Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q3 2013 results analyst and investors conference call. I'm Stephanie, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star then one on your telephone. Should you need assistance, please press star and zero to call an operator. At this time, it's my pleasure to hand over to Mr. Ulrich Spiesshofer, CEO of ABB, and Mr. Eric Elzvik, CFO of ABB. Please go ahead, gentlemen.
Good afternoon and good morning to everybody on this call. Welcome to everybody to the Q3 2013 results call. It's a pleasure for me to present the results for the first time as ABB CEO. It's an exciting time to take on this challenge. I'm looking forward to talking to all of you in the coming months and quarters about how we see the business developing, as well as hearing your views on the company. I'm joined today by my long-term colleague, and our CFO, Eric Elzvik. You know that Eric and I worked together very well in the Discrete Automation division. It's great to see the proven team together again today.
Today we're going to take you through the results, together with Eric here. Then I will take some time to talk to you about where I see ABB's strengths and where I think we can do more. I'll summarize with a midterm view of our end markets and the near-term outlook for our businesses. Before I start, this is now related to slide number two, let me remind you that as always, my comments in this call refer to the presentation that you can download from our website at abb.com. Also, please refer to the important notices outlined on chart two regarding any forward-looking statements made today. Let me move to chart number three, which shows an overview of the quarter.
We showed solid performance across the business. It was demonstrated by the increase in revenues, operational earnings, net income and cash from operations, which was up by almost half a billion versus a year ago. Our base orders returned to year-over-year growth. We are higher in most regions. In all divisions except Power Systems, where the strategic repositioning to focus on higher value-added projects continued to reduce orders significantly. We are really encouraged to see orders up strongly in some key markets. For example, in China and in Germany, both at double digits, and steady order intake at high levels in the U.S. Our large orders remain slow, reflecting both the PS realignment and continued postponements in our customers' capital expenditure in the utility, mining and marine sector. The operational earnings and margins increased despite the mixed market, reflecting the positive volume effect and solid project execution.
Our performance also reflects the strength of our broad geographic footprint in manufacturing and engineering presence in all of our main markets, which helps mitigate risks from currency fluctuation. Thomas & Betts and Baldor integrations also contributed to the performance. We will later on get back to that one. We closed the Power-One acquisition and have begun the integration according to plan. I can tell you that the customer feedback is really positive on the combined business. We have announced some new appointments to the executive committee, as well as some realignments and responsibilities, which I will lay out later in the presentation. We saw a good increase in earnings per share, about 8%, as you know. Eric will provide you some more details on these topics.
If you go to slide four, which summarizes the key figures of the group, I've already highlighted quite a couple of the developments in there. Let me just point out a couple of other thoughts. The group order decline reflects to a large extent the impact of the PS realignment, which is the right strategic move at the current time. Our good revenue growth reflects both the strength of our backlog and the increase in base orders. At the same time, the backlog has declined, which may have some implications for revenue growth over the next four to six quarters. Tendering activity is very high. We are cautiously optimistic that we will win our share of orders in the coming quarters.
The operational EBITDA margin is up compared to a year ago by about 40 basis points, as I mentioned. Eric will take you through the bridge in a moment to show you a little bit more how this all comes together. Overall, I'm encouraged also by the strong performance in cash from operations, which was up 62%. That's really a sign of a very healthy enterprise. If you move on to chart five, which shows you the regional growth overview. First off, on the early side of business improvements, we saw really across the board. As I said, base orders were higher in most regions, with Europe steady versus the same period last year. The large order declines are visible mainly in the Americas and in the Middle East.
In Europe, orders in Germany, Sweden, and France were all higher, which offset most of the continued demand weakness in Southern Europe. The Americas were lower compared with a strong performance in the same quarter 2012. However, the U.S. was steady at high levels as order increases in the product divisions, despite the political uncertainty, were offset by declines in the large project businesses in PS and PA. Asia looked better this quarter with automation demand driving growth in both China and India. Australia is lower, reflecting the tougher mining environment. The decline in the Middle East and Africa is mainly due to low orders in PS, a large part of which is effect of the PS repositioning. Emerging markets orders declined 5% in the third quarter, while mature market orders remained steady, again, mainly reflecting the large order development.
Base orders, however, in the emerging markets increased at a high single-digit pace and faster than in the mature markets. On the slide six, you see an overview of the divisional growth performance. Let me highlight here a couple of points. We have a return on year-on-year order growth in most divisions, which is really good news. We have growth in the DM and LP orders reflecting strong early cycle demand. Power-One has contributed to DM's growth, and the outlook on the solar market is, on the one hand, still volatile, but the integration overall is on track. PA is flat on total orders, again, mainly reflecting timing of large project awards. The base orders in PA are up 8%. First quarter of order growth in PP, really since the second quarter of 2012, which again is good news for us.
