Ladies and gentlemen, good afternoon. Welcome to the ABB Fourth Quarter and Full Year 2017 Results conference call. I'm Irwana, the call operator. I would like to remind you that all participants will be in listen-only mode, and the conference call is being recorded. After the presentation, there'll be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mrs. Jessica Mitchell, Head of Investor Relations. Please go ahead.
Good afternoon and welcome to ABB's full year and fourth quarter 2017 results briefing. The press release and analyst presentation were published this morning at 6:45 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 to present our 2017 financial results are ABB's President and CEO, Ulrich Spiesshofer, and ABB's Chief Financial Officer, Timo Ihamuotila. Before we begin, I would like to draw your attention to the important information regarding safe harbor notices and our use of non-GAAP measures on slide two of the ABB presentation. This conference call will include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. I will now hand you over to Uli.
Thank you, Jess. Good afternoon, ladies and gentlemen. Welcome to our conference call. In today's call, we will start with a review of our 2017 financial performance, followed by an update on the execution of our strategy before presenting the outlook for 2018. Please turn to slide four. Let me begin by putting the past year in context. 2017 was an important transition year for ABB. It was a decisive period in a transformation that began in 2014 with the launch of our Next Level strategy, and which has delivered the streamlined and strengthened portfolio and operation you recognize as ABB today. As we stand now, we have a digital-first portfolio for customers in utilities, industry, and transport and infrastructure that is focused on two clear value propositions, bringing electricity from any power plant to any plug, and automating industries from natural resources to finished products.
We've achieved this crystal-clear portfolio through the consistent and disciplined implementation of key actions across our three focus areas of profitable growth, relentless execution, and business-led collaboration. We leave our transition year having delivered four consecutive quarters of increasing base order growth with base orders higher in all divisions and regions. Our innovative digital solutions offering, ABB Ability, that we launched in spring 2017 commercially, has been building good momentum over the year, and now we offer more than 210 digital solutions all around the world. Among the key actions to streamline and strengthen our portfolio, we completed the acquisitions of B&R and KEYMILE and announced the acquisition of GE Industrial Solutions. We also divested our high-voltage cable business and changed our business model for engineering, procurement, and construction, called EPC.
Beyond these actions, we announced key partnerships with IBM on AI, artificial intelligence, and with Hewlett Packard Enterprise to jointly develop edge digital industrial solutions. On the execution side, we delivered on our 1,000-day White Collar Productivity program, producing $1.3 billion in run rate savings, more than $300 million ahead of our original ambition. Over the same period, our net working capital as a percentage of revenue has been reduced by close to 300 basis points, and that's on top of our regular cost savings and efficiency programs. We have truly built a simpler, leaner, more customer-focused organization and strengthened our leadership and our global ABB brand. Standing here today, I'm proud of what our ABB team has achieved in the massive company transformation. The momentum and the company we have built in 2017 positions us for profitable growth as the global markets are improving.
Today's proposal from our board of directors for a ninth consecutive dividend increase to Swiss francs 0.78 per share demonstrates our confidence in the future and our adherence to our dividend policy. In short, we said we will have a better ABB at the end of this transition year, and this is what we delivered. Turn to slide five to let me briefly outline our key results. We delivered a steady financial performance in 2017 despite market headwinds and the dampening effect of our massive transformation efforts. For the full year, total orders were steady with base orders up 5%. We delivered now four consecutive quarters of increasing base order growth.
Revenues were up 1% to $34.3 billion. Our operational EBITA margin for the full year was 12.1%, and it was impacted by about 30 basis points due to the charges related to the EPC business model change that we announced in the fourth quarter. These charges were taken in the Q4 books. On a comparable basis, the operating margin was steady. Operational earnings per share was 1% lower in constant currency terms. Cash flow from operating activities was steady on the solid level of 2016 at $3.799 million for the full year. For the fourth quarter, total orders were 3% lower as strong base order development was more than offset by lower large orders in Power Grids and Industrial Automation compared to the exceptionally strong prior year period where you might remember the large Indian HVDC order as just one example.
Service orders increased 7%. Revenues were 1% lower. The operational EBITDA margin in the quarter was 10.9%, impacted by approximately $140 million in charges related to the EPC businesses, which more than offset our net savings actions. For more details on the results, I will now hand over to Timo.
Thank you, Uli. Let's turn now to the regional order development on slide six. As Uli highlighted, we saw strong base order momentum in the quarter, which was delivered across all of our regions. In Europe, orders grew 5% and base orders 8%, benefiting from the positive market developments in industry, transport, and infrastructure. Positive contributions were seen in Germany from investment in grid, infrastructure, and transport. Norway saw strong demand related to MRO spend in the process industries. Lower demand was seen in some other countries like U.K., Italy, and Sweden, but this was primarily driven from large order wins from the year before. In the Americas, orders grew 3% and base orders 12%, driven by increased demand in construction and general industry and some recovery in process. Underlying market drivers continued to be positive in the U.S. as base orders grew 11%.
Canada saw some selective investment in the process industries. Brazil continues to stabilize, including growth from grid investment and construction. In Asia, Middle East, and Africa, total orders was impacted by the large Indian ultra-high voltage direct current order that was booked the year earlier. Base orders increased 6% with strong contributions from India, Australia, and South Korea. China's orders were moderately lower as strong infrastructure and general industry spend could not mitigate lower demand for solutions in process and transmission. All in all, underlying market drivers remain positive. The slide seven briefly summarizes the actions we are taking to further de-risk our portfolio and complete the EPC business model change. In Power Grids, we continue to shift the portfolio towards more solutions and service offerings, having signed a joint venture agreement with SNC-Lavalin for electrical substation EPC projects.
In Industrial Automation, a joint venture was formed with project expert Arkad for EPC activities in oil and gas. In Robotics and Motion, a wind down of turnkey full-train retrofit business was initiated. At the same time, we took operating charges amounting to CHF 140 million across Robotics and Motion and Power Grids, as well as an additional CHF 76 million non-operational charge on net income in relation to the loss from sale of business to the joint venture with Arkad. As already noted for Q4, the impact of the operational charges on group operational EBITDA margin was 150 basis points, and for the full year, the impact was 30 basis points. All remaining EPC activities are reported as part of the non-core operating unit within Corporate and Other effective January 1st, 2018, and will remain part of this unit reporting to myself until completed or transferred.
