Abb Ltd (ABB) 2006 Q1 法說會逐字稿

Good morning and good afternoon, this is the Chorus Call conference operator. Welcome to the ABB 2006 first quarter results analysts and investors conference call. As a reminder all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. We would kindly ask each caller to limit themselves to two questions only. For those journalists who have called in your participation is in listen-only mode. This call must not be recorded for publication or broadcast. A replay of this call will be available for 96 hours following the conference. [OPERATOR INSTRUCTIONS].

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

Thank you very much madam. Good afternoon ladies and gentlemen. Thank you for joining our analysts conference call for the first quarter 2006 results. With me this afternoon is Michel Demare, our Chief Financial Officer. For those of you who have downloaded the presentation on our web page I’m going to refer to the charts which are included in the presentation. We start with slide number three called ‘Key developments in Q1 2006’.

We made a great start into 2006. We delivered strong profitable growth in the first quarter thanks to our leading position in fast growing markets. And our sharp focus on improving operational performance. The accounting treatment of the asbestos shares which amounted to almost $90m dampened an otherwise solid growth in net income. We saw continued strong organic growth in orders and revenues. Orders received were 21% higher in local currencies compared to the first quarter of 2005. And revenues were up 13% in local currencies with double-digit growth in all divisions except Robotics which was basically flat.

Our EBIT increased 30% to more than $500m. Higher volumes combined with price increases related high raw material costs contributed to the increase.

We also continued to improve factory loadings in our products businesses.

Our ongoing focus on business execution and operational improvements along with better project selection and execution also lifted our EBIT margin which increased to 9.4% in the first quarter, compared to 7.7% in the same period a year ago.

In addition improved cost controls in our corporate activities also help lift EBIT in the quarter.

However this volume and operational improvements were not fully reflected in our net income because of the $89m effect of accounting for the asbestos shares. Nevertheless our net income increased compared to the first quarter in 2005 reaching $204m.

Cash flow improved by almost $250m versus the same quarter last year. I’ll come back to that one in a moment.

Finally the plan of re-organization of our U.S. subsidiary Combustion Engineering became final at the end of March, bringing to an end a long and difficult chapter in the Company’s history. We have transferred various assets to the trust fund set up under the plan and we make the plan effective on April 21. Expected impact on our balance is explained in Appendix 1 to the press release.

We also moved ahead with our Lummas asbestos plan when we filed a pre-packaged Chapter 11 in the U.S. Bankruptcy Court earlier this month.

As a result of these positive developments we also received upgrades to our credit ratings earlier this month from both Moody’s and Standard & Poor’s. And I guess you have seen the -- just recent announcement from Standard & Poor’s this morning.

Let me also highlight the bond transaction we announced this morning. We have started a process to incentivize holders of our $968m convertible bonds during 2007 to convert the bonds into the underlying American depositary shares. If successful this transaction will lower our debt and increase equity. Together with our recent credit rating upgrades and our strong first quarter results, this will put us in a stronger position to carry out our medium term strategy of profitable growth.

Slide four, ‘Summary’. Slide four shows you the key results in the first quarter that I’ve just described. On the cash flow line let me add that the biggest improvements came from the Power Products division as a result of higher earnings and higher customer advances compared to Q1 in 2005. Also cash flow improved in the oil and gas and Buildings Systems businesses.

Slide five. This quarter continues the track record of growing profitability that ABB has established over the past two years. We have clearly benefited from our lead positions in some key markets and regions. Demand continues to be robust in the Power Transmission and Distribution sector where we are by far the market leader. Our top presence in most industrial sectors positions us to also benefit from the need for efficiency improvements in industry and rapid economic expansion in emerging markets.

Adding to these market drivers is our ongoing focus on operational improvements. We continue to improve our production efficiency and make our cost base more competitive. The result has been a steady increase in profitability.

Slide six. Regionally we also saw very favorable development in our orders received. Europe showed good development up 12% in local currencies which is very encouraging, as growth has been flat or modestly positive in recent quarters. Higher customer spending in Europe was led by the two power divisions and Automation Products.

The Americas grew 13% in local currencies mainly driven by a strong U.S. market environment for both power and industrial automation. In Asia with a 32% increase in local currencies China again led growth. All divisions reported higher orders in China in the quarter. India was also higher in local currencies led by Process Automation and Power Systems.

Finally the Middle East & Africa again showed very strong growth. High oil prices have fuelled increased spending in the region on power, and the industry infrastructure to expand, not only oil and gas production, but also channel industrial and residential development.

Slide seven please. Looking at revenues the recent trend of Asia increasing as a share of total sales continued in the first quarter. As you will have seen in the press release, Asian revenues were up 32% in local currencies compared to the first quarter of 2005. This growth clearly outpaced the more modest 4% local currency revenue increase in Europe. Revenues from the Americas were up 21% in local currencies reflecting the good order growth we’ve seen there in recent quarters.

Slide eight. I will just quickly read you the main results for each of the divisions. Starting with Power Products in chart eight. I would just remind you here that included in EBIT this quarter is approximately $17m for the transformer consolidation program we announced last June. As we have already said, we expect these charges to amount to approximately $50m in 2006.

Slide nine. In Power systems we saw higher orders across all regions and a doubling of large orders in the quarter. EBIT in this division benefited from the higher capacity utilization of engineering resources on large projects, as well as improved project risk management and execution.

