Abb Ltd (ABB) 2010 Q2 法說會逐字稿

Good morning or good afternoon. I am Stephanie, the conference call operator for this conference. Welcome to the ABB second 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 a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions (Operator Instructions). We will kindly ask each caller to limit themselves to two questions only. For those journalists who have dialed in, your participation is in listen-only mode.

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. Please go ahead sir.

Good afternoon and thanks for joining us today. Michel Demare is with me here, too. We are going to review our second-quarter results, as you know, and as always my comments on the call refer to the presentation that you can download from our website at ABB.com.

Please refer to chart 2 for our Safe Harbor text covering any forward looking statements made today. I will start with a summary of our second-quarter performance on chart 3.

ABB delivered a strong quarterly performance as our cost take-out program makes again succeeded in keeping our profitability well within our target range. We saw a further increase in industrial demand for ABB's energy efficiency solutions and lifted orders in the Automation divisions by more than 20%. As a result base orders grew by 15% in local currencies compared to the same quarter in 2009 and were 4% higher than Q1 this year.

At the same time utilities continued to delay many of their investments into power transmission, which is reflected in the 37% decline we saw in large orders. Nevertheless our order backlog is higher than at the beginning of the year and revenues declined more slowly, down 5% versus Q2 2009 in local currencies, than in any other quarter since 2008. Both of these are encouraging signs.

We achieved more than $400 million in cost savings this quarter. This, combined with an increase in our margin product revenues from the Automation divisions, helped us to generate an operational EBIT margin of 14.6% compared to 14.4% in the same period of 2009. This improvement comes despite additional project costs in the Power Systems division that I will come back to shortly.

On cash, the timing of customer payments includes the performance. We had lower cash from operations compared to a year ago, but comparing the total first-half cash flow, we're actually higher than last year so remain confident in our ability to generate cash.

Chart 4 gives you an overview of the key figures for the quarter. I have already discussed the main points, so here I just highlight the improvement in service revenues and the restructuring and derivative cost totaling about $130 million in the quarter.

We've also added EBITDA figure here, because as we explained to you when we did the Ventyx deal, depreciation and amortization related to the acquisition will impact earnings in the coming quarters. We expect that impact to amount to roughly $40 million for the full year of 2010.

Ventyx had a small impact on our results this quarter, as we've only included June's results in our numbers. Ventyx contributed about less than 30 -- I'm sorry -- $20 million in both orders and revenues, and the impact on the EBIT was also not significant. Let's move to chart 5.

Here you see some key data at the division level. As I already mentioned, delays in utility spending continues to weigh in on our power orders. The current short cycle industrial recovery, however, has had a dramatic impact on our Automation order intake. And in the case of Low Voltage Products, where orders are converted quickly into sales, you can already see the positive impact [of] the order rebound on revenues.

Process Automation also saw a significant order increase, a lot of it in the emerging markets including some large orders in the Middle East, in oil and gas, and also minerals. On the EBIT margin side, you can see the impact of our successful cost take-out program across the board. We were even able to maintain our Power Products margin despite lower revenues and continuing price pressure.

Power Systems' margins were again hit by cost overruns associated with the cable projects we mentioned in the first quarter. This amounted to about $80 million and follows an intensive review process undertaken this quarter aimed at fully [ring fencing] this particular risk. As we said after Q1, it is impossible to rule out further cost but we have our hands around this issue. We've already taken measures to make sure this issue doesn't arise in similar projects in the future.

Turning to the Automation divisions EBIT you will see the positive impacts from the cost take-out [and] a favorable product mix and especially in Low Voltage Products, strong incremental margins as we increase output from a lower fixed cost base.

In chart 6, you will see the development of base cost in large orders in more detail. Base orders were up in all divisions except Power Products and we're up by more than 20% in each of the Automation divisions. The lower large order intake brought the share of large orders down to 11%, which is the lowest we've seen since the end of 2008.

You will see -- you have seen already the $700 million order we won last week from transpower in Germany to build an 800 MW link between an offshore wind park in the North Sea and the German mainland. This will certainly go a long way to improving our large order performance over the rest of the year. It's also a reflection of the continuing very high tender backlog in this business.

We hope to see additional large orders in the coming quarters. This will depend, to some extent, on the world economy maintaining its current momentum. If that continues we would expect to see a return to greater utility spending, especially in power and transmission.

Turning to chart 7, you can clearly see how differently our Power and Automation business have developed through the economic crisis of 2008 and 2009. Our Automation businesses were the first to feel the downturn, starting already in the third quarter 2008 and declining more or less steadily throughout to the third quarter of last year.

At the same time, our Power divisions were still enjoying some significant order growth in early 2008 and orders were relatively steady through most of 2009. Now you can see how Automation has come back on the strength of the industrial recovery while Power remains under pressure. Given what we know today, we would not expect total Power orders to bounce back until late this year or into 2011.

On chart 8 we give you the regional breakdown of orders for the quarter. In total, emerging markets accounted for 51% of total orders in the second quarter. As their economies continue to perform above the global average, we're encouraged to see growth in Europe again mainly driven by demand for automation solutions.

Asia also came back this quarter as China returned to growth. Again, it was our Automation business that fueled growth in Asia. The Middle East and Africa saw a very good quarter, due mainly to some large Process Automation orders in Saudi Arabia.

In the Americas we had some large [fax] orders in Mexico last year that we didn't repeat, so that impacted our Power performance and more than offset an orders increase in the United States. Let's turn to chart 9 for more details on orders by country. Chart 9 shows order growth in some of our most important markets.

