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ABB LTD. (NYSE:ABB)

Proposed Acquisition of Power-One Conference

April 22, 2013 3:00 am ET

Executives

Joseph M. Hogan - Chief Executive Officer

Ulrich Spiesshofer - Head of Discrete Automation and Motion Division

Richard J. Thompson - Chief Executive Officer, President and Director

Eric Elzvik - Chief Financial Officer and Executive Vice President

Analysts

Andreas P. Willi - JP Morgan Chase & Co, Research Division

Daniela Costa - Goldman Sachs Group Inc., Research Division

Martin Prozesky - Sanford C. Bernstein & Co., LLC., Research Division

Martin Wilkie - Deutsche Bank AG, Research Division

Ben Uglow - Morgan Stanley, Research Division

Mark Troman - BofA Merrill Lynch, Research Division

Olivier Esnou - Exane BNP Paribas, Research Division

William Mackie - Berenberg Bank, Research Division

Operator

Ladies and gentlemen, good morning. Welcome to the ABB Media and Analysts Conference Call. I'm Goran, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

At this time, it's my pleasure to hand over to Mr. Joe Hogan, CEO of ABB. Please go ahead, sir.

Joseph M. Hogan

Hi. Welcome. Good morning. Really excited today to talk about our proposed acquisition of Power-One and just announced. I'm here with Ulrich and Eric. And we'll go through some charts, and then we'll be happy to take your questions.

First of all, I'd call your attention to Chart 2, which is our Safe Harbor statement. I think most of you that would join this call would understand that and know it.

Moving to Chart 3. We believe we're creating a global leader in solar inverters. It's a deal that fulfills our strategic goals in renewables, and I'll walk you through both the Discrete Automation and Motion strategy and how that relates to the overall strategy from an ABB standpoint and how this fits perfectly in the sense of where we feel the market's going and where we think ABB can add value and contribute in the industry.

Moving to Chart 4. This deal plays perfectly into our combined strengths in power and automation. I think you've heard us talk a lot about the convergence of power and automation in the marketplace. I can't think of too many better spots when you think of solar inverters where it takes automation capability and also power capability and expertise. Overall, it provides a unique opportunity to be a first mover and achieve a global market leadership. And we think it's one of the highest-value, fastest-growing and most dynamic sectors in the clean energy marketplace.

We know this today that the solar market's very volatile. It's immature. You'll see that in a lot of the valuations of companies that are in the solar market out there and how they've been treated recently. Ulrich and me and the team have really tracked this marketplace for almost up to 3 years. We feel we understand it. We understand the volatility, but we think, directionally, we know that this market holds a huge amount of promise and that we want to make sure that ABB can contribute to this and really play a part of it.

The solar PV industry is set for 10% growth annually, as PV-generated power rapidly approaches grid parity. And we talk about grid parity, we'll talk to you later on about where that stands from, like, a retail standpoint and a wholesale standpoint and how those are different, about how they're both converging. Inverters are part of a balances systems that are considered the most profitable segment of the market, so inverters are really the brains of the systems, and I'll walk you through what they do and what that means for the company overall. And Power-One is a company with an incredibly solid track record, comprehensive product portfolio and extremely strong management team that we've all been very impressed with. And we've really worked together with them over the last couple of years as we've talked about this eventually coming to pass.

And moving on to Chart 5, some highlights of the transaction. Overall, this has the aspects of how we have done deals around here in the past in the sense of you can see it's a one-step merger agreement. You can see that Power-One will be filing a merger proxy with the SEC as soon as practical, and that would be in the next few weeks. The cash consideration is $6.35 per share. It's a 57% premium to the 19th of April closing price. It's a 50% premium to the 90-day average. We believe this is a full and fair price. And this is one of those odd deals in a sense of what the premium is versus what the valuation numbers are, and we'll walk you through that too, and I think it reflects a lot of the uncertainty that's been surrounding this marketplace over the last 1.5 years or so.

Synergies potentials, so will be through quality product offering and global research, solutions and services. Cost synergies are mainly in sourcing and also G&A savings, too. And those G&A savings are on both ends of the equation, on our end in our solar activities, and also what we'd also see with Power-One.

Closing is expected in the second half of 2013, and obviously, it's subject to shareholder approval and required regulatory approvals.

And with that, I'll hand it over to Ulrich, and Ulrich will walk you through some of the strategic aspects and specifics of it. Okay.

Ulrich Spiesshofer

Good morning, ladies and gentlemen.

This potential acquisition is another step in executing our strategy in Discrete Automation and Motion. You might remember, 3 years ago, we set out with a 5-plank strategic direction. Renewables, at that time, we defined as one of them. And in the renewables space, we are committed to add value to our customers through products and solutions that really allowed us to play our strengths by adding significant value to our customers.

So it's in that context the solar move is a natural one. We -- as you know, we entered the solar PV market a couple of years ago through a start-up operation ourselves, with our own inverters. Today, we are at a run rate of about $100 million. We are the market leader in solar inverters in India already. And the combination of ABB and Power-One is just a natural next step in terms of the expansion and delivering of the strategy.

Now if you go to Chart 7, we are very committed to solar long term. We believe this is a long-term growth industry. It's an attractive industry overall. And the inverter segment is the most attractive one, in that context.

Moving to Slide 8. You see here that solar will play a key role in the future in the global electrical capacity mix. It will grow-out the global energy demand by x5 over the next couple of years. So in about 20 years from now, solar will be in the same order of magnitude as the nuclear power generation in the overall capacity installed in the world. Now what drives the growth in solar, and what are the key parameters?