Going forward, the reporting for our divisions will exclude these legacy businesses. As the transfer of the oil and gas EPC business into the JV with Arkad took place before year-end, this was already excluded from the Industrial Automation results in Q4. This change will have a material effect on the revenues of the Power Grids division. On pro forma basis for full year 2017, approximately CHF 400 million of additional revenues will be reported in Corporate. The pro forma information is available in the appendix, and more detailed information related to past periods will be available second week of March in the investor website. In conclusion, with these activities, we further focus and de-risk our portfolio. On slide eight, I will highlight some key divisional performance for the quarter.
In Electrification Products, total orders were 10% higher as all regions and end markets showed strong demand, in particular for data centers, food and beverage, and electric vehicle fast charging solutions. Operational EBITDA margin for the quarter was 14.7%, aided by positive net savings, including improved pricing despite ongoing commodity price headwinds. In Robotics and Motion, total orders improved 6%, growing in all regions. The division saw improved demand from process end markets, while larger orders declined due to the timing of tender awards. The operational EBITDA margin of 10.8% was primarily impacted by the charges related to the EPC business and continued higher material costs. The EPC charges negatively impacted the operational EBITDA margin by 300 basis points. In Industrial Automation, third-party base orders grew 5% on continued operational investment by process customers. Some selective capital expenditure was seen in mining and specialty vessels.
Service continues to support orders with 11% growth. Operational EBITDA margin of 14.8% reflects continued strong business execution and investment in digital. Please remember, the Q4 results for Industrial Automation exclude the EPC business that was transferred to the joint venture with Arkad. B&R continues to deliver solid results in line with our expectations. In Power Grids, third-party base orders grew 15%, mainly driven by the distribution and industrial sectors. Revenues were 7% lower due to the timing of order backlog execution and the lower order backlog. Service revenues grew 6%. Operational EBITDA margin of 7.8% reflects the impact of the EPC charges. Excluding this, the division's margin would have been 240 basis points higher. Excluding the EPC business, the division is within the 2018 target margin corridor for the full year on pro forma basis. Let's move to our operational EBITDA margin bridge on slide nine.
In Q4 2017, we continued to deliver on our cost savings programs. We achieved approximately CHF 186 million in net savings, which is comprised of our ongoing cost savings programs, including our white-collar productivity programs, net of pricing pressure. This positive was partly offset by negative impacts from net volume, net commodity price impacts, and our continued investment in growth like digital and Power Up investments in particular. Mix was slightly positive due to lower systems volumes compared with the year earlier. The acquisition of B&R and the divestiture of the high voltage cables business had a net positive impact of CHF 21 million. In the next bar, you can see that the EPC business charges had a significant impact on quarterly results, CHF 140 million or 150 basis points. Including all of these impacts, the group achieved operational EBITDA of CHF 1 billion, CHF 21 million and a margin of 10.9%.
Turning onto slide 10. Our three-year net working capital program has yielded positive results. Improved discipline resulted in a material reduction of net working capital by CHF 1.9 billion, excluding portfolio changes. As a percentage of net revenue, net working capital decreased by 280 basis points. Approximately CHF 1.5 billion of cash was freed up during the program. Although this year the program comes to an official close, we continue to drive working capital efficiency through improved inventory turns, harmonized payment terms, and reduction in overdue receivables. Moving on to slide 11. The information on this slide should be not new. It is more a reminder of what you need to consider when you update your 2018 models for ABB. Starting with orders and revenues.
We expect the positive trend in base orders to continue in 2018, although in the first quarter, two less working days will impact order growth in our short cycle businesses, particularly in Electrification Products and Robotics and Motion. At the same time, the weaker order backlog at the end of 2017 will weigh on 2018 revenue growth. On the other hand, short cycle businesses, as well as B&R and GEIS, will positively impact revenues. Regarding operational EBITDA, let me walk you through some of the headwinds and tailwinds for 2018. As communicated earlier, we expect approximately CHF 100 million of Power Grids' Power Up cost. It is weighted more towards the first half of 2018 and is 60% above the line and 40% below the line. The digital investment will continue, and as we see it now, commodity prices could be a slight headwind.
Further, the closing of the GEIS transaction will have an impact. Assuming we close by the end of the second quarter, we expect a reduction in the operating margin of Electrification Products division of approximately 110-130 basis points, and for the group, approximately 30 basis points for 2018. This is consistent with the 6% operating EBITDA we communicated when we announced the transaction. As stated earlier, we would expect Electrification Products to reenter the 15%-19% margin corridor during 2020. Operational EBITDA margin impact from B&R is expected to be fairly neutral. Regarding tailwinds, we expect to still see some benefit from the white-collar productivity program going into 2018. Mix should be positive and even the recent currency movements, all other things equal, that should also be a slight tailwind.
In addition, let me walk you through some of the impacts the consolidation and corporate line resulting from the transfer of the legacy EPC businesses. Our corporate and other orders and revenues will increase by approximately CHF 400 million. Corporate operational EBITDA is expected to be approximately CHF 500 million, including the EPC business transfer and further investments in digital. When we look at the below the line items for 2018, it is important to note the following. We expect GEIS to have approximately CHF 100 million of transaction and integration-related cost, approximately 80% we expect to be considered as non-operational. Normal restructuring costs will be between CHF 200 million and CHF 250 million. As discussed earlier, we expect approximately CHF 40 million of Power Up below the line. PPA amortization is expected to be approximately CHF 5 million to CHF 250 million for 2018, and this does not include GEIS.
We will give further guidance on the PPA impact related to GEIS once the deal closes. Finance net is expected to be approximately CHF 220 million, and the annual effective tax rate approximately 27%. In conclusion, there are still a lot of moving parts. However, we are well-positioned going into 2018. Let me now hand back to Ulrich.
