Abb Ltd (ABB) 2006 Q2 法說會逐字稿

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the ABB 2006 second quarter results analyst and investor conference call, hosted by Mr. Fred Kindle, CEO of ABB. [OPERATOR INSTRUCTIONS]. After the presentation there will be an opportunity to ask questions. We will kindly ask each caller to limit themselves to two questions only. [OPERATOR INSTRUCTIONS] At this time I would like to turn the conference over to Mr. Fred Kindle, CEO of ABB. Please go ahead, sir.

Thank you very much, ma’am. Good afternoon ladies and gentlemen. Thank you for joining our analyst conference call for the second quarter 2006 results. With me as usual this afternoon is Michel Demare, our Chief Financial Officer. My comments this afternoon refer to the presentation that you can download from our website at abb.com.

Chart two. Please refer to chart two for our Safe Harbor text regarding forward-looking statements that may be made today.

Let’s move on to chart three, key developments. Chart three presents an overview of our performance. We continue to deliver strong results in the second quarter of 2006. We are clearly benefiting from the strong global demand for improved power infrastructure and increased industrial efficiency. On top of that, our efforts to further improve our business performance continue to pay off. Orders are sharply higher in almost all divisions and regions. Revenues are also higher, although growing at a lower pace than orders. This is the result of the increasing share of large orders in our backlog. I’ll come back to this shortly.

Good performance in four out of five divisions, the right attention to non-core activities, and a continued focus on corporate cost control helped us to achieve a strong EBIT and EBIT margin in the quarter. The year-on-year comparison looks particularly positive because of the $66m charge we took in the Power Products division the second quarter last year for our transformer consolidation program. We recorded only $3m of charges for that program in the second quarter this year. However, even disregarding this one-off cost, we were able to increase our total EBIT by more than 40%.

The two product divisions, Power Products and Automation Products, showed a strong performance in Q2, both with regard to volume development and operating margin.

In our Power Systems and Process Automation divisions, improved project quality and execution contributed to improved margins. The Robotics division continued to take steps to improve the operational performance. Market conditions, however, remained weak, with both orders and revenues declining in the quarter. As a result, and as I said after the first quarter results, the Robotics division’s profitability remains depressed and is not likely to recover before next year.

Last but not least, we saw improved EBIT from non-core activities and lower corporate costs, which also contributed to ABB’s strong performance.

In addition to these higher operating earnings, we also continued to strengthen our performance below the EBIT line. Improvements in finance nets, in taxes as measured by the tax rate, and in income from discontinued operations more than offset the higher deduction for minority interests. All in all, net income increased to $367m compared to $126m a year ago. Despite the significant growth in bookings, cash flow from operating activities increased in the divisions in line with the earnings development.

On the finance side, we continued to strengthen our balance sheet in the quarter and we are now in a net cash position. As you know, our credit ratings were lifted in April by both Moody’s and Standard and Poor’s, and we are once again at the solid investment grade.

Last but not least, the solution to our asbestos issue is now almost complete. As you know, we made the Combustion Engineering plan of reorganization effective in April. I am happy to say that our plan for ABB Lummus Global was affirmed by the District Court last Friday, July 21. Assuming there are no appeals, and we don’t expect any, the Lummus plan should be finalized by the end of August.

Chart four. Chart four shows our track record of profitable growth over the past seven quarters. Our lead positions in key growth markets such as power transmission and distribution in Asia and the U.S., and the oil and gas, marine metals and mineral sectors on the automation side have provided us with a good tail wind. This has contributed significantly to our higher EBIT and EBIT margin. But ongoing operational improvements across all of our businesses to reduce costs and lift productivity have further contributed to our higher profitability.

Chart five. Chart five provides you with a breakdown of our results by division. As you can see, orders were up sharply in all divisions except Robotics, as I already mentioned. Revenues were also higher, although growth was more modest in our two system divisions. Revenues were up double digits in our two product divisions, reflecting both higher volumes and higher prices in some product areas like transformers, where we have successfully passed on higher raw materials costs to the markets. Revenues were down in Robotics following two quarters of lower orders in a weak market.

The good growth in Power Products and Automation Products contributed to the healthy EBIT margins in the quarter and clearly helped our overall profitability. I would also point out that we increased our earnings and margins faster than revenues in Power Systems and Process Automation. This is the result, as I mentioned earlier, of the higher quality of project orders in the backlog and our growing ability to execute them well and keep the profit. Factored revenues do not yet match the growth in orders reflects the time to cost large orders, and has a positive effect on our order backlog as already discussed right now in chart six, that is.

First, our order backlog continued to show healthy growth in the second quarter. At well over $15b, it’s up nearly $3b or 19% versus a year ago. That gives us reasonably good visibility for our business over the rest of the year, and now into the beginning of 2007. At the same time, the share of large orders booked in the quarter is at the higher level of some 13% compared to just 7% in the same quarter last year, and approximately 8 to 10% on average over the past several years. This has the effect of widening the gap between order growth and revenue growth. Orders are booked at full value in the quarter we sign them, but we only recognize the revenues as the projects are being executed, which would take several quarters, in some cases even years. Clearly we expect this gap to narrow in the coming quarters.

Chart seven. In chart seven we show the regional breakdown in orders and revenues. I’d like to highlight the growth as seen in Europe in the second quarter, representing an increase of 25% in local currencies. This continues the positive development we saw in the first quarter. Orders were up in Europe for all divisions, except Robotics.

