Abb Ltd (ABB) 2011 Q1 法說會逐字稿

Good afternoon. I'm Stephanie, the Chorus Call operator for this conference. Welcome to the ABB first quarter 2011 results analyst and investor conference call. Please note that for the duration of the presentation, all participants will be in listen-only mode, and the conference is being recorded. (Operator instructions) A broadcast of this call will be available for one month following the conference. (Operator instructions) This call must not be recorded for publication or broadcast.

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 to discuss our first quarter 2011 results. As always, my comments on this call refer to the presentation that you likely have already downloaded from our website at ABB.com.

Please refer to chart 2 for our Safe Harbor text covering any forward-looking statements we want to make today.

So moving on to chart 3, so let's start with a summary of our first quarter performance on this chart. One thing that came through again this quarter was how our leading market positions and lean cost base continue to pay off. Industrial spending remained high, fueling momentum in both of our Automation and Power businesses. With commodity prices on the rise, our Automation customers continue to expand capacity, invest in more energy efficient technologies, and improve productivity.

Utility customers are also more active, investing in grid interconnections, the integration of renewable energies, and in the Power Distribution end of the grid, we're higher in industrial activities, driven greater demand for electricity.

For ABB, that's translated into organic order growth of about 19%, or 25%, including the impacts of acquisitions, mainly, our recent Baldor acquisition.

A little bit later in the presentation, I'll update you regarding those acquisitions, but keep in mind that we closed the Baldor transaction at the end of January, so there's basically two months of activity included in this year's first quarter results.

Back to the Group information, while large orders were up 20%, our base orders increased 25%, to reach the highest level since the second quarter of 2008. China orders rebounded with 70% growth, led by Power Products, which grew more than 90% for the quarter. We have also a separate slide on China coming later.

Revenues, supported by execution of the record order backlog, as well as short cycle book and bill business, also continued growing at a double digit pace. Our cost savings program generated savings in excess of $200 million this quarter, mostly from sourcing. And we reconfirm our targeted savings for 2011 of at least $1 billion.

As we indicated last quarter, given the acquisitions we've made, we will now begin reporting operational EBITDA and the related margin. You will, of course, still receive EBIT figures, but our comments will focus on the operational EBITDA developments.

Accordingly, our operational EBITDA for the first quarter increased 37% to $1.3 billion, and the related margin was 15.7%, an increase of 1.9 percentage points, versus the same quarter a year ago.

On chart 4, it gives you an overview of the key figures for the first quarter. I've already discussed the main points, but note that the acquisition contributed more than $400 million of revenues this quarter, and delivered operational EBITDA of about $80 million. Our order backlog continued to grow, reaching a record $229.3 billion. Net income for the quarter grew 41%, to reach $655 million.

And finally, our cash from operations reflects a strong growth related working capital needs across most of our divisions. I'll say more on those developments in the coming slides.

On chart 5, you'll see our top line developments over the past three years. For orders, you can see we've nearly reached the pre-crisis levels from the first half of 2008. Some of that is related to acquisitions, but even organically, it's clearly a positive trend. And while revenues increased at a double digit pace, we still managed to increase our order backlog another 8% from the end of 2010.

In chart 6, you'll see what I mentioned in my opening remarks regarding large and base orders. Not only did our large orders grow more than 20% in the quarter, but our base orders also grew 25%. Large orders were supported by transformer orders from China announced earlier this year.

While the business was lifted by our short cycle businesses, as well the electrical distribution market recovery, note that organically, base orders were up a very strong 19%. Let's take a look at some of the divisional developments on chart 7. You'll see that all five divisions grew orders, and except for Power Products, all grew revenues as well. Increased demand for transformers and medium voltage equipment supported order growth for our Power Products division, while some of the large transformer orders that we took at the end of 2009 and in 2010, which has a relatively higher level of price erosion, were executed in Q1, and pushed the division's operational EBITDA margin lower.

Remaining divisions all increased their orders, revenues, and operational EBITDA margin significantly, and the strength of increased volumes for Discrete Automation and Low Voltage products were a positive mix in the case of Process Automation. And for Power Systems, their revenue growth was extremely strong against the light Q1 2010 comparison, and their margin returned to the targeted corridor in the absence of non-recurring project costs.

In chart 8, let's take a look at some of the regional developments.

As you might expect, order growth was quite strong across most regions. Demand for our High Voltage, Direct Current or HVDC technology in Europe and Asia drove strong double digit growth for our Power solutions in those regions, while a continuing recovery in the Medium Voltage and Electrical Distribution market pushed orders higher in the Americas.

The increased demand for energy efficiency and improved process quality, as well as high prices for commodities, continued to fuel global demand for our Automation businesses. Orders declined in the Middle East and Africa, which reflects a lower level of substation orders for our Power Systems division.

Let's [trawl] down a little further on order growth geographically, with chart 9.

One of the more positive developments in the quarter, of course, is a strong rebound in China. I'll come back to this in more detail shortly, but it was particularly gratifying to see the Power Products business rebound with some key wins for HVDC equipment in China. But the Automation businesses also continue to grow at very healthy pace in China, confirming our leading position in this important market.

The US also was a positive highlight, with 20% order growth on an organic basis, and thanks to our Baldor acquisition, we've taken a big step in building our Automation presence in North America, one of our key strategic goals. Our large business in Germany also enjoyed a good quarter, with strong growth in both Power and Automation.

India, however, remains a weak spot. Although the Q1 order performance showed a significant sequential improvement compared to Q4 of 2010, so we remain upbeat with our prospects here, I'll come back with more specifics on India in a moment.

Let's take a closer look at our Power business and Power Products business in the first quarter on chart 10.

As we indicated in previous quarters, there's an increasing demand for HVDC and Ultra HVDC solutions. We announced several awards this past quarter, specifically for those technologies in Europe and Asia. This trend is illustrated clearly by the Power Systems tender backlog shown on the right hand side of this chart, which has reached a record new high level.

Meanwhile, Power Distribution orders are stabilizing, and even higher in some regions like the Americas. And a stronger push for renewables as well, as our mid-segment product launches in places like China, are also starting to bear fruit.

