ABB Ltd
Q3 2015 Earnings Call Transcript

Published: 21 Oct 2015

[Operator:]

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q3 2015 Results Conference Call. I am Celina, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After our presentation, there will be a Q&A session. At this time, it's my pleasure to hand over to Mrs. Alanna Abrahamson, Head of Investor Relations. Please go ahead, madam.

[Alanna Abrahamson:]

Good afternoon, ladies and gentlemen, and thank you for joining us today for our third quarter 2015 results call. I am with Ulrich Spiesshofer, our CEO, and Eric Elzvik, our CFO. As usual, you can find the presentation on our website. This call is being recorded and will be available within the next hour. Before we get started, please refer to the important notices regarding Safe Harbor and our use of non-GAAP measures on page two of the ABB presentation. This conference call will include forward-looking statements. These statements are based on our company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. With that, I will hand over to Uli.

[Ulrich Spiesshofer:]

Thank you, Alanna. Good afternoon, ladies and gentlemen, and welcome from my side as well. Let me start by summarizing some of the Q3 highlights on slide three. We continued to deliver along our three focus areas; profitable growth, relentless execution and business-led collaboration. Our orders reflect the adverse market conditions we faced in the challenging Q3 2014 comparable when we won a record amount of large orders in Power Systems and Process Automation. Base orders were minus 3% globally, reflecting tougher conditions in China in the oil and gas sector specifically related to discretionary spending. However, through our profitable growth initiatives, we were able to win in the quarter for example some key power transmission orders specifically in Europe and in China. The book-to-bill ratio for the quarter was 1.03 times and 1.07 times for the year-to-date. Revenues in the third quarter declined 2% on lower short cycle volumes and weak demand in many parts of the distribution channels. Our continued focus on relentless execution enabled us to expand operational EBITA margin by 50 basis points. We achieved further progress on the Power Systems turnaround as we improved operational EBITA margin by over 520 basis points and continued to de-risk the portfolio. The turnaround is well on track and nearing completion. We also continued to drive self-help by focusing on growth opportunities in a disciplined way and step up our capacity adjustments, productivity measures and cost reductions to mitigate the impact of market headwinds. As part of the second stage of our Next Level strategy, which we announced in September, we are driving our focused 1,000-day programs of white-collar productivity and working capital. Our new divisional structure of four customer-focused divisions is ready for operation in January 2016 to ensure we spend more time with our customers, we are establishing a common sales platform across the group with Salesforce.com. The rollout is on track and the platform is already operational in 14 countries. Our Group Account Management program has been realigned, it is now focused to ensure greater success and further account penetration. In summary, we drove margin accretion in adverse markets and are setting up cost out and productivity measures to safeguard profitability of ABB. Let's now turn to chart four for the key figures, where I'll focus on a few key points. Orders were double digit lower in the quarter mainly because of the tough comparable of Q3 2014 but are steady year-to-date. Our order backlog is up 4% on a like-for-like basis versus the end of Q3 2014. This will continue to support revenues into 2016 and 2017. Revenues were minus 2% in the quarter, but up 1% year-to-date. Net income in the quarter was lower than in the same period last year as we booked after tax gains for the sale of businesses of about $100 million in Q3 2014. Without this, net income would have been in line with the revenue development. Cash from operations was flat in dollar terms as better capital management offset lower net income. Operational earnings per share on a constant currency basis grew 2% and 5% on a year-to-date basis. Let me now give you a perspective on the regional order performance on chart five. Orders in Europe were down 13% in the quarter. However, you might remember that we won a record amount of large orders in Q3 2014, including an $800 million order to provide power transmission link in Scotland as well as $70 million order for Swiss Railways. In Q3 this year, we won a $450 million order for high voltage direct current interconnection between the power grids of the U.K. and Norway as well as a $90 million high voltage cable order linking the Norwegian grid to the Johan Sverdrup offshore oil field. As you can see in the base order growth table on the right, it is really a mixed environment for Europe. Germany is steady. Finland and the U.K. grew double digit, while a weaker market impacted Italy, France and Switzerland. Orders in the Americas were steady. Brazil was down significantly due to the large mining order a year earlier and a tough economy, while the U.S. grew total orders 5% as we had some large utility order bookings. Softer demand in oil and gas was felt in the base order development in countries such as Canada and the U.S. The Asia, Middle East and Africa region was down compared to a very strong quarter a year ago when we secured a large marine order in South Korea. Although, China grew 5%, the underlying base orders declined 15% compared to the same period a year ago as we had signaled during the quarter. However, we received significant orders worth $300 million to boost power capacity and grid reliability which reflects the successful collaboration across ABB's business units. India this quarter grew 51%; there's key successes in almost every division. ABB won additional power orders related to renewables and an order to supply ultra high voltage AC transformers to upgrade their power transmission infrastructure. Our profitable growth initiatives and local footprint are really paying off in India. These developments demonstrate that our PIE approach works in a difficult market environment and that our broad geographic scope helps us identify and drive growth opportunities in a tough market environment globally. Let's move to chart six, where I would like to spend some time on the market trends we see going into 2016. When it comes to global end markets, many or few have expressed concern about the oil and gas and utility sectors, so let me give you some detail and granularity on these. In upstream oil and gas, we saw a big decrease in discretionary spending at the start of the year, which appears to be stabilizing at a low level. However, we believe that more postponements of new CapEx in upstream oil and gas are to come. Investment in offshore drilling equipment has basically stopped and shale gas investment has decreased materially. However, we are also seeing some benefits from the continued lower oil price. We have seen some positive effects from the lower feedstock prices in downstream in the petrochemical sector. We are also starting to see that funds for oil and gas subsidies being considered for re-deployment into other areas such as infrastructure. As for utilities, many are re-evaluating their business model and structure in times of uncertain energy policy and pricing environment and this has led to cautiousness in investment spending. We continue to see investment activity in ultra high voltage DC power transmission projects in mature as well as emerging markets. There is an increased demand to integrate renewables and invest in grid reliability. Grid automation continues to increase in importance as complexity in distributed generation needs to grow. In these areas, we continue to be absolutely at the forefront of technology. We are leading in power and automation for the grid. Let's now look at our two largest countries. The U.S. is showing evidence of developing into a two-speed economy. The manufacturing and trade sectors are becoming constrained as weak global economies, strong U.S. dollar and lower oil exploration and production impact spending. In contrast, the consumer market shows more resilience as food and beverage and automotive continue to grow. There is renewed optimism in residential construction in September; homebuilder confidence was the strongest in nearly 10 years. As for utilities, it has been showing stronger interest in power transmission solutions that integrate renewables. China has shifted its focus to a more consumer demand-driven economy, resulting in a reduction in industrial spending. In some industries, such as cement, the government has even legislated against building more capacity. The rapidly rising consumer spending has yet to offset the decline in traditional industrial investments. Therefore, short-term demand is depressed. On the positive side, there is continued investment in China's grid such as in ultra high voltage direct current transmission technology where ABB is a clear leader. State Grid of China has indicated that it will increase its investments by 7% to 12% in 2016. In addition, automation demand, particularly for robotics solutions, is growing significantly due to a shortage of qualified labor and productivity improvement needs. Let me turn over the presentation now to Eric to take you through the financials in more detail.

