Earnings Call: Q2 2018

Jul 19, 2018

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q2 2018 Results Conference Call. I'm Iruna, the Corusco operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ms. Jessica Mitchell, Head of Investor Relations. Please go ahead. Good afternoon, ladies and gentlemen, and welcome to ABB's 2nd quarter results briefing. The press release and analyst presentation were published this morning at 7 a. M. And can be found on our website. This briefing is being webcast via our IR website as well as being recorded. With me today are ABB's President and CEO, Ulrich Spissofa ABB's Chief Financial Officer, Timo Ihamukula and President of ABB's Electrification Products division, Tarek Mehta, who will provide an update on ABB's integration of GE Industrial Solutions. Before we begin, I'd 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 that are therefore subject to certain risks and uncertainties. I will now hand you over to Uli. Thank you, Jeff. Good afternoon, ladies and gentlemen, and welcome to everyone who has joined us today. As usual, we will start with a review of ABB's results for the quarter. I will then provide a brief update on our 2018 agenda. Let's look first at Slide 4, which gives an overview of how we have continued our profitable growth in the second quarter, driving both the top and the bottom line. In the quarter, we increased order growth in all divisions and across all regions. The book to bill ratio increased to 107 at the end of the quarter and was higher than 1 in all of our divisions. Our innovative digital solutions offering, ABB Ability, continue to be very well received by our customers, supporting growth with its portfolio of more than 2 10 digital solutions for utilities, industry and transport and infrastructure. We completed the acquisition of GE Industrial Solutions within the committed time frame. We are pleased to welcome all our new colleagues from GE Industrial Solutions as part of the global ABB family. With our disciplined approach to relentless execution, we have delivered both margin improvement and double digit EPS growth this quarter and continue to drive net cost savings. In the Q2, we continue to strengthen ABB through business led collaboration. Notable development included our global edge data center solution alliance with HPE and Rittal and the further strategic development of our brand as title sponsors of the ABB Formula E Championship. These results show that our transformation over the past years is delivering. While we still have a lot of work to do, we are achieving clear progress in our focus on customers, in realizing value from growing our ABB Ability Solutions portfolio and in driving relentless execution and productivity everywhere in our business. Let's turn to the results in more detail. As you can see from Slide 5, the 2nd quarter saw continued order momentum. Total orders were up 8% with increases in all divisions and regions. Base orders, up 9%, also increased in all divisions and regions. Revenues were up 1% at $8,900,000,000 Reported operational EBITDA was up 12% year on year in nominal terms, with the margin expanding 60 basis points to 13%. The operational EPS result on a constant currency basis was 27% higher at US0.38 dollars per share. Cash flow from operating activities was €101,000,000,000 for Q2 2018, and we are on track to deliver solid cash flow for the full year. Slide 6 shows you our order development for the quarter in total and base orders in more detail. Both total and base orders are up in all regions. Total orders were 8% higher. We have continued to see a selective recovery in large orders, which were up 2% year on year. Notable wins included large orders for grid integration and transformers as well as automation solutions for specialty marine, oil and gas and Chemicals. Base orders increased 9% on a comparable basis with strong demand in all regions. In Europe, base orders rose 12%. Growth was broad based, particularly strong in Italy, but also higher in Germany, the UK, Norway, Spain and France. The Americas experienced 7% base order growth. In the United States, ABB's base order were up 7%. Orders in Asia, Middle East, Africa rose 7% and in China, they are up 23%. This was a quarter of strong performance in both the U. S. And China, ABB's 2 largest markets. I will now hand over to Timo to take you through the results for the division. Thank you, Uli, and good afternoon, everyone. Moving on to discuss the divisional performance and numbers in more detail, let's start with Power Grids on Slide 7. Total orders were up 5%, while base orders rose 7%. The division has been delivering comparable base order growth for over a year now, with broad based growth driven by its PowerUp initiatives. The book to bill ratio rose to 1.09 from 1.03 at the end of Q1. Revenues were 8% lower, reflecting the lower order backlog at the end of Q1. However, the year on year backlog situation improved from minus 7% at the end of first quarter to minus 4% at the end of the second. While the lower order backlog year on year will continue to weigh on revenue, we expect the continuing base order momentum to drive gradual improvement in comparable revenues for the remainder of the year. The operational earnings margin was 40 basis points down year on year, mainly due to lower revenues and continued investments in the PowerUp program. With gradually improving revenues and cost management initiatives by Q4, we expect operating margins to improve and the division to be within its target margin corridor for the year as a whole. Turning to Electrification Products on Slide 8. Total orders rose 6%, while 3rd party based orders improved 4%. EP saw broad based growth in products, including high single digit growth in low voltage and double digit growth for data centers and EV chargers. Orders were higher across all regions. Revenues were up 4% year on year, and the order backlog ended up the quarter 5% compared to the same period last year. The division's operational EBITDA rose 100 basis points year on year, reflecting continued operating leverage and pricing measures. We closed the GEIS transaction smoothly within the planned time line. For the second half of twenty eighteen, we expect the impact from GEIS to increase sales in the EP division by roughly SEK 1,350,000,000. We expect GEIS to impact the division's operational EBITDA margin negatively for the second half by approximately 2 60 basis points. The impact is expected to be higher than this in Q3 and lower than this in Q4. Looking further out, we continue to expect the division to be back in its operational EBITDA margin range of 15% to 19% during 2020 as originally committed. Next, we