Earnings Call: Q3 2013

Oct 24, 2013

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABP Q3 2013 Results Analyst and Investors Conference Call. I'm Stephanie, the Chorus Call operator. I would like to remind you that all participants will be in a listen only mode and the conference is being recorded. At this time, it's my pleasure to hand over to Mr. Ulrich Biesehoefer, CEO of ABB and Mr. Erik Elszrig, CFO of ABB. Please go ahead, gentlemen. Good afternoon and good morning to everybody on this call. Welcome to everybody to the Q3 20 13 results call. It's a pleasure for me to present the results for the first time as ABB's CEO. It's an exciting time to take on this challenge and 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, Erik Elswick. You know that Erik and I work together very well in the Discrete Automation division and it's great to see the proven team together again today. So today, we're going to take you through the results together with Eric here. And then I will take some time to talk to you about I see ABB's strength and where I think we can do more. I'll summarize with a mid term view of our markets and the near term outlook for our businesses. Before I start and this is now related to slide number 2, let me remind you that as always my comments in this call refer to the presentation that you can download from our website at avb.com. Also, please refer to the important notices outlined on Chart 2 regarding any forward looking statements today. So let me move to chart number 3, which shows an overview of the quarter. We showed solid performance across the business and it was demonstrated by the increase in revenues, operational earnings, net income and cash from operations, which was up by almost €500,000,000 versus a year ago. Our base orders returned to year over year growth and were higher in most regions. And all divisions except Power Systems where the strategic repositioning to focus on higher value added projects continue 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 positive volume effects 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 and announced some 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 couple of the developments in there. But let me just already highlighted quite a couple of the developments in there. But 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 4 to 6 quarters. But tendering activity is very high and 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 about 40 basis points, as I mentioned. And Erik will take you through the bridge in a moment to see you to show you a little bit more how this all comes together. So overall, I'm encouraged also by the strong performance in cash from operations, which was up 62% and that's really a sign of a very healthy enterprise. If you move on to chart 5, it shows you the regional growth overview. First off, on the early cycle business improvements, we saw really across the board. And 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 20 12. However, the U. S. Was steady at high levels as order increases in the product divisions despite uncertainty, they're 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 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 3rd 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. So on the slide 6, you see an overview of the divisional growth performance. And 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. PowerOne has contributed to DM's growth and the outlook 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%. 1st quarter of order growth in PP, really since the Q2 of 2012, which again is good news for us. The PS is showing the impact of the realignment and vehicle utility transmission spend. Now let's move to the revenue side and just talk about the highlights here. We have really on the backlogs on strong backlogs on PA, PS and DM have contributed to really solid revenue performance and good execution was 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. So the synergies are really coming. The cost synergies are well on track. So altogether, the Baldor integration is moving really well. On Thomas and Betts, we have plans to bring together on the logistics side and leverage our joint business which is nearing really to completion. European and Asia integration is well underway. The sales growth plans are now in place. So we are moving swiftly and learnings from the Bardo 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 in when you do a large acquisition. Our sales for example, the sales people are all still different, 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 a chain savings are going very well. We have already added more than €10,000,000 to the bottom line coming out of the Thomas and Betts supply chain savings. Now if I move to the chart number 7, this gives you an overview on the earnings. And here really we have had solid execution. The earnings are 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. The EM is stable on a high level. The PA margin is at a very high 13.6 percent and this is mainly due to strong revenue growth of 13%, thus 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% to 15%. PS also executed better on its project business versus the Q3 last year, where the division to deliver 9% operational EBITDA for the Q4. So now let me turn over to Erik to take you through more of the financials. Okay. Thank you, Ulrich. So we talked to Chart 8 where you have the EBITDA bridge. You can see in the bridge here that the net savings increased compared to the Q2 2013 as we continue to execute well on the cost savings. Price pressure remains, but is and is mainly in the Power Divisions, but is now at a more normalized level where we can manage well to compensate that the cost and productivity measures as you can see in the table. We also have positive volume effects, which overcompensated for our selling and R and D costs, which didn't increase much in the quarter. And 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. But as you can see that's much smaller than the volume increase. And then on the other side that's some of a few different things from foreign exchange, some project costs, some center provisions for legal costs and adjustments that we are doing. But overall, we took up the margin from 15.3% to 15 point 7%. Let me this slide also remind to take a look at the historical revenue level and somewhat lower EBITDA margin. So it's important to see that that trend we should expect to come also this year. Turning to the next chart, number 9, on the earnings per share. Here you see the earnings per share both as the basic net income, the real bottom bottom line as well as the operational net income where we correct for some item bit of some or 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 2 $100,000,000 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 to date basis, the operational net income and EPS was up by 7% and that's the key number we focus on internally. The higher interest and finance expense is likely to continue because of the higher net working capital levels we have and I will come back to that on the next slide. Also impacting EPS is also the tax rate, which we expect to be around 20 7% for the full year, which is consistent with our prior guidance. So if we then turn to chart to number 10, you see our cash flow performance and also some comments on net working capital. 