If you move on to Slide 9, basically, declining system costs and rising energy prices lead to grid parity. And on this slide, you'll see nicely mapped what grid parity is today, what it will be tomorrow and then what it will be medium term. Grid parity is basically achieved when the costs are competitive or the PV-generated costs are competitive against coal- or gas-fire generation. Grid parity is a key difference between residential, commercial, industrial and utilities. It's first achieved on the residential side because the retail prices are higher than the wholesale prices. As you see in the slide, above, quite a couple of countries are already living at grid parity. In the next 2 years, some key countries will move into that space as well. And then in the years to come, there are more coming in.

But grid parity is not the only driver. There are additional drivers for the growth of solar, amongst them being the growing demand of power in emerging markets; the need for safe energy; the closure, for example, of the nuclear plants in Japan and Germany, are one of the drivers; and then there's reservation of oil and natural resources. For example, in Saudi, there really are the -- the value creation of oil is moving down the value chain, and solar is becoming a key source in the future.

Now within the solar space, inverters is the most attractive segment, and that's nicely shown on Slide #10. The solar inverters have -- will have a growth in terms of the volume over the next couple of years of about 14%. It's the central piece of the overall system. It is the brain, the intelligence of the whole value chain, and it makes a huge difference to the quality of an overall installed system our [indiscernible]. So every PV module, you need an inverter, everywhere you need to convert DC into AC power. And as you can see in the graph above, this is something that will not only grow, somewhere it will grow in all regions of the world in the next couple of years.

Now given that, there is a significant installed base of about 100 gigawatts already now. This will be expanded over the years to come, and service will be a very important piece of the overall value chain. ABB is uniquely positioned with its global service platform, with our very strong solar service offering that we have in place already today for our new product. So we believe the part of the value chain, the inverters, is most attractive. Service is an attractive additional element in there. This is where we're going to play if this transaction goes through.

Now let me talk a little bit about more why inverters and why inverters are so important, and you can see that on Slide #11. Overall, if you look at it, an inverter is basically a piece of packaged power electronics. With this combination, we would have in the division about a 5 billion portfolio of packaged power electronics. That will really make key differences in terms of innovation, in terms of functionality and matching unique requirements of our customers. The inverter key functions really are, on the one hand, the conversion of power from DC to AC, but there is more to it. It's the central control piece of a photovoltaican [ph]. A good inverter allows you also to maximize the energy harvest from a panels in -- from a panel. Today already, a good panel with a good solar inverter together allows you generate energy at full moon at a clear night, and we believe that the solar inverters in the future will do even more in terms of energy harvesting. The inverter plays a key role in stabilizing the grid and the power supply into the grid, and it will be a key element to integrate solar into the grid complex. So for example, the combination between a solar PV installation and an e-mobility station where you charge your car where is -- that you charge your cars in your home is something that a inverter could well control. ABB is already playing in this field. You know that we are in the e-mobility side also, very strongly growing, and this is just a perfect match for us.

The unique requirements in the field of an inverter need to be clearly understood. We -- together with Power-One, we will have the domain expertise. We will have the local knowledge of each of the specific market, the grid and safety codes that are required. And we will have a fantastic offering jointly in terms of reliability and service for the years to come.

Now let me talk a little bit about why we are so excited about Power-One and what this company is all about. On Slide 12, we have brought the message all together: Power-One is a global leader already today in solar inverters. It has the broadest product portfolio and has demonstrated solid growth over the last couple of years.

Moving on to Slide 13. What you don't see on this slide is Power-One is just a fantastic team. The business today has been able to build over the past years the culture, which is really focused on innovation, on growth. And customer orientation has allowed them to bring up a very, very good growth story. Today, Power-One employs, after being more than 40 years now in operation -- or basically, 40 years in operation, they employ 3,300 people all around the world. They've generated $1 billion turnover in 2012. The EBITDA range historically was somewhere between 12% and 29%. And main operations cover all power pieces of the world. About 3/4 of Power-One is in power energy solutions -- Renewable Energy Solutions and about 1/4 is in Power Solutions, and I'm going to talk about their business in a couple of minutes.

Now let me focus first on Slide 14, a little bit on the Power-One renewables piece. This is a really an amazing success story based on customer-driven innovation. And Power-One very successfully moved in the last couple of years towards the leading position. In fact, today, they are #2 in the global market, having about a 10% market share they have installed now. And we recently learned that, throughout the -- our discussions, more than 1 million units already out there in the market. They have shipped 3.6 gigawatts in 2012 alone and have today a very strong position in this market.

The range that Power-One covers, you see depicted on Chart #15. Basically, from an application and customer focus, Power-One is really able to cover all segments of the market from residential, over commercial and utility. Now if you look, the growth of the market is, in the future, commercial and utility scale. Power-One is ideally positioned in this field. The product portfolio covers the entire range of power rankings that you need to do, power conversion and investing [ph] through inverters ranging from micro-inverters up to utility-scale large inverter stations, turnkey installations for customers out there in the field.

On Slide 16, you see an overview of the Power-One Power Solutions offering. It's basically around AC/DC power conversion and DC-DC power conversion. And if you look at the offering and the industry segments served, these cover, amongst other, rail, infrastructure and data centers. This is again an attractive piece within the Power-One portfolio.

So as you can hear, as you can sense, we are excited about the quality of Power-One standalone, but now let's talk about the joint story. And on Slide 17, you see the key headline. Basically, together, we will create a global leader in solar PV inverters. And why do we believe in that one? On Slide 18, you see the 3 key arguments.

The first is, together, we have comprehensive offering for solar inverters and solutions. It's quite amazing how wide we can span and how much of specific customer orientation solutions we have all around the world in all of the key markets. But it's not only about the product, it's also about the basic competencies. If you look at the basic competencies of Power-One, having a fantastic innovation, technology track record, there's the fastest time-to-market of any of the competitors. And if we look at ABB, which is really bringing the bankability into the joint offering. We are global leader in power electronics. We are leader in smart grids. So this is a fantastic combination from a competency perspective, as well.

