Abb Ltd (ABB) 2009 Q3 法說會逐字稿

Good afternoon. I'm Stephanie, the conference call operator for this conference. Welcome to the ABB third quarter 2009 results analyst and investor conference call hosted by Mr. Joe Hogan, CEO. Please know 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 kindly ask each caller to limit themselves to two questions only. For those analysts 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.

Hello. Thanks for joining us. It's Joe Hogan and Michel Demare. This is our third quarter 2009 results conference. My comments in the call refer to presentations you can download from our website at ABB.com.

So on chart 2, please refer to that for our Safe Harbor text covering any forward-looking statements made today. I'll start as usual with an overview of our Q3 performance on chart 3.

The big story this quarter was our cost-out savings program, which allowed us to keep our EBIT margin within our targeted corridor. As most of you know, with significant exposure to utility and infrastructure spending, ABB is generally a mid to late cycle player. So we experienced the economic slowdown later from early cycle players.

But we also cannot say that we've seen stabilization yet, and you can see that in our topline development, where total orders were down 15% in local currencies. And I'll say more about our orders in the next [few] slides.

Revenues were down 5% in local currencies to just under $8 billion, as execution of our order backlog could not make up for the shortfall of our short cycle end markets. Our backlog remained at a high level and still 4% higher than the beginning of the year.

Our reported EBIT and EBIT margin included the provision and other adjustments we communicated last week. If you exclude from those adjustments our underlying EBIT margin, declined about 3.5 percentage points from the Q3 last year, from 2008.

Cost savings from our cost take-out plan continued well ahead of plan and we've already achieved savings of more than $1 billion this year to date. I'll say more about the cost take-out program later in my presentation.

As we indicated back on our Q2 call, we expected our cash generation to improve during the second half of this year and we recorded $1.3 billion of cash flow this quarter. Finally, our net income was aided by the $380 million of provisional adjustments and came in at $1 billion.

On chart 4, this gives you an overview of the key figures for the quarter. I've already discussed the main points, but here you can see how we calculate what we call our underlying EBIT margin of 12.4%. We back out the positives from the provision adjustments and the mark-to-market on hedge transactions, as well as the negative from restructuring.

Let's move to chart 5. On chart 5, you can see the quarterly order trends for the past few years. As indicated at our Capital Markets Day in early September, our base order trend of the second quarter continued into the third quarter, with declines of 20% to 25%. So the large order increase of 42% in local currencies could not fully compensate the 23% shortfall in base orders.

When it comes to large orders, let's turn to chart 6, where we can talk about the development of our Power Systems tender backlog.

In chart 6, you can see how our tender backlog for Power Systems business has developed. Reflecting the $550 million award for Rio Madera, a project in Brazil, as well as other large projects awards in Europe, the Americas, the Middle East, [through] tender backlog decreased. But as you would also expect, as a direct result of those tenders being awarded to ABB, the Power Systems orders backlog has continued to increase, which is further evidence of the transmission market remaining resilient.

A few words on chart 7 regarding our seasonal order and revenue patterns. As you can see from the chart, we do experience a certain seasonality during the year, particularly with our orders, where the fourth quarter has historically been the strongest quarter in any given year. That's not to say that that will be the case this year.

But what this chart also shows is that we've managed to keep our book to bill ratio above one, even in this difficult economic environment. That is, of course, what's enabled us to keep our backlog at a high level and will help us to continue weathering the tough end markets.

Turning to chart 8, which gives you the regional breakdown of orders, here you'll see that the $550 million HVDC project in Brazil offset a strong decline in US orders and enabled the Americas to report a small increase. Likewise, power orders in the Middle East and Africa supported 16% growth in that region; but higher power orders in Europe could not compensate for the declining orders from the remaining divisions, such as that European orders dropped 25%. And in Asia, lower power orders in Australia and lower marine orders in South Korea pushed our order rates down 23%.

Let's turn to chart 9 and I'll say a few more words about our emerging market growth. As you can see, our Q3 orders from emerging markets reached a new high at 55% of our total orders. And while the growth in these markets goes a long way towards mitigating the reduced industrial demand, it doesn't eliminate it.

So on this chart, you can see the Americas up slightly, thanks to the Brazil project I've already mentioned several times, but also Mexico was up strong double digits, and order growth was even stronger in places like Algeria, Egypt, and Saudi Arabia.

In China, our Automation Products division increased their orders by 10%. Let's take a look at the divisional results on chart 10.

As you would expect, with base orders down [from] 23% local currencies, both product businesses have order declines in the low 20% range, while the two Systems divisions showed the lumpiness of large orders. Power Systems posted a 70% increase after winning a number of large orders, and Process Automation posted a 39% decline with the absence of large orders.

From a revenue viewpoint, while all the divisions were down, with the exception of Power Systems that increased 7%, you can see that the execution from the backlog continues to support our revenues in Power Products, Automation Products and Process Automation.

The reported EBIT margins were down in all divisions due to lower absorption mix and pricing pressure. I will elaborate on those in the upcoming slides, so let's move to chart 11.

Once again this quarter, with the underlying EBIT margin of 12.4%, we remain within our targeted EBIT margin corridor of 11% to 16%. But turn to chart 12 and I'll walk you through how we get to the 12.4%.

