Abb Ltd (ABB) 2016 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon. Welcome to the ABB Fourth Quarter and Full Year 2016 Results Analyst and Investors Conference Call. I am Celina, 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'll be a Q&A session. (Operator Instructions)

At this time, it's my pleasure to hand over to Mrs. Alanna Abrahamson, Head of Investor Relations. Please go ahead, madam.

Thank you. Good afternoon, ladies and gentlemen, and welcome to ABB's fourth quarter and full year 2016 results briefing. The press release and analyst presentation was published this morning at 7:00 AM and can be found on our website. This briefing is being webcast via our IR website, as well as being recorded.

With me today are ABB's President and CEO, Ulrich Spiesshofer and ABB's Chief Financial Officer, Eric Elzvik. They will give a review of Q4 results, an update on the execution of our Next Level strategy and then present the outlook for 2017.

Before we begin, I would like to draw your attention to the important information regarding Safe-Harbor notices and our use of non-GAAP measures on slide 2 of the ABB presentation. This conference call will include forward-looking statements. These statements are based on the Company's current expectations and current assumptions and are therefore subject to certain risks and uncertainties.

I would now like to hand over to Uli.

Thank you, Alanna. Good afternoon, ladies and gentlemen, and welcome to our conference call.

Let's move straight to slide number 4. 2016 was a year of challenges and successes, as we made solid progress on our Next Level transformation. Orders for 2016 were 5% lower, primarily due to a 24% decline in large orders. Revenues were steady, as growth in Power Grids and Electrification products offset declines in Discrete Automation and Motion and process automation.

Our continued focus on productivity and cost resulted in margin accretion of 50 basis points to 12.4% operational EBITA and operational earnings per share improvement of 4% on a constant currency basis to $1.29.

A highlight for the year was our cash performance, driven by our working capital program, strong cash generation and disciplined cash allocation. Free cash flow was up 5% to $3.2 billion and our cash return on invested capital increased another 70 basis points to 14.1%.

For the fourth quarter, we delivered order growth of 3%; revenues improved 1% for the first time since first quarter 2015 we had this order growth; and operational EBITA margin was 11.7%, impacted by approximately $30 million in one-off events. Excluding these charges, we would have had a margin accretion of 10 basis points operationally in the quarter. Therefore, the reported results do not fully reflect the underlying operational performance improvement and momentum.

Now let's turn to slide five and consider our performance in the context of our three focus areas; profitable growth, relentless execution and business-led collaboration. In the fourth quarter, we delivered topline growth. Orders improved 3%, driven by the strong performance in Power Grids and strong growth in both the United States and China of 9%.

Revenues were higher, with strong performance from Power Grids and Electrification Products more than compensating for lower revenues in the other two divisions.

Our customers are really excited about ABB Ability, which builds on our role as a digital champion in our industry by bundling our solutions and services into a leading digital offering for our customers all around the world. With the related orders already received and significant customer interest, we are building growth momentum as we implement Next Level Stage 3.

In relation to relentless execution, we continued to build performance improvement momentum. As stated earlier, our underlying performance was stronger than the reported number suggests, if you consider the unique events that affected us during the quarter. Our operational EBITA margin would have grown 10 basis points in the quarter, if not for the impacts from the default of a Turkish distributor and a ForEx effect in Egypt.

During the quarter, we saw strong performance from Process Automation, which increased its margin by 130 basis points and Power Grids, which increased by 90 basis points. Our white collar productivity program remains firmly on track to deliver the increased cost reductions of $1.3 billion by the end of 2017. Our efforts on net working capital continue to yield results with net working capital as a percentage of revenues declining 150 basis points to 11.5% in 2016.

Overall, we continued to make significant progress in transforming ABB into a leaner, more efficient digital technology leader.

Regarding business-led collaboration, we improved country and account management collaboration. For example, in our food and beverage program. Within this program, dozens of new local sales teams were created all around the world using account managers and representatives from our business to bring the full strength of our portfolio to local customers in food and beverage.

In 2016, we set up global and regional service centers to provide our businesses with high quality back-office services in finance, human resources, information technology and supply chain management. These global service centers are now staffed with more 2,500 people.

As we announced at the Capital Markets Day in October, we are strengthening the global brand by consolidating all Company brands into a single ABB master brand. Now, that program is up and running. Having one unified ABB brand will help to differentiate us in the market and increase customer loyalty and purchase probability, as well as price premiums.

Please turn to the regional picture on slide 6. As shown, the US and China, our two largest markets, both performed well in the quarter and contributed to the strong order development. America's orders were steady, with base orders slightly down.

The United States delivered 9% growth overall, with 9% in base orders, mainly driven by transmission and distribution, robotics and port facilities. Canada was weak across all sectors, as heavy industry weighs on overall demand.

Brazil's results do not reflect the slow underlying demand pattern, as a large Power Grids order was booked during the quarter.

Europe was negative in the quarter, mainly due to the large orders that were booked in Germany and Turkey in Q4 2015. Base order development was steady, with positive contributions from Norway, Spain, the UK and Germany, being offset by declines from Turkey, France and the Netherlands. Asia,

Middle East, Africa grew 17%, driven by large order awards in Power Grids. China grew 9% with base orders 11% higher, positively driven by robotics, non-residential construction and power conversion products.

India experienced strong growth, with the large power grids orders, as well as an increase of 14% in base orders. All sectors were up in India. The Middle East continued to be subdued. All in all, it was a solid performance in a difficult market environment.

Before I hand over to Eric, I would like to go through some of the key orders that Power Grids won this quarter that led to our growth in the fourth quarter.

Please turn to slide number 7. Many of you (inaudible) for the third quarter, but as you can see, the demand drivers for transmission and distribution remain fully intact. We need to remember that this business, it has a certain volatility for large and base orders from quarter-to-quarter.

In Q4, Power Grids achieved more than $840 million worth of announced large orders. This reflects our global Number 1 position in transmission and distribution, as well as our technology leadership in high and ultrahigh voltage direct current transmission.

