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Edited Transcript of ABBN.VX earnings conference call or presentation 23-Oct-19 8:30am GMT

Q3 2019 Abb Ltd Earnings Call

Zurich Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of ABB Ltd earnings conference call or presentation Wednesday, October 23, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jessica Mitchell

ABB Ltd - Head of IR

* Timo J. Ihamuotila

ABB Ltd - Executive VP & CFO

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Conference Call Participants

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* Alexander Stuart Virgo

BofA Merrill Lynch, Research Division - Director

* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Andreas P. Willi

JP Morgan Chase & Co, Research Division - Head of the European Capital Goods

* Benedict Ernest Uglow

Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research

* Gael de-Bray

Deutsche Bank AG, Research Division - Head of European Capital Goods Research

* Guillermo Peigneux-Lojo

UBS Investment Bank, Research Division - Executive Director and Industrials Analyst

* James Moore

Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research

* Martin Wilkie

Citigroup Inc, Research Division - Director

* Wasi Rizvi

RBC Capital Markets, LLC, Research Division - Analyst

* William Mackie

Kepler Cheuvreux, Research Division - Head of Capital Goods Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Q3 2019 results analysts conference call. I am Alessandro, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over the Jessica Mitchell, Head of Investor Relations. Please go ahead, madame.

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Jessica Mitchell, ABB Ltd - Head of IR [2]

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Good afternoon, ladies and gentlemen. Welcome to ABB's Third Quarter Results Conference Call and Webcast. The press releases and financial information documents were published this morning at 7:00 a.m. and can be found on our website, along with this results presentation. Following our presentation, we will open the lines for your questions. With me today is ABB's Chief Financial Officer, Timo Ihamuotila.

Before we begin, I would like to draw your attention to the important information regarding safe harbor notices and our use of non-GAAP measures on Slide 2 of the ABB presentation. This conference call will include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties.

With that, let me hand you over to Timo.

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [3]

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Thank you, Jess, and a warm welcome to all. We will start with a review of ABB's results for the quarter. We will then provide an update on the group's progress in its transformation agenda. Finally, we will outline the group's financial expectations for full year 2019.

On Slide 3, we summarize the third quarter results. Total orders of $6.7 billion were down 1% year-on-year on a comparable basis; and revenues of $6.9 billion were steady, despite the impact of a specific project revaluation in our Industrial Automation business, which reduced group revenues by 1%. The operational EBITA margin expanded 20 basis points to 11.7%.

The margin this quarter was impacted by a combined 190 basis points, including a stranded cost burden of approximately 70 basis points, a charge in the legacy non-core business of approximately 30 basis points and approximately 90 basis points from the project revaluation in Industrial Automation.

All told, in the face of weaker economic conditions, the group delivered robust revenue and improved operating margins in the quarter, aided by resilient execution in our businesses, the ongoing integration of GEIS and the rollout of our ABB-OS operating model.

Our group's operational EPS of $0.33 was 7% lower on a constant currency basis, including the impact of a lower result from discontinued operations. The basic EPS result of $0.24 is 15% lower year-on-year. Cash flow from operating activities was $670 million, up 19%.

ABB's regional and country order trends for the third quarter are illustrated on Slide 4. In the Americas, orders declined 1% in comparable terms. Strong growth in Industrial Automation and steady performance in Electrification were outweighed by weaker demand in Motion and Robotics & Discrete Automation. Specifically, in the United States, our largest market, Electrification order growth was robust apart from large orders, which had a tough comparison base. Orders for Industrial Automation moderately improved. However, both Motion and Robotics & Discrete Automation saw a slight negative development.

In Europe, orders were 2% lower despite solid performances from Motion and Electrification. Robotics & Discrete Automation and Industrial Automation were lower, mainly due to fewer large order bookings. Order growth in France, the U.K. and Spain was more than offset by lower orders from Switzerland, Finland, Norway and Germany.

Lastly, you can see orders in the AMEA region were up 1%. Strong growth in Industrial Automation was supplemented by slight growth in Electrification and Motion, while Robotics & Discrete Automation faced a tough market. Lower orders from China and South Korea were offset by positive developments in India, Japan, Singapore and UAE.

Looking more closely at China, developments were mixed. The Industrial Automation business had an excellent quarter, while Robotics & Discrete Automation saw continuing strong headwinds. Both Electrification and Motion had negative orders on a year-on-year basis.

I will now provide a closer look at the third quarter performance of each of our businesses, starting with Electrification on Slide 5. Electrification's results show positive order development against a tough comparison period. Order growth was driven by strong demand for solutions and our smart buildings offering. Revenues were up 1% year-on-year, and the order backlog ended the quarter up 4% compared to the same period last year.

Electrification's operational EBITA margin expanded 70 basis points year-on-year. Margin improvement was driven by the solutions business, by Thomas & Betts and by the integration of GEIS. As well, the product business benefited from positive pricing actions. We expect Electrification's margin for the fourth quarter to be somewhat stronger year-on-year, driven by these same factors. Remember, too, Q4 margins are seasonally lower in the Electrification business.

