Abb Ltd (ABB) 2006 Q4 法說會逐字稿

Good morning and good afternoon. This is the Chorus Call Conference operator. Welcome and thank you for joining the ABB 2006 fourth quarter and full year results analyst and investor conference call. At this time, you will be joined into the conference room with Mr. Fred Kindle, CEO of ABB. Thank you.

[Inaudible]. We'll go through a presentation that you have in front of you. This presentation is also posted on our website and can be downloaded, for those who haven't done so yet.

After the presentation, that'll last approximately 45 minutes, I assume, we will start a question and answer session. As usual, we will take questions from the room. You can also ask questions over the webcast via email and of course also people participating on the phone are invited to ask their questions. Like every year, I will do it in a way -- I try to moderate it a little bit. I will take a couple of questions from the room, then probably a couple of questions from the phone and switch back and forth.

Once we have exhausted our appetite for information - I guess that will be around 4 o'clock, probably a bit earlier - we'd like to invite you for drinks, at least those who managed to join us here today, just outside the room here. But also the other members of the EC that are present here today will be around to answer some of the additional questions that you might have.

Last but not least, one word about security. In the unlikely case of an emergency, emergency exits are located on either side of this room, both in the back and in the front, so you know that from when you are on a plane like exits are -- okay. We are not planning to have any emergency training today, so, if there is an alarm, this is for real and please follow the instructions of the ABB support staff that is around.

With that, I would like now hand over to Fred. Fred, please.

Thank you, Michel. Ladies and gentlemen, also welcome from me. Thank you for joining us today. I realize there's quite some competition going on for attention from the financial [street] today, quite a few companies who announce their results. We appreciate that you are here, either physically or watching the webcast or listening in over the phone. And contrary to what Michel Gerber said, we try not to do the usual boring thing, but create a little bit of excitement here.

Let me start with the 2006 full year and also fourth quarter review. [I] jump right into the first summary chart, here, title is "We are heading into 2007 in a strong position". Looking back at 2006, I'm going to talk a lot about those first few bullet points.

But very quickly, it has been a record year for ABB in many ways. We achieved, I would say, excellent growth figures, especially in order intake, some time lag also in sales. Backlog has reached enormous volume, now, which is boding very well for 2007.

The operating margin, measured in EBIT, has reached an all time high since the very formation of ABB in 1988. It stands at 10.6%. This has never been seen before. And also net income has reached a very attractive level.

Cash flows have basically been more on less in line with net income, or actually even better. That, together with some financial restructuring, convertibles and so on, has led to a massively increased equity portion in the balance sheet. Everything together, to a reassessment by the credit agencies and an improvement of our rating to a very solid investment grade, which Michel is going to elaborate about.

Interestingly enough, just about nine months ago the hot topic was still asbestos. Seems that we have forgotten about it, because we were quite successful in putting that issue to bed once and for all, but let's keep it in mind in 2006 this was a major milestone. So that's looking backwards.

Looking at the present and the future, I think the outlook is very positive. We are experiencing, currently, extremely buoyant, extremely strong markets. Interestingly enough, there's no change visible yet, so it is really a positive environment. And I think at least a portion of our business has the advantage of being in a sector that will continue to create very lively markets for us. When we talk about stable energy supply, when we talk about efficiency and when we talk about lowering environmental impact, combating climate change, this is at the very core of ABB.

So we're positive, not only in the short term, but also in the long term. And one of the reasons why we are positive is the last big bullet there, which is business execution. Let's face it, yes, we are benefiting tremendously from the fact that the markets are very favorable at the moment and most likely also in the future, but the internal situation has also been massively improved.

We are, I think, doing a much better job with regards to cost management, risk management, order selection, making sure that what is being decided really happens and is executed on, that we monitor it and intervene if it doesn't happen. And [one], the last bullet up here, [the one of] corporate cost reduction is just one - [not tiny,] it's reasonably important, but it's one item to put evidence to this statement. We have been very successful in also reducing corporate cost.

From these bullet points, let's have a look at the [deep] financial benchmark figures. And as I said, we're going to talk in more detail about several ones, and then later on Michel will do that, as well, when it comes to net income and so on.

Let's look at the volume development in 2006. We are very satisfied about what has happened in 2006. Our order intake grew by 22%, in local currencies, that is. And as you know, we have not made any significant acquisitions, so it's really organic growth. And what we did not expect - and we have been surprised several times in the last two years - is the fourth quarter actually accelerated even more. We went up to 30%. So we had overall a very good order intake situation, the fourth quarter leading to this very strong order overall for 2006.

Revenues, lagging behind as usual. You can imagine, the more big orders we get -- These are typically orders going beyond one year, and only a portion of that appears in the same year in the revenue line. And that is the consequence up there. We see the revenues grew by 10% for the full year. However, they did accelerate in the fourth quarter and we expect that to continue. They went up to 16%.

This time lag between these two lines then opens up the line in between, the order backlog, which gives us a reason to be very confident about 2007. We have about $5b more in order backlog this February than we had a year ago, and that is very substantial. It's actually that much that it even causes now the luxury problem that we need to execute on this and really make sure we get it out of the factories on time. But all together, I would say a very promising, a very favorable, a very positive foundation also for 2007.

EBIT, then, you see the improvement to a level of 10.6% for the total year, which I mentioned is a record for ABB. The fourth quarter shows only [inaudible] of [2.4%] and maybe that was the major flaw from an analyst's point of view, saying, well, that's a little short of what we expected.

Let me just mention right away we feel that by far the biggest portion of the deviation to what some of you may have expected in here comes from non-core, namely Lummus and maybe some other one-offs that we don't hope to see again. So I'm not concerned about this. I don't think this is a change in trend. I think, when we look at the underlying situation, we have every reason to feel confident about the future prospects.

Net income, then, followed more or less in line with EBIT, but also helped by much lower net debt, as Michel will elaborate on, and the tax rate. It's roughly $1.4b. Here, we did have an impact of a discontinued business aspect. We decided to reclassify our Building Systems business and we [expect a capital] loss. You may recall, even two years ago, we said cleaning up the [portfolio], some portions, some pieces will create a profit, others will create a loss. This is of no strategic significance to ABB. It's not even of a financial significance in that respect, because it's really one-offs.

Earnings per share, they went up to CHF0.63, which is not quite but almost doubling the level we had a year ago. And as a consequence of that, the Board has decided to propose to the AGM a lift of the dividend by 100% to CHF0.24.

That's the key figures. Moving a little further down, I think Michel is going to talk more about free cash flow here, net and relationship to net income. Let me just mention, if you focus on that line called free cash flow as percentage of net income, we [used to] -- we had 123% in 2005 and now we have 115%.

For us, this is a very positive situation, because imagine, in a steady state situation, you would expect a business that is operating well to be around 100%. A business that is growing typically invests more in working capital, CapEx and other things and tends to be below 100%. But we have been able actually to [churn] up more cash than -- free cash flow than net income and this is a very nice feature. So we are, I wouldn't call it flush with cash, but we have a very positive situation when it comes to our net debt situation.

Return on capital employed is one of the most important measures we look at, because it combines both operating efficiency and capital intensity. This measure here is after tax and is currently at 20%, which we feel is very attractive. This is more than double what the [REC] is, clearly more. And therefore, we are creating a lot of value according to financial theory.

Return on equity was something which we never put in the highlights, because that can be influenced a lot by leverage and, with the little equity we had in our balance sheet, it was really not that indicative of the true performance of the Company. In the meantime, the equity has increased quite dramatically, on the one hand because of the convertible, on the other hand because of the financial performance. It's more relevant now to start looking at return on equity as well, and this figure here is at 27%. So even though the equity base has substantially increased, the return actually increased also. So we're doing well here in this respect as well.

So far about -- So much about the main figures. Let's talk a little bit more quantitatively or qualitatively. The picture here is just to illustrate to you how diversified the basis for this growth and success has been in 2006. It's just [taking] a few orders we got in different divisions, different business units, and putting them at the locations where we got them from. So it's really a situation which is very balanced. We are not dependent just on one region. We're not dependent just on one division.

And that you also see on the next chart, which is looking at the five divisions. And the title says "Strong organic growth in four divisions". Actually, Robotics, in the fourth quarter, also joined the gang here by showing some good growth in the fourth quarter. But if you look at it, we had -- For four divisions we had -- For the full year, we had growth rates between 20% and 30% - actually, between 21% and 28%. Revenues, as I mentioned before, lagging behind somewhat but also accelerating.

It is really very diversified. Four out of five divisions have done quite well with regard to growth. And Robotics, the last one, didn't do so well over the whole year, but it seems that a change of gear is happening here as well. So it's a very balanced, very diversified picture.

