Abb Ltd (ABB) 2005 Q3 法說會逐字稿

Good afternoon. This is the conference operator. Welcome to the ABB third quarter 2005 results conference call hosted by Mr. Fred Kindle, CEO of ABB, and Mr. Michel Demare, CFO of ABB. After the presentation, there will be an opportunity to ask questions. This call must not be recorded for publication or broadcast. At this time, I would like to turn the conference over to Mr. Fred Kindle, CEO of ABB. Please go ahead, Mr. Kindle.

Thank you very much, ma’am. Good afternoon, ladies and gentlemen. Thank you for joining our analysts conference call for the third quarter 2005 results. With me this afternoon is Michel Demare, our Chief Financial Officer, who will also jump in in answering questions. When going through the script here, I will be referring to the slides of the presentation which you can download from our Internet site.

Let’s start with slide number 3, ABB Group Third Quarter 2005 Summary. ABB turned in a very strong third quarter performance. Operational improvements and our lead position in key markets produced solid order and revenue growth and Group EBIT margin of 8.1%. In view of the positive market conditions and the expected results from our strong focus on execution, we are on track to hit or exceed the top end of our 2005 Group EBIT margin target. Our earnings before interest and taxes increased more than 80% in the third quarter. Net income rose to $188 million, almost double the level of last year. Our net income increased, despite about $70 million in non-operational charges from this continued operations and finance expense. Cash flow improved as well, as did our net debt. We made further progress towards resolving the asbestos issue, and in September we announced our new strategic direction medium-term target for 2009. So, overall, it has been an eventful and very positive quarter.

Let me now turn to the results in more detail. End markets continued to develop very favorably for both divisions. Orders were higher in most regions, and base orders increased at the Group’s pace again, which supported our revenue growth. Large orders also increased by almost 50%, as we saw some large power systems projects [unintelligible], mainly in the Middle East. We continued to see the benefits of early cost reduction programs, intensified sourcing from low-cost countries, and pushed through price increases to offset the higher cost of raw materials. With higher revenues and a more competitive cost base, Group EBIT rose 81% to $458 million in the quarter. The Power Technologies division showed an 89% increase in EBIT, while the AT division continued its steady improvement with EBIT up 21%. I’ll come back to these divisions in more detail in a moment. As a result, the Group’s EBIT margin in the quarter reached 8.1% compared to 5.1% a year ago.

Slide 4, ABB Group Summary Continued. The loss from discontinued operations increased this quarter. This is because we intend to divest our portfolio of financial leases in Finland. Therefore, we moved this business to discontinued operations and booked the charge of $26 million for the anticipated loss on the sale. This disposal will also affect our balance sheet, and I’ll talk about that later. As I already mentioned, our net income almost doubled to $188 million. Cash flow from operations also developed quite positively in the quarter and amounted to $387 million. Improvement came despite the negative impact of $246 million from reduced securitization activities. Without this impact, cash flow from operations would have been more than $600 million. Net debt was below $900 million, down from $1.2 billion, thanks to our good cash flow in the quarter. The repayment of maturing bonds in the third quarter reduced total debt and therefore also our gearing to 56% from 59% at the end of the second quarter.

Slide 5, Power Technologies. Let me now quickly review the key operational developments from the third quarter. In the Power Technologies division, orders increased by 28% in local currencies in the quarter. Orders were higher in all regions, and base orders continued to grow in both business areas. This indicates, again, that utilities continue to invest in replacing and upgrading their power transmission and distribution equipment. The division also recorded a higher volume of large orders in the systems business, especially in the Middle East. Revenues rose 13% in local currencies, reflecting the steady increase in base orders, the positive impact of the large system orders we received last year, and higher service revenues. As a result, EBIT in the division increased to $219 million. In the product business, we continued to increase productivity and lower our cost base through supply management initiatives, including an increase in the share of total sourcing from low-cost countries. Also, we finally caught up with the fast rising raw materials costs that have reduced EBIT in this business over the past several quarters. In the systems business, EBIT benefited from higher margins on projects moving out of the order backlog and into revenues. Included in EBIT this quarter is a $14 million charge related to the consolidation program in the transformers business that we announced in June. That brings the total charges for this program so far this year to $80 million. The rest of the roughly $120 million in transformer consolidation charges that we forecast for 2005 will therefore be incurred in the fourth quarter. As a result of all these factors, the PT EBIT margin increased to 9.0% from 5.5% a year ago. Cash flow has increased of higher earnings, higher advanced payments and improved payment terms. Included in the PT cash flow result is a negative impact of $51 million in the third quarter from reduced securitization activities.

