Abb Ltd (ABB) 2007 Q3 法說會逐字稿

Good afternoon. This is the Chorus Call conference operator. Welcome to the ABB Third Quarter 2007 Results Analysts' Conference Call, hosted by Fred Kindle, CEO of ABB. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. We would kindly ask each caller to limit themselves to two questions only. For those journalists who have called in, your participation is in listen-only mode. This call must not be recorded for publication or broadcast. A replay of this call will be available for two weeks following the conference. (OPERATOR INSTRUCTIONS). At this time I would like to turn the conference over to Mr. Fred Kindle, CEO of ABB. Please go ahead, Mr. Kindle.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining our analysts' and investors' conference call for the third 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.

Let's have a look at chart two. Please refer to chart two for our Safe Harbor text regarding forward-looking statements that may be made today.

Chart three. Then we start with an overview of our performance on chart three. A combination of strong market growth and operational discipline has once again paid off for ABB. Our market and technology leadership, together with performance improvements, are helping us to reap the full benefits from continuing global growth and heightened concerns about climate change and energy efficiency. Our customers continue to invest in expanding power infrastructure in emerging markets and in replacing aging equipment and strengthening grids in mature markets. Industrial customers have also maintained investment in productivity improvements and cost reductions by lowering their energy consumption.

As a result, Group orders increased by 25% in local currencies to reach $8.3b. It was the 11th consecutive quarter of double-digit order growth for the Group. Revenues grew by 19% to $7.2b. This reflects a combination of our very strong order backlog and some further price increases to offset higher raw material costs.

Our very positive revenue growth and our ongoing performance improvements allowed us to generate EBIT of $1b, up 55% versus a year ago, and an EBIT margin of 14.4% compared to 11.8% in Q3 last year. Included in this quarter's EBIT are approximately $30m in restructuring costs, of which some $15m is related to the transformer consultation program we launched two years ago. Restructuring in the same period last year amounted to approximately $17m, of which $5m was associated with transformers.

Net income rose 86% to $738m. In addition to the higher EBIT, our net income benefited from a low tax rate in the quarter, just 22% compared to 29% a year ago, as our ongoing performance improvement has allowed us to accelerate the use of our tax loss carry forwards. Net income also benefited from our lower debt levels and a corresponding reduction in net finance expense.

Our stronger earnings performance led to increased cash from operating activities despite higher working capital requirements to support growth. Our net cash position improved further to approximately $3.3b. And our gearing level fell again to 22%, compared to 25% at the end of Q2 this year.

In August we announced an agreement to sell ABB Lummus Global, our downstream oil and gas business, to Chicago Bridge & Iron for $950m. This essentially brings to a successful end the strategic program that we launched in 2003 to sell our non-core businesses.

Last but not least, we released our new mid-term strategy and financial plan in September, including updated targets for the period 2007 to 2011.

Chart four. Turning to chart four, this shows our track record on growth and profitability. One of the key conclusions from our strategy review was that we are in the right businesses with the right people, market positions and technology to achieve further solid organic growth with attractive levels of profitability and capital efficiency. Our third quarter results confirm that we continue to head in the right direction. We have now built 18 straight quarters of year-on-year improvement in EBIT margin, dating back to the second quarter of 2003. We continue to see significant potential to grow our business organically and push profitability higher.

Chart five. Chart five summarizes the key figures for the third quarter. Let me say a few additional words here about our order backlog, which continues to expand. It was 33% higher in local currencies at the end of the quarter compared to the same period a year ago, and over $2b larger than at the end of Q2. That gives us continued good visibility and confidence on revenues looking ahead into 2008. At the same time, however, managing this backlog to ensure quality and timely delivery continues to be a key challenge and priority for the Group. We remain positive about this as we still have the potential to debottleneck many of our plants and to build up a decent capacity, if needed, in emerging markets.

Chart six. Chart six shows the order development in some key markets. If we start with Asia, orders increased by 35% in local currencies as China and India maintained their long-term growth plans. Orders rose 34% in China in the third quarter and were 40% higher in India in local currencies. Power infrastructure needs growth in the steel and aluminum sectors and ship building all contributed to the strong growth in the region.

In the Americas, order growth slowed to 5% in the quarter as higher industrial demand, especially in process automation, was partially offset by a lower level of power grid investments in the U.S., compared to the very high levels seen in recent quarters. I'd like to note here that we don't see this as a trend in the markets. We remain confident that U.S. utilities will continue to invest significantly in their grids in the medium to long term. We do see a certain slowdown in housing-related power distribution activities in the U.S., but our exposure to this market represents only about 1% of the Group's total business volume. In the meantime, we continue to see double-digit overall growth rates in the U.S.

In Europe we saw significant investments in power infrastructure during the quarter, such as the $400m order to link the world's largest offshore wind farm with the mainland grid in Germany. Orders in Europe for industrial automation products, such as dryers and motors, also grew strongly in the third quarter, contributing to a total 36% order increase in the region for the Group in local currencies.

Some of our biggest European markets turned in outstanding performances. Orders in Germany, for example, more than doubled, thanks in large part to the wind power order that I mentioned earlier but also because of very strong performance in automation products. Overall, orders from Western Europe rose 38% in local currencies in the quarter.

In Central and Eastern Europe, orders were up by more than 20% in local currencies.

