ABB Ltd
Q4 2016 Earnings Call Transcript

Published: 8 Feb 2017

[Operator:]

Ladies and gentlemen, good afternoon. Welcome to the ABB Fourth Quarter and Full Year 2016 Results Analysts and Investors 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. At this time, it's my pleasure to hand it over to Mrs. Alanna Abrahamson, Head of Investor Relations. Please go ahead, madam.

[Alanna Abrahamson:]

Thank you. Good afternoon, ladies and gentlemen, and welcome to ABB's fourth quarter and full year 2016 results briefing. The press release and analyst presentation was published this morning at 7 AM and can be found on our website. This briefing is being webcast via our IR website, as well as being recorded. With me today are ABB's President and CEO, Ulrich Spiesshofer; and ABB's Chief Financial Officer, Eric Elzvik. They will give a review of Q4 results, an update on the execution of our Next Level strategy and then present the outlook for 2017. Before we begin, I would like to draw your attention to the important information regarding safe harbor notices and our use of non-GAAP measures on Slide 2 of the ABB presentation. This conference call will include forward-looking statements. These statements are based on the company's current expectations and current assumptions and are, therefore, subject to certain risks and uncertainties. I would now like to hand it over to Uli.

[Ulrich Spiesshofer:]

Thank you, Alanna. Good afternoon, ladies and gentlemen, and welcome to our conference call. Let's move straight to Slide number 4. 2016 was a year of challenges and successes, as we made solid progress on our Next Level transformation. Orders for 2016 were 5% lower, primarily due to 24% decline in large orders. Revenues were steady, as growth in Power Grids and Electrification Products offset declines in Discrete Automation and Motion and Process Automation. Our continued focus on productivity and cost resulted in margin accretion of 50 basis points to 12.4% operational EBITA and operational earnings per share improvement of 4% on a constant currency basis to $1.29. A highlight for the year was our cash performance, driven by our working capital program, strong cash generation and disciplined cash allocation. Free cash flow was up 5% to $3.2 billion, and our cash return on invested capital increased another 70 basis points to 14.1%. For the fourth quarter, we delivered order growth of 3%. Revenues improved 1% for the first time since first quarter 2015 we had this order growth. And operational EBITA margin was 11.7%, impacted by approximately $30 million in one-off events. Excluding these charges, we would have had a margin accretion of 10 basis points operationally in the quarter. Therefore, the reported results do not fully reflect the underlying operational performance improvement and momentum. Now, let's turn to Slide 5 and consider our performance in the context of our three focus areas; profitable growth, relentless execution and business-led collaboration. In the fourth quarter, we delivered top line growth. Orders improved 3%, driven by the strong performance in Power Grids and strong growth in both the United States and China of 9%. Revenues were higher with strong performance from Power Grids and Electrification Products more than compensating for lower revenues in the other two divisions. Our customers are really excited about ABB Ability, which builds on our role as a digital champion in our industry by bundling our solutions and services into a leading digital offering for our customers all around the world. With the related orders already received and significant customer interest, we are building growth momentum as we implement Next Level Stage 3. In relation to relentless execution, we continued to build performance improvement momentum. As stated earlier, our underlying performance was stronger than the reported numbers suggest, if you consider the unique events that affected us during the quarter. Our operational EBITA margin would have grown 10 basis points in the quarter, if not for the impacts from the default of a Turkish distributor and the ForEx effects in Egypt. During the quarter, we saw strong performance from Process Automation, which increased its margin by 130 basis points; and Power Grids, which increased by 90 basis points. Our White-Collar Productivity program remains firmly on track to deliver the increased cost reductions of $1.3 billion by the end of 2017. Our efforts on Net Working Capital continued to yield results with net working capital as a percentage of revenues declining 150 basis points to 11.5% in 2016. Overall, we continued to make significant progress in transforming ABB into a leaner, more efficient digital technology leader. Regarding business-led collaboration, we improved country and account management collaboration, for example, in our food and beverage program. Within this program, thousands of new local sales teams were created all around the world using account managers and representatives from our business to bring the full strength of our portfolio to local customers in food and beverage. In 2016, we set up global and regional service centers to provide our businesses with high-quality back-office services in finance, human resources, information technology and supply chain management. These global service centers are now staffed with more than 2,500 people. As we announced in the Capital Markets Day in October, we are strengthening the global brand by consolidating all company brands into a single ABB master brand. Now, the program is up and running. Having one unified ABB brand will help to differentiate us in the market and increase customer loyalty and purchase probability, as well as price premiums. Please turn to the regional picture on Slide 6. As shown, the U.S. and China, our two largest markets, both performed well in the quarter and contributed to the strong order development. Americas' orders were steady with base orders slightly down. The United States delivered 9% growth overall. This 9% in base orders is mainly driven by transmission and distribution, robotics and port facilities. Canada was weak across all sectors, as heavy industry raised on overall demand. Brazil's results do not reflect the slow underlying demand pattern as a large Power Grids order was booked during the quarter. Europe was negative in the quarter, mainly due to the large orders that were booked in Germany and Turkey in Q4 2015. Base order development was steady with positive contributions from Norway, Spain, the UK and Germany, being offset by declines from Turkey, France and the Netherlands. Asia, Middle East, Africa grew 17%, driven by large order awards in Power Grids. China grew 9% with base orders 11% higher, positively driven by robotics, non-residential construction and power conversion products. India experienced strong growth with a large Power Grids orders as well as an increase of 14% in base orders. All sectors were up in India. The Middle East continued to be subdued. All in all, it was a solid performance in a difficult market environment. Before I hand it over to Eric, I would like to go through some of the key orders that Power Grids won this quarter that led to our growth in the fourth quarter. Please turn to Slide number 7. Many of you were worried after the third quarter. But as you can see, the demand drivers for transmission and distribution remain fully intact. We need to remember that this business had shown volatility for large and base orders from quarter-to-quarter. In Q4, Power Grids achieved more than $840 million worth of announced large orders. This reflects our global number one position in transmission and distribution, as well as our technology leadership in high-voltage and ultra-high-voltage direct current transmission. Projects like the Raigarh-Pugalur link in India speak directly to the strength of our pioneering, leading technology in ultra-high-voltage direct current transmission and distribution over long distances. This project will draw powerful renewable and conventional sources in the South and the Mid and transmit over very long distances of more than 1,800 kilometers with low losses. In California, the Sylmar project is an excellent example how our digital platform, ABB Ability, and how we can drive this as an upgrade of older systems to incorporate the latest digital controls and safety features for more reliability and safety of suppliers. The result is a more reliable link between the city of Los Angeles and hydroelectric dams in the North. With that, I would like to hand it over to Eric.