And then if you look around the world, the global reach to address the rapidly developing market is basically unmatched. If you take Power-One and ABB together, we have an established presence in more than 100 countries. We have a global service network. We got an innovation and technology pool which will allow us to really create a very strong growth story in the years to come.

On Slide 19, you see a little bit more the details on the offering and why we believe this is really a fantastic marriage of 2 companies. Power-One, on the solar side, has a complete, very strong offering. ABB entered that market, we are on a run rate of about $100 million now on the solar inverter side, but we bring more to the operation, for example, the balance of system components that we -- are very strong and complement the Power-One offering.

On the wind side, Power-One has a small converter business. We are very strong in generators, converters and solutions. Together, we will have a great offering around monitoring control. And as I said before, the link towards storage, the link towards e-mobility and the combination between Power-One and ABB will be an extremely powerful offering to our markets.

So that's the story of a healthy combination. With that, I hand over back to Joe, who will put this deal into context of the overall ABB strategy.

Joseph M. Hogan

Thanks, Ulrich.

So if you look at Page 20, you basically see the 5 strategic planks of the ABB Group strategy. And when you look at each one of these, specifically, you can see that Power-One and solar inverters really fit 2, 3, 4 and 5 all together. It's just a great fit for our business overall. And that's why this market and this technology has been on our radar screen both organically and inorganically for really a long period of time and, as Ulrich explained very well, why it fits so well within the organization.

Moving to Chart 21, proven integration approach. Ulrich and the team in Discrete Automation and Motion, obviously, you know them very well for the Baldor acquisition and how well that's gone, also recently Newave. This is a team that's skilled in understanding what it takes to really integrate a business into ABB and into a division overall. We feel this is a low-risk integration. We look at the overall culture of ABB and how it fits well with the target. And we feel very confident we can bring the leaderships teams together very well.

Ulrich talked about the really fast paced and high-pitched type of development that the teams are used to. We'll definitely complement that and help to initiate that across not just to what Power-One does today but with what ABB can do also. We also feel very strongly that we have metrics in place and incentives in place that will allow us to keep this team together and make sure that we really become one, from an integration standpoint.

Moving on to Chart 22. Together, we will create a real solar PV inverter leader. Ulrich talked about that we're on a run rate of $100 million already in our internal solar inverter business. So this market is not alien to us at all, we do understand it. And we really appreciate and respect it in that sense too.

We feel that time is right here for this deal. It's -- obviously, the market's been -- it's been very a tumultuous market for solar overall and for wind and different kinds of renewable energies. But we -- I feel really strongly that there are 2 really big disruptors in the energy market in next 10 years. And it's basically shale gas and it's PV solar at about $1 a watt. It really takes it down, those 2 things. And when you look at the PV marketplace, we really need to play, as I talked about initially, in the sense of the convergence of power and automation and where ABB really has its expertise and what we believe in.

And so with that, I'd like to turn it over to Richard for his thoughts on the 2 companies coming together. It's all yours now.

Richard J. Thompson

Thank you, Joe and Ulrich. Again, this is Richard Thompson, CEO of Power-One.

As you have just learned, ABB and Power-One are joining to form the most comprehensive equipment software supplier in the solar PV industry. Our customers from the residential user to the largest utility will benefit from this unique combination. We believe the strengths of each company in solar PV space are highly complementary, thus creating a win-win transaction for both companies.

ABB benefits from Power-One's strong reputation as a technology leader and innovator in the solar inverter space, as well as acquiring the most comprehensive portfolio of inverters in the industry. Power-One benefits through ABB's global strength by significantly expanding our total addressable market, with immediate access to new geographies, including high-growth emerging markets and by leveraging ABB's well-established global sales and service network. Both companies benefit from combining the broadest solar inverter portfolio with state-of-the-art transformers, switch gear and control systems into the leading balances system offering to the utility sector. We both will have much greater growth opportunities on a combined basis than we would have as separate players in the global solar PV market. Likewise, Power-One's traditional Power Solutions business fits well with ABB's power conversion electronics resources, particularly in industrial applications.

Finally, our shareholders will receive a significant cash premium to the existing share price, in essence being compensated today for some of the growth opportunities that will be realized as being part of a combined company. ABB shareholders benefit from the economic rewards of becoming a much larger and stronger competitor in the attractive solar PV market, with a full complement of product offerings and service capabilities in every key market around the world.

Our management team is excited to join ABB. We share Joe and Ulrich's vision of creating the strongest offering in the solar PV market, a market that is ready for exceptional growth as PV-generated power rapidly reaches grid parity in many countries. Power-One's leadership team across the globe is pleased to have the opportunity to work with the ABB team and is committed to bring our customers, employees and investors exceptional products and opportunities and returns, respectively.

Thank you.

Joseph M. Hogan

Richard, thanks. And again, we're excited to have you and the team join ABB here, after we get through all the regulatory approvals and all the hurdles we have to go through.

So that completes our presentation. And now I'd like to open up the line, really, for any questions you'd have for the team.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Mr. John Revill from Wall Street Journal.

John Revill

I've got a couple of questions. The premium [ph] of 57% on the share price, there's been a little bit of sort of speculation that it's quite expensive. Joe, could you explain a little bit more about how this deal sort of creates value for ABB in terms of what extra sales and also what extra sales you see coming forward and what you actually see in terms of cost savings moving forward, what's the kind of breakdown between sort of synergies and revenues. That's the first one. And the second one is, obviously, this is the first kind of biggish deal for about -- well, for a while since Thomas & Betts or so. I was just wondering, is the company being, like, under pressure to sort of get a move-on with its M&A strategy spending money or putting money back to shareholders. Or what's behind this? And is this basically a one-off big acquisition moving forward now, and back to smaller ones or strategy moving forward on M&A after this? Those are my 2-point questions.

