Abb Ltd (ABB) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to this analyst investor presentation on ABB's Group result 2007. We have the usual set up. People are here in the room in Zurich. We have people following this conference call and some people over the Internet. So, especially later on when we're coming into the Q&A session, please I'll remind you to wait until you get a microphone so that people on the phone or on the Web can actually hear your question.

There is also again a bit of housekeeping with regard to security measures in case of an emergency evacuation procedure here at the conference. There are no plans to test the alarm today as usual. So if an alarm is activated, please follow the instruction of ABB hosts and leave the room by the exit in the back of the hall. It's -- actually, it's the one to my right, your left, or the two exits here in front of the room. So this is a bit of housekeeping.

Today the conference will be hosted and led by Michel Demare, CEO of ABB Group. We also have here with us today our Chairman, Hubertus von Gruenberg and, as usual, the entire executive team of ABB, in case you have any very detailed additional questions on the business, or questions for Mr. von Gruenberg. And they will certainly be more than happy in trying and answering them.

So with that, enough said, and now I would like to hand over to Michel.

Thank you, Michel. Good afternoon, ladies and gentlemen. A pleasure to see you all here again. Thank you for your interest in ABB and, as Michel just mentioned, I have here the support of the full EC team and the Board Chairman, Hubertus von Gruenberg. And I will make sure as well that once we are down to questions that you also get a chance to talk with all the various members of the Executive Committee so that we can have really a good dialog about the current state of business.

Today, it's all about talking about the results and I'm pretty happy and proud to talk to you about the 2007 numbers that, I think I can say, was another record year for ABB, both in terms of orders or organic growth and revenue growth. But as well, in terms of EBIT, we have posted this year an EBIT in excess of $4b and in terms of EBIT margin which is also a new level never achieved before in ABB.

Our net income was very high, almost $3.8b. That includes about $1b of, I would say, exceptional items, the capital gains on the sale of ABB Lummus, as well as the build up of deferred tax assets that basically give us in total $1b of exceptional net income. If I carve that out, we still have an increase our operating, or normalized net income by 98% compared to the year before.

And we had again a great year in terms of cash flow generation, despite the fact that to feed this machine growing at 20% per annum we have increased our capital spending quite a lot this year. But despite that, again on a full year adjusted basis for the exceptionals, our free cash flow conversion still was 88%.

And if you put this cash flow generation together with the capital market transactions that we have done earlier in the year, I think we can all agree that today ABB has a very solid balance sheet. And that was confirmed again recently by Moody's, that has also now upgraded us to A3. We are now a solid A rating, both for Moody's and for S&P.

ABB is following a very sound strategy, and I want to take the opportunity of this meeting here to confirm that this is still the same strategy than the one that you have heard in September 2007. The targets are still valid and we confirm that, despite what some people perceive as a challenging economic environment, we remain with these targets we set and we definitely want to deliver on.

We have done a lot of work in terms of strategic divestments. This year, mainly with the equity ventures, [Joff Lasfar] and [Mabeley] and later in the year with the disposal of ABB Lummus. All what we have left now is about $100m of assets in three equity ventures, two power projects and one airport. And I really strongly hope that we can finalize the disposal of these three assets during the year as well.

And I've mentioned here a prudent acquisition approach. Yes, it has been a cautious acquisition approach and it has paid off quite well. Yes, we end up with a lot of cash and a little bit of a, unleveraged balance sheet. But we are, for sure, also have not overpaid any acquisition target that we would have liked to look at during last year. So I think it has so far proven right and, obviously, I will develop much more our acquisition strategy later in this presentation.

As a result of all this good news and, of the fact that the cash is there and the balance sheet is strong, we thought it was about time now to yield as well to our investors. And as a result we have decided to again double the dividend to CHF0.48 instead of CHF0.24 last year. At the same time the Board has approved CHF2.2b share buyback that will be effective at the end of this month, with the intention to cancel those shares, latest, by the AGM of 2010.

In terms of outlook, what I can say really is that, today, the demand drivers that have made all these good results for ABB in 2007 are still intact. On one side when we look at the Power businesses, our long-term investment outlook is still very positive. The demand for power-related infrastructure in the world is still high. And we could even say the same in Automation, especially in the industries that are linked with raw material processes like oil and gas, like metals and like mineral.

On the other hand, you have also this theme of energy efficiency which is talked about everyday for the moment, where ABB has really positioned as a very strong supplier and that we feel will continue and that that business will still be there even if there is a downturn.

Obviously, there is a slowdown in the U.S. It's difficult to say at this stage whether it's going to go all the way to a recession and there's also a question whether there is decoupling or whether other economies in the world will come. But despite all that and, given the fact we have in a certain sense a limited exposure to the U.S. and also because of the fact that 50% of our orders nowadays come from emerging markets, we still remain quite confident.

So our outlook is that we're still looking in 2008 for growth rates in the Power business between 15% and 20% and in the Automation business around 10%, barring obviously an extended recession which would force a lot of people to change their forecast.

But what we, for sure, can forecast is that the quality of execution at ABB, which has tremendously improved over the last three years, will continue. We have a very strong order backlog nowadays; almost $23b that provides a very good visibility for the future. We have done a lot of initiatives in terms of low-cost sourcing, in terms of moving our manufacturing and engineering footprint. And that has definitely enhanced, first, our competitiveness but, as well, our flexibility and our agility to react if the risks get higher.

And at the end, we have also invested a lot internally. Sarbanes Oxley that I still want to consider as an investment, as well as 'One Simple ABB' and it is now time to start getting the benefits from all these investments too. And I would expect, for instance, 'One Simple ABB' to have a positive contribution this year to the bottom line after two years of investment.

Just to quickly go through the numbers, in terms of order growth we have posted for the full year an order growth adjusted for currencies of 19% and for the fourth quarter of 14%. We have had an excellent pick up in terms of revenue growth, with 18% full year and 16% for the fourth quarter. Our EBIT margin is now almost at 14% an improvement of 2.8 compared to last year and, as I said, our net income adjusted for the exceptionals is up about 98%.

Let me quickly take you through these adjustments. So if you look at it from a full-year base with a net income at $3.75b, we had a little bit less than $0.5b impact, one-time impact from building up deferred tax assets mainly in the U.S. and we had a little bit more than $0.5b capital gains from Lummus. So that gives you a normalized net income of $2.752b which is 98% increase for the full year, 77% for the fourth quarter. In terms of earnings per share or normalized earnings per share would have been $1.22, which is an 88% increase.

We had as well a very solid cash generation, a lot in the fourth quarter actually. The fourth quarter provided for almost half of the cash flow of the year. You can see again that with the free cash flow of $2.4b, again, adjusted for the net income we generated a conversion rate of 88%. So it is lower than the 115% that we had last time.

We have indicated many times that our target was to be on average at 100 and, given the fact that last year we increased our capital spending by more than 33%, about $765m in total, I think it's a pretty good performance to have an 88% conversion rate with this level of capital spending and feeding the growth.

The order growth of 19% for the whole Company has been achieved through a wide geographical coverage. The champions again were Asia. Asia orders were up 32% adjusted for currencies, obviously, driven by the very good business that we have in China and India.

But as you can see as well, even in Europe we did very well. And within Europe, all this growth was not just coming from Central Europe or from Russia, but as well for instance from Germany and from Western Europe in general, where the amount of investments especially in the power infrastructure has been quite impressive during the year.

Our growth in North America was 15%; a pretty good performance. And in fact the only number that was a little bit disappointing at first reading was the Middle East which only increased -- Middle East Africa which only increased by 1%. But there again we had a pretty tough comparison since last year. We really bagged a lot very large orders in Algeria, in Qatar, in Saudi Arabia.

And so obviously this amount of very large orders made the comparison from one year to another still difficult. If we look at the base orders in Middle East Africa, we were there up 20%. So the business is still there and we're still nowadays going after a very large number of large orders.

Just to give you an example, here, I won't take you through the slides in details but just to show you that we really worked with a lot of large orders. Actually, the orders are getting larger and larger and their proportion as a percent of total order has risen to 20%. This is not that we won this by design. This is just a market phenomenon. We have more and more larger projects. And as you see we have really been successful in hitting a ratio of return in terms of tenders submitted very good all across the globe.

We had a pretty robust top line growth and, as you can see, it was pretty well evenly distributed. You can see the two Power divisions have basically risen their orders by 25%. The three Automation divisions, it just happened they all grew by 13%. But as you can see, it is really a very steady evolution since the last three years and which has been followed as well by a very good revenue recognition. So not only do we bag all these orders, we also execute on them to the point that we are able to invoice our customers.

We ended the year with a backlog of almost $23b. That is a 32% increase adjusted for currency compared to the year before. And if we look at it in terms of visibility of the backlog, what is also important to understand is that not only orders are becoming bigger and bigger, they also extend over a longer period, which is normal in this field of full capacity. In both factories and engineering, people plan ahead much more than before.