Again it's the Automation businesses that drove growth in China, Germany and the US -- our three biggest markets. Industrial demand also supported modest growth in Brazil despite a significant decline in large Power orders compared to last year. As I mentioned a moment ago, Saudi Arabia enjoyed a solid quarter with large orders in oil and gas and minerals. Saudi orders amounted to almost $400 million in the second quarter, bringing it into the ranks of ABB's largest markets.

India, meanwhile, continued to struggle. This is a result of both delays in large orders and increasing competition from local producers, so we have some work to do here to rebuild our order intake.

Turning to chart 10, we also saw some order recovery in Process Automation in the quarter. Marine, metals, minerals, pulp, pulp and paper -- also strong double-digit growth. It's important to note that this is grow from a low level but the chart shows a positive trend across all of these businesses over the past several quarters. This is mainly in base orders and reflects increasing operational expenditures by our customers as they bring some capacity back online or as they refurbish and upgrade existing facilities.

It is still too early to say there is a recovery in capital expenditure into new capacity. This will be a key to a sustained order recovery in Process Automation.

Chart 11 provides an update on the Power Products business. We have a combination of tailwinds and headwinds affecting PP at the moment. Our overall demand remains muted.

We did see an 11% increase in base orders from Q1 to Q2 this year. That is largely the result of higher demand from industrial customers, which in turn lifted orders in medium voltage products. On the EBIT -- margin side we continue to see pressure and pricing and a negative impact of volume declines.

However, we were able to take out more than $100 million in cost during the quarter which allowed us to hold the line on profitability. There are still challenges ahead, starting with the delays we see in the utility spending on large transmission projects.

In China we still see the effects of increasing competition. We're taking measures to adjust by reducing costs and tapping into the new markets, for example in the mid-segment range, but the negative impact is likely to continue over the short run.

Finally, revenues will remain under pressure over the rest of the year as recent order decreases continue to flow through the P&L.

I won't spend much time on chart 12 other than to say we could hold our EBIT margin comfortably within our target band in the second quarter. The cost take-out has gained significant traction and the Automation recovery, especially in Low Voltage Products and discrete automation and motion, should continue to support the group margin.

Chart 13 provides you with a reconciliation of our operational EBIT from Q2 last year to Q2 this year. If we compare this to what we showed at Q1, you will see the volume and under absorption impact has contracted significantly from about 4% of revenues to just over 1%.

At the same time the effective price erosion in our Product businesses was about $200 million in the second quarter, or about 2.7% of revenues. Compared to $150 million in Q1, which is about 2.2%, the project margin piece is also higher reflecting the additional cost overrun in Power Systems. The good news is we were able to more than offset these impacts with excellent execution on cost and we kept our operational margin basically the same level as last year.

Let's move to chart 14 to see where these savings were achieved. So far we've achieved about $2.3 billion in cost savings since we launched this program at the end of 2008. That means we have passed the three quarters mark. In Q2 we took out more than $400 million, accelerating the pace compared to the first quarter.

The biggest piece was again in global sourcing where we reduced costs by about $150 million, taking our total sourcing savings up to $1.1 billion. We also saw good reductions through the footprint in operational excellence initiatives as well as lower G&A expenses. The cost so far has just been over $700 million, which means we have another $350 million to $400 million to go. So we're on track to reach our objective of a $3 billion cost take-out by the end of this year at a cost of just over $1 billion.

Chart 15 takes you through some of the actions we've taken to put our cash to work. As you know, we closed the Ventyx deal in this quarter in an investment of more than $1 billion. We acquired a US instrumentation business called K-Tech and invested about $20 million in [Trillion], a maker of Smart Grid communications equipment based in California.

We also made a $1.2 billion offer to buy UPS maker Chloride, but as most of you understand we eventually withdrew from the bid. We continue to look at M&A opportunities applying a very disciplined approach.

In addition to these activities we made an offer to increase our holdings in ABB India to 75% from our current level of 52%. This offer is still running and we should the results at the end of the month.

On CapEx, we expect to ramp this down somewhat from last year with full-year expenditures near $800 million for 2010. At the same time, however, we'll increase our R&D spend to make sure we maintain our technology leadership. This will remain a key growth driver and competitive differentiator as demand recovers.

Finally, our net cash position at the end of the second quarter amounted to $5.9 billion. Remember that we're paying our dividend for 2009 this month, which will affect our Q3 cash by possibly $1.1 billion.

Let me conclude on chart 16 with a summary and outlook. I think it's fair to say we had strong quarter with great execution on cost take-out, combining with an automation recovery to allow us to maintain profitability comfortably within our target band. Looking ahead, our recent performance in automation gives us confidence in the short cycle recovery.

A return to order growth in power transmission is likely only late this year or into 2011. We expect the emerging markets to continue the positive development that is shown through most of the downturn.

Where there is more uncertainty is in the developed world, where there are still some question marks around the strength and duration of the economic recovery. For that reason, we will continue to focus on excellent execution on cost while we tap opportunities for growth.

That concludes my formal remarks. I would like to thank you for your attention, and Michel and me will be happy to answer any questions.

(Operator Instructions) Ben Uglow, Morgan Stanley.

Good morning. Good afternoon. Two questions. First of all just on Power Systems, obviously something changed during the quarter. Previously -- and tell me if I'm being unfair -- but I think you guys were thinking that you would be back in the 6% to 8% margin range for the year. Now I'm assuming that is unattainable, but when do we see 6% margins coming back? Is this all finalized now? So that's question number one.

