Abb Ltd (ABB) 2010 Q3 法說會逐字稿

Good morning or good afternoon. I am Stephanie, the Chorus Call operator for this conference. Welcome to the ABB third quarter 2010 results Analysts and Investors conference call, hosted by Mr. Joe Hogan, CEO. Please note that for the duration of the presentation, all participants will be in listen only mode, and the conference is being recorded. (Operator instructions)

At this time, I would like to turn the conference over to Mr. Joe Hogan, CEO of ABB. Please go ahead, sir.

Yes, thanks for joining us for our discussion today for the third quarter 2010 results. As always, my comments in this call can refer to the presentation that you can download from our website at ABB.com. Please refer to chart 2 for our Safe Harbor text covering any forward-looking statements made today.

I'll start with a summary of our third quarter performance on chart 3. We continue to take full advantage of the global industrial recovery in the third quarter, with excellent orders growth, higher revenues, and thanks to our cost takeout program, strong earnings as well.

Orders for the Group increased by 18% in local currency, a clear reflection -- a clear acceleration compared to the 5% increase we saw in the second quarter this year. Both base and large orders were higher in the quarter, including a large, multi-million dollar power order in July to connect an offshore wind farm to the German grid. That was by far the largest order won by our Power Systems systems division ever.

Demand for energy efficiency solutions and renewable energies was a notable driver of growth this quarter.

The three Automation divisions each reported strong double digit orders growth, ranging from 25% in Low Voltage products, to 39% in Discrete Automation and Motion. The parts of our Power business exposed to industrial production, such as medium voltage equipment and distribution transformers, also reported higher orders in the quarter.

Utilities spending in Power Transmission equipment, however, remained muted, a trend that we expect to continue into next year.

While our revenue growth was modest, it represented a return to positive territory after five consecutive quarters of decline. Furthermore, this growth was generated from a lower fixed cost base, as our $3 billion cost takeout plan continued to yield significant benefits, about $350 million in the quarter. As a result, we were able to post an operational EBIT of 14% this quarter, compared to 13% a year ago.

Chart 4 gives you an overview of the key figures for the quarter. As I mentioned, we saw strong orders increase in the quarter. A good portion of that can be attributed to the offshore wind order I mentioned a moment ago. I'd also like to highlight the operational EBIT, which is reported EBIT adjusted for unrealized gains or losses from derivative transactions, as well as restructuring related costs.

This quarter, we had a positive impact from derivatives of about $80 million, and a small negative of $20 million for restructuring. When comparing our year on year performance, remember that we reported a $430 million net gain to EBIT from provisional adjustments in the third quarter of last year.

If you exclude that impact, operational EBIT this quarter is up 6%, versus the same quarter a year ago. Those provisional adjustments also positively impacted our net income last year, so making the same comparison, net income this year is 18% higher.

Let's move to chart 5. Here you see some key data at the divisional level. As I said earlier, we saw some order recovery in the short to medium cycle parts of our Power Products business. At the same time, it's clear that globally, utility CapEx for higher voltage power transmission equipment remains at low levels, which is reflected here in Power Products orders. Still, it looks like we've reached the bottom on the Power Distribution side.

In the EBIT column, the Power Products margin has declined by about 1.5 percentage points since last year, as volume and price declines could not be fully offset by a favorable product mix and cost savings of about $100 million.

Power Systems continued to work through a solid order backlog, and that's reflected in the revenue growth in the quarter. The EBIT margin in this division, however, is just below the low end of their target range. This is a result of the price erosion on orders taken last year, as well as some negative product mix effects. We had additional costs associated with our Cables business, as we discussed last quarter, but these were offset by the release of provisions related to the business in Russia, and to the recently announced settlement with the US Securities and Exchange Commission and the Department of Justice.

Turning to the Automation businesses, here, the results are extremely encouraging. Orders are up strongly across the board, and are short, mid, and even some longer cycle end markets, with excellent revenue growth on a lower cost base. The Discrete Automation and Low Voltage product divisions both turned in an outstanding EBIT performance. Process Automation revenues show how this business is still later in cycle, and it will take some more time for the order growth we've seen in the past two quarters to flow through to revenue. However, Process Automation also shows some expansion in operational EBIT margin, mainly on a higher share of product and services revenues, as well as the benefits of cost reductions.

In chart 6, you'll see the development of orders in more detail. Base orders were again up in all divisions except Power Products, and were up by 20% or more in each of the Automation divisions. Large orders were also higher, up 32% compared to the same quarter 2009. As a result, large orders accounted for 20% of total orders in the quarter, the highest level since the beginning of 2009.

The increase in base orders in Power Systems is normally a positive leading indicator for utility capital expenditure, but it remains unclear when we can accept it's the same recovery in this area.

It was also encouraging to see a 13% increase in Service orders in the quarter, led by a 20% increase in the Discrete Automation and Motion divisions.

Turning to chart 7, here are some of the areas where we saw positive demand developments in the quarter. Obviously, the large wind power order we won in Germany is a big plus for our Renewables business, and we expect to see more offshore wind projects being awarded in Europe.

We also saw a good increase in solar related orders, especially for breakers and switches. And for control products, from our Low Voltage products division, emerging markets were another positive when it comes to Automation, with orders up 36%, as customers continued to ramp up industrial capacity and as construction activities continued to grow. I already mentioned the growth we saw in our short cycle portfolio, and we saw Service revenues outgrow total revenues, up 11% in the quarter.

Chart 8 gives you an update on our Power business. I've already mentioned the improvement in the Power Distribution side versus continued weakness in Power Transmission. We're selling more medium voltage equipment like the switchgear pictured here for Power Distribution applications in various industries like Minerals and Metals.

Demands for large power transformers and high voltage equipment, which is more typically used in big transmission developments, remains muted. However, tendering activity in our Power Systems division remains at historically very high levels. Once again, it's hard to say when some of these big projects will finally be awarded, but this will obviously benefit the Products businesses later in the cycles, and we are confident that we'll take our share of that business when it comes.

Chart 9 presents an overview of orders by region, and you can see how Automation orders have led growth in most areas. Power in Europe is obviously impacted by the large offshore wind order in Germany, but even excluding that order, we would have seen Power growth in Europe. Asia showed a good overall improvement, higher in both Power and Automation, while the Americas had a mixed comparison, mainly because of a large order won in Brazil last year. The Middle East and Africa saw some decline in Automation because of a few large process automation orders compared to last year.

