ABB (ABB) Q3 2018 Results - Earnings Call Transcript

About: ABB LTD. (ABB)
by: SA Transcripts

ABB Ltd. (NYSE:ABB) Q3 2018 Earnings Call October 25, 2018 8:00 AM ET


Jessica Mitchell - ABB Ltd.

Ulrich Spiesshofer - ABB Ltd.

Timo Ihamuotila - ABB Ltd.


Ben Uglow - Morgan Stanley & Co. International Plc

Martin Wilkie - Citigroup Global Markets Ltd.

Guillermo Peigneux-Lojo - UBS Ltd.

Andreas Willi - JPMorgan Securities Plc

Gaël De Bray - Deutsche Bank AG (France)

Simon Toennessen - Joh. Berenberg, Gossler & Co. KG (United Kingdom)

Jonathan Mounsey - Exane BNP Paribas

Alok Katre - Societe Generale Global Solution Centre Pvt Ltd.


Ladies and gentlemen, welcome to the ABB Q3 2018 Results Conference Call. I'm Iruna, 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. The presentation will be followed by a Q&A session. The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Ms. Jessica Mitchell, Head of Investor Relations. Please go ahead.

Jessica Mitchell - ABB Ltd.

Thank you. Good afternoon, ladies and gentlemen, and welcome to ABB's third quarter results briefing. The press release and analyst presentation were published this morning at 7:00 AM and can be found on our website. This briefing is being webcast via our IR website as well as being recorded.

With me today are ABB's President and CEO, Ulrich Spiesshofer; and ABB's Chief Financial Officer, Timo Ihamuotila.

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

I will now hand you over to Uli.

Ulrich Spiesshofer - ABB Ltd.

Thank you very much, Jess. Good afternoon, ladies and gentlemen, and welcome to everyone who has joined us on this call. As usual, we will start with a review of ABB's results and then I will provide a brief update on our 2018 agenda.

Let's look first at slide 4, which gives an overview of how we have continued to deliver on our strategy to drive profitable growth, relentless execution and business-led collaboration. In the third quarter, both total orders and base orders were up in all divisions and regions. We reported our seventh consecutive quarter of base order growth. This sustained order momentum is translating into revenue growth and our innovative digital solutions offering, ABB Ability, continues to be very well received by our customers.

During the quarter, we were pleased that ABB Ability was recognized as the global leader for its Distributed Control Systems position and as the global leader in Enterprise Asset Management software.

In maintaining our disciplined approach to relentless execution, we have achieved solid operating results across the group. ABB's operating margin reflects the expected effect of the integration of GE Industrial Solutions and a charge related to our legacy non-core train retrofit business, which we are winding down.

Those issues aside, Robotics and Motion and Industrial Automation had a strong quarter and we saw robust results in Electrification Products. In Power Grids, the operating margin was at our target corridor. We continue to deliver net savings through price actions and ongoing productivity efforts, despite increased raw material costs and some direct impacts.

In Q3, we continued to strengthen ABB through business-led collaboration with partners. This included the formation of Linxon, a joint venture with SNC-Lavalin, to deliver turnkey substation projects together with the PG division.

We strengthened also our global brand, welcoming the Thomas & Betts brand into the ABB family, as ABB Installation Products. In addition, ABB was recognized for the second year running as the employer of choice for engineering graduates. Overall, these results show that a continued execution of our strategy and expanding the customer demand for our ABB Ability digital offering are driving the growth of our group.

Let's turn to the results in more detail. As you can see from slide 5, total orders were up 9% and base orders were up 7%. Revenues, they are up 3%, now at a corridor at $9.3 billion. The operational EBITA margin was 12.1% and it includes the expected 80 basis points impact from GEIS dilution and a charge in our legacy non-core train retrofit business, which had an impact of 40 basis points.

The operational results on a constant currency basis were 4% higher at $0.34 per share. Cash flow from operating activities was at $565 million for the quarter and we remain on track to deliver solid cash flow for the full year.

Slide 6 looks more closely at our order development for the quarter in total and base orders. Total orders rose 9%. Large orders were higher in all divisions. Positive developments included orders for our leading HVDC, rail, data center and cruise ship solutions. Base orders increased 7% on a comparable basis with robust demand from all regions.

In Europe, base orders rose 6%. Base order growth was particularly strong in Germany with positive contribution from Italy, Sweden and Switzerland. The Americas experienced 9% base order growth with 5% in the U.S., 7% in Canada and a strong growth in Brazil at 35% mind you from a low basis.

Base orders in Asia, Middle East and Africa rose 5%. There's strong growth in China at 17%, dampened by lower demand from South Korea, Saudi Arabia and the UAE. We will return to the topic of our strong growth in China later in the presentation.

Changes in the business portfolio included the acquisition of GE Industrial Solutions, the establishment of the Linxon joint venture for the EPC project and the sale of the terminal block business from EP, which all together resulted in a net positive impact of 4% on total reported orders.

I will now hand over to Timo to take you through the results for the divisions.

Timo Ihamuotila - ABB Ltd.

Thank you, Ulrich, and good afternoon, everyone. Turing to the divisional numbers in more detail, let's start with Power Grids on slide 7. Total orders were up 11%, while third-party base orders rose 13%. Order growth was broad-based, showing particular strength in grid digitalization for smarter grids and services, supported by ABB Ability and the Power Up program.

Revenues were level with the same period last year, reversing the negative trend of the last three quarters. The year-on-year backlog position improved from minus 4% at the end of the second quarter to minus 1% at the end of the third. We expect continuing base order momentum to drive gradual improvement in comparable revenues into next year.