And I've been talking about the time lag between order intake and sales. This is giving a little more detail on that. I've mentioned the $5b increase in order backlog, which you see on the right hand side. On the left hand side, you see a little bit more of the explanation why this has happened. The structure of our order intake has changed in 2006. The markets have been that buoyant that not only the base order trend was very positive -- and it's clearly in the double digits. That is, you could say, a very direct indicator about the market as such. It's growing clearly in the double digits.

On top of that, we got that many large orders that the total growth accumulated to about 22% for the full year. And because the large orders grew in size proportionally to base orders, that's the main reason why the order backlog increased, because we simply cannot push that through the P&L that quickly. That will take certain years. But the real advantage is not immediately having the sales - it's the advantage of having a lot of work in the pipeline that will become revenues in 2007 and even in 2008.

Moving from order intake, sales backlog further down, again the picture is the same, very well balanced. Four out of the five divisions have been able to increase their operating profitability in the last two years. You see we have reached quite respective levels in Power Products and Automation Products. I would also classify Process Automation as quite attractive, for a systems business and not a product business. Even Power Systems has already reached a level where we're generating true shareholder value, substantial amounts.

And only Robotics has been the contrarian, so to speak, in the portfolio. It keeps us a little bit modest. It tells us, well, the situation could be different. And the reason here, simply put, is threefold and I'm going to elaborate on it a little later.

The Group, as a consequence, has done quite well. We moved EBIT margin from 8.1% of last year to 10.6%, which I mentioned is a new record since ABB has been formed in '88.

Now, looking very quickly into the five divisions. I don't want to read out every number which is on this chart. I'm quite sure you will have very specific questions on some of them. Let me just try to summarize it with the main messages.

Power Products is the largest division ABB has. It's done very well. It's done very well with regard to volume development, as you see up there. For the full year, it was, in order intake, 26%. Almost the same in the fourth quarter - an unbroken trend, growing each and every quarter. Revenues, as usual, lagging somewhat behind, leading to a quite substantial order backlog.

Also very important - profitability moved up quite significantly. You see for the full year it's 12.9%, which is almost 3% higher than a year ago. Who would have thought that we are able to move this margin by 3% in one year? It's quite substantial and obviously it is the consequence of two - high voltage and medium voltage, who have always been very good performers - doing even better.

And it's also a consequence of the measures we initiated in 2005. You may recall the restructuring which we announced in the second quarter 2005, which came with a hefty cost. That is also paying off very nicely. It was the absolutely right thing to do and the execution is really on plan and we're making big progress and the actual financial results are ahead of plan.

So Power Products doing very well. If you are trying to find a snag or a flaw somewhere in there, you may point out the 12.7% EBIT margin in the fourth quarter was not the size for the full year. It did, for instance, have a slightly larger impact of restructuring costs, due to this transformer restructuring program, than we had in the quarter before. If you only accounted for that, you're already above the average for the full year. So we have no reason to be concerned about the performance of this division.

Power Systems is more or less, you could say, in line with Power Products. It's a very related business. In Power Systems, we take the products from Power Products, integrate them into larger systems. If you look at the figures up here, spectacular growth in the fourth quarter. That really stands out. We had a growth rate of 71% in order intake.

Several orders came in in the fourth quarter of quite substantial volume, partly from the Middle East, partly from Canada and other places, leading to this spectacular order intake. And overall for the full year also, at 28%, quite significant. Here, you see the gap between order intake and sales actually even widening, normally so, because this is about large orders which will take longer to flow through the P&L. The order backlog is also quite substantial.

And the EBIT has also improved both for the full year - 6.1% - but also 6.1% compared to the 6.5% of the fourth quarter. That is a little lower than last year, but let me remind you here the mix effects make a big difference. This is about large orders which have a little bit of volatility in the margins, how we book them and how we'll cost them. And so there's no effect -- That 6.5% is lower than 7.2%, for us, is not something to be terribly worried about. We feel very good about the trends. We have, for the full year, reached 6.1% EBIT margin, which is a point and a half better than a year ago. And the order backlog, the volume situation is very buoyant, very favorable.

Automation Products, the second largest division in the Group. It is, by and large, just a success story. Here, we're growing quite regularly. We're increasing profitability quite steadily. As a matter of fact, we have internally looked at statistics that go back as far as 19 -- help me out Tom. 1992? All the way back to the merger, almost before I was born. And we have -- For many years, we have been able to drive up margin each and every year. And I think Tom will continue to do that, hopefully, for the next few years to come.

So it's a great division and you see here the growth pattern. You see the EBIT margin moving up to 15.4% from 13.9%, fourth quarter even topping that. So unless the global economy was to tank, there's no reason to be concerned about the performance of this division.

I think the actual reason why we have to be concerned to some extent is how to cope with the growth. This is the division, besides Power Products, where we do have some bottlenecks. Some of our factories are [brimful]. Some of our delivery times are extending beyond one year, and there is just so much what we can do to cope with growth. So we have started to invest more, on the one hand in low cost countries, like China and India, Estonia, on the other hand also to de-bottleneck some of our established operations in Finland and Sweden and elsewhere. The same is true also in Power Products, where we have similar issues with some of the factories.

Moving on to Process Automation. Here you may say, well, growth wasn't really spectacular in the fourth quarter, because it was more or less flat. Fact of the matter is the third quarter was pretty good. It was up by 40%. This is pretty volatile. You cannot judge a trend by just looking at one quarter. Important is how this business moves over a longer period and, if you look at the annual order intake, it moved up by 21%. So there is no reason to be concerned that all of a sudden here the order intake would stop or the trend would change. I think it's a very good market situation overall. And again, as usual, sales lagging behind, a question of time until that will become P&L relevant.

EBIT margin, on the other hand, with a, I would say, quite sizeable if not, say, spectacular move upwards. For the full year, we moved from 8 to 9.9%. The guys managed just to stay below 10%, [although] in the fourth quarter they broke through that benchmark and returned 10.3%, which I think for this business is also a record that had not been seen before. So they're doing the right things. The markets are still very favorable and we're confident that we'll see a very good 2007.

Moving into Robotics, here, obviously, the message is slightly different, and we're in no way pessimistic about it, or feel too frustrated about Robotics. It says in the title, "Work in progress, results not yet visible". I'm fully convinced that we have pulled the right levers, we're doing the right things in Robotics.

We've done a lot of stuff to reduce the cost bases. We've closed some factories, for instance, Scandinavia. We established a bigger presence in China. We have done a lot to sort the quality problems we had in certain components. We have looked into lower cost sourcing opportunities. We have dealt with several operational issues.

And what we see here, in this comparatively dissatisfactory bottom line development is, I would say, an accumulation of three things. It's, on the one hand, a generic issue which the Robotics business has, which is the fact that 70 or 80% of its volume is dependent on the automotive industry. And if you listened what just was announced by one of the better-known automotive companies, it's a challenge there. It's not an easy industry to be in.

Secondly, without doubt, we made mistakes in the past. We did not do the right things or the necessary things when it comes to operations, some of the previous years. And we had to address that, and that came at a special cost, so to speak. Part of it shows up as restructuring. Part of it is just regular R&D or regular expense. That's the second impact.

And the third impact is a particular problem with one large order. And I would expect that this particular problem will disappear and also the positive things we have been doing, in 2006 and starting in 2005, will start to show off in 2007 and 2008.

We do see that the orders in the fourth quarter have rebounded now. We have -- As a consequence of this I would call it lack of discipline in the past, leading to [miserable] losses, we have tightened the [screws] that we are here to make a business and not to do fancy engineering. That, coupled with the fact that the automotive market was going down anyway with regard to orders, led to a quarterly decline in order intake.

It is nice to see that, in the fourth quarter 2006, we were able to actually [rework] this and come up with a growth of 20%. That's definitely good news also when it comes to capacity utilization and absorption. So while I cannot promise to you that this is going to be a stellar unit with regard to EBIT margin in 2007, I think we are going to see more attractive figures in the future.

After going through these five divisions, let's again have a quick look at geographies. Many times the question is about China and India. Many times people say, well, China was the obvious case for growth, maybe India as well. What you see here is again evidence that the growth we have seen at ABB is really very balanced, very diversified.

Of course, China has done very well, with 26%. We have seen an organic growth -- organic -- a growth rate in China of roughly 20% for several years now, I would say. And it seems to be going on steadily. But India, on the other hand, has even grown faster than China, up 39%.

Then let's look at Middle East. Middle East up 54%. I would say, for instance for the Power Systems division, the Middle East at the moment is of higher significance than even China, at the moment. That can change again, but at the moment the Middle East is a tremendously buoyant market for the Power sector.

