Abb Ltd (ABB) 2012 Q4 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q4 and full-year results 2012 conference call. I'm Selena, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. (Operator Instructions).

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

Good morning, and good afternoon. It's Joe Hogan here with Erik, as mentioned. Starting with page 2, our safe harbor statement, and page 3, which is just a quick summary, so we'll quickly go to chart 4.

As our headline says, we're raising our dividend; we had really solid growth in cash. We think improved geographic scoped in some successful M&A, this year, and carryover from the previous year, has really helped us. So if you take a look, we feel we've delivered reasonable results through this cycle.

We took significant actions in 2012 to adjust our geographic and portfolio balance. Especially when you think of Thomas & Betts, and especially in the context of North America, too, we're now in the range of $9 billion to $10 billion in that geography, which is the largest region that we have within the business.

On an organic basis, we delivered a decent top line in profitability in what we feel is a tough market. Furthermore, we addressed some critical issues in our Power Systems business, with a one-off charge of $350 million. We hate, as I mentioned before, the idea of this kind of a write-off, but we feel that the business is well positioned, going forward, in the sense of delivering higher returns and also, returns without the risk that we've experienced before.

We also executed on our strategy to develop disruptive technologies. When you look at our direct current hybrid high-voltage DC breaker, which is really one of the biggest breakthroughs ABB's had in a number of years. And then thanks to our solid cash generation, we propose to increase our dividend to shareholders. So on a balance, a good performance operationally, and we've made further progress in executing our strategy.

If you move to chart 5, I think most people that follow ABB know our five strategic planks of our platform is the competitiveness piece, the megatrend side, expand core, disciplined M&A, and exploit disruptive opportunities overall. Again, on the drive competitiveness piece, we've demonstrated our ability to execute on cost, and we have delivered consistent results in the market. We saved more than $1 billion in 2012, and we'll continue to push this extremely hard. We feel this is in the DNA of ABB now, and we want to make sure that we continue with that.

We continue to position ourselves to capture opportunities arising from the emerging economies, including China, India, Brazil, and Saudi Arabia. We have the strongest and deepest emerging markets presence among our peers, with a whole value chain embedded in these local markets. We feel that gives us a significant advantage of being closer to the markets and being able to move at the speed of these local markets.

We're also investing in countries like United States, Sweden, Switzerland. We've taken steps to build our core business through our region-for-region strategy. And I've talked before about, we're pushing hard on our DC technology, not just with circuit breakers, but also with DC technology in areas like ships and also data centers.

So moving to chart 6, and that's the full year 2012. I think most people on the phone have probably gone over these statistics already, but for the year, a little north of $40 billion of orders, which is up 4% in total, and about flat organically. Order backlogs increased 5% in local currencies.

Revenue up 3% on organic standpoint, up 7% in total to about $3.34 billion (sic - see page 6 "$39.336 billion")). Our operational EBITDA down last year, minus 8% overall. And obviously, that was disadvantaged from the charge that we took in the fourth quarter of $250 million on the EBIT side.

There's also negative mix that impacts that margin piece also, in some of our shorter cycle businesses that reflects like in low voltage products and also drives (inaudible). As we already mentioned about the dividend, and Erik will come back on that later on in this presentation to talk about it.

Overall, we've turned in a really strong cash performance in Q4. It brings us free cash to net income conversion about 94%. That benefited, of course, from the negative impact on net income from the PS reset, but even adjusting for that, the cash conversion rate was 85% or above, which again, in this environment, we think is a good result.

The cash return overall was 12%; mainly reflects the T&B acquisition. We said before, achieving our target above 20% for our 2015 plan is going to be very much dependent upon the timing of those acquisitions, and if we do those; the size of the acquisitions, too.

On chart 7, just a few highlights. Americas are very strong both organically and, of course, with the T&B as a contribution. Another good year in Power, with good refurbishment ongoing in the United States and Canada, and more investments coming for renewables. Automation was up about 10%, excluding Thomas & Betts, reflecting more robust growth in US as well as some specific investments we made in oil and gas.

In China, the political transition in China slowed down some decision-making around infrastructure investments, we believe, but we saw lower power orders. Automation demand fared a little better, especially with low voltage products and also process automation.

India, we had a weak year in India, partly on a difficult comparison with a $900 million North East Agra order that we booked in the fourth quarter of last year.

Brazil's up double digits in all divisions. Power orders related to wind and rail, oil and gas, and drilling ships were all very strong.

UK, biggest increase in low-voltage products, double-digit growth in all divisions except PS and so -- the UK, the strength in the UK this year really surprised us in the sense that we looked at it year on year, and our team has been executing well there. And, given the state of that economy, we're really pleased with our performance there.

Canada, we have a very large T&B exposure there now, but double-digit growth across most businesses, including a big rectifier order for $55 million on FACTS order that we received.

Italy, it's no surprise that it's lower in all divisions, except for Process Automation. I think it reflects more the weak macroeconomic environment there that we all know.

And Norway down a little bit; it reflects a big offshore oil order that we had last year, but Norway continues strong for us, overall.

So let's take a look at chart 8, and that's the full-year divisional performance. So starting with PP, PP grew its top line despite the market headwinds, thanks to its broad product and geographic scope. I think, as we talk about this at times, people don't appreciate in a sense the product and the geographic scope in this business that gives us a huge amount of breadth in the sense of where to look for business and try to find it at the right margins and to push it hard.

We also see more of the market in available profit pullout there, too. Our margins continued to suffer from pricing in the order backlog as well, and some negative product and regional mix. But we could offset this, and most of that, with great execution on cost as we have been doing. And we've now delivered a steady operational EBITDA margin for five quarters in a row; Bernhard and the team have really done a great job on this.

