Abb Ltd (ABB) 2011 Q3 法說會逐字稿

Good afternoon. I am Stephanie, the Chorus Call operator for this conference. Welcome to the ABB third quarter 2011 results analyst and investors conference call, hosted by Mr. Joe Hogan, CEO. Please note for the duration of the presentation, all participants will be in a listen-only mode and the conference is being recorded. (Operator Instructions). A replay of this call will be available for four weeks following the conference. (Operator Instructions).

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

Hello and thanks for joining us today to discuss our third quarter 2011 results. As always, my comments in this call refer to the presentation that you can download from our website at ABB.com.

Please refer to chart two for the Safe Harbor covering any forward-looking statements we might make today.

Let me start with a summary of our third quarter performance on chart three. This was a solid quarter where we continued to execute well. Our cost-savings again more than offset price pressure in Power and we continued to build the order backlog which will support growth in the coming quarters.

Growth in early-cycle businesses slowed this quarter, partly on comparisons on the very strong rates we saw a year ago, as well as weaker demand in some industrial sectors.

In total, we saw orders up 12% in local currency to almost $10 billion and 6% higher on an organic basis, excluding the Baldor acquisition. Revenues were stable to higher in all divisions and increased 11% in local currencies and 4% organically.

That generated $1.6 billion in operational EBITDA, an increase of 24% compared to the same quarter in 2010, with an operational EBITDA margin of 16.7%, about 0.4% higher than in Q3 2010.

Baldor made a significant contribution of more than $500 million in sales and about $100 billion in operational EBITDA. I'll come back to the strong Baldor performance in a few moments.

With another great quarter of execution on costs, with savings of approximately $270 million, that again more than offset the price pressure we see in the P&L as we execute on some lower-margin power transmission projects out of the order backlog. I'll come back to this one, as well.

On the cash side, we turned in what we consider a disappointing performance as higher net working capital, mainly inventories, had a negative impact. However, we're taking aggressive measures in this area and expect a solid fourth quarter cash return.

Finally, we took the opportunity provided by low interest rates to extend the maturity of our long-term debt under very favorable terms. We launched about $1 billion of new Swiss franc bonds maturing in 2016 and 2021. As the proceeds were only received in October, this bond issue had no effect on our third quarter balance sheet.

Chart four fives you an overview of the key figures for the quarter. I've already discussed the main points -- double-digit growth in both orders and revenues, along with a solid improvement in operational EBITDA. To help you make the link between reported EBIT and operational EBITDA, we provide you in this chart with D&A and restructuring-related charges, $260 million and $300, respectively, this quarter and the accounting impact of derivative transactions, which is minus $100 million this quarter compared to a positive of about $80 million at this time last year.

That gives us an operational EBIT of $1.3 billion and an operational EBIT margin for the Group of 13.9%, well within our target range of 11% to 16%.

Lastly, you can see the depreciation and amortization for the quarter, to get to the EBITDA number. Our order backlog remains strong, which will support us heading into the next few quarters.

Let's move to the divisional overview on chart. The Power business turned in a good quarter, both top-line and bottom-line improvement. The revenue growth we saw in PP in the second quarter continued into this quarter.

Volumes are increasing on both the power transmission and distribution side. This has not yet translated into as much growth as we would like, for reasons that we'll discuss -- we've discussed before, namely continued over capacity and price pressure in the large power transformer and high-voltage GIS switch-gear business. It will take a few quarters for increasing demand to absorb this over-capacity and bring some price stability back to the market. However, we do expect single-digit revenue growth to continue in Power Products going forward.

Power Systems had good order growth, almost 10%, against a very strong third quarter a year ago, thanks primarily to the $1 billion offshore wind connection order we took in August. Profit margins recovered from a weak performance we saw last year that included some project cost overruns in the Cables business.

Discrete Automation had another great quarter, with Baldor making a strong contribution. But even excluding Baldor, the division turned in double-digit growth. On the operational EBITDA side, the result was basically unchanged from a year ago, despite higher R&D spending, which is a priority in this business and up more than 20% versus the same quarter a year ago. Innovation is key to competitive differentiator in drives, motors and robotics and advances in power electronics will be a growth driver across many parts of the Company in the years to come.

In Low-Voltage Products, the pace of order growth slowed in the third quarter. As in the second quarter, this is partly because of very challenging comparisons with the great year we had in 2010 when, for example, LP's third quarter orders increased 25%. But it also reflects some softening in demand such as the construction sector in China and control products used in solar and wind power generation and for low-voltage products used in general industry.

On the earnings side, LP is down from the record level a year ago, when they reached an operational EBITDA margin of more than 22%. Part of the difference comes from an increase in selling and R&D of more than 20% this year.

The revenue mix, which reflects a higher share of local systems business compared to the third quarter of 2010, also negatively impacted margins.

Last but not least, we also saw some continuing impacts from higher raw material costs, principally silver.

The measures we announced after Q2 to recover some of these costs through price increases have begun to show an impact, but the main impact will only be realized in the fourth quarter.

Finally, in Process Automation, orders were up 5% versus a strong quarter last year in which orders were up 34%. Revenues were basically flat, but like Power Systems, Process Automation can be a lumpy business on revenues. The timing of large project execution plays a major role in revenue growth from quarter to quarter and we expect the relatively weak year-over-year comparison you see here in the third quarter to reverse in the fourth quarter. This shift in business mix also is reflected in a higher operational EBITDA margin in the quarter as the share of product and service revenues in the total mix increased.