The PS is showing the impact of the realignment and weaker utility transmission spend. Let's move to the revenue side and just talk about the highlights here. We have really based on the strong backlogs on PA, PS, and DM, have contributed to really solid revenue performance and good execution was the other reason for this. Just on the integrations, you might be interested to hear a little bit how our big deals are going. In Baldor, as you might know, we combined the front end between front motors and drives, and we have really good increase in drives into the U.S. market coming out of that with a revenue growth rate in the double-digits since the end of 2010. The mechanical power transmission sales, which you know is a certain percentage of the Baldor portfolio, is up more than 25% outside of the U.S.
The growth synergies are really coming. The cost synergies are well on track. Altogether, the Baldor integration is moving really well. On Thomas & Betts, we have plans to bring together on the logistics side and leverage our joint business model, which is nearing really the completion. European and Asian integration is well on the way. The sales growth plans are now in place, we are moving swiftly, and the learnings from the Baldor transaction here help us really to drive the growth in the right way with the right kind of process. We have good performance in retaining people, which is always important when you do a large acquisition. For example, the salespeople are all still with us, which is good news. On the cost reduction side, the cost synergies on Baldor, just as an example, the supply chain savings are going very well.
We have already added more than $10 million to the bottom line coming out of the Thomas & Betts supply chain savings. If I move to the chart number seven, this gives you an overview on the earnings. Here, really, we have had solid execution. The earnings growth across the board, driven by higher revenues and really good execution, just to repeat that. The margin is up in most of the divisions. DM is stable on a high level. The PA margin is at a very high 13.6%, and this is mainly due to strong revenue growth of 30%, plus really good project execution, especially in the marine business. PP is steady. We will continue to steer this business towards an operational EBITDA margin bandwidth of 14.5%-15%.
PS also executed better on its project business versus the third quarter last year, when the division experienced some project cost overruns, which in fact was one of the factors influencing our decision to launch the reset in the fourth quarter last year. PS remains on track to deliver 9% operational EBITDA for the fourth quarter. Let me turn over to Eric to take you through some more of the financials.
Okay. Thank you, Ulrich. We turn to chart eight, where you have the EBITDA bridge. You can see in the bridge here that the net savings increased compared to the second quarter 2013, as we continue to execute well on the cost savings. Price pressure remains, and is mainly in the power divisions, but is now at a more normalized level where we can manage well to compensate that with cost and productivity measures, as you can see in the table. We also have positive volume effects, which overcompensated for our selling and R&D costs, which didn't increase much in the quarter. This mainly comes out of volume increase, as you have seen in all divisions. The mix was negative as we had higher increases on the system business, so there's a slight negative mix. As you can see, that's much smaller than the volume increase.
On the other side, that's a sum of a few different things from foreign exchange, some project costs, some central provisions for legal costs and adjustments that we are doing. Overall, we took up the margin from 15.3% to 15.7%. Let me, in this slide, also remind to take a look at the historical performance into Q4, when you look at your models, because Q4 typically has a higher revenue level and somewhat lower EBITDA margin. It's important to see that trend we should expect to come also this year. Turning to the next chart, number nine, on the earnings per share. Here you see the earnings per share both as the basic net income, the real bottom line, as well as the operational net income, where we correct for some item, bit of some are more of a technical accounting nature.
The reported net income is up by 8% on a year-to-date basis. As you can see, the restructuring charges were higher than a year ago, and it is probable that we will, for the full year, somewhat exceed our guidance of $200 million for the full year. Operational net income didn't increase as fast as the operational EBITDA because we had also higher interest cost and financial expense depreciation compared to the same quarter last year. On year-to-date basis, the operational net income and EPS was up by 7%, that's the key number we focus on internally. The higher interest and finance expense is likely to continue because of the higher networking capital levels we have, I will come back to that on the next slide.
Impacting EPS is also the tax rate, which we expect to be around 27% for the full year, which is consistent with our prior guidance. If we then turn the chart to number 10, you see our cash flow performance and also some comments on networking capital. Four out of the five divisions reported improved cash from operations, we had a 43% improvement on the divisional cash side. That's because of good improvements and good performance in our efforts to work on the cash flow and networking capital. Nevertheless, there is clearly much more we can do in this area, and we have stepped up even further our focus on networking capital management under the program of relentless execution that we are now implementing.
Again this year, we expect a strong cash performance in the fourth quarter, which reflects our usual traditional factors like year and timing of project completions, as well as the payment pattern on some of our utility customers. The networking capital is also affected, the levels we have today, of timing on payment on some of the large projects, mainly in the Power Systems division. Some of those are of temporary nature and will go down over the coming quarters. For the year end, we will increase, or we have now increased our guidance for networking capital to be between 15% and 16%. It's somewhat above our old or our long-term guidance of 11%-14%, which we expect to get back into in a few quarters into 2014.
We are also guiding now to slightly increase the finance net this year to $310 million from the earlier guidance of $280 million, that is all related to interest cost for the working capital buildup. Also, taking a look at the balance sheet, we are at a net debt of $3.4 billion at the end of the quarter, which is the same level as the end of June. That is basically because during the quarter, we have also paid for the Power-One deal, which was a net cash effect on circa $750 million for the group. We also have confirmed our A rating with Moody's during the quarter, and we have also had reviews with Standard & Poor's during the quarter. We are firmly committed to stay with our single A rating. Now I turn it back to Ulrich.