The operational earnings margin of 10% for the quarter was at the target margin corridor for the division, reflecting our cost reduction efforts and strong project execution, while still showing the effects of the opening backlog and ongoing investments in growth. With gradually improving revenues and cost management initiatives, we expect the division's operating margins to be within its target margin corridor for the year as a whole.

Let's look now at the Electrification Products on slide 8. Total comparable orders increased 6%, while third-party base orders rose 3%. EP saw broad-based growth, supported by demand in both general and process industries and robust orders in its offering for buildings. Order growth in data centers was notably strong.

Revenues were up 3% year-on-year and the order backlog ended the quarter up 8% compared to the same period last year. Revenues from GEIS were in line with expectations. The division's operational EBITA was 260 basis points lower year-on-year with a dilution from GEIS of 270 basis points.

GEIS' impact was in line with the guidance we previously gave for its integration into ABB, which is well underway. For Q4, excluding GEIS, we expect year-on-year revenue growth to slow slightly as the division's more EP-weighted backlog will result in a less rapid translation of orders to revenues.

Also, excluding GEIS, we expect the division's Q4 year-on-year operating margin to decrease sequentially, in line with the usual seasonal effect. We expect GEIS to continue to dilute margins in Q4, in line with previous guidance.

Looking further out, we continue to expect the division to be back in its target corridor for operational EBITA margin of 15% to 19% during 2020 as originally committed.

Next, we have Industrial Automation on slide 9. This was another quarter of good operating delivery for the division. Total orders grew 7% and base orders grew 4% year-on-year. The division's growth was broad-based, led by continued recovery across process industries and continued strong demand for specialty vessels, particularly cruise ships.

Year-on-year revenues grew 3% with good book-and-bill in the quarter and good execution of the backlog. The division ended the quarter with its backlog 2% lower year-on-year. The operating margin year-on-year was up 70 basis points, reflecting net savings, positive one-off effects and strong project execution.

For Q4, even as the order backlog continues to improve, we expect revenues to be somewhat lower year-on-year as the profile of the backlog is partly driving revenue translation further in the future.

With respect to operating margins, as we have noted throughout the year, this division has delivered stronger margins than anticipated. This has been supported by tailwinds that we do not expect to repeat in future quarters. From Q4, we would expect operating margins to be lower relative to the very tough comparison base that has been established over the last few quarters with average 2017 margin being a better representation of what we expect over the next few quarters.

Equally, we want to remind you that an increase in systems orders has a negative mix effect that might drive lower margin profile for this division with the benefits reflected elsewhere in the ABB Group.

Let's turn to slide 10 and another very strong quarter for Robotics and Motion. Total orders grew 15%, while base orders grew 12% compared to the same period last year. Orders grew in all regions and businesses with good demand from target customer areas, including automotive, food and beverage, process industries and rail.

Revenues experienced another quarter of strong growth, increasing 7% year-on-year. The order backlog at quarter-end was up 10% year-on-year. The division delivered a particularly strong margin, up 60 basis points to 17%, reflecting positive volumes and mix benefits from ongoing restructuring and cost discipline.

Looking ahead to Q4, we expect continued momentum in this division with the usual seasonal impacts on revenue and margin.

To summarize the picture across the divisions, our focus on profitable growth and relentless execution continues to deliver. While the integration of GEIS has had a dilutive impact on operating margins in EP as expected, the group has delivered solid operational performance across all divisions and continues to demonstrate good top line momentum.

We look next at our group operational EBITA margin bridge on slide 11. In the third quarter, we continued to deliver net cost savings amounting to $102 million. This mainly reflects good pricing management and ongoing attention to supply chain management, productivity and operational efficiency within our divisions. Those savings more than offset a $30 million negative impact from commodity price increases. Volumes had a positive impact of $94 million, while mix had negative impact of $25 million.

Our investments in growth generated an increase of $35 million year-on-year, mainly in sales and digital. Inorganic activities, mainly GEIS, had a positive impact of $16 million. The other items reflect a negative impact of $80 million, including the charge related to legacy non-core train retrofit activities of $32 million. Additionally, currency translation effects had a negative impact of $48 million.

Counting all of these factors, the group achieved operational EBITA of $1.118 billion, increasing 4% year-on-year and a margin of 12.1%, including the 120-basis-point impact from GEIS and the charge in the non-core business.

Looking ahead to Q4, we expect top line growth and cost savings to support our margin development. The headwind from currency translation is anticipated to be around 4%. Rising geopolitical uncertainties, including trade tariffs, could continue to generate headwinds. We expect GEIS' impact on the group margin to continue in line with previous guidance.

Our goal remains to have some full-year comparable revenue growth and to be able to deliver slight margin accretion for the year as a whole, even net of the impact of GEIS and the dampening effect of recent headwinds, including the additional impact from our non-core activities.

On slide 12, we have a summary of group items and an update to our guidance for the year as a whole. I will not cover every item in detail. I will highlight only the items that have changed. The group's Corporate and Other operational EBITA was negative $455 million for the first nine months.

As indicated at Q2, we have seen higher negative impacts from non-core activities and the result this quarter also includes the charge for the train retrofit business. Reflecting these changes, we now expect full-year Corporate operational EBITA to be around negative $600 million compared to our previous guidance of negative $550 million.

With respect to below-the-line items, we currently expect normal restructuring charges to be around $150 million for the year, a slightly lower run rate than our previous guidance. The framework we previously provided for GEIS-related non-operating items remains unchanged. We expect net financial expenses to be $250 million for the full year, slightly higher due to additional financing related to GEIS.

Lastly, a few words on cash flow. Cash flow from operating activities was $1.057 billion in the first nine months compared to $1.93 billion over the same year-to-date period of 2017. This primarily reflects higher inventories and less favorable timing of cash flows for our large projects and tax payments.

