Peter Voser, chief financial officer, at the annual results press conference, February 27, 2003

Let me start my presentation today by saying that this is a fairly complicated set of results to take you through – although I will try to make it as clear as possible. The fact is that we have had several accounting changes since the third quarter results, so to set the scene, I will summarize them first.

As we announced in October, we have combined four of our former divisions into two core divisions, Automation Technologies and Power Technologies. We still reported under the former structure through the end of 2002, and will only report under the new structure from January 1, 2003. That is, the first official results you will see under the new structure will be for the first quarter 2003, in April.

We have already moved rapidly to implement the new structure, however, so today we will present our results pro forma, in the way you will see them going forward.

A fifth division, Oil, Gas and Petrochemicals, has been deconsolidated from the Group’s operating results and reported under discontinued operations. This is because, as you know, we intend to sell the division either as a whole or as business areas this year. What this means is that you don’t see OGP included in the Group orders, revenues or EBIT. Instead, OGP reports only net income as part of discontinued operations. In short, instead of a 22 billion dollar company, you see ABB today as an 18 billion dollar company.

On the balance sheet, OGP assets and liabilities are collapsed into one line each and called “assets in discontinued operations” and “liabilities in discontinued operations.” In the Group’s Cash Flow Statement, however, there is no separate line item for discontinued operation, so OGP cash flows are reported under the normal individual line items. This means OGP is fully included in Group’s cash from operations and free cash flow.

ABB’s final former division, Financial Services, has been broken up. As you know, most of Structured Finance was sold last year. The remaining Structured Finance businesses, along with Equity Ventures and Insurance, are now reported as Non-core activities. That is a bit of a misnomer, because in fact we intend – as we said before – to retain the Insurance business for the foreseeable future. For reporting purposes, however, we have segregated it since it is a financial services business from our core industrial divisions for better transparency.

The last part of the former Financial Services division, the Treasury Centers, are now being integrated into ABB’s headquarters finance function and are reported under Corporate. Let me just add that this unit no longer engages in proprietary trading, and is now run as a financing service to the Group businesses. This means that although it reported a profit in 2001, it is now treated as a cost center for 2002.

As a last accounting change, we now have treated Combustion Engineering, ABB’s U.S. subsidiary, as though it had already filed for the pre-packaged Chapter 11 as of December 31, 2002. This means that the assets, mainly cash, have been excluded from the Group balance sheet – and net debt. Provisions for future contributions to the Trust are treated – consistent with our previous practice – as discontinued operations, and cash payments are fully reflected in ABB’s cash from operations.

That’s it for the significant accounting changes. I hope this helps to clarify the figures you will see today.

I’d like to start with the fourth quarter results, the headline figures. Orders were down 8 percent overall, although core businesses were flat. In fact, Automation Technologies increased orders by 11 percent while Power Technologies were down 14 percent because of fewer large orders in Power Systems. Product orders, on the other hand, were up. This means that despite what was generally considered a difficult market in the fourth quarter, our customers are still with us.

Orders for Non-core activities were down by 19 percent. The biggest decline, oddly, was in Insurance – which does report orders under its own definition – because of the runoff in its Scandinavian RE subsidiary. Orders were also reduced by the sale of the Air Handling business in early 2002.

Revenues for the Group were down 5 percent, but the two core divisions were flat. Again, a good performance that was offset by 25 percent lower revenues in Non-core activities – for the same reasons in Insurance and Air Handling.

The core divisions increased EBIT by 38 percent on productivity gains and lower restructuring charges. This lifted their margin from 3.3 percent in the fourth quarter last year to 4.5 percent. The Group as a whole, however, posted zero EBIT for the quarter after losses and costs in Non-core activities and Corporate. These negative figures were reduced from the fourth quarter last year, but not enough to turn into a positive result.

Net income was a loss of US$ 838 million after discontinued operations, which came in at negative US$ 710 million for the quarter. The result in discontinued operations was driven by asbestos provisions, the divestment loss on the sale of Structured Finance, and losses in businesses held for sale, including Oil, Gas and Petrochemicals.

Finally, net cash from operations was positive at US$ 361 million. I will come back to cash flow later.

Turning to the fourth quarter highlights, we had some very positive events. First, we completed the sale of Structured Finance and Metering -- on time. Those divestments were cash effective in the fourth quarter and brought in US$ 2.4 billion, which we used to reduce net debt. This included repayment of the final US$ 1 billion still outstanding under the US$ 3 billion bank credit facility expiring in December.