have Industrial Automation on Slide 9. This was a quarter of excellent order growth for the division. Total reported orders in local currencies grew 30% year on year, reflecting the additional BNR. Total comparable orders rose 15%, with base orders up 9% year on year and double digit growth in services. All regions advanced. The division's demand growth was broad based, led by selective recovery in process industries, particularly oil and gas and demand for specialty vessels. Year on year revenues were steady for the 3rd consecutive quarter as strong performance from product orders continued to mitigate the order lower opening order backlog. The division ended the quarter within with its backlog 4% lower year on year, much improved from the minus 8% backlog year on year of the previous quarter. The operating margin year on year was up 70 basis points, reflecting continued positive mix, strong project execution and some onetime effects later in the quarter. Now looking at Slide 10, we have Robotics and Motion, which had another strong quarter. Total orders grew 11%, while base orders grew 16% compared to the same period last year. The division captured growth in all regions and across all business units, with drives and motors seeing continued support from recovery in process industries. Revenues experienced a similarly strong pattern of growth, increasing 8% on strong execution of the order backlog. The order backlog at quarter end was up 6% year on year. The division delivered a year on increase of 100 basis points in operating margin, reflecting positive volumes and mix and tight focus on cost control and productivity. To summarize the picture across the divisions, our focus on profitable growth and relentless execution is delivering, While the lower backlog position in IA and PG, in particular, has dampened revenues for the group, divisional performance in RM and in EP before GEIS is showing clear signs of improved operating leverage. We look next at our group operational EBITDA margin bridge on Slide 11. In the Q2, we continued to deliver net cost savings amounting to $94,000,000 This enables good mitigation of pricing pressures in the quarter through the ongoing focus on supply chain management, productivity and operational efficiency within our divisions and some ongoing benefit from the white collar productivity program that we completed in 2017. These were partly offset by negative impacts of SEK 35,000,000 from commodity price increases. Volumes and mix had a positive impact, contributing €19,000,000 27,000,000 respectively. Our investment in growth continued, including an increase in investments of €56,000,000 mainly in digital and sales. Inorganic activity, including the acquisition of B and R and some impacts from the EPC business model change had a positive impact of CHF 42,000,000. Currency translation had a positive impact of CHF 34,000,000. Including all of these impacts, the group achieved operational EBITDA of SEK 1,167,000,000, increasing 12% year on year and a margin of 13%, up 60 basis points year on year. Looking ahead, stronger sales, improved mix and continued cost savings are expected to provide ongoing support to margin development. The tailwind provided by currency translation in the first half is expected to turn into a headwind over the remainder of the year. As well, rising geopolitical uncertainties such as tariffs could act as a headwind. Then specifically on GEIS, at group level, we expect an approximately 60 basis point negative impact on the second half twenty eighteen operational EBITA margin. As we said going into 2018, our ambition remains to have full year comparable revenue growth and to deliver some margin accretion for the year as a whole, even net of the impact of GEIS. On Slide 12, we have a summary of group items and an update to the guidance for these items. Looking first at the items on the left side of this chart, the group's corporate operational EBITDA was SEK 278,000,000 for the first half. As noted in Q1, we have seen higher negative impacts from non core activities, which we expect to further impact the second half. We now expect full year corporate operational EBITA to be around SEK 550,000,000 compared to our original guidance for 2018 of $500,000,000 Our framework for the other items on the left side of the chart remains unchanged since the last time we spoke. On the right side of the chart, we would like to focus your attention on charges to below the line items, including GEIS related items, for which we now have clearer line of sight. I will not cover every item in detail, but would like to note that we expect normal restructuring costs to be around SEK 200,000,000 in the second half. For the year as a whole, this is in line with the low end of the range originally expected, with these costs now much more weighted to the second half. We expect SEK 120,000,000 of GEIS integration costs to be taken below the line in the second half, with $62,000,000 already reflected in the first half. The rapid progress we have already made with the integration of GEIS has brought more of these costs forward into 2018. At the same time, over the 5 year integration period, a more efficient tax structure will reduce cash taxes by around $130,000,000 Overall, we expect the cumulative cash impact to be broadly similar to our original estimate. And Tarek will come back to this point in a moment. Approximately $25,000,000 is expected to be booked for inventory adjustments at GEIS, and we estimate DPA related amortization charges from GEIS to be around €25,000,000 for the second half period. And let me now hand back to Uli to update you on the progress on the broader group agenda. Thank you, Timo. Please turn to Slide 13, where I would like to start with our focus on profitable growth. Our streamlined and strengthened ABB today offers 2 clear value propositions to our customers, bringing electricity from any power plant to any plug and automating the industries from natural resources to finished products. Within this, our 4 individual divisions, each either number 1 or number 2 in their field, are driving growth through our high approach of penetration, innovation and expansion. Here are some examples. In Power Grids, our Power Up program is driving market penetration and expansion. A highlight this quarter is the €150,000,000 agreement just announced with Orsted, formerly known as DONG Energy, to connect the world's largest offshore wind farm to the U. K. Power grid. ABB will be the supplier of grid integration and ABB Ability Automation Solutions as part of a 5 year long framework agreement. In Electrification Products, we are driving penetration of high growth sectors such as data