The two power divisions experienced the strongest percentage order increase in Europe as investments continued for both products to replace aging infrastructure and systems to link regional grids. But Process Automation and Automation Products also recorded double digit order growth in Europe. For these businesses, the growth driver was mainly the need to lift industrial efficiency in the face of high energy prices. As a result, Europe accounted for more than half of our order intake in the second quarter.

Elsewhere, Asia was once again a solid growth market for us, up 21% in local currencies. Orders from the Middle East and Africa region grew 34% in local currencies and remained at 9% of the total volume for the Group.

In the Americas, we saw another strong quarter for the U.S., with increased customer spending from utilities for power treatment upgrades. Orders were also higher for Automation Products and Process Automation in the U.S. However, the sharp decrease in the robotics orders from the U.S. combined with lower orders from South America led to 11% local currency reduction in orders from the Americas region in the quarter.

I think the main message here is that the ABB Group is truly a global player where no single region is decisive for our success. We are not dependent on one geographical area, but have the flexibility to offset temporary weaknesses in one region with a strong performance elsewhere.

Chart eight. If we look below EBIT in chart eight, our finance net amounted to $64m in the quarter. That includes net charges of $43m related to the conversion of the previously outstanding 2007 convertible bonds. This will be offset by lower interest payments over the rest of this year.

At roughly 30%, the tax rate is down significantly compared to last year’s 37%, mainly the result of higher earnings in low tax countries.

Minority interests are up, as you would expect, given the good growth we have seen in our joint ventures, mainly in China and India. And discontinued operations yielded a small positive this quarter as the result of non-cash income of $45m for the promissory notes we contributed to the Asbestos Personal Injury Trust. This gain will be amortized over time, so in the long term this is a zero sum event.

Chart nine. Chart nine shows you the fundamental restructuring of our balance sheet that resulted from the settlement of Combustion Engineering’s asbestos liabilities in April, and the accelerated conversion of the 2007 $938m convertible bonds. Gearing is down to 36%, and we have moved into a net cash position of $302m, compared to net debt of $427m at the end of the first quarter. In addition, our equity ratio has increased significantly to 24% versus 18% three months ago.

Chart 10. Here in chart 10 is an overview of our cash flow from operating activities in the second quarter. The divisions generated some $630m in cash flow from operating activities, which was partly offset by cash out from non-core activities, as well as interest payments, taxes, asbestos payments and other costs and corporate.

Chart 11. On asbestos, chart 11, we are almost done. We made the Combustion Engineering plan effective in April. And last week we received the green light from the U.S. District Court on our plan for ABB Lummus Global. That decision, as usual, is subject to an appeals period. At this point we are not aware of anyone with objections to the plan. Therefore, assuming that there are no appeals, we expect to finalize the Lummus plan by the end of August.

Chart 12. To conclude with chart 12, here is our market outlook for the rest of 2006. The picture remains positive. We have a very strong order backlog, and market conditions remain favorable. We expect demand to continue to grow, both in the power infrastructure and industrial automation sectors. Regionally we again expect good market development in Asia and North America, and Europe should also continue to grow. Whether we can sustain the exceptional growth rates in order intake experienced in the last two quarters remains to be seen. The fact of the matter is that we don’t need such high growth to maintain a consistent improvement in earnings.

Basic risks to our business have also not changed. Price volatility in oil and other commodities could present challenges, both in terms of end market development and our cost base. And the situation in the Middle East continues to create considerable uncertainty. Last but not least, we need to take care of the considerable volume that we now have in the pipeline and convert it into profit and cash flow.

Ladies and gentlemen, to summarize, we continue to deliver strong results in the second quarter building on the good start we made in Q1. We are clearly benefiting from the global demand for improved power infrastructure and increased industrial efficiency. Our efforts to further improve our business performance continue to pay off. ABB has a healthy balance sheet now, the strategic position to create success, and we look forward to a solid second half. With that, ladies and gentlemen, I’ll open up now for your questions. Thank you very much.

Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session. [OPERATOR INSTRUCTIONS]. The first question is from Mr. Ben Uglow from Morgan Stanley. Please go ahead, sir.

Good morning, everyone. Couple of things, a couple of questions. First of all, on the Power Systems business, it was pretty encouraging to see the sequential margins move up from 4.7% in the first quarter to 6% in the second. And I’m assuming that some of the large contracts that you had in 2005 or that you won are finally beginning to come through the P&L. Could you give us any more sense just in terms of the margins in that business, whether 6%, which in fact is your 2009 target for Power Systems, if that is a ceiling level or if you believe that operating margins in Power Systems could continue to improve as these contracts are executed? So that was question number one.

Question number two was just on the interest cost. Your interest during the quarter on a clean basis was something like $21m, and I guess from Michel, when we look into 2007, are you able to give us any idea at all of where net interest for the Company as a whole may come out? I presume it would now be significantly below $80m, given that you are already in a net cash position.

Okay. Well, thank you very much, Ben, for your questions. I think I’ll take the first one and Michel then the second one. As for your question regarding margins in Power Systems, yes, I agree, it has been very encouraging to see the uplift in margins in PS. And of course our ambition is to drive that further. Now I would say that’s dependent on a variety of different factors. One is, you could say classically, absorption. You may recall that we had some problems nine months ago, a year ago, with a lack of absorption in certain engineering sectors and also certain plants. For instance, the cable plant, the cable factory we up in Sweden. So absorption is one.