Projects like the Raigarh-Pugalur link in India speak directly to the strength of our pioneering leading technology in ultra-high voltage direct current transmission in distribution over long distances.

This project will draw power from renewable and conventional sources in the South and the Mid and transmit over very long distances of more than 1,800 kilometers with low losses.

In California, the Sylmar project is an excellent example how our digital platform ABB Ability and how we can drive [this as] an upgrade of older systems to incorporate the latest digital controls and safety features for more reliability and safety of supply. The result is a more reliable link between the City of Los Angeles and hydroelectric dams in the North.

With that I would like to hand over to Eric.

Thank you Uli. Slide eight shows the divisional performance and let me now take you through some of the highlights of the divisions.

First of all, Power Grids performed strongly in the quarter with 15% order growth; revenues up by 4% and operational EBITA margin up by 90 basis points to 10.4%.

Orders and revenues in Process Automation were weighted down by the continued weak demand in Process Industries, particularly in oil and gas. At the same time, we succeeded to achieve flat base orders, which is a clear improvement in the business.

With the weak volumes, Process Automation has done a great job of cutting costs and increased its operational EBITA margin by 130 basis points to 13.4%. In other words, the division has cut capacity in response to the current market conditions.

Orders in Discrete Automation and Motion rose 4% and this was driven by strong demand patterns in robotics and in light industry. Also, in Discrete Automation, we saw a 5% increase in base orders in the quarter.

This increase has more than offset the impact of the CapEx declines in process industries, such as oil and gas, with a similar pattern as we have in the Process Automation division. In this division, margins declined by 100 basis points, mostly as a result of the solar business, unfavorable mix and low capacity utilization.

Electrification Products had low orders in the quarter, due to low levels of low voltage and medium voltage system orders. Operational EBITA margins would have been steady, but declined by 90 basis points for the reasons mentioned earlier by Uli.

In Turkey, we had a large distributor default on payments. We have very strict credit controls in place. However, in the volatile environment in Turkey, this distributor was over-extended and he could not react quickly enough. We are still pursuing payments, but know it will be very difficult.

In Egypt, due to the devaluation of the currency and the inability to hedge the Egyptian pound, we reevaluated our Egyptian accounts payable. Electrification Products was the division primarily impacted, since most of its business is local and it's difficult to contract in hard currencies.

Regardless, we are trying to renegotiate contracts to reduce this impact. Excluding these two specific items, margin would have been steady in the Electrification Product division in the quarter.

Please remember that the new divisional structure, which we announced in October, takes effect on the first quarter of 2017. Electrification Product will receive the electric vehicle charging, solar and power quality businesses from Discrete Automation and Motion division.

This transfer will have a dampening effect on the Electrification Products margin and the division will most likely be outside the margin corridor in Q1 of 2017.

On the other hand, in the new Robotics and Motion division, the transfer would be supportive to the margins. And therefore, we see that this division will be within the margin corridor in the first quarter of 2017.

Let's move to our operational EBITA margin bridge on slide number 9. In a challenging market, we achieved approximately $111 million of net savings in the quarter. This came from our ongoing cost saving programs to compensate for price pressures, but also from our benefits from the white collar productivity program. And in particular, we saw strong results from the white collar productivity and supply chain savings.

Further, the volumes were positive in the quarter, reflecting the revenue increase, primarily from Electrification Product and Power Grids. The project margins, as you see, was generally steady from a year ago, which shows the improvement in the product management that were implemented in Power Grids and also in the Process Automation division.

On the mix side, we had an unfavorable development in three of the divisions; Electrification Products, Discrete Automation and Motion and Process Automation.

In the other number, there are a number of items, including the distributor default in Turkey, which I mentioned earlier, and the operational currency losses from Egypt. Other items consist of salary inflation and other one-offs that we typically have in the quarters.

Altogether, the Group achieved an operational EBITA of approximately $1.057 billion with a margin of 11.7%. And if you would exclude the items I just mentioned, we would have had a margin of 12%, or a 10 basis points margin accretion in the quarter.

On slide 10, we have a waterfall tying operational EBITA to net income. If we look at what you have in your models, some of the items are above or below your estimates and let me now walk you through these differences.

In the quarter, restructuring and restructuring-related expenses were significantly lower than in the same quarter of 2015. During the quarter, we reassessed the restructuring and restructuring-related provisions associated with the white collar productivity program.

Due to significantly higher than originally expected attrition and successful internal redeployment and retraining, the provision could be reduced by $114 million pre-tax. This had a positive impact compared to many of your estimates.

Regarding pensions, we are taking proactive measures to reduce our defined benefit pension programs. Therefore, in Norway, in the quarter, we moved from defined benefit to defined contribution plan. We'd had a short-term cost, which you see in the bridge. But from a long-term point of view, we improved predictability and we are also reducing the overall pension obligation in Norway by approximately $100 million.

The next item in the bridge is a $92 million for estimated warranty costs in the solar business, which is for products sold by Power-One prior to the acquisition in 2013.

Due to the age of the installed base, we observed increased failure rates mainly in three types of Power-One solar inverters, which were designed before ABB acquired the business in 2013.

In 2016, we performed a thorough analysis, which showed that the original provision for warranties in the Power-One solar business is insufficient to cover the anticipated warranty costs for the remaining warranty period.

This warranty provision relates to [defined set] of Power-One designed products that were designed and sold prior to the acquisition in 2013. The remaining part of the category, Others, pertain to smaller non-operational items and added up to $54 million.

I should point out here that we have made a modification to our definition of operational EBITA. We have made the way we report pension expenses more transparent. And this is in line in what IFRS already is requiring and what US GAAP is moving towards. This change is to allow investors to see more clearly what is operational versus non-operational portion of the pension and makes it also easier to compare to the peers, many of those who report under IFRS.

Also, changes that we may have to make to estimates relating to items before ABB acquired a company are outside of the operational costs.

Let's now move to slide number 11. Our hard work on the working capital program is yielding positive results. As a percentage of revenues, net working capital has been steadily declining year-over-year.

