Abb Ltd (ABB) 2005 Q2 法說會逐字稿

Good afternoon. This is the conference call conference operator. Welcome to the ABB 2005 second quarter results analysts and investors conference call hosted by Mr. Fred Kindle and Mr. Michel Demare. [OPERATOR INSTRUCTIONS] At this time, I would like to turn the conference over to Mr. Fred Kindle, CEO of ABB. Please go ahead, sir.

Good afternoon, ladies and gentlemen, or good morning, ladies and gentlemen. Thank you for joining our analyst’s conference call for the second quarter 2005 results. With me this afternoon is Michel Demare, our Chief Financial Officer. For those of you who took the time to download the presentation on our Internet site, I will refer to the charts in that presentation.

Let’s start with slide number 3, titled “ABB Group Q2 2005 Summary.” As you will have seen in the press release, we had a reasonably good quarter, despite some special charges. As a matter of fact, it would have been another excellent quarter if not for these additional items. On the tope line, orders and revenues continue to grow at a good pace, especially due to the very favorable development of base orders. This indicates that our markets continue to develop positively. It also compensated for the reduction in large orders compared to the second quarter of last year. You will remember at that time we booked a $390 million power transmission order for the Three Gorges hydro project in China.

The Automation Technologies division led the EBIT improvement in the quarter, up 28% versus the same period last year. The effect of operational improvement in the Power Technologies division was unfortunately more than offset by the charge taken for the consolidation of the transformers business that we announced at the end of June. We also took provisions for some litigation costs. I’ll come back to these in a moment.

Slide 4 ABB Group. We were able to lift our net income by 42% to $126 million compared to the second quarter of 2004. With [inaudible], despite additional costs in EBIT that I just mentioned, and a one-time additional charge in interest expense of about $14 million, most of this was related to the fine levied against ABB in 1998 following violations of competition rules by a district [heating] subsidiary. That business was part of our former power generation division that has since been sold. These charges in total in both EBIT and finance net added up to roughly $140 million. These items significantly reduced our net income in the second quarter compared to our first quarter net income of almost $200 million, as I indicated at the end of June. However, we’ve made a substantial improvement compared to a year ago.

On the balance sheet, net debt decreased compared to the first quarter, but this is mainly a currency translation effect. Since the end of March, the dollar has strengthened against the EURO and Swiss franc, in which most of our debt is denominated.

Asbestos is on track, and I’ll come back to that topic later on.

We saw a revised EBIT margin targets at the end of June. For the remainder of 2005, our focus will be to deliver on those targets to further improve operational efficiency and to push the transformer consolidation program ahead.

Slide 5 - Power Technologies. Let me now quickly review the key operational developments from the second quarter. In the Power Technologies division, we saw a solid improvement in base orders across most businesses in all regions. This more than made up for the big drop in large orders compared to the same quarter a year ago when we booked almost $400 million for the Three Gorges power transmission link. As I said earlier, that’s a positive sign that our end markets continue to develop favorably. It has also contributed to maintaining a good order backlog, which increased 5% in local currencies compared to the end of the first quarter this year. Revenues followed this positive base order development with the strongest growth in the Products business area. Revenues were flat in local currencies in the Systems business area. We expect a major revenue impact from a recent large [inaudible] orders in the second half of this year and into 2006.

When it comes to EBIT, we achieved some productivity improvements in the high- and medium-voltage product businesses and with [inaudible] a real estate gain in the quarter of about $10 million. However, these were more than offset by the $66 million in costs taken in the quarter for the consolidation program in the transformers business. On the Systems side, EBIT slipped as a result of the provision required for litigation expenses. This is related to the irregularities in a power network management unit in the U.S. As you will recall, we disclosed this matter to the Department of Justice and also issued a press release. Raw materials continued to weigh on the PT EBIT. However, price increases for some products and other supply management measures allowed us to mitigate the effect of rate extension in the first quarter. The net impact of higher raw material costs on PT EBIT in the second quarter was approximately $10 million compared to $15 million in the first quarter. As a result of all of these factors, the PT EBIT margins fell to 5.8% compared to 8.2% in the second quarter of 2004.

Slide 6, please - Automation Technologies. Moving to the Automation Technologies division, they showed another very good performance in the second quarter. Orders were higher in all regions, and as in PT, all business areas recorded higher base orders in the quarter compared to the second quarter 2004. This helped increase revenues by 13% in local currencies - a very strong performance. As I said after Q1, however, we do not expect this high pace to continue over the rest of the year. Along with the higher revenues, EBIT in AT also benefited from higher factory loading in the product business, continued cost migration efforts, and further productivity improvements. That led to a 28% increase compared to last year. It was, by the way, the eleventh consecutive quarter with increasing revenues and EBIT for AT. As a result, the EBIT margin continued to expand up to 10.7% from 9.8% a year ago.

Slide 7 - EBIT Overview. Here’s a quick overview of the contributions to EBIT. I’ve already discussed PT and AT. Non-core activities reported a $10 million loss in the quarter. Corporate costs improved by some $35 million. I’ll come back to these items in just a second. Overall, we were able to increase the Group EBIT margin in the second quarter and, as I said earlier, despite some significant additional costs.

