ABB Ltd
Q3 2017 Earnings Call Transcript

Published: 26 Oct 2017

[Operator:]

Ladies and gentlemen, good afternoon. Welcome to the ABB Third Quarter 2017 Results Conference Call. I am Maria, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there'll be a Q&A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand it over to Mrs. Alanna Abrahamson, Head of Investor Relations. Please go ahead.

[Alanna Abrahamson:]

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

[Ulrich Spiesshofer:]

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 of 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 EBITDA 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 with a year ago. It was impacted by growth as current receivables increased on higher revenues and inventories were build up, pending deliveries for growth. Now, let's turn to slide 4 and consider our performance in the context of our three 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 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 add up 3% growth. When including B&R, they were up 4%. With the B&R acquisition, ABB closed a 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 EBITDA margin increased approximately 10 basis points to 12.9%. Our Industrial Automation and Power Grids divisions turned in solid performances in the quarter. Electrification and Robotics and Motion continued to be impacted from 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 sales structure is driving performance better. We are nearing the completion of the transitioning from a country-based shared services to a Global Business Services. Our 4,000 employees are now operational in our new 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 broad-based 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 positive contributions from the UK, France, and Norway more than offsetting declines in Germany and Sweden. In the UK, we won two 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 this 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 a 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 great growth from grid investments and construction. In Asia, Middle East and Africa, orders grew 2%, with base orders up 12% for the quarter. We saw substantial growth in the Emirates, South Africa, and Australia, while Saudi Arabia remain soft. China had lower larger orders than a year ago but delivered really solid base order growth of 10%. Robotics solutions and general industry continue to be growth areas in China. India's order growth was dampened temporarily by the implementation of a nationwide new goods and services tax. Underlying demand drivers remain intact. With that, I would like to hand over to Timo.

[Timo Ihamuotila:]

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 remains positive for residential and non-residential construction, renewables components, and datacenters. 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 were 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 crews and specialty vessels. Orders were more 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 the 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 two key orders in the U.K. as well as many other medium-size 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 shift in 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 continue to deliver on our cost savings programs. We achieved approximately $150 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 own materials continue 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. All together, the group achieved operational EBITA of $1,124 million 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 you, Uli.

[Ulrich Spiesshofer:]

Thank you, Timo. Let's turn to slide number 9. We launched Stage 3 of our Next Level strategy at our Capital Markets Day one year ago. It is designed to unlock further value through four core actions

[Alanna Abrahamson:]

Thank you, Uli. Thank you, Timo. With that, let's open up the line for questions. Let me remind everyone, maximum two questions each please. Maria?

[Operator:]

We will now begin the Q&A session. The first question comes from Mark Troman, Bank of America Merrill Lynch. Please go ahead.

[Mark Troman:]

Yes. Thank you. Good afternoon, Uli, Timo, and Alanna. Two questions please. Firstly, base orders obviously look as though they're doing okay. And as you indicated, Uli, the outlook looks reasonably encouraging. But large orders, we haven't seen 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? And that's question number one. And secondly, pricing in raw materials, I guess, is 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 in raw materials. Thank you.

[Ulrich Spiesshofer:]

Okay. Thank you and good afternoon, Mark. Yeah, look, when you take the base order pattern across the businesses, it really shows nicely that our many activities of driving growth, our higher 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 three 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 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'm 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 where the overall orders were 14% and the base orders were 4%, this illustrates that we're getting a significant amount of large orders but in a new way. The way we get this booked 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 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 will see a massive lower large orders. This is not a surprise because we are changing the business model here. We're 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 have really given 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 is a change in the trend in a significant way. With that, I hand over to Timo on the questions that you had on pricing.

[Timo Ihamuotila:]

Okay. Hey, thanks, Mark. And, yeah, 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 a 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 that 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've said, we are definitely taking action on the pricing side.

[Alanna Abrahamson:]

Thank you.

[Mark Troman:]

Thank you.

[Alanna Abrahamson:]

Next question please.

