Earnings Call: Q4 2016

Feb 8, 2017

Ladies and gentlemen, good afternoon. Welcome to the ABB Fourth Quarter and Full Year 20 16 Results Analyst and Investors Conference Call. I'm Selena, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode. At this time, it's my pleasure to hand over to Mrs. Elena Ransom, Head of Investor Relations. Please go ahead, madam. Thank you. Good afternoon, ladies and gentlemen, and welcome to ABB's Q4 and full year 2016 results briefing. The press release and analyst presentation was published this morning at 7 am and can be found on our website. This briefing is being webcast via our IR website as well as being recorded. With me today are ABB's President and CEO, Ulrich Spieshofer and ABB's Chief Financial Officer, Erik Elswick. They will give a review of Q4 results, an update on the execution of our next level strategy and then present the outlook for 2017. Before we begin, I would like to draw your attention to the important information regarding Safe Harbor notices and our use of non GAAP measures on Slide 2 of the ABB presentation. This conference call will include forward looking statements. These statements are based on the company's current expectations and current assumptions and are therefore subject to certain risks and uncertainties. I would now like to hand over to Uli. Thank you, Alana. Good afternoon, ladies and gentlemen, and welcome to our conference call. Let's move straight to Slide number 4. 2016 was a year of challenges and successes as we made solid progress on our next level transformation. Orders for 2016 were 5% lower, primarily due to 24% decline in large orders. Revenues were steady as growth in Power Grids and Electrification Products offset declines in Discrete Automation and Motion and Process Automation. Our continued focus on productivity and costs resulted in margin accretion of 50 basis points to 12.4 percent operational EBITDA and operational earnings per share improvement of 4% on a constant currency basis to $1.29 A highlight for the year was our cash performance, driven by our working capital program, strong cash generation and disciplined cash allocation. Free cash flow was up 5% to €3,200,000,000 and our cash return on invested capital increased another 70 basis points to 14.1%. For the Q4, we delivered order growth of 3%. Revenues improved 1% for the first time since Q1 2015 we had this order growth. And operational EBITDA margin was 11.7%, impacted by approximately €30,000,000 in 1 off events. Excluding these charges, we would have had a margin accretion of 10 basis points operationally in the quarter. Therefore, the reported results do not fully reflect the underlying operational performance improvement and momentum. Now let's turn to Slide 5 and consider our performance in the context of our 3 focus areas, profitable growth, relentless execution and business led collaboration. In the Q4, we delivered top line growth. Orders improved 3%, driven by the strong performance in Power Grids and strong growth in both the United States and China of 9%. Revenues were higher with strong performance from Power Grids and Electrification Products, more than compensating for lower revenues in the other two divisions. Our customers are really excited about ABB Ability, which builds on our role as a digital champion in our industry by bundling our solutions and services into a leading digital offering for our customers all around the world. With the related orders already received and significant customer interest, we are building growth momentum as we implement next level Stage 3. In relation to relentless execution, we continued to build performance improvement momentum. As stated earlier, our underlying performance was stronger than the reported numbers suggest if you consider the unique events that affected us during the quarter. Our operational EBITDA margin would have grown 10 basis points in the quarter, if not for the impacts from the default of a Turkish distributor and the ForEx effect in Egypt. During the quarter, we saw strong performance from Process Automation, which increased its margin by 130 basis points and Power Grids, which increased by 90 basis points. Our white collar productivity program remains firmly on track to deliver the increased cost reductions of €1,300,000,000 by the end of 2017. Our efforts on net working capital continue to yield results with net working capital as a percentage of revenues declining 150 basis points to 11.5% in 2016. Overall, we continued to make significant progress in transforming ABB into a leaner, more efficient digital technology leader. Regarding business led collaboration, we improved country and account management collaboration, for example, in our food and beverage program. Within this program, dozens of new local sales gated all around the world using account managers and representatives from our business to bring the full strength of our portfolio to local customers in food and beverage. In 2016, we set up global and regional service centers to provide our businesses with high quality back office services in finance, human resources, information technology and supply chain management. These global service centers are now staffed with more than 2,500 people. As we announced at the Capital Markets Day in October, we are strengthening the global brand by consolidating all company brands into a single ABB master brand. Now that program is up and running. Having one unified ABB brand will help to differentiate us in the market and increase customer loyalty and purchase probability as well as price premiums. Please turn to the regional picture on Slide 6. As shown, the U. S. And China, our 2 largest markets, both performed well in the quarter and contributed to the strong order development. Americas orders were steady with base orders slightly down. The United States delivered 9% growth overall with 9% in base orders, mainly driven by transmission and distribution, robotics and port facilities. Canada was weak across all sectors as heavy industry weighs on overall demand. Brazil's results do not reflect the slow underlying demand pattern as a large power grids order was booked during the quarter. Europe was negative in the quarter, mainly due to the large orders that were booked in Germany and Turkey in Q4 2015. Base order development was steady, with positive contributions from Norway, Spain, the UK and Germany being offset by declines from Turkey, France and the Netherlands. Asia, Middle East, Africa grew 17%, driven by large order awards in power grids. China grew 9% with base orders 11% higher, positively driven by robotics, nonresidential construction and power conversion product. India experienced strong growth with the large power grids orders as well as an increase of 14% in base orders. All sectors were up in India. The Middle East continued to be subdued. All in all, it was a solid performance in a difficult market environment. Before I hand over to Erik, I would like to go through some of the key orders that Power Grids won this quarter that led to our growth in the Q4. Please turn to Slide number 7. Many of you were worried after the Q3, but as you can see, the demand drivers for transmission and distribution remain fully intact. We need to remember that this business has a certain volatility for large and base orders from quarter to quarter. In Q4, Power Grids achieved more than €840,000,000 worth of announced large orders. This reflects our global number 1 position in transmission and distribution as well as our technology leadership in high and ultrahigh voltage direct current transmission. Projects like the Raiga Apukalarur link in India speak directly to the strength of our pioneering leading technology in ultra high voltage direct current transmission and distribution over long distances. This project will draw power from renewable and conventional sources in the south and the mid and transmit over very long distances of more than 1800 kilometers with low losses. In California, the Simba project is an excellent example how our digital platform ABB Ability and how we can drive with this, an upgrade of all the systems to incorporate the latest digital