Abb Ltd (ABB) 2008 Q1 法說會逐字稿

Good afternoon. Here is the Corus Call conference operator. Welcome to the ABB 2008 first quarter results analyst and investor conference call hosted by Michel Demare, CEO.

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

At this time I would like to turn the conference over to Mr. Michel Demare, CEO of ABB. Please go ahead sir.

Thank you Madame. Good morning and good afternoon ladies and gentlemen. First of all let me apologize for the slight delay. We were experiencing some technical problems with our phone installation here. With me today are two colleagues from the Executive Committee, Tom Sjoekvist, the Head of Automation Products business and Anders Jonsson, the Head of our Robotic business. And with me as well, to help me with the numbers, is Hannu Kasi, our Group Controller and as well Michel Gerber, our Head of Investor Relations.

Thank you for joining this conference call for the first quarter 2008 results. My comments in this call refer to the presentation that you have or can download from our website at abb.com.

Starting with chart two, the Safe Harbor statement. Please refer to this chart for our Safe Harbor text regarding forward looking statements that may be made today. And let's then move on to chart three.

Let me start with an overview of our Q1 performance. ABB experienced a very good start in 2008 across all businesses and regions. Demand from utilities in most of our major industrial markets remains strong around the world especially in emerging economies but also in the United States. Customers continue to invest in areas where we are market and technology leaders - power infrastructure, energy efficiency and productivity. As a result, we saw orders increase 16% in local currency terms to almost $11b. This is the first time that ABB has booked more than $10b of orders in a single quarter.

Revenues grew 17% in local currencies to just under $8b. These excellent results also reflect our continuing strong operational performance. Low cost sourcing, footprint optimization, better project execution and risk management and more efficient capacity utilization all contributed to our improved results.

Further supporting the margin improvement this quarter was a gain of approximately $85m related to the mark to market accounting treatment of various ForEx and commodity hedging transactions. I will come back to this one in a moment.

Our net income in the first quarter reached $1b, mainly the result of our excellent earnings performance, but also reflecting an $80m improvement in our finance net result and a slightly lower tax rate.

Cash from operations continued to improve despite the need to increase working capital to fund our rapid growth.

And finally, we began the CHF2.2b share buyback program that we announced in February and we repurchased just over 9m shares during the first quarter.

Onto chart four. Chart four gives you an overview of the key figures for the quarter. I have already mentioned the strong top line development. We also had a very good quarter for EBIT and EBIT margin and I'll give you a bit more color on that in a minute.

I'd also like to point out that the EBIT margin in this quarter was positively impacted by the mark to market treatment of some of our hedging activities which did not qualify for hedge accounting under U.S. generally accepted accounting principles. The benefit to earnings amounted to about $85m, which is equivalent to approximately 1 percentage point of EBIT margin. The impact was spread across the divisions and resulted from hedging foreign exchange exposures and commodity price changes. The impact this quarter was substantial, given the unprecedented weakening of the U.S. dollar which added to the fluctuations of copper, steel and oil prices.

So, while we had a great quarter across the board and would have reported an excellent EBIT margin improvement even without this accounting impact, you should bear it in mind especially when you are thinking about our divisional margins this quarter and fine tuning your forecast for the quarters ahead.

Return on capital employed after tax meanwhile increased to 32% from 23% in the same quarter a year ago.

On to chart five. On chart five you can see our order development over the last 10 quarters. We've been in the plus 10% local currency order growth range since the first quarter of 2006. It's a track record that clearly demonstrates how well we are positioned in the global power infrastructure and industrial automation markets. These markets continue to show a very positive development and we have both the technology and the geographic presence to take full advantage of them.

Chart six shows you how we have continued to lift the EBIT margin across all of our divisions this quarter.

Starting with Power Products, it was another great quarter with an EBIT margin above 20%. This reflects, to a very large extent, the excellent demand situation we have seen in the past several quarters and the resulting impact it has had on the margins in our order backlog. Utilities in all regions continue to invest in new and upgraded infrastructure. As a result, the pricing environment has been very supportive and we have again been able to pass along raw material cost increases to the market.

Low cost sourcing played a strong role in this division as well and we continue to take down our cost base.

Furthermore, debottlenecking of plants in the mature markets has helped optimize our capacity utilization, meaning that while capacity is tight, we can still continue to increase output from a more or less steady base of fixed costs.

The story is similar in the other divisions. Again the market situation is very good and we are seeing significant volume effects in all our divisions as we execute the order backlog and generate strong revenue growth ranging from the mid teens to above 30% in the Power Systems division. However, these margins are somewhat inflated from the accounting treatment of some of our hedging activities and this is again not an impact that we expect to see continuing over the rest of the year.

Charts seven and eight show you the key data and a summary of the results for each of the divisions starting with the two Power divisions. I won't go through all of these in detail, but I'll point out a few highlights. Starting with Power Products, as you can see, the market remained very favorable with both orders and revenues growing at a solid double digit pace. Orders were high in all regions led by Asia and the Middle East. Orders were slightly high in the Americas due to a modest increase in the U.S. while in Europe orders grew 6% in local currency terms led by Italy, Russia and Turkey.

I already discussed the EBIT margins in these divisions. Let me also note that there were no costs in the first quarter associated with the transformer consolidation program that we announced three years ago. That was the same in the first quarter of 2007, so no impact in either year. We still plan to complete the program on schedule over the rest of 2008, which means you can expect some $40m to $50m in costs coming over the next three quarters.

In Power Systems, the overall market situation remained positive in the quarter even though orders were only 4% higher in local currencies. This is mainly a reflection of fewer large orders taken in the quarter. As always in this division, quarterly swings in order intake can be quite significant depending on the timing of large projects.