In the Middle East it was another quarter of power infrastructure investment, especially in the electricity-intensive aluminum industry. Each of the two power divisions saw orders more than double in this region in the third quarter, and automation orders were also higher. As a result, orders in the Middle East alone were up more than 100% in the third quarter. However, when you include North Africa in the region, as we do, where we didn't have the same level of large oil and gas orders this quarter as we had the same quarter a year ago, our total orders were flat.

Chart seven. Chart seven provides you with a quick overview of our performance by division. Starting with Power Products, orders increased by 30% with another strong quarter for transformers. Revenues were up 26% in local currencies and were higher in all businesses. The strong EBIT margin mainly reflects high factory loadings, although productivity improvements also supported the margin. And as I mentioned earlier, the Power Products EBIT includes $15m in costs associated with the transformer consolidation program in the quarter, compared to $5m in the third quarter last year.

Power Systems had another sharp increase in orders during the quarter to $1.8b, a 63% increase compared to a year earlier. This was driven in large part by power interconnection projects in Western Europe, as well as investments in the Middle East. Revenues grew across all businesses and were up 22% in local currencies, based on solid execution of the strong order backlog. EBIT rose by almost 60% and the margin increased to 8.6% from 7.1% one year ago.

Order growth in the Automation Products division returned to higher levels in the third quarter after single-digit growth in Q2. Demand was up in all businesses and regions, and orders grew 18% in local currencies. Revenues increased 22%, still in local currencies, as a result of higher volumes and price increases to cover higher raw material costs. Revenue growth and high capacity utilization led to a 42% increase in EBIT and an EBIT margin of 17.4%.

In Process Automation demand remained strong in metals and minerals, driven by high copper and steel prices. However, orders were down in pulp and paper and we received fewer large orders from the oil and gas industry in the third quarter, which resulted in the slight local currency decline in total orders of 2%. Revenue growth of 7%, plus 7%, mainly reflects the timing of the execution of system orders. Especially in the metals and minerals sector, we are increasingly taking orders on which work will only begin and revenues booked after 12 months. This is considerably longer than we have seen in the past and is related to the current tight supply situation in this sector. EBIT in the Process Automation division grew in line with revenues, and the EBIT margin remained at basically the same level as a year ago.

Finally, Robotics recorded a 19% increase in orders, mainly the result of continued strong demand from general industry and our successful efforts to develop the non-automotive robotics market. The automotive sector remained weak in the third quarter and we don't see that changing any time soon. Growth in automotive-related orders is also being affected by our greater project selectivity. On the other hand, we are pleased to see the 16% increase in revenues in the Robotics division. This is the first upturn in revenues since the first quarter of 2006 and is a result of the steadily growing order backlog finally flowing through to revenues. As a result, EBIT quadrupled and the EBIT margin reached 5.8% as cost efficiency and improved project management measures continued to pay off, and as the project costs taken last year were not repeated.

To summarize for the Group, another very good quarter with strong organic growth and excellent EBIT margins. So long as market demand remains at current high levels, we expect to further improve our performance going forward. I will come back to the outlook shortly.

Chart eight, please. Chart eight gives you a summary of financial developments below the EBIT line. Net finance expense improved by $16m in the quarter, mainly because we have less debts to service.

I already explained the low tax rate, just 22% in the third quarter. We expect a further significant decrease in the tax rate in the fourth quarter. However, our guidance of a sustainable 27% tax rate over the period to 2011 remains unchanged.

The reduction for minority interest is up once more on the continuing growth of our joint ventures in China and our listed Indian subsidiary. Discontinued operations include our Lummus downstream oil and gas company, as well as our share of a small transformer company in South Africa that we have divested. Here you see a small positive contribution to net income in the quarter.

Chart nine. Chart nine provides an overview of our key balance sheet ratios, all of which continue to move in the right direction. The biggest change is in our net cash position, which improved by about $1b compared to the end of the second quarter of this year, and which now stands at $3.3b.

Our return on capital employed increased to 28% after tax, up from 18% a year ago. The remainder of our CHF1b convertible bond maturing in 2010 was converted in the third quarter, which increased ABB's equity by approximately $170m.

Chart 10. Chart 10 shows the cash flow development by division. The improvement mirrors the high earnings growth, which outpaced the increase in working capital needed to support growth. The only exception to this trend was in Process Automation, where the working capital needed to execute the large volume of system orders in the backlog offset cash effective earnings. We also further reduced our securitization of receivables program in the quarter, which had a negative effect on cash flow of about $160m. Excluding that impact, cash from operations would have been approximately $1b in the quarter.

As a percentage of revenues, net working capital increased slightly to 12.8% from 12.6% last year at this time. This gives us confidence that our measures to improve working capital management are having an effect, considering our strong top line growth.

Chart 11. Turning to chart 11, let me quickly summarize. Our third quarter results were once again excellent. Our global markets remain healthy. We have the market positions, people, technology and brands to take advantage of the positive environment and generate further organic growth and a steady improvement in profitability. However, the other side to sustain strong growth is the challenge of maintaining quality, securing supplies and delivering on time. These will remain operational priorities for the foreseeable future. We also continue to examine strategic acquisition opportunities and aim to close the disposal of the Lummus business as soon as possible.