Looking ahead, we expect to see a factor of stronger cash delivery in the fourth quarter. Cash delivery for full year is expected to be solid overall while also reflecting the impact of higher working capital in support of growth and due to the timing of project cash flows, which are also impacted by the strategic shift away from large complex engineering projects, mainly in our Power Grids business.

Let me now hand back over to Uli to update you on the progress of the broader group agenda.

Ulrich Spiesshofer - ABB Ltd.

Thank you, Timo. Please turn to slide 13 where I would like to start with our focus on profitable growth. Today, all of our key businesses are either number one or two in their respective markets. Streamlined and strengthened, ABB's four entrepreneurial divisions are driving growth through our PIE approach or penetration, innovation and expansion.

Let me give you some of the examples of the third quarter. In Power Grids, a highlight this quarter that illustrates our penetration of emerging markets is the order to supply ABB's advanced High Voltage Direct Current converter stations for the CASA-1000 grid integration project. This World Bank project or World Bank-supported consortium project ensures the efficient transmission of 1.3-gigawatt of hydropower generation from Central Asia to high consumption areas in Pakistan.

In Electrification Products, this quarter, we drove innovation with the launch of the most energy-efficient uninterrupted power supply on the market, the DPA 250 S4. Setting new standards in reliability and efficiency, it is specifically designed for mission-critical, high-density computing environments such as data centers, commercial buildings, healthcare facilities, railway signaling and airports.

Industrial Automation is penetrating the recovering process industries with the delivery of the largest ever integrated control, safety and security system for a gas pipeline, laying an innovative fiber optic leak detection and subsea monitoring system, which is based on ABB Ability across challenging to run for 1,850 kilometers Trans-Anatolian Natural Gas Pipeline.

And in Robotics and Motion, the ongoing expansion of our robotics solutions suite was strengthened by the acquisition of Intrion based in the Benelux region. Intrion are a leading provider of logistics automation solutions and services for the warehouse and distribution, food and beverage and pharmaceutical industries. This significantly advances our logistics robots offering into fast-growing areas of e-commerce and the shift to mass customization that is driving increasing delivery expectations.

Now, let's go to slide 14 to discuss how we are driving profitable growth in China. China is ABB's second largest market in terms of revenue contribution to the group on a country basis and it is one which ABB is a pioneer and technology leader for utilities industry and transport infrastructure, it's very well suited to serve. China has the largest global end-market opportunities for our offering, including those for process industries such as mining and minerals as well as those for robotics or for transport.

We continue to experience strong and broad order growth in the country. End-customer markets, driving strong base order development in the past 12 months, include automotive and process industries, particularly also metals and chemicals as well as construction and power transmission.

ABB's activities are very well aligned with the focus of China's long-term development strategy. In 2016, the Central Government launched its 13th five-year plan, which aims to transform China into a high-tech economic power with leading positions in advanced industries. Of the key priority areas, China has identified six are directly served by ABB's business.

Our ongoing success in China is also driven by our clear local competitive strengths. By participating in China's reform agenda, ABB has developed a truly localized value chain over many decades. Today, more than 90% of ABB's sales in the country are from locally developed and made products and locally provided services and solutions.

They have a very well established footprint in China. The country is home to one of our main Corporate Research Centers as well as over 20 business research and development centers. We have 18,000 people with more than 2,000 employees working in R&D. We serve more than 600 cities directly and through e-commerce. We have continuously invested in the future of our business in China.

In 2015, we broke ground on a new ABB campus project in Xiamen. Now in the final stages of development, the campus covers a full range of traditional business activities, but includes also our main software application development center in China for China and the world. We have been in China for China, for 111 years and looking forward, we anticipate steady growth momentum from this exciting market.

Moving to slide 15, around the world, ABB Ability's pioneering solutions have enabled our customers and utilities industry and transport infrastructure to make a true quantum leap in digital. Drawing on our global installed base of more than 70 million connected devices and 70,000 industrial control systems, ABB Ability is helping our customers to improve their competitiveness and productivity as they plan, build and operate across the entire asset lifecycles. Our ABB Ability solutions provide enhanced digital value propositions across the entire breadth of the value chain from plan, over build to operate.

This quarter, we are pleased that two of these solutions achieved truly global recognition. The cross-industry capability of ABB Ability Distributed Control System 800xA was recognized as the number one global supplier again. ABB's cutting-edge solutions for integrated process, electrical and safety control systems have held the number one position for over a decade. Put simply, the 800xA's ABB Ability solution is the best-in-class for delivering efficiencies and driving asset productivity at processing sites with digital innovations including virtualization, digital process wins and machine learning.

Second, this quarter, ABB Ability Ellipse was named the top Enterprise Asset Management software for process and utility companies worldwide. Enterprise Asset Management software enables best practice management of assets, including financials and HR, through a lower operating cost, increased safety as well as optimizing day-to-day and lifecycle productivity. By driving our customers' efficiency productivity and competitiveness to higher levels, ABB Ability is enabling us to grow faster than many of our key end-markets.

Now, let me summarize on slide 16. Macroeconomic signs overall continue to point to growth in all regions. Geopolitical uncertainties, however, are an ongoing challenge, but better markets are driving an attractive demand outlook in ABB's three major customer sectors, utilities; industry; and transport and infrastructure. ABB is well-positioned to continue focusing on high-growth sectors and markets.

In the third quarter, we demonstrated sustained growth with total orders up in all divisions and regions. This was our seventh consecutive quarter of year-on-year growth in base orders across all the activities of ABB. Revenues at 3%, they are within our target range, with service revenues increasing 11%.

Our operational EBITA margin was 12.1%, reflected the dilution from the integration of GE Industrial Solutions and assimilate all the charge in the legacy non-core portfolio. At the same time, our focus on relentless execution delivered solid results across all of our businesses with Power Grids now at its target margin corridor. In the quarters ahead, our focus will remain firmly on delivering sustained profitable growth as we write the future with our market-leading industrial digital solutions.