Let's turn to chart 10 for more details on orders by country.

Brazil, as I mentioned before, the large HVDC order last year, that was not repeated, which accounts for the order decrease in Power. Automation, however, continued the growth we saw in Q2, partly due to increased customer spending in our Minerals sector.

Germany is also a very positive story this quarter, thanks to both a large Power Systems order. We also had solid growth in Automation that reflects Germany's continued robust industrial performance.

India enjoyed some recovery from its weak Q2 performance and saw Automation orders come back at double digit page. Power orders in India declined slightly in the quarter, with an increase in PS offset by a decline in PP.

Finally, China had another quarter of growth, with Automation orders up strongly, and growth in Power Systems partially offsetting a decline in Power Products.

Let's take a closer look at China and India in chart 11. There have been some concerns about these two important markets recently, so we wanted to provide you with a brief update here. Starting with China, we saw double digit orders growth in the third quarter, driven by very strong demand in our Automation businesses, as well as an improvement in Power Systems. This mainly reflects the continued high levels of industrial activity in China, where ABB is in a great position to meet growing demand for increased energy efficiency and process quality.

For example, we are in the top three in China in low voltage products, and number one in low voltage drives and low voltage systems. So we expect to continue to benefit from China's strong industrial growth.

Overall, therefore, the increases on the Automation side were more than enough to offset the continued order decline in Power Products in China. Again, in the third quarter, this was mainly the result of local competitors becoming more active with our biggest customer's state grid. However, we are starting to see some positive impacts from our mid segment strategy in Power Products, and we're expanding that to other parts of the business. We also continue to expand in areas like traction transformers and wind generators.

The government's new five year plan is being rolled out, and the focus on areas like industrial efficiency and process quality, alternative energy, and electric vehicles, clearly play to many of ABB's strengths.

So our overall view on China remains positive. Competition is tough in some areas, but there are still plenty of opportunities for profitable growth, and areas where ABB is a market technology leader.

Turning to India for a moment, here also PP saw some decline, along with Low Voltage products. Again, the overall portfolio, however, generated order growth in the quarter, compared to the 40% decline we saw in Q2.

One quarter is never enough to draw long-term conclusions, but we continue to work hard in India to become more competitive, both to meet domestic demand with locally designed products, as well as positioning the business to become a bigger exporter of both products and services. So here, too, we remain upbeat about the longer term perspective.

Chart 12 shows how we've maintained ABB's operational EBIT margin within our target margin range. We've been able to achieve these good results during the downturn, thanks primarily to the success of our cost reduction program. I'll come back to that in a moment. But an additional factor is the strength of our portfolio over the cycle.

If you look at how the EBIT mix has changed since the beginning of 2009, Automation [needs], it was already suffering significantly from the economic downturn. The Power still had some strength to partly compensate. Today, Automation is driving earnings and helping to keep us in the target range as we wait for the Power cycle to rebound.

Chart 13 shows you how the various divisions line up on their EBIT margin targets. You can see Power Products is comfortably within its range despite the downturn in demand and the price pressure they've experienced. They've done a great job of mitigating these impacts with their cost out initiatives.

The Power Systems division won't get to this minimum 6% EBIT margin target this year, however. The cost overruns associated with the subsea cable projects that we've discussed in previous quarters puts the target out of reach. Discrete Automation has also held up well through the downturn, and is now making full use of the growth opportunities coming from the economic recovery. Drives, Motors and Robotics are all enjoying solid growth.

The Low Voltage Products division is clearly outperforming right now. Demand is robust, and because they were among the earliest to take out costs when the downturn hit, they are seeing the biggest benefits today in leveraging that improved end base cost.

Process Automation continues to deliver within its target range, and has been a steady performer. Cost savings have also been key in PA, in Process Automation, and they have recorded the second highest level of savings so far this year after Power Products.

Chart 14 shows our EBIT bridge versus the third quarter of 2009. First, the operating leverage we're getting in Discrete Automation and Low Voltage Products resulted in a positive impact of about $120 million for the volume component of the bridge. As you'll recall, this was a negative $90 million in the second quarter. Price pressure remains roughly where it was in the second quarter, close to 3% of revenues. This is mainly in two Power divisions. The project margin column is smaller this quarter, as we get our hands around some of the execution issues in Power Systems.

There's a column called Sales and R&D, where we've seen some significant cost increases to support the growth we've experienced on the Automation side. There was no material difference in this category in the second quarter, which is why we didn't show it [to that, then]. We had a small plus on the product mix, with more -- higher margin product revenues, driven by the short cycle industrial recovery.

Last but not least, cost savings of some $350 million was more than enough to offset the price pressure. So once again, our great execution on cost has been a major contributor to our overall margin performance.

Turning to chart 15, let's take a look at the cost takeout program in more detail. Starting with the contribution from footprint and operational excellence initiatives, we are on or ahead of schedule in these areas. We continued to make progress in the third quarter in global sourcing and G&A cost reductions, contributing a total of about $170 million to the bottom line. However, the pace of improvement slowed slightly compared to the second quarter. This mainly reflects the shift of large parts of our Automation business back to the growth mode.

This is a tougher environment in which to take out supply costs and aggressively reduce G&A expenses. However, thanks to our outperformance in operational excellence, and good trajectory in our footprint initiatives, we remain confident that we'll make the $3 billion target by the end of the year.

On the cost side, we can see today that the total cost of the program will be below the $1 billion we originally estimated. Costs in the third quarter were just about $20 million, and we now expect some $150 million to $200 million in the fourth quarter.

Chart 16 takes you through some of our cash and balance sheet metrics. Cash from operations shows its usual seasonality, with a return to plus 100% of EBIT in Q3. This is mainly the result of timing of hedge settlements and corporate [revenue] and improved cash flow in our divisions. There we see an increase in net working capital to support growth, as well as payments related to the restructuring program.

As a result, divisional cash flows are mainly lower this quarter. Still, we are generating good levels of cash, and we achieved a net cash position of $5.3 billion at the end of September, even including a dividend payment of $1.1 billion, and the $915 million used to increase our ownership stake in ABB India to 75%. So no change in our very strong financial position.