The quality of order backlog is another one, and the third one is execution. Frankly, I think we have made progress in all three areas. Clearly we are benefiting from the fact that we had very nice order intake in the last year and a half, and that is increasing the workload in all of our operating centers.

Secondly I think also with our focus on not just volume but quality in the work we do, the order backlog in total is moving up in quality. But of course certain mix elements can have an impact from one quarter to the other one. Classically, smaller orders tend to be of slightly higher percentage margin than larger orders. But overall our quality in order backlog is improving.

And thirdly I think, most importantly, we start to execute better. We have introduced much more discipline, not just the last couple of months but obviously a year, two years ago with regard to risk reviews, with regard to cost and cost control and other things. And this additional control, this additional discipline is starting to pay off now.

Now I don’t want to go so far and issue here a new guidance with regard to the margin for PS, but let me just assure you that if the market environment doesn’t turn down, and we don’t see any special effects coming up, our ambition is always to improve on the levels of margins we have achieved.

Thanks, Fred. But I am right to assume that if operating or if absorption improves, in theory, both margins should continue to trend up on paper?

In theory you are right, yes.

Thank you.

Thank you. Michel?

Thank you, Ben. Good afternoon. Regarding the finance matter, I would agree with you with the current state of the balance sheet that the likelihood to get below this $80m next year is looking much better now.

I have to however give you one qualification. I guess you have read in the press release in the appendix one, the special accounting treatment of the asbestos obligation now that the plan has become effective. And you see what happens now is that all the obligations that we have under the asbestos plan that have become non-current, had to be accounted for in our balance sheet on a discounted basis. So we took in sector positive income of about $45m discounting in our income in discontinued operations. And now this discount is going to get amortized over interest expense in the coming two, two and a half years. And so in fact that means that the interest expenses of next year will start getting taxed by about $5m every quarter, if we take that discounting into account.

But even taking that into account, one would assume that the run rate, given that we’re in a net cash position already, should be dropping below $80m for the year. Correct?

Well, if you take that one into account, I would still keep this conservative guidance of $80m including the asbestos discounting. Obviously we are still dealing with a certain yield curve gap on whatever is left from our current bond obligation compared to the yields that we get for depositing more money. But clearly if we can continue generating cash flow at this pace, I hope we can be beat this target.

Great. Thank you very much.

Thank you, Ben. Next question, please.

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

Yes, thanks. The first question was just on Process Automation, in the sense that your margins have been about 9.5% in the first half of the year. How rapidly do you think you can move those up from where we are today? You’ve obviously got a pretty good demand backdrop. You’ve got the 800x platform rolling out. So could you give us a sense of if you feel these margins are in the range of 8.5%, 9.5% as we’ve seen for three quarters now, is that likely to continue, or is there scope for improvement over the next 12 months?

And secondly, in terms of Robotics, just on the restructuring, there, could you just perhaps provide an update there? Has the decline in orders meant that you’ve perhaps had to accelerate some plans, or just how you feel about the cost migration and so on in that business?

Thank you, Julian. For the first question, regarding Process Automation, it’s a little bit tricky. I could actually repeat some of the statement I made with regard to Power Systems when Ben asked his question. Similar things are true for Process Automation as well. What we need to keep in mind, however, is that we have costed relatively little volume so far, and once we start to cost the larger projects we may see a slight -- it’s not a trend, it’s just a slightly lower margin, because large projects tend to have a lower EBIT percentage margin than small projects, and that could be offset into all the improvements we do on the operations side.

At the end of the day, it still leads to a higher absolute EBIT, but when you talk about margins, I’m careful not to overstretch here and promise too much. I think with the current level we have achieved, if we can pump more volume through the system and maintain a similar margin, that would be quite a success.

As for Robotics, the situation here is one where we’re basically in repair mode. We have a business here that is facing a few challenges from the market side. Automotive is weak. This didn’t come as a surprise to us. As you may recall, we already knew that a year ago that the market would turn down. It has been a pretty visible downturn on the market side. I would say, exacerbated voluntarily by us because we have become more restrictive in what we do. At the same time we have to focus very much on improving certain internal issues we have with regard to product quality, project execution, cost position, cost migration.

Now these things which I’m hinting at, they happen on different lines in the P&L. Not everything is here classed as restructuring costs. For instance, if we spend double-digit million dollar amount in R&D to improve our product range, make that more competitive, that you don’t see in restructuring. So when we talk about changing the business here, we don’t talk about massive layoffs and cost migration from let’s say, Sweden to China. That’s all going to happen but it’s not comparable in scale and magnitude to other business units which we have where this is actually taking place as well.

I don’t know whether I answered your question?

Sure, it was just to follow up on the issue of Process Systems. In terms of the 800x, could you give some kind of sense of how -- presumably the rollout of that does help your profitability. Can you give some sense as to how penetration of that platform is going in terms of the customers, the facilities that you’re putting it into?

Yes, I can confirm that. It’s going very well. We are increasingly more successful with the 800xA. And as you said before, this is our architecture for the future. We strongly believe we have the leading edge technology here and some of our competitors still need to make investment to just match what we have here.

We have so far refrained from issuing any concrete figures with regard to how many systems have we sold and what is the penetration, because it is not a target by itself. We use 800xA whenever we feel the customer’s ready, because you can imagine, an old system may still yield a great return as long as the customer is satisfied with the functionality. We don’t press the customer to switch to 800xA. So the ultimate objective for us is not to maximize the speed of penetration, but to maximize the bottom line.

Okay, thanks.

Thank you. Next question, please.