Slide 6, Automation Technologies. Moving to Automation Technologies, they showed another good performance in the third quarter. In fact, it’s their twelfth consecutive quarter of higher revenues and EBITs. This is a reflection of continuing economic growth and [unintelligible] investment in most markets and confirms that we are still in a positive phase of the overall economic cycle. Total orders in AT increased by 8% in local currencies. Order growth in Automation products and process automation more than made up for lower orders in manufacturing automation, our robotics business. Orders grew strongly in China and India. In Europe, orders were lower than the same period last year when we booked a large order in Poland. Orders are flat in the Americas. This reflects mainly the decrease in large orders in the manufacturing automation business that is experiencing lower demand for its robotics products and systems from the weak U.S. automotive market. Overall, AT’s revenues grew by 9% in local currencies. [Unintelligible]. Operational improvements in all three business areas, but especially in process automation, contributed to a 21% increase in EBIT for the division in the third quarter. Along with the higher revenues, EBIT in AT also benefited from further productivity improvements, especially in the systems business, higher factor loading in the product business, and continued cost migration efforts. AT’s EBIT margin now stands at 11% compared to 10% last year at this time. Cash flow in AT was lower in the quarter as the result of reduced securitization programs, which partly offset an otherwise improved level of cash flow from operations.

Slide 7, EBIT Overview. [Unintelligible] contributions to EBIT. I have already discussed PT and AT. Non-core activities reported higher EBIT, mainly the result of further improvements in the oil, gas and petrochemicals business and a small loss in our building systems business. Corporate costs decreased as we continued to reduce spending at both the local level and at the Zurich head office.

Slide 8, ABB Group Key Data. Looking below the EBIT line, we had a net finance expense of $55 million this quarter. We had a number of exceptional items here, which together had a net negative effect of $18 million. The largest item was an adjustment to the fair value characterization of hedged bonds issued in 2002. Then, we have to discontinue the operations line, which has the $23 million mark-to-market effect from the asbestos shares we are holding for the trust fund, and as I already explained, an expense of $26 million for the expected loss on the sale of our leasing portfolio in Finland. That business previously belonged in structured finance, part of non-core activities. These three non-operational items, the exceptional items and finance expense, the accounting for the asbestos shares and the charge on the expected sale of the lease portfolio, lowered our net income by some $70 million.

Slide 9, Cash Flow from Operating Activities. Cash flow from operating activities increased compared to the year-earlier period, despite the approximately $250 million negative impact from reducing securitization activities, as I mentioned earlier. In line with our previous guidance, we expect that reduced securitization will lower cash from operations for the full year by about $500 million. In the first nine months of the year, lower levels of securitization reduced cash by slightly more than $500 million.

Slide 10, Net Debt and Gearing. I already mentioned that our net debt and gearing levels continued to decrease. Also, we announced early this month that we brought back some Swiss franc denominated parts. That transaction will further reduce our total debt in the fourth quarter and results in a finance expense of $17 million in the fourth quarter income statement. This reflects the premium we paid [unintelligible].

Slide 11, Updates on Asbestos. We continue to move forward on the asbestos front. We had a positive hearing on September 28 before the bankruptcy court in Pittsburgh. Following that hearing, we submitted to the bank a proposed confirmation order with respect to the plan. This was done together with all of the other parties per the revised plan of reorganization for our combustion engineering subsidiary. We are now waiting for the court to issue the confirmation order, after which the plan will be submitted to the district court for final confirmation. We cannot yet predict how long this will take, but we hope that we can finish the process in 2005. But, it could also stretch into 2006. We are also working in parallel on a pre-packaged chapter 11 plan for ABB Lummus Global. In a preliminary vote among claimants that was completed in September, 96% voted in favor of the plan.

Slide 12, 2005 Outlook. As for the rest of 2005, the market continues to be favorable. Our focus will continue to be on business execution, including the transformer consolidation, further cost migration and improved project management.

Slides 13 and 14, Targets for 2009. Finally, let me just remind you of the targets we have set out for the 2005 to 2009 period. If you compare them to our results in the third quarter, they might seem conservative. But, we have quite a bit of work ahead to reach these targets. We still need to execute, and we have to assume that the market will not continue to treat us this well throughout the next four years. However, if we can continue the growth development we’ve seen in the first three quarters of 2005 through to the end of the year, we will be off to a good, if not excellent, start in 2006 towards reaching these goals.

Slide 15, Q3 Key Points. To summarize, we had a strong third quarter thanks to our internal efforts to lift profitability and our leading positions is a key high-growth markets. Net income almost doubled, and we strengthened our balance sheet further. Cash flow was higher, despite the negative impact of reducing our securitization programs. And, we made good progress on asbestos. Finally, if markets continue to support us and with our focus on business execution, we are on track to hit or exceed the top end of our 2005 Group EBIT margin targets.

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

This is the conference operator. The first question is from Ms. Lisa Randall from Lehman Brothers. Please go ahead, madame.

Thank you. Good afternoon, gentlemen. Two questions in first, please. The first relates to the excellent performance from Power Technologies in the quarter. According to my numbers, if I strip out restructuring, there was contribution margin around 40%, and that, to me, looks like it was pretty much a record contribution margin. My question is, then, was there anything running through in Q3 in Power Technologies that was exceptional in terms of its profitability or anything else? Or, is that a sort of contribution margin we could expect to continue while the loading remains so strong? The second question is just on cash flow. You talked earlier in the year about possibly making contributions to the German pension fund in the second half of this year. Is that still a possibility in the fourth quarter?

