Abb Ltd (ABB) 2013 Q3 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q3 2013 Results Analysts and Investors Conference Call. I'm Stephanie, the Chorus Call operator.

At this time, it's my pleasure to turn over to Mr. Ulrich Spiesshofer, CEO of ABB, and Mr. Eric Elzvik, CFO of ABB. Please, go ahead, gentlemen.

Good afternoon and good morning to everybody on this call. Welcome to everybody to the Q3 2013 results call.

It's a pleasure for me to present the results for the first time as ABB's CEO. It's an exciting time to take on this challenge, and I'm looking forward to talking to all of you in the coming months and quarters about how we see the business developing, as well as hearing your views on the Company.

I'm joined today by my long-term colleague and our CFO, Eric Elzvik. You know that Eric and I worked together very well in the Discrete Automation division, and it's great to see the proven team together again today.

So, today, we're going to take you through the results together with Eric here. And then I will take some time to talk to you about where I see ABB's strengths and where I think we can do more. I'll summarize with a midterm view of our end markets and the near-term outlook for our businesses.

Before I start, and this is now related to slide number 2, let me remind you that, as always, my comments in this call refer to the presentation that you can download from our Website at ABB.com.

Also, please, refer to the important notices outlined on chart 2 regarding any forward-looking statements made today.

So let me move to chart number 3, which shows an overview of the quarter. We showed solid performance across the business. And it's was demonstrated by the increase in revenues, operational earnings, net income, and cash from operations, which was up by almost $0.5 billion versus a year ago.

Our base orders returned to year-over-year growth and were higher in most regions and all divisions except Power Systems, where the strategic repositioning to focus on higher value-added projects continued to reduce orders significantly. We are really encouraged to see orders up strongly in some key markets; for example, in China and in Germany, both at double digits, and steady order intake at high levels in the US. Our large orders remain slow, reflecting both the PS realignment and continued postponements in our customers' capital expenditure in the utility, mining, and marine sector.

The operational earnings and margins increased despite the mixed market, reflecting the positive volume effects and solid project execution.

Our performance also reflects the strengths of our broad geographic footprint and manufacturing and engineering presence in all of our main markets, which helps mitigate risks from currency fluctuation.

Thomas & Betts and Baldor integrations also contributed to the performance, and we will later on get back to that one. We closed the Power-One acquisition and have begun the integration according to plan. And I can tell you that the customer feedback is really positive on the combined business.

We have announced some new appointments to the executive committee, as well as some realignment in responsibilities, which I will lay out later in the presentation.

We saw a good increase in earnings per share, by 8%, as you know, and Eric will provide you some more details on these topics.

So, if you go to slide 4, which summarizes the key figures of the Group, I've already highlighted quite a couple of the developments in there. But let me just point out a couple of other thoughts.

The Group order decline reflects to a large extent the impact of the PS realignment, which is the right strategic move at the current time. Our good revenue growth reflects both the strength of our backlog and the increase in base orders. At the same time, the backlog is declined, which may have some implications for revenue growth over the next four to six quarters. But tendering activity is very high, and we are cautiously optimistic that we will win our share of orders in the coming quarters.

The operational EBITDA margin is up compared to a year ago by about 40 basis points, as I mentioned, and Eric will take you through the bridge in a moment to see -- to show you a little bit more how this all comes together.

So, overall, I'm encouraged also by the strong performance in cash from operations, which was up 62%, and that's really a sign of a very healthy enterprise.

If you move on to chart 5, which shows you the regional growth overview, first off, on the early-cycle business improvements, we saw, really across the board -- and, as I said, base orders were higher in most regions with Europe steady versus the same period last year. The large order declines are visible mainly in the Americas and in the Middle East.

n Europe, orders in Germany, Sweden, and France were all higher, which offset most of the continued demand weakness in southern Europe.

The Americas were lower compared with a strong performance in the same quarter 2012. However, the US was steady at high levels, as order increases in the product divisions, despite the political uncertainty -- they are offset by declines in the large project businesses in PS and PA.

Asia looked better this quarter, with automation demand driving growth in both China and India. Australia is lower, reflecting the tougher mining environment.

The decline in the Middle East and Africa is mainly due to lower orders in PS, a large part of which is effect of the PS repositioning.

Emerging markets, orders declined 5% in the third quarter, while mature market orders remained steady; again, mainly reflecting the large order development. Base orders, however, in the emerging markets increased at a high, single-digit pace and faster than in the mature markets.

So, on slide 6, you see an overview of the divisional growth performance. And let me highlight here a couple of points. We have a return on year-on-year order growth in most divisions, which is really good news. We have growth in the DM and LP orders, reflecting strong early-cycle demand. Power-One has contributed to DM's growth, and the outlook on the solar market is, on the one hand, still volatile, but the integration overall is on track. PA is flat on total orders; again, mainly reflecting timing of large product awards. The base orders in PA are up 8%. First quarter of order growth in PP really since the second quarter of 2012, which, again, is good news for us. The PS is showing the impact of the realignment and weaker utility transmission spend.