Next, on Slide 6, we have Industrial Automation or IA. IA's orders, revenues and margins were impacted by the revaluation of a project in South Africa due to timing and cost overruns. The project is part of IA's power generation business and has been in progress since 2014. The revaluation lowered orders by 2%, revenues by 5% and operational EBITA margin by approximately 400 basis points. Including this impact, total orders were 3% higher, IA's revenues declined 2% and operating margins of 9% were 520 basis points lower relative to Q3 2018.

Order development was driven by late-cycle investments across process industries, particularly in oil and gas and chemicals. The business continues to work on a stronger pipeline of large order opportunities, although customers remain cautious about investment decisions and the timing of bookings is uncertain. Conventional power generation remains weak, particularly affecting order development in Turbocharging. In addition to the project revaluation, margins were impacted by unfavorable mix and the absence of one-time effects that benefited the prior year period.

Looking ahead, we expect order growth for the fourth quarter in Industrial Automation to improve sequentially, supported by the stronger large order pipeline. We expect margins to be slightly stronger sequentially without the impact of the project revaluation.

Let's then turn to Motion on Slide 7, which delivered steady execution in the quarter against a tough comparison base and slower short-cycle developments. Total orders were up 1% with growth driven by motors. Revenues improved 3%, supported by backlog execution, while the order backlog itself grew 4%. The operational EBITA margin of 17.8%, a strong achievement for the business, was up 50 basis points compared to the prior year period. Strong project execution and cost management underpinned the margin gain.

Going forward, we expect to maintain the track record of steady execution in this business, although continued short-cycle headwinds giving rise to less favorable mix will limit the scope for year-on-year margin accretion in the fourth quarter. And remember, too, Q4 margins are seasonally lower in the Motion business.

On Slide 8, we turn to the Robotics & Discrete Automation or RA. Orders for Q3 were 16% lower, reflecting both a more challenging market and a tough comparison base. The robotics industry is facing continued headwinds in the traditional automotive and auto-related industries, with CapEx plans in the electric vehicle market uncertain at least for short term. In our own Robotics business, the industry's downturn had a marked effect this quarter. However, B&R, our machine and factory automation business, showed more resilience despite the ongoing machine builders downturn.

Revenues were 3% lower, with strong backlog execution providing support. The order backlog ended the quarter up 2% year-on-year. Margins were aided by cost-saving measures, but were impacted by lower volumes and adverse mix. The operational EBITA margin of 12.9% was 230 basis points below the prior year.

Looking ahead to Q4, a tough large order comparison base and ongoing market headwinds will continue to hinder business outcomes in RA. We expect margins in the fourth quarter to be lower, both sequentially and year-on-year, as seasonality and the impact of lower volumes and adverse mix are reflected more fully in their operating margin.

Let's now turn to Slide 9 to consider the main drivers of our group's margin on a year-on-year basis. Net cost savings amounted to $95 million, supported by our ongoing focus on OpEx and supply chain management, plus some impact from the ABB-OS simplification program. Mix, including under absorption, had a dampening effect of $10 million. Investments in growth, namely sales and R&D, were $24 million higher (sic) [lower] year-on-year. Project impacts cost $48 million, while other items, including stranded costs, amounted to $12 million.

On Slide 10, we break out key net income drivers for the quarter. Of note, restructuring-related costs were $59 million, of which $53 million was due to our simplification program. Power Grids transaction and separation costs were $44 million. Looking at discontinued operations, where Power Grids' performance is reflected, $97 million of net income was recorded. This result was impacted by approximately $80 million pretax in project charges on certain large projects in the backlog. ABB anticipates a significant improvement in the performance of its discontinued operations from Q4 onwards.

Looking forward on Slide 11, we revisit our financial framework where we set out approximations for key items. We will highlight items for which guidance has been adjusted. Our simplification program guidance for the full year has been reduced to approximately $200 million of nonoperating charges compared to the $300 million estimate provided at the end of first half. More has been achieved in the early phases through natural attrition than originally was estimated, but we still expect the total charges to be around $500 million over the full course of the program. We remain on track to deliver $150 million to $200 million run rate savings in 2019.

Transaction and separation-related costs for the carve-out of both Power Grids and our solar inverter business are now expected to be in the region of $200 million from $270 million previously. For Power Grids in particular, we now look for $180 million costs in 2019 because we are making more use of transfer service agreements, largely [IS] related. There is no change to the total carve-out cost expected of $500 million to $600 million for Power Grids and $40 million for solar inverters.

For GEIS, integration cost guidance has been trimmed to approximately $100 million from $120 million previously. We are on track with our synergy targets. ABB's estimate for net financial expenses for continuing operations is also reduced to $170 million from $200 million previously. Finally, ABB expects solid cash delivery for the full year from its continuing operations, not including cash outflows for the simplification program, carve-out activities and associated cash tax impacts.