Joseph M. Hogan

John, I'll answer your second question first. There really is no -- there's no pressure. I don't put any pressure on myself. The board doesn't put pressure on me or the team to do deals. We do deals that we think that make strategic and financial sense for the business. And we certainly, hopefully based on our presentation and what you've seen so far, that we truly believe that. Secondly, when you think about the premium, John, this is one of those strange deals where the market obviously has discounted a lot of the solar marketplace based on the volatility and all that we've seen out there. At the same time, when you look at the true valuation of this deal and what the multiples are on 2012, it's actually pretty good. It's about 0.7x revenue. And now it'd be wrong for us to project it that way because 2013 obviously was going to be a more challenging year for this company, but then again you do have reasonable multiples in that defense of 13x EBITDA and all from a projected standpoint. So I would say this is not an expensive deal in the sense of the valuations and the capability of the company, but it sure looks 50-plus-percent market premium obviously raising some eyebrows, and so we really look at it from a standpoint of the valuation overall. I think, John, the other part of your question was -- I mean, when you look at this marketplace and really sit back and think about it, it is right in the sweet spot of what ABB does technically. It's what we do commercially both from a services standpoint and also from a sales standpoint. And it fits well with what I would call the industrialization of this industry. I mean, for years, this industry has really grown up around different kinds of companies. It's -- you can see the fragment [ph] and territory [ph] nature as a company in the marketplace overall. I really feel, as you get to grid parity, as Ulrich talked about, you're going to see the industrialization of this industry. It's going to happen. And ABB has the ability to do that in the sense of our global scope, what we're able to do, the resources that we can bring to bear on it. And we feel that we're anticipating that. And there's no doubt that there is risk in this deal in the sense of, does PV solar really come about? And when you look at the number of gigawatts of solar that are installed from a capacity standpoint and that will be installed over the next 5 years, I think you can't deny the overall growth rate of the industry that Ulrich showed and that the inverters will be really the prime position inside of that in the sense of the brains and capability it takes to really -- to operate a PV capability.

John Revill

Okay. But are you actually saying anything on sort of the breakdown into how many -- how much extra sales you expect from this and sort of the breakdown between costs and synergies here and from a -- revenues going forward?

Joseph M. Hogan

We don't want to go through that right now, John. We obviously have some cost synergies. We have some, actually, tax synergies. And we also have -- which is a large part of it, would be the sale synergies piece. But we're not going to bring that out right now.

John Revill

Can you just kind of go into sort of what it is may be more towards, which -- is it more towards revenues, then, or...

Joseph M. Hogan

It's about split evenly between tax and costs and also future revenues.

Operator

The next question is from Mr. Charlie Therembach [ph] from AWB.

Unknown Attendee

Gentlemen, you read in your presentation that the acquisition will be EPS accumulative in year 1, but maybe I'm thinking wrong about when there is an EBITDA margin of 12% in 2012 compared to the 18-around percent the division has. It should be diluting the margin. Am I wrong?

Joseph M. Hogan

Turning you to Eric, [indiscernible].

Eric Elzvik

Well, yes. No, you're right on the EBITDA margin, if you look at the 2012 numbers. But the EPS accretion is calculated on net income. And there, we believe it will be accretive the first year.

Unknown Attendee

Okay. Can you maybe figure out how much the margin will come down, how many basis points this will make about?

Eric Elzvik

No. That's -- for 2012, that's calculating backwards. And '13, as Joe said, is a year of uncertainty. And we will not comment on margin, if that -- it will have some negative impact. But it is not a major deal.

Joseph M. Hogan

We're not -- we don't think it's material, Charlie. And that's...

Operator

The next question is from Mr. Patrick Winters from Bloomberg.

Patrick Winters

I have one question about the timing of the deal. I'm kind of wondering why you're doing it now and not in -- do it in 2 years or in 3 years. Joe, you said that it's a tumultuous now for the solar industry and that 2013 could be difficult. And I expect 2014 might be difficult as well. So why are you buying now? And what gives you the confidence that this industry will definitely pick up? And also, I guess, the backdrop to that too is that Siemens are pulling out their solar business. So why are you delving in now when Siemens are pulling out?

Joseph M. Hogan

It's a great question. I think, if you wait in this industry until it's very clear what the industry is going to look like, you're not going to be paying the multiples that we're paying here today, okay? That's -- if you look at some of the multiples that we're paying in this industry as little as maybe 3 years ago, I think it will show you very clearly that you don't want to wait in that sense because, at that point in time, those would be multiples that I really wouldn't want to entertain from a business standpoint. So I think you have to be somewhat willing to take a risk that you feel that the industry is going in a direction and it's going to hit an inflection point. And that inflection point is really built around grid parity, which we believe when the curves [ph] come together. I can't vouch for Siemens and why Siemens does what they do. I saw what they're talking about is moving out of solar. And I think obviously, strategically, they have a different opinion than we do. But again, inverters -- remember, we have a very strong capability, as Ulrich pointed out, in our business overall of when you think about the technical basis of an inverter, this is what ABB does. I mean, this is a core competency, some of our best businesses are about [indiscernible]. We're experts on the grid. If you look at the way these solar inverters interface with grids, the grid codes are different all over the world so the inverters have to be able to respond to the power grid in a very specific way. We know how to do that. That's in our DNA. That's ABB. We understand really how -- well how to use the kind of power electronics to pull the most from an efficiency standpoint out of these kind of things. And then broader than that, when you look at the [indiscernible] from a service standpoint, a bankability standpoint, from even a sales standpoint, to be able to spread this around the world, we have the footprint and scale and capability to do that. And that's why we choose to do it now.