In 2016, we achieved 150 basis points reduction through a further value chain optimization, which is a deep sustainable change in how we operate our processes and thus becoming a constant permanent lower need for net working capital. And you can see it in the curve on the left of the chart that it is not only at the end of the year, it's constant during the year, a lower level, which means we permanently have freed up this capital to use for other needs in the Group.

On the right side, you see the cash flow. Cash flow from operating activities continues to improve. We have a much stronger focus on consistent cash flow generation during the year.

In the bars, you see the quarterly numbers, with stronger performance in Q1 and Q2, and still a good performance in Q3 and Q4, which then led to a strong overall cash flow for the year. With this reduced net working capital, it also contributes strongly to the increased cash flow return on invested capital.

Let me now hand back over to Uli.

Thank you, Eric. Please turn to slide 12. When we first launched our Next Level strategy, we realized we needed to transform ABB in three focus areas.

Back in 2013, we had a lot of work to do in order to build a solid foundation for future growth. At that time, ABB did not emphasize enough our focus on organic growth. Our business units were not performing in line with expectations. Our white collar product -- our white collar organization was inefficient and [partly fed] and there was a lack of accountability. Our corporate structures were siloed. Departments and businesses were almost completely isolated from each other.

Now, we can point to a solid list of improvements that have been executed under our Next Level strategy. Growth momentum is building, driven by our PIE formula of penetration, innovation and expansion.

For example, our program to drive growth in the food and beverage sector has yielded good results. And our robotics business, today the number two globally, continues to become even stronger.

We are laying the ground of future growth with our quantum leap in digital, building on ABB Ability, our new platform, ranging from smart sensor solutions for low-voltage electric motors, to the cloud-based offering in partnership with leading company Microsoft.

Having completed a strategic review Power Grids, the division can now focus on growth and on accelerating its transformation and driving further value creation.

For cost savings, productivity and working capital, our programs are truly delivering. Today, ABB is a faster, leaner and more efficient company, with clear accountability and ownership driving performance. That transformation is overall progressing very well.

Please turn to slide 13. Those of you who were at our Capital Markets Day on October 4, might remember this slide. We launched a third stage of our Next Level strategy to unlock further value through four key action items.

Number one, driving growth in our four market leading entrepreneurial divisions, a quantum leap in digital, accelerating momentum in operational excellence and strengthening the global ABB brand.

Moving to slide 14. As of January 1, our four market leading entrepreneurial divisions, all of which are either Number 1 or 2 in their respective markets, are fully operationally [sound].

Electrification Products is the partner of choice for electrification of all consumption points. All electrification components and offerings are now consolidated into Electrification Products to allow a better growth and cost leverage.

This includes, as Eric stated before, the EV charging, solar or power quality offering from the DM division as key growth platforms for electrification space. In the short-term, this transfer will have a dampening effect on the division's profitability as laid out earlier.

Robotics and Motion provides a complete portfolio of robotics and intelligent motion solutions. In robotics, we are Number 2 and firmly determined to become Number 1. In Motion, we are already Number 1 in motors and drives and we continue to expand that position globally.

In Industrial Automation, we are Number 1 in process control and will drive digitalization in industry with forceful actions. And Power Grids offers everything needed for a stronger, smarter and greener grid.

Let me talk a little bit more on Power Grids on slide number 15. The strong results in Power Grids reflect the successful outcome of the Step Change program, which is successfully completed today.

It was a quite remarkable journey that we have been going through over the last three years. However, the transformation continues, as there is still significant value creation ahead of us, for all of our shareholders and all of our people.

Power Grids will continue to transform through the Power Up program, which we have launched in October 2016. Power Up is driving about driving growth and enhancing earnings accretion by focusing on core operational strengths and high-growth segments, as well as digitally enabled services and software.

This transformation journey will cost about $200 million over the next two years, but position Power Grids to be within the margin corridor of 10% to 14% effective in 2018 fully. So, we are moving from making Power Grids better to making it even better and bigger in the future.

Let's move to slide 16, quantum leap in digital. We have launched ABB Ability. As a hidden digital champion today, ABB is ideally positioned to win in the digital space with new and existing end-to-end digital solutions that builds on the intelligent cloud and close the loop with connected devices.

We will use our profound knowledge of our customers' domains to plan, build and operate with a unique digital offering, which we will truly deliver operational differentiation for all of our customers.

The newly launched ABB Ability platform will drive growth by integrating all of our digital solutions and services into one common group by global offering, which is horizontally leveraged and vertically differentiated.

This will unlock tremendous penetration opportunities in all customer segments and allow us to replicate the success of each digital offering across variety of our businesses.

ABB Ability truly cements our leading position in the fourth industrial revolution and support the competitiveness of our four entrepreneurial divisions. We will continue to develop next-generation digital solutions on an integrated cloud platform, in partnership with Microsoft, the world's largest software company.

Let's turn to slide 17. Here we would like to share with you some examples of how we are using today our digital solutions together with our domain expertise to help our customer to become more efficient, perform better at lower costs.

For planning of industrial installations, we have today robot studio, where more than 14,000 users every year use this software to plan and virtually commission their robots in the industrial environment.

In the building phase of our customers industrial activities, we have, for example, the Ormen Lange gas field in Norway where the 800xA control system, used together with software application, allows electric and mechanical problems to be early and easily identified, so that we can adapt the operational pattern of the activity.

Smart grid projects like in the US, with the Central Hudson Gas & Electric Distribution Automation Project have opened the door to advanced monitoring capabilities, lower maintenance cost and greater reliability between the digital grid.

What differentiates ABB truly is our end-to-end offering. It is just simply not enough to attach a sensor to a motor, or a robot, or a machine and transmit the data to the cloud. The value truly lies what you do within the data, how you use your deep domain expertise to truly turn information into actionable information and control to help customers derive maximum value from digitalization to assets and get better uptime speed and yield.

ABB is very well positioned, because we have one of the largest installed bases with 70 million connected devices and 70,000 control systems installed all around the world. This means we have the right domain expertise to understand how digital technologies can be used in the specific situations of our customer sectors.