We'll now turn to Slide 12 where we highlight how we are driving growth in each of our businesses with a few examples. To mention just 2, this quarter, Electrification made further advances in the co-location data center market, securing a significant electrification and automation package for DODID's flagship data center in Singapore. Our new ABB Ability Data Center Automation solution enables the customer to improve energy efficiency and reliability, while cutting ownership costs by 20%.

And in Robotics & Discrete Automation, we launched PickMaster Twin, the third generation of our leading packaging software, which incorporates in-house digital twin software. For customers, it reduces commissioning time and allows quick changeovers, faster response times and higher throughputs.

Let me update you on our transformation on Slide 13. The rollout of our ABB-OS operating model is progressing on schedule. The transfer of country resources to the businesses is now nearing completion. An important milestone was reached on October 1 with the determination of roles and responsibilities for approximately 15,000 employees. ABB's future operating model will be effective by year-end, and the dismantling of our regional structure will be largely completed.

The transfer of common resources from ABB to the future PG JV is also nearing completion. At the same time, the establishment of PG's legal structure is moving forward as planned, and we expect this to be finalized by year-end.

Let me then sum up on Slide 14. We remain on course in a more challenging market environment. We are on track to deliver $150 million to $200 million in run rate savings from ABB-OS by the end of this year. The carve-out of Power Grids is on track, as is the integration of GEIS. We anticipate headwinds to continue in some markets, particularly in discrete industries, over the next few quarters. However, growth remains resilient in many of our key end markets, as shown in the right-hand (inaudible) of the slide.

Overall, we continue to expect slight growth in comparable revenues for the group for the full year, supported by our order backlog. Group operational EBITA margin is expected to improve for the full year, aided by an improved GEIS performance, ongoing stranded cost elimination, noncore improvement and our simplification program. Lastly, we expect cash flow from operating activities for our continuing operations to be solid for the year as a whole.

Thank you for your attention. We are now ready to open the line for your questions.

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Jessica Mitchell, ABB Ltd - Head of IR [4]

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Thank you, Timo. Operator, may we have the first question from the lines, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Alexander Virgo from Bank of America Merrill Lynch.

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division - Director [2]

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Wondered if you could address a couple of things for me. I think on transformation, firstly, you appeared to have been making much better progress on central costs than I had expected and have done for a couple of quarters now, which I think is really good to see. And you've also talked to a couple hundred million essential costs per quarter, which you've also commented a little bit ahead of. So I just wonder if you could help us with how we think about that developing over the next few quarters. And what exactly is it you're doing which is running ahead of -- or appearing to run ahead of expectations? That would my first question. And then maybe I'll let you answer that and ask the second one in follow-up.

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [3]

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Okay, sure. Thanks, Alex. So on the transformation, maybe I'll take this in a way that I'll comment a little bit the year-to-date numbers on the corporate line. So if you split the corporate line into the, let's call it, running corporate cost, stranded cost and noncore cost, we are, year-to-date, on the corporate, about $80 million lower; we are, in stranded cost, about $40 million lower; and we are, in noncore, about $30 million lower.

Now there can be some slight impacts between noncore and corporate in this, but clearly, in that $80 million number, there is a significant part of the ABB-OS transformation savings, which are already presenting themselves.

And then when we look at the savings target overall, we have to remember that part of the savings is also going into our businesses through allocations because we are talking also about the resources in countries and activities in the countries which are allocated to the businesses. So hopefully, that gives some color.

Going into Q4 on the same topic, we continue to expect, overall, about $800 million. And when you then look at our guidance in stranded cost, where we expect to be $20 million lower Q4. And then also, if you draw a line sort of on the corporate cost because that, of course, fluctuates, but it's not as much, you can kind of read from here that, on noncore, our expectation would be that we would be somewhat higher sequentially but somewhat lower year-on-year.

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division - Director [4]

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Okay. That's helpful. And then I wanted to just touch a little bit on Robotics. I mean, the 16% decline was probably a bit worse than we'd expected, although I allow it follows the broader demand trends from some of your peers and the auto industry. And your comparative gets a bit tougher still in Q4, I guess, and you did touch on it a little bit in your guidance. But I wondered can you talk a little bit more in terms of any signs in shift in customer behavior or anything that can help us out as we think about next year? And I guess the defensibility of margins in that context as well would be helpful.

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [5]

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Yes. Thanks for the question. I'll take this opportunity to comment one topic in the Robotics area because we actually, let's say, inaugurated the building of the new factory in China this quarter. And I just want to highlight this because we originally announced this as $150 million investment. This factory is a new factory, yes, but it will come instead of the old factory. So we will not be having more factories.