[Operator:]

Next question comes from Ben Uglow, Morgan Stanley. Please go ahead.

[Ben Uglow:]

Good afternoon, Uli, Timo, and Alanna. 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? Are you really talking just about Power Grids? Are you talking about more normal in terms of investment in 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? I'm assuming that Automation and Low Voltage is better. How much better is it than Power is my question.

[Ulrich Spiesshofer:]

Okay. Good afternoon, Ben, and thanks for your question. Yeah, let me run you through what we mean with new normal. First, it means that all divisions are targeting the announced margin corridor. There is 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, and not as we have had this in the previous year massive additional amounts that we add in the there. Third, we had costs for transformation both below and above the line. These costs will be behind us and the activities, Ben, mainly continue. Some of them will 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 seizing the separate project management organization and we get that down. And last but 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 we had to do to make this company more agile, lean, and simple 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, your observation is right. I think the base order development is quite good. 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 quite positive all together. If I take the Power Grids 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 four years in Electrification in China. We are positive for the infrastructure in Electrification. The non-residential construction is an area that we have benefited from. On the residential construction, this will be impacted by the government's intention to slowdown the speculative investments in residential assets. 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 Grids, 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.

[Ben Uglow:]

Great.

[Alanna Abrahamson:]

Thank you.

[Ben Uglow:]

Thank you very much.

[Ulrich Spiesshofer:]

You're welcome.

[Alanna Abrahamson:]

Next question, please?

[Operator:]

Next question comes from James Stettler from Barclays. Please go ahead.

[James Stettler:]

Yes. Good afternoon, all. 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 adapting capacity? That's question number one. Question number two. Timo, you mentioned just to be aware of these costs in Power Grids for Power Up. I mean, how do you see if we look at the next one or two quarters? I mean, by 2018 you want to be within the range as we continue to rollout these cost programs. Could you maybe just talk about how we should be thinking about the timing? Thank you.

[Ulrich Spiesshofer:]

Yeah. Thank you, James, and good afternoon to you. So Timo will take the second question. I'll 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 all together, 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 our 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 division so we got a certain economies of scale that really are 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 in 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 drives side, the good news is that the team has found a formula really on the discrete 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 and 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 three buckets, a very strongly growing Robotics business; a decently growing smaller drives, smaller motors portfolio; and a dampened momentum into 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, I place my hand over to Timo.

[Timo Ihamuotila:]

Yeah. 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 $15 million a quarter. And then I would say probably a bit front end-loaded on 2018. So that's how we expect that to run through.

[Ulrich Spiesshofer:]

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

[Timo Ihamuotila:]

Yeah, absolutely. So still in the 10% to 14% margin corridor in 2018.

[Alanna Abrahamson:]

Thank you very much. Next question, please?

[Operator:]

Next question comes from James Moore from Redburn. Please go ahead.

[James Alexander Moore:]

Yes. Thank you. 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, could we just go 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 will be back into growing margins 40 to 60 bps specifically next year?

[Ulrich Spiesshofer:]

Okay. So James, let me take this, too. On China, look, if you take the results that are coming out of the party congress, if you take Xi's commitment to drive a transformation very long-term, up 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're 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. If you go through the four 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 in that one. And at the same time, the local distribution grid, the need to mirror the demands on EV charging, if you take the newest EV charging station, our 350 kV, it'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. Now, move over to Tarak's business. The non-residential 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 reach in that market in 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 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 where we will scale B&R at a good momentum in this large economy because the customers in China, they really want solution buying, they want to buy functionality, and our solution-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 initiative 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 with a great solution set which is really tailored to 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 where all the many things that we have done yield more results than in the transition year of 2017.

[Alanna Abrahamson:]

Thank you, Uli.

[James Alexander Moore:]

Very helpful. Thank you.

[Alanna Abrahamson:]

Next question, please?

[Operator:]

Next question comes from Andreas Willi, JPMorgan. Please go ahead.

