Abb Ltd (ABB) 2014 Q3 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q3 2014 results analysts' and investors' 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 is my pleasure to turn over to Mrs. Alanna Abrahamson, head of Investor Relations. Please go ahead, madam.

Good afternoon, ladies and gentlemen, and thank you for taking the time to join us today for our third quarter 2014 results call.

You can find the presentation on our website. This call is being recorded and will be available on our website within the next hour.

Allow me a short overview of today's events. Our CEO, Uli Spiesshofer, will briefly review the Q3 results together with our Chief Financial Officer, Eric Elzvik. They will then be available for answers to your questions.

Before we get started, please refer to the Safe Harbor statement on page two of the ABB presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions, and are therefore subject to certain risks and uncertainties.

And with that, I would now to hand over to Uli.

Thank you, Alanna. Good afternoon, ladies and gentlemen. Welcome, and thank you for joining us today to discuss our quarterly results.

In September, we announced ABB's next level strategy aimed at accelerating sustainable value creation. It defines our long term direction and targets. Today, along with our quarterly financial results, we will give you some insight into the solid progress we are making already in implementing our new strategy.

Let us now turn to chart three for some of the quarterly highlights. I'm pleased to report that our drive for profitable organic growth through penetration, innovation, and expansion is delivering results. ABB delivered strong order growth at 28% on a like-for-like comparison.

This translates into more than $2 billion in additional orders compared with the same quarter last year. This growth was driven by both large orders as well as base orders. Moreover, all of our divisions and all regions contributed.

Large orders tripled compared to the third quarter of 2013, and we have won some attractive large projects in power infrastructure, oil and gas, marine, and mining.

Base orders were up for the fifth consecutive quarter, and grew 5% on a like-for-like base. Base orders were higher in all regions and increased in all divisions with the exception of process automation, where the base business was impacted by lower growth in sectors like metals, pulp and paper, as well as in our turbocharger business.

Our service orders grew 10%, as our focused efforts to further penetrate our large installed base in both power and automation are really paying off. This overall strong order performance lifted our book-to-bill to 1.14 times, which will support revenues in 2015 and beyond.

As we flagged at the beginning of 2014, revenues were negatively impacted by the lower opening order backlog, as well as some delays by selected customers in taking delivery of products.

In the area of relentless execution, we achieved significant project milestones in power systems, where we continue to de-risk the portfolio and implement a new business model for offshore wind projects.

In the quarter, the division broke even on an operational EBITDA level, as we continued to drive our focused step change program and address the remaining challenges ahead.

Our efforts on relentless execution included driving our cost savings and cash programs and executing on our $4 billion share buyback program, in which we purchased shares in the quarter with a value of approximately $350 million.

At our Capital Markets Day in September, we announced a customer and market focused organizational realignment. This is well underway, and we are confident for a smooth implementation on January 1, 2015.

Moving to chart four, here are the key figures for our quarter. As previously mentioned, orders were very strong in the quarter, but revenues reflect the lower opening order backlog that we flagged at the beginning of 2014.

This mainly reflects the weaker large order intake we saw in 2013 in our longer cycle businesses like process automation as well as our power divisions. These orders typically take around a year or more to flow through the P&L, which explains most of the lower revenues.

In line with expectations, operational EBITDA was lower in the quarter. Compared to Q3 2013, about two-thirds of the delta is due to the low result in power systems, and about one-third comes from the lower revenues.

We have to remember that our third quarter in 2013 was a challenging comparable with a very strong operational EBITDA margin of 15.7%. Just to provide you some context on this, our average operational EBITDA margin over the last eight quarters has been 13.9%.

Regarding power systems, we will give you a brief update on the progress later in the presentation.

Net income in the quarter was positively affected by after-tax gains of approximately $145 million, mainly from the sale of the steel structures business and awarded products.

Net income for the quarter also included net pre-tax charges for foreign exchange and commodity timing differences of $76 million compared with positive pre-tax impacts of $113 million in the same quarter in 2013. This means we had a negative impact of about $190 million in the quarter from ForEx and commodity day timing effects compared to the previous year's quarter.

Net income was $734 million. Basic earnings per share was $0.32, and operational EPS amounted to $0.35.

On cash from operations, our focused efforts to improve net working capital management had a favorable impact in the quarter but did not fully offset the lower net income. However, on a nine month basis, cash from operations is almost 30% higher, or more than $400 million up, compared to the previous year.

We are also starting to see more even distribution of cash generation across the quarters. Eric will have more to say on this in a few minutes.

Now let's move to chart five for a closer look at the order development. Chart five shows how orders developed in each region during the quarter on a like-for-like basis. It's really encouraging to see orders up in all of ABB's regions, and both power and automation orders increasing in all regions.

The $800 million HVDC order in the UK helped Europe's growth, but we also drove higher orders in important markets like Finland, Switzerland, and Italy this quarter.

Orders in the Americas were up 11% thanks to a strong improvement in Brazil compared to a low level last year, as well as an increase in the US that is well above the GDP.

Asia was also strong, led by a large increase in South Korea where we won some marine orders in the quarter.

China continued to grow as well. We are actively driving a large number of growth initiatives in China and remain optimistic that this market will continue to be a growth driver for ABB.

Now let's move to chart number six. Large orders more than tripled in the quarter, and here are some examples of the order wins. In addition to the HVDC order in the UK, we won a large order in Brazil with Vale to expand capacity and improve productivity in an existing iron ore mine through driverless truck systems.

Our ability to deliver a combined power and automation solution, with substations, motors, and other electrical and automation equipment, played a fundamental role in winning this order.

In the Middle East and Africa, we won an order for a gas treatment plant that also draws on our combined power and automation expertise for the oil and gas sector.

In Bangladesh, we were able to help the government in developing infrastructure to bring electricity to rural orders.