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

Good afternoon. Three questions, please. On Robotics, do you believe you can remain profitable, including restructuring charges in the division, for this year, or even longer, depending on how long the downturn lasts?

Second question, on Latin America, is that purely due to difficult comparisons, or do you see a change in trend in Latin America where you had weaker orders in a number of divisions?

And the third question, on China. We haven’t seen a larger HVDC order out of Chine for either you or Siemens. If you could just give us an update, what we should expect there going forward?

Okay. I think I’ll pass the first question to Michel.

Yes, Andreas. Good afternoon. As far as Robotics is concerned, as you know, we have different activities in this division. We have as well, I would say, the good fortune to still have a very large install base in Robotics as well that generates a very good amount of the service business. So in a way we are fortunate with that because the revenues generated by this service business have been, so far, good enough to cover for the charges we have to take in order to recalibrate our portfolio of projects, for instance, in the System business or fund the research. Or, as you see we’ve been breakeven in the first quarter. We have a small profit this quarter, and at this time, except if we’re really a major issue that we don’t believe at this stage could happen, we still think that the service business will be strong enough to help us remain profitable for the rest of the year.

And as for Latin America, let me answer your question. Let me be very honest here. When I saw the figures on the regional development, I was a little frustrated when I saw the development in Latin America. It happens that in last three weeks we have looked in much more detail into the issues there. Honestly, I don’t think we have lost market share, or we’re missing out of the market opportunity in a big way. We probably can still improve, but I think the region as such, even though it’s always touted as the region of the future and so on, simply hasn’t happened as much as, for instance, in the Middle East, in China, and in India. But, nevertheless, it is an issue which we are going to look at in more detail, because I would love to see these figures show more growth in the future.

As for China and HVDC, China has been and will continue to be the most exciting HVDC market in this world for years to come. But, these developments, they go in certain waves, you could say. There hasn’t been a big order recently, that’s correct, neither for us nor for our competition. But that doesn’t mean the market has dried out.

As a matter of fact, at this very moment, there’s very serious discussions going on about the next level of technology. We speak here about 800kV DC, which hasn’t been installed anywhere in the world, and the Chinese want to be the first ones. And the likelihood is that they’re going to have this technology almost exclusively for the next five years to come, because they’re willing to invest big money into creating these HVDC networks that stretch longer distances than what we have seen before and therefore also need higher voltage. We are involved in that and our competition are as involved in that. To what extent this will come down to us as a straight order intake or in a joint venture setup where we have 51% or 50% or 49%, that is now a matter of even politics.

I would say from an economic point of view, the market is there. China will remain very attractive. They will give us, ABB, a lot of potential for the future. In what way exactly we’re going to be able to account for that in the next years to come, we will see. Did that answer your question?

Yes, thank you.

Thank you. The next question, please.

The next question is from Miss [Christa Mono] from UBS. Please go ahead, madam.

Yes, good morning gentlemen. It’s Christa here from UBS. I just had two questions, please. The first one is on the gap between order growth and sales growth. I was trying to understand, how do you feel they are not -- at which point in time do you believe that sales growth is going to increase, and how is it going to develop going forward?

One detail also while there. How -- price increase are playing a role in orders versus sales, and any impact of the working days in Q2 may be a negative impact, given that June has been boosted by additional working days.

And second question, quickly, on non-core EBIT. I was wondering how -- if we could have any detail given that the EBIT was lower in Q2 compared to Q1, despite higher sales?

Yes, hello Christa. Maybe I should start off with almost a positive comment on the gap in order growth and revenue and then hand the rest over to Michel. I’m personally not worried at all about this gap that has opened up between order growth and revenue growth, as long as it doesn’t affect in a significant way our absolute EBIT cash flow and net income figures. And we feel very satisfied about the absolute EBIT and net income we have turned out in this quarter. So the fact that the revenue is actually a bit on the low side is for me of little concern because you can look at it also as the glass being half full and not half empty. The fact is that our order backlog today is brim full, and we have a lot of volume which will go through the pipeline and hopefully generate EBIT and cash in the months to come. So it is the better of the two positions to be in. I’d rather have higher orders, order growth, even revenue growth than vice versa.

And I think Michel can tell you more about the price impact and the number of work days and so forth.

Okay, yes. Indeed, in terms of price impact it’s clearly also one of the reasons to explain why we have this gap between order and revenues, because obviously the orders do reflect the latest price increases. And I think we can say overall that we have been successful in keeping ahead of the raw material cost increases by applying a lot of price increases, especially in our product divisions. So obviously that is reflected in the orders. What is now starting to be reflected in revenues is orders that we have taken three, six, sometimes nine or 12 months ago, and obviously they don’t carry the same level of prices in absolute terms. So that is obviously a very important point.

I think as well the fact that more and more we have customers that are willing to commit themselves for delivery later in order to basically reserve capacity as they get a little bit afraid of seeing the high capacity utilization of most of the suppliers.

In terms of work days, to be honest, I haven’t made the math, but it’s true that we and our competitors have highlighted the fact that there was a bit of push at the end of Q1, ahead of the Easter holidays. So I guess mathematically we could explain a bit of that, but I think with order growth of 20% magnitude it’s probably not the most important element here. So that would be the answer on the first question.