Finally, exporting from our low cost footprint will be a source of competitive advantage going forward. All of these represent opportunities for our Power dividend, but there are, of course, challenges as well, such as excess global capacity in large power transformers, utility CapEx that's not yet fully recovered, and emerging market competition that's here to stay. And there are plenty of power transmission projects out there. Selectivity is key to ensure our profit margins. We need to be sure we have our people working on the highest value added projects going, and it plays to our strengths.

And we also need to speed up our in-country, for-country R&D and product design initiatives to make sure we have competitive products in the world's fastest growing markets. Considering where we are in the cycle, and given the additional costs we'll take out, we feel quite confident about our Power businesses going forward. So let's talk about our Automation businesses in chart 11.

On the opportunity side, we see high commodity and energy prices, as well as energy efficiency regulations driving demand. For those of you who were at (inaudible) Hanover Fair recently, you've seen that we have launched a new generation of highly efficient and compact industrial motors that give us an excellent market position as more and more efficiency regulations come into effect in Europe and elsewhere around the world.

Similarly, we have launched a new family of variable speed drives that offer increased functionality and a smaller design.

Combine that with our acquisition of Baldor Electric, North America's leading maker of high efficiency industrial motors, and we think we're in a greater position to benefit from these market trends. In addition, we continue to turn around our Robotics business with Discrete Automation and Motion, and Robotics has now reached an operational EBITDA margin in the mid teens.

And finally, the industrial productivity needed in emerging markets continues to drive extreme strong growth in places like China. The graph on this chart shows you the kind of order growth we've seen over the past two years in our Discrete Automation and Low Voltage divisions in China. And these are not small volumes. For example, our Low Voltage Products division will likely surpass $1 billion of annual volume this year in China.

Speaking of China, let's have a look at chart 12 and talk about what we've seen there in the first quarter.

Throughout much of last year, we saw solid demand growth in our Automation businesses in China. We took advantage of that through our strong market channels, local R&D to design the right products, and by boosting our sales resources in China. You saw the results of that in a previous chart.

We also now see a recovery in demand for our Power solutions. As I mentioned earlier, equipment orders for HVDC and Ultra High HVDC technologies reached $350 million in Q1, while healthy GDP is driving Medium Voltage growth, and our mid-segment strategy has begun paying off in China.

So all in all, it was a strong quarter in one of the most important markets. Let's turn to chart 13, so I can frame the situation in Japan.

When the tragedy occurred in Japan, of course, our primary concern was about our people. I'm very happy to say that of the roughly 700 employees we have in Japan, all of them are safe, and business is back to normal. We derive about $400 million in revenues from Japan last year, just over 1% of total sales.

From a sourcing standpoint, you can see that as of today, we have no material impacts expected on any of our key sources of supply. But we're monitoring the situation closely, and we'll keep you updated as we move through the year.

Please turn to chart 14 for an update on India.

As you may recall from chart 9, that orders from India were down slightly, that was due mainly to our pullout from non-core businesses such as rural electrification. Our Discrete Automation and Motion and Low Voltage Products divisions are enjoying robust growth in India. And we already announced the largest HVDC order, which we expect to book in Q3 of this year, subject to financial closing. The new management team in India under Bazmi Husain is forcibly driving change to improve our operational execution. We're being more selective on bidding projects, improving supply chain management, building up our competence in sales, R&D and project management, and localizing our capabilities for substations, transformers, switchgear, and breakers. So we're on track to bring ABB in India back to profitability in 2011.

Let me now give you an update on our recent acquisitions.

First of all, it's early in the process with just two months of results, but so far, we're extremely happy with what we see. On a standalone basis for February and March, Baldor revenues increased 27% over the same period a year ago, and their indicative operational EBITDA margin was 21%.

We already see cross-selling winds with NEMA and IC Motors, and we're very confident in the synergies we announced back in November. The integration is right on track, with the US sales teams now successfully merged. Acquisition related charges amounted to $107 million in the first quarter, and there should be no additional charges of this kind in latter quarters. Finally, you can expect an annual amortization charge of roughly $100 million going forward for intangible amortization.

We will continue to update you throughout this year, but suffice it to say, we consider Baldor a significant value adding acquisition.

Moving on to chart 16, you can see that operational EBITDA margin improved nearly 200 basis points, and improving volumes contributed more than $250 million to the improvement. Net product price erosion amounted to about 2% of revenues this quarter, mainly from our Power businesses. But that was more than offset by our cost savings of more than $200 million.

And finally, you see the new category entitled Acquisitions, which shows nearly $80 million of additional EBITDA in the quarter, primarily from the Baldor acquisition. Since you always get quite a few questions on pricing, we've included chart 18 to say a few more words on price pressure.

As chart 18 shows, product price erosion has decreased over the past year, from a net 2.2% to 1.8% this past quarter. This is mainly as a result of pricing strength in our Low Voltage Products business, and some of our Discrete Automation product lines, where we have initiated price increases mainly to offset higher raw material costs.

Based on recent developments in the Medium Voltage and Electrical Distribution markets, we expect Power pricing on aggregate across the portfolio to remain stable at low levels. Now, let's turn to chart 19 for a cost savings update.

As we indicated last quarter, we have targeted another $1 billion of cost savings for 2011. Roughly 70% of the savings will come from sourcing and operational excellence initiatives, with the remainder coming from footprint measures. And given that the majority of the pricing pressure is coming from the Power business, it should be no surprise that two thirds of the savings came from the two Power divisions in Q1.

Now, chart 20, I'll say a few words on our cash flow and net cash position. As those of you who have followed us for some time know, our Q1 is a seasonally weak quarter when it comes to cash flow, especially as you ramp up working capital in our project businesses. This year's Q1 was no different, plus we have additional pressure on cash from the strong revenue growth we see in most divisions.

As a result, our net working capital increased by approximately $1 billion in the quarter, compared to the first quarter of 2010.

Excluding acquisitions, net working capital was approximately $600 million higher. However, our net cash position remained above $2 billion, even after the Baldor acquisition. And this balance sheet will continue to support our growth initiatives.

Finally, let me wrap things up on chart 20. In summary, we've gotten off to a strong start in 2011. Strong industrial demand continued boosting orders in all businesses, driving both base and large orders. Revenue growth accelerated, and the order backlog also continued to grow, which bodes well for revenues in the coming quarters. Acquisitions added significant value, and operational EBITDA was up nearly 40%.