Let's move to slide number seven. On base orders, our continuous efforts to broaden and deepen our geographic market presence through penetration, innovation, and expansion has helped stabilize orders even in mixed markets. The list on the left shows some of the highest base order growth rates from among our top 20 countries in alphabetical order.

Through our geographic footprint as well as our focused profitable growth initiatives, we have been able to grow across all businesses and regions. This allows us to more than offset weaknesses in some countries where base orders are declined.

Now let me hand over to Eric for the next chapter.

Thank you, Uli. Chart eight shows you the different elements affecting the change in operational EBITDA between Q3 this year and Q3 2013.

Starting with the net savings, we again were able to offset price pressure with cost savings through our further supply chain actions, including product design changes that reduce production costs as well as operational excellence activities. The pace of the savings has increased compared with Q2, as we took out more than $0.25 billion dollars in costs in Q3 2014.

The net volume impact is higher this quarter, mainly reflecting the larger declines in revenue along with continued investments in selling and R&D as we drive our organic growth initiatives, which you see are paying off.

The mix on product margins was positive at $25 million in the quarter, reflecting the higher amount of product versus system revenues.

Next, in the category others, we have the usual impacts from G&A expenses and various small other items.

So, if we are to sum up this all, we have had a net negative impact on operational EBITDA of $88 million in the quarter, mainly driven by the lower volume. If we then add the negative power systems impact of $132 million, we arrive at the Q3 2014 results.

So, as Uli has said, about two-thirds of the change is coming out of the power systems impact. Most of the negative impact from the power systems projects is related but, as in Q2, this number also includes volume impacts from lower revenues.

Turning to chart nine, let me now walk you through the cash from operations and how we are driving a more consistent quarterly cash flow innovation. In 2013, the cash from operations was very weak in Q1 and Q2 with an extremely strong quarter three. This resulted in a year-to-date figure last year of approximately $1.5 billion.

In 2014, we have had more consistent cash flow generation in the first three quarters, and this has enabled us to reach a year-to-date level of about $2 billion, which is up by $400 million from the 2013 level, which represents an increase of about 30%.

This was achieved partly by ongoing efforts to even out the distribution of cash generation through the year, but also from the successful implementation of the net working capital initiatives. In Q3, our efforts to improve net working capital management allowed us to offset some but not all of the lower net income.

When it comes to the uses of cash, we launched our $4 billion share buyback program, as announced in September at our Capital Markets Day. And at the end of September, we had purchased some 15 million shares with a total value of some $350 million.

Let's now turn to chart 10, which summarizes the key metrics by division. I will not go through all the numbers on this table, but instead focus on some of the highlights.

Discrete automation and motion delivered a strong top line performance with a solid profitability at 18.1%, including the dilutive effect of the Power-One acquisition. Excluding this impact from Power-One, DM had a slightly higher margin than a quarter ago.

In low voltage products, orders and revenues both grew at 3%. The lower operational EBITDA mainly relates to a higher percentage of low voltage systems orders being revenued in this quarter. LP also successfully closed the divestiture of steel structures during the quarter.

Process automation had an extremely strong order growth this quarter, winning large CapEx orders in oil and gas, mining, and marine. The operational EBITDA mainly reflects the decrease in revenues from the lower opening backlog at the start of 2014.

In power products, growth initiatives in areas like rail and industrial power helped lift the orders by 13% in a tough market. The PP team also delivered an 11% increase in base orders, which is another positive achievement.

The revenue decline mainly reflects the lower opening order backlog, as well as some delays by customers in taking delivery of products. Good discipline on costs and execution drove power products to another quarter of industry-leading profitability.

In power systems, we saw a surge of orders, including the very encouraging double digit base order growth. We continue to be selective in focusing on margin and pull-through. The revenues were significantly lower than the prior year, impacted by the lower opening order backlog and also some execution challenges on selected projects.

We made solid progress on restoring the division's profitability, and reached a break-even operational EBITDA result in the quarter. We continue to work through the low margin order backlog and the difficult projects in solar, EPC, and offshore wind.

And now I'll turn it back over to Uli.

Thank you, Eric. Let's move to chart 11.

In September, as you know, we announced our next level strategy and financial targets. We talked about our strong position in attractive markets, and how we will deliver attractive shareholder returns through our three focus areas of profitable growth, relentless execution, and business-led collaboration.

Let me now show you some examples of how we used this framework to drive value creation in the third quarter. On chart 12, we have outlined some key highlights from the quarter where we have driven profitable growth through penetration, innovation, and expansion.

One area where we have already achieved some significant success and market penetration is our power equipment offering to the industrial sector. This continued in Q3 with good growth in industrial orders, for example in our medium voltage products business.

Selling more into the rail sector has been another focus for us. The $70 million order from the Swiss Federal Railway here in Switzerland in the quarter to modernize their locomotive fleet shows how we can build our presence in this key market with our latest generation of rolling stock solutions.

Tapping our large installed base to drive service growth is another way to achieve profitable growth through penetration. And our 10% growth in service orders in the quarter shows that we are making solid progress in this area and that our service strategy really works.

We announced a number of product innovations in the quarter, including the 525 kV HVDC cable that can double the power capacity of HVDC power transmission.

Many of you saw our YuMi robot that we launched at our Capital Markets Day in London. We are confident that this technology will open large new markets in the future of industrial automation.

Turning to chart 13, joining forces through partnerships with complementary players in our markets is another way to drive and how we will drive profitable growth. We announced two days ago a global partnership with Vestas to provide affordable, reliable, and environmentally friendly electricity to communities in Africa and other emerging markets using microgrid solutions.

This covers two of the growth areas we discussed at the Capital Markets Day last month, microgrids on the one hand, and building our position in the large and untapped African market on the other side.

