Earnings Call: Q3 2018

Oct 25, 2018

Ladies and gentlemen, welcome to the ABB Q3 twenty eighteen Results Conference Call. I'm Iruna, the Chorus Call operator. I would like to remind you that all participants are in a listen only mode and the conference is being recorded. The presentation will be followed by a Q and 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. Thank you. Good afternoon, ladies and gentlemen, and welcome to ABB's 3rd quarter results briefing. The press release and analyst presentation were published this morning at 7 a. M. 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, Ulf Spesorke and ABB's Chief Financial Officer, Timo Ihamu Tila. 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 ADD 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. Thank you very much, Jess. Good afternoon, ladies and gentlemen, and welcome to everyone who has joined us on this call. At Kyusho, 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 Q1, both total orders and base orders were up in all divisions and regions. We reported our 7th 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 system position and as the global leader in Enterprise Asset Management Software. In maintaining our disciplined approach to a relentless execution, we have achieved solid operating results across the group. ABB's operating margin reflects the affected the expected effect of the integration of GE Industrial Solutions and the charge related to our legacy noncore train retrofit businesses, 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 tariff impacts. In Q3, we continue to strengthen ABB through business led collaboration with partners. This included the formation of Linksen, a joint venture with S&C Lavalinor, to deliver turnkey substation projects together with the PG division. We strengthened also our global brand, welcoming the Thomas and Betts brand into the ABB family as ABB Installation Products. In addition, ABB was recognized for the 2nd year running as the employer of choice for engineering graduates. Overall, these results show that the 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 were up 3%, now at the target corridor at $9,300,000,000 The operational EBITDA margin was 12.1%, and it includes the expected 80 basis points impact from GEIS dilution and the charge in our legacy noncore 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 €565,000,000 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 contributions 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%, with 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 Blingdon joint venture for the EPC project and the sale of the terminal block business from EP, which altogether 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. Thank you, Uli, and good afternoon, everyone. Turning 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 world based, showing particular strength in grid digitalization for smarter grids and services supported by ABB Ability and the PowerUp program. Revenues were leveled 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 bench 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 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 2 60 basis points lower year on year with a dilution from GEIS of 2 70 basis points. GEIS's 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 EB 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 completed. 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 cruisers. 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 effect 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 a 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 Q3, we continued to deliver net cost savings amounting to CHF 102,000,000. 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 €30,000,000 negative impact from commodity price increases. Volumes had a positive impact of €94,000,000 while mix had negative impact of €25,000,000 Our investments in growth generated an increase of SEK 35,000,000 year on year, mainly in sales and digital. Inorganic activities, mainly GEIS, had a positive impact of SEK 16,000,000. The other items reflect a negative impact of SEK 80,000,000, including the charge related to legacy noncore train retrofit activities of SEK 32,000,000. Additionally, currency translation effects had a negative impact of €48,000,000 Counting all of these factors, the group achieved operational EBITA of EUR 1,180,000,000, increasing 4% year on year and the margin of 12.1%, including the 120 basis point impact from GEIS and the charge in the noncore 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 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 noncore 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 €455,000,000 for the 1st 9 months. As indicated at Q2, we have seen higher negative impacts from noncore 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 €600,000,000 compared to our previous guidance of negative SEK 550,000,000 With respect to below the line items, we currently expect normal restructuring charges to be around €150,000,000 for the year, a slightly lower run rate than our previous guidance. The framework we previously provided for GEIS related nonoperating items remains unchanged. We expect net financial expenses to be SEK 250,000,000 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 SEK 1,057,000,000 in the 1st 9 months compared to EUR 1,930,000,000 over the same year to date period of 2017. This primarily reflects higher inventories and less favorable timing of cash flows for Roald's projects and cash payments and tax payments. Looking ahead, we expect to see a pattern of stronger cash delivery in the Q4. 