[Eric A. Elzvik:]

Thank you, Uli. Let's move to our operational EBITA bridge on chart number seven. In this challenging market, we have achieved $8 million in net savings, which was offset then by negative net volume levels. Most of the product margin improvements came from Power Systems as the division continued to successfully execute its key milestones. The mix was negative as Power Systems made up a greater share of the revenues this quarter. As always, in the other category, we have many small items which add up, includes realized foreign exchange gains and losses, commodities supply chain costs, changes in corporate provisions and other small-offs. And as in the last quarter, the forex translation effect continues to have a material negative impact. All of these changes led to a group operational EBITA of approximately $1.1 billion and an operational EBITA margin of 12.5% or a 50 basis points improvement. Turning to slide number eight, we have here an overview of the divisional performance in the quarter. As I just mentioned, the highlight of the quarter was the improvement in the operational EBITA margin of 50 basis points. Solid execution on the step change program in Power Systems and cost savings measures in Low Voltage Products led to higher margins in a difficult market. The order decline in Discrete Automation and Motion is a bit amplified as there were significant internal marine orders that were booked in Q3 2014. The operational EBITA margin decreased mainly as a result of lower volumes in the quarter and a lower share of standard product revenues. We are taking clear actions as focused capacity adjustments and restructurings are underway and we are further ramping up these activities. The highlight for Low Voltage Products was the 180 basis points improvement in operational EBITA margins. This reflects targeted productivity measures, increased cost savings and a strong focus on execution. Please remember that in Low Voltage Products we have some small seasonal effects and therefore quarter four will most likely be lower, as it was in earlier years. Results in the Process Automation division also reflects the significant large order that were booked in Q3 2014 and overall lower spending in the oil and gas sector. Revenues will remain under pressure as short cycle orders, primarily from oil and gas, have been weak over the last nine months. The operational EBITA margin declined 120 basis points due to weaker revenues and an unfavorable mix. Capacity adjustments to mitigate these market headwinds are well underway. Cash was negatively impacted due to milestone revenue bookings late in the quarter which resulted in higher current receivables. Power Products had a strong revenue growth in the quarter as it successfully executed orders from the backlog. The operational EBITA margin was steady as higher revenues offset ramp-up costs associated with new production facilities in key markets. Cash flow reflects the current challenging market environments, where customer advances are deteriorating and payment terms have been more unfavorable. In Power Systems, large orders in the quarter declined for reasons of timing, challenging macroeconomic conditions and product selectivity. The operational EBITA and the related margin increased mainly due to the ongoing step change program and the continued cost savings which have been put in place to return this division to a higher and more consistent profitability. We are on track to be within the margin corridor in 2016. Cash flow here also improved as many of the key milestones were achieved in the quarter. Uli will go into more detail on the Power Systems step change progress later in the presentation. Many of you have asked about the corporate operational EBITA line and whether our guidance remains for 2015. With the current year-to-date figure and our estimate for quarter four, we will most likely be slightly below our 2015 indicated range of $500 million to $540 million for corporate EBITA. All in all, it is a tough market, but we are taking action to safeguard our profitability. And just as a reminder, when you are updating your models for quarter four 2015 and 2016, our restructuring guidance remains as before and therefore you should expect a much higher restructuring charge in Q4 of about $100 million to $150 million. In addition to this in September we gave you more detail on our expected white-collar productivity program. From this program you should expect an additional restructuring in 2015, 2016 and 2017. The detail of this can be found on chart 22 of the deck, which is the same as we showed in London at the Capital Markets Day, and for 2015 we presently expect the white-collar productivity restructuring charge to be at the lower end of the range of $300 million to $600 million as we have in this chart. We will be disclosing and tracking this program separately in the future. Let's now turn to slide nine and look at cash flow and net working capital. In quarter three, our effort to improve net working capital management started to show some results. Our free cash flow from net income conversion was 116% based on a 12-month average. Cash from operations was flat in the quarter in nominal rates but grew approximately 10% on a constant currency basis. In this challenging market, it is getting tougher to negotiate favorable terms of payment, advances are lower and payment terms are being stretched out. In this harsh market environment, our working capital initiative is critical. The net working capital improved slightly by around 65 basis points. We continue to reduce working capital by stepping up efforts to improve inventory management through the entire value chain, from product design to manufacturing and logistics. And these measures are also being put in place to reduce the excess unbilled receivables in the large projects. And with that, let me now turn it back to Uli.