Finally, in the outlook on chart 12, please. We expect business conditions over the rest of 2007 and into the first half of 2008 to remain in line with the positive market situation seen in the first nine months of this year.

Demand for power infrastructure is expected to continue at a high level in all regions. While U.S. housing-related activities in power distribution may see a certain slowdown, we feel this will not impact the outlook for the Group as a whole.

Automation-related industrial investments are expected to continue at the high level in most sectors, although below the growth rates seen in 2006.

We expect a further significant decline in the tax rate in the fourth quarter, as we expect to recognize additional deferred tax assets for tax loss carry forwards. The mid-term guidance for a sustainable 27% tax rate, however, remains valid.

Let me say a word here about the recent development of our EBIT margins, and actually you may flip back to chart four. As we increasingly get questions about the sequential changes in margin from one quarter to the next, I would also like to avoid the misunderstandings we had last year when our fourth quarter margin came in below the third quarter level, which is a pattern we often see in our business.

I don't intend to start providing quarterly earnings guidance, but please bear in mind that we do still have some seasonality margins related to the amount of restructuring or order costs we take in the fourth quarter. There can also be an impact from the product mix, especially when we have a large proportion of systems revenues coming through the P&L, as is typically the case in Q4. So, while we are happy to see that our Q3 margin this year remained at the same high level as the second quarter margin, we do not consider this sequential quarterly development to be a meaningful measure of our business performance. More important is the year-on-year development.

Finally, let me summarize by stating ABB remains well positioned to benefit from customer investments to reduce costs and mitigate climate change by using more energy-efficient products and systems. This placed our strength in both power and automation, and we continue to see this as a key growth driver for the future.

With that, ladies and gentlemen, I'd like to thank you for your attention and open the phone to questions. And as it happens, the sun has just come out here in Zurich through the fog and I'm glad about that. So let me take the questions now. Thank you.

(OPERATOR INSTRUCTIONS). The first question is from Mr. Julian Mitchell, Credit Suisse. Please go ahead, sir.

Yes, thanks. Two questions, please, the first one is just on your cost of goods sold. You seem to have kept a very tight rein on SG&A expenses this year versus what we saw last year, but your cost of goods sold in terms of the growth rate does seem to have accelerated over the last nine months or so. Is that because of, for example, transaction costs because of currency movements or is there something else going on there?

And secondly, could you give any steer as to how your transformer revenue growth within Power Products has differed from that in medium voltage and high voltage products over the last nine months? Thanks.

Okay. Thanks, Julian, for the question. Maybe I'll start with the second one and leave the first one to Michel. As for the transformer group pattern, as you know, we don't give specific figures for the business units within a division. What is fair to state, that one slight difference between medium voltage and transformers is actually the impact of raw materials, which is much higher in transformers and therefore also the impact of pricing in the top line growth figures. It's fair to state that in transformers pricing has a far larger impact. It could be as much as half or 60% of the total growth, whereas in the total division, Power Products division, the ratio is just the opposite. It may be about 60% volume driven and 40% price driven. And medium voltage, obviously, is different from transformers.

When it comes to markets development, there is not a striking difference really in the demand for the products. These two business units are coupled with each other. Both of them serve on the one hand utilities to some extent. In power transformers that's the large --- sorry, transformers is the large power transformers. But then they are also connected to more commercial, residential and industrial applications. But there's not a strategic difference in the growth pattern that we have seen in these two units.

As for your first question regarding costs of goods sold, Michel?

Yes. Julian, good afternoon. I think that you cannot read too much in the absolute increase of cost of goods sold over the year. What you see going through the revenues now is orders, some of this year, also some of last year's. [These] costs of goods sold reflect the huge increase in raw materials that we have seen. Just as a reminder, copper last year was up 80%, 15% this year. Crude oil, electricity levels even went down. Sooner or later it hits your cost of goods sold. I think the part which is really important to watch is that we still manage to improve the gross margin despite this increase in cost of goods sold. And that, as you can see, we have still done that with the gross margin, which is about 1% higher than it was in the same quarter last year.

Okay. Thanks.

Excellent. Next question, please.

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

Good afternoon, gentlemen. Two questions for me as well, please. First of all, on the Process Automation division in terms of the orders, you highlighted some of the trends between minerals and pulp and paper but also said you'd seen a reduction in large oil and gas. Is that just a timing issue or are you seeing any weakness in that industry?

And secondly, yet another quarter where you show exceptional growth in most of the divisions. In the products divisions, are there any bottlenecks, either in your own production appearing or in the supply chain, that would limit your ability to turn the strong orders into similar growth in subsequent quarters?

Thanks, Charles. As for Process Automation, you may recall, because we actually publicly announced it, we got two very nice orders in about the same time last year in Process Automation from Algeria, from Sonatrack. These were not oil but gas-related orders and they were pretty hefty with regard to volume. And here it's really a question of timing. It's a question of quarters do we get this order, can we book it or not.

What we have seen now is not the trend. The oil and gas sector is still very buoyant. But you have to measure the division's performance really on a yearly annual level, not on a quarterly level. So, our guidance -- our channel guidance for the Group is correct also for Process Automation. The market demand is at a high level. Having said that, we cannot expect the same high growth rates as we have seen, let's say, 12 months ago, in the double digits, but it will come down. But still a very positive environment altogether.

And as for bottlenecks, with regard to the products division, Michel?