Question number two was on the press release. On page 5 you made a very interesting comment suggesting that the EBIT margin adjusted for both derivatives and restructuring was roughly the same in Power Products in the last two years. My interpretation of that is the underlying EBIT margin is something close to 19% in our Power Products. Am I being too optimistic?

Your second question kind of takes me by surprise. Power Products for this quarter was 18.6% (multiple speakers) adjusted for derivatives and (multiple speakers). So is that your question?

Yes, it is.

So you're -- it is close to -- it is 18.6%.

Thank you.

On the first one (inaudible) have changed a little bit compared to the comments we had in the first quarter, where we said we are optimistic to see the power system margins back up. The fact is the problem has become a little bit more complex.

To just try to explain it without getting too much in detail, we had to deal with a bankruptcy of a subcontractor for cable laying and the ground trenching for some of the cable projects we've taken. We have replaced this contractor by another company that had the difficulties to cope with the cost. So we have been basically obliged to change a little bit the business model on some of the contracts we'd hired this company for.

And so the problem with that is that if you execute these contracts in parallel, obviously there's a little bit of a snowball effect and maybe we had underestimated a little bit this impact when we started looking at it in the first quarter. Like Joe mentioned, I think we have now a good understanding of the issue. There's still some downside risk, but there's also some upside because there's also some insurance issues that are related with that.

So it's too early to draw a bottom-line to this issue. Obviously we would say (inaudible) additional charge of $80 million and that is that for the rest of the year. That's about 1% of revenues; that will be difficult to make up differently. So I would say that now, if we say before [6%, 7%] it will for sure be closer to 6% for the full-year than the (inaudible) we were still hoping for.

But you know on that project business from time to time, on projects this size and this complexity, you get from time to time a problem.

Just to be clear, this is a problem with the original mis-estimate that originally you were thinking this was confined to one contract? And now (multiple speakers)

(multiple speakers) at the end and the fact that this one project got into trouble caused some delays on a few other projects, and after that you start missing your deadlines and that is what happens here. But we are catching up with [some] solutions now; the matter is now we have to see what is the total financial cost once we have sold all the [insurance] and customer issues.

Thank you.

Olivier Esnou, Exane BNP Paribas.

Yes. Good afternoon. A few questions, maybe just following on the previous question. I'm just wondering if you -- because supplier bankruptcy can happen; it's a supply chain issue.

From where you stand, are you happy with the speed at which (inaudible) went through the Government Systems of ABB? Are you happy today with the mechanism you have in place to monitor the supply chain? Because it happens in one division, could happen in another. Your general thinking on how your view has changed because of this situation.

I would say on that specific one it's not a financial governance issue, so I think the numbers were quite transparent for us. It has been basically a wrong technical judgment on the difficulty of the work we were doing. So basically, by switching supplier we have obviously also started -- the supplier has its own equipment, like trenching equipment for instance, and it just appears that this equipment was not as efficient in the kind of ground we had to work [with and] the supplier that went bankrupt. And that obviously is something that is difficult to [escalate].

First it is in the bottom of the ocean, to start with; but second, so it's not a matter of clarity of reporting or lack of controls. It is basically the fact that the technical conditions got worse and the alternative supplier we found was less skilled and less well-equipped to handle it.

Thank you for that. I choose to follow on quickly; some competitors are saying that a part of the improving demand situation especially, maybe the power distribution side is due to restocking. How would you qualify? What is your view on the impact of restocking, whether it be in power or maybe also in automation during the quarter?

And a last (inaudible) question, maybe just your view on corporate costs for the year. I think it was kind of small this quarter and I'm just wondering if there's an unusual effect here. Thank you.

On the restocking or destocking piece you have to look at it by business. When you look our Automation businesses, particularly like Low Voltage Products, I would say we're probably in a demand pattern there, not necessarily a stocking pattern, because we've seen a couple of quarters of (multiple speakers) orders coming back (multiple speakers).

On Process Automation or whatever I think you can't look at that as restocking. That is demand. As facilities start to start up again we are seeing a pull through for different kinds of automation products and equipment and systems that we have.

I think when you started to get into your initial part of year question which is power restocking or whatever, I don't know honestly. But I think you have to figure anything that goes through distributors and has been down, distributors -- as we all know what they do from a cash standpoint when the market goes down they're going to protect their [cash design]. So they are going to do a certain amount of restocking when it comes back.

So I would have to guess that some of that initial demand in medium voltage, and also we're seeing (inaudible) distribution transformers, might be somewhat of distribution depending on what the geography is.

On the corporate cost piece, our goal for the $3 billion cost-out is $330 million of G&A I believe. We feel confident we'll be able to hit that number. I know it looks like it's going to be a struggle. But I'm sitting right next to the guy who is running it.

If you remember, Olivier, we had commented in Q1 that we had some exceptionals there that have shown the G&A a bit higher than what we wanted. So you get a little bit of the offset of that. I still think we are on track. And obviously corporate cost is mainly G&A, so we should expect to see these numbers remaining at this low level or even going lower for the next two quarters.

Actually at the same time you are reducing your restructuring charge for the year. So, how should I read that? Is it that basically you have done so well on the rest of the cost savings that you think you don't need to do fixed cost saving going forward to keep the $3 billion? Or any other type of thinking behind reducing it now, while you are still in an environment where you say it is kind of uncertain?

On this one we have done well on the costs which don't require any restructuring like sourcing and OpEx, for instance, and we still see a lot of upside in OpEx which is good because that is basically getting more efficient processes and being able to get more output from more capacity.