Slide 10. Growth capacity utilization was also a major contributor to higher EBIT in the Automation Products division in the first quarter. As a result we were able to lift the EBIT margin above 14%. Orders were up almost 30% in local currencies revenues were 17% higher reflecting favorable industrial markets in the quarter.

Slide 11. A strong increase in base orders in Process Automation offset a decrease in large orders in the first quarter. This business continued to benefit from the robust development in the oil and gas, marine and mineral sectors. Better execution of large projects in this division also contributed to a higher EBIT margin up 1.6, 6 percentage points from a year ago.

Slide 12. Lower investments in the automotive sector, mainly in the U.S., resulted in a 15% local currency decrease in orders in our robotics division in the first quarter. Revenues also slipped partly due to the winding down of a multi-year order won in 2004. The biggest impact, of course, in the quarter is the lower EBIT and EBIT margin. This is the direct result of our decision to accelerate the operational improvement measures needed to make this business more competitive. This includes, for example, steps up on the expenditures to improve product design, but also ongoing consultation costs associated with our cost migration efforts in this business. And we took additional provision for lost orders in the back-log.

Slide 13. Below the EBIT line our finance net is down slightly, partly as a result of lower securitization costs. Minority interest is higher reflecting in large part the growth in our joint ventures in China. The big item is in discontinued operation and that’s the $89m mark-to-market expense to account for the change in value of the 30m shares transferred to the asbestos PI Trust. Because we transferred those shares on April 20, we will see this mark-to-market effect one more time in the second quarter results. That will amount to approximately $25m.

Slide 14. Key financial data. Looking at the balance sheet development in the first quarter, the positive trends we saw in 2005 continued. Gearing and net debt decreased for the fifth quarter in a row and our equity ratio is approaching the 20% level. This will improve significantly as a result of the adjustment in our balance sheet for the transfer of the asbestos shares. The fair value of the shares on the date of the transfer, some $407m, will move into shareholders equity.

In addition if the capital market transaction we announced this morning is successful, these ratios will again improve significantly. So we are well on track to having a much stronger balance sheet in 2006.

Slide 15. Update on asbestos. As I mentioned at the beginning of the call we have now made the Combustion Engineering plan of reorganization effective. Which brings to a close a long period of uncertainty for ABB. This will have some impact on our balance sheet in the second quarter and to a lesser extent on our income statement moving forward. And of course there will be certain cash flow implications over the next few years as we make the payments required under the plan. However, I think it’s safe to say that the financial uncertainty surrounding our asbestos issue is now behind us. The remaining asbestos liability in ABB Lummus Global is being handled through a separate pre-packaged Chapter 11 plan that we filed on April 21. We expect this to be finalized before the end of the year.

Slide 17. Outlook. Finally here is our outlook for the rest of 2006. Not much has changed since we reported our full year 2005 results at the end of February. Market conditions remain very favorable with continued strong demand for our power and automation offerings. We think the strong oil price will continue to spark customer investments in oil and gas production and marine shipping, as well as in power infrastructure.

On the other hand, we don’t see any improvements this year in the construction industry or in the North American automotive sector. Regionally we expect continued solid growth in Asia and the Middle East & Africa. North America should stay positive in most sectors. And we think the growth in Europe should continue although at lower levels than in other regions.

There are, however, some risks to our business in the current environment. One is the instability surrounding developments in the Middle East, another one, probably the more important one, is the uncertain impact of the current record high oil prices on the overall global macroeconomic development. If the oil price results in a general industrial and GDP slowdown then we will feel those effects most notably in our Automation Products and Process Automation divisions.

At the moment, however, the effect is still positive for us and we are assuming this won’t change in the next couple of quarters.

Ladies and gentlemen let me wrap up. The first quarter was a great start to 2006, our leading positions in high growth markets combined with our continued focus on business execution, resulted in a strong improvement in orders, revenues, EBIT and EBIT margin compared to the first quarter of 2005. Despite an $89m expense related to the accounting for ABB shares transferred to the asbestos trust, net income increased to $204m. Cash flow improved by $249m in the quarter and we have now put the asbestos story basically behind us.

Finally, we have launched a bond transaction that, if successful, will give us a stronger balance sheet and put us in a stronger position to carry out our medium term strategy of profitable growth.

With that ladies and gentlemen, I’ll open up for questions now.

Excuse me this is the Chorus Call conference operator. We will now begin the question and answer session. [OPERATOR INSTRUCTIONS]. First question from Mr. Andreas Willi, JP Morgan. Please go ahead sir.

Good morning. I have two questions please. The first one on your growth rate in orders, which was obviously very strong in Q1. Would you characterize that as a normal quarter, what you could expect for the rest of the year? Or due to larger orders, or some companies talk about the Easter effect that maybe Q1 was unusually strong from what we would expect for the rest of the year.

And the second question on your targets. You previously commented that you may come back this year relative to your 10% margin target for ’09. You have now achieved 9.4% in what is normally, seasonally the weakest quarter of the year. What’s your current thinking on that target?

Thanks Andreas for your two questions. The growth rate of 21% organic is clearly a very excellent growth rate. And coming from that point of view it would be almost arrogant to assume that this is a standardized growth rate for the quarters to come. Now I must say we seen positive surprises in the last 12 months. We -- if I remember correctly, the first half of 2005 was that we expect the growth rate to go down to the single high digits. It never did and the 21%, again, is a very positive surprise.