We signed a new replacement credit facility in December. This is a secured facility for US$ 1.5 billion that will give us sufficient liquidity through 2004 while we complete our cost reduction and divestment programs as planned. I want to confirm here that ABB has met all the financial covenants under that facility.

Another highlight was the prospect of achieving final closure to the asbestos issue for Combustion Engineering and the Group as a whole. As you know, Combustion Engineering filed for a pre-packaged Chapter 11 in the U.S. bankruptcy courts last week. I won’t say more about the process since Beat Hess will cover this in his presentation today, except to say that the negotiated settlement resulted in a US$ 420 million provision in the fourth quarter. This has of course generated a loss for the Group, which no one is happy about, but it represents the end of the earnings drain on this matter for ABB.

We have continued with our portfolio actions. We have written down some US$ 112 million in software and goodwill in non-core and discontinued operations. Additional provisions and asset write-downs in Non-core activities totalled about US$ 109 million, and for discontinued operations – excluding the 420 million already mentioned – the figure was US$ 183 million.

I will touch briefly on the full year 2002 results, since Juergen has already mentioned some of the key figures. Orders were down 8 percent for the Group overall, in what I think we all agree was a difficult year. Nevertheless, the core division orders were down only 2 percent, so the major drop came in Non-core activities – again, mainly due to the sale of Air Handling, but also for Insurance, Logistics and New Ventures following the management decisions to cut back these activities. Building Systems orders were down as a result of weak markets in 2002.

Revenues were also down by 6 percent for the total Group, but core divisions were up slightly, lifted by a strong order backlog going into the year. Non-core revenues were down by 18 percent for all the same reasons as orders.

EBIT for the Group was up 88 percent to US$ 336 million. This gave us an EBIT margin for the year of 1.8 percent, ahead of our target at 1.5 percent. The EBIT improvement was driven by higher core division earnings – up by 4.3 percent – but mainly by lower costs in Non-core activities. In particular, you will recall that in 2001 EBIT was reduced by a portfolio write-downs and a one-time charge of US$ 295 million in the Scandinavian RE business from a change in accounting for reserves.

The net loss for the year was US$ 787 million after discontinued operations, which came in at negative US$ 853 million – most of which was booked in the fourth quarter, as I have already explained.

Net cash from operations was a positive US$ 126 million for 2002.

Turning to the 2002 highlights, I’d like to reiterate what we accomplished on the financing side this year. We announced our financing program in March, and I am pleased to report that we have achieved all the goals we set. We almost completely exited the volatile short-term commercial paper market – and you might recall that at the time, we had CP outstanding of some US$ 3.3 billion. To do this, we renegotiated our US$ 3 billion back-up bank credit facility so that we had a revolving credit facility to meet our liquidity needs through December 2002. We aimed to lengthen our debt maturity profile from about 50 percent long-term debt to two-thirds, and we achieved this by year-end. It was done by issuing some US$1.7 billion in straight and convertible bonds and by paying down our short-term debt from divestment proceeds.

As you know, our target was to reduce net debt by at least US$ 1.5 billion from the year-end figure of US$ 4.1 billion. On a straight like-for-like basis, we accomplished exactly that. Before the transfer of OGP to discontinued operations and the asbestos settlement for Combustion Engineering, net debt was down to US$ 2.6 billion. I will take you through that calculation in a few minutes.

Another piece of good news comes after we have just about finalized our actuarial calculations for the pension liabilities at the end of 2002. As I communicated back in November, we did contribute some US$ 198 million in cash to the pension plans as foreseen. Overall, we expect a small decrease in our underfunded pension liabilities at the end of 2002, which as you might recall, stood at some US$ 1.8 billion at the end of 2001.

Here are the key figures. I won’t repeat the headline figures, but I’d like to draw your attention to a few points.

If you consider our net interest expense for 2002, it looks low in comparison to the previous year – which is not what you might expect in a year when our borrowing costs went up. In fact, interest expense was reduced by a gain of US$ 215 million arising from the accounting treatment of the convertible bonds that ABB issued in May 2002. This is an unrealised, mark-to-market gain on the equity conversion option on the convertible, which may fluctuate in future with market prices.

Let me also highlight the net cash from operations. You see that operating cash flow was US$ 126 million for the year, which looks very low next to the 2001 figure of almost US$ 2 billion. The core divisions contributed over US$ 1.1 billion in operating cash flow for 2002, which was offset by negative operating cash flow for OGP, Non-core activities and Corporate – including some US$ 206 million in asbestos cash payments. The point is, we have strong underlying operating cash flow from the core divisions that in future will be considerably less burdened by businesses we are now selling and asbestos payments.