Yes. Charles, good afternoon. I think there obviously we are working very hard at trying to solve these bottlenecks as they appear. For instance, if you look at our capital spending year to date, the amount is about 40% higher than the same period last year. So clearly we are investing in places like Vietnam, Czech Republic, Poland, Estonia. At the end of the day, the bottlenecks that are the hard ones to work with are still the same. You know how we tried the large machines in automation division and the large transformers in the power divisions. And there obviously it is part of trying to debottleneck capacities. It is also dealing with longer delivery terms, because it is not an issue that we have to [steadily be the whole] industries offering it.

And so, yes, we are working hard to try to resolve it and I think we are quite successful with a bit of (inaudible). And I would add to that, obviously, still the people issues that are a very proud resource for the whole industry.

Maybe to add just a few words. This bottleneck issue is one that we keep a watchful eye on, because it's not trivial. As you have heard, this has been the 11th quarter of double-digit growth and that's not easy to manage. And bottlenecks are not necessarily on the inside of our own system but they could also be outside. I'm talking about raw materials, for instance. So far I think we've done very well and we continue to do well. We are also one of the leading users of raw materials. That gives us some clout, some purchasing power, with our suppliers. And that's very important because we have seen competitors who had more problems in sourcing electrical (inaudible), for instance. And that's at the moment definitely to our advantage.

But from a more strategic point of view, as I said before, this double-digit growth that we have seen in the past, there's also a ceiling of what we can accomplish. We cannot go beyond that without risking not being able to deliver any more. So, what we have done the last couple of years is pretty much at the limit of what a healthy organization should be doing. Okay.

Thank you very much.

Thanks, Charles. Next question, please.

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

Yes, thank you. Good afternoon. Two questions. First of all, the margin in Power Products looks to me about 17.4% clean. How much further can you take that in the current environment? What is the issues there?

And then secondly, Process Automation, obviously there's a lot of upside to your target of 14%. What really needs to happen? Is it really just a mix issue here?

Okay. Thanks, James, for the questions. As for Power Products, I would slightly reshape your question. It's not necessarily a question of only how far can you drive it up there, but how far do we want to drive it up there because, as you know, when you look at competitors of ours, some of them are operating on a completely different margin level. And at the end of the day it's not the margin in percentage, it's the absolute dollars of EBIT that we create which is decisive. And it may very well be that it doesn't make sense to drive the EBIT margin even higher towards 20% and then lose volume or not maximize the volume any more.

So, we have to optimize two things. It's the margin level and it's the volume level. And as you may have noted from our strategic presentation, we have on purpose not said that in Power Products we want to push the margin even dramatically higher any more. I don't think this would really be the maximization of value creation.

Finally, let's keep in mind we are very transparent; that's good for you. But we are also very transparent for our customers. Believe it or not, there are certain thresholds that you should not touch when you walk into a purchasing department with a customer. Otherwise, they start to look at you a little bit in a strange way.

So, Power Products, the margin what we have stated in the strategic announcement on September 5, that's still valid.

As for Process Automation, the same can be said. In Process Automation, interesting enough, we have actually a higher stretch than in Power Products. And the reason for that simply is that we are not, not yet, best in class in Process Automation. We know what we have to do. I think we have a clear plan that we can execute on but this will take time. This is not something that's going to happen in the next six months. It takes some more operating/strategic measures which will take two or three years to be fully implemented. So, in order to drive it up to the 13%/14% range, as we have stated, this will take a few years.

Yes. I would even add for Process Automation as well that, obviously, it's one of the divisions where the backlog stretches the most over the coming years. It's really we have the orders for large ships, for instance, in the marine segment that will be executed all the way through the beginning of 2010. This year we take a lot of orders in minerals, in metals, and these are also orders that stretch over two or three years. So, we are happy about the margin level that we see in these orders. Before it hits the income statement, it still takes a while. But that's why, as Fred said, it will take a while to come up. But we feel we are putting the right ingredients to work there.

Great. Thank you.

Thanks, James. Next question, please.

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

Good afternoon. I have two questions, please. The first one is on the restructuring. You gave the numbers for Q3 in terms of $30m total charges, $15m transformers. Could you give these numbers for year to date as well, and maybe talk about what the full year number could be?

The second question is on acquisitions. It's another quarter with no announcement. If you could talk a little bit about the pipeline in general.

I think I'll let Michel go first.

Thank you, Fred. Okay. On restructuring, so year to date in terms of restructuring we are pretty low, $38m. So, that's about 0.2%. As we have told you already before, obviously, given the full utilization of assets it's a little bit difficult to continue aggressively restructuring at the same time. What we are looking for the fourth quarter is a number between $25m and $35m. So, if you translate, that gives you [about] $60m to $75m, I would say, for the full year. So, we will end up maximum at 0.3%.

Okay. As for acquisitions, Andreas, this may sound a little frustrating but in essence I really can't add much more to what we said on September 5. It's not that long ago that we made that announcement. In the meantime, while we're working continuously on looking into acquisitions, this is not the point in time to come up with any dramatic news. I think what is important for you to realize is that we will do the right things. We will do either acquisitions, if they make sense, strategic and financial, or we don't and then we look into other options what to do with the cash.