Revenues jumped by more than 30% in the quarter as we continue to successfully execute the very strong order backlog. The margin here also developed very well, reflecting the improving margins in the backlog from better project selection and execution. The tight focus the division has put on managing its G&A expenses also contributed to the margin improvement.

Turning to chart eight, our Automation divisions also turned in very strong results this quarter. Automation Products recorded a 15% increase in orders in local currencies with all regions and end markets stronger except for the construction related areas.

Orders in Europe grew 8% in local currencies in the first quarter. Germany led the improvement in Western Europe while Russia was the main growth driver in Eastern Europe.

It is encouraging to note that orders grew at a double digit pace in the U.S. in the first quarter. While the economic outlook in the U.S. remains unclear, we have so far not seen a significant downturn in industrial demand there.

Order growth for AP was also very good in the emerging economies in the quarter, up more than 20% in local currencies in both Asia and the Middle East and Africa.

In Process Automation demand from the metals, minerals and marine sectors was the key growth driver in the quarter as customers in these sectors continue to expand capacity to take advantage of high commodity prices and sustained demand. The margin improvement reflects not only excellent project execution but also a larger proportion of higher margin service and product revenues compared to system revenues.

Finally, Robotics, where some increase in demand for painting robots in the automotive sector, combined with continued growth in general industry to produce a 10% local currency improvement in orders. As the increasing share of higher margin orders from general industry runs through the P&L we can see a favorable margin impact. We feel we are on the right track in Robotics and we expect to see a steady improvement in profitability as we move forward.

Chart nine gives you an overview of our geographic growth trends. As I've already mentioned, orders were high in all the regions in the quarter, once again led by Asia. Orders in both China and India were up more than 30% in local currencies and were higher in almost every business.

Customer investment in metals and mining, especially aluminum and cement, helped lift orders in the Middle East and Africa. And a 9% order increase in the U.S. in the quarter with increases in all divisions drove the overall order improvement in the Americas. And finally in Europe orders were higher in all divisions and grew at 13% in local currencies.

The Power Systems, Process Automation and Robotic divisions showed the largest gain in Europe as customers increased investment for electrical equipment in power generation as well as for oil and gas and minerals development and general industry automation.

Chart 10 shows the split in orders between emerging and mature economies. The long term shift towards the emerging economies continued in the first quarter with our strong local positions in markets like China and India. But also in Vietnam, South Korea and other countries in the region we are in an excellent position to take advantage of this development. Indeed, the plus 30% growth we saw in China and in India in the quarter was the key driver of our overall strong order increase.

Chart 11 shows the development of our order backlog and the share of large orders in our first quarter orders received. The proportion of large orders in the quarter was more in line with recent historical norms. The volume or large orders in the first quarter grew by almost 40% in local currency mainly thanks to the strong increase we saw in the Process Automation division. At the same time, these orders were 13% higher in local currencies, which is a further encouraging sign as base order growth gives a better picture of the underlying market situation.

Chart 12 shows the various items in our income statement below the EBIT line. Finance net was positive as it was in the fourth quarter, reflecting our strong cash position and lower debt levels. A favorable tax code ruling in the quarter also contributed $25m in interest income to finance net. The same ruling resulted in a $40m tax benefit that helped reduce the tax rate to 25% compared to 28% a year ago.

Minority interests continue to increase, as you would expect, given the strong performance of our China joint ventures and our listed Indian subsidiary.

Turning to chart 13, our balance sheet continues to strengthen. Our net cash position improved by about $200m during the quarter. Gearing decreased further and equity, as a share of total assets, increased to a new high.

Chart 13 summarizes -- chart 14 sorry summarizes our share buyback activity since launching the program in February. We have repurchased 9.4m shares at a cost of CHF250m, equivalent to $240m. The program calls for a maximum repurchase of CHF2.2m -- CHF2.2b to be completed prior to the Annual General Meeting of shareholders in 2010.

Chart 15 shows the cash flow development by division. Thanks in large part to our improved earnings we have managed to significantly improve cash flow versus a year ago. However, in our current high growth modes, working capital requirements are increasing as well.

Our working capital, as a share of revenues, is up slightly compared to last year at this time at 12.3% versus 12.1%. This will continue to be a focus of management attention as we execute the order backlog and ensure that we meet all of our delivery, quality and cost commitments.

Working capital discipline is also a must, as ABB on the other hand, is significantly ramping up its capital spending which was up 69% compared to the first quarter of 2007.

Chart 16 shows you our macroeconomic assumptions for the rest of the year. There is no change since we first presented it in February. We believe the demand for improvement to power infrastructure will continue in all regions. Energy efficiency, productivity and renewable energy will all remain key themes going forward, even in the event there would be a broader economic downturn. Capacity constraints in raw materials and the availability of qualified people will also continue to be factors in our business development going forward.

As for the issue of decoupling, we do not yet see any impact on emerging market economies from the slowdown in the U.S.

When it comes to the outlook more specifically for our business, on chart 17, we see the Power sector continuing to develop favorably while economic growth in the emerging economies and further investments in the raw material processing sectors are expected to fuel growth on the automation side. We forecast housing related activities to weaken further but from already low levels. And our exposure in this sector is limited. As I pointed out in the past, less than 5% of ABB's total business. Should we see a broader economic slowdown the impact would most likely affect first the delivery terms. Pricing impacts would only come later.

Based on all of these factors then we reiterate the guidance we provided in February that we expect order and revenue growth rates in our Power related activities of 15% to 20% in 2008 and around 10% in our Automation activity.