Okay. Thank you, Lisa. It’s nice to hear your voice, by the way. The first question with regard to PT margin - the flat answer is no. We’ll be booked the $14 million charge for the transformer consolidation on the negative side, and on the positive side, we had nothing to mention. We had no real extraordinaries coming in there, which will be worth mentioning at this point. It’s really a reflection on the one hand that last year’s quarter was, I would say, above average poorly performing for the reasons known - lack of absorption, raw material prices and so on. We basically had good improvement on that one. Secondly, the third quarter this year was just simply a very strong quarter with very good absorption. We feel the positive effects of the higher order intake we have started to receive a year ago and which continued all the way through. We have finally caught up in pushing price increases to the market and setting off the price increases coming from the raw materials side. And, there were further order effects which helped us to improve the PT margin, but nothing really with regard to exceptionals.

As for your second question - Michel?

Yes, Lisa. Hello. As far as the pensions are concerned, you are right. We said that we have the intention to contribute again to the German CTA, and, in fact, we will do that in the fourth quarter. That is already why you can see that we have purchased some market securities in Q3 in order to do that. So, that will actually lift our pension contribution for a full year. It will be above $500 million in total. On top of it, we’re still monitoring the situation on some other pension funds because we have to watch that given the development of long-term rate. If discount rates on the long term continue to go lower, we may have to contribute a bit more in some other plans in order to make sure that we protect our asset base. So, $500 plus is a minimum for the full-year contribution in pension funds.

Lovely. Thank you very much.

Thank you. Is there other questions, please?

The next question is from Mr. Julian Mitchell from Credit Suisse. Please go ahead, sir.

Hi. Great. Thanks. I just had a question just in terms of-- From a reasonable standpoint in terms of the demand profile in western Europe specifically, one of the other companies in sort of European electrical equipment also alluded to an improvement in western European demand last week. I guess if you could comment on where you’re seeing that and how meaningful it is and how sustainable you think it might be. Secondly, I guess just in terms of your productivity - your head count - how you see that developing over the next sort of six or nine months, given the strength you’re seeing in terms of organic orders growth. Thanks.

Thanks, Julian. As for the strength of the, let’s call it western European market, we still remain a little bit cautious. If we look at the global market situation, the western Europe still ranks more at the end of the scale than at the top. It is tricky to evaluate it if you just look at the top line figures because large orders can make a big difference [unintelligible]. So, the base order development is actually more indicative now. I don’t think we have disclosed it on a regional basis, but it’s fair to state that this base order development for ABB in total is still going strong. So, we have no reason to believe that our global momentum is changing today. We still have the same outlook as we had, let’s say, three months ago. But, Europe is also the same. Europe is on the lower side - on the slower side compared to the other regions. Putting it positively, you could say if Europe really was to improve, if some of our competitors’ statements are right, then that will play into our favor.

As for your second question with regard to productivity and head count, quite clearly we are benefiting from operating leverage in various respects, whether that’s on the factory floor in the workshops, but also in SG&A because if you do the analysis, you can recognize that our SG&A percent is actually decreasing. The fact of the matter is our head count is never growing as strongly as is the top line. That’s helping us. We want to keep it that way. So, even though we’re growing quite strongly, we are carefully watching our head count development, which is also underlined by the success on the corporate costs side because there you cannot see that we have relaxed or become more flex with regard to our spending patterns. We will see an increase of head count, quite obviously, because we cannot cope with this kind of growth without adding some more people. Again, if you look at where these people are added, it is much more reasonable in Asia; maybe partly in North America, but, above all, in Asia, whereas in Europe we still continue to decrease the total head count. Did we answer your questions?

Oh, yes. That was great. Thanks.

Thanks, Julian. Other questions, please.

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

Good afternoon, gentlemen. Just a couple questions, really. One, your corporate cost performance, as you said, is coming in very well. I wondered how the Sarbanes-Oxley costs were coming through and whether they’ve actually hit you yet or whether they’re still to come, and, if so, if you can give us an idea on timing. Secondly, with the strong performance, particularly in PT, I wonder whether you’d seen any impact from Katrina and Rita in terms of rebuild orders, and if you haven’t, whether you would expect to get any in the fourth quarter.

Maybe I’ll start with your second question and then hand it over to Michel for the question on Sarbanes-Oxley. Quite obviously, it’s first of all, Katrina, Wilma, Rita, or whatever the name is-- these are catastrophic events. It is not very nice to talk about these events in a positive context and say they give us good business. But, the fact of the matter is that, yes, indeed; there’s a lot of power infrastructure which is down. The people need the power supply desperately. We have just been to the States for a board meeting. I met with quite a few CEOs from utilities. They’re sending all their work crews down to the south to Florida and other areas in order to help their colleagues and, actually, their competitors, to some extent, to bring the infrastructure back up online. That gives us an immediate benefit. We have several plants who are running three shifts seven days a week. There will be some benefit also accruing to the bottom line. I refrain, however, to try to specify that or give you an order magnitude. In the longer term context, this is much less important than, for instance, an energy bill and the fact that the total power infrastructure is very old and needs refurbishment and upgrading. That is much more of the essence to us for the next three or four years than these incidents which have happened this year. So, I would assume that there will be some benefit in the fourth quarter and maybe the first quarter 2006, but, for various reasons, I refrain from becoming more explicit about that.

Michel, SOX costs?

