Abb Ltd (ABB) 2005 Q1 法說會逐字稿

Welcome to the ABB 2005 first quarter analyst and investor conference call. hosted by Mr. Fred Kindle, CEO of ABB.

[OPERATOR INSTRUCTIONS]

After the presentation, there will be an opportunity to ask questions. We will kindly ask each caller to limit themselves to two questions only. Journalists who have called in, your participation is in listen-only mode. This call must not be recorded for publication or broadcast. A replay of this call will be available for 96 hours following the conference call.

[OPERATOR INSTRUCTIONS]

At this time I would like to turn the conference over to Mr. Fred Kindle, CEO, accompanied by Mr. Michel Demare, CFO. Please go ahead gentlemen.

Thank you very much. Good afternoon, or good morning, ladies and gentlemen. Thank you for joining our analyst conference call for the first quarter 2005 results. With me this afternoon is Michel Demare, our Chief Financial Officer.

I presume many of you have downloaded the presentation available on our Internet site. My script will more or less follow the charts in there. So if you want to compare my words to those charts, that's fine. I'll basically start with chart number three in our presentation.

The main message is -- We have made a good start into 2005. Favorable market conditions helped lift the top line growth for both divisions. Our group EBIT improved by more than 50%, led by a strong performance from the Automation Technologies division, and we achieved a positive [development] corporate costs.

Our ongoing focus on execution improved our operating efficiency, and our overall profitability continued to increase with our group EBIT margin now at 7.7%. Net income increased to $199 million thanks to the higher EBIT, lower net financial costs, and the reduction in losses from discontinued operations.

Our net debt increased, reflecting higher cash outflows that are typical for our business early in the year. Our total debt decreased and our gearing ratio improved to 61%. We took another important step in the first quarter towards an asbestos resolution with the term sheet agreement we announced in March. So overall a good, if not even a very good start for the year. And we are committed to achieving our group EBIT margin target of 7.7%.

However, despite robust growth in orders and revenues in Power Technologies, the EBIT margin there was weaker than a year ago. The business faces extreme volatility in raw material costs along with some operational issues. As a result, we can no longer reaffirm the 10% EBIT margin target for 2005. I come back to this one.

There are some additional challenges for the group in 2005. We expect to maintain top line growth, but not at the double-digit rates that we have seen in the past few quarters. We need to continue to drive operation performance in the Company, including a tight focus on corporate costs. The first quarter results do not reflect the increase in costs we expect later in the year to get our Sarbanes-Oxley program running at full speed.

We also expect our normal streamlining costs of 0.5 to 0.7% of revenues per year, which was not the case yet in the first quarter. We will continue to push for a timely settlement of our asbestos plan and we are making progress, but we cannot predict when we will finally complete the process. Let me turn to Power Technologies.

Let me quickly review the key operations developments from the first quarter. In Power Technologies, orders were up both base and large orders led by the U.S., the Middle East, and Asia, especially India. Orders were lower in China, but that is compared to a very strong first quarter in 2004. We do not see any significant change in the overall demand situation in China.

Revenues were higher in both the Product and System business areas, leading to a 12% increase in EBIT. However, as I mentioned earlier, volatile raw material costs, especially for transformer oil and electrical steel, reduced EBIT in the transformer business.

We continue to push higher costs through to the markets, hedge our costs, and lock in stable prices through long-term supply contracts. We're also sourcing more materials from low-cost countries. But raw material costs have continued to rise faster than we can adapt. Along with some other operational issues in the division, the rapid rise in raw material costs more than offsets higher EBITs.

In the medium voltage, high voltage and systems businesses, which was good news, and lower restructuring costs in the first quarter compared a year ago. As a result, the PT EBIT margin fell to 7.6%. Under these circumstances, reaching the 10% EBIT margin target for 2005 is unlikely. We will come back with a new target when we publish our second quarter results in July.

I move now to Automation Technologies on the next chart. Automation Technologies had a strong first quarter. Orders and revenues showed good growth, led by the U.S. and the Middle East. In Asia, increased orders from India more than made up for lower orders in China. Again, we are comparing with a very strong first quarter of 2004 when AT orders in China grew by more than 50%.

So we don't see this quarterly development in China as an indicator of any significant change in underlying growth trends. AT's higher revenues, lower restructuring costs and improved efficiency, all led to a 42% growth in EBIT and a margin increase to 10.9%, clearly a strong quarter for Automation Technologies.

Here's a quick overview of the contributions to EBIT. As I said, Automation Technologies had a good quarter. You see this on the next chart, by the way. Corporate also improved. I'll have more to say about that in a moment. Overall, we are very encouraged by the group margin of 7.7%, and we are on track for meeting the full-year target.

Non-core activities on the next chart also reported higher EBIT in the quarter, mainly due to the oil and gas business [that is Lummus]. Looking at building systems in Germany, where we have most of our remaining businesses, the market remains difficult, and we took some restructuring costs there in the first quarter. So we don't exactly expect the same level of losses in the next quarters.

Corporate costs developed favorably, reflecting some encouraging progress in reducing headquarter spending, but also a $17 million gain on the sale of real estate. As I mentioned earlier, we will see additional costs associated with Sarbanes-Oxley later in the year. So you should not expect to see corporate costs stay at this low level.

Discontinued operations. Losses from discontinued operations were lower this quarter, mainly the result of the non-recurrence of the $30 million loss last year on the sale of the reinsurance business. The mark-to-market expense on the ABB shares for asbestos was 6 million lower than a year ago.