Our outlook for the remainder of 2011 anticipates steady industrial demand to continue, with the emerging markets playing a key role. Our Power Transmission business is on track for a second half recovery, and the long-term drivers of energy efficiency, good reliability, and renewables remain stronger than ever.

That concludes my formal remarks. I'd like to thank you for your attention, and now open the line to any questions you might have for Michel or me. Thanks.

We will now begin the question and answer session. (Operator instructions) First question from Mr. Andreas Willi, JPMorgan. Please go ahead, sir.

Good afternoon. Two questions, please. The first one I have is on the Power Products division. Maybe you could comment on what margins, or gross margins you're now seeing in the backlog relative to the profitability we have seen in the last couple of quarters, where it can fluctuate between 14% and 16%. And then you speak about a Power recovery in the second half of the year. Do you specifically mean orders, sales, or does that also include EBIT?

And the second question, on the order intake in Power Products, you showed some growth in the US, but it's still relatively low also when compared to maybe, if we look at some of the EPC transmission orders we have seen in the US last year, which should translate into product orders. Should we expect that still to come, or it's basically the kind of run rate, what we should look for the US in terms of growth in Power?

Andreas, on the PP margin and backlog, you know, I'll try, and I'll get Michel to get specifics for you, too. But we've been trying to steer as much as possible for you guys to think in the 15% range this year, and I think you're going to see us kind of fluctuate around that mean. Depending on how the backlog breaks, you know, our Medium Voltage business has a higher profitability right now than the Large Power Transformer piece, so depending on how that mix comes through, and it's not always clear exactly how the mix will come through, we should be fluctuating around that kind of a mean.

So I think what you ought to think about, in terms of operating profit for Power Products for this year, is really in the plus or minus 15% range. Michel?

Yes, also on the (inaudible), the gross margin on orders fluctuate a little bit from quarter to quarter, this quarter, because of (inaudible) we had larger projects and margin [wasn't] a bit lower. Decline was a bit more than 1%, nothing to be (inaudible) about. Mainly a mix issue at this stage.

So I agree with you, we are still working on that. And the mix within Power Products keeps changing all the time. There's a lot of focus from everyone on large [projects] or medium [projects] transformer, but the rest of the portfolio, actually, we have [split where] Medium Voltage and even some components of High Voltage.

Yes. On the Power recovery, you said, are we talking about EBIT and orders? We're talking about orders, you know, Andreas. I think orders will have to come first, and then obviously, it will follow with revenue, and then that will be, at some point in time, we hope the pricing piece moderates, and you see that increase from an EBIT standpoint. So we're just talking about the (inaudible) in the sense of growth in that business overall.

And it also (inaudible), 16%, so -- do you find it disappointing, (inaudible)?

No, I mean, I just saw some -- you said Power growth in the Americas overall, it was 7%. I was just wondering, in terms of -- we saw a record order intake by a lot of EPC companies last year in the US in transmission. How long does it take for that to translate into product orders for you guys?

Yes, I guess it would take, depending on the kind of project, one to three quarters. But as I said -- sorry, my mike was not on, you can probably hear me better now. The orders for PP were up 16% in the US this quarter, so I see already a (inaudible) from this project as well.

Thank you.

Next question from Mrs. Christel Monot, UBS. Please go ahead.

Yes, hi. Good afternoon, everyone. It's Christel, here.

Hello, Christel.

Hi, Christel.

Hi, there. Two questions, and I'm sorry, it's going to be one of them -- of it, it's going to be on pricing again. So when we look at about a 2% price decline in Q1 this year, is there any reason to believe it's going to get worse, and when you extrapolate that, you end up with price pressure somewhere around $600 million to $700 million. It's actually a bit lower than the $1 billion you were talking about previously. So any reason to believe that it's going to accelerate, and where it would come from?

My second question would be on price increase in Automation. You said you basically had some selective price increase. Was that all executed already, or should there be more to come, and when was it basically made in the quarter?

And last question on M&A. Joe, you said statistically, we should expect more bolts-on or small deals. What did you exactly mean by that, if you could comment a bit more? Thank you.

Okay, maybe I start with the pricing question. So we said, indeed, we started the year thinking we expect to see $1 billion of pricing pressure during the year. That was both for products and for projects, as you have seen in the EBITDA walkthrough this quarter. Actually, projects' margin are quite okay. There was even a slight upside compared to last time.

So it also depends a little bit the kind of projects we take on, where can start getting some price pressure from there, too. I think if we look at the price pressure on products, obviously, we still saw it on the Power side, it is pretty clear. I think overall, it was quite neutral for DM, and in fact, we have seen already price increases going through in LP. So you see, there is a little bit of a different trend, depending which portfolio you're looking at.

Are we going to see more through the other quarters? I think the question there really depends a little bit on what happens with projects, but I think we have to be -- you know, there's three components here. One thing is the pressure on the prices that we sell our products to. The second is, how much sourcing savings can we still achieve in our supply chain. And obviously, if our supply chain is starting to be reluctant to give us further price decreases, that means the pressure is there, and we have then to start also to offset that with more price increases on our products.

So it's three components there that will move. The important is that these three components together should offset each other and be more or less neutral for our bottom line.

And Christel, you know, my comment this morning I think you're referring to, on M&A, statistically, what I meant by that is, if you just look at our market segment, and you laid out potential companies -- a company in our segment would consider to acquire, they would all be around a normal distribution curve. And the aggregate mean of that would be about $1 billion. And on the left hand side of that tail would be sloping down to $20 million and $10 million. On the far right hand side of that scale, the last 10% would be deals over $5 billion.

And so statistically, just as you look at the universe of what opportunities -- that's what I'm talking about, it just would work out that you would have the likelihood of doing more bolt-ons and those kinds of things than you would a larger kind of a deal in our segment. It's just the way it statistically works.

Does that make sense?

It makes sense. Just -- (inaudible) quickly. You said previously you were not necessarily looking to do a $10 billion deal. What are you thinking today?

We have no $10 billion deals in our gun sights right now.

Okay. Thank you. Thank you very much.

Next question from Mr. James Moore, Redburn Partners. Please go ahead, sir.

Hi, James.