Thank you very much for your attention. Now, let's open the line for questions.

Question-and-Answer Session


The first question from the phone comes from Ben Uglow from Morgan Stanley. Please go ahead.

Ben Uglow - Morgan Stanley & Co. International Plc

Good afternoon. Thank you for taking the questions. Two if I may. I guess for Ulrich and also Timo, but on the order backlog, when I look at the order backlog, as it stands right now about $23.5 billion, it's still not really significantly higher year-over-year. And when I look in the longer-cycle businesses, i.e. Industrial Automation and Power Grids, we're still kind of comping slightly down.

If we look forward into the first half of 2019 and particularly on those longer-cycle businesses, do you see a reasonable environment for growth, i.e. should those businesses be going at a positive rate in the first half of 2019? So, that's my first question.

And briefly, secondly, Ulrich, interesting color around robotics and what you're seeing in China. Could you just flesh out some of the customer conversations you're having in China? Obviously, we've heard lots of mixed views around automotive and semiconductor, but can you elaborate on what customers and OEMs on the ground are saying to you? Thank you.

Ulrich Spiesshofer - ABB Ltd.

Yeah. Good afternoon, Ben. Thank you very much for your question. I would suggest Timo takes the backlog and then I take on the China piece. Over to you, Timo.

Timo Ihamuotila - ABB Ltd.

Okay. Thanks, Ben. Thanks, Uli. So, first of all, when you look at the backlog, you are right to point out that there can be some slight changes in the profile of the backlog and that's what we sort of highlighted on the prepared remarks as well when we were talking about the IA and the impact of the profile of the backlog going into Q4. But overall, when you talk about the $23.5 billion backlog, so again on ABB level, the backlog is now up and it's positive 2% or it's actually gone up to 2% from start of the year of negative 4%. So, we have had good development on the backlog.

And also, as you know, we now give out this number on how we expect this backlog to convert into revenues during 2019 and we expect 45% to convert to revenue in 2019. Now, this number is actually little bit higher than it would have been year ago as a comparable. So, there is that impact going into 2019.

Then, on your specific question on PG and IA, so if I just compare with some numbers, so end of Q1, PG was at minus 7%, IA was at minus 8% and we were able, during Q3, to come out on flat revenue or same revenue at PG and up 3%. So, as we can see, this is not sort of a direct comparable. So, we are not giving any guidance here, but naturally our aim is to grow revenue going into 2019 as we have said earlier and we expect IA and PG to also contribute to that.

Ben Uglow - Morgan Stanley & Co. International Plc

I understand, Timo. Just on that point – thank you. But we do – I guess the growth rates we're seeing in those two divisions does depend also obviously on the sell-in and sell-out, right. That's a big factor in the revenue growth. And so, I guess what I'm implicitly asking is do you expect those growth rates that we see today to be maintained into next year?

Timo Ihamuotila - ABB Ltd.

Well, I think I already described the dynamics. So, we would expect to drive as much of book-and-bill in those businesses as possible going into next year. And we have been improving on that front during this year. So, of course, that will be our aim, but we are not giving any guidance to 2019 at this point.

Ulrich Spiesshofer - ABB Ltd.

Look, Ben, just one comment from my side before I move over to China, if you take our ABB Ability solutions that are now really taking off both in Industrial Automation and Power Grids, this is typically stuff that goes in and a large part of that is also sold as

ABB as a service where we sell a desk for certain system that you can use. The Enterprise Asset Management software and utilities side is one. There are more and more customers get interested in. So, there also the mix will be changing in terms of more of the solution base repetitive revenue coming in and that should support our ambition to grow revenue in these two businesses in the next year.

Now, on China, look, I think we have an exceptional position in China and that is something that has been built over the last 111 years. You might remember when I took office, the first thing that happened, that we put local management in place to run the local market and the local value chain. At the moment, when you go to China, I'm going there tomorrow again I think for the sixth time this year and I'm going this month alone two times, giving that market a lot of attention. When I go there, I see a management team where only the CFO is an ex-pat and everybody else are locals and closely tied to the local markets, understand what's going on. I think that's one factor.

The second factor is our really strong local value chain means also that we can compete on R&D with the drumbeat of innovation pattern that our local competitors have. China is definitely a high-speed country in terms of R&D. We have that high-speed pattern also, because we have more than 2,000 colleagues in R&D in China pumping out innovation and pumping out a continuously improving pipeline, which helps.

Then, when you talk specifically on automotive, in automotive, we really have – and that's not only true in China, it's also for example in Germany and other places – our solution-based approach on robotics is really paying off, as the complexity of the car industry grows by adding new platforms, by adding electric vehicles into the value chain and expanding that.

If you go into a customer where engineering resources are tight and limited and you have a solution-based approach, you solve not only the task that a robot will ultimately do, you also reduce the amount of engineering that's needed. And typically the more east you go, the more solution mindset our customers have and the more solution buyers our customers are.

In China, if I meet the NIOs of the world, the EV vehicle players that are coming and Jack from NIO is in the meantime a good friend, we have helped him to basically get all his plants up and going. He's not a guy that buys robots. He buys functionality and with our approach there, we can really help to safeguard not only the reliable operation of the robot, but also the productivity and the installation risk will be reduced when we put this solution in place. I think this is something – this really differentiates our business model. We are pretty much unique in this space, but that you might remember, the turnaround of robotics was led by amongst (34:30).

The second piece is we got a very strong service attachment rate, which is great and nowadays, on the service side, if you look at remote condition monitoring, the more new robot buyers we have that don't have engineering resources, the more they value our service capabilities. Our remote service capability all runs through the same service center in India, whether it's a motor or transformer or robotics. We have the same connectivity solution in ABB Ability, we have the same AI solutions that we use to predict downtimes and work on that and there we can really differentiate from our customers.