[Ulrich Spiesshofer:]

Thank you, Eric. Let's turn to slide 10. We launched the second stage of our Next Level strategy in September 2015 to accelerate ABB's transformation. Stage 2 comprises a significant set of actions to drive the shift of the center of gravity of the firm towards higher growth, greater competitiveness and lower risk by initiating two focused execution programs and accelerating the existing ones. Implementation of Stage 2 of the Next Level strategy continues along the three focus areas of profitable growth, relentless execution and business-led collaboration. If you turn to chart 11, let me quickly remind you what we really mean by shifting the center of gravity. There are three elements. One is to enhance organic growth momentum, which is at the bottom right of the chart. We achieved this by implementing our PIE framework and expanding into high-growth segments. In the bottom left, we show how we are de-risking the business by adjusting the business model as we are doing, for example, in Power Systems, and in terms of the economic balance that we aim for a better balance between early and late cycle businesses. At the top, we show the drivers to strengthen our competitiveness by broadening our solutions offering, pushing harder on our service business and driving further our software-led differentiation such as strengthening our leading position in asset management software. On chart 12, you can see examples for our progress in each of these three areas in Q3. On organic growth, we have grown food and beverage double digit consecutively over the last three quarters. With our unique and comprehensive product portfolio, we are able to provide the customer with a strong portfolio offering by collaborating as One ABB. On lowering risks, ABB is realigning the divisions to become more customer-focused whilst we are addressing the business model each year for their systems project. This will enable us to become quicker and more agile in addressing the markets. On the competitiveness side, we continue to introduce new products, software and service solutions across all of our businesses. As an example, we installed the first, the world's first high and medium voltage switchgear for Swiss utility EWZ with new eco-efficient gas, which significantly lowers the environmental impact. Chart 13 shows concrete examples how we drive profitable organic growth through our PIE framework of penetration, innovation and expansion. In terms of market penetration, we made solid progress in India by providing plant electrification, automation and substation solutions for solar power plants. We now have the largest installed base of solar inverters in India; we have a cumulative capacity of 2 gigawatts, that's half of the country's overall solar installed base of 4 gigawatts. Innovation continued to be a focus for growth as we introduced several new offerings. One example is a successful partnership with Dutch weather forecasting specialist, MeteoGroup, to optimize shipping routes, boost safety and protect cargo, the software that forecasts adverse weather conditions and takes the ship condition in mind. Our common solution will be installed now on 140 container ships belonging to the Maersk Line. This is a truly innovative offering to the market and it proves also that ABB is a true technology leader in what we call the Internet of Things, services and people. We're also expanding into high growth markets and geographies, such as microgrids in Africa. In the third quarter, we won a strategically significant order from Socabelec to install a microgrid solution to boost renewable energy use in a remote community in Kenya. This will provide power to a remote town of 5,000 people in a continent, where more than 600 million people do not have access to permanent power supply. Moving to chart 14, here are two examples of success in the high growth segment of e-mobility. Last week, we launched our fast charging robotics solution for public buses at the Busworld Trade Show. The first public project using this technology will integrate Volvo Buses and four ABB automatic e-bus chargers into the existing Luxembourg public transport system. This will allow electric buses to drive 24/7 with a typical charge time of just four minutes to six minutes. This system can easily be integrated into existing bus lines by installing flexible chargers; I call them robo chargers at end points, terminals and or immediate stops. Just yesterday, we announced another strategic partnership with Microsoft, in which ABB's leading fast charging stations for electric vehicles will be combined with Microsoft's Azure cloud based services. This gives us the solution, scalability and global agility to develop charging infrastructure for the world's major automotive markets in a swift way. Let's move to chart 15. We made a commitment to you to bring Power Systems back to sustainable profitability and we have delivered now four consecutive quarters of positive operational EBITA margin. Operational EBITA margin amounted to 4.6% with a 520 basis points improvement year-on-year. In offshore wind, we continue to kick off milestones in our remaining project portfolio. We handed over DolWin1 to the customer in July and we installed DolWin2 in the North Sea in August. Another key success in Power Systems in this quarter was that the first phase in the North-East Agra transmission link in India was successfully energized. Our partnership with Hitachi is now operational and we look forward to key business successes together in Japan. Hence, the turnaround in Power Systems is on track and we're nearing completion. As we mentioned in September, we will realign our divisional structure effective January 2016 and we are conducting the announced strategic portfolio review of Power Grids, which will be completed in 2016. Turning to chart 16, in this tough market environment, we continue to drive self-help by accelerating cost savings and productivity measures and our 1,000-day white-collar productivity program. Through our regular cost savings program, we continue to drive cost savings across supply chain management and operational excellence. We have reduced our workforce and are executing further capacity reductions in line with market conditions and productivity improvement. As announced in September, we have committed to reducing structural cost in addition by $1 billion through our white-collar productivity program. The work streams for the program are on track and the consultation process with employee representatives has already started. Let's turn to chart 17. This chart shows you how we enable and support collaboration to generate profitable growth by simplifying the organization, providing processes and tools and optimizing the way we go to market. We are continuing to drive ABB's transformation aimed at improving customer focus and increasing agility to support the achievement of our 2020 targets. The streamlined organization is ready to commence operation in January 2016 and the first three layers of divisional management have already been announced. A key enabler of simple and faster sales collaboration is the common sales platform. We continue to roll out Salesforce.com and we are now already operational in more than 14 countries. This tool cuts administrative time and increases the time that our sales people can spend with our customers. It's crucial to do this in today's tough market environment. The Group Account Management program is really about collaborating across ABB as a whole to get a higher share of the customer's wallet. We have recently redesigned the program and our pilot show proof of concept as we're now really improving account penetration. Turning to chart 18, in summary, in this challenging market environment, we delivered margin accretion. Going forward, we expect further hard-weather sailing. As part of Stage 2 of the Next Level strategy, we will continue to drive self-help, which means focusing on growth opportunities that are out there in a disciplined way and mitigating the impact of market headwinds through capacity adjustments, productivity measures and cost reduction. With that, I'd like to conclude my remarks and thank you all for your attention.