controls and safety features for more reliability and safety of supply. The result is a more reliable link between the city of Los Angeles and hydroelectric dams in the north. With that, I would like to hand over to Erik. Thank you, Ole. Slide 8 shows the divisional performance, and let me now take you through some of the highlights of the divisions. First of all, Power Grids performed strongly in the quarter with 15% order growth, revenues up by 4% and operational EBITA margin up by 90 basis points to 10.4%. Orders and revenues in Process Automation were weighted down by the continued weak demand in Process Industries, particularly in Oil and Gas. At the same time, we succeeded to achieve flat base orders, which is a clear improvement in the business. With the weak volumes, Process Automation has done a great job of cutting costs and increased its operational EBITA margin by 130 basis points to 13.4%. In other words, the division has cut capacity in response to the current market conditions. Orders in Discrete Automation and Motion rose 4%, and this was driven by strong demand patterns in robotics and in light industry. Also in Discrete Automation, we saw a 5% increase in base orders in the quarter. This increase is more than offset the impact of the CapEx declines in Process Industries, such as Oil and Gas, with a similar pattern as we have in the Process Automation division. In this division, margins declined by 100 basis points, mostly as a result of the solar business, unfavorable mix and low capacity utilization. Electrification Products had low orders in the quarter due to low levels of low voltage and medium voltage system orders. Operational EBITA margins would have been steady but declined by 90 basis points for the reasons mentioned earlier by Ole. In Turkey, we had a large distributed default on payments. We have very strict credit controls in place. However, in the volatile environment in Turkey, this distributor was overextended, and we could not react quickly enough. We are still pursuing payments, but know it will be very difficult. In Egypt, due to the devaluation of the currency and the inability to hedge the Egyptian pound, we reevaluated our Egyptian accounts payable. Electrification Products was the division primarily impacted since most of its business is local and is difficult to contract in hard currencies. Regardless, we are trying to renegotiate contracts to reduce this impact. Excluding these two specific items, margin would have been steady in the Electrification Product division in the quarter. Please remember that the new divisional structure, which we announced in October, takes effect on the Q1 of 2017. Electrification product will receive the electric vehicle charging, solar and power quality businesses from Discrete Automation and Motion division. This transfer will have a dampening effect on the Electrification Products margin, and the division will most likely be outside the margin corridor in Q1 of 2017. On the other hand, in the new robotics and motion division, the transfer will be supportive to the margins, and therefore, we see that this division will be within the margin corridor in the Q1 of 2017. Let's move to our operational EBITA margin bridge on Slide number 9. In a challenging market, we achieved approximately CHF 111,000,000 of net savings in the quarter. This came from our ongoing cost saving programs to compensate for price pressures, but also from our benefits from the white collar productivity program. And in particularly, we saw strong results from the white collar productivity and supply chain savings. Further, the volumes were positive in the quarter, reflecting the revenue increase, primarily from Electrification Product and Power Grids. The project margins, as you see, was generally steady from a year ago, which shows the improvement in the product management that we've implemented in Power Grids and also in the Process Automation division. On the mix side, we had an unfavorable development in 3 of the divisions: Electrification Product, Diskite Automation and Motion and Process Automation. In the other number, there are a number of items, including the distributor default in Turkey, which I mentioned earlier, and the operational currency losses from Egypt. Other items consist of salary inflation and other one offs that we typically have in the quarters. Altogether, the group achieved an operational EBITA of approximately 1,057,000,000 with a margin of 11.7 percent. And if you would exclude the items I just mentioned, we would have had a margin of 12% or a 10 basis points margin accretion in the quarter. On Slide 10, we have tying operational EBITA to net income. If we look at what you have in your models, some of the items are above or below your estimates, and let me now walk you through these differences. In the quarter, restructuring and restructuring related expenses were significantly lower than in the same quarter of 2015. During the quarter, we reassessed the restructuring and restructuring related provisions associated with the white collar productivity program. Due to significantly higher than originally expected attrition and successful internal redeployment and retraining, the provision could be reduced by $114,000,000 pretax. This had a positive impact compared to many of your estimates. Regarding pensions, we are taking proactive measures to reduce our defined benefit pension programs. Therefore, in Norway, in the quarter, we moved from defined benefit to defined contribution plan. It had a short term cost, which you see in the bridge. But from a long term point of view, we improved predictability, and we are also reducing the overall pension obligation in Norway by approximately €100,000,000 The next item in the bridge is €92,000,000 for an estimated warranty cost in the solar business, which is for products sold by PowerOne prior to the acquisition in 2013. Due to the age of the installed base, we observed increased failure rates, mainly in 3 types of Power 1 solar inverters, which were designed before ABB acquired the business in 2013. In 2016, we performed a thorough analysis, which show that the original provision for warranties in the PowerOne Solar business is insufficient to cover the anticipated warranty costs for the remaining warranty period. This warranty provision relates to defined set of PowerOne design products that were designed and sold prior to the acquisition in 2013. The remaining part of the category Others pertain to smaller nonoperational items and added up to CHF 54,000,000. I should point out here that we have made a modification to our definition of operational EBITA. We have made the way we report pension expenses more transparent, and this is in line in what IFRS already is requiring and what U. S. GAAP is moving towards. This change is to allow investors to see more clearly what is operational versus non operational portion of the pension and makes it also easier to compare to the peers, many of those who report under IFRS. Also, changes that we may have to make to estimates relating to items before ABB acquired a company are outside of the operational costs. Let's now move to Slide 11. Our hard work on the working capital program is yielding positive results. As a percentage of revenues, net working capital has been steadily declining year over year. In 2016, we achieved 150 basis points reduction through a further value chain optimization, which is a deep sustainable change in how we operate our processes and thus becoming a constant permanent lower need for net working capital. And you can see it in the curve on the left of the chart that this is not only at the end of the year, it's constant during the year a lower level, which means we permanently have freed up this capital to use for other needs in the group. On the right side, you see the cash flow. Cash flow from operating activities continues to improve. We have a much stronger focus on consistent cash flow generation during the year. In the bars, you see the quarterly numbers with stronger performance in Q1 and Q2 and still a good performance in Q3 and Q4, which then led to a strong overall cash flow for the year. With