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. Thank you, Timo. Please turn to Slide 13. I would like to start with our focus on profitable growth. Today, all of our key businesses are either number 1 or 2 in their respective markets. Streamlined and strengthened, ABB's 4 entrepreneurial divisions are driving growth through our high approach of penetration, innovation and expansion. Let me give you some of the examples of the Q3. In Power Grids, a highlight this quarter that illustrates our penetration of emerging markets is the order to supply ADD'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 drone in the DS4. Setting new standards in reliability and efficiency, it is specifically designed for mission critical, high density computing environments such as data centers, commercial buildings, health care facilities, railway signaling and airports. Industrial Automation is penetrating the recovering growth industries with the delivery of the largest ever integrated control, safety and security system for our gas pipeline, laying an innovative fiber optic lead detection and safety monitoring system, which is based on ADB Ability across challenging terrain for 18 50 kilometers Trans Anajolian Natural Gas Pipeline. And in Robotics and Motion, the ongoing expansion of our robotic solutions suite was strengthened by the acquisition of Intrion based in the Benelux region. Intrion, our leading provider of logistics automation solutions and services for warehouse and distribution, food and beverage and pharmaceutical industries. This significantly advances our logistics robots offering in the 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 2nd largest market in terms of revenue contribution to the group on a country basis, and it is one which ABB is a pioneering technology leader for utilities, industry and transport and infrastructure, is 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 auto growth in the country. Any 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. ABD activities are very well aligned with the focus of China's long term development strategy. In 2016, the central government launched its 13th 5 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, 6 are directly served by ABB's business. Our ongoing success in China is also driven by our clear local competitive strengths. Whilst participating in China's reform agenda, ABB has developed a truly localized value chain over many decades. Today, more than 90% of ABB sales in the country are from locally developed and made products and locally provided services and solutions. We 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 and 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 Compass project in Xiamen. Now in the final stages of development, the Compass 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 customers in utilities, industry and transport infrastructure to make a true quantum leap in digital. Drawing on our global installed base of more than 70,000,000 connected devices and 70,000 industrial control systems, ADB Ability is helping our customers to improve their competitiveness and productivity as they plan, build and operate across their entire asset lifecycles. Our ABB Ability solutions provide enhanced digital value propositions across the entire breadth of the value chain from plan overbuilt to operate. This quarter, we were pleased that 2 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 800X 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 trends and machine learning. 2nd, 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, enduring financials and HR to lower operating costs, increased safety as well as optimizing day to day and life cycle 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 3 major customer sectors: utilities, industry and transport and infrastructure. ABB is well positioned to continue focusing on high growth sectors and markets. In the Q3, we demonstrated sustained growth with total orders up in all divisions and regions. This was our 7th consecutive quarter of year on year growth in base orders across all the activities of ABB. Revenues at 3% were within our target range, with service revenues increasing 11%. Our operational EBITDA margin was 12.1%, reflecting the dilution from the integration of GE Industrial Solutions and has stimulate out the charge in the legacy noncore portfolio. At the same time, our focus on relentless execution delivered solid results across all of our businesses with powertrades now at its target margin corridor. In the quarters ahead, our focus will remain firmly on delivering sustained profitable growth as we rise the future with our market leading industrial digital solutions. Thank you very much for your attention. Now let's open the line for questions. We will now begin the The first question from the phone comes from Ben Uglow with Morgan Stanley. Please go ahead. Good afternoon. Thank you for taking the questions. 2, if I may. I guess for Ulrik and or for Timo, but on the order backlog, when I look at the order backlog as it stands right now, that $23,500,000,000 dollars 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 twenty nineteen 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 twenty nineteen? 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. Yes. Good afternoon, Ben. Thank you very much for your question. I would suggest Timo takes the backlog in the nitric on the China piece. Over to you, Timo. Okay. Thanks, Ben, and thanks, Oli. 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 backlog, so again, on ABB level, the DADWOG 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 49% sorry, excuse me, we expect 45% to convert to revenue in 2019. Now this number is actually a little bit higher than it would have been a year ago as a comparable. So there is that impact going into 2019. Then on your specific question on EG 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 IAMPG to also contribute to that. I understand, Antti. 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? Well, I think I already described the dynamic. 