Abb Ltd (ABB) 2010 Q1 法說會逐字稿

Good afternoon. Welcome to the ABB first quarter 2010 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. (Operator Instructions).

A replay of this call will be available for four weeks following the conference. (Operator Instructions). At this time, I would like to turn the conference over to Mr. Joe Hogan, CEO of ABB.

Thank you. Good afternoon everyone and thanks for joining us to discuss our first-quarter 2010 results. As always my comments in this call refer to the presentation that you can download from the website at ABB.com.

Chart 2 is our Safe Harbor statement. I think everyone on the phone knows, I don't have to read that. And then let's start with chart 3.

The one thing this quarter that was industrial spending that fueled the momentum in our short cycle businesses served by our discrete automation in Louisville to [each of our] products divisions. But as you know, more of our portfolio is considered late cycle where customer spending continues to remain cautious for us.

Revenues declined at 8% in local currencies to about $7 billion as the lower 2009 orders flowed through the P&L in the first quarter of this year. Our cost savings program generated savings in excess of $300 million this quarter while we had minimal restructuring costs, and Michelle and I will elaborate on that in a moment.

Our reported EBIT margin was 10.2%. It was lifted by a positive mix of short cycle revenues but also included project execution costs in Power Systems and continued volume and price pressure in Power Products. Adjusted for gains and losses, our derivative transactions and restructuring related charges our EBIT margin was 11.5%. Finally our continued focus on networking capital helped us to post and other impressive quarter of cash flows.

Moving to chart 4, chart 4 gives you an overview of the key figures for the first quarter. I've already discussed the main points, but note that our orders declined 19% to just over $8 billion. And while base orders were down 5% versus Q1 2009, they were actually up 15% versus Q4 2009.

That was actually the highest level in absolute dollar terms since the third quarter of 2008. I will say more on these developments in the coming slides. Similarly our order backlog, while down 5% in local currencies versus Q1 2009, actually increased 5% from year end.

Let's move to chart 5 on short cycle sales. On chart 5 you can see the volume of various impacts on each division. For orders you can see a 26% decrease in our Power Products division mainly due to volume and price. You can see similar declining rates for our two systems divisions due to large order comparisons year-to-year.

Recall that we had three extremely large orders in Q1 of last year, roughly $0.5 billion each, two in power and one in automation that were not repeated this year. On a positive note, the short cycle recovery can be seen in the orders of our discrete automation and low voltage products division where orders actually increased slightly.

Then from an EBIT margin perspective you can see that Power Systems suffered from some project execution issues. These are isolated issues and we fully expect Power Systems' EBIT margin to return to the targeted range for the full-year of 2010.

And for the short cycle automation businesses, you can see the positive impact on EBIT margin coming from both product mix as well as cost savings.

Moving to chart 6 you can see the tale of two businesses in our orders. While our shorter cycle automation businesses are benefiting from GDP growth and increasing industrial production, as well as significant emerging market exposure, our later cycle power businesses showed not only the timing of large projects awards but also the accelerated price pressure and cautious spending of our utility customers.

Let's dig a little deeper into the Power Products business by turning to chart 7. Here we have a mixed picture. On the one hand demand has clearly declined. 2009 was the first time in more than 60 years that global electricity consumption actually declined from the previous year. That was reflected in lower utility spending last year and we saw in several quarters declining orders in PP. The situation was not helped by buy local initiatives which tended to increase local competition.

If you had add aggressive pricing in a more challenging environment, where it's not always easy to pass through raw material price increases, it is clear that the Power Products is facing some short-term pressures. On the other hand we see the project pipeline for high-voltage transmission businesses remains robust and the pace of order decline in our shorter cycle distribution products business is slowing.

Furthermore we continue to make good progress on our cost and footprint optimization program which should yield significant upside when demand recovers. We [saw mid segment] strategies underway in several businesses to meet the competitive challenge and capture growth opportunities. We are the most comprehensive portfolio of products and solutions to meet the growing demand for more efficient power infrastructure. So we think we're well positioned to benefit when utility spending returns to growth.

On chart 8 we selected a few of our longer cycle industries in specific markets such as robotics in the US and China, or oil & gas in Europe and the United States, to show there are some encouraging signs in those longer cycle businesses. But it's still too early to say for sure whether these indicate a new trend in customer CapEx.

Let's take a quick look at chart 9 to discuss our seasonal trends on orders and revenues. So what you see on chart 9 is that we continue to see our typical seasonality trends on orders and revenues where orders were higher than revenues, resulting in a book to bill ratio of 1.2. That is of course what's enabled us to keep our backlog at a $25 billion level, actually increasing it from year end and will continue to help us as we go forward.

Let's take a look at our large and base order composition on chart 10. As you can see from the chart, our large orders typically vary between 10 and 20% of our overall orders in any given quarter. And the first quarter saw a return to this more normalized level of 15%.

As I mentioned earlier, base orders which tend to be more short cycle oriented were down 5% year to year, but up 15% sequentially versus Q4. You can also see the lower right portion of this chart that January started out seasonally slow, followed by a very difficult February. But then March was strong across all divisions.

On chart 11 we give you a regional breakdown of orders for the quarter. Here are several swings that capture your attention, like the 49% drop in orders for Middle East and African region, which is directly a result of $2.5 billion projects in Q1 last year that were not repeated.