Patrick Winters

And just a follow-up to that: Is this the last acquisition you're going to make in solar? Or have you got -- is it something -- is it an area which you see as pretty interesting and one which you will continue to pursue M&A-wise? Are there other kind of white spots...

Joseph M. Hogan

I think it's a good question. I'll just say, look, I can't tell you if it's the last one we'll do, but you won't see us ever do a solar panel deal. This is a solar inverter deal.

Patrick Winters

Okay. Yes, yes. Okay, and how about machinery, for example, to make solar panels?

Joseph M. Hogan

No, I -- look, that -- we don't -- that's not our area of expertise. We're not a machinery company at all.

Operator

The next question is from Mr. Andreas Willi from JPMorgan.

Andreas P. Willi - JP Morgan Chase & Co, Research Division

You talked earlier about the valuation, saying it's about 13x 2013 EBITDA. Is that correct? And this is -- because looking at Bloomberg estimates, I get to somewhat else. So is this -- is kind of this your assumption for the follow-on earnings in 2013? And the second question is on long-term pricing for inverters. This year, prices fall probably low double digits. What do you assume is, going forward, a normal run rate of price declines in the product [indiscernible] compared to what seems to be the good volume growth you expect? And on synergies, what's different about this deal compared to the other M&A announcements you have made where you normally were in a position to provide some details on the level of synergies?

Joseph M. Hogan

Andreas, first of all, from a pricing standpoint, I think I'll let Ulrich walk you through what we see in that industry overall. As far as what we're paying x 2013 earnings, that's all speculative. I mean, none of us know what the earnings are going to be in that sense. But -- so we basically look at the consensus estimates out there and kind of ratio off that, and you can do that math as well as we can. Overall, when you talk about, when you ask about why aren't we talking about synergies right now. We will, Andreas. It's just not a material acquisition in the sense of what a Baldor was or what a Thomas & Betts was and whatever. And -- but in time, as this goes through, we'll be happy to share that with you.

Ulrich Spiesshofer

Okay, Andreas, let me comment on the pricing development over the next couple of years. Basically, this is a little bit of crystal ball in some dimensions, but the general direction of the industry forecast goes towards an 8% to 10% price erosion in the years to come. Now this is something that some people are concerned about it. If you wind back about 30 years, think about when AC drives were the first time sold in the world, there was exactly the same argument, and everybody at that time questioned if they would ever make money on the AC drives long term. And I can tell you, today, we are very, very happy to have AC drives in the portfolio and we are happy with the profitability. And we are convinced that long term on the solar inverter side. Based on our innovation, on our service, on our global reach, we will have a similar success story.

Operator

Your next question is from Mrs. Daniela Costa from Goldman Sachs.

Daniela Costa - Goldman Sachs Group Inc., Research Division

Actually, 2 things. The first one, I just wanted to understand, does this have any impact in your CROI target for 2015? You mentioned a few times when you presented that -- the target, that it was -- or the timing was susceptible to when acquisitions happen, so wondering if this is large enough to have an impact or not really given also the weakness in the market in '13 and '14 that you talk about. And then the second thing is, you've mentioned services. Was just wondering if you could give us any indication of how much of the half [ph] sales and the earnings of Power-One are serviced already. And what is the gap between service margins and equipment potentially?

Joseph M. Hogan

Yes, that's correct. Go ahead, Eric.

Eric Elzvik

So Daniela, it's Eric speaking. The CROI target, which was also explained in the recent investor meeting, of 20%, is challenging. We have always said, if we have major amounts of M&A, either as a single deal or as many deals in the latter part of the period, it will be more difficult to reach that target. This deal is not that big. It's a mid-sized deal, I would say, so it will have some negative impact but it's not a material negative impact.

Joseph M. Hogan

And on the services earnings piece, I'd -- if Richard is still on. I think, Richard, if you could take that question, it'd be great.

Richard J. Thompson

Yes. Service is really important to us. Remember, we're just in the market for the last 6 years. And right now, we're in a -- still in warranty stage. Our attach rate, however, on services is increasing over time. We're at about an 8% attach rate now. We expect that to grow. Our service footprint isn't as robust as ABB. We're just building it out. That means we have some cost inefficiencies that -- a service organization, as we merge with ABB, we'll certainly be able to offer better services to all of our customers.

Ulrich Spiesshofer

And Daniela, maybe let me just comment on the service piece from the overall division perspective. We have at the moment somewhere between 2x and 3x the attach rate on our products and service than comparing to Power-One today, so dramatic opportunity for us to work together and get that going. And the profitability of service is above the division average.

Operator

The next question is from Mr. Martin Prozesky from Sanford Bernstein.

Martin Prozesky - Sanford C. Bernstein & Co., LLC., Research Division

Just a quick question on geography. I quickly looked at the Power-One split, and it seems like 70% is in EMEA, and obviously, that's the market that's declining now. So it seems to me that a big part of the upside here is really about China, China growth. Can you talk a bit about how you could distribute this business within your China organization? Is that one of the key rationalities that you can really grow that business? And then secondly, in terms of vertical integration, given your capabilities in power electronics, does it mean these products -- that you can take out a -- the profit margin from the suppliers in terms of vertically integrating here? Is that another piece of the upside?

Joseph M. Hogan

Ulrich, you want to handle the China piece?

Ulrich Spiesshofer

Yes. Martin, on the geographic mix, your observation is right, the world is changing in photovoltaics, and we are very well positioned to do so. But the world is not only changing to a balance a stronger China. There is a very strong U.S. piece into that one. If you look at the growth in the next couple of years, and there was just recently a report out in terms of the annual PV installations by region, over the years to come, the CAGR to 2017 in Europe will be single digits. The CAGR in the Middle East, for example, where ABB is very well positioned, will be more than 50% in the next couple of years. If you look at the Americas, the growth rate will be double digit, and it might even start with the a 2. And in Asia, it's a similar level. So the world altogether in terms of installations, we expect to grow for the PV inflation by about 14% and with a strong growth rate both in the Americas, in Middle East and in Asia.