And then you look at Central & Eastern Europe, with up 49%, again a spectacular figure. And even the old, mature economies in Western Europe and the U.S. show growth rates of the mid and upper teens. So it is a very positive situation overall, one that makes us feel very confident about the future.

Consequence of this picture is - and also consequence of the internal measures [to] address cost effectiveness and take advantage of the fact that ABB has global reach - that the pattern of our employment structure has also changed or is changing. You see in 2005 we employed 103,000 people on a permanent basis. In 2006, we employed 108,000. That number never went up the same extent as order intake did, or sales. Of course, we do employ quite a few of temporary workers, at the moment, that don't show up on this chart, because we want to keep our cost structure as variable as possible in order to be prepared if a dent happened in the economic development.

And then if you look at the distribution, the obvious case. In 2006, we already employed 4,000 people more in Asia than we did in 2005. In all likelihood, in about one year, latest two years from now, ABB China will be the ABB unit with the highest employment in all of ABB. It's a structural change which is reflecting nothing else than the structural change that is happening in the world at large and the fact that ABB's fully taking part of that. Having said that, let's not forget we also employ a few hundred people more in Europe. Europe is benefiting from the tremendous growth we see [around].

Last but not least, before I hand it over to Michel Demare, our CFO, I admit we tried our best, but we failed - we did a poor job - in planning. And when we presented to you our strategic plan in fall 2005, I recall your reactions. Most of you said, "Yes, we like the goals. Ambitious but realistic. Maybe there's a few in there where we have doubts whether you can reach them".

The picture quickly changed. A few months later the question was not 'whether you are going to reach them' but, "When are you going to reach them?". And the questions more recently have been, "When are you finally going to give us a new set of figures, because they're obsolete"?

By all honesty, we did not expect two things. We did not expect that the trading environment, the markets, would be as strong, as lively as they have been. [It's] been a tremendous situation and you can also see that with other companies. The second thing where we underestimated our speed was internal improvements. Obviously, we had ambitious plans. We wanted to move forward with execution, all of that. We did not expect that the fruit of those measures would become ripe that quickly, and that [helped].

And so if you look at the numbers up there, these are -- In white shade, these numbers are the original numbers that we issued in fall 2005 and, colored in blue, you see the actual results. And with the notable exception of Robotics, I think in all of the other figures we have already met the 2009 targets.

So apologies for giving you bad guidance, but we'll try to do better next time, and I'll come to speak about that a little later. It's definitely the better situation to be wrong in that side of the estimate than on the other side.

With that, I think I'll hand it over to Michel, now, to give you more inside views on financials. Thank you.

Thank you, Fred. Good afternoon, ladies and gentlemen. Fred has spent quite some time reviewing in detail the results of our core divisions. I will spend a much shorter time reviewing our non-core operation. That is the good news about our non-core operations nowadays - we can cover them much faster. The bad news is that they are still [imposing] us to take some charges that are dragging down the overall results of the Group, but I think there is also here a light at the end of the tunnel.

First of all, we have moved, this quarter, our German Building Systems business into discontinued operations, which basically means that we are signaling we are getting close to an agreement to sell this business. And we will in fact -- We have in fact taken, in Q4, an impairment charge [of about] $50m in order to cover for this transaction. That is the first charge.

The second one is that the overall non-core result, in the fourth quarter, was a loss of $5m at the EBIT level. And this loss, in fact, was mainly created by some special charges we had to take in Lummus, and they were all, again, related to some legacy projects that we are still trying to stabilize. As a result of that, Lummus for the full year is showing a break-even result. However, the EBIT for the whole non-core segment is still a gain of $72m, which is an improvement of 11% compared to the 2005 full year result.

The non-core activities are getting closer and closer to full disposals. I just mentioned what is going on with our German Building Systems business. You know, as well, that we have decided to re-launch officially the sale process of ABB Lummus. And we also announced early February that we had reached an agreement to sell our stakes in two power projects, one in Morocco and one in India, and we hope that we are able to close this transaction in the course of the second quarter this year. That is for non-core activities, so getting closer to the full disposal from that [point] of view.

Another interesting development is on corporate costs. That has always been a very high topic in the last couple of years. We're happy to report on that one as well that we have reached or even exceeded our targets in terms of corporate costs. For the full year, our costs are down 20% to $321m, which is much better than the guidance we had given. Our Headquarters and Stewardship costs, measured as percentage of revenues, are now 0.9%, which is also below the guidance and the targets that we have achieved. In two years, we have cut almost $200m from these corporate costs and I think we can say, here, mission accomplished.

Going now below the EBIT line, starting with finance net, obviously the finance net expenses start reflecting the better debt levels that we're showing in our balance sheet. Fourth quarter finance net expenses were $26m, almost half what they were a year ago. Full year financial expenses were $153m, compared to $246m in 2005. There, obviously, the lower debt levels, plus the capital market transactions that we did during the second quarter, have obviously helped reach this result.

Another good news was our tax rate, so tax rate came off from 32% to 29%, and even close to 25% in the fourth quarter. On the other hand, our minority interests have kept growing. They are actually up almost 40% compared to last year. And that is reflecting again the tremendous results that we get from our joint ventures and non-wholly-owned operations in emerging geographies like China and India.

And as I mentioned, we have still losses from discontinued operations. The loss of this quarter, $53m, is mainly related to the sale of the Building Systems business. For the year, we end up with a loss almost equivalent as last year, $167m. The majority of this cost is related to the asbestos accruals that we had to do during the first five months of the year, until we settled and delivered the assets to the asbestos fund. The rest is related to the sale of our low voltage cable business in Ireland that we announced in Q3 and the sale of Building Systems that we are announcing right now, or at least that we are in the process of closing right now.

2006 has been, I think, a great year for ABB in terms of business performance. We have also taken benefit of that to continue strengthening our financial foundations. And so the largest part of the operating cash flows has still been used to mainly reduce ABB's financial obligation, be it on balance sheet or off balance sheet.

You will remember, as well, we had two significant capital market transactions in the second quarter, first, an anticipated conversion of our U.S. dollar convertible bond and then an exchange offer that allowed us to extend the maturities of our debt portfolio. Doing that, we have in total reduced our total debt, improved our gearing ratio and, as a result, also reduced our overall net financial expense.

We have as well injected about $450m on a discretionary basis into our pension fund. That was mainly into our German pension fund. And our pension liabilities, unfunded pension liabilities, have now been reduced by another $550m. They are now below $300m as a total.

2006 was also an important year for us in terms of regaining investment grade rating. That happened in April, both from S&P and from Moody's. Subsequently, we got another two notch upgrades and we are now, since April, BBB+ at corporate level for Standard & Poor's and Moody's give us a Baa1 rating back in December.

Looking at the ratios, and we put here a little bit more history, because it's really important to still keep in mind where we are coming from. If we look back at the gearing ratio, the gross gearing ratio of the Company, we went all the way up to 87% back in 2002. Since then, we have really experienced a steep decline that, in fact, accelerated this year. We are now down to 34% on a gross basis. And I think even more impressive is the equity ratio. If we measure it as a percent of net total assets, we were down to 4% back in 2002. We are now at 26% - back, I would say, in the first league.

All that is obviously very visible when we look at our net debt position. We are coming from a $6b net debt position back in 2001. We have now a net cash position of $1.5b at the end of 2006. Just looking at the last two years, we improved this net financial position by more than $2b.

As you know, return on capital employed is also, now, one of the important targets and benchmarks that we use to measure our progress. Going back into 2003, 2004, we were still destroying value, thereby basically generating a return on capital employed that was below our weighted average cost of capital.

But as you can see from this slide, the conjunction of higher EBIT, lower tax rates - which went down 7% in two years - and at the same time growing the business at the speed we grew, but only growing our capital employed basis at the rate of 4% per annum, has allowed us to really increase this ROCE quite fast to reach, today, 20% on an after-tax basis.

Improvements are also quite impressive in terms of cash flow. We have, on this slide, adjusted the cash flows for the change in securitization that we did in 2005. And on a net adjusted basis, you can see that our cash flow from operating activities has improved by more than $400m during the year. Our free cash flow has improved by more than $200m. And as a result of that, as Fred mentioned earlier, we still have managed to produce a conversion ratio of free cash flow to net income of 115%.

I would say in order to reach that, in an environment where our order book has grown by 22% and our revenues as well in double digit, that took really very serious work in terms of net working capital. In fact, our net working capital, as a percent of revenues, has only increased by half a percent during the year, which I think is quite a remarkable performance.

