Abb Ltd (ABB) 2011 Q4 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB fourth quarter and full-year 2011 results analysts and investor conference call. I am Myra, the Chorus Call operator.

I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. (Operator Instructions). At this time, it's my pleasure to hand over to Mr. Joe Hogan, CEO of ABB, and Mr. Michel Demare, CFO of ABB. Please go ahead, gentlemen.

Hi. Good afternoon or good morning, depending on where you are. I want to thank you for joining us. I'll also let you know that the presentation we're going to refer to here in the initial part of this presentation is on ABB.com.

I'd also call your attention to our Safe Harbor statement that's on chart two and -- regarding just forecasts and statements on the business.

But I'd like to start off on chart four and we feel, despite, I think, initial market reaction, we feel pretty good about our performance in 2011. We reported double-digit increase in orders, double-digit increase in revenues and also a significant increase in operation EBITDA for the quarter.

And despite some concerns on cash flow that we expressed to you, Michel and I, in the third quarter, the teams really came in -- through very strongly in the sense of delivering strong fourth quarter cash flow. We can start to give you, Michel specifically, can give you some of the details of that in the sense of how that came through.

So, I'd like to turn now to chart five. Chart five gives you the representation of orders and revenues in different parts of our income statement. It's a real breakthrough for us to hit $40 billion in orders. It's the first time this business, really in any configuration of ABB since its inception, has reached over $40 billion in orders, which is a really good indication of the future for the business.

We delivered on solid EPS, much-improved project execution, both in Power Systems and (inaudible) and Process Automation last year. We executed on our $1 billion cost-out and I hope that's clear to everyone when you look at our waterfall in this presentation, as far as what that means to the business in the sense of maintaining margin within the parameters that we've expressed in the investment community.

Overall net income up $600 million. So, an EPS of $1.38 per share. Michel will tell you some of the ins and outs of that and how that's configured.

And then an 8% increase in dividend that we've just announced and more than anything, we want to show the confidence that we have in this business and reward shareholders for what we think was a very strong performance in 2011.

So, moving to chart six, chart six is the normal regional chart that we use to express our demand order pattern. You can see, starting from the left, where the Americas are up 50%, obviously on the back of Baldor. It's done fairly well. Baldor itself grew significantly, but ex-Baldor, we still were able to record about 20% growth for the Americas in the year. You see it's split between Power and Automation in that sense, too.

And Europe had an increase of about 4% and, overall, given, I think, the volatility that everyone's seen in Europe, I feel that's a good performance. And Asia up 32%, China up 17%. In that sense, we've had a large India order and really good progress from an Indian order standpoint in 2011.

And then the Middle East and Africa, I think anyone who regularly attends these kind of calls know we kind of live and die on larger orders in that part of the region and I think that'd be the story. Embedded in that, we can talk about it, is the Saudi Arabia performance. It's really good and Saudi Arabia continues to be one of the lead countries that we have in that region.

So, you know, overall we feel good about the overall orders pattern and then we've seen breadth in that orders pattern across different geographies.

And next, on this waterfall, on chart seven, I'm going to move it over to Michel and have him kind of walk you through the logic of this waterfall and what this represents for our margin accretion in 2011.

Yes, sure. So, we had told you at the beginning of the year 2011, that we were expecting a pretty strong headwind from pricing of about $1 billion and that, as a consequence, we had also put together a new plan to save $1 billion of costs. We're actually very close to reality, finding the pricing impact for the full year was $973 million and the cost savings that we delivered were $1.1 billion.

Now, the way we look at this chart, because it's the way we manage the Company, as well, is that we put the first columns together -- price, volume, and project margins -- and what you can see is what I call here the market force is actually positive $200 million. So, yes, we lost a lot of pricing, but we also went after new volumes and delivered with this new volume an EBITDA, which more or less offset totally the pricing losses and then we had a better execution on projects.

Then we delivered $1.1 billion of cost savings, received almost an additional $400 million profit for our Baldor acquisition, which, in total, gives us this new profit generation of almost $1.6 billion. 25% of that was reinvested in R&D and in the sales force and, by the way, this $385 million was within 1 full percent of margin for the year. And that still left us with $1.2 billion of EBITDA increase over the year.

So, a pretty strong operational performance, a lot of cost discipline that helped this profit improvement. And, as we see at the bottom of the chart, we start 2012 with the same mindset. We think that we might still see pricing headwinds in the same type of magnitudes and, hence, we are also targeting another $1 billion of cost take out in our overall cost structure.

And on chart eight, we drill down into the cost savings. On the left side of the chart, you can see from a sourcing standpoint, that's where the majority of the savings came from. Operational excellence and I call your attention to that, too. Remember this is the result of thousands and thousands of projects that go on within the Company in the sense of productivity and quality throughout the business and then our global footprint at 5%.

And on the right hand side, you can see how that split by each division. I think what's really important for you to see is that about roughly 65% of the savings came in the Power Systems and Power Products businesses and that's, obviously, where we see the most price pressure and where those teams have to be the most diligent, in that sense. But also a decent progress in Discrete Automation and Motion and also Process Automation.

So, as Michel indicated, we'll continue this trend into 2012. And it's something, as we talked about in Capital Markets Day, it's just part of the DNA of ABB. We're going to have to always balance this cost and growth equation, because we feel we live in a volatile world where you're going to have to work both sides of this equation really well in order to stay competitive.

The next chart, chart nine, we just wanted to call your attention to the investments, M&A investments, that we made this year. The financial criteria are stated as Michel and I have been very clear over the last few years of what those areas are.

And down below, we're listing the geographic, product, and industry market areas that we look at white spaces and then the various deals that we completed during the year and then on the far right, the Thomas & Betts announcement that we put together a few weeks ago for you, too.

Just, in general, our goal in these things are to buy good businesses when we can, if they fit into these three themes and that we really don't surprise you, that we telegraph very clearly what the logic is behind these deals and we pay multiples in these segments that are reasonable, within a range, and, hopefully, that's been communicated, I think, fairly in the Thomas & Betts deal, too.

And, obviously, we're proud of the Baldor, the largest acquisition we completed last year, Baldor, and how well that business has performed this year as part of the integration cycle.

On the next page, in chart 10, I just wanted to reinitiate you with what we talked about on Capital Markets Day as far as the five key platforms of our strategic structure here at ABB. More than anything, I want to drive home that how important number one for us is, because it's so important that we drive competitiveness and being competitive with our existing products, existing geographies and markets, is the most important platform we can use in order to drive two, three, four, and five.

And so, the cost-out areas that Michel just talked about to you see operational execution around our assets, is extremely important for us and is of the utmost priority in the sense of a management focus.

On the right hand side, you can see where those targets are in the Group targets and those are the ranges that we showed you that we intend to hold the business to as we go from the 2011 to 2015 strategic plan.

And so now, moving into the fourth quarter results, I'm going to move to chart 12. Really, solid top line growth in what we think is a challenging market, a very volatile marketplace. You can see orders of over $10 billion, up 17% and 10% of that's organic. I think that's still very strong in that sense.

I call your attention to behind that number, that our base orders were up 3% still and, as Michel and I have indicated in the past, that is our best leading indicator in the sense of where the business is going, is the base order rate, which, by definition, are under $15 million.

From a revenue standpoint, up 16%, again 10% organic. Operational EBITDA up 18%, so a little bit of leverage on that, and then operational EBITDA up 0.4 points.

Cost savings, as Michel talked about, is a really important part of this. Our operational EBITDA was up $250 million as it indicates on the right and overall strong cash generation in the quarter that really brought our net working capital as a percent of revenue back into the ranges that we've communicated to you before and where we want to run the business.

Obviously, it wasn't elegant in the sense of how we did it, a lot late in the fourth quarter. We'll try to drive more linearity in our cash, going forward. But I feel good about the team's execution in the fourth quarter to bring all the cash out we could.

