Abb Ltd (ABB) 2006 Q3 法說會逐字稿

Good afternoon. This is the Chorus Call conference operator. Welcome to the ABB 2006, third quarter results analyst and investor's conference call, hosted by Mr. Fred Kindle, CEO.

As a reminder all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for you 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 call. [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 and investor's conference call for the third quarter 2006 results. With me is as usual is Michel Demare our Chief Financial Officer. My comments on this call refer to the presentation that we have posted on our website at abb.com this morning for your download.

Chart two on the presentation. We refer to chart two for our Safe Harbor text regarding forward looking statements that may be made today.

Chart three. Let me start with an overview of our performance on chart three. The third quarter of 2006 was an excellent quarter in almost every respect. Our leading market positions and focus on execution continue to pay off. Strong global demand for improved power infrastructure and increased industrial efficiency continued. And the ongoing efforts to further improve our business performance successfully translated into higher earnings.

Group orders were again sharply higher, up 16% in local currencies. The strong performance by the two product divisions and a massive increase in our Process Automation activities more than offset the negative impact of the timing of large orders awarded in our Power Systems division.

Revenues, with an increase of 5% in local currencies, also continued to grow although at a lower pace than orders. Like in the previous quarter, this is mainly the result of the increase in share of large orders in our backlog. I will come back to this shortly.

A good overall performance in four out of five divisions, the positive development in the non core activities and a continued progress in corporate cost control, helped us achieve a strong EBIT and an attractive EBIT margin in the quarter. EBIT increased by over $200m or 48% to $686m. And the EBIT margin reached an impressive 11.4%. The reasons for these improvements are the higher business volumes, a better pricing environment and pricing discipline on our side, our better execution skills in large projects, as well as our continued focus on risk and cost management.

The high raw materials cost we are still facing, had no negative net impact on our results.

Profitability measured by the EBIT margin improved substantially in four out of five divisions. And only our Robotics division continued to suffer from higher costs related to our efforts to improve operational performance.

I had mentioned in the previous quarter the overall market conditions for Robotics remained weak with both orders and revenues declining in the quarter. As a result, we cannot rule out that this division will not break even for the full year and may post a small loss before starting its financial recovery next year. Operationally, we already do see part of the impact of the measures taken in the last 12 months, however.

Last but not least our non-core activities continue to improve and corporate costs declined further, adding to ABB's strong performance in the quarter.

Below the EBIT line, the positive trends continued as well. Finance net was reduced substantially to minus $28m. That was a direct result of our overall lower debt levels, following the recent efforts to strengthen our balance sheet. The tax rate further declined to 29% in the quarter compared to 33% a year ago.

A loss of some $30m in the discontinued operations line is primarily related to the plant disposal of a small business in the Power Products division.

All in all net income for the Group more than doubled to $397m in the quarter. Cash flow was $523m. This was influenced by two main factors - higher earnings and customer demands were offset by an increase in working capital, due to higher business volumes primarily in the Power Products division. The previous year's numbers included a cash outflow of some $250m, due to the reduction of our securitization program. So doing an apple to apple comparison, cash flow was about even.

Looking at the balance sheet, we continued to strengthen our ratios in the quarter, reducing gearing to 34%, while equity improved to 25% of total assets. The net cash position now amounts to some $700m at the end of the first quarter.

Last but not least, ABB was able to finalize the outstanding relevant [expansion] exposure when the Prepackaged Plan of Reorganization for Lummus Global was confirmed by U.S. District Court at the end of August 2006. A long and indeed a very painful and costly story comes to an end,

Chart four. Chart four shows our track record of profitable growth. The positive story continues with our leading positions in key growth markets such as power transmission and distribution in Asia and the U.S. and the oil and gas, marine, the metals and minerals sectors on the automation side providing us with a very good tailwind. Higher volumes, higher EBIT and better EBIT margins are the result of our ability to capture market opportunities, combined with disciplined execution.

If you turn to chart five now, the share of large orders booked in the quarter continued to expand from the level experienced a year ago, and was at some 15% of total orders compared to 13% in Q3 2005. This compares to a historical average of approximately 8 to 10% over the past several years. The gap between order growth and revenue growth is the result of this development. Let me remind you that orders are always booked at the full value in the quarter we sign them, with the respective revenue recognition only following in the common quarters, or in the case of a very large project, several years. Clearly we expect this gap to narrow in the common quarters. However, on the positive side I have to add that the higher content of large orders is also improving our business visibility going forward.

Looking at the order backlog chart on the right hand side of this slide, we see that the healthy growth continued in the third quarter. At over $16b backlog, is up $3.5b, or 24% versus a year ago. This provides us a very favorable starting position going into 2007.

Chart six please. Chart six provides you with a breakdown of our results by division. As you can see, orders were up sharply in three out of five divisions. The decline in Power Systems is a combination of timing of project awards this year, and the high level of large orders in the same quarter last year. By no means do we see this as a change in trend. As a matter of fact, the outlook in Power Systems continues to be favorable.

In Robotics, I already mentioned the overall weak market situation.

Revenues were also higher although growth was held back by Power Systems, Robotics and non-core. Revenues were up by double digit amounts in our two Power divisions, reflecting both higher volumes and higher prices in product lines like transformers and high voltage products on the Power side, from motors, breakers and switches in Automation. Revenues continued to decline in Robotics reflecting the mainly reduced order backlog.