Looking ahead on chart 17, we see no significant changes in the outlook compared to last quarter. Emerging markets will continue to be key growth drivers, and we are extremely well positioned to benefit from this.

We expect continued growth in our short cycle businesses as the global economy continues to expand. And Renewable Energies and Service will provide further growth opportunities in the coming quarters.

On the Power side, we're seeing some recovery in Power Distribution, which we expect to continue. Power Transmission demand, however, remains weak, and we still don't have great visibility on when this will recover. Finally, when it comes to industrial CapEx, which is especially important for our Process Automation business, we see a two-speed development. Customers in the emerging markets are stepping up capacity expansions and moving ahead faster than many of their counterparts in mature economies, who we expect to continue to focus on improving efficiency and productivity of existing capacity.

In sum, ABB is well positioned to capture the coming growth opportunities, with our life cycle businesses seeing the main benefits starting next year. So to conclude, we had another strong quarter with higher orders, revenues, and operational EBIT. We continue to execute our cost takeout program according to schedule, and our cash generation and balance sheet remain among the strongest in the sector. We have a lot of growth opportunities in our business, and we'll pursue those actively, while continuing to be vigilant on costs as we head into the last quarter of the year.

That concludes the formal remarks. I'd like to thank you for your attention, and Michel and I are both here to answer any questions you may have. Thank you.

We will now begin the question and answer session. (Operator instructions) First question from Mr. Mark Troman, Merrill Lynch. Please go ahead, sir.

Yes, thank you. Good afternoon, Joe and Michel. It's Mark here from Merrill Lynch.

Hi, Mark.

A couple of questions. Obviously, you know, Power Products is the area still under some pressure. I wonder if you could give a bit more color on -- you talked about Distribution Transformers picking up a bit. A bit more color on what you think about -- how you think about this division recovering, in terms of global end market demand. And then maybe on the second point, on the market share, I think it's clear that China has been a problem. Is it really there where the market share has been lost, or is it outside there as well? So I'm trying to get an idea of how your performance in Power Products is going, versus the overall T&D market.

And just a final question, on your profit bridge. You introduced the sales and R&D costs. I wasn't clear whether that was in the previous bridge and wasn't listed, or whether that's a new element. But the main point of the question is, do you think you can still get a lot of -- I guess, margin leverage out of further volume growth on the Automation half of your business, and maybe give us a sense of some utilization. Thank you.

You know, on the Power Products side, I know that's a lot of questions that are going on out there. I think within the Power Products division, we certainly have a medium cycle part to that business that we look for. So I'd say it's earlier longer term. And that's the Distribution side, whether it's -- the interface is with the industrial applications, and so that's where Distribution Transformers and also Medium Voltage comes in also.

We've seen that pick up. It's not the utility customers' CapEx that necessarily drives that. And so we -- what's that mean for the business? It's helpful, because it's a significant part of the business. It is a good early indicator, at least historically, that that leads before the other parts of our business come through.

And so, you know, Mark, I don't know how much color you want in that, but we see that in the United States, we see that piece in China, we see that placed in different areas. But I don't want to mislead you, that's an industrial interface, primarily. It's not a CapEx utility interface. And so we're still waiting to see that part of our Power Products portfolio come through that would be more utility driven.

On the market share side, yes, you're right. When you look at market share, we don't have any kind of significant loss in market share that we can see, outside of China, and even within China. It's all really basically with state grid, and has to do with transformers. It doesn't have to do with high voltage switchgear. It's mainly on the transformer side.

But I would say that we had some strong competition out there, but I would say, when you really pin it down, China transformers state grid is the primary component of market share loss, if you were concerned with that.

On the profit bridge, I'll let Michel handle that.

Yes, Mark, on the profit bridge, so far, we never mentioned selling and R&D, because basically there was not major differences compared to last time. As you know, it's not part of the savings programs. That was only focusing on the G&A part of this expense. But it just happens now that we feel that it is the right time, especially in the Automation business, to put more salespeople on the ground on one side, also for the whole Company to invest more in R&D, and especially, it is R&D that can help us design products to better compete with these Chinese and Korean competition.

And so, yes, we are -- we have been increasing R&D this quarter to an extent that we felt it had to be mentioned on the bridge, because it was more material. So it is the first time that we have such a difference.

Okay, thank you. And just one quick follow-up. In terms of the Power Products division, do you envisage more restructuring in that area, or how do you think about that going forward?

Oh, we've never stopped restructuring that division, Mark. We won't stop. I mean, we have to adjust costs with volume.

It's clearly the division that is most challenged for the moment, so it still has a number of programs to execute, yes.

Okay, thank you very much.

Next question from Mr. Andreas Willi, JPMorgan. Please go ahead, sir.

Good afternoon, gentlemen. I have a follow-up question on the earnings bridge, first. Where do we see changes in commodity prices in the earnings bridge? And maybe you could give us some indication how that's affecting ABB in Q3, and maybe also going forward.

On the price declines which year on year have gone up a bit relative to Q2, maybe you could give us some indication of the sequential change, because we don't really have all the data for last year. And in terms of Power Products, maybe you could explain us a bit more in terms of what's going on in the mix in that division, whether that also explains why Q3 underlying EBIT was about $100 million lower than Q2 on $100 million lower sales. Thank you.

You want to do the earnings bridge?

Yes, give me a minute on that one, yes. Can you take another one first?

Yes. Andreas, you know, you had some pretty big financial questions, so I see Michel is working hard over here, so I'll kind of do a commercial for you for a while.

You asked about the sequential change in pricing. [Rene] and Michel will give that to you, too. On the Q3 EBIT, what exactly is going on between Power Products, I think what you're talking about is Q2 this year versus Q3 this year. Is that right?

Yes, in terms of the -- it's about $100 million less EBIT, and about $100 million less sales, and I just wondered whether on top of price and the impact of the volume decline, is there also mix changes that maybe help to explain some of the high quarter on quarter variations on profitability?

Yes, there are -- you know, Andreas, there are some mix changes, and it depends how you want to quantify mix. I mean, there's some jobs that will roll through. Sometimes it could be the same product, like a High Voltage kind of a product, it comes through at a higher price versus another one. That would be mix, based on price mix between products.

But also, when you look at Medium Voltage as being one of the larger components versus high voltage, it carries a higher margin sometimes, you can get negative or positive mix, depending on those things (inaudible).

