Abb Ltd (ABB) 2017 Q3 法說會逐字稿

Ladies and gentlemen, good afternoon. Welcome to the ABB Third Quarter 2017 Results Conference Call. I am Maria, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

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

Thank you, Maria. Good afternoon, ladies and gentlemen, and welcome to ABB's Third Quarter 2017 Results Briefing. We have with us today ABB's President and CEO, Ulrich Spiesshofer; and ABB's Chief Financial Officer, Timo Ihamuotila. Uli and Timo will discuss the Q3 results and update us on the execution of the Next Level strategy and outlook for 2017 and beyond. After they speak, they will remain on the line, and we will open up the call for your questions.

The press release and presentation were published this morning at 6:45 Zurich Time and can be found on our website. This briefing is being webcast via our Investor Relations website and is being recorded.

Before we begin, I would like to draw your attention to Slide 2, which provides notice that all -- that this call will contain forward-looking statements and make use of non-GAAP measures. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties.

With that, I would like to hand over to Uli.

Thank you, Alanna. Good afternoon, ladies and gentlemen, and a warm welcome from my side as well.

Looking at Slide 3, let me summarize some of the key figures for the quarter. We continued to build growth momentum across all regions as we delivered total order growth of 5% compared with the third quarter 2016. Base orders improved 6% and increased in all divisions. Large orders fell by 5% and represented 9% of total orders year-on-year. In the quarter, revenues grew 3% to $8.7 billion. We reported an operational EBITA margin of 12.9%, approximately 10 basis points higher versus the third quarter 2016 and, sequentially, 50 basis points above the second quarter 2017 levels. Operational earnings per share grew 7%. Cash flow from operating activities was $954 million in the quarter, down compared to -- with a year ago. It was impacted by growth as current receivables increased on higher revenues and inventories that built up pending deliveries for growth.

Now let's turn to Slide 4 and consider our performance in the context of our 3 focus areas of profitable growth, relentless execution and business-led collaboration. As I stated earlier, orders were up 5% and base orders were up 6% on a comparable basis. When adding the B&R acquisition to the total orders comparable, they were up 6% and to the third base -- party base orders comparable up 7%. ABB Ability solutions are really driving momentum as total services and software orders grew 11% in the quarter. Revenues had a 3% growth. When including B&R, they were up 4%. With the B&R acquisition, ABB closed the historic gap in machine and factory automation and created a uniquely comprehensive Industrial Automation portfolio for customers all around the globe. The integration of B&R is progressing well, and we are happy to have the B&R team as part of the ABB family. During the quarter, we announced the intended acquisition of GE Industrial Solutions, which further strengthens our leadership position in electrification by improving our market access in North America. I will come back to that later in more detail.

Our operational EBITA margin increased approximately 10 basis points to 12.9%. Our Industrial Automation and Power Grid divisions turned in solid performances in the quarter. Electrification and Robotics and Motion continued to be impacted for material cost increases in some of their businesses, but showed solid sequential improvement as our homework against the second quarter is yielding results. Our White Collar Productivity program remains on track to deliver the raised run rate savings of $1.3 billion by the end of 2017. Net working capital as a percentage of revenues was stable, impacted, on the one hand, by our growth as well as the B&R acquisition and, on the other hand, by the divestiture of high-voltage cables.

We continue to create value through enhanced collaboration across the group. We have optimized our sales organization and our enhanced structure is driving performance better. We are nearing the completion of the transitioning from a country-based shared services to Global Business Services. Our 4,000 employees are now operational in our few global services hubs serving 80 countries. So ABB is truly continuing its transformation.

On Slide 5, you can see our performance in terms of regional order development. We are seeing growth -- base growth across all the regions. Growth in Europe was strong at 8%, benefiting from broad-based positive market developments in industry and transport and infrastructure and the timing of large capital investments with the positive contributions from the U.K., France and Norway more than offsetting declines in Germany and Sweden. In the U.K., we won 2 large orders associated with the same project, a $130 million order to provide power transmission infrastructure for the new Hinkley Point C power plant and a $60 million order to reinforce the power network connecting the station to the national grid. Base orders in Europe grew 2% with positive contributions from Germany, Spain, France and Norway.

In the Americas, orders grew 4% driven by increased general demand for automation and the need for energy-efficient solutions in industry and transport and infrastructure. In the United States, total orders and base orders grew by 3%. Canada and Brazil had strong development in the quarter off a very low comparable base a year ago. Canada's order development was strong with total orders up 8% and base orders up 14%. Brazil's economy continued to stabilize, bringing growth in from grid investments and construction.

In Asia, Middle East and Africa, orders grew 2%. This base order is up 12% for the quarter. We saw substantial growth in the Emirates, South Africa and Australia while Saudi Arabia remained soft. China had lower large orders than a year ago, but delivered really solid base order growth of 10%. Robotics solutions and general industry continued to be the growth areas in China. India's order growth was dampened temporarily by the implementation of a nationwide news goods and services tax. Underlying demand drivers remain intact.

With that, I would like to hand over to Timo.

Thank you, Uli. Let's turn to Slide 6, where I will take you through some of the Q3 divisional highlights. Electrification Products orders were up 7%. In particular, growth was very strong in China, Canada, Egypt and Turkey, but it was also positive in significant markets, like the U.S. and Germany. Demand remained positive for residential and nonresidential construction, renewables components and data centers. Revenues were up 5%. The operational EBITA margin in the division improved sequentially by 110 basis points, reaching 16.1%, but was slightly lower in the quarter versus a year ago, mainly due to higher material costs which could not be fully offset by productivity and cost savings.