Please turn to slide 18. We truly accelerated momentum in operational excellence and we delivered margin accretion through our continuous focus on cost and productivity. We have taken a lot of cost out, in excess of $1 billion each year through operational excellence and supply chain optimization.

Our target remains at 3% to 5% of the cost of goods sold every year. Our white collar productivity program is on track to deliver an additional higher target of $1.3 billion in gross savings within the same timeframe, while incurring much lower restructuring costs, due to the natural attrition and smart HR management and internal redeployment that Eric already mentioned.

Please turn to slide 19. The goal of our Next Level strategy is accelerated sustainable value creation for all of our shareholders. We returned $2.9 billion cash to shareholders in 2016, increased our free cash flow to $3.2 billion, representing 161% conversion rate.

We have lifted the cash return on investment to the mid-teens. We have completed our first share buyback program in 2016 and are now starting the buildup and the planning for the implementation of the buyback program of up to $3 billion from 2017 to 2020.

In addition, the Board of Directors will propose the eighth consecutive increase of our dividend to our AGM, which is coming soon, to CHF0.76, [or 76 wrap in] at the 27 Annual General Meeting. This is a 3.5% dividend yield as of the end of 2016.

Now, let me turn to slide 20. In the short-term, we foresee continued geopolitical uncertainty. In our sector, we expect utilities to invest further in transmission and distribution and continued growth in the renewables of solar and wind.

On the industrial side, investment in discrete and hybrid industries, such as automotive, food and beverage and machinery remain positive, while oil and gas and mining investments are likely to remain pretty sluggish.

In transport and infrastructure, we see the market for rail growing, along with specialty ships, for example in the cruise sector and the construction market, mainly in the non-residential area should continue to improve.

In terms of regional development, China is likely to increase investment in power transmission and distribution, as well as robotics and construction. And India should grow well across all of our sectors.

In the US, investment in power infrastructure will be positive, but we don't expect significant improvement in Brazil. Europe is a truly mixed picture. Spain looks strong, but Brexit uncertainties and events in Turkey, combined with the elections coming in many places might temper the growth in other places.

Let me turn to slide 21 and share with you our priorities for 2017. With a lot of homework done and transformation progressing, our operational excellence programs are on track. 2017 will be truly a year where we consolidate our achievements and drive growth momentum.

We will drive organic growth through PIE, penetration innovation and expansion, and it drives momentum for ABB Ability through our customer base and within every business unit. We are ready as well for disciplined inorganic moves and partnerships should the opportunity arise.

We intend to deliver on our white collar productivity and working capital programs and move ahead, based on our leading operating model, supply chain management and quality programs, and live truly the new performance culture and performance system to drive a strong entrepreneurial culture and approach in ABB.

In addition, we will tap growth collaboration opportunities in countries and accounts and build on our new performance culture with a strongly, better shaped organization and leadership team by strengthening the global ABB brand.

Let's conclude with Slide 22. Let me share with you why it will be attractive to own ABB.

ABB is a pioneering technology leader with strong positions in attractive markets. We have a crystal clear transformational agenda to drive earnings per share and cash return on invested capital. We have an efficient balance sheet, which we will use wisely. And we will generate attractive returns for our shareholders. Our Next Level strategy is truly unlocking value for our customers, our employees and shareholders. Thank you very much.

Thank you Uli and Eric. With that, I would like to open up to questions please. And I would ask that you limit it to two questions and that is it. Please, operator.

(Operator Instructions) Andreas Willi, JPMorgan.

A question on pricing and one on Process Automation. On pricing, it seems to have got a bit worse in the bridge in Q4, but maybe you could help us with the cost savings, white color and the rest in terms of the run rate, where we are in Q4. And what do you see there in the backlog in terms of pricing for next year relative to headwinds on raw material inflation and what you have started to enact on price increases to offset that?

And in Process Automation, it's done a great job on margins, particularly in Q4. But overall in the year, should growth come back, what kind of incremental margin should we expect?

Historically, it hasn't shown much leverage either way, but maybe in terms of what the changes you've made on the cost savings in terms of structural versus cyclical cost cutting, what should we expect when revenue growth comes back? Thank you very much.

I start with PA and then hand over to Eric on the pricing piece. Your observation is right. Peter Terwiesch and his team have done a wonderful job mitigating the very tough market headwinds and delivering a solid margin in this business.

That has a couple of drivers. The one is proactive cost management, in line with the backlog. This business is a long-term book-to-bill business. So we have good foresight on the backlog. And Peter has done a great job responsibly managing, adjusting capacity in that how we run the business.

The second piece that he has worked also on is a significant improvement on risk management and risk mitigation on large projects and the operational execution quality on projects in this business has become even stronger. The food element is, the strong push on services and digital services have enabled us to lift the margin in this division, even in difficult times.

And if you look at it, Andreas, basically all three elements are there to stay. So when this business comes out of the trough in the market, you can expect a nice development of the underlying quality of the margin.

We are not giving concrete guidance, but we are confident that if we can manage through the downturn in a good way and Peter is able to increase margins, his work on his portfolio and focus on services, his derisking approach and better operational execution will help us to deliver very attractive drop-down margins when the market comes back.

With that I hand over to Eric on the pricing.

So for the pricing side, Andreas, the pricing pressure in Q4 was quite similar to what we had a year ago in Q4, a little bit more than in Q3 of 2016, but that was also the same pattern in 2015. So you can say over and above, it is a similar situation.

On the basic cost savings on supply chain, on OpEx, we did continue to do really well on the supply chain side. On the OpEx it was a little bit less than before. At the same time, the white collar productivity program is continuing to deliver very strongly. So the net of all those effects is $111 million that you see.

The pricing trends, I would say, is continuing on the same level currently. You correctly said we have some raw material increases that has to reflect itself back in pricing and there we are using the same methods as we have done historically, to update prices as we go to match it when also our hedging programs are running out.

So it is quite balanced over the cycle, but we are taking the right actions to protect the pricing. And that should then mean, potentially in some of the areas, lower price pressure per se when we move further into the future.

Ben Uglow, Morgan Stanley.

