Abb Ltd (ABB) 2012 Q3 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB third quarter results 2012 analyst and investor conference call. I am Stephanie, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session. (Operator instructions).

At this time, it's my pleasure to hand over to Mr. Joe Hogan, CEO of ABB; and Mr. Michel Demare, CFO of ABB. Please go ahead, gentlemen.

Good afternoon. It's Joe Hogan here for third quarter results, I think, and we start off with the presentation today that's on abb.com; and assuming that most of you have it downloaded, we'll start from there.

Chart number 2 is our safe harbor statement, and nothing's changed there so we'll move quickly to chart 3.

Chart 3 is a summary of what we saw in Q3, we want to share with you. And consequently, the rest of the slides are just a backup to these [thoughts]. Base orders were steady in a mixed economic environment. When we say steady, our base orders are actually up 8% in total, but about flat organically overall. When you roll out Thomas & Betts, it comes to flat. Remember, base orders are any orders that are $15 million or below.

China we say is moving sideways. Everyone, I'm sure, remembers the severe downturn we had in the Low Voltage business in China in the first quarter of this year. China's stabilized for us since then. In fact, China's business within Low Voltage Products is actually up for this quarter. But in general, we see China moving sideways. It's about 0% growth, and I'll talk about that on our orders chart.

Operational EBITDA we see steady versus Q2 2012, just up 1 point; and versus Q3 2011, it's down. And that was a very strong quarter for us and, again, we'll get into that comparison.

Power Products operational EBITDA margin is steady for the fourth consecutive quarter. In line with what we discussed at Capital Markets Day, we're telling you that we have a firewall in that business around 14.5% to 15% operational EBITDA, and we've been able to achieve that in the last four quarters, and we feel it gives us a solid foundation to continue that as we go forward.

Our project margin decline in Power Systems, we have a slide on that. We'll walk you through it.

We have just good divisional cash from operations. Michel will walk you through the cash piece where we see cash conversion at Group levels approaching our Q2 2012. So we're -- when you look at the two operational cash parts of the business, and not what we have from a treasury standpoint, we had much better operational cash in 3Q.

Thomas & Betts contributed about $120 million of EBITDA in the quarter and $90 million of cash. It's performing at this point above expectations, which we're really pleased with. We've got a strong balance sheet; we continue with that. I think it's interesting to note that the currency translation reduced our reports by about $570 million in revenue, and our EBITDA number by $100 million.

And also, there's a lot of talk about our orders number itself. When you look at our orders side, anywhere between [$500 million] and [$550 million] of reduction in orders occurred because of translation in the quarter also.

And then operational EBITDA, as Michel explained in the second quarter call and at the Capital Markets Day, in the way that's measured is flat in local currencies.

So turning to chart 4. When you look at the figures, basically the condensed income statement, you can see that orders of approximately $9.3 billion, which is flat, or minus 6% organically. Order backlog, which is good news, of $29 billion, up from our third quarter of last year about 3%. Revenues of $9.745 billion, which is up 10%, and about 4% organically.

Operational EBITDA of $4.83 billion (sic - see chart 4 - $1.483 billion). That would give us about 15.3% operational EBITDA. This is down versus last year 6% in total, and minus 14% from an organic standpoint.

And cash from operations of $768 million. That's minus 5% in dollars, but again, when you look at cash from operations, we felt we had a good quarter and we anticipate having a very strong quarter in the fourth quarter also.

Just some thoughts behind those numbers. Order development; we had a 30% drop in large orders from our DolWin order last year that came out of Germany, but it's clear in our business that this short -- what we call our short cycle, early cycle businesses are slowing. And we see that in parts of our Low Voltage Products business. We see it in areas like drives and motors and generators, inside our Discrete Automation & Motion business. There's no question we've seen an order slowdown in what we would call the shortest cycle parts of our business.

Our Services orders were up about 9% for the quarter, and so when you compare that with base orders down overall about 6%, that's a very strong performance for our Services business, which we're really happy with that we have that kind of momentum, given more difficult economic times that I think all of us see if you read the papers right now.

Now operational EBITDA margin, as I mentioned, was against a very strong quarter in Q3, and that was particularly in PP and PS. Last year, our Power Products was 17.2% and PS was 9.7%. So quarter over quarter, when you compare the years, the biggest discrepancy we have is in the Power side.

Reported net income is down, albeit slightly; and cash from operations, we'll talk to you in more detail about that.

Moving to the next page, which is chart 5, it gives you a look -- this is our standard chart. I'm looking at our regional development orders. You can see the Americas is up 38% overall, excluding T&B, up 16%; Power being up 20%, and Automation being up 14%, when you take Thomas & Betts out too. So a good quarter in the Americas overall.

We worry about the economy there. We worry about the fiscal cliff discussions and all those things, but our orders right now reflect good performance in the Americas, and we hope that will continue.

When you look at Europe, down 24%, again, that's the DolWin1 project we won last year. But if you exclude that, European Power orders are basically flat. To a certain extent, you can't exclude that because it was so large, but the percentage of large orders in the quarter being about 15% versus 30% last year, I'd say the normal aggregate is about 22% large orders as a percentage of our total. And so we're off in that area in the $400 million range, and if you think about how much large orders we'd normally have as part of the total order pattern of ABB.

In Asia, we're minus 13%. On the next chart, I'll talk more about what China looks like in that way, but there's no real surprise there.

Middle East and Africa, up 73%. A lot of it has to do with Saudi Arabia and the Middle East being very strong and some large projects we have this year.

