ABB's (ABB) Ulrich Spiesshofer on Q4 2015 Results - Earnings Call Transcript

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ABB Ltd (NYSE:ABB) Q4 2015 Earnings Conference Call February 3, 2016 8:00 AM ET

Executives

Alanna Abrahamson – Head of Investor Relations

Ulrich Spiesshofer – President and Chief Executive Officer

Eric Elzvik – Chief Financial Officer

Analysts

Andreas Willi – JPMorgan.

James Stettler – Barclays.

Mark Troman – Bank of America Merrill Lynch

Jeffrey Sprague – Vertical Research Partners.

Natalie Falkman – Carnegie.

Simon Toennessen – Berenberg

Daniela Costa – Goldman Sachs.

James Moore – Redburn Partners.

Martin Wilkie – Citigroup

Andre Kukhnin – Credit Suisse

Alexander Virgo – Nomura.

William Mackie – Kepler Cheuvreux.

Graham Phillips – Jefferies

Andrew Carter – RBC.

Gile DeBray – Deutsche Bank.

Alessandro Foletti – Bank am Bellevue.

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to ABB Fourth Quarter and Full Year 2015 Results Analyst and Investor Conference Call. I’m Maria, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session. [Operator Instructions]

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 welcome to ABB’s fourth quarter and full year 2015 results call. The press release and analyst presentation were published this morning at 7:00 AM and can be found on our website. This call is being webcast via our IR website as well as being recorded. With me today, our ABB’s President and CEO, Ulrich Spiesshofer; and ABB’s Chief Financial Officer, Eric Elzvik. They will give a review of the Q4 results and update on the execution of our Next Level strategy and present the outlook for 2016.

Before we begin, I would like to draw your attention to the important notices page regarding Safe Harbor and our use of non-GAAP measures on page 2 of the ABB presentation. This conference call will include forward-looking statements. These statements are based on the company’s current expectations and certain assumptions and are therefore subject to certain risks and uncertainties.

I would now like to hand over to Uli.

Ulrich Spiesshofer

Thank you, Alanna. Good afternoon, ladies and gentlemen, and welcome. Before I start to go into the details of the fourth quarter, let me summarize 2015 in a couple of points. In 2015 we faced challenging markets. However, we continued to execute our Next Level strategy by taking decisive actions to drive profitable growth in the segments wherever possible.

We improved our customer focus and simplified the organization to become more market oriented. We truly accelerated our productivity improvements and cost-reduction measures and delivered solid margin accretion. Driving the Power Systems step change program was a key priority and has brought the division back into the target margin corridor in Q4 already ahead of time. Our focus on cash generation is paying off, as we delivered strong growth in this area.

We continue to focus on delivering attractive shareholder returns. In 2015, we’ve returned more than $3.2 billion in cash to shareholders through dividend payments and share repurchases. The board proposed the 7th consecutive dividend increase to a value of CHF 0.74 per share. This is in line with our progressive dividend policy.

Together, the actions taken during 2015 positioned us well to deliver our Next Level strategy in 2016 and ongoing, despite the global uncertainties which we will continue to face. So now let me now turn to the Q4 highlights on the slide 3.

In the challenging market environment that we face, we continue to drive PIE, penetration, innovation, and expansion. And in the quarter, we realized some key orders in the U.S., Europe and Middle East. Growth in large orders offset the 6% decline in base orders that is the result of the tougher market conditions mainly in China and in the oil and gas sector.

We continue to build the basis for future, as our backlog grew 5%. The divisional realignment that we announced at the Capital Markets Day in September last year is complete and fully operational. The strategic portfolio review of Power Grids is well on track, and we will conclude, as announced previously, during 2016. Our continued focus on relentless execution enabled us to expand our operational EBITA margin by 60 basis points in challenging times.

We achieved a major milestone in Power Systems, as we reached the target margin corridor with 7.5%, an improvement of 620 basis points over the previous year, ahead of schedule. The turnaround is on track and is nearing the completion. We also continued to drive self-help by focusing on growth opportunities in a disciplined way and stepped 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 drive relentless execution and are accelerating our focused 1,000-day programs on white collar productivity and working capital. Cash return on investment capital was up 70 basis points to 13.4% on a full year basis. This demonstrates that we’re progressing well towards our new cash culture in ABB.

In our third focus area, business-led collaboration, we simplified further our organization and confirmed all the leadership appointments effective January 1, 2016. Implementation of Salesforce.com, our collaborative sales platform across the group, is operational in more than 40 countries and will soon reach 20,000 people. This tool enables us to have greater transparency into opportunities and to collaborate more effectively as one ABB, in summary, to drive efficiency and effectiveness on the sales front-end.

The Board of Directors has proposed four new members for election to the Board at the AGM in April. These members will strengthen our expertise in key areas of future growth for our Next Level strategy. In short, our Next Level strategy is really delivering positive results.

Now let’s turn to chart 4 for the key figures. The currency impact was significant in 2015, due to the strength of the U.S. dollar, which had a translation impact on average of about 10%. Orders and revenues were stable in the quarter and for the year, reflecting the challenging market conditions that we faced. We grew operational EBITA margin as we drove our cost and productivity programs. Our initiatives to accelerate the reduction in working capital can be seen in the strong cash generation for the quarter as well as for the year.

So let me move to chart 5. As we have said before, our primary focus is to generate attractive shareholder returns by growing earnings per share and increasing cash return on invested capital. In 2015, we faced strong market headwinds that dampened top line growth. By continuing to drive PIE, we focused our sales force on opportunities in target segments and were able to deliver steady revenues in market headwinds.

On cost and productivity, we took decisive actions and achieved the 60 basis points margin improvement. We also achieved 5% operational EPS growth versus our target of 10% in adverse market conditions. We delivered on our free cash flow conversion to net income of greater 90%. We had very good progress on our cash return on invested capital and are moving towards the mid-teen range.

Let me now give you a perspective on the regional order performance on chart 6. We truly continued to experience hard weather sailing in many parts of the world. Markets were mixed and softened further in the fourth quarter. Europe orders grew 7%, driven primarily by selective transmission and distribution investments in Sweden as well as Italy.

Turkey won a large order for the Trans-Anatolian Natural Gas Pipeline where ABB will deliver the complete control system, telecommunications, pipeline monitoring and security systems, utilizing fully our capabilities Internet of Things, Services and People. Turkey also had base order growth across almost all our divisions.

Americas was plus 1% in the quarter as weaker demand from the process industries was offset by power orders. As announced today, we won a $130 million order to upgrade an existing HVDC connection in the U.S. Base orders were down in the U.S. and Canada, primarily driven by weak automation demand for process industrial equipment. Declines in North America were more than offset by strong base order growth in many countries in South America like Argentina and Peru.

The 13% decline in AMEA in Asia, Middle East and Africa was primarily driven by China. In China, our base orders were down 21% of a difficult comparable. In Q4 2014, we experienced significant pre-buying, as distributors we were wanting to achieve their year-end bonuses. India in the quarter declined 90%, because it had a very difficult comparable for Power Systems. India continued to grow in Discrete Automation and Motion, as well as in Power Products.

All these developments demonstrate that our PIE approach works even in a difficult market environment and that our broad geographic scope helps us to identify and drive still some very attractive growth opportunities.

With that let me turn over the presentation to Eric, who will take you through the financials in more details.

Eric Elzvik

Thank you, Ulrich. Let’s move to chart 7, where we have an overview of the divisional performance in the quarter. The order decline in Discrete Automation and Motion is primarily related to lower demand for standard products used in the process industries in key markets like the U.S. and China. The operational EBITA and margin decreased, mainly as a result of lower volumes in the quarter and a lower share of standard product revenues.