Orders in Robotics and Motion improved 4% and 7% on third-party base orders on continued demand for robotics and energy-efficient solutions in the automotive sector and general industry. Demand for the process end markets was slightly positive to stable. In Asia, Middle East and Africa, orders grew double digits with China being one of the primary contributors. Canada, Germany and Spain also had strong base order development in the quarter. Operational EBITA margin improved sequentially by 120 basis points but was lower in the quarter versus a year ago due to higher material costs, which more than offset our cost reduction measures. We will continue to implement operational improvements as well as to take out additional capacity, where needed, to ensure performance is enhanced.

In Industrial Automation, orders were up 14% and base orders up 4% on a comparable basis due to the selective capital expenditure investments in mining as well as cruise and specialty vessels. Orders were broad-based with positive growth across all regions. Including B&R and currency effects, reported total orders were up 33% and reported third-party base orders were up 23%. Revenues grew 1%, and when including B&R, reported revenues were up 15% in U.S. dollars. Revenue performance was related to strong book and bill business in the quarter, meaning that orders and their revenues were booked within the same quarter. Operational EBITA margin increased to 12.6%, reflecting improved project execution, positive mix and solid cost and productivity savings.

In Power Grids, total orders were impacted by the delayed timing of large order awards and continued selectivity, driven by the change we are carrying out in the business model. As Uli already mentioned, we won 2 key orders in the U.K. as well as many other medium-sized orders in emerging markets. Third-party base orders rose 5%, securing a second consecutive quarter of growth underpinned by continued investments in emerging markets. Revenues for the division were 2% lower because of timing issues on certain large contract awards as well as a lower backlog due to the business model change. Operational EBITA margin increased 0.2% to 9.8%, reflecting improved productivity and cost savings, solid execution and a shifting portfolio mix, which more than offset investments for growth. Please remember the Power Up program when updating your models. We will continue to invest in this initiative in the coming quarters to drive transformation and value creation.

Regarding corporate costs for 2017, they will be slightly higher than indicated in previous guidance. We expect them to be $430 million due to additional investments we are making to drive growth. Regarding the divisions, we would expect to see the normal seasonal pattern going into Q4. In Q2, we said we were going to take further actions on capacity utilization. As you can see in Q3, we had approximately $80 million in restructuring costs, bringing us to $140 million year-to-date. We maintain our guidance at $200 million to $250 million, and it will be most likely at the upper end of that range.

Let's move on to our operational EBITA margin bridge on Slide 7. In Q3 2017, we continued to deliver on our cost-savings programs. We achieved approximately $115 million in net savings from ongoing cost-savings program, pricing pressures and our White Collar Productivity program. Commodity prices had a $23 million negative impact on operational EBITA as the costs for many of our raw materials continued to increase. We continue to drive price increases to offset material costs. Net volume was positive as the 3% growth in revenue drove additional contributions to the bottom line. We continue to invest in areas to drive growth, such as digital, R&D and sales.

Project margins were slightly negative versus a year ago. Similar to last quarter, the mix was slightly unfavorable, primarily due to lower-margin products and solutions that were delivered in the quarter. The acquisition of B&R and the divestiture of the high-voltage cables business had a net positive $16 million impact. As discussed earlier, other includes a number of items, like salary inflation, under-absorption, changes in corporate provisions and other small one-offs. Translation also had a positive impact in the quarter. Altogether, the group achieved operational EBITA of $1,124,000,000 and a margin of 12.9%.

Let's move to Slide 8. As a percentage of revenues, net working capital was stable. This was impacted by the acquisition of B&R and the divestiture of the high-voltage cables business. We continue to drive our working capital program to free up $2 billion by the end of the year. In the past 12 months, ABB has generated cash of $260 million by reducing working capital. Actions are in place to drive the performance improvement required during Q4 to achieve our target. The cash flow from operating activities was impacted by growth as our current receivables increased due to the revenues that were invoiced in the month. We are also building up some inventory to help us deliver the orders coming in. For the full year 2017, we expect cash flow from operating activities to be somewhat above last year's levels.

And let me now hand the call back to Uli.

Thank you, Timo. Let's turn to Slide #9. We launched Stage 3 of our Next Level strategy at our Capital Markets Day 1 year ago. It is designed to unlock further value through 4 core actions: driving growth in 4 market-leading entrepreneurial divisions, a quantum leap in our digital activities, accelerating momentum in operational excellence and strengthening the global ABB brand.

So turning to Slide 10. 2 September 2014 (sic) [9 September 2014] when I laid out the Next Level strategy, we made our clear -- ambition clear to shift ABB's center of gravity towards strengthened competitiveness, high-growth markets and lower risk. Since the beginning of 2017, we have made great progress. ABB Ability is strengthening our competitiveness through a set of unique solutions and software packages to harvest the benefit of industrial digitalization. We completed the acquisition of B&R, a leader in machine and factory automation, and we acquired NUB3D, a specialist in 3D visual inspection software and solutions in robotics. In Q3, we closed the acquisition of KEYMILE's communication network business to strengthen our leading position in the digital grid. We also announced the acquisition of GE Industrial Solutions this quarter, and I will talk more about this important deal in a moment.

Beside acquiring businesses, we have divested those that are no longer core, such as the high-voltage cable business in the first quarter of this year. Beyond these actions, we announced a partnership with IBM on artificial intelligence and executed successfully the launch of a next wave of solutions of ABB Ability during the year, amongst many other activities. Altogether, this is a truly transformational period for ABB.

Turning to Slide 11. Let me now revisit the compelling logic behind our recently announced acquisition of GE Industrial Solutions. We know exactly what we are buying, and GE IS presents a unique opportunity for ABB to expand its access to the North American electrification market and globally. GE IS has strong customer relationships and over 20% of the U.S. installed base. It is a noncore business for GE but we see significant value-creation potential for this business within ABB, driven by our innovation leadership and significant cost synergies, which we estimate at $200 million in year 5. The cost synergies are comprised of harmonizing the product and technology portfolio between the 2 companies, footprint optimization, supply chain savings and significant SG&A cost reduction.