It was similar in Europe where the $0.5 billion transmission product was not repeated this quarter, and in Asia where overall orders were down 13% local currencies to strengthen our automation businesses could not compensate for the weaknesses in our Power business. But in the Americas, short cycle strength in our automation business was enough to compensate the power weakness and lift orders higher.

Let's turn to chart 12 for more details on orders by country.

So this chart is further evidence of cyclical recovery. With the exception of Brazil where we exited some full-service contracts, automation orders fared better than power orders in these countries. In the US, automation end markets like those served by robotics pushed orders higher. And while demand for Power Products remained challenging, the distribution related market or residential and commercial construction markets appear to have reached bottom.

When it comes to China, where orders were down 15%, we devoted a separate slide for this situation there, so please turn to chart 13.

So for China, you can see that our automation business was quite strong on the back of industrial production, energy efficiency, the metals and marine businesses and even robotics. On the other hand, our power business had fewer large orders in the quarter but also faced aggressive local competition and the buy local initiatives related to government stimulus programs, both of which make the power business increasingly challenging.

On chart 14 our orders from emerging markets in Q1 [eased to] 47% mainly reflecting the lower level of large orders which more often come from these emerging markets. As you can see, despite the decline in the large orders, a number of businesses were still growing at double-digit pace within the various emerging countries.

Let's talk about our EBIT margin by moving to chart 15. Once again this quarter in a challenging environment we managed to post an EBIT margin at the operational level of 11.5%. That adjusted for gains and losses on derivative transactions and restructuring related charges, so we managed to remain within the annual EBIT margin target corridor of 11 to 16%.

Turn to chart 16 and I will walk you through how we get to the 11.5%. Now this quarter, in order to eliminate some confusion that arose around the adjustments in the past, we've giving you the actual local currency amounts of the various factors impacting our EBIT margin. You can see that the cost savings of more than $300 million could compensate for the volume and price erosion impacts in the product businesses.

However, we also have lower margins in the project businesses related to both execution issues as well as competitive margin pressure. The impact from mix continued to be positive this quarter. You could see a final adjustment here for the foreign exchange translation effect, as well is a few one-time items that take you to the 11.5% operational EBIT margin.

Clearly we will continue to focus on controlling and reducing our cost which takes us to chart 17 on our cost take-out program. As chart 17 shows, as I mentioned earlier, we achieved more than $300 million of cost savings in the first quarter and incurred only $7 million in restructuring costs.

The biggest contributions, as usual, are sourcing and global footprint with a saving of $120 million and $100 million respectively, but operational excellence was also a major contributor with almost $80 million. G&A also contributed some $20 million of savings for the quarter. We still expect to achieve $1.5 billion of savings in 2010. And despite the low level of restructuring related costs in the first quarter, we still expect to spend roughly $500 million for the full-year of 2010 in restructuring.

Now let's turn to chart 18 regarding our cash flow for the quarter. Indeed it was another very good quarter in terms of cash flow. We reported more than $400 million of cash from operations, as our continued focus on net working capital drove our inventories down further and resulted in a decrease in net working capital [percent] of about $700 million. Our net cash position remained basically unchanged versus the end of the first quarter at $7.1 billion.

Perhaps a few more words on our net working capital approach. Our chart 19 shows that we have methodically reduced our net working capital level each quarter over the past year. As I mentioned, a lot of this is from reduced inventories which can be partially explained by the overall business environment. However, it is also worth noting that we see lower net working capital also in our growing divisions. So this is a real improvement in the way we manage cash flow and the result of significant management efforts in recent years.

If I maybe wrap up with things on chart 20, in summary it appears that short cycle businesses are gaining momentum, but we expect the later cycle businesses to remain challenging. As such we will continue our focus on operational execution and to work diligently on our cost take-out program. We will also continue to look for growth opportunities to leverage and improve our cost base.

That concludes my formal remarks. I would like to thank you for your attention and we'll turn it over to questions for both Michelle and me.

(Operator Instructions) Andreas Willi, JPMorgan.

Two questions please. The first one is on the restructuring savings. You said $3 billion is the total size and you want to get another $1.5 billion this year. Does that leave anything for 2011? And what do you expect in terms of the exit run rate by the end of the year that could then carry area over in terms of savings for next year?

And within the savings particularly, given that about half of it is coming from sourcing and the pressure we get now from raw materials going up, is that target still achievable in the current form?

The second question is on pricing, gross margin and SG&A. You talk about pricing pressure but at the same time you actually had quite a good gross margin. What was more disappointing is the growth of the SG&A expense; maybe if you could give us some more details there.

I will answer the first one and I'll ask Michelle to do the second one. First of all, we're still shooting for $3 billion and I think your question has to do with really the carryover that goes into 2011. I would say that when you look at the OpEx piece of what we're doing, those are what I would call sustainable savings. And then also the work we've done on footprint restructuring is a good carry forward.

I haven't really and Michelle and I haven't calculated exactly what that carryover will be in 2011. Our focus has been to deliver the $3 billion of cost out from the year we started in 2008 and the $1.5 billion for this year.

On the sourcing side we're beginning to see that pressure that you mentioned in the sense of some of those firming prices that are out there. Remember as part of our cost savings programs we've never talked about the commodity piece. We've let that move and it's really inside that is noncommodity we're focusing on.