I think this is not a conscious decision to reduce the restructuring costs. I would rather say that as we go through a lot of the cases that we knew we would be expensive, it just happened to be that I think we have done it at better terms and conditions than what we had initially estimated. So it is nothing that we pull back actually; we are even accelerating some initiatives or adding new ones like in Power Products that is still struggling a little bit more than the other divisions. But we have just executed more efficiently than we initially thought.

Thank you very much.

Mark Troman, Bank of America Merrill Lynch.

Thank you. Good afternoon, Joe, Michel; it's Mark at Merrill's. Just a couple of questions, first one on pricing, on your chart 13 on the profit bridge you have $200 million roughly for product price erosion. Just roughly, how much of that was Power Products? That would be the first question. I think it was about $110 million or so in Q1.

And I guess is it fair to say as you go into Q3 your comparative gets easier? From memory, it seems to be you took a bit of a pricing hit in Q3, but I don't remember it being talked about so much in Q1 and Q2 last year. So the first question on pricing and the second question a bit open-ended.

But clearly there are issues in China and India, and I think we know broadly what the issues are but I'm more interested to hear what you are actually doing to try and remedy the situation. So maybe some key points on what you're doing in China and India to fight back. That would be very helpful, thank you.

I'll take the China and India while Michel works on the pricing question. On China you can see that our orders are up in China 8% for the quarter. If you dig down into that, Mark, what you will see is our Automation businesses did extremely well there and across the board, whether it's Process Automation or Low Voltage Products or also discrete automation and motion.

So when you look at those businesses and you start to decompose them there's a lot of middle market work there. We've adapted those products really well for the Chinese market place. We sell within the Chinese industry, the kind of industry standards that they have, so we're really part of a flow there. It's not a kind of a high end strategy with those businesses.

When you take a look at Power Products in China, and that's been predominately when you look at Power Products and Power Systems, we sell mostly Power Products in China, we have been really reliant on State Grid and Southern Grid to a certain extent. I think you know our business with State Grid is anywhere between $600 million and $800 million a year. And that has been under pressure particularly in the transformers side, but what we're increasingly doing is making sure we modify our products to make them more cost competitive with Chinese competitors.

And secondly is to look at markets outside of just the classic utilities. We're looking at industrial market places and different things where we can adopt these products in China, and we call it our in China for China strategy.

You'll see a lot of our competitors, GE and Siemens, talk about taking products and modifying them in China for the Chinese market place. We kind of sit back and say that is great. When you look at several of our businesses, particularly on the Automation side, we have been doing that in China for years. In the power market we haven't done it as much and we have to move much more rapidly to diversify there and look at that middle-market and adapt our product line more for a broader Chinese market place.

On the India side I would tell you it's a marketplace where I feel from an Automation standpoint I think we'll see a pickup there in the third quarter. On the Power side we have some work to do on both gas insulated switchgear and the transformers side. I feel we have a good grasp around it.

What we're doing right now to move to 75% share of our stock will help us, because we want India to be a strong export hub for us, too, and with that additional share that will really help. But I feel confident we know what to do in India. And what we have to do in China is execution right now and staying on the themes.

On the pricing, Mark, for the Power Products in the second quarter the pricing decline is a little bit accelerated. It has been between 4% and 5%. So if you try to translate it in dollars, let's say, a bit more than half of this $200 million we have lost in pricing comes from BP. Okay?

In Automation it starts being a little bit more of a different set. So net, net, net we're still losing a little bit of prices in discrete automation. But on the other side I would say that the global (inaudible) we even in some sectors start seeing a few price increases, but I would say in absolute terms it is probably neutral for the quarter. So more than half is Power Products here.

Okay, that's helpful Michel. Just to follow-up on that, on the discrete automation, is the pricing there -- is there something structural there? Or is it more it is just a function of the demand? You've still got sales declining, a bit of overcapacity; is that a simple function of the demand or is there something else going on there?

There is not just one answer there because in discrete automation we have, for instance, robotics that are doing extremely well. It was quite a turnaround for robotics, both in terms of orders and as well in terms of price realization. But it is especially in the larger motors that we call machines that there's still a little bit of a fight out there and we still have to stabilize the market.

And finally, part of the original question was last year the pricing pressure sort of escalated during the year at the group level. Can you just remind us how that profiled through the year roughly?

I don't have here the data of last year, so it would be a bit difficult to answer like this. But what you're trying to guess is if we are going to see the same kind of profile in the second half of the year?

I guess so because last year, from memory, I think Q1 you didn't really mention much price. Q2 a little bit, Q3 it really was a topic and Q4. So I'm guessing that the comparatives are a bit easier.

(multiple speakers) If you compare to a year ago, I think a year ago obviously the Automation was also still not doing very well. So the two sides of the portfolio (multiple speakers) were starting to suffer. Automation was already in the hole.

I think what you see here now is clearly, as I said, Automation is picking up quite fast both in terms of volume and the prices are stabilizing. Power -- there are buckets actually. The medium voltage part of Power is doing pretty well. It is showing positive order intake for the quarter and I think there the prices are really stabilizing. The pressure is really in high-voltage and in transformers and, there again, not everywhere.

Obviously we see a lot of pressure in China, in India, in the Middle East, but some other markets or some niche markets like traction transformers or dry transformers are still okay. So I would say it's a bit of a different one, and like Joe said before, we're still cautious on the Power side. You notice the transformer market, for instance, is a market that has a lot of inertia. So it might take another 6, 12, 18 months before you see the impact of some lower prices we see in some markets really hit us.