Chart six summarizes the pluses and minuses we saw at the Group level in the quarter. I've covered most of these already, but let me just quickly highlight one or two of the most important developments.

Power Products' second consecutive quarter of revenue growth and good profit margins give us confidence that the business can achieve a full-year operational EBIT margin close to 15%.

Power Systems orders rose 10%, even against a quarter in 2010 when we won another offshore wind connection order of almost $800 million and we had another quarter of double-digit service order growth, which should support revenues and margins going forward.

The negatives are around the slower pace of growth in the early cycle businesses, which, as I said, is the result of both tough comparisons versus a year ago, as well as a slowdown in demand as GDP growth has slowed in most parts of the world in the last few months.

I've already talked about the margin development in low-voltage products. Let me add the ongoing impact of lower prices in our power transmission business. Here we see again you see a year-over-year impact revenues of about 5% to 6% and 4% to 5% on orders, which is, as we said before, will impact our P&L into 2012.

The impact on margins will, of course, depend on our success at taking out further costs. We have announced some capacity adjustments in Western Europe this year and we'll continue to take out costs through sourcing and operational excellence initiatives.

We believe we have now reached the bottom of the pricing cycle on the transmission side. Finally, the revenues from our two systems businesses were a bit weak, but that merely reflects the timing of project execution and we fully expect both divisions to come back with higher revenues in the fourth quarter.

Let's turn to chart seven to discuss our regional developments. Asia and the Americas once again led the order growth in Q3, up 8% and 49%, respectively.

Automation and Power orders were in both regions -- were up in both regions, even excluding the impact of Baldor in the US. Orders in Europe were slightly up, reflecting continued strength in the automation business, despite a slowing in early cycle end markets and a flat order development on the Power side as base orders for Power Systems declined.

The Middle East continues to be a large project-driven region for us and bounced back from a second quarter that posted a flat order intake this quarter, reflecting several large orders for Power Systems and a flat development for our automation businesses.

In chart eight, you can see the development in some of our key country markets. Starting with the US, the Baldor acquisition continued to have a dramatic impact on orders. Excluding Baldor, the Automation businesses were up slightly and the Power businesses were up a double-digit pace, reflecting several orders for Power Systems.

Power Products orders also continued growing, but at mid-single-digit pace. Excluding Baldor, the remaining Automation businesses growth also moderated to a single-digit pace.

In Brazil, both Power and Automation continued to benefit from expansion of the Brazilian economy as many investments supported automation growth and grid infrastructure spending continued to boost the Power side.

Germany was up 14% in the quarter, reflecting the large wind power order awarded to Power Systems, while Power Products orders were flat. On the Automation side, Low-Voltage Products orders were flat, reflecting the early-cycle slowdown, but this was more than compensated by the double-digit growth in the discrete and process automation division.

India was again the outperformer in Asia this quarter, up 25% in local currency, with strong double-digit order increases for both Power businesses. Growth in both Discrete Automation and Low-Voltage Products could not compensate the difficult comparison to Q3 2010 faced by Process Automation.

Similarly, in China strength in our Discrete Automation and specifically robotics, could not compensate the lack of large Process Automation orders, but also the decreased demand from the construction industry for Low-Voltage Products. Power Products returned to single-digit growth. Power Systems orders were down significantly due to the difficult comparison.

While emerging markets continue to be a key growth driver for our orders, growing in this quarter at 9%, mature market growth was actually higher at 15%, reflecting, once again, the $1 billion wind power project in Germany.

Finally, you can see that the BRIC countries grew at a rate of 10% overall.

Let's take a closer look at our Power businesses in the third quarter on chart nine. Overall, the trend of increased spending from the distribution and industry sectors continued driving growth and tendering activity in Power Systems has continued at very high levels, with a number of large HVDC projects in the tender pipeline, some related to offshore wind power development, but there are also some large projects in the high-power substation business.

On the other hand, given the global macro concerns about European and US debt, and China inflation and while demand for transmission-related equipment seems to have bottomed, we have yet to see a pickup in demand for this equipment. Joining emerging market competitors and continued price pressure, these are generally the same risks that have been presented for the past year. That is why we continue to take out costs aggressively, as well as localize our R&D and product design. So, we will continue taking steps to benefit from the growth opportunities, while at the same time mitigating the risks.

On to the Automation side of the business in chart 10. Here, the overall picture remains positive, although the early cycle sectors have become more challenging and the difficult comparisons will only continue.

But on the positive side, demand for robotics and medium-voltage drives was robust as energy efficiency continue to be a key demand driver. We also continued to see strength from sectors such as oil and gas, marine, pulp and paper and price increases mitigated the weaker margins seen in the second quarter this year. More increases will come, where needed, to reflect commodity cost inflation, as well as robust demand.

Despite the tighter early-cycle comparisons going forward and tougher comparisons, our higher selling and R&D expenses over the past two quarters are expected to support our competitiveness.

The Baldor business continued to shine and you can turn to chart 11 for more of that. Baldor continued to make a solid contribution to both the revenues and operational EBITDA in the third quarter. As you can see, the sales growth continued in the high teens on a stand-alone basis and operational EBITDA grew another 33% on an operational EBITDA margin of about 20%.

Both the revenue and cost synergies are developing inline with our expectations. We continue to see the upside potential as we push for sales of Baldor's predominantly US mechanical power transmission equipment outside the United States.

So, the integration is going very well and the retention of key management gives us confidence the strong performance will continue. As mentioned last quarter, you can expect amortization costs to run about $110 million annually and this impact will run until 2017, after which it will start to decline.