So I know there's a lot of questions out there on Power Products and pricing and whatever, but I think what we want to reiterate to you this is a business we feel confident we'll hold between 14.5% and 15%, and we look at that range going into 2013, too.

We'll talk more about Power Systems in a few moments, but it's worth noting that, if you exclude the impact of the reset, the division came very close to hitting its original margin corridor in 2012.

DAM, that's Discrete Automation and Motion, and in LP regenerated growth despite the early cycle weaknesses of our investments in selling and R&D, and they're really helping to pay off in those businesses. And PA delivered a solid result, really on the back of oil and gas and mining.

Now I hand over to Erik, and he'll walk you through the fourth quarter results.

Thank you, Joe. Let's look into the detail of the fourth quarter. I'm on chart number 10. We delivered a solid top line performance in a relatively weak economic environment in the fourth quarter. Orders were up 4%, including Thomas & Betts, and were flat excluding Thomas & Betts, whereas the large orders were declining, mainly due to the Indian order that Joe mentioned already.

We had some quite strong performances again in robotics, as well as oil and gas, and in mining. Service continues to grow faster than the average for the Group, which means we increased the Service share as we have said we would. It was 5% growth in orders for Service in the fourth quarter on organic basis.

Thomas & Betts continued to perform very well. We had $600 million of revenues in the quarter, and in excess of $100 million of operational EBITDA.

On the margin side, Joe already mentioned it, we executed well against our targets, mainly due, or partly due, to good performance again on the cost saving side where we had in excess of $300 million in the quarter.

And last, but not least, on the cash side we had a great quarter with $2.4 billion of operational cash flow from operations, which brought the yearly total very close to a year earlier.

Turning to the detailed numbers for the quarter, we achieved a $10.5 billion order number for the quarter, up 4%, organic flat. The base orders were up 8%, including Thomas & Betts and again flat organically reflecting the early cycle business slowing in some parts of the world.

On the revenue side, we have $600 million T&B included, and the backlog is still growing to support growth in the coming quarters; it's up by 4%, as you see.

The operational EBITDA margin, as well as net income, were down as you see on this chart, but if you exclude the PS reset charge they were up or flat. We achieved a 14.8% margin, excluding the PS reset, on operational EBITDA level.

You can also see that the foreign exchange impact on the numbers is very limited in this quarter. The numbers are very close to each other when you look in the dollar change as well as in local currency.

Looking at the geographical spread again now for the quarter. What Joe had before was for the full year; this is the quarter. Americas continued to perform very well, plus 22%, excluding Thomas & Betts. And that is then because of very good performance in Canada, and in Brazil, but also in the US we were 8% up, excluding Thomas & Betts. We had some good orders there from the cable side, but it is still a good performance in most areas in the American market.

Europe, plus 3% in the quarter, with a big mix between the countries. We still think it's a good level in the difficult climate we have, in Europe. And you can see some countries are sharply up like Finland where we booked a cable order which we announced a short while ago. And also Russia, that's a highlight where all the divisions were growing at a good rate, and we achieved a 38% increase.

There are a lot of questions on what happens in Southern Europe, and as you can see, we were up 3% in Southern Europe in the quarter. So still a stable situation also there.

Asia is sharply down, again due to the large project from India in the fourth quarter of 2011. So the positive sign is that China showed a growth of 10% which is a good sign from China. Our sustainability, when the real upswing comes, we don't speculate right now, but it is a good performance in the quarter itself.

Turning to the next slide, chart number 13, we have the divisional overview for Power. Joe already mentioned the stability of the margins we have in Power Products. We achieved about 15%, and we stay with our near-term guidance for the coming quarters for 14.5% to 15%.

The Service sector also performed well, and both Power divisions continue to grow faster than their divisional averages, which also helps the margin. On the reset for Power Systems, we have completed the first actions, and I will come back to that on the next chart, number 14.

You have seen our announcement, and we had a separate call on that back in December, when we announced the charge we were taking, and the reorientation of the PS business, to focus on reducing low value added contracting activities in a number of countries, and to drive higher returns through higher ABB content and more selectivity in the bidding.

We booked now a $250 million charge, which was exactly the number we announced before Christmas, and that charge includes also a few cost overruns on projects we have talked about in the previous quarter, including the offshore wind projects.

It also includes additional cost we have taken to complete projects in some countries where we had a high EPC content, and where we are now reducing the capacity as we will focus on projects with higher content from ABB and lower construction-type content.

We have also completed quite a few steps of the program, including changes to the tendering process in contract management and claims to make sure we have an organization in place to drive the division in the right direction towards the high returns.

The new targets, as we already announced, for the EBITDA margin corridor is now 9% to 12%, up from 7% to 11%, and we repeat that we are aiming to reach the lower end of this new range by the fourth quarter 2013 on the run rate basis. On the gross side, we reduced the targets to 7% to 11% on a CAGR basis from the 10% to 14%, reflecting the higher sell activity we have on projects.

Turning to Automation; we had positive top line in both DM and LP, despite difficult markets. The margin is slightly up in the quarter in DM from good cost control, despite some negative mix changes between drives and robotics. LP is continuing to improve the margin from the lower numbers we had in the early part of the year, and at Thomas & Betts the integrational synergies are on target. We are seeing some initial effects of those synergies on the P&L side. And also here Services are continue to grow.