So moving over to the next page, which is chart 6, this just gives you another degree of detail by country more as far as how we're performing. You see that Canada was extremely strong for us. Thomas & Betts is very strong in Canada, but even excluding Thomas & Betts, we're up 10%. In the US, up about 13%. We had some very large orders in Brazil, mainly rail and offshore for oil and gas, which is a really big help in that sense.

In Canada, too, we had a $55 million [fax] order. That's for grid systems in Canada, and plus as I mentioned, it's a strong T&B marketplace, too.

The UK was up exceptionally in all businesses except Discrete Automation & Motion. It was really a strong quarter for the UK. Sweden up 6%, as you can see. When you look at Germany, down 64%, if you take out of the DolWin order, Automation was up 2% in Germany, and minus 6% in Power by pulling out DolWin.

I think the other part of this chart that's important is China; was flat. When you break those numbers apart, China was up 17% in Power, and down 8% in Automation. What was affected most in Automation was Process Automation; was down pretty significantly, almost 39% for the quarter in China. They had a couple of large orders last year that didn't repeat. And then Discrete Automation & Motion was down about 14% in China, mainly on a path of lower renewable kinds of sales, which would be drives and motors and generators associated with wind energy there.

India down 39%. India didn't repeat on about a $240 million large order that it had last year, but overall, we think India's been moving in the right direction for us.

And I think the last thing to point to is Southern Europe itself was up for us 2%, with Italy being up 3% too, showing that we're able to find some growth in that region of the world that has been so hard hit by the euro crisis.

So I'd leave this chart by saying that it's one of the things since I've been here at ABB I've really come to appreciate is our scope and depth around the world in the sense of the number -- kind of products that we have, and the breadth of distribution that we have across the globe, really helps us in difficult times, because we can find areas of growth that I think other companies that don't have a similar footprint would struggle to have that kind of exposure.

So moving to chart 7, and this is Q3 divisional look, so in Power Products, orders minus 6%. Revenues were flat. Operational EBITDA down about 19% versus last year, but again, that critical margin of 14.8%, which is up a tick from last year, and being able to hold in that range; again, this is the fourth consecutive quarter of being able to do that. Hopefully, everyone starts to see that we are confident in our ability to be able to maintain that range.

When you look at the pricing impact on PP, and Michel and I anticipate those kinds of questions coming up when we go to Q&A, the orders for PP pricing was down 3% to 4%. So basically the same as Q2 2012, we saw the same kind of pressure from a pricing standpoint on orders.

On revenues, minus 6%, so as we flush some of these lower priced orders out of backlog, we'll continue to see that. But that's versus 6% to 7% in Q2 2012, so we look forward to that getting better in the upcoming quarters in some way.

As you look at Power Systems, large orders were down at $1 billion, again, since the DolWin order was booked in Power Systems last year. So orders were down 27%, revenues were up 11%, operational EBITDA was down 41%, and EBITDA itself it's 5.9%.

We had some project execution issues in this business that we'll get into, particularly around offshore wind. We made some leadership changes in the meantime to be able to address that. We've made some organizational changes with some of the product groups, aligned them properly between Systems and Products, and we do expect this to get better in 2013, but right now for 2012, we are unlikely to make our target of 7% to 11% that we've stated, but we expect to be able to recover that in 2013.

Moving on to chart 8, and this is just -- I'll quickly go over this. These are the successes and challenges in Power. I think I've covered most of these.

I'd like to call out the cost initiatives continue to generate significant savings. You'll see a majority of the cost savings that we've driven this year that we anticipate to be over $1 billion this year are on the Power side. We know that the Power Systems piece, orders are up 25% when you exclude the offshore comparison, so we continue to have a good orders backlog in Power Systems overall. And Services growth maintained in line with our strategic targets for Power too.

Challenges; our offshore wind project is listed below. Project underperformance in PS in general, and part of that in the power generation group. Some pricing pressure, but again, what we're going to do is we'll do our best to leverage technology, software, industrial knowhow, and our large installed base to bring this thing back.

Moving to the next page, we break out Power Systems in a little more detail, and this DolWin1 offshore wind project, the platform sail-away date was postponed because the permits weren't available. Platform substructure, we call it jacket, did sail out and was installed. The control and the valve station will be next spring some time. We had cost overruns of about $20 million associated with that project which we booked in the quarter.

Look, there's a very complex framework of regulatory and commercial responsibilities exist in this, and I know there's going to be questions as far as what it's going to look like in the fourth quarter. All we're prepared to say is, right now, we're looking at -- we're trying to get a better idea of exactly what's going here and what the charges are, but we expect a charge of anywhere between zero and $50 million for the quarter.

Then last is we've got specific project issues in Saudi Arabia and India with our Power Systems business that we're also working through right now too.

And then down below, I talk about the management changes that we have made. We have intensified our project execution people and skills, and we are in the process of making sure we have much greater project selectivity and pricing quality.

So moving on to the next slide, which is chart 10, we take a look at our Automation piece. I think there's probably not a big surprise in these numbers for you, I don't believe. Discrete Automation & Motion, up 1%; revenues up 5%, as you can read; operational EBITDA 18.9%. That's down from last year, but a little bit up from Q2 2012.

We have, as I mentioned, lower industry and renewable orders, offset by some utilities, and traction in automobile orders that would be associated with robotics primarily. We have a good, solid order backlog to help to lift some revenues. And operational EBITDA, there's a big mix piece in that given our drives business is down somewhat from last year, and that's been a bad mix factor for us also.

Low Voltage Products; remember, this is our T&B acquisition, so you can see the discrepancy between the numbers. Up 45%, including T&B in orders; minus 1% without T&B. 44% in revenues and minus 2% without T&B too. Operational EBITDA up 34%, but just down a tick versus last year from an organic standpoint. A really good performance in 19.5%.