So the Power System division, for instance, that represents 32% of our backlog has in fact a backlog that ranges really all the way to 24 months. Process Automation is really going towards 18 months and sometimes even beyond, Power Products on average a little bit less. While obviously Automation Product divisions and our Robotics Divisions have a shorter backlog. But that is important to understand that this $23b that we started the year with, are not all going to be executed and delivered within 2008.

We have, in fact, as well enjoyed a pretty steady margin expansion and I think this slide is really a very good illustration of the quality of this portfolio. Then if we looked at each division has really improved their margin compared to last year, whatever the exposure in terms of geographies or in terms of industry.

And even our Robotics division that was a little bit of a sick child I would say last year, we have worked very hard now and made the investments to turn around the manufacturing footprint, to expand the R&D, to really do what was right, come out with new products. And this year, again, our Robotics division has grown in terms of orders and has posted a profit which already reaches now the bottom sign of the target range that we have for 2011.

Let's quickly go now to the division reviews, starting with Power Products. This has been again a very powerful year for Power Products. Orders up 26% in the fourth quarter and 25% for the full year. A great revenue recognition as well of 27%. You see, by the way, that this is now $10b division, Power Products. We have seen the three segments of Power Products, High Voltage, Medium Voltage and Transformers all performing very well, with Transformers leading the train in terms of order growth.

We ended up with an EBIT margin of 16.3% for the year and 16.0% in the fourth quarter, as this was also the quarter where we posted most of the restructuring expense. Actually, to talk about that, our Transformer restructuring program is still going on. We spent this year about $34m for it, so we are now programmed today at $195m. And we intend, as planned, to continue this program next year and spend the last $45m that will finally get us to the $240m that we had announced back in June 2005.

Moving on to Power Systems, a very strong performance there as well. A 26% full year order growth and negative growth this quarter. There again, we had to see that the hurdle was really very high for the division, if we remember that last year we had about $800m of large orders just in the fourth quarter. We had a large order in Qatar, we had one in Saudi Arabia, another one in Canada and a few more that finally made $800m.

So obviously, again, these large orders come and go. Timing is sometimes a bit difficult to say. So we have an order decline for this quarter, but nothing that we are preoccupied about. The request for large infrastructure projects is still very high and we are working on a very high tender backlog at the same time.

Another very interesting point is that Power Systems achieved a margin never seen before for the full year, 8.4%, and even exceeded 9% in the fourth quarter.

Moving to Automation Products, Automation Products is the business that has now steady improvements year after year and after year. Not that it is a slow grower, as you can see, 13% growth for the full year, 10% in the fourth quarter and 18% revenue growth.

In terms of EBIT margin we have again put a new precedent, moving from 15.4% to 17.1% both for the full year and for the fourth quarter. So there really the hard work continues. The market is there. We are growing faster than the market. At the same time, we are working very hard internally to optimize factory loading and to keep moving our plant to lower cost locations which allows us obviously to be much more competitive on the cost side.

Moving on to Process Automation, Process Automation had overall an excellent year and especially had an excellent quarter in terms of order growth. If you remember we had a bit of a question mark, or at least you had a bit of a question mark in the third quarter, where we had in fact a flat order growth and also a difficult comparison there due to $400m large orders that we have had in Algeria back in August last year. We said we were quite optimistic for a good fourth quarter and, as you can see, it was delivered with $2.3b order intake which is an increase of 54% compared to the year before.

EBIT margin was also a solid 11.3% in Q4, 10.6% for the full year and I would say there, on top of all the recipe that I already explained before for the other divisions, I would say that Process Automation as well as Power Systems has again benefited tremendously from the very good project management and risk management that we have put in place, both at the stage of risk review, selectivity of tenders and finally project execution. This is really a very hard work that is now paying off handsomely. I would say that today the quality of our project portfolio both in Power Systems and in Process Automation is really excellent.

And finally Robotics, I've already alluded to. I think one of the very good results we have in Robotics is that, not only the business managed to grow again 13% for the full year. But on top of that, it managed to grow while reducing its dependence to the automotive sector. A couple of years ago, 75% of the orders we were taking in Robotics came from automotive. Nowadays, it is less than 50% and obviously that makes a lot of difference, and this is also why we manage to keep going despite the fact that the industry -- the automotive industry is obviously not doing much better.

We even managed to finally correct the impact of a number of quarters of declining order growth and finish the year with 3% revenue growth. So that one is now turning around as well. And we reached in Q4 an EBIT margin of 6%. So we are really now well on the way to start targeting the higher side of the target range we have defined last year.

How are we doing compared to our targets? Well, we are doing quite well in terms of revenue growth. Obviously, we have to see that over a five-year period. But we start this first year at 18% revenue growth while the target was 8% to 11%. We are well in the middle when it comes down to EBIT margin with 13.8%. We had normalized, for the purpose of this slide, our EPS growth, our ROCE and cash flow conversion to take off this one-off effect so that we can really measure our operational performance.

EPS growth obviously at 88% is very strong and return on capital employed which is obviously a very good story as well. We are already now at 30%. And finally, our conversion --our free cash flow conversion as a percent of net income is as well now at 88%, while over a five-year period we try to reach an average of 100%.

All our divisions are as well doing very well with regard to their targets. They are all growing much faster than what we have announced as the five-year target last September, except Robotics which I have just mentioned has turned around and finished the year with a positive 3%. In terms of EBIT margin, they are all as well very placed toward the high side of the range. And Robotics now has rejoined its own range and, hopefully, will continue climbing towards this 10% top-of-the-range target.

Let's go a little bit more in details in some of the financials. And as you know, I have always focused in the last year on what happens also below the EBIT line, also because you tended to focus on that quite a lot in the past too and that is also where often we had bad surprises. Obviously, the situation looks much better today. First of all, our very good cash situation means that our financial expense for the year are basically zero, coming from still more than a $0.25b two years ago. And I expect this year that, obviously, we will have a positive income now given the cash situation that we have.

Our tax rate keeps on coming down. Officially, it's at 15% because of the recognition of deferred tax assets. But if you exclude this event, in fact, we would be at 27% which is in all a good, progressive reduction. On the other side, our minority interests keep growing which is a good sign of the good health that our businesses in China, in India, in Russia have nowadays.

And finally, the one that is obviously the major change, the one where you have seen most of the surprise in the past, this discontinued operations in fact now are showing a very positive number. $530m out of this $586m is the gain on the sale of Lummus. But finally, I would say that all the assets that we had to one day dispose with a tremendous loss have now left the balance sheet of ABB.

We have obviously kept a very strong focus on operational excellence. On one side, despite the fact that raw material costs kept increasing and despite the fact that energy costs keep rising, we have managed to again increase our gross margin by another 2%, which means that in two years our gross margin has changed by 500 basis points from 26% to 31%.

At the same time, we have been able to run this very fast-growing business, growing at 20% per annum, keeping still a good control over our SG&A expense that increased only by 8% during 2007, which obviously gave us a pretty good reduction in SG&A if you compare it as terms of percent of revenue. And obviously, the explanation of these two charts is the fact that productivity numbers have really come up, both revenues per employee as well as EBIT per employee.

I briefly talked about the cash flow. These are also I think quite impressive charts, where you see that our cash flow from operating activities have gone from just $1b just back in 2005 to more than $3b this year. And that our free cash flow in fact for this year was $2.4b which, again, was a conversion of 88%. So the Company is generating a lot of cash, still to my taste a little bit too much concentrated in the last quarter of the year. But I can assure you we are working hard on that to try to smooth out the seasonality effect and have a better cash flow generation throughout the year as well.

Return on capital employed obviously keeps rising. It's only in 2004 that we were able for the first time to have a return comparable to our cost of capital and since then we kept going on. In fact, now if we normalize again on net income, we would be today at 30%. That is obviously the result of a combination of a much higher EBIT from one side, $4b, lower tax rate at 27% but, above all, a number that I always watch very closely of very strict control on our capital employed. Our capital employed -- first of all, this Company runs a $30b business on less than $10b of capital employed and this base, in fact, is only growing at a pace of 5% per annum. And that obviously translates into the kind of ROCE that we are very proud to show here today.

That slide you know I like very much; the historical balance sheet development. And nowadays, the only thing I can assure you is that the gearing cannot become negative. We are now at 19% coming from 87% back in 2002. Our equity as a percent of the total balance sheet, which I had always indicated I would like to have always about 25% of equity, we are nowadays at 37%. And we have turned the net debt of $6b back in 2001 to a net cash position of $5.4b at the end of 2007. We now have more than $8b of cash on our balance sheet.

Organic investment, as we always told you, is the top priority and you can see that, for instance, we have really put much more resources into capital spending. We have increased it this year by -- I said before 33%, actually it's 41% to $756m. And, in fact, it's the first time since many years that ABB is spending more money than depreciation in capital spending. And you see that at the same time we have again increased our annual R&D spend by more than $100m and we plan again to do the same next year.

So let's talk a little bit about balance sheet management. And first of all, obviously, not only the balance sheet got improved by the very good cash flow generation that we have demonstrated throughout the year. But you remember as well that we converted earlier this year CHF1b convertible Swiss franc bond and, thereby, basically moving about $825m of debt into equity which obviously gave us a much better balance sheet position.