Now let's move to the revenue side and just talk about the highlights here. We have really, based on the strong backlogs on PA, PS, and DM, have contributed to really solid revenue performance, and good execution was the other reason for this.

Just on the integrations, you might be interested to hear a little bit how our big deals are going.

In Baldor, as you might know, we combined the (inaudible) motors and drives, and they have really good increase in drives into the US market coming out of that with a revenue growth rate in the double digits since the end of 2010. The mechanical power transmission sales, which you know is a certain percentage of the Baldor portfolio, is up more than 25% outside of the US. So the growth synergies are really coming. The cost synergies are well on track. So, all together, the Baldor integration is moving really well.

On Thomas & Betts, we have plans to bring together on the logistics side and leverage our joint business model, which is nearing, really, the completion. European and Asia integration is well underway. The sales growth plans are now in place. So we are moving swiftly, and the learnings from the Baldor transaction here help us really to drive the growth in the right way with the right kind of process.

We have good performance in retaining people, which is always important when you do a large acquisition. For example, the salespeople are all still with us, which is good news.

On the cost-reduction side, the cost synergies on Baldor -- just as an example, the supply chain savings -- are going very well. We have already added more than $10 million to the bottom line coming out of the Thomas & Betts supply chain savings.

Now, if I move to the chart number 7, this gives you an overview on the earnings. And, here, really, we have had solid execution on the earnings growth across the board, driven by higher revenues and really good execution, just to repeat that. The margin is up in most of the divisions. DM is stable on a high level. The PA margin is at a very high 13.6%, and this is mainly due to strong revenue growth of 30% plus really good project execution, especially in the marine business. PP is steady. We will continue to steer this business towards an operational EBITDA margin bandwidth of 14.5% to 15%. PS also executed better on its project business versus the third quarter last year, when the division experienced some project cost overruns, which, in fact, was one of the factors influencing our decision to launch the reset in the fourth quarter last year. PS remains on track to deliver 9% operational EBITDA for the fourth quarter.

So now let me turn over to Eric to take you some -- take you through some more of the financials.

So we turn to chart 8, where you have the EBITDA bridge. You can see in the bridge here that the net savings (technical difficulties) to the second quarter 2013 as we continue to execute well on the cost savings. Cost pressure remains, but it's -- and is mainly in the power divisions, but it's now at a more normalized level where we can manage well to compensate (inaudible) cost and productivity measures, as you can see in the table.

We also have positive volume effects, which over compensated for our selling and R&D costs, which didn't increase much in the quarter. And this mainly comes out of volume (inaudible) in all divisions.

The mix was negative, as we had higher increases on the system business. So there's a slight negative mix. But, as you can see, that's much smaller than the volume. Volume increased, and, then, on the other side, that's some of a few different things, from foreign exchange to some project costs, some central provisions for legal costs and adjustments that we are doing.

But, overall, we took up the margin from 15.3% to 15.7%.

Let me at this slide also remind to take a look at the historical performance into Q4 when you look at your models because Q4 typically has a higher revenue level and somewhat lower EBITDA margin. So it's important to see that that transmission is expected to come also this year.

Turning to the next chart, number 9, on the earnings per share, here you see the earnings per share both at the basic net income, the real bottom, bottom line, as well as the operational net income, where we correct for some items with somewhat more of a technical accounting nature.

The reported [net bank income] is up by 8% on a year-to-date basis. As you can see, the restructuring charges were higher than a year ago, and it is probable that we will for the full year somewhat exceed our guidance of $200 million for the full year.

Operational net income didn't increase as fast as the operational EBITDA because we had also higher interest cost and financial expense, depreciation compared to the same quarter last year. On a year-to-date basis, the operational net income and EPS was up by 7%, and that's the key number we focus on internally.

The higher interest and finance expense is likely to continue because of the higher net working capital levels we have, and I will come back to that on the next slide.

Also impacting EPS is also the tax rate, which we expect to be around 27% for the full year, which is consistent with our prior guidance.

So, if we then turn to chart number 10, you'll see our cash flow performance and also some comments on net working capital. Four out of the five divisions reported improved cash from operations, so we had a 43% improvement on the divisional cash side. That's because of good improvements and good performance in our efforts to work on the cash flow and net working capital. Nevertheless, there is clearly much more we can do in this area, and we have stepped up even further our focus on net working capital management under the program of relentless execution that we are now implementing.

Again this year we expect a strong cash performance in the fourth quarter, which reflects our usual, traditional factors, like yearend timing of project completions, as well as the payment pattern on some of our utility customers.

The net working capital has also affected the levels we have today, both timing and payment on some of the large projects, mainly in the Power Systems division. Some of those are of temporary nature and will go down over the coming quarters. But, for the year, we will increase, so we have not increased our guidance for net working capital to be between 15% and 16%. It's somewhat above our own -- our long-term guidance of 11% to 14%, which we expect to get back in a few quarters into 2014. We are also guiding now to slightly increase the finance net this year to $310 million from the earlier guidance of $280, and that is all related to interest cost for the working capital buildup.