Let's have a look at our operational EBITDA bridge on chart 12. I've discussed quite a bit about the different divisions, so let me now step back and discuss our operational EBITDA and margin at the Group level.

As you saw, the operational EBITDA improvement at the various divisions, you naturally would expect an increase at the Group level and, indeed, it increased by some 24% compared to the third quarter a year ago.

This quarter, we actually more than offset the negative impact of price erosion through our cost savings initiatives. In fact, even after spending an additional $90 million on selling and R&D expenses, from which you would expect to see tangible benefits from the coming years, we still improved our operational EBITDA by another $200 million on contributions from volume and a positive business mix.

And finally, you see that Baldor contributed another $108 million in operational EBITDA to get us to a margin of 16.7%.

Price pressure will, no doubt, continue in some of our businesses and we continue to improve our productivity, taking down costs where necessary and executing well to deliver our full-year margin targets.

Let's turn to our cost-saving program in chart 13, where we discuss the 2011 cost savings on a year-to-date basis. As you saw in the last chart, we were able to take out another $270 million this quarter, bringing our year-to-date savings to $750 million compared to price pressure of roughly $650 million. This keeps us well on track to achieve the full year savings of $1 billion.

Sourcing continued to account for more than half of the savings and operational excellence measures also gained traction, representing 40% of the total cost savings.

On a divisional basis, two-thirds of the savings came from the Power side, where such savings were required to remain competitive and keep our financial commitments to our shareholders. And we still reduced costs in the Automation businesses, but not as much was needed, given the robust growth over the past year. The balance between growth and cost control will continue to be a high priority for the Company in the coming quarters.

Chart 14 summarizes our cash flow performance in the quarter. Our performance, quite frankly, was disappointing, but one that we will work very hard on during the fourth quarter to improve. As a percent of revenues, net work capital reached 16% at the end of the third quarter. We will push hard to reduce inventories and collect receivables. While it will be very challenging, we still aim to reach our upper range of our target for net working capital of 11% to 13% of revenue. Our net cash position ended the quarter at $1 billion.

Late in September we took advantage of extremely attractive interest rates by launching roughly $1 billion of Swiss-franc-denominated bonds in two tranches. The first was a $500 million Swiss franc bond with a five-year maturity at 1.25% and the second was a $350 million Swiss franc bond with 10-year maturity at 2.25%.

Not only were these the largest bond issues in the Swiss market in the past two years, but they were also the lowest interest rates ever achieved by ABB in the public bond market. With those issuances, we have extended our maturities from just over 1 year to 4 years. As the issuance was very late in September, the proceeds will not reflect on our balance sheet until the fourth quarter.

Let me wrap it all up on chart 16. So, when we look at our Q3 results, then, we saw solid execution of cost takeout initiatives and on the Baldor integration. We saw the steady earnings, despite a softening in demand from some early-cycle sectors.

We increased operational EBITDA and our operational EBITDA margins. However, this operational improvement is not visible in our earnings per share in the quarter because of the impact of the accounting treatment of the derivative transactions.

While our cash development was less than stellar, we will improve it in this coming quarter. Regarding our outlook, obviously, the macro concerns make short-term forecasting very challenging, while the long-term drivers such as good reliability, energy efficiency and emerging markets remain intact.

So, in the near term, while we have seen some softening in the early-cycle businesses, order growth is still expected to remain near current levels. As the macroeconomic confidence improves, so, too, should the early-cycle businesses. At the same macroeconomic concerns may delay the recovery of some later-cycle businesses.

We are, of course, watching these developments closely and continue to focus closely on flexibility and productivity, which will allow us to maintain our competitive positions and improve profitability as we finish 2011 and move into 2012.

That concludes my formal remarks for the third quarter results. Before I line the line to questions for Michel and me, I would like to remind everyone about our Capital Markets Day next week, Friday, November 4th, here in Zurich. We'll be publishing our new targets that day and communicating our strategy through 2015.

So, thanks for your attention and Michel and I will be happy to take any questions you might have.

(Operator Instructions). First question from Mr. Andreas Willi from JPMorgan. Please go ahead, sir.

Good afternoon, gentlemen. I have two questions, please. The first one on transmission pricing, if you could just clarify that. At one point in your speech earlier you said that you think pricing has troughed in that market but then a bit later you said again that the competition situation is unchanged, requiring continuous cost takeout. Maybe you could just clarify where we are on pricing on orders and on sales in Transmission.

And the second question, you also talked a little about the growth slowdown in the early-cycle businesses. But isn't the real disappointment, in terms of order growth, in the late-cycle businesses like Process Automation, but also, if one looks at the base orders, in Power Systems, maybe you could say a little bit what's going on with the utility spending in Europe.

Thank you.

Well, Andreas, on the transmission pricing, what I'm indicating is we think, in general, across a lot of different geographies and product lines, we see a troughing in transmission. But then we do have some specific parts around the world, like in the Middle East, where we know we'll continue to see price pressure, but we don't think quite at the same kind of a level that we've experienced over the last couple years.

So, I'd say if you take the most sensitive part of our portfolio, which are the high-voltage transformer side, we think we'll continue to see pressure there, Andreas, but not at the same kind of level. But that's why the cost-out focus that we have is so important, so that we can maintain that margin piece that we have basically committed outside of the marketplace.

Overall, I think, Andreas, to your question two on the transmission side is that, I mean, right now since industrial product -- industrial production looks like it's moderating and, obviously, in different parts of the world, it's starting to -- if that slows down, that slows down transmission investment. So, the longer this goes on, the more that can be a concern for us. So the longer-cycle part of this business could stretch out.