Slide 8 - Non-Core Activities. Non-Core activities reported an EBIT loss in the quarter. The oil and gas business remains steady at positive $30 million, but on a lower revenue base. Building Systems was down $10 million as costs to close some projects offset the break-even results in Germany. In Equity Ventures, we had an asset write down in one of our investments of about $10 million.

Slide 9 - EBIT Corporate. Corporate costs, again, developed positively in the second quarter compared to a year ago. We continue to make progress in taking our costs, mainly at our larger local head offices, but also in the Zurich headquarters. Sarbanes-Oxley spending remains at the low level for the time being. You can expect, however, to see more impact from this in the second half. Corporate costs for the first six months of this year are about $180 million. Nevertheless, we are keeping our guidance for the full year at $450 million.

Slide 10 - Discontinued Operations Net Income Impact. Discontinued operations continues to be less and less of a factor in our results. We still have the mark-to-market treatment of the shares set aside for the asbestos trust. That resulted in an expense of $10 million in the second quarter, reflecting the recent increase in our share price. There’s an expense of $6 million related to the sale of the power lines business in Germany. The losses in the same quarter a year ago were related to upstream oil and gas, insurance and our wind energy business.

Slide 11 - ABB Group Key Figures. Our finance net expense increased to $95 million from $50 million last year. Most of this is the result of a one-time interest expense of some $40 million. As I mentioned earlier, this is mainly interest on the fine levied against our district heating subsidiary seven years ago. Our effective tax rate also increased slightly in the quarter. This reflects the tax impact of the various special charges that I described before. These impacts are a matter of timing and are part of the usual fluctuation in tax rates from quarter to quarter. For the full year, we continue to expect an overall tax rate of between 33% and 35%.

Slide 12 - Cash Flow from Operating Activities. Cash flow from operating activities increased by $280 million in the second quarter of this year compared to the year-earlier period. A number of factors were at play here. Cash flow was higher in PT with working capital as a percentage of revenues continuing to decrease to below 14% at the end of the quarter. In AT, working capital as a percentage of revenues also decreased again compared to a year ago to below 8%. However, in absolute terms, working capital requirements were higher in AT to support the strong revenue growth. We continued to reduce our securitization activities in order to lower our finance costs. This will have the effect of reducing cash from operations over the rest of the year. In the first six months of the year, the winding down of securitization in the Group reduced cash flow by about $150 million. Cash flow improved in non-core, mainly reflecting the high cash outflow a year ago related to the sale of the upstream oil and gas business. In corporate, the smaller cash outflow resulted from lower costs, the timing of certain securitization activities and lower asbestos payments.

Slide 13 - Net Debt and Gearing. Net debt and gearing were both down compared to the end of Q1. We remain committed to reducing our overall financial obligations to bring finance costs down further.

Slide 14 - Update on Asbestos. Coming to asbestos, as you know, we filed a revised plan of reorganization for our U.S. subsidiary Combustion Engineering with the U.S. Bankruptcy Court on June 24. This plan was the result of our agreement with claimants that we announced earlier in the year. The next step would be a hearing on August 19, after which the plan will be submitted to claimants for a vote of approval. We continue to work with the other parties on all of the issues involved, and I can say that so far the process is moving ahead as expected.

Slide 15 - 2005 Outlook. [Inaudible] the market outlook for the rest of the year continues to be favorable. We expect top line growth in the high single digit range for the full year. Raw materials prices has stabilized at a high level. We made progress in mitigating the impact of this increase on EBIT in the second quarter, but it is difficult to predict how it will develop over the rest of the year. Our operational focus will continue to be on lifting business efficiency. That includes executing the transformers consolidation swiftly. We were expecting to take more restructuring charges in the second quarter for this program, and our full-year estimate remains $120 million. Of the remaining approximately $50 million, you can expect the biggest impact in the fourth quarter. Turning to our targets very briefly, nothing new there compared to what we said at the end of June. We reduced our EBIT margin targets for PT as a consequence of the transformer consolidation and the ongoing high raw materials cost. As a result, we also lowered the Group EBIT margin targets. The AT EBIT margin target remains unchanged. Our guidance for Non-Core Activities remains an operational result of break-even for the full year, not including the effects of any potential investments. In corporate costs, we are on the way to achieving our target. We are now working to reach our targets for the year 2005, as we also prepare to provide the market with new medium-term targets on September 6.

To recap, it was a reasonably good quarter, both in terms of market development and operational improvements. Unfortunately, results were impacted by a number of hefty charges. Actually, it would have been a great quarter if it had not been for these extra items. We kept up the momentum we developed at the beginning of the year, and we will keep a tight focus on further operational improvements over the rest of the year.

With that, I would like to open for questions. Thank you.

[OPERATOR INSTRUCTIONS] Julian Bear; Enskilda.

I have a couple of questions relating to power, if I may, please. I think you’re expecting to invoice the backlog of your large power orders in an accelerating way from now on. My question is to what extent have the margins in that backlog been affected by the increase in raw materials cost since you booked the orders. Also, on the conference call one month ago, you stressed a need to improve overall the margins in Systems to enable you to ultimately get to a stretch target of 10% for the power division. Does that comment in any way reflect concern for the margins in your current power Systems backlog, or is it a more general observation of what you need to do in the future?