Looking at ABB group key figures now, our finance net expense improved by 38 million, of which 28 million came from the non-recurrence of the well-known bifurcation expense, that we used to incur on our dollar denominated convertible bonds. As you know, we no longer have that effect, since bondholders agreed last year to a change in the terms of the bonds.

In addition, we had lower net interest expense and financial profits in the first quarter. We don't expect these positive effects to be repeated at this level. And so we stick with our guidance on finance net for the full year of about $225 million.

Cash flow. Cash flow from operating activities decreased by just over 100 million compared to a year ago. As I said earlier, our networking capital needs increased, as orders and revenues have risen strongly again. But we have been able to reduce working capital as a percentage of revenues in both divisions, indicating a better efficiency.

In non-core activities, we had some cash payouts related to provisions taken in the fourth quarter last year, and a 21 million payout on the second [inaudible] of the upstream oil and gas divestiture.

Looking at net debt and gearing development, now. Our operational cash outflows increased net debt in the first quarter compared to the end of last year. The strengthening dollar in March had a positive effect on our net debt position, a plus of about $180 million. Gearing is now at 61%. Our gearing target of 50%, first set in 2002 is much less important for us today.

Instead we need to take balance sheet steps that create economic value. For example, in the area of securitization, rather than simply aiming for gross ratios that do not really add value. I'm indicating here that the gearing ratio for us is no longer a holy grail to go for. So we really have to look for the best of the Company, what really adds value. Looking at the maturity profile of that securities, not much has changed.

As we said at the end of last year, we will not be able to change this picture until we have an asbestos resolution. Talking about asbestos, as you know, we have reached an agreement with [Mr. Quezon] and others on the term-sheet to amend our plan of reorganization for both combustion engineering and ABB Lummus.

We have had a status hearing before the bankruptcy court on April 5. And we have two months to submit documentation now. We will have another status meeting in May, and we are working with the other parties to have a submission ready for the court in June.

To wrap up, the market outlook for the rest of the year 2005 looks favorable. We don't expect top line growth to continue at double-digit rates, as you have seen in the last few quarters. AT is developing on track for its 10.7% EBIT margin target, and non-core and corporate are also on target.

The PT goal of 10 -- of a 10% EBIT margin for 2005 has become unlikely because of the volatility in the business. We will provide a new target when we issue our second quarter results. As for our balance sheet, we will take steps that create maximum economic value. Finally, after a good start for the year, we are committed to reaching our 2005 group EBIT margin target of 7.7%.

And with that, I would like to open for questions now.

Excuse me, this is the closed call conference operator. We will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS]

First question is from many Lisa Randall, Lehman Brothers. Please go ahead, madam.

Good afternoon, gentlemen. Two questions, please.

First of all, just coming straight on to the raw material impact on the transformer business. Could you just talk us through what visibility you have of the procurement process there of those raw materials? And on that basis, what you expect the full-year impact to be in dollar terms, please, on the current procurement basis.

Especially interested obviously in the first quarter. The impact seemed to be about 60 basis points of margin. And if that's going to accelerate more over the full year, then does that explain fully why you don't believe that you'll get to the 10% margin now.

And then the second question, just on Automation, please. Can you tell us whether there was any special mix impact in Automation in the first quarter which explains this strong margin performance. You commented that the highest -- the greatest revenue came through from Automation products.

I'm just wondering whether the strength of that margin is capable of -- can continue through the rest of the year, or whether the higher order intake coming through from manufacturing and process will actually mean that we won't see a repeat of the Q1 strength.

Thank you.

Okay, maybe we start with your raw material question first. And maybe I start with a few sentences and then hand it over to Michel Demare to prop it up with a few numbers as well.

Generally speaking, the situation is pretty difficult because the market is in an extreme situation at the moment. Meaning that even if, for instance, we have long-term supply contracts, we really cannot rely on these contracts.

We have seen situations where suppliers seem to step away from contracts and ask for increased prices, irrespective of existing contracts. You could call it almost a blackmail-like situation. And these kind of developments have made the situation very unpredictable. So when you think about hedging and all these things, they can definitely help to smoothen out the curve. But if raw material prices keep to -- rise very rapidly, then there is only a smoothening effect. And eventually we will be hit by the cost anyway.

And then on top of that we have, as I just mentioned, contracts which are no longer reliable and things like that. So all together, the situation is characterized by some lack of predictability. And secondly we have seen some of the important raw materials in transformers to go up very steeply in the last quarter, especially transformer oil. Oil is used for insulation purposes inside the transformer. And also electrical steel. And both of these raw materials are not traded in a widely open market with hundreds of suppliers. Not at all, actually contrary is true. So we're very much exposed with regard to that.

Having said that, maybe Michel can add a few words on --

Not too much to add to that. But I think overall you're asking about our procurement process. I think we are comfortable with our procurement process except for the limitation that Fred just explained. Now, in terms of what we've seen in the first quarter as we say, our biggest exposure, are really transformer oil, copper and steel. Transformer oil just for Q1 was up 35%. Copper and steel was up 15%.

And the real problem we have when we're trying to hedge that, either through price increases or through derivatives, is really more the volatility of those markets and the sudden changes. At the end of the day what we have to see as we have seen first quarter we have an impact of about 50 million. In fact, the cost impact was really more in the 45 million neighborhood and the rest we could get back through the appropriate hedging of pricing decisions.

