Abb Ltd (ABB) 2007 Q1 法說會逐字稿

Good morning and good afternoon. This is the Chorus Call conference operator. Welcome to the ABB 2007 first quarter results analysts and investors conference call, hosted by Mr. Fred Kindle CEO of ABB and Mr. Michel Demare, CFO.

As a reminder all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. We will kindly ask each caller to limit themselves to two questions only. For those journalists who have called in, your participation is in listen-only mode. This call must not be recorded for publication or broadcast. A replay of this call will be available for two weeks following the conference. [OPERATOR INSTRUCTIONS].

At this time I would like to turn the conference over to Mr. Fred Kindle, CEO. Please go ahead sir.

Thank you very much ma'am. Good afternoon ladies and gentlemen. Thank you for joining our analysts and investors conference call for the first quarter 2007 results. With me is Michel Demare our Chief Financial Officer. My comments in this call refer to the presentation that you can download from our website at abb.com.

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

Chart three, a true success in almost every respect. Let me start with an overview of our performance on chart three. The first quarter of 2007 was a true success in almost every respect. Our operational improvements and global reach are paying off. We are positioned to capture the strong worldwide demand for technologies to deliver reliable power, increase productivity and save energy.

All five divisions in every region, particularly Europe, contributed to our strong start to the year. Group orders are up 20% in local currencies to $8.6b, and revenues are 15% higher at $6.2b, all of that organic growth. We've reached our highest ever EBIT margin, 13.2%. Our net income has grown by 163% to $537m.

Also contributing to the net income increase were a lower tax rate. And the end of the mark to market accounting treatment of the ABB shares held for the asbestos settlement, which reduced our net income the first quarter of last year by $90m. Cash flow was up significantly from a year ago reflecting our strong earnings growth.

We reclassified ABB Lummus Global, our oil, gas and petrochemicals business to discontinued operations. And we are confident that we can complete the divestment within 12 months. As a result of the reclassification our non-core activities now represent less than 1% of the Group's total volume.

Our balance sheet is even stronger than at the end of 2006, following the partial conversion of our 2010 Swiss franc convertible bonds. More than three-quarters of the bonds were converted in March, resulting in a reduction in debt of approximately $650m, and a similar increase in equity.

Let me also mention that we successfully passed our Sarbanes-Oxley certification in the first quarter of this year. While this has admittedly been a costly process, it has also helped us push through significant improvements in our internal business processes. The challenge going forward shall be to fully integrate these changes into our standard operating procedures worldwide.

And finally Standard & Poor's, earlier this week, raised our long term corporate credit rating from BBB+ to A- with a stable outlook. It was the third increase by Standard and Poor's on ABB's credit rating since the beginning of 2006.

Chart four, looking at chart four, let me quickly review the key figures for the quarter. Group orders were again sharply higher, up 20% in local currencies, led by the Power Products and the Power Systems division. Revenues grew by 15% in local currencies. This continued the catching-up trend we saw in the fourth quarter of 2006, as our strong order backlog starts to feed through to revenues.

EBIT and EBIT margins were higher in all of our divisions, reflecting the good market demands, strong capacity utilization, better project management and continued cost reduction efforts. As a result our EBIT has grown 67%. And, as I mentioned a moment ago, our EBIT margin has reached 13.2%, more than 3 percentage points higher than in the first quarter in 2006. Cash flow from operations increased by $276m compared to a year ago, despite increases in working capital that are needed to fund our rapid growth.

Chart five, on chart five you can see our track record. We have more than doubled the profitability of the Company in the past 12 quarters. And this is the sixteenth consecutive quarter of year-on-year margin improvement.

Chart six shows the strength of our broad geographic scope. Orders are growing at a healthy pace in all of our key regions. Orders from Europe are up 20% in local currencies, primarily the result of further investments by power utilities in both Eastern and Western Europe to upgrade the grids.

India continued to grow at very high rates. And the U.S. turned in another strong quarter, again fueled mainly by the Power side. China order growth remained in the double-digit range, with demand continuing across all of our businesses.

Last, but not least, growth continued in the Middle East, although not as strongly as in other regions. Nevertheless demand continues to grow in the region driven my investment in the oil and gas industry, and the expansion of the industrial base particularly into the metal sector.

In chart seven you see the development of our order backlog, up more than $5b since the end of the first quarter a year ago, and more than $2.5b higher than at the end of 2006. As we work through the strong order backlog we are enjoying the cost benefits of a high level of capacity utilization. You can see the benefit clearly in our EBIT margins.

At the same time we are carefully managing this growth in order to keep costs under control, ensure consistent high quality and deliver on time. We have been successful so far in adapting to these demands.

We continue to expand production in the highest growing markets, like Eastern Europe and Asia, through our local operations there. We can increase capacity when needed in our mature markets by de-bottlenecking some of our production facilities. In most operations we still have room to add shifts, hire temporary workers, and other measures that reduce the risks of building up capacity that may be unnecessary in the future.

Chart eight provides you with a quick overview of our performance by division. Let me just mention a few key points. As you can see our Power Products and Power Systems divisions led the way on order growth in the first quarter, at 35 and 30% respectively. Transformers, high voltage switch gear, sub-stations, network control all of these businesses are enjoying solid growth.