I had a couple; both relating to power. On the sort of power outlook, Uli, maybe -- or could you just talk about base orders and why in the last couple of quarters base orders have continued to appear quite weak?

When you look at the tender pipeline for larger orders into 2017, is that funnel looking any bigger than it was a few months ago? That's question number one.

Question number two, and maybe this is for Eric, could you just remind us about the phasing of the power up investments in Power Grids? You've had quite a nice step-up in margin in the fourth quarter. What I'm trying to figure out is, how significant is the dampening effect of investments likely to be during 2017?

Yes, look, I think your observation overall on the quality and improvement of Power Grids is correct. We had 4.3% margin, not too long ago, now we are -- for the year -- firmly above 9% in the quarter, even above 10%, and that's a good momentum, and Eric will give you more granularity on the outlook on that one.

Regarding the tender pipeline, look, when you go around the world at the moment, renewables are really kicking in massively all around the world. I'll just give you one concrete example. I was two weeks ago with the Energy Minister of Abu Dhabi, and they are building now plants, where the IPP price for solar is $0.024 per kilowatt hour.

And that means, it is a very, very attractive value proposition. We see that not only in the Middle East, we see it in India, we see it all over the world. And this project means there will be connections needed over long distances to connect the renewables into the main areas of demand.

So on the long distance connections and long distance connections, especially for the feeding of renewables into the grid, we remain optimistic, as we have shared with you at Capital Markets Day.

You have seen, now for example, the Belo Monte project in Brazil is feeding in renewables into the Brazil grid. India, the very big project is basically taking wind from the South and putting it into the middle.

So the tender backlog and the tender activities and the project discussions are healthy in Power Grids, and I'm optimistic that in the future, we will realize more projects.

Now, as you know, the large project business is lumpy. You can never predict exactly in which quarter it will come. So, we will have from quarter-to-quarter some ups and downs, but it's normal in the large project in Power Grids.

That brings me to the base order situation. Yes, look, on the base order side, there is an element of Power Grids, which goes into large industry, and that's on the process, the mining side, where we connect industrial operations and new industrial operations with the grid.

That's definitely a subdued part of the portfolio. So to supply of power grids in the industry is subdued and that contributes to the dampening on the base orders that we had seen. Let's see how that turns out again. It is definitely our ambitions to bring also base orders back to growth in Power Grids.

And with that I hand over to Eric to talk a little bit more about the Power Up program, and its cyclicality or timing of the cost.

Yes, Ben, so let's go to that topic. So, first of all, we are of course very pleased to see that we have this division in Q4 above 10%, in the new margin corridor.

At the same time, this is quite the pattern between the quarters, so we should not count that we will, during the transformation time with Power Up be every quarter in the margin corridor.

The Power Up costs, as I said at Capital Markets Day, we see approximately $200 million in total; about $100 million in 2017, about $100 million in 2018.

Most of that will be on the operational side; could be some smaller pieces on the non-operational side, but most of that is operational and will then have a slight impact on the margin in the respective quarters.

James Stettler, Barclays.

You had very good margin momentum in the DM division before Q4. Can you talk a bit about how we should look at that division into 2017? Assuming you weren't to make the changes, is there a possibility to get back into a range, or is this going to take a bit longer, especially given that base orders are picking up? That's question number one.

And on question number two, you had the $2 billion working capital program, which supposedly will end this year. If I'm correct, is there still $1.1 billion to go and should that all come in, in 2017? Thank you.

Yeah, look James, thank you for your observation on DM. DM, as of January 1, is becoming RM and it's a much better focused, much more streamlined portfolio. There we really focus Sami and his team on Robotics and Motion.

And in Robotics and Motion, Robotics is going very well. We are happy motors and drives had to go through a trough in 2016, given the very strongly dampening effect of the process industries. We are working our way out of that and will be better in 2017.

The portfolio part that goes over to Tarek belongs to Tarek logically. In electrification, it makes sense to combine everything that Tarek has with the EV charging, with the solar activity and the power quality piece. All three of them are under critical in terms of true industrial mass and relatively early in their ramp-up. So they have a relatively low margin and that will have a dampening effect on Tarek's business.

Now we have significant synergies between Tarek's existing portfolio and these activities. So you should expect that over time the dampening effect of this transfer into Tarek's portfolio to wear off and Tarek get to their target margin corridor that we have announced for the business later in the year.

With that said I hand over to Eric, our working capital man here.

Yes. Look, James, we have done $900 million-plus until the end of 2016, with a much better speed and trajectory in the second half year. So we have now another $1 billion to do in 2017 to reach the target and that is what is in the plan and its of course spread from inventory, to accounts payable, to accounts receivable and quite comprehensive programs running in all the areas.

So we are confirming the target for $2 billion for the program until the end of this year.

Mark Troman, BAML.

Two questions if I could. First one on outlook, could you give a bit more color really on the process markets, I guess the ones that are still weak; oil and gas, petrochemical, marine, metals and mining?

And what are we seeing? Are we seeing a bottoming, are there any parts that are improving, are there parts that are still declining quite heavily? If you could provide a bit of a color on those process markets that would be helpful. Thank you.

And the second question on the restructuring charges. I think according to your number booklet, you did $674 million in 2015, $543 million, I think, in 2016, which is a bit lower than expected, because of this Q4. What should we be penciling in roughly for 2017, 2018 in terms of restructuring? Thank you.

The answer for your process industry question is yes, we got to have all of it what you just said. We have massive contraction, we have steady bottoming out and we have growth. And let me run you through the different industry segments.

The biggest one is definitely oil and gas. And the weakest in oil and gas will be offshore. We don't expect any improvement in offshore in 2017 in the business sentiment, in the investment climate. So this one will be still a very, very tough part of the market.

We see on the onshore and especially the downstream operations, we see signals that the OpEx and the service activities are getting a little bit more money, which is good for us.

And we have the first discussions on future projects, which are becoming now a little bit clearer, so there will be a tender pipeline coming, but it's too early to speculate that this will kick in in a significant way in 2017. I think that's more 2018. So 2017 is probably more OpEx recovery on the downstream and onshore activities that we have.

