Abb Ltd (ABB) 2009 Q1 法說會逐字稿

Good afternoon. I am Stephanie, the Chorus Call operator for this conference. Welcome to the ABB First Quarter 2009 Results Analyst and Investor Conference Call, hosted by Mr. Joe Hogan, CEO. 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. We will currently ask each caller to limit themselves to two questions only. For those journalists who have called in, your participation is in listen-only mode. This call must not be recorded for publication or broadcast. A replay of this call will be available for two weeks following the conference. (Operator Instructions).

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

Good afternoon and thanks for joining our Analyst and Investors Conference Call for the first quarter 2009 results. My comments on the call refer to the presentation that hopefully you've downloaded or can download from our website at ABB.com. Please refer to chart two for our Safe Harbor text regarding forward-looking statements that may be made today.

I'll start as usual with an overview of our Q1 performance on chart three. Given the depth of the financial and economic crisis, our first quarter results are encouraging evidence of ABB's resilience. It's important to remember that Q1 of last year was our best first quarter ever at ABB, so we're comparing results achieved in a profound recession with those at the peak of a boom.

In terms of top line, the difference is relatively modest. Orders are down 3% in local currency and revenues are up 3%, also in local currencies. Thanks to two major power transmission projects and an oil and gas project one in March, Q1 was a record quarter for large orders for us.

The base orders, which are a more meaningful measure of the underlying business environment, were down 18%. Our reported EBIT and EBIT margin were clearly lower than a year ago, but if you exclude the impact of the mark-to-market accounting treatment of our foreign exchange and commodity hedging activities and some other items that I'll come back to in a moment, the EBIT margin deteriorated about 3 percentage points overall.

The main driver of the margin decrease was lower capacity utilization compared to the very high levels we enjoyed a year ago. Many of our factories were running at maximum output with extra shifts and generating correspondingly high contribution margin. That has clearly eased off versus 12 months ago, and we see the impact on our EBIT margin.

In addition, the reduction in base orders had a margin impact. Many of these orders, for example, for standard industrial products flow through to revenues in the same order as they are booked. Since they typically have a higher EBIT margin than large project orders, the margin can be diluted when the share of base orders declines as much as we saw in the first quarter.

Finally, we have seen some price pressure in some of our short-cycle businesses, but compared to a year ago that has had a relatively minor impact so far. While the difference in the underlying EBIT margin gap is not as dramatic as reported numbers suggest, it's still significant and we're taking further steps to adapt to the changing environment. The $1.3 billion cost takeout program we announced in February is being expanded to generate total savings of some $2 billion. Most of these will again come from the key areas of sourcing and global footprint operational excellence and G&A costs. I'll also come back to that one, shortly.

Our net income is in line with EBIT this quarter. The cash from operations is negative. It's typical for ABB to have a weaker Q1 on cash as a seasonal increase in orders requires a higher level of working capital. This effect was compounded in Q1 by the weak business environment, which resulted in a larger-than-usual buildup in inventory.

The timing of customer payments on some large projects also had a significant impact on cash flow this quarter. So, we expect to see some rebound in cash as the year progresses. That's the usual pattern for ABB and we see no reason to change it at this point.

Chart four gives you an overview of the key figures for the quarter. I've already discussed the main points. I'd also point out our good book-to-bill ratio and the local currency growth in order backlog. I'll come back to those in a moment.

I already mentioned the impact of lower base orders on revenues in the quarter, which reflect the tough economic conditions in our key markets, but the downturn has also resulted in some customers slowing down project execution or in accepting delivery of products. That in turn causes delays in invoicing, which affects revenues, as I just described for cash flow, also changes the timing of payments and leads to some inventory buildup.

As for EBIT, I've mentioned that we are seeing the impact of a tough market on earnings, but the reported EBIT and EBIT margins also contain a few items unrelated to underlying operations, such as mark-to-market treatment of hedging derivatives and the write-down of some of our Russian assets. I'll deal with that in more detail later on also, but if we adjusted reported EBIT for those non-operational factors, we're looking at an underlying EBIT margin of about 13%.

On chart five, you can see the tough comps we've faced this quarter and that we'll continue to face as we move into Q2. The first half of 2008 was a clear record for ABB when it comes to orders, a 3% local currency decrease against that standard is pretty good. Having said that, it's also clear that our good order performance in the quarter was due mainly to large projects awards won in March.

Chart six, you can see how the balance of total orders in the quarter has shifted dramatically. More than a quarter of total orders are now large projects. This is the highest-ever proportion of large orders received in one quarter. I've already described the impact this can have on revenues and EBIT, as many of these base orders are booked to bill, meaning they flow through into revenues in the same quarter as the order is booked.

If you take one example, we've seen a sharp decrease in orders for spare parts in our process automation and service business. As many industrial customers have cut production and don't need service at the same level as a year ago, the lower factory loadings in some standard product businesses has also reduced margins. Partly as a result of these factors, the profitability mix in our revenue stream has changed quite significantly from a year ago.

Chart seven shows you how our tender backlog is developing in power systems. You can see a slight decrease versus the end of 2008, as we've landed some of those orders in the first quarter, but the level remains very high, and that gives us confidence that the power transmission market is proving to be as resilient as we'd expected.

Turning to chart eight, as you know, we don't usually look at our business on a sequential quarter-to-quarter basis, but in today's rapidly changing business climate, it's worth looking at this for a moment. As you see in the chart, our orders increased quite substantially in Q1 versus Q4, while our revenues went in the other direction. This is a clear seasonal effect that we see almost every year. Customers are often invoiced at the end of their fiscal year for budget reasons and they then place orders in Q1, so our booked-to-bill ratio is usually above one in the first quarter and this quarter is no exception.

Chart nine provides you with the reconciliation of our reported EBIT margins that show some of the unusual items that explain part of the 5 percentage point difference in margins between Q1 last year and this year. The major impact, of course, is the mark-to-market accounting treatment of our hedging activities. That gave us more than a 1 percentage point plus in the first quarter last year, compared to a negative 0.5 percentage points this quarter.