Turning finally to chart 18, let me summarize. Our operational improvements and global reach continue to pay off. We are capturing the strong worldwide demand for technologies to deliver reliable power, increase productivity and save energy. Strong demand, favorable pricing, high factory loading, low cost sourcing and footprint initiatives, all of these have contributed to our high EBIT and EBIT margins.

The strong devaluation of the U.S. dollar resulted in mark to market gains which produced one-off positive impacts to our EBIT margin that are not likely to be repeated. We managed to increase cash from operations versus the same quarter a year ago despite the increased need for working capital to support growth.

Obviously, we also have some challenges to manage over the rest of 2008. Most important is executing the backlog on time and at our usual high quality standards. Supporting this will be significant capital expenditures to ensure we have the capacity to deliver on the backlog and investments in R&D to protect our leading technology positions. This is critical to further building our competitive advantages and capturing all of the organic growth opportunities that lie ahead of us.

Finally we will continue to focus on our G&A costs and working capital development in order to manage our high growth rates while securing our profitability and our ability to generate cash.

In summary, ABB is ready with the market positions, the technology and the people to capture an increasing share of the promising opportunities ahead, to generate both growth and profitability and superior shareholder returns.

With that, ladies and gentlemen, I'd like to thank you for your attention and open the line to questions.

Excuse me, this is the Corus Call conference operator. We will now begin the question and answer session. (OPERATOR INSTRUCTIONS). The first question is from Mr. Mark Troman, Merrill Lynch. Please go ahead sir.

Yes, good afternoon everyone. It's Mark Troman here from Merrills.

Good afternoon Mark.

Basically first question I think is on capacity, particularly in the Power Products sector Michel. We hear there's more capacity going on-stream. I think you're doing some more capacity in India in the Power Products sector. What are you seeing in the market? Who's putting what where? Is it in the high voltage area, the medium voltage area? And do you think there will be any impact on the pricing power that you have enjoyed up to date? Thank you.

Yes we are obviously observing the developments as well. On one side clearly the market needs more capacity because the demand out there is tremendous given the large infrastructure projects that are being worked on for the moment. So it is not all bad news that people add capacity. We see clearly in some areas like very large power transformers and even smaller sizes. As you have emphasized before it happens mainly in emerging economies where it is needed.

I would say that we are also being cautious where we add capacity. We do it especially in the smaller size of power transformers. We are much more prudent in adding capacity in the very large ones because this is obviously very dedicated capacities that are not always possible to use for other things if the market would suddenly stock down. So there we are more doing operational improvements, debottlenecking, trying to get a better productivity out of factories than just adding capacity.

So overall I would say yes it is a phenomenon. It is fine as long as the demand remains as intense as it is. But it for sure calls for vigilance and to be also a bit prudent with margin expansion forecast in transformers.

Okay, thank you. Just one further question. On Automation Products, it was interesting that you did double digit growth in the U.S. yet you also mentioned construction is weak. I would imagine it might have been weaker in the U.S. as well. What strength are you seeing there in the U.S. and what is the outlook for that segment going forward? Should we expect double digit growth going forward? Thank you.

I will leave Tom Sjoekvist to answer this question. But just to tell you as well that the double digit statement was in fact pretty humble because our Automation Product business was in fact higher by more than 20% in this quarter and the Process Automation business was higher 40% in the U.S. So it was really an excellent quarter for the U.S. in terms of Automation. But Tom, please if you can comment on the question.

Yes. I think it's a couple of things. One is of course that you could say we are lucky we are not really into the construction related market in the U.S. because simply our installation material is for the European standards. So we're not affected there. We do have a very strong position in low voltage drives for heating, ventilation and air-conditioning applications and that is still doing reasonably. But I expect that that will be affected by the downturn in construction activities in the U.S.

Then of course I think it's fair to say that we are not the biggest ones in the U.S. Not yet at least. We have a tremendous potential to grow there by increasing our market presence by using what I think is a very, very competitive product range for all industry related applications from low voltage breakers, industrial type not the installation type, control products, motors, machines, drives, power electronics. And I think we see continuously the benefit of that very strong product range and our very strong effort in increasing our own market presence and increasing it together with channel partners, be it OEMs, be it distributors or agents. So I think we're -- most of the business is really in growth areas that are still growing and on top of that we have our -- what we think strong product range, strong scope.

Okay good. Thank you very much.

Thank you Mark. Next question.

The next question from Mrs. Lisa Randall, Lehman Brothers. Please go ahead madam.

Good afternoon gentlemen. Two questions please. Firstly just on the 85m hedging impact across the divisions. Should we take that fairly evenly spread or are you able to give us a breakdown across those divisions?

Okay, no in fact it's not exactly the same and I will give you a breakdown because I think from a transparency point of view it is better for you to work with adjusted numbers that you don't put your expectations too high. As I said, for the whole Company it was slightly more than 1%. If you look at the details, let's say Power Products where we had a reported margin of 20.4, the adjusted one is 19.1.

Thank you.

In PS 10.5 official and 9.2 after the impact. In Automation Products it's a little bit less since there's less long term cash flows. It's a bit less commodities, so it goes from 19.0 to 18.4. In Process Automation it goes from 12.9 to 11.7. And in fact Robotics had the adverse impact. So they in fact did suffer from these hedging gains and in fact after adjustment the margin is slightly above 7.

Okay. Excellent. Thank you. And then just secondly, again on the translation impact, the impact in the quarter on the orders and revenues was slightly more than I was expecting working on the average rates I was for the quarter. Is there anything exceptional happening -- that happened in the quarter that caused that? Or is it simply that I guess simply that I underestimated the dollar impact or the -- the revenue is now derived directly in dollars or dollar denominated currency.