I must say as well that the free cash flow has been helped quite a lot by the very large order intake, and especially the large order intake that we had in the second half of the year and especially in Q4, that meant that our customer advances also came up quite a lot. So customer advances throughout the year have increased by $600m, represents now an asset of $1.5b in our books, so that is also a sign of the good health of our business.

Looking at our overall financial obligations, I have spoken about on balance sheet. We have today $4.8b on our cash line and we have $3.3b of financial debt, and you can see here how it compares back to 2003, where we had $7.7b of debt.

We have also done quite a job to reduce our off balance sheet obligation. You see that unfunded pension liabilities are now less than $300m, back from $1.5b just two years ago. We have kept our lease obligations more or less at the same level, despite all the capacity expansion that we have done, and we have as well reduced, in two years, our securitized receivables by about $600m.

Well, if you put all that together, on balance sheet and off balance sheet, we have reduced, in two years, our financial obligations by $4.5b.

One item that I need to emphasize for you as well is that, since ABB books according to U.S. GAAP, we had a change in accounting rules regarding pension accounting and we had to implement SFAS 158. Basically, this statement requires companies to book on the balance sheet the over-funded or under-funded stages of the pension fund and, on top of that, to recognize other items, like for instance actuarial gains and losses. These losses now, or these gains, have to be realized -- have to be accounted for in other comprehensive income, which, as you know, is part of equity.

So we took care of that in Q4. We had actually given you a heads-up on that and I think the last estimate that we had given you we were talking about $560m. At the end of the day, given the good results we had in our pension books in the fourth quarter, the one-off charge that we had to book to equity in the fourth quarter was a charge of $415m. Again, it is a one-off charge. This is an accounting charge without cash impact.

But in the future, what you will see is a bit more volatility because, from now on, any change in our under-funded pension liabilities - and you know these changes come from change in interest rates, change in asset return -- These changes will directly impact the other comprehensive income, and hence the equity. So a bit more volatility there, but that sounds like what our accounting regulation body wants us to do.

Talking of financial strategy 2007, I would say not much change compared to what we have tried to do this year. We will keep working at maintaining and improving a solid investment grade balance sheet, so we will continue looking at opportunistic debt reduction each time we can. We will continue funding, on a discretionary basis, our pension funds, although I must say we have more or less reached the limit of what we can do there. We will still look at minimizing off balance sheet obligations and exposure, and then work at continuing to secure flexible sources of financing, so that we are always able to fund our future growth, be it organic or external, and finally, at the same time, try to optimize our balance sheet structure.

But our strategy is not just about financials. We are also doing very hard work internally to strengthen our internal processes, our controls and systems, and we have there two very important initiatives. One is Sarbanes-Oxley, where we have now to transition from project mode into embedding this [soft] habit into our day-to-day working processes. And the second one is obviously a project that you have all heard of it by now, which is called One Simple ABB, which is all about standardizing the processes, the charts of accounts within ABB, and finally allowing the Company to simplify its system structure and work on one common structure.

Also, as a heads up, we expect to see -- to spend more money on capital expenditures, because we need to continue expanding capacity in our lower cost countries, also in the framework of our global footprint migration program. And at the same time, we will selectively de-bottleneck facilities in the OECD countries, so that we can make sure we can follow up and deliver on the commitments that we have taken.

Fred mentioned at the beginning of his presentation that the Board will recommend at the AGM to double the dividend from CHF0.12 a share to CHF0.24. That vote will take place on May 3 and, if approved, will be effective on May 8. This CHF0.24 a share represents a dividend payout of 31%, based on our 2006 net income result. Our dividend policy has not changed. It is to distribute a steadily rising but sustainable annual dividend.

And I have to point out as well that, at the same AGM, the Board will also recommend to the shareholders to approve the creation of up to 200m shares of authorized capital. This is basically to replace the previously approved authorized capital that expired last year and to continue allowing us to optimize financial flexibility in order to fund our future growth.

That's it for the financial section. I will pass the word again to Fred Kindle for the conclusions and the outlook. Thank you.

Thank you, Michel. The next thing we want to do is talk a little bit about the future, and short term future and longer term future. And in order to do so, we want to very quickly pick up [just after the past year]. You may recall this picture, which we showed to you, I think, in fall 2005, for the first time, basically trying to analyze a little bit what went wrong in the 90s with ABB, because, with hindsight --

It's always easy to judge with hindsight and I don't want to do that, but it's interesting to look at what happened. First six, seven years of ABB, continuous growth, especially externally, with large acquisitions, but EBIT margin hovering around 4 or 5%. And quite a volatile period in the second half of the '90s, where actually the volume of ABB went down again and quite a few businesses were sold, like the Transportation business, the Power Generation business, and EBIT being very volatile. And then it was very high, like in the year '99, massively supported by non-operating [moves] like divestiture gains.

And then the crisis hit us. And after the crisis, we had to ask ourselves what can we do better, what do we need to do differently in the future in order to really make -- create here profitable growth. And fortunately enough, 2005, when we used the chart, turned out to be a pretty successful year, I would say, because both growth took off and also the EBIT margin went up.

And today, we are in the situation to show you the next column here, where again the growth has been quite visible - even more so in order intake than in sales, but that's to come later to the bottom line - and the EBIT margin moving up to a new record level of 10.6%. It's fair to state that this EBIT margin was not underpinned by any special factors. It is a true reflection of the operating strength of the Company.

So the question is, what needs to be done in order to continue on this path of success - growth on the one hand and profitability on the other hand? [The thing of the essence] is not to forget what have been the core -- the cornerstones of ABB's success in the past, and still are. There's three things.

It's technology innovation. It is being close to the customers, being out there in these different world regions, be there quickly and be very close to the customers. And thirdly, even more so than ten or 20 years ago, being a global company, with a global culture that allows all participants in the ABB network to really contribute with pride and with dedication.

Take these three pillars and tie them together in an [execution]-oriented framework -- Sounds [inaudible], but it isn't. Let me come back to these three, [prospectively] four, items very quickly. The first one, technology innovation, it's just to repeat what we also see partly outdoors, or outside in the hallway, with some exhibits.

This is of the essence for ABB. We are a technology-driven Company. We have been spending $700, $800, $900m for R&D and [order]-related development in the core divisions alone. And we never gave that up, even in the times of the crisis, of the most severe crisis. In the meantime, we have propped up this volume even more. It's reaching now almost $1.1b. So I think that really is mandatory for us. Fortunately, because of that, I don't --

There's always something you can improve. No doubt about that. There are always certain gaps in certain product ranges, but, by and large, ABB has a profound product range. There's a lot of business we do today with products that are younger than five years, and so on and so forth. We have roughly 6,000 people employed in research and development, and it's absolutely paramount that these folks create new products that the market really requires. It's part of our DNA, and it will remain so.

Another factor is what I called being close to the markets, being close to the customers. Here, you see some statistics indicating what ABB has done in the past, and here there's also quite a bit of thanks and praise that go to the famous/infamous 1990s. ABB has established itself very early in very promising markets like in India, like in Beijing and also in eastern Europe, and we are benefiting from that today.

In China, we're called the early birds. And because we were there early and we did develop the Chinese business the right way, we have been quite successful, as you can see, by the way, from the minority interest line, which is more or less reflecting China and India.

So this has been part of our success in the past, and it will remain so. But in order for this to happen in future as well, it's important that ABB is truly becoming a global company, not just talk about multinational activities and foreign regions and so on, but really act as a global player. And you see a few pieces of evidence for that in various aspects.

For instance, China could very well become the biggest place of employment at ABB in the next 12 to 18 months. At the moment, we're employing 10,500 people in China. The likelihood is that will reach 12,000 people in that period I've just mentioned. And if that happens, it will be the biggest place of employment, surpassing Germany with about 11,000 people at the moment. That's one piece of evidence.

We will have, with the incoming new Executive Vice President [people] like we now have four people in the ABB Executive Committee of 11 people who have actually lived and worked in China. That is, I think, very unusual. You won't find many companies who have that. We have -- In this Executive Committee of 11 people, we have nine people of different nationalities, of nine different nationalities amongst 11 people, and [there are] many more things like that.

But while in the past it was a disadvantage for ABB to be rooted in very small countries - Switzerland, Sweden, and so on -- It was a disadvantage, because we didn't have the political clout, the Chancellor or the whatever, President, joining us for a business trip to some place. Today, I would claim, it's become an advantage, because, if you employ people somewhere, they want to assimilate very easily with our culture. And the ABB culture is a very open culture and, as a consequence of that, we can attract the best people and we can retain them.

In China we have an industry turnover of 12% -- between 10 and 15%, whereas at ABB it's around half, and that is real cost savings, tremendous cost savings. So things like that are very important and you see the consequence of that in the pie chart on the right-hand side. 1988, ages ago, we were a predominantly European company with international activities. Today, it has really become a global Company, and we think that's good. That's the right way to go.

