ABB Ltd

Alanna Abrahamson - Head of Investor Relations and Group Senior Vice President Ulrich Spiesshofer - Chief Executive Officer Eric Elzvik - Chief Financial Officer and Executive Vice President

Ben Uglow - Morgan Stanley, Research Division Daniela Costa - Goldman Sachs Group Inc., Research Division Andreas P. Willi - JP Morgan Chase & Co, Research Division Martin Wilkie - Deutsche Bank AG, Research Division James Moore - Redburn Partners LLP, Research Division Olivier Esnou - Exane BNP Paribas, Research Division Fredric Stahl - UBS Investment Bank, Research Division Simon Toennessen - Crédit Suisse AG, Research Division

Good afternoon, ladies and gentlemen, and thank you for taking the time to join us today for our third quarter 2014 results call. You can find the presentation on our website.

This call is being recorded and will be available on our website within the next hour. Allow me a short overview of today's event.

Our CEO, Uli Spiesshofer, will briefly review the Q3 results, together with our Chief Financial Officer, Eric Elzvik. They will then be available for answers to your questions.

Before we get started, please refer to the Safe Harbor Statement on Page 2 of the ABB presentation. This conference call may 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. And with that, I would now like to hand over to Uli.

Thank you, Alanna. Good afternoon, ladies and gentlemen.

Welcome and thank you for joining us today to discuss our quarterly results. In September, we announced ABB's Next Level strategy, aimed at accelerating sustainable value creation.

It defines our long-term direction and targets. Today, along with our quarterly financial results, we will give you some insight into the solid progress we are making already in implementing our new strategy.

Let us now turn to Chart 3 for some of the quarterly highlights. I'm pleased to report that our drive for profitable organic growth through penetration, innovation and expansion is delivering results.

ABB delivered strong order growth at 28% on a like-for-like comparison. This translates into more than USD 2 billion in additional orders compared with the same quarter last year.

This growth was driven by both large orders as well as base orders. Moreover, all of our divisions and all regions contributed.

Large orders tripled compared to the third quarter of 2013 and we have won some attractive large projects in power infrastructure, oil and gas, marine and mining. Base orders were up for the fifth consecutive quarter and grew 5% on a like-for-like basis.

Base orders were higher in all regions and increased in all divisions with the exception of Process Automation, where the base business was impacted by lower growth in sectors like metals, carbon paper as well as in our supercharger business. Our service orders grew 10% as our focused efforts to further penetrate our large installed base in both Power and Automation are really paying off.

This overall strong order performance lifted our book-to-bill to 1.14x, which will support revenues in 2015 and beyond. As reflected in the beginning of 2014, revenues were negatively impacted by the lower opening order backlog as well as some delays by selected customers in taking delivery of products.

In the area of relentless execution, we achieved significant project milestones in Power Systems, and we continue to derisk the portfolio and implement a new business model for offshore wind projects. In the quarter, division broke even on an operational EBITDA level as we continued to drive our focused step-change program and address the remaining challenges ahead.

Our efforts on relentless execution included driving our cost savings and cash programs and executing on our $4 billion share buyback program in which we purchased shares in the quarter with the value of approximately $350 million. At our Capital Markets Day in September, we announced a customer and market focused organizational realignment.

This is well underway, and we are confident for a smooth implementation on January 1, 2015. Moving to Chart 4, here are the key figures for our quarter.

As previously mentioned, orders were very strong in the quarter while revenues reflect the lower opening order backlog that we flagged at the beginning of 2014. This mainly reflects the bigger large order intake we saw in 2013 in our longer cycle businesses like Process Automation as well as our Power division.

These orders typically take around a year or more to flow through the P&L, which explains most of the lower revenues. In line with expectations, operational EBITDA was lower in the quarter.

Compared to Q3 2013, about 2/3 of the delta is due to the low result in Power Systems, about 1/3 comes from the lower revenues. We have to remember that our third quarter in 2013 was a challenging comparable of a very strong operational EBITDA margin of 15.7%.

Just to provide you some context on this, our average operational EBITDA margin over the last 8 quarters has been 13.9%. Regarding Power Systems, we will give you a brief update on the progress later in the presentation.

Net income in the quarter was positively affected by after-tax gains of approximately $145 million, mainly from the sale of the steel structures business in Low Voltage Products. Net income for the quarter also included net pretax charges for our foreign exchange and commodity timing differences of $76 million compared with positive 3 gigs [ph] impact of $113 million in the same quarter in 2013.

This means we had a negative impact of about $190 million in the quarter from Forex and commodity timing effects compared to the previous year's quarter. Net income was $734 million.

Basic earnings per share was $0.32 and operational EPS amounted to $0.35. On cash flow operations, our focused efforts to improve net working capital management had a favorable impact in the quarter, but did not fully offset the lower net income.

However, on a 9 months basis, cash from operations is almost 30% higher or more than $400 million up compared to the previous year. We are also starting to see more even distribution of cash generation across the quarters.

Eric will have more to say on this in a few minutes. Now let's move to Chart 5 for a closer look at the order development.

Chart 5 shows how orders developed in each region during the quarter on a like-for-like basis. It's really encouraging to see orders up in all of ABB's regions and both Power and Automation orders increasing in all regions.

$800 million HVDC order in the U.K. helped Europe's growth, but we also drove higher orders in important markets like Finland, Switzerland and Italy this quarter.

Orders in the Americas were up 11% thanks to a strong improvement in Brazil compared to a low level last year as well as an increase in the U.S. that is well above the GDP.

Asia was also strong, led by a large increase in South Korea as we have won some marine orders in the quarter. China continued to grow as well.

We're actively driving a large number of growth initiatives in China and remain optimistic that this market will continue to be a growth driver for ABB. Now let's move to Chart #6.