centers, EV fast charging and food and beverage. We have recently announced the global strategic alliance with HPE and retail for secure edge data center solutions. Our recent collaboration on a turnkey infrastructure software solution for the ultra energy efficient Glastal mine data center in Norway shows the potential of this alliance. As process industries show signs of recovery, Industrial Automation will be working with China's Yitai Group in a series of projects to digitalize operations with ABB Ability in Greenfield Polds all the way to chemical plants. And in Robotics and Motion, we are expanding our innovative robotics solution portfolio with the announcement of the acquisition of AB Rotec, an experienced supplier of robotics welding solutions for the automotive sector in Turkey and Southeastern Europe. Now let's go to Slide 14. Our leading ABB Ability Digital Solutions portfolio is integral to driving growth in our divisions and momentum is building in a very encouraging way. Put simply, it comprises software solutions for domain specific value added in utilities, industry and transport and infrastructure. Already today, our portfolio includes more than 210 of these digital solutions. This slide shows you how we are doing this with recent examples of development in each of our divisions. ADB Ability's Distributed Energy Resource Management System, or DIAMS, as we call it, is enabling Power Grids customers who invest in renewables to better manage intermittent energy supply. The Derm Software and Control solution provides real time information so that network operators can control thousands of assets and optimize performance. This not only improves grid reliability, it also cuts the total cost of energy supply by up to 25%. In Electrification Products, one of ABB's latest software solutions for low voltage switch care, ABB Ability M and S Digital, was installed in the Basisokye Cemento at the recently modernized cement factory in Turkey. With M and S Digital's intelligence, our facility can achieve operating cost savings of up to 30% and drop in approximately 20% reduction in electrical infrastructure investments. Moving on. At last month's Euromine Expo 2018 held in Sweden, we showcased ABB Ability Mine Optimize, the new software and control solutions set to help mining customers achieve enhanced productivity, efficiency and safety in their facilities. For example, it can reduce ventilation energy costs, a large part of any underground operating costs and more than 50%. And with the new condition monitoring and diagnostics in our ABB Ability Connected Services solutions, we are using machine learning and artificial intelligence to better detect anomalies in robots. Through better predictive maintenance and optimization, this solution can achieve 24% reductions in downtime and 60% faster response time. These are just some of the many ways that ABB Ability today is adding value to our customers and strengthening the profile of our businesses, contributing to growth and driving profitability. Please turn to Slide 15. As a global market leader in EV fast charging infrastructure, we are proud to be a true pioneer in e mobility, and I would like to spend a few minutes on this today. This is one of our most exciting market opportunities as adoption of electric vehicles is substantially increasing around the globe. By 2,030, an estimated 24% of new cars sold globally will be electric. This is the equivalent of up to 20 5,000,000 electric vehicles being sold each year and a total of 100,000,000 electric vehicles on the road in total. EV charging infrastructure will grow exponentially with the number of charge points installed in the year expected to expand more than tenfold by 2,030. ABB is uniquely well placed in the value chain of e mobility. There are 4 key building blocks for e mobility: renewables integration, transmission and distribution grid upgrades, EV charging infrastructure and finally, the electric vehicles themselves. ABB is the global number 1 in 3 of these and working with OEMs of electric vehicles all around the world. We have made a promising start since launching as a start up in the electric vehicle charging market back in 2011. As an example, in the Q2, we launched our Terra HP charger, the world's 1st easy fast charger able to operate at power up to 3 50 kilowatts. The Terra HP HP can right recharge an EV's battery in about the same time needed to refuel a gas engine vehicle. It means about 8 minutes for a 200 kilometer reach refill. We have recently received groundbreaking orders for this charger from Electrify America in the U. S. And Ionity in Europe. With ABB Ability, our fast charging stations are connected via a cloud computing platform, enabling integrated vehicle and fleet data management and cashless payments as well as remote services. In addition to our technological leadership, we have a broad installed base of more than 7,000 fast chargers in 60 countries today. Our reach as a group with a presence in over more than 100 countries and more than 30,000 service employees worldwide uniquely positions us to achieve rapid growth and support customers all around the world. Today, ABB's EV fast charging business is already roughly €100,000,000 in size. While it has been growing at a high double digit pace, our end to end global electrification offering competitively positions us to benefit from the multiplier effect of increasing demand of electrification through e mobility infrastructure. With our brand proposition reinforced through ABB Formula E, we intend to capitalize on our leadership position in the future. Turning to Slide 16, a chart many of you will be still familiar with, we illustrate our approach to ongoing active portfolio management. As you can see from the chart, over the past few years, we have continuously shaped our portfolio towards better competitiveness, lower risk and higher growth. This was a very active period of transformation, but we would not say that our portfolio is now cast in stone. We will continue to shape ABB and constantly look for opportunities to shift our center of gravity to drive more profitable growth and further streamline and strengthen ABB. The guiding principles of our actions will always be what creates the most long term value for all of our shareholders. The purchase of GE Industrial Solutions illustrates this approach. With the acquisition, we increased ABB's exposure to the world's largest economy, the United States. Moreover, it strengthens the group's commercial profile in this very important market for Electrification Products division, and alongside other portfolio actions, it adds early cycle exposure. Now let me hand over to my colleague, Tarak