And I think what's interesting here is our China business, which is critical; improved when you look at quarter over quarter. What I mean is Q3 2011 versus Q3 2012. And then also, we saw some momentum too between the second quarter and the third quarter.

And then lastly, Process Automation; minus 3% in orders, plus 3% in revenue, minus 11%, and operational EBITDA, 12.3%. The loss in EBITDA versus last year, and also Q2, has mainly to do with more Systems flowing through in the quarter versus Products down 1 point in that sense. But there's nothing systemically from a price standpoint or a cost standpoint in this business. That is just pure mix.

So moving on to chart 11, from an Automation standpoint is that we were pleased with resilient demand; flat on organic order, despite a very mixed marketplace. We had some price improvements in Low Voltage Products of about 1 point to 1.5 points that really helped. And LP also drove some very strong cost savings after the issues we had in China in Q1. And then you can certainly see that in the figures, in the operational EBITDA figures.

Thomas & Betts, the integration's going well. I'll talk about that in a second. And we have some new products that are helping us in the marketplace too.

Down below, challenges and actions. This is an uncertain market. These businesses are hit the first because they are shorter cycle businesses. So we stay on our toes in the sense of cost and where we have growth opportunities around the world. Thomas & Betts is critical for us, so we continue to focus on that and drive energy. And as we talked about, PA will further optimize the Products and Systems business as we go forward.

So moving from chart 11 on to chart 12 is Thomas & Betts; about a 4% revenue growth in the quarter. Operational EBITDA up substantially, about 2 points from last year, up 19%. And so overall, we had revenue of $620 million; contribution in the quarter $120 million on EBITDA and $90 million in cash.

So really performing well. We're really pleased on what we see with the leadership team there with their integration efforts, and truly the scope of what we feel we can do together as a team between T&B and ABB in the United States, but also across the world too. So integration's on track.

And now down below, we listed the Q3 PPA amortization pieces of $51 million, $116 million. So full year for 2013 we think will be $120 million, which is pretty close to where Baldor was too.

So when you think we paid almost the same amount for this business as Baldor; and, obviously, the EBIT multiple's a little bit lower in that sense, but when you think about PPA calculations and those things, it's going to be very close to what we had in Baldor, and they were very similar businesses in the sense of hard versus soft assets. And those things would be considered in that kind of analysis.

So with that, I will turn it over -- chart 13 is our waterfall. I'll turn that over to Michel, and Michel will walk us through that chart. Michel?

Yes. Thank you, Joe. Can you hear me?

Yes, I can hear you fine.

Okay, good. So for this quarter, as you can see, starting a bit with the market forces, we had about $256 million of pricing pressure, out of which Power Products was still the majority of it, but not increasing compared to the previous quarter. Actually, the impact on pricing product -- on Power Products is quite stable quarter after quarter.

We had this time a bit higher project margin differences. You see it's almost $100 million, $98 million. So that obviously takes into account the charges that we took on the DolWin project; but as well, some difficult comparisons.

We've mentioned a few other project slippages that we had in the Middle East and in India. But as well last year, we had quite some positives. We had some insurance recovery, for instance, and some completed projects where we could release provisions. So that also makes the comparison a little bit more difficult.

So these two obviously represent about $350 million which are then offset by cost savings of $280 million. So we are left net with a small deficit in terms of market forces.

You see that our sales and R&D investments have increased by $120 million compared to the third quarter last year. But here, it was offset by the EBITDA on additional volume of $165 million. Business mix was negative $53 million.

And then in the Other again, the major component of this $133 million is ForEx. ForEx has impacted EBITDA by about $100 million this quarter; has impacted all the revenues by about $550 million. We had again a very big fluctuation of the US dollar, especially against Brazil and against India. But even against the euro and the Swiss franc, it was a double-digit change.

And so finally, the last component is T&B. T&B is a very good contribution of almost $120 million of EBITDA, and that finally explains the net changes of $97 million for the quarter as compared to the quarter last year.

Joe?

Right. Moving over to chart 14, you look at the cost savings. Overall, we have about $280 million this quarter; $820 million to date. We are confident we'll safely see the $1 billion that we forecasted for 2012.

Operational excellence, about 50%; direct sourcing about 35%. That's changed a little bit. The indirect sourcing piece is important, because that was an area we really focused on this year and knew we had some opportunity, and we're seeing a good yield there. And global footprint about 5%.

On the right-hand side, you can see this 60/40 ratio between Power and Automation that I think makes sense, given what each business is experiencing from a competitive standpoint.

Okay. And I'll turn it back to Michel to talk to you about the cash flow.

Yes, the cash flow, you see the trend again. I hope that now after the Capital Market Day that it is a bit clearer for you. The issue that we have on the one side and reporting the cash flows anyway by the divisions; on the other side, the cash flow that is generated or spent by corporate to hedge, or different corporate exposures, especially in the balance sheet.

So the good news is that the division's cash flow has improved. You see it's $160 million better now than it was in the third quarter of 2011, so that is going the right way.

But on the other side, as long as the US dollar stays strong that we need to continue hedging all dollar assets to offset the fact that we finance part of these assets with a big chunk of equity in Swiss francs, and also still some European currency [bets]. That obviously leads to negative cash flows in terms of hedging realization. That one was, as you can see, a delta of about $200 million this quarter.

So cash flow at first glance doesn't look good but, in fact, the operating cash flow is really improving from the divisions.

Okay. And moving to chart 16, and just a quick close-out on the presentation is our short-term view. It's hard to call exactly when the economies are going. I think, again, we're all in tune to what's being printed and forecasted around the world right now, and it's really hard to be optimistic in the sense of a big uptick in economic growth.