Large orders more than tripled in the quarter and here are some examples of the order base. In addition to the HVDC order in the U.K., we won a large order in Brazil with Vale to expand capacity and improve productivity in an existing iron ore mine through driverless truck systems.

Our ability to deliver a combined Power and Automation solution, with substations, motors and other electrical and automation equipment, played a fundamental role in winning this order. In the Middle East and Africa, we won an order for a gas treatment plant that also draws on our combined Power and Automation expertise for the oil and gas sector.

In Bangladesh, we were able to help the government in developing infrastructure to bring electricity to rural orders. Let's move to Slide #7.

On base orders, our continuous efforts to broaden and deepen our geographic market presence through penetration, innovation and expansion has helped stabilize orders even in mixed markets. The list on the left shows some of the highest base order growth rates from among our top 20 countries in alphabetical order.

Through our geographic footprint as well as our focused profitable growth initiatives, we have been able to grow across all businesses and regions. This allows us to more than offset weaknesses in some countries where base orders have declined.

Now let me hand over to Eric for the next chapter.

Thank you, Uli. Chart 8 shows you the different elements affecting the change in operational EBITDA between Q3 this year and Q3 2013.

Starting with the net savings, we again were able to offset price pressure with cost savings. There were further supply chain actions, including focus on changes that reduced production costs as well as operational excellence activities.

The pace of the savings has increased compared to Q2 as it took up more than $0.25 billion in cost in Q3 2014. The net volume impact is higher this quarter, mainly reflecting the larger declines in revenue along with continued investments in selling and R&D as we drive our organic growth initiatives, which you see are paying off.

The mix and product margins was positive at $25 million in the quarter, reflecting the higher amount of product versus system revenues. Next in the category Others, we have the usual impact from G&A expenses and various small other items.

So if we are to sum up these all, we have had a net negative impact on operational EBITDA of $88 million in the quarter, mainly driven by the lower volume. If we then add the negative Power Systems impact of $132 million, we arrive at the Q3 2014 results, plus only a 1/3 -- about 2/3 of the change is coming out of the Power Systems impact.

Most of the negative impact from the Power Systems project is related, but as in Q2, this is a number also includes volume impact from lower revenues. Turning to Chart 9, let me now walk you through the cash from operations and how we are driving a more consistent quarterly cash flow innovation.

In 2013, the cash from operations was very weak in Q1 and Q2, with an extremely strong quarter 3. This resulted in a year-to-date figure last year of approximately $1.5 billion.

In 2014, we have had more consistent cash flow innovation in the first 3 quarters, and this has enabled us to reach a year-to-date level of about $2 billion, which is up by $400 million from 2013 level, which represents an increase of about 30%. This was achieved mostly by ongoing efforts to even out the distribution of cash generation through the year, but also from the successful implementation of the net working capital initiatives.

In Q3, our effort to improve net working capital management allows us to offset some, but not all of the lower net income. When it comes to the uses of cash, we launched our $4 billion share buyback program as announced in September at our Capital Markets Day, and at the end of September, we have purchased some 50 million shares with a total value of some $350 million.

Let's now turn to Chart 10, which summarizes the key metrics by division. I will not go through all the numbers on this table but instead focus on some of the highlights.

Discrete Automation and Motion delivered a strong top line performance with a solid profitability at 18.1%, including the dilutive effect of the Power-One acquisition. Excluding this impact from Power-One, DM had a slightly higher margin than a quarter ago.

In Low Voltage Products, orders and revenues both grew at 3%. The lower operational EBITDA mainly relates to a higher percentage of low voltage systems orders being revenued in this quarter.

LP also successfully closed the divestiture of steel structures during the quarter. Process Automation had an extremely strong order growth this quarter, winning large CapEx orders in oil and gas, mining and marine.

The operational EBITDA mainly reflects the decrease in revenues from the lower opening backlog at the start of 2014. In Power Products, growth initiatives in areas like rail and industrial power helped lift the orders by 13% in a tough market.

The PP team also delivered an 11% increase in base orders, which is another positive achievement. The revenue decline mainly reflects the lower opening order backlog as well as some delays by customers in taking delivery of products.

Good discipline on cost and execution put Power Products to another quarter of industry-leading profitability. In Power Systems, we saw a surge of orders, including the very encouraging double-digit base order growth.

We continue to be selective in focusing on margin and pull-through. The revenues were significantly lower than prior year, impacted by the lower opening order backlog and also some execution challenges on selected projects.

We made solid progress on restoring the division's profitability and reached the breakeven operational EBITDA result in the quarter. We continue to work through the low-margin order backlog and a difficult project in solar EPC and offshore wind.

And now I'll turn it back over to Uli.

Thank you, Eric. Let's move to Chart 11.

In September, as you know, we announced our Next Level strategy and financial targets. We talked about our strong position in attractive markets, and how we will deliver attractive shareholder returns through our 3 focus areas of profitable growth, relentless execution and business-led collaboration.

Let me now show you some examples of how we used this framework to drive value-creation in the third quarter. On Chart 12, we have outlined some key highlights from the quarter where we have driven profitable growth through penetration, innovation and expansion.

One area where we have already achieved some significant success in market penetration is our power equipment offering to the industrial sector. This continued in Q3 with good growth in industrial orders, for example, in our medium voltage product business.

Selling more into the rail sector has been another focus for us. The $70 million order from the Swiss Federal Railways here in Switzerland in the quarter to modernize their locomotive fleet shows how we can build our presence in this key market with our latest generation of rolling stock solutions.

Tapping our large installed base to drive service growth is a another way to achieve profitable growth through penetration, and our 10% growth in service orders in the quarter shows that we are making solid progress in this area and that our service strategy really works. We announced a number of product innovations in the quarter, including that 525 kV HVDC cable that can double the power capacity of HVDC power transmission.