Also, taking a look at the balance sheet, we are at a net debt of $3.4 billion at the end of the quarter, which is the same level as the end of June. And that is basically because, during the quarter, we have also paid for the Power-One deal, which was a net cash effect circa $750 million for the Group.

We also have confirmed our A rating with Moody's during the quarter. And we also have reviews with Standard & Poor's during the quarter. So we are firmly committed to stay with our single-A rating.

And now I turn it back to Ulrich.

So we want to use this opportunity also to take a couple of minutes to explain to you where I see the strengths of the Company and, then, some opportunities to improve even more.

So let's move to the slide number 12. First, we have demonstrated in the past few years that ABB is really a robust and well managed company. We have great position in some very exciting markets, which are well summarized by our tagline, power and productivity for a better world. This will remain the key to the ABB story.

There are other areas that will remain top priorities, as in the past. We will continue to execute against our 2015 strategy, including our ambitions to take out costs and lift productivity every year on a sustainable basis. We will try to improve customer and market orientation even further, and we will focus strongly on technology innovation, which is basically the lifeblood of ABB. And this will definitely stay a top priority.

In service, we have really developed good momentum, and we will keep pushing hard on that one. This is a really good part of the business, and we will continue here pushing.

On integrity and sustainability, these are critical themes to really ensure that we do the business in the right way and deliver on our commitments to our stakeholders. So there will be no compromises on that one.

However, there are also some areas that we can do more, and this is what I will explain to you in the next few charts, around themes of profitable growth, business-led collaboration, and relentless execution.

So, if you move to chart number 13, there are basically three main focus areas that we are really taking on to bring our performance to the next levels. This will drive all of our actions going forward, so this will be basically the umbrella for ABB to act in the future.

The first one is profitable growth. The opportunities are out there, even in a volatile market like we have today. But you need to take clear actions to get there. And I'll lay that out in a minute.

Business-led collaboration is about working together across all the businesses in ways that are focused on the needs of our customers. That will not only lead to more growth but also greater productivity and competitiveness of ABB.

The third focus will be relentless execution, striving for continuous improvements in the way we operate all of our business in terms of service levels, costs, cash, and productivity.

Our success in these areas will ultimately translate into higher earnings per share and cash returns on invested capital.

Now let me briefly run you through each of these focus areas.

If you would, please, turn to chart number 14. One of the great advantages of ABB today is really that we have the right products and technologies in the right markets; for example, around the mega trends on energy efficiency, renewables, infrastructure investments, increasing [organization], and others. But, in the kind of market environment that we see today, it's not enough to be in the right markets with the right products. We really need to actively drive growth.

And, therefore, I see three key opportunities to drive growth and that we refer to from now on as the PIE approach for profitable growth. It's basically penetration, innovation, and expansion.

Profitable growth can be driven by increasing the market penetration of existing market segments by combining offerings across different businesses more effectively and continuously enhancing customer intimacy and service. One concrete example is optimizing our various channels to market, serving our customers not only with direct sales but also through distributors, OEMs, or system integrators.

Having locally focused product management in-country, for-country is another growth lever that we can pull, differentiating and tailoring our offerings better to meet local customer needs.

And we will definitely focus on also developing better tools and processes to improve our customer relationships.

Innovation is and will be a key element of ABB. This will include both new products and innovative packages, as well as solutions of our existing offerings and services. We have invested throughout the cycle in innovation, and I strongly believe that innovation, our new products that are coming out, will be a key driver of growth in the future.

Growth will also come from further expansions into attractive segments with high growth potential, such as solar photovoltaic, subsea oil and gas production, and the increasing demand in the area of e-mobility.

So, if you move on to slide number 15, which lays out the second principle, business-led collaboration, it shows some examples on how we can deliver superior value to our customers by combining our offering from across different businesses and driving productivity through a joint approach. The ability to do this and to provide an integrated solution also means that we can deliver greater operational efficiency and productivity because we have in-depth process knowledge in different industry segments. It's important to recognize that this collaboration, driven by the needs of our customers, understanding their specific needs and then creating an ABB solution based on multiple business offerings not just from a single division.

And, on the slide above, you see some really good examples; on the one hand, clear growth combinations -- offering combinations for growth and, in the lower part, some really good examples for joint operations that we have set up, for example, in China and in Brazil.

If you move to slide number 16, this goes to the third focus area that we call relentless execution. We have demonstrated a strong track record in execution in cost management in the past few years. This will not change. Management focus on execution will include not only consistent delivery of cost savings equivalent to 3% to 5% of cost of sales every year but also stricter management of net working capital to lift cash flow, as well as driving excellence in integration of newly acquired businesses. Our announcement earlier this week that Greg Scheu will now lead this new role on integration in the executive committee is part of this drive.

And this brings me to slide 17, where we lay out the key leadership appointments and organizational alignment. We have recently announced a number of key leadership appointments and organizational alignments that will enhance our ability to deliver on these three areas.