Our regional chart, as I move to 13, on demand. This is for the fourth quarter and, again, starting from left to right, the Americas, up 41%, excluding Baldor, still up 11%. Good Power growth of 16% you can see below.

Europe minus 8%. I would tell you there's a real disparity in that comparison now because of a large order we took in Europe in the fourth quarter of last year. But we do see a lot of weakness in the Mediterranean countries in our Mediterranean region, obviously because of the euro crisis and what's going on there, but the industrial production figures and various things out of Germany look more positive than what we thought and it gives us some hope in the sense of balancing Europe out.

On the right hand side, you can see Asia, fairly strong at 61%, a lot of that driven by India, obviously the large order, but positive growth in China this year, too, which, as I move to chart 14, you can see that China was up 6%. Overall, you can see India up about 4X, Germany up 4% in Power and also Automation, Saudi Arabia up 17% as part of the Middle East, and you can see the Americas on the far left hand side.

So, again on this chart, I hope you can appreciate the diversity of the demand pattern of ABB across all these geographies and that we do all we can to find the growth that's out there, to exercise our footprint, as much as possible.

And, Joe, if I can add here, I think on India, it's not just the large order, actually. Our Power Products business doubled in India during the quarter and the EM business was up 50%. So, it was really across the board.

Yes, great. And I'm moving to chart 15. That's a bigger drill-down on the Northeast Agra job we put together. This is a very large, ultra-high-voltage DC link of about $900 million. It's a very competitive bid that we've been going through for a number of years and we're happy to land it.

I think from a technological standpoint, if you have an interest, this is unique in the sense that it's actually two separate lines that fold into one and that one line then goes into Agra, which is a city in India. This is a first in a line of evolution of the DC grid or high-voltage DC grid we've talked about.

This is the first step in that evolution is where you bring those two lines together, so -- and, again, as we mentioned in Capital Markets Day, we're very confident that within this strategic period to 2015 you'll see us be able to implement, begin to implement a DC grid in some part of the world. This is a good start.

Moving on to chart 16, I'll turn it over to Michel with margins by individual division.

Yes, maybe just one last comment on the previous slide, on the HVDC order in India is the financing, because that was a very important part of the bidding too, and you know that we have this policy of not using our own balance sheet and this is a good demonstration of the engineering we could put together here, putting Swedish Export Credit funding together with European commercial banks and local Indian banks, and, finally, being able to put a competitive package together here.

So, if we move to the chart 16 and the details, so, again, on the top line orders up 17%, revenue up 16%. On an organic basis, both were up 10%. Important to note is that all the divisions are showing positive growth. It was not only Power Systems, the brightest here, with a 21% increase in orders, and a good project execution that gave us a 17% increase in revenues.

We're also happy to see the revenue growth accelerating in Power Products. It turned positive one quarter ago. Now it is at 6%. Discrete Automation is double digit, even without Baldor. On the other side, we see that Low Voltage Products is slowing down, but still at quite acceptable rates of mid single digits. Process Automation is a mix, depending on the end-user market, but the strong backlog and the good project execution allowed a 10% increase in revenues.

From a profitability point of view, which we measure by operational EBITDA, the profit is up 18% and the margin is up 0.4%, but it also fair to say that the largest part of this improvement comes from Power Systems that delivered a very clean quarter this time compared to the larger one-off charges that we had to take last year against a problematic project. This project now has been closed and actually gave us a little bit of upside this quarter.

And so, a lot of this improvement has, unfortunately, been offset by poor margins in the other divisions, which is really a combination of tough pricing but especially a significant change of mix, having to go to new markets, new end-user segments, in order to compensate for some of our traditional markets that did not perform as well as usual.

Yes, I think, on chart 16, again, I know there's going to be a lot of questions in the sense of the margin by business. Michel and I anticipated this. And reading some of the initial comments, too, I think, if anything, Power Products, we continue to see a challenge in that business on price. But -- and the businesses down below, Discrete Automation and Motion, Low Voltage Products, Process Automation, we're not talking about increased pricing pressure in those specific businesses. We're talking about really strong negative business mix, but actually delivering more margin overall, but a mix issue, in general.

I know mix can be used a lot of ways to hide behind it. That's not our intent here. It's a real accurate representation of what we've seen in those businesses.

Moving on to Baldor, solid execution, about $100 million contribution to operational EBITDA. I think you can go down through the specifics, but what I call your attention to is that, really, after 11 months, we talked about we want a return on WACC, which is roughly 8% to 9% and we want that within a three-year period. We actually almost have that with an 11-month period, which is a great story about how this business has come together, how well it's done, and, really, the effectiveness of the integration team in allowing this business to continue to operate while -- and bring the parts of ABB together with Baldor that really adds value.

We hope to be able to do the same thing on Thomas & Betts and we're going to organize for that.

And with that, I'll turn it back to Michel to work from chart 19.

Yes, chart 19, how have we done in this first year of a new five-year target? Well, I think we're off to a pretty good start. We had a revenue growth for the full-year 2011 of 15% versus our target of 7% to 10%, and an additional 3% to 4% for M&A. So, at 15% we are already above this range.

Our operational EBITDA martin, at 15.8%, which is right in the middle of our target corridor of 13% to 19%, and with an EPS growth of 23%, we are already there, as well, off to a very good start, since the growth target is 10% to 15%, with a potential addition of 3% coming from M&A.

Our free cash flow conversion at 82% is a bit shy of the target, which is an average five-year target of 90%-plus. This is explained this year by the fact that we had a higher amount of cash taxes to be paid and that we, as well, increased our capital spending. This is something that we expect to normalize, over time, and so we still feel pretty strong about this five-year average target of 90%.

And finally, the last one, cash return on invested capital. This one is down almost 7% to 14%. We warned of that. Obviously, we paid for the Baldor acquisition in January and even if Baldor did very well, we, obviously, don't get the full return potential of an acquisition in the first year.

So, we are still confident. We're going to see it again if we close the Thomas & Betts acquisition, but we're still confident that by 2015 we are able to deliver this 20% at this stage.

Chart 20, the EBITDA bridge for the fourth quarter, not looking, actually, very different than the full year. You see that we still have a pretty strong pricing impact and we'll, for sure, come back on that with a question, more or less 3% of revenues.

Again, mostly offset by volume gains and, in fact, delivering a new market force positive, because project margins were better, too. We had quite some hit from mix changes, especially going from products in more systems, but we were able, again, to deliver $331 million of cost takeout, of which we invested 45% into additional research and additional sales force. This investment, by the way, is worth 1.4% of EBIT margin. It can explain some of the difference in terms of expectation.

The fact is, at the end, we delivered $244 million more EBITDA, out of which Baldor contributed, more or less, $100 million and the rest came, really, from this dynamic cost-saving management.

Chart 21, this one is going very much into detail, but we felt it was probably useful to show this to you in order to try to bridge the difference in expectations as we saw the overall EBITDA level the expectation, consensus expectation from analysts was not so far from our actual, but it was at the net income. And, obviously, there are a lot of elements that are not always easy to forecast for you.

So, to give you the details here, depreciation and amortization in the quarter was $265 million. Derivatives impact was a negative $53 million. You have to always take into account that we hedge a lot of dollar proceeds from projects and that the dollar, obviously, got stronger during the quarter, especially against currencies like the Swedish krona or the Indian rupee.

We had $107 million of restructuring and about $20 million of acquisition-related charges. All that has obviously weighed on the net income. Plus the taxes, and that's how we finally get to this net income of $830 million, shy of the consensus expectation, but I think that this bridge here can help you reconcile the differences.

If we look at the cash flow on the right side of this chart, it's an interesting analysis, too. So, the cash from operations this year is $3.6 billion compared to $4.2 billion last year, but, as you can see, in fact, the true operating cash flow, before interest and tax, is only down $90 million compared to last year thanks to a very strong fourth quarter.