On the industry side, the metals and mineral sector along with marine were the main drivers of growth in the first quarter. And demand for energy efficient motors and drivers were the key growth factor for our Automation Product division.

In the Process Automation division base order growth of 7% in local currencies offset lower large orders. As you may remember from last year, order intake in this business can be volatile and depends on the timing of project awards, so quarterly swings in either direction should not be taken as indicative of a trend. We remain confident that the market for Process Automation in 2007 will continue to develop positively, driven by high oil and gas prices, the tight supply of commodities, and rapid industrial growth in the emerging markets.

Robotics orders increased, as orders from general industry more than offset lower orders from the weak automotive sector. In addition measures started last year to restructure and streamline this business, have started to pay-off and profitability has improved.

As for the other divisions, EBIT margins have all improved significantly compared to the same quarter a year ago. As I said earlier this is primarily due to high capacity utilization and ongoing costs and productivity improvements.

Part of the increase in our Group EBIT is due to the fact that we had lower restructuring and other costs this quarter, leading to a very clean set of results. Just to remind you, in the first quarter of last year we had $17m of cost relating to the Transformer consolidation program, some restructuring costs in the other divisions. And, as I just mentioned a moment ago, costs associated with improving the Robotics business. Those costs have not been repeated so far this year.

With regard to the Transformer consolidation, let me also mention that our internal improvement efforts, combined with a strong market have allowed us to reach the 2009 EBIT margin target of 8% already in the first quarter of this year. So overall a very strong improvement in EBIT and EBIT margins across all of the divisions.

I can imagine that you may ask me again how much higher can they go. As I said at the end of 2006 we are in the middle of a thorough strategic and market review, looking out into the medium term. We intend to provide you with the results of that review in the third quarter.

I also said that you should not expect our order growth to remain in the 20 to 30% range that we saw in 2006, and I would repeat that today. These growth rates are not sustainable, simply because the base of comparison is continuously growing, and such high growth cannot go on for years.

However, we have not yet completed all of the measures in our internal plans to become even more cost competitive. We still have room to improve the amount of sourcing we do from lower-cost countries. We can still do more to make manufacturing, assembly and engineering network more cost efficient. Doing a better job of selection and executing the right projects with the right conditions can also yield more benefits. So clearly our ambition is to keep improving profitability, to take maximum advantage of the good market environment we are in.

Chart nine gives you a summary of our financial developments below the EBIT line. Our net finance expense is lower, reflecting our lower debt levels versus a year ago. Our tax rate was down to about 28% compared to 34% a year ago, which obviously also contributed to our good net income development. Minority interests are up once more on the continuing success of our joint ventures in China, and our listed Indian subsidiary.

As I mentioned earlier, the discontinued operations now contain the ABB Lummus oil, gas and petrochemicals business. Their positive result in the first quarter gives us a plus in this line. Lummus has a very strong operating quarter, but we took a provision to close out a loss project dating back to 2001.

In Chart 10 I've already touched on our strong balance sheet, and the impact of early conversion of some of our 2010 bonds. Combined with our good cash generation in the quarter, this has again improved some of our key ratios. Gearing, which is total debt over total debt plus equity, including minority interests, is down to 26%, while equity as a share of total assets is now at 29%. This is still not as strong as many of our peers, but it's moving in the right direction. Net cash increased again, and is now at almost $2.5b.

It's a healthy balance sheet but not the most efficient. We continue to actively screen and evaluate potential acquisitions that make strategic sense. Where we have the capacity to successfully integrate them, and that meet our evaluation criteria. Finding the right target is not easy as the prices are very high, and we are determined to create shareholder value not just to make ABB bigger.

Chart 11 shows the cash flow development by division. Thanks in large part our improved earnings we have managed to significantly improve cash flow versus a year ago. Let me also point out that in our current high growth mode, working capital requirements are clearly increasing. Our working capital as a share of revenues is up by a percentage point compared to last year this time. However, given the rate of order revenue growth and the fact that in much of systems business we build up working capital before we recognize some of the corresponding revenues, we believe our working capital management is becoming more efficient.

Furthermore this improvement comes in what has traditionally been a weak cash quarter. While our cash flows are often determined by project payment terms and the seasonal habits of some of our customers, we have worked hard in recent years to flatten out the seasonal fluctuations in cash flow. The results of those efforts are visible here.

Turning finally to chart 12 let me summarize. Our operational improvement and global reach are paying off. We are capturing the strong worldwide demand for technologies to deliver reliable power, increase productivity and save energy. Strong demand along with high factory loadings and improved operational execution has lifted our productivity in every division. Add to that the absence of any significant unusual costs, and we have achieved a record EBIT margin for the Group.

Finally our balance sheet and cash flows are clearly stronger than a year ago. But there are always challenges ahead. In the current very positive business environment managing growth prudently will be the most important issue. This comes back, once again, for our constant focus on business execution. We are confident that we have the processes in place to ensure that we get the most from this market, while ensuring that we can respond quickly and successfully if and when the market changes. We will continue to examine strategic acquisition opportunities that build on our core strengths, and that deliver significant value.

Completing the disposal of our non-core assets also remains a priority. The reclassification of ABB Lummus Global into discontinued operations, signals our confidence that we will complete this key divestment within 12 months.

Finally the successful development of our strategic medium term road map and targets is on track. We are making good progress on this, and we will be ready to share this with you in September.