[Eric A. Elzvik:]

Thank you, Uli. Slide 8 shows the divisional performance, and let me now take you through some of the highlights of the divisions. First of all, Power Grids performed strongly in the quarter, with 15% order growth, revenues up by 4% and operational EBITA margin up by 90 basis points to 10.4%. Orders and revenues in Process Automation were weighted down by the continued weak demand in process industries, particularly in oil and gas. At the same time, we succeeded to achieve flat base orders, which is a clear improvement in the business. With the weak volumes, Process Automation has done a great job of cutting costs and increased its operational EBITA margin by 130 basis points to 13.4%. In other words, the division has cut capacity in response to the current market conditions. Orders in Discrete Automation and Motion rose 4%, and this was driven by strong demand patterns in robotics and in light industry. Also, in Discrete Automation, we saw a 5% increase in base orders in the quarter. These increases more than offset the impact of the CapEx declines in process industry such as oil and gas with a similar pattern as we have in the Process Automation division. In this division, margins declined by 100 basis points, mostly as a result of the solar business, unfavorable mix and low capacity utilization. Electrification Products had low orders in the quarter due to low levels of low-voltage and medium-voltage system orders. Operational EBITA margins would have been steady, but declined by 90 basis points for the reasons mentioned earlier by Uli. In Turkey, we had a large distributor default on payments. We have very strict credit controls in place. However, in the volatile environment in Turkey, this distributor was overextended and he could not react quickly enough. We are still pursuing payments, but know it will be very difficult. In Egypt, due to the devaluation of the currency and the inability to hedge the Egyptian pound, we revaluated our Egyptian accounts payable. Electrification Products was the division primarily impacted since most of its business is local, and it's difficult to contract in hard currencies. Regardless, we are trying to renegotiate contracts to reduce this impact. Excluding these two specific items, margin would have been steady in the Electrification Products division in the quarter. Please remember that the new divisional structure, which we announced in October, takes effect on the first quarter 2017. Electrification Products will receive the electric vehicle charging, solar and power quality businesses from Discrete Automation and Motion division. This transfer will have a dampening effect on the Electrification Products margin, and the division will most likely be outside the margin corridor in Q1 of 2017. On the other hand, in the new Robotics and Motion division, the transfer would be supportive to the margins. And therefore, we see that this division will be within the margin corridor in the first quarter of 2017. Let's move to our operational EBITA margin bridge on Slide number 9. In a challenging market, we achieved approximately $111 million of net savings in the quarter. This came from our ongoing cost saving programs to compensate for price pressures but also from our benefits from the White-Collar Productivity program. And in particular, we saw strong results from the White-Collar Productivity and supply chain savings. Further, the volumes were positive in the quarter, reflecting the revenue increase primarily from Electrification Products and Power Grids. The project margins, as you see, was generally steady from a year ago, which shows the improvement in the product management that we've implemented in Power Grids and also in the Process Automation division. On the mix side, we had an unfavorable development in three of the divisions