We realize cash is piling up. And while this gives us some confidence, we have more cash than we have two years ago, we also know this is not a sustainable situation for years to come. So, there's going to be some action in whatever way in 2008. And until then we just have to ask you for a little patience that we know what we need to do and we will come forward with the right action in due course. Okay?

Thank you.

Thank you, Andreas. Next question, please.

The next question is from Mr. Julian Beer, SEB Enskilda. Please go ahead, sir.

Thank you, madam. Good afternoon, gentlemen. A couple of questions, firstly on the margin seasonality issue. I can understand why project-related divisions should show a lower margin in the high invoicing Q4. But would you expect a division like Automation Products to show a seasonal margin drop in Q4? And, if so, could you expand on that?

And then the second question, I think it's probably a quick question, would you expect to be able to communicate a decision on whether to return cash to shareholders along with the Q4 report, or is it likely we'll have to wait later into 2008 for that sort of decision?

Michel?

Which one do you prefer?

Go ahead.

Okay. On the margin seasonality, you are partly right. Typically, when you look at the large project divisions like Power Systems and Process Automation, that is where you have the most of it. Like Process Automation, for instance, invoices much more systems business in the fourth quarter. Power Systems, there is also a lot of milestone accounting on a lot of these large projects. And as a result, the mix of large projects in the revenues is much higher. So that is one reason.

We have also a second reason, especially in Power Systems, where we finished the execution of some very successful large projects in Q2 and Q3. That was one of the reasons why we had these good margins. There's not so many large projects that we intend to finish in the last quarter, so that is another reason.

But then you have some spill through effect as well, because at the end of the day, when Power Systems invoices finally a utility, for instance, for a large project, that means also that Power Products invoices to the Power Systems division some very large transformers or primary switch gear that also carry a bit lower margin than the usual product mix that you see in other quarters. So because of that, you have a little bit of a distribution of this lower margin into a product division as well.

It's maybe a bit less obvious in Automation Products. I think there the major phenomenon of Q4 is that Automation Products being a business that ships more than a million units a day, when you have the Christmas holidays, obviously they have less days in the year to make money and that has also a certain absolute impact, I would say.

As for your second question, Julian, I run the risk here of completely frustrating you and a few others but I really cannot comment on whether we are able and willing to make an announcement on cash redistribution back to shareholders with the fourth quarter announcement or not. And you can think through the scenarios yourselves. There is different scenarios you can think about and in most of these scenarios you cannot make an announcement; in some you can. It's completely open at this moment. And I think, at the end of the day, it's also the Board that needs to decide on certain issues. And therefore, it would not be very wise for me to become too specific about that and make a statement that is quoted everywhere and it can start up a prejudice for future actions.

Again, we are very well aware of our situation. And I want to go that far and tell you that if it's clear to us that the prospect for making any meaningful acquisition that would absorb a sizeable amount of our cash is completely gone and unlikely, then we're not going to hold back with the decision until the end of 2008. That's not going to happen. But that's probably the most -- the maximum statement I would like to make now. The rest really should be open for our key decision makers, including the Board, to think about. Okay?

Okay. Yes, that's made it quite clear. Just one quick follow-up question. Do you expect to have any charges which don't relate to the core business areas which we should be thinking about for Q4?

At this stage, I would say not really that I know about. As you know, there is not much left in the non-core business, so there the appetite for charges is -- I would say the possibility for charges there is much lower than it used to be in the past. So from what we have so far in (inaudible), not that I know about.

There is also, as we mentioned this morning, some upside, mainly on the tax aspects. As we have explained, this quarter we have a tax rate of 22%. As we keep now making more and more profits widely distributed, including in some countries like the U.S. where we have a number of tax loss carry forwards, it has now reached a point that also because the visibility of our financial plan for the future in the U.S. is much better, that we will have to start rebuilding deferred tax assets in the fourth quarter. And it is already difficult at this stage to give an order of magnitude, but I said this morning in the press conference that this would probably allow us to have a tax rate around 10% in Q4. So that is obviously a one-off which is worth to mention.

Excellent. Thank you very much.

You're welcome, Julian. Next question, please.

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

Yes. Good afternoon, everybody. Fred, just two questions. Automation Products looked to have very good growth. I know -- I hear your comments on maybe Process Automation not quite as high growth as before. But what is driving the Automation Products, if anything, acceleration in growth? And how long can that be sustained? Thank you.

Thanks, Mark. Actually, we have the impact of large orders changing the picture in each of the two divisions in a different way. As I just mentioned, in Process Automation it's largely due to the fact that we didn't have that many large orders. That they have been suffering is too much of a word. They're still positive year to date. But they haven't shown that dramatic growth in this year.

In Automation Products it's just the opposite. They had -- they were massively supported by one large order they got in the third quarter. You may recall it. It was this E.ON order for this train application. And if that hadn't been around, the growth would not have been on this 18% level, still positive in the double digits but not at the same dramatic level.

So it's very difficult to look at one and conclude on a negative environment and look at the other and conclude in a very positive environment. This could change from one quarter to the next. I think important is the basic statement remains that we feel the overall environment is still positive, so we're not concerned about the stagnation or recession. It's not visible to us yet. At least, we don't see that in our outlook when we talk to the customers and the project activity we see. Having said that, it is also fair to repeat that the growth rates that were around 20%, these were exceptional and it would be wrong to expect these to occur again and again for the next two quarters. We are perfectly happy if the growth rates in automation are more towards 10% than 20%.