Maybe 2006 bears the possibility for a few other positive surprises, but again, I have a hard time to classify 21% as a standard growth rate. We are happy if we continue the growth in the double-digits. Let’s keep in mind that we also the base effect, that obviously we have increased volume every quarter and that’s a challenge when we grow bigger to continue on this base.

As for you second question, I understand it very well because we had the question already when we announced the annual results in February “How about our mid-term targets?” And we said it’s too early for us to change anything. And again, this quarterly result, I understand increases the urgency or the insistence on asking the same question again. But for us we have not seen, I would say, long enough of a period to -- with considerably above expectation results to change our medium term targets.

Medium term goes up to 2009, let’s keep that in mind. If the oil price keeps on going up, if something bad happens in the Middle East, we may have a different environment in 2007 that puts everything into different relations again. So I would assume that we will continue to speak about this topic and am looking forward to addressing it again in fall. Thank you. Other questions?

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

Yes. Thanks. A couple of questions. First of all, just in terms of the time line for the turn around in Robotics. Your charges overall for the Group, in terms of restructuring, were very low, I think half a percent of sales or less. Do you expect Robotics charges to increase a lot from where we are today over the balance of this year? And also could you give a bit more detail on, perhaps, some of the headcount reduction measures in that division?

And the secondly, if you look at the Power Systems business, not much evidence of margins improving year-on-year. I think the capacity utilization really picked up in the middle of 2005 so you would have expected decent margins in the second half to be continued now. Was it just one or two projects that caused the margin to really not expand much year-on-year, or is there something else going on? Thanks.

Thank you Julian. I’ll answer your second question first on Power Systems. I don’t want to go into too many details but yes, I would say there were one or the other special negative effects that we had in the quarter which kept a ceiling on our margin improvements. So our ambition clearly is to drive the margin up in a more visible way. And you also know our medium term targets which are above 6% and I would hope that in 2006 we see some more improvements.

As for Robotics, the story is, in a way, similar to what we have seen in transformers, even though the financial magnitude is quite different. The story is similar in that respect that once we recognized that we needed to shape up things and correct a few flaws in our system, and we want to do it as quickly as possible. We are not here to manage quarterly earnings we’re here to manage the business and make sure it improves as fast as possible. So yes, we have taken measures, we have actually accelerated some of the measures and therefore have made some provisions already in the first quarter which should help us to bring Robotics back into a better performance position earlier than later.

We have a hard time in becoming too specific when it comes to EBIT guidance, we have not provided guidance on the Group nor on the divisions. What we’ve said this morning is that we clearly do expect positive results from Robotics this year. Having said that you can make your own, how do you say, deductions from that statement. But obviously we wouldn’t expect huge order provisions or restructuring costs to appear on the horizon. Did I answer your question?

Yes. No, it was just the restructuring charges for the Group overall were, you’ve got this guidance of 0.5 to 0.7% of sales for restructuring. And I guess it seemed to come in at the bottom end or below that in the quarter. In Robot you’re saying that you took a lot of charges, so it was just squaring those two things. I was just a bit confused that was all.

Shall I take over? Julian, it’s Michel here. Good morning.

Hi.

Yes. Just to go a bit more in details. It’s not all restructuring charge actually, the pure restructuring charge on Robotics in the first quarter was low, but we’re really going into the whole -- we analyze now of the business. And really what we said is that part is restructuring, part is accelerating R&D spending. We described many times before that we need to work on [a forward plan] to make it more in line with the customer demand.

And it is as well looking into our order book and especially in our forward Systems orders and as well there trying to readjust if sometimes we feel that there’s some orders that have been booked with too optimistic margins given the current condition of the business. So all that together has caused a certain wind-down in the first quarter. It may be a little bit more pure restructuring expense in the quarter to come. It might be that the Robotics business overall will spend more than 0.5 to 0.7%, but again for ABB as a whole we think that we’re going to be well within the range that we have indicated.

Okay. Thanks.

You’re welcome. Next question please.

The next question is from Mr. Can Elbi, Cheuvreux. Please go ahead sir.

Hi. Just two questions from my side. First I’m just trying to understand the movements we have seen in the profitability of the Power Products business in the last two quarters. They’ve been down and then up again. So I’m just trying to understand why you would see these large movements and whether it’s only due to mix between transformers and the high medium voltage products businesses.

The other things is, with raw material prices still going higher and probably having a 200, 300 basis points negative impact on a gross basis on your cost of goods sold, I’m just trying to see how much lever you have in further increasing prices? Thank you.

Thank you Can for your questions. I’ll take the first one and leave the second one to Michel. When you look at the Power Products division in general, let’s keep in mind that it consists of three business units. There’s high voltage, medium voltage and transformers. I did mention in the past how we classify the performance level of these three business units and I’ve said we’re actually running, I would say, a pretty good operation with high voltage and medium voltage. For all of you who have done the homework you could pretty much figure out what the EBIT levels were for these two units. And the EBIT levels for these two units combined have increased again significantly. So that was a very good performance of high and medium voltage in the first quarter.

Having said that, transformers is also improving. We always have this special effect of the restructuring charges, it was $17m this quarter. Leaving that aside transformers is also moving up the EBIT scale. And this has to do, on the one hand, with price increases that Michel is going to talk about, but also with the fact that the restructuring program is taking early effect already even though it will last quite a bit longer.