I think those two questions are linked with each other, but, nevertheless, they ask for different answers. Talking about Systems margins in general and the necessity to improve those margins, I would say the answer there is more related to, I would say, partly product line corrections, meaning what kind of product lines do we want to push and increase the volume because they carry good margins, and which product lines are rather a case for de-emphasizing. I made several remarks in the [inaudible], which sometimes journalists make a big deal out of them. We have no intention whatsoever to leave large projects. Clearly, there are some projects -- we’re talking about, I would say, more commodity type substations where we have to ask ourselves how much of a margin potential is in there and with whom do we compete. Do we compete against small local contracting engineering companies or against the big competitors we face globally? What is the consequence out of that? Should we be in that business or not? What I’m really trying to indicate here is we do have some product line issues to answer in the future that will not change the nature of our activities. ABB is very much committed to large projects, and we have lots of great technologies [inaudible] and the like to also create good margins. But, there are a few, I would say, product market related corrections. On top of that, we have the usual operating questions or issues relating to risk control, rigorous execution of projects, sourcing and so forth - nothing dramatically new there. I would say the regular set of challenges we have to face. The other part of your question was more related to raw material costs. Let me expand a little bit on that one. First of all, raw materials are not really that relevant to the Systems activities because our PT Systems activities is a business of roughly $4 billion in size. They pull through a lot of products from the Products areas of PT, roughly $1 billion. Obviously, in the Products we have the impact of raw material prices, and, above all, I would say, in transformers. In high-voltage and medium-voltage, we also see the increasing raw material prices, but because our pricing power has been different there, it was not that much of an issue. As we mentioned before, we were actually able to increase the profitability in those business lines. By and large, you can, in a simplistic way, reduce the raw material correction to PT transformers. There, I think the most important news is that, first of all, we have seen different developments again in the second quarter with regard to raw material prices. Some still went up. For instance, transformer is very much pegged to the overall oil price. Others went down. On average, we can say we have seen the stabilization in the second quarter. And, equally important, we have been more successful in transferring price increases to the customer. We want to do more of that. Putting it all together, as I mentioned, the total impact of raw material prices on our P&L is decreasing. We spoke about the net effect of $50 million negative in the first quarter. This is now $10 million in the second quarter, and we would love to see a closing of the gap in the next few quarters. All in all, the expectation is that we can increase our profitability in the PT division in the next few quarters. As you know, we have a seasonal effect in that the third quarter is never as good as the fourth quarter. But, if you look at the rest of the year, we clearly hope that we can improve the margins and eventually meet the guidance given on June 30.

Okay. So, if I understand correctly, if one was to take the charges out of the margin calculation, you wouldn’t expect the increased Systems component in the power mix to negatively impact margins. In fact, it sounds as if it’s the reverse.

If you look at the guidance given, we have provided a guidance of, if I remember correctly, 6.8 to 7.3. At the moment, the PT margin is at 5.8, so, obviously, we do expect an increase in margin in the second half. Right?

Okay. Thanks.

William Mackey; Main First Bank.

A couple of questions. First of all, if we can come back to the corporate costs. Your guidance for the full year at $450 million seems now a little conservative after the $180 you booked in the first half. Perhaps you could help us understand why the second half expectation is so strong. Or, alternatively, give us a feel for the level of Sarbanes-Oxley costs that you might expect in the second half. Then, my second question really comes back to follow up from some of Julian’s questions. Could you, firstly, give us an indication of the level of the litigation costs that you took against the U.S. network that you mentioned. And, also, perhaps provide a split of the type of operating margins you’re seeing between Power Technologies Products and Power Technologies Systems at the moment, so we can gauge a feel for how the mix change might affect the profitability going forward.

Let me first state that at this point, we shy away from providing more detail to insights into the two divisions, simply because that has not been our policy so far. But, as we mentioned in September, we’re going to come out with a more detailed look into the medium-term strategy with new targets for ABB going into 2009. You can expect us to increase the transparency provided. So, some of the questions you have today will probably be answered in the future in the regular fashion. Coming to corporate costs -- Yes. You are absolutely right. It looks like this is going to be very easy to achieve the $450 guidance we have given. As a matter of fact, I’m glad to see the change in the kind of questions we have to answer. Whereas before we had questions about “is this achievable” and “can you do it”; now the question is why can’t you do more? We will try to do better; no doubt about that. But, let’s face it; the first semester -- the first two quarters have been helped on the one hand by a few non-operating related items, and we mentioned them in the previous conference calls, like certain divestitures and certain part-time gains. They were also helped because the cost for Sarbanes-Oxley really has not reached the average level yet. For the first half, I think it was something like in the high single digits - $1 million - the cost for Sarbanes-Oxley. I’m not talking about the internal cost of the time we all spent, but the out-of-pocket costs. This is going to increase by a multiple of that in the second half. That’s our expectation. If you add that all together, that’s the reason why we stay conservative and remain with the $450. On top of that, you could also say, whether rightly or not, we at ABB have always had the problem that the market considered us to be overly optimistic in certain things. We want to change that. We want to provide guidance that we really can commit to and also deliver on. Michel, maybe you can elaborate a little bit on the litigation question.