Okay. And just one second question. Can you give us an update on the potential for some of the larger grid upgrades in the U.S. and where we stand on that? Are we nearer them or further away from them? What's the latest there?

It's an interesting question because just a month ago I happened to visit the U.S. and I got, actually, a very conflicting impression there talking to many utility executives and CEOs, West Coast and also Texas and East Coast and so on. What is very positive, there is no doubt that these guys need to invest and they're all asking for help and support. And there is quite a few challenges they need to cope with. And these challenges all make ABB a preferred supplier, a player in this industry that can help them. So I'm very confident about the medium and long-term outlook in the U.S.

When it comes to these very large projects, which typically are linked to speculation on the Energy Bill and similar things, I got the impression that the U.S. today is a very fragmented market. To be honest, the West Coast has a completely different set of challenges than the East Coast. In the West Coast they're talking a lot about how to integrate wind into their grid, which poses new challenges because wind is a very, very volatile and lower quality of electricity that poses new challenges on the grids. Texas, the Texan flag is a Lone Star and that's the fact there with regard to the electricity grid. They're more or less isolated from the rest of the U.S., believe it or not. Then you have the East Coast, where there is more interconnections happening.

So the frank and honest answer is if you see these kind of very large projects that we have seen in Europe, the Middle East and anywhere else, I think the U.S. will see that more on a regional level. We may see some connections within a region or between two or three different states. But if you have national projects or something like that, that's still a longer way to go.

Sorry, just a follow-up on that point. Is there any concern about the financing of these projects? Have the plans been inhibited in any way from what we've seen in the markets?

I got no indication whatsoever.

Okay.

That seems not to be the core issue for them. It's more the regulatory environment. Just to come back to the Energy Bill very quickly, the Energy Bill is something very positive but the actual implementation of the Energy Bill, as usual, takes much more time than anticipated. Up to this point they haven't been really established. The power is in the hands of the Federal Committee to enforce certain corridors. They're moving in that direction. There's a lot of lobbying going on, a lot of debate. And it would be naive to assume that this is a thing which will within 12 or 18 months already have very concrete consequences.

What we have seen, and this is positive, is the action really happens with the utilities, not so much on the political level. Utilities, the CEOs are very concerned. They need to gear up. They're putting together their own initiatives. They're putting real money behind these projects and that's where the action is happening. So, despite what I said, I'm still very positive about the U.S. but in a slightly different way than in Europe.

Brilliant. Thank you very much.

Fred, I would like maybe to just add one thing on the previous question about potential one-offs for the fourth quarter. Michel Gerber just reminded me as well one that is not a detail. Obviously, we do hope and think there is a high likelihood that we will close the Lummus transaction in the fourth quarter. And obviously if that happens, and we hope it will, that would as well trigger a one-off capital gain that we will be able to detail once the transaction is closed. So that's another potential upside.

Thanks.

Okay. Very good, Mark. Can we have the next question, please?

The next question is from Mr. Timm Shulze-Melander from Bear Stearns. Please go ahead, sir.

Afternoon, gentlemen. Congratulations on a very solid quarter. Two quick questions, if I may. Number one, just across your automation business, when you look at your customers, you look at the orders that they've placed with you and the business you've done with them, just big picture, can you talk about the magnitude of capacity increases that you're seeing amongst your customer base and if there are any particular areas that stand out? And then I have a follow-up.

Okay. If you look into sectors, our sectors that are really excelling at the moment as a consequence of capacity additions is classic oil and gas, where a lot of investment is happening. And you certainly know the figures from the oil majors, for instance, the kind of CapEx programs they have ahead of them for the next five years. Exactly the same thing can be said about the mineral sector, which is also expanding in a very rapid stage. Then we have -- following that, we have metals. We have steel and aluminum.

You could say it's really at the bottom of the food chain where the big action is happening at the moment. The higher up they go in the food chain, there's still a positive environment but probably less dramatic, less rapid than in the basic industries -- can you still hear us? Hello? Have we lost the connection, Operator?

The line of Mr. Shulze-Melander is open.

Okay. So everybody can hear us?

Yes.

Okay. So sorry about that. But that was my answer. As I said, a very demanding rapid development, capacity expansions in the basic industries starting with energy, metals and minerals, and in certain divisional sectors that we have seen very lively in the past, marine and other sectors being still positive but not quite as dynamic. And then at the end of the chain, the sectors that have not done that well is pulp and paper, and chemicals to some extent.

Did we answer your question? I guess we lost him. Can we go forward with the next question, please?

The next question is from Mr. [Sam] Nicholls, Quillen Securities. Please go ahead, sir.

Good afternoon. I was wondering if I could ask two questions, one about the China market currently and secondly about HVDC Light. Starting with HVDC Light, I was wondering if you might be able to walk me through the difference from similar competing systems. And secondly on that, I was wondering if the appeal is strictly the value proposition or are there environmental regulatory catalysts that could be stimulating demand as well across your regions?

Okay. Very interesting questions. I'll give Michel a chance to talk about HVDC Light.

No, no, what was the first question? On China? China market, okay.

I can do it.

It's okay. You can talk on HVDC. You're the engineer here.

Okay (multiple speakers) HVDC.