Jean-Christophe Deslarzes is not only a seasoned HR leader but also has significant operational and general management experience both in the Americas and Europe. He has also a good track record as an experienced integration leader and brings from that experience the right sensitivity to bring the integration element into the HR work of ABB.

Pekka Titinen as the new head of the DM division brings a solid track record of superior growth and highly competitive cost management from his term as head of our highly profitable drives and controls business.

Greg Scheu, an American citizen, as you know, will use his extensive experience, on the one hand, in power and automation roles in ABB but also integrating our largest acquisitions to drive excellence in integration across the Group and take North America to the next level of performance.

Frank Duggan will take on leadership of our account management organization using his in-depth knowledge of local markets and his successful track record as a key partner for our customers.

The cross-business growth initiatives that [Frank] was driving the so-called industry verticals in areas like solar, wind, rail, datacenters, and so forth -- they will be driven from here on by people that run operating businesses, meaning the EC members responsible for divisions. And they will be responsible for ensuring the successful collaboration needed to take advantage of these growth opportunities. So this is why we speak about business-led collaboration.

On chart number 18, you see as a summary the overview of the new team as it will be effective as of November 15. You see it's a real experienced team. It's a great mix of people. I think all of them have a great track record of performance in many industries and business environments. So this is absolutely the right team to take the Company to the next level.

With that said, let me come to the outlook statement that you're probably all waiting for on chart number 20. This summarizes the midterm macro outlook for ABB.

So there is not much change versus the end of the second quarter. We remain cautiously optimistic about the US, today, our largest end market, although the full impact of the recent budget impasse is hard to predict. Europe looks like it has reached a bottom, but a meaningful upturn is not yet reasonable at this point with southern Europe still weak despite the relatively easier comparison this last year. Asia looks more positive, led by China. But India will probably remain a challenge until the next year's elections that are coming. The Middle East is a large project business, and we have to see how the customer decision-making develops. But, in the meantime, we will focus on the tendering activities, which are picking up, and really keeping the customer intimacy in (inaudible) where not much large orders are being placed.

So let me come on slide 21 how we see ABB for the remainder of 2013 and going into the next year.

The good news is really our long-term demand drivers, such as the need for greater industrial productivity, more reliable and efficient power delivery, and the development of renewable energies, as well as infrastructure upgrades remain in place.

Early-cycle macroeconomic developments remain positive. But several forward-looking indicators contain some mixed signals, and we still face some near-term market uncertainty. So, if we look at these forward-looking indicators, I could name, for example, the development of some of the emerging market currencies. If you look at what came out recently in terms of employment data, the uncertainty around monetary policy, and, really, what will develop in US regarding the political standoff that we have just experienced are contributing here.

In this environment, we will steadily continue to execute our 2015 plan. Growth will be supported by delivering from our large order backlog, as well as increasing the focus on market penetration, innovation, and expansion.

We will continue to relentlessly execute and to drive cost savings and productivity improvements equivalent to 3% to 5% of cost of sales every year through improved supply management, better quality, and higher returns on investments in sales and R&D, which we call white-collar productivity.

We remain committed to deliver higher cash to our shareholders and improving the cash return on our invested capital, the inventory turn rates, and the net working capital levels.

Before we move to the Q&A, let me add that we are planning an investor update event as part of our yearend results in February, where we'll provide more details around the themes I have just outlined and the status of our strategy.

As in the past, we will continue the practice to hold capital markets day every second year in September, where we update our strategic plans. And we will be holding the next capital markets day in September next year as originally planned.

So, with that, I'd like to conclude my remarks and thank you all for listening and turn it over for the Q&A.

Simon Toennessen, Credit Suisse.

The first question is on the decline in the large orders you've seen, the 43%. Could you elaborate a bit more how much of that was Power Systems and maybe even further going into the end markets and elaborate how much of that was oil and gas as well?

And the second question. Could you give us the local currency growth split of LP, DM, and PA in Europe, just to have a better idea how these different businesses have grown?

And then, lastly, on the Power Systems reset, you've said on the press call that you expect this to turn around and improve next fiscal year. Maybe you could just give us a bit more color around that. Thank you.

On the decline of the large orders, about half of that comes from PS. And, there, you have basically two factors. The one is the reset of the business towards a longer-term, more sustainable profit margin and, secondly, the slow decision-making in some of the transmission and utility infrastructure. So that together contributes about half to that.

Oil and gas is something that we see some positive signals coming, especially in terms of the tendering activity. So the drop did not come strongly out of oil and gas.

In terms of the local differentiation of the growth of the product business in Europe, I hand over to Eric to give you a little bit more color on that.

So, Europe is stable overall. And the local currency increases in Europe in the product divisions is following that pattern. It is getting better. It is in some of the areas positive and some of the areas still flat. But it is in a positive term like it is in also Americas and in China.

Okay. And then the Power Systems reset for next year?

On the Power Systems, look, Peter and his team are doing, really, a lot of hard work. They're driving the right kind of actions. I'm, long term, really optimistic that this business will come out in the way that we want it. The timing of the recovery is depending not only on us but also on the market coming back. So I'll stick to what I said earlier today. We expect it to come back sometime during the next year.