But overall, so we call this a mixed market. We remain confident of our ability to be able to find growth in the markets going forward. But we're going to be cautious on cost, and we're going to make sure that we hit cost savings extremely hard to give us that insurance policy we need to keep the margins in the range that we've committed to you.

We do see some problems with our first cycle businesses overall. We don't see the bottom dropping out of them, but we're seeing negative 1% to 3% growth in some of the short cycle businesses, which is an indication that things have softened in the marketplace.

When you think about Q3 and what drives our cautious optimism is we see resilient demand in key markets we've talked about. We even saw some growth in the southern part of Europe this quarter on orders, which is great.

Our sustainability of the EBITDA margins within Power Products continues for four quarters in a row now. We're seeing the same kind of pricing environment being stable for Power Products, which has been a concern. We have no slowing at all in the pace of our cost savings, and we will push that again very hard in 2013. Services orders continue on a good track, and we maintain a very strong balance sheet.

Down below, when you think about our management focus in the months ahead, obviously, Thomas & Betts' synergies are critical, and we follow through on those. And then, project execution improvements in Power Systems.

And also, I'd add, and this is a follow-up to what Michel just talked about, is the really strong focus on cash in the fourth quarter, as we always have, to bring home the kind of cash that we've committed in the business.

And so with that, I will turn it over to you so Michel and me can address any questions you might have.

We will now begin the question and answer session. (Operator Instructions). Daniela Costa, Goldman Sachs.

Actually, three things. The first one, just to clarify on your commentary on the 2013, on the cost savings that you want to continue to be very aggressive, where, I think on the media call you said even slightly more aggressive than this year. Tying that with your comments that the pricing pressure is slowly easing, would that imply that going into next year, you expect the cost savings to more than offset whatever is left on pricing in the backlog?

That's number one.

And then the second one. We've seen some positive commentary out of China that rail and nuclear investment is going to restart. Do you see any tenders already, or is this just still only plans in paper?

And then the third one, market share in the US. Have you seen any positive increments post the finalization of the anti-dumping?

Thank you.

Starting on the cost side, we've committed to over $1 billion of cost this year as we go into 2013. Michel and I kicked that around, and we -- obviously, we'll push hard to do another $1 billion of cost or more in 2013 also.

To say if we'll take it up, I'm not quite sure right now as we roll our projects together. But we certainly, given the difficult economic activity out there, we will push harder on cost in 2013 than we even did in '12.

But right now, I think the best way for you to think about that in the sense of how you look at ABB and any kind of spreadsheet development or anything is think about $1 billion cost savings. And we'll just report during the year how we're doing, up or down.

Pricing pressure easing; the pricing pressure we talked about easing was really on the order side was consistent [3] to [4] to what we saw in the second quarter this year. We talked -- I talked about pricing pressure easing on the revenue side, and that just is what comes out of backlog.

And remember, we have tremendous mix between our Transformers business, our Medium Voltage business, and our High Voltage business, and that can mix around.

But right now, I'm not claiming that it's going to ease greatly in the next couple of quarters, because these are long cycle businesses. But it is very favorable that we see the input pricing on the order side actually being better quarter to quarter than what we've seen in the past, and that's a very good signal.

On China rail and nuclear, I'll look at Michel on this one to -- I don't think we have an uptick right now that we've seen in rail and nuclear, though, like our competitors and other people in the industrial sector, we have heard about this. Most of the time when you hear about something in China, it ends up getting done. So we will remain optimistic that you'd see that kind of investment and that kind of push.

The last thing on the market share in the United States, I can tell you that, obviously, the tariffs and quotas have kicked in against Korean transformers. That has helped to ease the pricing pressure in the marketplace. It's too soon to say if that's made a major difference in share gain, but it certainly has changed the composition of large power pricing for transformers in the United States.

Thank you.

Andreas Willi, JPMorgan.

First question on the cash flow and the guidance, what we should expect for the rest of the year. In terms of working capital guidance, you have the 11% to 14% range, but now mentioned in the press, in the slide pack, that it's going to be at the higher end. So in terms of how much of this hedging loss should we get back in Q4? And what's coming later?

The second question on Power Systems in terms of the outlook for large orders. It's been a while since we had a large order and, obviously, this year looks down pretty significantly on last year. Is there something in the pipeline for Q4, or is this more a topic for next year?

And then the Power Systems issues you mentioned in India, is that the big HVDC line you're building where there are execution issues?

Thank you.

Okay, Andreas, Michel here. I will take the first question on the cash flow. Listen, if you look over the last three years of cash flow, unfortunately, we try to always change it. But the fact is it's always the fourth quarter that kind of makes the whole year. And if you look in terms of statistics, it has been actually pretty stable. The last three years, we have generated between $1.7 billion and $1.8 billion of cash from operations, and between $1.3 billion and $1.4 billion of free cash flow.

I don't see any reason why we can't at least do that this time, first of all because we have a bit higher overdues than we had last year the same period; nothing fundamental, it's big names, but they are a little bit behind. We have some of these project executions that obviously drag the cash flow down. So the more we can solve the project execution, the more we reach milestones that we can bill the customers and get the money as well. So that is the second point that makes me feel quite optimistic.

And if you look at it from a free cash flow point of view, I think we should be able to generate between $1.4 billion and $1.6 billion in the fourth quarter. If we get that, that means that we would have a year to date, a full-year free cash flow of $2 billion, or even slightly better than that, which should get us to this 70% type of conversion rate that I had already indicated at the Capital Market Day.

Obviously, you mentioned the hedging. I need a crystal ball for that, because it really depends what the US dollar will be doing this quarter. If the dollar keeps going up, that means that we might have more cash flow, not losses on realized derivatives. If it is stable, it might be a neutral event for this quarter.