Mehta, to update you on the specifics of the strategic acquisition. Tarak, over to you. Thank you, Uli, and good afternoon, everyone. Please turn to Slide 17, where you can see the slide we first showed you at the announcement outlining the rationale behind our acquisition of GE Industrial Solutions, we are more convinced than ever by this proposition. GIS expands our access to the attractive North American market and provides a significant installed base around the globe and particularly in the U. S. This was run like a non core business by GE, but as part of ABB, it strengthens our core and our number 2 global position in electrification. It also offers significant potential for value creation. As key drivers of value potential, we see the injection of ABB's leading technology into a combined and harmonized portfolio along with the delivery of the cost synergies. Together, GEIS and ABP will provide the most comprehensive electrification portfolio in the sector. Moreover, the agreement comes with a long term strategic partnership that supplies GE with ABB's leading products and solutions. Slide 18 provides an update on the significant progress we have already made by preparing for the integration of GIS. Since signing, we have completed a very extensive regulatory approvals process, closing the transaction as committed at the end of June. We have created a new Electrification Products business unit named EPIS and appointed Stephanie Mains from GEIS as the unit's Managing Director. The leadership structure is in place and we have focused on retaining key staff from GEIS as an important part of this process. The clean team preparing for the integration has planned how to implement the transition from day 1. They have worked closely with GIS to identify the resources required to secure the targeted synergies, and they have developed a comprehensive plan for infusing ABB's technology and ABB Ability solutions into the GEIS portfolio. In the period between signing and closing, we looked closely at how to create the best of both worlds, and we have set clear performance targets in line with the acquisition business case. This extensive preparation has put our integration well on track. With EPIS and ABB already receiving 1st joint orders, we will continue to build on GEIS' deep customer relationships while bringing its performance up to peer levels. Please turn to Slide 19, which revisits the significant value creating potential of GIS in financial terms. We continue to see great potential to harmonize the joint portfolio, optimize our footprint and create cost synergies. These include supply chain synergies and SG and A efficiencies. With the current pace of integration, we expect to realize around $120,000,000 in cost synergies in 2020 with the full $200,000,000 run rate of synergies captured by 2022. The profile is roughly 6 months ahead of our original expectations. The planned rapid pace of integration will frontload more of the cost into 2018, with $62,000,000 of non operating costs already reflected in H1, as illustrated by TiVo. We expect approximately $480,000,000 in further pretax one off costs from H2 of this year through 2022. Around 80% of these costs are expected to be nonoperational. Around $130,000,000 in reduced cash taxes over the same timeframe. In summary, I'm confident we will deliver the confirmed cost synergies and we will be back in our division's target margin corridor during 2020. Looking further out, I'm also confident that we can achieve further top line synergies from the GEIS' significant installed base. Thank you, and let me hand it back over to Yulik. Thank you, Tarak, and also thank you for your leadership so far on this important deal. Slide 20 brings us on to relentless execution. With our 1000 day program successfully completed last year, we are now driving towards world class efficiency and effectiveness within our 4 divisions. We continue to deliver productivity improvements and cost savings through a systematic approach to supply chain management and the Lean Sigma methodology in all of our businesses. Let me illustrate this with some examples. In Power Grids, our U. S. Transformer factory ran a successful design to value program. We then took the program to factories in Sweden, where in one of our high voltage factories, this program reduced lead time by 67% and improved on time delivery, cutting inventories by 49%. In Electrification Products, we systematically raised standards with our protection and collection business unit across 12 sites to achieve a 50% improvement in quality performance and 22% increase in productivity. Within Industrial Automation, a full site program at our measurement and logistics facility in Italy saw a 30% reduction in lead time and a tripling of the Net Promoter Score as a customer satisfaction measure. And our Robotics and Motion division used the Lean 6 Sigma methodology at one of our motors factories in the U. S. To increase delivery performance by 40% in a strongly recovering market. In all, ABB has 1500 continuous improvement projects within its 4 divisions underway. This supports our ongoing aim of offsetting 3% to 5% of the group's cost of sales each year and providing superior service for our customers. This ongoing focus on productivity has contributed to the improvement you are seeing in the operational EBITDA of the group year on year despite steady revenue and ongoing brand. More than 1,000 trademarks have been consolidated into 1 ABB master brand, and we are enhancing our brand positioning with strategic investments such as the sponsorship of ABB Formula E. This quarter, the champion races were held in Rome, Paris, Berlin and Zurich, bringing ABB to thousands of consumers and customers in important markets. With these measures, we have increased brand equity by more than €2,500,000,000 in the period after our new branding was unveiled. We have improved our reputation as digital leader, The ABB is now ranked number 2 versus peers, and we have made ourselves an employer of choice for graduates, doubling the number of job applications we received since the strategic grant launch in 2016. Let me summarize on Slide 22. All our markets are in growth mode. Rising geopolitical uncertainties will require careful navigation, but we are a global company with a strong and flexible global footprint and capable of meeting these challenges of our environment. Longer term, the Energy and 4th Industrial Revolutions offer substantial opportunities for demand in ABB's 3 major customer sectors: utilities, industry and transport and infrastructure. ABB is well positioned to tap into these opportunities. Concluding on the Q2, we continue to deliver profitable