Here is a real world example of how this can work. Vestas supplies refurbished wind turbines and takes the EPC responsibility, and ABB provides a standardized microgrid solution to integrate a diesel engine power microgrid with a control solution and other electrical infrastructure.

Energy storage is also key to the success of microgrids. And our recently announced partnership with BYD in China will help us build our position in what we see as a high growth market in the future.

Now let's move to chart number 14. Relentless execution is the second of our focus areas for accelerating sustainable value creation. We talked at the Capital Markets Day about our ongoing focus on cost savings and cash generation.

On costs, we again generated more than $0.25 billion in savings in the third quarter through supply chain savings, product and process redesign, and productivity improvements. We stayed in line with our guidance of cost savings equivalent to 3% to 5% of cost of sales.

This chart shows a few examples of how we can achieve the savings. Some of these are larger projects like the bundled purchasing of carbon steel across multiple businesses that can deliver big savings. Some of them are smaller, at the level of a factory, that generate a few hundred thousand dollars of savings a year.

We have thousands of such projects underway in ABB, with new ones being developed all the time. This is why we are confident that we can continue to drive savings of this magnitude for a long time to come.

Let me also refer you back to another theme we discussed at the Capital Markets Day, which is implementing a leading operating model in ABB. As an example, at our high voltage capacity plant in Sweden, we have implemented significant operational improvements, from changing the plant layout to integrating engineering design and back office processes with ERP and sales tools.

The results have been very impressive, a 40% increase in revenue productivity, a 50% reduction in lead time, and a doubling of inventory turns. Our ambition is to implement this kind of process excellence as the standard across the whole company. This will be a continuing source of value creation for the foreseeable future.

Now let me move to chart number 15. This gives you an overview on the power systems situation. Relentless execution on power systems is an immediate priority, and this chart shows you an update on the step change program to return this long term, attractive business to higher and more consistent profitability.

We have achieved some important milestones in some of our critical projects in offshore wind and EPC solar in the third quarter. We are executing changes to adjust the cost base in the division, and further de-risking the EPC business as we change the business model toward system integration.

The PS team achieved double digit growth in base orders in Q3. That reflects the team's success in driving growth in this side of the business through a disciplined approach to penetration, innovation, and expansion.

Looking ahead, let me reiterate what we said after Q2. Completing the PS step change and taking this business to the next level will take time. We have made good progress, but this is a marathon run and not a sprint.

There is more work to do, but we have a much better grip on the risks ahead. Our guidance remains unchanged. 2014 is the trough year. We commit to be breaking even in the fourth quarter, and we aim to be at break even for the full year of 2014.

With that, let's move on to the next chart. Chart 16 shows how we are applying business-led collaboration through our next level strategy to simplify the way we work together.

As we announced at the Capital Markets Day, our ambition is to create a customer focused organization where we will really have the next level of external focus in daily operations, where we empower people closest to the customer so that they are fast and agile in serving our customer needs.

One way to achieve this is to establish undiluted global business line responsibilities for our business units and divisions. Another is to reduce the number of regions from eight to three and take out a layer of hierarchy so that regional managers -- Greg Scheu for the Americas, Veli-Matti Reinikkala for Europe, and Frank Duggan for Asia, Middle East, Africa -- are in the executive committee, and all large countries report directly into the executive committee.

Their focus is very simple, customer collaboration, shared services, and running the countries. It's a lean, cost effective, and focused organization ready to drive profitable growth starting in January of next year.

Let's turn to chart 17 and the steps we are taking to implement our next level strategy. We are taking a phased approach with rigorous tracking and follow up to make sure that we deliver on our commitments. Implementation is taking place through our countries waves.

The executive team, together with me, has been actively communicating our goals and how to achieve them through one on one meetings and town hall events, explaining the way forward with already some 12,000 employees face to face meetings made today.

We have decided on a select number of value creating 1,000 programs already, and are putting the teams in place so they can begin work at full speed starting January 1, 2015.

A critical success factor of the implementation of the next level strategy is our ability to track our progress and follow up effectively to ensure we deliver the right results on time. Here we are putting into place the necessary project monitoring and controlling tools so that we have a smooth implementation at the beginning of 2015.

To summarize on chart 18, we turned in a solid result despite increased uncertainty in the business environment. We delivered strong order growth, with large orders tripling and days orders increasing for the fifth consecutive quarter.

The PS step change program is on track with operational EBITDA at break-even in the quarter. Revenues and operational EBITDA reflect the lower opening order backlog and the ongoing actions we are taking in PS to take the business to the next level.

We continue to execute well on cost reduction and cash generation. And we have made good progress to mobilize the organization for a smooth launch of the next level strategy in January.

On the outlook, the attractive long term demand drivers remain intact for utility, industry, and transportation and infrastructure markets.

In the short term, macroeconomic and geopolitical developments are signaling a mixed picture with increased uncertainty. Some early cycle macroeconomic signs in the US remain positive, and growth in China is expected to continue.

At the same time, the market remains impacted by slow growth in Europe, political tensions in various parts of the world, as well as the health situation in Africa.

In this environment, we aim to continue to outgrow our markets in major customer segments by systematically driving profitable growth through increased market penetration, generating more revenues from our pipeline of new product innovation, and expanding into new attractive market segments.

In addition, we intend to accelerate business-led collaboration such as further developing the service business, driving the successful integration of acquired businesses, and increasing ABB's productivity by focusing stronger on the needs of our customers.

Our third focus area is relentless execution, especially in the areas of cost savings, cash flow generation, and returning the power systems division to higher and more consistent returns.

To summarize, ladies and gentlemen, our Q3 performance shows that our actions to drive profitable growth are bearing fruit. We are making good progress in implementing our next level strategy, and we are well positioned to accelerate sustainable value creation and to continue to deliver attractive shareholder returns.