With that, ladies and gentlemen, I would like to thank you for your attention and open the phones for questions. Thank you.

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

Good afternoon, I have two questions please, the first one on power products, on the mix. You obviously had a strong quarter there, if you could talk about the mix in the quarter between high voltage equipment, and sub-station transformers?

And second question related to that on orders. In your comments you say that orders are particularly strong for sub-stations and transformers. Does that mean that the margin mix may deteriorate there?

And the second question on acquisitions, obviously you've commented on that already. But it's been quite some time now when you have said that ABB is looking again for acquisitions, but we haven't really seen anything yet. Could you talk a little bit about the pipeline, how many targets are in there that you're reviewing, what kind of the size is? Just a little bit more of an idea what we could expect in the next 12 to 18 months.

Okay, thank you Andreas for your questions. Maybe I start with the acquisition topic, and then Michel if you like to go on with other part.

As for acquisitions, if you listen to us, and I'm sure you certainly did, it was a different shaded message that we wanted to convey to the market place. I think, on the one hand, we have now the capacity to execute acquisitions successfully. We have the financial back in the balance sheet, the founding capacity. We have also proven, I think, that we're able to make operations work and really create value in operating margin and cash flow. So that gives us a really nice foundation to make acquisitions.

At the same time we also said that we don't necessary need acquisitions, because we're growing in leaps and bounds, we don't need an acquisition to create even more growth. We are in number one or number two in almost every activity, which means we don't need to make acquisitions also for defensive reasons. And putting these two things together it means we feel really very comfortable, we can take a very comfortable approach. Clearly we want to make acquisitions, we are ambitious about that. And without going into any details, we have been looking into acquisitions, [this theme was] raised going back in the last, I would say, 18 months.

At the same time we are committed to remain very disciplined. That just simply means that an acquisition is to fit our strategic criteria. They also need to be in an area where we feel comfortable of making an integration work well. And thirdly the financial value creation must be proven. It's obviously directly connected to prices.

And I think the one and only issue we have at the moment to make an acquisition, a sizable one, is pricing. But without, again without going into any details, we know exactly who the targets are, we would love to acquire. I think we know very well how easy or how difficult it would be to integrate them, and what kind of plans we would need to make. But prices are not so conducive to us to make an acquisition. We will see we will see how the situation will change over time, and obviously if we don't make large acquisitions we have different topics to face.

So much for your second question, shall we go on to the first one Andreas?

Yes please.

Okay, then Michel.

Yes, good afternoon Andreas. I would say your question regarding product mix in the power product division, there is really no significant change of product mix. If you compare this quarter with the first quarter last year, we are more or less the same split. I think one difference that you see is that obviously transformer is the largest segment of power product. And that is also where the margin improvement, compared to the very depressed margin that we had a year ago has been the most impressive. So obviously that has leverage in the overall improvement of the power product margins.

As far as your question regarding the large orders in sub-stations, no, I would not deduct it. Because of that we should expect lower margins in the future, because it is also the segment where we have really applied the most selectivity in terms of the orders for which we bid. And so clearly we have left some orders on the table, but the ones we have picked we are very happy with the margin.

But the mix improved in Q1 versus Q4 maybe? No?

Not even actually, I have the numbers here in front of me, and it is not a major change, it is really a couple of percentage, not more.

I think want is --.

[Inaudible] lot of profitability as well of the different segments has been moving differently and there again the transformer part has moved quite a lot even compared to Q4.

You could say looking into the past there was a striking difference in EBIT margin between high and medium voltage on the one hand, and transformers on the other. You know the EBIT margin we had in 2004, because we disclosed it. And the fact is the these business lines are moving closer to each other, which means the mix effect is still relevant but it's not as relevant as it was a couple of years ago, 12 months ago.

Thank you.

Welcome. Next question please.

Next question is from Ms. Lisa Randall, Lehman Brothers. Please go ahead madam.

Thank you very much. Good afternoon gentlemen.

Good afternoon Lisa.

Good afternoon. Just to follow-up from Andreas' question on transformers. Given that the rate of the improvement in the margin has come through so rapidly, do you now believe that the transformer business will be able to get significantly closer, well certainly above the 8%, but significantly closer to the average for power products?

And then just also to clean-up that division, at the Q4/06 conversations that were had. Fred you made the comment in one of the meetings that you considered that power products probably had -- it could probably squeeze out another 100 to 200 basis points of improvement in that division. And obviously in Q1 you've managed to squeeze more than that out.

So the question is do you still believe there is significant improvement in the -- or meaningful improvement, potentially, in the margin of power products over the next couple of years? I know you're obviously going to comment more in September, but just really relating back to your comment back in -- earlier in the year.

And then just secondly on automation products, it's the second quarter in a row that you've run at about a run rate of about $1.9b, and obviously still managing to improve the margins. My question there is you've commented obviously you are running at very high capacity levels in automation products. Are there any particular product areas that are at a particularly high capacity that you're having to reduce the bottlenecks, or is it across the division? And do you believe that that's a run rate you'll be able to -- that you're relative constrained at for the course of this year? I guess the question is how long it takes to de-bottleneck some of the areas there? Thank you.