From an already high level, the EBIT margin increased further in Power Products and Automation Products. Additionally, Power Systems and Process Automation continued their recent upward trend, both posting a very significant increase in the EBIT margin. As I mentioned earlier, all these divisions have clearly taken advantage of their market leadership positions combined with a focused execution. Profitable growth is what value creation is all about and the focus on this topic at ABB in the last two years is paying off.

In chart seven now, we show the regional breakdown in orders and revenues. While the growth in orders was at least 10% in nominal currencies in all regions, strongest growth was seen in the Middle East and Africa and in Europe. However, if I may add one word of caution here, when looking at the growth rates, we always have to remember that the numbers are from a supply-side perspective and therefore may distort the economic reality. For example, a project in Asia may influence the order number in Europe as some components maybe delivered from Europe to Asia for this particular project.

Orders were up in Europe for three out of five divisions. Power Systems was flat due to the timing of large orders as mentioned before while Robotics was down. For the Power divisions, the overall theme in Europe remains the need to replace ageing infrastructure and systems to link regional grids. While in Automation Products and Process Automation, the growth driver is mainly the need to lift industrial efficiency.

Orders from the Middle East and Africa region grew 36% in local currencies, increasing their share of total orders to 14% of the total volume of the Group.

In the Americas we saw continued growth, with North America showing positive developments for the product divisions. Robotics continued to be weak. South America reversed the negative situation it experienced in the last quarter, posting positive order intakes in all divisions.

As well, Asia was once again a solid growth market for us, although at a somewhat lower pace.

As I said in the past, ABB is truly a global player where no single region is decisive for our success. We are less dependent on one geographical area, but have the possibility to offset temporary weaknesses in one region with a strong performance elsewhere.

Chart eight please. If you look below the EBIT line in chart eight, finance, net amounted to minus $28m [sic: see presentation] reflecting the overall lower levels of debt and the reduction of our securitization levels. At 29%, the tax rate is down compared to last year's 33% mainly the result of increased earnings from lower tax jurisdictions. A loss of $28m was recorded in the third quarter of 2006 in discontinued operations, primarily related to the plant disposal of a business in the Power Products division.

Chart nine. Let me spend a minute on our non-core business here in chart nine. Overall here it is summarized, and this category continued to make progress, posting an EBIT of $24m, compared to $10m a year ago. Lummus received a number of large orders in the quarter totaling $270m. However, operational improvements were offset by a loss provision for a previous project. In addition, we are in negotiations to resolve outstanding claims in another large project. Equity Ventures reported stable income and our Building Systems activities reached a break-even result.

Corporate costs were further reduced to $81m, down 10% from a year ago, as stringent cost control continues at the local and Zurich head offices.

Chart 10. Chart 10 shows you the ongoing progress of the restructuring of our balance sheet by the special Q2 items like the settlement of the combustion and asbestos case for the early conversion of our 2007 convertible bonds are not repeated, the positive earnings and cash flows further improved their ratios from a quarter ago. Gearing is down to 34%. We have expanded our net cash position to $704m. And equity now represents a quarter of our total assets.

Chart 11. Here in chart 11 is an overview of our cash flow from operating activities. The divisions generated some $670m in cash flow from operating activities, which was partly offset by cash out from interest payments, taxes, asbestos payments and other costs in corporate. Adjusted for a cash outflow of some $250m due to the reduction of our securitization program in 2005, cash from the divisions was flat. Higher earnings and customer advances were offset by an increase in working capital due to higher business volumes, primarily in the Power Products division.

Chart 12 please. As I said in my earlier remarks, ABB was able to finalize the outstanding relevant Asbestos exposure. The Prepackaged Plan of Reorganization for Lummus Global was confirmed by the U.S. District Court at the end of August 2006. A long and very painful story comes to an end.

To conclude, this chart 13, here is our market outlook for the rest of 2006 and into 2007. The picture remains strong. We have a very healthy 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. The basic risks to our business have also not changed. Price volatility in oil and other commodities could present challenges both in terms of in the market development and our cost base. And the situation in the Middle East continues to create some uncertainty.

Overall, while the current rapid pace of growth in order intake is expected to slow in 2007, we expect ABB to continue to take advantage of the favorable global investment environment.

Ladies and gentlemen, to summarize, the third quarter of 2006 was an excellent quarter. We think we delivered strong results, building on the good start we had in the first six months of the year. We continue to benefit from our leading market positions in power technology and industrial automation and 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, a strategic position to create success. And we look forward to a successful rest of the year and a good start into 2007. With that ladies and gentlemen, I'll open up now for questions. Thank you very much.

Thank you. This is the Chorus Call conference operator. We will now begin the question and answer session. [OPERATOR INSTRUCTIONS]. The first question is from Mr. James Stettler, Dresdner. Please go ahead sir.

Thank you. Good afternoon. Two quick questions. First of all, if you look at the order growth in Power Products and Automation Products, can you break that down by volume and pricing?

And the second question is regarding the margin development in Power Systems and Process Automations. Last quarter you mentioned that the invoicing of larger projects would lead to a margin dilution. When do you see that coming through?