Yes. Regarding SOX, we have spent in the third quarter $10 million on SOX. That contrasts with the more or less $16 that we have spent in the first half this year. I expect this ramp up to continue to be probably around $15 for the first quarter. So, let me insist again that these costs mentioned here are both external and internal costs. We [unintelligible] account for the cost of ABB employees which have been assigned to this project. But, that’s all we always have accounted for since the start. I’m just trying to be consistent here in the accounting. You will see a ramping up, and that’s why, also, we’re still cautious in our guidance of corporate costs for the first quarter. There is always a bit of higher cost in the last quarter of the year.

Thank you. I have one supplementary. I notice that on your employees that the number of people in Power Technologies is actually unchanged. Presumably, with the margin progression, within that there’s been lower people employed in western Europe and more people in China and India. I wondered whether you had a figure for what that change has been in the overall flat number.

I don’t have the number for Power Technologies separately. But, I know when we look overall at people statistics or employment in Asia, for instance, it increased by 1,500 people since the beginning of the year. That gives you a little bit of an idea of the shift.

We don’t disclose these head count figures on a regional basis, but what we have disclosed was that in the fall 2004 we said we were going to add 5,000 people in the next few years. This is in China, and, as a matter of fact, within the last year, we have added just 1,000 people more or less in China already. So, the employment figures we look at every month show a tremendous increase not only in China but in other places as well. In western Europe, it continues to decrease.

Thank you very much.

Thanks, Charles. Next question, please.

The next question is from Mr. William Mackey from Main First Bank. Please go ahead, sir.

Oh, a very good afternoon to you. A couple of questions. First, if I could follow up on Charles’ point with regard to corporate costs. I think you’ve stuck with your guidance of $450 million or lower. Is there any seasonality within the corporate costs, because I think with that, the implication if you get to $450 is about $170 million charge in the fourth quarter? Secondly, historically, the Group has delivered a very strong seasonal fourth quarter cash flow performance. Is that something that you should expect to be able to repeat this year?

As for corporate costs, maybe you’ve recognized that in the last few quarters we have taken a rather conservative, sober attitude towards providing guidance. We have so far not changed the corporate cost guidance, which is the $450, maximum. As for seasonality, there’s several things happening throughout the year. We have, for instance, certain personnel costs [unintelligible] accruing mostly in the second quarter. We have all the fields which typically happen more towards the end of the year. So, this is slight seasonality. But, putting that aside, I would say we would be disappointed if we’re not able to beat the guidance we have provided. Looking at the current figures, we have no intent to fill the gap in between the forecast from the three quarters to the full year by incurring additional costs. We may seem somewhat higher costs in the fourth quarter, but we still expect to be lower than the $450.

Okay. Thank you.

And, regarding your question on cash flow, I must say first of all we are very pleased with the cash flow we have produced this quarter. It’s a major improvement if you adjust your calculation for the reduction of securitization. And, if you actually look at it in terms of EBIT conversion, you will see that we are quite well ahead on the year-to-date basis compared to last year, for instance. We are more in the 60% or 65% area compared to 40% last year. So, we start being successful, it looks like, to better spread the cash flow over the year rather than just concentration in Q4. Now, clearly, we cannot change everything. Most of our customers are working this way. So, we still expect a pretty strong cash flow in Q4. We remain very optimistic on the generation for the full year.

Okay. Thank you. Just one supplement for your follow up there. You’ve achieved a very good corporate tax rate of 32 in the third quarter, and yet your guidance historically has been about 35, reducing steadily towards 33. Is there any reason now that you might be able to change that?

[Unintelligible] this year has been to be between 33 and 35. Judging the tax rates on a quarterly basis sometimes gets a bit dangerous because it may depend on a few events. So, we still remain within this guidance. We are 34% year to date, so I think we are quite comfortable to stay within that zone and to be within our target range.

Thank you very much.

Okay. Thanks, William. Other questions, please.

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

Good afternoon. I have two questions as well. In terms of your corporate expense, you’ve obviously made faster progress towards lowering these, or is it additional progress? Do you expect a continued improvement in ‘06/’07, or is this just all pulled forward - improvements you’ve targeted before? The second question is on provisions in your cash flow statement. You show you billed a net provision of $124 million during Q3. Obviously, there have been some restructuring charges and other things, but if you’d just give a bit more detail on that? And, maybe just a quick follow-up question on the Power Technology orders in the Middle East. This already includes orders for the Pan Arabic Reef.

Okay. Maybe for your third question, the Pan Arabic Reef, or the Gulf Link, as we call it. There have not been yet issued formal contracts. So, that is not included in the third quarter order intake.

As for your first question regarding corporate costs, let me remind you that, obviously, we have a -- not a long term but-- a target going beyond 2005 into 2006. We said by the end of 2006, we want to be at the level of $350, $350 being roughly $200 real corporate cost, $100 corporate R&D and about $50 million in pension-related costs relating to the past, which we really cannot change that much. I would say the $350 more or less is a good-- not end result but a-- going-concern basis. With 1% real corporate costs, you’re at the level where you can still become lean or mean and you could drive it down to 0.8% or so. But, the question is what kind of value do you want to provide with the corporate center? Do you want to shape the organization more than just being a portfolio holder? Of course. That’s exactly the intent we have in mind. So, coming from that perspective, we have not an ambition to go, I would say, visibly below the 1% ratio as to operating costs.