Our pension funding has improved a quite lot too. In a few years we have reduced the deficit of almost $2b. We now have a surplus of $22m. So we're basically totally balanced in terms of assets and liabilities in our pension funds.

We have continued our strategic divestments. We have very good cash flow income this year from that. We have managed to keep our net working capital very well under control. Actually, in one year it just increased from 10.9% to 11.1% and that is obviously I believe, again, a pretty good performance given the fact that we are growing the business at the pace of 20% per annum.

And we got, as I mentioned before, all upgrades from S&P and Moody's. Obviously, on a technical perspective, if you calculate the ratios we should even be higher than that. But they as well obviously have some question marks about what we're going to do with the cash. And so they have already factored some material acquisitions into our rating which is, in fact, a very comfortable situation to be in.

So financial flexibility has always been, and still is today, the key in the current environment and we feel that we have today the balance sheet to support its ambitions.

Looking at priorities, nothing new there, it is still the same three priorities, organic investments first, executing value-creating acquisitions second, and returning cash to the shareholders. And we intend -- our goal for this Company is that we need to leverage this balance sheet. We cannot obviously keep forever a cash situation like we have now, nor an equity situation like we have now.

I have always indicated a gearing ratio target of about 40%. We are obviously far from there now. It gives us the first potential calculation. Another factor that is often used is the net debt to EBITDA ratio adjusted for all the adjustment that the rating agencies are doing. And that one translates as well into a range that I would put between 1.5 and 1.8 which, actually, in the currency constants gives you more or less the same number in terms of debt affordability.

Let's look now at the different priorities, starting first with the organic investments. As I already mentioned before this year, we're going to again increase by 40% our capital spending and bringing it to a level of $1.1b. We really need to do this. We have a backlog of $23b that we keep investing and, at the same time, investing in the right location by promoting our global footprint program. And we will again boost our R&D by another 15% which means again another $150m additional that will be pumped into our research labs.

Priority number two is executing value-creating acquisitions. As I said, we are ready. The cash position is strong. We have a very good leverage potential. Obviously, now, the current economic environment is a challenge. It demonstrates as well that it was so far very right to be cautious. Let's look back.

Had we made the large acquisitions last year, we would look today at an asset that would probably would have been overpaid by 20% or 25%. So we have been proven right so far. Now the next proof of the pudding will be to choose the right timing, and decide at which moment the economic uncertainties are fading away, which is the right moment to step in and grab some opportunities which seem to come again in the direction of industrial players.

But meanwhile, as we are in this observation phase for acquisition, we have built now such a strong balance sheet that we feel that it is now possible to already address priority number three, which is returning money to the shareholders. So on first sight, we have decided to look at the dividend and double it again from CHF0.24 to CHF0.48, which corresponds again if you normalize our net income to a dividend payout of 36% compared to 32% the year before. We will pay this year the dividend under the form [the newsie] in Switzerland of nominal value reduction.

The second part of the program is that the Board has approved a share buyback program of the equivalent of $2b that will be used as well, like it is often done here in Switzerland, using the second-line trading model and our intention here is to cancel the shares prior to the 2010 Annual General Meeting.

So what we're really looking at here is improved shareholder returns and, at the same time, keeping the financial flexibility. Looking at dividend, it has quadrupled in two years. It was still only CHF0.12 in 2005 and obviously it was zero in 2004. We now have a $2b share buyback program that is approved by the Board. We have as well asked, or we will ask our shareholders at the next AGM to approve the reclassification of more than CHF2b from our legal reserves into our retained earnings, which gives us full potential in terms of future capital distribution.

And we will as well, after having asked last year our shareholders to approve a new 200m shares of authorized capital, we will now do the same this year to ask them to approve a 200m share conditional capital. Putting all that together, all our options for acquisitions and or for capital distributions are open and available for quick action in the future.

Looking now at 2008 and beyond. So if we look at the fundamental market trends, clearly, what we're still looking at today, even if there are some questions about slowdown or recessions in the U.S., is really rapidly growing emerging economies. We still see the need for further T&D investments even in mature economies. There is a lot of issues being debated about climate change and improving energy efficiencies. And finally, there's a sustained drive for higher productivity through industrial automation.

And ABB's strategic position is exactly there to answer those needs. We are a top global supplier of key products and services, especially in this whole area of energy efficiency and combating climate change. We have leading positions in emerging markets and in mature economies as well. We continue to massively invest in technology where we are already the recognized leader.

We have a global footprint program in place that we keep accelerating. We are globally a very attractive employer, and that is very important. If you remember in our strategic plan we mentioned that we had to increase ABB employment by about 20,000 people to be able to execute. That is quite important to have the right image. And finally, we have an organization that is focused on execution.

We have taken a lot of footprint measures to be able to increase our flexibility. If you look nowadays our order intake, 48% of our orders in 2007 came from emerging countries compared to 44% the year before. So, clearly, the Company is more or less now 50% based on emerging market economies. 43% of our employees work today in emerging economies, but 72% of the new hires came from these countries.

We have about 37% of our capital expenditures spent in emerging countries. But there again, given the fact that our Europe and North American footprint also costs quite some money to maintain, it really means that more than half of the new capacities were invested in emerging economies as well. And finally, we keep increasing our sourcing coming from these emerging countries. It was 33% in 2007, and it is moving up very fast.

Organization and culture are important as well. ABB is an execution-focused culture. We have a very experienced management team in place here. They are all here and you can question and test us a little bit later this afternoon. We are an attractive employer. We have a solid bench strength. We have effective processes and tools and we have really worked very hard in the last year to do that. We have an open and global culture and we are really focused on getting things done.

At the same time, we have been dealing with our issues, one of them being obviously business ethics. And I think that today we can say that we have really done a lot of progress there. Obviously, we still have to deal with the sins of the past and we will. But, meanwhile, the organization has worked very hard under this leadership here to make sure that the values are clear, uncompromised, that we improve the organization in terms of awareness, in terms of prevention, in terms of education. And at the same time, we are working very hard at trying to settle these outstanding issues that we have both in terms of compliance and anti-trust and basically turn the page and move on.

Let's still quickly talk a little bit about acquisitions. You are all very familiar with this chart. It hasn't changed and, actually, it is still totally accurate even in terms of timing. You remember we showed it in 2005. We had put some assumptions in terms of how much net income we needed to reach, having a healthy balance sheet and then we put a timeline. Today we are in 2008 and, as you see going down to 2008, we are talking about any size of acquisition considered within ABB's strategic criteria and financial capability. So this is exactly where we are today. There's really no change from that perspective.

What is the current status regarding these acquisitions? Obviously, we have talked about this a lot. We have done a lot of work internally to identify targets, to really proof test them. We have taken them to our models. I want to remind you again that we have very clear criteria to make acquisitions. We want to see positive NPVs on different economic scenarios. Most importantly, we want after three years to have a return on our investments, including the delivery of the synergies that at least return our cost of capital, so that the acquisition can start also to create value for our shareholders.

And we obviously look as well as accretion dilution. There we are a little bit more flexible. We could even accept some dilution for a limited period of time, if the returns prove to be attractive enough.

Based on those, we first have cancelled some projects we were following just because we didn't like certain exposures that they were carrying along with them. But we have as well looked at odd ones even more seriously and finally decided during 2007 to shelve them because the market uncertainties had suddenly brought down our comfort in terms of being able to reach these return targets that we had fixed to ourselves.

Where do we stand today? I would say nothing has changed. The only thing which has changed is that we have even more cash on the balance sheet. We have even more possibility to leverage and what has maybe changed as well is that obviously markets have changed. Some valuations have come down. So it can also become a little bit more attractive. But as I said before, the bigger issue now is to find the right timing, because what has come down 20% or 25% can also still come down another 20%, 25%.

The key here will be to find the right time where we think that now these acquisitions makes sense and that we may need to move on. So the current economic uncertainties are at the same time a challenge and potential opportunities. But the fact is we are ready. Our homework is done. The balance sheet is ready. ABB is in a great position to take advantage of the opportunities.

Finishing, then, in terms of market outlook and maybe I'll start with the negative column. Already there are a few question marks, not just for ABB, for every industry in the world. It is this question about the U.S. Is it a slowdown? Is it a recession? Is it decoupled from other economies like European and the emerging economies? We have then some factors that were there already even before this crisis start, which are the capacity constraints, both in terms of factory capacity and engineering capacity that also makes that some projects are, if not delayed, at least extended.

We have the uncertainty on the credit crunch. It could one day be that bad that some very large project may be delayed because of lack of financing. We are not seeing that for sure right now. And obviously, we have the construction sector that obviously is hitting the crisis. This is not new. Actually, it had started when we were in the second quarter last year. But it is also something we need to take into account, despite the fact that ABB is in fact not that much exposed to this sector overall.

Looking at the positives, as I mentioned before, the push for greater energy efficiency both in power and industrial sector is there and that is probably the kind of investment that is a little bit more immune to cycles. And it is the same with power T&D infrastructure in mature markets, especially where there is a lot of replacements, a lot of refurbishment and as well a lot of work done in terms of interconnections between states or between utilities.