But, as we indicate, we think overall when you look at a blended kind of geography look, we should be kind of at the bottom of that transmission cycle. Counter to that, on the distribution side we do see positive improvement to that, almost in every geography. And so we hope that that will continue and the industrial side look good, too.

The later-cycle PA growth, Andreas, I don't really worry about the PA growth for the quarter. Remember, this is a big project business, too. It can vary year to year. As I've mentioned in the opening, last year the comparison was a 34% increase for the third quarter of 2010. So the comparisons are really tough.

If you kind of dissect that business, like the marine and crane business was up about 10% in orders for the quarter. Minerals and metals were down 31% and 10%, respectively. Measurement products was up 12%. Oil and gas was up 11%. So, you just see in the markets, there's a lot of variability in the markets and it's more of a year-to-year comparison than I think it is, necessarily, a trend, because you and I both know, the biggest markets we were down in, minerals and metals, are two markets that continue to be very strong overall, across the world. So, I don't see that as a trend.

On the PS base order side, Michel?

Yes, I think, obviously, we were also a bit disappointed by the numbers there, seeing the major part is the strong push that we started doing on base orders in PS started last year. So that is also the first quarter that we had very challenging comparisons.

Difficult to say if it is a trend. That's waiting for confirmation now. But, as you know, so far we have done extremely well on base orders year to date. So, let's see Q4. There's no indication here for major change at this point.

So, from the utilities in Europe, you haven't seen major change, because if one looks at Power orders in Europe and takes out the even larger order this year than last year in terms of the offshore, then it looks like Power orders in Europe are down double digit in the quarter.

Andreas, I'd say I haven't seen any major trend from a yearly -- a year-on-year basis and I wouldn't use this quarter as a proxy to say that because the base orders are down in Power it's just kind of a reflection of exactly what the future's going to be on European base orders for Power Systems. I'm not ready to do that yet. We want to get through the fourth quarter and see, really, what the trajectory is.

Thank you.

Hey, Andreas.

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

Hi, Simon.

Yes, thank you. Hi. I wanted to delve a little further into the discussion of cash flow. I mean, obviously, poor cash flow has been a feature, generally, of this results season for companies and you've obviously had quite an outflow there.

I mean, what exactly is causing this? I mean, the main elements seem to be the receivables rising and also inventory.

Yes.

I mean, sales don't seem to me to be that disappointing. So why the pickup in inventory? Are you finding that some people are finding credit tougher, so that they're -- you're finding it difficult to be paid?

And also, is there any relationship between the lack of -- the seeming lack or the lower level of way-stage payments in contracts this quarter and people not being prepared to pay the way-stage payments?

Yes, obviously, I think the big difference compared to last year in the same period is that inventories are much higher. We have seen a rise in the three categories of inventory -- raw materials, work in process, as well as finished products.

I think it all started with the Japanese tsunami crisis where a lot of people started piling up components to make sure not to have a shortage in the supply chain. And, after that, as the market slowed down a little bit, they also finished -- they also ended up with a little bit more finished goods. And that is now the backup that needs to be -- the backlog that needs to be worked off during Q4.

So, to your point, we are disappointed about it. We have fixed some very ambitious targets for business units for Q4 in order to try to offset this trend.

On the receivables side, let's say, we don't have a higher level of overdues than last year at this period, but you're right, the composition is a little bit different. It may be a bit smaller customers than the mix that we had last year. And, obviously, part of it is some liquidity issues in the market and we'll have to really work hard to collect this in Q4 so that we also reduce the credit risks that are associated with it.

Are you able to give any insights into where those liquidity -- where that liquidity tightness is most prevalent?

Well, yes. I mean, you can find it all over the world. For instance, China, for sure, has worsened a little bit this quarter and that is something that we really want to watch. India, as well, actually, partly also because of some project delays and then, as you said, a little bit less advance payment, as well, that explains the situation.

Thank you very much.

Hey, Simon.

Next question from Mrs. Daniela Costa from Goldman Sachs. Please go ahead.

Good afternoon. Actually, three questions, the two last ones a little bit more followups on the prior one.

But the first one, on the outlook statements, you comment essentially mostly on the near-term outlook and on the earlier cycle businesses, which you later say it's 20% of the sales. So, I was wondering on the other -- on the remaining 80%, which are more mid and late cycle. You mentioned that the long-term opportunities remain unchanged, but when do you exactly expect to see this starting to recover and to compensate for the lower levels in the earlier cycle? Can we expect already something in Q4?

And then just quickly on your margin expectations going forward, in the press call this morning you seemed more positive on both pricing and also on the cost savings and on the cost savings side, although you are on target, you have just done 5% of the footprint savings. So I assume the remaining footprint savings will come next year. So, is there some upside from more cost savings into next year?

And then finally, just a followup on the working capital question. Can these higher levels of working capital in Q3 be also related to your -- the fact that you have more project business in Power Systems than in Process Automation and with revenue recognition more of these falling into Q4? That will also help you in the inventories in Q4. Thank you.

Well, Daniela, on the first part, the 80%, which is kind of mid-cycle to late-cycle for ABB is -- I think it's really hard -- difficult to project right now economic activity. Things -- think about the difference between today and yesterday. You've got the US report recently with 2.5% GDP growth, which is kind of a surprise to us and to me. And then secondly, the European debt program that's being put together to address the crisis. So, I think, things change from day to day.