With that, I would like to open the line for your questions.

(Operator instructions.) Ben Uglow, Morgan Stanley.

Afternoon, everyone.

Good afternoon, Ben.

Hope all's well. I have three questions. I guess you're going to get lots around orders. I had a few about price. This is a very general question, and I'm asking plenty of my companies about it. Are you seeing any change in price conditions in any of your end markets at the moment? Do you sense in any way that the price environment is getting more competitive?

I ask because we've seen some very cautious or more cautious commentary lately from the likes of Hubbell and Schneider and even Siemens on the power side. And I just wanted to know, from a sort of top down point of view at ABB, are any of your end markets becoming incrementally more difficult from a competitive standpoint? So, that was number one.

Number two is just a more specific issue on the margin bridge. I think you've said, and you said on this call as well, that the cost savings were approximately $250 million or something like that in the quarter, which implies a negative price of around $209 million in the third quarter.

That looks to me as if it's coming down a little bit year-on-year. I don't know if I'm comparing exactly apples to apples. But perhaps, Eric, you could give us a sense of what is the general price trend in your margin bridge both year-on-year and quarter-on-quarter.

And the final question was just the, I guess, slight confusion, or I wanted to understand better this big difference between the reported EBIT in power systems and the adjusted EBITDA. And obviously there's the line of $49 million which includes, I understand, sort of embedded derivative contracts, etc. Eric, can you just explain how those work and will we see the same effect in the fourth quarter, or does this sort of roll off?

Ben, thanks for your three questions. I'll take the first one and let the other two hand over to Eric.

Look, on the pricing situation, first of all you stated the Siemens power gen business. We are not in the power turbine business, so that's not something that's in our space.

On the other areas, look, since the financial crisis hit the world in 2008, we have seen continuous competitive pressure that reflects the moderate market development of the last couple of years. In this environment, you see companies winning, you see companies losing, and you see companies getting nervous and companies being steady.

For us, at the moment we don't see a delta, a significant delta, in the price momentum going up or down. We have seen competitive pressures, but I wouldn't describe anything unusual in the last quarter or going forward that we would expect.

With that, I'll hand over to Eric for your questions two and three.

Hello, Ben. So then number two, the $250 million refers to the total company. And you have to pay attention in the margin bridge that we have separated out the power systems business completely compared to a year ago.

So, inside there are all obviously the cost takeout and the price on the power systems side. Having said that, however, if I look at the details behind, the price pressure is somewhat less than it was a year ago also on the separate piece, but only somewhat.

Okay. And quarter-on-quarter, if I could have that as well?

I think it is not a big difference quarter-on-quarter.

Okay, very clear.

But, you have to also see that the revenues are down. So, of course this -- we have to look at the absolute numbers and at the percentage numbers. But, I don't think there is a big change that you should pay attention to.

Okay. Thank you.

And then on three, your question obviously on EBIT and EBITDA in power systems. These swings in the derivatives is really timing and revaluation of the derivative portfolio we had to do from an accounting point of view, but which does not over time have any economic effect on ABB. And that is why we show them separately.

So, the real true apple to apple comparison is the operational EBITDA, and that is why we show that number. But, that is in the performance in the portfolio, and it happened to be positive last year and negative this year. And that's why you have the big effect that we have right now.

Okay. And just so I understand it, that movement on the derivatives, that's effectively related to the dollar, correct?

Yes, it is I think mainly related to the dollar and euro. But, obviously we are hedging all of our operations back to the local currency where we have most of the production costs. And then, this is just the effect of the multitude of currencies we have in our portfolio in ABB.

Okay. And so, basically in terms of the adjusted, the operational EBITDA in power system, you still have the aspirational target of being able to reverse the -- well, reverse the full $44 million in the fourth quarter as an aspirational goal.

No, no, I didn't say that. It doesn't go quarter by quarter. This goes over a longer period of time. These are related to hedges that could span over a much longer time than that.

No, understood. Sorry. But, I was going back to Uli's comment that we still hope to be break even at the EBITDA level in power systems for the full year.

Yes, now I understand.

I'm not misinterpreting that, that basically there is an aspiration that the nine month losses could be reserved in the fourth quarter at the EBITDA level.

Yes, aiming at trying to do that, that's what we have said.

Okay. Thank you very much.

Next question, please?

Daniela Costa, Goldman Sachs.

Hi. Good afternoon.

Hi, Daniela.

I have three questions. The first one is regarding I believe when you presented the targets in September, you had a $100.00, more or less, oil price in the medium term. Can you just guide us through what type of sensitivity your 4% to 7% growth would have if we were to stay at the level where oil is now? That's question one.

And then, second question, I think on the media call as well you talked about some customers in infrastructure slightly hesitant on shipments. But, you did have a very strong power systems base order growth. Can you comment on how one ties to the other? What do you see in terms of order growth in power systems going forward, if double digit is possible or if it was one quarter?

And then just finally on M&A, my sense from the Capital Markets Day was that you were more focused on the organic activities now and eventually some bolt-ons. But, I think there have been some articles on Reuters or on Bloomberg that mention numbers of potential deals of up to $4 billion. But, I'm just interested in the update there. Thank you.

Okay, Daniela. I'll take the number two and three and then have Eric talking about the oil prices.

Look, on the customer delays, that relates to revenue. We quoted that related to revenue. We had some customers that wanted to delay shipments of actual projects or actual products because they were not ready or they wanted to slow down the finalization of their projects. So, that was revenue-based.

And if you look, for example, in the power products division, that's one of the reasons that, in the last couple of weeks in the quarter in power products when the uncertainty went up, we had some delays in that one. So, that's related to revenues.

And the other comments that I made on orders, they are intact. And our targets that we announced at the Capital Markets Day remain unchanged for the year 2015.