Thank you, Timo. Slide 12 now shows our Next Level strategy. You will recognize this well as it's showing the key actions we committed to as a part of Next Level along our three focus areas of profitable growth, relentless execution, and business-led collaboration. At the end of our transition year, we're delivering on these goals. The transition year is over, but we will continue to live Next Level, and we will continue to drive further progress in this area. Let's look at some of the highlights of the year in more details. Please turn to the next slide 13. In 2017, we shaped a streamlined and strengthened ABB. Our digital-first portfolio for customers has two clear value propositions, bringing electricity from any power plant to any plug, and automating industries from natural resources to finished products. We do this through our four market leading entrepreneurial divisions.
These divisions are all today number one or number two in their respective markets. If we look at the portfolio across our two value propositions, we see that Power Grids and Electrification Products together hold truly the number one position in the space of plant to plug. Combining our Industrial Automation and Robotics and Motion business puts us in a strong number two position for automation globally. With that, we are well-positioned for future profitable growth. On slide 14, we see the highlights of how our growth approach on Penetration, Innovation, and Expansion is continuing to drive growth in our four market leading divisions. Our focus on organic growth through better penetration of existing markets has delivered truly impressive results.
For example, in food and beverage, orders are up 20% in 2017 as we won major orders from Heineken and Tetra Pak, and we have a very strong industrial solutions offering for this industry that helps us and positions us well for future growth. In our microgrids program, orders were up more than 100% over the year, and the growth in orders accelerated in the fourth quarter. The bulk of that growth was driven by renewables, digitalization, and emerging markets. Our Africa program resulted in a 40% increase in orders for the year in this part of the world, and we have gained much better access to many markets across the continent. Looking at slide 15, Innovation is the next lever, the I of the PI approach. In 2017, we continued to strengthen our technology leadership in each of our divisions.
Just to give you a few examples, in Power Grids, we pioneered high voltage direct current transmission in the 1950s, and we continue to lead in this technology with our innovative and new HVDC Light solution. This really extends the power range of HVDC transmission from a few tens of megawatts to 3,000 megawatts and 640 kV, enough to power several million households and enable power transmission over more than 2,000 kilometers. In Electrification Products, the division today is the world leader in fast-charging solutions for electric vehicles with more than 6,500 fast charging stations in more than 50 countries all around the world. We started this business as a startup in 2010, and today we are truly globally leading.
To support the message on sustainable transport and overall electrification, we became in January the partner and title sponsor of Formula E, the world's first fully electric international motorsport series, and we formed the ABB Formula E for the years to come. Our Industrial Automation division was recently again recognized as the market and technology leader in distributed control systems, and they continue to invest to maintain and strengthen that position. Building on the success of our hugely successful YuMi, the world's first true collaborative dual-armed industrial robot, our Robotics and Motion division last year unveiled the newest member of the YuMi family, a single-arm collaborative robot which combines industry-leading capabilities with a much smaller footprint. On slide 16, we look at the E of our PI approach expansion.
In the first quarter, we closed the acquisition of KEYMILE's communication network business to strengthen our number one position in the digital grid. We expect to close the acquisition of GE Industrial Solutions in the second quarter of this year, which will truly strengthen our number two position in electrification globally and our market share in the extremely important North American market. With our acquisition of machine and factory automation leader B&R, we filled a historic gap in ABB's portfolio and offer today one of the most comprehensive industrial automation portfolios in the industry, which allows us to further strengthen our number two position. Finally, we have expanded our robotics capabilities and portfolio by adding artificial intelligence and machine learning to YuMi and many other functionalities. In addition, we have opened the Silicon Valley R&D lab focused on advanced vision and AI for robotics. On slide 17.
ABB's quantum leap in digital is integral to our today's and the future profitable growth story. With ABB Ability, which we launched in March commercially in Houston in the U.S. and then took around the world, we now offer more than 210 digital solutions and are ideally positioned to win in the digital space with new and existing end-to-end digital solutions for customers all around the world that build on the intelligent cloud and close the loop with connected devices. Our very large installed base and deep knowledge of our customers' domains is enabling us to build and operate a unique digital solutions offering, which delivers real value to our customers, whether in utilities, industry, or transport and infrastructure. These next-generation solutions are being developed on an integrated open architecture cloud platform in close partnership with Microsoft.
The architecture for our ABB solutions extends from device level to edge to cloud. Customers can access our solutions on mobile handheld devices and implement them on a range of installed equipment in all of our target industries. Customers can choose to restrict them to being operated by edge servers, since we have the solution together with HPE, located on-site at a facility. They can make use of the full scope of ABB Ability by accessing common services from our global cloud platform. The result is a high level of flexibility and choice, and customers are free to expand their use of our integrated solution as they become more familiar and comfortable with them. Please turn to slide number 18.
To ensure profitable growth continues in the future, we have been working since 2014 to really shift ABB's center of gravity in terms of strength and competitiveness, more focus on high-growth markets, and a better and more attractive risk profile of the business. We have made a lot of progress in 2017. We continue to strengthen our competitiveness by investing heavily in our digital offerings centered around ABB Ability. We are expanding our service portfolio, which is already founded on a very large base of installed equipment. As already noted, major additions to our business portfolio are the acquisition of B&R and the announced acquisition of GE Industrial Solutions, which will give us a greater access to more early-cycle electrification business and helps us with our imbalance towards late-cycle activities.
Additionally, we acquired KEYMILE Communication Network business to strengthen our leading position in the digital grid, and NUB3D, a specialist in 3D visual inspection software and solutions in robotics. Besides acquiring businesses, we have also divested some that don't fit the intended risk profile or are no longer core, like the high-voltage cable business that we completed and closed the transaction in the first quarter in 2017. Overall, we significantly improved the commercial and risk profile of ABB. Beyond these actions, we announced partnerships with IBM on AI and with Hewlett Packard Enterprise to jointly develop digital industrial solutions that can be developed on-premise, on the edge, on the cloud, and hybrid IT environments. Finally, the large-scale change in our business model for EPC that we announced in the first quarter also represents a very important step towards de-risking ABB and improving our commercial profile.