Joseph M. Hogan

Eric, can you talk about the -- I think, your comment was since we are backward integrated into semiconductors, high-power semiconductors. You might have a difficult time pushing on suppliers in that sense. What we we're trying to say is we have a competency in power electronics. We understand power electronics well. These -- this happens to be a lower threshold, a wattage threshold, than what we would normally be -- run in our fabs. And so we'll be relying on our suppliers, as Power-One has been relying on its suppliers, for the supply of these chips.

Martin Prozesky - Sanford C. Bernstein & Co., LLC., Research Division

And just one follow-up on the China one. So on -- can you give us a sense for why you think you gain -- can gain share in that market? Because today it's quite small. I don't think ABB has got a big position in inverters in China today. Is it a product distribution strategy in China? Or just what gives you the confidence that you can be a big player there?

Ulrich Spiesshofer

Yes, Martin, if you look at the China environment, we have about 15,000 people now in China. We got a very strong brand, with some key of the customer segments in China on the utility side. On the industrial utility [ph] side, we are very well known. We have the access to distribution. If we look at the residential side, our low-voltage products business in China, it's a very strong one. So if you combine what we already got there today, the DM division is about 2 billion. And John [ph], if you get -- take what we got in terms of customer access, in terms of brand reputation, in terms of R&D footprint, in terms of local manufacturing, I'll remind you, 80% of what we ship -- sell in China we produce in China already today. So we can hop on that one very quickly. So we are very convinced that we can create a growth story together with Power-One.

Operator

The next question is from Mr. Martin Wilkie from Deutsche Bank.

Martin Wilkie - Deutsche Bank AG, Research Division

It's Martin from Deutsche Bank. There's a couple of questions, I mean, firstly just on what you're expecting the market over the next 12 or 18 months. You've alluded that '13 is going to be quite weaker. I think a lot of other companies have said that as well. But are you expecting those growth rates that you refer to, to kick in from next year? And then, just related to...

[Technical Difficulty]

Joseph M. Hogan

I missed the last part of your question, Martin. Martin, I think we lost you.

Martin, I think, if I received all your question, I'd just frame it with, there's a lot of uncertainty, in a sense, what the growth rate is going to be exactly. There's a huge amount of mix you can see is, if you sell an inverter, whether it's in a commercial marketplace, utility marketplace or residential marketplace. There's different prices, different margins. And that kind of works the same way by region, too. So it's really difficult for us right now to tell you exactly what this is going to look like. Obviously, as we get further along the integration process and all, we'll be able to share more details with you. Ulrich, what -- do you have any other thoughts on that?

Ulrich Spiesshofer

Now if you look at the IMS reports, Martin, these are the key reports that are being used in this industry. They are forecasting this being about a 5% growth for inverters in 2013, about a 9% growth in 2014. Whether that happens or not, in the context of the current volatility, we can't determine with a high probability, but this is at the moment what the industry experts think about.

Martin Wilkie - Deutsche Bank AG, Research Division

And just a follow-up to that, do you think it's fair to say that you're not reliant on new legislation on feed-in tariffs or subsidies or anything like that? It's very much driven by this reaching of grid parity to drive that growth?

Joseph M. Hogan

Martin, I'd tell you, we really feel strongly that this is about grid parity. This is about economics. And that's why we're doing this deal. If we thought collectively that this was going to rely on government subsidies going forward, that was a really important part of it, we wouldn't be on the phone with you here today.

Operator

The next question is from Mr. Ben Uglow from Morgan Stanley.

Ben Uglow - Morgan Stanley, Research Division

I had a couple of questions. One was just, I guess, for Joe. Strategically, at what point in the process when you were growing the solar inverters business, when did you kind of decide or when did you realize that an acquisition was the way to go? Because my understanding was that, say, 3 or 4 years ago, you started up, you actually gained some market share. So I guess, at what point did you feel that you hadn't got sufficient critical mass? Or what led you to the decision to actually buy a company rather than continue growing organically? Secondly, is there anything specific to Power-One's technology that is very different from SMA Solar or any of the other companies? Is there something particular within Power-One that you see as proprietary? And then the final, just I heard your answer on pricing. There are a lot of moving parts here between volume, price and cost. Are -- do you have the general sense that margins in this industry are very close to a bottom, i.e., 5 years from now, do we think that this sort of overall level of profitability is sustainable? Or do you actually think it may improve?

Joseph M. Hogan

First of all, strategically, Ben, on your question, is -- when I first came to ABB, I was a little concerned that we had missed the solar inverter marketplace from an organic standpoint. And a company like SMA and, obviously, Power-One had beaten us. Our -- I can tell you honestly that our first 1.5 to 2 years attempt at doing solar inverters was not good in the sense of we didn't understand some of the grid codes, we didn't understand the trajectory and speed and amplitude of the technology. We were way behind. I can tell you, the last 1.5 year, the team has done a really good job internally to understand it, to do better. And as Ulrich talked about, in Asia marketplace, in India today, we're #1. But we sat down and we collectively feel, given the number of solar inverters you need -- the different kinds, the different regional requirements and how fast this market is moving, we felt that we couldn't rely organically, we had to go inorganically. And we always kept a close look at the marketplace. And so it was easy for us to really understand exactly where to go and why we thought Power-One was the right company to partner with in that sense. As far as the difference between this technology and SMA and other ones, Richard, still being on the phone, I'm sure he can articulate this much better than any of us here. I'd ask Richard to really comment on that.