[Andreas Willi:]

Yeah. Good afternoon. 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 bps for Q4 versus consensus of 12.5 bps currently. Is that the specific message you're giving or is that a bit more of a kind of a broader context you're giving that comment about seasonality? And the second question on GE Industrial Supply (sic) [GE Industrial Solutions] (46

[Ulrich Spiesshofer:]

Yeah. Andreas, thank you very much for your two questions. Yeah, look, on what Timo flagged with the seasonality, now that we had a reasonable third quarter, we don't want that 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 are quite encouraging. Talking to the customers of this business, they basically said 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 is one that requires a lot of attention, that they get it right. The second message, and that was also an encouragement, is the reaction of the employees of this business was very positive. If you go on their respective blogs, then you'll 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 we know where we belong, and they are quite happy to be part of that. So that's two stakeholder groups that are important. Then as you have seen in the value creation case, we got four 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 moment when 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 (48

[Alanna Abrahamson:]

Thank you, Uli. Thank you, Andreas. Next question, please?

[Operator:]

Next question is from Jeffrey Sprague, Vertical Research. Please go ahead.

[Jeffrey Todd Sprague:]

Thank you. Good day, everyone. Two questions from me. The first one would be on cash flow. I 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 kind of restructured and repositioned the portfolio, Uli, thinking of the comments about large orders that were made earlier. It would seem that the net working capital to sales are still high relative to what would be kind of best-in-class. And I just wondered, looking out a year or two or three, 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? Thank you.

[Ulrich Spiesshofer:]

Yeah. Jeffrey, good afternoon. Let me start with B&R and then I hand over to Timo in 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. Then I look at the synergy teams, how they are working, that is in the top line or on the costs side, we are in full swing, 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 where basically a B&R Industrial PC together with other components and ABB robots is powering up a logistics handling cell, which is one of the fastest-growing markets in terms of automation. So altogether, we are happy. The management is fully on board. 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're happy with the deal. Look, at 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 (52

[Timo Ihamuotila:]

Yeah. 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, so overdues are coming down even if current receivables went up. And I said we also had a 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 three years kind of ends now, this program does not at all mean that we would stop driving this. We have further opportunity, particularly in the area of inventory.

[Jeffrey Todd Sprague:]

Thank you.

[Alanna Abrahamson:]

Thank you. Next question, please?

[Operator:]

Next question comes from Andre Kukhnin, Credit Suisse. Please go ahead.

[Andre Kukhnin:]

Good afternoon. Thanks so much for taking my questions. My first question is 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 particularly in China? And second question is much broader on energy storage and utility-scale battery storage. You seem to feature highly with your position 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? Thank you.

[Ulrich Spiesshofer:]

Now let me take the decentralized energy and storage question first because that's what we're 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 that's nicely demonstrated in many projects that we're doing. If you take a project that's going on in Australia, there we are building a very large storage capacity. Microgrid. If you take the microgrids that we are selling in India, if you look at the way they're using storage, and 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're building – it's an $800 million project that we connect North Sea Wind Germany with hydro in Norway. And there's a cable system between Norway and Germany. We are 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're 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 solar solutions, stackable 2-kilowatt hour solutions where the batteries, for example, come from Panasonic. And we have a partnership with BYD, with Samsung for the different segments that they're going. Now, recently in this quarter we announced a partnership with Northvolt, and that's a different situation. Northvolt will build one of the largest battery factories in Europe 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, and 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 of our integrated offering, ranging from process automation in mining into discrete 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 uses, such 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 (59

[Timo Ihamuotila:]

Yeah. 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 pricing increases in RM as well. But in RM, we have also done quite a few bigger acquisitions and we are looking at both pricing but also improving efficiency of operations, that what we have said earlier, and that's what we will continue to do going forward as well.

[Andre Kukhnin:]

Thank you.

[Alanna Abrahamson:]

Thank you, Timo. Next question, please?

[Operator:]

Next question comes from Gaël De Bray, Deutsche Bank. Please go ahead.