And also, when we look at the $150 million, of that number, about $50 million is CapEx. And out of that, we expect to spend clearly less than half 2020. And then when we look at the $100 million outside the $50 million, that's more related to long-term commitments in leases and such. So just that you see that we are also managing this investment now in a slightly different way, given where we are on the cycle. But of course, overall, our view is that this continues to be a strong growth market. We will continue to invest into R&D through cycle.

Then a bit on the shorter term. So as we said today, we expect similar trends to continue into Q4. And when we look at the revenue line in particular, we have been supported by strong backlog now for a couple of quarters. And of course, at some point, that will start to come in as well, so I wouldn't rule out that we could have a bit higher revenue climb than this 3% in Q4. But overall, we are seeing the trend to continue pretty much as is.

One important point I want to still highlight on that business line is that the machine and factory automation business, i.e., the B&R business, is weathering the situation well, and we are having really record new design wins on that business, which then later will turn into orders and revenue when the machine builders start to get orders from their final end customers, like bottling companies and others.

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Jessica Mitchell, ABB Ltd - Head of IR [6]

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Okay. Thanks, Alex.

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Operator [7]

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The next question comes from Andreas Willi from JPMorgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [8]

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My first question relates to the project in Industrial Automation where you pointed to the -- kind of the history a bit. Could you maybe give us a little bit more information? When do you think this project could be completed and, therefore, kind of risks of additional charges would go away? Is there a maximum in terms of liquidated damages or cost for delays that you would have to pay? And how far away are you from that? And does this relate just to 1 of the 2 big plants in South Africa that are being built? Or are you involved in both of them? And then I have a follow-up after.

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [9]

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Okay. Thanks, Andreas. So as we said, this relates to a project in South Africa. Maybe I'll take your last part first. So it relates only to one and we do not have other such projects in the IA backlog. It dates back to 2015, as we said. And naturally, when we look at the provisioning, we have taken what we expect is the right amount at this time, because there was a triggering event and we needed to reevaluate the situation during Q3. We continue the project, and it is still expected to last sometime. But of course, we have taken what we expect to be the full impact to our best estimate as we always do regarding such situations.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [10]

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And the follow-up I have is on the marine end market. You put it in your chart in the -- one of the markets that you still see as favorable with positive growth. Ship contracting has collapsed year-to-date. What's your normal time lag in terms of the impact on ABB relative to the contracting we see at the yards, which is down pretty much across all types of ships now this year?

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [11]

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Yes. We have to remember that ABB has a very strong niche positioning in this market. So we are, in that way, quite unique because we are really in cruise, in LNG, icebreaking vessels. And here, the general market trends are different from the overall cargo ship type of market. And so currently, our trending backlog on the marine continues to be promising. And we are often quite early in the vessel phase because our ticket in, in a way, is the electric propulsion offering. And then -- includes also then often Electrification, Automation and products from Motion as well. So that's really where we are here. So we are in a slightly different position then than this general overall marine market, what you're referring to.

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Jessica Mitchell, ABB Ltd - Head of IR [12]

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Thanks, Andreas.

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Operator [13]

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The next question comes from Wilkie, Martin from Citi Research.

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Martin Wilkie, Citigroup Inc, Research Division - Director [14]

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It's Martin from Citi. So a couple of questions. The first one, a good performance on margins in Electrification. And I appreciate, obviously, we no longer get the GEIS numbers separately. But if you could just fill out, I mean, is that in line with what you expected at the time of the deal closure or just some sense as to whether that's now tracking slightly ahead?

Second question, unrelated. Your cash guidance now refer to the operating cash in continuing businesses, perhaps implying that Power Grids and disc ops could have some cash outflow. I mean, you do talk on a net income basis that Power Grids should be better into Q4. But just to understand what the message is on potential cash outflows related to Power Grids and discontinued operations.

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [15]

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Okay. Thanks, Martin. So first of all, on EL, we're very pleased with the performance in EL and have coming up with -- or the margin being up. This 70 basis points is coming from multiple areas. We are seeing margin accretion in our DS business, in the distribution solutions business. We're also seeing first snippets of positive trends in the Thomas & Betts, which is very good to see. And then we're also seeing this coming from GEIS. As we said, we are not separating it out, but GEIS is being executed in accordance with the plan, and we are tracking to our synergy estimates on GEIS. And maybe one more point to note on EL is that in this NEMA market in the U.S., or if you look at the NEMA-published market share results, we are actually also gaining market share in the U.S. So that's good to see.

Then on cash. We called out that we continue to expect a solid cash performance from continuing operations, and the reason is simply that in the discontinued operations, we are behind last year. And we're about $100 million behind last year at the moment, and we do not expect to have higher cash, as we said, earlier than last year in discontinued operations. So that is the slight change in our guidance regarding cash.

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Jessica Mitchell, ABB Ltd - Head of IR [16]

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Thanks, Martin. Did you -- okay, follow-up if you want.