Capacity and footprint adjustments to mitigate these market headwinds have been taken and they are well underway. We expect the benefits of these actions only to be felt in the second half of 2016. Low voltage products were slightly down on orders, as the division had a difficult comparable in 2014, specifically in China, where Q4 of 2014 had significant distributed pre-buying as Uli already mentioned.

Low voltage products operational EBITA margin was impacted by the greater share of low voltage system revenues compared to a year ago. In Process Automation, low base order growth was offset by the large gas pipeline order that was mentioned earlier. Margin declined primarily due to weaker revenues and mix. As in DM, capacity adjustments to mitigate these market headwinds have been taken and they’re well underway. In Power Products, orders were up 3% due to the selective transmission utility spend.

And in Power Systems, had large orders in the quarter as mentioned earlier that more than offset the decline in the base order growth. As mentioned, the operational EBITA and the related margin were significantly higher, mainly as a result of the ongoing step change efforts, an improvement in the product margins and continued cost out measures. The financial turnaround of Power Systems is on track. And the division delivered another solid quarter of profitability and entered the operational EBITA margin target corridor of 7% to 11%. Uli will go into more detail on the progress of Power System step change program later.

Many of you have asked about the corporate operational EBITA, since we had a 13% decline in the year on a constant currency basis a 24% decline in U.S. dollars, and whether this is a sustainable level going forward or not. For 2016, we expect the corporate operational EBITA to be in the range of $400 million to $450 million. All in all, it’s a challenging market, but we are taking actions to safeguard profitability.

And just as a reminder, when you are updating your models for 2016, our standard restructuring guidance is approximately $200 million to $250 million. The white collar productivity restructuring for 2016 should be around $300 million to $400 million and we expect implementation costs of slightly more than $200 million. So all in all, those non-operational items will be about $700 million to $850 million.

Let’s move to our operational EBITA bridge on chart number 8. In the challenging markets, we have achieved a $25 million net savings which offset the negative net volume levels. Most of the project margin improvements came from Power Systems, as the division continued to successfully execute on key milestones in the projects. The mix was negative, mainly from the higher system business, primarily in the voltage products, but also lower short-cycle business overall in the divisions.

As always, the other category consists of many small items which add up, for instance, realized foreign exchange gain and losses, certain commodity supply chain costs, and changes in corporate provisions and other one-off items. And as in the last quarter, the foreign translation effect reduces the reported number in dollars. All of these changes led to a group operational EBITA of approximately $1.1 billion and an operational EBITA margin of 11.7%, which means a 60 basis points improvement.

Now let’s turn to slide number 8 and look at the cash flow and net working capital. In Q4, our efforts to improve the net working capital management, started to show results. Working capital decreased significantly, mainly from stronger inventory management and improved collection from customers. We continued to drive the optimization of the entire value chain and work hard on the unbilled receivables in large projects. We are well on the track to achieve our $2 billion working capital reduction by the end of 2017.

Our free cash flow to net income conversion was more than 150%, mainly due to the low net income from the restructuring and related expenses. And there was also a little cash out for those restructuring expenses in 2015. This would expect in 2016, a significant cash out, approximately $700 million to $800 million for those restructuring provisions we have taken. And for that reason, we should not expect as high conversion rates in 2016 as in 2015. But, we will continue to drive a good cash flow under good cash flow conversion.

On slide number 10, you see the positive trend from the free cash flow, which is up by 16% in constant currency. We are constantly generating a strong free cash flow over time, as you can see in the chart, which goes back here to 2011. We are targeting an efficient balance sheet with a single A rating, which gives us the flexibility and a solid basis to implement our strategy and to drive the shift in our center of gravity.

On the capital allocation priorities, the next page, remain unchanged. You have seen them before, and they are exactly like we have presented in – back in the Capital Markets Day. First of all, as we often said, the organic growth generates the most attractive returns, and we will continue to fund our growth initiatives, including research and development and capital expenditures. In 2015, we invested more than $1.4 billion in R&D and some $900 million in capital expenditure, all of this to strengthen our competitiveness and our global technology leadership.

As you can see from the Board proposal today, we remain committed to our progressive dividend policy by returning a steady to higher cash dividend to the shareholders every year. The Board proposes now another dividend increase for the 7th consecutive year, this time to CHF0.74 per share. At the current share price, this proposed dividend represents a yield of about 4%. This is a strong vote of confidence in the strength of our business and our ability to successfully execute on our Next Level strategy.

Value-creating acquisitions remain one of the ways we can deploy cash to generate high returns. We have a strong track record of disciplined acquisitions. And you should expect us to continue with that approach. Returning additional cash to shareholders is the remaining tool at our disposal. And as of the end of 2015, we have completed more than half of our $4 billion share buyback program, which runs until September of 2016. If you look at last year's dividend payment and the share repurchases during 2015, we have returned almost $3.2 billion to our shareholders during 2015.

Let me now turn back the presentation to Uli.

Ulrich Spiesshofer

Thank you very much, Eric. Now let’s summarize our performance for the full year in 2015 on chart 12. Looking at this chart, you can see that we had a lot of homework to do from the turnaround in Power Systems to laying the foundations for ABB to truly move to the next level of growth and productivity with our Next Level strategy. In line with this transformation, I would like to draw your attention to the rollout of our new performance and compensation model for 70,000 of our people. This is absolutely instrumental in ensuring that we will be successful in the future as well.

In the next few slides, I will go into more detail about our success in transforming ABB. On chart 13, you see the slide that we launched at our Capital Markets Day last September. And it basically set out and showed you the details of the second stage of our Next Level strategy. We announced that we would align the divisions with the pattern of our customers' activities. From five divisions, we now have four, really focusing on power and automation for the grid on the one hand and power and automation for the site on the other hand in the other three divisions.

For our utility customers, our new Power Grids division offers a complete transmission and distribution offering. The division is the market and technology leader, with a global presence and the largest install base. As such, it is well positioned to meet the changing needs of utility customers, such as integrating renewables, grid complexity, and other challenges of the current energy transition. As stated earlier, the strategic portfolio review for Power Grids is well on track, and we will conclude during 2016.

Our other three divisions, one of which, electrification products, is new, our focus on power and automation for the side of electricity consumption. Our new electrification products division sees us organized in the low and medium voltage segments in the way that our customers want to buy from us. We have the broadest portfolio in the industry in these segments. Discrete Automation and Motion remains the number one in industrial motion while being a major robots business as well.

In Process Automation, which is the number one in distributed control systems globally, we have a strong position in process industry and process industry automation as well, whilst in parallel being a leading player in the marine sector. This new market-oriented divisional structure came into effect January 2016, and is fully operational now with the appropriate leadership appointments.

Now let me turn to chart 14. You might remember we continue to transform ABB by shifting the center of gravity towards strengthening our competitiveness, driving organic growth, while de-risking our business. The following charts illustrate how we have been doing on this in 2015.

So let’s move to chart 15. When we look into shifting the center of gravity of ABB, how does it truly improve competitiveness? One way is by driving growth in our service business. ABB has a tremendous install base of products and systems around the world worth about $400 billion. We achieved our target of increasing our share of service revenues by 1 percentage point in 2015 to 70% on a comparable basis, through driving penetration of our install base and localizing our product offerings. We have really a great potential to grow service even further in the future.

Turning to chart number 16. A key driver to strengthening our competitiveness is technology leadership, which is at the center of our Next Level strategy. We are continually striving to develop technologies that better serve our customers and strengthen our position as a pioneering technology leader in power and automation. We have the strongest portfolio to help utility customers with the shift towards a more sustainable power supply system. Our new switchgear, for example, with the eco-efficient insulating gas mixture was a true technological breakthrough.

Our YuMi robot needs very little introduction nowadays. It is the most advanced industrial robot available and illustrates how we are helping to drive a transformation in industry in the way humans and machines collaborate. In the transport and infrastructure sector, we remain a leading provider of fast-charging solutions for electric mobility. As an example, our e-bus system, which is already deployed in Geneva, was complemented last year by an addition of fast-charging robot solution that can easily be added to existing bus lines.

