Abb Ltd (ABB) 2008 Q4 法說會逐字稿

Good afternoon. I am Stephanie, the Chorus Call operator for this conference. Welcome to the ABB fourth-quarter and full-year 2008 results analyst and investor conference call hosted by Mr. Joe Hogan, CEO of ABB. Please note that for the duration of the presentation, all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). 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. Joe Hogan, CEO of ABB. You are now joined with your conference room. Thank you.

So I would like to welcome you, ladies and gentlemen, to ABB Limited's fourth-quarter and 2008 full-year results. My name is [John Corona] for those of you that don't know me and I am filling in for Michel Gerber who, unfortunately, is recovering from the flu. But he is here somewhere. I can't see so well out there. You probably have more of a glare than I do, huh?

So before we get started, I would like to point out the emergency exits to you in the unlikely event of an emergency. We have the two doors at the front of the room here on each side and the one door in the back -- well, I guess that is the front for you, that you probably walked in through to get into this room. Those are the three exits and I am sure we will have people helping you get out if that was necessary.

Today, with us, we have Joe Hogan, our Chief Executive Officer, as well as Michel Demare, our Chief Financial Officer and Head of Global Markets and we also have here in the room in the first couple of rows our entire executive committee.

So today's meeting will consist of the usual format. Presentation, probably about an hour or so, followed by a Q&A session and then afterwards will serve some hors d'oeuvres outside with some cocktails where you can ask some questions of our management in a more informal atmosphere.

Of course, quite a bit has happened out there in the world over the last six months and towards the end of 2008 and ABB has taken a number of measures to address that and announced a number of measures. So why don't we get started right away I guess and let me introduce Joe and he will talk to you all about that. Thank you.

Good afternoon. Thanks for coming. Michel and I are going to take you through the fourth quarter of ABB and then also 2008 and then give you some idea of what we think we face in 2009 and the actions the Company has to take in a very uncertain economic environment.

But, first of all, we will take a look at 2008, which was a record year for ABB in both revenue and EBIT and we will go through specifically the income statement of that and what drove it. EBIT overall was $4.6 billion. That is with the $870 million provision that we announced in December of the fourth quarter of last year. That would have given us a $5.4 billion adjusted number from an EBIT standpoint. So whether it is $4.6 billion or $5.4 billion, this is still a record EBIT number and a record operational execution for the business overall.

Cash flow, which I know the community out there understands, is a real true reflection of the operating performance of the business, came in at $4 billion, which is really outstanding overall and it shows the underlying strength from an operational execution standpoint of ABB across the board.

Another closely watched variable that I know that you watch and we watch specifically is return on capital employed. 31% was the provision in, 36% was the provision out. So I think everyone in the crowd would recognize that is an outstanding performance and a significant increase for the business over the last several years.

We took some steps, obviously, in December, again, as part of the provision to address the compliance issues that are out there. Secondly, we did some bolt-on acquisitions. We will talk to you about those acquisitions and the integration of those, but they were right in line with the strategy we have communicated to you and other analysts around the world in the sense of bolt-on acquisitions, acquisitions that are easy for ABB to apply strategically and to be able to integrate within our businesses and we will show you the progress on those.

Overall, we have a solid opening backlog of about $24 billion. We had some charts that will piece that out for you as far as how that backlog looks in 2009 and for 2010 and 2011. So you will get an idea because, obviously, you are worried a lot more about 2009 right now than 2008 and we are too and we will give you as much visibility on that as we have and show you the direction of the Company.

Our dividend is unchanged at $0.48 (sic -- see slide presentation) a share and we will show you what that means from a cash allocation standpoint and the basis of that decision. So this is -- I want to emphasize -- this is a record year for ABB. The team here -- nothing to do with me -- this team has executed well throughout a very challenging year and one that reflects very well on ABB overall.

So now the fourth quarter. The fourth quarter shows good underlying execution again on the backlog. Again, we will talk about orders in the fourth quarter because it is, obviously, the most recent data that we have to show you where the business is going, but we are down on orders of about 10% in local currency and we will talk to you about that too.

Our cash flow operations are very healthy despite pressure from a working capital standpoint and obviously, our earnings were reduced by the $870 million provision that was announced in December. So orders were down about 11% in local currency. Large orders were down about 50% in local currency. So if you remember back in the end of the third quarter, what Michel and I reported to you was that our large orders, which we quantify over $15 million, had begun to really become reduced. We saw that same trend continue through the fourth quarter to the extent now that those orders were down about 50% year-on-year.

But our base orders on the other side were just about flat, minus 2%. So they have held in there pretty well. Pretty much around our product businesses, those base orders have been pretty flat. So a very big difference between the large orders and the base orders and we will show you the overall makeup of that and what we think about that going forward.

Power Products and Automation divisions were stable in this sense. Our power grid upgrades continue in the United States and Europe and we will show you what some of the economic stimulus packages around fiscal kind of stimulus for power grids and power generation could mean to the business going forward.

Power Systems and Process Automations were down and we will take you through those businesses specifically. Here is something that is very important and I know it is a question that would be first is there has been no significant order cancellations in this business. So again, what Michel and I communicated to the investment community back in the third quarter was there was not a historical precedent at ABB for large cancellations in our order backlog. So we haven't seen that happen again in the fourth quarter. Again, we are not making a prediction about 2009, but this trend of no large order cancellations that are material in any sense continued in the fourth quarter and we hope it continues throughout next year.

We announced a cost take-out program that we need to put in place for both 2009 and 2010 and we will walk you through the specifics of that, where that money will come from and the execution from a chronological standpoint going forward.

So here is the full-year result from an income statement. On the left-hand side, you can see that's the fourth quarter and overall in the fourth quarter, revenues as reported were about $9.1 billion. Order backlog, close to $24 billion as we talked about. The EBIT has been reduced by the $870 million charge of $459 million in net income of about $213 million. Good cash from operations of about $1.4 billion.

What is real important is to look at the orders again on the far right-hand side in the fourth quarter, down 11%, revenues up 15% overall. On the right-hand side is for the entire year. You can read through those numbers again, but terrific revenue performance of about $35 million. EBIT, again, reduced by the $870 million provision of about $4.6 billion and then tremendous cash flow of $4 billion through the business that really helps us in a sense of our overall cash position at ABB and how well I think we are prepared for the economic downturn as we move into 2009.

So overall, my congratulations to this team. Again, nothing to do with me. This team executed very well in a year, but I would say this is a year of two very distinct halves. The first half was a strong demand period with capacity limitations and rapid commodity inflation. The second half was a rapid slowdown. We saw it beginning in the third quarter and we saw that continuing in the fourth quarter and that is the trend, that fourth-quarter trend that we see that, as we look at (inaudible) cost actions and we communicate that to the community, we know we have to make sure that we position this business for a downturn in 2009, though it will be transparent through that downturn and being able to quantify it is fairly difficult.

So look, from an orders standpoint, and this is just a broad geographical representation, if we look at the Americas, our Power Systems and Power Products orders in the Americas are actually up 42%. Now America has been in a recession since the first quarter of 2008, so the team in the Americas, particularly in the United States in this sense, has done a good job and a lot of these orders have come in around reinforcing the grid in the US. So products like FACTS, which is with our AC productline or static var compensation and those kinds of products have been doing very well in the United States and we will talk about some of those orders.

Our Automation business was down in the US, particularly from a Process Automation standpoint. We will walk you through where that is, but remember, that is industry-related to a broad extent. So whether it is paper and pulp or whether it is minerals and mining and those areas of the economy, we feel that much more strongly in our Process Automation business and a little less so in our Power Products division.

In Europe, power was up 3%, again, on some grid opportunities that we were able to capitalize on. Automation down 13%. In Middle East and Africa, Automation up 16%. You can read Power down 18%. Remember, the Middle East lives on large orders and so if this large order deficiency continues, you are going to see that affected in those Middle East numbers. And Asia, surprisingly down 30% in Power and 24% in Automation. We are somewhat optimistic given the fiscal stimulus packages that are being announced over in Asia, particularly China, will help this business. We expect some very tough comparisons in both those businesses from big orders we had last year, but nonetheless, those numbers were down and Asia is a very important market for us. So we're going to stay focused on that and look for the growth opportunities that are there to take the cost actions that are needed to make sure that our cost base is in line with what we need to compete in the marketplace.

So look, more information on orders here and this is a similar chart to what we showed you in the end of the third quarter. The broad blue part of this bar, the darker blue, we call navy blue, represents base orders and then the light part is the orders over $15 million, which would be the large orders that we quantified. If you just take your eyes and look out to the fourth quarter of 2008, you can see we have an almost historical low over the last few years of 11% of those orders only being the large orders out there and the rest being base.

But the good news there, you can see the base orders are about equal for the fourth quarter of 2007, which says that our base orders have been holding in there primarily around our Products businesses, both the Power Products division and also the Automation Products division.

On the right-hand side, our Power Systems tender backlog, and I want to be clear on this again, remember, this isn't our backlog, this is a backlog of orders that we track out there, potential orders we track out there that we hope to realize at some point in time. You can see those numbers continue to increase in the fourth quarter of '08.

Now if these jobs were canceled, we would cancel the amount of the order backlog. They haven't been canceled. They are still there. They still could be live. We are hoping that some of the increased funding that could come from government programs could be an opportunity to free some of these up. We don't know. But we are encouraged by the size of the backlog and we are encouraged by the focus of governments around supporting these kind of grid types of investments. We will have to see over time how this works out, but I think it's at least a positive variable in that sense that there is jobs out there that could find funding and it can be placed on an [important] scale. There is an opportunity for ABB there.

So staying with the backlog, the order backlog contracted about $3.4 billion between the fourth quarter of '08 and the third quarter of '08, but based on that, about $2 billion of that was down because of book to bill. In other words, we billed more than we booked in that sense and about a little over $1 billion is on currency. It gives you some idea and a sense of the backlog coming down, some of it based on exchange and some of it based on real book to bill ratios. Again, we will give you more information on that.

When you look at our backlog in the sense of what converts in '09 and '10 and '11 and how it is registered in our books, what we have in 2008, again, $24 billion roughly. About 65% of that is scheduled to ship in 2009. So if you do the math quickly, it is about $15.6 billion of that will convert into 2009. And then 25% you can read in 2010 and in 2011. So hopefully it helps in the sense of your estimate and what we have to work off. Now we will give you the relative components of that backlog too by business so you can see where that is and that comes later on in the presentation.

Our services orders are something that are -- it is a surprising thing right now, which is good. I feel this business over the last two years has put a good focus on services and we need to, especially in times like this where CapEx budgets will be constrained and you want to move more toward the OpEx business of companies from a standpoint of energy and productivity and the normal spend a company would have. And so you can see that our service revenue line has been growing at about -- been growing pretty phenomenally here and passed 17% in 2008. So I think that is a good variable for the Company going forward and we will continue to put emphasis on this so we can grow the services business and obviously, know it is a good annuity to have in times where there is questions on capital investment and exactly what the economic cycle is going to bring during the year.

We will walk now through the different product businesses. We have five divisions here and we will walk you through the product and systems divisions we have. This is Power Products. Obviously, a core key business overall for ABB. You can see orders in the quarter for the fourth quarter were up 2% on a local currency basis, which is good for this business overall. Bernhard and his team have a good order backlog of about $8 billion. Revenues for the quarter were about $3.2 billion. EBIT, with some charges down below that are mentioned, was about $444 million as you can see. You can see it as a percent of revenues. That is about 13.8%. If you do the math and you add back the one-timers for the Power Products business in the fourth quarter of '08, you will come to roughly an operating margin here of close to 19%. It rounds to 19%. That shows you just very good overall execution in that business and leverage in the business overall in the year when you pull the one-time events out.