Now, I talk about execution. It's a strange term, but execution is a lot about things that people usually don't like. When you're a student, you typically don't like homework. Well, execution is like doing your homework, [about] discipline, [about] diligence, [about] sitting down there, going into the figures, following up, making sure things happen, [what is being] decided, headquarters is really being followed through, in the subsidiaries, if it doesn't happen, that you monitor, that you recognize it, you intervene. It's all these things which everybody says yes, we need to do it, and nobody likes doing it. That's execution.

I think there was something missing in our culture in the past. ABB was a lot about the nice -- the fancy stuff, like reorganizing and talking big strategy and making [colorful] events. Execution is a little gray. It's a little more boring, in a way. It takes a lot of patience and effort, as I try to say here. It also takes simplicity and clarity.

ABB's structure today, I think, is very clear. Of course, there are always areas of overlap, but the responsibilities and the accountability, by and large, is very clear. People can't really escape if it doesn't happen, [clear] who is responsible.

Those are all things that are important in execution. Now, applying execution to these three things - technology, being close to markets, being global - I think that is part of the reason for the success we're having at the moment.

Talking about execution, a sub-component, an important one, is business ethics. And for very good reasons, again, we include a chart. [And I must] just talk in very general ways about this. I think ABB has taken great steps, and also necessary steps, to improve our situation also with regard to compliance and business ethics.

I think it's fair to state that what we have achieved, [especially] in the last three years or in the last year, in particular with regard to mechanisms that we have installed, systems and tools, is tremendous. I think it's state of the art in many ways. On top of that, I think the attitude change that actually started before I even arrived -- Zero tolerance and all these terms were here at ABB, I would say, three or four years ago, even, not only the last two years. The attitude change at ABB has also been a sea change with regard to the past.

So having said that, I feel absolutely confident that we're moving in the right direction and at the right pace. We're not slow here. We're very explicit about it. And you can measure us. You see how we act upon it. We were always very explicit if something happens. We were very transparent, and we left -- tried to leave no doubt that we would not accept muddling through, questionable behavior.

Having said that, it is a relentless effort that is necessary, but it's like in a country. Every country has a legislation and, unfortunately, every country has a police. Citizens tend not to always follow the legislation, the laws. And in a big organization, it's similar. So even though we made big improvements, I cannot promise to you that we will be free of sins, free of failures. But our ambition must be to drive it down to zero, reach a level that is exemplary, that is really a standard for the industry, and do that relentlessly.

[What has happened] just in the last few days, because I know you folks are most likely going to ask me questions about it, let me just tell you. It was very unfortunate what has been in the news. I cannot tell you more than what we have read anyway. It has been another investigation by the European Commission, together with the German authorities, in one of our transformer locations in Germany. [I'm completely open] what this means, what [the assumptions is], and I don't want to and cannot speculate on that. But rest assured, we do everything that this case is [resolved] and we're fully cooperating with the authorities.

Moving on to maybe a little bit more exciting topic, besides business ethics, another thing that is many times in the news now is that I made a statement a couple of months ago that yes, we are able, maybe even willing, to spend billions of dollars again. Now, let's rationalize a little bit the statement. What does it really mean?

This is the chart we showed to you in fall 2005. [But] there's no difference. It's exactly what we showed you in 2005. What has happened in the meantime? All the assumptions that we put up in the chart in 2005 have come through. And in essence, the chart is still valid.

And if you look at it, we did make a few acquisitions below $100m, small enough so that it didn't become really conspicuous or noticeable. We looked into a few acquisitions of larger sizes, above $100m. We did not execute, because we felt the prices were not right. We did not look very much into even larger acquisitions, because that really wasn't a priority.

Now, the situation is different. We are in a very luxurious situation that, on the one hand, the Company is growing in leaps and bounds. We have organic order intake growth of 22%. We don't need to create artificial excitement by looking for acquisitions. We can be conservative about it. On the other hand, I think, with the capabilities we have, with the global reach we have, with the technologies we have, knowing where we could fill a gap, be it geographic, be it technology-wise, if we make the right acquisition this could be truly value-generating.

And looking at today's situation, 2007, I think it's fair to say we have the financial means now to also look into larger acquisitions. And we also have proven that we're able to run a good operation, and that's the first cornerstone. If you don't have your own operations under control, if you cannot generate the right EBIT, you should not try to resolve that by adding yet another problem, going for an acquisition.

But now, I think we are in a position that we can look at acquisitions again. Doing so, we are stuck a little bit in a dilemma, because we say we're going to be disciplined about it, which means we want to make sure that any acquisition has a strategic fit to what we're doing, not just simply pure opportunistic behavior because something's up for sale.

Secondly, integration is paramount. The job doesn't stop when you make the signature on the final purchase contract. It actually starts then, because then you have to integrate the acquisition and converge those famous synergies on the business plan into reality, and that takes a lot of focus and attention.

The third one is value, which relates obviously into the two criteria before, but then also to the price. And let me tell you, we looked at acquisitions of several hundred million, and the strategic fit was okay, and we felt comfortable with the integration. We felt the prices was too high. [Stopped it]

So here, to put things back into perspective, yes, we have an ambition to make acquisitions and, yes, we will also look into larger objects, because we think we have now reached the magnitude to do that. At the same time, we will be disciplined and, if we think the fit is not right, we cannot integrate because we have too many other things to do, or the price is not right, we're not going to do it.

In essence, the ambition is there, the outcome is open. There is no reason to put too much speculation into the topic. If it happens, most -- hopefully we are able to make a Group presentation and explain what we're doing and why we're doing it and why it's value-creating. And if it doesn't happen, you can assume that we felt uncomfortable about it.

Now, looking into the outlook, what is up on the next chart here regionally, I think, is very well known. It's more or less saying in a few bullet points, we feel very confident about not only the short but the medium term outlook for ABB. If [we take] the power sector, the case is almost obvious. The newly emerging markets need to invest a lot, because the power grid related infrastructure is the backbone for industrial development. It's simply not feasible that regions like China or India, the bricks, would substantially reduce their investments into this field, because they need to.

Having said that, almost the same is true for the mature economies, in western Europe and North America. North America, we have a situation where, you all know, there has been a tremendous lack of investments and they need to invest now. And you actually saw the order growth we had in North America of 18% - not that bad.

Europe, similarly, some locations now have obsolete equipment as well. And on top of that, we have the political integration, where the new regions need to be linked to western Europe. In November, I was up in Estonia to inaugurate the Estlink, the HVDC Light connection between Estonia and Finland. More things like that will come and happen. You cannot just simply stipulate, for instance, a competitive free market for electricity if you don't have the physical infrastructure to do that. So we feel very confident.

On the other side, on the Automation side, let there be no doubt we are dependent on the world GNP. [If] world GNP was coming to a screeching halt, we would feel it directly. Having said that, the topic of Automation, gaining more efficiencies and so on, I think, is slightly less exposed than, for instance, a classical chemical producer or a basic metals or minerals producer, because, especially when you downturn, you're even more inclined to look for efficiencies and cost savings. So I think there is a certain -- a limited but still a certain hedge in that position as well.

To sum it up, in the short term, we are very confident [where] it concerns 2007. On the one hand, you have heard we have tremendous order backlog, which is $5b higher than it was a year ago. By nature, I'm a little bit a conservative person. I've seen too many ups and downs in history and in business cycles, and I strongly believe cycles -- the cyclical downturn will happen at some point. It's just the way I think. Do I see it now? No, I don't see it. I don't see it yet. The markets are still buoyant.

I cannot tell you how it will look like in 2009 or 2010. At the moment, it's not visible, but the [annual] history tells us to be cautious. And you may have learned, from some remarks I made, we try to be on the cautious side. We hire a lot of temporary workers. We go from two shifts to three shifts before investing into new capacity and so on and so forth. At the moment, it's still going on very nicely.

Having said that, in the press release, we included a term saying we don't expect these growth rates to continue. Let's not become overly pessimistic. It doesn't mean we think these growth rates will completely disappear and turn negative. But 30%, as we had in order intake growth in the fourth quarter, is just -- I would call it a peak. Maybe future quarters will prove me wrong, as we have been proven wrong before, but it's just unnatural to see 30% growth rates each and every quarter, so I would like to caution you there a little bit.

And finally, a strong business foundation is in place. As I mentioned, I think ABB, irrespective of the market buoyancy, today, is better-placed, more efficient, more cost- and risk-minded than it was before.