From a portfolio perspective, ABB and GE Industrial Solutions are a truly excellent match. GE's large installed base and portfolio of electrical solutions complement ABB's technology leadership in Electrification Products, both in North America and globally. With our pioneering technologies and ABB Ability offering, we have a wide-ranging portfolio that we'll bring to the market through GE Industrial Solutions' extensive network of distributors and strong customer relationships. As part of the transaction and key to the overall value creation, we have agreed to establish a long-term partnership to supply GE with products and solutions from across the entire ABB portfolio.

As well as being strategically compelling, the financial rationale of this transaction is attractive. GE Industrial Solutions is a sizable business with sales of $2.7 billion in 2016 and an operational EBITA margin of 6%. We will acquire GE Industrial Solutions for $2.6 billion, less than 1x EV to sales and approximately 12x EV to EBITA, which is in line with peer and our own valuation. We expect the transaction to be operational and EPS accretive in year 1 and expect the closing to be in the first half of 2018, naturally subject to customary regulatory clearances. Overall, we have built our acquisition base case for significant value creation around cost synergies and have a clear and detailed road map how to get there.

Let's continue to Slide 12. ABB Ability reinforces our leading position in the Fourth Industrial Revolution and industrial digitalization. We have successfully introduced it at many customer events over the last year, and we continue to win new orders on the strength of its solution-based approach to industrial digitalization. ABB Ability has cemented our #1 position in the field of digital power grids, and our leading market share at digital control systems for the grid underscores the value of ABB Ability to our customers.

In the field of utilities, our solutions make it possible to apply advanced management techniques and industrial digitalization solutions to distribution and outages. This enables utilities to respond faster and more effectively than ever before to possible or looming power outages, amongst other issues. For example, ABB just commissioned the ABB Ability Network Manager distribution and outage management system for ComEd, the utility for the greater Chicago area. This system will help to reduce the length and frequency of outages and their associated costs.

ABB Ability offers solutions in many more areas. With more than 180 industry-specific digital solutions and services, it is unlocking tremendous value and tapping into growth opportunities in all of our customer segments. For industry, we have now established 16 ABB Ability collaborative operation centers for remote condition monitoring and services around the world. This serves a wide range of applications, areas including robotics, paper mills, mining, oil and gas and many others. Transport and infrastructure is another segment that has begun to benefit heavily from our cloud-based digital solutions. In this quarter, for instance, we launched a new version of our ABB smart home -- ABB Ability smart home solution that integrates seamlessly with Amazon's Alexa and the Sonos audio systems. These are just a few examples of how ABB Ability is supporting the competitiveness of our 4 entrepreneurial divisions and making it easy for our customers in every segment to participate in the opportunities of the digital revolution.

Please turn to Slide 13. An area in which ABB demonstrates clear market leadership is EV charging and especially EV fast-charging infrastructure, a high-growth segment with excellent long-term prospects. Customer demand is high for the integrated cloud-based charging solutions powered by ABB that we manage in an integrated way the flow of electricity, information and funds along the electricity value chain towards the fleet of electric vehicles.

On this slide, we have provided an illustrated example of one of our solutions, the EV fast-charging station that we introduced at the Hannover Fair this year. This pioneering technology reduces the time it takes to charge an electric vehicle down from 40 minutes to 12 minutes for a travel distance of more than 100 kilometers. The station is integrated into an EV charging network that's entirely monitoring control through the cloud to enable a user-friendly payment as well as proactive management of information on power, fleet and maintenance status. Moreover, it can be integrated with solar solutions and solar packages to provide clean energy for charging up for clean individual mobility.

Through solutions like this and our fast-charging stations along all urban bus routes, our TOSA system, electric vehicle charging was a highlight in the quarter. We have an installed base of more than 6,000 (sic) [5,000] fast-charging stations worldwide, which will be soon 6,000 with orders for EV charging infrastructure in the U.S., Europe and South America. As one recent example, in September, we signed a major order with an energy company in Germany for 117 fast-charging solutions along the German highway. This comes on top of previous order for 68 charging stations with the same company to supply our latest generation of fast-charging stations, which, through ABB Ability, are connected to the Internet via our cloud solution and provide a fantastic infrastructure along the German highways. As you can see, ABB remains the clear market leader in charging infrastructure for electric mobility, both in Europe and the Americas.

To conclude, let's move to Slide 14. ABB has continued to build growth momentum in the quarter, and our targeted initiatives are starting to deliver results. Total orders grew 5% compared with the third quarter of 2016. This order is higher in all regions. Base orders grew 6% year-on-year. Services and software orders were up 11% with ABB Ability driving this momentum. Revenues were up 3%, moving between our target corridor for 2015 to 2020 for this KPI. The operational EBITA margin was up 10 basis points to 12.9%. Net income was $571 million while cash flow from operating activities was $954 million. This was impacted by our revenue growth in the quarter. Net working capital as a percentage of revenues was 14.4%, stable on an annual basis, and we have the actions in place to drive further performance improvement required to deliver on the goals of our net working capital program by the end of 2017.

Looking ahead, the short-term picture is moderately encouraging. Macroeconomic signs are trending positively in Europe and the U.S. with growth expected to continue in China. The overall global market shows modest growth and is impacted by geopolitical tensions in various parts of the world. 2017 is a transition year, and we have clearly articulated so. But the long-term growth drivers remain in place for utilities, industry and transported infrastructure. We remain that the long-term outlook is positive. We will maintain our primary focus on profitable growth and execution. We will continue to do our homework and take the appropriate actions to successfully complete our transition year in 2017.

With this, let me thank you and hand back to Alanna.

Thank you, Uli. Thank you, Timo.

With that, let's open up the line for questions. (Operator Instructions) Maria?