Hi, there, everybody. I wonder if I could also follow up on the pricing. Could you say a little bit about how much the [155] was, how is the -- mainly, how was the [100, 130], just to get a feel for what Automation pricing is doing in revenues. And then would it be possible to put a percentage on what aggregate Power pricing is doing in orders, and Automation pricing in orders, just to get a feel for where pricing and orders is versus revenues.

And then, secondly, I just noticed that the cost takeout of $215 million was perhaps a bit below the $250 million quarter run rate. Are you still thinking you'll see the $1 billion, and is it back-end loaded, and what explains that?

And then finally, can you say anything about raw material headwind in the quarter and whether it's going to get worse as we move through the year, or ease, or how that's going to shape out?

On the cost takeout side, James, I tell you, this is not -- it has never been a linear equation for us, so you can't take the first quarter times four and say that we're short. Usually we initiate these projects in the beginning of the year, and then as you realize them, they kind of have a longer tail on them in the sense that they go through, particularly operational excellence piece in some of the sourcing side.

So we're still committed to the $1 billion of costs out that we initially mentioned at the end of the fourth quarter, and a lot of that is going to come from sourcing.

Now, you know, James, if something happens that we experience inflation pressures and all, and commodities that we're not anticipating, I mean, we obviously have to work the price side of the equation on the other end of our portfolio to help to balance the margin. But right now, we're working both, and we still have our goal of hitting $1 billion in the cost out side, and we feel we will.

On orders pricing, I don't know if we ever give that thing, really, by division as it comes in, but I think our -- we're pretty much flat in this sense, Michel, of our --

Yes, I would say -- what we can say, at least, is that the majority of this price pressure came from the Power side of the business, and Power Products and some of the products of Power Systems. As I mentioned before, on the Automation side, we had a slight price decline in Process Automation, but I think Discrete Automation overall is neutral. It's a combination of price declines and price increase, and we have some net price increases in low voltage products. But the majority of the [155] is from the Power side.

Okay, does that cover it?

And then you had your question on raw material. Yes, what happens there, obviously, we are impacted by the fact that copper and oil especially are going up. We have hedges in place for that, so we are kind of mitigating, or delaying, at least, the timing of the impact. On the other side, electric steel is going down, and there, for instance, if you take a product like the large transformers that use a lot of commodity raw material, the two are kind of offsetting each other at this stage.

Obviously, will it go on? We for sure expect that commodity prices will remain pretty high, so we keep hedging, and we have to remain also very alert with the price increase to be able to offset the impact of that on our margins.

That's great. Thanks. Thanks.

Next question from Mr. Julian Beer, SEB Enskilda. Please go ahead, sir.

Thank you very much, and good afternoon. I noticed that corporate costs were a little bit higher than usual for a first quarter. Michel, were there any special issues to highlight there, and what would you expect the run rate to be, going forward?

Yes, actually, one of the big reasons why they were higher is R&D. We have a few R&D programs that we are stealing from the corporate centers, so part of our corporate R&D units. Overall, other M&A, just the basis R&D spending is up 15% this quarter, which is intentional. Most of it has been booked as corporate costs.

Okay, so would you expect the costs to come down then for subsequent quarters?

It would probably be lower than this quarter, but I wouldn't expect it to totally come back on the levels of next year, because we have some ambitious projects that we want to finance this year in R&D. So don't expect a linear progression from what you have seen here, but it still will be higher than 2010.

Percent of revenues?

Sorry, was there a percentage of revenues for guidance there for the total (inaudible)?

No number --

I have to go back to you on that.

Okay, no problem.

I'll check.

And then finally, your demand outlook comments really are quite positive, even for the material markets. I think I'm right in saying that the comps will get tougher already from Q2 for several divisions. So the question is, would you expect the base order, your near term, to stay in double digit territory, at least on an organic basis, for the next few quarters?

It is difficult to say. We usually don't make any focus, just observe the reportings on -- from some of our competitors, who have a bigger shorter cycle business than us. They're still showing double digit order intake, so I think that this stage, the industry is pretty strong. As long as the market is there, I think we'll enjoy it too.

Okay -- all right. Thanks a lot.

Bye, Julian.

Bye, Julian.

The next question from Mr. Mark Troman, Bank of America Merrill Lynch. Please go ahead, sir.

Yes, good afternoon, Joe and Michel. It's Mark from Merrill Lynch.

Hello, Mark.

Hi, Mark.

Just a -- Joe, if you could maybe say a few more words on China, and what's going on in Power there. Obviously, you've got those couple of big orders. If you can talk maybe, should we expect more of those? You know, there's some big numbers flying around on ultra high voltage spend in China, I guess, you and Siemens and maybe one or two others. But you take the lion's share of that.

How would you see yourself in China? You're sort of exclusively HVDC now, and more marginal in the mainstream market, or what are you seeing there?

Well, I think -- first of all, I think regardless of where -- if HVDC, or if it's AC, if you get under -- over 500 kilovolts, we become more relevant in that marketplace than below 500 kilovolts. That's not to say we're not relevant in the lower size on the Power things, but it's just kind of the way the competition and the way the technology stacks up.

Look, the jobs that we -- specifically, the job that we landed in the first quarter and we booked, it was something that we had been tracking in China for a number of quarters. We've known it's there, and it's a big HVDC order. There are more jobs in China that will be coming up, but I think -- I don't think the first quarter was an anomaly, in the sense of the size and the overall scale of that piece.

But the way I look at it though, I don't think -- you know, I think we've seen our worst days in China from that sense, if you look over the last 18 months in Power Products. And we are readjusting our product line, as you know, I talked in my initial comments, so we can be more competitive in that mid-segment, and we'll keep pushing.

Our Medium Voltage switchgear business continues to do extremely well in China, and continues to grow there, too.

So overall, we're optimistic about the marketplace, and I think -- I don't know, Mark. Maybe these aren't the right comments for you, but I'd say, we're probably never as bad or as good in China as people want to make us out to be, okay? We're pretty consistent over time, and our portfolio works for us. You can see that the Automation side was strong, and continues to be strong. The Power side will be more lumpy. That's just the nature of the transmission business. And so we're going to have some good quarters, we're going to have some down quarters, but overall, I feel we're competitive in China, and we can keep that.