So far we're happy still with the margin we have in our backlog, but it will be a challenge to keep them at this level. On the other side in Automation, the [conjugation] of higher volume and all the cost take-out, you can see the result this quarter.

Thank you very much.

Andreas Willi, JPMorgan.

Good afternoon. Two questions, please, the first one just following up on Power Products and the profitability there. Maybe you could give us a bit more information about the mix, how much mix has been a driver, and also with that helping us maybe to understand for the second half to compare margins.

Then we had a weaker first quarter, a stronger second quarter. What was the mix impact there and what should we expect for the rest of the year? Is there any unusual benefit in Q2 from a particularly specific mix?

And a couple of things to clarify on the financials. The tax rate has started to creep up a little bit; what we should expect for the full year. And on Ventyx, you said about a $20 million quarterly hit for amortization. Is that amortization for the deal or is that amortization within Ventyx for capitalized software?

Quickly on the last two, our guidance for Ventyx in terms of the amortization of the intangibles that have been recognized in the purchase price accounting, the guidance we're giving is about $40 million per year, so about $10 million per quarter. So, that is on that part.

In terms of the tax rate, indeed it is creeping a little bit high. We're still keeping our guidance at 27% for the moment, because one of the issues we're dealing with for the moment is the uncertainty of having all the restructuring expense that we incurred. We (inaudible) tax-deductible so it's a little bit of case-by-case issues. There's also some transfer pricing uncertainty that need to be resolved.

So we are not throwing the towel. It's more a challenge than it was six months ago, but at this stage our tax specialists still believe they can deliver the 27%.

On the PP profitability, I would say you have $100 million of cost (inaudible), as I mentioned in my opening remarks and which is -- overwhelmingly is what really helped when you look at that overall operating margin rate, as I would call it, or percent.

There was mix in there. I can't tell you specifically. It's how rich the mix was but we did have some medium voltage and (inaudible) (multiple speakers)

Medium voltage is good then also we have finally stopped bleeding in terms of volume under absorption and distribution transformer, for instance. And so there are a few fixed costs that we can recover from that part, too. So the mix is only starting to play, but obviously there's still some exposure in transformers and high-voltage as well. So I would still be cautious on that one.

So we shouldn't use just the Q2 as the new base for the rest of the year?

No, this is a dogfight. We fight this thing every day and the team did a great job in the second quarter. We're going to continue to work the cost-out piece hard. But we would encourage you to say that -- this is a fight. The longer this recession stays on, the more difficult it's going to become.

The division is at the high side of this range and I think the range is still valid.

Thank you very much.

Axel Funhoff, ING.

Good afternoon. I've a couple of questions left. You described a very high tendering activity in the power utility industry and obviously also they have very good reasons to spend again. From that perspective, would you say that in your expectations a recovery of utility CapEx spending is just really a couple of quarters out? And also where, geographically, do you [expect] the utility CapEx side would be driven from? That's the first question really.

I'll tell you, I think when you look at the United States, I'll start there, is pretty much the 2010 budget was set in 2009 as many of us know. So when you look at that, there was not a lot of money in the marketplace. The demand for electricity was down. So we're experiencing a low amount of CapEx for the United States for this year that was really set in 2009.

There is -- most of the consensus out there is we will see an increase in CapEx in the United States in 2011. You have to guess that is true, but I think a lot of it is going to do with the US economy and how robust this swing back is.

As Michel indicated, in the US we saw somewhat of a strengthening, a flattening to a strengthening in our distribution transformer business which would tell you there is some electricity usage increases going on out there. And that would be the first place it has hit. So I would say 2011 you should see some kind of an improvement in the United States.

In Europe, the projects we're quoting on have a lot to do with sustainability, offshore wind farms, those kinds of things. I think there's a huge bias when you read the statistics and you talk to customers about transmission and distribution right now versus power generation and particularly these offshore wind farms and things like that. So those are the big areas.

Now China, after an overwhelming spend in 2009, a little bit less this year, a lot of projections are that China might be a little bit stronger in 2011 too.

And I would mention the Middle East. There are a lot of projects in the Middle East that we're working on. So it's really emerging markets -- Middle East, China, India, Brazil and then renewables in general that also creates a lot of opportunities.

Makes sense. Second question on your competition, you obviously are getting a lot of questions on intensified competition from China and India and so on, but can you also speak about your traditional competitors? Is there anybody who is more aggressive than what you were used to or are there any other new competitors except for those from China specifically?

I would say Michel takes care of our outside markets, too, but I would say we're seeing the same level of competition with our traditional competitors. It is on and off depending on what the product or what the region is.

The Chinese in China do give you another look. And I would say it's not necessarily in the high-end of the market place. It's much more in the middle end of the range but they're very competitive. The Koreans pose an issue at times, too, selectively by geography and by componentry.

I would agree. Maybe the big changes, the Koreans are even more aggressive than they used to be in the past. But that's the major change.

You know Axel, obviously Michel and I read all of the analyst reports and thoughts and there's a lot of concern about a structural change in the Power segment. I would say -- will there be -- there won't be. It will be dictated by capacity and dictated by demand and we'll see how fast demand comes back.

But secondly, remember we have very competitive plants in China, very competitive whether it is gas inflated switchgear, if it has to do transformers or whatever. And we can exercise that footprint to be able to compete with people offshore. We will increasingly do that in order to remain competitive in the market place and hold our margins at the same time.

Thank you very much.

Martin Wilkie, Deutsche Bank.

Good afternoon, it's Martin from Deutsche Bank. A couple of questions on the Automation business. In both discrete and low voltage you saw big jumps in your margin both year-over-year and quarter-on-quarter. And obviously the cost out in the volume side I can understand.