(Operator Instructions) The first question comes from Mark Troman, Bank of America Merrill Lynch.

Two questions then, please. Firstly, base orders obviously look as though they're doing okay. And as you indicate earlier, the outlook looks recently encouraging. But large orders, we haven't seen many of those that's -- many of those yet. So maybe you could comment on what you see in the large order funnel and when we might expect those to convert. Or has the market just changed to a more kind of smaller order environment? That's question number one.

And secondly, pricing and raw materials, I guess, especially relevant for Electrification Products and Robotics and Motion, still some catch-up to do. I think it was $23 million dragging in the quarter, similar to Q2. If -- just hypothetically, if raw material levels were kept at this level, could you recover that quite easily in the next quarter? That's question number two on pricing raw materials.

Okay. Thank you, Mark. Look, when you take the base order pattern across the businesses, it really shows nicely that our many activities of driving growth, our PIE approach of more market intimacy and focusing our activities better in line with the market are paying off. When you take the base orders around the world, all 3 regions are up. So this is a pretty broad-based development, and it's very clear that our ambition is to keep that going. We also have to be -- had to admit that if you take, for example, Saudi Arabia, this is still a difficult country. Just coming back from it this morning, I am encouraged with what I had heard medium for next year and the years to come. But this year, it has hit us quite significantly. So it's a mixed picture. But overall, the tendency is going in the right direction and moving forward.

Now let me comment on large orders. Large orders, we have a threshold of $15 million. And if you take, for example, the Industrial Automation division, there the overall orders were $14 million and the base orders were $4 million, this illustrates that we are getting a significant amount of large orders but in a new way. The way we get these [book] orders, it's basically solution-driven approach, that the orders are not much bigger than the $15 million. They're just above the threshold, and it's complete solution packages. In Industrial Automation, the solution packages for mining, for example, to upgrade automation, to de-man the mine, to increase safety that we have tailored, in most of the cases, combined with Ability, are really taking off.

Similarly, when you look at the recent orderings in oil and gas, it's all about productivity and getting better yield or larger-scale service packages to work with our customers, and that's exactly what we want in the future even more so. In Power Grids, you see a massive lower large orders. This is not a surprise because we are changing the business model here. We are extremely selective on the quality of large orders. And we have also stopped, in certain segments, EPC activities, as we have previously announced. That's the reason why we are calling this year a transition year because we are really giving the Power Grids division a new normal. Overall, we see more discussions starting on potential tenders on larger orders. But at the moment, the inflow is not yet sufficient to really say there's a change in the trend in a significant way. With that, I hand over to Timo on the comments -- on your questions that you had on pricing.

Okay. Thanks, Mark. And yes, we had a negative impact from net commodity of $23 million. As you see, during this quarter, it was slightly down from Q2, and we are definitely pushing the pricing very hard, in particular, in EP, but also in RM. We have weekly follow-up on this, and we are seeing impact from our price increases on the market. Then the second part of your question was if this would stay at current levels, would it sort of normalize? And when we look at the situation during this quarter or during Q3, quarter-to-date Q3, we continue to have approximately 10% up in these key commodities, copper, aluminum, zinc, and in that sense, that will still work itself through our systems. We have some hedging in place, and we will continue to push pricing. But going into Q4, this could still be a slight headwind. But as I said, we are definitely taking action on the pricing side.

Next question comes from Ben Uglow, Morgan Stanley.

A couple. Ulrich, I think you're on CNBC and also saying it again just now that 2018 is a new normal versus the transition year of 2017. Can you be more specific? Is that -- are you really talking just about Power Grids? Are you talking about more normal in terms of investment restructuring? What is the nuance of what you're trying to communicate there? So that was question number one. Question number two, just on China, reasonable base order growth of 10%. Can you give us a sense? Can you calibrate what's happening on the Power side in China versus what's happening in your Automation and low-voltage businesses? How -- I'm assuming that Automation and low voltage is better. How much better is it than Power is my question.

Okay. Thanks for your question. Yes, let me run you through what we mean with this new normal. First, it means that all divisions are targeting the announced margin corridor. There's no exception anymore. Everybody is targeting the target margin corridor, including Power Grids. Secondly, you should not expect major additional restructuring in the business to improve. We will have the normal restructuring coming next year, but there will be -- and not as we have had this in the previous year, massive additional amounts that we had in there. Third, we have costs for transformation both below and above the line. These costs will behind us. And the activities -- then they continue some of them. They'll be run through the normal line organization.

Fourth, the 1,000-day programs that we have initiated to really ramp up the transformation of ABB are coming to an end, and the activities in that field will be basically then put into the line management organization. We are ceasing the separate project management organization, and we get that down. And last, not least, and I think very important, management attention will be also fully in the market on technology and development, on innovation. All the hard homework that they had to do to make this company more agile, lean and simple is -- will be behind us by the end of this year. We are not done yet fully. We still have some actions in front of us to get through. But as planned by the end of the year, we should be through. So that's basically why we call it a new normal to realize.

Now on China, the Automation is right. I think the base order development is quite good. As the total orders are down minus 1, the base orders are up 10. But if you take out the $300 million HVDC order last year in the third quarter, the signal is right, positive altogether. If I take the Power Grid situation in China, if I take out the HVDC large order, the base orders in Power Grids are up 7, and they are starting to pick up again, which is encouraging for me altogether. If I take Electrification, we have had a really good momentum, and basically, it's the highest momentum since 4 years in Electrification in China. We are positive for infrastructure in Electrification.

The nonresidential construction is an area that we have benefited from. On the residential construction, this will be impacted by the government intention to slow down the speculative investments in the residential asset. The good news is we have a lot of solutions for retrofit. So when the money doesn't go into speculation anymore, the money might go into retrofit, and that could be dampening then the impact of the slowdown. So altogether, I would say in Electrification and Power Grid, we are cautiously optimistic on China. But we are well aware that the large order business is a lumpy one that doesn't repeat itself every quarter again.