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. Look, and 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, that is sell a desk for a certain system that you can use. Enterprise Asset Management software and utility side is 1 that more and more customers get interested in. So also the mix will be changing in terms of more of the solution based 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 happens 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 6th time this year, and I'm going this month alone 2 times, giving that market a lot of attention. When I go there, I see a management team, but only the CFO is an expert and everybody else are local 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 and D with the drumbeat of innovation pattern that our local competitors have. China is definitely a high speed country in terms of R and D. We have that high speed pattern also because we have more than 2,000 colleagues in R and 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 source not only the task that a robot will ultimately do, you also reduce the amount of engineering that's needed. And typically, the more ease you go, the more solution mindset our customers have and the more solution buyers our customers are. In China, if I meet the wheels of the world, the EV vehicle players that are coming, and Jack from Nios, in the meantime, a good friend. We have helped him to basically get all his plans 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 that really differentiates our business model. We are pretty much unique in this space. The fact you might remember, the turnaround of robotics was led by amongst other by that. 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 aid 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 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. I guess, 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, where they opened 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 they're well positioned. So altogether, 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 of my CPaa benefiting. 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, we had 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 in mix. As you know, the ABD 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 by the delta there is a bit stronger. So that's overall the flavor. I would say 3 stacks back, China's reform agenda and ABB fit extremely well together. We are strong loyal player. We have a portfolio that fits the reform agenda, and we will continue to drive growth. And I'm always has been wrong on China always, and I will remain wrong on China. Thank you, Ben. And we'll go to the next question. The next question from the phone comes from the line of Martin Wilkie with Citi. Please go ahead. Yes, 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 talked about Italy 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? Yes. 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. And that's the reason why we are saying from a macro perspective, we see raised uncertainty, and that's the reason why they changed to 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 Grades, take Lxification, 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 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, in 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 and R is remains to be a real jewel in our portfolio. I'm happy about B and R. But then if you look at the countries, Germany in Industrial Automation, France, they're good points. And in Germany, we got another set of large cruise orders, which naturally helped us well with our customer in Germany. And Robotics and Motion, As the European Automotive Industry is preparing for the e mobility wave and as they are bringing up capital investments to really support the change in platforms, again, our position is very, very well established there to help the customers altogether. So the flagging of the outlook is cautious. The business underlying business performance is good. Thank you. And we will move on to the next question. The next question is from Guillermo Peigneux, UBS. Please go ahead. Hi, good afternoon. It's 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 this actually progresses through 2019? Allegedly, copper prices now are down and obviously in 20 19, probably we see how your pricing sticks on direct materials actually become less of a pressure. And I basically then follow-up with a question on acquisitions afterwards. Thank you. So what was your second question? It was a little bit too you don't have a clear line. But what's the second question on acquisitions? The question on acquisitions was regarding potential new acquisitions or deals 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 current other places you saw during 2017 and 2018. So I wonder what the current valuations may be a bit more attractive. And obviously, I bear in mind that you have plenty of work to do actually in Bienaar and GEIS, right? So I understand this, but I wanted to see how you see prices now. Thank you. 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 pricing processes in ABB. You might remember we got caught in the Q2 of 2017 on that topic. So this is something that is high on our radar screen, and we make sure that we have to paid 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's some good momentum. Timo, any comment on that. Yes. 