On the right-hand side, you can see how the business performed for the year. It is up 15% in orders. Overall revenues of about $12 billion and again, in the EBIT side, about $2.1 billion overall and again, if you looked at this EBIT number as a percentage of revenues, it would be close to 19% for the year for Bernhardt and his team too. So we talked about the orders up in the Americas and the Middle East, lower in Asia and Europe, some new large projects were delayed, but grid upgrades continue. We see it all around the world and you can see the gives and takes down below on that EBIT number that we had to make for that business in the period.

Next is Power Systems and remember, our Power Systems business are the systems for [A3DC] and in substations and putting the overall power business together. Orders for the quarter were down 14% and again, this is a continuing trend. We saw those in the third quarter too. The tender backlog keeps getting bigger in that sense and we haven't been able to convert yet, but, again, it hasn't changed.

Revenues were roughly $1.9 billion, EBIT of $181 million you can read, but as a percent of revenue, it is about 9.5%. That is a historical high for this business from a marketing standpoint and it shows good execution by Peter and his team in the sense of how these projects are done, they are executed and the reserves we have in place around the specific jobs.

On the right-hand side, you can see for the total year orders of about $7.4 billion, down about 8% in local currency. Revenues of close to $7 billion. EBIT of almost $600 million and overall, about 8.6% overall. So base orders are steady also in this business. It's the large orders that are affected. You can walk down through and see the areas of interest here. But again, for this business, there is opportunities all over the world in the sense of these large projects. In developing parts of the world and also in the developed areas of the world, the trick is will funding go out there and will that become available and will that materialize in 2009. We are not sure.

And then the cash flow respect really reflects the customer advances. So that cash flow number of $98 million versus $245 million last year is the fewer larger orders that you get, obviously, the project payments are going to be decreased and that is what is broadly reflected in that number difference.

So moving from Power Systems onto the Automation Products business. Overall, pretty -- from an order standpoint, minus 3% in local currency for this business. Remember, this business has the most diversity profile across the business units of Automation Products. So everything from drives that are energy-saving devices to wiring devices and different kinds of breakers and systems that would be related to the construction industries. Anything that is close to construction, particularly home construction or commercial construction, has seen a pretty big downturn in our business overall. Anything on the energy-related devices and we will walk you through has actually has pretty good resilience through the period. So this is a business that we have to balance by business unit in the sense of where we look for costs and how we run the business going forward.

So overall, you can see that revenues for the quarter of about $2.5 billion, up about 13% local currency and EBIT of about $422 million, close to 17% overall. Good performance from Tom and his team. On the right-hand side is -- you can see revenues for the year of about $10.25 billion, 13% up and an EBIT number of close to $2 billion overall. Good leverage you can see in dollar form from 19% to 29%.

So again, as I mentioned, orders for energy-efficient products, standard product orders for industry and construction were down overall and so you really have to dig into the portfolio of this business to understand the big gives and takes of it. But there is some up and some down obviously, but overall, this is a terrific year for Automation Products and this is a business too, it is worth saying, I guess you can read through my words, this is the shortest cycle business we have by far.

So if you look at Automation Products and their order backlog of about $3.8 billion right now and revenues of $2.4 billion, this is the shortest piece. So this is a business we really have to be on our toes in the sense of adjusting capacity and resources depending upon what we are seeing out there in the market and again, Tom and his team have done that so far, but we will keep our eye on that and make sure this thing is executed well as we go through the cycle.

The next would be Process Automation and the best way to think of Process Automation, this is a business that is very well aligned with heavy industry. So paper and pulp, oil and gas, metals, mineral, mining, those kinds of businesses. Obviously, with the commodity deflation going on out there and the lack of funding for new projects, this business has been hit the hardest in that sense and honestly, it had the most difficult year-over-year and quarter-over-quarter comparisons when you look overall.

So from a standpoint in the fourth quarter of revenues, you can see a little over $2 billion, EBIT of $240 million and about 11.5% EBIT rate going forward. Cash from operations of $282 million. Now for the year, this is a tremendous performance by the team here with revenues of $7.8 billion, EBIT of $926 million and then you look, on the dollar side, up 22% in dollars and 36%. So good leverage and good productivity from the revenue number to that EBIT number overall.

Services overall remained steady. I think it is good for you to understand too that about -- for (inaudible) business, about 30% of these orders right now have to do with services, long-term services contracts and also with consulting contracts and those kinds of things. So that is important. It is not just look at the backlog of this business, the order backlog. This is a business that has the highest service component overall in it and it is a very important part of how we are going to run this business going forward. And again, the cash flow piece, because you might ask the question, again, this is a large project business in that side of the business and it was affected by project payments.

And then Robotics. Robotics actually felt the full brunt of the downturn the fastest than any part of our business. In fact, if you track this industry and you look at discrete automation specifically, you can see the discrete automation businesses across the world have been hit extremely hard, particularly those that are associated with automotive and there is, obviously, a large automotive component that we have in our Robotics business here.

Revenues for the quarter, you can see at about $400 million. EBIT was roughly flat. It is minus $73 million because we took about $70 million of restructuring provisions in this business to help allocate resources more across the business into emerging regions. On the right-hand side, you can see revenues of about $1.6 billion, EBIT about $9 million, again adjusted for that provision and then you can see the order rate overall for the year about 5%.

Look, this is a business where I feel we are taking the right actions from a cost standpoint and structurally to get it in line. I think there is going to be consolidation in the Robotics industry overall over the next several quarters. We will look for that piece. This is a chance for us to make sure that we get our cost position in line. We make this business stronger and that we take advantage of the cycle. Anders and his team have done a terrific job in the last couple of years in the sense of trying to diversify out of automotive more into general industry. They have been very successful in that, but unfortunately, we still have a large automotive component that is dragging us down and on the general industry side, we have seen slowness in that investment area too.

So we did some acquisitions last year. I listed three of them here. The total amount of money spent on those acquisitions you can see here is about $650 million spent. Again, the emphasis has to be here from our end. Michel and I both told you that we wanted to do bolt-on acquisitions, nothing that was extravagant, things that were in line with the business and in line with strategy and each one of these, whether it is Vektec Electronics out of New Zealand or Kuhlman or Ber-Mac, all these were partitioned through our individual businesses. I can tell you the integration activities have gone well. There is good plans in place. There are good processes to follow those plans to make sure the milestones are reached.

Overall, I like the EBIT and revenue multiples that we purchased these businesses for. It was reasonable in that sense and so this is broadly representative and when we talk to you about acquisitions that are opportunistic, reasonable acquisitions that are easy to bolt on and fit with the overall strategy and capability of the Company and we will continue on that strategy as we move into 2009.

So a quick summary. Look, a great year in 2008. Again, I just want to congratulate the team in this room that helped to deliver that. I know many of you don't care, okay? It is about 2009 and we will get into 2009 in more specifics and really what we have to do. But again, record EBIT, record cash flow, our tender backlog conversion is critical and you saw that tender backlog. It means a lot to the business and our backlog of orders that we currently have on the book is something we have to stay focused on and execute.

With that, I will call Michel up and Michel will walk you through more specifics on the financials.

Good afternoon, everyone. So let me go a little bit more specifically in some of the financial analysis and it is a bit more need to understand because we have a few exceptional items that I need to clarify a little bit for you. First of all, we talked to you about the fact that we have taken about $870 million of special provisions this quarter. If you back that out of our EBIT results for the full year, we ended up having delivered this year an operational EBIT margin of 15.5%, which is the best margin ever in ABB history. And obviously, if you look at this evolution on the last four years, the markets have helped us quite a lot. We don't deny that. Obviously, there was huge demand for products and services that has allowed us to be strong on the pricing side, but as well to increase the capacity utilization of our factories and as a result of that, we could really improve our EBIT margin by 10% over the last four years.

So it is not just the markets, we have also worked very hard at improving our cost base. You see, for instance, that our cost of sales base went down from almost 75% to 68%. So that is a 6% improvement that came, not only due to the strong markets, but as well by all our efforts in terms of providing lower cost sourcing for purchases and as well working on the global foot print of our manufacturing factories, but as well of our engineering centers.

At the same time, this Company grew from more or less $21 billion of revenues to $35 billion. We have done that without growing at the same pace our overhead and as a result of that [OSG&A], in spite of the fact that we have invested a lot in selling expense to keep conquering new markets, our SG&A provided another 2.5% of additional margin to the dilution in the high revenues. So that is really a success story, 10% improvement of EBIT margin over four years.

(inaudible) saying it's a difficult quarter to explain the numbers. I will try to take you through that. We have taken in total $870 million of special charges at the EBIT level this quarter. Included in this $870 million is about $140 million of restructuring expense. Most of them being already the result of the decisions we have taken to implement this $1.3 billion cost-saving program that we have initiated. The rest of this provision is really linked to the several compliance and antitrust cases that we have been working on that we are negotiating today with the authorities of the United States and the several countries of Europe.

We have as well included in this provision a very complex and specific tax case where we were basically obliged to resubmit VAT and income tax forms in a specific country that caused us actually to record additional VAT charges, take some income tax, as well late interest provisions and all that is billed as well in this charge. I will tell you already I won't give you more details on that because that is obviously a case that is (inaudible) being litigated and so it is not in our interest to disclose more details about that.

Again, if you back up all these special charges for the full year, EBIT is about 15.5%. For the fourth quarter, actually it was very close to 15%. So it is overall still showing a pretty solid operational performance and we tried here to also give you an estimate of the impact it has had on each of the divisions. So you see that in the fourth quarter, Power Products special charges were about 4% of the EBIT margin impacts, Automation Products 1% and the largest was, obviously, Robotics because of the $70 million provision that they took. The impact there on the EBIT margin was about 16%. For the full-year results, Power Products has an impact of more or less 1%, Process Automation 1%, and Robotics 4%.

So if you think that was an easy slide to explain, let's go to the next one. We still have a few more of special items to explain. The first one is the finance net. It comes probably as a surprise to you. We had in the fourth quarter a total charge of $145 million of finance expense. Part of that is again linked to the specific tax case. We had to book about $30 million of interest on late taxes that affected the finance net position as well, but the biggest extraordinary item that we have here is a temporary foreign exchange loss on investments of about $100 million and let me quickly explain to you what it is.

As you know, we have become very conservative in the way we invest the cash in this Company. We have gradually shifted our bank deposits into commercial paper and into government securities. We had at year-end about $1.5 billion of short-term government securities, basically euro-denominated T-bills from Germany, Holland and some other European countries. These securities were designated as securities held for sale, which means that, during the time that we keep them in the book, the revaluation of these securities, in all cases, may lead to a foreign exchange impact because they were held in a dollar company or kept into the equity account, which we call other comprehensive income. And they only go back to the income statement when they are either sold or when they mature.

The fact is that what we do normally we have done that since here is that since the end of the quarter, we basically sell these securities, realize a profit and then move on to the next quarter. The fact, with $1.5 billion of government securities at the end of the year and limited through liquidity, we decided, economically, it didn't make sense to do this in our transaction. So we consciously decided to keep them on our books. With or without the $100 million more or less foreign exchange impact that we had on this security, sales in the equity account didn't impact the income statement, but it is a temporary loss. All these securities mature in the first quarter and as they mature, the profit comes back in the income statement. So I can already give you a very assertive statement that our finance metric for the first quarter of 2009 will be close to a positive $100 million. So it is just a timing issue and I think, economically, it was the right thing to do for ABB. So that is the first point.