Okay. Thank you very much.

Andreas Willi, JPMorgan.

I have one big-picture question and two clarifications on numbers.

On the business-led collaboration which you mentioned, this has been a focus for ABB before under previous CEOs and programs. What do you specifically plan to change in terms of changing the corporate behavior in terms of collaboration across the divisions?

The second question on base order growth. Obviously, a big swing from minus 5% to plus 5%. Does this plus 5% also include Power-One? And maybe you could give us some indication of sequential growth, because it's always a bit difficult when we look at year-on-year growth, particularly given that, if we look at multiyear comparables, they have got quite a bit easier in Q3. So maybe it would be helpful for us to know what the sequential pickup in base orders is.

And a last question, on Power-One. If you could, give us the sales and underlying EBIT contribution for the quarter so we can work out the organic development and maybe also some indication what happened there in profitability since you acquired it. Thank you.

Let me start with the last one first. We will not in the future disclose details on Power-One. This is not a material transaction for ABB. So this will be part of the reporting of the DM division.

Power-One is developing in line with the case that we put together when we made the deal. The market environment on the solar side is one which is faced by certain challenges. We were well aware of that when we went into the deal. And we are executing against the plan that we have put together in a really good way.

Your question on the big picture on business-led collaboration. Look, collaboration is always something that ABB aims for. There is tremendous opportunity out there, as I laid out.

What is different? The difference is really the term business-led. The division heads that we have today are mainly focused on their -- executing their divisions, and we had some resources bringing the activities together across the different activities. So what will change now is that these executive committee members do have, personally, accountability and responsibility for each one of the collaboration efforts. And it will be anchored in their performance incentives and in their performance targets. So, basically, none of them will fully get their PDA targets fulfilled if the other ones don't collaborate. What I want to have, really, is a very strong execution of this collaboration by the business leaders in the Company. That's point number one.

Point number two is we have started, really, a journey of jointly identifying and agreeing on these collaboration activities in a focused and prioritized way. The business leaders are deeply involved. They are basically also suggesting them. We'll keep building on their experience how to deal with customers better and how to address the markets best.

So I really believe that, under Joe, we set up a lot of collaboration activities, brought them to a certain level of maturity, and now is the right time, having achieved this maturity, to go to the next stage of excellence by having the business leaders directly responsible for these collaboration (inaudible).

On the base order question, I hand over to Eric, who will give you some more color on that one.

On the first question, Andreas, the 5% includes Power-One, as we don't separate that out. But it is not a major impact on the Group level from Power-One. Sequentially, it is improving, both overall and also in the major regions; actually, quite well in some of the regions. So base order development is in an upward trend.

So you're not going to report organic growth going forward. So, if you do acquisitions up to $1 billion, you wouldn't split them out going forward as organic and inorganic growth.

We have split up the large transactions, Thomas & Betts and Baldor, over the last few years. And we have not split out the smaller transactions. Power-One is a relatively small transaction from our point of view.

Thank you.

Ben Uglow, Morgan Stanley.

I had a couple of questions. First of all, maybe, Ulrich or Eric, can we just step back and talk a little bit more about the short-cycle pickup? From reading your press release, obviously, I get the impression that things are moving upward in low voltage. You've called out the robotics division as well. Can you give us any more evidence of either end markets or product categories or any one geography that gives us sort of confidence that this is, how should I put it, a broad-based upturn as opposed to something specific in a couple of divisions of ABB? That was question number one.

Question number two was really around strategy. I was reading from some of the comments this morning that ABB would like to invest more in subsea oil and gas, and, at the same time, everything we see in terms of process CapEx in general appears to be slowing down a bit. So I wanted to understand what is your thinking about the oil and gas vertical; specifically, why subsea. And what is it about subsea that would be more attractive than going into, say, unconventional oil and gas, like shale markets, for example?

I'll start on the short-cycle, and, Eric, you might bring some color. And then I'll move over to the strategy piece.

Look, on the short-cycle piece, it's really pretty good news. All around the world, we are experiencing a pickup on the short-cycle pieces of the portfolio, being it in Tarak's division, parts of the DM division. We see a good pickup in China. We have seen good pickup in Germany. We have seen in the robotics field continuous good demand. And, look, I'm going tomorrow to China to meet the mayor of Shanghai talking about pollution and everything. If they don't automate, there will be clearly a significant risk for their economy. So we are well positioned there all around, and it's coming together.

Eric, any other comments on the short-cycle?

You basically said it all, Ulrich. It is picking up. The tenders have been there. We reported it also last quarter. It is, overall, not enormously strong [term], but it is in the right direction. And there is -- it's relatively broad-based, both product and geography.

That's very helpful, guys. Can I just interject? Is there any end market where you see things being different? Automotive I get. But is any of this related to residential or nonresidential or food and beverage? Any particular industry?