So it has been a broad based performance improvement in Power Products. It’s all three business units who have either already performed at a very high level or even increased it further. As for raw materials, Michel.

As for raw materials. Can, good morning.

Morning.

I think what you can say obviously, yes there is an impact of raw material prices especially on oil and copper this quarter. Although I can really say that we’re still ahead of the game there because the pace of oil price increases for the moment outbids the pace of the raw material cost increase. And I think the most interesting therefore, in a sense, is to see what happens in transformers where in many areas of the world our customers now are reserving capacity, because of the anxiety of further price increases in the transformers.

So we see really our order book full and so delivery terms starting to extend. And obviously that gives us the pricing power necessary to offset the impact from raw materials. So we are not seeing any negative impact at this stage, or at least we’re able to offset.

Thank you.

Thank you Can. Other questions please?

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

Thank you. Two questions please. Just looking at your order growth what I was surprised by is the slightly under -- the slight under performance there in Process Automation, given the strength we’re seeing in end markets. Could you make any comments and what you see going forward?

And on the North American market, again this [inaudible] are you starting to see evidence of that coming through?

Finally, just in terms of your balance sheet, which will obviously look pretty strong after these transactions. What’s the thinking on acquisitions? Have you changed your views there on the timing and size?

Okay. Well James, I’ll try to answer to the first two questions and then leave the acquisitions to the guy who has the money, our CFO. Process Automation, I would slightly disagree, we had in local currency we had an order intake of 10%. That’s not bad. You always have to keep in mind there’s quarterly differences. Large orders come in in an erratic way and we did mention we had very little large orders in the first quarter. But nevertheless the total growth was of 10% which is a very nice growth rate in local currencies. And keep in mind this is all organic growth. So we don’t see it that way, we are not disappointed about this order growth, knowing that in one or the other quarters there will be a large order again and the situation looks different.

In North America I think what is taking place there is something that we mentioned already a year ago when the question came up, what’s the impact of the Energy Bill? and all that. We said, well the Energy Bill is an important new item as it concerns the North American development reform especially Power Products. But it’s not something which has a really sudden immediate impact, but it’s a necessity for the trends which we have seen going on to continue in the long term. And this is exactly the case. We have seen the volumes going up steadily, not dramatically but steadily, because customers, utilities had to invest, their equipment was becoming obsolete and this is an ongoing trend now and the Energy Bill is supporting that.

So yes, altogether I feel the situation in North America, especially when it comes to Power Products and Power Systems, is one which really signals a trend, a positive trend.

On the Automation side, the North American situation was also very positive. That’s more dependent now on North American GDP development and the outlook is still positive. But obviously there we’ll be much more dependent on certain cyclical up and down swings. And Michel, balance sheet --?

As far as the balance sheet is concerned you will remember when we made our strategy presentation in September that we had said that as far as the finance strategy is concerned 2006 was really focused on continuing to restructure the balance sheet, extend the duration of our debt and reduce our finance expense. I think this transaction basically takes care of targets 1 and 3 putting more equity into the balance sheet, and at the same time paving the way for reducing interest expense in the future.

So it looked like from a timing perspective that this is the right thing to do. Does that mean that we are gearing up for making tomorrow a large acquisition? No. You have seen as well in our strategic presentation, one condition was to get the balance sheet in shape, the second was to improve operating performance, and there we are well underway too. But we have also got some homework to do internally to be able one day to consider integrating a large acquisition, and there we are not yet fully at the end of our journey there. So I would say obviously the good results for the moment help, and maybe in 2007 we can start changing a little bit the tone, but it is not yet a reality for tomorrow.

Did we answer your questions James?

Thank you. Yes.

Thank you. Next question please?

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

Good afternoon gentlemen. Charles Burrows from Goldman Sachs. A couple of questions please. First of all, you talked particularly on the passing through of price increases earlier. I wondered whether you could give us a feeling of how much pricing, i.e. the passing through of cost increases or other pricing effects, was within that sales growth that you had.

The other thing was your comment about not assuming much in the way of construction, or not seeing much construction upturn. A number of other people have talked about the European construction market coming back, Germany in particular. You seem to be more cautious than that. Is that just because your products come in at the end of the construction process? Or could you perhaps expand that a little bit more on what you’re seeing there please?

Yes. I’m happy to do so Charles. As for construction, let me first point out that we’re probably not quite as dependent on construction than some of our direct competitors. It is a sector which is mainly important for Automation Products where a lot of the low voltage equipment ends up in residential and commercial buildings obviously, but not to the same extent as some of our competitors.

Maybe our statement is a little bit on the conservative side, but also because we simply have seen much more growth in other areas. As was mentioned in the script or in the presentation, there’s certain sectors in the Automation Products division which have performed much better than construction. We mentioned specifically oil & gas, transportation, utilities and marine. So I would say in contrast to these sectors, construction has not been as exciting. That doesn’t mean it’s really in a recession or anything like that.

Okay. Thank you.

As for price increases, I have a hard time to figure out or to give you guidance how much of the total growth was driven by price increases. I can tell you that specifically in an area like transformers, we have in the course of twelve months, we have definitely increased prices for some of the products by 20 to 30%. We had to.