On the MA, yes, look, it's very interesting to read what the press writes, but let me just tell you what we said before one more time.

We said very clearly that at the moment we have enough to do with doing the power systems turnaround. We have the organizational change coming first of January. We had really good progress in the integration of Thomas & Betts and Power-One. This is going well, but it's taking up quite a bit of activity on our side.

So, given that, we decided in September to announce the share buyback and execute it. And as you have seen, we have also executed on that very well already in the first month.

And then, looking forward, we said in 2015 we are considering looking at acquisitions again. We didn't make any commitments whether we'll do anything or not. But, at the moment, the focus is purely on the turnaround of power systems, on executing in and starting the implementation of next level and focusing on organic growth.

And as you can see, that focus paying off very well. Our growth momentum is accelerating, and the entire global ABB family is really focused on driving that in a pretty hard way.

Now, on the $100.00 oil price, I'll let Eric talk about that one too.

So, we put approximately the $100.00 level in as one of our assumptions in the targets. You are absolutely correct in that. And obviously, a reasonable level of the oil price is important for the investments in oil and gas and also, if you want, in the motivation for energy efficiency and energy efficiency investments.

So, we will see how this plays out if it stays at current levels. It doesn't change that quickly, and see how it plays out. It may be some shifts in demand from one market to another. But, it's too early to say which impact this will have, and obviously for a long time it will stay on the current level.

Thank you.

You're welcome, Daniela.

Next question, please?

Andreas Willi, JPMorgan.

Yes, good afternoon. Two questions, please, the first one on you mentioned the increased macro and political risk. How does that affect your kind of investment plan for SG&A and R&D as we go into 2015, how you balance the short term margin protection potentially relative to your longer term growth aspirations?

We have seen R&D and SG&A trending up quite strongly also in Q3. And as you get the payback on the orders, should we expect those two as a percent of sales to continue to increase into next year, or plateau or even come down?

And the second question the on revenue phasing. Obviously you had the large orders also in process automation, but you had base order declines there. What's the revenue profile in some of these large orders? So, maybe if you could help us model 2015 revenues in terms of the phasing on some of these big projects. Thank you.

Well, look, Andreas, both good points. I'll let Eric answer the second one.

On the macro environment, yes, look, if you look what's happened in the last couple of weeks of the third quarter, we need to be walking around the world with open eyes.

And we have clearly seen nervousness in the financial markets. We have seen an increased concern over the health situation in Africa. We are seeing actions and uncertainties in the Middle East and other political instabilities. And we need to be very, very mindful of that when we look forward in aligning ABB.

The investments that we have taken in a selected way on the S side -- just to be clear, the investments are in the S side and not on the G&A side. On the S side, they are paying off.

The order momentum shows that nicely, growing base order at two times GDP, growing service at about three to four times GDP. And having the large order momentum doesn't come for free. And it was a good and conscious investment to do that.

We are extremely cautious of doing more in that field. To be quite honest, when you put S activities in, you want to also see over time some productivity gains, because you don't get immediately full productivity.

So, for 2015, we will focus on a combination of driving more productivity and getting more out of our salespeople through productivity, and will really, really be very careful on any additional investments on the cost side until we see a little bit longer term where the world is going in that environment.

And it's very clear that the margin protection is key. If you take the five divisions in the last quarter, look, Pekka is up on a like-for-like basis. Tarak had a mix change with a little bit more systems, low voltage systems activities in there. And that explains what happened there.

Power products, if you look at the revenue drop that they had and at the same time protecting their margin, you can understand that margin protection is not only something that we talk about, that we also execute and drive very strongly.

So, for me, your point is a good one, and you should be concerned. And I guarantee we will keep all the good actions that we have going on to protect the margin going forward.

With that, I'll hand over to Eric on the revenue phasing question.

Yes, and that is mainly related to process automation. And we have booked, as you have seen in the quarter, a large number of significant large orders.

And most of them have a longer term revenue profile. So, we should not expect too much of revenue from those contracts to come over the next coming quarters now. It, of course, depends on which contract you look at, but some of them stretch into 2016 and 2017 also from a revenue point of view.

So, as we have the current backlog which stretches out the revenue, we will see the same pattern now from those larger orders.

And Andreas, take the Scottish project. Full commissioning is planned for 2018. So, you will see that these projects really provide a nice baseload over the next couple of years in terms of underlying revenue which will run for quite a while.

Thank you very much.

Next question, please?

Martin Wilkie, Deutsche Bank.

Yes, thank you. Good afternoon. It's Martin from Deutsche Bank. A couple of questions. Firstly, just to clarify on your growth expectations for next year, I think you said earlier that we shouldn?t take the slowdown in revenue bookings towards the end of the quarter as any reason why you shouldn?t hit your revenue growth targets in 2015. But, obviously the targets you have are more midterm. I just wanted to check that I'm not reading too much into that comment in terms of how you expect revenue to grow in 2015.

And secondly, on power systems, you're guiding to break-even not just for Q4 but also for 2015. I just want to just check the sort of nuances around that comment. Is it that you are expecting that to be sort of a base level and hope to get much higher than that, or are you genuinely expecting power systems next year to be around a break even level for the year as a whole? Thanks.

Yes, good afternoon, Martin. Good questions. Look, on the growth side, when we went out on the 9th of September with our next level strategy, we said we are targeting a revenue growth of 4% to 7% as an average annual growth on a like-for-like basis over six years with a base year of 2014.

So, that's what we said. And that means for next year the target is at least 4% on a like-for-like basis compared to 2014. So, I hope that clarifies that piece.

And on the PS side, look, when you look at the situation, 2014 is the trough year. 2016 we commit to have power systems on an EBITDA level between 7% and 11%, and 2015 will be at least break even. And naturally we aim to be higher and to be somewhere between where we are today and where we're going to be in 2016.