To come back to your question what we see now is more of an advancing of cost savings, a [unintelligible] then an additional cost savings. I’m not saying that we couldn’t go further down than the $350 I mentioned, but it is not an explicit target. You will probably not see us coming up with a new target which is a further reduction in corporate costs than what we have issued so far. But, nevertheless, it’s a good development. It is going in the right direction, obviously. It will be helping us to drive costs even further down than the $350. But, it is not so crucial at this point anymore for the total corporate performance.

As for Parisians, Michel?

Yes. Maybe I will just mention as well-- You were mentioning the pension cost of %50. Actually, we’re starting a certain decline. That is our pension costs related to businesses we have divested. For instance, they’re contributing to our German CTA. Some of these businesses divested were in Germany. We now manage thanks to the return on these assets to reducing these royalty costs. They’re more going down towards $35 million a year, which is also an improvement and helps the total.

As far as your question on provisions is concerned, I would say there are mainly two explanations here. The asbestos shares. We had to provision for another 23 million this quarter for the share price was up for the asbestos settlement. And the rest is really linked with the fact that all these large orders we have received have now really entered into execution phase. So, they’re really representing [unintelligible] warranties for the volume increase and the provisions for work due, which is related to these large contracts. So, nothing really exceptional, just finally the high volume hitting the books.

Thank you.

Thank you, Andreas. Next question, please.

The next question is from James Stetler from [Unintelligible] Bank. Please go ahead, sir.

Thank you. Good afternoon. Two questions, the first one on process automation. Clearly, this is an area where you see a significant margin upside. I just noted that you didn’t see any increase in orders in North America. What’s the reason behind that? Is there, obviously, a nice potential for pick up in 2006? The second question is on cash flow. Obviously, this year, a lot of the cash flow is going back into the Company, paying down pension liabilities and securitized receivables. Looking into ’06, could you give us a rough idea as to how much you intend to spend on pension pay down and also on the receivables side?

As for your first question, James, process automation order intake in North America, I think it reflects a little bit our policy that the quality of the order intake is of higher importance than the absolute size. In process automation where you deal with the larger scale contracts, [inaudible] it is comparatively easy to expand the volume if you’re willing to become more flexible, so to speak, in terms of conditions and prices. One reason why the quality of our performance, why our EBITDA has gone up quite nicely-- One reason among several ones is the fact that the quality of the order portfolio has increased and also because of the higher total order intake we can afford to become more selective. We don’t need to have all the volume as in the past in our pipeline. Whether that will lead to a nice potential in 2006 we will see. It is clearly the case that the overall market situation in process automation is, as we said, still favorable. We see quite a few of our industries on the upside - oil and gas, even the chemicals are not doing badly, the marine sector is going strong, the mineral sector, of course, very strong. On the downside, I think it is [unintelligible] exactly which has not been doing very well. I did mention the chemicals. Chemicals, I would classify more as average. But, the majority of the sectors are still strong. We don’t see a change around the corner.

Just a follow-on there. Your margin in process automation was 6% last year. Could you give any indication where that is now?

I don’t think we should be doing this because we will only start to give you exactly this information next year in 2006; otherwise we run a problem here also with second accounting. We still run our organization according to the old structure - the existing structure with the two divisions. Sorry about that. Michel, on pensions?

Regarding your question on cash flow, we are not yet at the point of giving guidance. We’re going to spend the money next year. In terms of pensions, I would maybe keep that question for a bit later or earlier into next year because it obviously depends on our alternative. In terms of securitization, the goal is much more clear. We have already, as you can see, the securitization level quite a lot. Actually, the ultimate goal is to bring it down to probably a level of $250 to $300 million. That basically represents one program that in fact, because what we have done on the other programs, we have been able to renegotiate at a much more favorable cost than what we used to have in the past. So, depending how much we still will use in Q4 that might leave a little tail into next year, but I would say after that we have brought it back to a level which we are happy with, both in terms of volume and in terms of cost.

Great. Thanks a lot.

Thanks, James. Other questions, please.

The next question is from Mr. Oliver [Esno] from Exxon B&P [unintelligible]. Please go ahead, sir.

Yes. Good afternoon. I have two questions, please. Can you hear me well?

Yes.

Okay. The first is on automation. If I look into the automation presentation, it states that you expect restructuring to reach 50 basis points for 2005 within that division. So far, if I understand well, you haven’t booked anything. So, is that all going to happen in Q4? I think my calculation leads to about $60 million. Is that correct, and would that cover already restructuring for the robotics business that you were already alluding to in the September results? Are you already covering it for that? That’s the first question. The second question is on the securitization impact. I just would like you to help me to reconcile. At Group level, securitization at $246 million impact. But if I add up the impact in the division, it’s a higher number. Can you just help me with the math here? Thanks.