On slide 19, you can see where we are in terms of transformation of our Power Grids division. Execution is a hallmark of our Next Level strategy. The turnaround and transformation in Power Grids is key to that. Excluding the EPC businesses, Power Grids profitability was within the target range for 2018, ahead of plan on a pro forma basis, and the division's Power Up program, driving its transformation and value creation, is well underway. Profitability has improved more than twofold since we started this journey, and now it's about making ABB not only better in the future, it's about making it bigger and better in the area of Power Grids. Power Grids continues to drive the business model changes as it further expands its significant digital and service offerings. Moving to slide 20.
Another hallmark of our execution focus was our 1,000-day white-collar productivity program, which concluded at the end of 2017 and has fully delivered. It reduced a run rate of more than $1.3 billion in savings, which was more than CHF 300 million ahead of the original target. The savings program was implemented within the expected timeframe and cost about CHF 300 million less for restructuring and implementation than originally announced. Along with reducing the number of divisions from 5 to 4, we streamlined our regional organization from 8 regions to 3. We cut the headcount in the headquarters by half here in Zurich, and we consolidated more than 60 back-office operations into 2 global and 3 regional business service centers. Savings are being partly reinvested in our digital offering, our sales platform, and in our brand.
Slide 21 shows how compensation has been developed in ABB over the last couple of years. To drive stronger performance orientation with our line, with our Next Level strategy, we changed our performance and compensation model to focus on individual accountability and responsibility. Four years ago, when we launched the Next Level strategy, the link between individual performance and compensation was unclear, and in many cases, non-existent. Today, our compensation system is closely and transparently linked with strategy and performance. Compensation and incentives are dependent on merit and individual performance, and the long-term incentive program for executives is wholly linked to attractive shareholder returns. Talking about attractive shareholder returns, if you turn to slide 21, you can see we have been doing a lot of homework, and we start to see the results.
The total shareholder return for ABB stock in 2017 was a 24% gain in local currency, outperforming our European and U.S. peer group. Our U.S. peer group includes GE, which has lowered the average for the U.S. group. We still recognize that we have a lot of homework to do if we truly want to compare with the best of the best performers in the U.S. Our capital allocation priorities remain unchanged. We have continued to raise our dividends progressively for nine times at a sustainable rate. You are seeing a dividend increase proposed again today. We have been funding organic growth through R&D and CapEx projects and attractive cash return on investment. We invest in a focused way in value-creating acquisitions when the conditions are right. We have returned additional cash to shareholders through share buybacks as it was appropriate.
Slide 23 looks ahead to the future. Going forward, we will continue to drive progress along our three focus areas. We will be investing in innovation. We will expand into new fields with our ABB Ability solutions. We will continue to create value through strategic acquisitions and forge partnerships with leading global companies, such as those that we already have with Microsoft, IBM, and HPE. We will continue to shift ABB center of gravity towards greater competitiveness, high growth segments, and lower risk. We will focus relentlessly on world-class operational excellence across the whole organization. We will continue to strengthen the links between strategy, performance, management, and compensation. We will keep our focus on the market and on running a lean organization. We will always continue to deliver our leadership and stay focused on strengthening the global ABB brand. Let me close with slide 24.
ABB is now truly positioned for profitable growth. Our transition has delivered a streamlined and strengthened portfolio and operations. Today, our digital-first portfolio for customers in utilities, industry, and transport and infrastructure has two clear value propositions: bringing electricity from any power plant to any block and automating industries from natural resources to finished products. With our shift in our center of gravity and the growth momentum we have built in 2017, we are today better positioned in a better market. Our focus is now firmly on relentless execution. With ABB Ability, we will help our customers take advantage of the efficiency, productivity, and performance improvements that digitalization can deliver. In doing so, we will capture the market opportunities of the energy and fourth industrial revolutions for our customers all around the world. Thank you very much.
Let's open the line for your questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on your touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from James Stettler from Barclays. Please go ahead.
Yes, thank you very much. Good afternoon, all. Two questions from my side. First one's a tricky one. Given all the growth you're talking about, given the improvement in the backlog, is there any way to quantify what type of organic revenue growth you'd be expecting, sort of a range, in 2018? The second question is around pricing. Again, that still seems to be a problem in two of your divisions. What can you do to address that, and do you believe that you're able to get ahead of that inflation trend in 2018? Thank you.
Yeah. Good afternoon, James. Thank you very much for your questions. Look, first of all, let me really, on the one hand, apologize to the entire community for the complexity of this result. When you do a fundamental transition of a company, then you have many influencing factors, and you see them in our results that are clearly dampened and influenced heavily by this transition. On the organic revenue piece. We look at different drivers here that we need to consider. First, the underlying base order momentum that we have built is truly significant. If you go back 18 months, we had minus six on base orders because many of our markets were contracting. In the fourth quarter, we have now plus nine.
That's the momentum that we really have the strong ambition to follow over the next couple of quarters, which will have a positive effect on our business, especially in the early cycle parts of our portfolio. Dampening that is the lower backlog that we ended the year 2018 with compared to the previous year. It's very clear it is our ambition, out of the dampening effect of the lower backlog and the solid underlying growth momentum, to deliver revenue growth during 2018. It's clear the later it gets in the year, the better it will be, and that's the prediction that we are making for the business going forward, that we will enhance the revenue momentum. We need to appreciate the different drivers that are influencing the overall revenue realization across the portfolio. On pricing, I think you're right.
We have in at least one of our business, one and a half of our business, we still have our homework to do. It's a really tricky one, because when the markets come back and the growth starts, and you have seen our really broad-based base order growth across all divisions and regions, on the one hand, you need to manage your cost and capacity in a careful way that you don't get hit by the raw material pricing. On the other hand, you need to have the right capacity to serve the buildup and the backlog and the higher order momentum that they're experiencing. We also need to make sure we have our eye on the ball really on the pricing side, on our own pricing towards the market.
The more technology innovation we have and the better our technological differentiation is, the better it will be and the easier it will be, to realize better prices and have a higher price realization. The cost piece needs to be managed. We need to manage the price realization and support it through the right innovation and technology pipeline. And there, I'm pretty confident because even during the very difficult and complex transition years and transformation years, we have kept R&D spending. We are in fact spending more money on real R&D because we cut out also there a lot of white-collar activities. The pipeline of innovation is rich, and that should help us when we launch the new product also with a better pricing quality. It's an ongoing task that we need to give the right attention to.