Thank you James for your questions. I think I'll start with the second one and hand over the first one to Michel. As for the second one, yes indeed it's true. If you look at our current EBIT margin I think it is a remarkable EBIT margin that we have achieved. It is on the one hand due to all the improvement and the nice market situation. But on the other hand, we have not pumped yet the large volume through the system, which is actually good news.

But looking at the five divisions, leaving aside Robotics for the time being, because that's a small and special case, I would say there is no reason why we should not be able to maintain, or even prop up the margin in Power Products and Automation Products further.

On the other hand if we look at Power Systems and Process Automation, once the very large projects flow through the P&L, they -- that may water down a little bit the margin. Hard to tell how much of an impact there will be because we have been able to consistently improve our operating performance. But yes, there is a certain risk that when the big volume comes, and the actual bottom line increases in absolute terms, that the margin may suffer a little bit. And as for your the first question --

Good afternoon, James. It's Michel here. For the first question, I would summarize by saying that in Power Products overall it would be a 50% price related, 50% volume related. Now as you know, the price increases are always mainly linked with the increase in commodity prices. So the 50/50 I tell you for Power Products is a combination of transformer, where pricing was the major element of the increase and the high voltage, medium voltage where it was more volume than price. But on average, I think 50/50 is a good number.

As far as Automation Products is concerned, there the driver is mainly volume. We have achieved price increases in most of the products, especially the big ones. But overall the volume has prevailed.

If you were to take it for the whole Group it would be about one-third related to price --

And two-thirds volume I would agree.

Have we answered your question James?

Yes. Thank you very much.

Okay, thank you. Next question please.

Next question from Mr. Julian Mitchell, Credit Suisse. Please go ahead sir.

Hi. Yes. Thanks. The first question really on your Automation Products business in North America. I was just wondering how much of your increases there are market related and how much of that is related to your increased efforts in the distribution channel and so on which you've been making in the last couple of years in that region. Obviously some concerns out there that the consumer softness may filter through to the industrial economy at some point. I just wondered what your thoughts were on that?

And then on Robots, secondly, could you give us some sense of underlying earnings versus restructuring charges. How you see restructuring charges for the whole of this year in Robots specifically. Thanks.

Thanks Julian. As for your first question relating to AP and North America, let me phrase it this way. I think we have a pretty good standing, a pretty good market position in North America. However it is not as strong as it is, for instance, in Europe or in China and in other places. So historically, it has not been the strongest point with regard to market position of ABB. And therefore we could imagine doing more in North America. By the same token, this relative weakness is playing to our advantage because I don't feel we are as exposed to market weakness in North America as some of our competitors are. And more specifically, we are not as marginal in let's say the housing or the real estate market as some of the other players.

Structurally or strategically we have not changed our set up in the last couple of years in North America. There has not been a specific change in distribution channels, which means that everything that is reflected in our pictures is directly a reflection also of the marketplace. So all in all, I don't think we have a particular exposure in North America in Q3 and particularly worried about what is coming up there.

As for the question regarding Robotics in operating performance versus special charges.

Yes Julian. What I would say, you know the business model in Robotics is mainly an articulated one, the service business. That one continues to do pretty well both in terms of revenues and the margins which are pretty high. We are, for the moment, working at restructuring the products and the systems division. So it's a cumulation of additional R&D expense and write-downs on projects and some restructuring as well. I would say, if you look at the operating performance, we would for sure be at least at the mid single digits if you would put the exceptionals away. So we're still quite confident that once we have finished our work here, that then the good profitability that can get out of the system -- of the service part of the business would help again get us towards the targets for fiscal '09.

To add to that, we were specifically asked this morning whether 9% as a medium target for Robotics is still realistic looking at the current performance and our answer was yes. The current performance is impacted by the items Michel mentioned. It's not reflecting the, I would say, regular operating situation. Have we answered your question, Julian?

Yes. That's great, thanks.

Okay. Thank you. Next question please.

Next question from Mr. Andreas Willi, JP Morgan. Please go ahead, sir.

Good afternoon. Two questions, please. One on Lummus. This business is doing well on the top line we have -- on the orders now we have solved the asbestos. What's your view on how long you think you will keep it within the Group and if you could also give us some more details on these contracts where you have some problems? How old are they and how big is the risk on that contract in terms of a big hit to numbers in Q4 or any later time?

Second question on minority expense. It doesn't grow as fast as it used to grow. Is that an indication that the profits in China and India are growing slower, or is that because you have bought back -- bought some stake or increased some stake there or reduced basically the economic exposure -- or increased the economic exposure, I mean.

Thank you Andreas. I'll take the first one. As for Lummus, the situation hasn't really changed. And from a strategic point of view, Lummus clearly is flat. In fact it's non-core which means the strategic options are less open on purpose. We manage it with a going-concern perspective that has paid out. I must say that the value of Lummus has, I would say, increased quite substantially in the last two years because we took care of it and we executed the turnaround. And in the meantime the market environment has also changed very positively.

It is clear that this situation of having Lummus plugged into the non core category, that cannot last forever. We need to come to a conclusion what it really means. Whether it's going to be core in the future or whether it's going to be discontinued. That means to be sold at some other point. That's a decision which is coming up and we need to -- we will establish some clarity later on.