There is also a need in the emerging economies that are growing at 10% or even more, to be able to follow up with new power infrastructure and that keeps going on as well, as do the high oil prices and the high commodity prices. And these high prices, as we have seen in the last year, finally are driving a lot of new industrial investments.

And finally, there's the need for better industrial productivity which is the only way for companies in the mature economies to compete with low-cost labor coming from the emerging countries. So these factors we think will keep going even if the economies slow down a little bit.

And we think that we have, as I mentioned already before, a lot of internal strengths to go through a little bit of a more challenging business cycle. First, we have our backlog. It gives a great visibility. It gives us ample time to react when we see the times are getting tougher. We still have internally -- what will happen here really is if the markets will start slowing down, we can't expect to receive from the market the margin increments we got before. We're going to have to deliver it ourselves.

We have already worked very hard on it and I think we can continue to do that. There is still a very large untapped potential for cost saving through low-cost sourcing and other footprint measures. And as I mentioned before, 'One simple ABB' also is still to come in terms of G&A improvement from that perspective.

But then as well, ABB has really some structural advantage; our global coverage first, the fact that we are very well balanced. For instance, our exposure to the U.S. is only 10% of the total orders of the Company. So it is important but it is, in relative importance, still manageable.

Our investments in the energy efficiency offering are really independent from the economic cycle. Our footprint measure, not only are reducing our costs, they also help us to balance our currency exposure and to increase our flexibility to react in case of change in conditions. And at the end of the day, we are more of a late cycle Company.

Overall, I would say that probably about 20% of our revenues are generated from early cycle industries. So we have there as well a good capacity to react.

What do we expect for 2008? The sentence is quite simple. We are in different markets and they will behave differently. We are still very optimistic for our Power activities. That should remain buoyant everywhere around the globe, different drivers in different areas. But at the end it translates into a very large increase in orders. Our Automation markets will, for sure, remain attractive in all the emerging economies.

But obviously on the other side, we have some question marks on geographies like the U.S. or activities -- sectors or activities like housing related, that could see a further dampening. And again, we have to work to compensate that with the further development in the areas where we're doing well.

The fact that we and our competitors have a pretty high backlog also means that if orders would slow down one way or another, it would probably not have an immediate impact on pricing. It's only when the backlog starts suffering that people will start reacting more. So that is probably more an issue that will be a matter of discussion in the second half of this year if we are still with the same kind of economic scenario around us.

So, based on all that, I think that I can summarize it by saying that our outlook is still quite positive. And in fact we expect our growth rates and our bit of a mix of orders and revenues to still be around 15%, maybe even 20%, in Power businesses and to be about 10% in Automation business. And that is obviously barring an extended recession but, overall, these are still growth rates that don't really conjugate very well with the world recession and we are sticking to them.

So, in summary, 2007 was another fantastic year for ABB, a record year, never experienced before since the Company was created back in 1988. Yes, we got help from very robust markets, but we had also a lot of operational improvement that really took both revenues and profitability to new heights.

Our net income more than doubled. We were very good at generating cash, CHF2.4b of free cash flow. We got another rating increase that confirmed strength of our balance sheet. As a result of all this great news we have -- our Board will recommend to the shareholders to double our dividend by -- to CHF0.48. And at the same time, the Board has approved now CHF2.2b share buy back program.

What are our opportunities, what are our challenges? Well, obviously, the challenge is all about execution. We have a backlog of $23b and we want to make sure that we execute it is due time, without delay, without quality issue. We absolutely need to remain focused on that.

But we can also use a better business execution that we have really now got in our genes to secure further performance improvement, regardless of the macroeconomic developments. We have to be prepared for changing economy or, I would even say, for changing economies, because they won't all change in the same direction.

We will keep pursuing strategic acquisition for the right value. And finally, we will continue driving for being in the leading seeds in terms of compliance standards for the Company.

And this concludes my presentation. Thank you for your attention, and we're now happy to open the floor for questions.

Okay, thank you very much, Michel. As usual, I think we will apply the procedure that I will take maybe three questions from the room first and then we switch over to questions from people who are on the phone, or maybe there are also people on the Web that will submit their questions via e-mail. So the first question maybe here, Marti.

(OPERATOR INSTRUCTIONS).

-- questions. First of all, on the balance sheet, could you give us an idea of what you think your total deployment potential would be for M&A? Obviously, you've got a net cash position now in excess of $5b. You've talked about your gearing potential. You've also now got this 200m share authorization potential. Are acquisitions in the $15b plus range potential, or are you still thinking that up to $10b is a more likely (inaudible) --?

Well, as I said, obviously the balance sheet keeps improving all the time as the cash flow generation has been excellent. So these numbers keep rising as long as we keep doing that, so I would say, yes. Now in terms of affordability, it you take these three criteria that I explained, the gearing at 40%, this debt equity ratio between 1.5, 1.8, at that same time still keeping enough equity to be able to have a good buffer there in the balance sheet, we can obviously comfortably finance an acquisition in the range you are mentioning in case that would be the best value creation opportunity that we would see.

Yes. I just a question on profitability. You've given an outlook for '08 in terms of organic growth. But in terms of margins, again, you saw incremental margins in your [Power businesses] of above 20% in Q4. But do you still see incremental margins running at that kind of level both from pricing and (inaudible)?

Obviously, our ambition there is still to continue developing our margins. You know that all targets say that in case everything goes well, we would like as a Group to reach the 16% as a the topside of the range. So clearly, with an optimism that we can still have a market helping us to take an order growth 10%, 15%, sometimes even more percent, we do expect as well that this growth is a profitable growth and that it's still results in incremental EBITDA margins in 2008 as well. So we're looking at further progression, for sure.

Thank you.

Okay. Next question, maybe here, Thomas.

Yes, Thomas Baumann from NZB. First of all, to the deferred tax asset recognition. If I'm not mistaken the amount it is a bit above guidance and, at least, what I expected, but you mentioned that in 2008 there's more to come. Does that now mean that you have already consumed what you expected in 2008, or what can we expect in terms of tax?

No. And sorry to have given you an estimate after the last quarter that was a little bit on the low side. Fact is it's a bit difficult to estimate; there's a lot of judgment calls to be done. And what happens really is that the deferred tax asset are really estimated based on, not just results, but more profitability outlook.

And so if you take a country like the U.S., which obviously was where we have the most accumulated tax loss carried forward, it is clear that the sales of Lummus has taken a lot of volatility away, so we can forecast much better with that. And the fact is that the business plan of our operations in U.S. is much better than before. We keep increasing them so we're much more confident today about the profitable outlook for that business.

So as a result of that, we have made our estimate here at the end of 2007. And we finally came with this number, which is in total a net of $475m, which was more than what we had anticipated, but that is the number that sounded right for that perspective.

But that doesn't mean that there is nothing left to come. Actually 2008, if the market doesn't change totally and that we have a total different outlook long term for the U.S., it will probably be again a discussion later in the year. I would say probably more towards as well the fourth quarter next year, when we will again reassess the situation and where we still have the potential again to take a few hundreds of million of additional valuation allowance away from our deferred tax assets.

My second question goes to Process Automation. You mentioned that Q4 was outstanding in terms of order intake. Can you elaborate maybe a little bit more in detail? Is that a change in trend or is it one offs? I saw the large (multiple speakers).

[There was one for really massive].

And also from a strategic point of view, did the intention to increase the product content in the division, what is being done in that respect?

Thank you very much. First of all, I would say that there is no big change in trend. The timing of orders, which Michel mentioned here before, that is very much the case with process automation. And there was a lot of large orders coming in on the fourth quarter, I would say exceptionally, many of them, and they amounted to almost to 700m which is two times almost the previous record.

So that probably tells a little bit of a little bit of a trend that in some industries the customers seems to buy in larger bulks, you could say. They want to have a smaller number of suppliers in one project, which means that a Company like ABB who has a wide portfolio, we can engage ourselves with a little bit larger content combining automation, electrification, instrumentation.

And that you could say is probably a kind of trend issue on the customer side. And this is particular true for, I would say, oil and gas companies who are representing one third almost of our business.

Strategic direction definitely in the division is to increase the product content. And that is driving division kind of to the direction where we are less, you could say, in project business, seen as an EBC company, but we are more seen like a technology company who has a broader own portfolio and, therefore, you could say a deeper value added value chain within ABB's product portfolio.

So it is the direction. It goes quite slowly though because the share of the product in the division is very small. So even if you increase percentage fast, it doesn't really give the volume because the volume is still very much in systems and service. So it's a clear direction, but the impact comes quite slowly.

Thank you very much.

Next question, there in the back, Alex.

Yes, good afternoon, Alex Migliorini from Helvea. Three questions, if I may. First of all, could you give us some additional information on the losses at non-core activities? Are those non-recurring? And on the sharp increase in corporate costs in Q4, at least vis a vis Q3, I suppose currency played a -- was a factor there.

Secondly in Robotics, can we have an idea where we are in the turn arounds and how fast margins can improve from the current level?