The second then is the tax. You see that we had, for the fourth quarter, a tax expense of about $5 million, which is great for a company our size. Obviously, it was again here a special charge I think you knew about, that we were still considering to release more of the valuation allowances that we have against our deferred tax assets, mainly in the US, but also in some other countries. In total, it was about $400 million that we built in tax assets in the fourth quarter. And that was again partly offset by this tax case that forced us to accrue for more income tax liabilities in the tax line.

At the end of the day, the full tax rate for the year is officially reporting 25%. In fact, if you back off these one-off items, our real tax rate for the year was 26.8%. So very close to the 27% guidance, which, by the way, is also the guidance that we are keeping for the years ahead of us.

And let's say the third element that I want to emphasize in this slide is the discontinued operations. We have now taken care of on the last two potential liabilities that we have related to asbestos. We still have two conditional payments of $25 million each, due in 2010 and 2011, provided we reach an EBIT margin of 9% and 9.5% respectively and we have now decided it was time to book these two payments, which had an after-tax impact of $31 million in the discontinued operations line.

So if you put all that together -- the EBIT charges, all the special items below the EBIT -- at the end of the day, the net charge to net income was about $750 million. Now to make it even more complicated, you remember last year, we had an opposite situation where we had booked $500,000 net gain on the sale of Lummus and another $500 million -- sorry -- and another $500 million positive impact from the valuation (inaudible) reduction in the US. So we had $1 billion of positive one-off impact on net income. So the difference between the two $1.75 billion. If you build it back in -- in fact, net income in the fourth quarter is up about 25% and for the full year, our net income is up more than $1.1 billion, which is an increase of almost 40%. So (inaudible) explanation, but I think it deserves some attention because, otherwise, it would hide an operational performance, which I think is really very solid.

You have seen this slide many times and obviously, we like even more to show it in these challenging times. The good thing with the first slide is I showed you the improved profitability. The second good thing is that we have kept most of this cash regenerated to make ABB a better company and make it more solid for the time that the economy will become a little bit more challenging.

We start now the year 2009 with the gearing at 17% and with a net cash position at $5.4 billion, which gives us, we think, all the flexibility we need to both jump on opportunities, gross or external, or as well to finance the restructuring that will be needed to achieve the cost savings that we want to achieve.

If you look back at the last five years, the improvement in our financial situation has, obviously, been very impressive. In 2002, we had a [junk] rating, BB+ plus and Ba3, both with a negative outlook and if you look at the progression we had during these five years, increased the cash pile by about $2.5 billion. We have decreased the debt by close to $6 billion and probably the most impressive is that we have increased our equity by more than $10 billion. And what is not even on this slide is that the off-balance sheet obligation we are doing is previously reduced by more than $3 billion.

So we have today a much more solid financial situation that is evidenced by our credit ratings, which are solid, investment-grade ratings of A- and A3, both with stable outlook and this situation is as well acknowledged by the credit markets as ABB has today one of the lowest, if not the lowest, credit default swap spreads of about 110 basis points, which reflects again I think the solidity of our financial foundations.

Return on capital employed is a KPI that we often measure ourselves to internally and that one has grown substantially over the years from being 3% to below cost of capital back in 2003 to 36%, again, adjusting for the one-offs on an after-tax basis in 2008. And the recipe for the slope of this curve is, in fact, quite simple. We grew the top line by 14% per annum during this period. We grew the EBIT by 67% per annum and at the same time, we had a very tight discipline on capital employed that only grew at the pace of 7% per year. And that obviously gives you the kind of leverage which, at 36% after-tax, is as well I think one of the best returns on capital employed of industrial and engineering companies.

Balance sheet, we said, is very important and we are really working very hard. We have worked very hard to rebuild it and now we do whatever we can to protect it in this challenging time. We have about $8 billion of liquidity that we need to invest. We are doing that in a very conservative way. We are spreading this surplus cash out to more than 50 well rated institutions. As I mentioned before, we have diversified away from banks. We have, at the end of the year, about $500 million invested in corporate commercial paper and about $1.5 billion invested in government securities. We are not having any refinancing exposure over the next 12 months. We are talking about $350 million that becomes due and our next major maturities are in 2011 and 2013. They are both slightly above $900 million, which obviously is not a problem with the cash pile that we have for the moment.

Over the years, and I would say that this is true since the crisis, we have maintained a very tight relationship with the banking pool that kept us out of the water back in 2001. This group of about 20 banks has been providing us, on one side, the liquidity we need with a backstop facility of $2 billion that is confirmed and matures next year in 2010. But they are also providing us both of the guarantee and bonding lines that we need to run our business and this we are obviously talking about a number of billions of dollars that we need in order to support our bidding and our project businesses.

In 2008, we finished the year with the same net cash position that we had at the end of 2007, but we have done a lot of things during the year. And if you think, first of all, we financed the expansion of our top line by 15% with all the requirements on working capital needs that it represents. We have kept investing. We spent $1.2 billion in capital spending, the highest number that anybody ever spent in terms of CapEx. We started acquiring companies. The three acquisitions that Joe talked about in his presentation represented a total disbursement of about $650 million and we as well spent $1.6 billion of cash that we send back to the shareholders. $1 billion is a dividend and $620 million was in the share buyback program of $2 billion that we announced last year. So overall, we have done a lot of things. Financed the growth, invested for the future, acquired companies and yielded to our shareholders and still finished the year with the same net cash position than what we had at the end of 2007.

And cash is king. That is obviously very important. I say that many times, but I think now more than ever. In these challenging times for the banking industry and those times where nobody knows really when liquidity will come back to these markets and when the financial markets will stabilize, having cash on your balance sheets is for sure no more a crime. It is a huge asset and we are managing these assets as cautiously as we can.

Capital preservation is the name of the game. It is not about maximizing the yields. We are also having a very good capital efficiency program in place. To give you an example for instance, in difficult liquidity times, we generated $1 billion of operating cash flow just in the month of December, just to show that when people go after the cash, we will get it and (inaudible). It is not only important to collect the cash to just add it to the pile, but obviously it is also an important credit management tool as credit risk across the group has increased quite a lot.

We are also strictly monitoring our inventories level and we have already taken some decision regarding cash deployment in 2009. For instance, we are going to cut our capital spending by about 20%. We have as well as Joe announced decided to maintain our dividend at $0.48 (sic -- see slide presentation) a share, but as you know on the other side, our share buyback program has been kept inactive since the month of September. I said before we have spent about $600 million, $620 million on this program and this program will now stay inactive here. I can say so until we see again the liquidity going back in the market. So there is no intention in the short term to reactivate it.

Same for M&A. This is the time to do nice bolt-on acquisitions that we can pay with cash. This is where you can really grab the good opportunities, but at the same time, you don't want to do a transaction that will fundamentally change the balance sheet structure. So the large M&A activities that we are rumored to do all the time is for sure not the kind of thing we should consider until we really see a clear confirmation that financial markets have stabilized. Because, at the end of the day, we work very solidly on the last two points. Retaining our investment grade is key and banking relationship management, especially for what it represents in terms of bonding lines, is as well essential to run our current day-to-day business.

And to finish on the dividend, so as we said, we are going to pay an unchanged dividend of CHF0.48 per share. That is in line with our dividend policy, which is to distribute a steadily rising, but sustainable annual dividend toward the business cycle as we did last year. We are proposing to pay the dividend at a nominal value reduction. The payment will accrue at the (technical difficulty) and as you know, (inaudible) distributing dividends at low additional cost for the Company, but represents significant tax benefits for all the shareholders given the fact that this type of dividend is not subject to 35% swiss withholding tax. And obviously, the proposal that we are doing to our shareholders and that we hope will be approved at the AGM in May 2008.

So much for the financial (technical difficulty). I'd like to (inaudible) to Joe.

(technical difficulty) -- outside. The way we have looked at this program is we expect (technical difficulty) walk you through that. So if you look, this is just a quick graph of our -- blue bars are orders, the light ones are revenues and then the red line is the book to bill. You can see there is a certain amount of seasonality to this business that kind of bends in the different times of the year. But if you look at the fourth quarter of '08, that book to bill ratio on that red line is actually lower than any other point on that chart. And so you have to think that that is not an anomaly, that has to do with what is going on with the economic situation right now. We are certainly billing more than we are booking and so we are going to have to take some actions on costs to get at ahead of this thing to make sure that the business is going to be in the right competitive shape to move forward.

So we are asked often about our EBIT margin corridor. As Michel indicated, we're at the top of that corridor right now, close to 16%, about 15.5%, 15.6% and our goal is to manage this business within that corridor during this period of time and that is a significant part when we talk about confirming future projections, that we stay within this bandwidth that has been communicated to the investment community overall.

So the cost take-out program. The first part it's -- you can read the statement. It's to reduce costs from the 2008 level by a total of $1.3 billion by 2010. We are going to spend about $600 million on this program. We have spent or have accrued already about $100 million of that in 2008. We anticipate $300 million invested in this program in 2009 and then another $200 million in 2010. Over half of these savings are targeted to occur in 2009.

There are four main cost levers here. First of all, it's global sourcing. You have seen the significant investment we have done in emerging economies all around the world to adjust our footprint and to give us that capability in those parts of the world. We're going to leverage that much further and much faster than we have done in the past.

Operational excellence in this business is the efficiency on how we operate the business overall. I want you to think about, from an overall target standpoint, this is about our labor productivity and our material productivity as it flows to our facilities throughout ABB.

Our footprint, we are going to adjust our footprint and make sure that we have the right types of manufacturing and engineering capability aligned properly. A lot of this will be again aligned with the emerging economies and the structure and the positions that we have built in those economies over time.

And then G&A, general and administrative costs is a significant part of this activity also. So it is a combination of both fixed and variable costs that we have to go after in this program.

So if you look at it again around those four buckets, from a sourcing standpoint, I will just walk through some of these. We have about 40 cross business teams from a commodity supply team standpoint in place to go after this now. So it is not a new activity for ABB, but it certainly has a much stronger focus through each one of the divisions and the functions also. We will focus on high labor costs components and again, try to move those as much as we can to gain the productivity savings with those. We will optimize logistics and then when you look at emerging markets from a sourcing standpoint, we will be up more than $5 billion since 2005. And so that is a significant opportunity for us in that sense.

Now footprint, we will expand both manufacturing and engineering capacity in the emerging markets also. All CapEx for new capacity is going to be on the emerging markets side. We're going to keep about $1 billion of CapEx in this business. It is going to be down roughly 15%, 20% from where it was, but we will continue to focus that CapEx in the emerging economies so it gives us the flexibility to be able to exercise that asset as we move through this cost-out program.

On the G&A said, we are going to take full advantage of the one simple ABB common ERP platform that we have put together at ABB over the last couple of years. We have made significant progress with that. We are in a position we can start to leverage it and that is one of the key programs for us to go after G&A. Our goal here is to take 10% of G&A out of this business based on where we ended in the fourth quarter of 2008 and we will look at general and administrative costs across all the businesses and all the functions and make the proper decisions in that area to make sure we stay competitive, but at the same time, address that cost base from a G&A standpoint.

So those are the four key buckets of the program overall. That is the cost-out program and we can answer more specific questions on it during the Q&A period. Michel and I also wanted to walk you through the order backlog again in some detail because we thought there might be some questions there.