On the challenging side, we are looking to tap the market and portfolio's growth to secure profitable growth and get return of the investments we have put into Baldor and Thomas & Betts, and to drive home the synergies in Thomas & Betts, and also optimize further on the Automation side the product and system mix. We have done a lot of that already, but we will continue to drive it to improve returns and margins.

On Thomas & Betts, we had a strong start on the standalone performance, and integration is on track. I already mentioned the $600 million revenues, the $100 million of operational EBITDA. Also very strong cash flow from operations in the quarter and, on standalone basis, Thomas & Betts achieved a percentage point higher margin in the fourth quarter of 2012, compared to a pro forma number from 2011.

So integration is on track, and it is already EPS accretive, excluding the one-time cost that we had for the acquisition. The special items for amortization are unchanged from our earlier guidance.

Turning to slide number 17 and the operational EBITDA bridge. You see on the left, the 14.8% margin that we reported in the fourth quarter of 2011. You can see that we have still product price pressure mainly in the Power business, but the rate is reducing. We are now on 2.6% of revenues, so we decelerate the rate.

We had some negative impacts from project margins where we had positive effect in the fourth quarter 2011. We have reduced the rate of increase for sales and R&D significantly, compared to earlier quarters, and it's now down to $28 million.

On the volume side, we had a $48 million positive effect and that is also less than earlier quarters, due to lower revenue increase. As you saw before, on organic basis, revenues are essentially flat. And then we have the important cost saving, which is in excess of $300 million, which then compensates well for the pricing deterioration and the other items.

So on a comparable basis, we are on 14.7% operational EBITDA in the quarter, which is an improvement compared to the earlier quarters where we have had about 1 percentage point of deterioration from the quarters of '11 comparing to the quarters of '12. So we believe this also is a stabilization on the overall Group.

On the right side, you have then the contribution from Thomas & Betts, as well as the PS reset of $254 million, bringing the operation reported EBITDA margins to 12.5%.

Turning to the cash chart, number 18; we had a great cash flow in the quarter, as I said before. We were up by $300 million, on a comparable basis, from the divisions. This was mainly coming out of a strong performance on the inventory reductions, which always happens at the end of the year, but it was even better than earlier years. We have also reduced overheads, and we achieved higher customer advances at the end of the year.

The corporate cash flow, which has been negative in earlier quarters from accounting treatment of some of the balance sheet hedges we have, turned around because of the change of the exchange rates in the other direction. So that is now slightly positive in the fourth quarter, but still negative for the full year.

Net working capital ended at 13.8% of revenues, which is essentially the same level as at the end of 2011. Our efforts will continue to work on this to aim to get more balanced cash flow over the year. We will always have a heavy cash flow in the fourth quarter, but we are working hard on actions to try to have it more balanced over the year.

Next slide is on the debt situation, chart number 19. We ended the year with $1.6 billion of net debt, an improvement from $3.6 billion net debt at the end of the third quarter from the strong cash flow. We have a strong balance sheet, which will support all our planned organic growth actions as well as further M&A.

The cash is $8.5 billion which is higher than you have seen in earlier years ends, and partly this is due to our actions last year to take advantage of the low interest rate environment and secure long-term funding at attractive rates. So we will have now, in the first half year of 2013, quite some need to repay bond loans and also, obviously, pay the dividend and, potentially, reduce on some commercial paper funding that we have.

The net debt to EBITDA stands at 0.3 times, which is a comfortable rating to maintain our debt rating of A, which is a key pillar in our finance strategy. You can also see here that we have pension underfunding at $1.8 billion at the end of the year, which is up from earlier numbers. But that is mainly due to accounting effects from very low discount rates at the end of last year.

The rates are already moving in the other direction, so today this is less than $1.8 billion, but we are still looking at this very carefully to make sure we manage our pension funds to the best possible returns to keep this underfunding as low as possible.

On chart number 20, you have the dividend history. We have succeeded to increase the dividend year by year, except for 2008, according to our policy of steadily raising sustainable annual dividend, over time. The proposal from the Board is now to raise the dividend to CHF0.68 per share. It's a 5% increase over 2011, equivalent to a 63% payout ratio, and a 3% dividend yield based on the share price at the end of December, which is a good yield in comparison to our peers, and also in the Swiss environment. So we believe that this is the correct level of dividend in today's environment.

So with that, I hand back to Joe.

So moving to chart 22. Thanks, Erik. If you take a look at where we stand versus our 2015 targets overall, from a growth perspective we're on target so far. As you recall, our growth target is based on an assumption that global GDP bottoms out in 2012 and 2013 before heading back up to the 4% range in 2014, 2015. So we're still counting on that; we'll see that. That kind of economic growth would certainly be a tailwind for us and, obviously, other people in the segment, to make this work. We'll have to see how it develops in the meantime.

On the margin side, we're on track there, as you can see. EPS growth is behind at the moment, but we think we can come back as the global economy recovers in the next couple of years. Cash conversion is in the green zone, which is really good. As I mentioned before, the cash return on invested capital metric will be determined mainly by the timing of acquisitions. So we're clearly on track. There's nothing red here; more greens than yellows. We'll give you periodic updates as we go through 2013 and how we feel about that.

So moving to chart 23, this is just to give you an idea of what we see, by region, from an aggregate macroeconomic standpoint. Next year, we think we're going to see a slight upturn United States, both in Power and Automation, and that falls in line with some strength we saw in that geography this year.

In Europe, it's a mixed bag. In the northern part of Europe we think we'll continue to see growth. The southern economies will continue to be a challenge. But we're looking for more stability in Europe and we'll see that, but overall, we're calling the European side relatively flat. We had a strong year in the Middle East and Africa, and so we're calling this flat also but, in general, we'll continue to see investment, we think, in Power and Automation in those economies, too.