I'll hold off on the China question. We could start with HVDC Light, perhaps.

No problem. Well, HVDC Light is a adaptation of HVDC Classic with certain main differences. The light indication is actually for use for lower amounts of energy, electricity being transported. And technically, that allows us to use slightly different systems with pros and cons. At the moment, I think the ABB HVDC Light seems to be the only one that really has been and still is commercially available. We know that competitors of ours are in the process of positioning themselves to offer something similar but it has enjoyed a very, I would say, a very strong or dominant market position in the last few years and we want to keep it that way.

The attractiveness of HVDC Light is both. It's commercial as well as environmental. Commercially, obviously it gives a lot of the benefits that also HVDC Classic offers, which means the coupling of grids through a DC connection, which gives you all sorts of possibilities to adjust frequency and phases and couple grids that are not completely in sync with each other, flexed our possibility and all sorts of things like that.

On top of that, there is also an increasing environmental aspect to this. HVDC Light is a system that typically uses cable, not overhead lines necessarily, but cables that are either in the sea or on the ground. And HVDC Light is today, for instance, a favored technology to connect grids or systems in an inner city environment where space is very precious and therefore you cannot just build up an overhead line.

We feel that this kind of underground aspect will become more important in the future. It is for the utilities increasingly difficult to get permits to put together new overhead lines because they cut through forest, they cut through landscape, they don't look that nice. And if it wasn't for the higher price, all the villages and cities and communities would force these overhead lines to go underground. But of course, it's a different price range we're talking about. It's a multiple of classical overhead line. The prices have come down and at some point there will be a match. When the prices have come down to a point and, at the same time, the regulatory or approval pressure has gone up that high, the utilities will decide to actually use HVDC Light for just regular connections between different regions and communities.

Once that happens, it's going to open up a new market of very sizable proportions. And obviously, we're hoping that at some point this will take place. There's a few pioneering projects being discussed in Europe. Everybody is waiting for the decisions to be taken. And of course, utilities have kind of mixed feelings about that because once it happens, once the first one, two, three HVDC Light projects are happening for purely environmental reasons, it will be even more difficult for them to get approvals for new overhead lines. So it's a politically very charged, very delicate decision but at some point it will happen.

So (multiple speakers) please.

I'm sorry. That was helpful. Have you finished? I'm sorry.

That was as much as I wanted to say. It is a technology with very attractive prospect and fortunately we are the world leader in that.

Okay. And secondly, about China, I was wondering, State Power Grid, State Grid, Southern Grid, especially State Power Grid keeps increasing their investment plans. And I was wondering why they keep underestimating. Is it because of power consumption exceeding their estimates or are there other considerations as well?

Well, obviously, the power consumption on one side is a major driver, since they have been constantly underestimating their GDP forecast as well and they have to constantly readjust the top side. So clearly, the consumption number that they derived from that is wrong. The second thing obviously is that if a project costs more, given the rise in the raw materials and in the -- given, I would say, the engineering costs to put these projects together. So I believe you see sometimes an acceleration and the fact that the projects have become more expensive for them than they were in the past.

The primary driver is certainly the incredible growth that the Chinese economy has gone through in the last, I would say, 15 years. And as you know, the Chinese government has actually tried to slow down the economy somewhat in order to take out some of the distortions and extremities, but without success. China keeps on growing at a very rapid pace and a company or utility like State Grid is very tightly linked to the five-year plan. So the input from the ministers and so on, and if the ministers are wrong with GDP, so are they. I think that's the primary reason for their continuous uplifting of investment levels and so forth.

Terrific. Thank you very much.

You're welcome.

You're welcome. Next question, please.

The next question is from Mr. Colin Gibson, HSBC. Please go ahead, sir.

Hi. Good afternoon. It's Colin Gibson. A couple of questions, please. The first one, one I've asked several times before, which is about 800xA and whether you think you're getting any closer to shutting down any of the legacy platforms in Process Automation, whether we should still be thinking about that as something for the medium term or whether it's starting to become something rather more near term.

And the second question was on Robotics. You moved the head office to Shanghai, what, a year or two ago. And yet I can't help but notice in the current quarter, or the most recent quarter anyway, three-fifths of your business is still in Europe. I'm looking at the orders pie chart on chart 21. In order to really see a sustainable long-term growth trend for Robotics, do you really need to get on top of the Asian market there? You were talking in the strategy review in September about the importance of the Asian market, particularly for Robotics. What would -- what more do you need to do there to break the market? Is it new product introductions and, if so, when do they come?

Thanks, Colin, for your questions. As for 800xA, we're very satisfied about the progress. We continue to sell it more and more. It is the platform for the future and it is successful in establishing itself in different applications and sectors. So there is no doubt about that. But that doesn't mean that it's immediately going to replace older platforms. And we take a rather, I would say, not passive but a flexible approach to that. We are not [wielding] our interest and enforcing the customers to switch. Customers should switch when they feel that the old platform they're using has no longer the functionality or the features they would like to have, and then it's the right time for 800xA to come in and take over. If you force customers to switch from one day to the next, we actually open up the division for competitive entries and we don't want that. We don't need that. So it's an evolution. This is not a revolution.

And therefore, to answer your question very concrete, it doesn't matter to us whether an old platform is being terminated tomorrow or only two or three years down the road, as long as in these two or three years down the road we're not going to continue to invest a lot of money in an old platform. But that's not happening anyway.