Now let me turn to chart 17. In Industry, the world is on the cusp of the fourth industrial revolution driven by digitalization. Among the key drivers, are the increased availability of data operating tools [ph] connectivity between and among machines and people, and the exponential growth in processing power. Software is a large and growing part of our offering and a key differentiator for ABB. Today 50% of our offering is already software based, with leading edge technologies such as our Ellipse asset heath center solution, we can dramatically improve safety, uptime and return on investment for utility and process industry customers.

The same applies to our offerings for industry. For example, we helped our costumer Boliden to transform the Garpenberg mine in Sweden into one of the most efficient and productive digital mines in the world. For transport and infrastructure customers, we are already the world’s leading supplier of fast chargers for electric vehicles. Now, in collaboration with Microsoft, we are pioneering a new platform for EV charging services using Microsoft’s Azure cloud-based platform.

Another example on the software side is our Octopus software for marine applications, which we are using to develop a route optimization solution for 140 containerships of the Maersk Line, helping them to find a safest, shortest and most fuel-efficient routes to their destinations, taking in consider the load, the weather and the wave conditions which are being transmitted by satellite to this very leading edge system.

Turning to chart 18. One key to our success is, particularly close collaboration we have developed with important and leading customers. One example is our relationship with Statnett with which we are connecting the Power Grids of Norway and Germany, as well as Norway and UK in orders together worth well over $1 billion.

Another example is our strong and long lasting relationship with Ford in China, where we are able to help improve the flexibility and efficiency of Ford’s local production with a fully automated robotics solution that has world-record changeover time in industry. The transformation of ABB to a more market and customer-oriented company is reflected in our steadily increasing net promotor score, which rose last year to 48%, top quartile in the industry.

Now let me move to our second focus area, relentless execution on chart 19. We committed to you to bring Power Systems back to sustainable profitability and we have delivered five consecutive quarters of positive operational EBITA margin. In Q4, meaning ahead of time, we entered the target margin corridor for the division with an operational EBITA margin of 7.5% a 620 basis points improvement year-over-year.

In offshore wind, we continued to complete key milestones in our remaining project portfolio. We have handed over two of the three offshore wind connections, and the third is now in the energization phase. We have exited the solar EPC business and have now implemented a successful new business model and growth is back in the solar business of ABB. Our latest success is our joint venture with Hitachi, which will use our HVDC technology for its projects to strengthen the Japanese power grid.

In summary we fulfilled our commitment in Power Systems. The turnaround has been a real success and a key execution achievement of Claudio Facchin and his team.

Turning to chart 20. Our strong performance on cost savings is a continued further demonstration that execution is a hallmark of ABB. We accelerated our savings program when we saw the scale of the market headwinds during 2015 and took out $1.2 billion in cost making 2015 the 7th consecutive year in which we delivered savings of more than $1 billion. We remain committed to our goal of taking out 3% to 5% of cost of cost of goods equivalent every year.

On chart 21, you can see how ABB’s productivity is improving. We have accelerated the improvement in 2015 in response to a further slow down in growth in some key markets during the course of the year. Specifically, in the Discrete Automation and Motion division, this action included a 7% reduction in total workforce last year and further footprinted the capacity adjustments are well underway. The full effect of these actions will only be felt in the second half of this year.

Turning to chart 22, in this environment we continue to drive self-help by accelerating our 1,000-day white collar productivity program. Key actions include the optimization and consolidation of business functions into centers of excellence and streamlined shared services. Over the next two years, the 68 country-based service centers that we have will be consolidated into two global and four regional centers. The two global centers will be based in India and Poland. This process is already underway and it enable us to deliver higher quality services to the business at best-in-class cost.

As announced in September, we have committed to reducing structural cost by a run rate of $1 billion by 2017 through our white collar productivity program and we are targeting gross savings of $400 million in this year already. That means the program is on an excellent track to deliver results.

Moving to chart 23, to drive collaboration and enhance the expertise of our leadership team in line with Next Level, we have confirmed several appointments on the senior level of ABB’s team. In the executive committee, three of our leaders have new roles. Bernhard Jucker, Tarak Mehta, and Claudio Facchin, following the realignment of our divisions to generate profitable growth by simplifying the organization and optimizing the way they are focused on the markets and going to market. To support the ongoing transformation of ABB, the Board of Directors proposes four new Board members for election at our AGM in April. Roger Agnelli has elected not to stand for reelection at the next AGM.

The expertise of the new Board members in such areas as service, software, project management and emerging markets, will be particularly valuable in supporting the shift in the center of gravity in ABB’s activities, markets in line with our Next Level strategy.

Going into 2016 on chart 24, the market remains challenging, and we anticipate further hard weather sailing. We expect utilities to continue to make selective investments in transmission and distribution and solar and wind to continue growing. Growth should continue at a moderate pace in the consumer industries, while process industry will continue to be difficult due to overcapacity, mainly on the supply side of the value chain. Transport and infrastructure markets should continue to grow with one possible exception of marine, which gets impacted by the oil and gas sector as well.

Moving to chart 25, the geographical outlook is mixed. Growth in China is set to continue, but at a slower pace, while India should accelerate as the country invests in power infrastructure and industrial development, while low oil prices will dampen demand in the Middle East. In the Americas region, the United States will likely remain steady, but conditions will be difficult in Canada. One reason is the heavy reliance on unconventional oil and gas. Europe is a mixed picture with Northern Europe steady and Eastern and Southern Europe growing.

Let’s move to chart 26, which states the priorities for 2016. 2016 will be a year in which we drive external focus on our customers and markets, accelerate organic growth, and make ABB even further leaner, faster and more agile. We cannot expect much help from the markets. Our disciplined and determined progress in our three focus areas demonstrates that we are now in a strong position to expand our technology leadership and realize the benefits of our realignment.

Our focus on execution will continue and we expect to see additional significant savings and efficiency and productivity improvements. With stronger collaborations and enhanced expertise of our leadership team, we will make decisive progress in moving truly into the Next Level.

So on chart 27, in closing, ABB is a pioneering technology leader with strong positions in attractive markets. We have a crystal clear transformational agenda to drive earnings per share and cash return on invested capital. We are committed to deliver attractive returns to all of our shareholders. Our Next Level strategy is delivering positive results and will accelerate sustainable value creation.

With that, I’d like to conclude my remarks and thank you all for your attention.

Alanna Abrahamson

Thank you for that. And we will now take some questions. So one thing that I would remind everyone is that maximum two questions. If you have additional questions, we need to be fair to everyone that is out there. And you have to get back into the lineup of the queue.

So with that we will take our first question.

Question-and-Answer Session

Operator

Our first question is from Andreas Willi, JPMorgan. Please go ahead, sir.

Andreas Willi

Good afternoon, everybody. My first question is on base order development. Maybe you could give us some indication on how that developed in the fourth quarter as we went through the month and maybe what you've seen in January so far. And also maybe on the tendering particularly for larger projects, what's coming up for the next couple of quarters, how that looks like in terms of the tendering pipeline for the large projects, I guess particularly in Power Systems and Process Automation.

And the second question is on Power Systems, where you're ahead of time or ahead of your plan in the turnaround. Is it also just running in a higher trajectory? So, should we expect upside going forward as well, or is this more a question of having got to where you wanted to be quicker?

Ulrich Spiesshofer

Okay. Good afternoon, Andreas and thanks for your question. If you take the base order development, the world distribution and distributors plays a major role in the fourth quarter. Last year, the distributors, especially in China, they're close to make their annual targets. So, they ordered very strongly and got their warehouses filled. This year, we had de-stocking going on. And we have a very conservative behavior of the distributors. And that’s one of the key drivers of the distribution – of the distribution driven slow base order development in the year and in the last quarter of this year.