Thank you.
Next question.
Next question, please.
The next question comes from Ben Uglow from Morgan Stanley. Please go ahead.
Oh, good afternoon, Uli, Timo, and Jessica. Thank you for taking the questions. I had two which were basically quite specific to the divisions, and again, I guess it's coming back to this question of understanding the backlog and the trajectory of future growth. On Industrial Automation, we see that the orders are coming through mildly positive, 3% over the year, 5% on the quarter, but obviously we're now starting with a backlog that is down 10% year-over-year. Could you just give us a sense during the course of 2018, should we expect the growth to kind of be linear, i.e. sort of ramping up throughout the year, or is it going to be fully back-end loaded? Are we going to have to wait till the second half to see revenue growth in Industrial Automation? That's question number one.
Question number 2, Robotics and Motion, even if I add back the EPC charges, year-over-year, your margins are down by 60 basis points, from 15.5% to 14.9%. Can you really give us an idea of what's going on between the different divisions? I.e. how are the margins in Robotics? How are the margins in Drives? How are the margins in Motors? Where is this gap coming from?
Good afternoon, Ben, and thanks for your questions. Look, the complexities on IA are quite interesting. We have a turning market. We have a lower opening backlog. We have an underlying base order momentum, and we have B&R coming in full swing for 2018. Let me start with the last one. We are very pleased with development of B&R. B&R is ahead of the plans regarding integration and financial performance. I think it's really nurturing it in ABB, giving it the right kind of oxygen, investing and growing it, has really helped this business to develop extremely well. We are very happy with that one. Naturally, given the nature of this business, this should have a good impact on the underlying momentum, both on orders and revenue in the IA division.
Against that, flows again, the lower opening backlog that we have in this division, which is truly about 10% down year-on-year. It is our ambition to drive the revenue momentum in this business in line with the market opportunities. We have to recognize that the dampening element of the backlog compared to 2017 will be a tough one to manage through the year. It is our ambition that we come out with revenue growth by the end of the year, but it will be clearly weighted towards the second half of the year because we have the backlog impact in the first half, primarily in Industrial Automation. On Robotics and Motion, let me see whether Timo wants to take that one.
Sure. Thanks, Ben. Uli, if you allow, I'll just throw in couple of numbers because I went through the last year and this year on IA as well. Last year our orders went down on total level 18%. This year we are growing two and base orders were minus six, and this year they are plus three. This is actually a significant change in IA from that perspective. On the RM business. There, when we look at the numbers and we take into account the EPC, you are correct to point out we are below last year's numbers. When we look at Q4, we are approximately at the same level. We can't be pleased with this margin performance in the division. There are a couple of things working here.
First of all, you know that we have been impacted by the increased commodity prices. That has impacted the division as well. There, I would say that especially large motors, where there is overall some overcapacity on the market, it has been difficult to move that into the market. On other areas, we have made good progress on moving it to the market during Q3 and Q4. Also during Q4, we have been building further capacity on the growing robotics business, which has impacted the margin this year, which we then expect to reverse going into next year. Overall, our ambition is to have both absolute as well as percentual margin accretion going into 2018.
Okay.
Thanks.
Thank you, [inaudible].
Thank you. Next question.
The next question is from Daniela Costa from Goldman Sachs. Please go ahead.
Hi. Good afternoon. I have three points as well. You had quite a significant increase in free cash flow this quarter. Overall, you have a good free cash flow conversion. When do you think you could potentially return to the buyback, or how do you think about cash capital allocation in general for the next year or two? The second point, just on restructuring. Is there anything else you have in mind beyond the White Collar Productivity program? If you can talk about what else could you do to improve margins, given some of your U.S. peers in some divisions, for example, still have higher margins than what you have. My final point, just wanted to follow up on the 15% underlying, sorry, base order growth in Power Grids. Can you talk about the market conditions? What drove that?
Is that more of a one-off or you are seeing really that market starting to move? Thank you very much.
Good afternoon, Daniela. Thank you for your three questions. I take number 1 and 3, and Timo takes the restructuring question. On the free cash flow, thanks for the compliment. You know that cash is very, very high on my agenda and Timo's agenda as well. We are driving it very hard, and I think it is very important to realize despite the negative impact of the transition efforts that we have had, we have good base order growth and we got really strong cash generation, which is a sign for a healthy business. In the first half of 2018, we have two large cash out events. We have the dividends that we will pay, and we have the closing of GE Industrial Solutions. Both of them will weigh on our balance sheet, and that is very clear that we will do that. You are right.
Should the market conditions prevail and our operational performance be, then we will be soon confronted with the question on what we do in terms of allocating capital. Here our priorities are unchanged. Number 1 is allocating cash and capital to driving organic growth. I am really pleased to share with you that I think our prioritization and quality of capital allocation in line with value creation opportunities across the portfolio has significantly improved, and there is tremendous opportunity out there in our two value propositions in the market to grow and create a lot of value in organic investments. Be it on the digital side, being it on the robotics side, being it on the e-mobility side. We will continue investing organically to drive good value creation. The second priority in our capital allocation remains our dividend policy.
As you have seen today, with the announced intent to raise the dividend for the ninth consecutive time, we stick to our dividend policy of steadily raising dividend. Come hell or high water, this is something that is really, really important to me personally and to the company that we deliver on that. The third priority is M&A. M&A is not only about whether we have the financial capacity. The right target needs to be around, and we need to have the acquisition and integration capacity. With B&R and GE Industrial Solutions as well as KEYMILE, we have made three significant steps. The teams are at the moment either busy with the integration or busy preparing for the integration. We need to have that in mind when we consider alternative acquisitions in the future.
We wouldn't rule out reinforcing and restarting the buyback as the balance sheet develops, that's something when we get closer to the situation that we will then communicate. Your other question, your third question was on the Power Grids. In Power Grids, we are going through a fundamental transformation. We are today about two times, two and a half times at the profitability that we were. The guidance and what we have told Claudio is, in the first couple of years, focus on making the business better. If you need to compromise top line, if you need to compromise order sizes, that's perfectly fine. We want to have the business in a better quality. Now on the underlying momentum in Power Grids, I'm pleased to see the momentum ramping up on the base business.