But that makes it even more difficult to look ahead of what is going to happen in the future because it's not only just having a crystal ball about the direction of the raw material costs going forward, but it's also the volatility, shall we be able to hedge or not.

That's why at this stage we prefer to say hey, let's everybody have his own assessment about where we go and let's wait until these markets stabilize a little bit to see how we are doing

There is, strange enough, some silver lining on the horizon. There's certain raw materials which unfortunately are not are used too much in transformers, like carbon steel where we have seen the markets slow down as the prices have become soft and hopefully that -- [inaudible] the overall market to soften down a little bit. But we don't want to speculate too much.

But that's the situation, we are currently caught in a dilemma that we simply don't have the clarity, the reliability to come to conclusion what the real impact will be for the rest of the year.

But by the second quarter announcement, we feel we should be there, that we can clear it up and come out with a new target for PT.

As for your second question with regard to Automation Technologies division, the overall improvement of the division was very, very spread, very well-paced on all three business areas. As you know, we have never handed out financial figures for these three. We don't intend to do so. But we have given some qualitative indications. For instance, we said previously that AT automation products is a business area where we think we operate as best in class, really on a very nice high level. Whereas in the other two, manufacturing automation and process automation, we could do significantly better, because some of the competition is also doing better.

Now it's a clear situation today, first quarter 2005 is such that we have seen an across-the-board improvement. And this is actually a very solid improvement because it's much better than if we had just seen it remain this change in mix towards automation products with the other two [inaudible] still lagging behind. That's not the case. We have seen strong improvements in process automation, and also some improvement in manufacturing automation.

So the total improvement is less so a consequence of a mix change than a broad improvement in all three business areas. Automation products, by the way, also increased their performance further in a very nice rate.

Thank you.

Thank you, Lisa.

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

Good afternoon, gentlemen. I have two questions, please. The first one is on your targets. Based on the divisional targets for AT and corporate expense and the 7.7% group targets. This implies about the margin for PT of 9% Why have you reiterated the group targets today but can only tell us in Q2 what the PT target is, because that's clearly connected.

The second question relates to restructuring. Was there zero restructuring in the quarter or just a relatively low amount that you didn't feel you needed to break it out?

Okay, thank you, Andreas for your questions. I'll leave the second to Michel. As for the first one, you're absolutely right. This is a set of targets which all must [inaudible] together, and you guys have done your own calculations before, and you're again doing your own calculations.

With regard to PT target, we have said why we don't want to spell out a concrete target now because as change in raw materials prices is a significant one can easily have an impact of let's say 0.2, 0.3 percentage points in overall of PT. And that clarity we don't have as of this moment. On the other hand, you have seen the development in the first quarter overall. I think it was a very positive development.

Without trying to overcommit on order individual targets, we feel still very confident about the 7.7%. And that's the situation. So I think most important message I can deliver today is that we remain committed to 7.7, in its own fashion we will get there.

As for your second question, Michael?

Yes, Andreas. Regarding the restructuring expense, as you know, we have given guidance that we would have for the year restructuring expense between 4 and 5 and upon 7% of our sales. And we keep it as such. Now, it is true what you say, that the first quarter has been very low in that regard. The numbers that are really in single digits.

So we think indeed that it was not really worthwhile to go in details in that. I have to add, though that we have also had some restructuring expense in our non-core portfolio and our building systems and a little bit in the OGP business. But for the core business, indeed that was a very low quarter and our initiative here was to give you a heads-up on that, that this doesn't change our plans for the full year.

Does it mean single digits in each division in PT and AT, or together?

In each division and together.

The total was single digit as well.

Thank you.

Which would, if you do the calculation, if you look at our previous guidance, it would be something like 15, 20 million short of a -- let's call it regular restructuring charge.

Okay.

The next question is from Mr. William Mackey, [inaudible] Please go ahead, sir.

Yes, good afternoon. My first question relates to the corporate cost line. Obviously, a very good development in Q1 with regard to HQ and stewardship. But, could you offer us a little more guidance as to the expected ongoing costs that should be related to the implementation of Sarbanes-Oxley.

And furthermore, I think you have an objective to reduce the HQ and stewardship to 250 million of annualized costs. Could you perhaps walk us through some of the actions that you can implement, or that are already underway to drive down that number from a run rate of about 320 or 330 at the moment? That's the first question.

And secondly, perhaps you'd like to comment on -- given the improvement in the group's capital structure, where and when you might see yourselves as being able to pay a dividend and what likely metrics you would use for that? Thanks.

Thank you, William for your questions.

As for corporate costs, I don't want to get too long on this item. But just to lay out the plan once more, if you look at 2004, our run rate was 500 plus. You add a nonspecified but significant additional charge for Sarbanes-Oxley, and then you look at the target of 450. It is clear that this is quite an ambitious target for 2005, to bring it down to 450. At the moment, if you multiply the [ATAs] by 4, you'll come up with a much lower number actually than 450.

But as we said, the [ATAs] of this quarter was helped by real estate gain and also by the fact that some of the expected costs simply have not appeared in our P&L yet. So expect this [ATA] to go up. As a consequence, the 450, the guidance we have given, is still valid. Of course, we try to meet that. Of course, we try to actually stay lower than that. But that's still the guidance we have handed out, and we stick to that.

Looking further into the future, we want to bring the costs down to a level where the true operating cost is 200 million roughly, plus corporate [inaudible] another 100 million brings it up to 300. Plus let's call some them pension legacy costs which we cannot change, of 50 that brings it to a total of 350. And we want to be at the 350 at the latest by the end of 2006. That's the plan. And the actions on the line to arrive at this goal are various, as you can imagine.