Thank you Lisa. Let me answer the first one, and pass on the second one to Michel again. As for the first one, I can imagine that there is a lot of guessing going on where is this transformer margin right now, and how far has it improved. We did mention today officially that obviously we have reached the 8% margin target that we committed to by 2009. You remember the announcement in June 2005. We are shying away from disclosing margins on the product line level, because we feel that is not necessary and it is going too far.

But in order to do you a favor, I just repeat what I said. I think it was in the session we had in London, because I was asked how far the margins could improve with regards to power products. And I kind of answered, well, we were clearly not on the 15% level, but I said well if we could reach 15% that would depend a lot on transformers. And if transformers moved above 10% then we could reach the 15%, that's what I said two months ago. Here we are, we are above 15% and you can draw your own conclusions out of that.

So everything we have done seems to have been the right things, and transformers is clearly moving in the right direction. And that's also the reason why the mix effect, which Andreas asked about, is still relevant but not to same extent anymore.

Will power products be able to move it even higher? Our ambition clearly is yes. [Inaudible] meaning if the markets continue to develop the way they have, and we're not shaken by any dramatic movements in our input cost factors, yes we should be able to rise the margin up.

There is always something happening in a quarter, you know, we have a [surprise] a quarter, summer, summer we need to take a provision, and that can immediately shave off, let's say, a point, two points of a margin. That's always possible in any quarter, so I cannot guarantee for that. But in principle it is possible to improve the margin further. And what that means for the next two years we are going to disclose in September.

And as for your second question on automation products, Michel.

Lisa, I think indeed it is always a challenge to continue at this pace. But I think overall we do manage it. You have to look a little bit at the different segments of automation products. We are obviously suffering a little bit from capacity squeeze when we go into the larger pieces, especially the low voltage motors or the big machines or the pole electronics, where, in fact, we are now really taking orders with much longer delivery terms. If you see now we have automation products a backlog of $3b, which is 50% than a year ago. That's about five months, I would say, of sales in automation products. So that is really very high for a business that is supposed to turn very fast.

But we are as well expanding capacity and some can go pretty fast. You know we are in Western Europe doing some selective de-bottlenecks, for instance in Finland and in Switzerland. That is quite cheap in terms of output and it is also very fast on the line. At the same time we have also built new capacities in Estonia, in China, in India, selectively. And there as well these plants come on stream pretty quickly. So for the fast [inaudible] material, we -- first of all taking materials we still manage to keep the pace. The other one, the bigger machines and so on, are more managed to payment -- no deliver terms management as well as price increases. So, yes, we think we can sustain the pace as long as the demand is behind.

Lovely, thank you.

You're welcome Lisa. Next question please.

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

Good afternoon gentlemen. Charles Burrows from Goldman's. Obviously a very strong performance in power products has already been eluded too. And first question is could you give us an idea of between price and volume? Both seem to have been strong but give us a feel of that.

And secondly in the non-core business, obviously you took Lummus out but it was still a strong result. Could you tell us what's happening in terms of accounting there at Jorf Lasfar? Obviously you've got the gains to take in the next quarter, but it would seem as though there's some kind of extra profit taken in this quarter as well.

Okay, shall I take the non-core question first. On Jorf Lasfar indeed we are very confident that we will close the deal this quarter, both on Lasfar and on Neyveli. Already meanwhile the Company keeps operating. So what you see in this first quarter is the reflection of the profit realized by the company, by Jorf Lasfar and by Neyveli during this quarter. So obviously if you were trying to calculate the capital gain, based on the year end figures that would obviously be deducted from the total capital gains. So I would say that the capital gain that you maybe here expect to see in Q2 is basically spread over these two quarters now.

So that is for Jorf Lasfar and Neyveli. For the rest of the non-core [now], once these two assets have gone there is not too much left. We still have three very small equity venture participation, two power projects and an airport, but not a very high book value. And then we have basically what we call the corporate real estate. So the real estate that is not directly owned by the divisions, which is part of the non-core as well, and where you sometimes see some results being either from rental income if we sub-lease this real estate to third party, or capital gains or losses when we dispose of some of it. So it is really [inaudible] key non-core right now.

[Inaudible].

Excuse me.

Thank you for that. And as to power price versus volume.

Price over volume, Charles I would say, high level one-third price, two-thirds volume. So really the demand is still pretty strong. And we keep rising the output, but clearly the pricing power remains, even in a quarter where commodities were more on the flat side.

Relating to power products you asked the question, didn't you Charles?

Yes. I did. I am very happy about the overall figure as well, but particularly in power products, because obviously with 35% growth was a very strong performance indeed both in general terms and compared to previous quarters.

Let me caution then a little bit. This is not -- price increases here is [not just] pure margin, but price increases are clearly reflected in the increases of costs of raw materials again. And those of you who have followed the raw material cost development it has been a very interesting development in the first quarter. First we saw quite a significant easing of the prices, especially on the corporate side. And then starting, I don't know exactly when, but let's say the last six weeks or so, we have seen a tremendous upward development again, reaching almost record levels again. So this is very volatile development. And much of price increases we push through, by far the majority are necessary price increases, because of commodity prices.

Especially we have also electric steel that has not even shown any weakness on the other side.

Yes. So would you say that the mix in power products is very similar to the Group overall, or was? Because we know obviously in things like transformers, the raw materials are perhaps the higher proportion of the total value that maybe there was a higher price effect in this area as well as strong volumes.