Richard J. Thompson

Great. Thank you, Joe. As you look at our products versus our competition, our hallmark has always been our high efficiency and the maximum power point tracking we can do to better harvest energy off panels. Certainly, our products lend themselves to a very good replacement in the field when required. Each of our units have modular design, and our current ULTRA unit, which goes up to 1.56 megawatt, has modulus -- modulars, I'm sorry, that are in the 390-kilowatt range. So this is a great product. It's certainly responsive to customers' needs and desires. And in some instances, we're actually doing some tailoring for individual customers. So the modularity of the product is great, the maximum power point tracking works well and our efficiency is excellent. And then lastly, particularly when you get to our string inverters, it is very easy to install our string inverters. On some megawatt installations on the rooftop, we're able to do that with our TRIO unit, where others have to do -- to central solution which brings in extra costs on the balances system and cabling and installation cost. So net-net, our products give our customers a better price point on their ownership and lower capital investment for the same-size plant with other -- of our competitors.

Joseph M. Hogan

Ben, if you hear Richard talk about that too, to understand the whole value chain in this industry is really interesting, too. You can see how you have to play in all these different dimensions, even from an installation standpoint, how fast these things can go in and those kind of things. We studied this intently over the last couple of years, and we know that. And that's another reason that we felt we had to accelerate this thing with an acquisition. Lastly, your price as far -- your question on price as far as do we think this is going to bottom, is the marketplace going to bottom in that sense on price? We certainly do. We're not smart enough to tell you exactly when. This market will certainly consolidate. It will have to, given its fragmented nature. That's when I use the term industrialization, it's what I mean. I think you'll see other companies come in, probably of ABB's size, at some point in time to really want to be part of this also. But we definitely feel that we -- there is obviously a bottom to this, end to this pricing. And you can't think of this as kind of unitary pricing on one kind of a unit. There are really literally hundreds of different ways that you go about solar inverters in the sense of these 3 specific markets that we're talking about, and all the different grid codes that are around the world. There's a significant amount of differentiation here. And there's a service opportunity here also that allows us to think about pricing and overall margin in this business in a different way.

Operator

The next question is from Mr. Mark Troman from Bank of America Merrill Lynch.

Mark Troman - BofA Merrill Lynch, Research Division

Just going back to an earlier question on the ability to develop business outside of Europe, in the U.S. and Asia. In the U.S., Joe, how are you going to do that in terms of the distribution channels, et cetera? Does Thomas & Betts help in any way? Or how is that exactly going to work? And in Asia, obviously, you'll -- you do have strong distribution there, but how is this business going to compete with being -- the incumbent Chinese and the new entrants, people like Sungrow, et cetera, and especially, I guess, if the market is going to sort of more local micro-inverters. So a question on how you're going to grow the business outside of Europe?

Joseph M. Hogan

Yes. Mark, first of all, from a -- again, let's take the businesses into 3 broad segments, which you have commercial, you have utility and you have retail. On the retail side, United States, obviously, Thomas & Betts could really help us in that sense. We're not in our evaluations here -- and if you think of Richard's business [ph] today, they're not overly reliant on the retail marketplace. It's broadly commercial and it's also utility scale. I think you know we have really good contacts, from a utility standpoint. And obviously, from a commercial standpoint, our distribution channels can help us. But we also have a large commercial sales force in the United States too that we can leverage on either end, to that end. From an Asia standpoint, I think there's a lot of -- I mean, it's -- we -- obviously, Mark, we have to question ourselves on China also because we're in the power market in China. We know how competitive it is. In this case, Sungrow is a very good competitor in that sense. But I think Ulrich laid it out really well: We have 15,000 people in China. We produce a huge amount of our own product in China for China. We do understand this market extremely well. And so we can really add a lot to -- that other companies really couldn't in the sense of our understanding the Chinese marketplace. But I can tell you, from a synergy standpoint and all, we're not overly reliant on penetration in Chinese marketplace to make the financials of this deal work. That's not it. We're confident with what we can do in China, but we're not -- and you look at the growth that's going on in China, it's huge. But we're also, I think, not naïve in the sense of what it takes to be overly successful in China, and that's not what these synergies are based on.

Operator

The next question is from Mr. Olivier Esnou from Exane.

Olivier Esnou - Exane BNP Paribas, Research Division

Three questions, please. The first is about the deal itself. What is the minimum acceptance rate at the Power-One AGM to -- required to validate the deal? Second question, you mentioned so the different pricing dynamic by channel. Can you maybe give a breakdown of the combined ABB plus Power-One inverter business? What is the sales in resi, commercial and utility, please? And maybe lastly on how you integrate the business into ABB: Did you think about having it in low voltage as well? Or how -- why did you decide that automation was the best business to integrate it given that Thomas & Betts could actually play a role?

Joseph M. Hogan

That's -- so we'll answer your question by going backwards. First of all, your last question is how we really integrate it. I'll talk first from my end in the sense that you look at this technology and you'd say, "Overall in ABB, where do we think it fits the best in that sense?" This fits the best in Discrete Automation and Motion because of their power conditioning business and, overall, what they've done for years, in that sense, and their expertise. But I've talked about before is, when you think about our portfolio of power and automation, it's never binary here. We have great power expertise in the automation business. We have good automation capability in the power business too. And so this fits extremely well with the Discrete Automation and Motion team. If you think about, even with -- when you talk about UPS systems, you take that energy base and then you condition it to put it back on the grid or if you put it into a data center or anything like that. I hope that makes sense. But I'll turn it over to Ulrich to talk about the integration piece too, and how that will be done and why it fits.