4 out of the 5 divisions reported improved cash from operations. So we had a 43% improvement on the divisional cash side. And that's because of good improvements and performance in our efforts to work on the cash flow and net working capital. Nevertheless, there is clearly much more we can do in this area and we have stepped up even further our focus on net working capital management in under the program of relentless execution that we are now implementing. Again, this year, we expect a strong cash performance in the 4th 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 net working capital has 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. But for the year end, we will increase or we have now increased our guidance for net working capital to be between 15% 16 percent. So it's somewhat above our old or our long term guidance of 11% to 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 3 €10,000,000 from the earlier guidance of €280,000,000 and 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 SEK 3,400,000,000 at the end of the quarter, which is the same level as the end of June. And that is basically because during the quarter, we have also paid for the PowerOne deal, which was net cash effect on circa SEK 750,000,000 for the group. We also have confirmed our A rating with Moody's during the quarter and we have also had reviewed Standard and Poor during the quarter. So we are firmly committed to stay with our single A rating. And now I turn it back to Ulrich. Thank you very much, Erik. So we want to use this opportunity also to take a couple of minutes to explain to you where I see the strength of the company and where there are some opportunities to improve even more. So 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 EVP 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 lease productivity every year on a sustainable basis. We will try to improve customer and market orientation even further and 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 ensure that we do the business in the right way and deliver on our commitments to our stakeholders. So 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. So if you move to chart number 13, there are basically 3 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 a volatile market like we have today, but you 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 our 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 3rd focus will be relentless execution, striving for continuous improvements 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. Now let me quickly run you through each of these focus areas. If you would 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 megatrends on energy efficiency, renewables, infrastructure investments, increasing 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. And therefore, I see 3 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 the in country for country is another growth lever that we can pull differentiating and tailoring our offerings better to meet local customer needs. And we will definitely focus on also 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 become or come further from further expansions into attractive segments with high growth potential such as solar photovoltaic, subseaoil and gas production and the increasing demand of the area of e mobility. So if you move on to slide 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. And on the slide above, you see some really good examples. On the one hand, clear growth combinations for offering combinations for growth. And 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 3rd focus area that we call relentless execution. We have demonstrated a strong track record and execution in 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 net working capital to lift cash flow as well driving excellence in integration of newly acquired businesses. Our announcement earlier this week that Craig Choi will now lead this new role on integration in the Executive the organizational alignments. 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 Delaise 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 Zietenen 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. Craig Shoy, American citizen, as you know, will use his extensive experience on the one hand in power and automation roles in ABB, but also level of performance. Frank Dagen 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 Craig 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 for advantage of these growth opportunities. So 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 track record of performance in many industries and business environments. So this is absolutely the right team to take the company to the next level. With that said, 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. So there is no much change versus the end of the Q2. We remain cautiously optimistic about the U. S, today our largest end market, although the full impact of the recent budget impact is hard to predict. Europe looks like it has reached a bottom, but 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 elections that are coming. The Middle East is a large project business and we have to see how the customer decision making develops. But 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. So 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 as infrastructure upgrades remain in place. Early cycle macroeconomic developments remain positive, but several forward looking indicators contain some mixed signals and we still face some near term market uncertainty. So if you look at these forward looking indicators, I could name for example the development of the