And as Michel talked about raw material prices, they have gone up dramatically, copper is still going up, it’s at the moment I think it’s setting new records, with $7,000 a ton, it’s just amazing. And we need to continue to increase prices. So it’s part of the success in driving EBIT margin up but it could claim, yes also part of the growth. Even though I would say it’s much more the order activity, the real volume that has driven growth. That’s clearly the dominant factor, not price increases.

Okay. Thank you. And one final one if I may. Obviously the change to the business, the strength of demand that you’re currently seeing, do you think that is reducing the seasonality of the business? Or should we still expect in effect Q4, Q2, Q3, Q1 as a natural order in terms of strength?

You’re referring to our internal quarterly seasonality, not the market?

Yes.

Yes. Well I would say it could become somewhat lower, the difference between the quarters, but we’ll still have it. Because some of our businesses, especially the systems businesses, obviously when it comes to [POC] and the way large projects are accounted for, there is simply more volume happening in the second quarter and the fourth quarter. That doesn’t necessarily lead to an increase in EBIT margin but it usually leads to an increase in absolute EBIT. So the answer is, maybe somewhat of a slight decrease, but we will still see some seasonal pattern in our quarterly results.

Thank you.

Thank you. Other questions please?

Next question's from Mr. Alessandro Foletti, Lombard Odier Darier Hentsch. Please go ahead sir.

Yes, good afternoon. I've a question regarding the pull through effect. I have the impression that it has been pretty high. Eliminations were high among the division. Can you quantify how -- what is the pull through effect and what divisions for Power Products and Automations Products? And also if there's a way to make a forecast of the elimination there? This is my first question.

And then the second question also on the margins, especially on the three divisions that are ahead of their 2009 target. Is this a level that for 2006 we can consider sustainable? Or is there anything special inside there?

I try to answer the second question then --

Sure you don't want to take the first one? Okay I can do -- okay.

As for the second question with regard to margins, you understand that we're careful in spelling out here concrete figures which could serve as guidance. We don't want to do that.

Let's keep in mind at the end of the day, life is about absolute figures. It's about net income and cash flow and earnings per share and not percentage figures. So we must make sure that the total EBIT in dollars goes up and reaches a maximum and not just the margin.

But of course we have said in three divisions we have set new benchmarks, and our ambition is to maintain these benchmarks. But if we have to face a trade off between having a little more volume and increasing EBIT in absolute figures but at same time at the cost of the EBIT margin going slightly down, that won't be really a big concern to us. Our ambition clearly is to continue or even improve on the margin levels which we have achieved. Our ambition. But the year has three other quarters to come.

As for pull through what do our experts say.

Your experts say he that has to come back on that because, Alessandro, for the moment really all I have is a consolidated number which was about $0.5b. But maybe as we go through the call I can try to get a bit more details and come back to you at a later stage, because I've not myself here gone through the analysis of consolidation within divisions.

Okay, thanks.

Thank you Alessandro. Next question please?

The next question's from Mr. Olivier Esnou at Exane. Please go ahead sir.

Yes, hello. Ollie Esnou from Exane. My three questions are the following. First I would like to come to -- back to the Transformer business, because you mentioned that people were reserving capacity because they see a price will go up. So do you think there could be some over-ordering underway because of fear of prices rather than a reflection of underlying demand? And could that be something which is not only going on for Transformers? I'd like your thoughts on that.

Then the second question is looking at last year quarterly seasonality as you disclosed it. Is there anything special when we look at the quarter or do they reflect normal margin patterns? I was especially thinking about Power Systems, which was rather strong in Q4. Is that what we should think in terms of seasonality for '06?

And the third question is on the disposals. Are you moving forwards and making progress with Building Systems and have you moved forward with Lummus now or are you still waiting? Can you update us on these two processes? Thanks.

Yes, okay, I'm happy to do that. And pass part of the question to Michel. Ollie, as it concerns Transformers, no I don't think there's a risk of overbooking or over-ordering. Because what we have seen the trend is a consistent one and one very much based in real activities with the customers. We have not disclosed the growth figures for Transformers but they have been very substantial.

What could happen is that these growth figures slow down somewhat because the pace of this increase in orders for Transformers is just almost dramatic. That could happen but that doesn't mean there's over-ordering. Customers cannot just reserve capacity then walk away or whatever, call an option or something, that's not the way we do business.

So yes, the extreme growth we're experiencing at the moment could slow down, even that would be sufficient if it slows down. But I don't see a risk of over-ordering or that we have to correct the order book or something like that.

As for the other two questions, Michel. Seasonality.

Yes, seasonality. They will always be in the older businesses. So especially for Systems Process Automation you will always have a seasonal effect in Q4, because usually it is orders hit the income statement in terms of milestone accounting. And it just happens that a lot of the milestones usually are put at the end of a calendar year.

So you always see a little bit of a surge in Q4. You've seen it last year as well the mix between Systems and Products has always steadily increasing towards Systems because of these revenue recognition rules.

So I think that is really the only pattern that you can see recorded that is almost more contractual pattern that the really business climate specific. I think if you focus on the two big Products division then there is less and less really over very large cyclicality between quarters.

As far as disposals are concerned you were especially questioning Building Systems and Lummus. Well, we're still working on Building System. Obviously the remark that Fred did before about construction in Europe and in fact especially in Germany, where also from the Automation side, it's one of the large exposure we have to the construction market.

It's still not very brilliant, we still have some people talking to us but as we're saying many times before, we need to make sure that we have the right partner at the end that can take over the entire business. So meanwhile -- the entire business and all the financial issues linked with it.