And on the right in Asia, leaning a little bit into China that, from a standpoint of what we read and, hopefully, what we see here shortly, we think that China could be a little bit stronger in 2012 (sic) than it was in 2013 (sic). We're counting on that and so, from an Asia standpoint, we think we'll see some positive growth next year.

Turning to chart 24, just examples of growth in actions in 2013. From an emerging market standpoint, we want to build on our footprint area. You know that we've made significant investments with in the Middle East, China and Brazil, and we'll continue to move west in China, particularly with our Low Voltage Products business that we tend to lead with in that sense, and then to follow with our other businesses.

From a developed market standpoint, we want to capture large potentials in North America. We still have significant what we call revenue synergies that we have in, what we say, the Baldor acquisition and also, the Thomas & Betts acquisition, that we'll push hard to drive. We're going to be very selective overall in the Power standpoint, from a cost and growth standpoint, reflecting Erik's comments, particularly on the Power Systems business.

On Automation, again, the synergies in Baldor and T&B. And then Software Solutions for resource efficiency, that's Ventyx and Mincom, we think we'll see some decent growth in those areas, too. On the megatrends side, when we talk about megatrends, there's really three really critical key megatrends, and that has to do with renewable energy and energy efficiency and productivity. Those are the big deals, and we see that across almost every economy in the world.

And lastly, in technology, this is a technology-based business. We'll continue to invest in technology. We've made some significant investments over the last couple of years. We'll look to really push hard on those and really grow our technology investments. It's really [an inflation] this year, as we move into 2013.

Then on page 25, we just have some examples of products that have come out of our investments recently.

On the left-hand side is software for ships. And ships, about 60% of the operating cost now have to do -- and these are industrial ships -- have to do with fuel usage. So our software really is good at saving a significant amount of fuel in the sense of how the ship is run, how the load is actually oriented on the ship and, actually, the hull design and as it relates to weather. And so it's a whole control system that we offer, from a solutions standpoint, that our customers have been doing well with.

On Power Electronics, the train that you see there, that is a transformer that's a solid-state transformer, so we take out all steel, all copper and we use solid-state capability to run that. And this is an experimental product for traction transformers; it's being done now. And what that offers is about 15% energy savings. But in the case of transportation, it reduces a significant amount of weight and also space, so you can design these cars differently, from a power standpoint.

On Smart Buildings, this is our Busch-Jaeger product for security. And it's been doing extremely well for us.

And on the right-hand side is a WirelessHART communicated intelligent device. One of the biggest challenges in the marketplace with a product like this is, if you have to have batteries because it's remote and there's not a power piece to it, the batteries will go dead and it's hard to maintain them.

What this does, it actually harvests excess heat. It turns it into electricity to make it completely standalone, self-sufficient and to eliminate the battery piece.

So just some small examples in the sense of what we've been investing and we think we'll be able to drive future growth around.

So turning to chart 26 and looking ahead, the fundamental long-term drivers of our business, such as growing electricity consumption, urbanization, industrialization, emerging markets, all these continue to move forward.

In the short term, there's a lot of questions around the pace of growth in the United States and China, and also in Europe. And we're going to approach those markets cautiously, from a cost standpoint, but, again, push hard in areas where we think we can see growth and drive it.

We've demonstrated, over the past few years, the ability to really compete successfully. And we're very confident about our competitive capabilities in each one of these geographies. That means we'll continue to be conservative on costs again, and make sure that we are positioned to outperform in the economy and in the environment.

So with that, I'll turn it over to questions and answers, and Erik and I are in the room to help you with any questions you have. Thank you.

We will now begin the question and answer session. (Operator Instructions). Andreas Willi, JPMorgan.

My first question is on restructuring. You normally take a sizeable piece in Q4. This year it was mainly for the Power Systems work you're doing, but you haven't taken a lot elsewhere. What should we expect, as we go through '13, on the fixed cost restructuring for the Group?

Second, you talked this morning in the press call about still quite good demand in mining, good demand in Australia. Maybe you could elaborate a little bit on your exposure there and how you see that develop, given that some of the project orders now coming out of the big mines are coming down.

And thirdly, on your return on capital targets, how important is it to reach that 20% plus by 2015 for you, versus what you try to do on the portfolio. Obviously, you're running at 12% now. You mentioned that you would like to continue to do M&A, which will probably mean you wouldn't get to the 20%. How important is that target?

Andreas, I'll start with the demand in the mining sector first. On that end, my comment this morning, what I meant by this is that we don't expect a whole lot of Greenfield sites out there. What we see, from a mining standpoint, are companies really wanting to get the most out of the assets that they have and the mines that they have. I think that's the mode we're in, because you see a lot of commodity prices moving sideways.

I think coal, Andreas, is really a tough one, right now, and so a lot of the mining equipment that goes into coal, we think will be suppressed. But really the ores and the hard rock kinds of things, we participant pretty significantly in, whether it's gearless mill drives; whether it's drives themselves and motors; the automation software that is associated with that, whole solution sets that go into those mines.

So we're not talking about significant growth in mining, but we think that we'll continue to see investment in existing facilities that will help us during the year.

From a standpoint of restructuring, Erik, [would you --]?

Yes, I can take that. So the guidance remains unchanged; we are 0.3% to 0.5% of revenues for restructuring long term. And, obviously, the number for 2012 included now Power Systems. We have no such projects in the pipeline, but the long-term guidance for the smaller projects remains 0.3% to 0.5%.