So that's a little bit difficult to do, and is the difficult part of this whole balance sheet hedging. In fact, it should have never been reported as operating cash flow, but unfortunately, we started that 10 or 12 years ago. And so, obviously, we are trying to be consistent here. At least we try to highlight it to you so you see the difference between the pure cash flow from operations and the cash flow that comes from hedging.

Andreas, on the Power Systems large order question on this year and next, I can tell you that we have a strong tender backlog. We've had some quotes on some rather large jobs recently in the $900 million to $1 billion range.

It's really difficult to say with these things if they're going to stay in the quarter or move out. We might see something this quarter, or we might see something in the first quarter of 2013. But certainly, within that timeframe, within the next six months, we would expect at least maybe one of those to come through.

On the India, the issues that we have in India have nothing to do with North East Agra. Right now the North East Agra job, is I think that you're referencing, has been progressing pretty smoothly for us. Okay?

Yes.

Mark Troman, BofA Merrill Lynch

Three questions, please. First one, I guess, the inevitable one on pricing. You gave some discussion, Joe, in the presentation. Just a little bit more color really what's going on in Power Products. Are there areas where you're really seeing very intense pressure still and the absolute price indices are still going down quite hard and other areas moving? Or is this more a uniform trend that you're seeing stabilization?

Related to that, it's very hard for us to get data on capacity in T&D, and I was wondering if you've spotted any trends in terms of is capacity stable, or going up, or doing down versus demand.

Second question, just on China, you commentated Power orders were up I think 15%, Automation down. I just wondered how you saw the short cycle developments in China. Have they deteriorated through the quarter or got a little bit better? I know you talked about Low Voltage, but just a bit more color on where you think China is going in the mix there.

And then finally, just on the wider, early cycle parts of your business. Did you see deterioration of that through the quarter? We've seen some of that in the machinery markets, but just I guess on the electrical side, or was it fairly just a steady trend through the quarter that you saw?

Thank you.

Mark, on the PP, I would answer your question as what you mentioned in the latter part of it as it being more uniform. It's really hard to use that term when you think of PP because you have businesses in Power Products like medium voltage switch gear, it's incredibly so international. It's all over the place. And all these markets are different. The specifications are different, or whatever. But those statistically tend to average out over the years to give you the kind of margins that we deliver from a quarter-to-quarter standpoint.

We mentioned in the first quarter that we had some issues with medium voltage in China associated with rail and some different areas too. We still have those issues, but we've been able to diversify a significant number of those sales away from that piece and move it into industry, and that's helped us. The pricing scenario there is different in that sense and it's a little more stable.

On a high voltage side, you can see extreme pressures in [pricing terms] in the Middle East, but much different in Europe and the United States.

And so I don't see anything that, Mark, from a quarter-to-quarter standpoint is tremendously different, either above or below that. But I can tell you the trend is, when you talk to Bernard and his team about this, is that we are like in the Middle East able to quote certain types of jobs and certain types of products that we wouldn't have quoted a year and a half ago because the prices were too low. And so I think that's a positive sign, and that relates, I think, to your capacity piece.

Whether it's capacity, Mark, or whether it's just sanity in the sense of some of our Asian competitors wanting to make money, we certainly have seen a better rigor in the marketplace around price than we did if you go back 12 months or 18 months ago.

Okay.

On China, and staying with that piece and what we saw in Power and Automation in general in short cycle, is as much as when you think about it, Discrete Automation & Motion was down 14% in the quarter in China, but actually, Low Voltage Products was up. Okay? And when you look at drives and motors, and then the broad portfolio in Low Voltage Products, those are really our best short cycle businesses. And so you have a contrary comparison there.

You have Low Voltage Products being up. You have [DM] being down. The one thing I can tell you in DM that we're sure of is a significant amount of that weakness has to do with renewables, and specifically in wind. And so we know that. We expect that to recover in the fourth quarter, or the first quarter, based on signals we get in the marketplace. But we think a lot of consolidation with OEMs is going to go on in China because of the pressure that's been in that market.

On Low Voltage too you'll see that quarter to quarter, third quarter last year and third quarter this year, there is a marked improvement. But from first to second quarter 2012, and third quarter 2012, it's flattish overall.

And so the trend for Low Voltage in China is sideways. And so our comments in our press release about China going sideways are pretty much a mix of looking at all these different businesses and which way they're going, or whatever, and some are up, some are down. There's no big material movements either way. In general, we see China flat to sideways.

And lastly, the early cycle deterioration. It's really hard to tell anything when you start to come out of the summer and so you have to always be cautious about those August numbers that you see. As you get into September, our short cycle businesses in the areas that I mentioned, Low Voltage Products and also DM, whatever, 0% to minus 2%, talking around in that kind of range over that period of time. Okay?

Brilliant. Thanks very much.

Olivier Esnou, Exane BNP Paribas.

Three questions, please, first on the Service business. So I understand you're doing some clean-up of past portfolio to increase the margin, but when I look at the P&L, the gross margin on Service is going down year over year, so I was wondering if it's the right way to look at it or not, and if you could comment on that.

Secondly, on the Power System business and the execution issue, you mentioned Middle East and so on, do you get a feel that --? Can you maybe explain a bit more what's going on? Is it just poor pricing in the beginning, or is it more with how you're delivering the projects. I just want to get a feel that we're not going into another type of issue like cable, for example, and that you have a good level of understanding and control over what's going on really.

And lastly, I think I heard in the press call that you didn't see big M&A out there. And given the strength of the balance sheet, I was wondering whether you were thinking about some cash return strategies that we've seen some of your peers doing. Share buyback, special dividend, how do you think -- how do you feel about that?