It's cutting costs at each and every corner, whether it's here at corporate headquarters or whether it's in the country organizations. A lot of the costs that will be cut is related to discretionary spending. Fortunately, a lot of our out-of-pocket costs which we have had in the past and which we don't need to spend in the future. That's actually the least painful step to cut costs. It's much more easy than to cut people, actually. Everything it takes to get eventually down to the 350. Michel, you want to add something to Sarbanes-Oxley?

Yes. I think Sarbanes-Oxley -- and you have probably seen it with a lot of American companies last year. I think that we are not reaching full steam as of the first quarter. This first quarter was really focussed in putting together the internal resources that we are [locate] to the project going to a selection process to hire an outside consultant. And starting to discuss the scope of the activities with our external auditors.

So putting all three together, that is what really kept us very busy in the first quarter. So it's not yet really down to paying the bills. So we have already had some expense, but nothing in line with what we will start spending in the next quarters.

And you had a second question?

Regarding the dividend. But if I could just follow-up first on the corporate cost issue.

Okay.

If I take the 90 in the first quarter and out back the benefits from the capital gains, you're running at a run rate of say 380 or 390 for the full year. You're guiding to 450.

So should we assume that the implementation costs of Sarbanes-Oxley is something in the region of 60 million?

It's not only Sarbanes-Oxley, but there may be other things as well. I give you a small detail. For instance, salary increases, appear here in April, not yet in March. There is a lot of small items which we need to factor in. So the 450, is I would say, is a safe guidance. It's one which is relevant and one which is valid.

Of course, we always want to beat our own targets, but that's what we have committed to. Okay. And as for your second question?

As for the second question, as you know, last year we said that we didn't feel yet we had the balance sheet structure to propose a dividend at this stage. Obviously, we start looking at the situation now with the cash flow should keep increasing, and our balance sheet position should get better.

So allowing that this gets in place, that the asbestos case is really behind us, then will be the moment to speak to a board and take a decision about the dividend. Obviously it gets more likely as we keep improving. But this is something we'll keep for the later part of this year.

Did that answer your question?

Yes, thank you very much. I'll stick to two.

Thank you, William. Next question, please?

The next question is from Mr. Michael [Hayman] from UBS. Please go ahead, sir.

Hi, it's Michael Hagman from UBS.

Just really some questions around the Automation performance which was really very, very good. If you could just give us a little bit of an indication if -- actually the automation products are actually ahead of the original targets? And if you could tell us how far the process automation and manufacturing automation are still trailing behind the original margins?

And if you still believe that you will be able to achieve those margins in particular in the manufacturing automation space?

Michael, if you allow me, what kind of margins are you referring to when you said the original margins?

At the AT we were very kindly provided with a slide which gave us an indication on how much of the improvement at the time was supposed to be coming out of those three different divi --segments within automation. And I was just -- therefore I think you must have had targets for those different segments.

And I was just wondering, where are you in reaching those originally set targets, and is it right to assume that automation product is already ahead of those original targets, and that the other two are still trailing?

I wasn't -- you're referring to the AT division day, spring?

Yes.

Well, I wasn't there, unfortunately. But let me still give you some kind of an answer to your question. I would say the ATAP margin level achieved by now, still needs for improvement. But if you look at the economic value creation, I would say if you can have a high growth rate at that kind of margin level, that would create a lot of value. So the bigger lever for value creation there, is now to maintain the growth and look for another 3, 4% margin increase. There is still room for margin improvement, no doubt about that. But they're really operating on a best in class level.

As for manufacturing automation, we have seen a very nice improvement, but still leaving some potential. And most of you guys know our competition out there, for instance, [Fanu], some potential for improvement. This has become a reasonably attractive business again, especially when we look at return on capital employed as well, there is room for improvement both in margin and in volume in contrast to AT. AP, more so in margin than in volume, I would say.

And as for process automation, they have come through, I would say admirable improvement in the first quarter. Very nice step upward, but still quite some margin potential left to improve performance further.

Thank you.

Thank you.

The next question is from Mr. [inaudible] Please go ahead.

Yes, hello, two questions, please. If you speak about PT, you addressed obviously the problem of raw material increases. But you also spoke about other operational challenges. And I would like to understand what those other operational challenges are going to be.

And secondly, if you assumingly increase your longer term goal for PT, where should the improvement really come from? What really needs to happen to get the margin further up again? And then really, a second question on AT. Do you have any signal of a business slowdown in AT? I mean, your book-to-bill ratio is very healthy, just like last year. What is really the growth outlook for that business?

Okay. Well, as for PT, let me repeat what I said before in the presentation. There is actually quite some good news in there as well, because as you know, high voltage, medium voltage and systems we were able to increase the EBIT and it was the transformer business, which was the bitter pill, so to speak in this quarter. Nevertheless, even in the well performing businesses, there is potential for improvement.

To give you one, for instance, we will see the full positive impact of better capacity utilization only in quarter 2, quarter 3, even going into 2006. We have not seen the full positive effect in the first quarter yet. This is relevant, for instance, for high voltage. In high voltage, the new orders coming in, for instance, the Nornet order has a very positive effect on capacity utilization in certain plants in Sweden. We have seen them picking up already in the first quarter, but not yet to the extent expected. So that's one improvement potential we still have ahead of us.