this reduced net working capital, it also contributes strongly to the increased cash flow return on invested capital. Let me now hand back over to Uli. Thank you, Erik. Please turn to Slide 12. When we first launched our next level strategy, we realized we needed to transform ABB in 3 focus areas. Back in 2013, we had a lot of work to do in order to build a solid foundation for future growth. At that time, ABB did not emphasize enough our focus on organic growth. Our business units were not performing in line with expectations. Our white collar product our white collar organization was inefficient and partly fed, and there was a lack of accountability. Our corporate structures were siloed, departments and businesses were almost completely isolated from each other. Now we can point to a solid list of improvements that have been executed under our next level strategy. Growth momentum is building driven by our pie formula of penetration innovation and expansion. For example, our program to drive growth in food and beverage sector has yielded good results. And our robotics business, today, the number 2 globally, continues to become even stronger. We are laying the ground for future growth with our quantum leap in digital, building on ABB Ability, our new platform ranging from smart sensor solutions for low voltage electric motors to the cloud based offering in partnership with leading company Microsoft. Having completed a strategic review of Power Grids, the division can now focus on growth and on accelerating its transformation and driving further value creation. For cost savings, productivity and working capital, our programs are truly delivering. Today, ABB is a faster, leaner and more efficient company with clear accountabilities and ownership driving performance. That transformation is overall progressing very well. Please turn to Slide 13. Those of you who were at our Capital Markets Day on October 4 might remember this slide. We launched the 3rd stage of our next level strategy to unlock further value through 4 key action items. Number 1, driving growth in our 4 market leading entrepreneurial divisions, a quantum leap in digital, accelerating momentum in operational excellence and strengthening the global ABB brand. Moving to Slide 14. As of January 1, our 4 market leading entrepreneurial division, all of which are either number 1 or 2 in their respective markets, are fully operationally staffed. Electrification Products is the partner of choice for electrification of all consumption points. All electrification components and offering are now consolidated into electrification products to allow a better growth and cost leverage. This includes, as Erik stated before, the EV charging, solar, power quality offering from the DM division as key growth platforms for the electrification space. In the short term, this transfer will have a dampening effect on the division's profitability as laid out earlier. Robotics and Motion provides a complete portfolio of robotics and intelligent motion solutions. In robotics, we are number 2 and firmly determined to become number 1. In motion, we are already number 1 in motors and drives, and we continue to expand that position globally. In Industrial Automation, we are number 1 in process control and will drive digitalization in industry with forceful actions. And Power Grids offers everything needed for a stronger, smarter and greener grid. Let me talk a little bit more on Power Grids on Slide number 15. The strong results in Power Grids reflect the successful outcome of the step change program, which is successfully completed today. It was a quite remarkable journey that we have been going through over the last 3 years. However, the transformation continues as there is still significant value creation ahead of us for all of our shareholders and all of our people. Power Grids will continue to transform through the Power Up program, which we have launched in October 2016. Power Up is driving about driving growth and enhancing earnings accretion by focusing on core operational strengths and high growth segments as well as digitally enabled services and software. This transformation journey will cost about €200,000,000 over the next 2 years, but position Power Grids to be within the margin corridor of 10% to 14%, effective in 2018 fully. So we are moving from making power grids better to making it even better and bigger in the future. Let's move to Slide 16. Quantum Leap in Digital. We have launched ABB Ability. As a hidden digital champion today, ABB is ideally positioned to win in the digital space with new and existing end to end digital solutions that build on the intelligent cloud and close the loop with connected devices. We will use our profound knowledge of our customers' domains to plan, build and operate with a unique digital offering, which we will truly deliver operational differentiation for all of our customers. The newly launched ABB Ability platform will drive growth by integrating all of our digital solutions and services into 1 common group wide global offering, which is horizontally leveraged and vertically differentiated. This will unlock tremendous penetration opportunities in all customer segments and allow us to replicate the success of each digital offering across a variety of our businesses. ABB Ability truly cements our leading position in the 4th Industrial Revolution and supports the competitiveness of our 4 entrepreneurial divisions. We will continue to develop next generation digital solutions on an integrated cloud platform in partnership with Microsoft, the world's largest software company. Let's turn to Slide 17. Here, we would like to share with you some examples of how we are using today our digital solutions together with our domain expertise to help our customer to become more efficient, perform better at lower costs. For planning of industrial installations, we have today RobotStudio, where more than 14,000 users every year use the software to plan and virtually commission their robots in the industrial environment. In the building phase of our customers' industrial activities, we have, for example, the Ormen lounge Gasfels in Norway, where the 800XA control system used together with software application allows electric and mechanical problems to be early and easily identified so that we can adapt the operational pattern of the activity. Smart Grid projects like in the U. S. With the Central Hudson Gas and Electric Distribution Automation project have opened the door to advanced monitoring capabilities, lower maintenance costs and greater reliability within the digital grid. What differentiates ABB truly is our end to end offering. It is just simply not enough to attach a sensor to a motor or robot or machine and transmit the data to the cloud. The value truly lies what you do within the data, how you use your deep domain expertise to truly turn information into actionable information and control to help customers derive maximum value from digitalization the assets and get better uptime, speed and yield. ADB is very well positioned because we have one of the largest installed bases with 70,000,000 connected devices and 70,000 control systems installed all around the world. This means we have the right domain expertise to understand how digital technologies can be used in the specific situations of our customer sectors. Please turn to Slide 18. We truly accelerated momentum in operational excellence, and we delivered margin accretion through our continuous focus on cost and productivity. We have taken a lot of cost out in excess of €1,000,000,000 each year through and excellence and supply chain optimization. Our target remains at 3% to 5% of the cost of goods sold every year. Our white collar productivity program is on track to deliver an additional higher target of €1,300,000,000 in gross savings within the same time frame, while incurring much lower restructuring costs due to the natural attrition and smart HR management and internal redeployment that Erik already mentioned. Please turn to Slide 19. The goal of our next level strategy is accelerated sustainable value creation for all of our shareholders. We