First of all, you can see the way the X axis of this graph is set up is anything that is a percentage of backlog to our 2008 revenues. So an example, grid systems right now. What this chart shows is we have over a two-year backlog in our grid systems business right now within the business. We have over 100% in marine metals and minerals, power electronics and also substation network and power generation. Oil and gas, paper and pulp and power products, you can see about 50%, but then down below in Robotics, which is associated broadly again with the automotive side, and then anything with construction, again, you can see has less than 20% from a backlog standpoint. That is a real pressure point to the business that we have felt and we are taking the most immediate cost actions on that side of the business to address those short cycle businesses that we think we will continue to be affected by the economic downturn.

So we will talk about growth opportunities to because it is not just the cost piece of this business or our backlog itself, it is how you add to it. Even though it is going to be a much stronger and intense competitive environment out there, there are certainly opportunities for growth and we would like to point those out to you and where we are going to focus our time and our talents.

So if you look at what is going on from the fiscal stimulus program package out there now, the US announced an $800 billion program. Now I think anybody that studies US politics knows this is a grab bag in general, but that is an American term I can explain later on. But it is about -- I would say there is $70 billion to $80 billion of infrastructure spend that would be directly related to ABB products that we could advantage of (technical difficulty). Germany, Italy, Spain, UK, China have all announced major (technical difficulty) infrastructure programs, fiscal stimulus programs, (technical difficulty) to the energy segment and specifically the electrical segment. It will be right in the ABB sweet spot for us to be able to take advantage of that. So more than $1.6 trillion of new government stimulus plans have been announced. Now how quickly those are infused in the economies and the projects are identified still remains to be seen, but it is somewhat hopeful that that stimulus package will be able to see a certain part of that.

(technical difficulty) specifically, this has to do with transmission and distribution. So you bring it right down into the Power Products and Power Systems part of our business overall. The US does about $20 billion direct spend on there. You can see how that works out from loan guarantees and renewable energy. There is still some concern in the United States on the production tax credit that goes with wind energy. It's up for a vote again now. It is every three years. I guarantee the Obama administration will push it hard. I think that will get through the Senate, but that just has to be done in the US to continue that aggressive investment in wind. And obviously the Obama whole campaign and the position on global warming and overall climate change, you're going to see a huge amount of focus in the United States on green energy and our position both from a grid standpoint and a product standpoint with wind energy I think can benefit from that.

Now China, it is just amazing to me, China needs $132 billion to expand power grids by 26,000 kilometers. So, look, there are two kinds of investments going on here. One is you upgrade grids in the G-7 countries and optimize them as much as you can. And then you build these huge infrastructure grids just to bring energy to emerging economies and that is what is going on in China. In both those cases, they are different, it is different products at times, but we have the products and we have the distribution capabilities in those parts of the world to be able to deliver those products.

Europe, you can see a EUR5 billion. You can see India also. So it looks like all governments are in the game here. China, United States to a broader sense of reinforcing the grid and expanding the grid, which is a significant part of our business.

Some other examples here on the left-hand side of the chart we have shown before is how HVDC plays in Europe. And so when you look at the European grid and structure and opportunity, there is different areas where you can move power from one continent to another or one country to another that our products help to facilitate over time and so we have talked about the NorNed link this year and I have a slide on that where you brought power, hydropower from Norway down to the Netherlands. There are opportunities all over that and so obviously some of that tender backlog has to do with these kinds of projects and again, as the governments target fiscal programs for that, hopefully funding will loosen up.

On the right-hand side, we have a significant position in oil and gas and across different businesses here at ABB. Even though oil CapEx is being cut in the oil and gas industry, from what I can see right now, the announcements are anywhere between 15% and 20%. That is cut from an historical high. We still know that there will be a significant amount of investment going on in oil and gas around the world. And a couple trends. One is most of the oil companies that we talk to now, they gauge their investments around $40 to $60 a barrel. We are obviously on the lower side of that piece right now. But I think it is somewhat probable that you will see oil in that range in the near future.

And also the nationalization of oil. In other words, more countries move like Russia has done, Venezuela has done, what Brazil has done with Petrobras overall is that you are going to see that the social construct of a country becomes more in line with that energy that is sold in that sense. And so drilling and exploration to keep running that through, regardless of what the cost of oil is, we think will continue as you see more the socialization of some of those energy assets throughout the world. So oil and gas is an area where we know that investment will be somewhat decreased year-to-year, but we still think that there will be significant opportunities out there for our business.

One of the things coming to ABB that I have grown to appreciate is this Company is very global, but it is also extremely local. If you look down through this, whether it is North America or China or Europe or the Middle East, I want you to think of ABB as being embedded in those regions and embedded in those countries. And so it is not that we just sell or transact in those environments, we often engineer and manufacture. We are part of the social fabric of those countries in some ways. So, look, whether you like it or not, there is going to be a certain amount of economic nationalism that comes and you see that is introduced in some of these bills. In fact, there was a very egregious part of the US bill when it went through Congress that was a buy American clause in some way. Now no one wants to see that. I hope it doesn't happen, but if certain parts of that economic nationalism does leak into these fiscal stimulus bills, we are still well-positioned at ABB because of our strength and local position to be able to take advantage of that. And so we will watch this closely and use all the assets of ABB to take advantage of that money as it presents itself in the economy.

You know we have strong verticals in wind power, rail and water. I wanted to list them. The growth in these markets since 2004 has been unprecedented. The wind market has grown almost 50% for us. The railway market almost 40% and water about 50%. You can see they are significant in the sense of the overall size of the business. ABB alone in 2008, we sold close to $1 billion on the wind side of our business. And you can see the scope of the products that we offer for each one of those.

So when we talk about green energy and we talk about infrastructure and how it relates to rail and those, we have a myriad of products and systems that line up behind that to take advantage of again those fiscal stimulus packages [from our] government to invest in infrastructure overall.

One thing that I think the economists have learned in the world and countries have learned in the world is if you want to use fiscal policy to drive demand in a period of a recession, but get a return on that investment in some way in the future, infrastructure has proven that if you put good infrastructure investment over time, it actually benefits the economy. It helps to drive a broader percentage of GDP in the future and I see some -- at least some of the packages coming out have a recognition of that and hopefully that continues.

Our services business -- we had a chart before how it has been growing. We closed out the year at about $5.3 billion. We are projecting anywhere between a 15% and 20% compounded annual growth rate for that business going forward. As I mentioned before, there has been a wonderful and very specific focus on services here at ABB. We will certainly continue that and put more emphasis on it. But I look at it as a -- we have to enter more into the operating budget cycle of the Company and not just the CapEx cycle. And the way to do that is to focus on services as much as we can and we do have a lot to offer and you can see the team has made significant progress and we need to continue to do that.

So just a quick summary and outlook. I told the team the other day I wish I was an economist because you can change your forecast like everyday and that is basically what this chart says is no matter when we go out and ask for an economic projection right now, it comes back worse than what it was the month before. And so I think from where I stand and where Michel stands, we have to run this business the way we think it is moving and we have to watch our order rates and be anticipatory in the sense of what we think and how we have to position this business both for growth and also for cost because I don't think any forecast you could use right now to guide your business. You are going to have to use your own sense and your own internal capability to figure out where you go.

So from where we are starting from right now from an organic growth standpoint and EBIT standpoint, again, as Michele pointed out, it is an extremely high level. So we have a great balance sheet to work from and we have good momentum from an overall margin standpoint and cost standpoint to help to leverage going forward.

I wanted to show you here from an emerging market standpoint, we talked a lot about leveraging the investments that we have made in emerging markets over the last several years. The top bar on the left-hand side gives you a look at employees and you can see it has grown from about 29,000 employees to close to 52,000, 53,000 employees in 2008 and we added a significant number in 2007 and '08 also. And you can see our capital expenditures right below that, the bar chart, has followed right in line with that side.

On the right, the reason we have put this in here is I wanted to show you our share of employees in the mature markets, but I think when you often think of emerging markets and we communicate to you, you think of China and India. The fact is this team has been very resilient and I think resourceful in the sense of looking at all emerging market opportunities. And so we have significant facilities now in Mexico, Bulgaria, Estonia, Poland, Brazil, Egypt, Vietnam. I talked before about ABB being embedded in those economies and becoming part of the social structure and the structure of that. That is the intent of these investments too. So it is not overweighed in a sense of one particular emerging economy. I feel it is spread out well and that is going to help the business as these economies help to flourish and grow also.

R&D is very important to ABB overall. We will keep a good research and development focus in this business, product iterations to keep us ahead of the cycle in both our Automation side and also our Power side, are really critical to help to continue to drive margins in this business and growth overall.

Some of the areas we are targeting right now is distributed and renewable power. You can't pick up the paper these days without reading about smart grids. We obviously have a very good position from a standpoint of how smart grids could develop in different parts of the world and we will look to enhance that in the future.

Advanced materials and insulation to do it with insulation overall and on the right-hand side, you can see that is a huge transformer for an 800 kilovolt DC transformer that is used in China. It was to hook Shanghai with a hydro plant about 2000 kilometers away. I found this really interesting and hopefully you do too is that when you go out and you meet customers in different markets as I have done here in the last five months, the grid customers in the developed countries are very conservative. They tend to want products that have been tried and true for a number of years. There is a conservative nature in the sense of how technology is implemented in those markets.

When you go to China, they are building the most sophisticated grid structure in the history of the world, by far and they push us and technology development like no other country does in the world. And so this high-voltage DC transformer is the biggest in the world, is part of the grid program in China is unprecedented in the sense of the size and scale and really the risk in the sense that can you get that done, but being strong partners with state grid in a sense in China to be able to prove that this transformer works and you can distribute power at that kind of -- that size over that distance.

Look, energy consumption, no matter how you look at it, will continue. We talked about the doubling of energy overall by 2030. Almost -- you can see from a standpoint of terawatt hours, about 34,000 at that point in time. There is a direct correlation between energy increasing and GDP increasing in the economy. So we are going to go through a very difficult economic cycle. But I think governments are going to continue to invest in grids, continue to invest in these systems. They have to. It is a very energy hungry world and that will continue.

Look, our technology milestones, we talked about the NorNed link, which is a 700 megawatt power link between Norway and the Netherlands for about 580 kilometers. The CO2 emissions from there reduced about 1.7 million and so the theme here, and we talked about the NorNed link before though, as economies push for more green power, often it is going to be wind power, it is going to be hydro, that power tends to be away from the major metropolitan areas of where you want to deliver the power. And so we have the grid system capability and the technology with HVDC to be able to grab that energy that can be in a very disparate part of the world and be able to move it in the metropolitan area with the least amount of watts from the energy transportation standpoint. In this case, you transported about 700 megawatts of energy between these two countries in a cable about this big. It is just amazing when you see it and no oil, anything like that that would be an environmental issue.

Technology milestones for oil and gas safety and process control, our 800xA product, which is our distributed process control product, is proving itself in the oil and gas market and this is a great product not just in the sense of selling a product, but putting systems in place and having an annuity of service revenue around that going forward. So I think we have close to probably 4500 sites right now of 800xA and we will look to expand that going forward.

So our competitive advantage in today's market, I talked about the strong local presence, efficiency from a global manufacturing, engineering and logistics standpoint. Our balance sheet is extremely strong and we are proud of that and we will guard that with our professional lives. We have a significant service opportunity here as I have mentioned. We have a great experienced management team that has been through different cycles at ABB.

I go back to when I wasn't here in 2001 and 2002. The institutional memory of what you have to do as a company to survive is embedded in these people and they remember how to go through a tough time. And so as we put together cost reduction programs and things that are showing up here, this team knows how to address that and doesn't shirk from the responsibility that we have to be able to go after it.