And of course there is always some issues with regard to a few projects, which we could have done better, delivered in a better quality and so forth. But if you look at these items, they pale in comparison to the impact we've seen in raw materials.

As for your second question regarding the AT business outlook, it was interesting for us also to look at our relevant competition. I think it's fair to state that with the local currency double-digit growth rate in the first quarter we actually did quite well. I talked about China and the slowdown we have seen in China.

This is kind of a freaky thing, because obviously when you look at total China order intake for ABB -- AT and PT, large orders make a big difference and that will obviously always have an impact on a comparison. Did we have a large order in the quarter of last year or not, or do we have it this year? Leaving that aside, if you look at base orders, both AT and PT we don't expect the slowdown in China.

We expect that the current deceleration will pick up again, and at the end of the year we show some nice growth again. Whether it's going to be as stellar as in the year before, that is doubtful. But still if you have double-digit growth rate in China, it's not too bad.

In the U.S., actually, we have seen quite some pickup, especially in AT in the lower level also in PT So, no indication that the economy will be slowing. And in Europe, it's the usual European mixed picture. As long as European economy is just limping along with 1.5% GP growth in the euro zone, that's really not that much happening apart from singular large orders like S-Link or Nornet.

So that's the picture. I would say, as I tried to conclude at the end, we clearly expect growth to continue. This growth may likely not be in the double-digits any longer, if you speak about local currencies, and that's the more relevant comparison. It may go down, but we still expect in the high single-digits which still will be very nice. So all together, not a bad environment.

Okay, thank you.

You're welcome.

The next question is from Mr. Julian Bear, Enskilda Securities. Please go ahead, sir.

Hi, Fred and Michel. I'd just like to say it's great to see a clean and easy to read report from ABB, and long may it continue.

Thank you.

A couple of questions, please. First, the last year you had a really great year for large systems orders in power. Can you, in retrospect, pin down what factors drove the surge in 2004 in particular, and what the prospects are for 2005 to be an up year organically for those kind of orders versus a very strong last year.

And then the second question is really, looking at what your comments were on the top line. You said not to expect double-digit sales trend for the rest of 2005.

Is that for organic sales only, or it is for the both organic and reported sales trends? Thanks.

As for your second question, that's organic growth only. Talking a little bit about that, today we have the potential, we have the money and the balance sheet flexibility to look into smaller scale acquisitions. And if the right ones are around, we would do so. We wouldn't hesitate, and we actually are looking at acquisitions each and every moment.

At the same time, we would be very hesitant in spending large sums of money for acquisitions for two reasons. On the one hand, we don't need it. As long as we can show double-digit organic growth, that's the best evidence that we are very strongly positioned in our markets. We don't need to artificially create growth.

And the second reason is, we still need to focus this organization on driving operation effectiveness. And any large acquisition would detract from that. Clearly the answer is, if I speak about high single-digit growth, that's the organic growth we should be able to generate out of our current operations.

Your first question regarding large orders, it's a different shape between large orders and very large orders. The very large order usually are linked to PT, the Power Technologies. And there it's really project business driven. You can have three, four orders let's of let's say 78 to 100 million a year. You can have none.

It's really hard to forecast. If you think about it, the last two relevant orders we got in PT, one was [inaudible] order, this was if I remember correctly a 100 -- no, 220 million order from Norway. That order we actually booked five years ago. [inaudible] question whether it should have booked that early, but it was booked five years ago, but in essence we only got the valid registration of that at the end of last year. Very positive because now it has good implications our capacity utilization, volume absorption and so forth. If you look at the S-link order, that's an order which we felt we had received it about three times.

But because Estonia joined the European Union, they had to go through another approval process. We are certain that we have this order, but we have not booked it yet. It may be booked some time in the near future. So that's indicative about the whole situation with these large projects. On the one hand, it's driven by individual events and developments. And second, you never exactly know when you can book it into your P&L.

Looking now into 2005. Yes, of course there is large project activity going on each and every moment. There's very large project possibility, for instance, in the gulf area. That's a connection amongst the Arabic countries where some very large project or order possibilities are happening. But it's very speculative to come up with an estimate, how much of -- how many large orders we're going to receive this year.

All in all we have no reason to be concerned. Whether in one quarter or the other we get the large order or not, is not so decisive. Important is that ABB is at the front here and does get a fair share of the relevant large order market.

Okay.

So there is nothing about the environment which could make you feel you're going get back into 2002-2003 drought of relatively large orders?

No, no. As a matter of fact, what -- if you look at countries and regions, there is a lot happening. In China, for instance, the government is in very serious discussions how to develop so-called supergrid.

This is a new grid which would use technologies currently not available where AC would go up to one million volt and HVDC up to 800kv. This grid is presenting a lot of potential for us and our competition, obviously. But it's completely new. The Chinese started talking about that six, seven months ago. And all of a sudden in 2005 it's already becoming very concrete. That won't result in orders tomorrow, but it's indicative that we can expect that large order activity will continue in the years to come.

If you're looking to America, you may have heard about the energy bill was passed the House but, not the Senate yet. Just yesterday, President Bush delivered the speech where he pointed out the importance of the energy bill. In that speech he explicitly spoke about necessity for America to prop up the grid and make it a modern grid. I spoke about the situation in the Persian Gulf. There is always something going on.

So, there is no reason to be concerned, barring a -- I would say sudden standstill in the world global GNP. We really have no doubt that large project activity will continue.

That's great.