If you look at – and actually, we don’t give you any guidance on the January activity. I ask you for forgiveness on that one. But, when we talk about tendering and large project, if you look on the PA side, there is still projects out there on the downstream part of the value chain which are being tendered and discussed with customers. And we see really two distinct patterns. On the one hand, the fully integrated oil and gas customers that have upstream and downstream, they are extremely cautious. And they are trying to help the upstream situation that's slowing down the downstream investments. The companies that focus primarily on the downstream side are still looking at interesting project. And we see some activity in that field out there.

On the PA side, all over the world, connecting renewables to the grid is a major theme. If you look at the acceleration of change of mix in power generation all over the world, this is something that needs to be addressed with grid opportunities. The second thing that we see is connecting local disconnected communities, for example, in India and Africa, to the grid via microgrid solutions or even have off-grid microgrid solutions, is another activity that we see coming.

And the third point is that you’ve seen us announcing today, a major order upgrading the existing grids in traditional economies is an opportunity that we can tap with our great retrofit technology and our modernization capabilities that we have.

Now, on the PS side, look I’m really proud of what Claudio has done with the team. I think the turnaround was a really, really tough task. It reminded me a lot of the robotics turnaround that we had to take a couple of years. And I’m very pleased together with the Board and management that the team has done such a good job getting us back there. We have committed a new target bandwidth for the Power Grids division of which Power systems in large will be one of the major building blocks. And we continue with that commitment. We will be in the target range of Power Grids going forward. And that’s all I'm going to say about forward-looking statements.

Andreas Willi

Thank you very much.

Alanna Abrahamson

Next question please. Thanks, Andreas.

Ulrich Spiesshofer

You are welcome.

Operator

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

James Stettler

Yes, thank you, and good afternoon, all. Could you maybe give a bit more color around the Discrete Automation division? There's obviously a lot going on there, Power-One. You've got robotics. You've got motors. And could you talk a bit about the restructuring? And should we be looking at margins sort of at the – in H1 around the Q4 level? Secondly then, just in terms of M&A, if you look at how things are developing out there, if you could maybe talk a bit about your priorities, especially in terms of software, what you think is missing in the portfolio. Thank you.

Ulrich Spiesshofer

Okay. Good afternoon, James. Thank you for your question. Look, on DM, as you rightly observe, it's a really interesting wide portfolio that Eric and I happen to know a little bit from the past. The robotics business is doing very well. We are pleased with the development, as you have seen. We are throwing really the ball into the future with our technology. We have leading-edge offering, both on the technology and the service side. The team is doing a great job growing in basically three dimensions, more with existing customers, more industries, and more applications that we are driving. We do that in an incredibly disciplined way. And I'm happy with the progress that we have there.

On the Power-One piece, look, we bought Power-One in an undisciplined cyclical behavior on the ABB side. We bought it at a time when the market went down. You might remember on a net basis because we got about $250 million cash. We sold one piece for about $120 million. So, on a net basis, we spent about $630 million to get the number two position in solar inverters in the world. And we combined it with ABB's existing solar activities that we had before.

We have today the best offering of anybody between the panel and the point of consumption. We are the only player that brings together all these capabilities. And we really today see significant growth opportunities and solid growth going forward. If you take India, for example, India has an install base of about 4.5 gigawatt in solar to – as of end of last year. We have provided half of that. So, we are very strong there. The integration is fully done on the Power-One side. And now, we can benefit from the market upswing, both with the legacy ABB portfolio and combined Power-One activity. So, I'm very pleased with the positive growth momentum that we see in that field.

Now, on motors and drives, you have a situation where our strong historic position on the process industries was something that hit us now this year because, there, we had a massive deterioration in demand on the oil and gas side and a continued softness on the mining and the mineral side, especially on the large motors and the drives. And basically, the larger the product and the closer to the soil of the earth, the more difficult is the market condition.

We have reacted swiftly on that one. We have taken a lot of capacity adjustment and went through the situation. We are shutting down factories. We are adjusting the workforce all together. So far, we have taken about 7% of the workforce out, and there's more to come. And it will take during 2017 – sorry, during 2016 until you see the full effect of these measures. Pekka and his team are on it. They're acting against it. And we are taking all the efforts to really address that going forward.

Your second question on M&A, look, when you take M&A, I think Eric laid it out nicely. We have clear capital allocation priorities. Number one is organic growth. Number two is the dividend policy. And with the increased dividend, you see that we are really honoring that, even in a challenging market environment. Number three is M&A. Number four is then further returns to the shareholders.

On M&A, we have done a lot of homework fixing the company and putting the foundation in order. So, now, we are ready to consider inorganic moves. We will always stay disciplined in terms of pricing. We will also always stay disciplined in terms of cultural fit. But, naturally, now is potentially a good time to look in certain fields.

So, when you take the areas where we're looking, take from a cyclicality perspective, if we could add early cycle activities to our portfolio, it would be good because, historically, we have grown a little bit more late cycle. It would be good to have some early cycle activities. If you look from a business perspective, I think all of our businesses have an opportunity to grow through acquisitions. But, we will definitely not go in too strongly and add in areas where we're already very, very strong. We will have more complementary moves, filling holes with our offering. Take the Process Automation area between measurement, control, and actuation. We are strong on the control side. We have a leading-edge position there. On the measurement and on the industry-specific actuation, we want to do more in the future organically and inorganically.

Low voltage products and electrification products, some of the businesses that we have are pretty local businesses with local – strong local peers. We might add to that one going forward. And then on the overall software space that you asked specifically about, look, we differentiate between three types of software, embedded software, control software, and application software. On embedded software, that's basically in majority an organic game. But, we are strengthening our capabilities by putting artificial intelligence in systems and bringing that in by having selectively smaller teams and maybe even acquiring them.

On the control side, on the DCS side, we are number one in the world. There's no need to deploy capital in that one other than the normal organic growth. On the PLC side, that's a dream since many years, but we need to admit the scarcity of assets there is something that we have to respect. And then when we take the world of application software, there are two areas where we will further strengthen ABB, both organically through partnerships and also through acquisitions.

On the planning engineering side, helping our customers to define, to plan the assets of the future, to define and plan the operations of the future is something that we already have strong activities on the power side, where we want to do more. And then on the operations side, take our Ellipse asset health software solution that we have already today. This is a space where we see tremendous value creation potential for our customers in a space that we will definitely also look at application software.

So, all together, our center of gravity shift, you can expect a little bit less on the hardware side, more focused electronic software and service in terms of M&A.

Alanna Abrahamson

Thank you, James. Next question please.

Operator

Next question comes from Mark Troman, Bank of America Merrill Lynch. Please go ahead.

Mark Troman

Thank you. Good afternoon, Uli, Eric, and Alanna. I've got two questions relating to demand, part of which I guess you've dealt with already, but just a bit more detail. On oil and gas and the process impact, which we're clearly seeing in Discrete Automation and Motion, and you've talked about taking cost out and adjusting capacity, where are we – where do you feel we are in that cycle, given the pace of decline? Are we going to be declining all year, or should that stop by the half year if you can get your cost savings in, or you just take each quarter a time? So, I guess my question is – we're already well into the decline rate. Where do we think that sort of hits bottom on the process oil and gas impact for Discrete Automation?

And secondly, a question on China. Base orders fell I think 21% if I recall, yet your outlook for China gives a kind of overall positive tone. Are we seeing any signs of bottoming there? I realize the comparison was difficult in Q4. Are we seeing any stabilization? Would you expect that number to turn around notably this year on China? Thank you.