Let's see how the markets turn out. Let's see how the world develops. But, we are firmly committed to continuously enhance the quality of this business and take it then in a way that latest in 2016 we are within the margin corridor.

Okay. And just on that point there, I mean, obviously the break even came a quarter earlier than you had indicated. Was there anything that has been brought forward in terms of milestones, in terms of anything that caused that to come in a little bit earlier, or is it just generally the trend is pretty much the same now as you'd been expecting a quarter or so ago, just to understand if there's been any improvement in the trajectory of how those projects get executed.

Yes, let me try to explain the third quarter activities. And I'll give you some very concrete examples so that you understand the granularity that we have in there.

We have a platform called DolWin2. DolWin2 sailed out of the dry dock in Dubai a couple of months ago. We had to move this around the South African cape in wintertime and bring it up to the Norwegian fit out station where it's being now done.

Now, sailings around the cape in wintertime in South Africa is not something which would be naturally free of risk. We got that done very well. The team hit the milestones. And honestly, I'm very pleased to see that.

When we made the predictions for the fourth quarter, we knew that this is a important milestone that we have to hit. And I'm glad to report that we did it.

The other one is energization on one of the other platforms that was targeted for August. We got that done on time for August, which was another key point to deliver.

And then, if we look at the other part of the portfolio, solar EPC, Massimo Danieli, who runs the business unit, and Claudio have done a wonderful job in really flushing through more of the backlog and getting that done. Quite honestly, we expect more than 90% of the solar EPC activities to be completely done by the end of this year, which is a good achievement.

So, in Q3, the team did a good job addressing the challenges and risks that we had. I don't want to brag about it in a unreasonable way. They did solid work, and now we need to continue that pattern in the fourth quarter to address the risks that we understand now much better.

We understand much better today what we have in our hands in terms of risks, but this is not risk-free. And we need to continue the good operating pattern and give full management attention to it.

And I just can give you an operational example. This morning we had a review with the team because there was very, very bad weather forecasted for Germany yesterday and for today, and we made sure that all the precautions are taken. So, this is the kind of involvement that we have and really the attention that we give it.

And with that, our confidence that we deliver also in the fourth quarter a break even is strong. And we also -- as Eric said before, we will do our utmost to work towards a break even for the full year.

Okay, that's great. Thank you.

You're welcome, Martin.

Next question?

James Moore, Redburn Partners.

Yes, good afternoon, everybody. I've got three questions. I understand your commitment to be above zero in PS in the fourth quarter and the aspiration to be above $44 million. But, can you help us understand the underlying dynamics in the division a bit better, please? Could you say what the operational issues and charges were in the third quarter?

I think you called out about $100 million of operational issues and charges above the line in the first and the second quarter in relation to the offshore wind and solar EPC contracts. I wonder if you could give us the equivalent number for today's third quarter results. I'm guessing it's about $60 million.

And within that, could you tell us what your expectation is for those underlying charges in the fourth quarter and into 2015? I?m really trying to think about the 4% operational EBITDA margin you did ex those charges in the first half of the year and how that's running as we head up to just over 8% on an EBITDA basis for your 2016 target.

Secondly, a housekeeping question. Your central line was pretty good in the quarter, minus $34 million. Is there anything behind that? And I think more importantly, you said you hope to be a similar number to last year, something like $328 million. Are you still happy with that? Because I think it means about $140 million in the fourth quarter.

And then finally, I think you called out a couple of base order numbers for a division or two during the call. Could you give us all five? Because there's a lot of large orders in there, it would be very helpful to see what the underlying like-for-like base order picture looks like divisionally. Thanks.

Okay. Thanks, James, for your questions. On the last one, look, we have disclosed what we want to disclose, but I can talk a little bit about -- in a qualitative way.

DM shows a really nice development on an ongoing base in terms of driving growth momentum both on the large and the base orders. Low voltage product is basically a low -- is basically a base order business. We have seen the targets manage to be on GDP growth here on a like-for-like basis. We have some markets where it's even ahead with this business.

If I take the process automation business, yes, we have a tough environment for this quarter in the third quarter in terms of the base orders that we mentioned. Large orders are very strong.

Power products is up on base orders. And the team is doing a great job, especially on the industrial side, to keep that running.

And in power systems, as we said, base orders is up double digit, which shows very strongly that also in power systems there are some very attractive orders that you can take below the $15 million threshold and make good money with -- going forward. So, that's that piece.

In terms of the PS situation, look, on the fourth quarter, we confirm our commitment to be break even, and we confirm the aspiration that we said before. And that's all I'm going to say about that one.

And in terms of the underlying third quarter situation, I will hand over to Eric to give you a little bit more flavor to that.

Yes. So, on the central cost and the overhead that you pointed out, we had a fairly good development on that cost in the third quarter. But, if you look at the full year, I think we should expect to be somewhere at about the same level as last year.

This is a little bit hard to predict. There are some one-off items in here. There are also some things related to internal trade and bookings that is in that number. But, I would assume that it is something similar to last year.

Okay. And the underlying in PS?

Yes. On the PS side, you have seen the $130 million or so that we have in the EBITDA bridge. And the majority of that has to do with different costs on the projects that we have in the backlog there, so in solar or other areas.

Sorry. To be clear, I was referring to that $100 million that you called out in each of the last couple of quarters. Could you give us a comparable number to that?

I will not give you a specific number to that this quarter. I'll say it's the majority of the $130 million.

Okay. Thank you very much.

Next question, please?

Olivier Esnou, Exane BNP Paribas.

Yes, hello. Good afternoon.

Hello, Olivier.

Hi. So, a few questions, please, maybe if you could give us some granularity on what you are seeing in China right now. You seem to be doing a little bit better than some of the trends we've heard from peers, and if you could differentiate what you see in the market versus what is very specific to what you are achieving.