Yes. The litigation question. As a result that was made in the first quarter was a total of [$15] million that you’ll find now in the EBIT margin of the Power Technology division.

Andreas Willi; JP Morgan.

I have two questions, please. The first one is on restructuring. When you announced your transformer restructuring plan, you said it’s on top of the kind of .5% of sales you plan to take every year on average. However, you have not spent much this year outside the transformer restructuring. What should we expect in the second half of the year? And, has there been any kind of other restructuring in AT or PT in Q2, other than the $66 million you disclosed?

Maybe I start off by providing part of the answer and then hand it over to Michel. First of all, let me just say that we have obviously taken a provision of $66 million the second quarter. Some of the analysts have correctly commented that they expected more. We also expected a little bit more. As a matter of fact, we expected something like $90. You may recall we said we expect for the full year $120 million and for the full program $240 - for the full year 2005 $120, and the majority of the $120 the second quarter. Plus, that meant something like $90; now we’re at $66. The reason for the difference is simply U.S. GAAP accounting rules. We simply are not able to book a provision in the second quarter, but we may see the charge in the third and, predominantly, the fourth quarter. Some of the analysts wrote that the result was helped by lower restructuring charges. That’s correct from that point of view. It’s not correct if you keep in mind that we absorbed another $65 million in litigation costs. That’s the first part of the answer. Maybe, Michel, you can talk more about it?

Yes. I’ll try to give you a clear answer, because obviously it’s a bit of a calculation to be made here. But, indeed, we have spent more than just the $66 million in this quarter. Actually, the total restructuring for ABB in the second quarter was $85 million. So, if you deduct $66 from there, you’re basically talking about $19 million, which is more or less equally split between AT and PT and the Non-Core businesses. In the first quarter, we had reserved a total of $29 million in restructuring, out of which, as we said at the time, Non-Core was very small. The two divisions together were below $10 million. The rest was in Building System and in Lummus. Overall, including the $66 of the transformer restructuring, we are now at about $115 million for the year. Let’s say the guidance we would like to give you from here is that we see Power Technologies still running at more or less .4% of restructuring on top of what we are indicating for the transformer. So, on top of the $120, while AT will be rather on the low end of the range -- we would say .5 to .7, so it will be more towards the .5%, we think, from what we see for the moment. Then, with a few other restructuring that we have in the Non-Core, I think that for the year, we can talk a total amount of restructuring above $200 million, probably more towards $225.

Did we answer the question, Andreas?

Yes. The second question I have is on the outlook for larger orders in PT. You haven’t booked anything -- You have booked one, but mainly the gross was driven by underlying base orders. There are a few orders outstanding in China and the Middle East. If you could give us some indications on the timing of these orders, although it seems like that Siemens won the last two - the one in the U.S. and the one in China. Is it kind of your turn again now?

Well, I would say it was about the turn of Siemens to win a few orders too. But, let’s comment on ABB more than on our competitors. First of all, I would say with regard to looking into the future, the base orders are obviously much more indicative about how the market is doing and how we are doing with regard to market shares. There, we have no reason to be concerned or doubtful about the future prospects. Things are moving forward, I would say, at a rapid pace. As a matter of fact, if we look inside the PT division and look at the Products business area, vis a vis the Systems business, the Products business area was into the significant double-digit growth still. So, we really had all that gap on the Systems side. And there it’s rather speculative. I mean an order like the $400 million order we booked last year doesn’t come every quarter. It doesn’t even come every year. But, there can also be an accumulation. You may recall that after the first quarter or after the annual results, we presented a several-month summary showing that in the eight or nine months before the annual closing, PT did actually very well in accumulating quite a few large orders. Large orders for us is everything above $15 million. Looking forward, the overall project activity is still strong in China, but not only in China, also in India. It may be worthwhile to take note of the fact that the Middle East is building up infrastructure which is, I would say, mirroring the size of China, at least for the next few years. So, there’s quite a few projects going on in the Middle East. The key word here is Gulf Link, which is happening right now. Whether we get something - a share of that, either a large one or small one - is too speculative to comment on. Finally, the famous energy bill in the U.S. There has been just in the last couple of days a new development that I think -- a rather awkward clause related to [ABB] was taken out of the bill, which does increase the likelihood of its final passage in the congress. All in all, we are not concerned at all about the future prospects. I think there is generally a very positive trend going to help us, and since we are the world leader, the market will not bypass us. Whether we’re going to a large, big booking next quarter - fourth quarter - I cannot tell. I would surely hope so, but I cannot tell.

Ken Elbe [ph]; [Inaudible]

Two questions from my side as well. First, in AT, we saw this acceleration in organic book currency top line growth in AT. Can you maybe just talk qualitatively about which of the three business areas did better than others, so we can gauge the mix impact. And, in relation to that, obviously, despite the top percent sequential growth on the top line in AT, we still had a small sequential decline in the EBIT margin, I think from 11% to 10.9% in the period structuring EBIT margin. Can you just try to make sense of that as well - whether that was all in the mix or whether there was anything else?