Another important factor was a $35 million asset write-down in Russia this quarter. This was related to the very severe economic downturn that we're seeing in Russia. So, if you adjust for these factors, you come back to an EBIT margin of 13%, compared to an adjusted margin of 15.9% last year.

Turning to chart 10, our cash from operations was negative. This is to some extent a seasonal effect as we build up working capital compared to Q4 in order to deal with the higher orders received. This effect was amplified this year by the difficult business climate where, for example, our inventories have built up. There's also an impact on the timing of large project payments. For example, although we booked three very large orders in March, not all of the corresponding customer cash advances have been made.

As a result of these factors, our average net working capital as a share of revenues has risen to 13.7% this quarter, compared to 12.3% last year. We expect the cash flow pattern to improve again as the year progresses. The cash flow will continue to be a management priority in this tough environment.

A few words on chart 11 on the divisional performance. As you would expect, the increase in large orders is reflected mainly in our two system divisions, power systems and process automation. The divisions with the biggest exposure to short-cycle businesses, automation products and robotics saw a decline in both orders and revenues. Lower capacity utilization, as I mentioned earlier, was the key driver of the overall margin decline and was particularly noticeable in automation products and robotics.

When it comes to product mix, the reduction in the share of standard product sales diluted the margin to some extent. That was visible in automation products but also to some extent in power systems, where the mix of projects, substations versus high-voltage systems, for example, was a factor in their EBIT margin decrease.

Chart 12 gives you the regional breakdown of orders. While the overall picture is negative, our global scope again helped mitigate the downturn, as a strong performance in the Middle East partly offset the decrease we saw in other regions. There are also pockets of growth, such as double-digit increase in orders for power products in China and an increase for automation products in India.

We have always considered our exposure to emerging markets as a competitive advantage, and this hasn't changed. The global macro outlook for 2009 remains very weak, but at the same time there will be growth in emerging markets, and we are best placed to take advantage of that.

Turning to chart 13, our balance sheet remains among the strongest in the sector. Our net cash position was down $600 million, slightly lower at the end of March, but more than half of that is a result of foreign exchange effects, so not a significant change there.

We have all the financial tools available to support the business and to provide us with maximum flexibility. Protecting our investment-grade credit rating remains a key priority for the Company. As I said, we aim to stay ahead of the wave when it comes to adjusting cost to the changing market environment and are expanding our previously announced cost takeout program from $1.3 billion to about $2 billion.

Chart 14 shows how the focus remains on the four cost levers we identified in February, optimizing our global sourcing, making sure we get the full benefits from our manufacturing and engineering footprint initiatives, taking down general and administrative costs even further and pushing hard on operational excellence. We've already achieved more than $150 million in sourcing savings in Q1 in both direct and indirect materials. Projects are underway to take down the cost of key components. We have identified further areas for cost reductions in this area.

Our facility in Mexico is fully operational and all five divisions will be able to serve the North American market more cost-competitively as we move forward. Another example is a major automation products facility in India that became operational in Q1. This will be a low-cost feeder factory for our global AP operations.

We've applied the brakes to G&A costs, which are flat compared to Q1 last year and in the current run rate is below our Q4 level, so we're making progress here as well. Finally, on operational excellence, we have more than 300 projects running across all divisions and regions to ensure that we ratchet up our productivity even further. Our Q1 results mainly reflect the impact of the sharp economic downturn on our short-cycle businesses, in a tier where we're moving fastest to adjust.

Chart 15 shows some examples of the steps we've taken and continue to implement right now to adjust our cost. As you would expect, most of the manpower steps we've taken have been in automation products, which has the biggest short-cycle exposure. Work weeks have been shortened, shifts cut, factories have been shut down for a few weeks at a time. We've also had to take out permanent employees. We also have some exposure to the industrial downturn in power products, where we either sell directly to industry customers or to utilities who are building out infrastructure for industrial development.

The distribution transformer business is a good example, and here we continue to reduce capacity in the United States. We've reduced employment by 50% since the third quarter of last year, including some significant reductions during Q1. And in robotics, where demand has fallen the fastest, we continue to build up our facilities in China and reduce our cost base in Western Europe, but also North America. I've talked a lot about adapting to the downturn, but it's just as important not to lose sight of the growth opportunities.

Chart 16 shows some of the orders we took in the first quarter in markets that continue to grow, including, for example, wind and solar energy and water infrastructure, and power transmission and oil and gas appear to be more resilient markets in the downturn, as we expected. Don't forget that our order backlog remains at high levels and is even growing again in Q1, with the result that we even need to hire more people in some businesses units in order to ensure on-time delivery. There will be more opportunities over the rest of the year and we intend to be there to take them.

To wrap up, then, on chart 17, the first quarter showed the resilience of ABB and the advantages of our global presence. Despite being in the middle of a profound global recession, our orders declined only 3%, compared to one of the strongest quarters in ABB's history. Furthermore, our order backlog grow, compared both to the year-earlier quarter and compared to Q4 last year.

A large part of that was due to some large orders in power and oil and gas. Revenues increased thanks to our good backlog, although revenues from our base business declined. This, along with the mark-to-market accounting of hedges, lower capacity utilization and some one-offs resulted in a lower EBIT and EBIT margin. We continue to adjust our cost base and have expanded our cost savings target from $1.3 billion to $2 billion by 2010. The focus remains on sourcing, footprint, G&A and operational excellence to make sure our cost structure continues to support our profitability targets.

Finally, cash flow, reflected as a combination of lower earnings and seasonal increases in net working capital, especially in the timing of project payments and inventory buildup, securing our solid cash flow will be a major management focus for us in the rest of the year.

Turning finally to chart 18, these are the key messages for 2009 and beyond. First, our ambitions. We intend to stay ahead of the wave on cost and capacity adjustments as we work through this historic downturn. We take advantage of our unique global presence and technology lead to outgrow the market.