[Ulrich Spiesshofer:]

Thank you, Eric. Please turn to Slide 12. When we first launched our Next Level strategy, we realized we needed to transform ABB in three focus areas. Back in 2013, we had a lot of work to do in order to build a solid foundation for future growth. At that time, ABB did not emphasize enough our focus on organic growth. Our business units were not performing in line with expectations. Our White-Collar organization was inefficient and partly failed, and there was a lack of accountability. Our corporate structures were siloed. Departments and businesses were almost completely isolated from each other. Now, we can point to a solid list of improvements that has been executed under our Next Level strategy. Growth momentum is building, driven by our PIE formula or Penetration, Innovation and Expansion. For example, our program to drive growth in the food and beverage sector has yielded good results. And our Robotics business, today, the number two globally, continues to become even stronger. We are laying the ground for future growth with our quantum leap in digital, building on ABB Ability, our new platform ranging from smart sensor solutions for low-voltage electric motors to the cloud-based offering in partnership with leading company, Microsoft. Having completed the strategic review of Power Grids, the division can now focus on growth and on accelerating its transformation in driving further value creation. For cost savings, productivity and working capital, our programs are truly delivering. Today, ABB is a faster, leaner and more efficient company with clear accountabilities and ownerships driving performance. Debt transformation is overall progressing very well. Please turn to Slide 13. Those of you who were at our Capital Markets Day on October 4 might remember this slide. We launched the third stage of our Next Level strategy to unlock further value for four key action items. Number one, driving growth in our four market-leading entrepreneurial divisions; a quantum leap in digital; accelerating momentum in operational excellence; and strengthening the global ABB brand. Moving to Slide 14. As of January 1, our four market-leading entrepreneurial divisions, all of which are either number one or two in their respective markets, are fully operationally (22

[Alanna Abrahamson:]

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

[Operator:]

We will now begin the question-and-answer session. The first question is from Mr. Andreas Willi from JPMorgan. Please go ahead.

[Andreas Willi:]

Good afternoon, everybody. I have a question on pricing and one on Process Automation. On pricing, it seems it just got a bit worse in the bridge in Q4, but maybe you could help us with the cost savings, White-Collar and the rest in terms of the run rate, where we are in Q4. And what do you see there in the backlog in terms of pricing for next year relative to headwind from raw material inflation? And what you have started to enact on price increases to offset that? And then, Process Automation has done a great job on margins, particularly in Q4, but overall in the year. Should growth come back, what kind of incremental margin should we expect? Historically, it hasn't shown much leverage either way. But maybe in terms of what you – with the changes you have made on the cost savings in terms of structural versus cyclical cost cutting, what should we expect when revenue growth comes back? Thank you very much.

[Ulrich Spiesshofer:]

Thank you, and good afternoon. Thanks for your questions, Andreas. I'll start with PA, and then hand it over to Eric on the pricing piece. Look, your observation is right. Peter Terwiesch and his team has done a wonderful job mitigating the very tough market headwinds and delivering a solid margin in this business. That has a couple of drivers, one is proactive cost management in line with the backlog. This business is a long-term book-to-bill business, so we have good foresight on the backlog, and Peter has done a great job responsibly managing, adjusting capacity in that how we run the business. The second piece that he has worked also on is the significant improvement on risk management and risk mitigation on large projects, and the operational execution quality on projects in this business has become even stronger. The third element is the strong push on services and digital services have enabled us to lift the margin in this division even in difficult times. And if you look at it, Andreas, basically, all three elements are there to stay. So, when you – when this business comes out of the trough in the market, you can expect a nice development of the underlying quality of the margin. We're not giving concrete guidance, but we are confident that when we – if we can manage through the downturn in a good way and Peter is able to increase margins, his work on his portfolio and the focus on services, his de-risking approach and better operational execution will help us to deliver very attractive dropdown margins when the market comes back. With that, I'll hand over to Eric on the pricing.

[Eric A. Elzvik:]

Okay. So, for the pricing side, Andreas, the pricing pressure in Q4 was quite similar to what we had a year ago in Q4, a little bit more than in Q3 of 2016, but that was also the same pattern in 2015. As you can see, over and above, it is a similar, similar situation. On the basic cost savings on supply chain and OpEx, we continue to do really well on the supply chain side. On the OpEx, it was a little bit less than before. At the same time, the White-Collar Productivity program is continuing to deliver very strongly. So, the net of all of those effects is the $111 million that you see. The pricing trends, I would say, is continuing on the same level currently. You correctly said we have some raw material increases that has to reflect itself back in pricing. And there, we are using the same methods as we have done historically to update prices as we go to match it when also our hedging programs are running out. So, it is quite balanced over the cycle, but we are taking the right actions to protect the pricing. And that should then mean potentially, in some of the areas, lower price pressure per se when we move further into the future.