The risk factors you know yourselves. Most of them hit everybody in the room. If these things happen, you're all exposed in one way or the other. You will see how we cope with that. The fact is that ABB has lived through a crisis, mastered a crisis. There is certain scar tissue left, which makes us feel confident that, even in an economic downturn, we know what we need to do.

Finally, let me wrap this up by showing this nice picture of a few faces here. I guess you know all of them besides two. Let me take the opportunity -- and maybe, Peter, if you want to get up very quickly. Peter Luepp is our new EVP - Executive Vice President - and member of the Executive Committee responsible for Power Systems division.

Peter has had a long career with ABB. In his last stage, he was in China, the Head of China, as well as in the latter stage, also, the Head of the North Asian region. He has been in China for six years altogether and he brings along a tremendous amount of knowledge of that particular market and its relevance, especially to the power sector. And so he's the new Head of the Power Systems division and will take care of those activities.

And then on the top right-hand side you see a picture of Diane de Saint Victor. I would have loved Diane to be here today, but she cannot, because she has to attend certain urgent business matters. I promised you that, while I made a joke once about the hairstyles of the people up on this chart, there is now a female hairstyle there as well. We are making strides here to improve also our diversity, not also with regard to origin and belief and passports, but also with regard to gender.

You know that there is a woman who is heading our ABB Switzerland operation, Jasmine Staiblin. We have a new Head of Corporate Communications, Clarissa Haller, who was here in the morning. And now we also have one person, a very competent person, as the Head of Legal and Compliance, General Counsel of ABB, Diane de Saint Victor, who has joined us from EADS, from the Airbus company, so to speak. So we'll take the opportunity to introduce her to you at another occasion.

What's going to happen in the rest of 2007? As usual, we will have our quarterly presentations and announcements. On top of that, as I said, we're going to go for a strategic review. As a consequence of that, we'll have a new financial plan, medium term plan, of which we will take the new set of targets, medium term targets, that we will communicate to you some time in the second half of 2007. Second half means definitely fall. It's not going to be late summer, because internal process, Board approval, vacation time and all of that will definitely take us beyond August.

I think this is as much as I wanted to say. There's a wrap-up chart. Let me make this very short. We feel very good about 2006. It was a great year for ABB. We feel a certain pride about what we have achieved here, but then, of course, what we have achieved is already the benchmark for future things to come. And rest assured that our plan is, in 2007, to beat whatever we have achieved in 2006.

So thank you very much. With that, I think Michel is going to take over the Q&A session. Thank you.

Thank you Fred and Michel. We open up now for the Q&A session, and I guess we start here in the room. We have a webcast and a conference call as well, so please wait until you get the microphone so that people on the phone or on the web can also hear your questions.

Thank you. It's Martin Wilkie from Deutsche Bank with three questions. Firstly, you mentioned about capital deployment and the potential for acquisitions within your financing capability. Given your very strong free cash flow, your net cash position, as well as some disposals of non-core assets, you could potentially see yourselves with $5b or more of cash over the next couple of years. Is that the kind of financing capability you're looking at for acquisitions and, if not, what would you do with your cash pile?

Secondly, on CapEx and freeing up some of these bottlenecks you talk about, could you let us know what you think will happen to the capital base over the next couple of years to support the very strong order intake that you've seen?

And then, finally, just on order conversion, given bottlenecks within ABB or even at your customers, is the order conversion time to get from orders to revenues -- is that getting longer because of some of these bottlenecks?

Maybe I'll start with the third one --

Yes.

-- and leave the other two to Michel. Yes, you could say so. In certain conditions, the order to revenue time line is changing, is being impacted by just simply the big amount of orders we're taking there.

It doesn't apply to all of the divisions the same way. I would claim that the Products divisions are less exposed to that, even though we started having larger orders in Automation Products, for instance, where we got a few orders in the magnitude of $50m, but typically these would not last longer than 12 months to execute. Maybe there's a few exceptions, but, for the overall size of the division, not relevant. So you could say Power Products, Automation Products - and in Robotics, because they are a different situation anyway - I wouldn't change -- I wouldn't see [lots of] change there.

In Power Systems and Process Automation, maybe you see a slight - let's call it duration - a duration change. But whether that's really relevant with regard to the P&L, whether it will reduce the revenues in the next year, I think it has a secondary impact. We have -- On top of the order backlog, we have income and revenues.

Let's keep in mind the total order intake, about 85% is still base orders. Remember the chart. Base orders are orders below, what is it?

$15m.

$15m, and these [in no way] take longer than a year. So it's a fair question to ask. It may have an impact in two divisions, but I think it's of secondary importance.

Starting with your first question on the request for authorized capital, I would really characterize it, at this stage, as being just a conservative measure of financial management, just being sure we leave all our options open.

Obviously, we are looking at acquisitions. I would say the price level, whether it is half a billion or many billions, is maybe less important than the value creation we can have in a certain DSO. That is really what we look at, the value creation. If the deal is large enough that -- Clearly, we have regained our investment grade status and we are not going to jeopardize this one by financing an acquisition fully with debt if the amount is big enough.

So we want to have this flexibility open. At this stage, it doesn't mean we are ready to announce a big deal tomorrow. We just say we put it back on. As you know, for Swiss companies, we get an authorization like this for two years. If we don't use it, it just -- [all it takes], you just have to go back and ask for it again.

As far as the CapEx level is concerned, I think the heads up we are giving you here is that, in the last two, three years, ABB has significantly under-spent the level of depreciation. We've always been with a CapEx lower than depreciation. That is not going to be the case anymore. We are more looking at CapEx level which might be 120% of depreciation or even slightly above that.

Next question. Thomas.

Thomas Baumann from NZB. I've got two questions, if I may, the first one with regards to margin evolution from Q3 to Q4. Usually, Q4 margins are low because of seasonal reasons but, in Q4, you had significantly higher volumes than in Q2. So can you give us the reasoning, especially in Power Products - I think, there, it's most dramatic - the reasoning why that is so?

My second question refers to ABB Lummus. Just a technical question. Do you set there the same preconditions as in Building Systems, where you say either you sell it including all contingent liabilities such as warranties and guarantees or you don't sell it? Just -- What do we have to expect? Is there any contingent liabilities, in case you sell it, that will remain with ABB? Thanks.

Thomas, I'll take the first question, Michel the second one. The first question's specifically about Power Products. What we're looking at is an EBIT level of 12.7%, [vis a vis] 10.2% 2005. So the year to year comparison, I think, is a very positive one. 12.7%, however, fourth quarter EBIT, compares to 12.9% for the full year in Power Products and therefore it's a little bit on the negative side.

Let's factor in that we had -- In the fourth quarter, we had charges for the restructuring program of $14m for transformers, which we did not have to the same extent in the average of or let's say the third quarter in 2006. There was a few million, I think three. So if you account for that only, the corrected EBIT margin would already be above 12.9%.

So I think my general view on that is that the 12.7% EBIT margin, for me, is no reason to be concerned. It has been impacted by a few special factors in the quarter and I would hope that we are able to move the margin further in the coming year. Did I answer your question, no?

I mean, I did the calculation. Before the restructuring costs [as well] there was still a decline in PP from 40 basis points. I don't focus on the number too much, it's rather the fact that it declined.

A decline compared to Q3?

-- 2006 to Q4 2006. The question really is does that mean that there's no more economies of scale? Are you actually at the limit, or is that statement not fair?

My statement [was] we're not at the limit, but [we] have the benefit of Bernhard Jucker being here. Bernhard, do you want to get up quickly and give a few more specifics to the situation? Bernhard Jucker is the Head of the Power Products division.

Just to add one or two information towards what Fred said. It has also to do with the product mix, so -- And important is that we see the improvement which we achieved from quarter four 2005 to quarter four 2006, the 2.5%. And on top of it, as Fred said, we are continuously improving in order to get the result up, so it is not the limit yet.

But to add to that, I remember several questions we got about the structure of the profitability of the margin inside Power Products. And you know we have three business units - high voltage, medium voltage and transformers. And it became obvious that high voltage and medium voltage are -- operate at a much higher level, EBIT margin level, than transformers.

First of all, the good news is, if you leave aside restructuring costs, we're doing well, actually very well, with transformers now. We made a commitment, when we announced the restructuring in the second quarter 2005, to move the EBIT margin up to -- I think it was 8% by 9% -- by 2009. We're well ahead of plan with regards to that. So that's the good news.

But then, of course, if you [cost] more transformers, for instance, in one quarter than what is a typical average, your total EBIT margin may look different.

I would also conclude saying the incremental margin on Power Products in the fourth quarter compared to fourth quarter last year is still 24%. So I think it still shows you that we keep pushing this potential further down the road.