In general, what we would normally expect is that our longer cycle business and mid-cycle businesses would start to come back and that trend had been in full for the second quarter. But as the world whacked off about a point of GDP growth over the last three months or so in projecting for economic activity, we would expect that to lengthen our longer cycle business time. It only makes sense.

So, I can't predict to you that there's going to be any major upturn in the fourth quarter on this, but Michel and I don't think we're going to see a downturn. We think we've seen a trough in our longer-cycle businesses and we think that we'll have a gradual return here, but not, maybe, as quick as you'd see in past cycles.

Yes.

On the margin recovery, and the cost-out piece?

Yes, so the cost savings, yes, as we confirmed this morning in the press call, we are quite confident we'll hit the $1 billion mark that we had fixed as a target. We might even slightly exceed it if you see the run rate that we have for the moment. You're right, there has been very little footprint for the moment. We'll make more provisions for that in the fourth quarter that it will, indeed, produce savings next year. So fourth quarter will still be concentrated mainly on sourcing and on OpEx savings.

We haven't fixed, yet, a target for next year. We're still working on that. The thing is, these are continuous programs now. It has kind of come in the DNA of our business management and so we should expect to see the sourcing savings, as well as the [quarter four] quality savings really continue.

Footprint depends, obviously, more on the economy. These are tough decisions and expensive decisions, so you are always a bit more cautious with this one, but I think we have a good pace going on there and that we are confident we can keep it.

As far as the net working capital is concerned, yes, obviously, Q4 is always a good quarter for revenue recognition in the project business and that should be, again, the case this year. So that will help for this work in process part of inventory.

Maybe just to point out, last year at this point in time we had net working capital of 14.4% of revenues and we reduced it by $700 million in the fourth quarter to bring it down to 12%. This year we are even targeting a bit higher reduction than that, if possible, towards $1 billion and I'm talking about that because last year the biggest effort was on accounts receivables. This time, also, we need, really, an effort on inventories and if you put the two together, it's a stretch target, but that is what we are trying to get our teams to work on.

Thank you.

Next question from Mr. Mark Troman from Merrill Lynch. Please go ahead, sir.

Yes, thank you very much. Good afternoon, Joe and Michel.

Good afternoon.

Just a short question, really. Can you just provide a bit of more color on what's going on in China amongst your various divisions and just maybe put it into context to what we've seen so far this year? Thank you.

Michel, if you want to dig up the segment numbers, I can give him kind of some overall color.

Yes.

Mark, from a China standpoint, we did anticipate or expect that our Low-Voltage business, which is about $1 billion this year in China for us, we saw some slowness in the second quarter and beginning to slow in the third. And that's our business that's probably -- well, most certainly closely integrated -- related to the construction market that China's trying to get their hands around right now from an inflation standpoint. So, that wasn't a surprise.

I think you know our Power Products division is very lumpy. So we had a huge first quarter of orders in that segment. And every year we just -- we kind of play this thing by tender offers with the state grade from quarter to quarter.

Michel, on PA?

Yes. But -- so PP first, it was good news this quarter. We had a positive order input, not big. It was 3%, but at least it is showing, as well, stabilization from that perspective.

PS is little in China where we don't have these very large projects and so that was not a quarter to speak about, because there was hardly any orders to be booked.

In fact, the Discrete Automation division is still doing quite well. It was up 20% this quarter and that follows a 19% last quarter. So the sale of drives, of motors, is continuing to do quite well in robotics, actually.

PA was also part of the disappointment this quarter. It was 23% down in China and that, again, is very lumpy. Last quarter was up 43%. So it really depends on some large orders that you can get there.

Effective, yes, we are down 5% this quarter in China. We were slightly up last quarter. Let's not forget year to date we are still up 20%. So overall the Chinese market has been pretty good for ABB.

Is there a discernible trend? I guess Low-Voltage there seems to be, obviously, some sort of slowdown and, clearly, in the renewable space. But maybe outside of that, are there any discernible trends or is it just difficult to call, quarter to quarter? So do you think Power Products we're going to see growth through '12 like we've seen here or is it just one quarter's different from the other? I just want to get --

Yes, one quarter is very different from the other, but if you look at the economic forecast for the moment, which is still talking of a GDP growth of about 9%, I think, with this kind of growth it still gives you plenty of opportunity. So, there's no reason for us to become overly pessimistic. But it's not a regular quarter-after-quarter growth. It's very difficult to judge it sequentially.

Okay. And just one final one. In Europe in the T&D market, I guess projects seem to be returning. Is that still the case? I mean, obviously, you had the big order in offshore wind and your tender backlog looks pretty busy, but just what's the outlook for Europe, European T&D?

Well, on the big transmission jobs, I mean, we do have, particularly offshore where HVDC plays a big role and also, Mark on FACTS or static-guard compensation, those things that are used to reinforce grids as more green energy are applied to them, those quotes are pretty robust right now.

So, we're -- we have a few more quotes to come through in the fourth quarter on some large jobs.

Yes. Cable business, as well.

Yes.

Okay, great. Thank you very much.

You're welcome.

Next question from Mr. Jeffrey Sprague from Vertical Research. Please go ahead, sir.

Thank you. Good day, everyone.

Hi, Jeff.

Joe, can you give a little more color on what you're seeing in US Automation? Is that ex-Baldor, I guess, up slightly. I take that to mean kind of low single digits and just kind of the tempo of activity in the US in the channel and where inventories are sitting currently?