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% 10%. But as we are doing hedging, this will come through gradually. So commodities, we expect to be slight headwinds still going into Q4 but less than earlier. But I also want to highlight that, that FX sorry, commodities less overhead. Headwind FX continues to be a bit of a 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 2 70 basis point impact, then we actually had some margin accretion in ETV, which shows that we are being able to pass this on in pricing as fully said. Okay. And then to your second question, Guillaume, I think are spot on can see that you cover ABB for a while. B and R and GAIS are tasks that are ongoing. The teams are doing a great job getting 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 the overall message from them is it's great to be core. It's great to be in a company with a welcoming culture like ABB. We have one sitting in the room that has joined us here from GIS. So I think that is good. On the B and R side, similarly, we are firing in all cylinders. The team is doing a great job individually. I'm proud of the colleagues from B and 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 financial capacity, it's also management capacity. And you can in the electrification products and industrial automation, we will 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 everybody immediately to say now we're going to sell at a lower price. That's the first point. And overall, our capital allocation principles remain unchanged. So we fund organic growth. And as you can see, the investments of inorganic growth, whether it's penetration, innovation or expansion in new offerings, is really paying off. We have good growth momentum coming. The dividend policy remains unchanged. And then the other 2 priorities on capital allocation, M and A and additional returns to shareholders will happen at the time when we have more money to spend and funding to tell. Thank you, Guillermo. And we'll move on to the next question. The next question comes from Andreas Willi with JPMorgan. Please go ahead. Yes, good morning good afternoon, everybody. I have a question on Electrification Product and 1 on Grids. On Electrification Product, the growth there over the last few quarters around 3% average is substantially below what, 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? You mentioned earlier that maybe you have a different exposure to some 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 basically not commenting on it. But the last time we had uncertainty whether grid was core or noncore, 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? Okay. Andreas, thank you very much. Yes, 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 parts is coming back. Now if you look at the fastest return, it's in North America in unconventional onshore where the industries come back and buy that. That's not exactly ADB sweet spot, so we need to appreciate that. And then you need to differentiate between Products and Systems. So for example, 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 group. And naturally, 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 TRYCs, well, 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 down billing 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, stateless to our customers and ensure that they get excited, and they are excited. I can tell you at the distribution conference that happens every other year in Paris, ABB was recognized as the leader in the digital grid. We have the strongest offering in debt there with ABB Ability, both from the virtual substation planning, the digital twin on the substation side, all the way to Enterprise Asset Management. So there's can comment on this topic. Thank you, Andreas. Next question, please. The next question from the phone comes from the line of Gerd Brade, Deutsche Bank. Please go ahead. Thanks very much. I have a couple of questions, please. The first one related to EP, actually two questions on 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's driven this weaker margin momentum in Q3 at least sequentially compared to the first half of the year? Thanks very much. Okay. Look, I'll take the first part. We're not commenting on the on the GEIS specific margin. We're commenting on the EDP 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. Okay. So maybe I'll just drop in a little bit of mechanics on still on the Q3, Q4 situation because you correctly backed out the margin, but we said that we expect approximately 2 60 basis points impact for the second half, bit more Q3, bit less Q4. So that it so 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 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 we have 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, taking that into account, we continue to drive operating leverage. Thank you. We will move on to the next question. The next question from the phone comes from Simon Panason, Berenberg. Please go ahead. Yes, good afternoon, everyone. My first question is on the margin bridge, I guess a question for Timo probably. How should we think about the margin drivers going forward? I'm thinking sort of 3 to 6 months out. If I drive by driver, given GIS, it was 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 in other areas. You had some one offs obviously in this quarter, but the margin overall of the business has been flat over the past 9 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 with 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 a sort of just deeper pickup thereafter. And then the second question is just on the corporate line. You guided earlier in the year for €500,000,000 in €600,000,000 Again, that's probably some one offs in there. But this corporate line used to be €300,000,000 back in 2015. So quite a significant doubling almost in corporate cost, and it's been the same, obviously, last year already with some IFRS or with fewer statements. But where do you see sort of the corporate, like the opportunity for you to reduce that corporate line going forward because it's always been quite a margin track over the past 2 years? Thank you. So I'll have Timo start in the margin bridge, and then I'll take the second topic. Yes. 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 headwind 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 Color Pro activity as well during this, and that would also impact Q4. Yes. And the second point on the corporate cost. 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 salesforce.com. 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 advertise some of the parts on the white color productivity, as Timo rightly said, but there's more to come. And there's also some financial aspects that Timo would like to comment on here. So just to highlight on the noncore business because that is, of course, something which was not there at a time. 