Okay. As for your question relating to restructuring, let me first mention that there has been an accounting change in this year. The numbers this year vis a vis last year’s are not perfectly comparable. Certain things which would have been classified as restructuring charges in 2004, today actually happen inside - cost of goods sold and are no longer depicted as restructuring. Having that in mind, some restructuring has been booked this year, but it’s not visible as restructuring any longer. But, you’re absolutely right. We do expect some restructuring to occur, and quite a bit of that will be incurred in the fourth quarter. I wouldn’t classify this as mainly a robotics or manufacturing automation restructuring, but clearly in the AT division there are also certain things going on to shape up for, not just the short, but the medium- and long-term future. So, you do need to expect a higher restructuring charge in the fourth quarter. Michel?

If I can follow up on this, you were mentioning you had calculated $60 million of restructuring because manufacturing automation is a business of $1.5 or $1.6 billion.

No, I was just looking at the total of automation because it states that automation as a whole will have a charge of 50 basis points.

We have automation-- It’s because of what Fred just explained. You can’t really follow it in the statements as clearly as before. So, on a year-to-date basis, we have spent about $31 million in restructuring for automation. So, we still have plans for the fourth quarter to bring that up. But, it’s not that we haven’t spent anything this year. We’re still a bit on the low side of the range.

Okay. So, I would assume that this bullet point actually refers to the restructuring charge which is now booked in cost of goods sold and has already been booked.

That’s right. It’s either in cost of goods sold or in SG&A, depending which kind of cost we are taking out.

Okay.

Okay? As far as your question on restructuring is concerned, you are right. In fact, what has happened as well is that we had some securitization done as a corporate program before that was not linked with the core businesses. In fact, when we say that overall the securitization in these quarters comes down by $246 million. In fact, for the core business, it was down $334, but it increased in corporate, which is more a technical aspect than anything else, which is [unintelligible]. So, you come to this total of $246.

It’s a net figure.

It’s a net figure. So, we leave the cash flow on an adjusted basis. I would say the cash flow from the core division has really increased by $339 million, if you make the same calculation.

Okay. That’s perfect. Thank you.

Thank you, Oliver. Do we have other questions?

The next question is from Mr. Robert [Heuer] from Citigroup. Please go ahead, sir.

Hi. This is Bob Heuer at Citigroup. Two questions. The first relates to manufacturing automation and the weakness there. What’s going on there? Is that just timing, or is there something more secular at work? The second question has to do with Lummus and where that stands these days. Does the outlook--? I would imagine the outlook for that business has been improving considerably over the last year. I’m just curious as to your thoughts on what’s going to be happening there.

Okay. This is a classic question. [Unintelligible] short-term figures may overrule a strategic position. Let me try to be very clear at this point on Lummus again. The situation is such that Lummus is non-core because Lummus is related to energy, of course, but not related to electricity and automation and similar topics. So, it is not really in the core portfolio of our business. That means we have a very open attitude with regard to the portfolio creation, whereas Lummus belonging to the portfolio short-, medium- and long-term are not. We have to treat Lummus, on the other hand, as a going concern because Lummus is, first of all, an important operation. It’s not to be compared, for instance, to building systems, which is much smaller. Lummus deals with large, long-term contracts with very important customers - customers who also deal with ABB in our core businesses. So, we have to instill a certain trust and a certain reliability. That’s the reason why we treat it as a going concern perspective. That could imply that we would even invest new money into Lummus if the payback is short term enough and if it’s value enhancing. So, we treat it with a going-concern perspective. From a strategic portfolio point of view, we have a different attitude towards Lummus than we have to our core businesses. And, luckily enough-- I mean ABB has had to divest quite a few businesses in the past because we needed the cash and we had to sell it at low prices. Because of the asbestos constraint we have with Lummus, we were not able to do so, and as a consequence of that turned we turned around the business. It is now reasonable profitable again, and I think the value has increased almost every day. That’s playing into our advantage. We’re going to take that to our benefit in the future as well. So much for Lummus.

As for ATMA or the robotics business, what you see here clearly is already the reflection of something which is not necessarily just a short-term performance change. As we mentioned before, in manufacturing and automation we have to anticipate that the market demand is slowing. It’s going down somewhat. 70% to 80% of our business is related to automotive, and in automotive, the driver is not the actual number of cars produced, but it’s the number of new models introduced. Car manufacturers set up new assembly plants according to new models. This number of new models is going down; that has a direct impact on our order activity. This is the case, and we see this coming up and are taking the necessary steps to make sure that we can improve our operating performance, EBIT mainly, even in a market situation which is not as favorable as in the rest of our portfolio. That’s also one of the reasons why we have changed the focus pretty much, from just looking to the outside to also improving the internal operating system costs from western Europe to Asia and so forth. Does that answer your question?

Yes, it did. Thanks very much.

Thanks, Bob. Other questions, please.

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

Hello. It’s Tim Adams from Citigroup. You’re getting one after the other here, I’m afraid. Can I just confirm-- Three small questions, really. Can I confirm there are no reorganization charges other than the $14 million that you refer to in the PT division? Secondly, in PT, you talk about the delivery rate on the large system orders having ramped up in the third quarter. Are we now at the run rate that you anticipate going through on that over the next sort of few quarters? Have we seen all the ramp up, or is there more to come as we go into the fourth quarter and into ’06? Finally, on interest costs. You’ve been notoriously cautious about forecasting a reduction in the interest cost level. I note in this quarter you’ve achieved an interest cost of sort of $37 million, if you exclude the exceptionals. Obviously, I note there is going to be some more exceptionals in the fourth quarter. But, looking to 2006, are we going to see interest costs running at the rate that we’re getting into, excluding the exceptionals, in this quarter?