Ulrich Spiesshofer

Good afternoon, Mark, and thanks for your questions. Yes, look, if you take the demand piece on the oil and gas side, it's interesting when you look at it in – at the dynamics of that industry because, at the moment, the deterioration on the oil price and the shift on appetite, on adding capacity or spending money on service and CapEx is purely supply driven. From a demand perspective, the assets are running and pumping out the oil. So, the world is not consuming less oil. That's not the drama. The drama is that it's on the supply side. That means the existing assets on the upstream side and on the downstream side, some may need to be, again, serviced. And the service spend will come back.

So, when you look at it, the new capacity additions in that space probably will be stopped for quite a while on the upstream side, but the service activities on the existing running assets will come back because, otherwise, our customers are risking downtime, which is even more expensive than not spending the money. So, this will be a positive element, but whether we have reached the bottom of the bathtub in that area or not I don't want to speculate. I can tell you we're taking very responsible cost actions and capacity actions to ensure that the deterioration in the margin doesn't continue in a massive way going into the future and, and are optimistic that the team has taken the right actions to address that situation.

Now on China, look, the 21% looks really strong, but if you understand the dynamics of it, in the one year, distributors buying very strongly at the end of the months to really get their bonus. And this year, they’re basically stopping because they know they don’t get it anymore. That very wide gap is something, which can be explained in the way that I just did. If you take the Chinese pattern at the moment, let me go through the three customer segments, utilities, industry and transport and infrastructure, separately.

On the utility side, there’s a continued appetite for standing. If you look at the announcements that state grid has made publicly on their spending going forward, if you look at the T&D infrastructure investments which are needed to connect the newly added power capacity both conventional and renewable to the grid. And if you look at the demand-side dynamics on the distribution side, we are cautiously optimistic on transmission and distribution in China. And that may just also the CapEx forecast of our major customers in that field.

On the industry side, we have basically ad adverse development on the one hand, and a positive development on the other one. The process side is still subdued. And a large investment-driven activities that characterize the Chinese economy’s growth in the past, that’s coming or has come down very significantly. And we don’t expect the take up on that one.

On the consumer-driven pattern, I always call it the piece economy, where you produce pieces on cars on electronics or whatever, it’s still growing. I’ll give you an example, the automotive industry in China, the complexity of the cars is going up. More different materials require more different joining technology, more automation. The demand is shifting, it’s not growing that strongly on the end consumer side, but it’s shifting from the international OEMs to the local OEMs, so they need to build capacity.

And you have a significant labor scarcity in many parts of China today. So all together, there is really an automation opportunity that we can tap going forward. We have had significant growth from new customers in 2015, in China offsetting the deterioration, for example on the process side, by going less, by going to new segments. And that’s something that we will continue to do. So, the negative delta on the process side has now probably bottomed out. And on the consumption side, you see a pattern that allows our cautiously optimistic perspective on growth. And that’s the reason why we made the statement as I did before.

Alanna Abrahamson

Thank you, Mark.

Mark Troman

Thank you very much.

Ulrich Spiesshofer

You’re welcome.

Alanna Abrahamson

Next question please.

Operator

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

Jeffrey Sprague

Thank you. Good day, everyone. Just two quick ones. You’re covering a lot of ground here. Thank you very much for all the detail. First, I was just wondering if you could give us a little bit of perspective on how you view the incremental balance sheet capacity you have, Eric, relative to that trajectory that you illustrated to us. And then secondly, I was wondering if you could address price dynamics in your end markets, maybe collectively or if there’s a couple things to spike out in the verticals. Price didn’t show up anywhere in the earnings bridge, but I’m sure it’s embedded in there somewhere. Thank you very much.

Ulrich Spiesshofer

Thank you very much, Jeffrey, I hand your questions to Eric.

Eric Elzvik

Yes. So let’s start on the balance sheet capacity. We have a net debt, as you’ve seen, of slightly more than $1 billion. We’re approximately the same as a year ago. During the year, we have returned $3.2 billion to shareholders. You can say, with a flat revenue growth, we have returned all the excess cash to shareholders, maintaining the net debt level.

When you look at our current rating, which is a single A rating, it is where we would like to be and if you read the report from the rating agencies, you will see that we are somewhere in the area where we should be. With our strong cash generation, obviously we’ll continue now the buyback. And we will also have sufficient resources to implement the strategy and the needs. So I would not say more than that, but we certainly have a balance sheet that we can implement our strategy.

On the pricing side, the price is behind the net number of $25 million savings between the cost savings, which we said is over $1 billion and actually close to 5% of all the cost of goods sold, which then shows that our strategy works to outpace the price pressure with those cost savings efforts. So it’s a $25 million net savings as we showed in the quarter.

Jeffrey Sprague

Thank you.

Alanna Abrahamson

Thank you, Jeff, next question please.

Operator

Next question is from Natalie Falkman, Carnegie. Please go ahead, madam.

Natalie Falkman

Good day, Alanna, Ulrich, and Eric. Thank you for great answers. I have two questions. On the white collar productivity program, should we expect the even distribution or the benefits between the divisions? And can you just confirm that it’s still the net saving will be in the range of 50% of gross savings? And also, on the capital allocation area, would it be possible for you to connect capital allocation with the preferred leverage going forward because your buybacks are ending September, just how you’re reasoning around that since you have such a strong balance sheet?

Ulrich Spiesshofer

Okay. Look, on the white collar productivity side, I’m extremely pleased how this program is progressing. We kicked that off, you might remember during 2015. And when I look at the actions that we have taken in the three dimensions that we have given, I’m pleased.

We are taking out management complexity and we have made significant progress on that. We are implementing a completely different structure on the shared services side. And Eric, for finance and JC for HR, are really truly leading that. And that will be a truly transformational change in ABB. And we’re driving white collar productivity in the business function side.

So, all together, we are optimistic about this program. We see gross savings of $400 million this year. And with that I hand over to Eric to comment on the net savings and the second part of your question.

Eric Elzvik

Yes. So we have said at the Capital Markets Day, we had $400 million gross savings for 2016. And we remain with the same statement as we did at that time, that we would be disappointed if not at least half of that saving will go to the bottom line. Obviously, it depends on the speed of implementation. And it also depends on the market development around us. But, we remain with exactly what we said at the Capital Markets Day.

Ulrich Spiesshofer

Second one is capital…

Natalie Falkman

Capital allocation.

Alanna Abrahamson

Natalie, can you just repeat the second one? It was on capital allocation, right?

Natalie Falkman

Yes, just if you’re able to connect capital allocation priorities to your preferred leverage because, I guess, as you evaluate one year and you have certain leverage and then you have capital allocation, what has been done, what can be done, just how you reason surrounding that?

Eric Elzvik

The capital allocation priorities, as I said, they remain unchanged.

Natalie Falkman

Yes.

Eric Elzvik

And they are designed to keep an efficient balance sheet at any point in time. We will continue to implement our share buyback until September. And looking at the other alternatives on capital allocation, we will decide – make the decisions in the future that are needed keep an efficient balance sheet for ABB.

Natalie Falkman

And you haven’t communicated what efficient balance sheet is, what preferred leverage would be?

Eric Elzvik

We have said we are targeting the rating that we have today. And that’s what guiding the efficient balance sheet.

Natalie Falkman

Thank you.

Alanna Abrahamson

Thank you very much. Next question please.

Operator

Next question is from Simon Toennessen from Berenberg. Please go ahead sir.

Simon Toennessen

Yes, thanks. Good afternoon, everyone. My first question is just a follow up on James’s question earlier on the DM margin. I mean, if I look at kind of the last three years’ pattern, obviously, you were close to 17% in 2012, last year Q4, 15.6%, and now 12.5% in Q4. Margin ranges 14% to 18%. Would – shall we expect, basically given also that the capacity adjustments will only kick in really or benefiting from the second half, that reaching kind of the bottom end of that margin range would be a year that you – well, a target that you would like to achieve and that you think is reasonable to achieve?

