. Yes, no connection whatsoever to the other issues we have been discussing before. As for asbestos, no change at all. The substance hasn't changed ,the third circuit got together in June 3rd it must have rules by now. I would presume that they probably wording the ruling and we are just waiting to receive this ruling. This could happen tomorrow, this could happen in two months, we simply don't know. We can not influence the court over there and we are waiting as much as you are.

OK. I would like another clarification on the power technology, because at the beginning of the conference you said that actually the regional Florida margin is so low. It is hardly one off, if I quote you and then during the consult, when you said there is a one off. So what is the exactly the one off in this situation of power technology and what is not the one off.

You probably misunderstood maybe because it is partly one off. We cannot expect that all the problems will disappear because of the one off, some of the things we need to correct by ourselves. But then some of the issues clearly they are one time event certain situations in project for instance, we can expect that they are repeated in the future, at least not for the same extent. I just explained that we do expect the situation power lines all that improves somewhat, but partially it is one off and other things you know we need to work on to correct them. For instance, the materials pricing issue is something which we have the lever in our hands to correct, which means we negotiating with this raw material suppliers and also trying to pass the prices to our customers. We have a need to be very active in order to correct it.

Is it like the statistical you have used this word, the statistical concentration of problems in the projects that we have some sort of high concentration in this quarter with this? It can be defined as a one off.

We would say this is definitely the frequency plus the magnitude which then be classified as statistically special about this quarter, unfortunately. But there would be too simple a story obviously, we just do not wait for the statistic to play out and the losses to be reduce automatically. We have to do something about this as well, and as I mentioned project management, tour of systems basically and things like are on the agenda. But let me say that we have basically used of our time, I'm willing to accept one more question and then we bring the conference to an end. Because as you know we will be on the road show for quite a days starting tomorrow, then also next week and so forth; there will be ample opportunity to ask more questions. So may be we take just one more question please, if there is one.

Yes sir, the last question is from Mr. Mark Nichols from Lehman Brothers, please go ahead sir.

Good afternoon. It is Mark Nichols from Lehman Brothers. I just like to come back in your comment on price rises in relation to the raw material cost situation. You said you haven't managed to put the prices up, I don't quite understand whether it's a timing issue, or whether there is difficulty with the customers and so on. I wonder if you could just elaborate on that and what your expectations for being able to do it and by when.

It is primarily a timing issue. At this moment, the world has seen a so dramatic price increase in steel, copper and other materials that everybody is accepting this fact. Even the automotive industry for instance is accepting the fact that suppliers are increasing their prices. However we need to do that in a certain, I would say co-ordinative process. We just cannot go around and say, hey, we charge you more because the raw material has gone up. You need to announce that the balance may come at certain time period, until it's really passed through and this is what we are talking about. So it's a timing issue, and I mentioned, we do feel that at sometime next year we are going to see the negative effect of this petering out.

OK, thank you if I may just one further question. You mentioned during your comments that you are looking refocusing on the operations. I am clear as to what you mean by that given that which seems to be probably on track and if you come out of these step change program and every thing seems to be perfectly well focused at that point.

You mean my last comment when I spoke with strategy execution of people.

Yeah.

Well this is actually interesting question because it goes a little bit away from the current focus on figures. When you think about running a large organization, in essence it comes down to three themes. It is about strategy, which is defining the right way into a successful future, its execution making sure that the necessary steps happened at this future is really approached. The third one is people. I would say that the topic of strategy is over rated many times. Strategy is important probably as a decisive role only every five or so in a company, and if you look at the execution this is much less dramatic in a way. It a lot about hard work it is about discipline, it is about day-to-day leadership; and if you ask me as an investor would I rather invest in a company with a great strategy and bad execution or vise versa I would go about execution. And if you look at ABB I think the strategy over all is OK, it doesn't need a big reshaping at the moment. Who knows how it will look like three or four years from now, but at the moment it is OK, I think what we do need to address is execution. You heard about the problems we had for instance in certain sectors of PT and there is other problems in other sectors of course. So that is the things we must act on. We need to think about the procedures, the business reviews, the discipline and things like that. The company has gone through a period of very, very severe shakes and jittery moments and has regained stability in the last six months, which successfully ends the de-stabilization phase and this the time now to focusing on execution.

So with that, thank you for your last question. We look forward to talking to you again tomorrow and next week, and in the next announcements. And thank you for your interest and have a nice afternoon or a nice rest of the day, bye, bye.

Ladies and gentlemen the conference call is now over, you may disconnect your telephones. Thank you for calling, good bye.