And I'll address the return on capital piece. We're at 12%; we would have been 14% without Thomas & Betts, I think.

20%'s important, Andreas, to us. We think that investors, this is a very big point for you guys, and for us also. We need to get a good return on our capital. But, obviously, if we think that there are opportunities out there strategically that make sense for us that fit well with this business, we'll take advantage of it.

And so, I'd just say there's a balance here, Andreas. We make this; it's a very serious metric for us. I think I learned this at [GE2] over the years. We'll watch it closely, but if there is something that makes sense, we would certainly take advantage of that too.

So I think all I can tell you is we're serious about it, but we'll have to wait and see what eventually takes place.

On the restructuring, because you did specifically something in Power Systems, but for the other divisions you did very little in '12. In terms of delivering fixed cost savings in '13, you haven't done a whole lot of restructuring in '12, outside the specific PS program.

When I think about that, Andreas, and Erik can chime in here too, in Power Products, we made some significant investments this year in restructuring parts of that business. We are not as overt in communicating exactly what that is at times because of, obviously, union situations and things that we do, but we've been fairly aggressive in that sense.

And if you look at Erik's old business, we had a motors' repositioning this year in [DM] --

Yes, we closed the factory in Spain, which is public information, so yes, we are taking quite a few steps. And behind that restructuring number are, of course, PS reset and quite a few smaller projects.

But, Andreas, I've been here five years now, I think that the numbers that we normally give you, the percentages Erik's giving you in that $200 million to $250 million range for restructuring is not necessarily a bad number to keep around. Sometimes it'll be less, sometimes it'll be more. But historically, that's proven to be, I think, pretty accurate.

Thank you.

Ben Uglow, Morgan Stanley.

I have a couple of questions. First of all, could you talk a little bit, just in very broad terms, about the amount of time it should take for the approved pricing on new orders in Power Products to begin to come through the P&L?

The reason why I ask is, obviously, we've been seeing some improved trend on your orders. I think last quarter it was roughly 3.5% down versus roughly 6% down in the P&L. But, in theory, sooner or later, there should be some accounting positive in your P&L from the convergence between order pricing and revenue pricing. And I wanted to know how we should think about that.

And the related question to that is, fairly obviously, when I look at your Power Products, I guess it's new margin guidance or reiteration of old margin guidance for this year, but 14.5% to 15%, are you factoring in the current improvement that you're seeing in order pricing? So how do you square those two effects?

The final question is just on Discrete Automation. There definitely is seasonality in the fourth quarter. Could you give us a sense of whether we see some improvement if we go back toward last year's levels during the first half of this year? Thanks.

I'll let Erik handle DM; I can talk about PP. When you ask me that question, Ben, you have to remember the three big BUs inside Power Products have different time differentials, in the sense of long and short cycle, and mid cycle. And so when you look at our Medium Voltage business, that's more medium cycle, sometimes even short cycle. So when that happens, those things kind of go through pretty quickly.

Like you saw with Medium Voltage in China last year, when we told you we had a downturn, how it affected our margins. So Medium Voltage has been pretty consistent over the years, in that sense, so it doesn't take long there. But we have been very selective in Medium Voltage all along in the sense of industrial customers, trying to push that side that has less price sensitivity than utilities. So we've played that pretty well, Ben, not just recently, but really over the whole cycle.

So it leaves you with transformers and high-voltage products. In the high-voltage products, these things take a time, 12 months, 18 months, depending on how the order follows through; it takes a while to get through. On transformers, on distribution transformers, there's shorter-cycle times; you can see faster. But on large power transformers it's still 12 months to 18 months [to see the thing through].

Most of what we talk about in these mix equations, big mix within a BU, has to do with transformers. And if you see large power transformers getting a little better, that takes a while for it to really hit our P&L.

So basically, if we saw the uptick, let's say, in the last six months, we won't be feeling the full benefit of that, possibly until 2014. Is that the right way to think about it?

That's the right way to think about it.

In the long-range end of the scope, which is quite [different].

Yes. And on the DM side?

So that's on the seasonality on DM. We achieved an unchanged margin in the last quarter. Last quarter has traditionally been lower in DM. The first quarter, last year, was a very strong quarter. So we expect to have improvements on the margin, but not all the way back to the margin levels of the first quarter of last year.

Just as a follow up, Erik, obviously I know you know that business very well. Is there any change you see in terms of competitive dynamic? Or is it just really a kind of volume effect, waiting for volume to pick back up?

It is waiting for volume to come back up. The revenues are typically a bit lower in the first quarter, which, of course, puts some pressure on the margin, on the leverage. And it's also a bit of mix in it between the different business units, between the regions, which has been putting some pressure on the margin lately. We had a very good mix in the first quarter of 2012.

Okay. Thank you very much.

Mark Troman, BofA Merrill Lynch.

A quick question, Joe, on investment. If you repeat the sort of cash flow performance this year, as you might expect, you're going to be, maybe not net debt free but, reasonably close, reasonably un-geared. How are you thinking about M&A? Are there more opportunities out there, less? Are you happy with the pricing? Are you happy with the pipeline? Could you give us a little bit of detail of where that M&A, or pipeline, is biased, a little bit more color on that, please? Question one.

Question two, just back to pricing; inevitably there's always questions about pricing. But could you just give us a read of what you really see going on in the field, Joe? Because obviously, we're starting to see, as Ben highlighted, some moderating pressure, some leveling. What's really going on in the regions and competitively? And do you expect this trend to continue when you see sequential trends?