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Martin Wilkie, Citigroup Inc, Research Division - Director [17]

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Just to clarify. So the comment on cash and Power Grids is more about the cumulative effect you've seen so far. It's not a signal that we should expect a big incremental negative from here. It's more about what you've seen so far.

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [18]

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Yes. It's because we discussed earlier in the year that we would have expected stronger cash performance this year from discontinued operations than last year. Last year, we had approximately $600 million of cash from discontinued operations. Now we are no longer saying that. So that's the change. It doesn't reflect into Q4 in particular.

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Jessica Mitchell, ABB Ltd - Head of IR [19]

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Thanks, Martin.

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Operator [20]

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The next question comes from Ben Uglow from Morgan Stanley.

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Benedict Ernest Uglow, Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research [21]

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The first one, Timo, is really to get just a sense of how trading or how things are happening on the ground in China. If we put Robotics to one side, because obviously that's a sort of global situation, when you look at your Industrial Automation or low-voltage business, are you seeing any signs that things are sort of sequentially stabilizing or even are -- even a few green shoots? How have things progressed through the quarter? And when you look into the fourth quarter, how should we think about underlying growth rates in China?

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [22]

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Thanks, Ben, for the question. So first of all, I want to highlight that we had quite high comparable growth rate in China when we look at the continuing ABB. And I understand this number is not directly available, so I wanted to mention that. So we had approximately 10% order growth in China, excluding Power Grids last year. So the comparable was quite high. Then if I would take first the Robotics part of the question, so if you would take out the Robotics decline, we actually would have grown orders in China on the other part of the business. And we had particularly strong growth in IA.

And in Electrification, we have a situation where we are, and this we have announced already earlier, in the process of exiting a JV related to the GEIS business, and this had quite a significant negative impact in the Electrification. So overall, if we look at low-voltage in Electrification, that actually performed quite well in China. And we are not expecting a significant change going forward into Q2 -- into Q4 in this regard. But maybe on the overall order performance, I could mention that we had really high comp overall also in Q3, about 9%. And going into Q4, I would say that seeing some slight order growth in Q4 is probably more likely than it was going into Q3.

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Benedict Ernest Uglow, Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research [23]

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Okay. That's helpful. And then just one follow-up around the U.S. I think the statement talked about slightly weaker macroeconomic indicators, which I'm assuming is kind of the ISM discussion. But could -- again, could you just give us a sense of what you're seeing on the ground with your customers and your distributors? Is the step-down in the U.S. basically mainly related to Motion? Or is it more broad-based? How do we think about the trajectory in the States?

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [24]

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Yes. Thanks again, Ben, for the question. You are actually noting the right point in our business here because when we look at the development in the U.S., we are seeing some slowdown in the industrial short-cycle business, and that then presents itself mainly in the Motion in our case. So this is in the NEMA area of Motion business. In the other businesses where we're actually faring quite nicely in the U.S., in Electrification, we again had a very large order in the data center business last year. So if you take that out, the base business is doing well and moving to the right direction. We grew in Industrial Automation. And also in Robotics & Discrete, U.S. was pretty much flat. So that was slightly different there. We have bit less exposure to the automotive business. And actually, the general industries for our Robotics and Motion business performed well in the U.S. during the quarter.

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Jessica Mitchell, ABB Ltd - Head of IR [25]

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Thanks, Ben.

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Operator [26]

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The next question comes from James Moore from Redburn.

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James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [27]

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Maybe I could start with Robotics. It looks like we've got quite a significant decline in China in orders in the quarter. And I wondered if you could maybe break that down a little bit further. Would it be fair to say automotive was worse than average? And within that, EV was worse than average? And when you look at the sequential trends in the toughest parts of the China Robotics business, do you see some stabilization at the new level? Or do you think we can go yet further? And on your Shanghai plant CapEx comments, thank you for the very helpful breakdown. I'm just trying to understand what that means on the expansion. If you wanted to slow the speed of expansion, do you have the flexibility to do that or not, really?

And my second question is on the corporate items. I think you're still guiding to $800 million for the year. And unless I've got my math wrong, you did $535 million in the first 9 months, which leaves $265 million in the fourth quarter, which, given your improving underlying run rate with the ABB-OS simplification and your guidance on stranded costs seems high, have you baked in something for some one-off items in the fourth quarter there? Or is there a scope to come in at a better number?

And finally, the Motion margin looked very, very strong. I hear your comments on the fourth quarter, but as we move into next year, do you think you do have a new level of profitability in that business?

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Jessica Mitchell, ABB Ltd - Head of IR [28]

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That's a lot of questions, James, but we'll do our best still.

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [29]

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Yes. Exactly, exactly. So we'll start with the Robotics and in China. So first all, as I said, our China order growth would have been positive without Robotics. So Robotics was a big decline, and it was mainly driven by auto. And we have a slight change because earlier, recall that the EV for us was positive, now we would say that it's part of the auto situation in general. So we're not saying it's better or worse than the other part of the auto, but it is part of the automotive and automotive-related trend. On the other hand, in China, on machine and factory automation, we actually saw quite strong order growth. So that was good to see inside of Robotics & Discrete Automation business.