So what we do is start with the reported EBIT margin in Q3 of 17.9%. We back out the positive impacts of derivatives, roughly $50 million, and the provision adjustments, another $430 million. Then we add back the restructuring charges of roughly $40 million and that gets us to the 12.4%, which is roughly 3.5 percentage points lower than the underlying EBIT margin in the third quarter of 2008. The bulk of that difference comes from price erosion, volume and cost absorption, and business mix, which are significantly mitigated by our cost savings program.

Now regarding those items that weighed on our EBIT margin, they are listed there in order of magnitude, such that price and mix weighed a little more heavily than volume and under-absorption. When it comes to price, we've seen increasing pressure mainly in our short cycle products, exposed to the industrial construction markets; but also the impact of weaker pricing and longer cycle orders taken at the beginning of this year, and now flowing through revenues.

Regarding the business mix, we've seen an increase in the proportion of lower margins systems business and a decrease in the higher margin product business, such as medium voltage distribution transformers and a number of our Automation Products, due to the reduced industrial and construction in market demand.

And finally, I think the lower volumes and resulting under-absorption are self-explanatory. So let me shed some more light on the results of our cost take-out program by turning to chart 13.

As chart 13 shows, we achieved more than $500 million of savings in the third quarter alone, putting us at more than $1 billion of savings year-to-date, which was our full-year 2009 targeted savings. In fact, we now expect to save more than $1.3 billion in 2009.

From the cost side, we only recorded about $40 million of restructuring costs related to the program in the third quarter, but we fully expected to record significantly more restructuring next quarter. In fact, we expect to have roughly $300 million or more of restructuring in the fourth quarter alone, and that will bring our total 2009 restructuring costs to approximately $500 million. Since we still expect to spend $1 billion in total for this program, that will mean restructuring costs of roughly $400 million in 2010.

Now let's turn to chart 14, where we give you a little more detail on the cost-savings by division. Here you can see the relative magnitude of the various cost-saving levers for each division. Perhaps it comes as no surprise that the two product divisions, having numerous raw material inputs, get the majority of their savings from sourcing.

But the Power Systems division also gets the majority of savings from sourcing, and that's because sourcing includes not only raw materials but also subcontracting by civil works and other external services.

Then a division like Process Automation, you can see the importance of footprint as we've aggressively increased our engineering presence in low-cost countries.

Before I begin to wrap-up, let's have a look at our cash flow on chart 15. It was a good quarter for our cash generation. We reported nearly $1.3 billion of cash from operations on reduced inventories and improved cash collection. So our net cash position increased slightly to $5.8 billion, despite paying our annual dividend in July that amounted to $1 billion.

Okay, now I'll say a few words on what we expect from the markets going forward.

And quite frankly, despite what others may be saying about a bottom to the cycle or stabilization, for me and my management team here, the trends for our lifecycle industrial end markets still remain extremely unclear. There is no doubt that the economies of the Middle East, India, and China will continue growing; and though competition will continue to increase in those areas, ABB will fight hard to get our share of the business and maintain our profitability.

Europe and the US, which remain large markets for us, will likely continue to be challenging. Our oil and gas and power transmission markets remain resilient. The rail and water-related markets continue growing; so it's still a mixed bag out there. And while we're hopeful for a rebound, we're also prepared if the market does not turn back up.

And finally, let me summarize on chart 17. Our third quarter witnessed lower volumes and prices, but our cost take-out program allowed us to keep our commitments on profitability. We continue to maintain a strong order backlog that gives us confidence going into the fourth quarter and 2010. So we're ready to capture any rebound opportunities when they arise but we certainly don't take a recovery for granted.

Thanks for your attention and we'll open the line now to Michel and me for any questions.

(Operator Instructions). Mark Troman, Merrill Lynch.

Good afternoon, Joe and Michel. It's Mark here from Banc of America-Merrill Lynch. Yes, just a quick question on the restructuring program. I guess you said -- I think you said $300 million spending or something like that for Q4?

That's right.

I wonder if you could give some sort of rough guide as to the sort of divisional split of that, just to help us with our forecasting for Q4, that's point one.

Point two, also with restructuring, it looks as though you've saved about $500 million, I think, in the quarter.

That's right.

And I guess you were guiding to $300 million saving in Q4. I'm just trying to understand that. If you've taken -- I know there could be some business mix changes, but I'm just trying to understand maybe an explanation of why it would be lower in Q4.

And I guess a third question is still on the restructuring theme. Are you looking to save more than $2 billion then if you're doing $1.3 billion this year and are well ahead of schedule? Or just some thoughts on that. Thank you.

Mark, your math is impeccable. Okay? We do have a certain amount of momentum on this cost-out program and we're really pleased to be over $1 billion for this quarter. So, we say we'll be at $1.3 billion by the end of the year, but we have good momentum in this program.

The fact is, though, you always have to be conscious of mix here. And in the fourth quarter, we tend to have a little more of a systems business than we do on the product side. So you might not see quite as much of a pull-through as we had before. So, this is our best estimate at this point in time, but we'll have to see how the fourth quarter really develops in that sense.