Okay. Let me start with your first question, Tim, about reorganization charges. I think we need to differentiate between restructuring and reorganization charges. We have mentioned the $14 million for transformers. As we indicated before, we have all the charges, even in the third quarter, but they’re not necessarily classified as restructuring for accounting reasons. More of that is to come. So, we will see, besides the transformer program, which will likely cost us something like $120 million by the end of the year, some other restructuring charges as we discussed. When you talk about reorganization charges, referring probably to the new organization coming up in 2006, I would not expect any charges of significance to appear here on the P&L. That is really an evolutionary step. As a matter of fact, we intend to execute that with the effect of having lower charges in the medium to long term and not increase the charges. So, there’s no big hits coming up or anything like that.

As for the delivery run rate question, with PT, let me just remind you that typically the fourth quarter is one of the strongest quarters there is. PT in that sense is more seasonal than AT. It has a little bit to do with POC but also with customer behaviors. I don’t think that what we have seen with regard to volume in the third quarter is the end of the story. If you ask me beyond the fourth quarter going into next year, I become more cautious because quite a bit of the volume is driven by new orders coming in. But, for the fourth quarter, we are still very positive that we see continued benefits from the very good order intake we have had this year and also the last year.

Interest costs, Michel?

Yes. As far as interest cost is concerned [unintelligible], it’s a bit difficult to take a run rate out of that because there’s always some exceptionals hitting every quarter. So, with this quarter, I don’t think that you can really use 37 and say that is a run rate because every quarter you may have different impacts from foreign exchange, for instance. What I would say is if you start looking at next year-- Obviously, we would love to bring the interest costs down. On the other side, the fact is that we still have at this stage about $3.6 billion of cash and that we’re still carrying pretty expensive debt in our book that we find too expensive to buy back at this stage. If you just calculate the impact on that, you’re looking at [unintelligible] GAAP of 3.5% or maybe even more. That gives you a little bit of an idea that we can reduce it. We sure want to reduce it below 200. But, you are still going to get a very conservative estimate from me because, for the moment, I already see we can bring it down spectacularly faster.

Okay. Can I just ask one follow up there? I accept there’s been sort of a change in policy in terms of counting for restructuring, but in the third quarter last year, you had $12 million of restructuring costs in PT. You’ve got the $14 million related to the transformer program. How much on top of that have you got within the EBIT number? That’s what I’m trying to get to.

Well, it is only $1 million on top of that. So, the total restructuring charge for PT this quarter was $15 million, which is $14 for the transformer program and $1 for the other businesses.

But, you anticipate that there will be some ramp up in the other businesses in Q4?

Yes. We think we’re going to spend more of that in the Q4, in line with the usual 0.5%. So, indeed, we will for sure spend even more than this $1 million that we have here. [Inaudible] to get to 120. I wouldn’t be surprised if the PT for the fourth quarter we’re going to have total restructuring charge probably a bit in excess of $15.

Thank you very much.

Okay. Next questions, please.

The next question is from Mr. Michael Hackman from UBS. Please go ahead, sir.

Two questions, if I may. The first question is if you could give us an indication on what the price impact might have been on sales and orders; if possible, if you could split it between PT and AT. The second question is on the cash flow. I was wondering why the contribution from corporate and other was a positive $146 million. If you could shed some light on that - if there was an exceptional in there that might unwind later. And, then the other one on cash flow is if you could give us an indication how much of a contribution came from customer advances. So, the movement in net customer advances in the quarter would be great. Thanks.

Thanks, Michael. I’m a little bit at a loss. I cannot give you the differentiation involving a price impact. Michel?

We don’t publish this. It’s sometimes even a little bit difficult for us to follow, given the diversity of our businesses. We have product businesses, we have services, we have engineering. So, a price [unintelligible] from a Group perspective doesn’t really make a lot of sense. All we can tell is that for sure in this quarter is the first quarter that we can report that our price increases have been enough to offset the increase in raw material costs. This is the first quarter since many quarters that we can say that. I can’t really give you any more detailed numbers about that.

We had about a couple, if not three, new waves of price increases in transformers in order to catch up with the accelerating increase in raw materials. That now is the case. We don’t see a net negative impact because of all the measures we have taken.

There were two cash flow questions, one corporate and one customer list.

As far as the corporate cash flow is concerned, that one is always a bit difficult to analyze because it also incorporates the cash flow coming from our treasury operation. So, we have pretty important settlement of derivative transactions going through in this quarter that contributed really a big part of this total. The fact that we reduced securitization, as I mentioned before, has also an impact on corporate cash flow. Finally, we had also a very small asbestos insurance collection, so that was [unintelligible].

As far as your customer advances are concerned, the increase this quarter was about $20 million.

Just $20 million. You mentioned it in the release that you had significant contributions. $20 million doesn’t sound like a lot.

It’s actually PT, which is I think the major change that there was. It’s still quite important if you look at the overall volume we have there.

Can you give us a little bit more detail on this big difference between this $146 million cash flow and the negative $95 million of EBIT in corporate?