returned €2,900,000,000 cash to shareholders in 2016, increased our cash free cash flow to €3,200,000,000 representing 161 conversion rate. We have lifted the cash return on investments to the mid teens. We have completed our first share buyback program in 20 16 and are now starting the build up and the planning for the implementation of the buyback program of up to €3,000,000,000 from 2017 to 2020. In addition, the Board of Directors will propose the 8th consecutive increase of our dividend to our AGM, which is coming soon, to CHF 0.76 or CHF 0.76 at the 27th Annual General Meeting. This is a 3.5% dividend yield as of the end of 2016. Now let me turn to Slide 20. In the short term, we foresee continued geopolitical uncertainty. In our sector, we expect utilities to invest further in transmission and distribution and continuous growth in the renewables of solar and wind. On the industrial side, investment in discrete and hybrid industries, such as automotive, food and beverage and machinery, remain positive, whilst oil and gas and mining investments are likely to remain pretty sluggish. In transport and infrastructure, we see the market for rail growing along with specialty ships, for example, in the cruise sector And the construction market, mainly in the nonresidential area, should continue to improve. In terms of regional development, China is likely to increase investment in power transmission and distribution as well as robotics and construction, And India should grow well across all of our sectors. In the U. S, investment in power infrastructure will be positive, but we don't expect significant improvement in Brazil. Europe is a truly mixed picture. Spain looks strong, but Brexit uncertainties in events in Turkey combined with the elections coming in many places might temper the growth in other places. Let me turn to Slide 21 and share with you our priorities for 2017. With a lot of homework and done and the transformation progressing, our operational excellence programs are on track. 2017 will be truly a year where we consolidate our achievements and drive growth momentum. We will drive organic growth through pie, penetration, innovation and expansion, and it drives momentum for ABB Ability through our customer base and within every business unit. We are ready as well for disciplined inorganic moves and partnerships should the opportunity arise. We intend to deliver on our white collar productivity and working capital programs and move ahead based on our leading operating model, supply chain management and quality programs and live truly the new performance culture and performance system to drive a strong entrepreneurial culture and approach in ABB. In addition, we will tap growth collaboration opportunities in countries and accounts and build on our new performance culture with a strongly better shaped organization and leadership team, while strengthening the global ABB brand. Let's conclude with Slide 22. Let me share with you why it will be attractive to own ABB. ABB is a pioneering technology leader with strong positions in attractive markets. We have a crystal clear transformational agenda to drive earnings per share and cash return on invested capital. We have an efficient balance sheet, which we will use wisely, and we will generate attractive returns for our shareholders. Our next level strategy is truly unlocking value for our customers, our employees and shareholders. Thank you very much. Thank you, Uli and Erik. With that, I would like to open up to questions, please. And I would ask that you limit it to 2 questions, and that is it. Please, operator? We will now begin the question and answer session. The first question is from Mr. Andreas Willi from JPMorgan. Please go ahead. Good afternoon, everybody. I have a question on pricing and one on process automation. On pricing, it seems to have got a bit worse in the bridge in Q4, but maybe you could help us with the cost savings, white color and the rest in terms of the run rate where we are in Q4. And what do you see there Process Automation, it's done a great job on And on Process Automation, it's done a great job on margins, particularly in Q4, but overall in the year. Should growth come back? What kind of incremental margin should we expect? Historically, it hasn't shown much leverage either way, but maybe in terms of what the changes you have made on the cost savings in terms of structural versus cyclical cost cutting, what should we expect when revenue growth comes back? Thank you very much. Thank you and good afternoon. Thanks for your questions, Andreas. I'll start with PA and then hand over to Erik on the pricing piece. I look your observation is right. Peter Serves and his team have done a wonderful job mitigating the very tough market headwinds and delivering a solid margin in this business. Then there's a couple of drivers. The one is proactive cost management in line with the backlog. This business is a long term book to bill business, so we have good foresight on the backlog. And Peter has done a great job responsibly managing adjusting capacity and that'd be how we run the business. The second piece that he has worked also on is a significant improvement on risk management and risk mitigation on large projects and the operational execution quality on projects in this business has become even stronger. The 3rd element is the strong push on services and digital services have enabled us to lift the margin in this division even in difficult times. And if you look at it, Andreas, basically all three elements are there to stay. So when you when this business comes out of the drop in the market, you can expect a nice development of the underlying quality of the margin. We are not giving concrete guidance, but we are confident that when we if we can manage through the downturn in a good way and Pir is able to increase margins, his work on his portfolio and the focus on services, his derisking approach and better operational execution will help us to deliver very attractive drop down margins when the market comes back. With that, I hand over to Erik on the pricing. Okay. So for the pricing side, Andreas, the pricing pressure in Q4 was quite similar to what we had a year ago in Q4, a little bit more than in Q3 of 20 16, but that was also the same pattern in 2015. So you can say over and above, it is a similar situation. On the basic cost savings on supply chain on OpEx, we did continue to do really well on the supply chain side. On the OpEx, it was a little bit less than before. At the same time, the white collar productivity program is continuing to deliver very strongly. So the net of all those effects is the SEK 111,000,000 that you see. The pricing trends, I would say, is continuing on the same level currently. You correctly said we have some raw material increases that has to reflect itself back in pricing. And there, we are using the same methods as we have done historically to update prices as we go to match it when also our hedging programs are running out. So it is quite balanced over the cycle, but we are taking the right actions to protect the pricing. And that should then mean potentially in some of the areas lower price pressure per se when we move further into the future. Next question please. The next question is from Mr. Ben Uglow from Morgan Stanley. Please go ahead. Afternoon, Ulrik, Eric and Alana. I have a couple, both relating to Power. On the sort of Power outlook, Uli, maybe could you just talk about base orders and why in the last couple of quarters base orders have continued to appear quite weak? And when you look at the tender pipeline for larger orders into 2017, is that funnel looking any bigger than it was a few months ago? That's question number 1. Question number 2, and maybe this is for Eric. Could you just remind us about the phasing of the PowerUp investments in Power Grids? You've had quite a nice step up in margin in the Q4. What I'm trying to figure out is how significant is the dampening effect of investments likely to be during 2017? Yes. Good afternoon, Ben, and thank you very much for your I think your observation overall on the quality and improvement of Power Grids