Many of you saw our YuMi robot that we launched at our Capital Markets Day in London. We are confident that this technology will open large new markets in the future of industrial automation.

Turning to Chart 13. Joining forces through partnerships with complementary players in our market is another way to drive and how we will drive profitable growth.

We announced, 2 days ago, a global partnership with Vestas to provide affordable, reliable and environmentally friendly electricity to communities in Africa and other emerging markets using micro grid solutions. This covers 2 of the growth areas we discussed at the Capital Markets Day last month.

Micro grids on the one hand and building our position in the large and untapped African market on the other side. Here is a real world example of how this can work.

Vestas supplies refurbished wind turbines and takes the EPC responsibility, and ABB provides a standardized micro grid solution to integrate a diesel and wind powered micro grid with a control solution and other electrical infrastructure. Energy storage is also key to the success of micro grids, and our recently announced partnership with BYD in China will help us build our position in what we see as a high-growth market in the future.

Now let's move to Chart #14. Relentless execution is the second of our focus areas for accelerating sustainable value creation.

We talked at the Capital Markets Day of our ongoing focus on cost savings and cash generation. On cost, we again generated more than $0.25 billion in savings in the third quarter through supply chain savings, product and process redesign and productivity improvements.

We stayed in line with our guidance of cost savings equivalent to 3% to 5% of cost of sales. This chart shows a few examples how we can achieve these savings.

Some of these are larger projects like the bundled purchasing of carbon steel across multiple businesses that can deliver big savings. Some of them are smaller, at the level of a factory, to generate a few hundred thousand dollars of savings a year.

We have thousands of such projects underway in ABB with new ones being developed all the time. This is why we are confident that we can continue to drive savings of this magnitude for a long time to come.

Let me also refer you back to another theme we discussed at the Capital Markets Day, which is implementing a leading operating model in ABB. As an example, at our high voltage capacity plant in Sweden, we have implemented significant operational improvements from changing the plant layouts to integrating engineering design and back office processes with ERP and sales tools.

The results have been very impressive, a 40% increase in revenue productivity, a 50% reduction in lead time and a doubling of inventory turns. Our ambition is to implement this kind of process excellence as the standard across the whole company.

This will be a continuing source of value creation for the foreseeable future. Now let me move to Chart #15 which gives you an overview on the Power Systems integration.

Relentless execution of Power Systems is an immediate growth priority, and this chart shows you an update on the step change program to return this long-term attractive business to higher and more consistent profitability. We have achieved some important milestones in some of our critical projects in offshore wind and EPC solar in the third quarter.

We are executing changes to adjust the cost base in the division and further derisking the EPC business as we change the business model towards system integration. The PS team achieved double-digit growth in base orders in Q3 that reflects the team's success in driving growth in this side of the business through a disciplined approach to penetration, innovation and expansion.

Looking ahead, let me reiterate what we said after Q2, of leading the PS step change and taking this business to the next level will take time. We have made good progress, but this is a marathon run and not a sprint.

There's more work to do but we have a much better grip on the risks ahead. Our guidance remains unchanged.

2014 is a trough year. We commit to being breaking even in the fourth quarter, and we aim to be at breakeven for the full year of 2014.

So that leaves me -- let's move on to the next chart. Chart 16 shows how we are applying business collaborations through our Next Level strategy to simplify the way we work together.

As we announced at the Capital Markets Day, our ambition is to create a customer-focused organization that we will really have the Next Level of external focus in daily operations. Then we empower people closest to the customer so that we are fast and agile in serving our customers' needs.

One way to achieve this is to establish undiluted global business line responsibilities for our business units and divisions. Another is to reduce the number of regions from 8 to 3 and take out a layer of hierarchy so that regional managers: Greg Scheu for Americas, Veli-Matti Reinikkala for Europe and Frank Duggan for our Asia, Middle East, Africa are in the executive committee, and all large countries report directly into the executive committee.

Their focus is very simple: customer collaboration, shared services and running the country. It's a lean, cost-effective and focused organization ready to drive profitable growth starting in January of next year.

Let's turn to Chart 17 and the steps we are taking to implement our Next Level strategy. We're taking a phased approach with rigorous tracking and follow-up to make sure that we deliver on our commitments.

Implementation is taking place through our countries and base. The executive team, together with me, have been actively communicating our goals and how to achieve them through one-on-one meetings and town hall events.

Explaining the way forward, we've already some 12,000 employees face-to-face meetings made today. We have decided on a select number of value-creating 1,000 programs already and are putting the teams in place so they can begin work at full speed starting January 1, 2015.

The critical success factor of the implementation of the Next Level strategy is our ability to track our progress and follow up effectively to ensure we deliver the right results on time. We are putting into place the necessary project monitoring and controlling tools so that we have a smooth implementation at the beginning of 2015.

To summarize on Chart 18, we turned in a solid result despite increased uncertainty in the business environment. We delivered strong order growth with large orders tripling and base orders increasing for the fifth consecutive quarter.

PS step change program is on track with operational EBITDA at breakeven in the quarter. Revenues and operational EBITDA reflect a lower opening order backlog and the ongoing actions we are taking in PS to take the business to the next level.

We continue to execute well on cost reduction and cash generation, and we have made good progress to mobilize the organization for a smooth launch of the Next Level strategy in January. On the outlook, the attractive long-term demand drivers remain intact for utility, industry and transportation and infrastructure markets.

In the short term, macroeconomic and geopolitical developments are signaling a mixed picture with increased uncertainty. Some early cycle macroeconomic signs in the U.S.

remain positive, and growth in China is expected to continue. In the same time, the market remains impacted by slow growth in Europe, political tensions in various parts of the world as well as the health situation in Africa.