Ulrich Spiesshofer

Right. If we look at the integration between Power-One and our business, as you might have observed, recently, we reshaped our business structure. We put all the drives businesses under one business unit, drives and control, and we formed a business unit power conversion. And in power conversion, we basically have all the infrastructure and renewables-related power conversion offering of ABB in one unit. We already have our existing solar inverter business in there. We got the wind converters in there. We got everything else around infrastructure power conversion on that one. So this will be a very, very good home. It's the same technology base. It's the same kind of team spirit in terms of innovation. It is basically a lot of market access opportunities that we have there jointly. So we feel this will be a really, really good and successful integration place for the -- for Power-One in the next couple of years.

Joseph M. Hogan

And on the sales by channel, Richard, we'll it turn over to you for, really, the last 2 questions, the minimal acceptance rate from a shareholder standpoint and also the -- how your sales break up by channel.

Richard J. Thompson

Great. On the channels, remember, we have string inverters that last year, our TRIO unit sold over 53,000 units in Europe. That basically displaced a lot of central units of our competitors. The TRIO alone was almost 1 gigawatt in that very profitable commercial market. The residential market is important for us but actually smaller. It's more in the 20s percent. And then on utilities, again, it is 20% to 30%. So it's a balanced portfolio. Our goals going forward, Joe and Ulrich, as you know, is to be more successful with the ULTRA unit in the utility space, particularly in North America. And we expect those ratios to change. I'm sorry, I -- we've had a little phone difficulty. I didn't hear the first question.

Joseph M. Hogan

It had to do with the minimum acceptance rate from a voting standpoint, from a shareholder standpoint, to get the deal done.

Richard J. Thompson

I believe it's just the majority plus 1.

Ulrich Spiesshofer

Exactly...

Joseph M. Hogan

Yes, yes, 50%.

Operator

The next question is from Mr. William Mackie from Berenberg Bank.

William Mackie - Berenberg Bank, Research Division

Just I wanted to go back over one of the points earlier. Looking at the market development between '09 and '12. The other players in the solar inverter market increased from 41% to 58%. You've highlighted a number of product-related advantages, but more generally, can you broaden the competitive advantages, which you see as sustainable for Power-One, versus the number in proliferation of new entrants in the inverter market? Secondly, the Power Solutions business within Power-One, we haven't talked about much. Maybe you could just highlight how that fits into the portfolio given its different end markets and varied technologies? Is there also a potential that as it moves from being an independent business to being captive to yourselves that you lose some of the customers for that business who you, ABB, compete with? And lastly, Joe, I think, in the past 3, 4 months, you've highlighted that there were a number of transactions on the cards. It was brought up by a number of journalists earlier, but where are you with your thinking in terms of a deal pipeline beyond Power-One? Has this consumed all of your firepower? Or are there other a couple of other potentials that we should just be aware of in the background?

Joseph M. Hogan

Well, your last question first is, we always -- we have a pretty robust deal pipeline that we go through all the time. We have nothing imminent right now of this kind of a mid-sized deal or a larger deal, really, on the radar screen over the next 3 to 6 months, in that sense. And I think that's about the best timing that I can give you. On the Power Solutions side, I'll turn it over to Ulrich, as far as our initial thoughts on that.

Ulrich Spiesshofer

Okay. Now let me take that one, and then I get back to the first, on the market mix. On Power Solutions, if you look at it, it's power conversion. It's around AC-to-DC and DC-to-DC power conversion on the lower voltage level than we typically do it. So this is a business that we get. We did the transaction, we look at it. We have already some preliminary thoughts what we're going to -- how we're going to develop it in the future, but it's early -- too early to come to final conclusion how exactly we're going to run it. On the Power-One renewables piece and then the market's position and the fragmentation that you observed, it's like, look, in a growing market which is not yet a fully mature market everywhere, you would expect a lot of new players coming in. We have seen it in other industries, you see it here as well. The good news is that, on the -- within that context, Power-One has been able to really differentiate and double their market share over the last couple of years, over the last 4 years, to a double-digit market position. Now how do we believe that this market position going forward will be made sustainable or further growing which is definitely the ambition that we had. Let's start with the technology, the innovation in itself. Managing a couple of different angles on power electronics is absolutely crucial. The one is the efficiency of the product itself, getting a better power conversion efficiency, getting more harvesting [ph] out of the panel will be a key differentiator. The reliability of the product is a key point in there. If you look at the reliability of our power electronics offering in other fields, and then bringing together Power-One and our capabilities will be a real source for differentiation for us going forward on the chip [ph] technology and in relations side. And the third point, on the technology side, if you look at the functionality of an inverter, it's not just a naked DC-to-AC conversation. It's much more control nowadays. It's grid connectivity. It's expanding the functionality into a multifunction purpose on the e-mobility side, on the household side, on the grid stabilization side. And this is our home, this is where we are really good and where we can differentiate together with Power-One against all the other new entrants. So I think, if we play our strengths there from an innovation and technology side, we've got a very, very strong argument speaking for ourselves. The second point that I want to mention is access to distribution. If you look at our global reach combined, if you look at the different channel strengths that we bring, if you look at the regional and the specific country exposures that we have being active in more than 100 countries already today, having a platform to serve these countries, having a transaction platform, having a brand established, this will be a differentiator for ABB and a very, very hard piece to match for any competitor going forward in the years to come. And the third point that I want to mention here, on the service side, you might have seen we had a really nice run on service between our power electronics offering in the last couple of years. We got a good attach rate, which is growing rapidly. We are moving away from prix fixe [ph] to remote condition monitoring and other kind of sophisticated services that add more value to our customers. So if you take this together, the innovation piece, the access piece and the service piece, I think we have strong reasons to be optimistic about our future market position in this very interesting market.

Joseph M. Hogan

Great. Thanks, Ulrich. Hey, well, thanks for the questions. That ends the call today. We're out of time. And we really appreciate your interest. And we'll be back here shortly, obviously to report the first quarter.

Okay? Oh, we have a call this afternoon at 3:00 also, as a follow-up. So again, we look forward to talking to you again soon.

Operator

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

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