In terms of the second question, the non-core EBIT, well, first of all, obviously compared to the second quarter last year, it is still quite an improvement, but it was not as much as compared to the first quarter. I would say the major difference here is that on our Oil and Gas business we had again to make some additional provisions on some of our contracts to reflect the profitability of those contracts. And so despite the fact that the ongoing business is going very well, and especially the technology part of the business, the fact that we had to take these additional provisions basically made this a closer quarter with a small loss for the Oil and Gas business.

Building System continues to run at the same pace. That means a small loss, which is really linked to the under-capacity utilization, because we keep restricting the number of new orders that we are taking there, and the rest of the non-core activity is being the equity ventures and as well the real estate are both showing a pretty healthy profit in line with what we've seen in the other quarters.

Is that okay Christa?

Yes, do you mind if I have a quick follow-up question please on Lummus?

Yes please.

Given that you are saying that you are as I understand, expecting the plan on Lummus to be closed by the end of August this year, are you considering you are going to diverse the business before the end of 2006?

Well the official doctrine here is very clear, is that it's non-core business. The likelihood is that Lummus at some point, will leave the portfolio but we'll treat it as a going concern business because we need to manage it for value and we have big customers, we have long term projects and we will see what that means.

Okay, and what's the integration for OGP?

Well, we will see.

Okay thank you, thanks for that.

Sorry about that.

Thank you, next question?

The next question is from Mr. Richard Hagen from Neuberger Berman. Please go ahead sir.

Could you help us better understand how you will apply the free cash flow going forward, relative to dividends or possibly a share repurchase program?

Okay Richard, thank you for the question. I think that's perfectly for Michel.

Yes, well obviously the guidelines that we have given in terms of dividends, or the expectation that have given, we have not tightly linked it with a payout ratio. A lot of people would like us to just express a percentage of net income as our dividend policy. What we have said is that we will decide every year on the dividend amount, which will be either flat or up but that we will try each time to fit the dividend in a way that we feel we can sustain this level toward the cycle.

So, that means really that yes, we're going to pay dividends. Obviously when things go better we'll increase it if we think we can afford to keep it at this level after. But again, as we have stated before, we don't intend to turn ABB into a high-yield stock. We still feel at this case that we have a much other hopefully better ideas to do with the cash that we are generating.

Thank you Richard.

Could you expand on those alternatives other than the dividend?

Well, there is obviously still some work to do especially on our off-balance sheet obligations. For instance, continue to fund the gap into the pensions plans and as you have seen we have been working on, -- working on that, there is still more to go.

And then after that clearly, there will, if there's opportunity, I will always be happy to buy back some debt, but only at reasonable prices. And for the rest of it, we will start looking at what targets for external growth.

Have we answered your question Richard?

I thank you.

Okay, thank you very much. Next question please.

The next question is from Mr. Mark Troman from Merrill Lynch. Please go ahead sir.

Good afternoon it's Mark Troman here from Merrill Lynch. Just two question please. Firstly on the issue of pricing, I wonder if you could provide a little bit more detail, I guess on the Power and Automation divisions. What pricing trends you are seeing, are they keeping pace with what we have seen before, are they leveling out and how are they combating the raw materials? Are you seeing a slowdown in raw material price acceleration there or is it leveling off? That's question one.

And the second question, could you just indicate how much cost saving basically you had between this quarter and the quarter of last year. So if you like, how much of the EBIT improvement was driven by a lower cost base? Thank you.

: Thank you Mark for your question. Maybe I'll take the second one and give the first one to Michel.

As to the second one, the simple answer is no, unfortunately I cannot. I cannot, I can't in a way tell you how much of the all time EBIT for instance, was driven by cost savings and how much by all the factors because as you can imagine, this is a rather complicated analysis. It's everything moving here. Even the cost basis is moving at different prices of labor, of raw materials, different end customer prices. You have different volumes in all of that. Roughly, we've said just from a qualitative point of view, it is clear the market has been helping us with enabling us to push through better prices and of course, higher volume leading to higher absorption. On the other hand the success we are enjoying at the moment would not have happened without internal improvements either.

And the internal improvements are on the one hand classical cost savings, where you cut out costs, where you renegotiate raw materials, supply contracts. But not only that, it's also preventing unnecessary costs like, introducing more diligence more rigor in the risk views in selecting the projects we take on.

So, honestly, I could not give you a quantitative indication but it's clear the markets have been very helpful. That’s may be half of it and the other half that was really ABB's work.

As for the first question, actually regarding pricing and raw materials, yes, obviously raw materials have continued to progress, especially copper, which is one of the most important commodities that we are buying. But I think that now since a few quarters we are really well on the ball both reacting in terms of price increases and in terms of hedging. And if you put the two together I think we have managed to preserve really all margins impact from that point of view.

And obviously we can make the comment as a general for the whole Company and although it is very difficult for us to say since we are selling products on one side, engineering services on another, but you could probably expect that about a quarter of all the growth is more pricing driven. Now clearly, when you look into divisions for products you would have a higher percentage in that as you can expect because we need to obviously offset, especially in transformers the commodity price and I think we have managed to do so.

But as well in Automation Products for instance, we have been increasing prices to reflect the higher costs, but also in a way to manage the risk of capacity restrain because of the high demand that we have. So, obviously increasing prices there allows us also to be a bit more expensive in this field. So, clearly, price -- prices start playing quite an important role in the evolution over orders.

Sure, so, I guess where I'm going with this is you've clearly got an order backlog that has been built up in a rising price environment. And although, as you mentioned, you have higher growth in large orders, which normally is a slightly lower margin, you should have, correct me if I'm wrong with this analysis, but you should have a positive driver for margins for the rest of this year at least, and for the visibility of that order backlog?