We'll continue to aggressively drive our services strategy. We saw services growth outpace total growth in Q1 and we'll push this trend even further, and we'll remain disciplined on price, selling the overall ABB value proposition, higher quality, dependable delivery, the best technologies. In this challenging environment, we must focus on strong operational execution. We'll implement the cost takeout program quickly and remain flexible and responsive so that we can catch the market upturn when it comes.

With that, I'd like to thank you for your attention and for joining the call, and we'll open the line for any questions.

(Operator Instructions)

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

Good afternoon. My two questions are the first one on restructuring. You have taken about $100 million so far in charges in Q4 since the downturn has started, yet you talk about staying ahead of the curve in terms of restructuring. If I look at a lot of your competitors, they have done more.

Is this because you still have many businesses there, revenues are still running reasonably high and you can't restructure yet, or what's the reason for maybe there's a bit more reluctance, restructuring effort compared to other companies? And the second question is on base order growth. You mentioned somewhere that March saw some improvements. Has that continued into April, or was March maybe flattered a little bit by the Easter effect, at least in Europe?

Andreas, first of all, on the restructuring side, I'd say that when you talk about the $100 million we did in the fourth quarter, first of all, remember our business, as you indicated, is we have some parts of our business that actually have large backlogs, and we actually have to add employment. And it's primarily our short-cycle businesses like robotics and AP that feel this kind of a downturn.

And so, what we've done in those businesses, too, is and you'll see on the pages that we've taken about -- overall, about 3,000 people out of those businesses. Even during the upturn, over the last 18 months, is we put a lot of people on that were temporary employees, so that we didn't necessarily hire a lot of full-time employees, and that's helped us to be able to dramatically respond in the short timeframe here, too. So, we -- as we indicated, we're going to continue with the restructuring investments that we're going to make.

We think that can be upwards of $1 billion over this two-year period that we've expressed and we'll go forward with that. On the base orders, from a March standpoint, they were better in March than they were in January and February, but they still weren't positive. And so, I wouldn't necessarily say that March is a trend any more than January and February is a trend. We remain uncertain exactly what the future is and I think you know we can't give you any forward statements as far as what we've been seeing in April so far.

Michel, I'd turn it over to you for any.

I think, yes, just on the restructuring, I think we had mentioned that a couple of times in the past, that the way we had built additional capacity in the last two years, we had managed to build ourselves more or less 15% of our payroll costs were basically variables or temporary people over time and all that, so that is obviously where we first attacked, the first way we attacked.

It was equivalent to 3,000 full-time employees that we have taken out, so we didn't have at this stage to do more. And for the rest of it, there are plans in place. As you know, some are taking always a bit more time, especially in Europe, so there's for sure more coming in Q2, but at this stage it will be enough to execute on the measures we started in December.

Thank you.

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

Yes, hi, good afternoon, everyone. It's Christel from UBS. Yes, I have two questions, please. The first one is on the negative free cash flow in the first quarter. It looks to -- I mean, you were talking about inventory buildup, so I'm just wondering, can you give or just give us your view on how lower production was compared to the revenues and just for us to understand where the inventory buildup comes from.

And I guess my next question would be how do you intend to reduce inventory in the second quarter and how is it likely to impact margins and, related to that, I guess, and if you could illustrate where capacity utilization are at the moment? Thank you.

Yes, Christel, I'll maybe take the question on the cash flow. Yes, it was as well not a pleasant news for us to see that. If you compare to the first quarter last year, in fact, first quarter traditionally is always a quarter where there is a lot of stretch on the net working capital. In fact, this quarter was not so much more than last year. The difference obviously is that we start with a lower profitability and you put the two together, we end up being in negative territory.

But then, when we look really at the net working capital components and it takes quite a while to analyze it because there's a lot of currency components into that as well, but what we see is that, in fact, the largest increase is in fact in payables and I think that is also in decrease of payable balances. And I think that is a combination of the fact that we have bought less, obviously, but as well it looks like that in some cases we maybe paid a bit too fast.

And we are -- that is obviously a little bit concern sometimes at our production units, they want to make sure they secure their raw materials, that the supplies are good and it's fine, but we have to also make sure that we're not becoming the bank to the world here. And so, there is obviously big measures we're taking there.

The second one is the increase in the inventory. There, the largest category is work in process, which is not on because we are still working on the very big backlog that is actually still growing. And then, the third part that we pay attention to is overdues. They have increased again this quarter, especially in some emerging countries like in China and India, and so that is clearly where we're going to have to pay extra attention during the second quarter.

Now, we also know that there are some specific items that we know we will collect or have collected already in April. A lot of the large orders that we announced in the last days of Q1, in fact, the advance payments were not yet in at the end of Q1, so that will impact Q2, and we have as well some very important milestones in some project execution that we will be able to invoice. So, we are really working hard now to get a better cash flow out of that, because that was not a pleasant news.

Okay.

Can you comment a bit about capacity utilization and just to understand, basically, you added capacity last year and it looks like maybe the top line is actually weaker than what you were expecting. What kind of impact on margins do you think it had and whether it's going to have an impact during the rest of the year? Thank you.

Boy, it certainly had some impact on margins. I'd say that you have to look at this by each division. I mean, when you look at our robotics division, I mean, there's very little capacity utilization when you look at what's been flowing through that business, and so it is challenged in that sense and we have built capacity for that business from a strategic standpoint in China, also. And so, we're in the process of obviously closing down some areas in high-cost countries and moving those resources into China.

AP, our automation products business, is also one that's on the shorter cycle side, and there's about five BUs, business units, within AP that are somewhat challenged that I would say they're under capacity that we're taking cost out now significantly from an employment standpoint in order to adjust those businesses.