The next question comes from James Stettler from Barclays.

Can you talk a bit about what's going on within Robotics and Motion, just Robotics versus the Motion side and where you are there on the -- your adapting capacity? That's question number one. Question number two, Timo, you mentioned just to be aware of these costs in Power Grids or Power Up. I mean, how do you see if we look at the next 1 or 2 quarters? I mean, by 2018, you want to be within the range? As we continue to roll out these cost programs, can you maybe just talk about how we should be thinking about the timing?

Yes. Thank you, James. So Timo will take the second question. I take the Robotics and Motion. If you take Robotics and Motion, total orders are up 4%, base orders third-party is up 6% and internal orders are down quite significantly because Robotics and Motion, historically, has delivered a lot into the process industry. And as Peter's backlog in this area is coming through, it's clear that it has a negative impact on Sami's deliveries into that segment.

If I give you a little bit more flavor on the Robotics side and on Motion altogether, Robotics is a market which is growing very nicely. We are growing extremely well in the largest and fastest-growing market in China. We have a fully integrated footprint there. We have local R&D teams. We have the local distribution. So this is one which is developing very well. And our innovation pace, the pace in which we are bringing out new services, offering and solutions in Robotics is one that will be hard for many competitors to match. If you take the remote condition monitoring services that we offer, we combine them with the other divisions, so we got a certain economies of scale that really are an advantage for us.

If you look at the amount of applications and solutions that we bring out for general industry, tied around our classic and our YuMi product portfolio, is something that really helps us to have the drumbeat, not only on innovation but also on market penetration going. And naturally, we will continue to invest in this business, which is really a very strong part of our portfolio. On the Motion side, on the motors and drive side, the good news is that the team has found a formula, really, on the street industries, on the smaller product industries, smaller companies and the smaller motors and drives to get a good momentum. The large motors and drives are still characterized by a very, very tough market. Because until we get so much new capacity in mining, in oil and gas for larger drives and motors that it makes a mark in the growth momentum, that will take a little bit more.

So the average number in this division is basically characterized by 3 buckets: a very strongly growing Robotics business; a decently growing smaller drive, smaller motors portfolio; and a dampened momentum in the large drives and motors, which we expect to come back during 2018 going forward. So that's the momentum in this division. And on the Power and Power Up question, I hand over to Timo.

Yes. Thanks, James. So on the Power Up, there is no change. We said about $100 million for 2017 and about $100 million for 2018. And if we look at 2018, we expect about 60% of that to be above the line and 40% to be below. So that would give a kind of like 50% in a quarter, and then I would say probably be front-end loaded on (inaudible). So that's how we expect that to run through.

But we remain firmly committed to the margin corridor in 2018.

Yes, absolutely, so still in the 10% to 14% margin corridor 2018.

Next question comes from James Moore from Redburn.

I have a couple as well. Can I get back to China? Thanks for the color on base orders. I just wonder, if we look ahead to 2018 and the sort of base order environment we might see next year, do you think that will be growth? Where do you see the better aspects of that growth coming from? And secondly, can we just get back to your comment about 2018 and the new normal? Just trying to understand what you're trying to help us with there against the transition year of margins being down 10 bps year-to-date. Should we think about the new normal being that you'll be back into growing margins 40 to 60 bps and specifically next year?

Okay. So James, let me take this 2. On China, look, if you take the results that are coming out of the party congress, if you take GE's commitment to drive the transformation very long term, out to 2050 in China, if you take the many initiatives around One Belt One Road, if you take the upgrade of cities towards cleaner technology, if you take the Industrial Automation and Robotics push, if you take the push in AI, that we are really leading in using AI and robotics, I remain long on China and I remain cautiously optimistic that this country will continue to grow, and ABB's capabilities and skills are ideally positioned to support the country in its path going forward.

Take the -- if you go through the 4 divisions, China will have massive additional capacity of power generation in the renewable sector that needs to be connected in the grid. This will be good for Power Grids because there is a significant requirement to strengthen the grid on that one. And at the same time, the local distribution grid will need to mirror the demands on EV charging. If I take the newest EV charging station, now 350 kV, that's like switching on 350 hairdryers at the same time, if you don't reinforce the grid in a good way on a local level, you're going to have a problem. And this is basically mixed in between Tarak's business in Electrification and the Power Grids business.

If I move over to Tarak's business, the nonresidential construction will continue to grow. Building becomes more intelligent. There's more consciousness around energy efficiency, and he has great solutions there. So I'm optimistic that this will continue. In my view, Electrification Products go, for example, also into OEM machinery. And the combination between our historic region end market and B&R will help us there to drive this going forward even stronger. In Industrial Automation, the process industries -- I wouldn't expect much growth in the years -- in the year to come, in 2018. There's still overcapacity. I don't think we're going to see much investments, but we will see a lot of investments on the safety side. We will see investments on de-manning and upgrading existing activities that are running so there's an opportunity.

And then the main opportunity is really around the B&R offering, that we will scale B&R in a good momentum in this large economy. Because the customers in China, they really want solution buying. They want to buy functionality, and our solutions-based approach is ideally positioned to help there. I already made some comments on Robotics and Motion. I'm optimistic that we will find also in 2018 good growth. Altogether, I think our localization initiatives that we started many years ago, the fact that we have 12% of our staff in China in R&D, which is higher than most competitors, makes me optimistic that we will not only have a good market, we have also good interface with the market. We have a great solution set, which is really tailored for this very large economy.

Now on the 2018 new normal question, I think I already said a lot. But it means that all of our targets are intact, and then you can translate yourself what it means in terms of margin accretion. But the ambition is very clear. Next year needs to be a year of growth and margin accretion, that all the many things that we have done yield more results than in the transition year of 2017.