[Alanna Abrahamson:]

Thank you very much.

[Andreas Willi:]

Thank you very much.

[Eric A. Elzvik:]

You're welcome.

[Alanna Abrahamson:]

Next question, please?

[Operator:]

The next question is from Mr. Ben Uglow from Morgan Stanley. Please go ahead.

[Ben Uglow:]

Afternoon, Ulrich, Eric and Alanna. I had a couple both relating to Power. On the sort of Power outlook, really, maybe – could you just talk about base orders and why in the last couple of quarters base orders have continued to appear quite weak? When you look at the tender pipeline for larger orders into 2017, is that funnel looking any bigger than it was a few months ago? That's question number one. Question number two, and maybe this is for Eric, could you just remind us about the phasing of the Power Up investments in Power Grids? You've had quite a nice step-up in margin in the fourth quarter. What I'm trying to figure out is how significant is the dampening effect of investments likely to be during 2017?

[Ulrich Spiesshofer:]

Yeah. Good afternoon, Ben, and thank you very much for your questions. Yeah, look, I think your observation overall on the quality and improvement of Power Grids is correct. We had 4.3% margin not too long ago. Now, we are for the year firmly above 9%; in the quarter, even above 10%. And that's a good momentum, and Eric will give you more granularity on the outlook on that one. Regarding the tender pipeline, look, when you go around the world, at the moment, renewables are really kicking in massively all around the world. I'll just give you one concrete example. I was two weeks ago with the Energy Minister of Abu Dhabi and they are building now plans where the IPP price for solar is $0.024 per kilowatt hour. And there, that means it is a very, very attractive value proposition. We see that not only in the Middle East. We see it in India. We see it all over the world. And these projects mean there will be connections needed over long distances to connect the renewables into the main areas of demand. So, on the long-distance connections and long-distance connections especially for the feeding of renewables into the grid, we remain optimistic as we have shared with you at the Capital Markets Day. You have seen now, for example, the Belo Monte project in Brazil is feeding in renewables into the Brazil grid. India, the very big project is basically taking wind from the South and putting it into the Middle. So, the tender backlog and the tender activities and the project discussions are healthy in Power Grids. And I'm optimistic that, in the future, we will realize more projects. Now, as you know, the large project business is lumpy. You can never predict exactly in which quarter it will come, so we will have from quarter-to-quarter some ups and downs, but it's normal in the large projects in Power Grids. That brings me to the base order situation. Yeah, look, on the base order side, there is an element of Power Grids which goes into large industry and that's on the process, the mining side maybe connect industrial operations and new industrial operations with the grid. That's definitely a subdued part of the portfolio. So, the supply of Power Grids in the industry is subdued, and that contributes to the dampening on the base orders that we have seen. Let's see how that turns out again. It is definitely our ambition to bring also base orders back to growth in Power Grids. And with that, I'll hand it over to Eric to talk a little bit more about the Power Up program and its cyclicality or its timing of the cost.

[Eric A. Elzvik:]

Yeah, Ben. So, let's go to that topic. So, first of all, we are, of course, very pleased to see that we have this division in Q4 above 10% in the new margin corridor. At the same time, this is quite the pattern between the quarter, so we should not count that we will during the transformation time with Power Up be every quarter in the margin corridor. The Power Up costs, as we said at Capital Markets Day, we see approximately $200 million in total, about $100 million in 2017, about $100 million in 2018. Most of that will be on the operational side. It could be some smaller pieces on the non-operational side, but most of that is operational and will then have a slight impact on the margin in the respective quarters.

[Ben Uglow:]

That's really helpful. Thank you very much.

[Alanna Abrahamson:]

Thanks, Ben. Next question, please?

[Operator:]

The next question is from Mr. James Stettler from Barclays. Please go ahead.

[James Stettler:]

Thank you, and good afternoon, all. You had very good margin momentum in the DM division before the – before Q4. Can you talk a bit about how we should look at that division into 2017? Assuming you weren't to make the changes, is there a possibility to get back into range or is this going to take a bit longer, especially given that base orders are picking up? That's question number one. And on question number two, you have the $2 billion working capital program, which supposedly will end this year. If I'm correct, is there still $1.1 billion to go until that all come in, in 2017? Thank you.