Now, when I talk out from our competitors, when I look outside of automotive, we see a certain softness in 3C at the moment and that's very clearly impacted by the trade situation that we have, but that helps us on the other side, because the demand for 3C robotic solutions outside of China, for example in North America and the U.S., may be open this year for a very well-known mobile phone brand together with a contract manufacturer in a record time, a new factory with our robot solutions. I think we're well positioned.

So, all together, I would say robotics, the business model and the local market is paying off very well. If I look at the other businesses, it's not all nice, better (35:56), it's definitely that on the large scale process industries, we still see a subdued demand and we would expect that to be around for quite a while.

In Power Grids, last year, you might remember, we had a very low comparable. So, let's be cautious to celebrate too loudly, but we had a good growth in Power Grids in China also in the quarter. And in Electrification, we had solid growth in China, but the industry big picture was really mixed. As you know, the ABB has a little bit of stronger process industry exposure also with our Electrification business than some of our competitors that are more tied towards the consumer area and that's probably driving also the explanation why the delta there is a bit stronger.

So, that's overall the flavor. I would say three steps back, China's reform agenda and ABB fit extremely well together. We are a strong global player, we have a portfolio that fits the reform agenda and we will continue to drive growth. And I'm always – I've been long on China always and I will remain long on China.

Jessica Mitchell - ABB Ltd.

Thank you, Ben. And we will go to the next question.


The next question from the phone comes from the line of Martin Wilkie with Citi. Please go ahead.

Martin Wilkie - Citigroup Global Markets Ltd.

Yeah. Thank you. Good afternoon. It's Martin from Citi. The first question is around the outlook. On Europe, you slightly modified the wording, talking about your remaining robust. But then, when I look at what you've done in Europe, you talk about actually being strong and so forth. I just wanted to clarify if that was more almost sort of hedging uncertainty that might come as opposed to actually any change that you saw over the course of September, just to sort of work out why you made that change in wording? Thanks.

Ulrich Spiesshofer - ABB Ltd.

Yeah. Thank you very much for your question, Martin. Look, in the past, we saw really growth in Europe and we were optimistic about – more optimistic on the macro environment. Now, Italy has joined UK as one of the uncertainties in Europe. That's the reason why we're seeing from a macro perspective, we see raised uncertainty and that's the reason why we changed the wording.

If you look at the business performance, we had really a stellar quarter in Europe. We had total orders up 15%. We had base orders up 6%. And that was a really, really nice development. And basically if you take Power Grids, take Electrification, if you take Industrial Automation and Robotics and Motion, all of them grew in a very solid way. I think we need to be cautious about these uncertainties too, but at the moment, the underlying business momentum is very good. And here and on the Power Grids side, that is the integration and the grid stabilization around renewables, that really helped us to have a good momentum in there.

If you take Electrification, we had a really strong growth in Sweden and Finland. We had good growth in Germany. We had a very strong growth in Switzerland. At the same time, we were dampened in Turkey. We had a bit of significant FX volatility in there, that definitely is something. Spain was very good.

And if I take Industrial Automation, it's really coming back. On the one hand, B&R remains to be of real jewel in our portfolio. I'm happy about B&R. But then, if you look at the countries, Germany in Industrial Automation, France, they are good coins. And in Germany, they got another set of large cruise orders, which naturally helped us well, this – our customer in Germany. In Robotics and Motion, as the European automotive industry is preparing for the e-mobility wave and as they're bringing up capital investments to really support the change in platforms, again our position is very, very well established here to help the customers altogether. So, the flagging of the outlook is cautious. The underlying business performance is good.

Jessica Mitchell - ABB Ltd.

Thank you. And we will move on to the next question.


The next question is from Guillermo Peigneux, UBS. Please go ahead.

Guillermo Peigneux-Lojo - UBS Ltd.

Hi. Good afternoon. This is Guillermo Peigneux from UBS. I actually had a couple of questions, one in EP and the other one regarding acquisitions. First on Electrification Products, can you comment a little bit on the price to cost environment and how do you think these actually progresses through 2019? Allegedly copper prices now are down and obviously in 2019 probably we see how your pricing sticks and direct materials actually become less of the pressure. And I basically then follow up with a question on acquisitions afterwards. Thank you.

Ulrich Spiesshofer - ABB Ltd.

Sorry, what was your second question? It was a little bit to – we don't have a clear line. What was your second question on acquisitions?

Guillermo Peigneux-Lojo - UBS Ltd.

Oh, the question on acquisitions was regarding potential new acquisitions or...

Ulrich Spiesshofer - ABB Ltd.


Guillermo Peigneux-Lojo - UBS Ltd. going into the future, obviously asset prices have now declined to some extent and in the past, you mentioned areas like software or metrology as of interest, but obviously not at the places you saw during 2017 and 2018. So, I wonder what the current valuation is maybe, a bit more attractive and obviously I bear in mind that you have plenty of work to do actually in B&R and GEIS, right. So, I understand this, but I wanted to see how you see prices now. Thank you.

Ulrich Spiesshofer - ABB Ltd.

Okay. So, related to EP, I will start and then I will ask Timo to chip in. So far, we have realized net savings with our efforts that we have taken in EP. I think the team has done a great job optimizing, driving processes in ABB. You might remember we got caught in the second quarter 2017 on that topic. So, this is something that is high on our radar screen and we make sure that we pay very, very close attention to the market dynamics, the underlying cost dynamics. But I'm quite happy this is in good shape and I think the team is realizing there is some good momentum.

Timo, any comments on that?

Timo Ihamuotila - ABB Ltd.