Hey, Jeff. First of all, our Automation business in the United States, ex-Baldor, has already been really weak in general. I think our only -- so, when you look at it, it's hard to separate the two. And our Low-Voltage business is extremely small, also. It's not -- I don't think it's really a good indicator of economic activity there, given the overall size of it.

But to bring you back to what we're seeing in Baldor right now, Baldor is extremely strong. The mining business, industrial kind of fluid handling, food and beverage, those kind of things --

Service.

Yes, service is extremely strong. I think this energy savings legislation that went through last year you're really seeing that come through because of a broad portfolio that the Company has.

Outside of that business, Jeff, is our drives business, which was the -- the organic business. It was the largest part of what was left in pace of the Discrete Automation and Motion business. That's gone up pretty well this year. I think the order rates for the most part of the year have been up over double digits. And remember, we're not -- a lot of that is applied to the heating, ventilation and air conditioning market place and that's been pretty strong, too.

So, overall, I have been placed -- in fact, I think, surprised -- with what we've seen coming out of Baldor and the overall strength in that statement. But we don't have a square D kind of a position in our business or something that would give you a broader look, I think, of what you're seeing across the US Automation business.

Thanks. And I wonder if you can also just spend a little time on capital deployment going forward. I'm sure you'll address it next week, but it does look like you're very comfortably getting Baldor digested and it looks like an early success story. What's your comfort level with moving forward on something else sizable here in the next six to 12 months or so?

Jeff, I'm comfortable if we don't overload one division. I think the integration piece, you never want to overload a specific division. So, I mean, there's -- we have five divisions and this -- overall between $7 billion and $10 billion and as long as I think we can find the right opportunities at the right multiples and the right fit, we would certainly entertain them.

But we've -- I think we've been -- I'd like at it as being cautious over the last couple years in picking the ones that made the most sense for us and we'll keep that same logic going forward.

It's been difficult over the last, really, six months because we saw such a decrease in equity values and -- resulting to huge market premiums versus the peak of these stocks. So the markets are going to have to come back a little more than they have so far in order for us to get back in a zone again where I think there's realistic premiums in the marketplace.

And then just finally, at a real high level, if you could, your comment that it would be very logical for some of the late-cycle stuff to slip if there's economic weakness obviously makes sense, but in your dialogue with clients on long lead times projects are you seeing people really reevaluating their CapEx plans for 2012 yet? Has that kind of crept in pervasively in the thinking or is it just really too hard to discern what people's intentions are for the next year?

Jeff, it's too hard to discern, I'd say. I haven't seen anything that would be systemic in the sense of people rolling back their capital expansion plans. In fact, I saw things more systemic at the beginning of the year with a few projects, big transmission projects in the United States that were delayed because of a really slow uptake on electricity usage.

So I haven't -- Michel, you're out there, too. I haven't really seen that there's any big trend, big difference from quarter to quarter.

No.

Great. thank you very much.

Thanks, Jeff.

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

Hi, Colin.

Hi, good afternoon, gentlemen. Just a quick question --

Hi, Colin.

Hello. Just a quick question for you on cost out and how you account for cost out, given the pretty extreme volatility we've had in commodity prices so far this year. I was just looking on the charts while you were answering the other questions. For the first nine months of the year, I think it's roughly right, say the copper price was up 25%, 30% year on year. Currently it's down how much year on year? Currently it's down, ballpark, 10% year on year.

When you're thinking about that extra $250 million of cost out that you're hoping to get through Q4, how are you accounting for raw material prices in that? I think you had an ambition to try to make the numbers you give to the market sort of commodity-price neutral. But how does that actually work in practice and do you see any -- will you see any volatility, quarter on quarter there?

No, sir. In fact, the savings as we code them, always exclude the commodity impact so that you will find the net commodity impact is in this other column of the EBITDA bridge and, as you can see, it can offset each other. As you say, copper price has come down. Electric steel was a little bit down, too. On the other side, silver prices are up 95% compared to last year, more or less. So that has kind of given us a little bit of an offset of the good trend we had in the copper prices.

The net result is not much yield, I would say at this stage?

And you expect it to stay that way in Q4, as well?

Well, we are also hedging our commodity -- our future commodity purchases, so we are, in any way, kind of smoothing out the impact of the moves. We are always ready for commodity price to remain firm, also, because we believe in emerging markets and, as you know, that is a big driver of commodity prices. So, we keep our hedging ratios pretty high at this stage, yes.

That's good, Michel. Thanks a lot.

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

Hi, good afternoon. Thanks for taking the questions. It's Will Mackie at Berenberg.

Hi, William.

Hi. Firstly, can I go back to the cash flow, please? And just -- you've outlined some of your ambitious goals and also the measures that you're taking in the fourth quarter to drive down the inventories and receivables. Could you just jump back to a comment on the media call this morning and clarify where you think you can get your cash flow from operations for the Group to be? I mean, you said about flat in '11 on '10 if you hit your goals.

Yes.

Were you talking to the operating cash flow line?

Yes, I was talking to the operating cash flow. That was about $5 billion last year. Year to date we are trailing $200 million behind it and so I think we can try to make this up in the fourth quarter and then we would also end up around $5 billion this year.

I think that gives you close to a record cash flow in the fourth quarter against previous quarters.

That is correct. As you know, it's always a strong quarter and this time, since the third quarter is quite disappointing, we need to put more pressure to make it happen. It's a stretch target, I agree, but I think the Company usually does well in Q4 and this time we have these inventories, which is a new situation for us to work on. So I think there's some potential there, too.