[Gaël De Bray:]

Thanks very much and good afternoon, everybody. 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 digits this quarter, maybe 15%. So basically I just wanted to double check these two numbers. And then the second question is on the inventory buildup 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 the inventory buildup.

[Alanna Abrahamson:]

Gaël, that's more than two questions. I think you got the first one and a little bit, but let's see.

[Gaël De Bray:]

Okay. Thank you.

[Ulrich Spiesshofer:]

Okay. So let me take the question here. First, on the purchase price of B&R, we have agreed with the seller 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 (01

[Timo Ihamuotila:]

Yes. As you know, we don't really split this inventory by division on our external reporting, so just giving a little bit of color here. So first of all, inventory was not as big of a driver at all, as was the current receivables, so we are talking some of 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 a bit of an impact in inventory. And also then, because RM has been growing very strongly for many quarters, there is a little bit there as well. So I guess we can go with that color.

[Alanna Abrahamson:]

Thank you. Next question, please.

[Operator:]

Next question comes from Jonathan Mounsey, Exane BNP Paribas. Please go ahead.

[Jonathan Mounsey:]

Hi. Yes. Good afternoon. Thanks for taking my question. I wonder if we could think about Ability. As I remember it, your recent Innovation Day, you were talking about a number of Lighthouse projects related to mobility. I'm just wondering if you could comment maybe on the pipeline of 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 to scale the revenue opportunity? And then finally, linked to all of that, are there any launch costs next year to bring these additional solutions to market?

[Ulrich Spiesshofer:]

Yeah. 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 reactions, 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 somewhere are being used in customer segments and with customers where they have not been used. And secondly, between customers that are already an 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. And you take the utility, industry, and transport and infrastructure segments where Ability is being deployed, and we will continue to invest. In Ability this year, we have invested a significant amount of money in the launch and getting going. Despite that and all the other costs that they 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.

[Alanna Abrahamson:]

Thank you very much. And last question, please?

[Operator:]

Last question comes from Alok Katre, Societe Generale. Please go ahead.

[Alok Katre:]

Hi. Thanks for taking my questions. 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, at 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. I'll follow-up with the other one.

[Ulrich Spiesshofer:]

Okay. So on the margins revision, I'll start and then I hand over to Timo a little bit more. Yeah, look, the good news is if you take Industrial Automation, you'll see a 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 improvement and we have the Power Up transformation cost, 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 is more to come and we will keep really going in that direction. All together, we are aiming firmly to improve next year the margin between the stated margin corridor. Timo, any additional flavor?

[Timo Ihamuotila:]

Yeah. 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 solutions sales platform is driving this. And also, as we said after Q2, we have done more restructuring but it takes time before that restructuring runs into the operational number. So during the first two quarters we did about $60 million, and now during Q3 we did $80 million. And as I said, 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.

[Alanna Abrahamson:]

Alok, last question?

[Alok Katre:]

Yeah. 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 RM and Industrial Automation as well. But let's say the increment in terms of the growth that we saw in 3Q was wasn't, let's say, as good as the easing of the comp. So are there any different moving parts that are pulling these divisions in completely different directions and how should we sort of think about this going forward, particularly 4Q or 2018?

[Ulrich Spiesshofer:]

Yeah. 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 acquired a steep comparison and then we're still delivering that. I think on the base order side, everything you said that we wanted to lay out for 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 sales people are lined up in a better way. They have better supporting tools to drive the growth. So I would expect going forward that our ambition to enhance the growth momentum materializes. It's very clear we cannot predict exactly the uncertainties in the market, whether anything will prevail. But everything on a comparable basis, we are firmly committed to make 2018 a year where we, again, deliver solid growth. And naturally, that solid growth will drop better to the top and bottom line. Because of the many dampening effects that we had in 2017, quite a lot of that will go away and we'll go forward. Or in the growth areas we will have a certain scale achieved, that there is a solid (01

[Alanna Abrahamson:]

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.

[Operator:]

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