And, finally, just on China, maybe a little bit more color on what you see there; obviously, we've seen PMIs rise begin to rise there. There are some signs of pickup; you're obviously expecting a bit of growth this year in your chart 23. Maybe just a little bit more color how you see China developing for you, and how quickly that can pick up? Thank you.

First of all, on the M&A piece, Mark, I'd say that when you say about the pricing, the pricing is always variable by segment. So if we want to do something in deep sea oil and gas, that we thought that the portfolio, some of those multiples I consider astronomical, so you shy away from them. But if you look at the core parts of our business, in Automation and different areas, they're usually between that 9.5% EBITDA range, that 13% EBITDA range which, when you look at those things, are reasonable in that sense, depending on cash flow and position, and those kind of things.

You said what's our pipeline like? I can tell you, our pipeline right now we don't have any $5 billion deals that are -- but we always have a pipeline of a series of deals anywhere between $100 million and $1 billion. It's always there. We obviously don't always execute on those things. I'm still shy right now, because we executed on Thomas & Betts, and that takes a lot of organizational capacity to make sure that we deliver on those integrations.

But we'll do -- Mark, you've seen us now for the last four years, five years. When we say disciplined M&A, we really mean it. It's disciplined from a price standpoint; it's disciplined by not having too much in the sense of too much to integrate with, and not being able to follow up on it. And it's also disciplined in the sense of making sure that we balance our cash properly, too. So I can't really say much more, but I hope you've gained confidence over the years, that we're not going to do anything outside that would be strategically obvious of the power platform or automation platform that we have.

On pricing, in this field, Erik, you can jump in on this too, but it's I would say -- remember we're very selective at times. And so what you might see is it looks like we're giving you obviously lower pricing declines quarter to quarter, over time. Don't always think that that's just strictly market driven. That's often our selectivity in the marketplace that really drives that in our breadth of product, in scope of businesses across geographies. I think it forges a broader look to be able to make those decisions at times than maybe some of our competitors have.

Mark, honestly, with 3% GDP growth out there, it's still tough. You can't look at it as a significant amount of capacity constraint out there that would allow these prices to go up. So it's really based on selectivity and then the overall restraint that our competition shows in the sense of how they want to compete on price or [work at] price too. Don't look at it so much as a capacity constriction that would force a discipline in the marketplace. I think it's more about our discipline in the sense of how we go about this. Erik, what would you say?

I think that's right. And there is also quite a few different pockets. There are also pockets in price increases in some areas of all the Automation portfolio, so it is not everywhere price pressure. But I think with the low growth we have, we will still have some price pressure. And we also have, of course, quite a lot of products where we simplify, and we make them more competitive, where then the price points go down for an equivalent product. And that also comes into these calculations. So I think there are many different impacts that come to this line.

Mark, on China, I think everybody that sits in my chair, or Erik's chair, has to be careful on China, because I think -- we just got back from the World Economic Forum, too. You can talk yourself up into a frenzy on China. But we see the PMI numbers too, but the industrial production numbers haven't followed, and we're going to have to wait and see, when that thing crosses the 50% line in a meaningful way what that means.

But I think the logic that many of us use is that, with the political pressures that were in China last year, and the focus on that governing transition, is many of us feel that China should be better in 2013 than it was in 2012. And we're going to watch industries like nuclear, in transportation, in renewables, those areas that we thought were behind last year. And we're going to watch those closely this year if we see an uptick in those markets. If we do, then we should -- at least in our markets we should see a better China.

Okay. Thanks, Joe; thanks very much.

Daniela Costa, Goldman Sachs.

Just one question regarding the movements we have seen in the Japanese [one], wondering if how do the Japanese players typically compete in automation in particular? Do they normally compete on pricing or not so much? Have you seen, or expect, any changes in competitive dynamics on the back of that? Thank you.

Daniela, on the Japanese side you have to look at what Japanese competitor, if you take someone like Yokogawa, they're always competing on price. When things get outside of Japan, they can be pretty aggressive. They target projects that they want, and they can be pretty aggressive.

But if you take someone like [Stanic] in robotics, they're very disciplined on price, very. And these guys carry 30% operating margins in their business; they're a very good competitor in that sense.

So you really have to look at it by competitor, whatever, but I wouldn't -- and I think I know where your question's coming from, in the sense of the Japanese yen and its recent weakness. It is weaker than it was before, but it's still at historical lows. And so I'm not looking at that as a competitive advantage or disadvantage, as we roll into 2013. Would you agree, Erik?

Yes, I think that's right. I think that's absolutely right.

Jeff Sprague, Vertical Capital Research.

Just a few things. I wonder if you could elaborate a little bit more on what you're seeing in Process; in particular, perhaps the pipeline and downstream US oil and gas, and how that looks over the next 12 to 18 months?

Okay. Jeff, I think everybody's excited about Thaioil and what that means. I think I've read recently, it's almost $60 billion to $100 billion of investment in refineries, in capacity announced in the Gulf Coast.

I would say, Jeff, that doesn't mean anything to us in the next 12 to 18 months, because there's a lot of engineering and planning to go in place before you see those assets go.

Jeff, I was looking at the World Economic Forum, BP put out this information to show you what's really changed in their 2030 estimate, in the sense of where oil and gas is coming from. And when you see the incredible difference between what was expected to come out of the Middle East, and what now will come out of North America, is truly amazing.

So I think America's going to be long oil, right now. It's going to change the dynamics of that economy. I think you're going to see a significant amount of industrial investment around that. But we still don't have a good handle around what that's going to mean for us in the midterm.

I would guess that, as we get into the second quarter of this year, we'll be able to give you a more definitive answer.