On the mix side, was that significant there? Was there an abnormal mix development that perhaps we shouldn't expect to be repeated in next quarter or later in the year? Or was it really the cost out and the volume that really drove those margins?

Then secondly also in those businesses, obviously a phenomenal strengthening of order intake. Just if you could comment, was there any change in that trajectory during the quarter? Obviously there have been, at the macro levels obviously increasing fears of a slowdown in the second half. Did you see any sort of tailing off of that order intake toward the end of the quarter or was it pretty consistent inside the quarter?

Your last question first. I would say the trajectory was pretty consistent throughout the quarter. In fact we saw base orders, which is the main indicator in this case, really remain stable or even up as we went into June. I'm talking now for the discrete automation and also low voltage business. We also saw that in Process Automation too.

You asked about discrete automation and motion and those margins, that mix or whatever. I think, and Michel can verify (multiple speakers) -- if you have it, go ahead.

I think if you look overall, Low Voltage Products for instance, it's like you say. It is mainly volume and cost take-out, the conjunction of the two and the fact that the prices are holding. And obviously you get to use leverage by taking all these fixed costs away.

In the discrete automation there's still a little bit of a mix also because, as I mentioned before, the robotics business is really now showing excellent signs of recovery. And as you know, we spend a lot of money to restructure this business. Or if we get more volume and the change is quite fast, and so as a result you have got a little bit of a help from robotics that we were still losing a lot of money a year ago and is in fact printing black numbers now, so that's quite good.

But as I mentioned before it's slightly offset as well by the fact that the (inaudible) large machines business we still have a few things to improve. So, high level summary I agree; it's a volume and cost cutting.

Thank you.

James Moore, Redburn Partners.

A couple of questions, three questions if I could. In the first half, you had positive mix as a group level on your bridge. Have you got any visibility on how that, at a group level, is going to develop into the second half?

And you made some comments on pricing and gross margins. Could you say a little bit about the gross margins and the backlog and where they are against the P&L, and where pricing is in orders that are coming in today versus what we're seeing in the P&L? Just so we can think really clearly about how pricing in the P&L should develop going forward.

And then finally, R&D spend, you said you are going to lift it. Could you say where it is as a percent of sales today versus last year and where it is going to, so what the delta is?

James, starting from the end first, from the R&D spending standpoint we have been lifting it year on year. So there is no -- I'm not announcing a change in our operations or what we are doing in R&D. In general we spend anywhere between 3% and 3.5% revenue of R&D, and it is a big process within ABB to understand exactly where those funds go and how.

We just wanted to make sure that as we instituted our cost out process across the Company that we maintain the right R&D spend to make sure we're competitive in the market place and we continue to do that.

As far as positive mix going forward, I'm not ready to call that one in a sense of the next couple of quarters.

Yes, it's difficult. I think this quarter was better because the automation recovery started to offset the fact that we have less volume in Power Products. You would have to have a vision that on one side Automation continues recovery and that on the second side Power Products stabilize. Then it would happen. But I think it's a bit difficult to predict at this stage.

If you look at the margins we'll surprise you probably with that. But I would say if you look at today of our margins of order intake and even of the backlog, they're actually slightly improving. But we have to be cautious with that as well, because a major reason why they are improving is that our percentage of large order intake that we have had so far this year is well below way below last year. Like this quarter it was 11%; quarter last year was 19%.

So it is clear that if we start and we firmly count on backing some of these very large orders in the second half of the year, the margin on orders will start coming down because it will just be a mix issue. But so far we're doing well. We're executing still okay despite the problem we have on the power system this quarter.

But we are also ready for more challenging conditions. And this is why we're not slowing down the cost cutting program, because we think is can the take a challenge to deliver the margins at the bottom line.

Just to follow-up on that, if you look at your year-on-year pricing as you talked about on revenues and you look at your year-on-year pricing in orders, is there a big difference that is going to hit the second half as the P&L delivers that?

At this stage, no. I would say it is more or less the same, but again, once we take large orders this might change. It's normal.

It's not that large orders have less margin intrinsically. We're still doing a good margin on ABB content. But we also take a lot of other costs that are just passed through that you get on the topline and on which you don't make any margin.

Thank you very much.

Thomas Baumann, Neue Zurcher Bank.

Thank you very much. Good afternoon (multiple speakers). First, to your remark that tender backlog for Power systems is close to record levels [such] that the -- refer to the charts you [once] published earlier (inaudible) a record level in Q2.

And also does that still include the $700 million order? In other words, the record levels, is that as per end of June or end of today? That's my first question.

The second question goes actually to note 11 in your notes where you talk about the cumulative costs of the restructuring and the expected total cost. There we have $700 million accumulated and building in total makes a difference of $300 million for the end for the remainder of the year.

We said it would be a bit above $300 million. Actually I think so far we've left a guidance for this year of $1.1 billion. And so now we say we will be between $1.05 billion and $1.1 billion.

So we should take what you just said (inaudible)

(multiple speakers) Yes.

Okay.

On the tender backlog, yes indeed it makes reference to (inaudible) charge we used to show from time to time. And so basically what we refer to here is the tender backlog extending at the end of June. So before we got this large order for $700 million dollars in Germany, and at this time it was kind of a record high backlog since we started measuring it.

Thank you.

Simon Smith, Credit Suisse.

I actually have three questions. The first one was with regard to the Low Voltage Products division. Obviously a fantastic margin you've achieved there, and I think in the commentary you've given so far you sort of talked about it being more down to sort of volume and cost.