Regarding your second question on Lummus, I think you're right with your assumption. We have learned from the past and [not put it into] the deals done in the past. It was [fire sale] deals, most of them. But dealing with [details] after that can become very expensive for the Company and takes a lot of management time.

So clearly we want to achieve a clean sale where we pass on liabilities and the good and the bad things about the business. And I think as well the market circumstances should allow us to do so, because we clearly have a high number of demonstrations of interest at this stage. So that is the target that we have, clearly.

Okay. If there's another question from the room, I'll take a third one. Otherwise, we'll switch over to the phone. So, doesn't seem the case. Operator, may we have the first question from the telephone conference?

We have a question from Mr. Julian Mitchell from Credit Suisse. Please go ahead, sir.

Yes, thanks. Two questions. The first one is really on your gross margin. If I look at the gross margin increase year on year in the fourth quarter versus the previous nine months, clearly it was bit lower. But I would have thought, in the light of your comments last conference call about price increases should really start to hit the P&L in the fourth quarter, you would actually see the gross margin going up a bit more. So could you perhaps comment on how you see the trade-off between price increases in your product business versus this issue of the mix of large orders, how you see that playing out in 2007?

And secondly, in terms of your investments, you made some comments in the presentation about R&D spend and also capital spending. If I look at your SG&A costs, for example, those grew some distance faster than revenues in 2006. I understand you need to invest to grow and so on. Do you anticipate a similar trend in SG&A versus revenues in 2007? Thanks.

As for your second question regarding the pace of SG&A development, first of all, that's something which we watch very carefully. After the history we have gone through and after all the cost cutting we have done, the fact that, yes, SG&A have increased raised our attention as well. And it has become a regular topic in discussion, also in our business views for the division. At this moment, I would call it watchful of the development. We're not that concerned yet.

The reason is that a lot of the SG&A spend -- First of all, if you [structure it] in G&A and S, we have much less of a negative trend in the G&A portion, the really fixed portion. That is, I think, pretty much under control. And the S portion you have to correlate not only to sales but actually to orders, because a lot of the S expense is expense which you incur because you want to get the order. Once the order's in, actually, the S goes down.

So if you do a fair comparison, you would probably have to correlate the S out of the SG&A not only to sales but maybe to a reasonable mixture of sales and orders. And as you have seen, we have a noticeable gap in order pace and sales pace. If you do this analysis, you will find out that actually our SG&A, or our S, in relation to a mix of sales and orders has not gone up but actually has gone down.

[Inaudible] academic explanation why we're not so worried about it, most important is, when I talk together with Michel to the division heads and we investigate the topic, we go into much more detail and ask what is happening here, does it make sense or not. And we feel the situation is pretty much under control. We don't need to be worried yet.

Yes, and maybe to add a last thing on that, I think what you're always worried about, SG&A, is obviously payroll costs, because that is the most fixed component of SG&A. When you look at our number of employees, they have increased this year by 4.7%. So again, you put that in a relationship with double digit revenue increase and 22% order increase, that even makes us feel quite comfortable that it is under control and that we're keeping the required agility if suddenly the business would slow down.

As far as your question on gross margin is concerned, I do appreciate the analysis you do three quarters versus the fourth. At the end, we still look at it Q4 versus Q4, because there's still, in terms of revenue recognition, such a difference in Q4 compared to the first three quarters of the year that the comparison would be very difficult to explain.

If you compare Q4 to Q4 last year, we are up 1.7% to 27.5, so I think that again confirms the tremendous pricing [inaudible]. I think you have to put it back in perspective. If you look at the way raw material costs have increased last year, overall this would have represented a cost for the Company of more than 400m, if you tried to quantify that.

We ended the year, finally, with a gross margin that has improved by more than 2%. Obviously, there has been a little bit of hedging cost, but most of it has been recovered through aggressive price increases. So I would, for sure, disagree with your question that we are losing pricing [inaudible] later in that year.

Did we answer your questions, Julian?

Yes, that's great. Thank you.

From the phone.

Your next question is from Mr. Andreas Willi from JP Morgan. Please go ahead.

Good afternoon. I have a question on Robotics -- three questions on Robotics. The first one, on the orders, obviously you had a good Q4. Is that the beginning of a trend or [was it] just an unusually good quarter? And to what degree was it driven by you being more active in the market again with new products, or is that still yet to come?

The second question is on the development in 2007. You said you expect to see an improvement. Is that something that should come quickly, in the first few quarters, or are we going to see a few more quarters where you are working on some of the problems, like in 2006?

And the last question, there was speculation that Fiat may focus its Robotics business purely on in-house activities. Can you confirm that? That would obviously be a positive, I guess, for the market?

Thank you, Mr. Willi, for your questions. Again, we have the benefit of having Anders Jonsson here, our division head of the Robotics business, and I would ask him to answer your questions.

[After having] one quarter as a trend, that's probably too much. I think it was a good quarter, yes, but you should not see it as a trend. I think we have a positive development.

And regarding the improvement, [if] we have some issues we have to sort out which are more short term, [which] you can say with sourcing from low cost countries etc., but we have also a rather extensive redesign program that takes some time to get in place and get the benefits coming.

About Fiat?

Look, Fiat -- I don't want to comment on Fiat.

In terms of your --

Next question from the phone, please.

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

Good afternoon, gentlemen. Charles Burrows from Goldman Sachs. Three questions, please. First of all, just in terms of the interest charge. As Michel said, good progress in Q4. You've obviously signed an agreement to sell your [inaudible]. You've put some money in the pension fund, which is going to further decrease it over the course of the next year. I wondered if you could give us some guidance of expectations of that for this year.

Secondly, with regard to the recent announced disposals, could you give us an idea of how much they contributed in 2006 so we can see how we have to adjust our models for that?

And I wondered whether you could just clarify, in terms of corporate costs, as you say, you've got it down to under 1% of sales. Is there more to come there, or is it really likely to stay around this level going forward? Thank you.

Maybe I'll start - thank you, Charles, for your questions - start with the third one and then hand you over to Michel. As for corporate costs, you may recall the history of our announcement with regard to where we are and what we want to achieve.

I think it's fair to state that we are pretty much there where we wanted to get, with the current level of roughly $320m corporate costs. That is equivalent to about 0.9% of sales. And we know more sales is going to accrue anyway to our top line, without even changing the corporate cost situation. So I think we are on a very competitive level.

And reducing corporate costs even further, bringing it down from, let's say, $320 to $300, $280m is not of the essence how to make ABB even more successful. Question is now how can we use the corporate center in such a way to create more positive impact in the business lines, like for instance what Ulrich Spiesshofer is doing with supply chain management or cost migration to lower cost places and so on.

To answer more bluntly your question is there more to come, I would not expect the absolute level of corporate costs to change significantly. I honestly don't care that much whether its $10m more or less, as long as I feel satisfied about the quality impact the corporate center is going to have in the future.

Yes, Charles, on your first question regarding interest charge, as you have seen, we are coming down. The fourth quarter, we had a quarterly interest charge of $26m on a net basis. Clearly, we expect this trend to continue going down, so we should be comfortably below $100m for the full year interest charge in 2007.

Obviously, it's still a slow progress. You could say, in a way, can we still have interest charge when we have a positive net financial debt. We're still dealing a bit with legacy there and the debt that we still have in our books is still carrying an interest charge that [makes] that we always start the year with, I would say, yield curve gap costs of almost 4% on this debt.

And obviously, as you can understand, we are quite conservative in the way we invest our cash, and so clearly we are suffering a certain handicap there. But I'm still quite optimistic that we can continue bringing this number down. And, as I said, we will also continue trying to opportunistically reduce the old debt and try to get to some deals that can get us in a better position.

For your second question, as I said, the non-core portfolio generated in total $72m EBIT. Lummus was more or less break-even on that. Building Systems has been removed and put into discontinued operations. So this $72m basically represents the result of the equity venture portfolio, as well as the capital gains realized on real estate.

So we are not really disclosing the details, but I would say that, overall, the operations we have sold have generated a profit slightly below last year, because we had some exceptional income from the Indian joint venture, but otherwise it's more or less in the same area.

So subject to further real estate disposals, once your [inaudible] has gone, that equity number, or the non-core number, is going to be negligible?

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

Yes, hi. It's Mark Troman here from Merrills. Fred, on the issue of pricing, particularly in the products areas, could you comment -- is the rate of price increase you're getting in the market, is that running ahead of the raw material increases you're seeing, or just in line? Thank you very much.

I think the correct answer is the rate moves prices up pretty much in line with the price increases of raw materials, because that's something the customers watch very closely.