It is absolutely our ambition to keep a solid base order momentum, then to participate also with larger orders going forward, as the business model change comes through, we have implemented it. The market overall for Power Grids, that was your sub-question, is developing favorably in 2018. We have now certainty on many governments in Europe, how they're going to position themselves, that will help with decision making. The tax bill in the U.S. will give the U.S. government money out of the taxation of the reshored funds that can be used to drive an infrastructure stimulus. China and India will continue investing on the power grid. Middle East has quite a bit of investments coming as they move towards more renewable driven power generation. There will be a lot more feed-in points. All together, I think the market condition is quite okay.
Now on your other point, your second question on restructuring, let me hand over to Timo.
Thanks, Daniela. First of all, on the WCP program, even if we do not have restructuring there anymore, we would expect maybe $ 250 million of savings to flow through during 2018. As I said, on the normal restructuring, we are looking to have something like $ 200 million-$ 250 million. We will go forcefully after underperforming units where we have a lower capacity utilization. I think another thing which you mentioned on driving margin, we have also increased pure cost out metrics in our key KPIs, on the operating units, and same is actually true for inventory turns. That also helps us to drive that.
Thank you, Daniela. We will take the next question.
The next question comes from Mark Troman, Bank of America Merrill Lynch. Please go ahead.
Thank you very much. Good afternoon, Uli, Timo, and Jessica. I have got two questions, one around operating leverage and the other about large orders. Firstly, on operating leverage, 2017 was a transition year. You did portfolio changes, EPC model, et cetera, and you have got good base order growth. Hopefully, that will continue. How should we think about leverage in your growth investments? I think you did CHF 66 in Q4. I wonder if you could outline how much that was for 2017 in total, and whether that will continue or should we think about you have done the investments now and now is the time to leverage that investment with future growth? That is question number one. Question number two, just briefly, how should we think about large orders? There are clearly some out there, but at the same time, you scaled back your exposure.
Large orders, should we think of that as roughly 10% of ABB these days compared to the 2025s we used to see many years back? How should we think about that? Thank you.
Yeah. Good afternoon, Mark, and thank you for your question. Let me start with operating leverage. Look, 2017 was a pretty unique year. If you go through the commercial quality first, we still had a significant change in mix of business. The deteriorated size of the business in our most profitable segments was basically compensated with investment in this growth in newer segments that are not yet as profitable. As you rightly say, we had also massive transition costs in 2017, directly and indirectly. We invested in sales, in branding, in digital platform. Given all that, if you exclude the EPC charge, we have had a steady margin. That's a quite okay result in the context of all these different heads and tailwinds that we had.
It's absolutely our ambition to get a good operating leverage in the year 2018, where the transition is behind us, the mix is going in the right direction, and the growth is kicking into a cost base, which is much leaner than we had it before. It's clear that with all the one-off effects in 2017, it didn't come out that strongly. The numbers are blurred by the contradicting effects of these different elements. All together, we're going in the right direction. The investment in growth in the year overall went off of $100 million, that we have done. We will continue to invest going forward because we think it's really important to shape the future ABB. As the impact of the transition wears off, the investment of growth will not drag the margin down.
What you also need to understand in the year 2018, we will have GE Industrial Solutions coming in in the mid-year. If that comes in at the anticipated about 6% operating margin, that will have about a 30 basis point dampening effect in the year for the full year for ABB. It's clearly our ambition that we outgrow that and still deliver somewhat margin accretion going forward. On large orders, I give you some anecdotes there that recently happened. I start with an area that we haven't talked much about large orders recently, and that's the robotic system business. We have at the moment a competitor out there in this field that is very aggressive in taking large-scale system orders. We let them have it. We are not coming with a profit warning on robotics. Others have to do that.
That's something that naturally shows the commercial discipline that we have in the robotics field. In Industrial Automation, we see the first discussion on larger projects coming, and I'll give you some examples. Downstream investments in oil and gas to build up more refinery capacity, to really put more value add on the barrel of oil is a discussion that we're having actively, for example, in Saudi Arabia. You might remember we built Sadara as we had a key partner for Saudi Aramco and Dow in Saudi in the last couple of years. That's a site three by six kilometers, and there are two more of these sites in parallel that will in the next years be developed. This will not lead immediately the first half of this year to large orders, but it's an opportunity that we see, and we see that in many other fields.
On the utility side, I'm really happy that we have now certainty in Europe, in the largest country, Germany, on the new government as of last night, and in France. That will help us to have more stability and predictability in the European energy policy. That means the appetite for investment will then be better. In the U.S., as I've laid out, I would expect the reshoring of cash and the taxation of that to create significant funds for the government to be deployed on the infrastructure side. I had recently the opportunity to be together with some members of the government, it was very clear that they are committed as a next wave to really take on infrastructure as they have now successfully navigated the tax bill.
In China, 2017 was a very low year in terms of large utility orders because there was so much started in 2016. I think in 2018 and going forward, there's more coming. Altogether, there's no reason to be pessimistic on this, but we also need to stay cautiously optimistic on the impact of 2018 because the appetite for spending in certain fields is just now starting, and between the first discussion and an order and then later revenue will take a bit of time.
Thank you. Next question, please.
The next question comes from Andreas Willi from J.P. Morgan. Please go ahead.
Good afternoon. Thanks for the time. I've got three questions, please. The first one on your process automation business. If you look at the growth there, it seems to be still lagging Honeywell, Emerson or Siemens, also on base orders. Maybe you could give us a bit more detail. Is this just marine and a different exposure, or do you see other shifts happening there? The second question, maybe you could give some indication where Thomas & Betts and Baldor are today in terms of profits or profitability. I know it may be difficult given these have been integrated. I continue to struggle to reconcile the performance of the EP and RM division overall over the years, given the M&A spend and where earnings are now relative to where they were four or five years ago before these acquisitions. The last question on cash flow.
You did the $1.5 billion working capital performance over the last years. The original target was $2 billion. Maybe you could give some indication where you fell short and what still the potential is going forward. Thank you.