Okay. And, specifically, could you highlight -- are there any of the divisions where you've seen the inventory build thing most significant? When I look at the cash flow by divisions, it seems to be that the disappointment came in Power Products.

Yes, Power Products is a big problem, both in inventory and in receivables, as well as Low-Voltage Products was really on the low side and has to improve in Q4.

Okay. And the moving on to just a couple of specifics. Your corporate expense line is bouncing around. I think this quarter was $120 million against $80 million in the previous quarter. Where is the normalized run rate that you would see for that on an annualized basis or for this year?

There's a lot in that.

Yes, because there's a lot of one-offs in there. Obviously, we had some central R&D investments that we do there. As we said, we increased R&D by 16%. A lot of that is booked in the corporate costs. But we had, also, a lot of one-offs, environmental provisions, some costs related to M&A and to divestment transactions. So, you'd have to really take that out.

I would have a tough time to give you a run rate right here. But hold on, we are looking at that.

Okay and then while you do that, perhaps the last one --

I would say probably $120 million, $130 million a quarter would be a good run rate to look at.

Thank you. And very last question, related to restructuring, the footprint initiatives you said you plan to accelerate for the fourth quarter and I think that means you're probably looking at about $130 million to $150 million of restructuring charges this year. Should we start to look at that as a normalized level of charges, Joe, for a business the size of ABB? Is that what you'd expect to incur year on year out?

Yes, I would say -- let's say, if the economic conditions don't get worse. $150 million, $160 million gets you back into this range of 0.5% to 0.7% of revenue that we always mentioned in the past. So I think as long as we have a normal economic cycle, it sounds like a good guidance, indeed.

Okay. Thank you very much.

You're welcome.

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

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

A couple questions. Firstly, on the tender backlog in Power Systems, Joe, were you interviewed this morning about whether the $1 billion contract you won back in August was exceptional. I think you said that you were now expecting you could book two or three contracts of similar size per year, which seems to be a much more confident statement than you've made in the past about how quickly that tender backlog could turn into orders. I just wanted to double check. Are you seeing more confidence in utilities in actually placing those orders or just some comments behind that?

And secondly, on the US market, we did see the US administration look to accelerate some approval of transmission projects in the US. Do you think that's another false dawn or are you beginning to see an improvement in tendering process in the US market, as well? Thanks.

Hey, Martin, on the PS tender backlog, I think -- hopefully what I said or what you heard me say is that we quote on many more of these projects now than what we did in the past in the $0.5 billion to $1 billion range. I might have said it's not inconceivable that we could book two or three of those where we have one a year.

But we do see a much larger number of those than if you go back even three and four years ago. So, obviously, our odds are higher to have more of these.

When you look at year on year, at this time last year we had an $800 million order in Germany, also. So when threw this $1 billion -- this one against it, too. So I think you're starting to see some consistency against this whole piece, too.

So and a lot -- I think you understand it comes from offshore wind or grid connections, often across water from a -- using HVDC as a reinforcement.

On US market T&D, I was just in the US market in the early part of this week. I saw two a few utility customers. In general, I'm not picking up any real change in their feeling in the sense of what they can do or what they can't do, based on some of the information that you heard on the federal government wanting to accelerate things.

I mean, as you know, there's a lot of cynicism in the sense of how this federal government helps or doesn't help in that sense. So, I haven't really picked up any major trends that would be different than what I had in the first or second quarter this year.

Thank you.

Okay, Martin.

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

Good afternoon, everyone. Just two questions, please. First, on European power, I just want to get back to kind of the weakness there. If I strip out the offshore order, you mentioned that Germany Power Products was flat. Europe was down 2%, including that order. So where was the weakness within Europe? Is it Southern Europe or is it other countries?

Yes, Southern Europe. Weak across the whole portfolio, actually. Yes.

And other -- Northern Europe, other markets were fine?

At least they maintained. I think some markets like Sweden is quite good and UK, as well, has shown quite some good orders. So, it's really the southern part of Europe that has showed weakness this time.

Yes, quarter to quarter, that was our European market that was the lowest, in that sense.

Okay. And then on the silver issue in Low-Voltage, I think you've mentioned -- this is the second quarter now that's mentioned. Can you just give us a sense of the hedging plans there, when that should take effect and what the impact on the margin in Low-Voltage was because of silver in Q3?

Well, we started now a hedging program in Q2 like we have for the other commodities like copper and aluminum. And, I think, at this stage we are hedging 12 to 18 months ahead with a hedging ratio of, oh, 50%. So I think we are, at least, now putting that in the normal hedging routine, which is fine. Obviously, it takes a while to start producing impact.

In this quarter, actually, the impact of commodities, which is mainly silver, on Low-Voltage Products, was close to $20 million.

Great. Thank you.

You're welcome.

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

Yes, good afternoon. I just wanted to come back on pricing and restructuring costs. On the order intake in Q3, could you give us the price evolution for the products divisions, please?

And on restructuring costs, I just wanted to make sure that I really get the figures right. You said just before that restructuring costs could be $150 million to $170 million per year in the normal cycle. Do you consider that 2011 and 2012 will be, now, a normal cycle or are we in a quite different context?

Okay, on your first questions, we don't really disclose or even calculate price impact on orders because it is so complicated with the different mix we have. We can do this on an income statement basis, but it's very difficult from an order book or an order backlog.

What you see on the revenue side, for instance, is, as you see in the EBIT bridge, the impact of prices this quarter was $210 million compared to $280 million last quarter. If you relate that to revenue, that means the impact was 2.2% this quarter compared to 2.9% last quarter.