And lastly on large orders, were there any notable large orders in the automation order book in Q1 that we should be alert to?

I think we announced in a press release that there was a large Pamex order for the Gulf Mexico which we announced in January. We had made an announcement of several orders regarding total for the marine sector. And I'm just handing a leaflet here to look up some figures.

Okay. But nothing that wasn't in the press releases?

Usually if we have large orders, we do communicate them in press releases.

Okay, thanks.

Thank you, Julian. Next question, please.

The next question is from Mr. [Charles Barrows] from Goldman Sachs. Please go ahead, sir.

Good afternoon, gentlemen. A couple of questions and one point of clarification, if I may.

First of all, back in the end of last year you indicated that PT, which was then suffering from raw materials and also from the lack of capacity utilization, that those issues should have worked their way out by Q2. I wonder whether you could give us some guidance of the margin improvement you'd expect Q2 over Q1 from those two factors, the price increases you put through last year and the high utilization in the high voltage side.

The second question related to, again PT. [inaudible] the struggling at the moment in the current raw material environment to get to the 10% margin. But is that a margin that you see just as not achievable, or is it something you think you might be able to achieve in the future? And the point of clarification was, you talked about considering securitization. I wasn't clear whether you were thinking you were going to wind it up or you were going to increase it.

Okay, thanks, Charles for the questions.

As for raw materials, yes you are correct. We obviously said, and we said it several times and [explicitly] we expect the situation to improve. And that we will finally be able to either pass it on through the costs of those somehow resulted with different contract hedging and so forth. The situation actually is a different one. And this was also one of the reasons I mentioned why there is so uncertainty and why the 10% margin target for PT is challenging.

The fact that raw material prices do have an impact and we cannot control them completely. The situation today is different from what we expected to see four months ago. The situation has worsened, as I indicated. We have seen steep increases in transformer oil, in electrical steel, and both of these raw materials -- they're not in monopoly situations, but it's a very tight market where we don't have much choice.

In the transformer oil, for instance, we don't even have a chance to generically trade this on a stock exchange or an exchange, but we actually have to physically deal with this [inaudible]. And we don't want to build up tank capacity to start hedging and speculating. So we're caught in a dilemma here. The situation is different from it was four months ago. We were able to pass on some of the price increases, especially in the states, less so in Europe. But it's clear we have to especially deal with the price issue further. We must somehow try to transfer some of the increases to the market.

Now, I cannot give you a specific figure of how much of an improvement we have seen due to price increases, because some of that was eaten up again by increases on the raw materials side that will be going too far. As for your question regarding the PT margin target of 10% in general, whether that's achievable or not. Yes, it is achievable, but obviously the market situation needs to be a different one with regard to raw material prices or end product prices. I would say the triggering, or the decisive point for ABB in the 10% margin target is on the one hand the transformer business. It clearly needs to shape up and deliver higher margin.

On the other hand, also the systems business. In the systems business we have seen an improvement. But more of that needs to come. And then the 10% would become -- would get into reach. But for this year, this is unlikely.

Thank you.

And with regard to your question on securitization, Charles, we're talking about bringing the level of securitization down.

What we're really looking here is to say, we'll let's not just focus on the debt that we have on the balance sheet. As you know we also have a number of obligations off balance sheet, which is basically securitization and from the pension liabilities and [lees] obligations.

What we want to do now is we look at the total package of obligation and start using the cash to review the one that are the most expensive. And obviously, securitization is not a cheap business. So it makes sense to start working on that. Obviously, we are aware that it's kind of artificially [inaudible] flow or [inaudible] cash flow.

But we will also be transparent about the movements we have in securitization so that everybody can reconcile the number.

So here you could say we have a hope that the market sees that what we're doing here is going in the right direction, even though it may not be helpful to officially achieve our 50% gearing targets. Because when we deal with securitization, we are dealing with an off balance sheet item. It also has a visible impact on our cash flow statement. But clearly you are sophisticated and professional enough to see that there is real value in doing that.

Yes, that makes sense. I just wanted to check which way you were going with it.

Okay. Thank you.

Hope you are reassured.

Thank you, yes.

Next question, please.

The next question is from Mr. James [Schteckler], Dresdner Bank. Please go ahead, sir.

Yes. Thank you. Just coming back to cash, looking at your cash flow in Q1, obviously working capital very significant outflow. Could you just give us any guidance on how you see the cash flow for the full year relative to EBIT for the core? And also your capital expenditure seems to continue to be falling.

Your longer term, where do you see that number as a percentage of sales?

I don't remember whether we have given guidance in the past of the kind of operating cash flow that we aim at. Usually we look at it as a percentage of EBIT conversion. And I don't think that we should have any different target in the past than that is pretty close to a one to one ratio of EBIT conversion. We are not really concerned about the cash outflow the first quarter.

If you look back a little bit in all, cash flow is to [inaudible] the first quarter is always shown a pattern like you're seeing now. On top of that you obviously see the large orders that we have taken, the large increases that we have there. It means that now we have to start building some inventories and working process in order to be able to deliver on these cash flows. We've also some exceptional outflows in non-core -- in our non-core businesses that won't be repeated in the next quarter.

So we're quite confident from that perspective that the cash flow for the year is [inaudible] track. And you had a second question?

Yes, in terms of CapEx, where do you see a normalized level there? It's roughly 1.6% of sales in Q1.