So it depends a lot -- especially in the sourcing savings, it depends a lot on what we buy during the quarter and obviously, every quarter is a bit different pattern. So that is why we have two estimates in for the moment -- we'll see how the reality comes out (inaudible).

In terms of the restructuring costs, without going into too many details, actually the largest will be the robotics business, where we will be going to a fundamental change to change the footprint, to align the capacity to the new demands. And so that one we have normally documented plans that [Ivy] mentioned in the quarter. The two product divisions have a decent share as well but less than what robotics [will be].

$300 million as an estimate. It might be a bit short, it might be higher than that. But I think we will be closer to $500 million for the full year.

Okay. And Joe, for the overall program?

The overall program in the sense of, as I indicated, we'll spend anywhere between $900 million and $1 billion of restructuring for this entire program. And then as we roll into next year, remember, our goal was to save $2 billion between 2008 and 2010. We're obviously on track to beat that right now, Mark.

What we'll do is we'll update everyone at the end of the fourth quarter as far as what our future plans are for next year. In other words, we'll have a good idea of the momentum in the fourth quarter we have with this program, and we'll know by then if we have to increase this to a larger amount as we roll out of the year.

Thanks very much.

Andreas Willi, JPMorgan.

Two questions, please. The first one on the quarterly margin variation. If you could help us a little bit more -- we had 350 basis points down in Q3; [113] in Q2; 280 in Q1 on revenues that didn't decline much or were that different. How should we approach modeling margin both going into Q4, given the significant variations quarter to quarter? And was this Q3 just characterized by a particularly unfavorable mix?

And the second question on pricing and Process Automation, what are you seeing there in terms of the bidding that's now going on? You've commented that you've seen some lower prices in orders you have taken earlier this year; with orders down 50% from the peak for the whole industry more or less, what do you expect in pricing now for the orders you're discussing now in the tendering?

You know, on your first question, Andreas, I think -- I'll let Michel join in here too -- but as we go through the year, we're getting more and more of a systems mix as we come out, and less and less of a products mix. And obviously, that starts to have us mix down.

As we go into the fourth quarter, I think you'll see this trend continue because the fourth quarter traditionally has been when we've closed out here a lot of our systems business. So that's one component of -- as you walked through, what the difference is in margin from quarter to quarter. There is a significant systems mix here as we move from the first to the third, and then into the fourth quarter, too.

Andreas, it's also what Michel and I will both tell you is in our product businesses, we're seeing pricing pressure. And as we've indicated, the longer this recession goes on, we feel the more that we'll see that. When you look specifically at our Products division, you know we're thinking about almost minus 3% right now on price with Automation Products, and about roughly 3% to 4% on Power Products right now.

We hope to be able to keep it within those ranges, but that's pretty much what we're experiencing and that's why this cost-out program is so important, to be able to throw those savings against the price pressure that we're seeing.

And then on -- as the volumes get a bit lower, the under-absorption expense is also increased in that traditional margins too. And that's why we accelerated these cost-cutting programs, to try to offset the [price].

Thank you very much. Very clear.

Martin Wilkie, Deutsche Bank.

It's Martin Wilkie from Deutsche Bank. A couple of questions. The first one, just going back to pricing -- obviously, within the Power Products business, the Transformers side is the one I guess that people are most worried about, in terms of both the pricing and what that does to margins.

You gave a number there on generally what's happened to pricing within Power Products. But if you could just let us know on the Transformer side, what you're seeing and is the step-down in pricing in Transformers, would that necessitate any specific additional restructuring in the Transformers business over and above the program you undertook over the last couple of years?

The second question is on currency effects. Obviously, on a translation basis, the weaker dollar has been good for your translated revenues, but you do still have a bit of a currency mismatch in terms of exporting from Europe. Have you had any additional thoughts on that? Is there any additional change that could be made because of potentially a weakening dollar environment? Thanks.

Well, Martin, first of all, on the Transformers side, first of all, the pricing is -- depending on what segment you look at and what region of the world, they do differ; but we are coming under increasing pricing pressure in that business.

I'd say the worst geography that we have is distribution transformers in the United States. And I think you'll see some reports from our competitors that are really embedded in that business in the US. You'll see some pretty extreme pricing discussions from these guys.

Remember we had a much more diversified portfolio both in product and also geography allows us to mix away from that -- we don't totally escape it; we mix away from that in that sense. So that's where the majority of our Transformers come from. So like small power transformers, distribution transformers, those are the ones that we see, particularly in the United States, that are experiencing the most pressure.

From an overall pricing standpoint, I'd say about -- when you think about the margin piece, I'd say about [60%] of what you're seeing right now would be on the pricing side. The rest would be just deflation recession on the commodity standpoint. But I'd say anywhere between 50% and 60%, depending on what you're looking at.

This is not -- Martin, as you look at that, and I've highlighted this to other people that have asked me this question, obviously in Power Products -- Transformers is the product that gained probably the most in operating profit over this run that we had at ABB, and it's the one we all have to keep our eyes on as we go forward.

But right now, there's no panic here in the sense of a bottom falling out of the marketplace. We're trying to manage the mix of this thing as much as possible. And as you mentioned, we'll look at restructuring opportunities or anything else that could be available to allow us to be able to maintain a very competitive cost base in that business.