Thank you. And I want to come back to the ROIC question. If we put deals aside, there's maybe three levers, maybe there's others, but I think of three levers, right. You organically grow the Company; you improve the margins; or you more aggressively return capital on what's an under-levered balance sheet; a generous dividend, but an under-levered balance sheet.

How do you see playing those levers? Obviously, it's not all or nothing on any of those, but what do you see as the primary driver of getting to 20%, in a non-M&A environment?

First of all, Jeff, we're not Apple, okay (laughter). But I think our lever right now, our biggest lever I feel, is on the margin side. What we did in Power Systems I think was meaningful. We chopped out $4 billion of revenue growth that we had in our strategic plan up to 2015, and we substituted that with margin, basically, by raising our bottom end from [7% to 9%]. And so that should be a big help to us.

Secondly, Jeff, I think what's really interesting, we've been talking about this a lot recently, if you go back to 2008 and you look at the margins that Power Products had, up in the 19% range for operating EBITDA, what's happened is, we have bled a lot of margin, after the super cycle really came off in 2008, out of Power Products. And we finally feel like we've stabilized in that 14.5% and 15% range.

What the investors haven't really felt was the incremental margins that we were generating in our Automation products and our Low Voltage products, because it was really being consumed by the decrease in Power Products.

By holding Power Products stable, and then moving Power Systems up, and then driving the margins forward in our Low Voltage business and Discrete Automation and Motion business, and also in Process Automation, to a certain extent, that's where we think we can really see the margin, going forward, and you can feel it. That also implies a certain amount of organic growth with it, too.

And Jeff, the last piece on capital return. I really mean what I said on that question before, is that you and I have lived that before, that 20% number is very important. And we take it seriously here, and we will work hard to get there.

Great. Thank you very much.

And also, in the areas where we have made investments, like in this case Automation with a big Baldor investment, which then obviously took down the average return quite significantly, we are now building that back up relatively quickly from synergies, cost savings, and a lot of things on the same asset base. So I think out of the synergies from the large deals will also come quite some improvements on this area.

Okay. Great, thank you.

Fredric Stahl, UBS.

I was wondering if we could -- yes, maybe on that last point, on the synergies, if you can remind me, at least, what those are for Baldor and T&B, in particular?

And then more housekeeping, if you could talk a bit on how you see R&D for 2013 in the net interest cost line? That would be great. Thank you.

R&D in 2013, we've had a pretty big run-up in the last two years in R&D. And if you take out our acquisitions, Fredric, I don't see that growing any more than 2% or 3% this year. Indeed, that's our goal.

So you won't see some of the double-digit increases you saw last year, but we certainly are going to invest in some commercial resources to make sure that what we do have, that we can commercialize properly. Okay.

Very good.

On the synergy standpoint, I'll make sure that Erik gives you the right answer here, along with your net question here.

On Baldor, the math is easy; it's $100 million of cost synergies, and $100 million of revenue synergies, so of profit improvement. In the case of Thomas & Betts, it's some $80 million of cost synergies, and revenue synergies of $120 million; exactly $120 million, when you calculate it in the same way. After three years, in the Thomas & Betts case.

And then the net question you had, Fredric, was --?

Yes, the net finance line, net interest cost.

Net interest cost. Hang on.

For the answer, I missed that because I was already looking for the synergies. Could you repeat it, Fredric, please?

Yes, just for the Group P&L, if you have a view what the net interest line looks like in 2013.

We believe it will be around $240 million for 2013.

Very good. Thanks, guys.

Olivier Esnou, Exane BNP Paribas.

A few questions. Maybe you've given it, but I was wondering if you could give the Power Products price pressure on incoming orders, versus what's being traded in the P&L?

And second question; if I look at the bridge now, we have savings exceeding price pressures. That's quite nice. Is that a valid framework for every quarter for the rest of the year?

And maybe the third question; I heard during the presentation that you want to continue to refocus the Automation portfolio, leaving maybe a bit of the systems type of work you do. I just want to understand, is that a gradual exercise, or is there also a possibility that there's a form of reset happening in that division, like in Power Systems? How is that going to happen? Thanks.

I'll take the last question first, and leave the other ones to Erik. On the Automation side, in Systems it's going to happen relatively quickly. Now some of these systems that we get, sometimes can take four years for them to work through, like these offshore jobs, and whatever, so it's hard to see that initially on the balance sheet.

But when you look at what Brice and the team are doing there, we have really raised our expectations in the sense of the margin and net income expectations, across each one of the four BUs, business units, within there.

And so for some of these, well, you can see it rather quickly, but some, like in grid systems, they have these long cycle times. It'll take a while for us to really be able to see them.

Does it involve a big charge coming up in one specific quarter?

No. We took our charge.

Yes, we have taken a charge from PS.

No, before Automation, there is nothing like that coming up?

No, we see nothing (multiple speakers).

No, we don't see anything like that, no.

Okay.

Okay. Let me take the other two questions. On the PP pricing in the last quarter of 2012, we saw on the order side some 2% to 3% price deterioration, so that is reducing the run rate compared to earlier quarters, as we already said on the call.

Then your second question on the dynamic pricing and costs, I think you are correct to assume that there is a connection between the price deterioration and the cost savings in the sense that part of that is price that goes down when we simplify products, we sell the same features for a lower price, and that's, of course, connected to a lower cost base. So there is connection between these two.

Okay. Thank you very much.

James Moore, Redburn Partners.