Thank you very much, Eric. We want to use this opportunity also to take a couple of minutes to explain to you where I see the strengths of the company and where there are some opportunities to improve even more. Let's move to the slide number 12. First, we have demonstrated in the past few years that ABB is really a robust and well-managed company. We have great position in some very exciting markets, which are well summarized by our tagline, power and productivity for a better world. This will remain the key to the ABB story. There are other areas that will remain top priorities as in the past. We will continue to execute against our 2015 strategy, including our ambitions to take out costs and lead productivity every year on a sustainable basis.
We will try to improve customer and market orientation even further. We will focus strongly on technology innovation, which is basically the lifeblood of ABB, and this will definitely stay a top priority. In service, we have really developed good momentum, and we will keep pushing hard on that one. This is a really good part of the business, and we will continue here pushing. On integrity and sustainability, these are critical themes to really ensure that we do the business in the right way and deliver on our commitments to our stakeholders. There will be no compromises on that one. However, there are also some areas where we can do more, and this is what I will explain to you in the next few charts around the themes of profitable growth, business-led collaboration, and relentless execution.
If you move to the chart number 13, there are basically three main focus areas that we are really taking on to bring our performance to the next levels. These will drive all of our actions going forward. This will be basically the umbrella for ABB to act in the future. The first one is profitable growth. The opportunities are out there, even in a volatile market like we have today, but you need to take clear actions to get there, and I'll lay that out in a minute. Business-led collaboration is about working together across all the businesses in ways that are focused on the needs of our customers. That will not only lead to more growth, but also greater productivity and competitiveness of ABB.
The third focus will be relentless execution, striving for continuous improvement in the way we operate all of our business in terms of service levels, cost, cash, and productivity. Our success in these areas will ultimately translate into higher earnings per share and cash returns on invested capital. Let me quickly run you through each of these focus areas. If you will please turn to chart number 14. One of the great advantages of ABB today is really that we have the right products and technologies in the right markets. For example, around the mega trends on energy efficiency, renewables, infrastructure investments, increasing organization, and others. In the kind of market environment that we see today, it's not enough to be in the right markets with the right product. We really need to actively drive growth.
Therefore, I see three key opportunities to drive growth and that we refer to from now on as the pie approach, for profitable growth. It's basically penetration, innovation, and expansion. Profitable growth can be driven by increasing the market penetration of existing market segments by combining offerings across different businesses more effectively and continuously enhancing customer intimacy and service. One concrete example is optimizing our various channels to market, serving our customers not only with direct sales, but also through distributors, OEMs, or system integrators. Having locally focused product management in country, for country, is another growth lever that we can pull, differentiating and tailoring our offerings better to meet local customer needs. We will definitely focus on also on developing better tools and processes to improve our customer relationships. Innovation is and will be a key element of ABB.
This will include both new products and innovative packages, as well as solutions of our existing offerings and services. We have invested throughout this cycle in innovation, and I strongly believe that innovation, our new products that are coming out, will be a key driver of growth in the future. Growth will also come from further expansions into attractive segments with high growth potential, such as solar photovoltaic, subsea oil and gas production, and the increase in demand in the area of e-mobility. If you move on to slide number 15, which lays out the second principle, Business-Led Collaboration, it shows some examples on how we can deliver superior value to our customers by combining our offering from across different businesses and driving productivity through a joint approach.
The ability to do this and to provide an integrated solution also means that we can deliver greater operational efficiency and productivity because we have in-depth process knowledge in different industry segments. It's important to recognize that this collaboration driven by the needs of our customers, understanding their specific needs, and then creating an ABB solution based on multiple business offerings, not just from a single division. On the slide above, you see some really good examples. On the one hand, clear growth offering combinations for growth. On the lower part, some really good examples for joint operations that we have set up, for example, in China and in Brazil. If you move to slide number 16, this goes to the third focus area that we call Relentless Execution. We have demonstrated a strong track record on execution and cost management in the past few years.
This will not change. Management focus on execution will include not only consistent delivery of cost savings equivalent to 3% to 5% of cost of sales every year, but also stricter management of networking capital to lift cash flow, as well driving excellence in integration of newly acquired businesses. Our announcement earlier this week that Greg Scheu will now lead this new role on integration in the Executive Committee is part of this drive. This brings me to slide 17, where we lay out the key leadership appointment and organizational alignment. We have recently announced a number of key leadership appointments and organizational alignments that will enhance our ability to deliver on these three areas. Jean-Christophe Deslarzes is not only a seasoned HR leader, but also has significant operational and general management experience, both in the Americas and Europe.
He has also a good track record as an experienced integration leader and brings from that experience the right sensitivity to bring the integration element into the HR work of ABB. Pekka Tiitinen, as the new head of the DM division, brings a solid track record of superior growth and highly competitive cost management from his term as head of our highly profitable drives and controls business. Greg Scheu, American citizen, as you know, will use his extensive experience on the one hand in power and automation roles in ABB, but also in integrating our largest acquisitions to drive excellence in integration across the group and take North America to the next level of performance. Frank Duggan will take on leadership of our account management organization using his in-depth knowledge of local markets and his successful track record as a key partner for our customers.