So far we're okay in that sense, but we know we can have gathering pressure in the years. So we will continue to look for other ways that we can help to mitigate these cost pieces. Obviously we always do have plans in place, in a sense, to help mitigate things that could move higher on one end by allowing us to push lower on another. That is still -- so we still stay in the bounds of that $3 billion total anything above that.

From the pricing side, I will let Michel handle that one.

So on just on the SG&A I think it's a little bit disappointing for you (inaudible) this quarter. Obviously you put SG&A flat against revenues that are going down 11%. You see right away your margin leaving there.

I think that what happens here is that one side the [effort really so far always efforts in terms, and most] (inaudible) G&A as well have a few one off impacts. That doesn't really change the run rate that we've identified, that we understand.

And I think yes it's a disappointing number but it's not that the discipline (inaudible) suddenly has gone away. I think we're going to be back on normal track as of Q2. But I agree it has a big impact on EBIT margin this quarter.

And was it, in that sense, maybe Q1 last year or quarter where you really brake hard on any potential discretionary spending and now you just have to travel again and do all these things and that's why it is up?

No, I don't think so. Travel expense actually are still doing pretty well. As I said, first it's selling. Especially in the automation division, there's still quite -- some salespeople on the ground that sold this Power Systems. I knew we would have certain growth programs that we want to execute and so R&D is also up 3 or 4% compared to last year.

And then as I said, there was also some adjustments of licenses, payroll costs and all that we had to pass this past quarter but which are not to be repeated in the next quarters.

Okay, thank you.

Mark Troman, Bank of America Merrill Lynch.

I've got a question on -- I think it is your profit bridge where you showed a 13% to the 11.5%. The first question on the project margins, I wanted to go into a little bit more detail what is going on there. I guess that all relates to -- or most of that relates to Power Systems and whether or not that is a drag that will continue in coming quarters or is that more one off. That would be question one.

The second question on that slide again, the volume under absorption, Michel I wonder if you could just tell us how much of that may be related to destocking, I guess the under absorption part. And the third question is the March trends you highlighted in an earlier slide. I think you said there was some strength across the board. I wonder if you could give a little bit more detail in whether -- where you saw the most improvements from a geographical and divisional perspective. Thank you.

Michel, I'll talk about the project piece if you could take the under absorption side. Okay? And then we'll come back to the March trends and we can do that one together.

You know on your first question on the Power Systems piece is we look at a substantial part of this is just being one off. As I indicated in my comments as we expect to be in that normal margin range we've committed to for Power Systems the year goes through. We had some onetime areas that -- you always have in these businesses, you can have actually positives and negatives. We're just in the more negatives here and this is unusual. So we're really confident we will be back on track for the rest ofthe year.

I will let Michel talk about the destocking piece on the under absorption side.

Let me specify on the margin analysis that this is (inaudible) [EPS] but as well (inaudible) and even the systems part of automation business like robotics (inaudible) relate everything to the revenues of (inaudible) from that part. But we are still, if you take that away, EPS is still running at -- should be still running at its normal run rate of EBIT, which is usually between 6 and 8%.

In terms of the volume under absorption, I don't know if any it's related to destocking. It's really relating to the fact that there was lower demand. And as a result of that, we're not fully absorbing our fixed costs in some of our factories.

The biggest part of this volume impact comes from Power Products, where obviously there is in terms of (inaudible) a lot of either capacity like distribution transformers that we mentioned a few times, and sometimes even some of our transformer plants in China for instance. And that obviously creates under absorption of fixed cost and that is what we're trying to highlight with this analysis here, call volume.

As far as March is concerned, as we mentioned, we did pretty good March month where base orders were up solid double-digit in terms of percentage, so there was improvement across the board. But again with a marked impact for the automation divisions and especially the [MNMP] that had more short cycle business in fact in that all units like rakers and switches, like low-voltage [lines], like motors, have been doing much better. That obviously is very good because that will hit revenues much faster and the contribution margin that comes along with it is obviously quite satisfactory.

Just to follow on, Michel, in terms of the Power Products was there any change in March or was it still fairly weak -- relatively weak across the quarter?

It was better as well, but probably less margin than the automation division. But it has improved. At least the market conditions we feel like are improving towards the end of the quarter after an extremely weak month of February. January we're used to having weak months of January, but then (multiple speakers) (inaudible) from there and February was (inaudible) surprise for us. And then the market started coming back in March.

Thank you very much.

Julian Beer, Enskilda Securities.

First on price pressure, could you just give us a hint as to how the trend is going for distribution transformers in the US? Secondly, at the time of the Q4 report you clearly warned about the tough Q1 comp. How do you see the comps going into Q2?

On the distribution transformer piece, and in fact I'm in the US right now, I would say we are seeing a bottoming in that market place. There is still at lot of competitive pressure in that sense, but I think overall we have seen a bottoming in the market place as I indicated in my current comments.

As far as orders are concerned I think Q2 is a little bit of an easier comp because we didn't have such a big quarter last year in terms of large orders [above 1.4] or close to what we have this time. So I would say from that perspective it should be a little bit more -- easier to compare to, especially if this base order we [calculated] to receive toward the end of the quarter gets confirmed in Q2.