And thirdly, in Power Systems, you won that major order in China which I think is a significant technological leap. What are the prospects of getting other similar projects, not just in China, but in other markets? And do we really need to see this technology being tested before you push it more aggressively?

Good, thank you. Let me quickly start with the detailed question on the losses in other income. Basically, you have two aspects there. Obviously, we have now sold most of our equity ventures so we are not enjoying any more the income that was coming from these equity ventures. That explains already part of the comparison for us here.

The rest what you have there is more one timers. It's basically litigation expense provisions for some -- related to actually some very old divestitures that we are still having some litigations about, or even related to another case that dates back to I think 1988. But you still have to sometimes deal with some of these litigations.

And actually that is also, this second one, is the one that is impacting corporate costs because that was more a shareholder issue and so it is booked in corporate costs. On top of that, as you mentioned, obviously there was also some currency impact, given the quick dollar decline that we've seen in the fourth quarter.

If that answer the question, maybe Anders would you like to comment from the Robotics questions?

Thank you for the question regarding Robotics. And that was two questions; one was the turn around where we are and then the margin, where we should end.

Regarding the turn around, that's the different steps we are in there, we have managed the turnaround pretty well. I think we have a solid profit here and that's very much coming out of stabilizing our project business. So we have an appropriate management in place and we execute according to plan. And that's improving a lot during 2007.

The other part of the restructure of Robotics is related to product redesign, streamlining the products, making them more cost efficient. And that is ongoing. We are roughly half way through that product; it takes two year to redesign a robot. And that will be ended at the end of this year.

And then what we are doing as a third step is to looking over our footprint related to sourcing, related to manufacturing and that is also ongoing. So we have partly effects of that during 2007, and more will come during 2008.

Regarding the margin gap, the margin development we are moving. We will improve the margin here. We will follow the gap plan we have that was presented by Michel Demare here earlier. And we are focusing for the two-digit EBIT margin.

Thank you, Anders. And Peter, maybe you can take the question on China, although I have to precise that actually this order was won both by the Power Product division and the Power Systems division. It was more than $400m in total. Peter, please.

Hello. The question was very much related to the technology and will there be more projects in that field. Definitely there will be more, there will be more in China, there will be more -- there will be some in India and most probably there will also be some in South America.

But you have to be aware that the technology has a few preconditions at the customer side. First of all, you need the power to be transmitted. And the power we transmit on this one power line is approximately the power of six nuclear power plants on one line. So there is not too many places around the globe where you transmit this amount of power from one point to another.

It's more in the power of Switzerland?

Yes, it's actually a bit less than half the installed capacity of Switzerland to give somewhere a comparison on that.

And the second thing is this is technology this is also made to transmit bulk power over long distances. So also this is not in many places around the globe the case. But we will definitely continue to work on that because as I mentioned for these countries like South America, India and China there is quite a lot of additional projects in the pipeline.

Thank you, Peter.

Okay, maybe we'll take one more question here from the room before we move over to the telephone. Timm.

Great, Timm Schulze-Melander, Bear, Stearns. Two quick questions, if I may. The first, actually, to Hubertus. Could you just fill us in, in terms of what you see the roll of the Board being at ABB going forward and, particularly, your role as Chairman of the Board?

And then secondly, a question on M&A and the question is would it be reasonable to expect that M&A would be postponed until you have a permanent Chief Executive? Thank you.

Role of Board on ABB's development. Yes, it's a little different in Swiss law, so-called (spoken in foreign language) from what you have in Germany and many other countries. There is a direct strategy responsibility of the Board for overall direction, overall framework.

I guess we are doing exactly that, but we are not dong it alone. We are doing it not in a vacuum. We are consulting, we have our visions, our ideas, we want to lead, to check with the Executive Committee what they consider feasible and we agree on a total framework, the framework, the broad direction that they, when setting it, already have the power.

And that is passed over to them for implementation, for filling in the details and they then come back to the Board saying, listen folks we agreed on these general directions and principles. We have filled the details in and this is what we think it boils down to. Are you in agreement? Then we have a discussion and then it's a decision. This is fundamentally the role that we as a Board, not me, The Board, my colleagues and I have to play. That was the question as far as it went for me I think.

A Chairman has to make sure, and this is what my colleagues here in the executive Committee expect of me, to organize for a more or less unanimous position of the Board. They cannot be torn in between factions, or we get nowhere. That is my role to come back with the combined solution, a combined direction, a combined philosophy, that I need to achieve.

So far, Board decisions at ABB as long as I'm around, have been unanimous. It's not that debate always takes three minutes; it may take a little longer. At the end of day I would not talk about Juergen Dormann's time. Let me talk about my time from May 3 onwards.

All decisions have been unanimous and I was not living the day yet of having to overrule, steamroll, any one Board member vote. And this exactly is the job to have unanimous support of whatever turns out to be strategic direction; that's my job. Thank you.

With regard to your second question, Timm, at the end of the day an acquisition is not a one-man job. There's not just one person that goes there and makes the deal and do it themselves.

Maybe the CEO get involved a way or other in the negotiations but at the end it's those guys here that will do the work after that to integrate the acquisition. So I think it's no way that we can afford ourselves to just put ABB on the sidelines until we have a clear direction what is next. This team is ready, it's the same team as yesterday and we push the opportunities as they come.

Thank you. Now, we will go to the phone. Operator, can we have the first question from the phone?

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

Good afternoon. I just have one follow-up question first. What is a large acquisition in your definition? You mentioned 'large' a number of time on the slides, from when on do we speak about 'large'?

And the other two questions I have, you talked about the savings from one simple ABB. If you could give us some indications what the net costs still were in 2007 and what then the savings would be in 2008.

And the second question, on your buyback, you said you will cancel the shares only in 2010. What is the reason for this, I would call it, low commitment to cancel them? Are you going to buy then back now and just hold them for two years, or are they going to be bought back over that period of time, so CHF2b over two to three years?

Thank you. Well, starting with your question on size of acquisition, obviously, two years ago I would have told you that a $500m acquisition was a large acquisition. Things also changed that. I would categorize a large acquisition of being a multi-billion acquisition.

Obviously, as we discuss before, once we talk about financial affordability we can go higher than that. But I would only consider for a company that has not done acquisition for a while, that a multi-billion dollar acquisition for a start is already an interesting project to work on. So that characterize, I believe, what we call large acquisitions.

In terms of one simple ABB program, I think I have indicated many time to you that this is a project that, once finalized, will probably range in terms of investment between $300m and $400m. We have so far spent about half of that, about $150m, $160m, probably half of that in 2007. So that was a substantial investment.

And as I said, 2008 is the first year where we expect that the benefits generated by this program, the productivity improvements will outweigh the level of investments. Not by much, maybe it's going to be $25m, maybe $30m. But obviously, after that it's something that will keep improving over time.

At the end of the day we think that the potential just in terms of cost saving will, by far, exceed $100m a year and that is just the potential in cost savings. After that you have also the potential of having better informed division managers, much faster access to data, and that as we know speed of decision making is key in all the industries and that will help us quite a lot as well in this one.

As far as the stock buy back is concerned, yes, it is a two years program. We have given ourselves the flexibility to execute as we see it fit, as market conditions come up. And we will -- when there are some and we decide it's the right time to do it.

Now, we could also opt to say the cancellation is for a Swiss company; something that needs to be approved by the shareholder. So if we have done the program partly we could go and let's already cancel these ones by 2009, or then we just leave it open and we say we'll do it all 2010. As you have seen, the wording is really prior to the AGM of 2010, so I would consider that is we have done it all we might consider to cancel them earlier, but it's too say about timing at this stage.

Thank you.

Thank you, Andreas.

Okay, the next question, please.

The next question is from Mr. Rupert Coull, Redburn Partners. Please go ahead, sir.

Yes, good afternoon. It's Rupert Coull at Redburn. I hate to go back to the question of acquisitions, but I'm going to. You said that you looked at some large deals in 2007 which were shelved in the autumn because of, quote, rapidly increasing market uncertainties. You're now saying that when economic uncertainties are fading away is the right time to make acquisition.

Now, to me, that would suggest that you're not ready to deal deals right at the moment. I think it's fair to say that economic uncertainties have only increased over the last six to nine months. So would that -- would I be correct in taking that as meaning that you're ruling out a deal in the short to medium term?

And then a second question is what sort of timeframe are you going to put on making an acquisition before you then consider returning a larger amount of capital to shareholders? Thank you.

Okay. A good profitable value-creating acquisition is a combination of the economic scenario that you put when you make your valuation and the price you pay. So obviously, now, what we're seeing on one side is a little bit less stable economic conditions that have some risks. On the other side, it is also lower valuation. So it plays from both angles and I think you're forced, as I said, it's a matter of timing.

There will be a point in time where all (technical difficulty) is different than the valuations that stock exchanges are showing there. That will probably be the right time to get in and do the acquisitions that we have prepared for.

Obviously, I can't give you a timing for that. Anyway, if we were about to close one tomorrow I wouldn't tell you anyway. So I think we just have to look a little bit further down the road and see when the right time is there.