But we paid about $75 more interest and more than $400 million more of taxes, based on the higher profitability this year and also to the fact that in some countries, like Germany for instance, we have now used our tax loss carryforwards and so have more shifted to cash taxes instead of accrued taxes.

Then, from this $3.6 billion cash from operation you have to deduct another $1 billion of CapEx, which is about $200 million more than last year, and that gives you a free clash flow of $2.6 billion, which is $800 million less than last year, but so this $800 million really is explained by $400 million of taxes, $200 million of more CapEx, and about $75 million interest. So, you see that from a pure operating perspective, we still have done pretty well.

As I said, the very strong -- I'm now on chart 22 -- the very strong fourth quarter in terms of cash generation. That came, obviously, through a strong push on net working capital. We have reduced our working capital in Q4 by $1 billion, bringing it down to 13.7% of revenues, which is within the 11%-14% target range that we have indicated to the capital market there.

An inventory reduction was 75% of the total net working capital reduction. We are now at $5.7 billion. It is still high compared to the previous years, but, obviously, you have to take into account, as well, that we have acquired businesses and that they are also part of this inventory count.

From a balanced sheet point of view, our net cash position is reduced by $6.4 billion to $1.8 billion as a result of the acquisition Baldor, income, and the payment of dividends. It is still a very healthy, investment-grade balance sheet.

We also went during the year back to the debt markets. You will recall that we issued in June $1.25 billion of US dollar bonds and we followed up in late September with CHF850 million dual-tranche Swiss franc bond issue and, in fact, issued, as well, very early in January, another CHF350 million Swiss franc bond issue due in 2018. This one does not yet, obviously, show in the balance sheet yet.

And so that means that now, after having repaid a maturing bond of EUR650 million in November, that we now have an average duration for the portfolio of 5 years, which was one of the goals we had this year in our financing strategy. The gearing is also down to 20% from 22%.

I have to also emphasize the fact that our off-balance-sheet liabilities have somewhat increased as our underfunding of our pension plans have increased during the year from $400 million to $1 billion, a pretty predictable increase, given the very low level of discount rates that we used to discount the liabilities and also to the fact that we had to adjust our liabilities to reflect new mortality tables in countries like Switzerland, for instance.

And the final good news is that after we announced the Thomas & Betts, both Moody's and S&P reaffirmed our investment grade, A/A2, with stable outlook and this is exactly where we want to be.

Chart 24, the Board of Directors will recommend to the shareholders at the next AGM to increase our dividend from CHF0.60 a share to CHF0.65. This is an 8% increase, equivalent to a 47% payout ratio and paying a yield of about 3.3%, 3.4%. I should emphasize here that this is the fifth increase in six years, which is very much in line with our dividend policy of paying a steadily rising, sustainable annual dividend throughout the business cycle.

We will make the payment of these dividends from our capital contribution reserves that are still more than CHF5 billion nowadays and which allow to retain all the Swiss tax benefits for the Swiss shareholder. Again, this dividend needs approval from the AGM and if this approval takes place, the dividends would be paid early May.

And with that, Joe, we go to the summary.

Thanks, Michel. Moving on to chart 26, we've just about said everything that I think you need to know in this chart. At the end I'd -- on this chart, I'd just, again, emphasize the dividend piece. We're really confident in the cash generation capability of this business and the strength of it, going forward, and the dividend is not just a reward for 2011, it's also a strong indication of the confidence that we have in this business going forward, too.

On chart 27, our organic growth initiatives, we have done a lot of M&A. We understand that. We know the responsibility in having to make sure that we focus on the integration of those assets. At the same time, we have to continue to drive organic growth.

You'll see that we'll accelerate our execution on software and services. We finished the year pretty strong on services and we like the result that we've seen in the increased investment in that and will continue.

We'll focus on key areas, the growth areas, that you know about well, like smart grid, rail, data centers, E-mobility, those types of areas, along with the traditional areas of just raw productivity that drives a lot of what we do in Discrete Automation and Motion.

We'll continue to lead and invest heavily in grid areas like high-voltage DC and FACTS. We'll look at those disruptive technologies, broadly, around DC that we think we can apply to different marketplaces that we're confident about, and then we'll leverage our core technologies for growth, too.

Again, this cost-savings piece that we talked about earlier couldn't be more important for us as we move into 2012. Again, we think supply chain will supply about 50% of the earnings that -- or the savings that we need to have in order to offset some of the pricing pressure we see.

Operational excellence will continue and we'll look at global footprint from a restructuring standpoint in aligning our assets properly with where we feel there's proper growth and opportunity for savings.

The next chart, 28, again we wanted to emphasize that the R&D employed, again continue to diversify that and balance it between the emerging economies and also the emerging nations. Again, a lot of this has to do with making sure that we efficiently have R&D resources in the right regions to deal with the organic demand that's there.

On the right, we see a gradual increase of R&D over this strategic period. Again, we mentioned this in Capital Markets Day, to go from roughly 3.6% of sales now to 4.6%. We're going to see this as a steady rise, again based on the performance of the business and how well we do.

On the right, some new products that we introduced during the year that we think will help to yield some growth results. One to call your attention is the GIS ELK-14, which is a new type of GIS in the sense of a different modular design that makes it easier to ship and assemble and also has about a 40% space reduction versus classic GIS. And we'll look at carrying that technology to other parts of the line, also.

The outlook for 2012. Michel and I are trying to be as transparent as we can on this. As we have indicated, we know we're going to have some margin pressure in the sense of how high the margin was in 2011 when we compare it to 2012. In this -- remember, our short-cycle businesses, in general, have a higher profit margin than our long-cycle businesses. And our short-cycle businesses have slowed down pretty significantly in the third and fourth quarters and that carries kind of an intra-business mix in the sense that that's going to be down. It's going to dilute some of the margin we have in the business.

It's hard -- we're just trying to give you some visibility on what we see initially as we move into the quarter. Our long-term view doesn't stay -- doesn't change. We continue to be very optimistic about our opportunities for growth around the major areas we've defined for you before.

And then we're going to look at how well we can execute around early-cycle growth. Price pressure is going to continue. We can talk about that more in detail, as I'm sure your questions come in, but, again, we'll work the cost side to help to mitigate that piece.

The markets that we look at to continue to grow are, obviously, emerging markets, our oil and gas, power distribution, and, also, anything related to productivity that our businesses are in.

And then, from a management priority standpoint, I think we really obtained a lot of momentum or drove a lot of momentum in the business in 2011. We want to keep that momentum as we go into 2012 in those specific areas I just mentioned. You'll see us focus on excellence in M&A from an integration standpoint and execution. Hopefully, you've gained some confidence in us based on how well Baldor's done and we'll use that experience and momentum to carry that over to Thomas & Betts and maintain what we have going on with Baldor.

Net Promoter Score continues to drive a lot of our actions in the sense of being able to address the concerns externally that customers have with us and I think this is a great insurance policy for us going forward in the sense of maintaining the customers we have.

We'll look at continuing -- extending our footprint into emerging markets. And cash generation is extremely important for us. You'll see us continue to focus on that and drive the cash in this business, because we know how important it is. And, ultimately, it's the most important metric in the sense of how well the business is performing.

So, with that, I'll turn it over to any questions that you could have for Michel and me on the quarter and the year. Thanks.

We will now begin the question-and-answer session. (Operator Instructions). The first question is from Mr. Benedict Uglow from Morgan Stanley. Please go ahead, sir.

Hello, good afternoon.

Hello, Ben.

Hi. I had a couple of questions. I don't think they'll be altogether surprising.

But on product pricing in Power, when I go back and I look at the statements that have been made over the last few quarters on the quarterly conference calls, we're talking about product price erosion having decreased. That was as early as the first quarter of last year. And when we go to the third quarter of last year, we were told -- we made the statement, we believe we've now reached the bottom of the pricing cycle on the transmission side.