emerging 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 standards 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 and improvements equivalent to 3% to 5% of cost of sales every year through improved supply management, better quality and higher returns on investments in sales and R and D, which we call white color productivity. We remain committed to deliver higher cash to our shareholders and improving the cash return on our invested capital, inventory turn rates and the net working capital levels. Before we move to the Q and 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 2nd 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. So with that, I'd like to conclude my remarks. And thank you all for listening and turn it over for the Q and A. We will now begin the question and answer session. The question is from Mr. Simon Jonathan from Credit Suisse. Please go ahead sir. Yes. Thank you. Good afternoon, gentlemen. First question is on the decline in the large orders you've seen at 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? And the second question, could you give us the local currency growth split of LPDM and PA in Europe? Just to have a better idea how these different businesses have grown. And then 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. So 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 2 factors. The one is the reset of the business towards a long term more sustainable profit margin. And secondly, the slow decision making in some of the transmission and utility infrastructure. So that together contributes about us to that. Oil and gas is something that we see some positive signals coming in terms especially in terms of the tendering activity. So 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 Erik here. So Europe is stable overall and the local currency increases in the product divisions is following that pattern. It is getting better. It is in some of the areas positive and some of the areas still flat. But it is in a positive trend like it is in also Americas and in China. Okay. And then the Power Systems reset for next year? Well, 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. And 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. So I stick what I said earlier today. We expect it to come back some end during the next year. Okay. Thank you very much. You're welcome. The next question is from Mr. Andreas Willey from JP Morgan. Please go ahead sir. Good afternoon. I have one bigger 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 collaboration across the divisions? The second question on base order growth, obviously, a big swing from minus 5 to plus 5. Does the plus 5 also include Power 1? And 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 multiyear comparables they have got quite a bit easier in Q3. So maybe it will be helpful for us to know what underlying EBIT contribution for the quarter, so we can work out the organic development and maybe also some indication what happened there on profitability since you acquired it? Thank you. Okay. Andreas, thank you very much for your question. Let me start on with the last one first. We will not in the future disclose details on PowerOne. This is not a material transaction for ABB. So this will be part of the reporting of the DM division. PowerOne is developing in line with the case that we put together when we made the deal. The market environment on the solar side is 1 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, yes, 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. So 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 their performance targets. So basically, none of them will fully get their PDA targets fulfilled if the other ones don't collaborate. So 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 1. Point number 2 is, we have started really a journey of jointly identifying and agreeing on this collaboration activities in a prioritized way. The business leaders are deeply involved and are basically also suggesting them building on their experience how to deal with customers better and how to address the markets best. So 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 this collaboration field. On the base order question, I hand over to Erik who will give you some more color on that one. Yes. On the first question Andreas, the 5% includes Power 1 as we don't separate that out, but it is not a major impact on the group level from Power 1. Sequentially, it is improving both overall and also in the major regions actually quite well in some of the regions. So base order development is in an upward trend. So on you're not going to report organic growth going forward. If you do acquisitions up to $1,000,000,000 you wouldn't split them out going forward as organic inorganic growth. We have split it out the large transactions Thomas and Betts and Waldron over the last few years and we have not split it out the smaller relatively small transaction from our point of view. Thank you. You're welcome. The next question is from Mr. Benedikt Ugloff from Morgan Stanley. Good afternoon, everyone. I had a couple of questions. First of all, obviously, I get the impression that things have the robotics division as well. Can you give us any more evidence of either I know end markets or product categories or any one geography that gives us sort of confidence that this is a how shall I put it a broad based upturn as opposed to something specific in couple of divisions of ABB. So that was question number 1. Question number 2 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 time everything we see in terms of process CapEx in general appears to be slowing down a bit. So I wanted to understand what are your thinking about the oil and gas vertical? Specifically, why Subsea? And 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, it's really, really good news. All around the world, we are experiencing a pickup on the short cycle pieces of the portfolio being it in Tarax division, part of the DM division. We see a good pickup in China. We have seen good pickup in Germany. We have seen in the robotics field, continuous good Mayor of Shanghai talking about pollution and everything. If they don't automate, that will be clearly a significant risk for that economy. So we are well positioned there all around and it's coming together. Eric, any other comment on the short term? No, you basically said it all. It is picking up. The trend has been there. We reported also last quarter. It is overall not enormously strong term, but it is in the right direction. And there is a broad relatively broad based 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 guess, but is there is any of this related to residential or non residential or food and beverage, any particular industry? 