As for the contracts exposure, Lummus is in two different businesses. One is clearly a technology business, which has been very reliable and very profitable. The other one is the classical EPC, Engineering Procurement Contracting business, where we deal with all sorts of contracts. Some of them are very large. And the issue that we have been dealing with, and which we mentioned in our presentation, is actually a large scale contract going back years and years. Actually it was signed in 2001. There's not many left of the ancient past that would cause us to -- that would be cause for worry and troubles. This is one of them and we are going to resolve it.

As for your next question with regard to minority interest.

Yes, with regard to minority interest Andreas, I would say there is nothing special. We haven't bought back any minority, especially in the two countries that we usually think of, China and India. Actually yesterday ABB India announced its third quarter results and the profit progression there was again spectacular. Something close to 50%.

Above.

Above 50%. So I would rather put that just on the timing of profit recognition. I believe I recall that last year actually there was quite fast progression of the minority interest in Q3. So it's just a timing issue. We still expect the kind of progression that you see year-to-date will continue in the fourth quarter, given the very good health of our businesses in China and in India.

Did we answer your questions, Andreas?

Yes. Thank you.

Thank you. Next question please.

Next question from Mr. Charles Burrows, Goldman Sachs. Please go ahead, sir.

Good afternoon, gentlemen. Charles Burrows, Goldman Sachs, here. Two questions please. One just a clarification please Michel on the tax charge and on the discontinued. On the tax, obviously it's come in much below expectations. Would that lead you to change your ongoing guidance, eventually 30%? Or do you think it's actually going to come down quicker? Maybe we ought to be looking at 29% as an ongoing charge. I don't know how you see the mix coming.

And in the discontinued item there, could you tell us how much of that was a write-off or whatever, how much of that was due to the underlying performance of the business?

And then the second question was when you're looking at the price versus volume issue, how much of the price increases that you put through have you really seen? Did that all come through in Q3 or is there a delay effect to come through in Q4, particularly thinking of the transformers? And as prices of some of the inputs maybe start to decline, I'm thinking of the impact of the decline in the oil price perhaps, will you see that coming through? Or do you think you will have to start giving that back as you pushed up prices so aggressively?

Okay. This is more than two questions, Charles.

Well, two and a half.

It's okay. Now listen, as far as the tax is concerned I agree with you. I believe we are doing faster progress than we have projected. So just to remind everybody we have given as an indication that by 2009 we were looking at having a tax rate way below 30%. I would say 29% this quarter was really very good. I believe that is still a little bit of a low level to consider it sustainable. But indeed I think that reaching a 30% tax rate average for the full year, is feasible and that is what we will try to do in the course of the fourth quarter. So that is the first one.

As far as the discontinued operation is concerned, well I would say that by the finish usually what you have in discontinued is mainly one-offs. So a good part of discontinued operation is indeed the capital loss that we have taken in from this business that we mentioned in Power Products that we are discontinuing. So what you do then is that you book there the capital loss and you transfer whatever operating loss that you had taken through that line with also some, a few upsides. So overall I would say most of the numbers that you see there are one-offs.

As far as price, volume, your question about prices I would say well most of it for the moment you see really in the order backlog. Some maybe will hit the revenues in the same quarter. But I would say it is also one of the reasons that explains the fact that we have for the moment this gap of growth between revenues and orders, because the price increases are all included in the order book and not yet in the revenues. So you will indeed see much better flows of that in Q4 and I would even say in the first half of 2007.

And as for the order backlog, I think we see two conflicting trends. On the one hand, we see the quality of the order backlog increasing because of us becoming more selective and also becoming more price disciplined. On the other hand we have this effect which I talked about before that some of the larger orders that by their very nature have a lower gross margin. And those are obviously offsetting each other to some extent. But altogether we have a very strong and healthy order backlog for the rest of the year and for next year, even going into 2008. Did we answer your question Charles?

Yes. Just one element that wasn't answered. In terms of if we start seeing some of the input costs coming down, I'm thinking of about oil, and I wonder whether transformer oil has followed the general oil price, whether you think that will be reflected maybe in a negative price movement or such is the strength in demand that it would be something that would further enhance your margin?

Well in some contracts we have an connection where we have indices or contract clauses in there which are directly linked to the raw material price and there obviously it's a one to one. But in many other areas we don't have this direct connection. It's more or less a question of how we change prices in accordance with our customers. I would expect once the price has come down, that we obviously try not to do that exactly in parallel and benefit a little bit from that.

I would say in general due to the fact that the raw material prices have escalated in the last 18 months, the organization had to learn the bitter way how important pricing is. This is an aspect which typically doesn't get utmost attention from engineers, because it is like a trivial side aspect. From a commercial point of view however it's absolutely crucial. And I think the organization has taken big advantage of the development in the last 18 months. We are very, very focused on pricing these days.

But I would add as well, the key driver for the moment is really the strength of the demand. And so I believe the capacity utilization of all the suppliers it's pretty much to the top. And so people do manage a little bigger capacity through price management also, so demand is probably a bigger driver nowadays than raw material prices.

Okay.

Thank you.

Thank you, Charles. Next question please?

Next question from Ms. Christa Muno, UBS. Please go ahead.