In a qualitative way, I may do that. But, again, I refrain from providing any complete figures. But, I did mention before that on the Automation Products business area, which is roughly between $5 and $6 billion, we think we operated on a best-in-class level. That’s true. They’re still doing very well. They still have possibilities to further increase. We’re very satisfied about their overall performance. In Process Automation, which is the other big business of ours -- it’s about $4 billion -- between $4 and $5 billion, actually. We have seen major improvements in the past, and these improvements are continuing. There again, we feel we are on a positive track. In Manufacturing Automation, which is mainly robotics, there we know that we are facing a tough situation from the market, because the market, in all likelihood, is not going to show incredible growth in the next three years. As you know, automotive customers are tough customers to deal with, and they’re having their own set of problems. That’s the one area where I think we have to do clearly better. I mean we can do better everywhere and will do better everywhere, but that’s the one area which is, I would say, a little bit of swing factor in the overall mix. Let’s keep in mind it’s the smallest of the three business areas I mentioned. It’s just $1.5 billion in size. I think I’ll leave it at that. Again, you will hear more about the various businesses and how we feel about them in September.

Fred, if I can just add a small add-on. In terms of -- Again, in Q2 versus Q1, in terms of this 10 basis points small decline, would I be correct to assume that at least Process Automation did better than Automation Products in terms of top line growth in Q2?

In terms of top line growth -- I must say; I’m not sure whether I have [inaudible] in front of me the local currency. If you allow me, I would like to come back with that later on in the telephone call?

Of course. Thank you.

Okay? Let’s do that.

Lisa Randall; Lehman Brothers.

Just two questions, please, relating to PT. First of all, around the underlying margins for Q2 versus Q1. Now that you’ve given us the approximate restructuring charges, I think we can more or less see that there was a reasonable increase in the underlying margin in Q2 over Q1, possibly around 100 basis points. My question is going forward into the next couple of quarters, where is the increase in profitability going to come from? You said before about price rises that were enacted at end of last year feeding through now. You’ve talked before about the under-absorption in solutions really coming through or being eliminated in the first half of the year. So, for the second half of the year, what are the major drivers of the underlying improvements in Power Technologies case?

Okay. You’re right with your statement about the underlying increase in operating performance of PT, if you take out those [inaudible]. Actually, an increase was even higher if you consider the fact that in the second quarter we were also plagued by some litigation costs - not of the same significance as the restructuring, but significant enough to mention it here. PT really has shown a very nice improvement in the second quarter. We expect more of that to come because it is, I would claim, primarily volume driven. We will see more of the absorption and so on taking effect in our [inaudible] plans. This has all taken place now in the last few months, but the full brunt of it is still to come. Absorption is definitely one thing. I would say the quality of the order backlog which we’re working with is also slightly increasing. Finally, some of the problems we have to talk about in the last few months, like the raw material price increase -- As I mentioned, they are becoming less significant, partly also because we are able to pass on the prices. We went through a series of price increases in the transformer business line, for instance. We had also in the past few months a few quality problems, not of the magnitude that they were worth mentioning, but if you add it all up, there’s still some potential left to see improving margins in the next few months and quarters. Okay?

Just a second question; just briefly, with Manufacturing Automation. Order intake positive in the second quarter. I know it’s only a relatively small business. But, you said before that you expected that, really, 2004 and early 2005 was the peak of all this. Was that increase in orders a surprise in just the amount that’s sustainable and indicative of what might be happening in the market, or is it a one-off?

I would not call it a one-off because it was not due to lack of chance or random circumstance. I think what has happened is we have started to shift some of our value-added design in manufacturing to other places. For instance, we have built up a robotic unit in China. As a matter of fact, we booked a very nice order coming out of China. It may be worthwhile to keep in mind that in a few years from now, China may be the third largest producers of cars in this world, overtaking Germany. It’s very crucial for us and strategically important to be present there, not only with sales, but with local value added. In this context, it was not a one-off. It was not lack of chance, but a consequence of the actions we have taken. Nevertheless, we see -- Talking now about the next two or three years, we see a certain reduction or stagnation in the number of new models being introduced by the car manufacturers. That will also naturally have the consequence that there is less large orders, and we have to be prepared for that.

Axle Vonhauf [ph]; Bear Stearns.

First question. The underlying EBIT margin in PT is about 8%, if you include restructuring charges. My question really is do you have any indication that this might come under pressure, or do you expect operating leverage to kick in on the back of strong base order growth?

I would rather say go for the second answer, and I think it goes in line with just what Fred said before. We have started really seeing in the second quarter a very strong improvement, first in the high-voltage and medium-voltage business, and then as well I would say the transformer business that has plagued on margin in the past. It’s really managed to pass on some of this price increase, and it’s been very successful in hedging the raw material. We feel that, provided -- Obviously, I would exclude from that a potential shock of another huge commodity price increase. But, let’s say if the commodities keep on stabilizing at the levels that we have seen during the second quarter, we think there is still some way for potential improvement in the quarters to come.