That's right. Usually we're more compare it to the depreciation level. It still appears that we be spending CapEx below depreciation this year as well. It's a trend that we're focusing more so on CapEx and capacity expansion rather than building brand-new plans from greenfield. So it appears this kind of CapEx level is enough to sustain the business expansion that we are looking at.

If you allow me, it's an interesting situation. Because with our new CFO coming from originally, the chemical industry, where he always has to restrain people in asking for more cash, the situation at ABB is actually very convenient.

If you look at our CapEx, it is, I would say on a reasonably low level. In the long-term, CapEx we spend should be more or less of about the same level as depreciation. We are not top-down managing CapEx in a way that we can tell the business area division managers that they have to be very careful in spending money.

As a matter of fact, they need to spend all the money they need in order to make sure that we continue to grow. So this is the situation of today. And what you see in the current P&L and balance sheet maybe is not exactly indicative about the medium term future. I would expect the CapEx spending to pick up somewhat.

Okay, thank you.

Welcome.

The next question is from Mr. Ken [Elbe] from [inaudible] Please go ahead, sir.

My questions have been answered. Thank you.

Welcome. Other questions?

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

Good afternoon. Two questions, please.

Firstly, you're still running with a very large cash balance. I know you said you'll be using that to pay off other off sheet liabilities. But as more of your growth in revenues come from Asia, can you just give us an update especially since Mr. Demare had a very good look at the accounts? Can you really get all of that cash? How much is stuck in India and China, where it might be difficult to repatriate?

And then secondly, you referred not just to raw materials in PT, but also operational challenges. Can you give us a bit more flavor on what these operational challenges are, what you're doing to correct that, and what's going wrong there?

Well Peter, on your first question, I can reassure you that to say that we have not been retiring more debt, is not due to the fact that the cash is blocked or too much cash is blocked in the countries. I think if you add together all the cash in the countries where it is not too easy to move it out, you will probably get to about $600 million out of the almost 4 billion that we have there.

So the problem is not really there. The problem is more about, does it make economic sense to go in the market and pay a pretty big premium to buy back our bonds. Actually, if you look at it, it would be quite an expensive exercise for ABB to do so. So, I believe that it's a situation that we have to monitor, be ready to jump on an opportunity when it comes. But also not to first to openly mark that we are waiting to do that and really make a calculation and see what makes sense for the bottom line.

That's why, as we are waiting for the right opportunity, I prefer to focus on other obligations, like reducing securitization level or continue to fund -- or unfund the pension liabilities and all this. At the end, it's a [holy] question and I think we all agree we should do what is right for the bottom line.

As for your other question regarding other operational issues, it's kind of a capture it all term indicating that by far the most important thing was raw material prices for the -- I would say lack in operating performance at the transformer business. But it wasn't the only one. We had some other issues as well [inaudible] happen.

We had a few quality issues where some projects didn't deliver the profit as anticipated. Some orders with too low margins and things like that. They are not catastrophic. They're not dramatic. But they all add up to a certain gap in the opening performance of transformers.

But it doesn't sound like you're building up to any sort of restructuring charge or any other problems later in the year from what you're saying.

No, no. These are project-related issues which are not, as I said, catastrophic or dramatic. But, of course, when you talk about restructuring, general streamlining, as we indicated, we need to shape the business so that we perform [inaudible] in this quarter and the next quarter, as well as in the two, three, years, in the five years to come.

And therefore we have given the guidance of 50 to 70 basis points as natural kind of restructuring. That means essentially maybe shutting down certain plants, moving them to lower-cost countries. And more of that will come. So that guidance is still valid.

Thank you.

It does include transformers as well. Because in the transformers alone, we have more than 50 plants.

Thank you.

Welcome.

The next question is from Mr. Oliver [Esnow], [inaudible] Please go ahead, sir.

Hello. Good afternoon. I have three questions, please.

First, in PT, can you talk a little bit about the competitive environment? Because of course raw material is an issue for everybody. And it's difficult to pass on this increase with prices. So is the environment here getting tougher, or maybe give just some qualitative appreciation?

Secondly, in automation, can you give us the percentage of sales coming from service right now? I think you have a target to reach 25%. Where do you stand versus that target?

And third question, Lummus is improving its performance. Can you give us a bit more indication what kind of performance level you think the business can sustain throughout the year?

Thank you.

Okay, thanks, Oliver, for your questions. As for PT, if you look at the PT business, you could say it is in essence about four different businesses. The high voltage business where we deliver systems like HVDC, HVDC Light , [FACT], so on, and -- sorry, I was just confused, HVDC, HVDC Light, and [FACT] are in the systems portion.

But there we have switches, switch gear breakers, cables and things like that. That's high voltage. In high voltage, the competitive situation is a very clear one in a sense that there's very limited competitors who are really of relevance. We speak here mainly about Siemens, we speak about [Ariba], you have by far the largest market share. So we do have, due to our large market share, some power in pricing.

With regard to medium voltage, the situation is more -- we have a fragmented market with quite a few players in there. Nevertheless, our performance is very strong because we have very good product technology. And we are not very concerned there about the competitive environment. We're actually looking for increasing our competitive position if the right opportunities appear.

If you look at transformers, the situation is a very different one. Because historically, the PT market was a very national market. Almost every country wanted to have their own suppliers for strategic reasons. You can see that the power technology and station transformer technology to be of strategic value. So they all had their own suppliers. When the markets deregulated in the course of the 90s, obviously, there was over capacity and too many suppliers. Quite a bit of consolidation has already happened and is happening at this moment.