In this environment, we aim to continue to outgrow our market in major customer segments by systematically driving profitable growth through increased market penetration, generating more revenues from our pipeline of new product innovation and expanding into new attractive market segments. In addition, we intend to accelerate business-led collaborations such as further developing the service business, driving the successful integration of acquired businesses and increasing ABB's productivity by focusing stronger on the needs of our customers.

Our third focus area is relentless execution, especially in the area of cost savings, cash flow generation and returning the Power Systems division to higher and more consistent returns. To summarize, ladies and gentlemen, our Q3 performance shows that our actions to drive profitable growth are bearing fruit.

We are making good progress in implementing our Next Level strategy and we are well positioned to accelerate sustainable value creation and to continue to deliver attractive shareholder return. With that, I would like to open the line for your questions.

I had 3 questions. I guess you're going to get lots around orders.

I had a few about price. This is a very general question, and I'm asking plenty of my companies about it.

Are you seeing any change in price conditions in any of your end markets at the moment? Do you sense in any way that the price environment is getting more competitive?

I ask because we've seen some very cautious or more cautious commentary lately from the likes of Hubbell and Schneider and even Siemens on the power generation side. And I just want to know from a sort of top-down point of view at ABB, are any of your end markets becoming incrementally more difficult from a competitive standpoint?

So that was number one. Number two is just a more specific issue on the margin bridge.

I think you said and you said on this call as well, that the cost savings were approximately $250 million or something like that in the quarter, which implies a negative price of around $209 million in the third quarter. That looks to me as if it's coming down a little bit year-on-year.

I don't know if I'm comparing exactly apples to apples but perhaps Eric, you can give us a sense of what is the general price trend in your margin bridge both year-on-year and quarter-on-quarter. And the final question was just the, I guess, slight confusion or I wanted to understand better this big difference between the reported EBIT in Power Systems and the adjusted EBITDA.

And obviously, there's the line of $49 million, which includes, I understand, sort of embedded derivative contracts, et cetera. Eric, can you just explain how those work and will we see the same effect in the fourth quarter or does it sort of roll off?

Ben, thanks for your 3 questions. I'll take the first one and let the other 2 hand over to Eric.

Look, on the pricing situation. First of all, you stated the Siemens PowerGen business.

We are not in the power turbine business, so that's not something that's in our space. On the other area, since the financial crisis hit the world in 2008, we have seen continuous competitive pressure that reflects the moderate market development over the last couple of years.

In this environment, you see companies winning, you see companies losing, and you see companies getting nervous and companies being steady. For us at the moment, we don't see a delta, a significant delta in the price momentum going up or down.

We have seen competitive pressures, but I wouldn't describe anything unusual in the last quarter or going forward as we would expect. Then I hand over to Eric for your question 2 and 3.

Hello, Ben. Number two, the $250 million refers to the total company, and you have to pay attention in the margin bridge that we have separated out the Power Systems business completely compared to a year ago.

So inside there are obviously the cost takeout and the price on the Power Systems side. Having said that, however, if I look at the details behind, the price pressure is somewhat less than it was a year ago also on the separate piece, but only somewhat.

Okay, and quarter-on-quarter, if I could have that as well?

I think it is not a big difference quarter on quarter. But we also see that the revenues are down.

So of course, you have to look at the absolute numbers and the percentage numbers. But I don't think there's a big change that you should pay attention to.

And then on three, your question obviously on EBIT and EBITDA in Power Systems. These swings in the derivatives, it's really timing and reevaluation of the derivative portfolio we have to do from an accounting point of view.

But this does not, over time, have any economic effect on ABB, and that is why we show them separately. So the real true apples-to-apples comparison is the operational EBITDA, and that is why we show that number.

But that's [indiscernible] improvement in the portfolio, and it happened to be positive last year and negative this year, and that's why you have the big effect that we have right now.

Okay. And just so I understand it, that movement on the derivatives, that's effectively related to the dollar, correct?

Yes, it is, I think, mainly related to the dollar and euro, but obviously we are hedging all of our operations back to the local currency where we have most of the production costs and then this is just the effect of multitude of currencies we have in our portfolio in ABB.

Okay. So basically in terms of the adjusted, the operational EBITDA in Power Systems, you still have the aspirational target of being able to reverse the -- well, reverse the full $44 million in the fourth quarter as an aspirational goal?

No, no, no. I didn't say that.

It doesn't go quarter-by-quarter, this goes over a longer period of time. These are related to hedges that could span over a much longer time than that.

No, understood. Sorry, but I was going back to Uli's comment that we still hope to be breakeven at the EBITDA level in Power Systems for the full year.

Yes. I know, I understand.

[indiscernible] I'm not misinterpreting that, that basically, there is an aspiration that the 9 month losses could be reversed in the fourth quarter at the EBITDA level.

Aiming at trying to do that, that's what we have said.

I have 3 questions. The first one is regarding, I believe when you presented the targets in September, you had a $100 more or less oil price in the medium term.

Can you just guide as to what type of sensitivity your 4% to 7% growth would have if we were to stay at the level where oil is now? That's question one.

And then second question, I think on the media call as well, you talked about some customers in infrastructure slightly hesitant on shipments, but you did have a very strong Power Systems base order growth. Can you comment on how one ties to the other?

Is the -- what do you see in terms of order growth in Power Systems going forward? And if double-digit is possible or if it was 1 quarter?

And then just finally on M&A. My sense from the Capital Markets Day was that you were more focused on the organic activities now and eventually some bolt-ons, but I think there have been some articles on Reuters or on Bloomberg that mentioned numbers of potential deals of up to $4 billion, but I'm just interested in the update there.

Daniela, I take the number two and three and then ask Eric to talk about the oil prices. Look, on the customer delays, that relates to revenue, we quoted that related to revenue.