First, these things like Medium Voltage hits the revenues much faster than High Voltage. That stays in the background for a while. So when the Medium Voltage picks up, you see the mix impact much faster.

So there is some mix in there, Andreas.

Andreas, your question on commodity for the EBIT bridge, obviously it's not part of the bridge itself. Basically, if we have an increase of commodity costs and that we are unable to pass it on in terms of price, it impacts the change in EBIT from one quarter to the other. So what we tried to explain, the EBIT bridge is what we get from high or low volumes, whether we get from the pricing over all products, but the raw material cost goes up, and remember that the savings that we register, we have excluded commodities from that. We are just working on the normal -- all the products, so the commodity stuff having a negative impact, this will explain part of the segment EBIT margin as different than it was in the previous periods.

But it would still need to show up in one of the different (inaudible) you show? I mean, let's say commodity costs are now $100 million higher than in Q3 last year. Would it then basically reduce the volume leverage, or --

Yes, it would reduce the volume leverage, and the price leverage as well, because it drives one with the other. So it's kind of embedded into that, and explains a difference of EBIT from one quarter to the other.

Okay, thank you.

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

Yes, good afternoon, everybody. It's James Moore at Redburn Partners. And a couple of questions, if I could, one on R&D and sales. The $17 million headwind, will that run for the next three quarters, because you're just at a higher running rate? And secondly, some questions on pricing in Power Products. I get the impression that Power Products has been the deterioration on year on year price. If it's 5% to 6%, let's say, is it possible to give us a feel as to where the pricing pressure is worse at the moment, and what the range is between, say, Power Transmission down to Medium Voltage? And also, do you have any visibility on fourth quarter and 2011 Power Products pricing?

You want to handle the R&D and sales and the bridge?

Yes, okay. The R&D and sales, I think this quarter especially, we had a few specific R&D projects that came to completion, so I think it was a little bit of a blip. I don't expect so much more in Q4, but I think for the whole year, we'll see R&D expense probably up 6% or 7%, compared to last year.

In terms of sales expenses, well, I think we are running for the moment slightly positive. This trend will probably continue that on a full year basis. I would expect to see our sales expense up 2% or 3%.

Okay.

And James, on the pricing side, I think if you look at the price down that we had in the quarter, we know that about 60% of that price down had to do with the Power side, and about 40% of that price had to do with the Automation side. So being kind of lined up that way, to figure out what the differences are.

You know, if you look -- I don't have a lot of visibility going forward. Michel and I watch closely what the margin is coming in on orders, so that we can anticipate if there's going to be a material change in some way. I can say we haven't seen a huge change in that piece.

Remember, volume -- and there are some mix -- as Andreas asked in the last question, to come in at times. So the Middle East continues to be a very competitive marketplace. If most of the orders that we get come from the Middle East, you're going to see a lot of pricing pressure, in that sense. You start to see things come back in Europe and different parts of the United States. We don't see as much pricing pressure in those cases, and we'll see higher margins.

And so it's going to really be -- a lot of it has to do with how these economies develop, and what kind of capital expenditures that we're going to see from a utility standpoint, will dictate a lot, in the sense of what kind of margins we're going to see on Power Products as we go into 2011.

Can I just follow up there and say, if pricing pressure sustains itself in Power Products, would you do some kind of restructuring actions within all the charges that you've taken? Or would you have to make an additional program that would be broken out like the last one?

We do have more restructuring in the queue for Power Products. We know exactly what we're going to do, when we're going to do it. And so I would say, that is -- we've had these plans in place for each division, depending on what kind of volume we see. And we'll continue to execute on those until we see a marketplace. And in fact, if you dig down into Power Products, we have those restructuring plans, whether it's Transformers, it's High Voltage, or Medium Voltage. We know exactly where we need to go.

And James, remember that before we started this $3 billion cost saving program, we always had restructuring going on. We had a guidance to save at least [0.5%] of restructuring costs every year for the Company, which is between 0.5% and 0.7%, so that will continue. It won't be a record for the whole Company, but probably the Automation divisions are far beyond that point now, but for sure, Power Products needs to work more, and to really work at getting even a better footprint, and better product design than what it has today.

Sure. Thank you very much.

You know, James, the last thing I think we'd tell you, too, is I think years ago, we gave a margin corridor for Power Products of between 12% and 17%. We're standing here at 15%, and it really -- in the depth of this whole recessionary piece. So I think the teams may be able to juggle that one pretty well, and you should take some comfort that we've been able to restructure and be able to be competitive within that range, to keep that business in good shape.

And we also clearly indicated in Q2 that the 18% was not sustainable, so I think you are more back to normal margins here.

Okay. Thank you very much.

Next question from Mr. Simon Smith, Credit Suisse. Please go ahead, sir.

Hi. Thank you for taking my questions. I had two main questions. One was, in terms of the Power business -- so clearly, you've seen here the pricing pressure come through from orders that were already in the order backlog. And I know that in some of the areas that have been most aggressively competitive in terms of transformers, they are the longer lead time parts of that business.

And I just wondered if you could give me some impression as to how much more would have to come through from that backlog, in terms of the Transformer side, in terms of price pressure. And sort of maybe, dovetailing into that, what we could maybe expect in terms of a sort of price component in Q4, whether on easier comps, we should now expect that to ease, or whether we should expect something similar to what we've seen.

So that was my first question. And the second question was really, a comment that you made in your introductions, about the mid-market strategy in China. You were saying that you've already seen some successes there. I just wondered if you could maybe give some details on what you've done there, and maybe how that has seen an improvement.

You know, Simon, on the first part, on the backlog, from a Transformer standpoint, remember, Transformers is a pretty diverse business. And so, when we talk about our Distribution Transformer business showing some -- at least bottoming out, or showing some upside, it helps us. And that helps us see the price pressure kind of moderate there, and that should help us going forward if we can see that kind of sustainable growth. It's the large Power Transformer piece that is the longest cycle part of the Transformer side, and we continue to see pressure out there on it.

But we have a mix backlog of products that recently -- that have -- you know, some of them have good margins, some of them don't, and then some of them that are longer that have higher margins. So it's hard for exactly -- when those peel off, and what's going -- what exactly it's going to be.