Yes, we have quite satisfied with first the volume in the order backlog, which I think is well the quality of the margin is giving us the satisfaction that we need. And you know as well, when we take orders, especially on this large one, as soon as the order is booked, we also do hedge, right away the commodity content of it. So, we normally we shouldn't expect any big surprises from that prospective.

Okay thank you very much.

Thank you Mark, next question please?

The next question is from Mr. Tom Melville from Bear Stearns. Please go ahead sir.

Hello.

Tom can you hear us?

Hello Mr. Melville your line it's open.

Fred Kindle Hello Tom.

Hello can you hear me? Apologies for that. Yes just one question. In the first quarter, you saw very strong order growth in the U.S. from both your power divisions. Now, it looks as though that's trended down a fair bit in Q2. Are there any specific reasons for that and perhaps you could just talk a little bit generally about the outlook for the Power business in the U.S.?

Thanks Tom for your question. I would actually correct your view on that by saying first of all I don't think we disclosed the U.S. specifically but we disclose the Americas. In Americas you have the effect of first of all Latin America, which we talked about and we were not quite as happy about. We also have Mexico mingled in there. Finally, we have not just the Power Product systems overview, but you have the whole Group and the Robotics obviously have much lower order intake that the year before.

That explains the, I would say -- you call it downward trend. It's not a trend but a different impression that you got. If you look at the actual market situation in the U.S. we have seen for the last couple of years now a trend upward in power infrastructure investments. And that's also the picture today. So Power Products and Power Systems are benefiting from this situation and we expect this to continue. So, if you talk about the trend, actually the opposite is true. We feel that the market situation is very beneficial in the U.S.. Okay?

Okay. Thank you.

Okay next question please?

The next question is from Mr. Alessandro Foletti from LODH. Please go ahead sir.

Yes, good afternoon. I have two questions. One very quick, some numbers form Michel Demare. Can you please give us an update on the number of shares outstanding at this moment and if there are some further dissolutions to expect? And then what did you do in securitization and pension funding?

And the second question for Mr. Kindle. I was a bit surprised to see $34m restructuring in Automation Products. Can you tell us what the reasoning behind it? Did you just take everything that you had in mind because you had this gain, or is it something special going on? Are there more restructuring charges to come up in this division and are we at the end of the day at the top of the margin here? Thank you.

Thank you Alessandro, Michel do you want to start?

Yes, I have to first react on the last part of the question, Alessandro. We can't just do whatever we want and book a reserve because we have a good profit. So, we can expand on that after that, but obviously a reserve linked with a decision that has been taken and that has in fact already been executed, as we speak.

As far as the number of shares is concerned, to give you the exact count, we had at the end of the quarter 2,182m shares and that is the residual result of the bond conversion that we did during quarter two.

Now that we have to expect further dilution in the future where we have for sure no intention to issue new shares tomorrow. Obviously you know that we still have a Swiss Franc convertible out there, that has a maturity in 2010 and we keep considering options for this one as well.

In terms of securitization, I think that there we have now reached, I would say, a stable level. It always fluctuates a little bit between a quarter and other. I would say it fluctuates always between $250 and $300m. The outstanding at the end of the quarter were now $265m, so I would say that the securitization really had a very small impact on the cash flow generation for the quarter.

Coming back to your second question, Alessandro about restructuring and as Michel pointed out it is clearly linked to a specific measure, otherwise it wouldn't -- couldn't take the hit.

Of course.

But to be more specific, what happened, what explains the biggest portion of the restructuring there is actually a specific development in Germany. We have taken the decision to downsize part of our operation in Germany. And that created the double-digit million-dollar expense.

Now, that may be substantial for a quarter, but in the overall context it's really nothing. These things will happen, almost every quarter somewhere in this organization and they are perfectly within the bandwidths of guidance we usually talk about. The same as 50 to 70 basis points of revenues which we need to spend each and every year to transform this business.

Okay, and let me still give you the information you're asking about pensions. So, year to date we have injected $310m into our pension and other plans. It is $110m, which is really the normal contribution that we have planned. We have given an indication for the full year we were looking at about $205m. And then we have in addition to that, injected another $200m in our German PTA scheme. So, the total here to date is $310.

Thank you very much.

You're welcome.

Thank you, next question please.

The next question is from Mr. Olivier Esnou from Exane. Please go ahead sir.

Yes, good afternoon. I would like to talk about the minority interest. It's a good jump again this quarter. Could you update us on how we should think about this part of you're earnings developing looking going forward?

And as part of your use of cash flow, are you considering the opportunity of buying out a bit more of these JVs which are growing fast? That would be the first question.

Second question on the Transformer business. In the previous quarter you were positively surprised by the pace at which customers were reserving capacity. Is that still the case or do you still believe that the demand is a good reflection of the underlying need really, for transformers right now in the market?

And the last question, I have read somewhere that there were some issues that Daimler Chrysler plant in the U.S. using ABB robots. Is there any risk going on there for you in terms of earnings or penalties?

Thank you Olivier for your questions. Let me start with Transformer and Robotics and then hand it back to Michel for minority interests and cash flow.

As for the Robotics situation, I mentioned before that we have several issues to tackle. One is the market and the other one has certain internal issues. And of course, you always have some projects that don't go as well as they should. The question is only the frequency of such projects and the magnitude and one of the biggest pushes, we introduced a couple of years ago, was to make sure that we don't end up with catastrophic projects.