[Alanna Abrahamson:]

Let's now open the line for questions.

[Operator:]

The first question comes from Mr. Jeffrey Sprague from Vertical Research. Please go ahead.

[Jeffrey T. Sprague:]

Thank you. Good day, everyone. Hello and thank you.

[Ulrich Spiesshofer:]

Hi, Jeffrey.

[Jeffrey T. Sprague:]

Hey, just a couple of questions, please. First, Eric, given what you were saying about kind of the issue of payment terms and the like that you're seeing out there, I'm wondering also if you're seeing any slippage in and how backlog conversion is playing out in your business. It doesn't sound like there are significant order cancellations, per se, but I'm wondering if you're seeing kind of meaningful push-outs to schedules?

[Ulrich Spiesshofer:]

Eric, you want to take, directly you will address.

[Eric A. Elzvik:]

Yes, I will take it. So on the backlog side, we have not seen any pattern other than normal in terms of order delays and then some smaller cancellations, but we are already executing quite well on the backlog as you have seen mostly in the Power businesses. And on the payment side, it is what it is. We are of course working very hard to improve our net working capital in this environment, but it's clear that some of the customer segments, it is tougher with payment terms and payments.

[Jeffrey T. Sprague:]

And then just another follow-up. I'm thinking about just what's going in the pricing environment. In your bridge that net savings $8 million in the quarter has been pretty stable. I think it was $6 million in the prior quarter. But is the price dynamic underneath that changing in a meaningful way? Are you seeing more inherent price pressure across the portfolio?

[Ulrich Spiesshofer:]

Hello, Jeff, the market environment out there is tough. There is a fight going on for demand that's out there. ABB has clearly chosen not to participate in price wars. We will protect the delivery of our margin ambition in this tough time and we rather and as we have shown in many examples would like to wow our customers with innovation that we are bringing out with great customer service. So there is a price dimension in that, but we will hold the line to make sure that we are not giving up on the margin going forward.

[Jeffrey T. Sprague:]

And then just a quick last one for me and I will move on. Just the 2015 restructuring being towards the lower end, does that just reflect kind of the timing and mechanics to get the program up and running or is there some other element to that? Thank you very much.

[Ulrich Spiesshofer:]

Hey, look, Jeff, when you do this kind of programs, you go out at the beginning before you consult with the labor employees and you give the full range of that they have given for $300 million to $600 million for this year and then when you work through the options that we have and what kind of actions we take to get the cost out of the door, our ambition is to deliver the cost savings with as little as possible restructuring and for example when you sometimes in source cost and at the same time have improvements, you might not have restructuring costs by still getting significant cost down. So that's the tradeoffs that we are working on, we are right in the middle of the consultation process at the moment indications that they're giving is towards the lower end of the range.

[Jeffrey T. Sprague:]

Right. Thank you very much.

[Ulrich Spiesshofer:]

You're welcome.

[Alanna Abrahamson:]

Next question, please.

[Operator:]

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

[Mark A. Troman:]

Yes, thank you very much. Good afternoon, Uli, Eric and Alanna. Two questions from me, please. First one, so on service, orders look to be down 4% I think and sales grew 5% and both about 16% of the business at the last count. I don't know if the book-to-bill there is still well above one time, but if it isn't, should we expect the service sales to go down soon or when should we expect those service, the service part of the business to decline? That was question number one. And then secondly, just on the outlook, you talk about growth in China and the U.S. and slower Europe but the report today and I think the last one as well was almost the complete opposite to that with base orders in China down 15% and down 5% in the U.S. and Europe looking generally okay. So are you calling some selection points in those geographical trends into 2016, Europe slowing and China and the U.S. maybe getting a bit better or is that more to do with your order visibility? Just a bit of explanation on what gives you the – if you like what drives the thinking behind that geographical guidance? Thank you.

[Ulrich Spiesshofer:]

Hello, Mark, first of all thank you for your question on service. On service year-to-date, we still have positive book-to-bill and we are fighting hard to make sure that we keep it that way going forward. It's interesting on the service side because I give you a little bit of granularity that oil and gas discretionary spending is directly associated with our service volume in that as fuel and debt has come down massively because customers are very, very careful for example on inventory of spares and other elements there. At the same time, we are growing with service in China, where we have a very large installed base that typically and historically customers have not yet taken up the service offering as strongly and we are pushing that very hard by making sure that we are penetrating here, so basically what we are doing is we recognize the market, contraction in certain areas, but at the same time we are pushing it very hard. We are bringing out a lot of new service products. We have strengthened consciously not only our service sales but we have especially strengthened our service product and product portfolio management to make sure that we have exciting great offerings for our customers out there, which all have at the moment an issue they want to de-man. They want to make sure their own maintenance crews are being reduced and there is a good opportunity for us. So the ambition is to keep it at a book-to-bill which is positive going forward. Now on the market, if you go to page six of our presentation, there is a little bit of description how we see the trends going into 2016 and altogether it's really a mixed bag. If you take China, we have a massive contraction of the classic investment spending and this year the pickup on the consumer demand side is not – it's solid, but it's not big enough to compensate it. So it could well be that during 2016 we are at an inflection point and we are getting back to a growth momentum overall. Now what we are also doing in China particularly, we are refocusing resources on the key growth opportunities. I mentioned service before. Our automation continues especially on the Discrete side and especially on robotics, a major opportunity. So we are reallocating resources in that field. And then also in the Power Grids side, look, State Grid just came out and have not only given a guidance for next year of 7% to 12% growth, they have also said until 2020 they will invest about $300 billion U.S. into incremental spending on the grid side. So this is something where we are all over it and make sure that this great technology that we participate in that one. And in the U.S., a similar picture because the consumer driven, the residential construction. I was impressed by the September number on residential construction, which basically was as confident as it hasn't been for the last 10 years or so, that's positive. Automotive, I had just this morning important meeting with a large automotive customer based somewhere in Michigan who is really planning major investments there, and also on the transmission side customers are more and more interested to get renewables connected and work with us not only on the flow of the power but especially on the grid stabilization and grid automation side. At the same time, upstream oil and gas and mining in my eyes will remain to be very, very soft in 2016. So, it's probably flattening out and then coming back. But if you take that momentum then, you could expect soft growth or growth in the U.S. next year, and then in oil and gas, look, at the moment the massive contraction in oil and gas upstream has outweighed the opportunities on feedstock-related investment, but they are there, we see them. I was just couple of weeks ago in Saudi, visited our Sadara project, which is at the moment the largest downstream oil and gas project going on in the world, it is a 3x6 km site. And there are two more sites in parallel; there is a strong consideration to develop them as well. So, it's a mixed bag altogether. I wouldn't call them market inflection, overall, Mark, for next year but we have some positive signals and with our heat map approach maybe go much, much closer in terms of segmentation and reallocation of resources swiftly, I am confident that we will be able to sail well irrelative to the market development.