Then on CapEx and the factory, we really wanted to give you the full color because this has been discussed somewhat earlier as well. And clearly, from what I said, i.e., that we would expect to have less than half -- clearly, less than half of that CapEx 2020 of the approximately $50 million, shows that we can somewhat adjust to the situation. But it is not in our interest to fully delay this because this will be a more effective and better factory where we are also building something where we call robots build robots. And we want to get this operational so that we can move to the next phase and really serve the market when the market then start to come back with even better products, better quality and so forth.

So that's how we look at that investment. And as I said, overall, we continue to invest in R&D through the cycle. And if I look at Robotics & Discrete Automation and ABB as a whole, we have a good structure in our fixed cost investment also supporting the ABB-OS execution. So we are slightly up in sales cost, we are clearly down in G&A and we are up in R&D. And this is how we want to see this equation to move forward as well.

Then on the corporate line, so we continued to say we expect $800 million for the overall corporate cost. And you correctly pointed out there's kind of an envelope of $265 million in that bucket for Q4. We continue to expect stranded costs to go down per our guidance. And that (inaudible) means, as I said earlier, that at the moment, we would expect the noncore business, which we have all the time said is lumpy, to be sequentially higher but lower than year-on-year.

Oh, yes, then there was a quick one on Motion. So we're very pleased with the performance in Motion and how the team is executing in the market. And see it here, we really see a little bit of a two-tailed situation. We have, on the other hand, a little bit of this slowing of the shorter-cycle industrial demand impacting, but the longer-cycle business continues to perform well. For example, areas like traction.

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Jessica Mitchell, ABB Ltd - Head of IR [30]

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Thanks, James. Thank you.

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Operator [31]

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The next question comes from Guillermo Peigneux from UBS.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [32]

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Guillermo Peigneux from UBS. I guess 2 additional questions on -- first, on Industrial Automation. Could you comment on which indices were actually driving these trends through the quarter and whether that is also something that you see in the pipeline as we speak? And I have a follow-up after that.

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [33]

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Yes. When we look at IA, we continue to have a quite solid pipeline of orders. But as I said earlier today, the timing of the orders continues to be, of course, difficult to estimate. We said that in upstream and midstream oil and gas, we are seeing a good pipeline of, let's say, smaller CapEx and also service and OpEx. We are also seeing a good pipeline in LNG, which, to us, also presents itself in the marine market. So this is where we are present in LNG. And then also, we are seeing at least a reasonable pipeline continuing in mining and metals. So those are the areas where we are seeing this longer-cycle impact to continue to be there. And this is naturally then related to the comment, what I made in the earlier question on the Motion business, i.e., it also impacts Motion.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [34]

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And the follow-up is on the tough comps that you were sharing with us from China, 10%, I think, excluding Power Grids. And I wonder whether you could kind of give some granularity by division. Where is the tough comps issue more complex or more complicated from the divisions as we stand?

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [35]

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Yes. We had, last year, a very strong performance in overall Robotics and Motion because it was presented differently. So it is both in Robotics as well as in the Motion business we have a tougher comp. In IA, we have a bit less of that dynamic. But overall, honestly, I don't have all of the last year's comparison numbers that way, so I would maybe focus my comment here on the Robotics and Motion.

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Jessica Mitchell, ABB Ltd - Head of IR [36]

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Thanks, Guillermo.

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Operator [37]

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The next question comes from Gael de-Bray from Deutsche Bank.

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Gael de-Bray, Deutsche Bank AG, Research Division - Head of European Capital Goods Research [38]

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Can I have 2 questions, please? Since you mentioned the tough comps in data centers, and also, I think in the presentation, you highlighted the leadership in co-location data centers. Can I take the opportunity to ask what's the size of your data center business today? And I also would like to understand, perhaps a bit more, the strategy you have in this area to sort of catch up with Schneider in particular and better compete against them maybe with some particular light on the UPS and DCIM segments. So that's question number one.

The second question is about the end market growth estimates you provided, Slide 14. Could you comment a bit more about the growth you're seeing in commercial buildings? I mean, you said more than 3%. But in which geographies in particular do you see that kind of growth? And if you could elaborate about what's going on in the U.S. in commercial buildings, that would be great.

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [39]

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Okay. Thanks for the question. So first of all, on the data centers, no, we do not break out the size of the data center business. But as we have said, it is one of the core growth areas and has been growing strongly for Electrification. Overall, on the separate product offerings in the UPS and other, I will have to let you go back to the IR on that question. But overall, we are building a strong offer towards the data center customers, and that continues to be a strong growth area for us.