growth. Orders were up in all divisions and regions. Our portfolio of ABB Ability Solutions is driving growth. We have already made great strides with the integration of GE Industrial Solutions. Operating margins have expanded, and we have delivered double digit operational EPS growth. Our focus will remain firmly on relentless execution to deliver profitable growth in the quarters ahead as we write the future together. Thank you very much for your attention. Now we'll open the line to your questions. We'll now begin the question and answer The first question from the phone comes from the line of Ben Uglow from Morgan Stanley. Please go ahead, sir. Afternoon, everyone. Thank you for taking the question. A couple quickly. Just, Orec, on China. Obviously, we can see a pretty nice sequential movement in the base orders. It was plus 12% last quarter, plus 23% this quarter. Is that can you give us an idea how much of that is actually a sequential improvement in demand and how much is just a comp effect? Are you seeing an underlying kind of trend increase in China in 2Q? And if so, which industries might be driving that? And then the second question, can you give us a little bit of help around tariffs? This has become a bit of a topic today on some of the conference calls. Is there any way of quantifying for us what percentage of your U. S. Production is sourced from China, even a rough idea? I mean, I'd assume that this is fairly low, sub 10%, but can you could you give us any color on how your supply chain works from China into the U. S. For ABB? Ben, good afternoon. Thank you very much for your questions. Look, your observation on China is correct. We have a really nice China growth momentum. And I think the move of China as a country and the transformation of China as a country and the key issues and actions on transformation in ABB's portfolio fit really like a glove in these times. So there is a pickup on the overall momentum. Yes, the comparables were also a little bit easier, but altogether, we see a pickup. And let me just run you through the 4 businesses what we are seeing out there. If you take the Power Grids business there, we really are nicely up, but having said so from a low comparable last year, mainly due to really solid base orders on grid reinforcement, on digital ABB Ability and on Renewables Integration. In Electrification Products, basically, China was good growth in the entire portfolio. We see also some sign of recovery in the industry. However, it's still mixed. On the one hand, food and beverage is up. Oil and gas remain slow in China for electrification. If you look at transportation rail, it's good. If I look at buildings, there's really a dual buildings, such as hospitals and restaurants are quite okay. Commercial building is a little bit slow, and residential really suffers from the governmental restrictions on the building market. In Industrial Automation, good growth Here, especially also B and R is doing very well. We are super happy with the demand. And Robotics and Motion, both parts, both the robotics and the drives part is growing in a very solid way. Robotics, if you look at the amount of EV manufacturing that's coming up in China, we are very well positioned. So altogether, I would say a good market and good priorities in China where ABB fits very well. And look, on the tariffs, let me just run you through a little bit. We have in a moment tariff spread in the U. S, we have it in China, we have it in Europe. And we have a team that's basically looking at all of that to make sure we are flying on-site with whatever is coming in and some of the news are coming really on a daily basis. Secondly, we have our supply chain management clearly on top of all the topics. Now specifically regarding the U. S. In the U. S, we are pretty self contained in terms of ready made product. You might remember, we even opened up a robotics plant not too long ago, so we can really do a lot self contained. In the U. S, the topic is more raw materials. We have about 4,000 people on the shop floor that are producing motors and transformers. Now for our highly energy efficient transformers and motors, we need specialty steel. And that specialty steel is not produced in sufficient quantity in the U. S. There's only 1 producer, and he is full, flat out, so there's no capacity available. When you do that now, when you source, we source from Japan and Korea, And therefore, this would be impacted if we don't get an exemption. And it's very clear what our position is here. We want to have a level playing field. If a country says there will be tariffs on imports, we have to respect that. But our request is then at least that the raw materials and the ready made product get the same tariff at the same time because otherwise, it would mean that shops are moving away towards the country where the ready made products come from. And we could also do that. We could ship into the U. S, but that would basically destroy the jobs that we have invested in, in the last couple of years. We have articulated that clearly with government. We have found open ears and a good communication, and we really hope that these uncertainties get mitigated over the next couple of quarters that we enjoy the pretty good underlying market in a positive way. That's really helpful. I'm sure there's going to be a lot of follow-up, so I'll pass it on. But thank you for that right now. Okay. Thank you. Thanks, Ben. We'll take the next question. The next question comes from James Stettler from Barclays. Please go ahead, sir. Yes, thank you. Good afternoon all. 2 from my side. Can we just again talk a bit about Power Grids? I mean, having had the PowerUp program now going on for some time, do you feel that you have the right setup here? Can you talk a bit about how you see the order pipeline evolving and looking into next year? Do we really think do you really think you can return to growth there? And the second question is on IA, which has continued to outperform, at least my expectations, on the margin. Can you talk a bit how you see the margin development for the second half of the year? Thank you. Yes. I'll start with the Power Grids situation. Look, in Power Grids, taking first your question on the order momentum, I'm really happy. I'm really happy that Power Grids in the quarter has grown both in total orders, about 5% and in base order, 7%. That means also we are still starting to build backlog again in this business. You might remember the backlog got dampened by a couple of different effects. The one was a softer market, especially on large orders. Secondly, the massive change in business model in EPC and also some divestiture of activities like