[Mark A. Troman:]

Very helpful. Thank you.

[Ulrich Spiesshofer:]

You're welcome.

[Alanna Abrahamson:]

Next question, please.

[Operator:]

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

[Ben E. Uglow:]

Thank you, afternoon, everyone. I had a couple, so, first of all on the Discrete Automation business in particular, I'm not sure if this is for Ulrich or from Eric, but can you give some color or some sense of what is driving the top line specifically? 7% down is a big number for that division. It happened quite quickly and the press release talks about motors and drives. I'm guessing that part of that is shale and oil and gas in the U.S. but can you give us a sense of what is driving down Discrete Automation both in the U.S. and China, and is 7% down going to be the new normal? So that's question number one. Question number two, and I guess it relates back to an earlier question, the Discrete Automation margins were down 170 basis points. Is that the division, Ulrich, where you are seeing greater price or lack of price discipline? How much of that 170 bps drop is a price impact as opposed to simply volume? And then final question for Eric, corporate eliminations bounces up and down quite a lot; it was obviously quite low this quarter. Can you give us a sense of why that's actually happening? The market was looking for $130 million I think it was of eliminations, we got $70 million, but what's actually driving that volatility?

[Ulrich Spiesshofer:]

Ben, thanks and good afternoon to you. Let me first comment a little bit the top line in DM. Look, if you take, if you go start with orders, orders went down 9%, but if you look at really third-party it's 4% because last year we had a significant booking when we had the large-scale order in South Korea on marine, that was then passed through to DM as a large-scale order. We got that order through PA but then it went – a part of that is being supplied by DM, so on a like-for-like basis, if you take out that inter-order, the top line is down by about 4% third-party on the order pattern. And then on the revenue side, look, it is basically a contraction of short cycle volume mainly in the U.S. and China in products and services. You might remember in the DM portfolio, we have a very strong exposure to process industries, where we have built a very strong platform of offering on the large-scale drives and the large-scale motors and also have a very strong service capability. That division has a strong service attachment rate to it and there we see a massive contraction on the discretionary spending which has flown through the annual book-to-bill this year already in the revenue base in there. Now, on oil and gas spending discretionary on these kind of products, customers have in my eyes maybe even a little bit over steered and there's a risk of uptime if you don't invest in service, if you don't invest in spares. So I would say we have reached a bathtub there, the bottom of the bathtub and now we need to navigate out of it, calling that precisely right in timing if I would note it, Ben, I would not be sitting here. I would probably be a rich man sitting somewhere else, but that's the reality. So that's the top line in revenue development in DM. On the margin and the corporate eliminations, I will let Eric take that one.

[Eric A. Elzvik:]

Okay. Good afternoon, Ben.

[Ben E. Uglow:]

Hey, Eric.

[Eric A. Elzvik:]

On the margin side, the main reason is simply the mix and the lower share of standard products, specifically driven to the segments that Uli has spoken about and the markets in U.S. and China to quite some extent. There is some small element of price but it is not material if I look quarter-over-quarter on that side. I think you also should see that the third quarter last year was not a high quarter but a relatively high quarter that we are comparing to.

[Ben E. Uglow:]

Okay, okay.

[Eric A. Elzvik:]

But I will – and then you asked how will it – in which direction is this going and obviously it depends on where the volumes are going, and Uli talked about the volume, the volume numbers already on that side.

[Ben E. Uglow:]

Okay. And just to follow, I mean, being brutally simplistic, is it fair for us, and I'm really just thinking about this one business, is it fair for us to assume that we continue to see for a couple of quarters some top-line pressure, but your assumption is that the margin shouldn't go down too much from here?

[Ulrich Spiesshofer:]

No, Ben, as you might remember, we are not giving forward-looking guidance. I think we have given you all the inputs to model the future in that one.

[Ben E. Uglow:]

Okay.

[Ulrich Spiesshofer:]

I'm sorry for that.

[Ben E. Uglow:]

All right.

[Ulrich Spiesshofer:]

Let's move on ...

[Eric A. Elzvik:]

Then we have the corporate eliminations, which is actually the whole corporate EBITA, so that's not only eliminations, that's also cost, the different type of costs that we keep on the corporate level. And that is a mix as I said already over some realized FX effects, some corporate cost that we have all support of commodities savings and cost changes that is not picked up in the normal cost saving on the supply chain side and frankly a list of a lot of a mix items and I think the reality is that both Q3 last year and Q3 this year were both lower than normal just because how those items sum up. So, you should not take this as a new level, rather that as I said when we look for the rest of the year that we see normalization in the fourth quarter and that we will end up somewhere at the lower end of the range where indicated for that line of $500 million to $540 million, maybe even below the $500 million.

[Ben E. Uglow:]

Okay. That's helpful. Thank you very much.