Yeah. Maybe quickly as you were asking about the impact going forward, so it is correct that we have seen a little bit of easing in commodities now, maybe on the ones which are impacting us between 5% and 10%, but as we are doing hedging, this will come through gradually. So, commodities, we expect to be a slight headwind still going into Q4, but less than earlier. But I also want to highlight that commodity is less of a headwind, FX continues to be a bit of headwind as well impacting here on the similar type of items.

But if we look at EP overall, again when you don't take into account the GEIS 270 basis point impact, then we actually had some margin accretion in EP, which shows that we are being able to pass this on in pricing as Uli said.

Ulrich Spiesshofer - ABB Ltd.

Okay. Then, to your second question, Guillermo, I think you are spot on when considered you cover ABB for a while. B&R and GEIS are tasks that are ongoing. The teams are doing a great job getting it in on GEIS. Just to give you a little update, the customer resonance is very positive. So, we are very happy, on the employee side, the team has been welcomed by ABB and their overall message from them is it's great to be core. It's great to be at a company with a welcoming culture like ABB. We have one sitting in the room that has joined us here from GEIS. So, I think that is good.

On the B&R side, similarly, we are firing on all cylinders. The team is doing a great job individually. I'm proud of the colleagues from B&R that are now family members of the ABB family, but I'm also proud of how we are working on the synergies. Given what's going on there, we are cautious, because acquisition is not only a financial capacity, it's also management capacity and you can bet that in the Electrification Products and Industrial Automation, we both first deliver what we wanted to deliver before we do anything more large scale.

Now, in general, yes, there is, at the moment, a stock market rerating, but let's see what happens there. I would not expect every board immediately to say now we're going to sell at a lower price. This is the first point. And overall, our capital allocation principles remain unchanged. So, we fund organic growth and as you can see, the investments in organic growth, whether it's penetration, innovation or expansion in new offerings is really paying off. We have good growth momentum coming. Our – the dividend policy remains unchanged and then the other two priorities, on capital allocation, M&A and it is returns to shareholders will happen at a time when we have more money to spend and something to tell.

Jessica Mitchell - ABB Ltd.

Thank you, Guillermo. And we'll move on to the next question.


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

Andreas Willi - JPMorgan Securities Plc

Yeah. Good afternoon, everybody. I have a question on Electrification Product and one on grid. On Electrification Product, the growth there over the last few quarters, around 3% average, is substantially below for example Schneider has shown, but also some of the other competitors are showing in the market. Maybe you can give us a little bit more granularity where you think this difference comes from? Also, you mentioned earlier that maybe you have different exposures in process industries, but those are now also recovering. So, maybe you could elaborate a bit more on that.

And the second question on the grid debate, you commented this morning in the press release that you're basically not commented on it, not commenting on it, but the last time you had uncertainty whether grid was core or non-core, we had a pretty negative impact on the business performance in terms of near-term base order intake due to the uncertainty. Do you see the risk that that happens again or is there something you communicating to customers to prevent that from happening?

Ulrich Spiesshofer - ABB Ltd.

Okay. Andreas, thank you very much. Yeah, let me first talk about EP. The EP portfolio indeed has a different structure than some of our competitors. We are more exposed with our channel the day we go out there to the process industry as well and as you rightly say, the process industry in some part is coming back now. If you look at fastest return, it's in North America in the unconventional onshore where the industry has come back and by that, that's not exactly ABB's sweet spot. So, we need to appreciate that.

And then, you need to differentiate between product and systems. So, for example, the last quarter, we had product growth close to 5% and we had on a steady base – we had a steady system business and the third point is if you take last year's Q3, you might remember EP had a growth of 5% last year. There was some advanced buying into the stock in some parts of the world and actually, we are starting from a much higher comparable than some of our competitors who did not enjoy the same growth last year. So, I would state it as the key differences.

On grids, yeah, look, we keep the head down and we do our job transforming this business. As you can see, growth is coming. We have now – despite the dampening effect that we had in the backlog, we have at least steady revenue. We are now at the target margin corridor and there's more to come operationally that we need to drive and it's very clear we need to stay close to our customers and the uncertainties that are created by certain forces out there in terms of spreading all kind of messages, we need to see through that, stay close to our customers and ensure that they get excited and they are excited.

I can tell you the secret, the Transmission and Distribution Conference that happens every other year in Paris, ABB was recognized as the leader in their digital group. We have the strongest offering in that there with ABB Ability, both from the virtual substation planning, the digital train on the substation side, all the way to Enterprise Asset Management. So, there's more coming operationally and that's all I can comment on this topic.

Jessica Mitchell - ABB Ltd.

Thank you, Andreas. Next question, please.


The next question from the phone comes from the line of Gaël De Bray, Deutsche Bank. Please go ahead.

Gaël De Bray - Deutsche Bank AG (France)

Thanks very much. I have a couple of questions, please. The first one related to EP, actually two questions on the Electrification Products. So, firstly looking at the GEIS margin this quarter, it seems that the margin was probably close to 2.5%, something like this, when do you actually expect the business to be back to the originally indicated margin of 5%, 6%?

And still talking about EP, if you now exclude GEIS, I think the operating leverage was a bit disappointing, I mean, at least when I compare that to Q1 and Q2, when the margin momentum was probably much better. So, could you elaborate on what has driven this weaker margin momentum in Q3 at least sequentially compared to the first half of the year? Thanks very much.

Timo Ihamuotila - ABB Ltd.

Okay. So...

Ulrich Spiesshofer - ABB Ltd.

Yes. Look it at, the first part, Gaël, we're not commenting on the GEIS specific margin. We're commenting on the EP margin overall. And here, we have a commitment to be back in the margin band, we're starting at 15% in 2020 and we keep that commitment.