You know, I guess I'd finish by saying China, overall, the economy continues to be strong for us, so when you see 20% to 30% growth rates in our Low Voltage business, and also, our Discrete Automation and Motion business, it's pretty incredible. I mean, that's after some decent quarters last year also. So it does speak well for our product line, for our mid-market strategy there, and the extremely strong distribution channels we've been able to establish in China over the years.

Mark, did I answer your question, or --

Yes. No, it's fine, just one follow-up, on the slide you have on the -- I guess the Power Systems tender backlog. Is -- which is being -- looks sort of double what it was in Q1 '08. Is most of that growth emerging markets, or is it western market projects that have come back a bit, like maybe some of the projects Andreas was talking about in the US, (multiple speakers) --

You know, it's -- honestly, I'd say it's a good mix there. But there's a lot of developed economy, offshore wind up in the North Sea. There's a decent number of jobs out of the United States for HVDC that we're quoting now. But I mean, you mix that with like the North-East Agra job that we just did, we talked about, we'll book in the third quarter for India, those are large jobs, too.

So it's a good mix. It's a good mix overall. It's not -- I would say, when we went into early 2009 when things were the worst, there was a higher amount of emerging market piece to that. I'd say in the last year, we've seen that more solidify and a good balance between developed and developing.

Okay, and just to wrap up, sorry. The -- it's been -- I guess we've been through this downturn, and we've seen, obviously, the popular topic of Asian competition. When you look through it all, do you think ABB has lost any significant share in the global T&D market, or is it pretty stable overall?

I think we're pretty stable. I think if you look at our Medium Voltage business, I probably would say we've gained share in the overall context, probably on the back of our strong Chinese position there and what we've done.

I would say in large power transformers, there's no mystery -- I think we've lost some share in Asia, and we're not going to hide from that. Remember, our large power transformer business probably is about a $1.2 billion a year business, and we lost some competitiveness in the Far East, in some parts on the West Coast of the United States. That's why we revamped our export position, to be able to export out of the Far East, to be more competitive.

And then, frankly, Mark, that's where most of the capacity buildup has occurred, too, in large part, transformers, between Korea and China also.

So look, we're seeing, with these larger power jobs open up, and we have those opportunities, at a certain point in time, that capacity has to -- have to slim down, you know.

The market keeps changing as well. Last year, for instance, China didn't have any high level sophisticated projects, so we got much less of our shares, to see if they come back, and then we are right away back at the order books. So it really depends a little bit what you have to sell in the market on that year, too. Same in India.

Yes. And you know, Mark, the last thing I'd tell you in gas insulated switchgear, which is kind of a last piece of this -- you have transformers, you have medium voltage switchgear, and then you have gas insulated switchgear. We just announced a 245 volt gas insulated switchgear product that's about 40% less in size, and 40% less in [SS6] gas, which is a real concern with the utilities around the world.

So we increasingly -- it's not just a low cost country footprint. We have to be able to innovate within these product lines to make ourselves more competitive, too, and we feel good about our capability to do that. And then to execute that at our different manufacturing facilities around the world.

Okay, great. Thanks very much.

Okay, Mark.

Next question from Mr. Colin Gibson, HSBC. Please go ahead, sir.

Thanks very much. Yes, it's Colin from HSBC, guys.

Hi, Colin.

Hi, Colin.

A couple of questions, please. First of all, on pricing in Discrete Automation, I suppose I'm a little surprised. We're looking at organic order growth rates of, what, 30% and change, revenue growth of 20% and change. But I gathered from your comments earlier on, no pricing power as yet. Are you -- you talked about pricing being roughly flat across the screen.

I'm kind of wondering -- to me, it seems a surprise. We've had somewhat lackluster growth in the whole industry for a decade, and now we get some very strong growth coming through. You would imagine the supply curve is pretty constrained. So I'm wondering why we're not seeing better pricing power for you and your competitors in that business right now. That was my first question.

Second question, going back to the question about share in HVDC and UHVDC markets. I guess there is, as you say, they're in -- there's certainly evidence out there, and you more or less just said that you have lost share in large transformers, and also, looking at the size of some of these orders coming through in China, and comparing them with previous UHVDC links you've worked on, so far, we're not back at the same level of absolute order win there.

And I just wonder -- I can see, of course, what you want to do is get into the high end, the high value added. But given that HVDC is a 50 year old technology, and given that even a couple of years ago -- now you say under 500 kilovolts, you're less relevant, if you like.

What's the opportunity for you to continue to develop the technology, and continue to -- in absolute dollar terms -- maintain the size of your business? Or do you have to shrink that business more rapidly?

Colin, I'll start with your HVDC question. We did pioneer that business 50 years ago. If you look at what really delivers the technology of HVDC today is high powered electronics like thyristors and bipolar devices and those kinds of things. But 50 years ago, these guys used tubes. I mean, this was archaic. And when you look at the cost of those systems and what their capabilities were, you know, incredibly archaic, in that sense.

If you look at what we do, like an offshore wind job in Germany today, which is HVDC light, you have ingrained static bar compensation capability. You have -- you're using IGBTs and thyristors, which are infinitely more flexible in the sense of how you go to market. And then at some point in time, you're not going to -- these are all point to point, you know, so you have a wind farm, you're going to bring that back to a [shortcut], to a grid, and it's no mystery. If you look at us, or Siemens, or other people in this marketplace, you're going to see HVDC circuit breakers, you're going to see -- instead of point to point, you're going to see multiple drops. There's a huge leg to this technology that we're investing in aggressively as we find the right people, and then we'll push in the future.

So I would not -- and your comment, I think you want -- you might want to think of commoditizing that kind of product. I can tell you, it has probably one of the most interesting and dynamic technology curves that really has a market, a meaningful market application to it, you know, as you look at renewable energy and what we have to do.

So I feel terrific about how we'll be able to compete, and be able to -- it's not a static competition, either, Colin. It's one where, as we improve this technology, we actually open up the market. So if you look at HVDC light, you'd be hard pressed to do those offshore wind jobs in HVDC classic, because it would cost too much. And you wouldn't -- you'd have to put too much hardware into it. HVDC light gives you a lot more flexibility to attack that marketplace, and you'll see the cost coming down over time.

You know, you asked a question about Discrete Automation and Motion pricing, and you'd think we'd get more. I'd say, we have gone out -- you know, Discrete Automation and Motion, just think about it. It's robotics, it's low voltage drives, it's medium voltage drives, it's motors, and it's power electronics. I mean, that's kind of the basis of the business overall.