But I would appeal to you to try to understand, and I think you and I have talked about this before, that when you look at this Transformer business, try not to make it look like it's all large Power Transformers. It's not. And if the Distribution comes back faster, and this continues, that's going to help this business in a significant way.

But again, it depends upon what we see in the United States and also with China, which are -- and India, which is our Distribution Transformer side.

On the mid-market piece in China, I tell you, probably the biggest example is in our Medium Voltage switchgear side. You know, there's two combinations of that. One is having a competitive product that's designed and engineered in China, because we see in China that you have these incredible product development cycles that are three times as fast as what you have in the Western world, so you really have to have good engineering and manufacturing on the ground to service that demand.

Secondly is channel strategy in China for that particular product, it's really important. When you get in the middle market, you have to have the diverse channels all over China. And we've been able to develop that over the last -- really, last year, several quarters. We're turning that experience over to our Transformer side as we try to move from being almost captive to state grid, to adding more exposure in China, moving more engineering capability over there in those businesses, too. That gives us more flexibly from an engineering and manufacturing standpoint, to do that.

You know, Simon, I also tell you, on Low Voltage, and we've had this same kind of experience in China and also in Motors, where we have really world class businesses there, a number of -- yes, Process Automation, where we have number one positions that are really based on these mid-market strategies of strong engineering on the ground, they have their own autonomy, their own trajectory and how they can interface with the marketplace. And then, their own manufacturing capability, so they can respond, use local materials, and really be competitive.

And that's where we're moving both the High Voltage business and also the Transformer business in China, is to help them to make that model.

Thank you. And Michel, is it possible to give a sort of guidance of how pricing pressure would play out in the fourth quarter in the bridge?

Well, listen, at this stage, if we look at our margins and the backlog, and then you all -- there's nothing dramatic out there. So I think -- and if you see the two, on a year to date basis, the operating margin of PP is down by 1%, 1.5%, from a level that was extremely high last year. So you can still have a little bit of a drift, but as I said before, to be -- PP remains a solid 15% type of margin business, and I say for the moment, there are offsetting forces like Joe mentioned, distributed transformers, even small power transformers maybe starting to pick up, components, [dry] transformers, that Medium Voltage, that can offset the price pressure we see, especially on the Chinese market, or in Transformer or High Voltage. Nothing dramatic I think that we should expect a total collapse.

Okay. Thank you very much.

Okay, Simon.

Next question from Mr. Johan Trocme at Nordea. Please go ahead, sir.

Good afternoon, Joe and Michel. Two questions for you, please. First of all, just to avoid any misunderstanding, you mentioned specifically in this third quarter report that the competitive pressures have started affecting orders. Shall we read that as ABB having turned away from orders because of pricing pressure, because those wouldn't be attractive enough from a margin point of view, or is it something else that you're trying to describe there?

And second question, maybe, Michel, if I could just ask you to update us, at least in general terms, of what the net currency exposure situation looks like for the Group. There's been a fairly significant amount of change to your footprint just over the past couple of years, and what do your major exposures from a currency point of view consist of at the moment?

Johan, I'd say on the competitive pressure side, I -- again, I don't see any real marked difference, in the sense of what jobs that we decide we want to really deny, in a sense, because we see that there's pricing pressure there, and jobs that we take. We've always been very discriminate in the sense of what we take and what we don't.

We see a lot of the jobs today being in the Middle East, and depending on what country you are in the Middle East, based on their terms and conditions, there's sometimes -- it's not the pricing as a component that turns us away. We just don't like the Ts and Cs. And what we think the (technical difficulty), and we do walk away from those at times.

But I would tell you, there's not a material (technical difficulty) in the sense of what we say yes to and what we have said no to. You just might see more of a centralized (technical difficulty), rather, in the United States and Europe, (inaudible) before.

For sure as well, the fact that our backlog margins are still at an acceptable level, is also because we are still (inaudible), in that we don't take any kind of orders in the books. So we are, for sure, from time to time, losing a little bit of volume, but I think it's a sound way to operate for the moment, so that we keep our margins at acceptable level.

In terms of the currency exposure, you are right. With the footprint movement that we have done in the last years, we have obviously moved some of our cost base from euro denominated to Swedish krona denominated, into more the dollars, only if you still accept the principle that emerging markets, the dollar is always -- it's good in a way, because it has offset the weakness of the dollar that is still all major revenue currency, since we also sell a lot in the Middle East in US dollars.

So, I think it has slightly improved the overall positioning of the Company. Now, on a pure operational exposure, as you know, we are hedging all our commitments, of course, in terms of projects, and in terms of future cash flows. That's why you see this pretty high fluctuation of derivative impacts every quarter, but I think it shows, again, our -- what it can be, and this policy, I think, helps stabilizing our EBIT margin toward the quarters.

And would it be fair to say, Michel, that from a very general perspective, ABB would still be overrepresented in its cost base in euros, so if there's any exposure there, it would be that?

It's fair to say. It's less than it was a year or two ago, but I would still say that the euro is the major cost component -- euro, and Swedish krona.

Thanks very much.

You're welcome.

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

Thanks very much. Hi, good afternoon. It's Colin Gibson from HSBC. A couple of questions please, the first on orders.

First of all, just going back and looking at the order growth in Discrete, I mean, it was 24% already in the second quarter. It's now 39% in Q3. Great performance. So could you just give a bit more color on what -- which products it is that are starting to fly off the shelves, which geographies it is, which apps it is? Just a bit more detail, really, on that pretty remarkable performance.

And secondly, just going back to that PS tender backlog slide on chart 8, we saw a big step up in Q2 in the tender backlog, and we've held in there pretty well in Q3. And I'm wondering, to what extent that backlog leap up in Q2 was a result of just one or two very large competitors going in, and if they're still pending here in Q3, whether then there's a risk that we can [back down] in, say, Q4 or whatever, as those tenders are, in fact, awarded.

So that was the first question. And then secondly --

That was two questions, already.

Well, two quick ones. Hey, everyone else has had a go, so I thought I will. And then my second and a half question is regarding Chinese competition. You've had -- you obviously, you're one of the companies in the sector which to me has been struggling with some Chinese competition over the past year or so. We've seen something very interesting this week, which is a big Chinese infrastructure firm, it's CLCC, taking a $500 million hit on a contract in Saudi Arabia, a rail contract in Saudi Arabia.