So Lisa you're not talking about the hedging, translation in general, right?

No, no, just the translation effect in question, yes. Yes.

I don't really think that there was any particular. It is really more a kind of product mix issue and obviously geography mix as well. Let's not forget we do increase all the time our intake in the emerging countries that are still more dollar based. So you see that sometimes more. So, no, I don't think there was really anything particular there.

But you give me also the opportunity to comment overall that yes on one side we had these hedging gains that we wanted you to take into account because otherwise you would work with an assumption that is too high. I still claim that overall ABB suffers from a devaluation of the dollar. We still have a cost base that is a little bit more euro denominated and so that has obviously an impact. And obviously it is very difficult to quantify both in terms of size and in terms of timing. But I'm not trying to say that with a higher dollar some of our fixed cost base would have been lower than what it shows here.

Okay, that's clear. Thank you.

Thank you Lisa. Next question.

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

Good afternoon. I have two questions please. The first one on competitive behavior. You have the benefit of not having a lot of construction exposure particularly in the U.S. Some of your competitors have. Have you seen a shift that they have started to allocate more capacity or go after the utility or industrial opportunity more aggressively as their construction markets have slowed?

And the second question is on capacity increases. On the press call this morning if I remember right you talked about adding 20,000 people to ABB. Could you just give a timeframe for that quite sizeable increase?

Okay. I will quickly take the second question and I'll pass it again to Tom Sjoekvist then for the first one.

The second one, Andreas, I'm sorry if I create a misunderstanding there. I refer to what we said when we presented our strategy back in September last year that we felt that over five years in order for us to deliver the targets that we are committing to, that we will need to increase our net employment by 20,000 people. So that is over a period of five years. And in fact we are working at this pace I would say since a couple of years where we increase employment by more or less 4,000 people every year.

Okay.

So that was for the second question. I will pass it on to Tom for the first one which is regarding the competitive behavior in Automation Products.

Yes. It is a fact that some of our competitors are much more exposed to the construction market. And yes I can confirm that as expected, when things get more difficult there, they will try and are trying to compensate a bit for that by a more aggressive behavior in the markets that are still good. So we are seeing to a certain extent already and I have no doubt that we will see a bit more of competitors who have a lot of business in construction driven markets today will try to get more -- a bigger piece of the cake in that which is related to industry. And then it remains to be seen how easy that will be so to say.

And then in the Power Products division, could you see a similar trend that customers will target utilities more compared to maybe construction exposed end markets?

Yes, we have not seen that so far. And it is really maybe especially in the medium voltage area where we are a little bit closer to the construction industry that you could see that. But at this stage no, we haven't noticed that.

Thank you.

Thank you. Next question?

The next question is from Mr. William Mackie, MainFirst Bank. Please go ahead sir.

Good afternoon. It's Will Mackie from MainFirst. A couple of questions. First of all, could you provide some indications of the price volume mix impact on your orders and revenues and especially within the Power Products segment?

And then secondly within Power Systems, I think it's the third consecutive quarter we've seen weakness of orders in North America. Perhaps you could explain if there's a structural issue with the utilities withholding investments currently? Thank you.

Okay. As far as the price volume is concerned, what we're seeing in Power Products is a quarter where 40% of the order intake in Power Products was volume related and 60% was -- sorry the country. 40% price related and 60% volume related. Now obviously within the price there is always a good part of this price increases that are made to offset the cost of raw materials. So it's obviously not a net contribution to the gross margin. But it is still obviously operating very strongly there. And if you go in fact down in transformers, which has the highest content of commodities, there the impact was more or less 60% prices and 40% volume.

The second question was?

Weakening orders.

Oh yes, the weakening orders in the U.S. Yes, what I would comment overall is that the U.S. so far is really not a big market for PS. Utilities in the U.S. still procure themselves mainly via the product channel and then hire engineering companies, local engineering companies to do the system integration. Obviously it can start developing more with the help of the Energy Bill but we have to still realize that the situation in the U.S. is very different than in Europe.

In Europe you have big utilities, very concentrated that work for very large projects. In the U.S. you have actually dozens of utilities and independent power producers and so I would say that at their scale a 50m order is already a pretty large order. So it doesn't really say that we always will able to sell our products through the Power System channel. But at the end it doesn't really matter. What is important is that our products are well distributed there and we are very successful with our business in the U.S.

Thank you. A follow up with regard to the Power Products segment. Could you describe perhaps the variability of margin you're seeing in the first quarter between medium, high voltage and the transformer business?

Well as you know we're not disclosing the details of the margin. I can say that overall we are very happy to see how the margins have evolved in the three segments and like I commented already before the disparity of margin level between those three segments is narrowing all the time and that was the case again this quarter.

Thank you.

Next question.

The next question is from Christel Monot, UBS. Please go ahead.

Yes, hi. Good morning gentlemen.

Good afternoon.

Good afternoon, sorry. Three questions if I may. I'm sorry, you asked for two questions only and everybody has three. The first one is quickly on construction. You say that your exposure to housing, if I understood correctly, is roughly 5% of total revenues.

Less than 5%.

Less than 5%. That's only for housing. Could you tell us please what is the total exposure you have to construction, including non-residential construction? And then --?

Okay. You want me to start with that one?

Yes. Unless you want me to go on with the other one. The other one was --

Yes, why don't you list your questions and then I'll answer them (multiple speakers).

Sure. Sorry, the number two question is regarding incremental margins. How do you feel there? And if you look -- if we look at the improvement of the EBIT, incremental margins in Q1 were quite close to what you have achieved last year. So I just wanted to get a feeling of how do you feel regarding this for the rest of the year?