So look we took a provision obviously we talked about that from a compliance standpoint. I think there is some sophisticated accounting rules that limit exactly how much we can take. But look, I just want to assure you from a leadership, this whole zero-tolerance piece stays and it will be even overemphasized by me going forward.

We are going to move this to the next sense of maturity. It is not just where the line is, okay. But we're going to move this to a high integrity company so we understand what integrity is. So it is not just Foreign Corrupt Practices Act. It is not just antitrust. It is about how does a high integrity company actually operate.

We are rolling out an ombuds program that will help us much better from a grassroots standpoint to understand by country and by region of the world if we do have issues out there that we surface them early and we can get at them and that people are confident that the anonymity of where that information comes from can be kept confidential.

And then lastly, is a clear accountability profile, that people will be held accountable for this. Look, from an investor standpoint, I worry about how much money we spend because of these past infractions. But in addition to that piece, I worry about the reputation of ABB as being seen as a cheater in the marketplace. That is not the kind of profile we want as a company out there. It is not the kind of company that I see ABB is and we will take every step that is needed to make sure that we address this. And I want you to be sure from an investment standpoint that we are going to address this and we take it seriously.

I come from a background at GE where this is embedded in your culture. I can tell you that it takes time. It takes specific upper management focus to get it done and it has to be infused across the entire culture. And we will in the process -- this doesn't happen overnight but we will take the needed steps to get at this and make sure it doesn't become an underlying liability of ABB going forward.

So look, there is going be massive investments in power infrastructure about $11 trillion you know over the next roughly 26 years. 50% required just to maintain the current level of power supply that is out there today. When you think about all the server banks everything that computers drive out there today, all of these are big energy absorption devices that will continue to grow along with just industrial needs overall for energy.

You know climate protection is here to stay. If you go back and look at the papers 12 months ago, everything was climate change, everything was CO2 emissions. Now everything is replaced by the economic crisis. The point that Michel and I both want to make here is that this whole climate change thing isn't going away. The Obama administration that was partially elected on a green platform that people in the United States want this too. And so the US will join the rest of the responsible world in a sense of looking at CO2 emissions and being able to promote green power.

So we feel that this won't go away, it won't be overshadowed in the standpoint of focus as the economy goes through this cycle and this is a big part from an ABB standpoint is we can benefit from this. It is good for ABB and it is good to be in a business where you see something that is good for your business but it is also good for society in general.

Look, you have to be at ABB to love a motor to look like that and we do love this motor. This is about energy efficiency and it is hard to believe that industrial motors out there consume about 65% of the electricity consumed by industry. And the way to look at this too you would say so how do you get at this?

Well almost 90% of those motors have no drives on them and that is the equivalent of if you got in your car today and you didn't have a throttle on it and all you had was a braking system and you redline that car at 8000 rpm, and the way you slow it down is just hit the brakes. That is the way 90% of the industrial motors that are operated out there. Our drive simply puts a throttle on it. That is all. It feeds the amount of energy in the motor an equivalent to the amount of torque that is needed or the amount of speed that is needed in that motor in some way.

And we will lobby very hard for this. It is much better to save energy than it is to take and figure out to generate the next kilowatt of it and this is the most significant energy-saving opportunity the industrial world has in a short amount of time is to use drives on motors to remote this kind of energy efficiency.

So look, going forward, there is an external factors beyond our control beyond your control beyond our control. We recognize that. We don't know the timing and effectiveness of these government stimulus packages and exactly what they will mean for the economy and for ABB. Ability of funds for large projects, you can read these commodity prices but there are certain internal factors that are in our control that we have to recognize and be sure we execute around.

So we will take steps in this business to make sure we are cost competitive. We drive the operational excellence we've talked about. We have -- we keep the financial strength that we have. Energy-efficient focused, leverage our global and then local opportunities also and our leading market shares and overall from a technology standpoint.

So we certainly don't know what is coming at us completely. We know it is a much more challenged economy in '09 than we saw in '08. We are going to get our cost structure ready. We will get our teams ready but we will face this future with a huge amount of confidence both in the position of the business and the ability for us to find whatever growth is out there and exercise cost control in the areas that we have to.

So summary, a quick again the uncertainty in the market outlook, our overall backlog of $24 billion I showed you how that worked through. Our goal is to move out of this recession in a stronger competitive position than what we went into it. I think if you look at our balance sheet and you look at our global positioning, you look at our product base and the world's overall need for energy and automation, we should be able to come out of this in much better shape than what we went in if we play this right and we make the right moves overall.

Long-term market outlook, as I mentioned, still remains positive from us and we reconfirm our 2011 target. So 2009 is going to be a challenge but we are positioned at ABB to come out ahead and that is the attitude we are going to take.

So with that, Michel is good or read the Safe Harbor statement to you and then -- oh you are done? We will take any questions you might have.

(Operator Instructions).

In addition to the audience we have here in the room, we of course also have a conference call and webcast participants. For the people in the room, if you would raise your hand clearly so our support staff can bring you a microphone and then identify yourself, and ask your question that would be great. Same thing on the conference call if you could identify yourself clearly before asking your question we would appreciate it.

So with that, why don't we start in the room here. Martin?

It's Martin Wilkie from Deutsche Bank. So a couple of questions. First of all, obviously as you say the economic outlook is extremely uncertain and economists change the forecast every day but you must have an economic scenario in mind when you reach your 2011 target and set this cost cutting. So is that sort of 10% or 15% worst-case scenario downside to revenue you are basing that on? Just if you could give us an idea as to what sort of economic downsides you have assumed as your bear case to still be able to hit these targets.

And then the second question was just perhaps a little bit more detail on the cost savings. You have given us a table of the different functional areas that you're looking to cut costs, but just maybe how we should see that? Is that primarily a labor reduction? I know you are obviously moving some sourcing to low-cost countries. But just maybe a little bit more color on where we should see that cost coming out. Thanks.

Okay. Martin, first of all, how we put this forecast together is you start with what you have. We start with that $16 billion backlog that we will convert. We look at our services orders in the sense of the continuity of that and you kind of piece together what revenue you think you have guaranteed for the year. And then you have to consider a certain order rate. So the order rate that we are basically considering anywhere from flat to double-digit negative in this whole thing. And that is what we have put the whole cost containment program around. Now we're going to stay on our toes. If it gets worse than that, we're going to have to take other actions, but as we move into the first quarter this year, those are the parameters we have basically described.

From a cost-out standpoint, I think I will tell you a little bit and Michel can kind of join in too is that, for the most part, you're going to this as material and labor when you get down to it. Some of this labor is fixed, some of the labor is variable. So remember, there are some parts of our business, like in Peter's grid business right now, that we have a two-year backlog and we have to actually higher resources in order to help to relieve that backlog piece.

There are other parts, like Tom's wiring device business, that has a huge amount of pressure or [Bernhardt's] transformer distribution business in the United States and we've already taken a significant amount of labor out of those businesses and adjusted them.

We had -- again, I talked about the near-death experience of ABB between '01 and '02 and what this team has done over the last two years or three years has been terrific as demand has gone up is they haven't added a whole lot of fixed cost employees or full-time employees. We have about 5000 or 6000 temporary employees that have been put in place in the business. And so what we do is we go down -- remember, there is about 40 to 45 different BEUs and we have to look at demand patterns on each of those. But we have this variable cost component.

You start with taking over timeout, reducing temporary employees, changing vacation schedules. You go through all of that first and we have a significant amount of room to move in that piece first before you get into the next stage of restructuring, which is the real firm restructuring in those areas. We are prepared for both, but there is a lot of flexibility that this team has built into this system that allows us to move quickly in that situation.

Andreas Willi from JPMorgan. Three questions, please. First one on -- you mentioned you haven't seen a lot of order cancellations or no material ones. Have you done the opposite and actually gone through your own backlog and kind of looked at the customers and basically done a deep clean in terms of whether there is any stuff in there you are not comfortable to have in the backlog any more?

Second question, on the cost savings program, if you could give us the base level of G&A costs that you will measure yourself against for a 10% reduction --

That you will measure us.

That you're going to measure us on.

I hope you measure yourself --

So we will give you the rope to hang us with.

And just the last one in terms of Robotics -- obviously, it's a smaller business, but I think you are about the fourth or fifth [ADDCO] that has talked about fixing Robotics and the quarter, despite still some revenue growth, already has a big underlying profit decline. Kind of what is really structures, what's cyclical and what needs to be fixed?

Andreas, I guess I will take the Robots piece first, Michel and you can take the other piece.

Yes, sure.

From a Robotics standpoint -- look, remember, I was in charge of a factory automation division at GE and I think I understand the robotics market pretty well. It is a cyclical market, but I think it has very strong, long-term opportunities for it. It hasn't been, Andreas, in the last really eight to nine years, you have seen a significant amount of migration out of automotive into other discrete manufacturing capabilities, whether it is assembling cell phones in India or whether like the FlexPicker we showed you being used in different kind of general industry baking applications.

So I would call -- think of our business not just as a robotics business, but as a motion control platform that we will be able to move forward on and so in this period of time, I would say you have to think about the overall scope of the business as being motion control with -- when you look at that FlexPicker, you wouldn't necessarily call that a painting robot, right? It is completely different in the sense the way it's configured.

There is also aspects of this business too we have to get sharper in in the sense of vertical integration, back in some areas that can help us in cost that we have to get out.

Look, there is no naivete at this point. This is a tough business, it has seen a lot of different cycles, but it is our best piece of business in discrete automation. It has great capability in motion control overall and I think if we restructure this business properly and we give it proper scope in a sense of broader discrete automation capabilities, this can be a long-term platform for ABB. I can tell you really like that answer, but that is where we are going, all right.

(Inaudible question - microphone inaccessible).

I didn't say that.

Okay, on your G&A question, the base that we start from is basically the 2008 actual numbers, which is about $1.8 billion and so we will measure ourselves as we should get 10% below that by 2010. So the full year 2010 should be 10% below the full-year 2008, obviously adjusted for currency. But that will be the basis we will be looking at.

When it comes down to backlog and order cancellations -- so yes, indeed, we have had very little order cancellations so far and yes, we are obviously watching the backlog, I would say, in two ways. First of all, because it is an active backlog, so always we are working on because they are either large projects or transformers that have an 18 or 24 month delivery shipments. So it is not that we need to make sure there is still a desire to get delivery there, we are in constant contact with these customers and checking on different milestones.

Now you have a good point as well because it is clear that a company like ABB, credit management was not always the first preoccupation because of the type of our customers, developed with governments, with utilities, so credit risk has never been a major issue and we have actually never taken a lot of write-offs based on that.

And as I mentioned in my presentation, we have ramped up these efforts now quite a lot to be much more alert and make sure, indeed, that our customers that have a backlog we are working on are surviving. But I think on the other side, we are dealing with these people on a constant basis, we deliver the backlog, we have really the finger on the pulse and we still feel still quite comfortable about the quality of it.

I'd just add one thing to that too is I have been with different companies within GE and outside of that too and there is also what do you book as an order on your books and the rigor and the execution around that. I can tell you this team is very rigorous in the sense of what is considered an order and what is placed on the books that way too. So you do start with a really good solid commitment on that end.

We have one more question in the room. Will?

William Mackie from MainFirst Bank. Two questions if I may. First of all, coming back to the restructuring program. You have broken out the savings target from the G&A portion, but could you roll back and break down what proportion you would expect to allocate to the other three columns that you've put together in your presentation slide up there? And also perhaps walk through the buildup process that you went through over the last couple of months across the organization. What proportion of these targets are bottom-up rather than top-down?