But right now, besides the Irish restructuring of our transformer plant that we announced in the second quarter that's ongoing right now, we don't have any plans for a major move, a shutdown (multiple speakers) -- remember but that's been a three-year program for us of over $200 million of restructuring to get that business to where it is today; that it's very strong from a competitive base and a margin base.

So -- and obviously, you said you'd seen some pricing gotten worse through the third quarter, but would you say that it's the restructuring you've taken over the past two or three years and the additional work you're doing as part of the cost take-out plan, is sufficient to keep the Power Products margin within your target range, even given the accelerating decline in pricing you've seen over the third and presumably into the fourth quarter?

That's certainly been our objective, Martin. And so far, we've been able to do that. And I'm not ready to say that there's any difference right now, based on what we see coming in and where we feel our prices are -- but that's (multiple speakers).

It results in an adjustment as well, if you take the largest, the transformer trend we have in the US, actually, it's two years that we are constantly downsizing the workforce to adjust to the shrinking demand. So if you compare it to the time it was running at full capacity, I think today, we've probably run with one-third of the workforce we had at this time.

Martin, I hope that helps.

Okay, thank you.

Simon Smith, Credit Suisse.

Just a very quick question, really. You highlighted the gains you had from hedging within the quarter. Could you give us a feel as to how that split out between the divisions?

Well, if you want to look at it from a simple perspective, the Power Systems division is the one that had most of the upside. A little bit also in Power Products, while the [Triage] division had rather a negative impact. So Power Systems basically because of that had better earnings that the real operating margin, which is a bit more than 1% lower than that. And to find that it is lower than that is also because they had a couple of projects where there were some cost overruns. We know; we're watching those. But they had the one that had the biggest gain in terms of commodity and foreign exchange during the [test].

Great. Thanks very much.

Mike Schneider, Robert W. Baird.

I was wondering if you could first just address transformers specifically for the transmission space? We know pricing has fallen apart in the distribution space, but have you seen an equivalent amount of pricing pressure in the transmission transformers?

And then secondly, has it actually accelerated during Q3 and into Q4?

Well, you know, on the transmission side, it's certainly less than we see in distribution, Mike. And so it's not, to that degree -- remember, our biggest footprint we have in distribution transformers in the United States. And that's probably more of a magnified competitive environment, given what's gone on with construction and how that's declined.

On the transmission side, depending on the voltage, and -- the higher the voltage is, if you takes VDC versus AC or whatever, those are some variables that allow us to be able to maintain margins because of the limited competitive field that actually exists in that.

If it goes down in the voltage range, we do experience more and more competition. But again, like I explained before, we have a good diversity of portfolio and a good diversity of geographic fit here. So we try to maximize what we can in these plants to the highest margins that are available out there.

So -- look, these -- I'd just summarize it, to answer your question directly, not as dramatic as what we see in distribution. Depending on the voltage, it's much more aggressive on the lower side than the higher side. And we try to mix and match on capabilities and geography to maximize that margin piece.

And globally, the distribution business is how big for you in revenue, roughly?

We don't communicate the details.

Okay. And then just one second question -- on the protectionist measures that seem to be unfolding globally, you call out China in your slides as well, has that really begun to impact you yet in the order book? Or is that to come? And then I guess, are there workarounds that you can execute in China and elsewhere to basically raise your in-country content to the extent you need to?

Well, I mean, we see it in our incoming order rates in China on the power side, primarily, like we reported our AP products, this is actually up; but it's -- we see it more on the larger items, like on the power side.

I mean, we are, when you look at our footprint in China, it looks like a domestic footprint. I think you know what we have in those different entities. But if you look across our portfolio, Power Products is down about 10 in China; AP is up 11 for this quarter; PA was down 24.

So -- now as far as adjusting the whole footprint piece, I mean, there are some adjustments we can make, but we're broadly Chinese-based in these businesses. So it's not like we're doing assembly work, light assembly work to get around import barriers in China. I mean, these are really systemic kinds of cycles that we have in these businesses, where we develop these products here and we ship within China.

So we just have to continue to leverage our relationships there and to be aggressive across that to land as much of its business as we can.

Okay, thank you.

Scott Babka, Morgan Stanley.

Scott Babka from Morgan Stanley. Just two questions, please. On -- your free cash flow was strong in the quarter and we're seeing the inventories come off. I was just wondering if you could talk a bit what divisions you're taking those inventories down, and is that having an impact in terms of cost absorption? And for the year, what kind of structural savings do you think you can take out of working capital?

And the second question, I just wanted to follow up on this by China competitive environment a bit more. I mean, are you seeing more requirements to share technology and to partner? Or are you seeing legitimate competitors that are local and already have the capacity and they're just taking share? Thanks.

I'll answer your last question first, Scott, is that what we're seeing is legitimate competitors in China. Okay? So it's not push-on technology hearing or those kinds of things that you'd normally think of here. There are legitimate players in China. This is not new, they've been around for two or three years. Just when the -- it's just becoming more competitive, given what's available there right now.

But again, I don't want to give anyone the impression that we have a weak position in China. It's a very strong position in China and we're working from strength in that sense. It's just there's much more of a domestic attitude in the sense of how these orders are placed now. And we have to present ourselves as a strong domestic player in that sense, better to try to grab all we can.