That's great and just one follow-on. In terms of the utility capital spending which is clearly being constrained, do you see any indications or hints at all that there may be a resumption in that spend trend during 2010? Or will we have to wait a bit longer to pick up the spare capacity?

I think what we see is, we still see a good backlog through our Power Systems business and also Power Products and those kinds of -- so it's just really the initiation of those things flowing through. So, we're not ready to make any projections here, but we know we're going to have a difficult first half in orders pattern and we're hoping to see the market pickup in the second half of the year.

Okay, thanks very much.

Colin Gibson, HSBC.

First of all, can you just amplify on the comments in the press release about customer acceptance of products? I'm just looking know what that was referring to, whether you see that as a purely temporary issue or whether it's an issue which may hang over into subsequent quarters this year.

Secondly, on the question of project delays particularly on the power side, I guess as delays continue there is an ever-increasing risk that delays morph into cancellations. I guess in your own minds you must have a number of contracts which are at risk of cancellation. Can you give us any kind of sense of how big that chunk of business might be?

On your first question on the customer acceptance piece, you know I've been here now almost 2 years and I can tell you in talking to people about history, I don't see anything systemic in what is going on out there. I think this is a temporary thing. In fact we've seen that in the past in the first and second quarters that would occur. If Michel has any comments in that end he can help too, but I would call it much more temporary than systemic.

Yes.

And then on the project delays or cancellations, we don't really have a history of a lot of cancellations. We didn't see a lot last year. And so I wouldn't say that we're talking about some delays leading into -- cascading into broad cancellations for our business. We just haven't seen that trend in the past. We didn't see that in 2009 and I don't think we're anticipating it for 2010.

Thank you.

Martin Wilkie, Deutsche Bank.

A quick couple of questions please. Firstly on the pricing again you mentioned in the media call earlier, or Michel did, that pricing had deteriorated quarter on quarter. But when I look at your gross margin it is up year on year. Is there a mix or effect? Or is that just a signal of the success of your sourcing plan or how should we reconcile those two points?

Secondly, in the past you have given us some commentary on the power systems (inaudible) backlog. You mentioned earlier that there was a good pipeline for high-voltage (inaudible) if you could let us know what the outlook for the backlog is in Power Systems. Thanks.

Michel, do you want to take the gross margin piece?

I think the answer is really in the cost savings programs. If you look at (inaudible) that we provide (inaudible) the cost savings that we have ramped up (inaudible) has always been enough to at least cover the pricing impact (inaudible) gross pricing and volume. But at least from a gross margin point of view we're still doing quite okay, although in the overall environment of prices going down.

But I think we do reduce the structure quite a lot. The footprint helps quite a lot too. As we get more and more into these emerging markets, some of them being very low price, we also are localizing the sourcing of what we sell in discount (inaudible) to keep this gross margin at an acceptable level. Yes, again, if we haven't started these cost savings we would obviously be in big trouble today.

Your second question was on PS?

On the tender backlog.

On the tender backlog, so the tender backlog is basically unchanged this quarter compared to last quarter. So there has not been much activity nor in terms of new projects coming up or in terms of a project being ordered this quarter. We are still not seeing -- we are reading all the time about delays and suspension of some projects, but not official cancellation, even not in the tender backlog.

So as we say this the first time in 50 years that electricity prices go down but I don't think there's any expert in the world that is not challenging the trend in thinking that it will not continue.So people have just a little bit more time to execute their project. And we see the growth in terms of new projects and in terms of acceptance of products that have been ordered. The urgency is just not there for a moment because they can sustain the current demand with the infrastructure in place.

Ben Uglow, Morgan Stanley.

Good afternoon guys, it's Ben Uglow at Morgan Stanley. I had a couple of questions. First of all on chart 16, the margin bridge, you gave a figure of $150 million for product price erosion. And I was hoping to know could you give us a sense of how much of that was down to the Power Products or the power divisions and how much was due to automation?

And then secondly, just in very general terms, I'm curious to know whether the pricing pressures that you talked about on the press conference, whether you feel this is just due to a hiatus in orders and when orders come back hopefully in the second half of the year we'll return to more normal pricing conditions, or if this is actually due to far greater structural competition in China and other markets. How confident can we be about a cyclical upturn in pricing of when power orders begin to come back?

You take the first one Michel and I'll take the second one.

The first one, the majority of this impact comes from power products. I indicated this morning in the press conference that my estimate is that Power Products is more or less 4% of pricing losses. And the automation products divisions have only about 2% of these pricing losses. So I would say about two-thirds of that number comes from Power Products.

On the second part that you talked about is the pricing pressure and particularly in power; is it structural. I would say it's a combination of both right now. I would say obviously the less demand you have in the marketplace, the higher capacity you have.

If there was more capacity put in place in areas, transformers and high-voltage switchgears and those kinds of things, but with the return of the market place and the return of orders obviously there will be a tightening of what that supply is at some point in time. I can't make a projection as far as when it will tighten or how it will tighten because I just don't understand how fast this thing will come back in some ways.

But in the near-term I expect we will continue to see the kind of that we've seen planning around that. I'm not ready to make a projection in the future. But obviously with the kind of increases we expect in electricity demand, in emerging markets and those kind of areas, we do expect this market to firm up at some point in time here.