And then if I could, on the second question, just coming back to Robotics, I hear exactly what you are saying about the cyclicality and the risk to the business, but with due respect, you achieved about 3% growth in Robotics and the underlying business reported a loss year-on-year if we adjusted the $70 million charge. So could you just go back and perhaps -- is it a mix effect, is there one or two contracts that have damaged that reporting that result? Thank you.

On the cost side, we have here detailed four major acts of work -- the footprint, the sourcing, the operational excellence and the G&A. There is really two buckets. There is G&A and then the rest is really the whole area of procurement, supply chain, logistics. We have great hopes in continuing to deliver a lot of value from the sourcing efforts and really moving or sourcing more and more towards low-cost country suppliers and sharing the benefits of that. In a way, it is easiest. The more you can get out of that, it doesn't incur any restructuring costs, it doesn't take tough decisions in terms of people. So we have great expectation that sourcing can really become the major part of it.

The rest is a little bit more difficult to give you different block because, at the end of the day, it can turn out to the same when you talk about footprint, which is moving operation from high cost to low cost or when it reduces the cost of poor quality, it can have the same impact in terms of which type of expense are affected. So it is a bit more difficult to tell you the benefits coming out of there.

What I can tell you is that behind all that is a list of very precise action plans. It is a mix of bottom-up and top-down. I mean we have an executive committee level. We have an executive committee member or (inaudible) speaks (inaudible) for instance for all the supply chain logistics action or Gary Steel for the G&A costs that we really monitor the program too. But again, it is going to happen in the divisions in the business units and in the countries and it is really a list of very detailed actions to get us there. So we have pretty good granularity, but we are not going to start reporting to you for each bucket in which we save. We just want to look at the total cost package.

And coming back to your question on targets, it's very important to understand this one too. We have two types of targets in these five targets we've communicated. Some are revenue growth. We said on average we are going to be 8% to 11% CAGR over the next five years. We said that's given what we have in the bag already after two years, it is very likely that, over five years, we will be in this average.

When we look at EBIT, that was a different philosophy. We talked about the corridor of 11% to 16%, that at any point in the cycle, we want to stay within -- we have (inaudible) the 16% in good times. Now obviously we are going to test the 11% and basically here, not knowing really what the economy reserves us for the next 12 months, we say, well, let's go. If we cut $1.3 billion off cost to about 4% of EBIT margin gives us the buffer to stay within this range. And if it is not enough, we will start another wave after that. So I think it is a bit more short-term touch and go management, but I think it is wise for the moment to say we don't know how the economy rolls out, but we control what we can control, which is the cost structure.

On those buckets of cost too before I talk about the Robotics side, I think it is worth mentioning too that any kind of commodity deflation -- copper or aluminum or those kinds of things -- is out of these numbers. It would be ridiculous to do that. These are true really cost numbers in the sense of what we procure and what we do. Whatever that commodity deflation is, that will wash through the whole thing. We are not counting on that because we will probably end up having to deal with price on that side anyway. So we have taken that completely out of these calculations to be fair and make sure we are focused on the right area.

On the Robotics piece again -- look, I think basically what you saw in the Robotics business was a dramatic slowdown in that business and really underabsorption when you look at the thing going through. There really wasn't -- I can't point to a big mix issue or anything like that. It was basically qualified as basically an underabsorption piece.

Remember, that business is about a $1.5 billion business for us. It has some real core competencies to it in a sense of controller capability in different areas we can go. But it needs to be reconfigured properly and this basic restructuring that is going on is broadly reshifting resources from the United States and also Europe to emerging areas that will help to balance that piece, but there are some other deeper things that we have to do to help to integrate the business going forward. It is a good platform for ABB. It is one that I think we should continue to stay focused on and I am hopeful over time we will get this thing right.

Let's go to the conference call and take a couple of questions from there.

[Mark Truman], Merrill Lynch.

Yes, thank you very much. It's Mark Truman here from Merrill. Just a few questions, please, Joe. On Power Products, the Q4 underlying margin looked very strong. And I guess you have got good pricing in the backlog there. I wonder if you could comment on the pricing outlook in general. There is much talk about pricing trends, what they are likely to be in Power Products. How do you see that playing in 2009 and versus the raw material changes that you expect?

Mark, first, I would say that, when you look at Power Products, obviously, the copper side of that is going to see some commodity deflation and you will see customers try to reach for price. But electrical steel is the major component that we have inside of a transformer and electrical steel prices haven't come down yet. Remember, there is all different kinds (technical difficulty) underwater transformers, there is a lot of different pieces. And so right now, we have a pretty good backlog across the board in most of our utility-related transformer business. We are going to see increased pricing pressure, but I think so far we have been able to mitigate that. (inaudible) without any real downside on the margin piece. I can't really project, Mark, how that is going to look as we move into the third quarter of next year in that sense, but we have been able to hold it together so far.

Okay. Just following on from your cost-cutting program, how much does this eat into sort of the scope of the business? Obviously, no one is thinking about it at the moment, but if you had, in the event of a recovery, how quickly could you reconfigure to exploit that? Is there a -- I guess the risk with these big restructuring is that you have damaged the capability. What are you doing to ensure that doesn't happen?

Mark, I think you can really look (technical difficulty) what we are doing here is not just cutting resources (technical difficulty) billion dollar to maintain our assets, but also to build new capacity. We are going to do it from bases that are cheaper. We're going to look at ways to procure even cheaper than we have today and try to share these benefits. So in doing that, we are not cutting down on capacity; we can't do that. We have a $25 billion backlog to deliver on. So where we are really trying to be more efficient is in overhead and trying to work on that, but the rest it is really getting more money out of the supply chain and logistics chain that I think can really help us remain agile and react pretty fast when demand picks up again.

Okay. And just one very quick final one. Joe, you mentioned that Robotics could experience some consolidation in the next few quarters. Are you intending to participate in that or are you staying out of that?

Look, I didn't mean to say the next few quarters. I just think when you look at the pressure in the Robotics businesses across the world, I think you're going to see some casualties in the whole thing. Casualties are consolidations. All right? I mean the industry changes in some way. And so look, I am not out there hunting for assets on the Robotics business right now. That is not -- that is the least of my worries right now. But I do think that the competitive environment and the number of competitors out there could change over the next two years if you continue to see the kind of pressures we have seen in the automotive industry and the systems industry.

Okay. Thanks very much.

We will take another one from the call.

Christel Monot, UBS.

Hi, good afternoon, gentlemen. I have two questions please. The first one is on how the backlog is going to reverse into revenues in 2009, just trying to understand how I should he thinking about revenues in 2009 given you are saying now, with the calculation, that roughly 45% of revenues could be covered by the shipments. If you could help me understand that a bit better and how you feel about your ability to cover the rest of the year.

And my second question would be on incremental margins in the product division. Basically, they were quite solid in the last quarter. So just wanted to understand whether there had been some positive one-off elements there and how you feel about your ability to sustain that going into 2009.

Maybe, sorry, just one final question on the restructuring. Can you help us understand which divisions are likely to be impacted in 2009? Thank you.

Okay, Christel, starting with your backlog question. So there was a slide about that in the presentation where we stated about 65% of the backlog will translate into revenues in 2009. So 65% is about $16 billion out of the $24 billion backlog that we have. So I have to let you then work on your revenue estimate because, as you know, we don't give any guidance. But you can see that we started the year with $35 million in revenues, $16 million will go there next year and that gives you a bit of an indication of how much book to bill we need to have in order to achieve what you think the target will be. But I think at least a safe way to look at it knowing that this will happen. By the way, 65% is a conservative number that is down from the current trends, which is more in the low 70%s.

And the restructuring impact?

Restructuring impact by division. As I mentioned, the two major divisions that had restructuring were Robotics. That was pretty big. It was $70 million. Power Products was about $35 million. The rest was really spread around the three other divisions, but had less of an impact than the (technical difficulty)

Excuse me.

-- offset by other one-offs and incremental margin, based on that, you obviously need to -- I gave the indication in my part of the presentation of the impact you have in each margins. So obviously from that, you can calculate the incremental margins that I think overall are still quite good. We are looking for the group at an incremental margin net of about 23% for the year and 25% for the fourth quarter. So it shows again that the quality of the backlog is still good and delivers the value at this stage.

And no big one-timers in the sense of that?

No, that would be excluding all the one-timers.

I'm afraid -- thanks very much for your time, but just my question was rather referring to the $300 million restructuring that you are -- or the $500 million that you think you're going to take going forward.

Okay. I am sorry, Christel. I did not understand it this way. We do not have yet an appropriate breakdown that we are willing to communicate at this stage.

Okay, thank you very much.

We will take one more from the call.

[Andrew Carter], Macquarie.

Good afternoon. It is Andrew calling from Macquarie. I wonder if I could ask perhaps a couple of questions about China. One was that we had seen some, perhaps more in the power generation equipment space, seeing I think changes in the VAT regime leading to some delays in orders. And I was wondering if that had impacted any of ABB's businesses over there?

And then staying on the subject of China, it was perhaps just to ask if you can provide any more understanding of the $132 billion of potential stimulus there. And I was wondering whether you had any feel as to a little bit more about timing and whether or not you thought that this was likely to be something that comes through perhaps in the next two or three years or whether it might actually take a bit longer. I mean clearly the $132 billion that you mentioned is an enormous number. Thank you.

Andrew, first of all, from a China standpoint, I am not aware that that delays are anything that is affecting us right now. I mentioned that we did have some pretty difficult comparisons in the sense of what we booked in '07 fourth quarter versus fourth quarter of '08. But I am looking at my team here now and heads are nodding in the sense of no real bad issue in that way.

On the $135 billion grid situation in China, I can't tell you how much actually will move specifically, but my experience with China that goes back a number of years in about four different industries is when that government moves, it moves. It doesn't debate, it doesn't take a whole lot of time. I have seen the medical market change in three months over there and change significantly. And so I have a lot of confidence that when the Chinese government says they are going to do something, they actually do it. They have agencies like State Grid and Southern Grid in China that definitely have the capability to be able to take that money and be able to implement it at some point in time. So I do think that we will see some results of that in a relatively shorter period of time. I can't tell you the exact volume that that would be.

Thank you.

Do we have any more questions in the room? Okay. Then we will take another one from the call.

Erik Karlsson, AKO Capital.

Just had a question on the prices of transformers. Have you seen any change in pricing in terms of transformers in the market and what is your expectations for 2009 there? Thank you.

We haven't seen substantial -- look, we have some different kinds of transformers as I have mentioned before. If you look at our distribution transformer business in the United States, which is highly associated with residential construction, we have seen a severe downturn in that particular business, but the pricing has been relatively disciplined during that downturn, which we think is a good sign.

The larger piece of our business, which is the power transformer side, again, we have a pretty big backlog in that business and there is not intense competition right now around that piece. And so again, as I mentioned before, we have -- it is a great question and it is a part of our business we have to watch closely. It is an important variable. But to date, we haven't seen a significant amount of price erosion or changes in that marketplace in the third and fourth quarters of '08.

Thank you.

We actually have a question from our webcast audience, a couple of questions and I will read them as follows. Would you break out where the restructuring charges hit in the P&L? How much is in cost of sales, SG&A etc.? Go ahead and answer that and then I will --

I can give a rough estimate of where these charges are going. I would say, overall, if we assume that most of the restructuring charges are hitting the cost of sales, we have about $200 million of these charges in cost of sales, about $50 million in SG&A and the rest is in other expense, being basically all the things we haven't yet, for kind of reasons, not pushed down to specific divisions or specific countries. So that is more or less the breakdown.