Next question comes from Andreas Willi, JPMorgan.

Two questions, please. The first one, a clarification on what Timo said earlier. You mentioned, I think as I understood it, that you expect normal margin seasonality in Q4 versus Q3 for the operations. Historically, you had about a 90 bps decline sequentially. This will give you about 12.0% for Q4 versus consensus of 12.5% currently. Is that a specific message you're giving? Or is that a bit more of kind of a broader context you're giving, that comment about seasonality?

And the second question on GE industrial supply. You went through the strong faith on potential there, but maybe you could give us a bit more information whether you have any safeguards in place or provisions in terms of the contract with GE, given that the business seems to struggle incrementally this year with some operational issues and GE is clearly in a very difficult spot and that business may not be the highest priority from now until closure. So kind of what protection do you have in terms of what you take over at some point next year?

Yes. Andreas, thank you very much for your 2 questions. Yes, look, on the -- what Timo flagged with the seasonality, now that we had a reasonable third quarter, we don't want the people get carried away, that they still remember the seasonality of ABB, and that's basically what we are flagging with that.

On the GE Industrial Solutions business, look, I think it's fair of you to raise that this is a business that has its challenges. Let me share with you a couple of things, however, that will -- are quite encouraging. Talking to the customers of this business, they basically said, "Oh, this is great. This will be good. We will support this business in ABB's hands, and we look forward to working with them." Now it's clear we don't own this business yet. The acquisition will only come in. The transition period between signing and closing in one -- is one that requires a lot of attention that we get it right.

The second message, and it was also an encouragement, is the reaction of the employees of this business was very positive. If you go on the respective blogs, then you see what people are saying. When you meet the management, and we met them, they basically said, "Finally, we know the destiny of this business, and finally, where we -- we know where we belong." And they are quite happy to be part of that. So that's 2 stakeholder groups that are important. Then as you have seen in the value-creation case, we got 4 buckets in there. The one bucket is the business in itself. And yes, it has its challenges, and we are not blind on this one. We have done enough diligence that we know the momentum, and we see that. We also see the challenges that it has in certain areas, and we need to manage that.

Secondly, if you look at the opportunity, medium term and long term, the installed base is still very strong. And I think the [unlocked] business also typically neglects the service opportunity that you have. We have -- we are preparing a really nice set of actions to make sure that we can tap the installed base a little bit more. If you look in our own example, we are growing service and software 11%. And with that capability and with that set of solutions, I'm sure we can at least dampen any negative development that might be there in terms of the top line momentum. The third piece is the cost synergies, and the cost synergies will be delivered in line with the expectations. Tarak and his team have a very detailed plan on that.

And the fourth one, and that's really -- we have done this deal with belts and suspenders. The fourth one is the supply agreement. The supply agreement gives us a value-creation dynamic independent of how the GE Industrial Solutions business is happening, and I think it's very important to the overall value creation that we get. We bought this business basically at our own multiple. We bought it at less than 1x revenue because we see the challenges, and we have a clear path of value creation in front of us. So whilst recognize the challenges, I'm still confident on the value-creation logic altogether.

Next question is from Jeffrey Sprague, Vertical Research.

Two questions from me. The first one would be on cash flow. Understand what you said about the net working capital pressures here year-to-date, but really, just looking out a little bit further as you've kind of restructured and repositioned the portfolio, thinking of the comments about large orders that were made earlier. It would seem that the net working capital to sales is still high relative to what would be kind of best-in-class. And I just wonder, looking out a year or 2 or 3, what kind of working capital opportunity do you really see. And then the second question would just be on B&R, specifically, but maybe just kind of all your discrete undertakings generally, how those actually performed in the quarter.

Yes, Jeffrey. Let me start with B&R and then I hand over to Timo on the net working capital side. We are very happy with the development of B&R. The integration is progressing really fully in line with plans, and the business performance is very encouraging. So we are very happy with the way it's going. When I look at the synergy teams, how they are working, whether it's in the top line or on the cost side, we are enforcing, we are driving it. We have the first joint solutions between Robotics and B&R in the market. We showcased one of them at the Innovation and Technology Day. They're basically a B&R industrial PC together that's out of component. And ABB Robots is powering up a logistics handing cell, which is one of the fastest-growing markets in terms of automation.

So altogether, we are happy the management is fully onboard. We have not lost a single senior manager. We haven't lost any significant customers. So this is really, at the moment, exactly what we wanted it to be. We wanted it to be a continued growth story. And the momentum going into the first couple of months of ABB ownership is very positive, and we are happy with the deal. Look, our net working capital, before I hand over to Timo, just one remark. If you look at the 14.4% this quarter, B&R has a higher net working capital level than that historically. So naturally, that dampens that. And the high-voltage cable business was one with very low net working capital. It worked with advances. So to these 2 effects basically led to a stabilization of the net working capital. Otherwise, like-for-like, it would have been further down in -- compared to the previous years. With that, I hand over to Timo for a little bit more color from the CFO perspective.

Yes. Thanks, Jeffrey. So basically, if we look at the net working capital or capital performance, first during Q3 and then let's talk a little bit about longer term. So we had Q3 cash earnings from business, approximately flat at around $900 million. So that was really not the driver. The driver was net working capital. And we actually, inside this number, have made good progress in payables, where we have actually increased the days outstanding. We have also reduced our overdues, which is very important. When I look at the dynamics, our overdues are coming down even if current receivables went up. And as I said, we also had slight increase in inventory.