Now, when I look at the numbers two on pricing, if we go to the EBITDA bridge the pricing decline is about $327 million, which is nearly 50% bigger, or it is more than 50% bigger, than the average of the last three quarters.

So, what I'm trying to sort of marry up is why, if pricing in the market has actually been stabilizing for the better part of a year, why we should still be seeing such a big sequential deterioration coming through the P&L. So, that's question number one.

Question number two is just on the press conference call, I think on the final question, Michel, you mentioned or you indicated that the margin in the first quarter of this year would be lower than the margin in the first quarter of 2011. And my question on that is, first of all, what mainly is driving that? Is that across the businesses or is this predominantly Power?

And then secondly, and this is kind of in reference to something Joe mentioned on the press call, I know you've obviously got fantastic order intake and your revenues are clearly going to be much higher. Is there any risk that your operating profit could be lower in absolute terms in the first quarter of this year?

Okay, let me try to take the two questions and maybe starting with the second one.

I did indicate that this morning I was actually referring to EBITDA margins, because we have skipped to that measure of profitability to kind of set aside the impact of amortization of intangibles.

So, what I said, indeed, is that the EBITDA margin is expected in the first quarter to be lower than it was in the first quarter last year. It is something that we see coming in our backlog and that's why, although we usually don't give guidance, we saw that here we should, at least, give a heads up from that perspective.

Now, we also do that because there's still so much focus on percentage margin. And at the end of the day, the dynamics of the markets that we are trying to follow for the moment, where you have to really have a lot of agility to shift from one market to the other to continue producing the volume and the bottom line, sometimes the bottom line in actual numbers is becoming more important than the percent margin.

So, we might disappoint on the percentage margin. The rest will depend what kind of volume we take in the first quarter. We won't give guidance of that at this stage, but, obviously, we are working hard to produce a higher bottom line. That is pretty clear.

So, I'm talking EBITDA here, I'm not talking EBIT.

As far as your first question is concerned, it's a complex one. I would be tempted to tell you that, yes, prices have bottomed in some areas. We have probably seen the worst in some sectors, I would even say in the large transformers, for instance, we see a certain bottoming out.

We could even see a bit some optimism coming from the recent decision of the US Secretary of Commerce related to the anti-dumping issues in the US. You know now the Korean manufacturers have to pay a quite high provisional duty levy of something like 30%, so that will, for sure, help stabilize the prices in a certain way.

But what we have seen, on the other side, is sometimes some shift of markets. For instance, our distribution business has picked up in volumes, but the margins in different markets of distribution transformers can be very different. So, if you start going in a market that is carrying less margin, that impacts the pricing calculation, as well.

Or you have some other countries, like the southern part of Europe is not doing well. So, for instance, Italy is a big market with us with good margin. If suddenly that market goes down, we go and compensate, as you can see in the price/volume analysis, with volume that we take in other parts of the world, like Southeast Asia and all that, but where we don't yet enjoy the same level of margins than we have in these mature markets where we are an established leader. So, you have a little bit of a pricing mix playing there, too.

Another example is what happens in China where we have not seen so much activity in the rail sector and the nuclear sector and the construction sector. These are all pretty high margin businesses. We have replaced them by something else, but the margin content is not always the same, at least short term.

So, it's a kind of mixed answer here. I think, indeed, some of our segments are bottoming out, but the mix and the fact that we have constantly to shift to other markets to continue having the volume has an impact here, too.

Just one -- I mean, one follow up. How long should it take, I mean, given the lead time in your order book, which is reasonably predictable, how long should it take for a negative price in one quarter to filter through or a better price, I should say, in one quarter to filter through the P&L and for us to begin to see less intense price effects. Because we're already one year in.

Yes, what you have to look here is, well, obviously, in a business like Power Products a good part of the revenues come from the backlog. Another part comes from the new orders. What you see, obviously, is for the moment we are executing a poorer part of the backlog that has a bit lower margin, reflecting the situation that we had a year or a bit more than a year ago.

The new orders, actually, are not that bad. So, it's a matter of working on that mix and starting to build the backlog with a better quality, overall. It can take a couple of quarters before seeing the end of the light, the trend that we see and the hopes that we see with the large transformers and GIS continue to materialize.

Thank you, Michel.

But visibility is what it is and I don't think you have heard many different versions from our competitors lately.

Okay, thank you.

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

Hi, Mark.

Hey, good afternoon, Joe, Michel.

Hi, Mark.

Yes, just a -- I'm sure there'll be lots of questions on pricing, but just a quick follow up on Ben's --

I thought I had answered them all, by now.

Probably, yes. Yes. Just on the -- you said the more recent orders are not as bad as before. I mean, is there some sort of quantification? I guess the -- I guess in sales, it looks like -- and correct me if I'm wrong -- the price pressure looks to be about 6% to 7% in Power Products itself. Any indication of what the sort of order run rate is or what sort of pricing mix you're getting in the order run rate? That would be helpful. That would be question number one.

And secondly, obviously, timing, if you like, any impending improvement in pricing is difficult, but how long could you keep taking $1 billion of cost out a year? Is there any way you can persuade us if it goes on into the next year how much more you can do and give some examples, maybe, of how you'll be able to fight this, if it persists to be a bit stronger than expected before?

And then finally, I guess, the logical extension of that question is, strategically, what's your view in being able to make returns out of segments of the Power Products Division, in particular transformers, I guess, which gets all the headlines on the pricing? Is this an area where you believe you can make continued good returns, provided you execute well, or is this one where we are going to see ongoing structural declines, which eventually will catch up, if you can't get the $1 billion out? Thank you.

Okay. I'll take the cost saving and Joe will take the strategic question.

In cost saving, I would say in a way it's a question that you have on the whole supply chain. So, as long as we get the pressure that we get from customers today to continue cutting the price, it is clear that we have to squeeze the same out of our suppliers. And so our sourcing is still a very important part of that and for the moment it's a market which is demand-driven, so all the efforts have to come from all the way up the supply chain and we have to continue pushing on that very hard.

Of the operational excellence, we still see quite some possibilities from that part. We are still having quality issues that we need to fix and which cost a lot of money, especially with transformers, and so we are working hard and still delivering more savings from that perspective.

We have not much -- not done so much footprint so far. We have, obviously, plans in place for it to happen. It is always the last one that you trigger, because it's painful. It's a lot of knowledge and experience that goes away and it's also very expensive. But, obviously, if the situation lasts, we would have to take some much more drastic measures with that.

But, as you have seen last year, we could balance the pricing losses with the cost savings, and as long as we can continue doing that, it is really the last thing that we will trigger in the future.

Mark, on the -- I think the way I'd phrase your question is on the strategic aspects of some parts of the Power Products portfolio, I'd say most of the concerns from a commoditization standpoint and price down has traditionally been in the large power transformers and the medium power transformers. And it has to do with the competitive scope of that industry, some of the specifications that are more global than they are regional, that lowers the entry barriers in that area.

But I can tell you, Mark, even within -- let's just take Power Products and just say, for discussion's sake, that $2 billion of a $10 billion portfolio, $10 billion to $11 billion, is medium power transformers and large power transformers. I'm probably a little high on that, but it's probably close.

Outside of that, our medium-voltage businesses and switchgear business is extremely good and that business is strong and regionally aligned and very competitive. When you look at our high-voltage business, whether it's generator circuit breakers or gas insulated switchgears and those things, we see continued opportunity to really develop from a technology standpoint, to innovate, and to be able to position ourselves to be competitive around the world.

And, obviously, services is a big part, across the whole portfolio, whether it's the high-voltage side, the medium-voltage side or the transformer side.

If I come back to the transformers in general, remember that's about $5 billion of that $10 billion. And so $2 billion would be medium power and large power. But within that portfolio, you have incredible amounts of margin mix. I mean, the dry transformers, traction transformers, distribution transformers, all tend to carry a higher margin over time. Even within large power transformers, transformers like high-voltage DC, are ones that within that portfolio itself carry a higher margin.