The cross-business growth initiatives that Greg was driving, the so-called industry verticals in areas like solar, wind, rail, data centers, and so forth, they will be driven from here on by people that run operating businesses. Meaning the EC members responsible for divisions, and they will be responsible for ensuring the cost successful collaboration needed to take advantage of these growth opportunities. This is why we speak about business-led collaboration. On chart number 18, you see as a summary, the overview of the new team as it will be effective as of November 15. You see it's a real experienced team. It's a great mix of people. I think all of them have a great track record of performance in many industries and business environments. This is absolutely the right team to take the company to the next level.
Let me come to the outlook statement that you're probably all waiting for on chart number 20. This summarizes the midterm macro outlook for ABB. We remain cautiously optimistic about the U.S., today our largest end market, although the full impact of the recent budget impasse is hard to predict. Europe looks like it has reached a bottom, a meaningful upturn is not yet visible at this point, with Southern Europe still weak despite a relatively easier comparison with last year. Asia looks more positive, led by China, while India will probably remain a challenge until the next year's election that are coming. The Middle East is a large project business, we have to see how the customer decision-making develops.
In the meantime, we will focus on the tendering activities, which are picking up, and really keeping the customer intimacy in times where not much large orders are being placed. Let me come on slide 21, how we see ABB for the remainder of 2013 and going into the next year. The good news is really our long-term demand drivers, such as the need for greater industrial productivity, more reliable and efficient power delivery, and the development of renewable energies as well as infrastructure upgrades remain in place. Early cycle macroeconomic developments remain positive, several forward-looking indicators contain some mixed signals, and we still face some near-term market uncertainty. If you look at these forward-looking indicators, I could name, for example, the development of some of the emerging market currencies.
If you look at what came out recently in terms of employment data, the uncertainty around monetary policy, and really what will develop in U.S. regarding the political standoff that we have just experienced are contributing here. In this environment, we will steadily continue to execute our 2015 plan. Growth will be supported by delivering from our large order backlog, as well as increasing the focus on market penetration, innovation, and expansion. We will continue to relentlessly execute and to drive cost savings and productivity improvements equivalent to 3%-5% of cost of sales every year through improved supply management, better quality, and higher returns on investment in sales and R&D, which we call white-collar productivity. We remain committed to deliver higher cash to our shareholders and improving the cash return on our invested capital, the inventory turn rates, and the networking capital levels.
Before we move to the Q&A, let me add that we are planning an investor update event as part of our year-end results in February that will provide more details around the themes I've just outlined and the status of our strategy. As in the past, we will continue to practice to hold Capital Markets Day every second year in September, and there we update our strategic plans, and we will be holding the next Capital Markets Day in September next year as originally planned. With that, I'd like to conclude my remarks and thank you all for listening and turn it over for the Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question, press star then one on their touch-tone telephone. You will be prompted to confirm you are in the queue. If you wish to remove yourself from the question queue, you may press star then two. Participants are requested to use only hands while asking a question. Anyone with a question, press star then one at this time. The first question is from Mr. Simon Toennessen from Credit Suisse. Please go ahead, sir.
Yes, thank you. Good afternoon, gentlemen.
Good afternoon.
Good afternoon. First question is on the decline in the large orders you've seen, the 43%. Could you elaborate a bit more how much of that was Power Systems and maybe even further going into end markets, and elaborate how much of that was oil and gas as well? The second question, could you give us the local currency growth split of LP, DM, and PA in Europe just to have a better idea how these different businesses have grown. Lastly, on the Power Systems reset, you've said on the press call that you expect this to turn around and improve next fiscal year. Maybe you could just give us a bit more color around that. Thank you.
Okay. Thank you very much, Simon, for your question. On the decline of the large orders, about half of that comes from PS, and there you have basically two factors. One is the reset of the business towards a longer-term, more sustainable profit margin. Secondly, the slow decision-making in some of the transmission and utility infrastructure. That together contributes about half to that. Oil and gas is something that we see some positive signals coming, especially in terms of the tendering activity. The drop did not come out strongly out of oil and gas. In terms of the local differentiation of the growth of the product business in Europe, I hand over to Eric to give you a little bit more color on that.
Hi, Simon. It's Eric here. Europe is stable overall, the local currency increases in Europe in the product divisions is following that pattern. It is getting better. It is, in some of the areas, positive, in some of the areas, still flat, but it is in a positive trend like it is in also Americas and in China.
Okay.
Okay.
The Power Systems reset for next year?
On the Power Systems reset, look, Chris and his team are doing really a lot of hard work. They're driving the right kind of actions. I'm long-term really optimistic that this business will come out in the way that we want it. The timing of the recovery is depending not only on us but also on the market coming back. I stick to what I said earlier today, we expect it to come back sometime during the next year.
Okay. Thank you very much.
You're welcome.
The next question is from Mr. Andreas Willi from JPMorgan. Please go ahead, sir.