We had some customers that wanted to delay shipments of actual projects or actual product because they're not ready or they wanted to slow down annualization of their projects. So it was revenue based.

And if you look, for example, in the Power Products division, that's one of the reasons that in the last couple of weeks in the quarter in Power Products, when the uncertainty went up, we had some delays in that. So that's related to revenues.

And the other comments that I made on orders stay intact, and the -- our targets that we announced at the Capital Markets Day remain unchanged for the year 2015. On the M&A piece, yes, look, it's very interesting to read what the press writes, but let me just tell you what we said before one more time.

We said very clearly that at the moment we have enough to do with doing the Power Systems turnaround. We have the organizational change coming, 1st of January.

We have really good progress in the integration of Thomas & Betts and Power-One. This is going well, but it's taking up quite a bit of activity on our side.

So given that, we decided in September to announce a share buyback and execute it, and as you have seen, we have also executed on that very well already in the first month. And then looking forward, we said in 2015, we are considering looking at acquisitions again.

We didn't make any commitments that if we do anything or not, but at the moment, the focus is purely on the turnaround of Power Systems, on executing and in starting implementation of Next Level and focusing on organic growth. And as you can see, the focus is paying off very well, our growth momentum is accelerating and the entire global ABB family is really focused on driving that in a pretty hard way.

Now on the $100 on oil price, I'll let Eric talk about that one first.

So we put the $100, approximately the $100 level in as one of our assumptions in the targets. You're absolutely correct in that.

And obviously, a reasonable level of the oil price is important for the investments in oil and gas. And also, if you want, in the motivation for energy efficiency and energy efficiency investments.

So we will see how this plays out. If it stays at current level, it doesn't change that quickly and see how it plays out.

It may be some shifts in demands from a market to another, but we -- it's too early to say which impact this will have, and obviously for a long time it should stay on the current level.

Two questions, please. The first one on -- you mentioned the increased macro and political risk.

How does that affect your -- the kind of investment plans for SG&A and R&D as we go into 2015, how you balance the short-term margin protection potentially relative to your longer-term growth aspirations? We have seen R&D and SG&A trending up quite strongly also in Q3.

And also, you get the payback on the orders. Should we expect those 2 as a percent of sales to continue to increase into next year or plateau or even come down?

The second question on revenue phasing, obviously you had the large orders also in Process Automation, but you had base order declines there. What's the revenue profile on some of these large orders?

So maybe if you could help us model 2015 revenues in terms of the phasing on some of these big projects.

Look, Andreas, both good points, I'll let Eric answer the second one. On the macro environment, yes, if you look at what's happened in the last couple of weeks of the third quarter, we need to be walking around the world with open eyes.

And you have clearly -- we have clearly seen nervousness in the financial markets. We have seen an increased concern over the health situation in Africa.

We are seeing actions and uncertainties in the Middle East and other political instabilities, and we need to be very, very mindful of that when we look forward in running ABB. The investments that we have taken in a selective way on the S side -- and just to be clear, the investments are on the S side and not on the G&A side.

On the S side, they are paying off. The order momentum shows that nicely growing base orders at 2x GDP, growing service at about 3 to 4x GDP.

And having the large order momentum doesn't come for free, and it was a good and conscious investment to do that. We are extremely cautious doing more in that field.

But to be quite honest, when you put S activities in, you want to also see, over time, some productivity gains because you don't get immediately full productivity. So for 2015, we will focus on a combination of driving more productivity and getting more out of our salespeople through productivity and will really, really be very careful on any additional investments on the cost side until we see a little bit longer term that the world is going in that environment.

And it's very clear that the margin protection is key. You should take the 5 divisions in the last quarter.

It looks better. It's up on a like-for-like basis.

Unlike in a mix change, there's a little bit more systems, low voltage systems activities in there, and that explains what happened there. Our products, if you look at the margin -- if you look at the revenue drop that they had, and at the same time protecting the margin, you can understand that margin protection is not only something that we talk about, but we also execute and drive very strongly.

So for me, your point is a good one and you should be concerned. And I guarantee you we'll keep all the good actions that we have going on to protect the margin going forward.

With that, I hand over to Eric on the revenue-phasing question.

Yes, and that is -- mainly relates to Process Automation. And we have booked, as you've seen in the quarter, a large number of significant large orders.

And most of them have a longer-term revenue profile. So you should not expect too much of revenue from those contracts to come over the next coming quarters now.

It quite depends on which contract you look at, but some of them stretch into '16 and '17 also from a revenue point of view. So as we have with the current backlog, which stretches out the revenue, we will see this impacted now from those larger orders.

And Andreas, take the Scottish project, tool [ph] commissioning is planned for 2018. So you will see that these projects really provide a nice baseload over the next couple of years in terms of underlying revenue, which will run for quite a while.

It's Martin from Deutsche Bank. A couple of questions.

Firstly, just to clarify on your growth expectations for next year, I think you said earlier that we shouldn't take the slowdown in revenue bookings towards the end of the quarter as any reason why you shouldn't hit your revenue growth target in '15? But obviously, the targets you have are more midterm.

I just wanted to check I'm not reading too much into that comment in terms of how you expect revenue to grow in 2015. And secondly, on Power Systems, you're guiding to breakeven not just for Q4, but also for 2015.

I just wanted to check the sort of nuances around that comment. Is it that you are expecting that to be sort of a base level and hope to get much higher than that?

Or are you genuinely expecting Power Systems next year to be around the breakeven level for the year as a whole?

Yes, Martin, good question. So on the growth side, when we went out on the 9th of September with our Next Level strategy, we said we are targeting a revenue growth of 4% to 7% as an average annual growth on a like-for-like basis over 6 years with a base year of 2014.