I’d like to walk you through the EBIT composition of the Group, to highlight the areas where we are taking action to increase profitability. As you see, the core divisions have increased EBIT for both the fourth quarter and the full year in 2002. Although the costs are lower for Non-core activities, Corporate costs rose for the full year – and both are too high. These are the areas that are pulling down our operating earnings. Let’s go through them.

Starting with non-core activities, the main businesses here include Equity Ventures and the remaining parts of Structured Finance, Insurance, and Building Systems.

Taking these in turn, Equity Ventures and the remaining parts of the Structured Finance were profitable for the year, but EBIT was lower than in 2001. This was pretty much in line with our expectations, since we are not doing any new business in these areas – it is our intention to sell them.

Insurance, on the other hand, is a business we intend to retain for the foreseeable future. It posted a profit of US$ 40 million in 2002 on significantly higher premium income, although the downturn in financial markets meant that some marketable securities had to be written down.

Building Systems, as I mentioned before, suffered from weak markets in 2002 along with losses and write-downs from contracts booked in previous years. It reported a loss of US$ 114 million for 2002. We are on track to sell most of this business by year end 2003.

Other activities reported under Non-core activities reported combined EBIT losses of US$ 239 million for the year, up slightly from 2001. In Group Processes, we have now either stopped activities or transferred them to the divisions. In New Ventures, the loss “burn rate” has been reduced, as we have taken the necessary write-downs. Air Handling was sold earlier this year and Logistic Systems and Repair workshops are being wound down. Semiconductors will be transferred to Power Technologies this year.

In short, we are taking action to reduce losses from Non-core activities to zero by 2005. This year, in 2003, we will still have some losses – but we intend to reduce them to about US$ 100 million for the year.

Let me turn now to Corporate, where costs totalled US$ 393 million for 2002, up slightly from 2001. We divide these costs into three areas: Headquarter and Stewardship, Research and Development, and Other.

In 2002, Headquarters and Stewardship costs were US$ 156 million for the year, despite the refund of some US$ 70 million in pension payments from the former CEOs. We are attacking costs aggressively in this area, aiming to reduce them to about US$ 130 million per year by 2005.

Research and Development has already substantially reduced its costs, following the successful reorganization of its global research centers earlier this year. We are on track to achieve a run rate of about US$ 90 million per year.

Here you see the breakdown of discontinued operations, which took the Group to a net loss for the year. The headline figure is Combustion Engineering, where we provided a further US$ 420 million in the fourth quarter of 2002, and for the year. I will take you through this in more detail shortly.

The next major negative figure is for Oil, Gas and Petrochemicals. Now, let me remind you here that we are talking about net income, after interest and taxes -- not EBIT. In fact, OGP made US$ 40 million EBIT for the year, following provisions of US$ 167 million. These were mainly for loss contracts signed several years ago in the Downstream project business. In 2002, we shifted the large project bidding strategy away from fixed price and toward lower-risk reimbursable contracts, so there should be considerably fewer such provisions needed in future – but for certain ongoing projects, you can’t exclude the possibility that some risk remains.

As expected, the divestment of Structured Finance last year generated a loss of US$ 135 million, excluding currency translation adjustment.

Other businesses generated a loss of US$ 123 million for 2002, again excluding currency translation adjustment. This was mainly due to goodwill write-down.

To summarize, we had big losses for 2002 from businesses already sold or intended to be sold in the near term. The scale of these losses will already be more than halved by the Combustion Engineering settlement.

Since the impact of the Combustion Engineering settlement is so dramatic, I would like to take you through the key accounting items. First, of the total US$ 420 million in 2002 provisions, only US$ 300 million is cash-effective over time. In particular, the obligation to contribute ABB shares to the Trust will be proposed at the AGM to take the form of new shares. Part of the non-cash portion of the provision also took the form of a write-off of ABB’s equity in Combustion Engineering.

The pre-packaged Chapter 11 agreement provides for US$ 100 million to be contributed on a performance-related basis. In short, ABB must achieve a minimum EBIT margin of 8 percent for 2005 and 2006, and a margin of 12 percent for 2007 and 2008 to pay. If these margins are achieved, payments would only commence from 2006 onward. This part of the settlement has been booked as a contingent liability at the end of 2002.

As I mentioned before, asbestos cash payments were US$ 206 million for 2002, which is fully reflect in our operating cash flow. In future, the annual cash drain will be considerably reduced, with the first instalment of US$ 50 million only being paid in 2004.

Last, as I said in my introductory accounting remarks, we are now treating Combustion Engineering as though it had already filed for the pre-packaged Chapter 11 at the end of 2002. This means that we have excluded some US$ 400 million of cash from the Group accounts – and net debt – which I will come back to later, when I take you through the reconciliation of our net debt reduction in 2002.