Good afternoon. I have one big picture question and two clarifications on numbers. On the business-led collaboration which you mentioned, this has been a focus for ABB before on the previous CEOs and programs. What do you specifically plan to change in terms of changing the corporate behavior in terms of collaboration across the divisions? The second question on base order growth, obviously a big swing from -5% to +5%. Does the +5% also include Power-One? Maybe you could give us some indication of sequential growth, because it's always a bit difficult when we look at year-on-year growth, particularly given that if we look at multi-year comparables, they have got quite a bit easier in Q3. Maybe it will be helpful for us to know what the sequential pickup in base orders is.
Last question on Power-One, if you could give us the sales and underlying EBIT contribution for the quarter so we can work out the organic development. Maybe also some indication what happened there on profitability since you acquired it. Thank you.
Andreas, thank you very much for your question. Let me start with the last one first. We will not in the future disclose details on Power-One. This is not a material transaction for ABB. This will be part of the reporting of the DM division. Power-One is developing in line with the case that we put together when we made the deal. The market environment on the solar side is one which is faced by certain challenges. We were well aware of that when we went into the deal, and we are executing against the plan that we have put together in a really good way. Your question on the big picture on business-led collaboration. Look, collaboration is always something that ABB aims for. There is tremendous opportunity out there as I laid out. What is different? The difference is really the term business-led.
The division heads that we have today are mainly focused on their executing their divisions, and we had some resources bringing the activities together across the different activities. What will change now is that these executive committee members will have personally the accountability and responsibility for each one of the collaboration efforts, and it will be anchored in their performance incentives and in their performance targets. Basically, none of them will fully get their PDA targets fulfilled if the other ones don't collaborate. What I want to have really is a very strong execution of this collaboration by the business leaders in the company. That's point number one. Point number two is we have started really a journey of jointly identifying and agreeing on these collaboration activities in a focused and prioritized way. The business leaders are deeply involved and are basically also suggesting them.
We keep building on their experience, how to deal with customers better, and how to address the markets best. I really believe that under Joe, we set up a lot of collaboration activities, brought them to a certain level of maturity, and now is the right time, having achieved this maturity, to go to the next stage of excellence by having the business leaders directly responsible for these collaboration fields. On the base order question, I hand over to Eric, who will give you some more color on that one.
Yeah. On the first question, Andreas, the 5% includes Power-One, as we don't separate that out, but it is not a major impact on the group level from Power-One. Sequentially, it is improving both overall and also in the major regions, actually quite well in some of the regions. Base order development is in an upward trend.
You're not going to report organic growth going forward. If you do acquisitions up to $1 billion, you wouldn't split them out going forward as organic and inorganic growth.
We have splitted out the large transactions, Thomas & Betts and Baldor over the last few years, and we have not splitted out the smaller transactions. Power-One is a relatively small transaction from our point of view.
Thank you.
You're welcome.
The next question is from Mr. Ben Uglow from Morgan Stanley. Please go ahead, sir.
Good afternoon, everyone. I had a couple of questions. First of all, maybe Ulrich or Eric, can we just step back and talk a little bit more about this short cycle pickup? From reading your press release, obviously I get the impression that things are moving upward in low voltage. You've called out the Robotics division as well. Can you give us any more evidence of either, I don't know, end markets or product categories or any one geography that gives us confidence that this is a, how shall I put it, a broad-based upturn as opposed to something specific in a couple of divisions of ABB? That was question number one. Question number two was really around strategy.
I was reading from some of the comments this morning that ABB would like to invest more in subsea oil and gas, and at the same time, everything we see in terms of process CapEx in general appears to be slowing down a bit. I wanted to understand, what is your thinking about the oil and gas vertical, specifically, why subsea? What is it about subsea that would be more attractive than going into, say, unconventional oil and gas, like shale markets, for example?
Okay. Thank you, Ben, for your questions. I'll start on the short cycle piece, and Eric, you might bring some color, and then I'll move over to the strategy piece. Look, on the short cycle piece, it's really pretty good news. All around the world, we are experiencing a pickup on the short cycle pieces of the portfolio, being it in Traction division, parts of the DM division. We see a good pickup in China. We are seeing good pickup in Germany. We have seen in the robotics field continuous good demand. Look, I'm going tomorrow to China to meet the mayor of Shanghai, talking about pollution and everything. If they don't automate, that will be clearly a significant risk for that economy. We are well-positioned there all around and it's coming together. Eric, any other comments on the short cycle piece?
I think you basically said it all, Ulrich. It is picking up. The trend has been there. We reported also last quarter. It is overall not enormously strong trend, but it is in the right direction, and there is a relatively broad base, both product and geography.
That's very helpful, guys. Can I just interject? Is there any end market where you see things being different? Automotive, I get, but is any of this related to residential or non-residential or food and beverage, any particular industry?