Second question, on the mix in the bridge, it is positive. At the same time, you mentioned in low voltage there was a large limit of systems, so probably negative there. So, I was just wondering which division in particular was driving the positive mix situation for ABB this quarter.

And again in low voltage, I noted that the backlog was down quite a bit this quarter versus the previous quarter. So, you said earlier this is mostly a base order business, but it seems to indicate you have executed quite some amount of system business. And I was just wondering how we should think about the trend line for revenue growth now with backlog declining a bit, China possibly slowing. Thank you.

Okay. Let me start with the third one. And I'll take the first and then I'll hand over the second one for Eric.

Look, on low voltage, the reason that the backlog is down is we did well in shipping revenue on low voltage systems. And mainly the backlog that is longer is low voltage systems.

So, that's the triangle, how it hangs together, Olivier. When we ship it a quarter more in that business, the part of power aux business, the backlog goes down immediately in a significant way because we got the revenue out of the door, which is a good thing then to really execute on that one well.

On China in general, if you look at the Chinese agenda and compare it with our next level strategy, we are really made for each other. On China, at the moment if you see where money is being spent, take the 3C industry for example, the workforce in China is peaking in the next couple of years. There's a scarcity of skilled labor, and there is an increase in labor costs in China.

These three factors together cry out for automation. And that's the reason why we are doing well in China on the automation side. Our robotics business, which is fully localized in China, where we have strong R&D, we have strong capabilities on supply chain, we have strong marketing and sales there locally, is doing extremely well. And I'm very, very pleased the way this is operating.

And the automation on the industrial side is not only something that's nice to have for quality reasons. It's really something mandatory to get productivity up and address the labor market structural challenges that China has.

If you take the recent moves in China towards more sustainable cities and clean cities, electric infrastructure is another one. The Chinese government has just this quarter announced a more than $10 billion investment program for electric vehicle charging infrastructure.

We are the leader in China in electric vehicle charging infrastructure. As you might remember, we announced earlier this year a program or a project that we have won where we are working together with a local manufacturer to set up more than 100,000 charging stations across China. And naturally with that, we have a strong skill base and competence there to go, and we drive that in a very positive way.

If you take the industrial situation in China from a power perspective, Bernhard Jucker and his team are doing a great job penetrating the industry more with power products for the medium voltage space.

If you look at a modern factory, the medium voltage equipment is one of the major downtime sources, having electricity cut downs because of unreliable power supply. And going in there on the industrial side helps with uptime requirement and productivity requirements in that plant.

So, on the industrial side and the infrastructure side, I think we are extremely well positioned with our very strong local team. And as you know, a couple of months ago or earlier this year we changed leadership to Chinese leadership. They really drive the local penetration with now having the good flavor and understanding the market even better than others.

And on the power side, on the power infrastructure, at the moment China is not booming in that field. I wouldn?t describe it as a boom. But, our technology leadership, amongst others on the 1200 kV HVDC capability that we developed jointly with State Grid, helps us also to drive there.

So, I would say ABB is probably the most Chinese of all competitors in China. We are very strongly aligned in terms of our R&D, our offering priorities, in terms of the way we drive penetration. And with that all together, I am cautiously optimistic that we will in the future also have a good prospering future.

Now, with that said, I will ask Eric to give you a little bit more granularity on the mix element on the bridge.

Yes. The mix on product margins which are combined on the bridge is, as you have seen, positive. And it is clear that the LP content of that is a negative because of the system business that comes in.

But, in some of the other divisions, it's the other way around. We have a little bit better mix in some of the other product divisions.

Thank you. Maybe just as a follow up on the backlog in LP, was there a significant impact from disposals there?

No, it is not a significant impact. Those disposed businesses have a certain backlog, but not an over proportional backlog compared to the rest.

Okay. Thank you.

We will take two more people to ask questions.

Fredric Stahl, UBS.

Yes, hi. Good afternoon, everyone. I have three questions. Could I ask you, if you look historically, your base orders tend to move directionally quite well with your large orders. Is it the case that you, through cross selling or intra divisional cooperation, get -- how can you call it, spillover orders when you book a big order? That's question number one.

And then, if you look at your service revenues, they've been flat for the last three quarters, while over the same period of time you've booked quite good growth in service orders. Can you explain why that is? I actually think I'll stop there.

Okay. Let me take the first one, and I'll hand it over to Eric.

Look, on the base order-large order correlation, Fredric, this is a very good point that you take here. Let me just run you through the four large orders that we just have taken and what that can mean then also for the base order side.

Take a $100 million mine automation in Brazil that we won for Vale. If you set up this driverless truck automation in a mine, naturally it's not a one-off thing. Later on you need spares. You might add certain capabilities to that. You might roll it out a little bit further.

So, the first big order might be $100 million, and then later on you have an ongoing spares business, which by the way is very attractive in terms of the margins. You have typically then on the run maybe some smaller expansion and upgrade activities. So, that's the Brazil piece that I would like to mention.

Take the gas treatment plant in Tunisia. Same story basically, where you really -- when you install in the oil and gas industry equipment where you have also quite some rotating equipment, the motors and drives that we have in there, the sensors that need regular reliability checks, that's very good and attractive business to us that we do.

And then, if you take the $800 million HVDC order in the UK, that connects power from the renewables into the UK. And very clearly that doesn't end at the converter station. That goes then really into industry. And we need to connect then on the distribution level, typically with smaller kind of orders, the large project that we have done into the existing infrastructure.

So, there is a correlation between large orders and follow up baseload business. And since we have been quite successful in certain areas, I think you have a good catch on that one regarding the correlation.

And absolutely we are aiming to drive the installed base penetration in ABB even stronger. We are expanding our installed base with the large orders, and then we're going to do more in that field.