If I take that and look at it in the context of a year, which we don't really know the exact seasonality of this business, it still being a relatively new reporting structure. But does this imply now that you're going to be coming in on an annual basis above the peak margins you achieved in that division?

Well, Simon, we separated that from Automation Products last year to give us more visibility and you more visibility too. You saw a huge amount of leverage on volume; I think six points when you take a look at year on year. A lot of that came from a cost reduction piece and holding those costs and the margin leverage as you would guess.

I would say this should not be a surprise, Simon. Take a look at competitors in the market place. I think [LeGrand] is showing 20%, 21% operating profit with their portfolio right now, too, and ours is somewhat similar. So I don't think it's out of whack in that sense.

Thank you. In terms of India, you've obviously talked about the competitive environment you're seeing in China. And you mentioned the fact that the weaker order flow in India was due to competition. I just wondered if you could classify as to where it is you think you're losing out.

Is it a situation of you viewing competitors pricing business at unrealistic margins and you having to walk away from it? Is it a case of the type of products that are being purchased in the market whereas you are not strong and you need to move into? Or is there sort of some other dynamic in terms of locals favored over international players that is having an impact on you?

I will take this question because Joe has to leave for the airport to catch a plane. It's a little bit of everything. On one side there is a few one-offs.

We're consciously deciding to leave some businesses that we don't think are good for us in the future. I think I mentioned that before. For instance, the business of (inaudible) [electrification], so that has an impact on the topline but as well on the cost of pulling out of a business like this.

The second is a little bit an issue of [competitiveness]. It's a very low price market in India; high volume but very difficult in terms of being there with the right price level. So we have to address that first by improving the productivity and efficiency of our own factories, and as well and accelerating the development of products that are specific for this market that is what the market wants to pay for and not more.

We have already started that a couple years ago, but I would say that need to deliver on that has accelerated quite a lot. So I was just there recently. I think we see exactly what are the problems we're working on. It's a journey. Meanwhile, we have to try to get the best. But it is extremely competitive for sure.

So (multiple speakers) the goal in the future is, once we've established these very low cost bases, to use it as an export hub as well.

Indeed. Thank you. Just quickly, in your profit bridge when you show the impact due to contract project margins, the $140 million, does that include the $80 million that relates to (multiple speakers)

That includes the $80 million, so what you have there is basically two things. It's the cost overruns that you may have in projects like this $80 million that we [inflect] in Power Products.

And it's also the fact that from time to time we just take projects that are very similar in nature but are lower than what we did last year. You can have that on some standard substations, for instance. There also, the competition is very intense.

And what we do there is we quote it as a net margin change, because if we had to give you a pricing analysis there, you know, prices sometimes are down 25% or 30% but so are costs. So I think it would totally bias the analysis and that is why we (inaudible) focus on the net margin. Sometimes it is lower than it was a year ago and that is what we reflect in that column.

Thank you very much.

Colin Gibson, HSBC.

Three questions if I can please. First was on book-to-bill. We've gotten used to, during the last couple of years of downturn, something of a kind of random walk on book-to-bill. We get one strong quarter and then we have one weaker quarter. And I guess that's what we've have a little bit so far this year; a pretty strong quarter from a book-to-bill point of view in Q1 and a weaker one in Q2.

How do you see that going into the second half of the year? Is that kind of random walk trend continuing? Or does the pickup in automation, for example, give you more hope of a more sustainable trend there?

I would say yes. I would expect to see a more sustainable trend, again assuming the economies continue like they do and the Automation business captures as well the change in [economy] conditions. I think on the Automation side for sure we should continue seeing a positive book-to-bill.

And then the second thing is we really expect to book large orders in the second quarter, and that should indeed improve the book-to-bill in Power even if some of the Products side of the Power business may still get challenged. I would rather expect to stay in the positive territory.

Great. Second one, I wonder if you could give us a more color on growth in discrete automation. I understand clearly from your comments in the press release and in answer to previous questions that robotics has done particularly well here in the first half of the year.

But again, if I take a step back or three steps back and look at factory automation historically, I would have to say the history of the last 10, 15 years has been a bit lackluster. Growth has probably been poorer than most of the vendors would've been hoping.

Do you see any signs at the moment that what is happening is just a cyclical bounce back? Or do you think it is the start of something potentially more encouraging than that?

You can probably not give a global answer to that. We are still, as Joe said before, very cautious with Europe and the US because the kind of uptick we have seen this quarter is not exactly in line with what you read in the headlines. So that one we have to continue watching that and being cautious.

What happens in Asia on the other side is for sure something that is beyond question mark. Or if you just take Asia for instance, Automation's business, two out of three of the Automation businesses in Asia were up 60% for the quarter. So, if you like extremely strong number, pretty good in the Middle East too.

So, I think we start seeing a fundamental change. And before this all (inaudible) I think you look at some business units in some discrete automation business that have always been an extreme growth factor, like low voltage drives for instance; extremely strong, good margin business of the power. Or the power, electronic and medium voltage drives that becomes more and more at the core of a lot of the combined power and automation offering that we have.

Sometimes where you have a little bit more volatility is when you go to the higher components like machines. The heavier machines that one depends a little bit more on the real CapEx equipment so that's a bit less. And then you have robotics. We all know where robotics have been.

This has really been a terrible collapse in the last two years and now we have a fantastic rebound, obviously from a very low basis, but at least we're ready for that. Meanwhile we've cut the costs. We have moved all the production to China. And as you know, we're extremely well placed to take up the market as it rebounds.