Okay. Let me take a try at that one, Ben, to give you more color on this one. If you look at it, yes, food and beverage is one that is good. 3C is one that is good for us. If you look at the automotive, it's good for Tarak. We see in quite a couple of markets residential construction picking up, which is good signal. So, look, I know that you're going to nail us one more time, but it's a pretty broad pickup. And we have to stick with that.

We see some hesitancy in some of the process industries doing more than the general replacement and maintenance piece, which is not surprising, given the large order and the overall demand pattern there.

And quite a lot of those product categories also go through distribution. So, obviously, we know, to some extent, where they end up, but we don't have a complete picture of all the end markets which go through distribution.

That's very clear. Thanks.

Okay. Now, the second question was around strategy and subsea. Look, I think, when you run a portfolio like ABB, where you have $40 billion turnover, 140,000 people, it's important to invest in businesses not only with a short-sighted perspective, also with a long-sighted perspective. Oil and gas, as you know, is a key [home turf] for ABB. We are well positioned there. We're doing a lot with our DC offering, with our product offering with automation and actuation offering.

But we also have the responsibility to look ahead. And, if we look longer term ahead, the subsea area is really an area where you have an opportunity or higher opportunity to take logically -- differentiate yourself from others to really come out with unique solutions where technology really matters, there's a big difference. So I believe putting money into these kind of markets makes a lot of sense for us in the right and tailored way.

I give you another example. If you take e-mobility as another investment area, we did that as a startup business. A couple of years ago, we started it. We bought a small software and service company to complement our own hardware activities. And, today, we are the only company in the world that has now in Denmark and Estonia and The Netherlands country-wide supplies of fast-charging stations.

So we will have a good mix of the traditional innovation and traditional investments, and then we plant some seeds and put some money in the longer-term trends that we believe in.

That's very helpful. Thank you.

Mark Troman, Bank of America Merrill Lynch.

Okay. First question. It looks clear, obviously, base orders have turned up. If that continues, as is likely, how well is ABB positioned to leverage that growth? In other words, how much do you have to invest to capture the growth opportunity? Or should we see pretty good operating leverage in those product divisions? That's question number one.

Question number two. On the Power side, I guess, looking at pricing, it looks fairly similar to what we've seen before. But, if we looked at Power Products this year, at least, the EBITDA margin looks as though it would be at the bottom end of your target range. Can you comment on the scope to improve that on a 12- to 20-month -- 12- to 24-month view, given, I guess, the order (technical difficulties) is less than -- or less intense than what you're seeing in the P&L currently? That's question number two.

And, just finally, on M&A, Greg's appointment looked interesting. Is that because you've still got a lot to go in terms of synergies from the acquisitions? So maybe a little bit more detail as to what you're really looking for Greg to do and deliver. Thank you.

Okay. Let me start with the last one, Mark, on Greg's appointment. Look, you know that Greg has done a fantastic job leading the acquisition integration on Thomas & Betts. He has done a great job on Baldor. We have a certain concentration of the large deals in North America. So it's very, very important to have the right lead in place there.

We have good momentum on innovation. I'm really pleased where we are today. But there's much more to be gained. And that's something where we will have Greg strongly focused. His job is not only delivering the numbers. His job is also helping to bring teams together in North America, make sure the culture grows together over the next couple of years. On the front end side, on distribution, for example, we've only started the journey. There is so much more to be done. And Greg is a very, very experienced operator on the distribution side. So for me, this is a natural one.

And, if you look between Greg and Jean-Christophe, we have now two executive committee members who have really good integration experience helping us with delivering what we started in the past. The rest of the team, Eric, and myself have done quite a bit on that field. So that means we are prepared to do what we need to do for what we have already, but we are also ready that, if something else comes in, we will do a good job in the future.

So that's the point on Greg.

Now, on leveraging the product businesses in terms of growth, you have seen us continuously investing on the CapEx side throughout the cycle. And a lot of that investment has gone, really, into automation and productivity of our existing facilities. So we have quite a bit of room and quite a bit of capacity, opportunities to address growth to come with what we have installed. You should not expect a huge spending need for us to address the opportunities that the market hopefully brings to us near term.

And your third point on Power, I think I'll let my friend Eric answer on that one and give you the details on that one.

Yes. Mark, as I said on the bridge before, the pricing is basically stable now. We have already in the earlier quarter said that the order pricing is coming down in Power Products -- or the reductions are coming down, rather, specific in Power Products. But there still is some time to go before we see those effects in revenues. So we basically have a stable situation from Q2 to Q3 on revenue impact from Power.

Looking ahead, and you said 12 to 24 months, and assuming that the pricing stays stable to where it is today, we should see an improvement specifically on Power from the orders we have taken on the backlog from a pricing point of view. And then you have to couple that with the cost savings and how much we can achieve on the cost savings side. That's why we have continuously reported those two as a pair. But pricing separated should have a positive effect on revenues in Power over the coming 12 to 24 months.

I hope we have answered your questions, Mark.

Thank you.

Jeffrey Sprague, Vertical Research Partners.