Okay. Let me take a try at that one, Ben, to get you more color on this one. If you look at it, yes, food and beverage is one that is good. 3C is one which is good for us. If you look at automotive, it's good for Traction. We see in quite couple of markets, residential construction picking up, which is good signals. Look, I know that you're going to maybe nail us one more time, but it's a pretty broad pickup, and we have to stick with that. We see some hesitancy in some of the process industries doing more than the typical replacement and maintenance piece, which is not surprising given the large order and the overall demand pattern there.
Quite a lot of those product categories also go through distribution. Obviously we know to some extent where they end up, but we don't have a complete picture of all the end markets which go through distribution.
That's very clear. Thanks.
Okay. Now, the second question was around strategy and subsea. Look, I think when you run a portfolio like ABB, where you have $40 billion turnover, 140,000 people, it's important to invest in businesses, not only with a short-sighted perspective, also with a long-sighted perspective. Oil and gas, as you know, is a key home turf for ABB. We are well-positioned there. We're doing a lot with our DC offering, with our product offering, with automation and actuation offering. We also have the responsibility to look ahead. If we look longer term ahead, the subsea area is really an area where you have an opportunity or high opportunity to technologically differentiate yourself from others, to really come out with unique solutions where technology really matters. There's a big difference.
I believe putting money into this kind of market makes a lot of sense for us in the right and tailored way. I give you another example. If you take e-mobility as another investment area, we did that as a startup business a couple of years ago. We started it. We bought a small software and service company to complement our own hardware activities. Today, we are the only company in the world that has now in Denmark, in Estonia, in Netherlands, countrywide supplied fast charging stations. We will have a good mix of the traditional innovation and traditional investments, and then we plant some seeds and put some money in the longer-term trends that we believe in.
That's very helpful. Thank you.
You're welcome, Ben.
The next question is for Mr. Mark Troman from Bank of America Merrill Lynch. Please go ahead, sir.
Yeah, thank you. Hi, Ulrich. Hi, Eric.
Hi, Mark.
Hi.
Okay, first question. It looks clear, obviously, base orders have turned up. If that continues as is likely, how well is ABB positioned to leverage that growth? In other words, how much do you have to invest to capture the growth opportunity? Or should we see pretty good operating leverage in those product divisions? That's question number one. Question number two on the power side. I guess looking at pricing, it looks fairly similar to what we've seen before. If we looked at power products this year, at least the EBITDA margin looks as though it would be at the bottom end of your target range. Can you comment on the scope to improve that on a 12-24-month view, given, I guess, that order price pressure is less than or less intense than what you're seeing in the P&L currently? That's question number two.
Just finally, on M&A, Greg's appointment looked interesting. Is that because you've still got a lot to go in terms of synergies from the acquisitions, or maybe a little bit more detail as to what you're really looking for Greg to do and deliver? Thank you.
Okay. Let me start with the last one, Mark, on Greg's appointment. Look, you know that Greg has done a fantastic job leading the acquisition integration on Thomas & Betts. He has done a great job in Baldor. We have a certain concentration of the large deals in North America. It's very important to have the right leadership in place there. We have a good momentum on integration. I'm really pleased where we are today, but there's much more to be gained. That's something that we will have Greg strongly focused. His job is not only delivering the numbers. His job is also helping with bringing the teams together in North America, make sure the culture grows together over the next couple of years. On the front-end side, on distribution, for example, we've only started a journey.
There's so much more to be done. Greg is a very experienced operator on the distribution side. For me, this is a natural one. If you look between Greg and Jean Christophe, we have now two executive committee members who have really good integration experience helping us with delivering what we started in the past. The rest of the team, Eric and myself, have done quite a bit on that field. That means we are prepared to do what we need to do for what we have already, but we are also ready that if something else comes in, we will do a good job in the future. That's the point on Greg.
Now, on leveraging the product businesses in terms of growth, you have seen us continuously investing on the CapEx side throughout the cycle. A lot of that investment has gone really into automation and productivity of our existing facilities. We have quite a bit of room and quite a bit of capacity opportunities to address growth to come with what we have installed. You should not expect a huge spending need for us to address the opportunities that the market hopefully brings to us near-term. Your third point on power, I think I'll let my friend Eric answer on that one and give you the details on that one.
Yeah. As I said on the bridge before, the pricing is basically stable now. We have already in the earlier quarter said that the order pricing is coming down in power products, or the reductions are coming down, rather, to be very specific in power products. There still is some time to go before we see those effects in revenues. We basically have a stable situation from Q2 to Q3 on revenue impact from power. Looking ahead, you said 12-24 months, and assuming that the pricing stays stable to where it is today, we should see an improvement specifically on power from the orders we have taken on the backlog from a pricing point of view. You have to couple that with the cost savings and how much we can achieve on the cost-saving side.
That's why we have continuously reported those two as a pair. Pricing separated should have a positive effect on revenues in power over the coming 12 to 24 months.
Thank you.
I hope we have answered your questions, Mark.
Thank you.
You're welcome.
The next question is from Mr. Jeffrey Sprague from Vertical Research Partners. Please go ahead, sir.
Thank you. Good day, everyone.
Hey, Jeff.