The second question and last question. The Edison Electric Institute estimates that CapEx for transmission equipment in the U.S. will grow by about 25% this year. Do you think that this is a realistic expectation, and what does it really mean for you in the second half?

Oh, 25% you said?

Yes.

That’s an interesting figure. This is amazingly high. They said for this year?

Yes. For 2005. Yes.

Okay. Obviously, we have seen a very nice increase in our total order intake in the States, partly on the AT side, which is -- Well, it probably would fall into the same category as well. But, there I would say it’s typical for a more cyclical business. You can take the GDB and multiply maybe by 2. You don’t arrive at 25%. I’m a little bit baffled by this high figure. I’m glad to hear it, but I cannot reconcile it with our own thinking.

Maybe a quick follow-up on that one then. Because the energy bill looks very likely to be passed, maybe even with a week or so, do your customers in the U.S. give you any indication about potential order growth on the back of this energy bill? What’s the sort of timing you think about?

I think the answer really varies. There’s customers who feel that the energy bill will definitely have a positive impact, but the effect will take place over certain time only. And then there’s others -- I’ve, for instance, heard direct comments from one of our major customers who is just waiting for the energy bill. This customer has -- it’s a major utility in the States with an average transformer age of 42 years. 10% [break in audio] … seven years.

But you would expect 2006 to be positively affected by it already?

Oh, yes. If it happens, let’s say, in a month, we would definitely see some impact in 2006 order intake. Yes. Absolutely. Maybe coming back to an old question - I think it was Ken Elbe who asked it - about the revenue growth and whether Process Automation grew faster than Automation Products. The answer is yes. That assumption is true. Okay? … on a percentage basis.

Peter Reilly; Deutsche Bank.

Two questions on Automation Technologies. Very strong quarter for sales growth, with dollar growth at 17% and EBIT growth at 28%. I’m slightly surprised you didn’t get a better drop-through effect. I would have thought that scale of sales growth would have given you a greater percentage of EBIT growth. Perhaps you could explain what’s happening there. And, secondly, you talk about the first half growth rate being understandable and the slowing down into the second half. Given that most of the growth in Q2, as I understand it, was base orders, where I assume you have limited visibility, what’s making you cautious about the second half? Is it just big-picture macro issues and a feeling that the growth rate has to come down, or are there specific, factual things you see that make you more cautious for the second half?

Maybe I’ll start with the second question and then also give Michel a chance to come back to the first one. As for the second one, you have to see that a double-digit growth rate in local currencies is generally speaking a high growth rate. This has been the case for several quarters now. While the overall environment is still very positive, it’s simply not prudent to assume that we’ll see the same kind of dramatic development as we have seen before. We have been proven wrong at times. We have seen in the second quarter again a growth which was spectacular in many areas, and we did not assume so a few months before then. The visibility is -- You could say, from a strategic point of view, the visibility is good; that’s the reason why I can make a statement about the future prospects. But, how it actually turns out just a few months down the road is not so easy. So, we pulled back the growth rate targeted at single high digit results. I think it’s still a very nice target. The market may prove us wrong. If it does, even better. As for the consequence on EBIT - the growth for the volume consequence on EBIT, let’s just keep in mind that you have to take out the restructuring expense, and you have to take out the litigation expense. If you do that, I think it was a very positive fallout of the volume and of the higher absorption in the true operating run rate in PT. Michel, you want to [inaudible]?

For the first question, which was on AP as well - for the full-year disappointment on the EBIT margin --?

I didn’t say I was disappointed. They were good numbers.

What I would say, Peter, is obviously, as Fred has already indicated before, we had a higher sales growth in the Process Automation than in the Products in the first quarter. Actually, if you then look into the machinery automation, the robotics, this is actually where in the second quarter revenues gross was the most important, as we have had just a large order that we got from [inaudible] Chrysler that is now starting to impact the income statement. Obviously, you could take that in terms of product mix. Overall, you have a very slight dilution there that makes you have a little setback on the progression of the margin. But, I must say we’re really not concerned about that because, first of all, it’s great to see, for instance, our Process Automation business growing with a solid margin increase at the same time. Robotics will overall have, as well, better utilize of plants. We feel that from a portfolio perspective, this is just a quarter blip. The trend is still the right trend.

That’s very helpful. Thank you.

Thomas Bauman [ph]; NZB.

I’ve just got a question to clarify the $65 million cost related to regulatory issues and non-asbestos litigation costs. Where did you book the $65? Is it, just to confirm, the $40 million in interest expense and then $15 million in PT Systems, and then the remainder is in Non-Core? Is that correct?

That is absolutely correct. That is really depending what it was related to, and a big part was on late interest on the payments of the fines.

Okay. Perfect. Then, a second question I have. For the $66 million charge that you took in Power Technology, can you give us a split? What was the asset write-down, and what was the provision for head count reduction and [inaudible] plants, etcetera?

Out of the $66, $49 million is of a cash nature, so that there’s more severance claimants. The remainder, the $17 million, is asset write-down.

And the $17 million asset write-down is included in the break down of depreciation that you gave somewhere in your handout. Is that correct?