As far as the cash piece, I would say, while Michel grabs some statistics, I'd say that a great cash generation, particularly in our Power Products division and also our Automation Products division (multiple speakers) --

The two product divisions are doing very well. I would say especially Power Products that have both improved on inventory and on accounts receivable, so that adds quite a lot. Obviously, overall the CapEx started slowing down compared to last year.

On a year-to-year basis, we have spent more than $100 million less than last year, year-to-date, and about [$50 million] less this quarter, so you see the [deliberation part] coming in. And so yes, we're quite happy that this continues. [And you know we did] Q4 is always an important quarter for us. And we especially want to go after [all reduced], it has increased and that show again that liquidity is not available for everybody. So we have for sure more stretch to work on than before.

Okay, great. Thanks.

James Ratzer, New Street Research.

Three questions, please. Your margin in Automation Products still remains very high. What are you seeing on incoming orders? What kind of margin versus the backlog? That's the first question.

Then in terms of the margin target of 11% to 16%, given that you're not yet at the bottom, the mix shift is going against you and potentially pricing pressure accelerating, do you believe you can stay within that range?

And then finally, the last question on China. Is the pricing pressure you see there more than the average you gave for the group?

First of all, on the margin on AP products, we do see some reduction in our incoming margin on those orders. You remember, Automation Products is probably the most complicated group of businesses we have; they have the most diversification in the sense of the difference of those products. But that hasn't been the story. We've seen actually in some parts of that business some pretty resiliency on price. In other parts of that business, it's been more difficult.

But there's not a -- I think to answer your question, James, directly, there's not a huge difference right now we see from an incoming standpoint. Michel?

No, it's mainly a result of mix factors, because within Automation Products, obviously, you have products that have different cycles (inaudible) the business [units that are linked] to the construction industry. They have been coming down since two years. So today, their rate of decline is slower than, for instance, drives or motors.

And the margins (inaudible) will be higher than what we [reach] in the construction business. So it's mainly a mix that can change pretty fast. For instance, if we could see a bit of a revival of the drive business, which I'm sure, sooner or later, will come back.

On your next question, James, with our margin quarter of 11% to 16%, you asked if we think we can stay within that. I mean, that's our goal, that's our stated goal.

What we throw against this increasing price pressure is our cost-out program. You can see that we have momentum on that. We're ahead of where we need to be. And thank God, we are because we need to keep up that momentum, given what we're seeing on some parts of the price out there.

So that's our goal, and Michel and I haven't seen anything so far that would tell us that would take us out of that margin corridor.

The last one, your question was on China. In the sense -- I think your question had to do with the intensity of pricing in China -- was that -- indeed, compared to the average you gave for AP and PP.

It was higher than the average.

I don't think it is, overall. It's -- Michel, look at the numbers, he agrees to. So it is pretty much in line with what we are seeing around the world.

Great. Thanks a lot.

[Sam Edmund], Goldman Sachs.

Just a couple of questions. First off, just on raw materials, and thinking about next year. I'm just wondering if you are seeking to lock in some of your big raw material prices here, whether you feel that price (inaudible) and what we should think about in terms of that kind of cost element next year set against the pricing?

And the second question was you just made reference in your statement to the balance sheet being in a good shape to take advantage of any opportunities. I'm wondering whether you're thinking of M&A as more active at the moment than it has been over the last six or nine months. Thanks.

I knew we'd get the M&A question.

It has always been very active.

I just noticed that the [GM] (inaudible) wrote their joint venture on industrial controls recently.

Yes, I noticed that too. That was -- that's my old team, years ago. (multiple speakers)

Let me take the raw material one. Listen, as the policy we always had I would say two to three quarters ahead of us for raw material purchases, so it's an ongoing hedge. And that in order to have a little bit of a better visibility. And then obviously we also hedge all the commitments that we make in the frame of projects that we are taking on board. So with that there's always a kind of delayed impact whether they go up or down.

And that gives me also the opportunity to confirm again that all the savings that we are counting in our cost-saving programs do exclude the impact of all the commodity raw materials, that is taken out because that is something that we currently work on since it is regulated by the open markets.

On the M&A question is -- I'll just tell you, I've been here over a year now. And so I feel much more comfortable in the sense of where to direct any kind of inorganic moves, whether a specific geography, specific industries, areas that I'm convinced now are areas that are opportunity from an ABB standpoint.

Now as Michel indicated, to say that it is more intensity now than before, I would say that's not the case. But I'd say there's a lot more confidence across the table in the sense of where we think it makes the most sense strategically for our business. And so we'll continue to look at this and we'll continue to be active in that space, and we'll see what develops over time there.

And just -- sorry, a follow-up on that, Joe -- in terms of timing, would you want to feel comfortable of the site that there's bottom before you were pull the trigger? Or is it more just if the right opportunity comes up at the right price?

Look, I'll tell you, I cannot even call the cycle as far as the way my business moves, so I can't call the market cycle for sure. So this is more about what the right opportunity is for us as it comes to bear. It's not any kind of market timing on my senses that would delay or accelerate our actions.

Okay, thanks very much.

Andrew Carter, Macquarie Bank.