As for Robotics, we are still addressing the many different ways to answer this question. I think first we have to emphasize the fact that the profile of our business has changed quite a lot over the last years. We used to be a business that supplied 75% to 80% of value to the automotive industry. Nowadays I'd say in the last quarters, and this quarter again, the majority of the orders comes from general industry, not automotive. So obviously we have a total re-centering there.

And for doing that, we go on one side to the traditional industrial base that we still have in Europe and North America, and it's working quite well. And we start building from a low level a penetration in the general industry in China where, for instance, this quarter orders are at the moment 40%, and in Asia in general where we have more than 20%. So it takes a while, obviously, starting from low level to make sense in terms of absolute numbers.

I think if you go back to this decision of headquartering that business in Shanghai, it was as much a market-driven movement as it was as well a cost-driven initiative. And it was also a very important signal to say that we had to diversify our supply in terms of Robotics and Robotic service. And that is what we did as well by building a plant in Shanghai that we keep expanding, actually, and by moving some of the production lines we had in Northern Europe and in North America to China. I think we are well on the track there and, as you can see, the numbers start talking for themselves in Robotics.

Okay. That's great. Thanks very much. Just to go back to Fred's answer, please, you -- Fred, you yourself said, I think, a little while earlier on that you're aware you're not best-in-class in Process Automation. So if it's not cost savings through shutting off legacy platforms that you were alluding to in that comment, what is it?

Well, that's part of it but it's not the only thing. We have an additional task to increase, I would call it, the product type of sales in our portfolio that typically come with higher margins. These are typically processes that are locked into the system in one way or the other. We have also to look into our services business. Let's not forget, of the 23,000/24,000 people that we employ in Process Automation, about 11,000 are in services and they do a multitude of different services. And altogether it's a very good activity of ours, quite profitable, especially when you look at it in a return on capital employed perspective. But there's also question marks in there. So I'm not excluding what you hinted, that is one of the key levers to improve the EBIT but it's not the only one. It's not the only one.

Okay. That's great. Thanks a lot.

Thank you. Now, maybe we'll take the last question because checking the watch, it's already past four. Maybe the last question for today.

The last question is from Mr. Simon Smith, Citigroup. Please go ahead, sir.

Hi. Yes, thank you. I had a couple of questions. One of them was with regard to Automation Products. I think in the last quarter, when you had slower orders in Automation Products, you highlighted that you'd seen a bit of a flat spot in areas of low voltage and engineering systems, particularly with regard to large orders. And in your outlook statement you talk about more modest growth in Europe and North America. And I just wondered if you've seen a continuation of those trends within those segments, or if the color that you'd added to your outlook statement was in any way related to those areas.

And the second question was just a little bit more detail on the tax side. So you're suggesting that you could see a 10% tax rate in Q4, but ultimately you believe you'll return to a tax rate of circa 27% by the time you get to the end of your strategic period. I just wondered, could you give us any sort of greater understanding of what the profiling of that might be? And if you can't give the (inaudible) profiling, maybe some feeling as to where you think you now may be able to get to in terms of tax assets.

Well, Simon, as for your first question, Automation Products and the growth outlook, I think what I said before should be taken as the most important piece of guidance. We believe that the market is still positive. We will continue to grow. However, the growth will not be on the level that we experienced the last couple of years, near 20%. This applies to Automation Products. It also applies to Process Automation. I would say Robotics may be slightly different because they have gone through a -- sort of like a turnaround. So that is a more open case.

But for Process Automation and Automation Products, a growth rate which is more around 10% is probably more natural, more sustainable than what we have seen before, around 20%. AP, Automation Products, excelled again. In the last quarter they got one very large order. I mentioned E.ON. If you take that one away, it's at 11%. And of course we have been wrong before, and hopefully we're wrong again and we'll see higher growth. But to be on the safe side, I would say closer to 10% is more likely than closer to 20%.

Yes. Let's not forget, Q4 last year total orders for the Group was 30% and PS grew 71%, so probably the hurdle is high.

Right.

Okay? You're trying to talk about Q4 now? Okay. Sorry about the last question, so we cannot comment Q4. Okay, well (multiple speakers).

So, in the sequence on tax, as you probably know, what I tried to describe here is more an accounting regulation that once you have a certain visibility of your future profitability you have to [milk] deferred tax assets. From what I can see today, it will happen in two phases, the first phase that will happen in the fourth quarter and then the second phase that if everything goes in line should happen in the first half of the year next year. I think by the second half 2008, then we are back to normal tax rates and the usual effect of careful tax planning. And that is where then we should resume to cruise again around a 27% tax rate from there on.

Well, I can only conclude, isn't it amazing how we have to work very hard in operations to change a few millions here and there. Here comes a tax rate change and boom. As long as it goes in the right direction, we don't mind.

With that, let me close today's conference call. Thank you very much for your attention. I hope that you enjoyed the good news and we'll give it every effort to make sure we have good news again at the fourth quarter closing and announcement in February. I think it's a little too early to wish you a Merry Christmas and a Happy New Year, but we're looking forward to talking to you again in 2008. Thank you very much and bye-bye.

Bye-bye.

Ladies and gentlemen, the conference is now concluded. You may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.