And the second question is just on growth for 2016. Almost all Europeans and also U.S. electrics are giving some sort of guidance on organic growth in 2016. And I’m aware of the 3% to 6% growth target that you have. But, I think, last year, you commented a bit that you want to achieve kind of the bottom end of that range. Markets are obviously quite difficult. But, if you could just help us share your thinking there, and I’m not interested in a range here really. But, do you expect to grow sales organically in 2016? A lot of U.S. peers – and I appreciate you’re not going to comment on that – are guiding towards kind of minus 3%, minus 4%. So, just a bit more color in terms of how you think about organic growth in 2016 would be great. Thank you.

Ulrich Spiesshofer

Simon, thanks for your questions. Look, you can expect that we will forcefully act to ensure the DM is at the bottom end of the margin range, as much as possible. So, this is something that we have to absolutely focus on, it has all of our attention. And Pekka is getting all the loving tender care to make sure that we really deliver that in this year. The second point on the growth momentum, yes, look, when we came out with Next Level, the world had a certain kind of projections, when we came out with the second stage last year, we had a certain projection nobody expected the oil price to be at $30 at that time. And I don’t have the crystal ball or sharp enough to know what will be coming.

But let me explain to you what we’re doing. We drive growth with all force in the segments where we can grow. And I’ll give you some examples. We have grown in 2015 if you take our 1,000 day growth programs, we’ve grown double-digit in microgrids. We’ve grown double-digit in Africa. We’ve grown double-digit in food and beverage and intend to continue to do so. If you look at the pattern on the power side, it’s encouraging pattern that should allow us to get a certain growth momentum in that place.

Whether that’s enough to weather the storm and the headwinds that we experiencing on the process side, I can’t tell you at the moment, but one thing is very clear, we want to beat competition and we want to beat the markets on the growth pattern in 2016. Now, quite frankly the last two years, we were also very, very busy doing a lot of homework. The turnaround of power systems kept us pretty occupied on the power side. We put in a much lighter organization. We’re taking out a significant amount of cost on the white collar side, prepared [ph] that also requires some attention. This homework is now in good hands or done. So, the team can now really focus on the markets even stronger.

On the market side, I think through our [indiscernible] and PIE, we know better where to prioritize than before. And we can go in with a more selective and focused approach. So, all together, the ambition is to beat the market, and then the market goes in line with our original assumption that we had when we committed to an average of 3% to 6%. Then we will deliver on it. Speculating on how it exactly will come out in 2015, sorry 2016. I don’t want to give you any further guidance.

Simon Toennessen

Thank you very much.

Ulrich Spiesshofer

You’re welcome Simon.

Alanna Abrahamson

Next question, please.

Operator

Next question is from Daniela Costa, Goldman Sachs. Please go ahead madam.

Daniela Costa

Hi, good afternoon. Thanks for taking my questions. I have two things. Sort of the first one I wanted to ask you about, when you talk about relentless executions, and you – one of the sentences you have on the release is that you want to close the margin gap in operating performance compared to your best-in-class peers. Can you give us some color where you think those margin gaps are biggest, and what do you – what would you say is best-in-class? And the second thing I wanted to ask was regarding the strategic review of Power Grids.

And basically, from one side, when you’re talking about shifting the center of gravity, it seems – it almost – it reads a little bit like you’re talking more about the areas of the portfolio that are perhaps more automation related. Maybe it’s the wrong assessment. But, also, when you speak about the opportunities in power, microgrids, and the things that you were just talking about on the prior question, you seem quite optimistic about power. So, would – as part of the strategic review, is there an option which would be strengthening Power Grids? Thanks.

Ulrich Spiesshofer

Okay, thank you Daniela, for the questions. Look, on the relentless execution side, let me just explain to you how we go after that. You might remember, at the beginning of 2014, we set up a new performance management tool called the relentless execution dashboard. And basically, we look at KPIs in this space of care, customer, cost and cash. And in these KPIs, we not only look internally. We also look externally at world-class performance. So we’re not looking at a specific company for the overall performance. We’re looking at best-in-class operational performance and execution across all of our processes, all of our KPIs.

And the ambition is really to get in all of the KPIs in a leading position. Now, you will not do that at the same time, all at the same time. So we have a prioritized program, and we have a clear transformation path on our businesses going through. Take, for example, quality. ABB provides good quality, but could be become even better? Yes, absolutely. There’s always an opportunity. If you look at on-time delivery and service levels, we are good. But can you do even better in that area and get paid more then and have less cost doing so. Yes, absolutely, we do that.

So basically we go in, in a pretty granular approach with best-in-class benchmarking, business by business. We look at the performance indicators that we want to improve. Now as of 2015, we have tied now the – we call it Relex dashboard – results directly to compensation. So for 70,000 people in ABB, there is an execution element in the variable pay element of every person in ABB. So we’re also incentivating their journey.

So the ambition is, to whatever we do, we want to be at the very end in the top-class performance bucket. And that all together gives us the room for improvement and margin improvement. If you take companies that have gone through that journey, take Danaher, take Honeywell, who have really crunched operations and excellence in a great way. I think this is a part that ABB has only gone through partly. And we have tremendous upside and we are working on that one independent of the market dynamics.

Now on the portfolio review for Power Grids, I’m really grateful for your question, because at the moment there is too much nervousness around that in the public. What we are doing with this business is the following. We are number one in transmission and distribution today. And we have the clear aspiration to be also number one in transmission and distribution in 10 years time. So we are looking at the portfolio and say, what does it take to be number one in 10 years time? On which end market should be focused on? What is the offering that we should have, a mix between hardware, electronics, software and service? How should we position ABB going forward?

What is the right business model to provide each of these activities to our customers. And at the very end what’s the best ownership for this asset going forward. We are working with the board, we are working with the management an all these questions. You can imagine given the complexity of the task, this is something which requires thought [indiscernible] work. Now the good news is, we are not under pressure because Power Systems back in the target range. Power Product is performing well. So we will take the time to do this right. Is there a scenario where we could say, let’s strengthen this business and keep it under ABB? Yes, absolutely. That’s one of the scenarios that we absolutely should consider.

Alanna Abrahamson

Thank you, Daniela. Next question please?

Operator

Next question is from James Moore, Redburn Partners. Please go ahead, sir.

James Moore

Yes, good afternoon, everyone. I’ve got a couple of questions. I wonder if I could go back to base order momentum and the discrete margin. I see that the China numbers, they’re down 21%, and they’re down 15% in the U.S. and I can see also the Q-on-Q at a continental level. But, that’s skewed by large orders. Can you say organically what the Q-on-Q base order movement was in China and the U.S. in the fourth quarter versus the third, because I think we’re all trying to get a feel for what that looks like numerically?

And secondly, on the discrete division, the margin’s down 340 bps. Could you help us a little more here? Specifically, could you say whether the robotics margin fell or lifted in the year? And could you say whether that margin that we’ve just seen is a good guide for the first half, allowing for seasonality? I understand you’ve made some capacity adjustments, and they will kick in towards the end of the year, but not immediately. So, is that a reasonable guide, seasonally adjusted, for how we start the year?

Ulrich Spiesshofer

James, good afternoon. You went out on an interesting fishing exercise. And I have to say that I unfortunately have to disappoint you a little bit because the level of granularity that you’re asking for we are not disclosing. I think, on the base order dynamics, we have said very clearly what were the drivers in the fourth quarter. Actually, we have the ambition to rebuild the base order performance in ABB. There’s a lot of different drivers. If you take the new technology that we’re bringing into the market this year, we’ve got a lot of stuff coming out there. But, I will not comment any further on any details.