Two questions, please. The first one was just on the Power Products margin. I think just having scribbled down some of the numbers that you just said about the mark-to-market impact, it appears that the margin fell really quite substantially from the strong Q2 to the strong Q3.

And I know you've given some of the reasons, but I wondered if we could just talk through that a little bit more, given I think some of the comments that you made on the last quarterly call were actually suggesting that the backlog was still strong with very good margins. But you were still pretty happy about the direction of margins in that business.

And I guess the second one was, I think it was asked earlier but perhaps missed by yourself, was just on the transaction impact of currencies, and whether or not with the strength we're seeing in the euro, that's something that could start to impact the Company going forward.

Well, listen, on the PP margins, first, as you know, we never compare quarters sequentially because every quarter is a different pattern for us and especially ones that go to the summer quarter. However, the margin in Q2 was more, as we say, on an adjusted basis than the margin in the third quarter last year -- it was slightly lower [of] 19%.

So indeed, we are looking here to 3% decline, which is reflecting on one side lower volume because revenues in Power Products are slightly down. And as well it will be pricing pressure plus a certain change in mix. For instance, that would be the fact that our [Washington] business is affected, as it was some impact on the margins in Power Products, and so we had a pretty good high-voltage business in that country.

Currency translation.

Yes, currency translation, there again, I'd say we (multiple speakers) --

Sorry, I was thinking transaction, actually, I was thinking of exports out of Europe.

Oh. Yes, well, again, on that one, first of all we are trying to minimize that as much as we can. But we still had some exports from Europe, for instance, some automation products that we sell in the US. Obviously, that doesn't give us a lot of pricing strength with this kind of change. And that's why we're working more and more sourcing the US either locally or from countries like China or India. So that is part of the footprint measures that we are taking here.

Now -- so it might be a bit of a weakness in terms of pricing, once the order is taken and everything, we do hedge it and that helps. But as I have always said, it is clear that we still have a cost base that is more than half in euro, so a weak dollar doesn't have the margins overall. It keeps improving as a result of the global footprint program that we are implementing [in a few weeks].

Alfred Glaser, Cheuvreux.

I had also two questions. The one is on the restructuring measures. You mentioned that maybe you could do more than $2 billion of cost cuts, in which areas would you reduce the costs further? And would this be effective before the end of 2010 or just going into 2011?

And the second question is on demand. You said previously that you're more confident in demand in the power business than the automation business now. And you think that in order intake in the next few quarters we are also going to see better order intake straightaway in power? Or is this more like a medium term view?

As far as your last question first, I haven't said anything about demand, and if I misinterpreted your question, demand in automation being better than power -- if that's what your question is, it's not what I've indicated. I mean, is it better -- there are overall better dynamics right now on the power side, both in emerging markets and in developed markets because of the climate change trends and different things that are going on.

And we see a lot of pressure in our process automation business. You saw that in the order book being down 39% this quarter and AP being down about 22%. So right now, if that was your question, I would say that, no, maybe my comments were misinterpreted, but really I think there's better dynamics around the power side than we have around the automation side in general. That's a broad answer, but I think it's more (multiple speakers) --

I think the most -- a more important distinction is probably to make a distinction between emerging markets and mature markets. And there we are really convinced that we will see a pickup in demand first in the emerging markets. And you see it early this quarter. Emerging markets is 55% of our total order intake for the quarter.

And so then, coming to your first question because it's already linked with that, yes, did we extend the cost-saving program, clearly, the biggest focus will be on footprint. And that will be continuing to move the footprint from raw material economy to emerging markets in order to adjust the cost base to where the markets are progressing. And all divisions will bring a role in that.

And will this be reached before the end of 2010? Or will this be --?

Yes, for power, all the numbers that we are always giving is the number that we want to reach by 2010 as a comparison to the full year 2008.

Gerard Moore, Societe Generale.

It's Gerard Moore from Societe Generale. Thank you for taking my questions. A couple of questions just to clarify some early comments that you made -- for example, on pricing.

When you indicated that pricing in Automation Products was down 3%, were you referring to the orders or the revenue? And was that the absolute level of pricing? Or was it the net level of pricing once you stripped out the commodities effect, et cetera?

The second question again on Automation Products. I was wondering if you could give us an update now of the end market exposure for this business. Roughly, I guess how much is exposed to process automation and discrete automation; or maybe you could split it as long cycle and short cycle.

And the third and final question, you've indicated that the cash flow performance, I guess, for Q4 should be relatively healthy. But are there any other factors such as cash outflow related to restructuring or even some of the fines and different provisions that we need to watch out for as well? Thank you.

Okay. A lot of questions here. Just on the pricing, automation price overall, what we gave you here, first we talk about orders, but obviously, it's again an average measurement between all the different units that we have in automation parts, which again, has low voltage systems, power electronics, and [IFS] switches. So when we say overall, we mean we see a net pricing impact -- gross pricing and net pricing is not so different in this business, of about 3%. So that is really on the order part of the equation.

When you look at end markets, well, the biggest end market for Automation Products is still building and construction, which is a bit more than 20%. After that, the next markets are oil and gas, petrochemicals in general; utilities and manufacturing is very important, for instance, to see (inaudible).