When you take a look at what we've done, we picked up some larger projects this quarter that helped to accelerate our growth rate, and that really came in the medium voltage drives piece that really lagged behind last year. And so that does make your order rates look better, which they are, but it's a different part of the portfolio that's lagging behind.

And so, obviously, we'll have to be able to address that, but as time goes on, we'll have to address -- if capacity -- we'll address that price side.

But we've done price increases in low voltage drives, we've done price increases in motors. You know, Baldor went up earlier this year. It stuck. We went up earlier this year from an IEC standpoint in our marketplace -- it stuck, too. And that's worked.

Our Power Electronics business, I can tell you, we're going up in price in that, too. There was a disruption in Japan that disrupted some part of the supply chain in Power Electronics, so we're seeing a lot of pressure from customers that want to increase their demand cycle in that, and will obviously -- will affect the price of that product, too.

So you know, Colin, let me watch that closely. I think the team's being responsible in the sense of where we can -- where we need to drive price to keep up with costs, and we have that opportunity. We will push it, and you'll see us increasingly lean on that as we go forward.

All right, thanks a lot.

Okay.

Next question from Mr. Martin Wilkie, Deutsche Bank. Please go ahead, sir.

Hi, good afternoon. It's Martin at Deutsche Bank.

Hi, Martin.

Hi. A couple of questions on Power Systems. Firstly, on the revenue ramp-up, you saw a big step up in revenues in Power Systems. Just to perhaps give us a sense, is that because you're now seeing many of the large contracts you booked over the last year or so now essentially coming into the revenue stream, and we're now seeing a sort of step up in the level of revenue, as opposed to just a -- perhaps a blip because of a few contracts coming to an end in the quarter? Just if you can give a sense of the conversion of the backlog.

And the second question was a more sort of general question. You talk again in the press release about favorable demand for linking in renewables into the grid. One of your large competitors recently commented that it was winning contracts because of its integrated offering between wind turbines and renewables, as well as the grid offering. So there does seem to be, sort of, differing messages, depending on whether you've got a renewables business, or whether, like ABB, you have it independently. Perhaps you could just give some thoughts on that. Is there an advantage or a disadvantage with having either a partnership or some other arrangement with a renewables company? Thank you.

You know, I think on the -- Michel, you want to take the large -- the ramp-up piece?

Yes. I think the increase in revenues for Power System, obviously, part of it is because we had an execution of some large order contracts. But I also would like to point out, that since a few quarters, the increase in base orders has been quite spectacular. This quarter again, base order NPS were up 31% in all the small substations, to this [ICEE] jobs that want power generation and all that, and that translates much faster into revenues as well. And I think you start seeing now the impact of this additional focus we have had on base orders since more or less a year.

So that explains partly, also, the fact that revenues ramp up, on top of our project execution.

And you know, Martin, on the backorder integration question, that's -- it's a good question, and let me answer it kind of in two dimensions. I know of only one job that we were locked out of because of our German competitor having put together the wind farm itself, along with the HVDC connection. I think there was a lot of equity capital that they put into that, to help to support that piece. And I grew up in GE, I kind of know that game, and that can work at times.

But I've been in this role for three years now. That's the first job I've seen that happen with. Most of the jobs that we see out there, our customers break these things up. You know, they'll break the windmills, the wind turbines up themselves, they'll break the [bow] stations up, they come with HVDC, and then you break the cable up.

And so -- and obviously, you get more bidders on a job like that, when you can break it up into three points, and so, if you want to manage your job that way, you tend to be more cost competitive by doing it.

But I'd say there's another way to look at integration. You call that integration. I'd say, when you look at the integrated supply piece, ABB has the strongest integration piece, because we're the only HVDC company that offers cables, that we're -- we just talked about, we're going to open up a new cables facility in North Carolina, and we also -- out of Karlskrona, Sweden. We do our own land and sea cables for HVDC.

And we also are completely backorder integrated in our Power Electronics piece here in Lenzburg, Switzerland, so thyristors, IGBTs, IGBTs, all those things are ours. I think if you look at our competition, you won't see nearly that degree of integration. So -- and we think that benefits us on some jobs, because we control that supply chain, and both the technology side of it, and the availability of it.

So it just depends, you know, is it horizontal integration or is it vertical integration? And I'd say we have a better vertical integration piece, and we leverage that as much as we can, too.

Okay, thank you.

Okay, Martin.

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

Yes, hello, good afternoon. A couple of questions. Maybe starting with the reinvestment you're doing to support growth. Is it possible to annualize the number in Q1 to get a rough sense of what could be that reinvestment for the full year?

Second question, as you are driving or trying to drive price increase, have you seen some demand in the industry supply chain being put forward? Or do you still see a very rational level of inventories out there?

And maybe, lastly, coming back on your comment that maybe the lower end (technical difficulty) -- sorry, do you hear me well?

Yes, go ahead.

Yes, sorry. The third question was, maybe coming back on the lower end of the transformers, where you said you may be less relevant, do you see opportunities for maybe setting up a global partnership with some Asian competitors? We start to see that in some segments which are becoming more competitive. I'd like to have your thoughts on the opportunities. Thanks.

Michel, you want to do the reinvestment and growth piece?

Yes, listen, the reinvestment in growth, we have this year put in our internal budget indeed that we want to increase our investment both in terms of selling, so putting more salespeople on the street, and in terms of R&D. Difficult for you -- for us to give you an indication now whether the first quarter is a good indication of what will happen, because obviously, we modulate a little bit this investment with the market. We don't want to get ahead of ourselves on that.

But I think it gives a good idea, if the market conditions remain as they are, I believe, indeed, that we could continue at this pace for the rest of the year, too.

Okay. You know, your second question, on the -- you know, when you do these price increases, and you pull demand forward, that's a good question. I think if you're in business long enough, you know the answer to that question is always mixed. In some cases, you do. If you pre-announce it, you know customers are going to try to get underneath the wire in the sense of when the price increase is implemented, so you do pull some demand forward.

But you know, I think it depends on -- well, you know, the geography and the business in general. But I would not say that if you look at our orders rates right now, that they're materially affected by kind of an artificial pull through in the sense of a pre-announcement of price increases, something like that.