And the last one is regarding the timing in terms of share buyback. Obviously you have quite a large program. You have done a piece of it so far but obviously the cash you have is still very strong. So how do you feel regarding the timing of share buybacks in '08?

Okay. Good. Let's start with the first one, the construction exposure. So when we talk about really the residential construction exposure we are basically talking about the small single phase and distribution transformers in the Power Product division and the wiring applications in the Automation Product division. That if you put together is less than 5% that we are referring to. If you bring it a little bit further, then we probably have to include some enclosures and big rails as well there. Looking at -- over the unit you would add to that?

Yes. If we look at Automation Products where if I take the whole construction related activity, that's the business units, wiring accessories and the in-rail and enclosures and that in total is about 10% of Automation Products. And that is then what goes also into a commercial building. It's not only the residential private business.

So -- and then when you relate that 10% of Automation Products and Automation Products is a quarter of the Group, so there is a contribution of 2.5%, 3% to the Group's volume from that activity in Automation Products. And then, as Michel was saying, you have distribution transformers and that kind of -- you even have some medium voltage switchgear in large installations like shopping centers and hospitals and so on. And then I guess, and now I'm guessing a little bit because I don't know exactly the Power Product numbers, you have another 2%, 3% there. So the 5% number is pretty good, even if you include the commercial buildings.

And just to be clear Christel, while as we said we have seen some weakness in the wiring application in Automation Products, we have seen quite some sharp declines in our single phase and small distribution transformers in the U.S. in Power Products. The rest of the segments that Tom just described is so far doing well and we are still posting positive growth rates. So we are not feeling yet any pressure from the slowdown.

Now when we go to your second question, incremental margins, as you know I really only look at that in the Product division. If you adjust the margins for this one time hedging gain, we have basically an incremental margin of 31% in PP and of 26% in Automation Products. So I would say Automation Products is in line with what they have delivered already on quite a regular basis and with the guidance I've given.

Power products, it has in fact accelerated from mid-20s to this low-30s now. I would say I would keep my guidance that mid-20s for the moment is probably the one achievable.

Sometimes you have some timing differences, the velocity of your own price increases compared to the velocity of the cost increase in raw materials. It's difficult to put a figure on that. But I would expect that they had a little bit of a favorable tailwind as well and that we should not just draw a line from the very high level that we enjoy now.

Right.

Talking of timing of the share buyback. Well you know if you take into account the fact that the program really started on March 1 and stopped in the final period, so we had basically half of a quarter. So I think it is kind of a normal pace. There is no open intention to do everything at once. Obviously, I can't speak too much about market actions there. But clearly we keep watching a little bit the financial situation out there too. And we are also aware that cash is king for the moment and that's something you treasure and try to use always at best. So we'll do it each time we see opportunities and feel comfortable about it.

Okay.

Thank you.

Thank you.

Next question?

The next question is from Mr. Martin Wilkie, Deutsche Bank. Please go ahead sir.

Hi, good afternoon. It's Martin Wilkie from Deutsche Bank. A couple of questions. First of all on your margin progression, if I could ask you just to clarify whereabouts in the income statement we'll see that 85m in terms of whether it's included in the gross margin or not or whether it comes further down in other income and expense?

And related to that, if I look at your gross margin development, very strong year on year, nearly 300 basis points. If you could let us know how much of that, or give an indication of how much of that is pricing related and how much of it is a volume effect?

And then secondly just on that margin development, obviously you're undergoing many cost programs such as the One Simple ABB program. Can you just let us know how that's developing and in relation to that how much of that will be offset by for example these increased investments in things like R&D to support your growth levels?

Okay. Yes, to clarify these hedging gains in detail, we are hedging cash flows. We are hedging purchases of commodities. So clearly, all the impact of these hedging gains is in the gross margin because these are really operational hedging so that is obviously part of the explanation.

I would say for the rest Martin, the large majority is really volume. It's clear that we keep increasing output. As I said we have the pricing power today to pass on the cost of raw material increases. We can, in some certain markets, add on a little bit to it but I would say really the major part is volume and obviously dilution of fixed costs. And the fact that we keep working on our cost base and that clearly the two programs on one type of low cost sourcing and the second the fact that more and more of capacity is in low cost countries start really having an impact too. So I would say volume first, cost base second and a little bit of pricing as well.

Now if you talk about the other cost programs, yes I think we are working pretty hard internally for the moment on that. One Simple ABB, so far we have spent about $150m on this program but now the acceleration is quite fast. As I said, this year this is the first year that on a net base the program will yield benefits. It's not 200m but at least it won't be a cost any more, it will be a positive. So we are not really seeing it yet clearly in the income statement here. I think what it will especially allow us to do is to continue growing in the kind of pace we grow at now without really adding on fixed costs. So it is really almost building more capacity for the future.

Thank you. And then just a second question just on the M&A market. You mentioned at the moment cash is king. Could you just let us know your thoughts on what the market is like for doing acquisitions at the moment? Do you feel that the M&A market is effectively dead and therefore you're not expecting any transactions to happen in the near term? Or do you think that should the right deal come along at the right price there is a possibility you could do something in the near future?

Yes. And at the end that is all what it boils down to. I think I have explained what our criteria were, the most important being always that we want to return the cost of capital after a while that we have made an acquisition.

I would agree with you for a moment, the market is not very liquid. Yes, maybe valuations came down but in order to have a transaction you need a buyer and a seller. And some people that have seen their valuation come down just think it's a short term blip and will not just be ready to sell except if you pay them a premium that is totally outside of proportion.