Automation Products has [a lot] into the power markets with utilities, for instance, and with wind generators. So there's a lot of applications that go in that segment as well. So building construction is the biggest one for (inaudible); utilities and manufacturing. This makes more than 50%, the three together.

In terms of cash outflow, obviously, for power we haven't seen yet a lot of cash related to the restructuring. This quarter, we think it was about 25 million. The fine that was determined, the European Commission will decide in October, so that will be paid in the fourth quarter and it's about $50 million equivalent.

The rest, it's obviously, restructuring spending will accelerate but a lot of that is linked with the severance payments that can obviously be a lag of two or three quarters. And sometimes it will be mostly a 2010 event as far as the cash restructuring is concerned.

Okay, thank you. And maybe just one add-on question, if I can. Before you've also indicated for your transformer business that profitability is roughly in line with overall Power Products division. Is that still the case today?

Yes, it remains more or less in the same ballpark. There are always fluctuations from one quarter to another, but for sure, the margin difference between the three segments of that business is much closer now than it was two, three years ago.

Okay, thank you very much.

William Mackie, MainFirst Bank.

Thank you for taking questions. A couple of questions. First of all, could you just talk to the shorter cycle businesses within AP and PA? Have you seen any stabilization within the, for instance, the low voltage business unit within Automation Products and some of the other more short cycle product-oriented businesses on a quarter-on-quarter basis?

And within the Process Automation segment, have you begun to see any stabilization within the service and spares business, where you saw quite large falls I think in the first quarter? Have the miners and metals and minerals companies begun to start coming back to you?

The second question would be on M&A again. I mean, you mentioned you have a confidence in what and where makes most sense to you with regard to allocating capital. Could you flesh that out a bit and just talk about the specific areas that you think best complement right now some of ABB's business units as it is today?

And lastly, my final question area relates to China. Power Products down 10% in order terms in the quarter. Is that the beginning of a trend? Or are we looking at just a very difficult comparison? Thank you.

See where to start here. On the shorter cycle side, I think you're asking if we've seen a bottom or if we've seen any upturn in that piece of AP. And I think -- I would say overall for the business, I would say no.

I mean, there are some geography aspects that we might feel that it's a bottom or whatever, but when you mix them all together, I would say I haven't seen anything that tells me that we're absolutely at the bottom of that cycle.

You'll hear things like restocking and all the other things that are associated with that business. But right now, I'm not prepared to say that we've seen the bottom, as that we're in a position to have this thing spring back at some point in time.

Now on the PA service and spares, no, this is -- we haven't seen, outside of oil and gas, we really haven't seen a rebound in that industry yet. Oil and gas CapEx has stayed very strong. But metals and mining in those different areas -- at least in paper and pulp, we're still seeing a lot of stress in those areas. And it's reflected in our service revenues also and not just the parts -- in the maintenance part of it.

We see more activity in emerging markets in pulp and paper.

Yes, there's indications. I won't say there's orders. There's always optimism in this business, William. It's -- we're going to have to wait and see the orders here sooner or later.

From an M&A standpoint, look, I don't want to get any more -- I don't want to narrow this thing down any more for you. Just from a geographical standpoint, we know where our white spaces are. Across our portfolio, whether you're in the power side, you're in the automation side, there's opportunities for us that we need to take a look at. And we're in the process of exploring those with the growth board process that we use here.

On the China side, Michel, I'd look to you, I'd say minus 10 is -- I think your question is, is it an anomaly, William? Was that --?

Well, against the backdrop of the investments being made by the state grids in China.

Yes, I mean, it's for sure that for the moment the big utilities are still quite behind the investment plans that they had announced for this year. So in a way it might be a premier and we end up way below the targets that they had fixed because usually they [leave] on target. But it may happen because the only capture they would be able to do is quite mixed.

But still we -- sooner or later, it has to come. We have now seen that these couple of quarters we've had a double digit decline in [all four quarters] to business in China. It was last year, the same quarter, it was more flat. So it's not that we have a tougher quarter comparison, it's just that so far the utilities pending has been below expectations.

Now you know with the kind of [DVP] forecast that they still announce, obviously, it means electricity consumption will also pick up soon. So we are waiting for better days. We don't think that our competitive position has [drastically] changed in a couple quarters.

(inaudible), [Bernsteins].

I've got a few questions. The first one is on manufacturing and where you're seeing costs and absorption. Could you be a bit more specific in which areas you see it being the worst? And related to how your manufacturing footprint program and your restructuring program is focused, are you looking at permanently shutting out capacity in some end markets where you don't see -- or [credit] markets where you don't see demand going back to where levels were before?

The second question on US transmission, are you seeing any positive changes there in terms of demand? Any news on smart grid investment given the announcements from earlier this week?

And the third question is just for clarification, on your cost savings within the restructuring program of $300 million number you've mentioned, you mentioned that it's exchange rate of commodities only, so it doesn't include anything like electrical steel price discounts that you might have received.

No, that's correct.

That's right. So there's no commodity in that piece. We've made that clear. And we think the team is really focused on true cost out from a sourcing standpoint. And that's more opportunistic when you look at the commodity side.