You have certainly heard about Siemens acquiring Viatech, there was an Indian competitor who bought out a Belgian competitor and so on. That's happening every day. But I would say the market has not reached the end game yet. So there is some overcapacity and [inaudible] price pressure.

And finally, we have the systems business, which consists of a variety of different things. I mentioned HVDC and so forth, where we have very little relevant competitors and then there is more plain vanilla type of systems business [inaudible] substations where the price competition is pretty fierce. So all in all, you can't take PT and classify it in a uniform way.

I would say by far the majority of the business is very sound and healthy, strategically very strongly positioned in markets where we have a reasonable price situation. Then we have businesses like, let's say transformers on the one hand and substations on the other where there is very fierce price pressure.

Can I just jump on that?

Does it mean that you also would take part in consolidating transformer and substation, or you feel you have enough of a position here, or do you feel you need to play that role?

Let's put it this way. From a technology position point of view, we don't need to add anything. I think we are the clear market leader. We have all the competences we need to be successful. On top of that, we have very strong market positions all around the globe. So we don't need to add market share either. Usually, in a consolidating market, the one who does the acquisition pays the price. Unless there is real [inaudible] to be captured.

With 50 plants -- or more than 50 plants in our own ownership, [inaudible] I don't think I want to add too many more plants. With the money we're going to spend is rather spent on making sure that our manufacturing hopefully becomes as cheap and as efficient as possible than adding new plants by buying out competitors. Okay?

Okay.

I think there were two other questions?

Your question on services in AT. Indeed, at the end of 2004 we had reached a level that the services were 21% of our total revenues. And we said we would go to 25% this year. I can't give you a precise number for the quarter because it's quite an exercise where we have to really dig the numbers from every business unit to put it all together.

So we are not really reporting this number on a quarterly base. But at least from the business reviews we have had and the development that we see in these activities, we feel quite confident that we're on the right track to get to this 25%.

As far as Lummus is concerned, end of first quarter we had an EBIT of 9 million for Lummus. So that is already a good achievement. It's a progress every quarter.

I would just say that we have given indication for the year that Lummus will be in the black. And I think the result of the first quarter just reconfirmed this confidence that Lummus can turn a profit for the Corporation this year.

I presume some of you did the calculation when we announced the change in total group guidance from 8 points [year] to 7.7. That allows your first estimate of the expected performance of Lummus. Hopefully we can beat this, but it's at least a first estimate.

I would suggest that we now have a last question.

The last question is from Mr. Colin Gibson, HSBC. Please go ahead, sir.

Hi, good afternoon, gentlemen. I'll try to make it last two questions, if I may, but I'll be quick.

First of all, I just wanted to pick up on a comment I heard Honeywell make in their call last week. They were talking about process industry orders pushed back from Q1 into Q2 or even Q3 due to the high level of capacity utilization of their process industry customers during the winter months. And I wondered whether you thought there was any chance of the same phenomenon for yourselves? That's the first question.

The second question was with regard to manufacturing automation business and the Daimler-Chrysler frame agreement. Just trying to get some idea in terms of how material that level of business is as it moves through your accounts, whether it's having a material affect on margins, whether it's having a material affect on revenue growth, and what sort of time frame we should be looking for any such effects over?

Okay. As for your first question, Colin, we cannot repeat what Honeywell said about their order intake. It's fair to state that, as I mentioned before, that our process automation unit performed quite nicely in the first quarter. Not only with regard to the EBIT improvement which I talked about, but also with regard to the order intake. It was quite lively.

But then again, we have seen the situations before in the opposite way that competitors of ours reported a strong order intake in one quarter and we didn't have it. It's the nature of the systems business. So again, for us, the market in first quarter was pretty positive. We have no indication that there will be a change in the short-term.

As for our robotics business, manufacturing automation, that is. Yes, the Daimler-Chrysler order is significant and it is material. Because we did announce, when was it -- last July or something like that, a total value of what was it, 100-something.

Anyway, it is material in a way that obviously has immediate absorption effects. And due to that, also margin effect, it will have an impact all the way through 2006 -- sorry, all the way through 2005. And then will come to an end at some point.

And do you think margins for manufacturing automation 2006 will be able to live up to margins which in 2005 would have been helped out by the DCX order?

It's difficult to tell after lot will depend on the order intake in the upcoming months, because the throughput time for orders is anywhere between six months and two years, depending on whether you look at products or large system orders. So, 2006 really hasn't been defined yet from an order intake and volume point of view.

Fair enough. Thanks a lot.

Thank you very much, ladies and gentlemen. It was very interesting. We appreciate your interest in ABB. And we look forward to talking to you again at the latest when we announce our second quarter results at the end of July.

To add to that, you have seen that we stated in the press release we're going to talk about the strategy in early September. Just as a bit of clarification to that, we always plan to do something in July.

But then came to the conclusion that it's vacation period, we do have a board meeting at the end of July. Instead then, of doing it in July or August in vacation period, we decided to do it early September. I don't think this makes a big difference.

In early September we will discuss the future -- the future strategy of ABB, including also targets until 2009. I'm going to have a quite interesting discussion by then. And I was just made aware by [inaudible] that our Q3 results announcement will be one day later than originally announced. I guess that refers to -- so Q3 2005 will be announced October 28th instead of October 27th.

I think this is it for today. Thank you very much. It was a pleasure. Bye-bye.

Ladies and gentlemen, the conference call is now concluded. You may disconnect your telephones. Thank you for calling. Goodbye.