On mining, 2017 will be another difficult year. Mining will not improve and, knock on wood, that it hasn't bottomed out, but the signals there are not easy ones in terms of the overall activities. That's probably more a 2018-2019 market to come back than anything before that.

Then if you look on the marine sector, it's really an interesting situation, because we have -- if you take oil and gas supply vessels, the market contracted in 2016 more than 60%.

So there is definitely a [dead cat] bounce on oil and gas supply vessels. And we don't expect any significant pickup or even a dampening on that one. This will be bad in 2017 as well.

On the other hand, if you look at the cruise ship market, ABB is extremely strongly positioned with a fantastic offering on cruise ship that really goes from electrification over propulsion into the Azipod. We have now the fleet management, we have the software activities and that's a market which is going very well.

There is a backlog alone in China of more than 100 cruise ships. So all of China is going on a cruise, joining all the Americans that are going on a cruise. So I'm quite optimistic about that part of the portfolio.

So if you look at industrial automation and if you look at process automation specifically as a segment, we will need to fly onside. We are at one hand, we are restructuring and on the other hand, we are investing in growth. And I think Peter and his team are doing a very good job navigating the waters going through that.

With that, I hand over to Eric on the restructuring question that you just had.

Yes, Mark. So on the restructuring, you're right that the 2016 number benefited from the release that we could do, as was mentioned earlier on the call.

If you look to 2017, with this we see a very small additional restructuring in the WCP program, around $10 million, as we have put in one of the backup slides. And for the normal restructuring, we see a fairly normal year in 2017, where we have guided previously of about $200 million. So that is the guidance for the normal restructuring.

For 2018, we don't make any specific guidance at this point in time, but I would assume that it will also -- for modeling purpose that you can use a normal year.

What is important to point out is we also have below the line, the continued program implementation cost for the WCP program, which we are guiding to approximately $220 million in 2017. That is not restructuring, but implementation cost and it's important to keep those in mind for your modeling.

Martin Wilkie, Citi.

Just a question about potential cash deployment. There was some quotes in the press today that you might consider larger acquisitions. I remember Uli, when you became CEO, you talked about software, oil and gas, food and beverage as potential growth areas. And more recently you've also talked about becoming Number 1 in robotics.

Obviously, I can't expect you to talk to specifics, but perhaps you could talk more generally about what you think that you might need to fill into the white spaces across the Group. Is it technology related, distribution, install base? And a related question, and particularly if you can have another $1 billion of cash release in working capital, what you view your balance sheet leverage is, what you feel your scope as in terms of doing acquisitions? Thank you.

Look, our capital allocation principles remain unchanged and the priorities remain unchanged. Number one, we have to really support organic growth. I can tell you I'm quite excited about all the organic growth opportunities that is still out there -- see out there, and there is quite an active program going on in this field.

The second one is the dividend. You have seen we had increased the dividend again. And we absolutely stick to our dividend policy, adding this is very important part of our value proposition to investors in this volatile time.

The third priority is around acquisitions. We have been very disciplined on acquisitions. The first couple of years after me taking office, I had put a hold on it, because we first needed to do serious homework, get ABB into shape, create an integration capacity from a management perspective to really be ready to do that.

And the second half of last year reflects we are ready, but it does not mean that we are desperate to do acquisitions. We will do them at the right time, when we feel there is good value creation potential, there's an attractive opportunity, and there is also good implementation and integration capacity on our side.

If you look at the fields of deployment, if I go through the four divisions, take Electrification Products. In Electrification Products, a lot of the business and a lot of the offering is a pretty local offering. ABB in electrification, if you take the equator, we are strong north of the equator and we are not that strong south of the equator.

So, if we would find the right way to deploy capital in this field, I would be open to that. Also, in attractive markets, above the equator where we might not be that strong yet, we would be looking forward to invest money there.

I liked Electrification Products business, I think it's an early cycle, good quality, steady revenue, steady profitability business that we can grow, and therefore it will get the right level of capital, should an opportunity arise.

In Robotics and Motion, look, on the Robotics side, the only large deal that would have been available has been made last year, or is being completed this year. That's a deal where we could have acted, but we demonstrated our discipline and said forcefully no, because it just wouldn't have been right for our shareholders to do this deal.

You have seen us doing bolt-on acquisitions in Robotics. That pattern will continue. We will continue to make bolt-ons of smaller and medium-sized to complement our strength and navigate towards our firm ambition to become number one in that field.

On the Motion side, the motors and drives, we are strong in anything related to continuous flow, continuous actuation, that's the process industries. ABB is not that strong yet on a stop and go operation, on server movement and server actuation. Should the time be right, then maybe we will definitely look at it.

That gets me to industrial automation. In industrial automation, basically we look at three things; the measurement and sensing piece, the control piece and the actuation piece.

In measurement and sensing, adding more sensing and measurement capability would be absolutely attractive for us. We would deploy capital, should the right target arise.

On the controls side, we don't need another DCS platform, we are very strong. And on the PLC side, if I could, I would pick something up, but you know how the market is there and the pricing is quite prohibitive in this field. So let's see what comes out of that.

And the third one has been the actuation piece, the domain-specific actuation, like control valves and others. That's a space that we would be open to look at.

That brings me to Power Grids. Look, the transformation of Power Grids will include some acquisitions. We will look at engineering, planning, software capabilities to enhance, especially the planning phase of grid building on our customer side, and that will be also all together, a theme where if we can strengthen our position in software and services in a way, would be good.

On the software side, we will not go out and do huge deals at very, very high multiples. We will do bolt-ons if they arise and are attractive to our overall portfolio.

So as you see, a clearly understood roadmap, a clear priority set across our businesses. And when the time is right, we will strike. If the time is not right, another asset is not available, we'll continue the path we are on.

Andre Kukhnin, Credit Suisse.

My first one is on your outlook. It looks like China is improved for you there and buildings looks like the swing factor. So, could you give us a bit more color on what you're seeing there and where and maybe to what sort of order of magnitude?