Okay. And then this next question was what accounts for the $600 million roughly increase in other expense? Is this related to the $870 million charge?

Yes, so that is exactly the part of the provision that was not yet allocated specifically to a division or to a country.

Andreas?

I have a question on the situation with the utilities and the price-fixing allegations over the last few years. It seems like one after the other products that the industry sells to the utilities has come under the spotlight by your authorities. What is the reaction from the utilities about kind of in terms they have been taken for a ride by the supply industry a couple years back or for a long time? Is there kind of any talk they want to get some payback for that now or they are just pretty rational and say that is something in the past and we move on and nobody does it anymore or what is the reaction out there?

Andreas, I have seen several utilities or visited with several utilities since I have been here. That conversation hasn't come up one time in the whole deal. That's not to say that it won't and that it couldn't in some way, but at least in the executives that I have met in the utilities side -- now we do have a situation in the UK where, we can talk about there has been a filing from the UK from a -- I think it is called -- it is the National Grid in the UK about the GIS cartel I believe that we were associated with. We don't know exactly where that will come out or what will be done, but I don't think it is a theme in the industry. It is something we have to watch.

So look, Andreas, I want to make clear, we are -- I hate -- this company shouldn't be involved in these kinds of things. It is bad for the Company, it is bad from a competitive standpoint and we will do what we have to with the authorities to address this and we will do what we have to do culturally within this Company to make sure that it's done. But I can't anticipate or project what that might mean from the standpoint of backlash from customers or possible future lawsuits.

(Inaudible question - microphone inaccessible)?

I can repeat the question. Go ahead.

I mean there has been some talk in the market that National Grid has given a lot more of its business to the Koreans because they were upset about European suppliers. Have you seen an impact from that?

Yes.

(inaudible).

I don't think so.

We are still having very good business relations with National Grid, so no.

Another question in the room? Will? Will Mackie behind you. Sorry, Morton.

A couple of follow-ups on the cash. With the position today, you mentioned many of your customers decide issues with cash, but nothing with respect to suppliers. When you look across your supply base, are you comfortable that you won't have to extend or change the terms of trade or offer perhaps attractive terms to support some of your key suppliers? And also I guess still with cash, what is ABB's view with respect to supporting some of your customers in perhaps the near term with their funding needs?

We have been watching closely the supplier piece to this whole thing ever since the third quarter and look, we have thousands and thousands of suppliers and I can't tell you that everything is airtight in that sense. But I think we are in pretty good shape at the moment in the sense of both supply chain and what we can expect.

Michel, if you want to handle the --

The financing, yes. We are not in the business of financing customers and we have done that in the past and we know it ended. I think we are already taking a lot of execution risks in our projects from a technology, from a skill point of view, so it is not up to us to still add the financing part of the risk. So we have to be creative on that. And I think what we are now doing more and more is trying to put together a team that can really work at finding the right guarantees or the right financing for instance in creating the cooperation with these multinational development banks -- World Bank, EIB, EBRD, and all this -- and try to provide solutions there that can help.

It was very interesting the discussions you have from that point of view. All these government stimulus programs, at this stage, are still a lot of intentions. We are not yet going to see specific projects with the way they need to be financed and we hear a lot from the banking, from the development banks point of view that they are the help of people like us to help us put together a business case and do it and I think for instance what I hear from some of these conversation is that even more than financing what people need is people that take the risk out.

And that could be also a good solution for governments instead of always thinking of putting cash on the table, maybe just derisking projects at this time you can attract the financing. And so we are now putting together a workgroup and everything in a way we can provide this kind of assistance and try to help put some projects in place that we can do, but using all (inaudible) is not something we are really going to (inaudible) in.

So as long as we are sitting up here, we are not funding customers. We are not going to get into the finance business. We are going to find other entities and support those entities in some way with the customer piece, but that is not part of our strategy or intent at all.

With surprise, I fully agree with you on that. Let's not forget, part of all this sourcing initiative that we do is moving procurement from Western suppliers to suppliers in low-cost countries. So some of these people have tripled, quadrupled their volume of business because of ABB. So we need to watch that very closely and make sure that they keep a certain balance and that they don't provoke a rupture in our supply chain. So we are monitoring that very closely.

And often those are parallel supply chains too. We don't necessarily just cut it off in high-cost countries. We significantly reduce it, but it is -- you run them in parallel for a while to make sure you don't run into a situation where you hurt your supply line.

Hey, guys. A couple more questions from the call.

James Moore, Redburn Partners.

James Moore at Redburn Partners. I've got three questions if I could. Firstly, your $1.3 billion savings from $600 million of charges seems quite a big return rate, over two times your charges. How confident are you in keeping that and is that a net saving or a gross saving, i.e. do you expect to have to pass some of that on?

Secondly, on inventory to sales, you do have a big seasonal difference there, but if I take the last six fourth quarters, you have gone 12, 13, 13, 13, 14, 15. It looks like that ratio in the fourth quarter has been picking up. Are you overproducing or underproducing in the fourth quarter and sort of by how much? And then finally, I think maybe you made a mistake showing us your tender backlog charts because on page seven, we'd obviously like to see that more often for all the businesses. But we are halfway through the first quarter. When you look at tender backlogs in the other areas, particularly Power Products, do they also show that tender buildup that you see in Power Systems or was that a one-off division?

Okay, let me try to address some of those. On your first question, the savings is obviously a gross savings. So it is talking about gross cost. We keep the restructuring on the side. Why again does it look like such a good return? Because, as I said, we have, in all plans and expectations, the sourcing optimization, especially the procurement part of the sourcing, will provide an important part of the total savings and either of these are not linked with any kind of restructuring expense. So there is a lot of savings that are disassociated with the initial investment that you see there and that is why you see this kind of return. So we are quite -- it is going to be hard work, but we're quite comfortable that the commitment we are making here is something we can deliver and actually ABB has a good track record on that.

In the past, we have initiated one program called Step Change where we had talked about saving $800 million a year and finally ended up being $1.1 billion. After that, we started a corporate cost reduction program where we also overdelivered. So I think we have pretty good control over what we are doing here and feel quite comfortable that with this kind of investment, we can reach the overall target that we have put ourselves here.

On your questions about inventories, to be honest, I have not the ratios here in front of me. What I can say is that, (inaudible) in the fourth quarter, if you look actually overall, the operating cash flow of the divisions have become a little bit more difficult. There is obviously a huge foreign exchange component out of that that you need to take off and that may be impacting a little bit your ratio calculation as well. But I would say most of the situation in cash flow in the fourth quarter was due to lower trends from customers. The rest was a little bit of an inventory buildup and that is mainly in the area of work in process, a little bit finished goods as well, but mainly work in process as some of these projects also got delayed and have seen milestone payments moving to the first quarter instead of the fourth.

The third one on tender backlogs, no, I think the Power System is really the division that sees that the most. Power Products still has a different mix because it has high-voltage, but also medium voltage, so it is more a stable backlog, steadily rising as the business develops. But Power Systems is really the one that these are still very large -- $400 million, $500 million, sometimes a billion project -- and that obviously is the timing of award of one of these projects and have a huge influence on how the backlog looks like.

Can I just follow very briefly on the savings, what might the net be?

Well, I don't know if we really want to detail it at this stage. I can tell you we have a plan B and a plan C ready, but I think as well there is no need to start alarming all people internally. We work with what we have for the moment and if times get even tougher, we will communicate more on those. But the important thing that you should know is we are prepared. We are not denying the situation.

Thank you very much.

Another one from the call.

Julian Beer, SCB Enskilda.

Good afternoon, everyone. Can I just ask firstly a clarification to the very first question? Joe, I think you said that the planning scenario, you just calculated the same within the 11% to 16% margin corridor, given the announced cost-cutting was orders to be between flat and minus 10%. Does that imply that you are targeting at least 11% margins, even if orders fall 10% in each of 2009, 2010 and 2011?

Yes, we are saying that we will take all the measures necessary to stay within the EBIT margin range all the way through 2011. So that is -- a cost-saving program is the first way to ensure that, and we will have to do more if we see that we are losing fast in terms of pricing margins. So you are right, yes.

Okay, Michel. But what you are saying is within the announced cost cuts, you could see orders fall 10% for each of the years and still get your 11%?

We are really working year-by-year for the moment. I don't think anybody can have a longer-term perspective than that. But you know the advantage we have -- we have always the backlog in front of us, so we can see what is going and by the time it impacts our income statement, the cost cutting measures that we are taking start impacting as well. So we can really react in waves here.

Julian, I want to be clear too -- I didn't say zero to 10. I said 0 to double digits. So there is -- we are not bracketing these things into specifically around 10%. We reach even deeper than that with our plans right now.

Okay. Sorry. I understand it is not an exact science.

Unfortunately, no.

I'll tell you what, it sounds to me as if you're relatively confident near-term on the Power Production, Automation Products area, and the order flow has been relatively benign, close to flat, year on year in Q4. Could we expect or would you expect to see that sort of order momentum continuing for the next couple of quarters?

That is really hard to call. I think -- you know, on the Automation Products side, Julian, when we talked about it, there are some parts of that business that are really exposed to the construction cycle, and they are way down. And then the drive side of the business, the machine side of the business has had a decent backlog and there has been a decent order quality.

So you know, you look at that business, it's really hard to call. It's the shortest cycle business we have. It doesn't have a huge backlog in the sense of backlog to sales piece. And so let's just say we are watching it. And we take action on those businesses that look like they don't have the right demand from a cost standpoint. And we are hopeful and we push hard for growth on the ones that seem to have held up well.

On the Power Products side there is a lot of logic you can use to arrive at why Power Products continues to do fairly well from an order standpoint, in the sense of grid and upgrades to Power Systems and fiscal policy associated with different parts of the power structure. But we don't know how long that will last, how quick it will infuse. And so I hate to tell you that we are confident in any way. We are watching it. We are hopeful. But we will just have to play this thing quarter by quarter and see how it works out.

Okay, Joe, that's fair. And then just finally, do you see your position in terms of competing for US-related stimulus orders as any different from US-domiciled companies?

On the power side, I really don't. When I think about the competitors that are U.S.-based that would compete with us in that sense, again, it depends on what part of the grid or what it is like. But when you look at our technology and the breadth of capability we have over grid kinds of systems, I think we can compete really well in that spectrum.

Okay, thanks a lot.

We have got a question in the room. Alex?

Alex Migliorini from Helvea. A couple of questions, please. The first one is why are you still adding capacity at the moment? I think subsea cables is an area where there is going to be tight capacity over the next few years.

And the second is with respect to Power Systems. Orders have come down, but you still have a two-year order backlog there. And there is going to be a lot of people that will need your specialist expertise in this field. How fast would it be to ramp up that business? How much extra business can you get in with the current resources?

And perhaps one more question. Regardless of what is happening in the US at the moment, we have seen some new projects being announced. I think ERCOT is investing about $5 billion or has given the go-ahead for $5 billion extra investment. Is that going to come 18 months down the line or are we talking three or four years? How much visibility do you have in that respect there?

And perhaps I can push one last question in, whether you have your pension plan, whether you can give us an update there on the funding?

Do you want to start with the pension, Michel?

Yes, sure. Well, the pension plan, up until the end of October, we would have been happy to report to you that we were fully funded, but then long-term rates started going down and that had some impact on the revaluation of our liabilities. So we ended the year with an underfunding of about $700 million for the whole pension plan, which I remind you again is about $9 billion. So things go fast there. But we are still I think having that under control.