is correct. We had 4.3% margin not too long ago. Now we are, for the year, firmly above 9% and the quarter even above 10%. And that's a good momentum, and Erik will give you more granularity on the outlook on that one. Regarding the tender pipeline, look, when you go around the world at the moment, renewables are really kicking in massively all around the world. I'll just give you one concrete example. I was 2 weeks ago with the Energy Minister of Abu Dhabi and they building now plants where the IPP price for solar is €0.024 per kilowatt hour. And that means it is a very, very attractive value proposition. We see that not only in the Middle East, we see it in India, we see it all over the world. And this project mean there will be connections needed over long distances to connect the renewables into the main areas of demand. So on the long distance connections and long distance connections, especially for the feed in of renewables into the grid, We remain optimistic as we have shared with you at the Capital Markets Day. You have seen now, for example, the Belo Monte project in Brazil is feeding in renewables into the Brazil grid. India, the very big project is basically taking wind from the south and putting it into the middle. So the tender backlog and the tender activities and the project discussions are healthy in Power Grids. And I'm optimistic that in the future, we will realize more projects. Now as you know, the large project business is lumpy. You can never predict exactly in which quarter it will come. So we will have from quarter to quarter some ups and downs, but that's normal in the large project in Power Grids. That brings me to the base order situation. Yes, look, on the base order side, there's an element of Power Grids, which goes into large industry. And that's on the process, the mining side, where we connect industrial operations and new industrial operations with the grid, that's definitely a subdued part of the portfolio. So the supply of power grids in the industry is subdued and that contributes to the dampening on the base orders that we have seen. Let's see how that turns out again. It is definitely our ambitions to bring also base orders back to growth in Power Grids. And with that, I hand over to Erik to talk a little bit more about the Power Up program and its cyclicality or its timing of the cost. Yes, Ben. So let's go to that topic. So first of all, we are, of course, very pleased to see that we have this division in Q4 above 10% in the new margin corridor. At the same time, this is quite a pattern between the quarters, so we should not count that we will during the transformation time with Power Up, be every quarter in the margin corridor. The Power Up costs, as we said at Capital Markets Day, we see SEK 200,000,000 in total, about SEK 100,000,000 in 2017, about SEK 100,000,000 in 2018. Most of that will be on the operational side, could be some smaller pieces on the non operational side, but most of that is operational and will then have a slight impact on the margin in the respective quarters. That's really helpful. Thank you very much. Thanks, Ben. Next question, please. The next question is from Mr. James Stettler from Barclays. Please go ahead. Thank you and good afternoon all. You had very good margin momentum in the DM division before Q4. Can you talk a bit about how we should look at that division into 'seventeen assuming you weren't to make the changes? Is there a possibility to get back into range or is this going to take a bit longer, especially given that base orders are picking up? That's question number 1. And on question number 2, you have the $2,000,000,000 working capital program, which supposedly will end this year. If I'm correct, is there still €1,100,000,000 to go and should that all come in, in 2017? Thank you. Yes. Look, Jade, thank you for your observation on DM. DM as of 1st January is becoming RM and it's a much better focus, much more streamlined portfolio where we really focus, Sami and his team, on Robotics and Motion. And in Robotics and Motion, Robotics is going very well. We are happy. Motors and drives had to go through a trough in 2016, given the very strongly dampening effect of the process industries. We're working our way out of that and will be better in 2017. The portfolio path that goes over to Tarak belongs to Tarak logically. In electrification, it makes sense to combine everything the Tarak has with the EV charging, with the solar activity and the power quality piece. All three of them are under critical in terms of true industrial mass and relatively early in their ramp up. So they have a relatively low margin, and that will have a dampening effect on Tarak's business. Now we have significant synergies between Tarak's existing portfolio and these activities. So you should expect that over time, the dampening effect of this transfer into Tarrag's portfolio to wear off and Tarrag gets to the target margin corridor that we have announced for the business later in the year. With that said, I hand over to Erik, our working capital man here. Yes. Look, James, we have done €900,000,000 plus in the until the end of 2016 with a much better speed and trajectory in the second half year. So we have now another €1,000,000,000 to do in 2017 to reach the target. And that is what is in the plan. And it's, of course, spread from inventory to accounts payable to accounts receivable and quite comprehensive programs running in all the areas. So we are confirming the target for SEK 2,000,000,000 for the program until the end of this year. Great. Thank you. Thanks. Next question please. The next question is from Mr. Marc Thromen from BAMKO. Please Please go ahead. Yes. Thank you. Good afternoon, Uli, Eric and Alana. Two questions, if I could. First one on outlook. Could you give a bit more color, Uli, on the process markets? I guess, the ones that are still weak, oil and gas, petrochemical, marine, metals and mining. And what are we seeing now? Are we seeing a bottoming? Are there any parts that are improving? Are there parts that are still declining quite heavily? If you could provide a bit of color on those process markets, that would be helpful. And the second question on the restructuring charges. I think according to your number booklet, you did €674,000,000 in 2015, €543,000,000 I think in 2016, which is a bit lower than expected because of this Q4. What should we be penciling in roughly for 'seventeen, 'eighteen in terms of restructuring? Thank you. Good afternoon, Marc, and thanks for your question. Yes, look, the answer for your process industry question is yes. We're going to have all of what you just said. We have massive contraction. We have steady bottling out and we have growth. And let me run you through the different industry segments. The biggest one is definitely Oil and Gas. And the weakest in Oil and Gas will be Offshore. We don't expect any improvement in offshore in 2017 in the business sentiment, in the investment climate. So this one will be still a very, very tough part of the market. We see on the on shore and the down especially in the downstream operations, we see signals that the OpEx and the service activities are getting a little bit more money, which is good for us. And we have the first discussions on future projects, which are becoming now a little bit clearer. So there will be a tender pipeline coming, but it's too early to speculate that this will kick in, in a significant way in '17. I think that's more 'eighteen. So 'seventeen is probably more OpEx recovery on the Downstream and Onshore activities that we have. On Mining, 2017 will be another difficult year. Mining will not improve. And knock on wood, whether it has bottomed out, but the signals there are not easy ones in terms of the overall activities. That's probably more 2018, 2019 market to come back than anything before that. Then if you look on the marine sector, it's really an interesting situation because we have if you take oil and gas supply vessels, the market contracted in 2016 more than 60 dead cat bounce on oil and gas supply vessels, and we don't expect any significant pickup or even a dampening on that point. This will be