No.

And then lastly is on the low end of the transformer side, the global partnership with Asians or whatever. I think it depends on your -- remember, we have the world's -- I'd say, the world's largest transformer business by far. And transformers are different, from dry transformers, distribution transformers, (inaudible) power to me and power to -- you name it. And so it's a very diverse product line.

And our global footprint is extremely strong. We have sites in China, in different parts of Asia -- they're extremely competitive.

And so, we're not looking to lower the overall footprint cost of our product line, the way some of our competitors might want by doing an Asian kind of partnership. Our job, primarily, is to make sure that we leverage our Asian capability and export capacity to be sure that we're extremely competitive with our Asian competition, and not try to leverage and use our European footprint that inherently is going to have a high cost because of labor, and how it's set up to do that.

So I look more at leveraging what ABB has right now, than trying to do some kind of an Asian partnership of some type, because I don't think strategically that is what we need. Right now, we're just going to utilize what ABB has. Okay?

Yes.

Next question from Mr. Alfred Glaser, Cheuvreux. Please go ahead, sir.

Yes, hello. I just had two questions. One is coming back on pricing and power. Did I understand properly that pricing overall should be flattening out sequentially over the next few quarters, and if this is the case, when do you expect pricing to be finally flat year on year in the Power businesses?

And my second questions relates to foreign exchange. We see big movement in the foreign exchange markets. Could you walk us through the impact on sales and costs in the current environment, please?

Okay. In terms of the pricing of Power Products, what we say indeed is that the level of price decline seems to stabilize quarter over quarter, it's more or less two or three quarters now that we report the same kind of price decline, but it is still a decline. It's difficult to tell you when we think it's going to start getting back to a balanced situation, because again, it depends on competitive forces, but it depends as well on product mix. If distribution continued to recover, and there is some pricing power that comes along with it, it can help offsetting the fact that we still have some price pressure on large transformers, but to tell you it's going to happen in one or two quarters, it is quite difficult to do. I think we keep working on this portfolio, the more short cycle products we have in there, like distribution, like small transformer, like insulation components, I think it will help us achieve this point.

Meanwhile, we keep cutting costs, because we know that this is the only way to preserve the margins, and so we'll see as it comes. I really don't want to give too much of a forecast on that.

In terms of the currencies, yes, it is always an issue from that perspective. Fortunately, with all the efforts we have made in terms of the footprint of our manufacturing and engineering centers, we are getting more and more balance, so having more or less the same type of dollar incomes, we have dollar costs. So I would say we are not really suffering too much from it, sometimes more from a reporting perspective, because we show -- we report into dollars, so we have to always explain the difference in local currency as well.

But in terms, really, of impact it has on the business, I think it is quite limited also, because we do hedge all the commitments we make, for instance, for projects too. So I think we can really isolate the foreign exchange component, and we have enough alternatives in terms of sourcing to try to come with the best optimal bit when we have a large project to tender for.

All right, and which portion of sales would you say are now in US dollar?

If you consider that emerging currencies are still more dollar related, which is something that maybe should be revisited one day, I would say more than half.

Thank you.

Next question from Mr. William Mackie, Berenberg Bank. Please go ahead, sir.

Good afternoon. It's Will Mackie from Berenberg Bank.

Hello, Will.

Hey, Will.

Hi. A couple of questions, please. Firstly, as you kind of manage growth and change across the portfolio, can you perhaps talk a little bit to where you might start seeing some capacity constraints across parts of the Automation portfolio, particularly within the emerging markets, that might require you to step up your levels of capital investment to meet that rising demand that we can see? And against that, within the Power portfolio, I think in the past, we've talked about the need to address the capacity within Western Europe, or within the higher cost regions, as you continue to migrate your capacity into the low cost regions.

I mean, how do you see the need for restructuring across the Power Products portfolio today within the developed markets, and how might you sort of accelerate that strategy?

And then, the last sort of question would be more looking at some of the other peripheral emerging markets, India, specifically. How quickly do you think the management team there can turn that around, and when do you think the margins might recover close to a Group average? And also, how has the situation in Russia been developing, which was, in the past, a very significant market for you?

Hey, Will, it's --

(Inaudible) question.

Yes. Well, let's pick them off one by one here, is -- you know, on the growth and change across the portfolio in Automation, it's a mixed bag. I mean, when you've got a low voltage business, 80% of that low voltage business is between Europe and China, when you really get down to it.

And so, I think with China, we still have to -- we have the -- kind of the bricks and mortar that we need in place. We might have to add some more automation and stuff, and people, in order to meet some of the demand. But we're not anticipating major kind of capital investments.

And I think also, Will, as you think about it, too, I mean a major capital investment in Low Voltage or Discrete Automation and Motion is $20 million, $30 million for a facility. It's not like it's a capital intensive industry that would affect us in some way. And it's about 18 months to two years to kind of do it.

So a lot of these facilities are highly automated, too, and we can kind of respond in that sense pretty quickly.

On the portfolio side, for Power Products, look, there are some things -- kind of a dual-headed strategy, where we have to make sure we take the capacity we have in Europe and turn it more toward the European marketplace and be more competitive here. And that's a strategy we've had internally, and we've communicated it to the team, and so that doesn't necessarily mean we're going to shut down a bunch of European plants. We're going to rededicate them to make sure that we are servicing a broader part of the marketplace than what we had before. And we've been in the process of doing that over the last, really, year or so.

And that's not saying we don't have capacity that we would target. There is some capacity we will, and when we do that, we'll certainly make it very clear to the marketplace what we're doing.

India?

Yes, India. What do you think, Michel? Right?

Well, India, I would say, this year, we have in our plans to get back to kind of a high single digit margin, which would be an achievement, showing the turnaround. You know, India has never really been at the same level than the Group EBIT margin, because it's a very low-priced market, because it's usually a lot of system business we have there too.

But I think that double digit is probably still for next year, but this year, I really would expect that we can see this high single digit margin to -- which would be a first confirmation that the turnaround this operated.

As far as Russia is concerned, it is still a problem there. Two kind of prongs, on one side is a little bit the business model itself. We have really restricted the business nowadays to a plain product [trading] business. That obviously takes us away from some other opportunities, but where we don't feel we have the good ways to have the right approach to it.