Okay. Can I just ask, do you think that the companies you are looking at are better value?

Yes, I think we stated very clearly our objectives, organic, acquisition, sending money back to the shareholders. What we see here, this is a first step, a total of $3b, that we think is giving a sign. First, confirming the commitments that we have made, and showing that really we believe that more and more, given the situation of our balance sheet, we will be able to do the two, to have acquisitions and to regularly return some cash to the shareholders as well.

I'm not going to commit to any kind of timing about when is the next time that we will consider returning money again, because our hope, all of us here we entrepreneurs, our hope at the end of the day is to be able make these value-creating acquisitions. So, clearly, the other one is not something now that I would like to put a time stamp on it.

What is important I think is that we have opened this door. We have yielded to the requests of our shareholders. And in a way we feel pretty good about it, actually. The size of this stock buyback is more or less the size of the right issues that we needed to do in the worst time. So shareholders were very generous with us and helped us at the time and now it is also time for payback.

Okay, thank you.

Operator, next question, please.

The next question is from Mr. James Moore, Goldman Sachs. Please go ahead.

Good afternoon, everybody. I've got a few questions. Back to the operating business, I wonder if you could give us some clarity on the price and volume by area achieved in the quarter or the year?

And I wondered if you could comment on the pricing in the backlog and in the orders that you've just been receiving?

And thirdly, I wondered if you could talk about what geographical assumptions you've made behind the sales outlook for both Power and Automation and your revenue guidance?

And the then, finally, when it comes to an acquisition would you consider issuing significant equity as a significant proportion of the cost of an acquisition? Or do you only intend or, at this point, look at acquisitions which are cash or debt funded?

I just wanted to find out from your side, how can you reassure us that following the change of management there isn't something lurking out there that --

Hello. Are you listening to that?

-- come up in three or six months.

What happened?

Nobody wants [those] now.

And my second question relates to your targets, I guess --

She can't hear me.

-- (inaudible) targets it was before a scenario of recession in America set in. So by reiterating in your growth in sales and orders for 2008, should we assume that you're assuming that your business is almost recession-proof, or that you targets are just simply too low?

Okay, good. On your first question, I think I can answer that very simply. Up to 36 hours ago I wasn't CFO of this Company and I don't think I would be standing here if I knew there was some dead bodies in the cupboard. Though, in a way you know my position here as well is a guarantee of stability and continuity in terms of the management directions that we have taken. It is clear that if we knew there was some problems here down the road, there would be -- there would have been probably other alternative solutions than myself. So that I hope does reassure you as far as that is concerned.

I can tell you that the outlook I'm showing you here is what we firmly believe in and you have seen the financial situation of the Company. I don't think there is really any worry to have as far as that is concerned.

The second one when it comes to your target question, I thought first it was a nice question, but it became less nice at the end. No, I don't think we have kind of shoot low on the targets. I don't think that when people see a market that grows at 6% and tell you that they want to grow between 8% and 11% over a five-year period that this a buffer target.

Obviously, we have to look at it through the cycles. And what we try to do when we presented this strategy was not to say today we are at 11% and we're going to go to 16%. We said, listen, we don't have a crystal ball, we don't when the top will be or when the peak will be, we don't know where the trough will be. But in peak circumstances we can deliver 16%.

And especially, what we also wanted to indicate to you is that if really times get tough, with the way our portfolio is structured, we still believe we can deliver 11%. Which, by the way, is 10 more than the last recession in 2001 where we delivered 1%. So they are not low balls. I would say they reflect the five-year environment and it is probably only after these five year that you will be about to say whether we shoot too low.

I must say we would be very happy to deliver on those. There's a lot of value attached behind these numbers as well if we execute them well.

Okay, it's seems we have the people on the phone back so, operator, next question, please.

The next question is from Mr. James Moore Goldman Sachs. Please go ahead sir.

Good afternoon, everybody, can you hear me?

Yes.

Can I ask five question, please. Price, could you talk about the price in the fourth quarter by the key areas?

Secondly, could you talk about the price in the backlog versus the pricing in your current invoicing?

Thirdly, could you just run us through what geographical assumption you've made behind your '08 sales outlook for Power and Automation?

Fourthly, could you mention what speed of buyback we should expect? Do you expect to do much of that in the fist half?

And then finally, if you do find the right $15b plus large acquisition, would you consider issuing equity? And what's the maximum equity you think the market could digest?

Is that all?

Yes.

Okay. Thank you. Well, let me be pretty succinct in the answer as well. Price development in the fourth quarter. I can say as a general rule that we are keeping our pricing power to be able to pass on the raw material cost increases to our customer. I wouldn't say that the market is still as strong that you can definitely still add a premium on top of it. In some markets you can but, as a general rule, I think we're really quite happy to see this development that we can pass on the raw material increase.

What is good to see as well is that, I'm not really talking about prices in our backlog, but we obviously like the evolution of our margin in the backlog which shows that we're still able to take new orders at pretty good price levels and at the same time apply against it a much lower cost base that allows us as well to continue expanding this margin.

That is a little bit back to the story I said before that, when the market doesn't bring it to you, you have to then go and get it by yourself which is obviously working on your cost base.

Assumptions in term of the old -- the growth outlook that I give for 2008, it is probably -- this is obviously a very high level range that we indicated here just to give you an idea of the kind of numbers we are looking at. Obviously, when we're looking at our Power business as it is clear that the tender backlog that we're working on is still quite impressive, and so clearly there is a lot of opportunities out there.

Now obviously, as you know, we have been disciplined over this since many years, we're not just looking at the top line. We also want to have good profitable growth. So that is why you have to always select a little bit the right ones.

In Automation, obviously, what we have said as well is that we still believe that for the moment price levels are good. If the recession would really come or a marked slow down, probably you can expect a little bit more price tensions in the second half of the year as well as the product part of Power. But that is still factored into these numbers that we are giving you here.

In terms of buy back timing. No, I don't think I will comment on that as we said it was a two years program. Execution is left to the discretion of the management and I think obviously we will regularly report on what we have done, but I don't think we should give you and indication of where we're going to do it.

And to finish, it was -- your question was if we do a $15b acquisition should we issue equity.

Or if it was to $15b plus.

I'll answer it differently, because I think what is important is whatever acquisition we will consider we've always clearly said we want to have an investment grade balance sheet. And if it requires to issue equity in order to keep this investment grade, we will. If we can so without, we won't.

Thank you very much.

Thank you, James.

Thank you, James. You actually reminded me of one of the principles that we have in this call, which is please restrict yourself to two questions if possible so that as many people as possible have a chance to ask their questions. Thank you. Yes, I forgot to try to tell you that. And so, please, next question from the operator.

The next question is from Mr. Michael [Lockholm], PNC. Please go ahead, sir.

Yes, thank you. I think I want to applaud the gentleman from Goldman Sachs to actually discuss operating issues within the Company, and so he answered a lot of my questions. But I do want to make a comment.

For the last year most of your quarterly call is taken up with the discussion of M&A, definition of value creative deals, how we're going to do it, and how we're going to fund it. A CEO runs a company based on what is on his plate today. And until he makes a change, it's not on his plate, and so I thought you bought investments for what the Company is doing fundamentally, not what could happen.

Now with that said, I don't think we as an investor in ABB, or anyone on the street is interested in a two-year workout or a dilutive deal. So, a, I think the CEO runs a company on what his team is today, and not what could be, and I applaud the gentleman from Goldman Sachs to discuss operating issues. Thank you.

Well, let me maybe just answer on that one that, for sure, I think we have focused ourselves very much on running this Company and growing it organically and I think we have been very successful at doing that and keeping to improve the cost position and the bottom line. That is obviously a priority that is not going to go away.

The discussion about future deals only comes because of the balance sheet situation, and the fact that you also as a shareholder obviously don't like too much to see so much cash hanging on the balance sheet, that don't have the kind of return on capital that we think we can provide once we bring new additions to our portfolio.

So that is clearly a dual approach that we have to do, when we talk in terms of targets, when we talk in terms of strategic targets, the focus is always on organic growth. We are not making any interpretation or speculation on what an acquisition could bring and cook that in the numbers.

So, I do agree with your comments. I just want to reassure you that indeed running the business is priority number one, and obviously on the other side it is clear also that we have entrepreneurial ambitions. We have a great portfolio that we can still complement by doing the large acquisitions in terms of technology, or in terms of geographical coverage, and it's only natural then that we speak about it when we have the balance sheet we have today.

Okay, before returning here to the room, maybe one more question from the phone.

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

Yes, thank you very much. Just two very brief ones. Michel, you mentioned delivering the order backlog at lower cost base. Could you just give us a flavor, let's say, if we compare '07 to '06, your group margins went up close to 300 basis points. Just how much of that is cost base? Is it a significant chunk, or is it reasonably small and the volume and pricing drivers are much bigger in terms of that profit outlook?

Secondly, in terms of M&A, how important is the geography when you consider M&A? Is it more a case you'd like product? I know you've mentioned you prefer product driven acquisitions, and you can use your distribution to leverage say that product globally. My question is really how important is it to buy -- if you wanted to penetrate emerging markets or something, how important is it buy in India or China or something like that?