the cable business that we had before that we got out. So basically, we are going through the backlog growth in Power Grids. We are building backlog with our good book to bill that we see now. And out of this, that will also help us to get out of the revenue contraction situation that we still have experienced in the Q2. If you look at the transformation that's going on, we always said we make the business first better and then we make it bigger and better. The last couple of years was about making it better. We changed project execution. We changed the way we ran the portfolio. We divested a lot of activities, and we started investing into the future. Now that the growth is coming in, we really need to make sure we support the good growth momentum that's starting to build up. Digitalization of the grid, if you take the new smart transformer, the ABB Ability enabled transformer that we launched in Hanover, Honestly, we were even positively surprised how well the market took that. So the momentum is building service opportunities. Look, we have still a EUR 400,000,000,000 resale value installed base out there, and Power Grids has the lowest penetration in service at about 12%, 13%. So we have a tremendous opportunity to do more in that one going forward. So with that elements together, we are confident that for the full year, we will have the business back in the margin corridor and that we are building growth momentum in the orders that will ultimately result and also in revenue growth and help then also with the contribution going forward. On Industrial Automation, just a high level and then I hand over to Timo. Just one comment here on B and R. We are very happy with the B and R acquisition. It's growing continuously double digit. Its results of the integration and the financial results are ahead of plan. So it's good. And the collaboration of the B and R colleagues together with the other automation teams, be it on industrial automation or robotics, is really going well. So that's a good driver. The markets are coming back on the process industry. We see selective CapEx, plant field investments. So altogether, this is going to the right direction. I'll let Timo now address the margin topic that you wanted to have also addressed, James. Okay. James, we don't give the guidance directly, right? But I'll give some puts and takes. So we had very strong Q2 in IA driven by positive mix, successful project execution and also cost savings, and we also had some slight onetime impact on the quarter. And now when we look at the business going forward, we don't expect all that to continue to repeat itself during the second half. And also, we are moving to stronger order growth momentum here. The backlog, as I said, went from minus 8 to minus 4. And when we are starting to get new orders in especially larger orders, they basically will take the proportionate amount of services down a bit and can have a negative impact to the margin. Of course, this then pulled through some other products, which then would be a positive for FBB overall. So that's pretty much where we are on higher margin. Thanks, James. We'll move on to the next question. The next question comes from Andre Kukhnin from Credit Suisse. Your line is now open. Please go ahead. Good afternoon. Thanks so much for taking my question. Can I just firstly follow-up on China and on robotics specifically? Some participants from your supply chain and some of your peers have commented specifically about order cancellations there. And it sounds like primarily smartphones and maybe semi manufacturing related. But could you just confirm that whether you had any change in trend witnessed in China in robotics during Q2 and maybe splitting it between smartphone and industrial? Yes. Look, when you take ABB's position in robotics in China, we are the market leader. And we are the market leader with a very specific business model that suits extremely well the Chinese environment. We have a solution based business model where we help our customers to have the functionality easily installed that a robot needs to have. Some of our competitors are selling what they what we call naked product that a customer needs to build engineering resources themselves. So that business model is super well suited to the specific situation in China. The second piece is we probably got the most localized team. Our business there is led by Chinese management together with an entire Chinese team there. They have very, very deep long term and forward looking relationships with the customers. So we very often get involved very early in the process, then customers think about how to design the factory and how to put in the solutions, which gives us a competitive advantage as well. We see solid demand on the automotive side, especially on electric vehicles. And I have to say that our position is a very strong one. We are seen as a trusted partner. Somehow, the ABB exposure to e mobility and ABB's background helps there also to be an even more credible partner in that context. On the semiconductor side, on the smartphone side, look, the smartphone manufacturing is one where really robots can make a differentiating factor to productivity. Our solution offering, again, allows us to differentiate for 1 of the largest smartphone manufacturers in the world that has its base in China, but also expands globally. We have recently within half a year gone from planning a robot based assembly factory into installing the whole factory within half a year with our pre productized and pre configured solutions, we were able to get a very significant factory up and running. So I think our competitive advantage positions us well to continue a solid growth in China and maybe we experienced this a little bit better than the one or the other competitor. Thank you. And we will move on to the next question. The next question from the phone comes from Guillermo Pigneault from UBS. Please go ahead, sir. Hi, Guillermo Puneo from UBS. Thank you for taking my question. Just maybe an additional question on aftermarket. We saw that the aftermarket organic growth has slowed down during the quarter. And I was wondering the drivers behind that slowdown, if you could give some granularity around that. Thank you. Yes, we have yes, Timo here. Thanks for the question, Guillermo. So basically, on service orders, you're right, our service orders grew 2% during the quarter, but this is very isolated situation. So this is actually coming from power grids where we had an unfavorable comp last year in high voltage business. And when I look at the other three divisions, actually, the service orders are growing very nicely and in line with or better than the