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 noncore 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 noncore business last year, we had about SEK 300,000,000 of orders in Q3 that you can back out from our reporting. And this year, in the beginning, we have had about average SEK 200,000,000 per quarter. Q3, this was pretty much there off. So this is really moving down, and that is important. And going forward, we expect maybe 50 ish 1000000 orders on the noncore business Q4 and very, very little after that. So this is really coming to an end. And very similar trajectory in the revenue line. And we then need to now diligently work through this. And of course, when you look at the €600,000,000 guidance, we didn't have this full impact of the train retrofit in the SEK 550,000,000. So we need to take this up a little bit. And yes, we have built everything what we see in there at the moment. And if you divide our 4, 5 number by 3 and multiply by 4, so I if you periodize that, you come pretty much to the number what we are expecting to add now to come to 600 ish there or thereabout. So to sum it up, Martin, investment on the one hand is a good stuff on the growth side and then central management of the legacy backlog in certain noncore activities that we have centralized given to one team to really ramp down, and that's the key element of the increases. The noncore piece will die away as we execute the remaining backlog and get out of it, and the other piece is going to get the leverage. Okay. Thank you. And we'll take the next question. The next question from the phone comes from the line of Jure Kalmanski with Exane BNP Paribas. Please go ahead. Hi. Thanks for letting me ask a question. So just on Industrial Automation, obviously, we had a somewhat weaker order intake than 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. And I noticed 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. Yes. Thank you very much. I'll go on to the corporate cost, and I'll take Industrial Automation. Yes, look, Industrial Automation has a very specific business model in ABB, which is also not really comparable with some of the competitors because in Industrial Automation, it has basically some own activities, which is service, which is the DCS offering, 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 when some of the large system projects come, the margin for large system projects in Industrial Automation itself is moderate, but the margin for our products that they're pulling them 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 ADB 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 Hasipo in there. But then it also might have motors, drives and expectations from products and the Sammis business as we pull them through. And the more pull through we have, the lower the absolute the margin in IA will become because the part of the channel function then goes up relative to the part of their own equipment in that business. So that's the economic rationale. And as you rightly said, the more we sell large system orders, the more the margin will in Industrial Automation go down. But the ABB margin will go up because we have the 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. We got some really great capabilities in there. If you take the original products that we have in there, that is the Assiport pieces, that is measurement and analytics, that will get a lot of attention continuously for 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. Yes. So on the noncore, 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 0 in orders. And also, when we look at revenue this year, we are sort of 3.50, 4 100 type of range, and it's going to be less than $100,000,000 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. Thank you very much. And I know everybody has a busy day today, so we will now move to the last question. The next question comes from Alok Katre with Societe Generale. Please go ahead. Hi, thanks for taking the question. Just one or other couple over here. Firstly, in terms of the M and A, I was so I wanted to follow-up. Intune obviously seemed like an interesting move into the warehouse automation. I know it sort of furthers the robotics sales, but just maybe if you could help us understand what the synergies are between robotics and Intrium? 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 1. And then secondly, just in terms of maybe housekeeping on the tariffs and raw materialpricing 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 have situations playing out for you and whether we should see some pricing dynamics on that side? Thanks. Yes. Let me take the second one first. We maintain our ambition to hedge 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 multifaceted and personally 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 the M and A pattern in robotics and the M and A pattern. In robotics, if you look at it, there is no large industry around to be consolidated with large players. This is basically an industry where we are the only remaining European player or player with European background. Then you have the Japanese, you have the Chinese out there. And I would not expect there are very large scale moves in terms of consolidation. What 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 the warehouse and logistics space 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 pack in 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're hard, they're soft, they're heavy, they're 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, where 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 that we can really differentiate and help in the 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 even more activity and growth opportunities in the future. Thank you very much, everybody, for joining the call today. And just to remind you that IR is always on hand and delighted to help you with any remaining queries. Thank you. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.