So that's what we said. And that means for next year, the target is at least 4% on a like-by-like basis compared to 2014.

So I hope that clarifies that piece. And on the PS side, look, when you look at the situation, 2014 is the trough year.

2016, we commit to have grown our Power Systems on an EBITDA level between 7% and 11%. In 2015, we'll be at least breakeven.

And naturally, we aim to be higher and to be somewhere between where we are today and where we ought to be in 2016. Let's see how the markets turn out.

Let's see how the growth develops, but we are firmly committed to continuously enhance the quality of this business and take it then in a way that latest in 2016, we are within the margin corridor.

Okay. And just on that point, I mean, obviously, breakeven came a quarter earlier than you had indicated.

Was there anything that has been brought forward in terms of milestones, in terms of anything that caused that to come in a little bit earlier? Or is it just generally the trend is pretty much the same now as you'd been expecting a quarter or so ago?

Just to understand if there's been any improvement in the trajectory of how those projects get executed.

Yes, let me try to explain the third quarter activities, and I give you some very concrete examples that you understand the granularity that we have in there. We have a platform called DolWin2.

DolWin2 sailed out of the dry dock in Dubai a couple of months ago. We had to move this around the South African cape in winter times and bring it up to the Norwegian fit-out station where it's being now done.

Now sailing around the cape in winter times in South Africa is not something which would be naturally free of risk. We got that done very well.

The team hits the milestones. And now, honestly, I'm very pleased to see that.

When we made the predictions for the fourth quarter, we knew that this is an important milestone that we have to hit, and I'm glad to report that we did it. The other one is energization on one of the other platforms that was targeted for August.

We got that done on time for August, which was another key point to deliver. And then if you look at the other part of the portfolio, solar EPC, Massimo Danieli, who runs the business unit, and Claudio has done a wonderful job in really flashing through more of the backlog and getting that done.

Quite honestly, we expect more than 90% of the solar EPC activities to be completely done by the end of this year, which is a good achievement. So Q3, the team did a good job addressing the challenges and risks that we had.

I don't want to brag about it in an unreasonable way. They did a solid work.

And now we need to continue that pattern in the fourth quarter to address the risks that we understand now much better. We understand much better today what we have in our hands in terms of risks, but this is not risk-free.

And we need to continue the good operating pattern and give full management attention to it. And I just can give you an operational example.

This morning, we had a review with the team because there was very, very bad weather forecasted for Germany yesterday and for today, and we made sure that all the precautions are taken. So this is the kind of involvement that we have and really the attention that we give it.

And with that, our confidence that we deliver also in the fourth quarter breakeven is strong. And we also, as Eric said before, we will do our utmost to work towards a breakeven for the full year.

I've got 3 questions. I understand your commitment to be above 0 in PS in the fourth quarter and the aspiration to be above $44 million, but can you help us understand the underlying dynamics in the division a bit better?

Can you say what the operational issues and charges were in the third quarter? I think you called out about $100 million of operational issues and charges above the line in the first and the second quarter in relation to the offshore wind and solar EPC contracts.

So I wonder if you could give us the equivalent number for today's third quarter results. I'm guessing it's about $60 million.

And within that, could you tell us what your expectation is for those underlying charges in the fourth quarter and into '15? I'm really trying to think about the 4% operational EBITDA margin, you did x those charges in the first half of the year and how that's running as we head up to just over 8% on an EBITDA basis for your '16 target.

Secondly, a housekeeping question. Your central line was pretty good in the quarter at minus $34 million.

Is there anything behind that? And I think, more importantly, you said you hope to be a similar number to last year, something like 328.

Are you still happy with that? Because I think it means about $140 million in the fourth quarter.

And then finally, I think you called out a couple of base order numbers for a division or 2 during the call. Could you give us all 5?

Because there's a lot of large orders in there. It would be very helpful to see what the underlying like-for-like base order picture looks like divisionally.

Okay, thanks, James, for your questions. On the last one, look, we have disclosed what we want to disclose, but I can talk a little bit about, in a qualitative way, DM.

DM shows a really nice development on an ongoing base in terms of driving growth momentum, both on the large and the base orders. Low Voltage Products is basically a low -- is basically a base order business.

As we have seen, the targets manage to be on GDP growth here on a like-for-like basis, here, some markets race even ahead. This is business.

If I take the Process Automation business, yes, we have a tough environment for this quarter, in the third quarter, in terms of the base orders that we mentioned. Large orders are very strong.

Our Power Products is up on base orders. And the team is doing a great job, especially on the industrial side, to keep that running.

And on Power Systems, as we say, base orders is up double digit, which shows very strongly that also in Power Systems, there are some very attractive orders that you can take below the $15 million threshold and make good money with going forward. So that's that piece.

In terms of the PS situation, look, on the fourth quarter, we confirm our commitment to be breakeven and we confirm the aspiration that we said before. And that's all I can say about that one.

And in terms of the underlying third quarter situation, I will hand over to Eric to give you a little bit more flavor today.

Yes, on the central cost and the overhead that you pointed out, we had a fairly good development on that cost in the third quarter. But if you look at the full year, I think we should expect to be somewhere at about the same level as last year.

This is a little bit hard to predict. There are some one-off items in here.

There are also some things related to internal trade and bookings that is in that number. But I would assume that it is something similar to last year.

Okay. And the underlying in PS?

Yes, on the PS side, you have seen the $130 million or so that we have in the EBITDA bridge, and the majority of that has to do with different costs on the projects that we have in the backlog there, but it's also wind, solar or other areas.

Sorry, to be clear, I was referring to the $100 million that you called out in each of the last couple of quarters. Could you give us a comparable number to that?

No, we -- I will not give you a specific number to that this quarter. I'd say it's a majority of the $130 million.

So a few questions, please. Maybe if you could give us some granularity on what you're seeing in China right now?