other growth path. And also, maybe just to highlight that our service revenues were actually up 13% during the quarter. Thanks, Guillermo. And the next question, please. The next question comes from Mark Thromann from Merrill Lynch. Please go ahead, sir. Yes, thank you very much. Just two questions, please. Firstly, on market share, Uli. I don't know if you think in any of the major areas, if you look at your base order data, say, this year on a rolling 12 months, whether ABB has either gained or lost market share in a notable area. I wonder if you could highlight that, please. And secondly, on the profit bridge, we've seen net savings of, I think, €94,000,000 I wonder if you could comment on the pricing trends that you are seeing and where they're impacting. I know you mentioned it in the Electrification Products division. Is that helping robotics and motion as well with things like the larger motors and drives? Or a little bit comment on the pricing trends please? And also on the bridge, the other line was pleasantly surprised that was 0. Normally it isn't. Maybe if Timo could give a bit of an explanation what's going on there and how we should think about that going forward? Thank you. Yes. Good afternoon, Marc. Thank you for your questions. I'll let the second one be answered by Timo. Let me talk about the market share. If you look at the base order momentum and the total order momentum, it shows very clearly that we are growing ahead of the markets in our businesses, and I think that's a very encouraging signal for us altogether. It also shows that our continuous investment innovation, our strong focus on ABB Ability is really paying off, and it helps us to differentiate. If I become a little bit more specific here, I think the Power Grids business in the last couple of years, we wanted it to become smaller because we said goodbye certain activities. But now you see the strength of this business coming back in a market that may be growing 2%, 3% with a growth on total orders of 5% and base orders of 7%. In Electrification Products, a growth of 6% is clearly ahead of the market growth When you take the global reach that we have, that is good. Industrial Automation, I know that some people have come out with different messages about us. If you take a total order growth of 15% and base orders of 9%, it's very clear that we are taking share and that we are moving very forcefully and especially our ability solutions in Industrial Automation go a long way. And if you look at the recent survey positioning us as number 2 in digital services, we are ahead of a lot of the competitors here. In Robotics and Motion, we have a total growth of 11% and a base order growth of 16%. This is really good. We are taking active shares. So altogether, I think ABB is really firing now on all cylinders, getting the growth momentum up. We are not everywhere yet where we want to be on the growth momentum, but it's improving and coming out of the last couple of years together with an improving market. This is a good situation. And you remind just one thing. During the transformation, we increased our spending on R and D, we increased our spending on digital and still deliver a stronger margin. That means ABB really has a portfolio of highly competitive offering, and we are basically launching every month exciting new capabilities and also drive sales in a very much more structured way. With that, I hand over to Timo to give you the insights on the profit bridge that you have asked for, Marc. Okay. So on the bridge, first of all, when we look at the 94,000,000, so there are also some of the WCP savings on that line item. But then when we look at how the savings from purchasing and operational efficiency are coming through, so they are coming through actually quite nicely. And then when we look at the pricing environment, so we still have a headwind from commodity, but we have been able to push that better into the markets. And when we look at EP and RM in particular, so there is stronger growth dynamics in the market, particularly in the RM, and that also usually gives you a little bit more pricing opportunity on the market. So that's how that is developing in RM. We are also and you specifically asked about the larger motors. We are still having capacity, but less under absorption than earlier. So that business is also moving to the right direction. Then if we talk about the other line being 0, so this is actually a pure coincidence, that does not mean that it could not come back later as being a driver here, and we just think we had some less of these smaller items what have constituted at this time, like provisions and some other such items. So that's really the driver there. But as I said, it doesn't mean that it will be 0 from here forever. That's why we actually left it as a piece of the bridge. Thanks, Marc. Next question, please. The next question comes from Martin Wilkie from Citi. You may go ahead, sir. Thank you. Catherine, it's Martin at Citi. Just a question on GEIS. So thank you for the update on the integration. In terms of there was a lot of market chatter that the business had deteriorated before you sort of got your keys and took over ownership. Just to confirm, is the starting point for profitability in line with what you expected? And just as a sort of a follower or part of that, when you've talked about the guidance for the second half, it looks like you're giving a slightly bigger headwind to the divisional margin because of the GEIS deal. Is that just because of the phasing of above the line charges? Or is it because the underlying business is perhaps slightly less profitable to start with than what you'd originally thought? Thank you. Martin, good afternoon. Why don't we handle it the following way? I would ask Tarak to give you a little bit of a flavor on what he sees in the business and how he sees the integration ramping up. And then I would ask Timo to run you through the numbers on the situation. So, Tara, please give us an update on what you see in the business and how the integration has started. Thank you. Ole, as we see it and we've spent some time with the team now, 2 or 3 things come out very clearly. The people of GIS are very strong. The relationships with customers are even stronger, but it's also very clear we need to do homework in terms of the performance of the business. So, we work together with the team of GIS to put together a comprehensive plan that I described. In terms of the starting profitability question, we see it slightly lower than what we had thought through originally. But in terms of the overall scope and the opportunity, we still see we're still quite enthusiastic about the potential of