Good afternoon, Andreas, thank you for your question. Let's first talk about the process space. In our process automation activities, X, B&R, we have a certain profile that you rightly called that is really different than compared to the competitors. First, the marine activities in this field are truly subdued and will remain so for a while because shipping capacity is pretty available out there, and there's not much new builds on oil and gas supply vessels and oil and gas transport vessels, which was one of the key areas that we have. If you compare us against Emerson, we are strong in upstream in the North Sea. Emerson is strong in non-conventional in the U.S., and that's at the moment a hotspot, and that explains the difference in the profile.
Altogether, it's a structural explanation. The underlying performance of our Industrial Automation division is quite okay. If you look at the profitability resilience that Peter and his team have delivered, if you look at the relative pattern, in terms of momentum over the last couple of years when the market turned down, it was quite okay. Going forward, we need to structurally address the opportunities that are out there and drive that in a forceful way. Thank you for raising Thomas & Betts and Baldor. These are two strong brands and two strong businesses in the ABB portfolio.
It's very clear that, for example, on the Baldor side, the massive contraction on the larger scale motors and at the same time the massive commodity price swing there have also impacted the profitability. Sami and the team are working in full swing to get this one in the full shape back where it was to ensure that we not only have the top-line momentum but also get the bottom line going in the right direction. On cash flow, I hand over to Timo.
Thank you. First of all, when we look at the performance of the program, if you just look at the net working capital on the balance sheet, it went down from CHF 5.5 billion to CHF 3.9 billion, so that's about CHF 1.5 billion, CHF 1.6 billion. That does not actually take into account very well improved performance, which happened in cables, which was then exited. Also B&R, as we have discussed earlier, came in with, let's say, little less efficient net working capital. That actually then leads to the performance which we have estimated is about CHF 1.9 billion. We came quite close to the target there in the end and set very good cash performance during Q4. Now going forward, we are not giving out any new number here, but we're definitely going to continue to drive this.
We have now inside ABB, separated net working capital even further into its three components regarding the accountabilities . As I mentioned on inventory turns, we have now increased the weight of inventory turns in our KPIs, also impacting bonuses in the operating units. We have some more room there and as we have discussed earlier, we are actually on the overall program behind on inventory turns when we compared to where we want it to be. That's number one focus area now going forward. Also on DPO, we can further harmonize our payment terms so we have some work to do there. Also, we made progress on overdue receivables, but we have some work to do there as well. We continue to target to release more cash from net working capital going forward.
Thank you. Moving to the next question.
The next question comes from Martin Wilkie from Citi. Please go ahead.
Yeah. Thank you. Good afternoon. It's Martin at Citi. A couple of questions. The first one on the earnings bridge. The net savings look like they accelerated in the quarter, you've talked a little bit about price and savings, but just don't understand what was the main driver of that net savings number picking up. If we assume that pricing declines moderate in some of the process markets in 2018, it sounds like you still have some benefit from the white collar productivity to come through. Is that net saving number at a Q4 level, can that continue into next year? The second question was, again, just going back to large orders. You've talked about some of the longer-term drivers and infrastructure and so forth, just in terms of the nearer term, in terms of actual tendering, has there been any improvement?
I appreciate tendering is a lumpy and perhaps a sort of qualitative thing to talk about, do you feel the tender process has picked up at all or is that still somewhat soft? Thank you.
Good afternoon, Martin, and thanks for the question. I take the large order piece and then hand over to Timo on the earnings bridge. Look, as you rightly say, tendering and project management and project preparation of large orders is really an art and there are many influencing factors that make a customer say, "I like, oh, I don't go." What we see is, we see on the utility side quite some discussions on pretty significant projects. I give you an example. Backbone infrastructure building of large scale transmission investments in North America will be one of the activities that we see ramping up in the next couple of quarters.
There are some tenders underway as we speak, hopefully the regulatory side of the tender process, there are certain permits and permissions need to be obtained to make sure that the customer can really ask us to quote for a project. That one I'm more optimistic than I was last year, that we will see it through and that this year there might be the one or the other tender discussion becoming pretty serious and hopefully getting even into a bid situation better that leads into orders this year or next year. We need to see that on that bucket. If I look at the oil and gas activities on the downstream side, we have discussions on potential future tenders, it's not yet at a tender stage where at a development stage that I would say I'm confident that there are many large scale tenders coming in.
I know it's a vague answer, that's the reality out there in life that we are facing. The teams are now really much better positioned to address tender situations. We have improved also the white-collar productivity in these situations. As they come in, we can faster answer, and we can quicker get on the mark with the customers. Hopefully they come a little bit more in momentum then we get going. With that, I hand over to Timo on your question on the earnings bridge and the net savings.
Yeah. Thank you. Basically when we look at the net savings, first of all, the WCP impact in there is approximately similar as in previous quarters, so maybe a bit over $100. As I said, we expect about $250 million still to come in during 2018. We were a little bit ahead during this year and that's why earlier when we communicated this, we said $300 for 2018. Now that number is approximately $250. When we look at the bridge, the net commodity here is the commodity impact net of our hedges. As I indicated earlier, in some areas of EP or most areas of EP and in some areas of RM, we have been able to push the pricing a little bit better to the market and that has had an impact on the better net savings.
Naturally, our ambition is to drive the net savings as hard as possible so that they would be bigger going forward than what we have on the price impact.
Thank you. Moving to the next question.
The next question comes from Andre Kukhnin from Credit Suisse. Please go ahead.
Yes, good afternoon. Thanks so much for taking my questions. Just firstly on growth, thank you for providing the market growth outlook and the history. When I take the 2017 chart you shared with ABB exposures and market growth rate and run it blended, it does add up nicely to the 1% that you've just delivered. For 2018, that implies 2.5%. I just wondered if you could talk about where this can be wrong and which way the risks are around this, whether your performance against the markets or the market. Second question is just a quick follow-up on the working days, Timo. You said two less in Q1, but I think the Easter effect in Q1 is just one day. I just wanted to double check where the second day is coming from.