Thank you.

Okay, Olivier, I'll take the first two maybe. On the Service business, I think you have already given part of the answer, because indeed you know that we are trying to scale back a little bit on some these full service outsourcing contracts that we are doing. So these contracts first are -- have a much lower gross margin than the lifecycle services, and then there's some exit cost related to that as well that weighs a little bit on the gross margin. That is one part.

There's also a bit of a mix issue here. For instance, the turbo charging service is a little bit weaker this quarter and this is the service business that has a very good gross margin, so you can see here some difference if you have a little bit more robotics, a bit less turbo charger that makes a difference.

But we are still in a transition there where although service orders are up 9%, in fact, it's a combination of lifecycle services that are up double digit and full service contracts that are actually declining. And so you are not seeing yet the full potential of the gross margins. We hope to show it once we have a clean portfolio there.

As far as the Power System execution is concerned, indeed, I think you can't really talk here about the systemic thing because not only is in different countries, but it's also in different business units. Some of these issues are in substations; some of them in power generation contracts.

So it is poor pricing, for sure. If you see it from the backlog and that you compare it to the type of margins that we got into these businesses a year ago, but after that, it's a couple of project management issues and delay in execution.

But since it is really disseminated in different geographies, different business units, and even different product groups, you can't really see one issue that is all generated by the same business group. So we have to address it, but I really don't think it is anything systemic here given the diversity of the problems.

On the M&A outlook and the subsequent cash, the question is we -- what I'm saying is I don't see anything coming up in the near term, which would be in the fourth quarter, which would be any large extent in the billion dollar range, or so. We do keep obviously a good growth [port] process to understand where opportunities might be, and if we see something or something materializes, we'll certainly have the balance sheet to be able to pursue that, but I'm not projecting anything now.

I think when you start to get out ahead of us and you start to look at how much cash we'll generate and what that might be on the balance sheet, and how we look at the special dividends or stock buybacks, or whatever, just remember, our cash preferences really haven't changed really since Michel I have been working together. We start with having a -- keeping our dividend and maintaining our dividend, and hopefully bringing it up every year is a key area. I want to make sure that we have enough for CapEx and enough from a restructuring standpoint to do the things we need to do to make the business operate.

Next in line comes M&A and what makes sense, and then after that piece would be any special cash dividends, or whatever, would have to be considered at that point in time. And that's as good as I can deal with.

Yes. As we always say, the best mitigation of risk management is to have a strong balance sheet. That always helps.

Okay, can I just have one follow-up on the first answer? This cleaning, how long should that last of the past poor service contractor? When will we start to see gross margin going up again in Service?

Yes, it's difficult to say, because we are not going to go to completely out of the full service, we'll just be more selective on the industries and the kind of contracts we want to take. So it's not at every quarter we'll have an issue like this, but I think over time, the relative weight of the full service compared to lifecycle service will be diluted. So we should really start seeing some progress there.

Let's not forget also we are really pushing service in all the divisions. For some divisions, it is really starting from a low base, which means you pay a certain entry point with a gross margin that you still have to build. So I think it takes a while to start picking up, but we are quite optimistic that we should soon see tangible improvements that will start showing up in the gross margins as well.

All right. Thank you very much.

James Moore, Redburn Partners.

I have got three questions, if I could. On order pricing and PP, you talked about the same 3.5% level. When we go back to last year, I see that the comp was 50% easier, went from minus 5% to minus 4.5%, and I'm maybe reading too much into this, but has there been a touch of a sequential drop back in order pricing? And could you talk through regionally and product-wise what the trends are there?

In Automation, I think I get the sense that pricing in revenues in DM has come back a touch, but in LP it's gone up a bit. Could you give us a rough feeling for what the percentage numbers are for year-on-year pricing in the three Automation divisions?

And then thirdly, R&D sales investment. Will you pull back on sales feet on the street, given your comments about pushing on savings harder given the macro? And how should we think about that number next year? If it's roughly a $500 million headwind this year, how does it look next year?

Okay. James, I'll take the first one on the order pricing. If I compare it sequentially the three categories of Power products are high voltage, medium voltage and transformer are showing the same trend and what we reported last quarter. And actually, even a year ago it was not a big difference. We were also talking about 3% to 4%, or maybe, no, a little bit more. It was 4% to 5% a year ago that we had reported, so there is a slight improvement in transformer pricing, and a bigger improvement in high voltage compared to a year ago.

But compared to the Q2, the three segments is more or less getting the same impact that what we saw in Q2.

For Automation, you are right, we see a little bit of a pricing deterioration in the end. I think this is also a little bit the impact of weakness, of low voltage drives in China. This is renewable demand that Joe mentioned before. So [there] is no more contributing of positive impact to pricing. It's not a disaster but it's a small delta compared to last time.

And indeed, LP is now more catching up on some price increases that were announced a few months ago. And that, combined with the fact that they initiated some additional cost savings after the first quarter, which you remember was a bit of a crisis, that has helped them now restore the margins to the level that we have been used to see them deliver.

James, that Automation pricing. When you take PA, which is the easiest right now, we're not seeing any major deterioration in price there. It goes across a lot of different industries. The biggest issue you have in PA always is how much Products comes through in a quarter and how much Systems comes through in a quarter. That's primarily why you see that [0.7%/0.8%] difference in those two businesses year on year.

When you get to LP, as I mentioned, we think we get 1 point/1.5 points of price in that business. [Theac] and the team have done well in driving that. That's not saying that we have a robust marketplace in order to push price in out there. It's just the team has gotten much better at understanding selectively where we can get price, and being able to hold pretty well in areas where we might have some competition.