Yes. Right. Good afternoon gentlemen. Two questions if I may. The first one on restructuring charges that you had in the quarter. It looks like they were again below the guidance you have given for the full year, which may be due to the fact that the environment is very, very strong. So can we have just in mind roughly what was the amount of the restructuring in the quarter and what it will be for the full year?

And the second question would be on pricing. I'm sorry, but I didn't quite understand what was the answer you gave to James. You said that the improvement in the EBIT during the quarter was one-third due to pricing and two-thirds to volume. Could you give us a bit more clarity about the extent of pricing given that at the end of the day you're saying that raw material impact didn't have -- net impact was not negative on the quarter? Thank you.

Okay. Just to answer -- Christa, hello. To answer your second question first. When we were commenting to James, we were talking about the impact on the order book. So that when you look at the order growth we were saying overall for the Company, orders have grown one-third because of price and two-third about volume. Obviously going down to the EBIT there are many other factors that can influence like execution, project execution, capacity utilization, etc. So that was really about orders. It was not about EBIT.

As far as the restructuring charges are concerned, you know I agree with you. This was a low quarter where we were well below the ranges we have indicated. Usually we have already more -- always more actions coming up towards the end of the year. And we are still looking at different restructuring plans that we can put in place. So we're still sticking to our indication for the moment, but I agree with you that it will probably be towards the lower side of the range we had here.

To add to that we've said ABB expects almost every year to have kind of a natural restructuring charge order of magnitude of 50 to 70 basis points of revenues. Last year 2005, we went above that because it took the big hit in for the transformer restructuring program. And this year the charges, the special charges they'll be much lower. We said it would come down maybe upper end of the range. But fact of the matter is, once the year is over, I would expect that we are at the lower end of the bandwidth 50 to 70 basis points. But still within the regular bandwidth. Have we answered your question, Christa?

Almost, sorry. I just have a follow up -- a very quick follow up on the pricing. Just to understand exactly what you mean when you say that raw material cost had no negative net impact in the quarter. Very quickly, if we were to assume that raw material are roughly 8% of revenues and then you look at what we had -- the inflation we had, you could assume that at least we had a negative $100m on raw material. Would that mean that pricing impact on revenues was actually higher than that in the quarter?

On the pricing and you have to add to that the hedging that we're doing as well on the commodities. So if you combine the two together we have offset or even more than offset the negative impact of raw materials.

Alright. Thank you.

Okay. Thank you, Christa. Other questions please.

Next question from Mr. Julian Beer, SEB. Please go ahead, sir.

Hi, good afternoon. Can I just ask a question on dividends? Listening to your conference this morning I got the impression that you're looking for a progressive dividend policy whereby dividend doesn't fall over the cycle. I wonder, could you indicate what you would consider to be an appropriate pay out ratio average over the cycle and how close to a normal year 2006 will be?

And then I have a question on Power Systems after that.

Well Julian, Michel Demare. I will answer on the dividend. We have not indicated when we announced our strategy last year that we would function with a target dividend pay out ratio. Obviously you have seen for the moment we have been around 25%. Some people in the industry have a little bit of a higher number. We are not yet, or not at all actually indicating a pay out target as a matter of principle for dividend policy.

We are looking at what we feel is a right way to distribute a certain part of our net income. What we really pay attention to is that the number that we decide at the end is a number that we will always be able to sustain, even at the trough of the cycle. So you will not hear us for the moment talking about dividend pay out target.

Yes. I guessed that that was the case which was why I was wondering, why I thought -- what you thought would be the average over the cycle.

Yes. But I don't think we're going to go there.

Okay.

I think we need to leave some latitude to our Board to think about what exactly should be the level and the relevant period for that will be the beginning of the year.

Fair enough. They've got to earn their money. On the Power Systems, I see you've had many large sub station awards over the last two years. But I can only recollect two very large HVDC transmission contracts. I think they are the North Net link being reactivated and the large Chinese HVDC contract June, 2004. How optimistic are you that you'll secure new, large grid contracts in a timely manner to keep those grid project teams fully occupied during 2007?

We are very confident. That's the same plans. But a little bit more, we find answers if we look back the last two years. It was not just the contracts you mentioned but there was also an order we got from Italy, the connection between Italy mainland and Sardinia. And then besides [NorNet] there was [AshLink,] Finland to Estonia, NorNet was Norway and Holland.

At the moment there is a project going on between Holland and England which we have not received yet, but it is also an active project we're going after. There's more things coming up in other areas of the world. We have a lot of sub station projects being handled in all different regions of the world. Particularly in the Middle East we have seen an incredible wave of power grid infrastructure demand rolling over us and the competition, coming from the Middle East.

So as I said before, what you are seeing in the order intake with regard to Power Systems, that is supposed to be temporary. We are still very confident that it is just a quarterly aberration or fluctuation as we have seen before.

Okay, thanks a lot.

Thank you Julian. Next question please?

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

Good morning. Could you -- a couple of questions, first could you give us some sort of range or value on which you categorize non-core assets?

And second, we've had a wonderful scenario here of a terrific management team and terrific end markets and yielding a balance sheet at this point in time, seems way under the level where it should be. Are you considering any sort of recalibration of that through a share repurchase program of significance?

I'll have to leave both questions to my CFO.

Well thank you for the compliments first Richard.

Well deserved.