You seem to be doing a little bit better than some of the trends we've heard from peers. And if you could differentiate what you see in the market versus what is very specific to what you're achieving?

Second question, on the mix in the bridge, it is positive. At the same time, you mentioned in Low Voltage, there was a large element of systems.

So probably negative there, so I was just wondering, which division in particular was driving the positive mix situation for ABB this quarter? And again, in low voltage, I noted that the backlog was down quite a bit this quarter versus the previous quarter.

So you said earlier, this is mostly a base order business, but you -- it seems to indicate you have executed quite some amount of system business, and I was just wondering how we should think about the trend line for revenue growth now with backlog declining a bit, China possibly slow going?

Okay. Let me start with the third one and I'd take the first, and then I hand over to the second one for Eric.

Look, on Low Voltage, the reason that the backlog is down is we did well in shipping revenue on low voltage systems. And mainly, the backlog that is longer is low voltage system.

So that's the triangle, how it hangs together, Olivier. When we ship in a quarter more in that business, in the Power Products business, the backlog goes down immediately in a significant way because we got the revenue out of the door, which is a good thing then to really execute on that one well.

On China, in general, if you look at the Chinese agenda and compare it with our Next Level strategy, we are really made for each other. On China, at the moment, if you see where money is being spent, take the 3C industry, for example.

The workforce in China is peaking in the next couple of years. There's a scarcity of skilled labor and there's an increase in labor cost in China.

These 3 factors together cry out for Automation. And that's the reason why we are doing well in China on the Automation side.

Our robotics business, which is fully localized in China. There, we have strong R&D, we have strong capabilities on supply chain, we have strong marketing and sales there locally, is doing extremely well.

And I'm very, very pleased today, this is operating. And the Automation on industrial side is not only something that's nice to have for quality reasons, it's really something mandatory to get productivity up and address the labor market, structural challenges that China has.

If you take the recent moves in China towards more sustainable cities and clean cities, electric infrastructure is another one. The Chinese government has just, this quarter, announced a more than 10 billion investment program for electric vehicle charging infrastructure.

We are the leader in China in electric vehicle charging infrastructure. As you might remember, we announced earlier this year a program or a project that we have won where we are working together with a local manufacturer to set up more than 100,000 charging stations across China.

And naturally, with that, we have a strong skill base and competence there to go, and we drive that in a very positive way. If you take the industrial situation in China from a Powers perspective, Bernhard Jucker and his team are doing a great job penetrating the industry more with Power Products from a medium voltage space.

If you look at a modern factory, the medium voltage equipment is one of the major downtime sources, having electricity cutdowns because of unreliable power supply, and going in there on the industrial side helps with uptime requirement and productivity requirements in their plant. So on the industrial side and the infrastructure side, I think we are extremely well positioned with our very strong local team.

And as you know, a couple of months ago or earlier this year, we changed leadership to Chinese leadership. They really drive the local penetration with now having the good flavor and understanding of the market even better than others.

Then on the power side, on the power infrastructure at the moment, China is not booming in that field. I wouldn't describe it as a boom, but our technology leadership, amongst others on the 1200 kV HVDC capability that we developed jointly with State Grid, helps us also to drive there.

So I would say ABB is probably the most Chinese of all competitors in China. We are very strongly aligned in terms of our R&D, our offering priorities.

In terms of today, we drive penetration. And with that all together, I'm cautiously optimistic that we will, in the future, also have a good prospect in the future.

Now with that said, I will ask Eric to give you a little bit more granularity on the mix element on the bridge.

Yes, the mix and product margins, which are combined on the bridge, it's as you have seen, positive. And the -- it is clear that the LP content of that is a negative because of the system business that comes in.

But in some of the divisions, it's the other way around. We have a little bit better mix in some of the other product divisions.

Maybe just as a follow-up on the backlog in LP, was there a significant impact from disposals there?

No, it is not a significant impact. Those disposed businesses have a certain backlog, but not an overproportion of backlog compared to the rest.

I have 3 questions. Could I ask you, if you look historically, your base orders tends to move directionally quite well with your large orders.

Is it the case that you, through cross-selling or interdivisional cooperation, gets, I hope you can call it, spillover orders when you book a big order? That's question number one.

And then in -- yes, if you look at your service revenues, they've been flat for the last 3 quarters while at the same -- over the same period of time, you booked quite good growth in service orders. Can you explain why that is?

I actually think I'll stop there.

Okay, let me take one, the first one, and I then hand over to Eric. Look, on the base order, large order correlation, Fredric, this is a very good point that you take.

And let me just run you through the 4 large orders that we just have taken, and what that can mean, and also for the base order side. Take 100 million mine automation in Brazil that we won for Vale.

If you set up this traveler's truck automation in a mine, naturally, it's not a one-off thing. Later on, you need spares, you might add certain capabilities to that, you might roll it out a little bit further.

So the first big order might be 100 million. And then later on, you have an ongoing spares business, which by the way is very attractive in terms of the margins.

You have typically then, on the run, maybe some smaller expansion and upgrade activities. So that's the Brazil piece that I would like to mention.

Take the gas treatment plant in Tunisia, same story basically. Then you really -- then you install in the oil and gas industry equipment where you have all supplied some rotating equipment, the motors and drives that we have in there, the sensors that need regular reliability checks.

That's very good and attractive business to us that we do. And then if you take the $800 million HVDC order in the U.K., that connects power from the renewables into the U.K.

And very clearly, that doesn't end at the converter station, that goes then really in the industry, and we need to connect then on the distribution level, typically, the smaller kind of orders, the large project that we have done into the existing infrastructure. So there is a correlation between large orders and follow-up baseload business.