Yes, the second question is more on the catch-up effect in power and gas. We have obviously seen an element of that -- sorry, in Power Grids -- seen an element of that in Q4 after a softer Q3. Can we say that we're done with that and we're now at a normal run rate, or is there more to do? Thank you.

Okay, let me start with your second question. Look, the abnormal situation was Q3 and the normal situation are the other quarters. In Q3, we had a very, very low order intake, we were all unhappy about it, but we all also knew what we had in the pipeline. That's the reason why nobody on the ABB side panicked or got nervous. We just executed the tender and we won some significant projects. The Power Grids' order line will always be volatile with large projects. So don't expect that we're going to have a totally smooth ride. The large orders will create volatility from quarter-to-quarter. The base orders need to get back to a steady -- I mentioned before, the industrial part of that one is important that we get it back in shape and get going. But, altogether, you should see a Power Grids division in the future that taps the growth opportunities in the market in good way and really gets solid momentum going.

Now, on China, yes, ABB is going through a massive transformation, so is China. China is moving from an investment-driven to a consumption-driven, and innovation-driven country and we are working very heavily with China. I'm serving on two advisory boards there and work very closely also with the government. And it's very clear that the government is absolutely serious in deploying capital to really reshape China in a clearly defined agenda. The one is more renewables, more power grids, better infrastructure. That's great for us, and with our leading edge technology, with our strong capability to get low loss, long distant transmission going, we are ahead of competition and we are well positioned to work with China on this one. If you look at greener and smarter cities, whether it's the EV charging piece, where ABB is the leading startup company in the world, where we really drive that in a good way, or whether it's smarter buildings and smarter building controls, where with our home automation we are participating, I think they are quite well positioned.

If you look at the industrial upgrade and the Made in China 2025 program, it is paramount to be competitive and that does not only mean in the international comparison, but mainly also in the local comparison, against local competitors that companies invest in robotization and automation. And as being the number one in China in robotics, and having a strong automation capability is also helping us to drive. So that's the sector perspective in China.

The second perspective that is important is China is a large Continent. And in the past, we have been pretty active along what I call the Eastern Banana and it didn't go that strongly into the West and into the East of China. This is a forceful action that [Chunyang gu] is driving. He uses our PIE model to do that. He collaborates across the different business units and we basically have a [ways by ways] program going West and Eastern China, and that's the reason why we're also comfortable that we get there. If you look at, for example, the robots density per 10,000 workers in China compared to Europe or compared even to the US, which is lower than Europe, there is a dramatic catch-up to be done and a fantastic opportunity. So, all together, if we manage this well, we should be cautiously optimistic about China.

Jeff Sprague, Vertical Research Partners.

I was wondering if you could address mix a bit as we think about 2017. Uli, you talked a little bit about OpEx and process. But I would think that your mix would naturally want to get quite a bit better in 2017, as we move into more of an OpEx cycle and people are thinking about CapEx, maybe in the out years. But it does appear that many of your customers were starving OpEx and MRO here for the last couple of years. So I'm little curious why the mix was negative in Q4, but do you see that inflecting meaningfully in 2017?

Look Jeff, as I said before, in the process side, the first spend that will come back will go into uptime and reliability. It will not go into newbuild, it will go into uptime and reliability. That means replacement, that means service, and that's a business which is good for us. We underestimated, as I've shared with the you, the massive dampening on service that, for example, hit us, especially in the first half of the year in DM. But if you look at the way the assets are being run just up in Davos, and recently I met a lot of CEOs in the process industry and oil and gas, they all say the same, we have to start spending again; otherwise we risk downtime. And this is something that should have a positive effect, as you rightly say, and we need to drive towards this forceful action.

Just a quick one for Eric, maybe. These non-operating pension and pre-acquisition items, can you size an expectation for 2017 on those? I'm sure you know the pension, you may not know the pre-acquisition, but any help there would be much appreciated.

Yeah, on the pre-acquisition, as you correctly say, that I cannot give you a guidance on, because, if you would have seen, we would have taken care of it already. Hopefully that should not be too much, but it depends on where of course things could come out of acquisitions. On the pension side, the number that you see here includes -- as it's quite detailed in the notes -- specific curtailment that we have down in Norway to significantly reduce the overall pension liability. So that one you should not see repetitive. And that means this would be a relatively low number, as we see it. And back in the detailed notes, you will also see that we have shown how this number has been moving over the quarters back in 2016 and 2015, to give you a perspective where it is. We are not providing specific guidance for 2017. But I think you should assume that historic pattern, excluding this curtailment. This is what should be there.

Gael de-Bray, Deutsche Bank.

The first question is around the performance of the Process Automation business. I mean, based on the order trend that we've seen now for the past few quarters, it seems you're likely losing share here. So could you elaborate on the competitive dynamics for the business and is there actually a risk that you would have favored the mix and margins over [growth] a bit too much in recent quarters? So that's question number one. And question number two is around the manufacturing footprint you have in the US. I mean, could you elaborate a bit more on how much business do you export from the US, and how much do you import into the US? And also that would be great if you could give us sort of an indication on the level of taxes you actually pay in the US too?

Look, if I take the Process Automation piece, quite frankly, we are taking share in certain segments. We have a very specific structure in our PA business, historically. We have service in there very strongly, we have the marine business in there, we have our turbocharge business in there, and actually we have all of the DCS-based industrial solutions business in there. And if you look at the pattern, we benchmark every month, every division against key competitors on a pretty granular way on a business unit level. And I would say, Peter is doing quite well in what we have seen in terms of momentum in orders. I don't want to brag about it, but I'm okay with that development. And, naturally as 2017, hopefully, gets us on the service side, a little bit more momentum back that should have a positive influence on the quality of the business.

Now on the US, I will give you an overview and then hand over to Eric on the tax discussion. Look, ABB in the US is roughly a business which is somewhere between $7 billion and $8 billion. We have close to 20,000 people in the US, and given the more than $10 billion that we have invested over the last seven years, we have today a pretty self-contained footprint in the US. So, we are importing about the same level what we are exporting from US, and it's on a level which is not that significant for our US operations altogether.