If I look at it in terms of the investments we have done in the pension plan, we have contributed about $300 million to pension plans in 2008, plus $16 million in the extra programs. That was the normal investment and plus $54 million of extraordinary contribution that we did in US and Germany.

For next year, at this stage, we are starting with normal contribution, which is about $240 million in total. And as I said again, I think we had a pretty decent year in terms of asset return, but obviously in this kind of a market, it is a bit of a lot a lottery as well.

Alex, on the capacity expansions, you run it through the cable. That is our HVDC cable facility we have in Sweden. We are expanding that capacity because we do have a really strong backlog and we anticipate that there will be subsequent projects that will require that kind of cable capacity. And then here, in [Lyndsburg], Switzerland, we announced an increase in capacity in our power electronics facility and we are still pretty much backed up in the power electronics side. Remember, that goes to everything from traction kind of systems that go on trains all the way to HVDC, and being able to change the frequency between AC and DC on those kinds of projects.

I would also say that we have engineering capacity that we have to deal with in Peter's business to be able to do these grid sizes. So it is not just about CapEx for that kind of capacity. There is engineering capacity that we have to address and add also. How quickly can we do that? I think on some of the more normal systems that we have, we obviously can ramp that pretty quickly, but we are pushing the envelope on some of these new systems like HVDC light. They are going to require some real strong electrical engineering capability that Peter and his team are very attuned to and we are constantly looking for resources out there that can help to add to that capability.

You asked about the visibility of the grid investment. Is it 18 months, is it three or four years or whatever? Alex, in my mind, I have it anywhere between 12 and 24 months for most of the things that we see right now and that we try to count on. And so some of these projects that they did land in the first half of this year would begin to convert in 2010 in some ways. So think of it in terms of 12 to 24 months is, Peter, is how I would represent it. I don't know if you would say the same thing or not. If it is out five years or whatever -- God knows. We're kind of living quarter to quarter here in the sense of the way the economy is and these kinds of projects have 24-months visibility to them really. Is that it? I think we covered that.

Is there one from the room? Okay. We will go back to the call for a few.

Johan Trocme, Nordea.

Hi, Johan Trocme from Nordea Markets. Joe, first a question for you. You and the rest of the Board are recommending an unchanged dividend. Given that ABB had a very strong financial performance in the full year 2008 and is sitting on a $5 billion cash pile, what would you comment we should read into that proposal for the dividend? Is it you being conservative bracing the Company for a challenging period ahead or are there any other considerations in terms of requirements for funds that we should consider in your thinking there?

And secondly, a question for Michel. Is there anything of a one-off nature in the healthy cash flow that ABB generated during the fourth quarter in terms of paying suppliers later than usual or anything like that that might come back and reverse in the first quarter of this year?

On the dividend piece, don't read that into -- if I read the code I think in your question, we are planning on a major acquisition of some type. That is not our plan. We just want to be good stewards of our cash right now and stay attune to our dividend policy. Our dividend policy was about consistency of earnings, not specific payout ratios or anything like that.

I think you have to go into the economic situation that we are currently in with your eyes wide open. You saw that we have to spend about $600 million to restructure this business. If we have to take the next steps, we want to make sure that we have the cash to be able to internally fund that. And so as Michel's chart indicated, cash is king and we want to make sure that, again, we are responsible, we live up to our commitments on the dividend piece, but we are also responsible in that we control our own destiny from a cash standpoint within this business and our decision was balanced between those two.

Purely conservative is the right answer?

Yes.

Regarding your question on one-offs, no, there was no one-offs in operating cash flows. I would even say overall the networking capital got slightly worse during the fourth quarter. The only one-off, if you compare it to fourth quarter last year, is that, in the fourth quarter last year, we had a $200 million outflow related to an asbestos payment. If you remember, that was a payment that was subsequent to the sale of Lummus. And so that impacted corporate cash flows and obviously that hurts the comparisons this year. Otherwise, it is really plain normal cash flow with an excellent collection quarter in terms of reducing the amount of overdues and overall receivables from our customers.

Okay, thanks very much.

And another one from the call?

Simon Smith, Credit Suisse.

Hi, yes, it is Simon Smith. I have got three questions. The first question, you mentioned in terms of footprint changing or moving facilities, migration to emerging markets. I just wondered if you could give us a feel as to what you think the sort of run rate of CapEx that you would have going into next year would be.

Second question would be in terms of the cost-saving programs -- sorry to go back to it again -- but you've sort of highlighted on the G&A side savings of a sort of $180 million, which we could associate cost with. But I just wondered, of the $600 million of costs, if you could sort of say what that relates to. I presume it is to do with the closure of facilities and so sort of termination of assets.

And then really the third question would be that if you look at the run rate of orders that you had in Q4 and you were to annualize any of those, I mean you have highlighted the very low book to bill ratios in some areas. It obviously points to negative volumes. And while you have given us the guide on sort of an annual basis as to how you feel you can manage the business, I mean should we be looking for -- as you see a turn to negative volumes in some divisions, particularly sharp movements down in margin or would it be a sort of more gentle movement? Thank you.

On the footprint changes, and they have to do with the run rate on CapEx, we spent roughly about $1.180 billion in CapEx in 2008 and our goal is to spend about 20% less than that, about $1 billion of CapEx in '09. And again, we're focused on that as anything that is really new capacity or greenfield will be in the emerging markets area. So I hope, Simon, that is clear in that sense.

Footprint changes, I mean we are following through on our footprint changes that we had in place for our transformer business and we are in the final phases of that piece. I think you know we have done a significant amount of footprint alteration in the sense of the ability of our Automation Product business to be able to produce products in different parts of the world. We will certainly leverage that.

This is part of the continuous strategy or continual strategy to balance our overall capacity of ABB into a more emerging economy to take advantage of supply situations there, obviously, the cost of labor, but also opportunities to grow in those territories too. The cost savings on the $600 million, Michel, do you want to --

Well, yes, obviously, when you take the restructuring costs, it relates mainly to people and to write-off of properties and that is obviously what happens if you consider closing plants or parts of plants and moving them to other locations. So indeed, most of these restructuring costs have to see with a provision for redundancy expense and asset write-off. That is quite clear.

On the third one, run rate overall, I think the way to look at it is, as you know, we have always been watching on one side base orders because that is always what has been the pulse of our business, how it works. Base orders used to grow in the low double digits early in the year where high single digits in the third quarter, we had minus 2% in Q4. So that is -- I see where you see really the change in economic conditions, how the day-to-day business slowed down and obviously, we will keep monitoring that very closely because that is really giving us the real indicator of how the economy is performing.

After that, you have large orders. To give you a perspective, this quarter, large orders were less than $800 million. In Q2 this year, large orders were $2.5 billion. So it can be just having the award of one $800 million or $1 billion order can make a huge difference in terms of order intake from one quarter to another.

So that one, yes, it is difficult to control the timing. I think we can control the fact that we know about all these orders, that we try to tender in a competitive way. We have told about the tender backlog that we have in Power Systems and Process Automation we have as well a number of very interesting projects there for instance in oil and gas and they will now just depend on a little bit the business confidence climate of how fast our customers want to make these decisions. But I think really for you to understand the development of reason is watching the base orders is I think a better way to do it.

One more from the call.

Scott Babka, Morgan Stanley.

Great, thanks, gentlemen. Scott Babka from Morgan Stanley. Two questions please. Joe, I was wondering if you would talk a bit about R&D. You mentioned on the call today and on the media call the need to invest. Would you anticipate taking up R&D expense over the next few years or will they still be limited as part of the margin stability program? And then secondly, you talk a bit about the backlog and conversations you are having with customers. I imagine some projects in Power Systems and Process Automation haven't started yet. While you are not seeing cancellations, are you seeing people come back to you and ask for changes in terms or timelines given the changing commodity cost structure, changing costs for contracting work? Thank you.

Scott, firstly on the R&D side, as we have gone through this cost-out program, we have kind of ring-fenced right now sales and R&D. So don't look for massive increases of expenses in those areas. We're going to be responsible. But those are two areas that are very important in the sense of how we are going to generate future orders and generate orders in the short-term period too. And so we are going to be very cost-conscious around our sales and R&D assets, but we are not having it as part of this cost-out program right now overall in those things.

Now, that doesn't mean that that doesn't come in the slightest of business changes pretty dramatically over the next future quarters, but we would like to try to maintain our capability in that area because it is a real strain from an ABB standpoint.

From a backlog standpoint, as you asked the question, I just quickly -- I don't know of a -- look, customers will challenge us, but we have no real significant piece right now in the sense of customers coming back, canceling orders or threatening to cancel orders to renegotiate contracts or price down. We haven't seen that. We haven't seen it in the third quarter, we haven't seen it in the fourth quarter. We just haven't seen it to date. That doesn't mean that it won't happen, that it couldn't happen in some way, but so far, I would say that that hasn't been an issue in our business.

Great. Thank you very much.

We have got time for one last question I think from the room in the back there.

[Leland] (inaudible) from (inaudible) Bank. Okay. This is sort of a question on scrubbing down your order book and long-term relation to Asia. So Asian orders were down over 30% in the fourth quarter. What percentage is from China specifically, what percentage is government versus private and what are your concerns for the first quarter of the year? And also sort of a little bit more detail here is that, on the private side, obviously, you got orders from listed coal producers, power producers, railway upgrades, all that type of thing.

Okay, well, on the first question, obviously, China and India were two major contributors of the order decline in Asia. I don't have a consolidated figure here for China. But for instance, in the power business, it was quite a steep decline compared to last year and that was also mainly due to the fact that we had last year a very large order of more than $400 million if I combine the two divisions that came from this HVDC connection that we got as a contract. But China was basically not a good quarter.

The same in India where the decline was double digits in all the divisions. I would say it is a little bit different. We are still quite optimistic over China. Joe expanded already on that before. There is a program there. I think it is just maybe one quarter of slowdown and uncertainty after many quarters where the growth was really good. The project pipeline is great. We talk to our utility customers before all these packages started, they were all talking about cutting the capital spending for this year. Now they are actually talking about increasing it, so we can really see these packages come in.

I think India is a little bit of a different situation and you will hear that from many other sources. Maybe there has been a little bit of a hangover of growth in India for a while. Clearly, the country is, for the moment, taking a step to be a little bit steadier and so we expect maybe another quarter or two of slower growth before ticking up again and being able to absorb all these production commitments that have been done in the past. So quite a different situation from that perspective.

On your second question, I'm afraid we don't have an answer to that. We get this question from time to time, but we are not following our business in terms of public customers versus private customers. We are segmenting more by industry. So it is really a mix. So that one I really could not give you an answer.

The third one was --

I think that was it.

That was it, yes? Okay.

We will wrap up here. Hopefully you read through our comments that we feel the business is in good shape to face this downturn. We are ready with our cost-out program to immediately initiate this to bring our costs in line with what we think is a declining marketplace. Also, as Michel indicated, we have step two and step three to go through. Very uncertain environment, but I think ABB is as strong as it can be from a balance sheet standpoint and a backlog standpoint as we enter into this and hopefully you can tell from our comments, we are trying to be as transparent with you as possible as to what we see is to communicate that with you and we will continue to do that in that spirit as we move forward in '09. So we appreciate the time and we have hors d'oeuvres I think in the back of the room.

Just outside the back of the room.

Thank you very much.

Thank you very much.

Ladies and gentlemen, the conference is now over. Thank you for choosing the Chorus Call facility and thank you for participating in the conference. You may now disconnect your lines. Goodbye.