I would also add, Joe, maybe that I think the stimulus programs are also having an impact on the prices in some countries just trying to give a better chance to local competitors. And that is also pulling down a little bit the overall price levels.

That's for sure.

I don't want to put words in your mouth, but looking at the tone of the presentation I do sense that you guys seem to believe that power orders can recover in the second half of 2010. Is that a reasonable assumptions or am I being too optimistic?

I think it's an assumption that we think what we're talking to you about is long cycle versus short cycle. If you look at the history of these businesses, the longer cycle pieces like on the power side do come back later than the shorter cycle. So to pin down in the second half of 2010 we're not quite sure. But historically we would see some firming in that order pattern in the latter portion of this year is what we would expect. Michel do you agree?

Yes, totally.

William Mackie, Main First Bank.

Good afternoon gentlemen. Thanks for the questions. A couple of questions. Firstly on Power Products, could you perhaps elaborate a little bit more on which of the business units between transformers and high and medium voltage you're seeing the greatest change in profitability or the greatest pricing pressure within that division.

Secondly, clearly enjoying an upswing in some of the shorter cycle activities within DM and LP and I see the margin is developing quite strongly there. Certainly from where they were likely to have been at the end of last year. Would you at this point venture to what sort of level of profitability you should see those return to within a one to two-year time frame? Because I'm conscious at this point in time we don't have a sort of target framework within these two divisions.

And lastly just on housekeeping, the tax rate looks a little bit higher in the quarter. What are your indications at this stage for when the tax rate should run out for the corporate for the full-year? Thanks.

First of all, on the PP which units, I would say what we are seeing is a lot of pressure on the transformers side. Remember as we talked about before we have a lot of diversity in transformers from distribution to the large power transformers in those areas. And you also see it by region. I would say we increasingly see transformer pressure from an overall price standpoint.

We do see it in high-voltage like our gas insulated switchgear and particularly in the emerging markets. Medium voltage, it is actually by nature even more of a competitive market. It's more fragmented. You see a lot of competition in that area.

I would not say that the medium voltage is meaningfully different than what we saw in 2009. I would say it is pretty much on an even keel. But within those three areas I would say we're seeing more pricing pressure in transformers than on the high-voltage side.

On the DM and LP level profitability, I know we haven't given you ranges yet, but Michel you probably understand that one better than me in the sense of where you think it might be.

Maybe I [park it] for one second because Michelle Gerber is still looking at these numbers. I don't have them in my mind yet given the new divisions, but I'll be back soon and I'll talk about the tax rate first.

And we had indeed a tax rate of 29% and our goal is still to continue booking a tax rate of 27%. So that is still the long-term guidance I will give you. Now there are sometimes, some events in some quarters that makes it where you have some deviation.

For the moment obviously, we have to especially deal with still restructuring expense that are not only always the most tax efficient, because sometimes happens at companies that are making losses or don't have enough profit to carry forward to put against it. And as a result of that, you get some of these inconsistencies. But for the moment I've no reason to believe that once we're back to a normal level we will be at 27% again. So I will still keep that as the guidance at this stage.

So meanwhile Michelle Gerber has given me the targets. The targets for this (inaudible) automation (inaudible) of 14 to 19% and for low voltage products of 13 to 17%. So obviously the discrete division has quite a challenge as that it has (inaudible) division as well, which obviously it was already way beyond -- below the bottom of this target when it was integrated into discrete. So I would say in the short term you can't really expect to see the division getting back in the 19 area, but I think in the middle of this segment it is quite possible.

And by the way the robotics division has actually done pretty well this quarter with an order intake gross of 30% from a low base, but it's nice to see a new trend there. Low-voltage products the target range is 13 to 17%. I would see (inaudible) getting sooner back towards the high side of the range because this is really where we have the most short cycle business, a lot of exposure to construction and all of that in this business is really picking up quite a lot now.

Just a quick follow-up. To what extent would you say you may have benefited from higher rates of production and sales in either of those two divisions, if you like, in some sense a restocking through the supply chain which may have created an element of over absorption of overhead and hence perhaps help the margin development in the first quarter?

It's difficult to say. I would say it was [probably already simulated] a little bit in Q4, so I don't think we got an extra boost this quarter. (inaudible) It's always difficult to analyze.

I think, too, when you look at the robustness of that order rate across a lot of different regions, it kind of mitigates I think a stock out or inventory cycle that you might see one or two regions. We saw really robust kind of demand patterns across a lot of geographies.

That's great. Thank you.

[Johan Drachman, Nordia].

Good afternoon. If I could just ask a question on Power Systems please. Regarding these project issues that you've had, could you in any way quantify the sort of impact they've had in terms of cost, number dollars? You've already told us about the effect from market to market of exposures on the derivatives or hedges. Can you give us a sense of what this might be?

And is this anything you expect to happen going forward and have a similar kind of impact? I know you've gone through a lot on the business model on the project side of the business in recent years. Do you see this as a setback or is it purely a temporary thing?

Do you want me to take that Joe? So I would say it is one offs. If you put it together it's close to $50 million more or less for PS. That's why I say if you take that away, you're back to 6% type of level that we had last year.

Obviously there is always risk with these large products. One of the cases for instance is the bankruptcy a subcontractor [overall] that basically obliged us to absorb its cost overrun not to put the whole project into [injury]. The other part is just simply cost overrun. I would say [that] estimate of some of the cost we committed to in a lot of these contracts are lump sum turn keys or it happens.