So, you see -- now you see [inaudible] both and upside of the CNC here because obviously we are not going to answer very precisely the value of the portfolio of the non-core assets because non-core by definition, is something that you want to sell one day, and so really you don't want to show too much you cards in advance.

You know that basically in all non-core portfolio we have on one side the Lummus and I think that Fred has already commented before on that one. It's a business that has revenue of about $1b. So, I guess you -- that gives you more or less an idea of how to evaluate it.

We're also building System business mainly in Germany. That one obviously is a much more difficult one to deal with, so probably not too much value that you can attach to that.

And then we have a portfolio of equity ventures out of which the most important is the four projects that we have in Morocco, called [Job Lasfar]. And that one is actually disclosed in our annual report with a book value that is getting close to the $400m. So I think with these three components you see more or less the possibilities in our joint ventures. Here we have usually 50% or less participation in these assets. So, that gives you more or less an idea of what we're still considering on -- from that perspective.

As far as your second question is concerned, it is a question that we often get, especially from the other side of the Atlantic. And all questions on this Richard is really that we are still very focused on improving earnings per share by really working on the numerator side of the fraction. We still feel that there is a lot of operational improvements and we are delivering some now, that we can do to really increase earnings per share what I would call in a sustainable way. Implementing solutions that will help ABB for the many years to come. As you know, working on the denominator is one -- is a nice effect once but really it is not as long lasting. And on top of that, we always feel that for a company that has basically refrained itself from looking at acquiring external growth in the last five years while most of our competitors have done so, we still feel that we have an opportunity to implement that we think can contribute to shareholder value in a way which will even give you more at the end and buying back the shares.

One could also say we are very reactional and so is the Board. If we run out of ideas -- some value creating ideas on the asset side of the balance sheet we need to rethink the liabilities side or the equity side and you could say we think the equity structure and buy-backs and things like that is almost like the default. If we don't have any better ideas we will definitely come back to that. But it is too early.

Well, one thing to a share re-purchaser buying one of the finest companies that is around in the industrial sector. So, I'll just end with that comment and congratulations and keep up the good work.

Thank you very much Richard.

Thank you Richard.

Next question please?

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

Yes good afternoon. I just would like to come back to your indication with respect to slowing growth in 2007 or back then. Where do you take that view from? Basically, is it from base orders, [inaudible] social environment, is it the market that you see from a sales person or is it more from intelligent guess?

Alessandro I have to ask once more, you're hinting at potential downturn or the optimism in 2007? What is your question again?

With respect to the indication that you gave, all through the conference call and this morning, that you expect slowing growth rates.

Okay, no, there are different ways to view this subject. One way is just really theoretical and that was the starting point when we put our strategic plan together a year, year and a half ago. Basically saying we have not seen a period of five, six years without some sort of dip. It's unreasonable not to include something like that in the strategic plan. That was the situation a year and a half ago. Now today is late 2006 and I think the message we tried to convey with both the press release and also here in the conference call is that we feel pretty optimistic about 2007. On the one hand we have an incredible order backlog. On the other hand we still see the market situating environment being very positive. So, today we don't have any visible signs of a downturn. It's not visible to us.

On the other hand, if I were the customers, I refer to the Middle East for instance, where we have an absolutely booming area. It's just amazing what the people are spending there, what kind of plans they have. For those of you who have been to Dubai, but also other places like Qatar and Saudi, it's just amazing. But even there, major customers of ours are saying, well there's so much capacity and probably on the industrial side more than the utilities side. On the industrial side there is so much capacity coming on-stream in the next two years that the cycle may turn for instance, second half 2008. That was a statement I heard several times in that area. That's interesting to listen to. I think the overall assumption to assume that at some point the economy will not necessarily completely, break but slowdown to some extent is not unreasonable. Do we have evidence today? No. At the moment we don't see it but this Company has seen quite a few ups and downs and we want to be prepared when the down comes again.

So, maybe I can just try to describe it as well. I think what we were really trying to refer to is the second derivative of the growth and the speed of the growth. At the end of the day, what we say is that the comparison base is getting more and more challenging. Like if you take the numbers that we now announced this quarter, a year from now, to still post a 20% order growth based on these numbers is already a much bigger challenge than if a year ago the quarter was kind of so, so. And that is really what we were mentioning. I mean our base orders this quarter are up again 14% in local currencies. So, that doesn’t really give us any indication of a slowdown.

Sure, thank you very much. May I ask you on China what do you think, is there similar indication from the market that you just mentioned regarding Middle East. Is there over capacity building up in China?

Well in China you always hear this question about whether China as a nation continue to grow as they have in the last seven, eight years and my answer typically is China has been much more reliable and much more consistent in their development than any other region of the world. So, I don't expect China to dramatically change their GDP or their welfare and go to a different pace completely slowdown or anything like that. They cannot afford that.

What does it mean to us? To us it means on the industrial side in China, I think we can expect to see a really good environment for not only 2007 but hopefully for years to come. On the power side, they have really specific investment projects going on. They need to install a super grid so to speak, with even higher voltages where we can become an important partner to them. So, there's lots of opportunities. At this point, there is no reason for us to doubt that we shouldn't be able to continue with a similar growth rate in the future as we've seen in the past. That was typically around 20% per year.

Okay, thank you.

Thank you Alessandro. Next question please?