So meanwhile we keep cleaning, we have almost finished dealing with some large international projects that we still had. Second quarter is probably gong to be the end of it. And for the rest we are trying to just to keep the business on a break-even basis until we finally find somebody to take over.

You want to comment on Lummus quickly?

Yes, I can add a few words on Lummus. As you know we [inaudible] we had to bring Lummus back into non-core from discontinued operations, because according to U.S. GAAP there was a necessity. And because of the Asbestos situation being unresolved at that time there was no chance to reasonably divest Lummus.

On the meantime we have turned around, Lummus has been great job executed by Samir Brikho and his team. Lummus has become a profit contributor, and we can afford to keep Lummus. And our intent is actually to make sure that the value in Lummus is maximized for whatever option we will execute in the future. Whether the option is a divestment or continuing, it is absolutely necessary to make sure that the value in Lummus is maximized.

And a consequence of that is that we don't talk about divestiture any more because Lummus is working with very important customers, the projects simply take several years. A lot of that is based on trust, and if you have a unit up for disposal for many years you can forget about these contracts. And at the end of the day you don't have much to divest any more.

So we run Lummus with a going concern perspective even though we maintain all options open. And I think the first job what we need to do now is resolve the Asbestos situation. We said that we expect that to be cleared by end of the year. And then obviously the situation becomes more relevant.

In that context is it possible to know the sales and order figures for Lummus?

I don't know what's to be disclosed. We disclosed only non-core as a Group so I'm sorry about that.

Yes, it just as an order of magnitude I think we indicated earlier that Lummus was more or less a $1b business but you have to see now that with some slower order intake, the revenues have come down. So we are [expecting] less than that now. But we've not given more details on that, the only thing is that you can develop from that is that the EBIT margin of Lummus in first quarter was pretty good.

Yes, okay.

As long as the EBIT goes up I don't mind if the volume goes down. But not -- there's a certain correlation.

Margin was the result I talking --

Okay, thank you.

Thank you. Next question please?

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

Good afternoon. Two questions please. Firstly you talked a bit about how the market for Power Systems is coming -- is recovering in the U.S., and you talked about a sustainable trend with investments now taking place in the grid infrastructure. You also mentioned in the statement that Europe is improving. Would you say Europe also is a sustainable trend or do you think there that it's more difficult to judge?

And the secondly in Automation Products. I was very impressed with the pace of both sales and order growth, much higher than we've seen from some of your competitors. Do you think that you are winning market share that you've got a more favorable selection of end markets to sell into? Or is there something else happening there which explains why the growth rates are quite so strong?

Thanks for your questions. As concerns Power Systems in Europe, yes we do think it is a trend even though there may be more erratic elements and more volatility in this trend than in the U.S. But in Europe you have similar challenges, similar issues as the U.S. is facing.

Also quite a bit of equipment in Europe is obsolete, the demands in Europe are changing every year with Europe growing integration of the new European Union countries. And if you look at what is being discussed at Brussels about power, the security of power supply for Europe as a region and making the whole system more stable. Yes, there is a trend supporting this business. But this trend is not I would say that strong that it would wipe out any potential volatility in quarterly order intake, that's still a possibility.

In Automation Products what you've seen is simply the strength of both of very strong product lines we have. In many of the product lines in Automation Products we're world leaders. And secondly the geographic good distribution of our business.

I cannot tell you what is -- how the comparison really fares when you look at direct competitors of ours, but we have very strong growth for instance in China and also in the U.S. in the last quarter. And I would think China is almost a classic because we're very well established as a Group there. And in the U.S. maybe we are doing things better than we did in the past. As you know we have given the U.S., North America in general, more emphasis from a management point of view than we did two years ago.

You also asked about margins or --

No, those are the questions I asked. Thank you very much.

Thank you Peter. Next question please?

Next question from Mr. Tim Adams, Citigroup. Please go ahead sir.

Yes, thanks very much. Two questions. Could you just walk us through the transaction you’re doing today with regard to the -- or what you're proposing to do with regard to the convertible? What it looks like is you're giving them a carrot to convert early. And presumably that gives you some sort of step down in the interest rates you pay on outstanding bonds. Could you give us some idea of what the, aside from obviously the conversion of the convertible, what the interest cost savings could amount to?

And the second question is really coming back to Robotics. You highlighted that there were some costs in the quarter to do with lost contracts. Have you been through the whole of the order backlog now and put in all of the lost contracts into the Q1 and therefore we should actually see some improvement from the break-even level in later quarters? Or is it likely that reorganization costs and R&D and other things will mean that we see pretty low profitability through the whole year?

You want to start with transaction Michel?

Yes sure. Okay, as far the transaction is concerned, so again for those who are not too familiar with that bond, that was a convertible bond of $968m that matures next year. Obviously with a [strike] price which is $9 and a few cents. So very deep in the money. So if you look at it from a perspective of a convertible bondholder there is very little intrinsic value left, and the value of the bond is really starting to trace the price of the share very closely.

So when you look at it what we're trying to do here is to just accelerate the conversion that, excepting the major disaster on stock exchanges, would anyway happen next year. And so we're just offering a little bit of a cash incentive to basically create an arbitrage opportunity and incentivate these people to convert their bonds into shares today.