And then when we look at full year 2017 and when we look at how the cash performance of ABB has been in previous years, so we have had quite a bit of volatility in Q4. Last year, we had about $1.4 billion. Year before that, we had about $2 billion. So we are, of course, targeting these kind of numbers to make the target for this year. But I would say, as important or more important longer term, is that we have further possibilities both in order to cash process and particularly in inventory, when we look at integrated demand-supply management. So even if the net working capital program for the 3 years kind of ends now, this program, it does not at all mean that we would stop driving this. We have further opportunity, particularly in the area of inventory.

Next question comes from Andre Kukhnin, Crédit Suisse.

So my first question, just a follow-up on pricing, please. You commented on the EP side, but could you comment on the Robotics and Motion side as well, whether you're able to increase prices there to counter raw materials and, particularly, in China. And second question is much broader. And then on energy storage and utility scale battery storage, you seem to feature highly with the opposition in this space, and we've seen a couple of interesting announcements globally on large battery storage orders being placed. Could you talk about this business, how relevant it is for you and how you actually go to market in this?

Now let me take the decentralized energy and storage question first because that's what we are talking about here. ABB has a very, very clear strategy in this context. We enable our customers to tap the opportunities of energy storage, but we will not own battery technology at scale inside ABB on our balance sheet. And I think it's nicely demonstrated in many projects that we are doing. If you take a project that's going on in Australia, where we are building a very large storage capacity, a micro-grid. If you take the micro-grids that we are setting in India, if you look at the way we are using storage, this is all battery storage, they're using storage to dampen peak and shave off peak loads to optimize the load pattern. I think this is something that our teams are working with customers, both on the control side of storage solutions and the integration of storage technology into local situations.

The largest storage project that we have going on at the moment is a quite intriguing one. We are building -- it's an $800 million project that we connect North Sea wind in Germany with hydro in Norway, and there's a cable system between Norway and Germany. We basically have -- when the wind blows, we are pumping up water in Norway. If the wind doesn't blow, the water comes down, and we are basically balancing so the load. So we got a very, very wide range of activities in this field, from domestic home-based storage solutions, where you can put into your house, together with a solar solution stackable 2 kilowatt hour solutions, where the batteries, for example, come from Panasonic. We have a partnership with BYD, with Samsung for the different segments that we are going.

Now recently, in this quarter, we announced a partnership with Northvolt, and that's a different situation. Northvolt will build the -- one of the largest battery factories in Europe for -- mainly for the electric vehicle use. It will be the only value chain at the moment that's fully powered by renewable energy, where we basically use very pricey, attractive Swedish hydropower to power up this very energy-intensive manufacturing process. The site is located very close to key mining activities. So basically from the raw materials side up to the finished battery, Northvolt will have an integrated value chain.

ABB helps this company to get going, and later on, we'll be the electrification and automation partner for this leading-edge facility. Because with our integrated offering, ranging from process automation in mining into this grid automation in the battery facility, altogether, integrated with ABB Ability, we are ideally positioned with an end-to-end solution.

Second, we will have specific battery solution. And basically, after the form factor, that means when you give the cells a certain shape of a battery, then we will work together with Northvolt and develop tailored solutions for ABB customer segment users. That's, for example, in rail, in utilities and in other areas. And fourthly, we will work with Northvolt right from the beginning through our technology venture arm. We are giving a seed investment into the early phase of Northvolt to make sure that this activity goes into a good start. But we will not become a major shareholder going forward. We are the partner for Electrification and Automation, and we work with them on smart use.

So we have basically a low-asset, high-impact strategy on the energy storage solutions side, tapping our capabilities, market access without using our balance sheet to drive big battery build-up capacity. That's similar to our solar strategy, where we're also not getting into solar panels. With that, I hand over to Timo on your second question on the pricing dynamics.

Yes, thanks for the question. So pricing is fairly similar but still somewhat different in RM. So EP is more distributor market, and there, you can follow it in a little bit different way. Of course, we are driving the price increases in RM as well. But in RM, we have also done quite a few bigger acquisitions and that we are looking at both pricing, but also improving efficiency of operations. That's what we have said earlier, and that's what we will continue to do going forward as well.

Next question comes from Gael de-Bray, Deutsche Bank.

My first question is -- well, actually, I just wanted to double check a couple of numbers, please. Looking at the cash flow statement, it seems that you eventually paid about $2 billion, $2.1 billion for B&R, which seems to be a bit higher than the original price that had been suggested a few months ago. And also, the contribution from B&R to the top line looks much better than what I would have expected as well, suggesting that perhaps the business grew double digit this quarter, maybe 15%. So basically, I just wanted to double check these 2 numbers. And then the second question is on the inventory build-up that you highlighted. In which divisions did this happen? And perhaps also in relation to that, I was curious to see if there was any impact on margins in Q3 on this inventory build-up.

Gael, that's more than 2 questions. I think you get the first one and a little bit, but let's see.

Okay. So let me take the question here. First, on the purchase price of B&R. We have agreed with the sellers that we will not disclose the purchase price, and that's all we got to say on that one. Any speculation around that one is -- I leave that up to you. ABB has never commented on the purchase price. Only that we said it's in line with peer multiples. If you take the raw from multiples, that was the only guidance that we gave on that one. Now on the development, we said very clearly, we are buying a business that had a CAGR of double-digit growth over many years, and we expect it to continue. And yes, absolutely, we are very happy with the top line momentum on B&R. As I said before, the integration and business performance is fully in line with our ambition. And one thing is very clear, ABB adds a lot to B&R. It's much easier to build up a new country office because we got the G&A platform already going. I think we can give a lot of access to additional customer opportunities. We converge jointly on good solutions. And I would say, the momentum is only ramping up. There will be more to come in the future. So that's on B&R. Now a quick one on inventory?

Yes. As you know, we don't really split this inventory by division on our external reporting. So just giving little bit of a color here. So first of all, inventory was not as big of a driver at all as was the current receivables. So we're talking some tens of millions of delta when we look at the number compared to Q3 last year. B&R coming in, because of their operating model, has bit of an impact in inventory. And also then because RM has been growing very strongly for many quarters, there is little bit there as well. So I guess we can go with that color.