No I would disagree. Just roughly order of magnitude I would have said when you look at volume development at ABB, typically the Group is, let's say, two-thirds is true volume and one-third is price driven. And in PP it's more or less it's 50/50 and transformers it's just the opposite.

Okay, thank you.

You're welcome. Next question please.

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

Yes, thanks, two questions please. The first one, if I look at your operating expenses they grew less quickly than revenues in Q1, which is obviously a big contrast to what we've seen in the last three quarters of 2006. Do you continue to feel that this year your operating expense growth will remain less than your revenue growth, when you look at things like your headcount addition plans and so on?

And then secondly, if you look at the mix of large orders, as a proportion of total orders, they were lower in the first quarter versus what we saw in 2006. Do you expect that sort of trend to remain the same over the balance of this year as well? Thanks.

Thank you Julian. Let me start with the second one and then I'll hand over the first one to Michel.

As for large orders there is quite a bit of uncertainty about when they materialize, and which quarter they're booked. But we know what is in the pipeline. We see the [cautionary] activity. We also see where we have concrete negotiations going on. And, let's put it this way, I feel very confident that by the end of the year, I'm not telling you second quarter, third quarter, but by the end of the year we have a nice portfolio of booked large orders again. And one should not give too much emphasis on one quarter or the other. But I think the outlook for this year is still pretty much intact that we have some nice large orders coming up.

As for your other question regarding volume development and operating expense development, Michel.

Yes, Julian, your right it's a good point. I think if you look at SG&A in local currency they are up about 11% this quarter. So obviously it's a bit what we said, a lot of this operating expense are basically selling expense, which you spend to get the orders. So as long as the revenues were not kicking in is was not looking great.

Now we have revenues increasing double-digits since two quarters and we start seeing the benefits of that. And if you scratch a little a bit more there you see that really the investment, or the increase is really in selling and non-order related R&D, while in fact the SG&A is remaining quite flat. So we are quite happy with the development and yes, since we can expect from the backlog we have to continue seeing the revenues growing at a very good pace, I do expect as well to see the operating expense slow, growing less fast than the revenues.

Okay. Thanks.

Thank you Julian. Next question please.

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

Yes, thank you, good afternoon. I have two questions, starting off with process automation. The margin progression there seems slightly pedestrian compared to other divisions. Can you maybe explain what is going on, the underlying factors, where you see the upside?

And then just on acquisitions and I think you told us you're giving yourself about 12 months time to find potential targets. And if not you're be looking at over options. Can you maybe talk about your views there on share buybacks?

Okay, I'll take -- first of all good afternoon James, I'll take the first question. As for PA, I agree it is not the same dramatic evolution in margin than in some of the other divisions. Is that too low an emission level or lack of execution? I don't think so. To be honest I think the current operating margin, which is at 10.1% is not a bad one to start with. I think there is, with regard to longer term development, there is quite some potential to improve the margin further up there. But that will involve a slight change of mixture of activities of course.

In process automation you have to keep in mind we have a business which consists of about 40% service activities. And these service activities typically come at comparable low unit margin, but very good return on capital employed, so they're not a bad business by itself. And secondly the systems activities have similar characteristics, the EBIT margins they simply don't go up to 15% or anything like that what was used in products.

We have, however, an ambition to increase the EBIT margin in the longer term, that will involve adding more products which some of the competitors have, adding more products to the overall portfolio. But that takes time, that's not something that can be achieved from one quarter to the next.

So if you consider it's a pedestrian evolution or development, fine, so be it, I don't think this can dramatically change. It is hardly imaginable that we can lift the margin up from one quarter to the next by 2 percentage points or anything like that, impossible.

As for your second question, Michel.

James, as we have always said; clearly now we have a very good balance sheet. And the very first priority for the management is to use this cash surplus to make value adding acquisitions. But obviously we want to remain disciplined here it is a very important next step and we want to do it right. So it is clear that we aren't going to something which would be too risky in terms of delivering the synergies. We keep looking very hard we say we gave us a few quarters to do that.

Clearly if towards year end we continue accumulating the cash as we do now, and we don't see the right prospects to make really a value adding acquisitions, we will be talking about stock buybacks. Whether it's only stock buybacks or a combination of the two, clearly we still need to define that. And we also need to define, what is the best way to return money to the shareholders. But it's still something we will keep for the later part of the year, because we are still optimistic at this stage that there must be something out there that can be good to add value for ABB as a whole.

Thank you.

Thank you James. Next question please.

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

Yes, thank you very much. It's Mark here from Merrill's. Fred, just in terms of sales growth, and I think there was some questions earlier on capacity constraints. How fast can you grow as a Group? I know that's a function of the individual business units. But can you maintain -- forget about the demand side, just ability to supply for a second, can you maintain 35% growth in power products for example? If you could discuss that a little further.

Thank you, Mark, for your question. I think by and large what the organization has gone through in the last two years is something we can continue to manage, also looking forward. But it wasn't 30% growth in revenues, so the pipeline is not being filled on a 30% rate, but slightly lower. That's also the reason why we have a time lag between order intake and revenues, by and large, so that is absolutely manageable. We have more leeway to add capacity in a temporary fashion. We are actually spending more CapEx than we did in the last few years. As you know, we're spending above depreciation rate now. And so feel comfortable that with the current growth rate we can continue.