With that, I'll hand over to Eric for the second question.

Yes. And if I understood you right on the second question, you focused mainly on the order growth in service.

Yes, the revenue growth has been lagging there.

Both growth in orders as well as in revenues, and I think we have seen that for the couple of quarters going backwards now. And it really attributed to the service strategy that we are driving since I would say even two or three years today.

So, we will start to see a regular good level of service orders. And that has to do with focus, has to do with selling service products, and a good demand basically for also keeping the existing assets serviced and up to speed on our customer side.

But, unless I'm mistaken, your service revenues in local currency haven't grown in the last few quarters, while your orders have been growing, well, close to double digits.

And also you are correct that the orders have been faster, but the revenues were growing now in the last quarter.

And also, on that side there is obviously a certain backlog of medium sized projects, sub-traits and so on, that impacts the difference between orders and revenues. But, over time, I would pay more attention to the trend on the order side than on the revenue side.

Okay. Thank you very much.

You're welcome.

The last set of questions, please?

Simon Toennessen, Credit Suisse.

Thanks. Good afternoon, everyone. My first question is on the strong order growth. I'd just like to understand a bit more how much of this do you think is actually down to the PIE strategy compared to just a more favorable business environment? I know this is difficult to answer, whether you would have won these orders already at the same time last year in a similar environment. But, maybe you could quantify a bit more how much, in your view, the new strategy actually impacts, for example, your interaction with customers?

And on that note, looking at your current tender activity but also bearing the sanctions to Russia and a generally more uncertain macro environment in mind, how do you think about the coming quarter in terms of orders?

The second question is on discrete automation. You're saying that, excluding Power-One, the margin would have been up year-over-year, so on a like-for-like basis. But, given that Power-One already started to dilute the margin last year in Q3, is the comparison base you're referring to 18.8% or the margin you're providing in the slide deck, which also includes the Power-One dilution last year, or closer to sort of 19.5%, which I get to if I exclude Power-One last year?

And on that point, if the comparison base is actually 18.8%, could you just elaborate a bit more why the margin is then down probably year-over-year despite similar levels of organic growth?

And the last question is on the large orders that you mentioned on slide six in your presentation deck. Could you just give an indication whether these large orders for their respective divisions are margin dilutive or enhancing to the order backlog? Thank you.

Okay. Look, Simon, I'll take the order questions and I'll let Eric address the DM Power-One question.

On the order growth, if you just stick with slide six, we wouldn?t have gotten the mining order in Brazil if we wouldn't have done significant work on the I side of PIE, because we have basically here a very innovative leading edge mine 2.0 solution to automate a mine.

So, that's pure innovation developed even jointly with the customers out there. And we wouldn't have gotten that without this one.

On Bangladesh, that's a typical E piece. Bangladesh is a market that we have focused on recently a little bit more, invested in some sales capacity. So, that's an expansion of our activity that we have.

And then, the $800 million HVDC order in the UK, look, the UK customer was a customer that we already dealt with since many years. Getting now penetration to them by winning also this $800 million very large project is a typical exercise of the successful penetration activity in a traditional ABB market like the utility market in the UK.

So, the approach is working. We are not at the full potential yet. We are ramping up the momentum. I'm very, very pleased. When I've traveled around the world, everybody shows me proudly the heat maps and the associated activities.

And then, very often -- and that brings me to your point of collaboration. Very often they say, look, we identified an opportunity here. And Division A and Division C are working together with the support of our fiends in County X. And that's exactly what we want to see in the future.

We want to have not collaboration as a mandate in an artificial way. We want to have a market driven approach where the market drives our collaboration focus, and where we really say where do we get immediate benefit from teaming up.

I can tell you this is also fun for the team if you walk around the ABB groups. And as you know I'm traveling a lot out there, and I meet salespeople now. Salespeople that see a 28% order growth are happy people, and they see then where the pockets of excellence are and where collaboration works. And they copy with pride and they work with each other. And they see the other one performing and then they really go forward.

So, I think the PIE approach is only starting to get full traction. And with that, I'm very optimistic that also in the future we will be able to beat the market. Now, when the market is significantly down, we want to be ahead of it. So, that's on a relative basis we continue that.

The concerns that you raised or the questions that you raised to some parts of the world, whether it's in the eastern part or in the western part of the world, look, we have a much better radar today. Our heat maps, we are not only using them strategically for five, 10 year assignments.

We also use them short term, and we watch our markets very carefully. And if the one is a little bit more questionable and threatened, then we make sure we focus on somewhere else even stronger to compensate for that one. So, that's what we're doing.

The fact that we have now the three EC members on the executive committee having the three regions, they are really, really close to the market in the future. And they will have the countries directly reporting to them so we become more agile and fast in addressing market opportunities.

And if you take the four large orders that we have mentioned in slide six, look, when you take a large order, and as Simon in -- sorry, as Fredric in the previous question laid out very nicely, there is a correlation between large orders and base orders.

So, when we look at these opportunities, we need to say, this overall opportunity over a lifetime of the existence, is that something which is accretive or dilutive to ABB. Typically when you go through the large order piece at the beginning, it might be on or slightly below the divisional average. And then, if the service business comes in, if the spares come in, if the additional expansions come in, it becomes definitely accretive.

So, that's the direction of the items that I want to give you on that one. And with that, I'll hand over to Eric to answer the DM and Power-One question.

Yes. So, on the margin when you compare -- when we say it is up in the quarter, we do it on a like-for-like basis. So, it is not including the Power-One effects of last year's part quarter when they were in.

Okay. Thank you.

And with that, we would like to conclude the call today. Thank you very much for everyone for their time and their great questions. And looking forward to hearing you in February for our next Q4 results call. Thanks again.

Thank you very much to everybody.

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.