Okay, on the first question it's a bit difficult for me to answer to you like this. I don't have the numbers here. Obviously, again, if we look at our 2007 results and you look at the volume of order intake, we have still got the pretty hefty chunk of price increases.

Sure.

That, I would say, was probably about one third price, two thirds volume. So it is clear that based on that price still has an impact on this margin improvement, but without having a number in front of me, I would say with quite certainty that two thirds of this gross margin improvement was cost related, that is clear.

Okay.

As far as acquisition priorities are concerned, obviously, it always depends. As I said before you do an acquisition because you like the technology, because you get a product that you don't have yet on the portfolio, or because you re-enforce your geography. If you look at geography clearly we have preferences.

So we have preferences for emerging markets, China, India, also, for instance, Latin America where we are not as strong as we would like to be. Or even North America, where we are still under represented as a percent of the total ABB portfolio.

But it doesn't mean that if we see a company that has a great technology but is located in Europe, that we would turn our shoes and walk away. So I think it's a matter of what is the primary driver for the acquisition target first.

Okay, can I just follow up? Is that -- is that priority driven?

On that, we will return to the room, if there are any questions here.

Okay.

Maybe, Will.

Fine, maybe to take benefit of some of our division heads being here, that if you want to get some specific questions on their business it's the right moment to ask them.

Okay, thanks you. Will Mackie from MainFirst Bank. On your point there, Michel, maybe in Power Products it appears the orders in Europe jumped about 130%. Perhaps you could give us more detail on that, and what your quote book looks like.

And also within Power Products specifically how you've observed the split in the order and revenue growth between volume and price. And more generally, with regard to CapEx, you're pushing up 100 -- 40% increase. Where are you seeing the bottle necks, and where is the investment going to be directed during 2008. Thank you.

Bernard, would you take those questions, please.

Your question regarding the order thing in Europe. We've got some large orders in Germany. On the one hand, the [H3DC light] connection from the offshore wind parks to the to the grid, that is one part. And then we got large order as well in a power plant for a large transformer order so that is a significant one as well.

Please don't forget that orders which we -- which we have product suppliers receive from German EPC's might well end up in Middle East, or in an emerging market, just due to the sheer fact that EPC's are doing their job and purchasing and then installing the equipment over the globe.

Now, to your question regarding price and physical -- I mean price versus physical growth. In Power Products we have 60% is basically physical growth. Sheer physical growth, meaning MVA, meaning kilograms, meaning number of units, and 40% is price. Meaning increased commodity prices, but also then margin improvement.

Thank you, Bernard. As far as capacity expansion is concerned, [Ulri], would you like to take this one.

If you look at the CapEx structure for next year, there's about a half going into capacity extensions in emerging economies. The other half is going into de-bottlenecking, as we call it, and optimization of existing assets in traditional economies.

Now what you to be aware of is with the half that's going into emerging markets, we are creating much, much more capacity as if we would be investing in the same amount in traditional economies. Plus the prices for the assets, they are also significantly lower, as if we invest into Europe or North America.

Thank you.

Has that answered the question?

Thank you.

Hello. I just have two very quick follow ups. M&A targets; can you just let us know what percentage are unlisted companies? And then, secondly, in terms of the tender backlog versus order intake taken, clearly, we had a quarter with the books still being essentially 1.0. How close are we to the tender backlog actually being smaller than the orders book in a given quarter?

Well, that will be two quick answers as well. I think your first one, I'll answer you this one. The next question you asked me are the names, so I think we should just stop the discussion here.

In terms of tender backlog as well that is not an information that we communicate. So, again, since we now have so much large orders in the system you know I would say our book to bill on a quarterly basis is a bit tricky to follow. You will always have these differences so, I think on the long-term trend we are still doing pretty well and I won't elaborate any further, if you don't mind.

On the phone, any other questions?

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

Thanks very much, two questions, please.

(Inaudible) otherwise we can't hear you.

Yes, certainly, two questions, please.

Who is on the line please?

Hello?

Yes.

Hello, it's Colin Gibson at HSBC.

Hello, Colin.

Hello. I've got two questions, please. First, relating to the medium term targets, the 2011 targets, I appreciate you have a process whereby you review these targets every second year, but can we take it as read that if a significant event were to happen during 2008, for example, if you were to get a new Chief Executive during 2008, you might be prepared to review those targets even in 2008, although it would only be one year since you last did so? That was the first question.

The second question really on Robotics. Looking at the other divisions, they all appear to be ahead of where they would need to be at this stage in order to meet those 2011 targets. Robotics is the only division that still appears to be a little behind, and I appreciate it's the turnaround kid, so a slow start is only to be expected. But it does look a little bit in Robotics as if you'll be trying to win market share and increase your margins at the same time, which is always a hard thing to do. Do you remain confident that both revenue growth and EBIT margin targets can be met there? Thank you.

I'll take the first question so you have time to think about the second one.

On medium targets, Colin, I want to reassure you. Maybe we communicate the targets we've reached every two years, but that doesn't mean that during two years we don't look at them as well. And you know we have obviously, like any company an annual budget process, and we always re-calibrate our long-term plans to adjust for changing economies or changing economic conditions.

After that, it's obviously a next step to decide whether the changes are worth to go out and communicate new targets to the street, or whether it's just something that you manage internally. So, I would say, don't worry. We have the finger on the pulse. Maybe next year it's still not yet changed that much that we need to come out with new targets; it will really depend on the developments. Anders.

The reply now on the second question is, yes.

Thank you.

Why is it yes? Because the Robotics division has been behind in footprint, been behind in low-cost countries, so we're saying being behind in good enough technical solutions, so we have quite something to catch up.

And just to be clear, the 6% revenue growth target, do you see yourself taking share to achieve that target or not?

Another question from the phone?

The next question is from Mr. Simon Smith from Citi.

Volume higher, please.

Hello, this is Simon Smith from Citi. Can you hear me?

Okay, Simon, you can go ahead.

Right, thank you. I have two questions. One was just a clarification. You've made the comment in your outlook for 08 and I think you had a question on it with regard to pricing. I just wanted to confirm you're saying that if there's a potential risk for pricing this year, you see it coming through in Automation Products and in Power Products. Just wondered if you could be any more specific in terms of the general areas that you would see as the greatest risk within those divisions.

My second question; it's always a concept of a recession, an extended recession, definitions of them I think vary depending on who you're talking to. I just wanted to get a feel that in terms of the guidance you've given, what is your view of you know, not an extended recession, are you factoring just a negative couple of quarters in the U.S., without a great impact on Europe? I wonder if you could just expand to me exactly what your definition was there.

Okay. Well, what I can do here, on the first question about pricing just in general, and maybe after that I can ask Tom and Bernard to maybe comment a little bit on their specific business. Usually, yes, when we talk pricing we always refer it a bit more to our product divisions, so obviously our systems divisions who work more on kind of a engineer to order type of pricing, obviously they are also impacted by the price of the product that they sell through their channels. But it's obviously a bit easier to measure when we talk about product pricing really.

And what we meant there with the slide is really to say, well, if it gets a little bit tougher probably it's not going to turn into a lot of pricing war either way, because people still have a backlog to deliver. So it's only if it would be a little bit later that then -- and that you would see the backlog starting to decline that maybe competitors would get nervous and would start becoming a little bit more proactive. But I would like maybe to ask Tom if you can comment a little bit about what you see in your business and pass it on to Bernard after. Thank you, Tom.

Yes, it's my pleasure to do that. Of course, as Michel is saying, backlog is there which will be a pretty good safeguarding that prices will not start to drop wildly. Backlog is there in most of the product areas. However, we for sure have certain business units where the backlog is very short because delivery times are a matter of hours or days, and we cannot sit on a long backlog obviously because we will have a lot of customers who are upset with that situation if it's, for instance, in installation material.

And that is, of course, a risk if building construction markets start to drop also in Europe. Fortunately, we are not really affected by the U.S., situation, simply for the reason that we don't have a lot of suitable products, [earmarked] type product for the U.S., market, so we will not be hit or affected by that to a large extent.

Now, in Europe, I can see that there are some countries which are facing the risk of overgrowth in building construction activities. And then, of course, if and when that happens there will always be suppliers who will try to keep their volumes up by lowering the price. I have been through this exercise already a couple of times through my career, so it's not going to be anything new. And then, of course, that gives then the tendency that prices will flatten out or even to a certain extent go down.

And the recipe is very clear also. These are cost leaders. Cut costs, be proactive, like we are doing with a lot of efforts relating back to, for instance, what Ulri said about low-cost sourcing, global footprint, innovation for sure. So we are preparing ourselves for this situation a situation which, as I said, we have been facing a number of times before. So it will be in limited part of the total volume where I could see that there is at least the potential that something could happen within, let's say, the next six months or so. We don't see it yet, so it is more or less speculation if it will happen or not, and when.

Thank you Tom. Bernard?