Power products, from a transformer standpoint in all, distribution transformer area that I talked about, like the United States, we saw that downturn in the third quarter of last year, so we've taken significant resources out of that in order to reduce that type of capacity. But when you get into power transformers, we're still in pretty good shape with a large backlog and we had some pretty good orders this first quarter helps support that. Then, I think you know, with process automation and also in power systems is the have a very strong backlog there and we adjusted capacity in some BUs, but overall they're okay.

So, it's mixed in that sense. Michel, any --

Yes, I think still the thought is that we are not currently really reducing capacity. We are trying to shift it over. For instance, last week we inaugurated a new plant in India closer to the center of Bangalore, which is mainly an automation products plant. But for the moment it's quite empty, so we're in the buildup stage, and so obviously, you have a little bit of under-absorption that comes from that.

But we are still not reducing capacity overall because we need to be ready when the recovery comes. And when it comes to long-cycle products, like, for instance, power transformers, we are still working with delivery terms of 18 months and more. So, it's a very contrasted balance, depending which of those business units you look at here.

Okay, brilliant, thank you very much.

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

Yes, thank you very much. Good afternoon, gentlemen.

Hello, Mark.

Yes, just following on this comment about March being a little bit better, it's pretty interesting, because I guess what we're hearing, I guess little bits of news of stabilization around a lot of companies. Can you just give a bit more color in the base orders? Was that heavily localized to a region, say, China, or a certain business unit? Or was it pretty broad-based? Just thematically, things stabilized or look to at least have stabilized a bit better in March?

And the second question, on the tender backlog for the -- sort of the T&D contracts, big T&D contracts, what's your feeling there in the field from your salesmen in terms of the propensity for these contracts, one, to be delivered, and two, to be -- one, to be tendered, sorry, and two, to be realized? Has that sort of improved over the quarter? Thank you.

Okay. You want to take base, I'll take tender backlog/

Okay, yes. So when it comes down to March, to say again, like Joe said before, base orders were still down in March. It's just that the pace of decline slowed down compared to what we have seen in January and February, which is already a first sign. Obviously, total orders were up tremendously, given the very large orders that we booked during the month, but it was also a bit more encouraging from a revenue perspective.

It has been sometimes tough to be able to invoice customers, who are a little bit more taking their time to take delivery of products, to do the factory acceptance tests and all that. And at least in March we got that going, so revenues were increasing and once revenues increased, we see you had a better absorption of fixed costs, and so the EBIT was a bit better, as well.

Now, again, we are not saying that it is a trend. We need confirmation. We think April anyway is not a good month to test that because of the holidays that we were in the world too, so we're going to have to go more ahead in the quarter to have a better idea and meanwhile we remain very cautious. We still hear in many industrial sectors that we serve that it is far yet from really talking about recovery and hence, we are moving on with our cost-cutting programs to make sure we remain ahead of the game.

Okay, but it was fairly broad based, was it, the general?

Yes, it was. Yes, you couldn't really single out one region specifically. I think it was just broad-based overall level of recovery. For instance, in automation products had much better numbers in March, but again, let's see if it continues or whether it was just a bit of rebound after a couple of months of intense destocking.

Okay.

So Mark, we're taking obviously a cautious look at that whole thing.

Sure.

We're going to be working our cost-out program and hope for the best. Mark, on the tender backlog side, remember, if we think that any job in there is not going to be tendered or not going to be funded and it's apparent, we pull it out of the backlog. You can see that backlog had gone down a little bit in the graph, and that's the jobs that we closed for the quarter. So, we continue to be optimistic that the jobs that are included in that tender backlog have an opportunity to close.

When you look at a lot of the stimulus packages and government money and those kinds of things that could be offered or pushed through in the next year or so, some of those will be tied around those kinds of projects. If you take the cable, the North Sea cable between Ireland and the UK that we closed last quarter, that had some government funding in it also to help to push it along.

So, I -- look, that backlog, we still hope that we can close that and we'll push it hard over the next couple quarters, but as we indicated, it's always really uncertain in the sense of the timing of these things. And you know how we struggle with that through all of 2008, really, and significant part of the last half of 2008. And we're just pleased to see some of these jobs close, both in the first quarter of '09.

Just on that, I mean, the fact that you did win quite a few of these things, is that just coincidence in how it fell, or do you think there were certain -- you were past the worst, I don't know, in the financial crisis and that enabled people to sort of drive the green light.

No, I think we've had an indication since quite a while that we would win, because you always get indications both in terms of technical specification, where you stand in terms of price, but it's just that the final award decision was not taken. So, it looks like from that perspective a few of these big projects got de-bottlenecked in Q1 and finally decisions could be made, which maybe partly can be explained indeed by the fact that now, we have these government incentives kicking in and that some people feel a bit more comfortable making infrastructure projects again, no?

So, the tendering activity is still very high. What you see from time to time, people pull the tender out and then we tender right away, because conditions have changed so much, as well as with the cost of civil works and all this, that they feel it's better off to start all over again. And that is why in fact you see that selling expenses in divisions like power systems, for instance, are still increasing quite a lot, because it's a lot of work behind preparing all these standards.

Right, okay.

So, there's still quite some economic activity out there. It's just difficult to see when decisions are being made and that's why we also said this morning that although we're actively working on these large tenders, we do not anticipate at this stage at least that we will see as many large orders this quarter, because it's just a certain schedule that has to be followed. So, it might be a bit less in Q2.

Sure. Thanks very much.

The next question is from Mr. Scott Babka, Morgan Stanley. Please go ahead.

Good afternoon, gentlemen. It's Scott Babka with Morgan Stanley. Two questions for you. First, on power systems, I think that was probably in terms of the margins the most surprising in the quarter, and that's been bouncing around quite a bit the last few quarters. Could you just give us a sense for what's driving that volatility, and is there anything you se e that would suggest that things improve through the remainder of the year, or are we going to be running at that lower level?

And then, my second question, which is a little bit more on the costs of the restructuring program, you're talking about a $1 billion in total, so I guess another $900 million to go. When do you expect to spend that and where should we expect most of that money to be spent, by division? I imagine automation products, but just wanted to get a little bit more color. Thank you.