And then, when you look at the raw material buy and spend that Michel just talked about from an overall sourcing standpoint, we get huge leverage from being in that business, too, in the sense of the amount of electrical steel and copper that we buy that we leverage across the portfolio.

So, we feel that this portfolio fits together and hangs together. It still has an operational EBITDA margin that's in -- broadly in the corridor that we expressed to you at Capital Markets Day. And we think it's an important part of our portfolio going forward and, as Michel also indicated, with the dumping legislation in the United States and some of the pricing signals that we've seen out of the Middle East recently, it looks like that that market has, at least, bottomed from a large power transformer standpoint on price.

But we still have 18 months or so of some stuff in our backlog it takes, in large power transformers, to move through before you'll see that completely.

Just -- thank you for that, Joe. Michel, just to follow up on the first question, is 6% to 7% roughly the sort of number in sales in Power Products? Or are orders -- the order decline is, maybe, a little bit better? Maybe some bit of guidance on that?

You mean, 6% to 7% pricing impact on the revenues? That's what you said?

Yes, just in Power Products?

Yes, it was more, let's say, on the fourth quarter. Orders were more in the range of 4% to 5%. Revenues were in the range of 6% to 7%, indeed, yes. But, as I said, it was also not just price of specific products, it was just a different mix within Power Products that made that we sold into lower-quality segments.

And just one final one. In terms of the outlook that you've put on your statement, are you -- how long do you think the mix issues in the broader context will last? You're kind of hinting they're there for Q1 and maybe they're a little more favorable thereafter. If you could just, maybe, comment on that, and then I'll finish? Thank you.

Yes, for the moment, your crystal ball is as good as mine. Will Greece get out of the euro or will sovereign euros work out? Will the US continue their recovery? We have a bit of a mixed bag.

I would say, on one side, we are quite optimistic in the US. We see a pretty good recovery coming up there and a good demand that we see now quarter after quarter.

Actually, Europe is kind of mixed. The northern part in Germany, Benelux and the UK is actually still doing pretty well, but we suffer quite a lot in the southern part. And then China was still a pretty good quarter.

So, you see it's a kind of mix and things change very fast. For the moment, we have to keep investing for the future, developing new markets. So, it can take a quarter, it can take two quarters. That's why we said the rest of the year, we think, is going to be easier than the first quarter. That is also a bit through the analysis of our backlog. But, let's face it, visibility, as we said, is not very long term.

Thank you very much.

You're welcome.

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

Good afternoon, gentlemen. I have two questions, please.

The first one, coming back again to the same subject on Power Products and maybe a little bit in general, in terms of guidance, so you now guide specifically to a weaker Q1. At the time of the Q3 result, you didn't really indicate a weaker Q4 to the same degree. Were you surprised by the Q4? Or is this just a change in the communication policy?

And the second question I have is on your investment step-up. That's costing you quite a lot of money, 100 basis points on the year on the margin, even more in Q4. To what degree is this defensive investment spending in terms of to maintain where you are in terms of competitive positions and growth rate, and to what degree are you expecting this to actually have a payoff in above-average growth going forward, relative to peers? And should we expect an annual increase of a similar magnitude in '12 or was 2011 a particularly heavy year for investment?

Andreas, on the -- it's Joe, on the weaker fourth quarter in PP, this wasn't necessarily a surprise to us. I think you know we don't give forward statements and we didn't feel we needed to in the sense of how well we think the fourth quarter actually came out from an overall increase in revenue and also EBITDA.

The visibility, obviously, on Power Products clears up as you get into the quarter itself. And we had a very strong quarter in 2010 that we're comparing against, too. So, we never want to surprise you guys, but there is a certain amount of limitation that we have, also, in the sense of what we can tell you, given our forward-looking statement position.

This was not a change in communication policy. I think we try to be as transparent as we can. I would say maybe the only negative surprise is that we were probably banking on a faster recovery of the rail sector in China. That would have, obviously, helped quite a lot. That hasn't happened yet. Difficult to say on the timing there. But for the rest, it's what you said.

On the investment step-up, it was pretty aggressive this year when you look at $385 million, when you look at sales and also R&D. As you go into this year, I mean, I don't think you'll see it to the same extent.

But I wouldn't call these defensive, Andreas. I mean, it's -- I'd say it's offensive, to a certain extent, but it's hard, at times, to say that -- your competition's probably going through the same thing. So, you can't -- we don't live in a static environment that way.

Some of the businesses, particularly Discrete Automation and Motion and Mobile Products, were a significant amount of the stuff it went into, have been underinvested in for years in parts of that portfolio. And we wanted to make sure we refreshed that piece before it did get to a point that we might lose some margin from a competitive standpoint.

In the case of Low Voltage Products, it was evenly split between R&D and, also, sales. As an example, we had a significant increase in sales in Southeast Voltage for our Low Voltage Products and it's because we added about 130 sales people in that area and focused on how we can supply that piece. And we got a decent return out of that investment in, actually, a pretty short period of time.

And so, we'll continue to look at both long and short term, where that makes sense for the business.

So, we shouldn't expect an annual -- quarterly EBIT margin guidance from now for the next quarter? This is an exception that you basically guided to a weak Q1?

I consider this an exception.

Okay.

Yes, it is an exception.

Thank you.

You're welcome.

The next question is from Mr. William Mackie from Berenberg Bank. Please go ahead, sir.

Hi, good afternoon, Joe, and Michel.

Hi, William.

A couple of questions, again.

Just coming back to your thoughts about 2012 and you've kind of broken out the pricing impact at around $1 billion or so. How do you see that actually splitting down? The majority, I take it, is going to fall into the Power segment, but how do you see that breaking down.

And I think the cost savings that you took out in Power in '11 were about $650 million and I think from -- that next year you're going to have to step that up again. Can you, perhaps, talk a little bit about some of the structural ways you might be able to rebalance the Power business.

On the footprint side, are you running low capacity utilizations in Europe, which -- and much better in Asia? And is there kind of a two, three-year plan to continue to shift that footprint?

I'll start on the footprint side, William. First of all, we do this very quietly. I think you know, you've worked with us for a long period of time behind the scenes because of, obviously, union pieces and things.

But we have a significant plan that we implemented in 2011 of closing some facilities, particularly around transformers, and being able to move to areas of the world that are more competitive. We do have a long-term strategic footprint plan for that business. It does look at restructuring certain components, particularly of the transformer side, but also in some of the high-voltage side, too.

And so you have to -- Michel's looking at the numbers right now. The $600 million that you quoted is -- obviously, over time, you just can't keep doing that year after year, but we're confident, at least in the near future, that we continue to have the opportunity to pull price out of that business without materially disadvantaging the business in some way.

And the pricing question as to how you see the $1 billion split?

Yes, well, obviously, you can expect that like this year close to 80% of this pricing impact will come from the Power businesses and the majority will be in Power Products, obviously.

Okay. And just moving on to Discrete Automation and Motion, again, great volume growth, but the drop-through in the fourth quarter, on my calculation, is a bit weaker than expected. Can you just walk through -- how you saw that? Was that also a surprise in terms of the weakness in the fourth quarter returns, especially given the strength in areas like robots?

Hey, William, without being too transparent, let's just say that within Discrete Automation and Motion, there is a huge pricing and margin difference between different parts of the business units that we have underneath that.

So, an example would be one of the shortest or shorter-cycle businesses that we have inside Discrete Automation and Motion is the drive business. And it's absolutely one of our most profitable businesses.

We -- I think you know this year we improved the robotics margin substantially year to year, but it's still substantially below what the drive margin would be. And so we saw a decline, overall, in drives. We saw an increase in robotics. You end up with that kind of a business mix issue.

I don't think that there's anything systemically to worry about here. William, this is the way this thing stacked up. It's somewhat of an even -- there's a cyclicality to this business within drives in the fourth quarter, especially in December, that we saw in 2010, too, that this could happen.