There are a few spots however, a few locations, a few plans, where we know we're running into a problem. Where delivery times are expanding beyond one year, even two years, and that is not very healthy. Because then you start losing market share to competitors because they can deliver sooner than we can. And you may also run into quality problems and delivery times a little bit. So those are a few spots where we have to invest more, where we have to be very careful. Where we actually may have to curtail growth, because it would be unwise to continue the way we have in the last two years.

But this is a minority. We've got a few plants, this is France is the case, and automation product in machinery. These are, let's say, large motors or small generators which we still produce, there may be certain types of transformers, there may be certain sectors in the engineering functions, but very isolated special cases.

And if I could just add one thing, obviously we do that as well, bearing in mind we don't want to have to be in a position to regret it in a few quarters or years. So we are very careful, for instance, in terms of adding people. If you see in the first quarter or a head count, Julian was asking the question before, I forgot to answer that one, was up, I think, 1.2%. Last year we increased it for the whole year by 4%. So we're really using everything we can in terms of factory automation, in terms of outsourcing, in terms of higher productivity. And not just to -- and as well adding people, where we still have some flexibility after that to manage that. So that is also a very important part of this capacity management to keep the flexibility.

Okay, that's great. And just to follow on from that. Are you seeing your -- obviously let's say power products for example, where growth is obviously very strong. Are you seeing your competition add capacity more than you are? Or less than you are? What are you seeing there?

It's hard to tell, Mark, because we don't exactly know what kind of CapEx plans our competitors have. There are certain areas where we do have particular insight. And that makes me feel a little worried that in the current boom some people are not as vigorous or disciplined as they should be. And if the market really does come down, two years down the road or whenever, we don't see that. But if it happens them we may have capacity, it's just too much capacity. I hope that people will recognize that at the end we all need to make money. By and large though I cannot comment on this, we simply don't have these insights.

Okay. Thank you very much anyway.

Welcome. Our next question, please?

Our next question from Mr. Thomas Baumann, NZB. Please go ahead, sir.

Yes, good afternoon, gentlemen, thanks. I have a question with regard to power systems. Can you give us a flavor there with regard to the sales breakdown of larger orders? Where you would say you have a below average margin that's, I think, something you guided at the end of last year. And on the other hand normal orders, normal sized orders and normal margins?

Yes. Thank you so much for your question. It's difficult to answer your question the way you've phrased it. It's certainly true that large orders have typically a lower margin than smaller orders, that's certainly true. But there is also a question of type of orders. For instance, a very large order in [Asia Pacific] can yields a margin that is significantly higher than a smaller order in sub-stations. So the mix effect may be as important if not more important than the question of size.

And here, we have in systems we have seen a similar effect as you have seen in power products. Some of the lower performing product lines let's say sub-stations, have been able to visibly improve their EBIT margin in the context of the last 12, 18 months. And that is very, very important for listing the overall margin of power systems. So it's less obvious today to say that if the mix includes more large orders now that this has a detrimental effect on the margin.

Yes, and if I can add to that as well, large orders usually have a high content of product flow through, coming mainly from [poor] products. So even if you comment that the margin power system, maybe a bit larger for ABB it can -- will be a bit lower, it can still be good for ABB, because power product will have a margin by selling the product via power systems and this kind of issue. So that is one thing we watch. And the second we obviously keep watching the margin development in the backlog, and it is satisfactory to us.

That's an interesting comment Michel made. Because if you imagine, let's take a very extreme case, let's assume just for the time being that power system was only using power products from ABB. Even if they only made a 1% EBIT with no capital invested, it would increase the overall EBIT margin even of ABB, because all the products would fall through consolidation, and the EBIT margin would be pure add-on. That's something not to be forgotten. So if power systems is delivering whatever margin of 7%, this actually may lift the Group average margin, even though it doesn't look like that, depending on the amount of ABB pull-through.

Okay. Second question, what have you done with regard to pension contribution and securitization in the quarter, please?

We have not done anything outside of normal guidance. I think through the year we had a guidance of $200m, so I don't even have the precise numbers here. But I would say it's probably about $50m. We have indicated that maybe later in the year we might still do some voluntary contributions, although the potential we have left there is pretty low. We had done most of it by the end of last year. But now we are back at a normal stage, and we have run rate of $200m a year.

Thank you.

Welcome. Next question, please?

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

Yes, good afternoon. My two questions are regarding the order trend, especially in power product, how do you assess the strong demand? How confident are you that it does reflect the underlying demand? And can you share with us your view on that? Implicitly, do you feel that there is a tendency to over-order at this stage, or are you pretty relaxed with the order intake you see?

Second question, in China what is your view on the development in this market? Is it as easy as it used to be in terms of walking with the JV partners, and the implication of the government? Or do you see more reluctance there? Can you share with us your view? Thank you.

Thank you, Olivier. Well I think the first question is easy to answer. We could say we are fairly relaxed. Meaning we don't see any artificial distortions in the current order intake, that the order intake today is that big, because it is anticipating orders later on and there will be a vacuum or a gap opening up. No, we don't see that. So market situation is very strong, we're confident there's no reason why we should believe that the order growth will significantly slow down.

I'm not talking whether the order growth comes down from 30% to 25% and then goes back to up 30% again, that can happen any quarter. That's just normal volatility. But the nature of the market today, the general situation is the same as it has been six months ago, we're very positive.