I don't think we have relaxed any discipline in terms of risk reviews and project discipline, but just from time to time you can have an accident in this kind of job. So, we're still confident that these are the type of one-offs that we don't expect to be repeated every quarter and because of that we're still looking for the business to get back to this profitability margin between 6 and 8%.

And that's very clear. Just so I understand you and Joe right there, Michel, when you say you expect the Power Systems to be back on track for the 6 to 10% range you want it to be in, does that mean you expect to make up for this setback in the first quarter in the remainder of this year to actually achieve that level for 2010 as a whole? (multiple speakers) mean you expect the coming quarters to be on that level?

Yes, obviously given the current economics (inaudible) I don't expect the Power Systems business to develop this year at the top of his range target, but for sure it will be back in its normal range. We firmly expect that.

Thanks very much.

Alfred Glaser, Cheuvreux.

Two questions. One related actually to a comment by Michel this morning where he mentioned that there were some other plans of potential cost takeouts available in Power Products if pricing would not improve or stabilize soon. Could we have some additional comments on this?

My second question is actually on the margin outlook. Given the situation in Q1 with significant volume and price pressure, would you expect the next quarters to be at a higher-margin level than Q1 anyway?

I can handle the first one. From a Power Products standpoint what we have to do is adjust our supply with demand. And so I think what Michel is referring to this morning is we have opportunities in place to pull the trigger here to significantly reduce our costs in that area. If we can't -- if we don't see the volume coming through this is mainly variable cost kinds of actions. But we also have targeted different areas of SG&A also.

On the margin outlook for the subsequent parts of the year we really can't give you that kind of a forward look. I think the way Michel has been answering these questions in the sense of describing where we think these businesses are within these different ranges we provided is about the best we could do in that sense.

What we need is to get the revenues going. We still have a backlog of $25 billion. The revenue has been good pretty low this quarter especially in January and February. What we need to do now is push this revenue recognition from the backlog, and that obviously helps a lot in terms of underabsorption after that too.

James Stettler, New Street Research.

Thank you, good afternoon. Coming back to the structural changes, can you talk about what really is going on in China and what State Grid is trying to do, and indeed whether your business opportunity in the future would just be structurally lower? And the second question is just a technical one. Minority interest came down. Is that linked to performance in India or is that a reflection of what is going on in China?

Michel do you want to handle minority interest? And I will do the structural piece.

Okay, will you start with the structural?

Yes.

We're in different time zones here, so we don't see each other. (multiple speakers)

On the question on State Grid. State Grid has been very dynamic when you look at their actions over the last 18 months, and it's hard for me to say what's structural and what's not. It really depends on their buying patterns, too, if they are buying mainly on the distribution side of their business or they are buying on the transmission side of their business.

I can tell you one thing for sure is there is a structural change in the sense of the way that State Grid is going about their procurement program, as we mentioned and alluded to in our opening statements about the buy local pieces and focused on those areas. But there is still a huge focus in State Grid on buying high-quality power transmission equipment for HVDC and different kinds of projects. So I would say there has been a change. I wouldn't call it binary. I would not call it a 180 degree flip. But I would say there is a structural change that we're addressing as we speak.

With a minority (inaudible) it's a mix between China and India. Some of this project execution issue we have had [high] in India so there was also a little bit of an impact on the profitability there. In China is a combination of difficult pricing condition in power, also the fact that we have started a new joint venture. There's also some start up expense that come out of that and that explains as well why it is minority (inaudible).

This was not a good quarter nor for China, nor for India. They are both down in terms of order intake.

Great, thank you.

Martin Possienke, Sanford Bernstein.

Good afternoon, two questions. In terms of input cost pressures, a lot of people are alluding to that happening definitely into the second half of 2010. Could you talk a bit about copper how you hedged there? How extensive is the (inaudible) forward in electrical steel as well? Are you having -- what kind of negotiations are you currently having with your suppliers there?

And the second is on the restructuring charges. (inaudible) [500] and that seems a bit backloaded into the year. Can you explain the timing on that a bit more? Is it because you're executing on a lot of the footprint now and that's where the charges come through? Or how should we think about that number? Thank you.

On the input cost pressures, Michel I can take it from a high-level and I think you can probably do it from a lower-level piece. I think we normally hedge about six months out. Obviously we can't hedge electrical steel because it's not a commodity, so we look at the copper side.

Remember, we're never speculative. We always look at the jobs we have and we forward hedge based on those jobs to preserve the margin we quoted on. Copper prices are really high when you think about this part of the cycle, so it's going to be a challenge for us in the sense of making sure we keep our costs down.

And we push hard to be able to leverage a very strong -- when you think about it, we do buy a lot of these kinds of commodities and the size of the (inaudible) is again some capability to be able to push back on those things. On the electrical steel side I'm not familiar with the most recent negotiations, but I think we've been in a flat scenario on those prices at least over the last quarter or so.

Even slightly down, actually, because most of these contracts have been renegotiated about six months ago and we could get a substantial reduction for what we had. Actually so far our input costs for electrical steel is lower than it was last year.

And on the restructuring charges, Michel, I think you answered that question in the media conference this morning. Do you want to go ahead?