A couple questions; first, just back on the collaboration question. Ulrich, your comment that one of the things that's different is the leadership will kind of agree and kind of target it in a focused way -- that suggests, obviously, kind of harder targets, if you will. And I wonder if you could just give us any sense of your view of how big that opportunity really is in terms of revenues or however you could frame it and what your kind of hit rate likely could be on those type of opportunities.

The second question. I was kind of wondering. As you take a little bit of a fresh look at the portfolio and think about maybe restructuring or repositioning, obviously, Power Systems really stood out. But are there other areas in the portfolio where you see a significant opportunity maybe addition by subtraction, if you get my notion, to withdraw from some more commodity like areas and how you might execute on that.

And then, finally, I just wonder if the M&A pipeline has stayed active through the CEO transition. Obviously, Power-One happened right in the middle of it. But is there any change in kind of the activity or pipeline? Thank you.

Look, on the collaboration side, this is a significant opportunity for us in ABB. And, as you rightly guessed, there will be hard-wired data, and there will be hard-wired targets where we hold individuals and teams accountable and responsible towards delivering what we jointly we're going to do.

I think, in terms of the numbers around it, let's wait for the strategy update in the end of February. We will have a little bit more on that one and give quantification. Give me a couple of months to work with the team to get you more details on that one.

On the portfolio question, look, you have seen us very recently divesting the Baldor (inaudible) piece. That was a piece that came with one of the acquisitions (inaudible) subscale. We don't have combustion engines. And, in that business, you really need to have your own combustion engine to get at scale. So we decided that this would be better in a new home, and we divested that.

And, for me, look, if you want to grow a good apple tree, you need to prune it now and then. So this is something that it will be just a normal pattern in our portfolio, that we look at it, we prune it, and we invest in growth. And having that in a good balance going forward will probably give you a very focused portfolio. And things that at a time might not be optimally at home at ABB will have then to go. And, if this portfolio -- we are working on that one continuously. This will be a journey. There will be no radical events. But this will be something that becomes even more a pattern of ABB under my leadership in the future.

And the last one on the M&A pipeline. Look, you know that we have been pretty well executing over the last couple of years the pipeline. We have a good process that we call the (inaudible) process. We're going to keep the process in place. We kept it in place during the transition period between Joe and me. So you should expect that this is something that will stay in focus in the years to come. And, at the moment, it's not like that it's totally dead. But, naturally, in a transition period, you just want to first get the transition done.

Right. Thank you very much.

Daniela Costa, Goldman Sachs.

Actually, two questions. The first one. A year ago when you had the capital markets day or a little bit more than a year ago, you talked a lot about the service business and growing the service business. And, just looking at the numbers, it doesn't seem that there has been the massive move. Not much service represented in the portfolio versus before. So I was just wondering on your comments on what you think prevents it from taking a bigger share of Group revenues and why it's taking longer or why it should take a long period of time.

And then, secondly, just curious to know where your (inaudible) target stands at the moment and whether you still think the target for 2015 is reachable. I believe it was in one of the yellow traffic lights the last time you presented. Thank you.

On the service side, at the moment, if you look at the numbers, we have single-digit growth that we announced on the service side, on the order side. We got some really good execution. It's a highly profitable business. We like it. I personally like it. And we will do more in the future in that field, as we have always said.

Now, at the moment, the service piece -- if you look at large projects, typically, large service contracts go very often with large project sales. So large project sales being down means also the associated service packages are down in terms of income.

So the base service business in terms of driving product replacement and (inaudible) service activities are quite good. We have a really good pipeline of a lot of now product ties -- service products and service offering that the team worked very hard over the last three years to productize it, standardize it, made it more sellable. So I am quite confident about the future, and I think, as soon as the large orders will pick up, our overall large service orders will also pick up together with that.

We have also showed some discipline on the full service side that we didn't take every order possible. We want to make a profitable business. And there are some contracts that we have even discontinued and not taken on for prolongation just to show some discipline in terms of the margin.

Your second question on (inaudible). I hand it over to Eric.

It was a bit blurry line. But, if I understood, it was on the growth targets or the (inaudible).

On the (inaudible).

We are roughly at 12% (inaudible) at the end of the quarter, which is a couple of percentage points higher than a year ago at the same point. So we are turning in the right direction. On the divisions we made the big acquisitions, we have seen a clear pickup in the return following the realization of all synergies. Obviously, it is a long way from the 12% we had for 2012 to the target to be close to 20% or to be at 20%. But we have always said that we will be challenged to be at 20% if we have major acquisitions close to the end of the period of 2015. So we're working hard on it, driving it in the right direction. And we'll see how far we will get.

Let me just maybe complement what Eric just said. You heard me saying earlier that we will have a strong focus on net working capital and inventory. This is something where I really see ABB having opportunities. I'm not happy with that today. So this is something that we will enhance the momentum and put a lot of focus on to help the net working capital and inventory side go to the next stage of performance.

Thank you.

Olivier Esnou, Exane.