I’d now like to make a few remarks about the Group cash flow in 2002. As you see, cash from operations was positive for both the fourth quarter and the full year, which fits our traditional pattern. Operating cash flow was lower, however, than for the comparable periods in 2001 – which was, I have to add, a record year. This was mainly because of asbestos cash payments, as well as the negative impact on working capital of Other assets and liabilities that offset the cash released from receivables, inventories and payables. The main items in Other asset and liabilities were lower customer advances, which is in line with fewer large orders for the quarter, and a temporary decrease in receivables securitization as our programs were restructured late in the fourth quarter. Together, these two items accounted for over US$ 600 million in lower cash flow for the year.

In terms of free cash flow, however, 2002 exceeded 2001 because of our divestment program. In addition, we spent considerably less on net plant, property and equipment – reflecting the belt-tightening firmly in place.

For 2003, we expect similar proceeds from divestments and a strong free cash flow to further reduce debt.


This is a complicated slide, but again, accounting changes have affected the calculation of ABB’s net debt position and I want to reconcile these for you so you can see what we actually achieved on a like-for-like basis.

At the end of 2001, we had a net debt position – that is, interest-bearing short, medium- and long-term debt less cash and marketable securities – of about US$ 4.1 billion. That figure was subsequently restated, as you see it in today’s press release, to US$ 4.3 billion following transfers to discontinued operations – mainly Oil, Gas and Petrochemicals.

After cash from operations, some minimal investment in net PP & E and the net proceeds from our divestment program, net debt was reduced to a little more than US$ 2 billion by the end of 2002. We would have been quite happy with that figure, but some non-cash transfers for pensions and other items pushed it up again by about US$ 355 million. On top of that, the negative foreign currency translation impact for the year was almost US$ 600 million – an unrealised, non-cash effect, which nonetheless increased the net debt figure back to US$ 3 billion. After restatement for discontinued operations, this gives the reported net debt at December 31, 2002 of US$ 3.3 billion.

Nevertheless, on a like-for-like basis, we still had some US$ 380 million of cash sitting in Combustion Engineering at the end of the year that reduced our net debt position to US$ 2.6 billion – which was our target for the year. Because we decided just last week to file earlier for the pre-packaged Chapter 11, we have now treated CE – as a post balance sheet event – as having already filed as per the end of the year. So US$ 2.6 billion is the right net debt figure to compare with our guidance throughout 2002.

I’d just like to add here that we ended the year with US$ 4.7 billion in cash, about US$ 1.7 billion was not available as it is tied up in pensions and our insurance business. Of the remaining US$ 3 billion, about half was held in local operations and the rest in Treasury Centers.

Here is the maturity schedule of our debt. As you see, short-term debt stood at US$ 2.6 billion and long-term debt was US$ 5.4 billion at the end of 2002. Long-term debt now represents two thirds of ABB’s US$ 8 billion in total debt.

I have to say that when I first drew up this chart last year, the shorter-term debt looked a bit like the Himalayas to me. Now I am pleased to say that it has reduced to something more like the Matterhorn – still high, but it can and will be climbed. As you know, we plan for significant additional divestments in 2003 that will repay the US$ 2.6 billion coming due, together with cash flow and our other sources of liquidity.

This brings me to our medium-term financing goals. They have not changed since we first announced them last November. We want to reduce total – not net – debt from US$ 8 billion to about US$ 6.5 billion by the end of 2003. We are aiming for a gearing ratio – total debt divided by total debt plus equity – of approximately 70 percent.

By the end of 2005, we aim to reduce total debt to about US$ 4 billion – that is, half the amount outstanding at the end of 2002. That would bring us to an estimated 50 percent gearing level. After 2003, debt reduction will need to come primarily through cash-effective earnings. This is one of the reasons our cost cutting programs are so important – in addition to increasing competitiveness, they will help generate cash to put the Group on a stronger financial footing..

Let me summarize by stating our priorities in 2003. We will focus on completing our divestment program, generating more than US$ 2 billion from the target disposals, including Oil, Gas and Petrochemicals, Building Systems, and the remaining parts of Structured Finance and Equity Ventures participations.

We aim to reduce the traditional volatility in quarterly cash flow from operations, smoothing the Group’s liquidity requirements.

And we will implement cost-cutting measures at the headquarters level roughly equal to those in the divisions, focussing on reducing costs and losses in Non-core activities and Corporate.

Ladies and Gentlemen, that concludes my presentation.