So the offer, you can see it in the presentation, relating to that there is basically five elements to it. There is the normal [REP] premium that you still have there, there's the offered spread, there's obviously the accrued interest on the bond. We have also to provide the bondholders that decide to convert a dividend equivalent payment because if they have shares they want to receive the benefit of the dividend for that part. And finally also a small conversion fee so there are really five elements.

In terms of -- we're still finalizing really the terms as the offer goes out. I would say that from an ABB perspective on an NPV basis the cost for us is really very minimum. It is really a few million dollars on an NPV basis. The advantage obviously is that we do either way make a big shift from debt to equity.

We're going to have a cost, an interest cost in the second quarter, which is about $45m. But in Q3 and Q4 we're basically going to get the credit of that, so for the year we're going to be very close to break-even on this transaction. But for 2007 we see there obviously an interest expense gain in the neighborhood of $30m. And then obviously once this bond matures now there is no discussion about whether we need to refinance it or not because it's basically already converted to equity.

For those of you who will participate to the meeting tomorrow in London actually I will have somebody from our Corporate Finance team here with me that will even be able to take you in more details if you wish so.

The $30m saving that you're talking about, is that savings in addition to the not paying the interest on the bond or is that --?

That is mainly the saving from not paying the interest on the bonds. And also of stopping the amortization of what is called the [equation], which is basically the amortization of the option premium which is embedded in the bond.

Right.

That is also why we take more of a hit in Q2, because now you have to basically write it off at once.

Okay, thank you.

Okay, and as for Robotics, Tim. Let me point out that I think the last year already we spoke about Robotics being in need of certain repairs and fixes. We brought in new leadership, Anders Jonsson has taken over responsibility for Robotics business in fall last year. And what you see today's almost the classic new leadership after having been brought in and told that we need some fixes as we reviewed the whole -- examined the whole situation has come up with some priorities of what needs to be done, and these needs obviously come at a certain cost.

And the cost appears in different lines of our P&L. EBIT -- Michel spoke about R&D, it has to do with the design to cost issue we're facing there, we need to have cheaper robots. We have some smaller though restructuring cost related to shifting value added activities from, for instance Scandinavia, to other places like China.

But then we also had a much more I would say rigorous look into the order -- not the order but the project portfolio in hand. And there we took a few provisions because we felt there was too much optimism built into this order book, or project book, before by previous management. Obviously we don't hope that we need to have similar charges in every quarter and we did say that we expect the Robotics to come up with a profitable result. So I would not compare this in any way to the much bigger undertaking we had with Transformers.

Does that answer your question?

Yes, Q1 is likely to be the worst quarter in this year for Robotics is the drift I'm getting.

I would say let’s hope so.

Okay, thank you.

Okay thank you. Other questions?

Next question's from Mr. Chris Delmono, UBS. Please go ahead sir.

Hello. Can you hear me?

Yes.

Just a quick question on the cash flow. It looks like the cash flow was good on the back of provision [inside] of $166m. And also the fact that there was a positive movement from suppliers. It's not quite clear if it's customer advances here or not. Are you changing your working capital management or what could explain this move in suppliers? And also what are those provisions?

And second question going forward in 2006. Last year you were saying that the cash flow might be a bit less as good as '05 given that you're expecting some hits from restructuring etc going forward. So could guide us a little bit in the cash flow [insights]?

To start with your second question, the restructuring has not yet created a big discrepancy. We told you that we had $17m of restructuring in the Transformer business in the first quarter, and I think the cash brought forward about $20m linked to the program. So there's not yet a big discrepancy but obviously if you look at it from the beginning we've now accrued more or less $140m of provisions on the Transformer business and we've only paid a few 10s, so the cash outflow will a little bit accelerate as we go further in the quarters. So that is the first part.

The second part when you look at the cash flow, I still have to make it a little bit more complicated. And still talk about the impact of securitization because obviously that keeps going on when you have comparisons. Actually this quarter we have continued to lower the pace but we still have continue using our securitization volume by another $51m.

And then when you try to compare it to the first quarter last year, where there was in fact a reduction of $164m. If you put that together with the number that you are seeing in our official, we are finally talking of a positive cash flow, adjusted for securitization, of $90m now compared to an outflow of $53m in the first quarter of last year. So we have really an improvement of a bit more than $140m on the net basis after securitization.

Now in fact your question was specifically about what are we doing about net working capital. I would say that we are pretty well in control on the receivables side, so the [inflows] are stable. We see a certain increase in inventory, and that is quite normal when you're on the book to bill ratio of 1.3 or more. It is clear that the amount of work in process related to the order is increasing do that has a certain impact.

You were asking the question on suppliers I would say for me that is still the part where we still need to improve. And where we don't see really the improvement that we can expect. And as we are working operationally also to really much more globalize our procurement and our supply chain operation, where we did expect as well to see some improvements in the cash flow links with our suppliers.

Did we answer your question Chris now?

Yes, thank you.

Thank you. And maybe we come to the last question of today?

Last question from Mr. Alex Migliorini, Helvea. Please go ahead sir.

Yes, good afternoon. Actually a couple of questions. The first one is whether you're coming to a stage where you, in terms of capacity utilization, you actually fear or have any fears on your ability to deliver efficiently? Or if you're going to a stage of diseconomies of scale.

I also was hoping you could say anything about Transformers. Some of your divisions are going to be ahead of target. Will we be close to the 8% margin target this year? I wonder if you will answer this.