And, again, I think that is a perfect reflection of the fact that on one side the decline in the Power side is still there, but slowing down, but we can also start offsetting it with some price increases on the Automation side.

As far as the restructuring costs are concerned, so, yes, this year we said $150 million to $160 million. I would say in this kind of environment, this is the kind of numbers you can look at. Obviously, if the economy would turn worse, we might have to make more provisions for this, but at this stage, this is the kind of numbers we have in mind.

All right. A quick follow on, on the pricing, please. You just said that you don't -- cannot give the numbers for the order intake. In revenues, so this was 2.2% this quarter. Could you, then, give us some kind of indication for Q4, where we could be heading, given that the numbers in the P&L are improving and that, obviously, in the order intake it must be improving, as well?

I guess we can say anywhere between 1% or 3% or 0% and 4%, as you like to have it. No, it's very difficult to say. But the trend seems to be getting better and I think it's positive for the business.

Is that right? Thank you.

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

Hello. Good afternoon and thank you for taking the question.

Hi, Olivier.

I'd like to come back on the net working capital objectives first. So, I'd like to assess the risk of -- if you put pressure on one side to reduce inventories, is there an implicit risk on the margin as a consequence? So, you think you can actually achieve the net working capital aggressive objective without having, to some extent, to under-produce and hurting the margin in LP or PP? That's the first question.

Second question, maybe can you remind us of your kind of Southern Europe exposure across the Automation and Power piece? So, I just want to assess how big that is for you? Because I know Europe, but I don't remember the southern part.

And lastly, some companies have mentioned kind of emerging market inflation, not only raw materials, but salaries as well. And you have quite a big exposure, so I'd like to know what you see in your business in terms of risk coming from salaries. Is it accelerating or not? How are you managing it, et cetera? Can you give us some color?

Okay. On the first question, net working capital and margins, no, I don't think it is really a risk and it's also not the kind of tradeoff that we would contemplate, because at the end what counts is the cash and I think just keeping inventory for the purpose of producing margins, I don't think, is the right strategy, long term.

So, we just have to get the inventory levels back to where they used to be. I don't think it will have a significant impact on margins, to be honest.

So, the push will happen. Again, it's a stretch target. I'm not 100% confident that we will get it, but we are working hard to get there.

In terms of Southern Europe, well, I would say Italy is -- Italy is a part of our top five countries in the Company, so, obviously, it is pretty big, both in Power and Automation. So that one. But it has -- year to date Italy is still flat from a demand point of view, so that's not too bad, given the circumstances there.

Spain is a smaller country. It's more or less a third of the size of Italy and so is France. So it's a mixed bag. We have very little exposure to Greece, if that can make you feel comfortable.

So I think Italy for us is the major risk but so far it is just this quarter that we have really seen a major decline. The rest of the year was actually pretty good.

With regard to your last question on wage inflation, yes, we have read these reports, too. I would say, yes, obviously, it's something that we have to cope with every year, both in China and India, which are probably the two countries that are the most exposed to that.

We see wage inflation, which is double digit, 10%, 12%, sometimes 13%. We keep working on productivity to try to improve this. You have to draw a fine line in between productivity on one side and also avoiding to have too much rotation in the personnel on the other side.

But if I look at these two countries, our total personnel expense as a percent of revenue has only increased by a few commas, 0.2%, 0.3% in terms of total revenues. So I think so far they have done a pretty good job there.

Okay, thank you. So if I asked you what is your PIIGS exposure, can you give me a number?

What is my --?

Exposure to the PIIGS by comparison to the BRIC countries. What would be the number?

I would have to calculate that, but as I say Portugal is very small. Countries like -- the only big one is Italy, but I would say for the total Company you're talking $2.5 billion.

Okay, great. Thank you.

Year to date. So, probably $3 billion plus, for a full year, annualized. Okay?

All right. Thank you.

The next question is from Mr. Jose Arroyas from Santander. Please go ahead, sir.

Good afternoon, gentlemen. And just a couple of questions. Going back to the EBITDA bridge, could you just explain what the positive business mix comes from, $90 billion -- $90 million in this quarter, if I recall correctly. Is that something we should pencil in, going forward, or something a bit more of a one-off?

And secondly, on your gross profit margin, could you explain what factors primarily drove down the margin sequentially to 30.5% versus 31.2% in the previous quarter? Thanks.

Okay. On the first one, I don't think the mix was $90 million. If I recall, it was something like $50 million, $52 million, $53 million.

It's just because -- or $57 million. Yes, that was the number. Yes, it's just because we had this quarter less revenues from the systems business like Power Systems and Process Automation, which allows us, also, to make a good point. If you look, for instance, at the revenues in Process Automation, they are the same in the same quarter last year, but we have $100 million less systems business and we have $50 million more product business and $50 million more service business.

Now, the service margins are about 3 times the margins of the system business and so that gives you a little of an explanation in terms of what kind of outlook we have here.

So that was the first one. The second question was?

The gross profit margin.

Yes, the gross profit margin. That is basically the impact on derivatives, because they are in the gross margin. So last quarter -- last year, derivatives had an impact, a positive impact, of $80 million. This time they have a negative impact of $100 million and that explains most of the difference.

Okay, thank you.

That was the last question for today.

Okay.

Great. Again, thank you for joining us and for your interest and we look forward to seeing most of you at Capital Markets Day on Friday. So thanks again.

Yes, thank you. 'Bye-bye.

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