And then on DM, it’s similarly. Look, on DM, the margin got hit mainly by an impact from the process industries. And you can think yourself how many robots we sell in the process industries and how many we sell into the discrete industries. So, this is not hitting robotics in a substantial way. Without getting any – guiding anything on the margin side, I just guide you on what – how the business is positioned. And going forward, the actions that we’re taking on DM are pretty strong and deep. In some cases, we have already taken the restructuring. We already have the people out. And you will see the dampening effect of that one. Let’s see how the year develops. Our ambition is very clearly to have DM in the target range in 2016.

Alanna Abrahamson

Thank you, James. Next question please.

Operator

Next question comes from Martin Wilkie, Citigroup. Please go ahead.

Martin Wilkie

Yes, good afternoon. It’s Martin from Citi. Just a couple of questions. The first one is on how you’re reflecting the cost savings in the bridge and what we can infer from pricing off the back of that. You mentioned that you’ve had some savings from the white collar productivity, which matches the $25 million in the bridge. I just want to clarify if that number is in there as well as the regular savings. And related to that, you talked about gross savings being $1.2 billion, which might suggest that some of the offset, which is normally pricing, has actually gotten worse. And just wanted to understand if I read that wrong or if pricing has deteriorated towards the back half of 2015 and if you expect that to continue into 2016. And that was question number one. Thanks.

Ulrich Spiesshofer

So, Martin, thank you very much, I hand it over to Eric.

Eric Elzvik

Okay, good. Good afternoon, Martin. So, first of all on the cost savings, the price on the traditional cost savings is combined in that net number. There is no WCP saving in this number. So we have outpaced with the normal cost savings, the price pressure. Your observation that the savings are up, as said, with the $1.2 billion also means, obviously that we have price pressure. And in some areas, it is a bit more than it has been before, which is quite natural given how the markets are around us. But the key point is that we are driving hard and succeeding to outpace those savings with the cost savings that we have.

Martin Wilkie

And just as a follow up to that, the – obviously, we’ve seen a mix effect from some of the products – standard products in Discrete Automation, but would you say that the pricing in that part has been worse than expected, or was it really just sort of a volume mix effect inside that part of the business? Thanks.

Eric Elzvik

The mix effect is separated in the bridge, as you’ve seen, which has to do with the projects versus standard products. So, we are talking about when we talk prices, only price as comparable price.

Martin Wilkie

Yes, so I…

Alanna Abrahamson

Martin, we have to go to the next question, sorry, because we have a number of people here waiting. Next question, please.

Operator

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

Andre Kukhnin

Good afternoon. Thank you for taking my questions. Just two quick ones. One is on DM and low voltage production levels versus sales and probably more for DM in that. Did you underproduce in the quarter, given the demand trends and the distributors’ behavior? And if you did, then how much of the margin impact? And then the second question is on Power Systems. Do you still have any project or any revenue running through the system at zero margin? I understand you’ve handed over two out of three. But, does that mean there’s still some business going through at abnormal profitability in Q4?

Ulrich Spiesshofer

Yes, look, Andre, thank you very much for your questions. I’ll take the second one first and then hand over to Eric. On Power Systems, as I said, we have handed two – over two of the platforms. The third one is the energization phase. That means there is still some activity out there and that you can expect to have an impact or to be considered in the 2016 outcome. Despite of that, we have committed to be in the target range for the new Power Grids division in 2016. And with that, I hand over to Eric for the first part.

Eric Elzvik

Yes, and if I understood your question correctly, Andre, it’s about the production versus the demand in the DM and LP.

Andre Kukhnin

Yes.

Eric Elzvik

It’s clear that we have lower demand than expected at the end of the year. But, we have, as we have said, adjusted capacity and are adjusting capacity. So, some of that has been foreseen. And obviously, there’s always a balance how much we are producing and how much the demand is. But, I will not make any significant comment to that. I think we are in a normal territory.

Andre Kukhnin

It was more about the level of your factory loading and under absorption from that from your – i.e. did you produce as much as you sold in terms of motors and drives in DM, or did you take the inventory down?

Ulrich Spiesshofer

We’re not disclosing that detail, Andre.

Eric Elzvik

We’re not going there. What we are doing is we are taking capacity out as I said to match the demand levels. And there’s always ups and downs in shorter periods.

Alanna Abrahamson

Thank you, Andre. Next question please?

Operator

Next question comes from Alexander Virgo from Nomura. Please go ahead, sir.

Alexander Virgo

Thanks for taking the questions. Good afternoon. I have just one. I guess, going back to the base order development, I’m just trying to understand. Maybe this is just, I guess, a relative point. But, saying that you had tough comps in China on base order development, I think your Q4 base orders last year were up 4%. And that doesn’t strike me as a particularly tough comp. Q3 it was up 4% as well. So, I guess slightly building on James’s question earlier, I’m just trying to understand why that isn’t – why you consider that to be a particularly tough comp.

Ulrich Spiesshofer

Yes, because you need to go two years back and more years back to see that. Typically, in China, you have in the fourth quarter a distributor behavior that leads towards year-end buying, and we haven’t had that this year.

Alexander Virgo

Right, okay. All right, thank you. And then last question, I just wondered if you could give us a little bit of context to the 34% penetration rates in your installed base on the service slide. Can you give us an indication of where it might’ve been last year or couple of years ago or five years ago perhaps to give us some idea of progress? Thank you.

Ulrich Spiesshofer

If you take the service opportunity in ABB, this is probably one of the biggest opportunities that we have out there in terms of penetration. If you go back to the year 2010, that’s about five years ago. You would have been about 6 to 8 points lower in terms of penetrating the install base. So, this is something that we’re driving very strongly. You know that we have a dedicated service team on ABB level. But, basically, in each of the businesses, we have a dedicated service P&L, which is being run – fully run as a business. Our people get measured by their penetration of the install base. We have productized our service offering and have dedicated service product management. We have invested significantly in service sales and service engineering capabilities on the front-end side.

So, this is one area, Alexander, where we really see for ABB an opportunity to do much more. You will never get to 100% penetration. But, can we get significantly higher than where we are today? Yes, absolutely. And we have the machine in place now to do it. Now, the 2015 results on service get really impacted by a massive contraction on service appetite in the oil and gas industry. If you take that out and look at the rest of the portfolio, I’m quite happy with the momentum, but we’d still want to see more going forward.

Alanna Abrahamson

Thank you very much. Next question please?

Operator

Next question comes from William Mackie, Kepler Cheuvreux. Please go ahead.

William Mackie

Yes, thank you very much for taking the questions. Good afternoon. Firstly, I’d just follow up on the very strong Q4 cash generation you achieved across the group in the context of your target of approaching $2 billion release of capital by the end of 2017. Where do you see us on that path? Is Q4 a big step? Should the progression be linear, or are there specific programs that kick in as we progress through your – towards your 2017 target? And secondly, coming back to DM, clearly, you’ve laid out the challenges you’ve laid around the various demand issues. Can you just walk us through some of the actions that are underway to redress the capacity utilization versus demand mismatch and to get you back into the target range for the division at some stage this year? Thank you.

Ulrich Spiesshofer

Look, I’ll take the DM piece and then hand over to Eric on the capital side and really get going. If you take the DM situation, there is on the one hand the classic operational excellence, lean six sigma improvement on operations that we have had going on in this business since many years and that we’ll continue to strive. And naturally, we’re accelerating that and do whatever is possible to really mitigate the adverse market impact. The second piece is that we’re looking at capacity adjustments of the existing footprint, of the existing activities, and here, a couple of things that you might be aware of.

If you take Baldor, for example, which is about 20% of the DM portfolio, Baldor has a crew model that allows you breeze to up and down. And we have used that historically to really adjust the capacity. But, now, we have such a massive contraction in certain segments that we need to do more. So, we have announced some plant closures in North America to really address that and have already acted on that very swiftly.

And then the third point is really around capacity and footprint adjustments from a regional perspective. And you have seen us doing a lot in Europe, and there’s more to come. With that, I hand over to Eric.