Yeah. Andre, thank you very much on your question. Yeah, look, the devil is always in the detail that you provide credibility and growth and people do their math and they do the calculation for the future. It's very clear that our ambition is to increase the growth rate going forward. However, I ask you also to take into consideration the backlog situation. On a like for like basis, excluding backlog impact, we should accelerate the revenue generation, but the backlog has a dampening piece. That's basically the story behind that activity. With the other question, I hand over to Timo.
Yes, we have I think two things going on here. Basically when we just simply look at the weekdays and how the weekends drop in and all that, so we get two working days less, so that's what is driving.
With weekends. Got it. Thank you very much.
Okay, thank you. We'll take another question.
The next question comes from Simon Toennessen from Berenberg. Please go ahead.
Yes, good afternoon, everyone, and thanks for taking the question. The first one is just on R&D and also maybe CapEx. What are you thinking about in terms of R&D for this year? I think your R&D levels were down about 3% over the last couple of years, versus I think your German competitor has ramped that up by 15% quite aggressively over this time. Also CapEx, I think you're looking for a 5% increase year-over-year versus others being a bit more aggressive here. Maybe in terms of also allocation, where you're thinking the R&D goes in particular by division would be helpful.
Secondly, just on U.S. tax, I think you talked in the press call a bit about this this morning, but why you're not seeing an impact there for the full year, and you keep the tax rate at 27% versus most other companies guiding obviously for a lower tax rate here. Thank you.
Yeah, good afternoon. I take the first and then I hand over to Timo. Look on R&D, first of all, I ask you to consider a couple of effects. First of all, the changes in our portfolio. We directed certain activities and we focused our R&D better on high growth segments. Second, we have increased R&D productivity very significantly because we have also had white-collar productivity in R&D. We have cut the administrative part of R&D in a very significant way, and we have redeployed that money within R&D. We are not taking it down, but we are spending smarter and better, and that will have a better impact going forward. The third impact is the way we have shaped our portfolio today, we have much less complexity than many others in our portfolio. We have really the scale.
When you're number one or two in the respective business and have the scale, on a relative basis you might be spending a little bit less. On an absolute basis, we might be still leading. I give you an example. Nobody spends more money in Power Grids R&D than ABB, given the fact that we are significant larger than others. On a relative term, this might look slightly different, but that does not concern me that much. We will continue to drive R&D going forward. We have not cut it, we have improved it, and the quality of it is up. What we also do on the R&D side, we ensure that the shift towards a stronger electronic software and services portfolio is being supported.
As just one example, we have now about 500 people working on smart analytics and artificial intelligence, which is a clear investment of the ABB Group to really drive towards that. We have investments in some startups. We get some R&D momentum out of our partnerships, that we focus our activities on the core elements of our differentiation, and we get the more agnostic R&D contribution from our partners. I think this is just a new pattern in getting good R&D momentum going forward. On CapEx, look, we eat our own food, so we are putting investments in a smart way in our factories to get more productivity out of existing assets, and that naturally means that you don't need to spend as much money as the one or the other that doesn't do it that way.
All together, I think we are very well positioned, and as you see in our innovation leadership, whether it's on the grid side with HVDC, whether it's in robotics, whether it's on e-mobility, we are truly leading in many innovative areas, in many new areas, and we have the firm ambition to keep it that way. Now on the tax side, I hand over to Timo.
On the tax side, as was discussed in the press conference as well, we continue to keep our expected effective tax rate for 2018 at 27%. We have a very clean U.S. structure, first of all, we don't own many other businesses from U.S. At the same time, when the tax reform is happening, there are also some changes in deductions Our other items which we expect actually to pretty much compensate our situation, and that's why based on the currently available information, we continue to expect the tax rate to be at 27%.
Okay.
Timo.
Thank you. We'll now take our last question.
The next question comes from Jeffrey Sprague from Vertical Research. Please go ahead.
Good day, everyone, and thanks for squeezing me in. A lot of ground covered here, I'll just be brief. Two things. Uli, you made a comment about being bigger and better in Power Grids, obviously better has been a focus. Is the comment around bigger tied to some of these project-related opportunities you're talking about, or are you considering M&A there? There were a number of questions on cash flow, probably dancing around the topic. When you stir it all together, thinking about CapEx, working capital, your requirements to grow the business here, do you actually expect free cash flow to be able to grow in 2018?
I'll take the first one. Yeah, look, Jeffrey, it's very clear that in the Power Grids transformation, the core focus is on organic growth and increasing the underlying commercial quality. When I say bigger going forward, you have seen the base order momentum, it's clearly our ambition also to, with the new business models, to participate in the larger order pattern. That's one contributor in there. We also have quite a lot of innovative offering that allows us to drive penetration in market activities where we have not been so active in the past. The grid consulting piece is one that we are ramping up in a strong way. The entire asset health offering that we are already leading today, we take that to new geographic markets and drive that.
I think there is an opportunity to organically grow both through penetration and continuing the innovation. I'm cautious on M&A activities in Power Grids. When the business is in a full swing transformation, you don't want to overload the team. We did KEYMILE in 2017, which was a true technological innovation differentiator. On the communication side, on the digital grid with that, we really put our foot down as the leader of the digital grid space, and we will do that, but you should expect more bolt-on acquisitions in that space if we do anything transformational large scale in that space. On the cash flow, I hand over to Timo.
Our free cash flow has been pretty much on the $3 billion area during the last years. If we actually compare to 2016 and we had a little bit more CapEx during 2017 and 2016. On the other hand, 2016, cables impacted. It's pretty stable also on free cash flow basis when you look at it that way. Going into 2018, yes, our ambition would be to continue to grow free cash flow as well. We have a bit less charges of cash going out related to white-collar productivity program, so that should be enough to cover the other items.
Thank you, Timo. Look, that was the last question. Let me just one more time summarize where we stand. In the transition year, we have streamlined and strengthened our ABB. We come out of it with solid underlying base growth momentum. We have been able to have steady results despite all the headwinds that we are experiencing. Going forward, we are firmly committed in a better market situation to deliver a better ABB that's naturally profitably growing. With that, over to Jessica.
Thank you everybody for your time and patience today. With that, we'll end the call.
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