The way the prices move down again is a different story. As you have noticed, raw material prices have [eased] somewhat. For instance, copper, we had seen prices as high as $8,000 - now it's back at - I don't know exactly - [$6,000 or something]. So they're [easing] up and obviously we try everything not to move the price down as quickly as we moved it up.

So it is a different behavior. You could say the price increases are much driven by raw material price increases, but we try to keep prices on a higher level than they actually need to be once the prices of raw materials come down.

Okay. Could you comment on the trends in electrical steel?

[inaudible].

Thank you, sorry. Could you comment on the trends --

Did I answer your question, Mark?

Okay.

The next question is from [Nadia Adarna] from Morgan Stanley. Please go ahead.

Hi, it's actually -- It's Ben, Ben Uglow, here. I had a couple of questions. First of all, could we just get a quick update on the market situation in North America in terms of project bidding? Obviously, the $180m HVDC contract in Canada was unusual, but I would like to know if you are seeing a significant increase in potential contracts in the U.S. or Canada at the moment.

Secondly, could you just give us a very quick update on transformer pricing in the first quarter of 2007? How have things moved in that particular market?

And then, finally, on acquisitions, I know obviously that you're not able to say too much but, in the past, I think that you have exhibited some kind of preference for acquisitions in the product area. And we've recently seen Siemens acquiring in the automation software area. I wondered if you could just comment on the Automation area generally and software in particular.

Okay, thank you, Ben, for your questions. I think I'll try to answer the first one, maybe take advantage of Bernhard looking into transformer pricing, and then come back to acquisitions.

As for North America and especially in the power sector, let's keep in mind that, when we talk about the power sector, [especially in] the U.S.A., slightly different market structure than in Europe and elsewhere. In the U.S.A., we have a lot of contracts just coming into the game.

So you could say when it comes to the expected increase in volume and activity in North America, due to the lag in power infrastructure investment, there is much more of relevance to Power Products than it would obviously be to Power Systems. Having said that, it is fair to state that we have a much different, much more lively situation in Power Products in North America than we had 18 months ago. Some of our factories are now very full and we clearly see a pick-up in demand.

The same can be said also about other activities, but Automation Products is not quite as prominent in North America as in other places of the world, so it's not quite as relevant a question. And in Process Automation some of our most direct competitors happen to be U.S. of origin. So there we have the competitive situation, which is detracting a little bit of the attractiveness, with Honeywell and Emerson and Rockwell and all these guys.

But in essence, you're right. We do see -- Even leaving aside a big order like the HVDC order out of Canada, do see a much more lively market and that [boosts] us particularly in the Power Products area.

Bernhard, do you want to have more words on this, but then also on transformers? I'll give Bernhard Jucker, the Head of the Power Products Division, the word.

Just some words about the transformer pricing, which was obviously up. In transformers, we have basically three commodities. It is oil related, it is electrical steel and we have copper. And since electrical steel as well as the specific transformer oil, as commodities, increased, we will increase the prices accordingly, in order to compensate for the commodity increases also in 2007.

So that is happening right now?

As for acquisitions, you asked specifically about the Automation area and then software. As for the Automation area, it's fair to say that, yes, that is an area where we are actually quite curious about targets. We did mention that we're focusing in primarily on the products businesses. That's Power Products and Automation Products. We are also [flexible] with regard to the systems divisions, Power Systems and Process Automation, but a little bit more opportunistic. We're not actively looking in Robotics.

So, yes, the Automation area is of interest to us. We're looking at various opportunities in different fields of Automation, because it's a wide field [what will come in there]. It starts with [fine] low voltage technologies going into your household, ends with large pieces of machinery, like small generators, big motors and anything in between - power systems, the low voltage systems. Tom could give you about 20 different product lines we're active in.

Software, and the one you mentioned that was acquired by our dear competitor, I think, here, we talk about the field where classically ABB has not been quite as active - you talk about the discrete Automation. Keep in mind our Process Automation [is mostly] about continuous flow application, so our key customers are refineries, oil and gas upstream, chemicals, [inaudible] paper and so forth.

On the other hand of the spectrum, we have more assembly type of operations - manufacturing operations like automotive. They have more stop and go discrete automation tasks. And for historical reasons, ABB is very strong on the process side and not as strong on the discrete side. And the acquisition you're hinting at was much more focusing on that side of the Automation spectrum, so it simply didn't have the relevance to us that it had to our competitor.

But of course, software as an expansion of service activities is very much of interest to us. Let me remind you that, of the Process Automation division, roughly 23, 24,000 people - I'm mistaken -- 11,000 work in service. We do things there which are really going into what we call full service. We maintain plants and factories for customers of ours.

Thank you very much.

Okay, thank you Ben. May we have further questions?

Yes. Operator, next question please.

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

Thank you. Good afternoon. Two questions, please. Looking at your four core divisions, where do you see the most significant margin upside in the current year and why? And then secondly, quickly, on the tax rate - where do you see that trend in the next two years?

Okay, first of all, James, we have five core divisions. And I would say, from a relative point of view, I actually would expect the fifth one, Robotics, to have the most relative margin upside, because they more or less start at zero and I'm quite sure we can fill a big gap there.

But having said that, I think we have margin upside in all five of them. Robotics I just talked about. In Products we have upside that is substantial and we have it in Systems. I would at this point not try to rank them and say this is number one and this is number two. It also depends quite a bit how the market behaves and certain random events, big orders coming in en masse and things like that.

Then, of course, we have -- at times, we have internal issues. We do have, every so often, a quality problem. These quality problems may not be substantial or material, as such, as a single incident, but if there's two or three of them they can shave away 0.2, 0.3% in margins easily --

But would you expect the increase of large orders in Systems -- Power Systems to reduce the margin?

-- I would expect all divisions to move up in margin. [We will see what] happens and we'll do everything [to let it happen]. Second question?

Yes, as far as the tax rate is concerned, obviously, when the Company improves its operating margin like it does and this operational improvement is in all the countries where we are operating, it's obviously an easier task to reduce your tax rate, because finally all the tax planning that you have put in place starts working out. So, clearly, as we continue expanding our profitability, we're quite optimistic that we can continue decreasing our tax rate.

I wouldn't fix a new target. We have said below 30%, but clearly we would expect continuous improvement in that field as long as we continue the kind of business performance we have now. Business performance also means that, when the countries make money, we can leverage them better, pay more dividends out of them and, because of that, move the debt into a more tax efficient location. So everything [falls] back together. We are clearly aiming at a lower tax rate, but I wouldn't fix a new target for that one.

Okay. Operator, next question, please.

The next question is from Mr. Alex Migliorini from Helvea. Please go ahead.

Yes, good afternoon. Two questions, one on restructuring. Given the strength of most of your businesses at the moment, should we expect restructuring charges to decline below your targeted levels?

And second question, which is related to a capital gain displayed in your cash flow of about $22m. Is that spread between the divisions or is there only one major division that benefited from that, please?

Let me start with the first one, Alex. As for restructuring, I would expect restructuring charges to remain in the magnitude we indicated, which we say is typically 50 to 70 basis points. In a steady state situation, I think we would have the potential to reduce the guidance, in a steady state situation.

But one of the biggest challenges we see for the future is we have to be prepared for new types of competition appearing on the scene three, five, seven years down the road, with newly emerging competitors coming from China, from India and other places. And we want to be prepared for that.

And as a consequence, we have launched an initiative internally, under the headline of Global Footprint, where we proactively will shift quite a bit of our value-added activities to lower cost countries. We have already started doing so. To give you one piece of evidence, we have -- In the year 2006, we have shifted each month 100m of sourcing volume, high cost to low cost countries. And on top of that, we're also going to shift [ops] CapEx to lower cost territories.

That is all under the headline of Global Footprint. A bit of that will cause restructuring, necessarily so. And because of this proactive - and not reactive, proactive - measure I would not reduce the guidance given, 50 to 70.

As for your second question, do you need to repeat?

No, no, that's -- You were talking about the capital gain of $22m in Q4, right?

Yes.

Okay. I don't have all the details here, but I would expect that most of them are capital gains from real estate that form -- the largest part in ABB are owned by the corporate center. So you should rather expect to see these results within the non-core business and not specifically attributed to one of the divisions.

Thank you.

Any more questions? Doesn't seem to be the case, so thank you very much for closing. And Fred, you might have some last words.

Thank you for your attention. And I know that some of you folks expected a slightly different figure in one or the other lines of our P&L. I still think that we've done very well in 2006 and, as I said, I also think we've done very well in the fourth quarter.

We are very confident for 2007 and the next time we have a chance to give evidence whether it's a promise or a commitment is when we report on Q1, which is going to happen on April 26. And we're all looking forward to having you on the phone on April 26. Until then, have a nice 2007. Thank you very much for your attention.

Thank you.

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