[Alanna Abrahamson:]

Okay. Next question, please.

[Operator:]

The next question is from Mrs. Natalie Falkman from Carnegie. Please go ahead.

[Natalie Falkman:]

Thank you. Good day, Alanna, Ulrich and Eric. Maybe just in connection to Ben's question on DM, could you, outside of robotics, give some details which areas are stable to going up when it comes to organic growth sales, so outside of robotics? And then, a question on Low Voltage margins, which were strong, how much of that is lower system sales and how much of that would you say are your own initiative, cost initiatives? And then a question on Process Automation; you wrote that Process Automation base orders were steady in the quarter. Do you believe we are somewhere at the bottom for this division and the last question regarding the share repurchase; your current share repurchase program is ending in September and if you don't have a clear acquisition of couple of billion of dollars, would you be open to continue that for another one year, two years? Thank you.

[Ulrich Spiesshofer:]

Hey, Natalie, thank you very much for that set of questions. Let me try to address some of them and I will give the margin question over to Eric. So on DM, if you read through the successes that we have shared with you in focused high growth segments, some of them are directly associated with DM. Take the food and beverage piece, DM is playing a major role in that area. If you take the transport piece and if you take the rail piece, that business is developing quite well with our one step back strategy that refill the tin boxes in public transport with great electronic and propulsion solutions that is going well. If you take the renewable plays, DM is basically the father or mother, the way you want to define it, of the success story of solar in India with our very, very competitive especially large utility scale solar inverters that we have in there. So that's a pretty broad opportunity set in this division that we have and naturally we need to use them together with robotics to work on compensating the tough impact that we have from the contraction that we see on the Process side and the bottoming out in the Process side. Now on – the other one that I will take is the share repurchase and then I will let – hand over to Eric. Look, on the share repurchase, we're basically on track what we said we will do and there is no need to speculate on any direction going forward. We have very clear capital allocation priorities. Number one is the organic growth, number two is the dividend, number three is funding M&A, and number four is additional returns to our shareholders and depending where we are next summer, we will then consider how we deploy capital in the appropriate base, so it is too early to speculate. With that, I hand over to Eric on the LV margin and the PA base question.

[Eric A. Elzvik:]

So, I think it was both LP and PA.

[Ulrich Spiesshofer:]

Yes.

[Eric A. Elzvik:]

Yes. So on LP side, it is both the mix that helps, but also very strong execution on productivity and cost out in this division. So both items are impacting the margin. It is not one that is dominant compared to the other. The PA margin is low in the quarter compared to the earlier quarters. It also there has to do with mix and we've talked already about the service and the oil and gas impact and it all depends on where those volumes will continue to go in the future. We are working of course very hard also on cost out and productivity improvements in this division, so that should have a positive effect on the margin that we see. Will it be better result between the market and our internal effort? I don't want to give a forecast at this point in time.

[Natalie Falkman:]

And the question on PA was on the base orders if that – that you think that it will continue to be steady that you reach some kind of a trough?

[Ulrich Spiesshofer:]

On the PA side, you need to understand there is a significant element in the base orders on two elements. It is the domain specific products that we have; the measurement products for example that we have in PA and on the other hand the service activities. While on both, we have seen a mixed picture, we have seen in oil and gas a massive contraction, but PA has been successful on the service side to grow in other fields to compensate that impact and Peter's ambition is basically as the leader of this division to hold base orders as close as possible to the steady line in this tough market environment.

[Alanna Abrahamson:]

Okay. Let's move on to next question.

[Natalie Falkman:]

Thank you.

[Alanna Abrahamson:]

Thank you, Natalie.

[Ulrich Spiesshofer:]

You're welcome, Natalie.

[Operator:]

The next question comes from Mr. Andreas Willi from JPMorgan. Please go ahead.

[Andreas Willi:]

Yes. Good afternoon, everybody. My first question is on robotics. You called the business this morning in the press call, a rock star. How do you see the trends here in the next 12 months, 18 months, not the longer-term structural positives, but more the risks in the automotive industry from weaker global car sales and maybe also anything related to VW you could see here, given they have seen some areas of auto CapEx slowing recently? And the second question on the working capital; the dynamic between your own improvement in the market, the number you have given us at the Capital Markets Day for what you want to save, does that assume basically stable payment terms, stable pre-payments that we should subtract from that kind of the ongoing deterioration in those terms?

[Ulrich Spiesshofer:]

Look, Andreas. Good afternoon. Thank you for being with us. Look, on the robotics, let's talk about the market first and then about our own business. The market is one of the fastest growing markets in the industry at the moment. If you look at the forecast that came just out the last couple of days for China, for other parts of the world, this is our market that is not only long-term, but also short-term, will continue to grow. Now it's very important in robotics if you want to participate in the growth to have the right offering, because the offering is not only about a standard kilogram of robots, the offering demand is and the customers really make their purchasing decision on the purpose and the application that a robot can be used for and there we're really leading. We have invested around the world in application centers for specific situations, material handling, gluing and other applications, so that's something that was ABB's strategy already in the last couple of years and we are really benefiting from that. In addition, our investment in footprint, you might remember earlier this year, we complemented our China and our Sweden activity with a focused factory in Michigan in North America and that's really paying off altogether. Now on auto, look, it's interesting because in auto, there are some overall volume dynamics and this volume dynamics is the one driver but there are two other dynamics that I want to make you aware of, which are basically compensating maybe a little bit softer volume and the one is the complexity of cars. If you look back 20 years, a car basically was a bunch of steel and tin that was welded together. Today, if you look at the new 7 Series of BMW and some other cars, if you look at the amount of different materials that are being used, there have never been more different materials on the car and therefore just one example requires a much wider range of joining technologies. So, in the past we had welding, today you have laser welding, conventional welding, riveting, roller hemming, gluing to make sure you get magnesium, titanium, aluminum, fiberglass, tin and steel together, so that's really an opportunity for us and we have been working with the leading OEM in making sure their journey towards a more sophisticated car is complemented by our automation technology that we have altogether, so that's one driver. The other driver is if global demand is subdued, that does not mean that there are no demand dynamics underneath. We see strong growth still in emerging markets especially of the local players. Now, given the fact that we were the first and are still the strongest in robotics in China for automotive for example, this positions us pretty well to work with the local players; they are ramping up. And then the last point on the players that might be at the moment a little bit under pressure, one area to compensate this pressure is to launch fantastic new technology and fantastic new cars and we are looking forward to continue working with our customers and all the customers that you mentioned going forward on that one. With that, I hand over to Eric on the working capital side.