So it really comes down to Discrete Automation & Motion. And again, I'll tell you that within that whole portfolio, and we talk about that portfolio, you have to think about -- you have medium voltage drives, you have power electronics, you have robots, you have generators and motors, and you have drives, and these all have different margin components to them.

When I look at those and I think about the market back pressure that we see in those businesses, James, it basically hasn't changed. And when you see a margin drop like this in DM from quarter to quarter, it's mainly a mix. It has to do with a mix of, in this case, a little more robots, which is still a good margin, with drives, which has the highest margin within that business.

And so in general, don't interpret that as a deterioration in the market out there. It's more in the kind of businesses that are flowing through the income statement and how that mix adds up.

I think your last question, James, had to do with the sales and R&D expenses that we show, [$129] for the quarter. You should start to see those iron out as we get into 2013.

There's a lot of charges that are [stuffed] in there. They've got -- so I would say there's a certain amount of adult supervision that you have to use with those numbers. But in general, year over year, those are investments that we've made in our sales forces, and we've made in our R&D. Some of that has to do with -- we put a lot of salespeople into South East Asia, in different parts of the world, in low voltage, in different areas where we haven't had that before. Sub-Saharan Africa, we're seeing some good returns on investments that we've made in that area too.

And in R&D, some of the cost savings that you see in the cost savings side is driven hard by R&D in a sense of redesigning products and putting ourselves in a position, being more competitive rather than single-sourcing, dual-sourcing. All that takes R&D work to be able to put that together too.

And I think it is slowing down, James. If you look this quarter, the impact is $120 million towards $135 million in Q2, and $145 million in Q1. So you see, we are trying to also slow down a bit the pace there.

Thank you very much. Can I get back to the order pricing? Just sequentially, am I right in saying that it's still flat in Power Products sequentially? And does that -- is that the same through the three areas of high, medium and transformer?

Yes, that's what I said. It's the same, yes. So flat meaning it doesn't accelerate, or it doesn't decelerate (multiple speakers) impact.

And all three are the same?

All three are the same.

Yes. Great, thanks.

William Mackie, Berenberg Bank.

Will from Berenberg. Three questions, if I might. Firstly, can we go to your biggest market, North America? It seems you've had good integration success with Baldor in the past, and now Thomas & Betts.

But perhaps you could throw a little color on how that business and how the region has traded through the quarter. It seems in some businesses, and your peer group have seen a slowdown ahead of uncertainty around the elections and the like going into next year.

And then coming down to Process Automation, perhaps given the importance of the metals and minerals and marine end markets for you, and where a number of your peers again have seen some quite sharp drops in intake, how do you feel about Process Automation business going into the back end of this year and into 2013, given what's happening to the end markets?

And lastly, in Europe, really great, great result in Southern Europe. Really an anomaly against many of the companies we look at. So perhaps you could just highlight how you've achieved that, and specifically what's happening in places like Italy to allow you to achieve growth.

Well, I'll take the first one, Michel will take the second, and I'll follow up with what we've seen in Southern Europe.

On the Thomas & Betts and Baldor, I'll tell you that we do get a better look at that marketplace because we do have a much stronger footprint there now with those two.

We still see year-over-year growth by quarter in both of those businesses, in both Baldor and both Thomas & Betts. But we have seen a slowdown. There's no mistaking that we don't see the same growth in Baldor that we did this time last year. The comparisons, obviously, are very difficult, but we still see growth in that business.

And Thomas & Betts growing about [4%] is in line with what they projected, but they would tell you that they felt that the market was a little bit slower in the third quarter than what they experienced in the second quarter too.

So I think the best thing is the -- to talk about that is the uncertainties in the market. Once we get past the presidential elections, hopefully that will clear up in some way.

I think to keep in mind too that there are some signs that the construction market's coming alive in the United States. We'll have to keep our eyes on that, but that would obviously be a positive development too.

Then on the Process Automation, you are right. It was a pretty good quarter in marine and in minerals, which is not always what we [bear]. And I think it's also important to understand that if you take a business like minerals, we don't always serve only the CapEx of the customer, there's also a lot of OpEx that is customer spend, including Maintenance and Service, where we have a pretty strong business there.

So I think there's two reasons for this, because we can reach this OpEx portion of the customer spending. And second also, because we still have a market share that I think has been proved quite a lot with the big players in the industry. And so having a smaller market share is probably a bit easier to be resilient in this kind of industry when the CapEx starts to be cut down.

Marine is still pretty strong. So that is indeed the two businesses that are supporting the business for the moment. We had a bit of a weaker quarter in oil and gas, and as well in pulp and paper and in turbochargers. But marine, metals and minerals have helped the division to produce the kind of result they are showing here.

And, Will, on Southern Europe, when you look at Italy being up about 3%, whatever, Will, I don't know. I'll ask Michel too if he knew. But I know that in Low Voltage Products, we felt good about breakers. In that area too exactly where those breakers were going; industrial versus commercial, I'm not quite sure.

But in general, I can't tell you where exactly it comes from, but I look at it more as coming in our shorter cycle businesses than our longer cycle businesses.

Yes. In fact, if I look for instance at Italy, we were up in Italy almost 20% in the DM division, and almost 20% in the Process Automation division. So what you see there Italy still has a pretty robust export industry and it seems to start reviving a little bit and taking some orders, so that the combination of discount with basically Italy is up. Spain is still down because obviously there, the major economic issues are more local, like real estate, so I think that will take a little bit more time to happen. And France is about stable, flat. So it's really Italy that has made the difference here, especially on the Automation side.

Thanks, gentlemen.

Mr. Martin Wilkie, Deutsche Bank.