bad in 2017 as well. On the other hand, if you look at the cruise ship market, our EBITB is extremely strongly positioned with a fantastic offering on cruise ship that really goes from electrification over propulsion into the RC port. We have now the fleet management. We have the software activities. And that's a market which is going very well. There is a backlog alone in China of more than 100 cruise ships. So all of China is going on a cruise, joining all the Americans that are going on a cruise. So I'm quite optimistic about that part of the portfolio. So if you look at Industrial Automation and if you look at Process Automation specifically as a segment, we will need to fly on-site. We are at the one hand, we are restructuring. On the other hand, we are investing in growth. And I think Peter and his team are doing a very good job navigating the waters going through that. With that, I hand over to Erik on the restructuring question that you just had. Yes, Marc. So on the restructuring, you are right that the 2016 number benefited from the release that you could do, as was mentioned earlier on the call. If you look to 2017, with this, we see a very small additional restructuring in the WCP program, around €10,000,000 as we have put in one of the backup slides. And for the normal 2017, where we have guided previously of about €200,000,000 So that is the guidance for the normal restructuring. For 2018, we don't make any specific guidance at this point in time. But I would assume that it will also, for modeling purpose, that you can use a normal year. What is important to point out is we also have below the line the continued program implementation cost for the WCP program, which we are guiding to approximately €220,000,000 in 2017. That is not restructuring, but implementation costs. And it's important that you keep those in mind for your modeling. You very much. Let's go to the next question, please. The next question is from Mr. Martin Wilkie from Citi. Please go ahead. Hi. Thank you for the question. It's Martin from Citi. Just a question about potential cash deployments. There were some quotes in the press today that you might consider larger acquisitions. I remember really when you became CEO, you talked about software, oil and gas, food and beverages, potential growth areas. And more recently, you've also talked about becoming number 1 in robotics. And obviously, I can't expect you to talk specific, but perhaps you could talk more generally about what you think that you might need to fill into the white spaces across the group? Is it technology related distribution, installed base? And as a related question, and in particular, if you can have another €1,000,000,000 of cash release and working capital, what you feel your balance sheet leverage is, what you feel your scope is in terms of doing acquisitions? Thank you. Yes. Martin, good afternoon. Thank you for your question. Look, our capital allocation principles remain unchanged and the priorities remain unchanged. Number 1, we have to really support organic growth. I can tell you I'm quite excited about the organic growth opportunities that we still out there see out there. And there's quite an active program going on in this field. The second one is the dividend. You have seen we yet The 3rd priority is around acquisitions. We have been very disciplined on acquisitions. The 1st couple of years after me taking office, I had put a hold on it because we first needed to do serious homework, get ABB in the shape, create integration capacity from a management perspective to really be ready to do that. In the second half of last year, we flagged we are ready, but that does not mean that we are desperate to do acquisitions. We will do them at the right time when we feel there is good value creation potential, there's an attractive opportunity and there's also good implementation and integration capacity on our side. If you look at the fields of deployment, if I go through the 4 divisions, take Electrification Products. In Electrification Products, a lot of the business and a lot of the offering is a pretty local offering. ABB and Electrification, if you take aquarter, we are strong north of the aquarter and we are not that strong south of the aquarter. So if we would find the right way to deploy capital in this field, I would be open to that. Also in attractive markets, above the Eu Guatou, where we might not be that strong yet, we would be looking forward to invest money there. I like the Electrification Products business. I think it's an early cycle, good quality, steady revenue, steady profitability business that we can grow. And therefore, it will get the right level of capital should an opportunity arise. In Robotics and Motion, look on the robotics side, the only large deal that would have been available has been made last year or is being completed this year. That's a deal where we could have acted, but we demonstrated our discipline and said forcefully no, because it just wouldn't have been right for our shareholders to do this deal. You have seen us doing bolt on acquisitions in robotics. That pattern will continue. We will continue to make bolt ons of smaller and medium size to complement our strength and navigate towards our firm ambition to become number 1 in that field. On the motion side, the motors and drives, we are strong in anything related to continuous flow, continuous actuation that the process industries. ABB is not that strong yet on a stop and go operation on servo movement and servo actuation. So should the time be right, then we will definitely look at it. That gets me to Industrial Automation. In Industrial Automation, basically, we look at 3 things: the measurement and sensing piece, the control piece and the actuation piece. In measurement and sensing, adding more sensing and measurement capability would be absolutely attractive for us. We would deploy capital should the right target arise. On the control side, we don't need another DCS platform. We're very strong. And on the PLC side, if I could, I would pick something up. But you know how the market is there and the pricing is quite prohibitive in this field. So let's see what comes out of that. And the first one is then the actuation piece, the domain specific actuation like control valves and others, that's a space that would be open to look at. That brings me to Power Grids. Look, the transformation of Power Grids will include some acquisitions. We will look at engineering, planning, software capabilities to enhance, especially the planning phase of grid building on our customer side. And that will be also altogether a theme there, if we can strengthen our position in software and services in a way, would be good. On the software side, we will not go out and do huge deals at very, very high multiples. We will do bolt ons if they arise enough attractive to our overall portfolio. So as you see, a clearly understood roadmap, a clear priority set across our businesses. And when the time is right, we will strike. If the time is not right and as it is not available, we continue the path that we are on. Thank you. That was very helpful. You're welcome. Next question, please. The next question is from Mr. Andre Kockin from Credit Suisse. Please go ahead. Yes, good afternoon. Thanks very much for taking my questions. My first one is on your outlook. It looks like China is improved for you there and buildings looks like the swing factor. So could you give us a bit more color on what you're seeing there and where and maybe towards sort of order of magnitude? And yes, the second question is more on the catch up effect in Power and Gas. We've obviously seen an element of that sorry, in power grids. We've seen an element of that in Q4 after softer Q3. Can we say that we're all done with that and we're now in a normal run rate? Or is there more to do? Thank you. Okay. Let me start with your second question. Look, the abnormal situation was Q3, and the normal situation are the other quarters. In Q3, we had a very, very low order intake. We were all unhappy about it, but we all also knew what we had in the pipeline. That's the reason why nobody on the EBB side