Next question comes from Jonathan Mounsey, Exane BNP Paribas.

I wonder if we could think about Ability. As I remember, your recent Innovation Day, you were talking about a number of lighthouse projects related to Ability. Just wondering if you could comment maybe on the pipeline as new solutions arising from those projects, maybe particularly next year. And are there any particularly important areas across the group where you needed to develop solutions before you could really pursue the Ability strategy in those segments? So how many additional solutions are there, maybe the scale of revenue opportunity? And then finally, linked to all that, are there any launch costs next year to bring these additional solutions to market?

Yes, thank you very much for your question. As you rightly say, Ability is ramping up. And I have to tell you that the customer reaction has honestly surprised us positively. We expected a good reaction, but we didn't expect that good a reaction. So it's really going in the right direction. So what are we doing to grow this activity? First, we drive a lot of penetration. That means we need to make sure that solutions that we already have from there are being used in customer segments and with customers that it has not been used. And secondly, between customers that already have Ability offering customer, very few of them buy the full range yet. So there's also penetration or share of wallet penetration, and there's a share of market penetration. And we're driving them both forcefully. Now please forgive me, but for competitive reasons, we are not disclosing any focus areas in detail on how we are going forward and what the launch pattern will be. But all I can tell you, we have a very exciting continuation of the launch pattern in the next 24 months in front of us. The lighthouse projects are continuing to develop in line with plan, if you take the utility, industry and transport and infrastructure segments their Ability is being deployed. We will continue to invest in Ability team this year. We have invested a significant amount of money in the launch and getting going despite that and all the other costs that we have for transformation. The margin is still slightly up. So when we get scale into that one, Ability will become a self-feeding mechanism that, basically, out of the proceeds of Ability, we will be able to reinvest certain proceeds. I would not expect an additional negative dampening effect coming-out of that.

Last question comes from Alok Katre, Societe Generale.

Two, if I may, please. First, just on the margin development. I know there's been some discussion around raw material pricing, et cetera. But I mean, I just wanted to understand, beyond that, what's holding back, really, the raw material price development, given how decent the organic growth has been, let's say, to EP and RM as well? And we see that in industrial automation as well, where we had a reversal in terms of like-for-like growth, but we didn't see the usual sort of margin drop-through. So outside of raw mat, what's really holding back the leverage? That's question number one. And I'll follow up with the other one.

Okay. So on the margin situation, I start it then hand over to Timo a little bit more. Yes, look, the good news is, if you take Industrial Automation, you see a certain drop-through. And delivering a further improvement on the bottom line in Industrial Automation makes me quite happy. Because remember, a lot of this is new activities, it's Ability-driven, it's launch of new activities whilst the historic profit pool, the key profitable areas, like oil and gas and mining, are still not yet as strong as we want it to be. In Power Grids, despite a lower top line, there is further margin improvements. So you can -- and we have the Power Up transformation costs. So you can probably imagine what the potential of that division is. We will be heading firmly into the 10% to 14% corridor going forward and drive that. In EP and in Robotics and Motion, we had a glitch in the second quarter. We did our homework. We fixed that. Both divisions, we have sequentially improved. But one thing is very clear, given the size of both businesses, you cannot improve everything in one quarter. There's more to come, and we will keep to really going in that direction. Altogether, we are aiming firmly to improve next year's margin within the stated margin corridor. Timo, any additional flavor?

Yes, I don't think I have much to add. Maybe just to highlight still that we have been investing in growth this year. As we have said, this is a transition year. So naturally investment in digital R&D and also solution sales platform is driving this. And also, as we said at the Q2, we have done more restructuring, but it takes time before that restructuring runs into the operational numbers. So during the first 2 quarters, we did about $60 million. And now during Q3, we did $80 million. And as I said, we -- for the full year, we expect to be closer to the higher end of the $250 million range. But it will take time, of course, before this runs through to the operating results.

Alok, last question?

Yes. The last question really, again, just on the base order trends. Now I know that, obviously, Q3 comparables were a bit easier at the group. But also, again, just at the RM and Industrial Automation as well, but the -- let's say, the increment in terms of the growth that we saw in 3Q wasn't, let's say, at -- let's say, as good as the easing of the comps. So are there any different moving parts that are pulling these divisions in completely different directions? And then how should we sort of think about this going forward, and particularly, 4Q or 2018?

Yes. First of all, if you differentiate a little bit, I wouldn't describe RM as an easy comp. If you look at the dynamic that we had last year there, we need to be fair. This was a division that had a quite steep comparison, and they're still delivering that. I think on the base orders side, everything you said -- that we wanted to lay out before. The market is better than it was 12 months ago. ABB is in better shape, and we are bringing out a lot of innovation into the market, Ability being one of them, but all the activities. Our salespeople are lined up in a better way. They have better supporting tools to drive the growth. So I would expect, going forward, that we -- our ambition to enhance the growth momentum materializes. It's very clear, we cannot predict exactly when the uncertainties in the market, whether anything will prevail. But everything, on a comparable basis, we are firmly committed to make '18 a year that we again deliver solid growth. And actually, that solid growth will drop better to the bottom line because the many dampening effects that we had in 2017, quite a lot of them will go away and will go forward. Or in the growth area, we will have a certain scale achieved, that there's a satisfied engine coming out of growth that we don't need, so to add so much additional growth momentum that we basically take out and to drop down a certain amount of money and put it in there to keep the growth going.

Thank you very much. And I would like to thank everyone today for joining us on our Q3 results. Please remember, we have our fourth quarter and full year results on February 8, 2018, and we look forward to hearing from you then. Thanks, again.

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