Couple of questions. You mentioned earlier about the renewables impact in the Discrete business, but I just have a question more broadly on transmission. We've seen some noises in Germany and also the UK that feed-in tariffs and some of these other incentives for offshore may get toned down. And, obviously, we know in the US that the PTC is expiring. Are utilities already talking to you about what they might do with their CapEx plans related to offshore in the US and in Northern Europe, or is this something that utilities are really waiting to see what happens to the rules before really making that decision?

So that was question number one.

The second question, you talk about selectivity in orders in the Power Products business. Is this scope of orders that are of acceptable margin to you, is that still of broadly constant size, or do you feel that that selectivity is going after an ever-decreasing market as some of the competitors get a little bit more aggressive?

Thank you.

You know, Martin, on the renewable piece, the feed-in tariff side, I think the utilities, like with all government changes of regulations or whatever, they're not exactly sure what is going to happen. And in each one of these countries it's different. Germany is wrestling with a different issue than what the UK is wrestling with.

When you talk about offshore also, remember, not all of what we talk about offshore is wind. Often what we're doing offshore is we're connecting one grid to another, and that has just to do with grid reinforcement more than it has to do with dragging renewable energy from a coast based on a wind [side].

But I think, Martin, specifically to your question, the US has basically no offshore wind business at all, and so that's not an issue there. Anything we quote is usually land based, and those land based areas are [staff] related sometimes. Some aspects of [static part] compensation. And then the HBDC area, we had an order in HBDC for renewables in Texas this year down there too.

So I don't know if I'm answering your question but, obviously, there's a lot of anxiety in the marketplace right now in the sense of if the US are going to increase their production credits or continue their production credit, what's going to happen with offshore. Right now, we have no indication which way that's going to go.

On (multiple speakers), do you want me take that one, Joe?

Yes, sure.

Well, I would say for sure Power, both Product and also Power Systems are as selective as they can on the order intake to make sure that the margin is there, so that has an impact also on Power Products in terms of how much they sell to Power Systems, which is down quite a lot.

If you look at the utilities, let's say that channel has been more or less flat this quarter. But it's a combination of pretty weak on the distribution side but, in fact, transmission orders were up this quarter there. And then we still see some good, robust demand from the industry.

So you see it is a bit of a mixed bag. Selectivity is one place and a bit diversity of channels, which is always what helps the division to be resilient when utilities start delay on some of the projects.

Okay, thank you.

Mr. Frederic Stahl, UBS.

I just had one question, actually. I was wondering if you could give us a bit of color on the Low Voltage margins. They were quite a bit better than what I would have expected in the quarter, and obviously up quite a lot on the earlier previous quarters here.

Thank you.

Frederic, you have to at least have three questions. One question is not enough (laughter).

No, I think I mentioned it already before. I think there is still some positive effect of price increases that have come through and helped a little bit the top line, but especially they have increased quite significantly the amount of savings they realized, which is one of the conclusions we had taken after the major slowdown that we had seen in the first quarter. I think this big effort on cost control is starting to pay off now.

And also, a bit of a better pricing from a revenue -- a better mix from a revenue perspective, so bit less System revenues; Products coming back a little bit.

So it's fair to assume it is sustainable?

Well, it's sustainable, with the exception, as we pointed out, that we see the short cycle businesses are slowing down a little bit. And as you know, that is a business that is [a high] book to bill. So it will depend a little bit how the next months develop in terms of order intake for short cycle like wiring accessories and control products.

That's great. Thank you.

Mr. Mark Fielding, Citigroup.

Again, I'm afraid, three questions. Firstly, just in terms of Process Automation, it would be helpful -- last quarter, you indicated that an improving margin trend is something you felt was a sustainable pattern and, obviously, you've taken a step back that you think is mix related. So just maybe some commentary on whether that mix issue could continue into the fourth ,quarter or whether you think it is a one quarter issue.

Secondly, hopefully a very simple one. Just the tax rate looked a bit lower than I expected in the quarter. Maybe some thoughts there on the full year number.

And then thirdly, just -- I'm afraid coming back on the sequential pricing issue, just trying to get my head around that a bit more. Last quarter, you actually quite helpfully gave us a number for the sequential pricing change. I think it was marginally up 1%. But maybe a similar sort of commentary on this quarter in terms of the sequential price impact and in the Group as a whole.

Okay. Mark, first of all, I'll take the PA piece. We do feel that our PA long-term trends from a margin standpoint that we can push those up over time. We're confident about that and the plans that we have in place as part of our strategic plan in order to do that.

A big part of that plan is end up you having less systems and more product as part of that whole piece. But along the way, we are going to mix up and down periodically, as we have done this quarter, as some of this Systems business that we [take close to] that I mentioned before. But if you took a line and you drew it now, and you draw it out for the next two years, we feel pretty confident we'll be able to push our Process Automation, our margins up, primarily because of Products and really driving better margins on Products, and a higher percentage of products within that business as a percentage of sales of Systems.

Michel on the tax rate?

Then for the tax rate. You are right, it was a good tax rate this quarter. Sometimes, it depends a little bit on timing of tax, [how did you get] this tax. Obviously, they are positive, you can release some tax provisions. That has obviously helped this quarter. We keep our guidance of 27% tax rate for the full year, and I'm quite confident we can achieve this.

The third question in terms of sequential pricing, I don't want to enter too much into that, but I would say my feeling is that it has been stable compared to Q2, since the way it's on a quarter-to-quarter basis more or less the same. I think that you could also deduct from that the pricing sequentially has remained stable.

Thank you very much.

And with that, Michel and I thank you for your questions and your interest. We'll be back to at the end of the fourth quarter to give you a fourth quarter update along with the total year summary.

So thanks again, and have a good day.

Thank you. Bye bye.

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