And without going to far you could say, the answer Michel gave on the Lummus question of taking additional provisions, is related to a project that dates back years and years and has caused us many sorrows and tears. And this project you were hinting at Robotics, is also one of several reasons why Robotics haven't shown the EBIT performance we would love to see.

Of course, whenever a problem appears with quality or with a system not running, we need to fix it. And that's the point here. So, we're here to fix the problem and make sure that everybody first of all, our customer is satisfied and then at the end of the day also the investor because the financial performance comes back.

As for Transformer restructuring, or the Transformer situation, I should say, the picture we have with regard to order intake, I think it's truly reflecting the ongoing situation. Meaning the statements we made about customers in reserving capacity was more to give examples about the current market situation, which is a very good one. There is very strong demand. And less so, that this would lead to a pre-booking of [oil] debts will not arrive any more later, because it has already been pre-booked. I don't think that see a dip in order intake in Transformers because of this effect. The fact of the matter is they have seen a very stable, positive growth momentum a growth, which in nominal figures is impacted by the very successful endeavor to increase prices. So if you look just at nominal growth in Transformers, it includes both. It includes real volume growth in the double digits but also price increases. And we actually need to have both to come to the best possible EBIT margin.

But again, the picture is solid, the market is growing, we are the world market leader in transformers, we're directly participating in this market improvement.

Now with regard to the minority interest, I think that it's a very good observation. We are obviously as well, happy to see the development there, because at the end of the day it reflects the high quality and high growth of our activities in the China and India because it is really what is reflected through these minorities here.

Clearly, as long as this part of the world keeps performing like this, you can expect the minorities to continue growing at this pace. And again, we made a comment before that we haven't seen a large HVDC order since the one in China for the rest [inaudible] or the businesses like Power Products or even Process Automation really are taking a roll of orders in China and execute them with a very good profitability. So, clearly as long as the demand is there, you will see that continuing.

Now, what are we doing about it? Yes, in China we have -- we are always watching these joint ventures and some will have specific agreements to be able to increase our shareholding and we will always promote the dialogue with the joint venture partner to be able to do that. And in the past we have been successful to do so.

At the same time as we keep developing new fields of activities or technology in China, we also create new joint ventures. So, you have a kind of permanent recycling there that is going on. But again, also to reassure, as I have already said before, we can really get the cash back from key ventures. We have a pretty flexible dividend policies out of these joint venture and a good way to repatriate those dividends in a tax efficient manner. So, it doesn't really create a problem for us.

Alright thank you.

Fred Kindle Thank you Oliver. Next question please?

The next question is from Mr. Michael Andersson from Evli Bank. Please go ahead sir.

Hello it's Michael here from Evli Bank. I read the Swedish Incumbent [Investenfals] Q2 report today. And they are complaining about the German network regulator forcing them to take down their network tariffs. And they are saying -- talking about return on capital and so on and so on. Is this a trend you are seeing in Europe, or is it mainly in Germany and could this effect, do you think investments from the energy incumbents going forward here or is this just more of an issue for Investenfals? As we know there are underlying growth, very strong growth in Europe for the electo-infrastructure business.

Michael thank you for your question. However, it's a difficult one to answer, because it's bordering on political values. And as you know, there has been a lot of discussion in Europe about making the power market more efficient and the European Union Commissioner has made statements and has actually come down on utilities because there was a feeling that they were not adhering to, I would say, efficient market regulations and all of that.

I don't want to comment on what the German regulator is doing here. But to come back to the essence of your question, what does it mean to ABB? I can hardly imagine that regulatory changes in the short term will impact our order intake here. Because, the fact of the matter is that the world needs more power, especially in the form of electricity. The power grid needs to fulfill increasingly demanding requirements. For instance, the integration of alternative energy, wind farms and things like that. There is a political movement to get Europe closer together. You know to have the bordering regions become more linked to the center of Europe. I'm speaking about Eastern Europe, I'm speaking about the Iberian Peninsula. That all takes investments into the grid system.

So, I'm very comfortable about the need for ongoing investments for the years to come and a thing like this, a regulatory change in the rates the power generate the utilities can charge is unlikely to have a short term impact.

If it was to fundamentally change the industry profitability, then of course that would change the picture. We have seen that in the States, where there was a lack of financial incentives to invest into the power grid and that led to massive under investment for many years. And that's being undone now, which is again positive for us. But that is, I would say a rather extreme scenario to happen in Europe. Europe cannot afford not to invest into power grid. The fact of the matter is the opposite is happening. We have announced big connections in Scandinavia, [Eslink] between Finland and Estonia, [Nornet] in Norway and Netherlands. We currently also announced the connection between Italy mainland and Sardinia, which was a large order to us and more of that is to come.

Thank you very much.

Thank you Michael. Next question please?

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

Yes, two questions. One is on two items of expense, one is CapEx and the other is R&D. So far in this up-cycle you've been pretty efficient at holding down capital investment to levels which are accumulatively running well below depreciation still. And I think to judge from the published numbers in last years accounts, your R&D is being held around about 3% of sales, which looks like it's well below peer group. To what extent do you think those might have to ramp-up over the next two or three years in order to keep pace with the growing demands of the customers?

And the second question is on restructuring costs. Looking at this quarter, you've identified sort of $34m for us and you've identified a corresponding gain and then you've remarked on $3m of restructuring in the -- in relation to the Transformer business. Were there any other restructuring charges in the quarter?