But, in general, this is a true margin mix issue and not a competitive issue or a pricing issue.

Yes, and, again here, in terms of pricing, actually, (inaudible) in terms of pricing impact, but, as well, invested in selling and R&D for something that represents 1.1%, 1.2% of EBIT margin for the quarter.

Right. Okay, thank you very much.

The next question is from Mr. Simon Smith from Credit Suisse. Please go ahead, sir.

Hey, Simon.

Hi. Yes, hi. Thank you for taking the question.

I guess my first question was with regard to China. I think you saw, in terms of order intake, a nice pickup in this quarter, particularly on the Automation side, compared to what we had in Q3. I think in Q3 you sort of noted a slowing there and you sounded like you were a little bit more optimistic about it.

I'd just be interested in trends you're seeing on the Automation side and also within Power. I sort of understand -- we've been doing some work on the China situation and we seem to think that the focus of policy has moved more, now, to regional imbalances in terms of power supply and demand. I was just wondering whether that is opening up any further discussions in China. So, the first question would be on China.

The second question, really, was with regard to Process Automation. I mean, the Process Automation business plays into a number of end markets, which seem to have within them some pretty strong trends. And yet, when we're sort of looking at the division, it doesn't really seem that you've made any great progress in terms of margins. I mean, is this something that you would expect to continue or is there, maybe, some inflection point, either from the backlog or I think you've mentioned some headwinds you were seeing on the turbocharger business?

So there are my two questions. Thank you.

Okay.

On the China side on Automation, I think in the broad sense of Mobile Products there, too, and also Discrete Automation and Motion, I mean, we did like what growth we -- the growth we saw in that business and the way we closed the fourth quarter, you could see.

And so it showed, I think, the robustness of the Chinese economy over all in that sense. And so it gives us some amount of confidence as we go into this year that we hope to see that kind of level of demand within the -- within China.

And then, when you think about the policies, we understand what you're talking about with the regional imbalances within China, what might be happening. I can't tell you that we know exactly how that man plan out in our portfolio right now. We're, obviously, alerted to it, but, again, from a Power standpoint there, we continue to play in the medium-voltage switchgear area, where we're very competitive in China.

We opportunistically work with the State Grid piece on the higher voltages side that we talked about before and we continue to like our competitiveness there. And from all intents and purposes, I mean, State Grid looks like they're going to continue to be, as much as we can tell, aggressive in their investment on the grid and we hope to be able to take some advantage of that.

On the Process Automation piece, I think, Simon, you're probably comparing -- and, Michel, we can come back to this, too -- I think you're comparing some of our competitors, like Emerson, to us. We get this question a lot. Emerson, their Rosemount business and their rolled-out business is of high margin and it obviously contributes to the overall higher operating profit than we inherently have in this business.

There's a lot of diversity within our Process Automation business. Obviously turbochargers that carries a really high margin rate for us is extremely important to that business. But remember, when you see a swing like this in margins in Power Products that we saw during the year, you can see a point, 2 points, it usually has to do with projects.

When we have a project, as far an EPC project goes, those usually come off at lower margins. A lot of times, those projects will run off in the fourth quarter. That's they way they're scheduled and you'll see a lot of margin pressure, like we saw in this quarter, to do that.

But, again, it's not a systemic issue within that business of being competitive. It has to do with the way this portfolio is structured and particularly how you see the runoff of projects in the fourth quarter.

And, I think, from a Chinese standpoint what we saw -- are these fourth quarters statistics, Michel?

Yes.

And back to China, again, Simon, is -- in Discrete Automation and Motion we were up 44% in China in the fourth quarter. Power Products was up 8% and Low Voltage Products was up 4%.

Great. Thank you very much.

You're welcome.

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

Yes, good afternoon. It's Martin from Deutsche Bank. Just a couple of questions on your outlook.

You mentioned in the short-cycle business you're expecting low-single-digit growth until the macro backdrop improves. Is that comment for the year as a whole? I mean, are you planning or, indeed, anticipating that short cycle could turn negative in the first half and particularly if you believe macroeconomists then Europe, in particular, is going to be worse in the first half than it is in the second? So, just to understand how you might be thinking about the first half versus the second.

And the second question was, generally, your tone seems to be a lot better for later in 2012 across the business and if we exclude the backlog, so not just simply backlog conversion, but just generally your tendering activity, I mean, is the tendering activity and comment you're getting from customers, is that also giving you confidence for the second half of the year? Thank you.

To start with the second question, yes, obviously, we still -- a big portion of the revenues we produce in a quarter come from the backlog. So, a detailed analysis of the backlog always gives us a good indication of what will happen within three to four months. Or, indeed, we can see the weakness in Q1 and the improvement after that, given which kind of projects will give us revenues. So, I think that is a good indication.

From a tender backlog perspective, I would say that as much in Power Systems and in Process Automation, there's a lot of bidding activity going on. We still see the utilities, but, as well, especially the oil and gas and petrochemical sector really having pretty large projects being carried out, also in minerals. And so, I think from that, that gives us a certain optimism that the activity for energy infrastructure investment is still pretty high.

When we look at the short-cycle business, I would say it's always difficult to really measure. There's not much visibility here, but I would say times are difficult for short-cycle business at this stage and still we are delivering mid-cycle -- mid-single-digit-type of growth. And so we can hang on to it until business confidence starts improving a little bit more.

So, if we do see short-cycle volumes turning negative in the first half, you're comfortable that your cost base can adequately cope with that?

Yes, we are adjusting. We have done it already in the past. We are adjusting pretty fast to it. I think if you look at last year, if we got some margin compression at the time, it was more for maybe being a bit late with price increases and not fully anticipating the rise of the silver price.

As you know, silver prices have increased by 75% last year. We now have an ongoing hedging program for that, as well. So, that is taking care for the future.

So, I think, it is just a matter of managing the fixed costs. That division has shown in the past a lot of agility to work faster to change of pace.

Okay, thank you.

The next question is from Mr. Alfred Glaser from Cheuvreux. Please go ahead, sir.

Yes, good afternoon. I was wondering on two topics if you could give us some more explanations.

The first one is related to what you said to China. Could you update us on the development of the mid-market product ranges in Power Products, where you stand and where you plan to be by the end of this year?

And my second question relates to the US market, which you commented as being more positive and promising. Could you tell us what, exactly, you see in terms of end-market development in the US and whether you see some real pickup in the Power businesses there?

Okay, first of all, from a China mid-market standpoint, I mean, we have a huge amount of working going on in the sense of mid-market in China if you look at our Discrete Automation and Motion business, Power businesses and whatever. But I'd say the progress is good.

Probably the best progress we have is when you look at our medium-voltage switchgear position in China. We continue to innovate there well. We're competitive at the mid segment and we're optimistic about that business itself.

And our Low Voltage business, I would say that we continue to play at the high end of the marketplace, still, with positioning ourselves for the middle market more and more and seeing some success there.

In Discrete Automation and Motion, we have some major areas to focus on, particularly in medium-voltage drives, that we'll invest a lot of time and money in this year to make we become more competitive. But on the low-voltage drive side, we have, I think, really good mid-market capability, along with upper-market capability, too.

On the US market, I would tell you from a Power standpoint, we were strong double-digit growth this year. The US market -- the best guide to the US market is GDP. If that market continues to increase in GDP, it'll demand more electricity and it'll demand more products from the grid, in that sense.

So, I think your best leading indicator of how we feel about the United States marketplace is really two variables. CapEx on the utility side and then, secondly, is continued growth in GDP. And if those two things come together, we feel pretty good about that market.

All right. Thank you.

You're welcome.

The next question is from Frederic Stahl from UBS. Please go ahead, sir.

Hi, good afternoon, gentlemen. It's Frederic here at UBS.

Good afternoon.