[Eric A. Elzvik:]

Thank you, Uli. So on working capital, we obviously have set a very clear target and that is the target we have for 2017. Within that, the different parameters and blocks in working capital will move. We have some pressure, not potentially on the terms and conditions, but we are clearly targeting the number that was mentioned in the Capital Markets Day.

[Alanna Abrahamson:]

Let's move on to the next set of questions, please. Thank you, Andreas.

[Operator:]

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

[Andre Kukhnin:]

Yes, good afternoon. It's Andre from Credit Suisse. I'll go on with the time. Firstly just on China to come back to that. Within that, minus 15% in base orders, how much do you think was the customer de-stock versus underlying demand trend? And secondly just within China, how did the robotics business do within China in the quarter?

[Ulrich Spiesshofer:]

Okay. The second one is a pleasure to talk about. The business did well. And the first one, look, it depends really on the business line. If you take Tarak's business on Low Voltage, the de-stocking is probably less preeminent as it is on the motors and the drives side that goes through distribution. The massive stopping of process industry investments has really on the DM side makes the distributors extremely cautious and they are bringing down stock levels in a significant way. On the LP side, I would say the market has already balanced in terms of de-stocking levels a little bit earlier, so I wouldn't see the same amount of de-stocking on the LP as I would assume on the DM side altogether, but there is very clearly, there is a de-stocking going on, wherever customer confidence is softer and we have clearly reflect that it is softer and we expect it to stay soft going forward then people are very cautious in working capital investments on the distribution side.

[Andre Kukhnin:]

So given this just thinking about the fourth quarter, are you signaling that that minus 15% is likely to carry on to continue?

[Ulrich Spiesshofer:]

Look, Andre, we don't give forward-looking guidance on any market.

[Andre Kukhnin:]

Fair enough. And just one last question on State Grid in China, you said this investment is ramping up. Are you expecting to maintain, expand your market share within that spend?

[Ulrich Spiesshofer:]

Look, what we are doing is we are pumping out fantastic innovation with our new offering on the Power Products and the Power Systems side, I think we will continue to envision to be a strong partner of State Grid going forward. The new alignment of the division, the formation of the Power Grids division was very much welcomed by the customers, including State Grid. They said okay, now it is easier to deal with ABB out of one hand, so the innovation pipeline that we have, the strong push on good service, and the structural adjustments should put us very well to also participate into State Grid as a key customer that we highly value in the future.

[Andre Kukhnin:]

Thank you.

[Alanna Abrahamson:]

Thank you, Andre. We will continue with the next set of questions. I ask that everyone keep it to two questions, please. Next set of questions.

[Operator:]

The next question comes from Mrs. Daniela Costa from Goldman Sachs. Please go ahead.

[Jessica B. Graham:]

Hi, there, this is Jessica in place of Daniela. So we had a couple of questions; the first one being if you can probably talk a bit about where you stand in terms of capacity utilization across your various businesses? And the second one is about basically you've been talking about how automation, the trend of automation means that companies will start or customers will start investing more in CapEx now to invest less in CapEx in the future by becoming more efficient. Have you seen that in any particular end market? For example mining I guess has already gone through the – it has already seen declining growth for a couple of years now. But have you seen that step-up in CapEx in order to become more efficient? Thank you.

[Ulrich Spiesshofer:]

Okay, Jessica, thanks for your questions. Look, first, we don't disclose capacity utilization number by business or sector. But let me run you through how we drive capacity utilization. Basically, if you look at our assets and we've taken OAE approach, that's basically uptime speed and yield of each of the assets that we have out there. And naturally we need to look at the future. Uptime, are we running the facility, at what speed are we operating and what's the yield, and we have specific measures in place to all three of them. Now there is a productivity-driven element in that, and there is a demand-driven element on that. On the demand-driven side, you have seen us announcing structural adjustments to our footprint throughout the year. So for example in DM we have announced an adjustment in Sweden, we have announced adjustments in North America on the capacity to on the one hand get better in line with the market demand, but on the other hand also take productivity up and move some of the capacity to lower-cost places and that's an ongoing process. We look on that in a very disciplined way. It is very dangerous to become too nervous short term with capacity adjustments, but if we see a strong underlying trend either on the demand or productivity opportunity side then we are not shy making that adjustment. Now, on the automation side, if you take many – you mentioned mining as an example. Look, there is investments for example in the theme of de-manning the mines. At the moment, we have many customers that work with us and say can we, for an existing mine, build up a pilot of a mine where we are de-manning, where we are increasing remote monitoring and remote management, so the basic theme there is we take the people further away from the mine and we bring the equipment itself closer and more steady to the mine that we don't have so much lost productivity in moving equipment with the people out and in on the mine on the excavator side, on the truck side and whatever. And that is something we are working very successfully. If you take in the last quarter we had some orders or in last – sorry, in year-to-date we had some orders with Vale in South America doing that. We have a very strong customer up in Sweden called Boliden where we have been working to basically work on the mine of the future. So it is our area that we are working on to stay close to our customers. Would I call it yet a full change of the CapEx cycle? No. Mining is still I would call it at the bottom of the bathtub, but do these kind of activities keep us close to our customers and prepare us for the market ramp-up? Absolutely, and that's the way we will continue to position that.