So it is a little bit the chicken and the egg story here. And that's why I'm trying very much for the moment to say well we know what we want to do. It will happen when it happens.

Meanwhile we have so many opportunities on organic growth, so many opportunities geographically and in some market areas that I really want the whole Company to be focused on that. The acquisitions will happen and it is not only the big names that always everybody mentions and speculates about, but there is also even more possibilities in small and medium sized deals because there you deal with different factors. You deal with private owners, and so that is a different type of negotiation.

And as I've said many times before, if I had the choice between the two I would much prefer a more gradual approach to M&A, starting to get a bit easier on the integration activities and bringing it up progressively there. Except obviously if a great opportunity would materialize on a larger ticket.

To finish on the cash, yes, clearly the situation in terms of liquidity in the global economy is tighter than it is six months ago. So it's not the right time now to start taking too aggressive approach to leveraging for instance.

Thanks very much.

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

Yes, thank you. Good afternoon. Two questions please. First of all on Power Products. You set a target range last autumn of 12% to 17%. Can you comment what really has changed? Should we looking at the 19.1 as extraordinary or is this a new level? And indeed if I understand that correctly, the transformer margin probably is double than what your original target was for 2008.

And if you could maybe comment on the same topic in Automation Products where you've now reached a peak of the range that you've given. Do you still see further opportunities from mix to actually improve that?

Yes. Obviously these targets are fixed over a period of five years and we -- as we have done in the past our intention is always to revisit them every two years, see how we stand. So I don't think we should too quickly start saying that the targets are obsolete and that we need to put new levels. I'm the first one to admit we have a fantastic tailwind from the markets for the moment and we can't always expect that this will continue.

I think on the other side we are very dedicated to growth and continue to really turn all the stones to make sure we keep growing and gaining market share. There is a time that maybe the margins won't continue to develop or even might peak a little bit because we go for the growth and because the improvement mainly comes from the cost position, not from just being able to increase our prices.

I think what is important is that again here we illustrate that yes the peak in Power Products was at 17. We haven't stopped the business to say don't show 19 now. We take what comes obviously and we are aggressively pushing after that. So I wouldn't keep it too much from that perspective.

Tom, if you want to maybe comment on the Automation Product? I don't think it's very different from that but please?

No, it is not. We are happy that we have gotten close to this top part of the range. And now adjusted for these effects of hedge accounting as Michel said we are at 18.5 now. And that's pretty close to the 19. What we do of course is we really spend quite aggressively on developing new products, on investing in new capacity in low cost countries, on investing in market presence and so on. And then as Michel said we will take what comes. But we will not go through a major exercise now to figure out is that going to be more or less than the 19.

Yes, that's correct. I think that's a very important statement here too. Obviously we look at it. All these targets that we thought we could never reach, now we are there and obviously you will challenge your partner and say well can we bring it to the next level and definitely we want to do that. But I think for the moment this market out there is so exciting that we want the whole organization focusing on grabbing the opportunities and not just crunching numbers now for three months and coming up with a new set of targets.

And by the way there is still one target where we're not yet at the top. It's Robotics and Anders, if you would like maybe to comment a little bit how comfortable you are with your targets?

We are pretty well on the way with Robotics but we have not reached the target yet. But we are doing the same as Tom Sjoekvist said here earlier. We are having rather heavy spendings on new product development and new products as well as employing sales people. As we are moving into the general industry here we need much more sales people, feet on the streets around the globe and that costs some money.

So we -- it's the right time to deliver the performance we have and at the same time to build for what ABB is going to be a few years from now. Thank you. Next question.

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

Yes, Michel, a very good afternoon to you.

Hello Julian.

Hi. Firstly on the strong margin development in the project areas, I think in Q3 last year you commented that contingency release on certain project closures helped the margins. Was this a feature supporting the Q1 margins in Power Systems and Process and would you expect a similar support in each of the remaining quarters of 2008?

And then my second question is regarding marine. The global shipping order activity is down globally 40% year on year in the first quarter. What is the trend looking like in the shipping end markets that you address in marine? And the other question would be what is the proportion of marine sales in Process Automation as a whole?

Okay. The first question, I'm not aware that we had a specific big project that matured this quarter. But obviously you have always a number of projects that finish and clearly the execution record is so much better that I think we will see more and more on a regular basis the fact that some projects are completed and that we can release the contingencies that are attached to it.

I think the other point of Power Systems is that in addition to a very good risk management, they have as well an excellent control over their expense. You see the margin evolution and you look at the SG&A adjusted for currency you see now that since two or three quarters basically the SG&A is almost constant. And that obviously with the huge volume, increase the take was 30% increase in revenues has a phenomenal impact on the margins.

As far as the marine business is concerned, I hear what you are saying. Funnily enough we feel it a little bit different here. Actually if I recall, the first half last year we slowed a little bit. We've seen a little bit of a slowdown in the Marine business as the shipyards were totally booked until the end of 2009. Actually the order intake now in the recent quarters has been really excellent.

Marine for us is obviously a lot of things we do all the large ships. It is the turbo chargers that is linked with energy efficiency. We're selling a lot of new turbos for the moment for the large diesel engines.

It is also cranes and that is also for the moment a very good viable business from that perspective. Marines and cranes, which is part of the same business unit, has more or less a bit more than 155 of the total Process Automation business.

Okay, that's great thanks.

You're welcome.

Next question is from Mr. Thomas Baumann, NZB. Please go ahead sir.

Yes, good afternoon gentlemen. Just two questions really. First of all can you tell us how variable speed drives did within Automation Products in the first quarter? Was there -- I suppose that the replacement effect is still going on. Has it accelerated, has it decelerated? And also how big is -- just a rough number, how big is it within AP?