A few questions, please. First of all, when you talked about earlier this morning about market penetration focus, I was wondering whether -- how different is that or how do you prevent it from becoming a plain market share strategy, where -- slash price (inaudible) type of risk, because, obviously, it all depends how you measure that type of market penetration. But an easy way would be ABB just being more ready to engage into a price competition in some markets that have been historically a bit more disciplined.

A second question is about your comment about the backlog having implication for pressure on sales going forward. And it's true that, if I look at the Power divisions or PA, there's a large gap between the fourth quarter rolling orders, which is trending quite negative, and sales, which is still positive, maybe even accelerating. So do you think you have enough steam in the phase of the recovery to offset organic growth turning negative?

And just a last one, more practical. On FX, obviously, you're hedged, so you haven't really seen the pressure this quarter of some of these emerging market currencies going down. Is it something we should worry about? Or you can quantify maybe the implied pressure already for us? Or is ABB sufficiently locally present to this not being an issue for your EBIT bridge? Thanks.

Let me start with your penetration question, which I believe is a really good one. Look, this will not be a market share battle on a pricing war side. Absolutely not. Only over my dead body. This will not happen. And, trust me, I come from the southern part of Germany. We can spell discipline there. And we're going to keep that discipline in that context.

So what we will do is we will identify the segment-specific needs. We will invest in sales. We will invest in adapting our offering in the right way to really make sure that the customers choose us and not others. We will work very, very hard to serve all channels in the relevant segments. Sometimes our businesses are a little bit more OEM heavy. Sometimes it's a little bit more distribution heavy. And we have some opportunities. And what we basically do is we prioritize these opportunities in a way that there is a certain minimum margin pressure. Otherwise, we don't even look at it. And then we focus our resources, our investments, our efforts, all the energy in a way where we really expect good payback for you as a shareholder.

But, at the first piece, on the backlog and FX, I hand over to Eric.

Yes. Olivier, on the backlog, it is correct, of course, that we are taking out of the backlog on PS and PA; in PS, in quite a major way. At the same time, we have good tender backlog for large projects. So it will depend on when these would be awarded. We don't have so strong hopes for the very near future. But, when we get into 2014, we expect quite a lot of activity on ordering there. So it all depends on when those orders are coming and when we start getting revenues out of those. Obviously, the short -- the early-cycle and the base order business will help us. In these, we've seen an uptrend. And it all depends on how strong that is. But we are working very hard, obviously, to continue our growth on the sales line.

On the hedging, we are actually quite well positioned with our global footprint. So the impact of the recent movements of the main emerging market currencies have not had that big impact on it. Yes, we are hedged, but that is not the main reason why we are not impacted. The good footprint in large countries like China, India, Brazil, and other places will also export out of some of those countries, which obviously is even helped by the more -- by the lower level of the currency. So we simply don't see this as such a big issue from our point of view. No guidance. I will not give you any guidance on how we're going to look in the future because there is no larger impact on our side.

Thank you

Daniel Cunliffe, Nomura.

Just a question, really, on DA. Looking at the press release, you talked about (inaudible) automation margins being higher on higher revenues. Obviously, last year, as you know, they were lower on higher revenues. So I think, at the time, if I recall, there was some margin pressure last year due to mix and investments. Mix weakness and, particularly, renewables (inaudible) motors and drives segment, which now seems to have recovered. So I guess the question really is -- can you quantify, other than just straightforward volumes, what was really driving the improvements in margin, especially with reference to mix? Thanks very much.

Look, Daniel, I think the DM division, and Pekka is leading that now since a couple of weeks, we have focused enormous amounts on execution of operational improvement. Last year-- you are right with your observations last year. But I think the team has done this year a really, really strong and solid job on operational improvement and execution improvement, which has led to the (inaudible) steady margin that we have shown here.

There is a little bit of mix in there as well, but I wouldn't rate it as a strong -- but it (technical difficulties) really good fundamental improvement in the businesses all across the range.

So it would be recovery in renewables, a reverse of last year's situation. Would that have a positive or sort of less than the negative that you talked about last year?

I think it's too early to speak about a significant recovery in renewables. When it comes, hopefully, we have some upside.

Okay. Very clear. Thank you.

So I suggest we go to the last question now.

Fredric Stahl, UBS.

I'll just ask one question then. Could you maybe, just going back to China -- you were saying that automation demand has been good there. Do you mind giving us an insight into what end markets are doing particularly well across China? Thank you.

Look, on China, as you know, we have a very strong automation franchise today there with ABB across the different automation businesses. On the low voltage product side the construction penetration there is going well. I think Tarak and his team are doing a good job in getting us more going there.

We had on the DM side across the portfolio quite a positive development. The move of robotics into the 3C industry and into general industry supporting that is very good. We had, for example, a very, very significant large order coming from a Chinese manufacturer that has many, many thousands of machines, and we have addressed that one.

And then, on the drive side, all the investments in energy efficiency are paying off with the right investments and [drive].

Okay. Thank you very much.

So, with that said, let us thank everybody for attending this call, and over to the operator.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Good-bye.