Do you think that's symptomatic of the terms and condition that the Chinese, and maybe to some extent, even Indian firms are trying to do business on overseas? Do you think there are more risks out there? Thank you.

Colin, on the Discrete Automation and Motion side, the 39% orders piece, the big drivers there are Robotics drives and machines, real big ones (technical difficulty). You know, Drives has really had its biggest orders month ever, I believe, (technical difficulty) September. So when you think about Drives, you're thinking about energy savings, you're seeing motion applications and those kinds of things that it goes with.

Robots, too, I think you know how depressed the Robotics business was last year. We threw a lot of restructuring behind it. It's come back very strongly, and we're in a good position to be able to serve that marketplace, and both out of our Chinese production and Swedish production, too.

On the PS tender backlog, you know, large orders come in and out of that all the time. Sometimes we get them and retire them and they become part of our real backlog. Other times, we miss.

There are some large jobs out there. We talked about, in the large wind order that we had in Germany recently, we see a lot of wind orders coming up. You know, some of those are representative of the tender backlog, and some of those, they come through, will show up in that backlog also.

So, you know, this -- I think what to look at, they're calling is -- and this is what Michel and I look at too, is that this is a high tender backlog. You'll see it go down and up, but it's maintained a very high level over the last 24 months, actually higher, really, than any other time in its history. And it does show you the large number of projects that we see out there for PS and things like stacks or static bar compensation in HVDC.

On the Chinese competition piece, look, I -- you know, that's kind of an [EPC] that you're talking about. I think you can kind of look at Indian EPCs, and they made these mistakes. Korean EPCs made them when they first started going in the marketplace. Often, they don't have great understanding of Ts and Cs, hedging currencies, and those kind of things, and you can get caught in this kind of a situation.

I would say, we -- when we quote on those kind of jobs, obviously, we're kind of educated from a risk management standpoint and mitigation process. And as I mentioned to the last caller, the question is, there's sometimes on Ts and Cs, we just won't even go near those, because we're concerned about them.

But I would tell you, don't write off the Chinese because they made a mistake like that. If you look at the Koreans or whatever, they tend to learn based on that, and continue to move on.

So I wouldn't necessarily say it it's (multiple speakers) --

No, it's also symptomatic of a buyer's market. T&Cs are much more difficult to negotiate than they were a year or two ago. The customers have much stronger requests, and they find a company that are willing to accommodate for them. So it is a challenge, from that perspective, and maybe it will take a few accidents like this one for companies to draw the conclusions that they cannot be that aggressive on T&Cs.

That's very helpful. Thanks a lot.

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

Hey, good afternoon. It's Martin Wilkie from Deutsche Bank. A couple of questions. Firstly, on the Low Voltage business, where obviously a margin has been exceptionally strong, and just if you could comment if you're coming up against any capacity constraints and so forth, that may require investment, and therefore, limit margin progression, or if we should see that margin as essentially a new level that's possible within that Low Voltage business.

And then secondly, just going back to Power, on the Power Systems business, obviously, you've talked about not being within the target range for the full year, but just to get an understanding, excluding the provisions, and obviously given that the margin was weaker in the first half, do you think the run rates of margins is now at the lower end of that range, or are -- you know, excluding what happened in the first half, are you now back in that sort of 6% or so range? Thank you.

That's a good question.

Yes.

On Low Voltage, Martin, I'd say we -- this thing has ramped up quickly. We've seen a lot of orders come in. We have developed a little bit of a backlog in that business, our Low Voltage business that we don't normally have. But I would say our capacity is pretty good. We invested a significant lot of money during the downturn to really automate some capacity in different parts of the world to increase that, and that's helped us be able to meet this demand.

We've had some issues, as you've probably read about this with other companies, with some electronic componentry, that might not be readily available. These are things that aren't real expensive at times, they just become frustrating, Martin, like you know, small little capacitors, small little pieces.

We've been able to leverage the overall buy situation of ABB to mitigate that, and be able to get the components that we want. But it would be wrong of me to tell you that it's not a -- you know, it's not a focus for us. And we continue to be -- try to make sure that we leverage an overall buy as much as possible, so that we can get our fair share of what's available in the marketplace.

But I wouldn't say that there's a pending big issue for us, from the standpoint of either outside supply or internal ability to produce right now that's a major concern for us.

Yes. And also, in terms of all capacity, I don't foresee that we will soon enter into a problem. We have built new factories in the framework of this global footprint program, and so, in fact, the additional capacity that we start using now is the capacity that is new and well established in countries like India and China, for instance, that is also helping a lot in this fantastic incremental margins, so that we see Low Voltage at this time.

For your question on the Power Systems, I would say, yes, if you take that apart for a system, it's getting back to a normal run rate, and I would even say that we expect it to even improve in Q4, which is traditionally a very strong quarter for Power Systems. So you can see that in the previous years as well, there's a lot of projects arriving to certain [mind storms] in Q4, so a better revenue recognition. So we do count on a strong Q4 for PS, but still, given the amount of project losses that there has been since the beginning of the year, we don't see that reaching the 6% for the full year -- it's probably going to be close to 5%, I think.

Okay, thank you.

Next questions from Mr. Michael Hagmann, Nomura. Please go ahead, sir.

Hi, two questions, if I may. The first one, I would really like to come back to what Andreas Willi was asking and what Simon were asking about the pricing element in the bridge.

If you look back at those graphs over the last couple of quarters, we had a negative impact from pricing of about [300] in Q4 last year, and then if you add up the project margins and the price component over the last three quarters, we were in the range of [250 to 300].

Given your order backlog, you must know or must have a pretty good idea what the development is going to be in Q4, and maybe you also have some kind of a notion of what it could shake out to be during the first couple of quarters in 2011. And I think that's where we are coming from, and that's where we are with current -- [I'd like] to have some help. If you could give us some help, that would be really appreciated.

And the second one is on the cost savings. I was wondering if you could give us an indication on how cost savings in the quarter broke down between the different divisions. Thanks a lot.

Yes, okay. Listen, Michael, on the first one, you know, clearly, the price environment is not improving, so I think that what you have seen in the last couple of quarters, I don't see really a lot of reasons for it to improve in Q4. There is still the price decline that we see on all orders, it's still slightly faster than what we see on revenue, so this impact should continue. And that is why, also, we need to continue getting these savings, in order to deliver against it.