And then when we look at the buildings, so naturally, the buildings segment is something which can be volatile. But at the moment, this is how we are seeing the market. And we are seeing the buildings market being strong for us. It was a strong driver, continued to be a strong driver for growth, for EL, for example, in Germany. But also, in the U.S, we had good performance in the buildings side. So again, that's how we see the market at the moment, but we, of course, recognize that the buildings is something -- when the economic environment changes, that it can be volatile.

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Jessica Mitchell, ABB Ltd - Head of IR [40]

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Thanks, Gael. Okay. If it's a quick follow-up, then go ahead.

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Gael de-Bray, Deutsche Bank AG, Research Division - Head of European Capital Goods Research [41]

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Yes. Sorry, that was just about the data center question. Did you see some -- I mean, you've mentioned tough comps this quarter, but is this something that could actually continue in the next few quarters, that the comps are getting pretty, pretty difficult, in particular in the U.S., in particular when it comes to hyper-scale data centers?

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [42]

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Yes. So we called this simply in the U.S. because in the Electrification business, we had a very large data center order Q3 '18. We continue to see that market overall globally. And it's, of course, important to note that we have a strong global position on this area. And we, of course, then try to counter with other tools, what we have in the portfolio. But I don't want to take a stance in the data center market sort of a couple of quarters forward. We continue to see this as an important growth market for our Electrification business.

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Jessica Mitchell, ABB Ltd - Head of IR [43]

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Yes. And just as a reminder, we do have our Electrification day on the 5th of November, and we will be providing a lot more color around our different business lines within Electrification. So we are hoping to see as many of you as possible there.

Thanks, Gael.

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Operator [44]

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The next question comes from Andre Kukhnin from Crédit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [45]

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I wanted to ask about the pricing environment in the short-cycle segments of your Robotics & Discrete and maybe Electrification as well. Are you seeing any changes there?

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [46]

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Yes. When we look at pricing -- so first of all, if you look at Robotics & Discrete, so clearly, when you have a tougher market conditions, it has some impact. But we are not seeing anything irrational in pricing. So I would describe it as a sort of normal pricing environment in down-market type of situation in Robotics & Discrete at the moment. And then in Electrification, as we discussed earlier as well today, we have actually quite pleased with our progress on pricing. So in the product business, in Electrification overall, we had slight positive gross price. And in the business overall and also in general for ABB, we were able to counter the (inaudible) pricing net impact with our cost savings in OpEx and SCM.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [47]

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Great. And my follow-up is just on that issue with the project in IA. You've obviously done quite a lot of cleaning-up of any of this EPC exposure. At what point can you say firmly that this is all behind us? Is this kind of the very last skeletons in the cupboard, if I may call that? Or -- yes, if you could talk about that, that would be great, and kind of when we can put that finally behind us.

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [48]

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Yes, yes. Let's take this question sort of in 2 parts. So first of all, what we do going forward and what we don't do going forward, because we are talking about this better quality of revenue and it's a very important topic for us internally as well. And there, what we are saying is that we continue to do project business, but it has to have a high value-add ABB content, and the executability of the project has to be something which we can master. So this is the kind of project business we will continue to do going forward, and that's, of course, important part of our business portfolio.

Then on the so-called EPC exit. So as we said earlier today, this project is one of a kind in the IA portfolio, and it dates back to 2015. And it is also on the conventional power gen business, and it has some of the components where we are doing a fairly big or broad part of the project. But then on the noncore business, as we have said, we continue to have exposure to EPC type of business portfolio, which we have moved to the noncore business. And we said earlier, and I continue to say, that working through that portfolio will take approximately until the end of 2021. That's the guidance what we gave in our Capital Markets Day, and that continues to be the guidance at the moment.

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Jessica Mitchell, ABB Ltd - Head of IR [49]

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Thank you for that.

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Operator [50]

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The next question comes from William Mackie from Kepler Cheuvreux.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [51]

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Yes. First question relates to the clarification on your guidance for Motion margins in Q4. I think in your commentary, you said limited scope for accretion quarter-on-quarter. The comparative last year was very weak. Should we assume from that comment that you are able, in the fourth quarter, to grow margins against the 17.8% that you achieved in Q3 in the fourth quarter this year? That's the first question.

The second relates to your excellent progress within Electrification. You've called out the progress and improving performance in distribution, Thomas & Betts and the rising margin within the GIS business, and yet the division remains below the 15% to 19% margin target. Given the good progress that you've made in Q3, when should we expect, I mean, the division to be able to get back into that 15% margin goal? A very big question, that one, I think.

And very lastly, just on Robotics. If I could -- and Automation. If I could just come back to B&R. I hear you're having a lot of designing success with that business and its excellent portfolio of technology. But can you just give us a little sense of how the B&R revenues developed in the quarter, please?