As for China, yes, it is true, China has become increasingly challenging. But one could say this has always been the case throughout the last ten years. We have always been able to adapt to the new challenges and make them work, and I think the success has proven us right.

Now what is happening, yes, the Chinese government is putting more strategic emphasis on the power segment around power generation, but also T&D, especially the T, transmission, which means there's less room to have let's say 51% more ownership in certain strategic joint ventures. We have to be able or willing, to share more of the leadership with our Chinese joint venture partners.

Is that necessarily bad? Not really. It just means that we have to find means and ways to protect our intellectual property rights. And we have to find means and ways to really make sure that we stay in control of what is happening operationally. I think we are doing that. And with that again I'm confident that we will continue to be successful in China.

We answer your question, Olivier?

Yes, thank you.

Okay, thanks. Next question, please?

Next question from Mr. Martin Wilkie, Deutsche Bank. Please go ahead, sir.

Hi, yes, it's Martin Wilkie from Deutsche Bank. A couple of questions, first of all on the U.S. market there's been a lot of talk by utilities over the last few weeks in the U.S., that they're putting together joint ventures to construct some large-scale transmission links, putting together feasibility plans. Can you comment? Have you seen more activity there? Are you involved in some of those feasibility plans? And should we expect the U.S. market to accelerate further in 2007?

And then secondly, you've talked already about the China and joint ventures. Do you think that buying out the minorities with some of your net cash is feasible? Or do you think that, because of the focus on the T&D market by the Chinese government, the buyers and minorities is really not possible in China?

Okay, Martin, its Michel here, let me start maybe with the second question. We are in fact always monitoring the situation. And we have been regularly buying bits and pieces of joint our ventures to increase. The average, on average we own about two-thirds, 65 to 70% of the joint ventures that have all started at a point in time to be 50/50.

So whenever there is a possibility, in some you have it as a shareholder agreement, some you do it because the partner doesn't have the same strategic interest any more than it has in the past. But clearly the joint ventures that are more recent, that are dealing with more recent technology is just not possible, because it is the way it has been there.

So we are always ready to spend the money on that provided the price is reasonable, and that it increases our control from that perspective. So yes, we are now monitoring, but it is not, let's say, huge amounts of money that change that.

As far as your question in the U.S. is concerned, yes, we are seeing a lot of work in terms of design studies from our utility customers. And so we don't think it's really a development that we've seen just this quarter. This has been already busy since a few quarters that they are working in that field.

Meanwhile the business is doing very well. If you look at our, for instance, product in the first quarter in the U.S. was up something like 40%. So we have really very high volume, very good price levels, we are very happy with the development. And we know that it is probably there to last, because the energy bill will related orders are not kicking in yet.

I would like to add that, what we see now is really a general trend in the market. The utilities are invested because they need to. They have obsolete equipment, they lack the capacity. So it's a general upward trend and that is -- has happened for the last two years and is still happening. Now whether the growth of 30% plus is the same next quarter not again, we have here quarterly volatility, that's really not our concern.

As for the famous energy bill, yes indeed, we do expect at some point some large orders or large projects, I should say. How they are being tendered or are broken down into different lots is another question. But this may still be two years away. Let's face it this energy bill was very important. But at the same time it is also a fairly administrative process, with lots of political question marks about how to implement it and certain positions by the regulatory bodies have not been taken yet.

So the real impact on the transmission side of the U.S. market is still to come. And it's not obvious that it comes the next quarter, this will take longer. But in the meantime we are just happy to see the general markets going through a real upward trend.

Okay, thank you very much.

Thank you, Martin. Next question, please?

Next question from Mr. Colin Gibson, UB -- sorry, HSBC. Please go ahead, sir.

Thanks very much. When UBS give me the job offer I'll let you know. I have a couple of questions. First of all, Chinese GDP grew 11% in the first quarter, so did your Chinese orders. I wouldn't normally think of power transmitters as being a one-time's GDP business, so if -- can I call that weakness? And if so, is it purely temporary weakness? Do you expect order growth to reaccelerate in China for the rest of the year?

Secondly, you said at one point earlier on, I'm trying to find my note, you said we know very well who the targets are, we would love to acquire. I think that's a verbatim quote from you earlier in this call. And later on you said, talking about the process automation margin, we have a goal which involves selling more products. I'm terribly tempted to put those two comments together, and imagine that you might be looking at upstream acquisitions in process control. Would you have any comment on that? Thanks.

Okay, thank you Colin for the two questions. As for China, I will not give too much emphasis on this 11% growth, which we have seen in the last quarter. This again is quite volatile. And it just takes one large order, and the picture looks completely different. I think China will continue to grow, that's my belief, unless the world economy was to come to a screeching halt. And we are so strongly positioned we are bound to take advantage of that. So it has been 11% and that point was eventually the same as Chinese GDP, that really was just a coincidence and I will expect this number to increase again.

As for your second question with regard to acquisitions, you specifically asked about acquisitions upstream and process automation, if I understand correctly, right?

Yes.

Well let me then repeat what I said before. I think the primary emphasis, when we look at acquisitions, is on automation product and power products. Process automation, power systems we would also would make acquisitions if the right targets are available. And yes of course, there may be certain targets available that could be added to process automation. It is not obvious that the right targets are of the magnitude and size that you would consider them to be really of strategic significance to ABB.