So I can tell you that for Q4, once we go beyond that, no, that is quite difficult to say, because we still have a lot of book and bill sales as well. And on top of that, if the demand in the Automation side of the business keeps going, I would expect as well that we will have to increase prices to reflect the fact that the overall component suppliers do the same, because of the shortage that they are seeing. So the situation can change pretty fast.

For Q4, I don't expect an improvement compared to the kind of numbers we have shown in Q3.

And the cost savings --

As far as the cost savings are concerned, I don't think that we disclose these details by division. We have not done that in the past, and I don't think we should start getting into these kind of details. I think we more try to explain to you a little bit where we come from, the different categories of cost saving between sourcing and G&A. But we have not gone to (technical difficulty), and I don't think we should.

Fair enough. Thanks a lot.

Next question from Mr. Thomas Baumann, Neue Zurcher Bank. Please go ahead.

Yes, good afternoon, gentlemen. I have a question to Power Systems. Can you help here? I understand that you had a release of provisions that you mentioned in the press release, and against that, you had this $63.5 million payment with the US. Can you give us some detail at least what the net effect was? I understand it's a positive one in the quarter for Power Systems.

For Power Systems, I would say that in the quarter, the additional cost that we had on some project slippage that were a little bit above $20 million was basically offset by provision release that was related to this (inaudible) issue, to some Russian VAT issues, as well as just normal provisional releases on contracts that were executed, and had still a provision buffer left.

So if you put all of that together, it's basically neutral.

Oh, it's neutral. So we can -- you're feeling that the margin shown is more or less the run rate?

Yes, I would say, for a quarter, because also, traditionally, the run rate in the third quarter is lower. But as I said before, in Q4, you should expect a better run rate than that.

That's my second question, related to that. That would mean that you had to get close to 10% in order to end the year with 5%. Is that what you're saying?

No, but if I am not mistaken -- let me see. You're saying that last year, for instance, we were close to 7%, 7.5% on the adjusted basis, and you have also pretty high revenues in Q4, if you look at what you had last year at this time.

We do expect, both from an order, revenue perspective, quite a jump in PS in Q4, just because we know the progress of some of the projects we are working on. So I will see 10% if you consider the kind of revenues that I am thinking of. But it would take something close to it.

Okay. Thank you very much.

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

Yes, hello. I just had two questions on -- one, on emerging markets. Could you give us the total growth rate of the order intake in the emerging markets in Q3? And the other question relates to Low Voltage business. You have done a very impressive quarter in Q3 again. After your Q2, you basically said that we shouldn't expect such high margins to continue. Do your change your outlook now on Low Voltage, assuming that these very high levels of margin can be sustained going forward, or should we expect that at some stage, that there will be kind of a fallback of these margins?

On the emerging markets piece -- Michel is looking it up, but if my memory serves me correctly, I think emerging markets are 36% for the quarter. (multiple speakers) emerging markets?

I'm looking through the calculator, that you're -- no --

You're sure it's not --

No. No. We haven't calculated the [compound], but you know, I can give you a few examples. China is 13%, India is up 3%, but I think the problem here is, Brazil is down 74% because last year, we had this very large HVDC project in Q3, so obviously, they can't take the comparison. That's why overall, emerging market, the outlook is good this year as it was the other quarters, but it's just because of the large projects.

But 13% in China, given all the questions that you guys had before about China, still shows us a very robust position that we have there, and the Automation business has more than made up for the pricing pressures we are seeing on the Power side.

And do you have the total share of emerging markets in the total order intake in Q3?

Let me see if we have that. Have we calculated that, the total share of emerging markets in the total? It might be that we haven't yet calculated that, Alfred, but my intuition would be, less than 50%. Because we had a very strong quarter in the US, where we were up 37%, and we had an extremely strong quarter in Europe as well, where we were almost up 50%. So it was revenge of the old economies this quarter.

Yes, and big order comparison.

Yes.

On the Low Voltage business, the margin sustainability. I think we're obviously pleased with the 20.8% that we're reporting right now.

In the short term, we feel good about that business, and where the margin is. It's hard for us to comment exactly what's going to develop competitively in the longer term right now, but at least in the shorter term, we feel pretty good about the sustainability of that.

Obviously, it's going to have a demand component on here. It's going to be important in our ability to be able to maintain these productivity rates that we have, based on the restructuring actions that we took on plants and employment during the downturn.

Thank you.

Thank you, Alfred.

Next question from Mr. Martin Prozesky, Bernstein. Please go ahead.

Good afternoon, gentlemen. A few questions, please. On the Service business, you mentioned pretty strong growth, I think it was 12%. Is that a reflection of the strength of the Discrete Automation and Motion business, the Robotics, and software associated with that, or is that broader based? First question.

And secondly, on the very strong tender activity, are you seeing a difference in the mix of the types of projects that are being tendered on? So are there more high tech HVDC offshore and (inaudible) compensated projects in there, or is the mix similar to what you would have seen three, four years ago?

Oh. I'm not sure (inaudible) -- four years ago. I have no idea.

Well, let's say, yes, lately, for sure. There has been a lot of large orders in the HVDC segment, especially related with this wind offshore parks, while three, four years ago, I think we had much more substation projects to work on. It has been a little bit quiet on the substation front lately, but there's still a couple of things coming. But we have also still quite a lot of HVDC at the stage two, and not only new opportunities. We are considering a few projects in the US and in Canada. That obviously increases the scope quite a lot, too. So it is pretty diversified, and probably more high tech related than it was two or three years ago.

And more offshore wind, we see, too, then, I'm sure, than a couple years ago. On the Services business, I think we jumped 11% or 12% that you talk about. It's -- Discrete Automation and Motion, I know, had a really strong Services quarter overall. Some of that is going to be consulting software and those kind of things, but the majority would be break and fix, and things that we've been focused on over the last -- yes, and [Inventix], also, which came in as our acquisition, comes -- a predominant amount of that revenue comes in as Services, too, which helps that number.

But we see as well, for instance, quite a resurgence of service activity in the turbo business, from processor termination. And so that helps as well, because it is already a positive business in terms of margin contribution, too.

And I'd say, in DM, also, robots is -- we're seeing big orders in Robotics, but also, a lot of work from a maintenance standpoint and a services standpoint there, too.