And since we have been quite successful in certain areas, I think you will have a good catch on that one regarding the correlation. And absolutely, we are aiming to drive the install base penetration in ABB even stronger.

We are expanding our install base with the large orders, and then we have to do more in that field. With that, I hand over to Eric for the second question.

Yes, and if I understood you right on the second question,. you focused mainly on the order growth in service?

Yes, the revenue growth that's been lagging there.

Both growth in orders as well as in revenues. And I think we have seen that for the couple of quarters going backwards now.

And it is really attributed to this service strategy that we are driving in some, I would say, even 2 or 3 years today. So we really start to see a regular good level of service orders.

And that has to do with focus, has to do with selling service products and good demand basically for also keeping the existing assets serviced and up to speed on our customer side.

But unless I'm mistaken, your service revenues in local currency haven't grown in the last few quarters while your orders have been growing, well, close to double digits?

Yes, but in -- those are correct that the orders have been faster, but the revenue we're growing now in the last quarter, and also in that side, there is obviously a certain backlog of medium-sized projects, updates and so on that impacts the difference between orders and revenues. But over time, I would pay more attention to the trend on the order side than the revenue side.

My first question is on the strong order growth. I would just like to understand a bit more how much of this do you think is actually down to the PIE strategy compared to just a more favorable business environment.

I know this is difficult to answer, whether you would have won these orders already at the same time last year in a similar environment, but maybe you could quantify a bit more how much, in your view, the new strategy actually impacts, for example, your interaction with customers? And on that note, looking at your current tender activity, but also bearing the sanctions to Russia and the generally more uncertain macro environment in mind, how do you think about the coming quarter in terms of orders?

The second question is on Discrete Automation. You're saying that excluding Power-One, the margin would have been up year-over-year, so on a like-for-like basis.

But given that Power-One already started to dilute the margin last year in Q3, is the comparison base you're referring to 18.8%, so the margin you're providing in the slide deck, which also includes the Power-One dilution last year? Or closer to sort of 19.5%, which I get to if I exclude Power-One last year?

And on that point, if the comparison base is actually 18.8%, could you just elaborate a bit more why the margin is then down probably year-over-year despite similar levels of organic growth? And the last question is on the large orders that you mentioned on Slide 6 in your presentation deck.

Could you just give an indication whether these large orders for their respective positions are margin dilutive or enhancing to the order backlog?

Okay. Look, Simon, I'll take the order questions and I'll let Eric address the DM/Power-One question.

On the order growth, if you just stick with Slide 6, we wouldn't have gotten the mining order in Brazil if we wouldn't have done a significant work on the I side of PIE because we have basically here a very innovative, leading-edge mine 2.0 solution to automate a mine. So that's pure innovation, developed even jointly with the customers out there.

And we wouldn't have gotten that without this one. On Bangladesh, that's a typical E piece.

Bangladesh is a market that we have focused on recently a little bit more, invested in some sales capacity. So that's an expansion of our activity that we have.

And then the $800 million HVDC order in the U.K., look, the U.K. customer was a customer that we already dealt with since many years.

Getting now penetration to them by winning also this $800 million very large project is a typical exercise of a successful penetration activity in a traditional ABB market, like the utility market in the U.K. So the approach is working.

We are not at the full potential yet. We are ramping up the momentum.

I'm very, very pleased when I travel around the world, everybody shows me proudly the heat maps and the associated activities. And then very often, that brings me to your point of collaboration.

Very often, they say, "Look, we identified an opportunity here. And division A and division C are working together with the support of our friends in country X."

And that's exactly what we want to see in the future. We want to have not collaboration as a mandate in an artificial way, we want to have a market in our driven approach that a market drives our collaboration focus.

And that we really say, better we get immediate benefit from teaming up. I can tell you, this is also fun for the team.

If you walk around the ABB groups, and as you know, I'm traveling a lot out there. And I meet salespeople now, salespeople that see a 28% order growth, a healthy people.

They see then where the pockets of excellence are and that collaboration works. And they copy with pride.

And they work with each other and they see the other one performing and they really go forward. So I think the PIE approach is only starting to get full traction.

And with that, I'm very optimistic that also in the future, we will be able to beat the market. Now when the market is significantly down, we want to be ahead of it.

So that's on a relative basis. We continue that.

The concerns that you raised or the questions that you raised to some parts of the world, whether it's in the Eastern part or in the Western part of the world, look, we have a much better radar today. Our heat maps, we are not only using them strategically for 5, 10 years, Simon, we also use them short term.

And we watch our markets very carefully. And if the one is a little bit more questionable and threatened, then we make sure we focus on somewhere else even stronger to compensate for that one.

So that's what we're doing. The fact that we have now the 3 EC members on the executive committee, having the 3 regions, they are really, really close to the market in the future, and they will have the country's director reporting to them.

So we become more agile and fast in addressing market opportunities. And if you take the 4 large orders that we have mentioned in the Slide 6, look, when you take a large order, and as Simon in -- sorry, as Fredric in the previous question laid out very nicely, there's a correlation between large orders and base orders.

So when we look at these opportunities, we need to say this overall opportunity, over a lifetime of the existence, is that something which is accretive or dilutive to ABB? Typically, when you go through the large order piece at the beginning might be on or slightly below the divisional leverage.

And then if the service business comes in, if the spares come in, if the additional expansions come in, it becomes definitely accretive. So that's the directional guidance that I want to give you on that one.

And with that, I hand over to Eric to answer the DM and Power-One question.

Yes, so on the margin, when you compare, when we say it is up in the quarter, we do it on like-for-like basis. So it is not including the Power-One effect of last year's part quarter when they were in.

And with that, we would like to conclude the call today. Thank you very much for everyone for their time and their great questions, and looking forward to hearing you in February for our next Q4 results call.

Thanks again.

Thank you very much, everybody.