[Jessica B. Graham:]

Thank you.

[Alanna Abrahamson:]

Thank you, Jessica. With that, we will take two more sets of questions.

[Operator:]

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

[James E. Stettler:]

Thank you and good afternoon all. Just a very short-term question, first of all. As you looked at the last quarter, was there a step change in demand as we progressed through September and do you still feel that your normal restructuring is going to be sufficient on the production side? And then secondly, slightly longer-term as you embark on this strategic review of the Power Grids segment, could you maybe give us a bit more color of what your thinking is and what you're trying to achieve longer-term? Thank you.

[Ulrich Spiesshofer:]

I'll let Eric add for the first question on restructuring and I take then the second one on the strategic review.

[Eric A. Elzvik:]

Yes, so, as you have seen in the market, we need to do more restructuring. We have announced it earlier this year. A lot of those plans are already in progress and we are expecting then to book as much as we said earlier this year to get to the forecast for the fourth quarter, which would mean $250 million to $300 million of restructuring. Obviously, if we find projects that are worthwhile doing, we'll consider to do them, but we think we can do them within that frame which still leaves quite a bit above $100 million more to be booked in the fourth quarter.

[Ulrich Spiesshofer:]

And going through your second question, James, on the strategic review, what we're doing with this strategic review, we're basically looking at how do we safeguard the number one position in transmission and distribution long-term going forward. So we look at our technology platform and we take our perspective on the functional hardware, the corporate hiring staff, the electronic pieces that for example go into our converters, the software that we have on asset management and on grid management and the service. We also look at end markets and say how do we run this business for continued market leadership in end markets by industry segment but also geographically; we are pushing very hard in Africa. If you want to be successful in Africa, you might want to reconsider your business model how you do that. Similarly for parts like Southeast Asia, that's the second element. And the third element that we're looking at is also the ownership options that we have running this business going forward. And all options are on the table. We do that in a very calm and fact-based way. In the review that we have embarked on the existing management team of the future Power Grids division will be – or is already involved; they're already in discussions. We had yesterday a board meeting where we went through some of the topics and discussed them. So it's a good process and it is pretty similar to what we did at the end of 2009 with robotics. At that time, you might remember robotics was in a situation where we had to fundamentally ask the question how do we go forward and should we own this business. We came up with a clear transformation plan and with a recommendation to the board to keep the business at that time. I have to say thank God we did that. Today we are very happy, and exactly the same kind of process and logic we go now through with the Power Grids division. If you look at the performance improvement momentum in Power Systems, I would describe it as very strong. If you take the delta that Claudio and his team have delivered not only in terms of the profitability but in terms of the operations quality, in terms of the team that they are putting in, it's going in the right direction, so we are in no rush to be in some kind of an extreme urgency. We will take our time working with the team through and as we have flagged earlier too in 2016 when the time is right we will come out and share with the public what the outcome of the review is.

[Alanna Abrahamson:]

With that, I would like to have the last question, please, last set of questions.

[Operator:]

The last question comes from Mr. James Moore from Redburn Partners. Please go ahead.

[James A. Moore:]

Well, good afternoon, everyone. Thanks for taking the questions. I've got three. Firstly...

[Alanna Abrahamson:]

Two, James.

[James A. Moore:]

I will stick to two then. Firstly, can I ask why you see a bottoming of oil, mining, metals, marine that the heavy hit process industries, when those global industries are signaling further CapEx cuts in 2016? Is it that you believe they are being too conservative or is it that you see an over de-stocking at the moment that has to reverse? And secondly, could I ask about price, last time you actually broke price out in early 2014, it was running at just under $1 billion per year of pressure. Without putting a number on it, can you help us a little to say whether the last 12-month price effect is above that, similar to that, or below that, excluding savings?

[Ulrich Spiesshofer:]

Okay, James, thanks for your questions. They are good ones to close out with. Look, on the bottoming out, there is a very simple reason, I think the companies that over shot in cutting service spending and that needs to come up, needs to come up again for a very simple reason, the assets are all running. If you look at the amount of assets that are out, they are on the oil and gas side on the upstream side that are continuously running at the pace, some of the demand even has gone up and they are bringing, they are pumping more volume out to compensate the price pressure and that will require some investments on a pretty low level, but it will require some investments to keep the assets going. And we already see some signals. I wouldn't call it a trend yet, but I also have a customer late last week in the oil and gas segment and they have basically said look we need to do something again because we've realized if we keep going that way, we might jeopardize uptime and reliability of our assets and mind you, downtime in upstream oil and gas is much more expensive than putting a little bit of service in there. So that's the reason why I'm confident that it will bottom out on a low level and not further deteriorate. With that said, I hand over to Eric to take the price question.

[Eric A. Elzvik:]

Yes, look, James, the reason we keep them together nowadays is obviously when we have price pressure we also have opportunities to go more back to our suppliers and get more out of the supply chain. So that's the reason why we are not breaking the two numbers out in detail. We have communicated of course over the last quarters and also today that there is some more price pressure in some segments of the market. So if you really compare the latest trends, there is some more price pressure, but I will not give you an estimate exactly to what we had the last time that we had those separated out. I think you should look at it as a one thing together.

[James A. Moore:]

And thank you and on that, just as we go into next year because you're raising with the white-collar, your degree of savings basically from $1 billion to $1.5 billion broadly and is it that you think that the savings are going to sort of move ahead of that from being a little bit behind that at the moment?

[Alanna Abrahamson:]

James, I think I will call you on that question because the team here actually has to leave. So, I'll have to close the call out at this point in time. So, sorry, but I'll give you a call on that topic, okay?

[James A. Moore:]

Sure, thanks.

[Alanna Abrahamson:]

Thanks. And with that, I would like to say thank you to everyone for their time and efforts today and we look forward to hearing you on the next call for the fourth quarter. 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.