Let me give an example. If there was a target that has $300, $400m in sales, that is significant for the division, it will add quite something, but for ABB it was really not a strategic move. So we will talk about the acquisitions of larger size, those are mostly in the automation products field and power products.

Okay, that's very clear, thanks a lot.

Thank you. Next question, please.

The next question from Mr. Gianmarco Bonacina of Euromobiliare. Please go ahead, sir.

Yes, my question is if you can comment maybe evolution of T&D in other countries apart from the use of China. Maybe something on Russia or other countries, where until now the money spent by the government or by the owner of the network, has been quite low. So maybe it can be also your opportunity, even maybe being in the coming years.

And second question, on Europe. I know that the European Union is discussing about potential investment for improving the cross-border network. And so what do you think here, again for the medium term, because it is not something for 2007? Thank you.

Thank you, Gianmarco. I try to summarize my answer for both questions. The general comment is our feeling; our outlook is very good, very positive. It is not the usual suspects like China and India, where we have a lot of project activity and the [inaudible] coming in.

But you mentioned Russia. Russia we have seen quite a significant increase in our own activity in Russia as well. Europe is doing excellently, as we mentioned in our press release. We see many projects that are being discussed in Europe. Also trying to achieve what is the goal, the political level, the full integration of Europe. You can just politically stipulate that they physically enable the flow of energy. So there is a lot going on.

I would say in the U.S., as I have just mentioned before, we have probably seen more activities on the D side, on the distribution side, than on the large transmission sector. That's still to come in future years.

And finally, in Latin America we have seen a certain uptake in demand. Actually Brazil did very well the last quarter. It remains to be seen how that continues.

And then in the Middle East, that's just a region that is bound to grow for the years to come, assuming the oil and gas prices stay where they are and move even further upwards. So all together a very positive environment [inaudible].

Okay.

Thank you. Next question?

Next question from Mr. [Gerald Moore], SG. Please go ahead, sir.

Thank you for taking the call. A couple of questions please. The first question is on pricing within transformers. Can you just talk to us a little bit again about the market? Exactly what kind of demand you're seeing there, what kind of additional supply do you anticipate to come on stream? And really, do you expect to continue to raise prices throughout the year?

The second question is on acquisitions. You've mentioned during the call a couple of times that you will take a very disciplined approach towards acquisitions, and that they'll need to create value. Can you maybe be a bit more precise than that and let us know exactly what your value creation criteria are?

And the third question is really on Europe. You've obviously very strong growth in this quarter. Can you give us an idea of your view of the sustainability of this growth? And is it something that can last for the next few quarters or the next few years?

Okay, thank you for your questions. Let me start with the second one, that's with the acquisitions criteria. You specifically asked about our benchmarks or measurements to gauge value creation. What we do is classical MPV, and I think that's by far the most important way of how we assess acquisitions. We do the business plans including synergies, restructuring cost. And then we may look at different scenarios, and we look at the outcome of that and what it means to us, classical MPV.

Another thing we look at is what's the total return on the investment we have to make to get the acquisition done? And how does that shape up in the third year after the acquisition, assuming the first year is highly distorted anyway by restructuring costs. The second year you're going, hopefully, in the right direction to reap the synergies and all the benefits. The third year you should be there. And then there is a certain minimum requirement, what we would like to see after the third year.

Last but not least, accretion dilution is also a factor which we have to take into account, because the market does look at it, at the impact on earnings per share. I would say if the other factors are very convincing, I would not let a dilution in our EPS for one or two years deter us from making a very good acquisition. But, of course, we take it into account, and if it was extreme it would make us question whether we really want to go forward.

So much for acquisitions, as for Europe, your question was whether this strong performance of Europe is bound to continue. I would answer that, on the power side, we have every reason to feel confident that yes we continue to see a buoyant market. Whether this buoyant market leads to the same kind of growth rates that we have just seen is another question. But productivity is very good and it's unlikely that this will stall in the foreseeable future.

On the automation side, I would say it's very much dependent on global G&P. If the U.S. was having a hiccup, Europe will start to get the flu, my feeling is. But at this moment this is not visible so that's also a reason to feel confident.

And as for your first question on pricing on transformers and market events, Michel?

Yes, I would say from the [product] clearly the market demand is very strong. Although you need to differentiate within transformer, the trends are quite different whether you speak about the very large power transformer or the small distribution transformers. I think for us what is important is that it took us a while to catch back on the cost of raw materials that we are now much better in control. And the recent developments that, we have seen for copper now in the months of April, really show that we have to stay on our toes here, and be always ahead to the next movement. So clearly we need to continue managing the prices to protect us from these fluctuations. And at the same time, especially when it boils down to the large power transformers, to also help us manage the capacity restrictions. So it is still a very dynamic environment out there, on the back of a very strong demand.

With that, I was just made aware we are running behind time now, its eight past four. I would like to close this conference call first of all to thanking you in your interest in ABB. As you can guess we feel very proud and very satisfied about the outcome of the first quarter. We give it every effort to make sure that the second quarter will be a success again. And we are all looking forward to seeing you or listening to you and talking to you second quarter announcement at the end of July. Thank you very much, and goodbye.

Bye-bye.

Ladies and gentlemen, the conference call is now over and you may disconnect your telephone. Thank you very much for joining, and goodbye.