And the third thing is on Lummus, I hope you can clear -- give us an indication, EBIT margins from what you imply are close to 10%. Is there any extraordinary effect from either project closures or licensing etc?

Maybe -- thanks Alex for your questions. Maybe split the answers here. I start off with Transformers because that's going to be -- sorry, the easy answer. We don't disclose EBIT margins for business units. So I have to disappoint you. I repeat what I said, we're making good progress with regard to the true operating performance in Transformers. Maybe my wording was a little different, a little bit more aggressive if you already had the 8% over above it.

As for capacity utilization, the fact is that obviously with five divisions and I don't know, 40, 50 business units you cannot generalize the answer. Because in some units yes we may have issue with real capacity [inaudible] and in other units we don't. Overall we still don't have a significant problem in dealing with this volume coming in.

The primary handicap usually is not technical capacity but it's people. Because technical capacity is, keep in mind the kind of products we put together, it's usually assembly work. This is not hardcore manufacturing where you have very expensive pieces of equipment like numerical control lathes and drills and all of that, this is assembly work.

And this kind of lower investment assembly work you typically don't run in three shifts because that’s uneconomical. But if the situation comes and we need to run into two of three shifts you can easily do that because the capacity's there technically.

Then the question is do we have the right people and you could say for the typical assembly kind of operations it is comparably easy to get the right people. It becomes more difficult when you go into more sophisticated type of work like, for instance to use it again, in Transformers. In Transformers there's certain activities where you need to have a lot of experience and skilled people and you cannot easily go up.

Fortunately as you know the whole industry was suffering from over-capacity, and we as well, so there was some slack in the system that's actually helping us now. So by and large it's fair to say that we have not seen a huge problem with not being able to cope with capacity at this moment. When we look at our internal benchmarks, like on-time deliveries, we have not even seen a big suffering in that benchmark yet, so we're still able to cope with demand quite well.

And for your last question.

Can you repeat what it was because I was focusing on the numbers? Sorry.

It is Lummus, the margin there appears to be at 10% so I'm wondering whether there's any -- if that's due to project closures or royalties or something like that?

No, actually I would say that it is mainly due to a keen quarter overall. There's always some one-offs, but I would say this quarter they have more or less offset each other. So it's a quarter where the technology part of the business has been producing an excellent profit stream which it always does but this quarter was especially good. But where also the EPC part of the business has contributed which has not always been the case in the past.

So putting the two together it was indeed an excellent quarter. Again now on the back of revenues which are lower since we took less orders on. So it's a little bit of a revenue contraction and better quality of profit at the same time.

Orders continue to decline there, is there -- ?

Orders did not decline actually in the first quarter, orders started to come up again. Not 20% but close to double-digit. Now it's still probably at a low level that is obviously linked to the fact that we're still being very restricted from the kind of risk profile we take. But at least we have now got it back to a level in profile that we are more comfortable with.

Okay, thank you.

I maybe then would like to quickly -- that's why I didn't get the question because we were still getting the numbers for Mr. Foletti on the pull through. So to give you a perspective overall, you see that our corporate consolidation number in terms of revenue is -- has been about $550m, which is more or less the same than last year.

In fact I would say a normal guidance would be that this corporate consolidation number should be always between $550 and $650m, and composed of two elements. The product pull through between the two division on one side -- the five divisions on one side, which should be every quarter between $650 and $750m. And then it is partly offset by corporate revenues, which is really more the internal operations of ABB where we have shared services, internal services, IS services, which are recharged to the divisions and to the countries. So that minus the other comes to this net of $550, $650m.

Now if you look at this quarter indeed the pull through was on the high side. Close to $750m actually, but there was also more charges made from the corporate center. And that how we came finally to this $537m that we're showing in our consolidation.

Okay, I think with that I would like to close today's conference call. Let me just repeat very quickly that, from our point of view, we are pretty satisfied with the first quarter 2006. I think all of the key benchmark figures, which we were able to deliver, look pretty convincing.

There is maybe two areas where we are not quite on par with what some people expected from us. That is concerned net income and I must say it's just simply and accounting effect because of the Asbestos shares that we couldn't help. And as it concerns Robotics let me remind you, Robotics I think we're doing the right things there. And therefore we have to absorb some cost to move in the right direction. It is not dramatic in any way as it concerns ABB. And I'm quite confident that we are able to deliver the 9% EBIT margin in the medium term as we have set out last September.

With regard to the Asbestos shares let me remind you that second quarter we still see an impact of some $25m. And depending on these success of these capital market transactions announced today, we're also going to see a net income charge there actually in finance expense of some $50m --

$45m.

$45m.

[inaudible] as well there and it's worth some positive impact in the second quarter from the Asbestos accounting. Once we have delivered the plan you have the impact at the net income level of $25m, but in the other income we’re going to have actually a positive impact of close to $40m. And that is from our discounting of future liabilities and bringing them back. You'll have a one-time upside and then you amortize it until you deliver the payments finally.

So we can explain that even in more details but there's obviously a few accounting complications here. But I would say on an after-tax base probably the Asbestos impact on the result of the Company in Q2 should be more or less neutral.

Okay. Well, so I guess good news altogether. Thank you for listening in and we're looking forward to talking to you again at the time when we announce the second quarter results which is end of July. Thank you very much and have a nice day. Bye bye.

Ladies and gentlemen the conference call is now over and you may disconnect your telephones. Thank you very much for joining. Goodbye.