And then maybe one follow-up, just on the early cycle businesses and the components (inaudible) issues. Are you seeing other pressures in the value chain, pricing, or maybe pressure on working capital because of the supply constraint with, you know, your payment terms and things deteriorating?

No, you know, I don't think it's -- we've obviously had to build some inventory in order to help these businesses ramp up, so that's been a negative on working capital. But I don't look at this thing as a material change in a big way. I don't. It's what I (inaudible).

No, it's all net working capital as a percent of revenues is still about 1% lower than it was last year, so I think we are holding it quite well under control. Obviously, there is some requirements in terms of inventory, but we are trying to also compensate that by being tougher on the payment terms with suppliers. And so far, we have managed to (inaudible) the (inaudible) quite okay.

Thank you.

You're welcome.

So, answering the question of Alfred Glaser before, the [locals] country order intake for this quarter was 44%, emerging countries order intake. So that was a big change. Last quarter -- same quarter last year was 57%. But then again, a big part of that is that a year ago, we had this big HVDC project in Brazil, and this time we have a big one in Germany. And that makes a big difference.

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

Yes, good afternoon. It's William Mackie from Berenberg Bank. A couple of questions for you. First of all, going back to the restructuring and savings element of the business, when you look into Q4, could you perhaps provide a little bit more detail on where you envisage the $150 million to $200 million of restructuring to be allocated, given it's almost twice what you spent year to date?

And then, you mentioned earlier in the media call, that you would anticipate some of the savings, the run rate of savings in 2010, also rolling into 2011. So what type of benefit do you envisage in terms of the savings element of the plan actually flowing through in 2011 as a delta against 2010?

And then coming back to the Service side, across the Group, you've mentioned that the level of Service growth, and particularly within Low Voltage products, I think you highlighted it at 20%. But from my recollection, Process Automation is the division where about 40% of revenues are linked to Service. And yet, we've not heard at least what type of Service growth you're seeing in that division. So it would be great if you could throw a bit more light on the rate of Service growth within Process Automation.

William, I think on the restructuring side, Michel --

Yes. On the restructuring side, I think the two divisions that will take the most of this spending will be Power Products and Discrete Automation, where we still have specific progress to make, especially in terms of footprint. So that will be the major ones.

In terms of giving you an idea of the run rate for next year, no, we won't give you that, because the issue is also that it has not really become a bit of a different program for each of the divisions, though we can include there, in their budget for next year, it is clear that we are looking again at a year that we have to be able to juggle the challenges and still deliver an EBIT margin within fiscal (inaudible) expectations that we have. That will take some fine tuning, division by division, but we're not going to give any feedback on this now, because the program officially finishes at the end of the year.

And PA Services --

PA Service growth, I don't have the number here in front of me. The thing is that what we have done in PA, clearly, it has been a good quarter in terms of mix, so they have less systems and more products and services to book for.

As you know, we have mentioned it a few times, that we have done quite a cleanup of some of the full service contracts in PA that had, for a while, a negative impact on the top line of Service, but also, I would say, a better impact on the bottom line. Now, the traditional life cycle services, as well as turbo, is picking up. And so, I know that the development was positive. We are looking for 11%, or it was, in total, 11%, which is probably a combination of more than that in terms of life cycle, and a decline in terms of full service.

Great. Could I just ask a follow-up regarding the tender backlog, which is in relation to the last question? When you look into your tender backlog for Q4 and the year -- well, across the tender backlog, is there a great divergence with regard to geographic split? Are you seeing many of those tenders that are in that backlog coming from the Middle East and Asia, which have been sitting there, or is it more skewed to Europe?

Well, in Q4 for sure, we do expect a few Middle East projects to materialize. The Middle East has been a bit weak in the last two quarters, while in fact, there is a lot of tendering activity, so that should happen. For the rest of -- so we expect quite some things to happen in North America.

So I think that would be the two geographies where I would expect to see the more materialization of some of these tenders into real orders.

That's great. Thank you.

The last question for today is from Mr. Samson Edmunds, Goldman Sachs. Please go ahead.

Good afternoon, guys. Just two questions, please. The first one, just on the $82 million derivatives gain, I was wondering if you could give -- just give some details on that, whether that's sort of normal hedging gain or something.

And then the second question was just on your balance sheet. And you've done a couple of billion dollars' worth of acquisitions. You paid $1 billion in dividend. Your net cash position is sort of broadly unchanged, so you're kind of demonstrating that you've got enough cash flow in the business to do quite chunky bolt-ons.

I'm just wondering if there's a point at which you start to think about returning cash, or how you think about the balance sheet, what sort of financial place (inaudible) you want. Thank you.

Okay. On the derivatives, that is now something that you see every quarter, shows a little bit of volatility of the markets, as I said before. We have a policy to hedge all our cash flows, and especially the cash flows coming from projects. Now, hedge accounting is a very complicated science. For instance, the conditions that you need to put together in order to qualify for hedge accounting are very restricted. We have a project, for instance, change in terms of timing of the different maturities that you have in the cash flows, you are losing the qualification for hedge accounting, and then you have to take an immediate impact.

You would not be able to analyze our results if we don't reclassify that. That's why we divulge that separately, we disclose it separately. Now, $82 million seems to be a high number for a quarter in this, but year to date, for instance, it's an impact of negative [56], so after a while, you kind of catch up as these hedges do get realized. But quarter after quarter, you may have some differences there.

On our cash position, I mean obviously, this cash -- the cash we're generating right now is really top in the segment. We're well aware of it. We continue to look for ways to deploy that cash. We talked about restructuring activities -- that's always a big one. We're going to make sure that we have, as I've stated many times, a consistent dividend policy that you can depend on. And then we look at inorganic opportunities that continue to exist out there, and we'll pursue them.

We also know that there's dividends and stock buyback as part of cash allocation that we can consider too, and Michel and I consider that. We discuss it on the Board level all the time.

Perfect. Thanks very much.

Yes.

Thank you.

Okay, I want to thank you for joining us. Again, we feel we had a strong quarter, with a 14% EBIT, and strong orders, and also, a return to growth from a revenue standpoint. We look forward to talking to you again after the fourth quarter and reporting on the entire year.

Thanks again for your support and for participating.

Thank you. Bye, bye.

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