The next question from Mr. Ben Uglow, Morgan Stanley. Please go ahead sir.

Good afternoon. I have a couple of questions. First of all just on the end market situation in North America. In Power Systems, you did mention in the press release that there had been a drop in orders in the Americas and I guess I just wanted to know if you felt that the expected ramp up in investment in the transmission grid, how that was going and what you expected for 2007?

And secondly, just in terms of the balance sheet situation, I understand the interest not to be involved in a buy-back right now. But in terms of acquisitions, I think previously you've actually given us a little bit of a steer in terms of roughly which end markets or which product areas and roughly which size. And I just wondered if you could help us with that as well?

Okay, thank you Ben for your questions. As for Power Systems in North America, you may recall that we have now, for I would say more than a year, tried to be conservative about the impact of the Energy Bill and the overall environment. We always phrased it that we expect to see a continuous uplift in the market, a steady trend upward but with a slow gradient. But lifting the whole market demand to a different level and staying up there for years to come. And I think that's still the scenario we're working in. So, what we are seeing in PS in North America, I don't think it's seeing a break in trend or anything like that. It's just a temporary fluctuation as we're seeing in other areas.

As for -- actually what I'm saying we're still upbeat.

Okay.

And doing well on the Polish side.

And doing well on the Polish side, which is cycled into PS as well, but obviously going through different channels.

Do you have any obvious immediate prospects in terms of larger orders, either in the remaining part of '06 or in '07? Are you beginning to see that?

Yes.

Significant in volume or size?

Volume significant for you?

Let's say $200 to $300m.

That's pretty large, that's not -- we don't get many orders of that size, and typically we are in China, or the Middle East but if you talk about treble digits, yes.

Okay.

As for acquisitions, the story is very easy. We are very open minded, we can imagine making acquisitions in four out of five divisions. We're not looking to acquisitions on the Robotics side, because we think we have other priorities there.

For the other divisions anything's possible. If I had to prioritize, obviously we feel a little bit more not exposed, but confident in the product side, Power Products and Automation Products. We have two divisions there who are showing great returns. They're growing very nicely. We have great management teams. I'm not saying we don't have it in the other divisions but those two are just in a very prominent position. And if we can help them by adding one or the other new technology or market position that would certainly be very welcome.

On the Systems side, the same could be said. But there I think there is more open issues what we can do internal and therefore the priority is somewhat lower.

From a geographic point of view, again kind of a triple answer, anything's possible. Of course if you find a nice [subject] a nice target in the new regions like Asia or the Middle East that would certainly be very welcome. But also Europe and especially North America where we have been weak in the past or still are because we have some traditional home grown competition there. We wouldn't be opposed to taking the right additions. Does that answer your question Ben?

It does. I do have one slight question which is, in the past I think that you have given a little bit of a guidance in terms of what size of revenue companies that you would be prepared to go up to, are you -- is that narrowed down or are you prepared to elaborate on that?

I think it's fair to say that once we have entered 2007 and we have shown with the end results that this Company is really operating in an excellent way. We will also have accumulated cash and financing possibilities that will allow us to do anything possible. But anything possible doesn't mean anything goes. We will apply strict discipline both in regards to strategy, operations that means integrating an acquisition and finally price. Even if the best subjects were available and I could give you names but I wont obviously, if the best subjects were available tomorrow there's a perfect strategic fit and we would exactly know how to integrate them. If the price is not right we're not going to do it, full stop.

Great, thanks a lot.

Okay, thank you. Next question please?

Next question from Mr. Martin [Wilke] Deutsche Bank. Please go ahead sir.

Hi a couple of questions please. First of all, you mentioned in the past that the profitability in North America is less than the Group average. I just wondered if you could say has that changed or is it beginning to change and what should we expect in that region over the next year or so in terms of your cost based on profitability?

And secondly, on the Process Automation business, a lot of your peers are also posting very good double digit growth. Do you see any supply constraints there in terms of engineers or employees over the next couple of years? And would that either help pricing or would it actually temper growth if that was to come true?

Maybe I'll start with the second one and give the first one to Michel. As to the second one, yes we do see certain constraints coming up. I'm talking in general about the Group. We have certain capacity constraints becoming more visible now because of this tremendous order intake in the last 18 months. These capacity constraints are visible for instance in certain product areas like transformers or in large machine, motors and similar, but also in certain engineering areas in Power Systems and in Process Automation.

The consequence for us is because we feel it doesn't make sense to go for unbridled growth here and just add resources as quickly as possible and end up with a huge fixed cost structure that it will be too big again two or three years down the road once we see the other side of the economy coming around. We have become very selective and have a very focused strategy what we go for. So, you won't see ABB doing the same as some of our competitors will do, go for anything that is out there. We'll take advantage of the situation today to improve the quality of our order backlog and making sure that once we need to add resources to take care of the capacity constraints we do it on the right location. That means in locations where we have cheaper access to resources.

Finally, we do see certain limitations coming up from the supply side, talking about engineering and engineers. There is less and less qualified engineers being produced so to speak in Europe. And that's becoming an issue not only for ABB but for all of the engineering companies in Europe because all the regions of the world like China, and India are generating engineers at a magnitude and pace which is just enormous. We will take advantage of that but the consequence is that some of the European locations will have to adjust. As to your first question, Michel?