My second question goes to CapEx. It seems that Q1 was a bit below, or quite below, than a quarter of what I would expect for the full year. Do we see again sort of a back end loaded pattern as in 2007? Thank you.

Yes, let me take the first -- the second question first. Indeed it is the case. Sometimes to my despair, as well but the divisions are happy. They have not always succeed to explain me why the always spend more at the end of the year than in the beginning, and they are both smiling here.

But it is indeed like this. It's a pattern that you can go back many years and it is always the same. So in fact last year we were at $110m or $115m and I was calculating and find that if you compare us in the first quarter last year was about 15% of the total CapEx spend of the year and what we have now at this quarter is about 15%, 16% of out CapEx goal for this year. So it is in line but it would obviously be nicer to invest more. But I can tell you there's a lot of things going on there and I'm still totally committed to have this $1.1b CapEx spend. We need it to deliver on the backlog.

As far as the variable speed drives are concerned, Tom, I just warn you that we are not giving out business unit information at this level. But you can for sure give more or less the relative size, at least give a trend of the business.

Exactly. Yes, the low voltage drives, it is the largest business unit we have in the division. And it is keeping or maybe increasing that position a bit because growth rates are good, margin development is also good. It is at least as good as what we see in total there.

Now this is no surprise because as you say the trend to variable speed drives makes a lot sense for the world, so to say. It's a fantastic way of saving energy. It is also a fantastic way when you look at motion control or process industry, multi drive for process industry, it's a fantastic way also of increasing productivity in industry. So it is well positioned for both those drivers of growth, energy saving and increased level of productivity in industry.

So now we don't, certainly don't see a slowdown in that and we expect this to be a trend to stay there now for the coming years.

Yes, and I think there's a statistical there that says only 10% of the installed base of motors have a drive attached to it in the world.

It's huge.

It shows a huge potential for the future.

For the world to save energy which then of course to save energy is the best way of really protecting the climate what have you.

Thank you, Tom.

Thank you. Next question.

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

Yes, good afternoon, Olivier Esnou, Exane. I have two questions please. The first I just wanted to check, I have the impression you're gaining market share currently. It was a comment this morning. At the same time ABB, over the last few years, has taken a rather a cautious step towards order selectivity. So going forward, I was wondering how you plan to balance these two goals, which can be sometimes contradictory?

Secondly, just a minor question on the tax rate outlook for the year. Are we still looking at around 27%? Thank you.

Okay. Yes, I believe the best answer I can give to your first question is that I think we have reached this balance. We are not looking for it. I think we are very happy at the speed we grow and we have no regrets for the orders that we have turned down because they didn't have enough added value for ABB as a whole.

So it always depends a little bit how you calculate market share. Obviously, we're not really interested in market share for subcontracting of public works or for security services. Once you really focus on where there's ABB material and service that can be done I really think we are gaining market share. And as I commented this morning, if you look so far the results that have been released by our competitors you can see that we are growing faster.

So I believe the balance is there. And it is clear also that we are committed to this risk management approach that we have defined. Given our history in that sense we all feel very comfortable with it and so I would also expect that the day market gets a little bit tougher the discipline will remain in place.

When it comes down to the tax rate, the guidance indeed is still for this year a tax rate of 27%. And as I mentioned in February it is also quite possible that in the fourth quarter we might have again a write down of a deferred tax asset that would give us an additional advantage. But that is too early now to say.

Obviously meanwhile the operation in the U.S. are doing well so we are using day-by-day some of this tax capacity. But if the outlook remains still as good there might be more to come in Q4.

Okay, thank you.

Next question please.

the next question is from Mr. Timm Schulze-Melander, Bear Stearns. Please go ahead.

Hi, congratulations on a very strong quarter.

Thank you.

I just have one question actually and it just comes back to this hedge accounting and the gain in the quarter. You're clearly positioning it as some kind of an exceptional uplift but clearly, from what I understand of your hedging process, you're only hedging confirmed business. So essentially you're locking in the margin and the hedge then essentially matures as the business comes to fruition.

So I guess I don't really understand is why this is exceptional, and is it exceptional just because it matured early? And then so does that mean we're going to be hit with regular mark to markets in the coming quarters? And I guess there's a thought in the back of mind, how come it didn't qualify for U.S. GAAP hedge accounting? Is that related to you maybe splitting your role and maybe not being as closely linked?

No, no, no worry.

I do worry.

No, I will try to explain to you exactly what it is here. It has nothing to do with my double hat I promise you. In fact what happens here is that what we're hedging here is cash flows. If you close a project that goes over the next three years, for instance, we are hedging three years of cash flow in terms of dollars versus Swedish kroner, for instance if we do that out of our Swedish factory.

And we're also looking at our raw material purchases like copper, like steel, like oil. And we do buy ahead of three or four quarters in order to be permanently hedged for future needs. So normally in a perfect world for hedge accounting you know you put your hedge in place and you defer the mark to market results of these hedges until you can apply them to the resulting exposure getting materialized.

Now the pity is to be honest is that the people that write the financial accounting regulations have clearly never managed a company in their life. And they give you a number of conditions to apply for hedge accounting that is sometimes just impossible to deliver. For instance, if I take a long term project, if you start having some changes in your cash flow pattern, then suddenly it couldn't apply anymore.

Or I give you another example, we buy cooper in bars, or in bundles, or in, what do you call it, copper cables but the only way you can hedge copper is bulk cooper. And then you have to provide every quarter a detailed 36 months correlation and analysis. For a reason now that the bulk copper price doesn't progress exactly the same than the cooper bars or copper lines that you have bought well, then you can't apply the hedge accounting treatment anymore.