That’s a good question that I would need to double check, to be honest.

Because I saw that the depreciation and amortization quarter over quarter declined, actually from $54 to $48.

That’s why I wouldn’t expect to have it there. I think we have taken it one way as an asset write-down really literally. I will double check on that.

Thank you. That’s all.

Yves O’Janous [ph], Suisse First Bank.

Yves O’Janous: At the time of the conference call, you had for the profit [inaudible] in the transformers business. You gave quite a negative outlook for the Q2 figures. If I am right, Mr. Kindle mentioned even that there could be a loss in Q2 on the bottom line. Now the figures were very good, despite some extra charges you had to take. My question is have there been any negative elements at the time of this conference call which you were expecting and which have not materialized, or why have you been so negative then at this call?

Let me elaborate a little bit on this. For those of you who participated in the call and read the press release and everything, what we did is we said second quarter profit would be significantly below the first quarter. I think this has really happened. There were two or three factors which influenced the results in the second quarter. First of all, the true upgrade in performance in the second quarter - I’m sorry to say that, but it was excellent. It was better than anticipated. If you keep in mind that we took something like $140 million in extra charges - this is added litigation and the transformer consolidation program - our net income would have been visibly about $200 million. Much better than the first quarter. We did not quite expect that level yet when we made the announcement. I mean the first quarter was already strong, but the second quarter was actually even better than that one. The second effect was what I mentioned before. We did dissipate - take a hit of something like $90 million the second quarter for the restructuring program. We ended up doing only $66 for accounting reasons, which you could say helped us by $24 million. Those two things basically led to the situation as of today that our net income is still a nice $126 million, and I don’t feel too bad about that. Yes; we would have loved to see the $90 million in restructuring instead of the $66, and as a consequence the net income would have been, let’s say, $100 or $105 or whatever. But, I don’t think it will make a difference to what ABB is going to do in the next few quarters. In the medium-term future, the outlook is good.

Julian Mitchell; Credit Suisse.

I just have some questions in terms of your head count numbers. For example, in the corporate line, head count fell about 200 people in the first half. If you could give a sense of for the time being whether you’re expecting further reductions there. Also, in Automation, you had quite a big increase in head count in the first six months. Is that something that you anticipate will continue into the second half just because of the very good demand outlook, or --? If you could just talk about what you’re thinking in terms of the employee numbers, that would be good.

Maybe Michel can add a few words, but let me just mention that at this point we have reached a stage where I as a CEO don’t manage the operations with head count targets anymore. I manage them with financial targets. It’s up to the division president to figure out what they really need and how to manage their head count. What is important to know, however, is that there’s a shift taking place. What you don’t see from the head count figures is the swap from, let’s say, high-cost countries going into low-cost countries. Maybe Michel can elaborate a little bit on that one.

Yes. This is really a major area of attention when it comes down to head count is to see that at least when we have movements that they happen in the right business divisions and in the right geographies as well. If you look at those head counts, really in both we have the right answers. You have emphasized yourself most of the head count increase is in Automation Technology, so at least it’s in a core business. When you look at it from a geography perspective, a very large majority of it is in Asia, so that is obviously a part of, of course, migration efforts and effort to build resources where we need them. On top of that, you have to see that it is second quarter, so we are taking on also some temporary summer jobs that come on the payroll. That has contributed to the increase as well, as well as the fact that we have started our R&D centers in China and in India, and that also would provoke an increase in head count. So, from that perspective, I would want to look at all this as pretty good news.

Did we answer your question, Julian?

Well one thing just on the head count in the corporate sense. It went from 1,600 to 1,400. That presumably is structural because the corporate cost is something that you have to bring down. Is that something where you think about the head count a bit more than in the other areas, where I appreciate it’s not really such a big factor?

As we say, we’re always checking when we look at head counts, we look at the total, and then we divide it into corporate, non-core businesses and then core divisions. We have indeed -- If you take non-core and corporate, the decline there is quite substantial. Obviously, you see the results of that in our corporate expense, which is still the best way to look at it from a dollar perspective. Yes. That is a point of attention, and it’s going the right way.

Is that okay?

Yes. Thank you.

Charles Barrows; Goldman Sachs.

A couple of questions again, please. You’ve always indicated that Q3 is a seasonally weaker quarter, and yet you seem to have a quite a lot of momentum as we go into the second half of the year. Could you give an idea as we look forward as to whether you think the underlying growth, particularly in PT as the system contracts come through, will be big enough to overwhelm the seasonal weakness or whether we should still expect to see the seasonal coming through? Secondly, on the issue of Lummus, it’s now been profitable in a couple of quarters. Should we assume that that is the underlying performance, or has there been anything special in there? And, in regard of the plans that you have to put Lummus into a pre-pact Chapter 11, I believe you have tied that into the revised asbestos agreement. How confident are you that you’ll be able to (a) do that in time and that (b) the courts will be happy to tie the two events together? Finally, when you talk about a major revenue impact on the Systems business from the second half of ’05 through into ’07, can you quantify a little bit more what you mean by that? Is that sales both going from 4% to 10% or 4% to 20%?