panicked or got nervous. We just executed the tender, and we won some significant projects. The Power Grids order line will always be volatile with large projects. So don't expect that we're going to have a totally smooth ride. The large orders will create volatility from quarter to quarter. The base orders need to get back to a steady. I mentioned before, industrial part of that one is important that we get it back in shape and get going. But altogether, you should see a Power Grids division in the future that taps the growth opportunities in the market in a good way and really get solid momentum going. Now on China, as ABB is going through a massive transformation, so is China. China is moving from an investment driven to consumption driven and innovation driven country. And we are working very heavily with China. I'm serving on 2 advisory boards there and work very closely also with the government. And it's very clear that the government is absolutely serious in deploying capital to really reshape China in a clearly defined agenda. The one is more renewables, more power grid, better infrastructure. That's great for us. And with our leading edge technology, with our strong capability to get low loss long distance transmission going, we are ahead of competition and we are well positioned to work with China on this one. If you look at greener and smarter cities, whether it's the EV smart EV charging piece, the ABB is the leading start up company in the world where we have really drive that in a good way or whether it's smarter buildings and smarter building control where with our home automation we are participating, I think we are quite well positioned. If you look at the industrial upgrade and the Made in China 2025 program, it is paramount to be competitive. And that does not only mean in the international comparison, but mainly also in the local comparison against local competitors that companies invest in robotization and automation. And us being the number 1 in China in robotics and having a strong automation capability is also helping us to drive this. So that's the sector perspective in China. The second perspective that is important is China is a large continent. And in the past, we have been pretty active along what I call the Eastern Banana. And we didn't go that strongly into the West and into the East of China. This is a forceful action that Xun Yang Gu is driving. He uses our PIE model to do that. He collaborates across the different business units. And we basically have a wave by wave program going West and Eastern China. And that's the reason why I'm also comfortable that we get there. If you look at, for example, the robot density per 10,000 workers in China compared to Europe or compared even to the U. S, which is lower than Europe, there's a dramatic catch up to be done and a fantastic opportunity. So altogether, if we manage this well, we should be cautiously optimistic about China. Thank you. Next question please. The next question is from Mr. Jeffrey Sprague from Vertical Research Partners. Please go ahead. Thank you. Good day, everyone. Good day, Jeff. I was wondering if you could address mix a bit as we think about 2017. Uli, you talked a little bit about OpEx and Process. But I would think that your mix would naturally want to get quite a bit better in 2017 as we move into more of an OpEx cycle and people are thinking about CapEx maybe in the out years, but it does appear that many of your customers were starving OpEx and MRO here for the last couple of years. And so I'm a little curious why the mix was negative in Q4, but do you see that inflecting meaningfully in 2017? Look, Jeff, as I said before on the process side, the first spend that will come back will go into uptime and reliability. It will not go into new build. It will go into uptime reliability. That means replacement. That means service. And that's a business which is good for us. We underestimated, as I shared with you, the massive dampening on service that, for example, got us hit us, especially in the first half of the year in DM. But if you look at the way the assets are being run and just up in Davos and recently, I met a lot of CEOs in the process industry in oil and gas. They all say the same, we have to start spending again, otherwise, we risk downtime. And this is something that should have a positive effect, as you rightly say, and we need to drive towards that these 4 selections. Just a quick one for Eric maybe. These non operating pension and pre acquisition items, Can you size an expectation for 2017 on those? I'm sure you know the pension. You may not know the pre acquisition, but any help there would be much appreciated. Yes. On the pre acquisition, as you correctly say, that I cannot give you a guidance on because if you would have seen it, you would have taken care of it already. Hopefully, that should not be too much, but it depends on where, of course, things could come out of acquisitions. And on the pension side, the number that you see here includes, as it's quite detailed in the notes, a specific curtailment that we have done in Norway to significantly reduce the overall pension liability. So that one you should not see repetitive, and that means this should be relatively low numbers as we see it. And back in the detailed notes, you will also see that we have shown how this number has been moving over the quarters back in 'sixteen and 'fifteen to give you a perspective where it is. We have not provided our specific guidance for 'seventeen, but I think you should assume that the historic pattern, excluding this curtailment, is what should be there. The next question is from Mr. Gael Debre from Deutsche Bank. Please go ahead. Mr. De Bray, your line is open. Gail, I think you're on mute. We cannot hear you. Hi. Can you hear me now? Yes. Okay. Sorry for that. Good evening, everybody. The first question is around the performance of the Process Automation business. I mean, based on the order trend that we've seen now for the past few quarters, it seems you're likely losing share here. So could you elaborate on the competitive dynamics for the business? And is there actually a risk that you would have favored the mix and margins overgrowth a bit too much in recent quarters? So that's question number 1. And question number 2 is around the manufacturing footprint you have in the U. S. I mean, could you elaborate a bit more on how much business do you export from the U. S? And how much do you import into the U. S? And also, that'd be great if you could give us a sort of an indication on the level of taxes you actually pay in the U. S. Too? Thanks very much. Okay. Look, if I take the Process Automation piece, quite frankly, we are taking share in certain segments. We have a very specific structure in our PA business historically. We have service in there very strongly. We have the marine business in there. We have our turbocharger business in there. And actually, we have all of the DCS based Industrial Solutions business in there. And if you look at the pattern, we benchmark every month, every division against key competitors on a pretty granular way on a business unit level. And I would say Peter is doing quite well in what we have seen in terms of momentum in others. I don't want to brag about it, but I'm okay with that development. And naturally, as 20 17 hopefully gets us on the service side a little bit more momentum back, that should have a positive influence on the quality of the business. Now on the U. S, I will give you an overview and then hand over to Erik on the tax discussion. Look, ABB in the U. S. Is roughly a business which is somewhere between SEK 7,000,000,000 and SEK 8,000,000,000. We have close to 20,000 people in the U. S. And given the more than €10,000,000,000 that we have invested over the last 7 years, we have today a pretty self contained footprint in the U. S. So we are importing about the same level of what we're exporting from the U. S. And it's on a level which is not that significant for our U. S. Operations altogether. Our local footprint, we have more than 60 factories. You might remember, we bought Baldor, we bought Thomas and Betts. We are very