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 Tarak. We see in quite a couple of markets residential construction picking up, which is good signal. So look, I know that you got 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. And quite a lot of those product categories also go through distribution. So obviously, we know to some extent where they end up, but we don't have a complete picture of where the market goes through distribution. That's very clear. Thanks. Okay. Now the second question was around strategy and subsea. Look, I think when you run 140,000 people, it's important to invest in businesses not only with a shortsighted perspective also with a long sided 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. But we also have the responsibility to look ahead. And 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. So I believe putting money into these kind of markets makes a lot of sense for us us in the right and tailored way. I'll give you another example. If you take e mobility as another investment area, we did that as a activities. And today, we are the only company in the world that has now in Denmark, in Estonia, in Netherlands countrywide supplied fast charging stations. So 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 The next question is from Mr. Mark Drummond from Bank of America Merrill Lynch. Please go ahead sir. Yeah. Thank you. Hi, Ulrich. Hi, Erik. Hi, Mark. Okay. First question, it looks clear obviously base orders have turned up. If that continues as is likely, are you how well is ABB positioned to leverage that growth? In other words, how much do you have to invest invest to capture the growth opportunities? Or should we see pretty good operating leverage in those product divisions? That's question number 1. Question number 2 on the power side, I guess looking at pricing, it looks fairly similar to what we've seen before. And if we look at Power Products this year at least the EBITDA margin looks as though it will be at the bottom end of your target range. Can you comment on the scope to improve that on a 12 to 20 month 24 month view given I guess the order price pressure is less than or less intense than what you're seeing in the P and L currently? That's question number 2. And just finally on M and A, Greg's appointment looked interesting. Is that because you 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, Marc, on Greg's appointment. Look, you know that Craig has done a fantastic job leading the acquisition integration on Thomas and Besi has done a great job in Baldor. We have a certain concentration of the large deals in North America. So it's very, 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. And that's something that we will have Plagg strongly focused. His job is not only delivering the numbers. His job is also helping to bring the teams together in a example, we've only started a journey. There's so much more to be done. And Craig is a very, very experienced operator on the distribution side. So for me, this is a natural one. And if you look between Greg and Jean Christophe, we have now 2 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, has done quite a bit on that field. So 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. So that's the point on Craig. Now on leveraging the product businesses in terms of growth, you have seen us continuously investing on the CapEx side throughout the cycle. And a quite a bit of capacity opportunities to address growth to come with what we have installed. You should not expect a opportunities that the market hopefully brings to us near term. And your third point on power, I think I'll let my Frederic 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 it still is some time to go before we see those effects in revenues. So it's there still is some time to go before we see those effects in revenues. So we basically have a stable situation from Q2 to Q3 on revenue impact from power. Looking ahead and you said 12 to 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. And then you have to couple that with the cost savings and how much we can achieve on the cost savings side. That's why we have continuously reported those 2 as a pair. But pricing separated should have a positive effect on revenues in Empower over the coming 12 to 24 months. The next question is from Mr. Jeffrey Sprague from Vertical Research Partners. Please go ahead sir. Thank you. Good day everyone. Hey Jeff. Good A couple of questions. First just back on the collaboration question. Or is your comment that one of the things that's different is the leadership will kind of agree and kind of target it in a focused way. And that suggests obviously kind of harder targets if you will. And 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 kind of hit rate likely could be on those type of opportunities? The second question, I was kind of wondering as you take a little bit of a fresh look at the portfolio and think about maybe restructuring or the portfolio and think about maybe restructuring or repositioning, obviously, Power Systems really stood out. But are there other areas 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? And then Obviously, PowerOne happened right in the middle of it. But is there any change in kind of 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. And as you rightly guessed, there will be hardwired data and there will be hardwired target where we hold individually 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 cover a little bit more on that one and give quantification. Give me 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 Genet piece. That was a piece that came with 1 of the acquisitions. We were tough scale. We don't have combustion engines. And in that business, you really need to have your own combustion engine to get at scale. So we decided that this would be better in a new home and we divested that. And for me, look, if you want to grow a good apple tree, you need to prune it now and then. So 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 and 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 them to go. And if 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. And the last one on the M and 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. So you should expect that this