We still also have some protracted tax disputes with the authorities there that are also slowing down our efforts, and for sure, at this stage, we are not inclined to invest more in the country until these problems are being resolved. And that means that we are not really considering Russia for the moment as an area of growth for us.

Okay. Okay, thanks. Can I make one quick follow-up? You've, in the past, discussed a number of [light] spots across the portfolio with regard to inorganic opportunities. So I'm just -- Joe, can you talk a little bit about how you see current valuations, and how you see the sort of range of M&A opportunities that are presented to you at the moment, in terms of size or scope or diversity? Thanks.

Well, as far as the range of M&A opportunities, I mean, I don't think that it's materially different between what I saw in '10 and what we saw as a team in '10 and what we see today. I mean, the targets are still out there.

I think obviously, we're in a different part of the cycle, and people say, well, you know, ABB should have bought more businesses back in '08. Well, those businesses didn't want to be sold at valuations that were half of what they were, or 60% of what they were at one point in time. Now valuations are coming back, in a sense, that stock prices are in an area that companies will entertain any kind of bids at times, I think more so in this kind of environment than they did when their stock prices were seemingly suppressed based on where the market is.

I'd say, from a light spot standpoint, you know, I'd just -- from a broad area, I think you know that we have our Automation -- Discrete Automation and Motion business has some holes that we look to fill. I mean, some of the rumors of companies we'd buy, and PLCs and that, obviously haven't been right for ten years, and probably continue not to be right for another ten years.

We have geographical white spots. You know, continue in the United States, we're still, even with the Baldor acquisition, we're -- as a percentage of our portfolio, and the size of that economy, we're underpenetrated there. And so we continue to look for opportunities there.

You know, in India, China, parts of Europe, there's still opportunities that we look at.

So -- but I think, Will, if you're digging around, if we -- there's nothing really big out there. I mentioned in one of the other questions that someone said, do you have any $10 billion deals or above, kind of, that you're looking at right now, we're not. I'd tell you that there is more M&A activity out there that you know this point of this year than it was last year. Valuations are getting higher. And so we are cautious in that sense about where we are in the cycle, and the valuations that if we did do something, we'd pay. But there's obviously a lot of liquidity in the marketplace, and we do watch that, and it's part of the consideration that we would have if we wanted to move forward on some things.

Is that clear enough, Will?

Absolutely. Thank you.

Okay.

The last question for today is from Mr. Simon Smith, Credit Suisse. Please go ahead, sir.

Simon, you're late.

Hi, guys. Late, but still with two questions to go. Thank you for taking my questions, guys.

So the first question was really with regard to Process Automation. So, you saw a great step up in orders there, coming up to the sort of $2.6 billion level. And just looking at big orders that you announced, I didn't see anything sort of outlandishly large to make it a sort of one-off quarter. I just wondered if that sort of level of orders was something that you saw being sustained, and if there was anything particularly in there that was driving it?

And my second question was more to do with cash flow, and obviously, across the many divisions, it was a very good quarter in terms of orders. But I noted that customer advances was a negative, and that -- I just wondered, is that anything to do with maybe a change of behavior in any areas or was there anything else that was driving that? I would normally have expected that to be quite healthy --

I missed that last one. Did you get that, (inaudible)?

The level of customer advances?

Yes, the movement in customer advances, given the strong order flow you'd seen, I would have expected that to be a reasonable positive in the cash flow statement, and it seemed to be a modest negative. I wondered if there's anything particularly driving that.

No. It's that -- it's more or less stable, yes. You know, this level of advances depends very much the kind of customers you have. There are some countries where you get less in advance, or even nothing, depend on that. So I don't think there is really a trend from that part of the country. I think we are still considering the few orders that might come soon, where we will have a good customer advances, pay the funds, or -- that one, I'm not too concerned about.

Overall, I'm not too happy with the cash flow this quarter, for sure. I think we had a very strong fourth quarter cash flow, and it looks like we have paid a little bit for it this quarter. We need to ramp it up. I'm more concerned by the level of inventories than by the level of customer advances, and we'll monitor that very closely now to try to get it back within acceptable levels.

And yes, Simon, on our Process Automation business, that's a good observation. I mean, that's a -- $2.6 billion in orders is a pretty good orders quarter for PA.

Yes.

I'll tell you, you're right. There is not like a large Algerian order, something like we booked in the first quarter of '09, that would be a good comparative. As I run kind of through my mind, I know that we've had a series of what I'd call medium size orders, between $50 million and $100 million, that came through PA, in various industries. Whether you look at turbochargers, you look at mining and marine, it was pretty broad based in that sense.

So, you know, Simon, I wouldn't take that number times four and come up with a new number from an order standpoint for the year for PA. But we do see -- when you look at PA, they're right in the heart of mining and minerals and marines, and where we're seeing a lot of demand, and we do expect that business to perform well this year, in that --

This is a service that --

Yes, yes -- services based [too].

(Inaudible), yes, more products. So it is, for sure, a more stable business than before, because the level of systems as a percent of the total has come down.

Yes.

Great, thank you, guys. And just one final housekeeping question, if I may. In terms of charges -- I mean, excluding Baldor, charges are pretty low this quarter. Do you have a view as to where charges may now come in for the year?

Charges? You mean restructuring charges, Simon?

Exactly, yes.

Yes. I think usually, at this time, we had that last year, too, we started very slow, and then we continued throughout the year. So it's probably more a second half event. What did we say, Michel, in terms of total charges for the year?

$250 million to $280 million.

$250 million to $280 million, but for sure, much more back loaded as far as that is concerned. Otherwise, it was indeed a pretty low quarter. It was just $1 million of charges, yes?

(multiple speakers) Q3 and Q4.

(multiple speakers), when you think about our business going forward in a stable kind of environment, economic situation, and we talk about $250 million to $300 million in restructuring a year, and that's kind of the number that we're throwing out to you here in 2011, too.

Okay?

Great. Thank you, guys.

Okay. Hey, look, I want to thank everybody for their questions and their interest in ABB. Again, we feel good about the quarter. It's only one quarter in a year, so we've got to stay focused on execution and delivering all we can this year, and we look forward to talking to you again in the second quarter and reporting on our progress.

Thanks again for joining us.

Thank you.

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