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [52]

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Okay, William. Thanks for the question. So first, let's start on the Motion. So last year, as you said, we had 14.9%, and we are referring to that number in what we are saying is our guidance. So we said, we continue to see short-cycle headwinds and less favorable mix, and we would expect to see slightly up year-on-year vis-à-vis the Q4 number. So it has nothing to do with what we did in Q3. And traditionally, in that business, the Q4 is a lower quarter exactly as in Electrification as well.

Then on -- but I mean, we are executing quite well overall in Motion. I just want to say that. So this is more the pattern within the year. And as I said, we would expect to be up slightly year-on-year. Then on Electrification. So we are now at 14.2%, and as you said, guidance long term is 15% to 19%. We continue to expect to be in that 15% to 19% or lower end of that guidance range sometime during 2020. No change in that guidance.

And then finally, on B&R. So clearly, B&R revenues have been impacted by the slowdown as well, but the impact overall has not been similar on orders and revenues as it has been in the Robotics part of the business. So that business continues to be more steady. And as I said, the most important part to look at how that business would move forward is really to follow these design wins, and we are doing very well with that metric.

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Jessica Mitchell, ABB Ltd - Head of IR [53]

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Thank you very much.

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Operator [54]

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The next question comes from Wasi Rizvi from RBC Capital Markets.

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Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [55]

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A couple of questions. Firstly, on Robotics & Discrete Automation. Just to help me -- help us understand how you might think about operating leverage, how you might model it, particularly if those order declines start turning into revenue declines next year. And then it also sounds like the trends are quite different in Robotics versus in the B&R business. So I mean what kind of operating leverage or drop-through should we expect with strong declines in Robotics? If those order numbers start turning to the revenue numbers for next year, how do you kind of think about margins?

And then secondly, on the Power Grids cash performance. At what point do we have to start maybe reassessing that the net proceeds from the sale might be a bit lower because of completion mechanisms? Are we at that point? Do we need to improve the cash performance to still get to a $7.6 billion to $7.8 billion? Or are we still at that level where we're not at a level where we need -- think those proceeds might end up being lower?

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [56]

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Okay. So thanks for the questions. So first on the Robotics & Discrete Automation and the operating leverage. So clearly, with the mix changing and us having more solutions and less amount of robots in the mix, so that is impacting the margin negatively. And to really see positive operating leverage come through, the amount of product business would need to start to go up. So that's why we are saying today that, in RA going into Q4, we are expecting to be lower both sequentially and year-on-year because both lower volume and this adverse mix will reflect more fully in the results, which goes back to the backlog comment which I made earlier today.

And then on Power Grids' cash performance, so this has absolutely nothing to do with the deal parameters. So this transaction works as a normal transaction from cash perspective. It is, of course, not positive for ABB that we have lower cash performance this year than we were expecting in the discontinued operations because that cash, of course, would come to ABB. But it has nothing to do with the proceeds on the closing. And then we will do a normal network capital evaluation at the time of the closing, and we would continue to expect the $7.6 billion to $7.8 billion.

And clearly, the $7.6 billion to $7.8 billion is also driven by how we, in the end, come in with our estimate on the transaction and separation costs of $500 million to $600 million, and also the tax-related costs of $800 million to $900 million, which were part of the equation. So if we would come in, for example, better in one of those parameters, that would then improve the situation. So we continue to expect $7.6 billion to $7.8 billion.

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Jessica Mitchell, ABB Ltd - Head of IR [57]

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Thank you, Wasi.

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Operator [58]

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The next is a follow-up question from Ben Uglow from Morgan Stanley.

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Benedict Ernest Uglow, Morgan Stanley, Research Division - MD and Head of European Capital Goods Equity Research [59]

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Timo, this is -- I realize this is a hypothetical, but I wanted to understand how you may be thinking around capital structure. If we look at the sort of level of net debt today and net debt-to-EBITDA, it's roughly, say, 2.5x, a little bit more. And obviously, that's going to be coming down quite significantly next year as EBITDA improves and we get cash proceeds, et cetera. Once things are kind of cleaned up, right, so once we go into 2022 and 2023, what sort of target net debt-to-EBITDA should ABB have? If you look at the kind of capital structure in the company, where should it be 3 years from now?

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Timo J. Ihamuotila, ABB Ltd - Executive VP & CFO [60]

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So 2022, 2023 is clearly quite far out, and we have not set ourselves capital structure targets. So we continue to target this strong single A rating, as we have said, and then we look at the parameters accordingly. So that's our view at the moment on the capital structure. As I have said earlier, we have done quite a bit of simulation on the cash flow. And overall, we would expect, based on those simulations, that excluding Power Grids, the operating cash flow volatility in the company could decrease. We need to see how that starts to come through, and that will then give us more tools to assess if we want to change our view on the capital structure. But at the moment, the target continues to be to stay strong single A.

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Jessica Mitchell, ABB Ltd - Head of IR [61]

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Okay. Thank you, Ben. And with that, we'll bring our call to a close.

Thank you very much to all for your time.

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Operator [62]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines.

Goodbye.