Okay, Tim, it's Michel Demare here. Let me start with the last question. There was really a million or two I think, in Process Automation as well, so if you put all together you know, we have $2m in Transformers, $2m in Process Automation, with the rest we get slightly below $40m, which is then I would say, still within the range that we give as a guidance overall. So, it is -- and still the $34m, you could argue that some is not really pure restructuring expense as you call it.

So, from that prospective, that gives you the total amount for the quarter. So, we are still within this range, Fred do you want to answer?

Yes. and some of the, you could say, economic true restructuring doesn't appear in the restructuring line.

No, no, that we do a few quarters as obviously the accounting laws have changed. So a lot of the restructuring of expense appear in cost of sales or it's in G&A. But to give you the essence of it we are still within the range close to $40m if we talk about everything from that perspective.

Thank you.

Now, I'll maybe take the question on CapEx. So, indeed CapEx in the second quarter, let's say we were closer to the depreciation if you look at the $123m that we had.

Yes.

We do feel at this stage that this is enough despite the huge growth in orders that we are seeing, for the moment we can sustain that. And that is, we explained already many times before since most of the new plants that we are building are in the cheaper part of the world like, Estonia, like China or India. We can really add quite some capacity without spending too much money. On top of that we want to be careful about it because of the related growth that we see now. We don't know how long it's going to take, so you don't want to start building mega capacity and maybe regret it in a couple of years.

So, we are still being prudent but I must say we are not really holding back that we have huge fights about it. It looks like we can really manage that in the course of business and we don't expect because of that, that we will start spending a way above the depreciation in the future.

Did we answer your questions Tim?

Well just on R&D?

What was your question again on R&D?

Well the question is, you sort of looking at the accounts for the last three years, you sort of held it around the $680m, $700m range. I mean I don't know whether it's gone up in the first half of this year particularly but you seem to have been able to get an awful lot of growth without actually spending that much money on R&D particularly relative to one or two of your peers.

I mean maybe it doesn't look like that but we do actually competitive bench marking with regard to our R&D spending, both in percentage terms and but also in absolute amounts. What is really obvious to us is the pipeline. How many new products do we generate and how successful are they in the market place? And here I think they actually fare very well. Maybe this has to do with the focus we have on the leadership position we have. But we feel the amount of money we are spending in R&D is the proper amount and it's also very effectively invested because we do get the products to be successful. We don't think we have any particular issue at the moment in R&D.

We are also not artificially kerbing it back top down. And neither do we do that with CapEx. It just happens that the divisions see these amounts we're spending as the right amounts. Okay?

Thank you.

Good, thank you Tim. We've got to take the last candidate for questions here and maybe the person needs to give a good thought what kind of question to ask. Next question, last question please.

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

Hello good afternoon gentlemen. Charles Burrows here.

Hello Charles.

Hi there. I've just a couple of questions because the others have been asked. One question of capacity, you said you don't need much in the way of investment but could you give us an idea of cost of businesses of how -- what utilization levels are at the moment please?

And secondly, just on the products, you had a tremendous quarter in terms of the product businesses. Was there anything particularly special that you saw there in terms of any particular regions like a big reordering by a distributor or a particular utility that would have distorted that? Or is that just the current pace of growth in the markets?

Shall I take the second one, you the first one?

Well, I'll take the second one regarding products. By and large you could say no, there hasn't been really a special effect really anywhere, whether you talk about Automation Products or Power Products.

It's truly a reflection of the very buoyant markets on the one hand and I would say the internal improvements on the other hand. Internal improvements, also including our successes with regard to managing the price situation.

Maybe that is -- I should add within Power Products, Transformers is moving up there. On the one hand we didn't have much restructuring for the transformation program we're undergoing this quarter. On the other hand the true operating performance is already moving up from the levels we had in 2004, which was to between 3 and 4% EBIT margins.

With regard to pricing, it has become a very important not only issue but I would a say success lever to us. I think what started off as a real pain in our neck here and the fact that raw material prices; copper, aluminum, electrics, steel, transformer or vented roof, has taught us a good lesson. We are the world market leaders and if we don't push thorough the price increases to our customers nobody will. And this has happened, now and this is impacting all of the products business. With that about capacity.

As far as capacity utilization, obviously we don't communicate these numbers. It's sometimes here a bit difficult to measure. But I would say for sure the capacity utilization is at a high point if we compare to recent history. But they are still manageable. If we look in the two product areas, let's say if you take Automation Products first, we are adding some capacity. We've built a plant in Estonia and Northern China and also in India. It is also a lot of assembly work, so we can also solve this capacity situation by outsourcing a little bit of assembly or by adding shifts on a temporary base and then also by starting to negotiate longer delivery terms. If we look at the bigger products of the Automation Products, like machines, like motors, we start having customers that accept longer delivery terms just because the demand or the supply is very tight and so they have to accept the conditions of the market.

So, we're not really suffering from any big problem in terms of physical capacity. Obviously sometimes you may see some issues in terms of engineering skills and engineering availability, maybe especially in Western Europe. That is something that I think you hear across the industry and we are trying to deal with those challenges as much as we can.

Thank you very much.

Thank you very much Charles. With that we would like to close this conference call today. Thank you very much for your interest and attention. We will talk to each other again on the road show but then for the third quarter in late October. Until then enjoy your summer. Thank you very much.

Bye-bye, thank you.

Ladies and gentlemen this conference is now concluded and you may disconnect your telephone. Thank you very much for joining us. Have a pleasant day. Goodbye.