Our local footprint, we have more than 60 factories. You might remember, we bought Baldor, we bought Thomas & Betts. We are very strong in Power Grids historically, in both on the product and in the systems side. We got a large grid integration center in Raleigh, in North Carolina. We got a strong footprint around Wisconsin in the north, and Chicago in the north. We have Fort Smith, Arkansas, is the headquarter of Baldor. We have Saint Louis as the headquarter of Thomas & Betts. So, altogether, we are basically in the US, for the US.

And if you just navigate through the ripples, waves and noise that we see at the moment around the new government and look at the content, the content says we need to invest in infrastructure and there ABB is the number one on the trade side, with local offering out of local factories. The US, we'll invest in competitiveness, in industrial upgrade, in automation, to be able that if jobs come back, they are being combined with smart automation to drive competitiveness. ABB was the first one, less than two years ago that has invested in a local robots facility in Auburn Hills, close to Detroit, where we are manufacturing today's robots for US in the US. So, given that we are pretty self-contained, given that we have a strong US for US business with a lot of strong local players and strong local management, I'm cautiously optimistic that we will participate with a fair share of the activities to come, and actually we keep investing as we see the growth coming.

With that I hand over to Eric on the tax question.

Yes. So US is our biggest single market and biggest single operation, as we have said many times. It is a market with a very high corporate tax rate today. We are not benefiting much anymore from all the tax allowances and so on in the US. So if they were to reduce the tax rate, that in itself would be positive to ABB. However, as de-Bray, you well know, there are a lot of other elements of the potential tax reform there which could go in the other direction. So it's simply too early to judge exactly what it would mean for us on the tax side.

Alok Katre, Societe Generale.

Just had a couple of ones. Firstly on robotics. Could you talk a little bit about the competitive dynamics in China? Clearly the growth potential over there is pretty strong. Just wanted to understand what the strategy is for guarding against, let's say, domestic players taking share, or perhaps against technology transfer? And are you seeing any evidence of the government there trying to influence the market, especially given that one of your competitors could now potentially be seen as a domestic sort of Chinese OEM?

And the second question was just a clarification. On your digitalization portfolio, I mean, could you just remind us how much your digital and software sales are worth, either dollar terms or as a percentage of Group sales? And what sort of growth are you seeing there? Just asking this in the context of a pretty strong performance and comments by some of your peers. Thanks.

Let me start with the robotic situation in China. ABB decades ago set up a very strong team in Shanghai, and we are today the market leader in robotics in China, and we have the firm intent to say there. We have fully localized the value chain. We have local R&D, we have local manufacturing, we have local sourcing, and it is our firm ambition to beat any competitor in its home base, back in China. China is the largest robotics market in the world last year. It will be the largest robotics market in the world for quite some years to come. If you look at the global penetration, there is a lot of opportunity to do more and naturally this attractive market attracts competitors and investments in this field. I think it's very important that we keep investment, that we keep our strong portfolio. We have experience on what it takes when competitors come up in the country, because in the Power portfolio, they probably happened about 10 -- eight years ago already. So we know how to deal with it and we know how to run the business for competitiveness. And it's very clear that the Chinese government is supporting our robot investments, so does local governments. And it does not mean that we don't participate in that opportunity. We just play it in a smart way as a very strong local player that we are already today.

Now on digitalization, look, more than 50% of our offering is today software based. So it is not like ABB comes to that field as a newcomer. We are in this field since many, many years. We are number one in distributed control systems globally, with 70 million connected devices, 70,000 control systems. So ABB has a strong legacy, a very strong platform in this field. If you look at the newer digital services, if you look at the cloud enabled services, if you take what we are doing in marine, we had significant double-digit growth in marine on the digital services. We have the same around robotics. We are bringing up the smart sensor solutions. Last week, we launched Asset Health 3.0 for utilities. ABB is the global leader, and the number one in the market. So I would expect that to develop quite forcefully ahead of the average Company's growth in the future and this is the major source of growth in the future as well. We have all together, about 18% of our portfolio is software and services and we firmly intend to both grow that, but also grow the share in ABB on that going forward.

Jonathan Mounsey, Exane BNP Paribas.

Couple if I may. On Electrification Products, I think the order intake was a little light of what the consensus was expecting. I think you mentioned low voltage and medium voltage systems orders being rather weak. Is that any particular issue, or was it just sort of normal lumpiness in the quarter? And then secondly on Power Grids, after the reorganization, I'll put that way, the JVs, etcetera, in Power Grids we announced at the Capital Markets Day, are we really done now in terms of the ownership structure of Power Grids? Are there other elements of the branches of Power Grids where we may [yet again use] around a change in the way you do business or the ownership structure?

On the EP, yes it is the lumpiness in the system side of the business. So, no reason to be overly concerned. It was a soft one in the last quarter. But Tarek is working hard with his team to really mitigate that.

On the Power Grids side, as we said very clearly at the Capital Markets Day, we have taken the overall decision what to do with this business. We will transform it under ABB's ownership, and that means very clearly that we will also continue to work on the portfolio of that business.

You have seen us divesting Cables in 2016 and that will be completed soon, that deal will be closed. And it was just a business on the, as I call it, copper and iron side, which didn't allow us to long-term have a leading competitive position, because they were under-critical. So we put it together with NKT and secured a long-term supply arrangement to drive this. The two activities on EPC, both with [floor and able] are ramping up, I'm very happy with the development there. And that will help us to derisk, while taking a certain part of the topline away. But that's okay, because it's a topline that does not fit our future pattern that we will develop. You can expect that we will do some smaller adjustments, both coming in and coming up out of the portfolio. But in large, we are done with where we want to go and we will drive it that way.

So with that I would like to conclude our Q4 and full-year results call. I would also like to remind everyone as Eric has already stated that we have a new structure. The pro forma statements are in the back of the presentation. Many of you have asked when you're going to be getting the pro forma statements. They are in the back of the presentation. As we restate the figures, we will update them on our website.

So with that, thank you very much, and wish you a wonderful day.

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. Goodbye.