[Ulrich Spiesshofer:]

Yeah. Look, James, thank you for your observation on DM. DM, as of January 1, is becoming RM and it's a much better focused, much more streamlined portfolio. There, we really focus Sammy and his team on Robotics and Motion. And in Robotics and Motion, Robotics is going very well. We are happy. Our motors and drives had to go through a trough in 2016, given the very strongly dampening effect of the process industries. We're working our way out of that, and we'll be better in 2017. The portfolio part that goes over to Tarak belongs to Tarak logically. In Electrification, it makes sense to combine everything that Tarak has as to EV charging, with the solar activity and the power quality piece. All three of them are under critical in terms of true industrial mass and relatively early in their ramp-up. So, they have a relatively low margin, and that will have a dampening effect on Tarak's business. Now, we have significant synergies between Tarak's existing portfolio and these activities. So, you should expect that, over time, the dampening effects of this transfer into Tarak's portfolio to wear off and Tarak to get to the target margin corridor that we have announced for the business later in the year. With that said, I'll hand it over to Eric, our working capital man here.

[Eric A. Elzvik:]

Yeah. Now, look, James, we have done $900-plus million in the – until the end of 2016 with a much better speed and trajectory in the second half year. So, we have now another $1 billion to do in 2017 to reach the target, and that is what is in the plan. And it's, of course, spread from inventory to accounts payable to accounts receivable and quite comprehensive programs running in all the areas. So, we are confirming the target for $2 billion for the program until the end of this year.

[James Stettler:]

Great. Thank you.

[Alanna Abrahamson:]

Thanks. Next question, please?

[Operator:]

The next question is from Mr. Mark Troman from BAML. Please go ahead.

[Mark Troman:]

Yes. Thank you. Good afternoon, Uli, Eric and Alanna. Two questions, if I could. First one, on outlook, could you give a bit more color, Uli, on the process market? So, I guess, the ones that are still weak, oil and gas, petrochemical, marine, metals and mining. And what are we seeing now? Are we seeing a bottoming? Are there any parts that are improving? Are there parts that are still declining quite heavily? If you could provide a bit of color on those process markets, that would be helpful. Thank you. And the second question, on the restructuring charges, I think, according to your number book where (47

[Ulrich Spiesshofer:]

Good afternoon, Mark, and thanks for the question. Yeah. Look, the answer for your process industry question is, yes, we got to have all of it, what you just said. We have massive contraction, we have steady bottoming out and we have growth. And let me run you through the different industry segments. The biggest one is definitely oil and gas, and the weakest in oil and gas will be offshore. We don't expect any improvement in the offshore in 2017 in the business sentiment and in the investment climate. So, this one will be still a very, very tough part of the market. We see on the onshore and the down – especially in the downstream operations, we see signals that the OpEx and the service activities are getting a little bit more money, which is good for us, and we have the first discussions on future projects which are becoming now a little bit clearer. So, there will be a tender pipeline coming, but it's too early to speculate that this will kick in, in a significant way in 2017. I think that's more 2018. So, 2017 is probably more OpEx recovery on the downstream and onshore activities that we have. On mining, 2017 will be another difficult year. Mining will not improve. And knock on wood that it has bottomed out but the signals there are not easy ones in terms of the overall activities. That's probably more 2018, 2019 market to come back than anything before that. Then, if you look on the marine sector, it's really an interesting situation because we have – if you take oil and gas supply vessels, the market contracted in 2016 more than 60%. So, there is definitely dead cat bounce on oil and gas supply vessels, and we don't expect any significant pickup or even a dampening on that front. This will be back in 2017 as well. On the other hand, if you look at cruise ship market, ABB is extremely, strongly positioned. We have a fantastic offering on cruise ship that really goes from electrification over propulsion into the ASI ports. We have now the fleet management. We have the software activities in that market, which is going very well. There's a backlog alone in China of more than 100 cruise ships. So, all of China is going on a cruise, joining all the Americans that are going on a cruise. So, I'm quite optimistic about that part of the portfolio. So, if you look at Industrial Automation and if you look at Process Automation specifically as a segment, we will need to fly on site, via – at the one hand, via restructuring; on the other hand, via investing in growth. And I think Peter and his team are doing a very good job navigating the waters going through that. With that, I'll hand it over to Eric on the restructuring question that you just asked.

[Eric A. Elzvik:]

Yeah, Mark. So, on the restructuring, you are right that the 2016 number benefited from the release that we could do as was mentioned earlier on the call. If you look to 2017, with this, we see very small additional restructuring in the WCP program, around $10 million as we have put in one of the back-up slides. And for the normal restructuring, we see a fairly normal year in 2017, where we have guided previously of about $200 million. So, that is the guidance for the normal restructuring. For 2018, we don't make any specific guidance at this point in time, but I would assume that it will also, for modeling purpose that you can use, a normal year. What is important to point out is we also have below the line the continued program implementation cost for the WCP program, which we are guiding to approximately $220 million in 2017. That is not restructuring, but implementation cost. That is important that you keep those in mind for your modeling.