Good day. A couple questions. First, just back on the collaboration question, Ulrich, your comment that one of the things that's different is the leadership will agree and target it in a focused way. That suggests obviously harder targets, if you will. I wonder if you could just give us any sense of your view of how big that opportunity really is in terms of revenues or however you could frame it, and what your hit rate likely could be on those type of opportunities. The second question, I was wondering, as you take a little bit of a fresh look at the portfolio and think about maybe restructuring or repositioning.
Obviously, Power Systems really stood out, but are there other areas in the portfolio where you see a significant opportunity, maybe addition by subtraction, if you get my notion, to withdraw from some more commodity-like areas and how you might execute on that? Finally, I just wonder if the M&A pipeline has stayed active through the CEO transition. Obviously, Power-One happened right in the middle of it, but is there any change in the activity or pipeline? Thank you.
Okay. Thank you for your set of questions. Look on the collaboration side. This is a significant opportunity for us in ABB. As you rightly guessed, there will be hardwired data and that will be hardwired target, where we hold individuals and teams accountable and responsible towards delivering what we jointly decide we're going to do. I think in terms of the numbers around it, let's wait for the strategy update in the end of February. We will come up a little bit more on that one and give quantification. Give me a couple of months to work with the team to get you more details on that one. On the portfolio question. Look, you have seen us very recently divesting the Baldor generator piece. That was a piece that came with one of the acquisitions. We were subscale. We don't have combustion engine.
In that business, you really need to have your own combustion engine to get at scale. We decided that this would be better in a new home, and we divested that. For me, look, if you want to grow a good apple tree, you need to prune it now and then. This is something that it will be just a normal pattern in our portfolio that we look at it, we prune it, and we invest in growth. Having that in a good balance going forward will probably give you a very focused portfolio, and things that at a time might not be optimally at home in ABB will have then to go and leave this portfolio. We are working on that one continuously. This will be a journey.
There will be no radical events, but this will be something that becomes even more a pattern of ABB under my leadership in the future. The last one on the M&A pipeline. Look, you know that we have been pretty well executing over the last couple of years, the pipeline. We have a good process that we call the growth board process. We're going to keep the process in place. We kept it in place during the transition period between Joe and me. You should expect that this is something that will stay in focus in the years to come. At the moment, it's not like that it's totally dead, but naturally in a transition period, you just want to first get the transition done.
Great. Thank you very much.
You're welcome, J.
Next question is from Daniela Costa, Goldman Sachs. Please go ahead, madam.
Hi. Good afternoon. Actually, two questions. The first one, a year ago when you had the Capital Markets Day, or a little bit more than a year ago, you talked a lot about the service business and growing the service business. Just looking at the numbers, it doesn't seem that there have been a massive move from how much service represented in the portfolio versus before. I was just wondering on your comments on what you think prevents it from taking a bigger share of group revenues and why it's taking longer or why it should take a long period of time. Secondly, just curious to know where your CROI target stands at the moment and whether you still think the target for 2015 is reachable. I believe it was on one of those yellow traffic lights the last time you presented them. Thank you.
Okay, look. Thanks for your question. On the service side, at the moment, if you look at the numbers, we have a single-digit growth that we announced on the service side, on the order side. We got some really good execution. It's a highly profitable business. We like it. I personally like it, and we will do more in the future in that field, as we have always said. At the moment, the service piece, if you look at large projects, typically our large service contracts go very often with large project sales. Large project sales being down means also the associated service packages are down in terms of the income. The base service business in terms of driving product replacement and standard service activities are quite good.
We have a really good pipeline of a lot of now productized service products and service offering that the team worked very hard over the last two years to productize it better, standardize it, make it more sellable. I'm quite confident about the future, and I think as soon as the large orders will pick up, the overall large service orders will also pick up together with that. We have also showed some discipline on the full service side that we didn't take every order possible. We want to make a profitable business, and there are some contracts that we have even discontinued and not taken on for prolongation, just to show some discipline in terms of the margin. Your second question on CROI, I hand it over to Eric.
Yeah. It was a bit blurry line, but I understood it was on the growth targets on the CROI?
On the CROI, yeah.
CROI. We are roughly at 12% CROI at the end of the quarter, which is a couple of percentage point higher than a year ago at the same point. We are trending in the right direction. On the divisions we made the big acquisitions, we have seen a clear pickup in the return following the realization of all synergies. Obviously, it is a long way from the 12 we had for 2012 to the target to be close to 20 or to be at 20. We have always said that we will be challenged to be at 20 if we have major acquisitions close to the end of the period of 2015. We are working hard on it, driving it in the right direction, and we see how far we will get.
Let me just maybe complement what Eric just said. You heard me saying earlier that we will have a strong focus on net working capital and inventory. This is something where I really see ABB having opportunities. I'm not happy with that today. This is something that we will enhance the momentum and put a lot of focus on to also the net working capital and inventory side go to the next stage of performance.
Thank you.
You're welcome.
The next question is from Mr. Olivier Ezwann, Exane. Please go ahead, sir.