On the US transmission question, I would say we were quoting on some jobs that looked to be interesting. But these jobs had been around, predicted for awhile; it's just will the funding come through and there's some state's rights issues. When you pass from one state to another, that they always have to get over and we're waiting for some of those.

As far as smart grids go, I know there's a lot of excitement in the United States, and they talk about I think $3.5 billion being released here with the smart grid program. That should help us in some way, because we do have a position here. But some of that is for just startup programs to see -- to run some basically experimental programs on smart grid and how that's going to work.

And we'll obviously participate in some of those, but I don't -- I look at what's more importantly is when you look at the grid system, the transmission system in the United States, and how they're going to move power around, particularly on the renewable energy side -- that's where we're really geared to right now.

We haven't seen a big change in that yet, but we're certain the new administration have to address that. If they're going to put as much emphasis on renewable power as they've indicated they will, they're going to have to do something to promote the transmission of that renewal power from remote areas to usage areas. And that would incorporate a lot of the types of technology that we have.

On the manufacturing, under-absorption piece, that's a big question and --

I would say, if you want to think of some, we have talked before about Transformers in the US -- the distribution is more important on the US is one, we can even think about some large Transformers in China, because of the comments I just made about the -- on the expanding of the utilities.

A division like Automation Products, which is all the big manufacturing units, I would think both low voltage motors, for instance, in the operating factories or breakers and switches as well, that is where we are really needing volume again to offset the absorption costs that we see for the moment.

Johan Trocme, Nordea.

A quick question on Russia, please. Could you just remind us of the size of ABB's business in Russia? Is it still roughly holding on a year-on-year basis in scope from a sort of $1 billion level of revenue?

And could you also just mention to us a little bit about the items you've provisioned for in your Russian business in the preannouncement of third quarter earnings on the 19th of October? What are the issues there? And are you concerned with any remaining exposures that you might have to take measures to address going forward?

So, Russia at the peak of its business has been a bit more than $1 billion. That was already part built up from a business that was [totaling] $300 million about three years ago. We are far away from these levels anymore. I would think that as we said, we are probably running at the run rate that will translate into something like $400 million for the whole year.

Part of it is also because the Russian market has really collapsed; it's been hit very hard. The other part is that we believe that we are also (inaudible) of taking orders if we are not 100% sure of the model behind it.

So clearly, that is already a degradation that we are announcing [since] a few quarters. We have had some issues for which we have already provisioned in the past, starting in the [fourth] quarter of 2008. So I would say that so far, a good part of the exposure that we have identified have been provided for. Most of them are related with the (inaudible) and the income tax issues.

But we keep looking. And as we keep investigating and looking at each of the (inaudible) is, that it's -- we found recently other irregularities (inaudible) and that is the one that has triggered the more precise disclosure. In this kind of case, we first try to solve it with low noise, because at the end of the day, you have to negotiate with your utilities as well to try to find a solution.

But now we [feel] that given the size, it was time to disclose with a bit more transparency, although we still have to be very cautious as we are still negotiating the solution here.

And if I understand you right there, Michel, we're not talking about any potential exposure on the sort of level you've had in antitrust and corruption issues in more developed markets elsewhere?

Well, we would say that so far, it has been a three digit million exposure. We are not yet having any type of conclusion that makes us make assumptions, the kind that you just described here. So for the moment, these are mainly a business operation and tax exposures. And we hope it will be unrelated to this. But obviously, what ABB has to determine is what is the final solution and what is the cost related to this final solution.

That's helpful. Thank you.

Last question.

The last question for today is from Mr. David Lowish, Generation.

It's David Lowish from Generation. Can I ask just a question about India? You haven't mentioned it in the course of the presentation. How are things going for you there? Clearly, there's an opportunity there in the power business with the infrastructure requirements in that country.

And also, have you had any further thoughts about the subsidiary that you have listed there? And is that an opportunity for you to deploy capital there, perhaps taking the minorities out of that?

David, I just got back from India about three weeks ago, and so, you know, I like our business in India. It's -- we continue to invest in that area. As we talk about global footprint, it becomes a very important area for us to be able to diversify. Some of our manufacturing base in, like, the European areas and to diversify it on the India side. And I believe -- I think India is going to maintain its 6% to 8% kind of GDP growth rate through this thing.

And so, we're -- Michel and me and the rest of the team are very bullish on that country.

As far as obviously you having a public company there and not having complete control over it from an ABB standpoint, that could be an opportunity, but it's all based on what we think -- if we're somehow hindered by that structure versus having that totally part of ABB. And I can tell you, we constantly assess that. And at any point in time, we think that we're severely affecting our growth rates or margin rates sometime, we would consider it. And so --

(multiple speakers) advantages, too. It gives us a very strong [local agency] in India that helps quite a lot. And by the way, the business there has been quite resilient. If you look at the last two quarters, we were down 3% in Q2 and 7% in Q3. So if you compare that to the rest of our business actually, India has been performing very well.

Yes. Understood. Okay, thank you.

Thanks a lot for your participation. And we look forward to giving you the fourth quarter results and the full-year results early next year. Thanks. Have a good day.

Goodbye.

Ladies and gentlemen, the conference is now over. Thank you for choosing (inaudible) and thank you for participating in the conference. You may now disconnect your lines. Goodbye.