[Mark Troman:]

Thank you very much.

[Alanna Abrahamson:]

Thank you very much. Let's go to the next question, please.

[Operator:]

The next question is from Mr. Martin Wilkie from Citi. Please go ahead.

[Martin Wilkie:]

Hi. Thank you for the question. It's Martin from Citi. Just a question about potential cash deployments. There was a quote in the press today that you might consider larger acquisitions. I remember, Uli, when you became CEO, you talked about software, oil and gas, food and beverage as potential growth areas. And more recently, you also talked about becoming number one in robotics. And obviously, I can't expect you to talk specifics. But perhaps you could talk more generally about what you think that you might need to fill in terms of white space across the group. Is it technology-related distribution installed base? And as a related question, in particular, if you can have another $1 billion of cash release on working capital, what do you feel your balance sheet leverage is? What do you feel your scope is in terms of doing acquisitions? Thank you.

[Ulrich Spiesshofer:]

Yeah, Martin, good afternoon. Thank you for your question. Yeah, look, our capital allocation principles remain unchanged and the priorities remain unchanged. Number one, we have to really support organic growth. I can tell you, I'm quite excited about all the organic growth opportunities that is still out there – see out there and there's quite an active program going on in that field. The second one is the dividend. You have seen we had increased the dividend again, and we absolutely stick to our dividend policy. I think it's a very important part of our value proposition to invest those in this volatile time. The two priorities around acquisitions. We have been very disciplined on acquisitions. The first couple of years after me taking office, I had a put a hold on it because we first needed to do a serious homework, get ABB into shape, create an integration capacity from a management perspective to really be ready to do that. And the second half of last year reflect we are ready, but it does not mean that we are desperate to do acquisitions. We will do them at the right time when we feel there is good value creation potential, there's an attractive opportunity and there's also good implementation and integration capacity on our side. If you look at the fields of deployment, if I go through the four divisions, take Electrification Products. In Electrification products, a lot of the business and a lot of the offering is a pretty local offering. ABB in Electrification, if you take a quarter, we are strong sort of north of a quarter and we are not that strong south of the quarter. So, if we would find the right way to deploy capital in this field, I would be open to that, also in attractive markets above the (54

[Martin Wilkie:]

Thank you. That was very helpful.

[Ulrich Spiesshofer:]

You're welcome.

[Alanna Abrahamson:]

Next question, please?

[Operator:]

The next question is from Mr. Andre Kukhnin from Credit Suisse. Please go ahead.

[Andre Kukhnin:]

Yes. Good afternoon. Thanks very much for taking my questions. My first one is on your outlook. It looks like China is improved for you there, and the buildings look like the swing factor. So, could you give us a bit more color on what you're seeing there and where and maybe to what sort of order of magnitude? And, yeah, the second question is more on the catch-up effect in power and gas. We've obviously seen an element of that – sorry, in Power Grids – some element of that in Q4 after a softer Q3. Can we say that we're all done with that and we're now in a normal run rate? Or is there more to do? Thank you.

[Ulrich Spiesshofer:]

Okay. Let me start with your second question. Look, the abnormal situation was Q3 and the normal situation are the other quarters. In Q3, we had a very, very low order intake. We were all unhappy about it, but we all also knew what we had in the pipeline. That's the reason why nobody on the ABB side panicked or got nervous. We just executed the tender, and we won some significant projects. The Power Grids' order line will always be volatile with large projects, so don't expect that we're going to have a totally smooth ride. The large orders will create volatility from quarter-to-quarter. The base orders need to get back to steady. I've mentioned before, the industrial part of that one is important that we get it back in shape and get going. But all together, you should see our Power Grids division in the future to tap the growth opportunities in the market in a good way and really get solid momentum going. Now, on China, as ABB is going through a massive transformation, so is China. China is moving from an investment-driven to a consumption-driven and innovation-driven country, and we are working very heavily with China. I'm serving on two advisory boards there and work very closely also with the government. And it's very clear that the government is absolutely serious in deploying capital to really reshape China in a clearly defined agenda. The one is more renewables, more power grid, better infrastructure. That's great for us. And with our leading-edge technology, with our strong capability to get low-loss, long-distance transmission going, we are ahead of competition and we are well positioned to work with China on this one. If you look at greener and smarter cities, whether it's the EV charging piece, the ABB is the leading start-up company in the world where we really drive that in a good way, or whether it's smarter buildings and smarter building control. That is how our home automation we are participating. I think we are quite well positioned. If you look at the industrial upgrade and the Made in China 2025 program, it is paramount to be competitive. And that does not only mean in the international comparison, but mainly also in the local comparison against local competitors that companies invest in robotization and automation. And us being the number one in China in robotics and having a strong automation capability is also helping us to drive it. So, that's the sector perspective in China. The second perspective that is important is China is a large continent. And in the past, we have been pretty active along what I call the Eastern Banana, and we didn't go that strongly into the West and into the East of China. This is a forceful action that Chunyuan Gu is driving. He uses our PIE model to that. He collaborates across the different business units. And he basically has a wave-by-wave program going West and East in China and that's the reason why I'm also comfortable that we'll get there. If you look at, for example, the robot's density per 10,000 workers in China compared to Europe or compared even to the U.S., which is lower than Europe, there's a dramatic catch-up to be done and a fantastic opportunity. So, altogether, if we manage this well, we should be cautiously optimistic about China.