Now, on the operating leverage, I hand over to Timo to take that topic.

Timo Ihamuotila - ABB Ltd.

Okay. So, maybe I'll just drop in a little bit of mechanics still on the Q3, Q4 situation, because you correctly back out the margin, but we said that we expect approximately 260 basis point impact for the second half, bit more Q3, bit less Q4. So, that – it shows that there is improvement going forward. We are not giving any further guidance.

Then, when we look at EP and operating leverage, it is fair to say that when you exclude GEIS, we had a bit less margin accretion. As I said earlier, we had a bit of margin accretion in the business, but also going into this quarter, we had tougher comp and, of course, we are driving – tougher comp and also in EP, we are investing in growth. So, that is having an impact. And, of course, going forward, we need to take the seasonal impact into account when we go to Q4 in EP, but of course, taken that into account, we continue to drive operating leverage.

Jessica Mitchell - ABB Ltd.

Thank you. We will move on to the next question.


The next question from the phone comes from Simon Toennessen, Berenberg. Please go ahead.

Simon Toennessen - Joh. Berenberg, Gossler & Co. KG (United Kingdom)

Yes. Good afternoon, everyone. My first question is on the margin bridge. I guess a question for Timo probably. Timo, how should we think about the margin drivers going forward? And I'm thinking sort of three to six months out. In fact driver by driver, I give GEIS, it I guess impacts mix negatively and you're probably going to see a higher OE share coming through on the Industrial Automation side, that will probably still drive mix down a bit. FX, given the dollar is also probably going to be negative and I guess you're going to continue to invest in digitalization and other areas. You had some one-offs obviously in this quarter, but the margin overall of the business has been flat over the past nine months.

And if I look at what sort of consensus is modeling a bit further out, we're looking at 60 basis points next year. So, we're still – I guess in the short term, on mix and FX some negative drivers, is it fair to assume that maybe it's going to be a bit slower in terms of margin progression in the maybe shorter term and then we should see sort of deeper pickup thereafter?

And then, the second question is just on the Corporate line. You guided earlier in the year for $500 million, you are now at $600 million, again there's probably some one-offs in there, but this Corporate line used to be $300 million back in 2015. And so, quite a significant doubling almost in Corporate cost and it's been the same, obviously, last year already with some IFRS obviously restatements. But, Uli, where do you see sort of the Corporate – the opportunity for you to reduce that Corporate line going forward, because it's obviously been quite a margin drag over the past two years? Thank you.

Ulrich Spiesshofer - ABB Ltd.

So, I have Timo starting the margin bridge and then I take the second topic.

Timo Ihamuotila - ABB Ltd.

Yeah. So, okay, thanks for the question. So, first of all, when you look at seasonality going into Q4, so we usually have a bit of a negative seasonality going into Q4. And you are correctly pointing out that when we look at the headwinds and tailwinds, on the headwinds side, we have GEIS, we have a bit of FX, we said that on translation that would be about 4% going in. On the other hand, on commodity, we would expect that to ease a bit and then we still continue to have similar Power Up exposure.

And I said sequentially, we have proportionately more revenue from PG, which is lower margin, which is totally normal in our seasonality. But then, when we look at the tailwinds, we have had good base order growth and we would expect that to impact Q4 and we are still expecting to get some impact from White Collar Productivity as well during this and that would also impact Q4.

Ulrich Spiesshofer - ABB Ltd.

Yeah, and the second point on the Corporate costs, look, we have invested in ABB Ability and there's a significant part of investment on the Corporate side to really make sure we get going. We have invested in a platform called, where some of the costs are being taken by Corporate to make sure we boost across all the business a harmonized offering and drive that, but as you rightly say, this is an area that we will address continuously going forward. We have addressed some of the parts on the White Collar Productivity, as Timo rightly said, but there's more to come and there's also some financial aspect that Timo would like to comment on.

Timo Ihamuotila - ABB Ltd.

Yeah. So, just to highlight on the non-core business, because that is of course something which was not there at that time.

Ulrich Spiesshofer - ABB Ltd.


Timo Ihamuotila - ABB Ltd.

And of course we take the provisions at the level which is the best estimate we have at the time. Now, our strategy is to drive this non-core business down as quickly as possible and with as low cost as possible. And we are executing that strategy. So, for example, when you look at the orders in non-core business, last year, we had about $300 million of orders in Q3 that you can back out from our reporting. And this year, in the beginning, we have had about average $200 million per quarter, Q3, this was pretty much thereof. So, this is really moving down and that is important. And going forward, we expect maybe 50-ish million orders on the non-core business Q4 and very, very little after that.

So, this is really coming to an end. And there is similar trajectory in the revenue line. And we then need to now diligently work through this. And of course, when you look at the $600 million guidance, we didn't have this full impact of the train retrofit in the $550 million. So, we need to take this up a little bit and, yeah, we have built everything what we see in there at the moment. And if you divide our $455 million number by three and multiply by four, so if you periodize that, you come pretty much to the number what we are expecting to add now to come to 600-ish million there or thereabout.

Ulrich Spiesshofer - ABB Ltd.

So to sum it up, investment on the one hand is a good stuff on the growth side. And then, central management of the legacy backlog in certain non-core activities that we have centralized given to one team to really ramp down and that's the key elements of the increases. The non-core piece will die away as we execute the remaining backlog and get out of it. And the other piece is going to get some leverage.

Jessica Mitchell - ABB Ltd.

Okay. Thank you. And we'll take the next question.


The next question from the phone comes from the line of Jonathan Mounsey with Exane BNP Paribas. Please go ahead.