So as result of the every company that wants to still that and we want to do that because it takes a lot of the volatility of our earnings away has to first build incredible resources, I'm talking about tens of people to just comply with that. It doesn't add any value. It's just to make accountants happy. And at the end of the day you end up not being able to always apply the results.

We keep promising that we can do more and more. But then it just happens that this quarter where there was such a huge devaluation of the dollar, the mark to market change of our derivatives was way higher than any other quarter before. And that's why now this number became so prominent that we felt we had to disclose it because otherwise it was giving shareholders the wrong indication about where are margins really are.

So I hope I don't -- I have not lost you by now. But so what happens really is if it disqualify for hedge accounting, let's say if we have a hedge that covers the next four quarters of cooper purchases we have to mark it to mark to market and we basically get three or four times the impact instead of being able to defer over the next four quarters. So that is really what happened.

So the result of it we are still ramping up to be able to cover more and I think it will be better. Second, I really think it is exceptional because it's not every quarter that you have such a huge change in the value of a currency or in the value of a commodity.

Okay. But then just so that I'm clear here your hedges did even better. They outperformed relative to your underlying. So assuming they reconverge, then at some time over the next year or two that 85m should unwind and probably act as a margin drag.

Indeed. But you can't just say well now next quarter they will have a lose of 85m because as I say we are hedging cash flows that go over the next three years.

Understood.

And that's why overall usually it's not an amount that's even material enough. Hannu Kasi tells me for instance last year same quarter the next change in all our derivative was almost zero. So it is really unusual that you get the amount that you have now. But that is what we have to deal with the accounting world.

I think for me the major message to the shareholders is that we are hedging. We are not speculating, nor on foreign exchange, nor on currency and nor on commodities. And yes, sometimes the accountants don't let us reflect the value of these hedges they way it should be.

Okay, so it's nothing to do with your two hats. Okay.

Not at all, I promise you. But thanks for the question.

Thanks.

Next question.

The last question is from Mr. Alex Migliorini, Helvea. Please go ahead sir.

Yes, hi, good afternoon. First question is on Robotics where on an underlying basis we've seen quite a significant increase. Is that something that we're going to see continue during the rest of the year or is it a quarterly impact? Has Robotics really turned the corner at this stage?

And my second question is with regards to your increasing focus on emerging markets. Quite clearly you are likely to pay some pretty large fines at some stage in the near to medium term due to compliance issues. Are you developing your compliance so that we can rest assured that none of these large projects are going to be areas of concern in the future?

And perhaps one last thing, cCould you just clear up what the non-core results was in this quarter and perhaps what business was sold as well?

Okay. Anders, would you like to take the first one.

I can take the first one, yes, the Robotics. Yes, we see a rather steady growth in Robotics division here and it's coming both from the general industry and as well as the automotive. We have been carrying out some restructuring during 2006 and probably 2007 as well so we see good movement for the year.

And we are also as I mentioned earlier adding sales people here to better cover the market and grasp the opportunities that is out there. So yes, we believe that it will continue.

Okay, thank you Anders. On the second question Alex and I'm happy you ask that question that I can speak a bit about that too. It's obviously clear here. The past is the past and as you have said sooner or later we will have to settle for the sins of the past.

We obviously do everything we can to have an impeccable track record now and in the future. And obviously it goes to a huge and intensive training of all our people there and as well really putting a lot of resources on the ground.

To give an example, in China, for instance, we have really beefed up a whole compliance organization to really work and scrutinize any intermediary and any business practice we can have. And we are doing that in the all the countries there.

When it comes to the large projects that we are going after, actually compliance is really an integral part of the risk review. Our people up to the division heads actually spend quite some time in risk reviews where they review all the aspects of a potential project. And we have in fact lawyers and compliance officer that sit in the steering committee too and ask all the questions and double check every agent intervention that you may in some of these contracts.

So I feel quite comfortable. You know again an accident is always possible. But I think that today we've put in place a process that is very solid and robust where now it's really getting difficult for somebody that doesn't what to go to play by the rules to do it.

And then when it comes down to the third question, the non-core, well in fact now, as you have seen, we have regrouped everything under one heading, non-core and corporate because it had become very small. What we are left now in the non-core is basically we have two of our projects, one in Columbia and one in Ivory Coast and we have still an airport in South Africa. The three together have a book value of less than $100m. So it is no more something can create huge fluctuations.

What you see now in the non-core results is on one side the impact of the fact that obviously we don't have any more jobs thus far in these numbers, and that is obviously was contributing a nice income. And the second is basically the result of our real estate activities, which obviously with the expansion that we are working on is quite important.

So (technical difficulty) result that you see nowadays is linked to real estate while last year it was still a combination of job thus far and some write downs on assets we were getting ready to sell.

So the corporate costs have improved effectively?

The corporate costs have improved? No, I would say that now as we said they have rather stabilized. Let's not forget that we keep increasing the base as well. So they have rather stabilized. And as I said I'm actually that's why I'm hesitating to say that I'm actually not paying too much attention anymore to the corporate cost in general. What we are really watching is the G&A in general and the G&A in fact is totally under control and I'm pretty satisfied with that.

Okay.

Okay?

Yes, thank you.

Very good. Well I think that was the last question. So thank you all of you for your attention and for your questions and we look forward to speak to you soon again. I wish you a good day. Thank you very much.

Ladies and gentlemen, the conference call is now over and you may disconnect your telephones. Thank you very much for joining. Have a nice day. Bye bye