[Alanna Abrahamson:]

Thank you.

[Andre Kukhnin:]

Thank you.

[Alanna Abrahamson:]

Next question, please?

[Operator:]

The next question is from Mr. Jeffrey Sprague from Vertical Research Partners. Please go ahead.

[Jeffrey T. Sprague:]

Thank you. Good day, everyone.

[Alanna Abrahamson:]

Good day, Jeff.

[Jeffrey T. Sprague:]

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

[Ulrich Spiesshofer:]

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

[Jeffrey T. Sprague:]

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

[Eric A. Elzvik:]

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

[Jeffrey T. Sprague:]

Thank you.

[Alanna Abrahamson:]

Next question, please?

[Operator:]

The next question is from Mr. Gaël De Bray from Deutsche Bank. Please go ahead. Mr. De Bray, your line is open.

[Alanna Abrahamson:]

Gaël, I think you're on mute. We cannot hear you.

[Gaël De Bray:]

Oh, can you...

[Alanna Abrahamson:]

There you go.

[Gaël De Bray:]

Hi. Can you hear me now?

[Alanna Abrahamson:]

Yes.

[Ulrich Spiesshofer:]

Absolutely.

[Eric A. Elzvik:]

Yes.

[Gaël De Bray:]

Okay. Sorry for that. Good evening, everybody. The first question is around the performance of the Process Automation business. I mean, based on the order trend that we've seen now for the past few quarters, it seems you're likely losing share here. So, could you elaborate on the competitive dynamics for the business? And is there actually a risk that you would have favored the mix and margins over growth (01

[Ulrich Spiesshofer:]

Okay. Yeah. Look, if I take the Process Automation piece, quite frankly, we are taking share in certain segments. We have a very specific structure in our PA business historically. We have service in there very strongly. We have the marine business in there. We have our turbocharger business in there. And actually, we have all of the DCS based industrial solutions business in there. And if you look at the pattern, we benchmark every month every division against key competitors on a pretty granular way on a business unit level. And I would say Peter is doing quite well in what we have seen in terms of momentum in others. I don't want to brag about it, but I'm okay with that development. And naturally, as 2017, hopefully gets us on the service side a little bit more momentum back, that should have a positive influence on the quality of the business. Now, on the U.S., I will give you an overview and then hand it over to Eric on the tax discussion. Look, ABB in the U.S. is roughly a business which is somewhere between $7 billion and $8 billion. We have close to 20,000 people in the U.S. And given the more than $10 billion that we have invested over the last seven years, we have today a pretty self-contained footprint in the U.S. So, we are importing about the same level of what we are exporting from the U.S., and it's on a level which is not that significant for our U.S. operations all together. Our local footprint, we have more than 60 factories. You might remember we bought Baldor, we bought Thomas & Betts. We are very strong in Power Grids historically, in both on the products and on the systems side. We got a large grid integration center in Raleigh in North Carolina. We got a strong footprint around Wisconsin in the north and Chicago in the north. We have Fort Smith, Arkansas as the headquarter of Baldor. We have Saint Louis as the headquarter of Thomas & Betts. So, altogether, we are basically in the U.S. for the U.S. And if you just navigate through the ripples, waves and noise that we see at the moment around the new government and look at the content, the content says we need to invest in infrastructure. And there, ABB is the number one on the grid side with local offering out of local factories. The U.S. will invest in competitiveness and industrial upgrade and automation to be able that – if jobs come back, they are being combined with smart automation to drive competitiveness. ABB was the first one less than two years ago that has invested in a local robot facility in Auburn Hills close to Detroit, where we are manufacturing today robots for the U.S. in the U.S. So, given that we are pretty self-contained, given that we have a strong U.S.-for-U.S. business, we have a lot of strong local players and long – strong local management, I'm cautiously optimistic that we will participate with a fair share of the activities to come. And actually, we'll keep investing as we see the growth coming. With that, I'll hand it over to Eric on the tax question.

[Eric A. Elzvik:]

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

[Alanna Abrahamson:]

Thank you. Thank you very much.

[Gaël De Bray:]

Okay. Thanks very much.