Thanks very much. Lastly in terms of your strategic direction, I guess the creation of the Low Voltage Products division together with the Chloride bid kind of shows your hand a bit in terms of the way you are thinking about the strategic direction of the Group. Using what is it Emerson's terminology what does your M&A funnel look like in that space? I'm sorry (multiple speakers) and obviously I'm not asking about individual deals because (multiple speakers) but do you feel you have other ideas to pursue in that space?

Yes, and I think what you have to look at now is not just think of products. You can think, okay, we were trying to get a specific product there, but we have to also look at applications. For instance we have clearly [stated] data centers, for instance, systems, [seeing] where there are a lot of things to do.

UPS will be an interesting part. There are other ways to offer energy storage solution and even too much more package what we have already today in-house, in order to have an application specifically for this kind of market.

So what you see more and more, I think you talk about showing your hands, I don't really think so because the market is moving from being just pushing products to a customer in terms of much more building solutions. And we have this great portfolio of Power on one side, Automation on the other. [Would it] be nice to complement it, but we'll find other ways.

Thanks very much indeed.

Mark Fielding, Citigroup.

Actually three questions. The first one, could you just clarify? My impression is that the problem in Power Systems actually relates to three contracts in terms of undersea cabling. Could you clarify what the total value of these contracts are, where we are on the timeline of them and whether they're approaching (inaudible) [completion]?

I would pass on that one, because I have said it's a number of contracts. It's less than five. But I don't want to get more in detail because it involves a lot of negotiation with customers and the insurance companies. I think at this stage we should refrain from getting into these kind of details.

What I said is, yes, we took a charge this quarter. It might not be the end of it, but I would not expect it would get worse than what we have charged this quarter so that if there is another charge it would even be more than that. And I still think there's a lot of upside once we have solved the technical.

On these kind of things you first solve your technical problems. You deliver. Then you sit around the table to try to deal with the recovery. So I will leave it there if you don't mind, because that's quite sensitive.

That's fine. Just following up on Power Systems, in the answer to Ben's question right at the start of the Q&A you talked about how if this was the end of the charges you still could be towards that 6% margin. I assume on that basis you're talking on a sort of adjusted -- i.e., not adjusted for the charges but adjusted for derivatives and for restructuring? (multiple speakers)

Yes. That's true. We have to always judge on not just an operating basis because derivatives in that business has a big impact, since we do a lot of currency hedging and commodity hedging and nobody knows which direction that goes. With time it will all adjust itself. So I'm talking on an operation basis.

This quarter actually, if you correct for hedging, restructuring and (inaudible) provision actually the business is running at a margin above 7%. So it can still do that for the rest of the quarter, [or] what I say is that obviously $80 million on an annual basis more or less 1% of EBIT. And it will be difficult in the currency (inaudible) to raise the operational the EBIT to 8% in order to offset that. That is why I say I see more a likelihood of being close to 6% than to 7% now.

And finally on the Automation business, could you just talk about how the momentum has developed through the quarter? I mean, your base orders for example for the Group don't look like they particularly accelerated quarter on quarter. So I'm just trying to get a feel of actually how you are moving through the quarter.

Well, if I recall in first quarter we still had negative base orders overall, right.

They were up about 15% Q on Q.

The Group base orders were down 5% in the first quarter and so now we are up 15%. And obviously a lot of these base orders are on the Automation side, some on the Power Products side as well, which is still down.

So I would say it is really something that we comment in the first quarter that we really reached the bottom for the whole business in February. That was really the disaster month of the quarter. March was much better and after that we have had a pretty smooth pattern toward the second quarter that build up to the results we show finally today. So it's been a good and positive trend development throughout the quarter.

Thank you very much.

[Arnold Lazar], Cheuvreux.

I was just wondering if you could comment a bit on what you see in Central and Eastern Europe in terms of demand currently. And I had a second question again coming back on Power Products. Given the still uncertain outlook and important price pressure, in particular on the transmission side, do you still envisage to do additional cost cutting in Power Products at some stage? Or do you think currently that the improvement in, for instance, medium voltage will not make this necessary?

On the second question in terms of the Power Products, no. Indeed, we are working at -- it's not drafting plans because we always said we have all kinds of backup plans. And so there clearly, we still have some problems of capacity utilization and some question marks about how long the recovery will take.

So the tendency there is to either increase the program and look for additional saving obviously in sourcing as much as we can, but as well in footprint because there also the market has moved quite a lot, so it is needed to do that. So that will happen. And that's why it's a constant adjustment.

This cost-cutting program has never been a haircut the same for all. For instance, we have cut G&A but not selling and R&D. And obviously now with the Automation businesses peaking, we're even in fact investing in selling into those business. But on the Power side we need to continue trying to keep these costs under control and get more savings. We have (inaudible) the quarter and I think it's the only way going ahead for it.

On your first question in terms of central Europe I'm trying to find some data here. Let's say Europe overall was up as we showed you before. We had a decent quarter in Russia, although still from a lower base obviously.

And if I recall, I think the business in Poland in Czech was quite -- not booming but at least showing positive numbers. So it has been for the whole of Europe quite a decent quarter. I must say we hadn't seen that since quite a while.

Thanks a lot Michel.

Thank you. Thank you very much. That was the last question. I thank you all for your attention. I think it's the right time now to wish you a good summer and we will be talking again at the Capital Market Day in September, which is on September 10. Thank you very much and have a nice evening.

Ladies and gentlemen the conference is now over. Thank you for participating in the conference. You may now disconnect your lines. Goodbye.