I think you're more capable on the PS margin.

Okay, good, I'll take the power system question there. Yes, obviously, you first have to compare what is capable. Let's say the 5.9% margin we had this quarter was quite a clean margin, so there was not a lot of one-offs or debt. Last year, we had a margin of 10.5%, but with substantial help from derivatives. It was 9.2% on a net basis, so we're basically talking a bit more than 3% difference, which is obviously quite a lot in that business.

When we looked forward, what happens further is clearly a mix issue. In the first quarter revenues last year, we had quite a lot of cable invoicing, which we don't have so much this quarter. That depends a little bit where you stand on all these projects. In cable, remember as well that we have a business in Russia with a factory in Russia, and as Joe mentioned before, Russia is one of the markets that is the most hit for us, so that is also obviously creating a whole on the bottom line for power systems.

The second thing is that power systems, as I just mentioned, the selling expense in power systems, and the R&D expense, linked with some development for the projects we have to deliver, have both continued to increase at double-digit rates. And then, obviously you put that together with a flat revenue development and that explains part of it. And then, finally we had also in the first quarter last year, which was an exceptionally good margin, some provision release for substation projects that we delivered in the Middle East. And then, you get the kind of one-off from the two, which we didn't have at this time.

So, it's a lot of explanation. At the AN PS, the margin gets lower, but we feel it will never be a very stable margin on power systems. It always depends a little bit how much projects you have and what you can deliver and invoice. So, the guidance of 6% to 10% still holds. We are now at the bottom range, but still with potential for improvement that could work on the cost basis, too.

And Scott, on the $1 billion of restructuring that we talked about, as we mentioned before, we had $100 million that basically hit in '08. Michel and I feel right now, as we look at this - and remember, we have to anticipate where we think our capacity demands are going to be or where they're not going to be, but we feel about $400 million will probably fall into 2009, and then the remainder in 2010.

Okay, and just a quick follow-up. Could you give us an idea in terms of where the bulk of that's going to be spent by division?

It will be mainly in the product divisions, AP and PP, plus robotics that is still going through a very intensive restructuring. So, these are the three, while the other side, the two systems divisions have still huge backlog to deliver and in fact are even expanding their resources, rather than contracting.

Okay, very clear. Thank you.

But this is for the restructuring costs. Obviously, the systems division will as well have savings from the efforts we are doing in terms of sourcing or in terms of operational excellence, but there will be less restructuring costs involved with that.

Okay, understand, thank you.

The next question is from Mr. William Mackie, Main First. Please go ahead.

Yes, Will Mackie from Main First.

Hello, Will.

Good afternoon. Hello. Two questions. Firstly, within the process automation segment, clearly you've highlighted some changes to the development of service revenues there. Could you give us a sense of how we might expect the service revenues to develop, and then perhaps more broadly within process automation and automation products, there's a lot of moving end-market verticals and demand trends.

I mean, can you give us some color on how some of the end markets, with respect to marine or mineral or building or rail have developed? Where have the high points and the low points been in the quarter and how are you thinking about those developing through the rest of the year?

Well, I'll start with your second question first on the AP side. Remember, you have 10 business units in there, and when you look at breakers and control and motors, those have been hit pretty hard in the business overall. Those are the shortest-cycle components that we have.

But we look at things like drives and generators and the products that are on the other side of the BU, they've been reasonable in the sense of they're related to some of the infrastructure build and some of the energy side. So, you can almost split AP down the middle of how it's lined up by those different industries and those different product lines.

On the PA segment, on the services side, we had -- and Michel will give you the details -- we had one large service order of [Sterl Enzo]. It kind of -- it diluted our margin piece as we ramp up. It's a full service contract where we bring a number of employees on and we have to make initial investments. So, we ended up incurring, what it, Michel, about $200 million of revenues and --?

Michel Demare; No, of orders.

Of orders.

About $70 million of revenues. Obviously, you can't expect -- it's the initial phase, so there's not too much margin attached to it in the beginning until we have reached certain stabilization, so that's had an impact, too. But clearly, overall I would say service. And we have seen it in PA, we have seen it in robotics, as well. While people always believe that service is more immune to the downside, obviously, Q1 has not proven like this and we have read that from other industrial sectors, also.

We have seen a tremendous decline in the spare parts business, so it looks like really everybody has stopped spending. We're still confident it will come back, but clearly that has influenced the margin, especially in PA, where they had less revenue, less margin from service, and as a result the system part, which is obviously lower margin, had a higher weight in the total revenue distribution of the business.

Well, I'd also add that, finally, you talk about segments in different areas. When you look at metals and mining and paper and pulp and all those segments that PA would participate in, they've been down substantially. Our oil and gas segment is the one that's been -- we see significant investment in. Obviously, we had the big Algerian order that we closed in that business in the first quarter, too, but that's a real -- I'd say the most resilient market that we've seen has been oil and gas. Marine has been affected pretty dramatically, also.

And metals, too.

And metals, too. I hope that helps.

Okay, great. Thanks.

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

Hi, thanks. This is Martin Wilkie, Deutsche Bank. A couple of questions. First of all, on the cost savings plan, if you could highlight the -- which areas have seen the biggest change from the $1.3 billion to the $2 billion in terms of target cost saving. So, for example, is that primarily shifted to procurement, or is it across the board in terms of the delta in terms of cost savings?

And then second, just going back to the comments on the tender backlog, you mentioned in the press release still comments about limited availability of financing. Has that improved incrementally? Are you seeing a slowing there, even if it's still an issue? Just if you could let us know what the trends are in terms of financing on projects? Thanks.

Martin, on your first question, if I interpret it properly is most of the restructuring funds that we would focus on would be in G&A and would be also on footprint. I mean, that's where you'd apply most of this overall. On the sourcing side, remember, it's from -- we drive a lot of low-cost sourcing, but also we drive sourcing also in reengineering the parts in developed countries, also. So that's -- if that was your question, and I interpret it that way, that's where most of the restructuring funds will be focused on.