Good afternoon. Could you, maybe, give us an idea, if possible, when you look at your price erosion, if you can split it up, what is so-called mix shift towards the lower-quality segments and what is like-for-like price pressure, give us an idea what proportion is what there? That would be great.

And then secondly, on the -- as you say now that the cost cutting or the $1 billion programs here, that's in the DNA of the organization, then I must assume that you're becoming more productive in cutting costs, as well. Does that, actually, open up room for lifting the $1 billion to $1.1 billion, $1.2 billion, whatever it might be, or is it offset by the fact that it just becomes more difficult to cut costs? How should we think about that dynamic?

Okay, on your first question, it would be great, but I won't give that to you, because that would really start getting into huge details and I would almost have to send you a spreadsheet to tell you how we calculate that. So, I think we are already giving quite some transparency with the EBIT bridge that we gave, but after that I think you have to live with the verbal explanations that we attached to it.

As far as the second question is concerned, it's what we present at the Capital Market Day. We said this quest for productivity and efficiency has really to come in the DNA of the Company and we fixed several targets to take 3% to 5% of our cost of sales off every year, to just stay competitive.

As I said before, this is a demand market. Our cost position has really to be impeccable to be able to continue to compete here.

And so, yes, we keep looking for other ways to generate it. There's still gains we can make in sourcing. And, really, in operating excellence, in simplifying how the Company operates and trying to accelerate to the better speed to delivery, better on-time delivery to customers. All that can help. Cutting quality issues and, maybe, sometimes it can also help us increase price if the service is perfect.

So, we'll definitely continue it's a commitment.

My question was more that given that these programs are still relatively new, if I compare to other industrials, new to you, and my question was more do you -- is your capacity to take out cost increasing, as well or is it, as I said, offset by other factors?

I'm not sure -- relatively new, I mean, this is four years now that we are doing that. So, I think we have got much better at it.

If you look, for instance, at OpEx, we have thousands of projects running in parallel. There's, obviously, other new things that can discover all the time. But I believe that by now we don't feel like we are starting from scratch. We have a solid base to work on and we have people that have really that in their culture now.

So, I'm quite confident we are on the right tack and we can continue finding new ways to improve the productivity.

Frederic, if you look at that, too, I'd say there's been an evolution over those four years that Michel's talking about. If you look at the savings we talk about in sourcing, we had a larger percent from indirects last year than we had from the direct side, because we increased the visibility of the indirects and our focus in that area, too. We get better in the sense of sourcing overseas and bringing it back to developed countries.

So, I would say it's not -- we have to get that way in order to be able to drive this. That doesn't mean we can find more, but it gives us an ability and a confidence that we can drive that 3% to 5% cost out that Michel talked about.

And then, some transformations you have, too. For instance, it's not just about buying the same quality of a certain raw material for a cheaper price, it's also trying to change the design of our products so that they use less raw materials, because that's, obviously, a change to our cost base. So, that is another way, innovative, to try to keep cutting costs and improve the margins.

Sounds great. Thank you.

The next question is from Mr. James Moore from Redburn Partners. Please go ahead, sir.

James, you're late. We thought you'd be like right up front.

Oh, well, I'm being patient for once.

What is that, a New Year's Resolution, James?

No, don't -- no promises. So, some questions from me, if I could. Yes, three. Hi, good afternoon, everyone.

The change in R&D and sales investment in 2012, I wondered if you could give us a dollar number? I'm just trying to think how that moves. Should we think about another $350 million, $400 million?

Secondly, a lot of pricing chat on Power, so maybe I'll move to Low Voltage and Discrete. I get the sense that you've got a bit of a small price increase through there versus not having that? Is that sticking? Is there more to come, given the prices you've announced but not yet put through? Or have we hit the max and does it come back off?

And then thirdly, you mentioned the US anti-dumping issue. I thought that was quite interesting. I wondered if you could give us a flavor for the timetable and the scope of that? I mean, is it all transformers or just certain types? Is it all imports to the US or just from Korea? How does it play out?

All right, James. First of all, Michel's working on the R&D piece. On the Low Voltage pricing and Discrete Automation and Motion pricing, I tell you, the margin pressure you saw on Low Voltage Products, I don't know if we've highlighted well yet. We had a huge mix factor.

If you look at -- normally, remember, we talked about before that the Low Voltage systems business is, by far, the lowest margin which is in the Low Voltage business overall. Normally, that would be in the range of 15% to 16% or sales.

In the fourth quarter, 2011, it was about 22.5% of sales. So, I mean, it's very large in that sense.

So, inherently, the other part of the portfolio held on pretty well and we did get some price. I think we thought we got about 1.5 of price in that business, Michel, in the second half of the year?

Yes.

And we'll push price in that business as far as we can in 2012. We're not certain how successful we'll be. Obviously, the part of the business that's going to be important is what's the demand pattern. If we get a decent demand pattern, we'll work on the price side, too.

In Discrete Automation and Motion, we put some pricing in, particularly in our generators and also motors division, and we saw somewhat of an improvement in that the second half of the year and, hopefully, we'll see that continue as it rolls out of our backlog as we go into next year.

Okay.

On the US anti-trust -- and Diane's here, too. She can help us out if I mess up on anything. But this is just a Korean -- Diane, you want to take over?

Why doesn't she --?

Okay, the scope is the large power transformers and it is -- I mean, all Korean importers. This is, at this stage, a preliminary decision of the Department of Commerce in the United States. Some further milestones ahead of us and final decisions at some point during the summer.

Transformers only, yes? Large power?

Large power transformers.

And when that decision comes, would it be with immediate effect?

Okay, it comes with immediate effect as we speak this week and the decision is preliminary until it is -- with immediate effect, but until confirmed in August.

Okay.

And the range of duties is between 20% and 38%, I think. So give us a good idea of the amplitude of the issue that we had there.

So, in terms of the additional investment in R&D and selling, our intention this year was, again, to keep ramping up the efforts there, in the range of, maybe, between $300 million and $400 million. But, obviously, this is not something that we will do on a linear basis without question marks.

This kind of investments go in steps, like a staircase. You invest a part. You start seeing a little bit how it starts producing a return and then you go for the next step. So, it's not today that we will invest all that. It will depend a little bit, also, on the situation. But there's clearly a commitment from this management team to invest part of the margins in building the future and developing new markets.

Okay, that's very helpful. Just, when you get to the end of 2012, will your R&D to sales and your sales cost to sales ratios be a new normal or will it drop back?

Yes, what we explained, James, in the Capital Markets Day piece is that we see our R&D, as a percent of sales, getting to a 4% range by 2015. And so the stair step that Michel talked about.

Now, we'll obviously look at that in conjunction with where the business stands, also, and make sure that we don't invest too far ahead of where we see from a demand standpoint, also. So, we'll, obviously, leverage some management guidance in the sense of how we lay that in and where we lay it in.

Thanks for your help, guys.

'Bye, James. See you.

The next question is from Ms. Daniela Costa from Goldman Sachs. Please go ahead, madam.

Good afternoon, a question, actually, on inventories. And it looks like you reduced them a little bit. You always reduce them in Q4, but a little bit faster than normal and I was wondering if this has any part to do in the margin weakness quarter on quarter and how much? And also, how do you see the impact of that, potentially, in Q1? Thank you very much.

Okay. Well, yes, they reduced -- the reduction was faster than usual. Also, the increase as we see in Q2 and Q3, was also faster than usual on the way up. So, we had to, obviously, act on that.

In our analysis that had no impact on price, because, in fact, the reduction in inventory was across the board. It was not just in finished products. It was in raw materials and in work in process, too. So, it is a wide balance from that perspective, and, frankly, it is something we have scrutinized business by business and I did not have the feeling that it was just discounted to get rid of it.

Daniela, we see those comments in analyst sheets every once in a while about inventory reduction and price declines, so Michel and I are really sensitive to it. And I could tell you, from what we see, is that we don't -- if we have a high inventory at the end of the quarter, we're not out there discounting the stuff trying to move it. That's just not -- that's just not the way we do business here.