Yes Martin, you probably know as a principle we usually don't disclose the profitability by geography. It maybe sometimes quite misleading as well but obviously we have always made comments about the problems of profitability in the U.S. where we had losses for many years. What I would say at this stage is that we are no more making loses. We are in the black. We're still trading below the average of the Group and there are some pretty good reasons for that. The first being that we still have a little bit of a sourcing handicap compared to some of the competitors. So, we're still importing a number of products in the U.S. We have also saw some structural issues there. We're working very hard at correcting them. So, we are clearly improving the situation quarter after quarter, but we're still below the average of the Group.

Okay, thank you very much.

Thanks Martin, Next question please?

Our next question is from Mr. Christian [Frenis] [inaudible]. Please go ahead sir.

Hi, most of my questions have been asked but just three quick questions if I may? First of all, could you comment on your effect of copper price vis-à-vis spot and what sort of hedge horizon you have with that regard?

Second question is if I understood you correctly, you still guided towards forward restructuring charge, I think you said the lower end of 50 basis points to 70 basis points? But maybe I misunderstood that because that would imply a charge of 140 basis points in Q4. If you could just elaborate on that?

And then last question yes, for Power Products I noticed that last year you had a bit of seasonality in the Power Product margin from Q3 to Q4 the margin dropped, should we expect a similar development this year, or could you comment on that please? Thanks.

Michel Demare Okay, well let me start, on the hedging side, obviously we are not going to disclose our hedging positions. So we do -- copper is probably the largest exposure that we're looking at in terms of commodity so we are pretty active in that market. We look usually two to three quarters ahead. But I would refrain my comment here because obviously as I said before, we do protect ourselves partly through hedging, partly through price increases and so obviously we don't really want to divulge anything more on that one.

As far as the restructuring is concerned, you understood right. We said the full year guidance is always between 0.5 and 07% and what we said is that we will probably more end up around the 0.5% level for the year. So, the low side of the range.

In terms of the seasonality of the Power Products, I'm trying to recall last year what happened. It might be that in the first quarter we had a bit more restructuring expense than the quarter before because on the product side I can't really see any logical reason why the profitability would come down from an operating point of view in Q4. Usually it's been a little bit more in Power Systems because when you deal with the large utilities and the large projects usually there is a lot of milestones that are agreed on these projects in the fourth quarter. So, the fourth quarter is usually a quarter with the high revenues and slightly lower margins because of these large projects [inaudible].

It is fair to say that in Power Products we do expect a slightly higher charge for the transformer restructuring in the fourth quarter. So that would bring down the EBIT margins somewhat post-restructuring. Before restructuring, I agree with what Michel said there is no reason to assume that the margin should suffer that much.

Power Systems story is a little different as explained before. And Michel actually confirms to me now on the fourth quarter last year the fourth quarter margins were impacted by the transformer restructuring program, which had a pretty sizeable amount in the fourth quarter.

Okay but just to clarify, the restructuring in Q4 then I think, would be around 140 basis points of sales and most of that would be in the power -- in the transformer area?

I haven't really made the calculation to be honest.

I mean to get up to 50 basis points?

No, we -- I haven't the calculation here but for sure, the restructuring charges that were still think as of this stage are not all focused on Power Products. Now the standing on the transformer restructuring is much more spread equally quarter by quarter. We're also looking at some restructuring charges in other divisions. So you shouldn't really think that everything we will do in Power Products.

Okay but 50 basis points for the year. Thank you.

Thanks Christian. Maybe you can the operator to allow one more question and then we finish because it's already past four o'clock.

Yes so the last question is from Mr. Samson Edmunds Goldman Sachs. Please go ahead sir.

Good afternoon. It was just a question about your margin. Clearly the margin you've reported today and for the year is above you're 2009 target. And I was just wondering if you would be willing to comment as to whether you see the margin that the Group is achieving at the moment as being fairly mid-cycle or given the issues in terms of -- you mentioned that there were some dilution coverage come in with Process Systems and Power Systems whether this is to some degree, a peak margin. Just to give us a sense of where you feel the margin is compared to what the Group is capable of? Thanks.

Thanks Samson for your question. Well, it's -- I would say different answer depending on whether you look in short term or really medium term. If you look at it short term I would say what you've seen in third quarter is really a nice picture because we have seen very good margins except for Robotics, in all of the four divisions. And once we increase the absolute level of the top line and also the bottom line, the relative margin may come down a little bit because Process Automation and Power Systems may go down in the consequence of the large orders. So, in the short term this has been a very nice margin. It's not reasonable to assume that the fourth quarter is going to show again a spectacular improvement. On the other hand if you then take what you mentioned at mid-cycle or lets say medium term outlook, of course, our ambition must be to drive the EBIT margin of ABB consistently above 10% and I don't see a reason why that shouldn't be possible. So there the answer is a different one.

Thanks very much. That's perfect thank you.

Thank you. I think with that we close our conference call today about the third quarter 2006 for ABB. Thank you very much for your attention. We hope and look forward to talking to you again in February about the fourth quarter and full year results. And we hope that again we will have some positive news to share with you at that time. Thank you very much for your attention and we'll see I think most of you in the upcoming days on our road show. Thank you very much, have a nice day.

Thank you bye bye.

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