But in terms of the benefit, is the biggest benefit coming in procurement or is the benefit coming sort of across all the --

The biggest benefit overall of those four buckets comes from procurement.

Yes, that should be close to half of the total.

Yes. Think of 50%, and then when you think of -- and if you're trying to back into where kind of our restructuring investment and return, then you end up almost one to one, once you pull the sourcing piece out and the $2 billion. I mean, we're spending $1 billion of restructuring that we're anticipating over the two-year period. You can take about $1 billion of cost out.

That's a scale footprint operation like sometimes in G&A. As far as the final thing is concerned, Martin, I think it depends if we do region by region. Joe mentioned already before clearly it is HSBDC project that we had between Ireland and UK. There was some government funding in that, so that was quite helpful. If you address the countries in the Middle East, why it is not a problem from a funding perspective.

Probably on the other side, we've seen much more difficulties or slower decision-making in places like Dubai, for instance, so that is obviously impacting quite a lot. The continental Europe, yes, there is some decisions and still blockages there, although a lot of good intentions from supranational banks like European Investment Bank, for instance. So, I think everything starts getting in place, but it still takes time before the project gets totally unlocked.

And presumably, you still have no intentions to get involved in project financing yourselves?

No, we have no intention to use our balance sheet, but on the other side, our treasury folks are much more close to the business nowadays and trying to help with innovative solutions and we do much more work with the export credit agencies and with the supranational banks whenever we can. So, we are still there from a financing point of view, but without offering the support of our balance sheet.

Okay. Thank you.

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

Hi, it's Gerhard Moore calling here from Societe Generale. I have two questions, please. The first one is on pricing. You gave an indication in the press release that you suffered from price erosion in your short-cycle businesses. I was wondering if you could quantify what that price erosion has been and how do you see that developing throughout the rest of the year?

Then, a follow-on question, sticking with pricing, could you maybe give us an indication in your T&D businesses what the latest pricing trends are for transformers and power products on the whole? And then, the final question really is just going back to the cost savings, if you could give us some indication of when you actually expect to get the advantages of the savings that you've enhanced? Thank you.

On the price erosion in the first quarter, as we indicated in the release, it basically was minimal, from what we've been able to derive so far. It's not to say that we're not seeing price pressure in the marketplace, but based on what we've shipped and what we've been able to analyze so far that it's been basically minimal. We see pricing pressure across the entire portfolio, but if you look specifically at the T&D business, you asked about the pricing trends there. Substations in the Middle East are challenged in the sense that customers ask for prices down of 15% to 20%.

But at the same time, as we quote those jobs, our ability to lower our cost in that range to meet what customers expectations are and to be able to preserve our margins. I'd say that when you talk what's our projections for the future of this, we don't quite know. I mean, I can't tell you exactly what the pricing trends are going to be in the second and the third quarter, but we're not naive in the sense that we think we'll continue to see pressure.

You asked about transformers also, Gerhard, is our distribution transformer business, as we talked about, we took out a significant amount of capacity. Actually, our prices haven't come down substantially in that business. We haven't necessarily followed that trend and didn't see a whole lot of use in doing that, given the level of activity, or lack of activity, that's out there. In our power transformer business, I think primarily because of electrical steel pricing staying pretty high and pretty solid --

And copper, which is up 50% since the beginning of the year, no.

Yes, yes. We haven't had that much pressure that we would talk about, or have to yield to that much pressure currently, so that's hung in there pretty well. Michel, anything to add on that?

No, I think that sums it up. So yes, in the power product, the commodity-intensive business is still doing okay because of the trends you see from the commodity raw material. Sometimes it's a bit more pressure on the fast-rotating products of automation products. That is true, and for sure in robotics where there is a huge imbalance between demand and supply. But so, we have to see at this stage, for sure, pricing was not the major explanation for the margin decline of Q1. But I can say it's pretty clear.

When it comes to your second question, on when are the cost savings going to start kicking in, some minor savings already kicked in on Q1 on sourcing that will clearly accelerate in Q2, and we should as well start seeing a bit some impact of the people reduction that we have already done and that will accelerate. So, Q2 should already start showing more savings from the specific cost actions we have taken.

And if we take 2009 as a whole, is it fair to say that you should get, I don't know, 50% of the total savings?

We would say up to 50%.

Yes. That's what our target is.

I'm sorry, just one other question. When you mention that pricing for substations is coming down by 15% to 20%, and that you are basically able to cope with this because your costs were coming down, as well, were you referring there to just raw material costs, or basically ABB as a Group has been able to reduce all its costs in order to stay profitable in that kind of pricing environment?

No, specifically, engineering cost and some commodity costs.

The works, all the local works. Everything you can say locally, we do locally, the cost of that has come down tremendously, just also because demand-supply have changes for these offerings, no.

Gerhard, remember I said Middle East, too. I mean, that's where we've seen it. A substation is not a substation. It's different all over the world, depending on what the specifications are. In the Middle East, that's the kind of pressure we've seen.

: Okay, thank you.

The next question is from Mr. [Johannes Drachmi], [Nordia]. Please go ahead.

Good afternoon. If I could come back to restructuring with a follow-up question, please, there have been companies in the industrial sector worldwide which have done more in terms of announcing staff cuts and doing various measures. And there are examples of companies cutting, for example, their global workforce.

I've seen in your presentation pack that you have additional measures which you've been evaluating for some time, I believe, on standby, should things deteriorate further. Could you give us some sort of indication or comment around what might be triggers for you to transform those plans into action and start executing on them? And what kind of measures would you be talking about in that case?

I'd give you -- I mean, obviously, we're going to watch our margins and we're going to watch our volume. I mean, those are the two key areas. It's capacity utilization by business unit and it's also how our margins look. We're going to gear what we do from a standpoint of our phase two cost-cut efforts. When you look at a possible Phase 2, it broadly would be focused at a footprint at this point in time. It would be a facility utilization kind of a focus, Johannes.