[Alanna Abrahamson:]

We'll take two more sets of questions, please, operator.

[Operator:]

The next one comes from Alok Katre from Societe Generale. Please go ahead.

[Alok Katre:]

Yeah. Thank you. Thanks for taking my questions, and good afternoon. Just had a couple of ones. Firstly, on Robotics, could you talk a little bit about the competitive dynamics in China? Clearly, the growth potential over there is pretty strong. I just wanted to understand what the strategy is for guarding against let's say, domestic players taking share or perhaps against technology transfer? And are you seeing any evidence of the government there trying to influence the market, especially given that one of your competitors could now potentially be seen as a domestic, sort of, Chinese OEM? And the second question was just a clarification. On your digitalization portfolio, I mean, could you just remind us how much your digital and software sales are worth, either dollar terms or as percentage of group sale? And what sort of growth are you seeing there? I'm just asking this in the context of pretty strong performance and comments by some of your peers. Thanks.

[Ulrich Spiesshofer:]

Okay. Thank you very much. Let me start with the robotics situation in China. ABB decades ago set up a very strong team in Shanghai, and we are today the market leader in robotics in China and we have the firm intent to stay there. We have fully localized the value chain. We have local R&D. We have local manufacturing. We have local sourcing. And it is our firm ambition to beat any competitor in its home base back in China. The China is the largest robotics market in the world. Last year, they'll be the largest robotics market in the world for quite some years to come. If you look at the robot penetration, there is a lot of opportunity to do more. And actually, this attractive market attracts competitors and investments in this field. I think it's very, very important that we keep the investment, that we keep our strong portfolio. We have experience on what it takes when competitors come up in the country because, in the Power portfolio, that probably happened about 10, 8 years ago already. So, we know how to deal with it and we know how to run the business for competitiveness, and it's very clear that the Chinese government is supporting robot investments, so does local governments. And it does not mean that we don't participate in that opportunity. We just play it smartly as a very strong local player that we are already today. Now, on digitalization, look, more than 50% of our offerings today is software based. So, it is not like ABB comes to that field as a newcomer. We are in this field since many, many years. We are number one in distributed control systems globally with 70 million connected devices, 70,000 control systems. So, ABB has a strong legacy, a very strong platform in this field. If you look at the newer digital services, if you look at the cloud-enabled services, if you take what we're doing in marine, we have significant double-digit growth in marine on the digital services. We have to say that, around Robotics, we are bringing up the smart sensor solutions. Last week, we launched Asset Health 3.0 for utilities. There, ABB is the global leader and the number one in the market. So, I would expect that to develop quite forcefully ahead of the average companies' growth in the future, and this is a major source of growth in the future as well. We have – all together, about 18% of our portfolio is software and services and we firmly intend to both grow that but also grow the share in ABB on that going forward.

[Alanna Abrahamson:]

Last question, please?

[Operator:]

The last question is from Mr. Jonathan Mounsey from Exane BNP Paribas. Please go ahead.

[Jonathan Mounsey:]

Hi. Good afternoon. Thanks for taking my question. A couple, if I may. On Electrification Products, I think the order intake was a little lighter than what the consensus was expecting. I think you mentioned low-voltage and medium-voltage systems orders being a little weak. Is there any particular issue, or is it just sort of normal lumpiness in the quarter? And then, secondly, on Power Grids, after the reorganization, let's put it that way, the JV, et cetera, in Power Grids that were announced at the Capital Markets Day, are we really done now in terms of the ownership structure of Power Grids? Are there elements of the branches of Power Grids where we may hear news around a change in the way you do business or the ownership structure?

[Ulrich Spiesshofer:]

Yeah. Look, on EP, yes, it is the lumpiness in the system side of the business. So, no reason to be overly concerned. It was a soft one in the last quarter, but Tarak is working hard with his team to really mitigate that. On the Power Grids side, as we said very clearly at the Capital Markets Day, we have taken the overall decision what to do with this business, either transform it under ABB's ownership and that means very clearly that we will also continue to work on the portfolio of that business. You have seen us divesting cables in 2016 and that will be completed soon. That deal will be closed. And it was just a business on the, as I call it, copper and iron side, which didn't allow us to, long term, have a leading competitive position because we were under critical, so we put it together as NKT and secured a long-term supply arrangement to drive this. The two activities on EPC both with the floor enable our ramping up. I'm very happy with the development there, and that will help us to de-risk whilst taking a certain part of the top line away, but that's okay because it's a top line that does not fit our future pattern that we will develop. You can expect that we will do some smaller adjustments, both coming in and coming out of the portfolio. But in large, we are done with where we want to go and we will drive it that way.

[Jonathan Mounsey:]

Very clear. Thank you.

[Alanna Abrahamson:]

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

[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.