I've got three. On pricing, very encouraging to see the improvements in the year-on-year rate, I just wondered if you could say how that moved by region and by business unit? I'm just trying to get a feel for what was the move and what the range is, from the best and worse. You often tell us how complicated to get to that net number it is, given all the many moving parts. I wonder if you could just give us a bit of a deeper dive into that to understand how it moved better?

And secondly, if you look at the source of pricing pressure in PP over the last five years, what would you say the balance was of where the price pressure came from, from Asian competition between the Chinese and the Koreans? I'm really asking, given the move in the Korean won, and do you see that won move as giving a bit of optimism for the outlook for pricing?

And then thirdly, I've seen that the increase in sales and R&D investment has slowed, probably slowed faster than I might have expected. And when you talk about the 2% to 3% for this year, was that assuming a degree of revenue growth so that you're going to get some leverage out of sales and R&D this year, whereas last year you had negative leverage; is that how you see that?

James, I'll start with your last question, given what we end with volume this year, we would hope to -- that's a good way to back in. We told you we think we're going to be 2% to 3% up in R&D this year, kind of inflation adjusted.

It's our hope that revenues grow faster than that, and certainly we're going to drive some productivity to do that, so it did come in line quickly in the fourth quarter. We've been taking actions really since the second quarter, but there's some things you really had to follow through on, particularly in PP and other investments we were making, to make sure we're positioned properly. So I hope that helps.

It's an interesting question in PP; remember, the Korean's have been, outside of China, the Korean's were the big price players that were meaningful in that marketplace. Obviously in North America, it was primarily around large power transformers where we felt that the dumping legislation that was implemented there with the Korean's really effectively helped to mute that issue, and frankly, it's helped us in that sense.

But at the same time, as we saw the Korean's actually raise their prices in the Middle East area on large power transformers. So I think there is a realization within that business, within that company, about what was being done and was being addressed in some way.

I don't think that the won change right now, James, is really going to make a significant difference versus the difference in the Korean side. And on China, what we see in China mainly has to do with China and somewhat India, and the Chinese are -- we're in China; we work at the same variables; there is only a certain part of the power market we're allowed to have in that sense, and we compete pretty well on those higher voltage areas. I hope that helps.

And the last one was on the pricing move by region and business. That's a tough one, James; I think that's probably one step too far for us, okay?

If it's Power Products I'd give you really the same answer that I believe I gave Mark. But, James, honestly, this is an incredibly difficult business when you start going by product, by region. Just alone when you think of Power Products in itself, it has 20 different products that I can think of that are PGs, and those that all interface in a different way by geography, I think, James, your best thing is to take it to the bank that we'll do 14.5% to 15% in Power Products in 2013, and we're going to have to manage all those variables to get that done.

That's very helpful. Can I just get back to China? We all know the history of how some share loss happened because of the buy local; that was more in AC. We heard a lot of noise about increased investment in DC. Do you think the mix of Chinese investment in T&D Grid is going to shift to DC and you can take a better share of that because of your positioning in HVDC, or is that too optimistic?

Well, I think there are some big jobs that are being considered in China that are really high voltage DC jobs. We don't necessarily [know] where that stands right now in their 12th five-year plan, but we've been working with State Grid on those things.

James, I don't see a big change in what I would say would be the mix of high voltage DC things versus AC. What we'll watch closely in China, if you look at the fifth 12-year plan you're talking about more distributed kind of energy and what that might mean, and more renewables around that piece. And that might facilitate these kinds of investments you're talking about, because you want to move those renewables probably from remote places to get them to there. But we haven't seen the plans for those yet, or it hasn't been presented to us.

Brilliant. Thanks, Joe.

Martin Wilkie, Deutsche Bank.

A couple of questions; firstly, on Power Systems. You reiterated that you wanted to be at a run rate, at the new margin target, towards the end of next year. But if we back out the charges in Q4 it looks like you were pretty much close to that range anyway. Is that the wrong way to look at it, or is there something that's happening in the first half of next year that means you shouldn't be at that new level? So that was the first question.

And then the second question was just on cash. You mentioned in your press release about delivering higher cash to shareholders; I just wanted to clarify, given the priorities you list in your slide pack, I think it's slide 19, is a buyback or a return of capital something potentially on the agenda, or is that something you're not considering for 2013? Thanks.

Look, on the fourth quarter piece I think you're right. I think if you back out the charge you're going to be about 8.4% for Power Systems, which you have to be careful, Martin, in that analysis, is that the way that these systems businesses kind of come in by quarter.

Sometimes based on mix you can have some lower mix systems stuff come through; the fourth quarter we had some really higher pieces and that helped us.

So again, I think, as you guys try to do your spreadsheets and models or whatever, [we feel strongly] that you can model PS at 9% next year, at the end of the year, okay, is what we're going to gradually get to. We think the first quarter is going to be a challenge, and based on what we have in the backlog right now. Erik would you like to -- ?

Yes, I think it's a mix issue, but also keep in mind that we have those large orders which we have part of the PS reset, which are going to go through the books at very low or even no margins on some of the big orders, so that will push down the margin in the coming quarters. So that is why we say that we reach the lower end of the range by the fourth quarter, so that's essentially where we are.

And, Martin, on the return of cash piece, remember what we're emphasizing is the [ROTC] of 20% is very important to us. We're not in any big discussion, right now, on share buyback or special dividend or anything like that. We'll just have to wait and see how the economy progresses, how our cash flow is as we go into 2013, and we'll certainly keep you appraised of what we're thinking and what we're doing.

Okay. Thank you.

I think that's the last question. Again, we appreciate your questions and interest, and we'll be back at the end of the first quarter to let you know how well we're starting off the year.

Thanks again, and we'll talk to you next time.

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