is something that will stay in focus in the years to come. And 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, Cev. Next question is from Danica 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. And 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. So 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? And then secondly, just curious to know where your Croix target stands at the moment and whether you still think the target for 2015 is reachable? I believe it was in 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. Now at the moment, the service piece, if you look at large projects, typically our large service contracts go very often with large project sales. So large project sales being down means also the associated service packages are down in terms of the income. So 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 2 years to productize it better, standardize it, make it more sellable. So I'm quite confident about the future. And I think that as soon as the large orders will pick up, our service the overall large service orders will also pick up together with profitable business and there are some contracts that we have even discontinued and not taken on for prolongation just the social discipline in terms of the margin. Your second question on Croy, I hand it over to Erik. Yes. On it was a bit blurry line, but I understood it was on the growth targets on the CRO. On the CRO, yes. CRO, yes. CRO, yes. So we are roughly at 12 So we are roughly at 12% at the end of the quarter, which is a couple of percentage points higher than a year ago at the same point. So 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 our synergies. Obviously, it is a long way from the 12% we had for 2012 to the target to be close to 2020% or to be at 20. But 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. So we're working hard on it, driving it in the right direction and we see how far we will get. And let me just maybe complement what Erik 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. So this is something where we will enhance the momentum and put a lot of focus on to the net working capital and inventory side go to the next stage of performance. Thank you. The next question is from Mr. Olivier Esnault, Exane. Please go ahead sir. Yes. Good afternoon. Yes, a few questions please. First of all, when you talked earlier this morning about market penetration focus, I was wondering whether how different is that Or how do you prevent it from becoming a plain market share strategy wherepricewear type of risk because obviously it all depends how you measure that type of market penetration. But an easy way would be NDB just being more ready to engage into 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. And it's true that if I look at I mean 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. So do you think you have enough steam in the base order recovery to offset organic growth turning turning negative? Okay, Aure. 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 And is it something we should worry about? Or and 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. And trust me, I come from the southern part of Germany. We can spell discipline there. We will identify the segment specific needs. We will invest in sales. We will invest in adopting our offering in the right way to really make sure that the customers choose us and not others. We will work very, 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 some opportunities. And what we basically do is we prioritize these opportunities in a way that there's a a certain minimum margin threshold. Otherwise, we don't even look at it. And then we focus our resources, our efforts, all the energy in the way where we really expect good payback for you as a shareholder. So that's the first piece. On the backlog and FX, I hand over to Erik. Yes. Ulrich on the backlog, it is correct, of course, that we have we are taking out of the backlog on PS and PA in PS in quite a major way. At the same time, we have good tender backlog for large projects, which will depend on when these 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. So it all depends on when those orders are coming and then we start getting revenues out of those. Obviously, the short or the early cycle and the base order business will help us. In that is in an uptrend and it all depends on how strong that is. But 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. So the impact of the recent movements of the major margin market currencies have not had that big impact on it. And 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 more by the lower level of the currency. So there we simply don't see this as such a big issue from our point of view and have no guidance or 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 The next question is from Mr. Daniel Kalief from Mora. Please go ahead sir. Hello there. Just a question really on DAM. Looking at the press release, you're talking about discrete automation margins being higher on higher revenues. But obviously last year as you know they were lower on higher revenues. So 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. So 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 the DM in the DM division and Pekka 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, but I think the team has done this year really, really strong and solid job on operational improvement and execution improvement, which has led to the start steady margin that we have shown here. There's a little bit of mix in there as well, but I wouldn't rate it as a strong one. But it's really good fundamental improvement in the businesses all across the range. So 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 speak about a significant recovery in renewables. When it comes hopefully we have some upside. Okay. Very clear. Thank you. You're welcome, Daniel. So I suggest we go to the The last question for today is from Mr. Frederic Stahl from UBS. Please go ahead sir. Hi, lucky me. Hi, gentlemen. It's Fredrik 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 Tara and Ecemian 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 into general industry supporting that is very good. We had, for example, a very, very significant large order coming from a Chinese manufacturer that has many, many 1000 machines and we have addressed that one. And then on the DRIVE side, all the investments in energy efficiency paying off with the right investments on DRIVE. Okay. Thank you very much. You're welcome.