Yes. Good afternoon. Yes, a few questions, please. First of all, when you talked about earlier this morning about market penetration focus, I was wondering how different is that, or how do you prevent it from becoming a plain market share strategy where slash price war type of risk? Obviously, it all depends how you measure that type of market penetration, but an easy way would be ABB just being more ready to engage into a price competition in some market that have been historically a bit more disciplined. A second question is about your comment about the backlog having implication for pressure on sales going forward. It's true that if I look at the power divisions or PA, there's a large gap between the 4-quarter rolling orders, which is trending quite negative, and sales, which is still positive, maybe even accelerating.
Do you feel you have enough steam in the base order recovery to offset organic growth turning negative?
Okay, Oli. Go ahead.
Sorry, just the last one. More practical on FX. Obviously, you hedged, so you haven't really seen the pressure this quarter of some of these emerging market currencies going down. Is it something we should worry about? You can quantify maybe the implied pressure already for us, or is ABB sufficiently locally present to this not being an issue for your EBIT bridge? Thanks.
Olivier, thank you very much for your questions. Let me start with your penetration question, which I believe is a really good one. Look, this will not be a market share battle on a pricing war side. Absolutely not. Only over my dead body this will not happen. Trust me, I come from the southern part of Germany. We can spell discipline there, and we're going to keep that discipline in that context. What we will do is, we will identify the segment-specific needs. We will invest in sales. We will invest in adapting our offering in the right way, to really make sure that the customers choose us and not others. We will work very hard to serve all channels in the relevant segments. Sometimes our businesses are a little bit more OEM heavy, sometimes it's a little bit more distribution heavy, and we have some opportunities.
What we basically do is, we prioritize these opportunities in a way that there's a certain minimum margin threshold, otherwise we don't even look at it. Then we focus our resources, our investments, our efforts, all the energy in the way where we really expect good payback for you as a shareholder. That's the first piece. On the backlog and FX, I hand over to Eric.
Yeah. Olivier, on the backlog, it is correct, of course, that we are taking out of the backlog on PS and PA, in PS in quite a major way. At the same time, we have a good tender backlog for large projects, so it will depend on when this will be awarded. We don't have so strong hopes for the very near future, but when we get into 2014, we expect quite a lot of activity on ordering there. It all depends on when those orders are coming, and when we start getting revenues out of those. Obviously, the short or the early cycle and the base order business will help us in this, that it's in an uptrend, and it all depends on how strong that is. We are working very hard, obviously, to continue our growth on the sales line.
On the hedging, we are actually quite well-positioned with our global footprint. The impact of the recent movements of the main emerging market currencies have not had that big impact on it. Yes, we are hedged, but that is not the main reason why we are not impacted. We have a good footprint in large countries like China, India, Brazil, and other places, with also export out of some of those countries, which obviously is even helped by the lower level of the currency. We simply don't see this as such a big issue from our point of view, and I have no guidance, and I will not give you any guidance on how it may look in the future, because there is no larger impact on our side.
Okay. Thank you.
You're welcome.
The next question is from Mr. Daniel Callister from Nomura. Please go ahead, sir.
Hello there. Just a question really on sort of DM. Looking at the press release, you're talking about Discrete Automation margins being higher on higher revenues, obviously last year, as you know, they were lower on higher revenues. I think at the time, if I recall, there was some margin pressure last year due to mix and investments. Mix weakness in particular in renewables, the motors and drive segment, which now seems to have recovered. I guess the question really is can you quantify, other than just straightforward volumes, what was really driving the improvement in margin, especially with reference to mix? Thanks very much.
Look, Daniel, I think in the DM division, Pekka Tiitinen is leading that now since a couple of weeks. We have focused enormous amount on execution and operational improvement. Last year, you were right with your observations last year, I think the team has done this year really strong and solid job on operational improvement and execution improvement, which has led to the steady margin that we have shown here. There's a little bit of mix in there as well, it's really good fundamental improvement in the businesses all across the range.
With the recovery in renewables, the reverse of last year's situation, would that have a positive or sort of less than the negative that you talked about last year?
I think it's too early to, boy, speak about a significant recovery in renewables. When it comes, hopefully, we have some upside.
Okay. Very clear. Thank you.
You're welcome, Daniel. I suggest we go to the last question now.
The last question for today is from Mr. Fredric Stahl from UBS. Please go ahead, sir.
Hi. Lucky me. Hi, gentlemen, it's Fredric here at UBS. I'll just ask you one question then. Could you maybe just going back to China, you're saying that automation demand has been good there. Do you mind giving us an insight into what end markets are doing particularly well across China? Thank you.
Look, on China, as you know, we have a very strong automation franchise today. There is ABB across the different automation businesses. On the low voltage product side, the construction penetration there is going well. I think Parag and his team are doing a good job in getting us more going there. We had on the DM side, across the portfolio, quite a positive development. The move of robotics into the 3C industry and in the general industry supporting that is very good. We had, for example, a very significant large order coming from a Chinese manufacturer that has many thousand machines, and we have addressed that one. On the drive side, all the investments in energy efficiency are paying off with the right investments on drives.
Okay. Thank you very much.
You're welcome.