$95 million in corporate is really what we call the corporate costs. Is that [unintelligible] cost? Is that the corporate research cost? And, this pension cost relates to drivers to business. There’s purely a cost. In cash flow, what you have mainly is cash flow from the treasury department or the derivative [unintelligible]. It’s what foreign exchange hedges that come and mature. Obviously, it can give you very high viability from one quarter to another, as you can expect from a global company, which is obviously managing a lot of different exposure here. You can’t really link the two together because of that.

Can you then conclude that $250 million of the cash flow was not necessarily attributable to the quarter?

No. Why would you say that?

Because you have such a big impact from the settlement of hedges and so on in corporate.

Yes, but what you see as well is that at the end of the day the two core businesses had a total cash flow production, adjusted for securitization, of $661 million. And, you had a certain contribution corporate that was offset by some [unintelligible] in non-core. Still, from a pure core perspective, the cash flow generation was really excellent I think.

I don’t dispute that. I was just wondering if I could get a better feel for the seasonality or the exceptional characteristics of the cash flow in the corporate line.

It’s very difficult to give you that, Michael, because at the end of the day it really all depends. I think here we had some big maturities of swaps at one point. That can make a big difference. Next quarter there can be nothing, or the quarter after there can be a lot when they mature. As you know, the cash impact of discount of hedges is really something that’s very difficult to predict. We have always had these kind of liability in the past too. Now it’s just increased by the impact of securitization.

Okay. Thanks.

Thanks, Michael. I would now ask for the last question, please, because the hour is just about finished. Who has the last question, please?

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

Good afternoon. I have the traditional two questions. Firstly, just getting back to the issue of the very strong quarter you had at PT, it was notable-- you had 4% local currency grace in the second quarter and 13% in the third quarter. And your transformer announcement came right at the end of the second quarter. I was wondering whether some revenues slipped from Q2 into Q3 and therefore partially explains what was obviously, in any case, a very good quarter. Secondly, there had been some questions earlier about Lummus. I was wondering if you could give us an idea of how the business looks today in terms of what the steady-state revenues are and try and give us some assistance in trying to work out what sort of profit contribution we can work out on this-- we can expect going forward on the basis that it sounds like it’s all normalized now.

As for Lummus, I would say what you have seen now in the last quarter is the profit improvement. It’s clearly something we’d like to see also happening in the next year. We don’t expect Lummus to fall back into a miserable situation like we’ve had it in years before.

As for total top line, also-- It is obviously very volatile because we have large projects, and it depends what kind of PSCs you do and so on. I don’t think it’s so valuable to talk too much about top line deviations because a plus 20% can mean a direct impact to the bottom line or not, depending on the quality of the contract you have in there. I think most important is that we expect to continue part of this contribution from Lummus on the bottom line, on the EBIT line, for the quarters to come.

And, as for your other question, Michel?

Which was the increasing revenue in PT in fourth quarter. I don’t think so. I believe that at the end of the day what you have now is a number of these large projects that we have taken have really gone forward in execution stage and start hitting the income statement as we hit the milestones. That would be one part. On the other side, we also enjoying really a very robust growth in our product businesses, especially the medium voltage, for instance. That one is well sure a quite nice increase and transformers, despite the fact that we had margin problems, the demand was also pretty strong. So, I don’t think you can talk about slippage from Q2 to Q3. It’s just that the market has picked up. September has been very good. That’s just the trend that we saw at this stage.

Let me just add a sentence here - a few thoughts. We don’t manage quarters. That’s not our job. We can’t manage it, first of all, and, even if we could, we don’t do that. It’s just absolutely contrary to my own thinking. I think we as operational management must make sure that we move forward with the Company. If that means that we have to take a very immediately hit that is still the right necessary measure to move forward, then we’re going to do so. You have seen that in the second quarter when we came out with the transformer restructuring. There was no attempt to try to psychologically smooth that out over the quarters. We, in fact, gave you guidance before it happened. We came to the conclusion we need to do it now. There’s no value in waiting. Therefore, we issued the announcement. So, we don’t manage quarters, whether that’s top line or bottom line. We manage the total performance, and hopefully with that we have a good total annual result.

I wasn’t trying to suggest you’re managing the quarter, but it’s human nature for management to try and have a bit of a push of deliveries at the end of the quarter. Given there would have been a lot of management attention focused on the need to restructure the transformers, I just thought there was a possibility that some of the revenues might have slipped. I wasn’t suggesting you are massaging your numbers in any way.

I guess if we had the freedom to do that, we would have probably kept a few in the pocket for the fourth quarter.

It just shows you. We are beyond these policies. I don’t think we have the freedom to do that.

I’m delighted to hear it. Thank you.

Very good. Well, ladies and gentlemen, thank you very much for joining us in this [unintelligible] conference call. Just as a word from a personal side, I guess all of you were listening in a year ago in the third quarter, and you can understand this. This obviously gives me a kind of satisfaction to see how this situation has changed at ABB. We want to keep it that way. With that, we will be looking forward to seeing you again and to talking to you again some time in February when we talk about the fourth quarter and the full-year results of 2005. Thanks very much, and have a nice rest of the day. Bye bye.

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