Jonathan Mounsey - Exane BNP Paribas

Hi. Thanks for letting me ask a question. So, just on Industrial Automation, obviously we had a somewhat weaker order intake when consensus was forecasting on Q3 and that may slightly change the shape of the recovery as we go into 2019. But assuming we see that recovery, I'm assuming it's going to be large systems orders that start coming back. Can you just maybe comment on what happens to the margin when you do start to see that OE recovery, because, in my mind, that would be quite bad for mix? I know consensus has some quite nice operating leverage into next year. I'm just wondering is that realistic? Can we really see that as revenues on the original equipment side and systems in particular start to recover.

And second question, just follow-up to the last one. On non-core, I mean how much of a drag are these non-core activities in the Corporate line and how quickly are they actually going to leave the Corporate line. I suppose I'm thinking about what's the guidance for next year on that line? Thank you.

Ulrich Spiesshofer - ABB Ltd.

Yeah. Thank you very much. I will let Timo answer the Corporate cost and I'll take Industrial Automation. Yeah, look, Industrial automation has a very specific business model in ABB, which is also not really comparable to some of the competitors, because in Industrial Automation, it has basically some owned activities, which is service, which is the DCS operating, which is ABB Ability solutions that we have in there, but we also act in that business as a channel for the other parts.

So, for example, when large system projects come, the margin for large system project in Industrial Automation itself is moderate, but the margin for our products that they're pulling then from the other businesses is something that we enjoy very much. So, the mechanism of the business model that we have in Industrial Automation in ABB is a very specific one that we all need to understand.

So, I'll give you an example, when a large ship comes, the large ship might have the classic control pieces, ABB Ability in there, the Azipod in there, but then it also might have motors, drives, electrification (59:14) business as we pull them through. And the more pull-through we have, the lower the absolute – the margin in IA will come, because the part of the channel function then goes up relative to the part of the own equipment in that business.

So, that's the economic rationale and as you rightly said, the more we sell out system orders, the motor margin will, in Industrial Automation, go down, but ABB margin will go up, because we have to pull through from the other activities from the product businesses. So, that's how the mix and the piece will work on. As you have seen, we are growing our IA-specific offering on ABB Ability for example. They got some really great capabilities in there. If you take the original products that we have in there, that is the Azipod pieces, that is measurement and analytics, that will get a lot of attention continuously from ABB to grow that stronger. But that's the expectation that you should have over time.

Now, on the Corporate line, I hand over to Timo.

Timo Ihamuotila - ABB Ltd.

Yeah. So, on the non-core, when we look at going into 2019 and again this is important, as I said, so we do not expect orders. Now, there could be that some tens of millions slip to next year, but it's sort of there or there above zero in orders. And also, when we look at revenue this year, we are sort of $350 million, $400 million type of range and it's going to be less than $100 million going into next year.

So, this business is really ramping down. Then, when it comes to impact on op EBITA, there I cannot give you any guidance, because of course we are taking the needed actions exactly as we see them at the time and we will look to work through this with minimum impact on our profitability going forward. So, those are the parameters we work with, but we are working this down diligently as is our strategy.

Jessica Mitchell - ABB Ltd.

Thank you very much. And I know everybody has a busy day today. So, we'll now move to the last question.


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

Alok Katre - Societe Generale Global Solution Centre Pvt Ltd.

Hi. Thanks for taking my question. Just one or rather a couple over here. Firstly in terms of the M&A, I was – so I wanted to follow up, Intrion obviously seemed like an interesting move into the warehouse automation. I know it's sort of furthers the robotics sales, but just maybe if you could help us understand what the synergies are between robotics and Intrion and also whether generally speaking, warehouse automation is something that is a market that interests you from the perspective of further moves? So, that's question number one.

And then, secondly, just in terms of maybe housekeeping on the tariffs and raw material/pricing at the group level, I know you sort of said perhaps you see a bit of a lower headwind going forward, but maybe you could just (01:02:29) situations playing out for you and whether we should see some pricing dynamics on that side? Thanks.

Ulrich Spiesshofer - ABB Ltd.

Yeah. Let me take the second one first. We maintain our ambition to have net savings, including the tariff situation. We are working on that one very, very diligently. We have task forces for all the different aspects of tariff, which, you can imagine, is multi-faceted and presently involved in some of the discussions with the relative government. And so far, really knock on wood, we have been able to deliver net savings and that's the ambition going forward.

Now, talking about M&A pattern in robotics and the M&A pattern, in robotics, if you look at it, there is no large industry around to be consolidated these large players. This is basically an industry that we are the only remaining European player or a player with European background. Then, you have the Japanese, you have the Chinese out there and I would not expect there very large scale moves in terms of consolidation. But we do in that space, we do a string of pearls strategy and it's a string of pearls, we are adding solutions into attractive spaces.

You might remember a while ago, we did machine tending acquisitions both in Spain and in Sweden and warehouse and logistics base is a super attractive space. The more you order on your Internet platform products that you use at home instead of buying them in the store, the more picking, packing, palletizing, the more sorting, the more logistics management needs to be done.

Given that we have fantastic capabilities, for example, to recognize single pieces whether they are hard, they are soft, they are heavy, they are light, we really have the appropriate solution confidence to design solution in that space. And as the parcels get smaller and more single piece shipments come, there you really need to know this is not a package of something that I use with standard gripping. This is something that I need to have very specific capabilities to touch a certain type of product.

There we can really differentiate and help into warehouses in that space. Intrion has exactly that capability, for certain parts, within a warehouse to help us with logistics optimization in a warehouse. So, this was a very welcome addition to our portfolio there. And in general, yes, warehouse and logistics and the material flow associated with that is a very interesting one that will have inflow activity and growth opportunities in the future.

Jessica Mitchell - ABB Ltd.

Thank you very much, everybody, for joining the call today. And just to remind you that IR is always on hand and as delighted to help you with any remaining queries. Thank you.


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