Eric Elzvik

Yes, listen, on the cash side, it’s clear that we had a good start and a good momentum in the net working capital reduction, as you’ve seen on one of my charts. We started, obviously, early in 2015. And we have seen an acceleration towards the end of the year, but, it’s still a long way to go. As I said in the Capital Markets Day, quite a lot of those actions have to do with fundamental changes in the value chain and how we operate the business on the global value chain and also dip into the pieces that go into the local value chain. And many of those actions will take longer time to implement. So, the results of this program will come over time until 2017.

I will not say it is linear completely because, obviously, there are some areas having to do with projects and so on which might be more lumpy than others. But, we will see a continuous path to the end of 2017.

Alanna Abrahamson

Thank you very much. Next question please?

Operator

Next question comes from Bryan Phillips, Jefferies. Please go ahead, sir.

Graham Phillips

Yes, sorry, Graham Phillips here. I have two questions. First question is just one picking up on what you said earlier when the question was asked about the strategic review. You quoted too much nervousness in the public. Does that kind of that as it – as there was some concern the division may be sold that you are hearing from some customers, but we don’t want you to separate the business?

Ulrich Spiesshofer

Look, if you take the strategic review, when you form a new portfolio building out of different building blocks, I think it’s the duty of the team to really look at the long-term prosperity of that one. And that’s what we’re going through. There is speculation. And I’ll let the people that want to speculate do the speculation. We are driving this review in a pretty thorough and detailed way. Naturally, we are engaging also with our customers to assure them because, independent of the outcome, this business will be around. And this business is the number one in T&D, and it will be number one in T&D in the future. And that’s the whole ambition of that one. And that’s something that people that speculate, some of our competitors, just need to be aware of. We are not setting up this business to shut it down. We’re setting up this business to strengthen and maintain and further build on our number one position.

Graham Phillips

Okay. Thank you. And just the other question was around service. How do you think you can grow? Obviously, you’ve posted the numbers about the install base. And thinking about higher service contribution should be on higher profit margins. But, if we look at the profit bridge, we can’t really see any reflection of that. So, what ways can we think that this may contribute positively to profit? And again, I take the point that you made on one of the earlier questions that you’re seeing massive contraction in service for oil and gas.

Ulrich Spiesshofer

Yes, look, service is typically a business which is accretive to our activities in ABB. And quite frankly, it is also in many areas in ABB in 2015 and will do so going forward. Now, what you also need then to look at is the volume situation that you have in certain activities. And if you have an under absorption in certain areas, you might even have to look on the service side on the activities. And that’s what’s going on. But, if you go forward, if you take the service in ABB, we’re not only talking the classic lifecycle service on our products. That’s one element which is very important and we should do more in the future. But, if you look at, for example, technical consulting and engineering services, this is a growing activity at ABB where we could do much, much more in the future.

If you look at the software space and selling software as a service, this is a business model that we’re only tapping at the moment where we can do much more in the future. And you will be seeing us introducing new business models around software as a service in all kind of areas of our customer base. So, the lifecycle service piece needs to be driven. And hopefully, the contraction that we’ve seen in some segments comes back. And on the other hand, we need to expand our service capabilities, both on the consulting and engineering side, and for example, on software as a service in the future.

Graham Phillips

Thank you.

Alanna Abrahamson

Thank you. We have a three people left in the lineup. I would ask that each to accommodate all three’s questions, each one of you guys please ask one question. Let’s go to the next one.

Operator

Next question is from Andrew Carter, RBC. Please go ahead, sir.

Andrew Carter

Good afternoon. The – yes, just the one question then, please. It was on Process Automation, which I guess given the sort of slightly stronger margin in the quarter hasn’t been a massive feature of the Q&A today. But, I wondered if you could just talk a little bit about sort of the trends in the quarter in terms of oil and gas and metals and mining and to help us understand a little bit about what might happen in future quarters. And perhaps just going back to the earlier question I think, which is on discrete, which is about margins, I was just wondering, in terms of Process Automation, should we be thinking that Process Automation is kind of targeting a bottom of the range margin in 2016, or do you think it’s possible it could go below that?

Ulrich Spiesshofer

Yes, first of all, thank you for the questions, Andrew. It’s clear that we will do everything to keep Process Automation within the margin range. As I said in the beginning, it’s a tough world out there in the oil and gas side. If you go to slide 24 in our presentation, you see there also a little bit of guidance on what we expect in 2016 regarding the end markets. And quite frankly, the process industry end markets are tough. They are tough in mining. They are tough on the metal side. They are tough in oil and gas. And we need to understand it.

Now, Peter has done a great job in managing capacity, in taking cost out in a difficult year, 2015. He has my full confidence that we will also do so in 2016. But, it will be a tough year, no doubt about that.

Alanna Abrahamson

Well, thank you very much. Next question please?

Operator

Next question is from Gile DeBray, Deutsche Bank. Please go ahead.

Gile DeBray

Thanks. Good day, everyone. So, maybe the one question would be a general top-down sort of question. In this quarter, most industrial companies have posted stable to slightly positive numbers in Europe, but also negative numbers in North America. So, do you expect the current industrial weakness in the U.S. to be reflected in Europe at some point, as it did historically in the past, or while there is an instability of Europe, could we somewhat insulated this time?

Ulrich Spiesshofer

Look, thank you. I think that’s an excellent question. If you go to the slide 25, we gave you a little bit of a regional perspective on the world going forward. In the U.S., right at the moment, there is a slowing pace of industrial activity. And the closer it is to the soil, the more challenging it is. The closer it is to the consumer, the more cautiously optimistic we are. If we take the infrastructure piece, we expect a moderate growth in the infrastructure market in the U.S. all together. If you move over to Canada, Canada is really tough because you have the mining impact. You have the unconventional oil and gas impact. These are really, really difficult. I would describe infrastructure there as steady all together. If you take Mexico, in 2016, it will be on a low level okay-ish.

So, all together on North America, I think we need to watch it really carefully. If you look at the sentiment change, if I go back to the first quarter 2015, how people felt about, and then I go to the third quarter in the U.S. and now, there is a reason to have a frown on your face when you look at that and really prepare for all kind of scenarios. There’s an optimistic scenario that it might pop back. But, there’s also a scenario that it will be more difficult than we would have expected. And we’re prepared for all of them.

Alanna Abrahamson

Thank you very much. Last question please?

Operator

Our last question comes from Alessandro Foletti, Bank am Bellevue. Please go ahead, sir.

Alessandro Foletti

Yes, good afternoon. Well, it’s an honor to ask you the last question. Maybe on the restructuring that you’re doing in the Discrete Automation and Motion business unit, are you really reacting very quickly? At the end of the day, the downturn is already lasting two years more or less. Do I have to assume that you are actually planning for a new normal, or can you, if the markets come back next year, really fulfill demand with the new capacity level that you have?

Ulrich Spiesshofer

Look, Alessandro, I think your question’s understandable. If you look at the margin development in DM, nobody can be happy. We’re giving this a lot of effort, and we’re taking very decisive actions to make sure we mitigate the impact. As I said before, we will do everything possible to really have that division in the margin range in 2016. And you will see more actions being – become public in the next couple of weeks and months on that activity in that space. Naturally, when you run such a business, you also need to be respectful on the one hand to the backlog that you have to execute, on the other hand to your customer relationships.

And thirdly, when you take massive restructuring, you also need to play in the game with the – or play the rules with the unions and labor representatives right in the countries where we’re active. We’re doing that. But, be assured its high on our radar. So, with that said, thank you very much. I’ll hand back to Alanna to close the call.

Alanna Abrahamson

So, thank you very much for joining us today. We very much appreciate it. Thank you, Uli and Eric. And with that we close the call. Have a wonderful day.

Operator

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

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