strong in Power Grids historically. In both on the products and in the systems side, we got a large grid integration center in Raleigh in North Carolina. We got a strong footprint around Wisconsin in the north and Chicago in the north. We have Fort Smith, Arkansas as the headquarter of Baiduar. We have St. Louis as the headquarter of Thomas and Betts. So altogether, we are basically in the U. S. For the U. S. And if you just navigate through the ripples, waves and noise that we see at the moment around the new government and look at the content, the content says we need to invest in infrastructure and there ABB is the number 1 on the grid side with local offering out of local factories. The U. S. Will invest in competitiveness in industrial upgrade and automation to be able that if jobs come back, they are being combined with smart automation to drive competitiveness. ABB was the first one less than 2 years ago that it invested in a local robot facility in Auburn Hills close to Detroit, where we are manufacturing today robots for the U. S. In the U. S. So given that we are pretty self contained, given that we have strong U. S. For U. S. Business with a lot of strong local players and long strong local management, I'm cautiously optimistic that we will participate with a fair share of the activities to come. And naturally, we keep investing as we see the growth coming. With that, I hand over to Erik on the tax question. Yes. So U. S. Is our biggest single market and biggest single operation, as we have said many times. It is a market with a very high corporate tax rate today. We are not benefiting much anymore from all the tax allowances and so on in the U. S. So if they were to reduce the tax rate, that in itself would be positive to ABB. However, as I'm sure you well know, there are a lot of other elements of the potential tax reform there, which could go in the other direction. So it's simply too early to judge exactly what it will mean for us on the tax side. We'll take 2 more sets of questions, please, operator. The next one comes from Alok Katre from Societe Generale. Please go ahead. Yes, thank you. Thanks for taking my questions and good afternoon. Just had a couple of ones. Firstly, on robotics, could you talk a little bit about the competitive dynamics in China? While clearly the growth potential over there is pretty strong, I just wanted to understand what the strategy is for guarding against, let's say, domestic players taking share or perhaps against technology transfer? And are you seeing any evidence of the government there trying to influence the market, especially given that one of your competitors could now potentially be seen as a domestic sort of Chinese OEM? And the second question was just a clarification. On your digitalization portfolio, I mean, could you just remind us how much your digital and software sales are worth, either dollar terms or as a percentage of group sales? And what sort of growth are you seeing there? Just asking this in the context robotic situation in China. ABB decades ago set up a very strong team in Shanghai, and we are today the market leader in robotics in China. And we have the firm intent to say that. We have fully localized the value chain. We have local R and D. We have local manufacturing. We have local sourcing. And it is our firm ambition to beat any competitor in its home base back in China. The China is the largest robotics market in the world. Last year, it will be the largest robotics market in the world for quite some years to come. If you look at the robot penetration, there is a lot of opportunity to do more. And naturally, this attractive market attracts competitors and investments in this field. I think it's very, very important that we keep the investment, that we keep our strong portfolio. We have experience on what does it what it takes when competitors come up in the country because in the power portfolio, that probably happened about 10, 8 years ago already. So we know how to deal with it and we know how to run the business for competitiveness. And it's very clear that the Chinese government is supporting robot investments, so does local governments. And it does not mean that we don't participate in that opportunity. We just play it in a smart way as a very strong local player that we are going that we are already today. Now on the digitalization, look, more than 50% of our offering is today software based. So it is not like ABB comes to that field as a newcomer. We are this field since many, many years. We are number 1 in distributed control systems globally with 70,000,000 connected devices, 70,000 control systems. So ABB has a strong legacy and a very strong platform in this field. If you look at the newer digital services, if you look at the cloud enabled services, if you take what we're doing in marine, we have significant double digit growth in marine on the digital services. We have the same around robotics. We are bringing up the smart sensor solutions. Last week, we launched Asset Health 3.0 for utilities. The ABB is the global leader and the number 1 in the market. So I would expect that to develop quite forcefully ahead of the average company's growth in the future. And this is a major source of growth in the future as well. We have altogether about 18% of our portfolio is software and services, and we firmly intend to both grow that, but also grow the share in ABB on that going forward. Last question, please. The last question is from Mr. Jonathan Musni from Exane BNP Paribas. Please go ahead. Hi, good afternoon. Thanks for taking my question. A couple if I may. On Electrification Products, I think the order intake was a little light of what the consensus was expecting. I think you mentioned low voltage and medium voltage systems orders being a little weak. Is that any particular issue? Or is it just sort of normal lumpiness in the quarter? And then secondly, on Power Grids, after the reorganization, put it that way, the JVs, etcetera, in Power Grids that we announced at the Capital Markets Day. Are we really done now in terms of the ownership structure of Power Grids? Are there other elements of the branches of Power Grids where we may yet hear news around a change in the way you do business or the ownership structure? Yes. Look, on EP, yes, it is the lumpiness in the systems side of the business. So no reason to be overly concerned. It was a soft one in the last quarter, but Tarak is working hard with his team to really mitigate that. On the Power Grids side, as we said very clearly at the Capital Markets Day, we have taken the overall decision what to do with this business. We will transform it under ABB's ownership. And that means very clearly that we will also continue to work on the portfolio of the business. You have seen us divesting cables in 2016, and that will be completed soon, that the deal will be closed. And it was just a business on the, as I call it, copper and iron side, which didn't allow us to long term have a leading competitive position because we were under critical. So we put it together with NKT and secured a long term supply arrangement to drive this. The 2 activities on EPC, both with the floor enable are ramping up. I'm very happy with the development there. And that will help us to derisk twice, taking a certain part of the top line away. But that's okay because it's a top line that does not fit our future pattern that we will develop. You can expect that we will do some smaller adjustments both coming in and coming out of the portfolio. But in large, we are done with where we want to go and we will drive it that way. Very clear. Thank you. So with that, I would like to conclude our Q4 and full year results call. I would also like to remind everyone, as Eric has already stated, that we have a new structure. The pro form a statements are in the back of the presentation. Many of you have asked when you're going to be getting the pro form a statements. They are in the back of the presentation. As we restate the figures, we will update them on our website. So with that, thank you very much and wish you a wonderful day. 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.