In Power Products we see in U.S. the housing-related market of course it is going down. That was also said in previous -- in the previous quarter. This is the very low end of our distribution business. On the other hand, we see an increase on the transmission side, so we see the compensation coming through that we can compensate the, as I said, low-end distribution market with the transmission side on the other end.

Then the pricing is, of course, very much related on the commodity -- commodity pricing -- commodity price and cost behavior. And there we have the same crystal ball when it comes to copper. When it comes to oil, however, we have four, specifically electrical steel, which is a scarce resource. In our case we have long-term frame agreements and that puts us in a favorable position that we can deliver on time to the customers.

Thank you, Bernard. There was also a question about the recession scenario. Obviously, I would say barring an extended recession that would be obviously anything that goes beyond the theoretical definition of a recession which, indeed, is a couple of quarters or more. View for the (inaudible) you know maybe some incentive measures and devaluation of the dollar can at point in time correct that.

And again, the fact that we are not so exposed to the GDP cycle really so that it's also not even with a lower growth rates in the U.S., what Bernard said is that really on the transmission side, for instance, the amount of investments would continue. So it is still a more or less optimistic scenario.

Thank you.

Thank you. David Lodger from Carmignac. You've mentioned a couple of times the importance of your growth from emerging markets as well as the ability to source from low-cost countries. To what extent are you seeing new competition, new entrants into your industries on emerging/low-cost countries? And to what extent are they attacking you from more low-end products, that you then have to innovate more quickly and then quickly get up to the higher ground? Are you seeing much of that?

Okay, I will maybe answer it in a general term. And I think after if, for instance, Tom could be doing some comments to that as well.

We obviously see some movements. If I focus on countries like China, India or Brazil, you start seeing some local champions starting to go beyond the borders. You take, for instance, Crompton Greaves in India that has made a number of acquisitions in Europe, in Belgium and in Hungary, building market channels and starting to push the geographical coverage beyond India.

You see as well in China some companies starting to export to neighboring countries, so even that we hear them being an acquirer candidate from some assets that you hear about in the M&A markets as well. So there is clearly some activities going there.

Same for Brazil, where some of these companies are now expanding into the U.S., for instance, or even into Europe. Clearly, we see it is not yet a very structured movement, but it starts coming. You know there as well regroupings can happen pretty fast, and that's why we have to stay on our toes and remain very agile to be able to compete with these people. Tom, I don't know if you want to comment a little bit more, for instance, on the situation in China.

Yes, I can first of all just confirm what you are saying. Yes, we see competitors coming from [LCD] area, for instance, in the area of installation materials, low voltage products, motors. And what we have to do in being agile here, and what we are doing heavily, is we need to go there and beat them on their home market.

So we have -- I have in all the business units, for instance, in Automation Products, at least one factory in each of China and India. So, we are there and taking the challenge, beating them with our superior technology, playing with the same cost advantages as they have in terms of facilities and people, resources -- resourcing in those countries. I think that's the best recipe for being competitive also in our home market that we can be competitive in their home market. It is an issue to be taken very seriously, obviously, and that's exactly what we are doing. We're really trying to stay on top and being agile on this very subject.

Thank you, Tom. I have, meanwhile also a question by email. And that is how do you see the growth opportunity in India, especially on the large base.

Well, we're still doing very well in India. We have been enjoying now since a number of years a growth rate of 40%, sometimes 50%. You have seen the recent economic statistics in India that still lead to a very robust GDP goals overall. And we know as well that India has in fact a very ambitious program in terms of upgrading their infrastructure, for instance, with the Electricity For All program.

They are also looking at some very important interconnections to bring electricity's to new regions. So we have no reasons to believe at this stage that this growth that we have been enjoying in India for the last year is about to decline. And also because of the position that we have there, so we are remaining very optimistic about the development in this country.

Thank You.

Next question.

Yes, that's fine. Alex.

Hello, Alex Migliorini from Helvea again. Just a quick question. Instead of looking to buy companies, why not buy back your minorities? Have you -- can you give us an idea of what you think it could cost to buy out a majority of these minority interests? I know that some of them are joint ventures where the partner actually -- there is substantial value added but do you have an idea of what it would cost?

It would cost a fortune. In fact, in China we are doing that on a regular basis. We are always checking the status of all the joint ventures we have there. We have sometimes shareholders agreement that allow us to increase our participation so, whenever possible, we are doing it. Now this is offset by the fact that we also keep creating new joint ventures and then you start again from a 50/50 basis to start with. So, it is something we are monitoring all the time.

Obviously, when it was down to our quoted or listed company in India, there you are talking about another type of multiple. Last time I checked, I think the market cap was in excess of $7b, with the earnings multiple in the 60 times, 70 times. At the end it boils down to judging an acquisition like this like any other.

You need to find a return on capital for the money you put down. And on top of that, here you have to also keep in mind that most of the future goals and profitability that you put into your equation will be fuelled by yourself. So it is obviously always a possibility, but it has to make sense from a financial point of view.

We have a couple of minutes left, so maybe we turn back to a caller on the phone.

The next question is from Mr. Gerhard Moore, Societe Generale. Please go ahead, sir.

Hello, can you hear me?

Yes.

Good afternoon. everyone, it's Gerhard Moore from Societe Generale. I have three questions, please. The first one is on your guidance for 2008. Could you perhaps give us some more details on how you see the different divisions performing? For example, within Power do you expect both divisions roughly to perform equally well? While within in Automation Products, or within Automation, I imagine Process Automation should grow at a higher pace than Automation Products. So if you can just confirm that that is your outlook as well.

The second question is on CapEx. Could you perhaps give us an indication of your CapEx spend beyond 2008?

And the final question is just on the tax rate, if you could give us an indication for this year for 2008. Thank you.

Good. That's going to go fast. The guidance, to start with, we are not as you know providing specific guidance. I think here we give you guidance a little bit by family of activities, Power and Automation. It would be really hard to give you more than that, because like Power infrastructure you never know our contracts are being negotiated and you finally end up in the Product division or the System division. So I'm afraid you have to be satisfied only with this generic guidance, because we are not really taking it down to the next level.

In terms of CapEx, obviously, 1.1b is unexplored territory for us. When we put the strategic plan together we have assumed, given what [Uri Spicofer] said before, that we invest more and more in the emerging countries and that there really the costs of a new factory is much cheaper. So you get much more output for the dollar that you invest. We'd assume that over the long term we would probably start tending to go back towards depreciation levels which now will be close to 700m. Now it all depends really how far this cycle takes us. We are, for sure, not restricting it.

This 1.1b was not in the cards when we announced the strategic plan. We're now very happy to build it because we have a backlog that is going to feed these factories as well. So we will adjust this as it goes. If the growth slows down a little bit we will probably gradually come back to levels that get us closer to the depreciation, given our leverage on emerging countries.

As far as the tax rate is concerned, I gave you a guidance last quarter, but obviously now we're in this position to start taking out the valuation allowances on our deferred tax assets, we're going to do that again next year. Obviously, once we have done that, the challenge to keep delivering a low tax rate is really quite high. Because using tax loss carry forwards is obviously one of the best recipes to deliver a low tax rate. But still, [Alfresh Tor], who is in this room here and who is our Tax Manager, has committed to me that he will do his best to keep the tax rate at 27%, and that is obviously excluding the effect of any additional deferred tax asset build up that we will take during 2008.

Okay, thank you.

Okay. Maybe we will take the last question from the phone.

The last question is from Bracker Scherma, CLSA. Please go ahead.

Hello, sir, can you hear me? Hello, sir, can you hear me?

Hello, yes, I can hear you.

Sir, in a recent conference call at Compton Greaves that you mentioned earlier, said that they are seeing a significant slowdown and that demand for distribution transformer stronger than U.S., and even some part of Western Europe they have started seeing a slowdown. In your case, what percentage of your sales would be coming from the sewage and transformers? And how do you see the demand trend ahead?

Yes, I will ask Bernard. Are you going to answer this question?

Well, it is -- for Power Products it is roughly a volume of 20%, which could be affected of the U.S. market and we said that this will affect the Group by 1 -- could affect the volume of the group of 1%. That was the guidance which we gave during the last quarter already and that did not change.

Thank you, Bernard.

Are you seeing a slowdown continue --

(multiple speakers)

No. It's okay. He doesn't have the mic any more, but he tells me that he doesn't see any specific slowdown in activity for distribution transformers in Europe at this stage.

Thanks.

Very good, thank you.

Do you want to make some closing remarks, Michel, before you --?

Very good, well, thank you very much for a lot of interest in the question. Thank you as well for focusing on the business results which we really wanted to take the time to present today. We are again very proud about the results we have achieved in 2007.

I hope we have convinced you that we are still quite optimistic about the outlook for 2008. You have seen here, you have had the opportunity to hear more or less every EC member about their division. The team is strong, we are working here all together, and ABB is really an excellent Company with a very bright future, and will stay that way. Thank you very much for your attention and look forward to see you at the next quarter end release. Thank you.

Ladies and gentlemen, the conference call is now concluded and you may disconnect your telephones. Thank you very much for calling and have a nice day.