Okay, and how far --

And meanwhile, let's not forget, I mean what we are targeting here is more or less 7% of our cost base, which is I think already quite ambitious at this stage.

Yes. And how far in advance of things showing any signs of deteriorating further might you consider triggering further measures? Are we talking a quarter or are we talking a year before it starts to transform, once you've worked your way through your backlog further?

Well, we just went from $1.3 billion to $2 billion, and we did that within a quarter.

And the backlog increased.

And our backlog is up 10%. So, I think if you sit back and think about running a business right now, we're trying to juggle between businesses that have a huge backlog and a lot of demands and ones that are shorter cycle. I think some of the in industrial companies you're talking about probably have a much higher load of the short-cycle thing that they have to experience and can deal with, and so we're looking at both sides of the equation. But we will look at this thing week to week, month to month, and make the proper decisions and adjustments accordingly.

Thanks.

And I think it's also always important to understand that you were referring to other companies in other industries. We don't have these huge industrial sites where we have 5,000 people working on one site and that you can say, well, let's close it, and then you make a mega change. We have 250 manufacturing, engineering sites, so some go from pretty small critical mass to a bit larger, so it's a number of decisions that can be implemented in sequence, and so I think we can adjust the speed of that with quite some flexibility as we move through this crisis and try to see how long it will last.

Thank you.

You're welcome.

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

Yes, good afternoon, gentlemen. I just have one question left, actually. How do you monitor or how do you feel about supply chain risk at this stage? You mentioned overdues from the customer side. How do you manage it? But also, from your own suppliers, how do you monitor it? Where do you see the risk in terms of disruption? How do you feel about it? Thank you.

Yes, we do monitor it quite intensively, both at the local business unit level, so the plants, as well as the country. Financial management is very much busy with that. We've especially worked in looking a bit at the concentration of suppliers and make sure that we have always alternatives if one supplier would run into financial difficulties, so not to become too dependent on one.

And then, there's a bit -- I think from my comments on the cash flow, you heard me saying that there's clearly a bit of concern from the factories and that's why I suspect they tend to pay a little bit faster to make sure the suppliers remain in good health. And obviously, it's a bit of a balance here between the two. That is not what I would push to do, but at least it shows that they do monitor the situation quite fine. So far, we have absolutely no alert or alarm that we might have a supply chain breakdown because of the failure or oversupply at this stage, so that one is running okay.

When overdues are concerned, yes, that one is a situation that is a little bit new. Actually, historically we believe it has never had really any issue with bad debts, because of the kind of customers we deal with usually. Now, the situation changes there. We have had a few write-offs this quarter. That is related to bad debt, mainly in Russia, but also in some other countries.

So, we have there really upgraded a little bit of credit management organization, trying to employ it a little bit more within the country organization and start having more transparent reporting of credit performance so that people get a little bit more activated in that field and hopefully it's going to pay off.

Okay, thank you.

The next question is from Mr. [Andrew Carter], [Aquaria]. Please go ahead, sir.

Hi, good afternoon. It's Andrew calling from Aquaria. I had perhaps two questions, if I may. First of all, could you give us an update on what you're seeing in terms of the T&D initiatives that have been announced globally as regards sort of stimulus packages? I think you talked a little bit about China, if I remember correctly, in the previous call from the conference call. And I wondered if you could give a bit of an update as to what you're seeing there?

And I guess you've been through most of the questions I wanted, but perhaps just one other, thinking forward to what you're seeing in Q2. Do you see there being less business days year-on-year in Q2 in Europe, and perhaps just the same, I think in the last call you talked about their being a mark-to-market effect in the treasury, in terms of the Company holding treasuries. And I was expecting to see a credit, which I don't think came in Q1. Are we to expect that now in Q2?

Yes, I'll take the T&D side. In China, we landed a large transformer order in the first quarter that was broadly set off, I think, or at least freed up. This had been planned by the Chinese government for a number of years, but where we thought it might have been slowed down, beginning when we were working at the second half of last year. It actually came through.

We talked about the European cable opportunity too with some government funding, but I would say overall it's been sketchy so far, Andrew. In the United States, there's a lot of talk about what could happen with smart grid and some different investments, but remember some grid upgrades have been going on in the United States now for three or four years, since some legislation passed on liability concerning power companies' delivery of energy.

So, we're optimistic that these stimulus programs will kick in and help to reinforce that business over time. And I would say the UK grid application and also China are a strong indication of that. But we certainly haven't seen an overwhelming number of T&D closes based on government funding or government programs right now.

On the fewer business days, your question is a really interesting question.

It's a good one. We have always this argument when we have a monthly business review, so how many numbers of days there were. I think if you look at it on a quarter, I don't think we will use that as an excuse, because it's like this every year in Europe and it was there last year, too. I think what is more a challenge for us in Q2 is that last year it was an exceptional quarter.

I don't know if we have the numbers there in front of us, but our orders were 20%, our revenues were up 15%, our EBIT was up 40%. So, that was really the absolute top of what ABB had delivered in a quarter, and obviously 12 months later, we're in a pretty different situation. So, we know that we will have a difficult comparison basis there. After that, it will get a bit better, as of Q3, but Q2, from just a comparison point of view, might be a little bit difficult.

On you third question, I'm happy you ask it about the financial income. So, we have this quarter a net financial result of [60-plus], and this 60-plus in fact does include the $102 million that I had highlighted in Q4 that have stayed in unrealized profit, so these bills matured in the first quarter and came into our finance net, so we should have normally finished with [$100 million], but then obviously what happened after that is that there were some drastic cuts in interest rates.

Actually, the short-term interest rates have come down between 2% and 3%, so in fact strangely enough the $2 billion of debt we have, the credit spread that we have on this debt, is today more expensive than the yield we get from the $7 billion or $8 billion of cash that we are investing. So, that is one. And second, the interest rate differential has changed so much that all the forward points that we were collecting in our hedging have in fact become a cost now, because just the interest rate differentials between terms is reversed.