Yes. I think it obviously depends a little bit on the social plans because that is where most of the restructuring charges are coming. And as you know we can only start booking restructuring charge when we have an [answer] program where the people who are affected have been informed, or it is not a regular pattern that you have quarter after quarter.

As I said, we pushed a lot in the fourth quarter to get going. Now we're more in the execution phase (inaudible) a few other ways will come. So it will be not evenly spread over the next three quarters and it's difficult for me at this stage to tell you exactly when it will happen. Probably a lot in fourth quarter [is what -- I would not be surprised].

Thank you. Just one follow-up on China. In terms of the automation business there, which I think is not discussed as much as the Power business. Are you seeing very strong demand pickup in terms of OEM [supply] (multiple speakers) (inaudible) (inaudible) into that, can you just give us a bit of a sense of how that business is heading?

I can maybe give you some numbers first, Joe, and then you want to maybe comment on quality. Just to give you an example of how the portfolio is changing here, for the [M-division] orders in China is up 36% for the quarter. Low-voltage products is up 13% and process automation is more than 60% from a very low base again. But it really shows there's a lot of sectors that are starting to pick up.

I think in our China automation business, too, when you really study it, it's a broad business. There's a lot of different industries it impacts and on it's across a number of regions in China. As Michel indicated we see strength across each one of those with that business. In fact we saw strength in 2009 also in that business, too, so it's really a continuation of what we have been experiencing.

Fredric Stahl, UBS.

Good afternoon. It's Fredric here, at UBS. I was wondering on the same theme as that if you could give us an idea of what the base order growth was in APAC in Q1 and also if you could tell us whether the base order growth from March has carried on into April. Thanks.

(multiple speakers) (inaudible) answer any of the two questions. We don't give this breakdown of base orders by region and so I don't even have them in front of me. And for sure it's too early to give you now any outlook of how our April doing so far.

Okay, thank you.

Michael Hagmann, Nomura.

Thank you. The question is really around the buy local aspect you have been raising on the call and have raised this morning as well. I was wondering if you could give us a bit more granularity on what is going on in China and India, which are the products which are most hurt. And second, is it an issue outside of China and India as well? If could you give us an indication if it's also an issue in other regions.

And the third one is, if you look at China and India, our impression or my impression at least was always that you were selling yourself as a local company. So how can you square this if you are on one side pitching that you are a local manufacturer with the fact that you are now saying that you don't get all of this because the government is encouraging companies to buy local? Thanks.

On your first question on the buy local side, again, I think with a make sure that these comments are taken within the right degree. This has affected more of our Power Products division than it has affected our Automation division to be sure.

But I think also to be fair here is that these are much different. We rely on, in the power market, a much more selected group of customers that are more state affiliated than we do on our automation businesses, which are more industrial affiliated.

Within those state affiliated companies, we've seen -- I wouldn't say a complete transition but we have seen more of a willingness to entertain products that would be not quite of the quality or performance levels that we have tended to offer in that market place, even as a local (inaudible) supplier as you indicated. So there is actually a change in the buying pattern or specification, the specification demand in that sense.

When you say we represent ourselves as a local company, we do. Remember in our product portfolio at times, there are parts of our product portfolio that reflects more of a high-end product supplier in those regions. And then we also have middle-market capabilities too.

I would say it's the higher end product side that we get more and more pressure on. And we just have to make sure that we continue to move the bar in the sense of the performance and the overall solutions, in effect, that you could have on these products to be more competitive in these geographies.

(inaudible) When you talked about China and India I think we see trends in the United States, we see different trends in different areas about buying local. It's not necessarily associated with just one or two governments. But there is, as these stimulus packages go out, obviously politicians or officials would rather see that stimulus be [staying] inside that country rather than move outside.

Michel do you have any other thoughts on that?

No. I think that's a pretty good way to handle it.

So just to clarify, the US is the only other major region where you're facing similar problems?

Yes. But I wouldn't say, again, the US stimulus package right now has been slow in the sense of its ability to -- its infusion into our sectors. But if you read the US political side there is pressure to push for the local piece and you see that across a lot of these different areas.

Thank you.

Gael de Bray, Societe Generale.

Thanks very much good afternoon. My first question again relates to the Chinese market. Just looking at the 51% drop in the Power orders in China, in your view how much relates to lower spending from the Chinese (inaudible) and how much would relate to potential market share losses there?

Could you maybe also tell us whether the order decline in China has already started to flow through the sales development in Q1? And a follow-up on the Chinese [PND] players too. I was just wondering whether you have started to see much more aggressive competition from these Chinese players outside China and in which markets specifically?

I'll take your last question first. We've not seen a significant amount of these Chinese competitors move out of China and really challenge us in different markets. I think there's been a large enough market in China and the way they design their products is that it fits well in those geographies. We've not seen that major movement yet. That's not saying we won't see that at some time in the future, but I don't know think we'll see it in the year 2010 or the near future in that way.

Michel, do you want to address the other one?

What you see for the moment for sure is a combination of lower volume and lower prices. It is clear that in the large utility there is less demand than before. I think it is known already that this year, for instance, State Grid will have only six bulk auctions in the year instead of eight last year if my numbers are correct. So there's clearly less demand for that and there is much more competition for what is left, which also leads to this price deterioration. So that is really what you see now.