As we talked about, there is some lower-margin business that's embedded within, particularly, Power Products, that moves through from a backlog standpoint, but that's just inherently. The price that we took on that may be 12 months or 18 months ago and as it bleeds through the cycle.

So, don't look at that massive inventory reduction as we gave price in order to get it out the door. That's just not part of what we do.

No, I was actually referring more to the under-absorption of your fixed costs, if that had an impact?

Yes, not that I can quantify. It's an interesting question, but first reaction I would say, I don't think so, but something I need to look a bit more in details into. Tarak, what would you say in your business, for instance? We have Tarak Mehta here, head of LP.

In our case, given the slowdown in the product business that we saw, yes, it did have some impact. But it was not significant or material. It was mainly the mix between systems and the product side. That was a 1 point, almost a 1 point contribution, and that's what you see in the results.

Okay?

Thank you.

You're welcome.

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

Hello, good afternoon.

Hello, Olivier.

I wanted to come back on the general competition environment in T&D. Because, I mean, (technical difficulty) about, maybe, the US and you also mentioned earlier Middle East. And it's true that when I look at the Koreans and the Chinese margin there, they've been coming under intense pressure. I was just wondering if we were on the verge of having lower competition because that forced them to be more rational or if competition is going to move away from the US and become more intense in Europe?

Have you got any signal of the way the competitive landscape is moving in Europe? And do you firmly believe that we could have a more rational place, going forward? That's question number one.

Question number two is, you were mentioning in the previous quarter that you would monitor European utility demand quite carefully, because it was a bit weak and are we still now in the situation where Northern Europe is strong and Southern Europe is weak, or have you see some more inflection, I mean, for the base order of T&D getting weaker, more across the board in Europe?

And third question, that's more housekeeping, but how should we think about CapEx and tax rate for '12? Because you also mentioned some change in the underlying different tax elements, if I understand.

That's it.

On the lower -- the competition, how that's going to develop, I think it was Power Products, specifically, in Europe. I can tell you, we have seen any change in the dynamics in the sense of the competitors that are moving to Europe.

We have -- we talk about that, if that's going to eventualize, we're not sure. But we're certainly on board with it and we prepare ourselves to be able to compete regardless of what happens.

If we meet Far Eastern -- these competitors are increasingly here, we'll move product in from our low-costs bases in the Far East, too. And we're preparing to do that, if that's needed. But we haven't seen that composition change, at least in the last 12 months.

In the United States, obviously, with those kinds of tariffs that will be applied to Korean transformers, you'd think that it might increase competitiveness in different parts of the world. So, that's a reasonable question.

I think that could fall into the Middle East, too. But in the Middle East on large power transformers, we've seen more of a moderation on price recently than an increase in price down. So, I think what you see on your income statements is they've been hit pretty hard and I think those poor financial results, to a certain extent, means there will be some discipline exercised in those organizations around this marketplace. Or, at least, that's our hope.

Michel?

On the European utility business, we have seen a bit of a weaker demand for products during the quarter, but I would say, on the other side, if you look at the amount of transmission projects that are being worked on in Europe and the UK, still in the North Sea, where there are at least three projects of wind farms connections that have to be given or, for instance, the connection between Italy and France.

So, there's still a lot of projects being tendered by utilities and by TSOs, so the activity still looks like as being sustained and will give us quite some awards during this year.

In terms of guidance for CapEx, what I would say that we're saying that CapEx will be slightly higher than it was in this year, which was, a you know, a bit higher than $1 billion. So, I would say, up to a maximum of $1.2 billion.

In terms of the tax rate, we keep working on the guidance of 27%. It becomes, always, more challenging, especially when we acquire companies that have a higher tax rate. But, so far, we have managed to still get to this 27%.

Obviously, as I mentioned, there can be a little more cash tax payments because the good profitability means we have less tax loss carryforwards to apply against, but we still are confident we can deliver this 27%.

Okay, thank you.

The next question is from Mr. Andrew Carter from Bank of Canada. Please go ahead, sir.

Good afternoon. It's Andrew from RBC. It was just a couple of housekeeping ones, actually, again.

On the Power Systems, I think you mentioned in the statement about successful claims management and I was wondering, could you try and quantify that and talk about whether or not we sort of see it as a one-off?

And then the similar question, actually, just on Process Automation where I think you mentioned that the Swiss franc had an impact on the quarter and I wondered, again, how much it was and should we expect it to continue into the next quarter?

Okay. From the Power Systems point of view, the claim management, that was on a net base, because we had, also, some one-offs on some other projects for small amounts. Let's say, on a net base, it was an upside of about $25 million.

As far as Process Automation is concerned, I would say that between the Swiss francs and the usual one-off items that you have in quarter four when you try to correct the margin on the projects that are in execution, that more or less cost 1% of margin together.

So, we had the turbocharger business, which has a strong footprint in Switzerland, as probably one of the businesses of ABB that suffers the most from this Swiss franc footprint, but we are working quite activity to try to change the game there and have a much more balanced footprint in the future.

Thank you.

The next question is from Gael De Bray from Societe Generale. Please go ahead.

Yes, thanks very much. Good afternoon, everyone.

First question, please, is on the Automation business in India, because orders there have been down for the past couple of quarters now. So, could you help us envision how the competition looks like in this country and what ABB would need to strengthen its Automation position in India? Is it a better access to market or specific technologies that are missing your portfolio in this country?

Second question is on the regulatory environment for grid connections to offshore wind farms in Europe. Could you elaborate a bit more on that, please, especially on what's going on in Germany and the risk of project delays in this country? Thanks very much.

Okay. I think Tarak Mehta, the Head of our LP business will take the first question on India?

Yes, in case of LP, we actually grew quite a bit this year and also in the fourth quarter when it comes to India. Our growth rate is probably north of 20%, 25%, actually, in the case of Low Voltage Products.

In terms of what we need, we're aggressively localizing our product portfolio in India, so -- and also the R&D and the product development and product management capacity. That's the main answer for us in terms of how we approach India. We need to be locally present in the local portfolio and we are developing the bench strength and making significant capital investments. Market access remains a challenge for us in Low Voltage in India and that's something we are taking a hard look at.

But that's, from an LP point of view, how we see the Indian market and our competitive position.

And from an Automation standpoint, Discrete Automation and Motion was up 50% in the fourth quarter. So, obviously, some decent growth there, too.

On the regulatory environment and project delays, Michel?

Yes. Well, obviously, on this one there has been a lot of press about that point, here, also coming not only from the suppliers like ABB, but as well from the TSOs in Germany, because, obviously, it is a very risky business. These are very complex projects to put on and I think that everyone got his part of problems in the last two years in executing these projects.

So, it is quite clear that they are trying to get a little bit more guarantees and support from the German government to reduce the risk, to at least balance the risk, between the different parties here.

This being said, the number of projects keeps growing. There is a strong commitment from the German government to continue developing renewable energy and especially offshore wind parks. And, as I mentioned before, there should be three large projects of transmission that will be tendered during the year.

It is a challenge from a technical point of view, also from a speed of delivery, because you have always the weather factor, which can easily influence the execution of some of these projects and so from time to time suppliers like us take some hits, but, at this stage, even if we have to make some adjustments, nothing material enough to deserve a disclosure.

All right. Okay, thanks very much.

There are no more questions at this time.

Okay, well, look, thanks for joining us. Look, we're proud of what we delivered in 2011.

Again, what we're talking about in the first quarter, as we mentioned, it's unusual for us to give you a little look from a forward standpoint, but the major thing here is we don't want to surprise you and we want to give you as much clarity as we can on the business. And we'll do all we can to mitigate this and have a strong year in 2012.

So, thanks, and we'll talk to you at the end of the first quarter.

Thank you. 'Bye-bye.

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