So in fact, we had a negative 40 if you exclude this $102 million. Our vision for the moment, starting the year after one quarter of being at plus 60 is that we think we're going to finish the year more or less flat in terms of finance net, which sounds crazy when you have the cash position we have, but such is the structure of interest rates at this stage. And again, we are extremely conservative on the way we invest our cash, because we really don't want to take any risk on that part.

Thank you.

Your next question is from Mr. Mats Liss, Swedbank. Please go ahead, sir.

Yes, thank you. Just a couple of follow-ups, I guess. You put your margin target at 11%, 16%, 2011, and I guess I just wondered if you expect to be able to stay within that interval during the period, or if we should expect you to operate outside the interval, as well? And then, one about the currency impact during this, if you could have some comments regarding that, as well?

On the margin target side, remember, as you mentioned, it's 11% to 16% is what we've been focused on, and obviously our cost takeout goals and everything else that we've communicated in the past is we're trying to keep this thing in this range. But I'd also tell you that when this was set, we never anticipated we'd be going through the kind of economic environment that we're going through today.

That doesn't mean I'm saying we can't do it, just saying that we're going to focus on this. We have a commitment to the marketplace that we want to hold. We'll do everything we can to do it, but obviously we're going to watch the business over the next couple quarters and we'll be able to give you probably more of an accurate estimate at that point in time.

On the currency pieces --

Yes, the currency, okay, there's two things. That's obviously we have this quarterly volatility coming from hedge accounting treatments. We are doing whatever we can to try to limit this volatility, but obviously you have so much volatility in the different currencies, like in the first quarter, for instance, you had a point in time the Swedish krona had a huge devaluation and then recovered after that.

It's really difficult to minimize that, but we are trying our best. From a long-term view perspective, obviously, an increase of the dollar like we had seen in the first two months of the quarter is helping, because we still have a cost base that is more euro denominated than dollar. Now again, the dollar has a little bit weakened in the last months, so it's very difficult here to see what are the trends long term.

The good thing is that as we move and even accelerate our footprint program, we also get more and more balanced from a currency-cost position. And so, we might be less exposed to this kind of long-term trend in the future.

Okay, thanks a lot.

We'll take one more question.

The last question is from Mr. [Keenan Jine], Voyager Investment Advisors. Please go ahead, sir.

Good day to everyone. So, just I wanted to know that in the Asia business, how much contribution of the business comes from, say, China and India?

Yes, in fact, if you look at it from a top-line perspective, let's say both were down this quarter. Our orders in China were down 6%. In India, they were down 13%. We had one large order in China in the transformer business. It was about $200 million. For the rest, there was no large order booked this quarter. So, let's say the overall order of things, it was still not too bad of a performance. We are still, I would say, remaining quite optimistic for the future.

We think that once the recovery starts showing up, probably China will be the first one to show the positive development. India we probably now have to wait until the elections are by to see again the economic activity and larger projects kicking off again. So, we still remain quite positive for the long term and meanwhile, it's okay.

In terms of profitability, you can see it from the minority interests, because they are basically in China and India, and you see that in fact the decline in minority interest is more or less in line with the decline of our own EBIT, so the change in performance is more or less parallel to the rest of the world.

And the decline in EBIT is attributable to the fall in margins?

You mean the decline in margin in these countries?

Yes.

Yes, the fall in margins -- I would especially say the fall in volume that has caused some under-absorption both in some plants in China, as well as in India. In India, for instance, the local market has really weakened quite a lot and so, we have a little bit of under-absorption there. But we're also ready to ramp it up and even to start exporting from there if it is needed.

Just wanted to get a sense on the order inflows, like last quarter the severity of the downfall, that inflow was very much seen here in India, especially, like the order inflows were down to the extent of 27%, and now it has come back to just 13%. So, the pull back quarter-on-quarter has been very good. So, I just want to know whether we are back from good or bad in India.

In some of our businesses, we had -- in our AP division, we had some positive orders in India.

Quite good, actually.

Yes, really good for the quarter. We landed some large -- it wasn't positive, but we landed some GIS orders, gas insulated switchgears in our power products division there in India also, too. So, you're right, I mean, we did see an improvement when you look at quarter-on-quarter.

Yes, there are still some sectors that are still showing quite some activity. I would say, for instance, the cement sector in India, there is still a few projects working there, also on the power area. I must say as well that in India, for instance, we had for a while a number of orders coming from these rural electrification programs. That is something now that we are scaling down drastically, because we really don't think that we can really execute these projects the way we had hoped. And that is also a little bit an impact on the top line, but will help the bottom line medium term.

Just wanted to understand, what is your strategy to garner the power business in India, because the market is very large, it is growing significantly. So, are we having any dedicated strategy to garner this power business which comes from power grid, especially the higher-end one?

This is the last question I take from you because we have to conclude the call after that, but yes, I think the strategy is exactly a bit in the line with what I just explained. First, we have to maybe better focus our resource and that's why we have decided not to pursue projects in this rural electrification, which is really not the business that a multinational company like us can really excel.

So, that is probably more local market delivery, so we are then much better focused on the big projects and, as you know, there are some that are actually huge projects, hundreds of millions of dollars. There, we are ready, we are working very closely with the Indian authorities and we are just waiting, as I said, that the elections are over to see a little bit what the decision-making strategy will be for the utilities in the future.

So, we are focusing ourselves better and I still think we are very much well placed to capture the opportunities that you highlight here. Thank you very much for your questions.

Bye. Thanks.

Thanks for your questions and your time. I'd just summarize it by saying just as we indicated, it was a mixed quarter, but we feel we're taking the right actions from a cost standpoint and a focus standpoint to keep the business in line. So, again, we appreciate your participation and look forward to talking to you further. Thanks.

Thank you, bye-bye.

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