Now, it can also change very fast. They still have for instance the need for these large transmission projects. We expect there that at least one, if not two, of these large HVDC projects will be awarded and, too, that can obviously help rebalance.

You have also other sectors that are less dependent on this general environment, for instance, like [two action] transformers we sell to the rail industry, which has its own way of expanding. So there's still some possibilities for rebound from there, but this quarter unfortunately there was a lot of pressure.

I think it's also important to never take one quarter in China and project it into a trend as a positive or negative. It's a very dynamic market. We see things change dramatically from quarter to quarter.

Can I ask another question please?

Just a quick one, yes.

Okay, just in Process Automation you highlighted you're trying to reduce the exposure to some less profitable full service contracts. Just maybe could you give us a bit more indication that maybe as some examples of such contracts? And in particular, I would like to know whether -- when these contracts had to have been signed and how much maybe they represent as a percentage of sales for Process Automation?

I don't know if I want to go into specifics of how large (inaudible) that information. But to tell you in general, we did a sweep of what we call full service contracts in Process Automation. I really asked for that as we were in 2009 because these were some strategic aspects of what we were doing, maintenance in areas I didn't think ABB had a real strong competency in, in different parts of the world.

We did a really good analysis of where we thought we were making money and where we added value with the strategic account and where we didn't. And where we didn't we didn't think it had the right kind of margin and capability or strategic opportunity we would prune those. We'll continue to do that in that portfolio if we think it does make sense.

Okay, we're going to take the last question.

Olivier Esnou, Exane BNP Paribas.

Thank you for taking my questions. The first one, I'm trying to understand your tone for the quarter versus what happened because I was under the impression that your tone was more optimistic in February. And yet you [had been], from what you describe, a difficult month of January and an even more difficult month of February. So, what did really surprise you on the downside in March is the question that comes to my mind as the first question.

The second question is on the sourcing because it is about $150 million in the quarter, and since it's linked to the sales, even if we adjust for seasonality it's difficult to get to the $800 million roughly for the year. So are they specific contracts kicking in, in the coming quarters, that we can rely on?

And maybe as a last question, I ask you about the usual M&A update. If organic growth is getting more challenging, how do you feel about accelerating the inorganic aspect of things? Thank you.

You know, Michel I'll take the first, you take the second one and I'll take the third one. Quickly, I think the optimistic versus pessimistic tone, I think Michel and I did as well as we could at the end of the fourth quarter to try not to be as overenthusiastic as I think some of the investment community was with that situation. And so the first quarter I don't think really surprises us in really any way.

As we indicated as we emerged from the fourth quarter that we -- we still think we're going to experience a very competitive market and a difficult market. That's why we announced we were going to extend our cost out program. And some people questioned why we would do that, and it's because we anticipated we would have a difficult market here.

So I wouldn't say with a big surprise. As far as our tone goes between February or January and March or whatever, I just wasn't aware of a tone change one way or another. From a sourcing standpoint, Michel, do you want to --

I would just add as well that when we announced our results in February, we were obviously only knowing the January results. They were weak but did January is always weak. There's always a push towards year end and then the year start slow.

But usually you have a robust pickup in February. That just didn't happen by the time we saw the full month's results. So we had really only one month's knowledge at this time. February was the weakest month of the three. So just to be precise on that.

Listen, on sourcing again you cannot draw a line there because first we are excluding all the commodity raw materials from this calculation and that is obviously what you buy on an ongoing basis. The rest is really specific contracts with suppliers, with logistics, with supply chain, [being] steel cabinets, being (inaudible), whatever you can think of that we use. And so obviously the flow of these savings coming is very irregular.

We are [either] talking to you about what we estimate has hit the income statement this quarter. Actually we know we have already more savings committed in the supply chain, but at this stage it has not yet hit the income statement so we don't disclose it yet. So you won't see a straight line on that, but I think we've seen what we delivered last year. We're quite confident we can achieve that again.

And for the M&A, Joe?

At the M&A side our comments don't change in the sense of organic versus inorganic, in the sense of the market place. We continue to look for opportunities out there and when we see something that make sense from a valuation standpoint for ABB we will move forward on it. So the market situation will not change our strategy.

Joe, if you allow me, I have two communications to make and then you want maybe to make a concluding statement here.

Just to confirm, first of all, that exceptionally this quarter we don't have any road shows planned. The major reason for that is we have (inaudible) week on Monday, so we'll be back as usual after Q2. Sorry for that.

And the second also, to confirm this year ABB will not participate in the EPG because we have too much scheduling conflicts. We will replace this by the road show that Joe will make on the East Coast in the month of June.

Thanks Michel. And look, I would just thank everybody on the phone. I would say that this quarter is again not a surprise to us. We continue to face a difficult market place but hopefully you hear the optimism in our voice.

We are confident in our cost out program. We are seeing further strengthening in our short cycle businesses. There is -- the Power Products pressure is one where we feel it is about the long cycle recovery that is normally associated with that side of the business.

So again we thank you for your interest and we look forward to talking to you again in the second quarter.

Thank you very much. Talk to you soon.

Ladies and gentlemen the conference is now over. Thank you for choosing the [conference call] facility and thank you for participating in the conference. You may now disconnect your lines. Goodbye.