Maybe I’ll leave -- I call them the spreadsheet corrections. And, I concentrate on Lummus and asbestos. As to Lummus, clearly our expectation is that we can manage the business in a profitable way. But, I don’t try to indicate that the level we have seen is the level going forward. Let’s put it this way; we’ve managed to achieve a great turnaround in Lummus. This business cost us more than a shirt. We have several hundred million dollars losses in 2002, and ’03 and ’04 was still in the negative. Now we’re profitable. Now we need to manage the business in a stable way, maintaining profit. We’ll make sure that we have a reasonable order intake of high quality projects. Once the whole asbestos situation resolves, think about the next strategic step for Lummus. As for asbestos, the Lummus deal is tied into the combustion engineering deal. This is what you all know from a process point of view will mean that the combustion engineering deal needs first to get the approval and handed over to the district court from the bankruptcy court. Then the whole proceeding with Lummus will start. But, they’re closely interlinked with each other. You could say it’s an all combustion engineering deal. It won’t be a Lummus deal. The other option -- The other direction, theoretically, is more possible, but we don’t think so. Clearly, we have a deal here. We think we have a good plan. We think the plan will be upheld by the various courts. We’re looking forward to the next few steps. Every month there will be some additional news coming forth. Michel, do you have your spreadsheet ready?

No, but I can give you the answer. Regarding your question about the top line development in Power Technology, obviously it was tough not seeing the impacts of these huge orders that we have booked during the second half of last year, the main one being, obviously, the Three Gorges project that we will start seeing flowing to the income statement in the third quarter next year. Now, this is obviously something -- in the third quarter this year. I’m sorry. This is obviously something that will then be with us probably until the middle of 2007. You have also [Nomad], for instance, it will start hitting the sales line. That one also is a project that will extend until 2008. So, what we’re saying here is that now it is time to go from conversion for more than into sales. It is starting in the third quarter. It will progressively increase and will be with us for at least the next two years.

Thank you, Charles. I was just reminded to cut you short and announce the last question here because we need to go off to another agenda item here. The last question, please?

Alexander [Inaudible] Diaz [ph].

Yes. I have two questions, actually. If I look at all this what you’re seeing, it seems like in general top line should be coming through with nice growth, yet you reiterate the relatively old targets for 2005 of 4% [inaudible] growth from 2002 to 2005, and the others in the two divisions. The run rate is that you are clearly meeting them. So, why are you reiterating those targets? Are there any issues? Are there any worries about growth in your mind, Mr. Kindle? This is my first question. The second question relates more to general margin improvement, but especially to the corporate costs. We know that there is relatively strong foreign exchange transaction effect there. Can you quantify it, and, hence, give us an idea if the reduction, basically in corporate cost, is sustainable going forward?

As for the, let’s call them, old growth targets, let’s keep in mind they were for the first time issued in, I think it was November 2002, that they’re pretty old and the world has changed in the meantime. You’re absolutely right. We often question the validity of those figures still. But, on the other hand, you did not question the validity [inaudible] with regard to the EBIT margin target. So, people, generally speaking, don’t like us to change the targets. It’s clear that the growth targets have become to some extent irrelevant because we have done better than what was shown in those targets. We will come out with new targets not for 2005, but for the medium term, on September 6. Hopefully, you will agree that those are attractive targets. I think that’s the point that we need to discuss - more about where ABB wants to go and wants to achieve. Michel?

Okay. To follow up on that, I would just add on that point that we reflect maybe also a bit all our focus that what counts first is the profitability for the moment rather than the growth. So, we don’t mind so much that everybody stays focused on that part. As far as you question for corporate expense is concerned, we have year-to-date help from the U.S. dollar change of about $8 million. I think most of our expense in corporate, or a good part of it, is in the European currencies. Obviously, I have to remind you also this is very little compared to the hits we have taken since we fixed this corporate expense target as well. So, now it’s going a little bit in our favor. That is part of those -- one of the events like some real estate sales that we have signaled in the first quarter or the fact that [inaudible] year-to-date. That still makes us conservative overall - on our overall number for the year. But, at this stage, the help was only $8 million.

I would like to add that we maintained the target of $450, but we always said we want to move it further down and that by the end of 2006 is $450 or $350. You could say, on average, we should have a maximum of $375 for the full year 2006. So, the journey is going to continue. We want to bring corporate costs down to a level which is competitive, and for me that means about 1% on sales, which you could say now is $200 or $220 million, and you add corporate R&D plus some, let’s call them, legacy pension costs, which we cannot change. That’s how we end up with the $350. With that, I would like to close. I hope we answered your question, Alexander.

Yes. Thank you.

Thank you for joining us today. I would like to remind you that, as we said, after the Q1 results, our third quarter results will be announced on Friday, October 28. That is one day later than originally announced last year, so please mark that change in your calendars. I am quite sure we’re going to meet quite a few of you tomorrow in London, and, apart from that, we hope to also see you taking part in the strategy announcement on Tuesday, September 6. Thank you very much for your attention, and have a nice day.

Ladies and gentlemen, the conference call is now over. You may disconnect your telephones.