the business. On specifics with respect to your question on profitability, I hand it over to Timo. Yes. Thanks. So basically, when I look at this now purely from the finance equation perspective, I would still call this that we are broadly on track regarding GEIS. So when you first look at the revenue line, it's on track, and we expect about SEK 1,350,000,000 to come in second half, in line with our earlier expectation. We said in the beginning of the year 110 basis points to 130 basis point impact for full year for EP, and we are now saying to 60 basis points for second half for EP and a bit more than this during Q3 and a bit less during Q4. And it is fair to say that the running profitability is slightly lower in the beginning, but in the beginning, we also have some special items, which we now know impacting like change in revenue recognition, for example. If you look at the implementation costs, we also have a bit higher implementation costs, but we have already taken part of that during first half twenty eighteen. And we also have a clearly bigger positive cash tax impact than we estimated at inception, about EUR 130,000,000. And as said, we confirmed the planned cost synergies now 6 months earlier. So that's where we are on the equation. Thank you, Martin. And we'll move on for another question. The next question comes from Simon Turner from Berenberg. Please go ahead. Yes, good afternoon and thanks for taking my questions. Firstly, on software, Oli. You talked a lot about Ability Solutions and how it's picking up and I appreciate that. And also the partnership you have with Microsoft, you talked a lot in the past. I mean, over the last couple of quarters, you had in Q1, I guess, Emerson doing a partnership with Aspen. You had in just the recent quarter, Rockwell partnering with PTC and obviously Schneider is ramping up with its deals. How do you see generally the likelihood and the need for ABB to do more partnerships in software beyond maybe with the partnership that you have with Microsoft there? And secondly, Timo, you talked a lot about the bridge already. But in terms of the investments in digital or generally the incremental investments, I think you started splitting it out as of Q3 2017 in the bridge. And so in the next quarter, we're starting to comp, obviously, these incremental investments. How should we think about that headwind in the second half? Is it going to be 0? Or is it going to be is it still going to be negative? And then lastly, Uli, I thought when I heard you on press calls this morning and also on the analyst call now, you've been a bit more pronounced when you talked about the portfolio not being cast in stone. And naturally, I had several incoming questions this morning with regard to Power Grids again. And I remember well your comments in 2016 when the strategic review was done, why it remains part of the portfolio. But maybe you can just reconfirm on the call just the long term commitment to Power Grids. That would be appreciated. Thanks a lot. Yes. Simon, let me go through these questions one after the other. Let's talk about software first. When we talk about software, we need to remember that ABB's offering today is more than Tarak's portfolio is now moving in terms of software capabilities, We have now breakers that can control that entire microgrid through a software solution. So I think on the embedded software, ABB is very strongly positioned and well underway. Then if you take the control software piece, they're really the combination of our historic strength as a number 1 in distributed control software with the B and R offering has closed the offering, and we have now both machinery and factory automation, software control as well as the classic process industries. So I think in that second bucket, we are well positioned as well. The 3rd bucket is application software. And in application software, you basically help to plan, to build and to operate better. If I start at the end of that in Asset Health, in Asset Health in our industries, we are really leader in mining, we are leader in the power grid space, and we're expanding Asset Health very quickly into the robotics space. We have already expanded into the B and R space. So we are pretty well positioned there and get going. On the planning side, if you take reasonably one of our key projects, and that's a project that I mentioned before, we helped a major mobile phone producer to set with half a year to set up an entire new factory. We simulated that new factory, which is a robot driven factory with our robot studio software and got that going. On the PLM side, we are partnering with others. So I think application software that could be the one or the other acquisition coming in, but we are not desperate to have that. And then the 4th bucket is software platform. If you take software platform, we have the partnership with Microsoft altogether globally on cloud, and that's going super well. It also helps us with cybersecurity because cybersecurity is today a clear differentiating factor. Combining our capabilities with Microsoft, you see the one or the other competitor now copying that model because it's very, very powerful. On AI, we partner on the one hand with IBM, but also with smaller players to really get that going and drive that. And the 3rd part on platform is really a partnership with HP and retail on the edge side, where we are one of the few or basically the only large scale industrial player that can provide edge solutions for cloud services through hardware and software to industrial customers and get going. So I think we'll be on a good track together all together on the software path, And we have grown it very strongly. As you see, ABILITY is really off to a strong start. The customers love it. We have a very different approach than most of our competitors here because we go from a solution base where we combine domain expertise, agnostic software and application and engineering know how, which really differentiates us and creates a lot of value to the customers. Now let me hand over to Timo for the second question, and I'll come back later on with portfolio. Yes, okay. So a quick one on the investments to growth. So as you see, we are at approximately the same level as where we were in Q1 sequentially. And of course, because these are mainly fixed cost type of investments, so you don't ramp them up or down that quickly. So we would expect that this would continue around these levels. I checked your point that this was €49,000,000 Q3 last year. So compared to that, we would expect it to be a bit higher. But then if you look at the content of the number, we would expect that the digital will continue to grow and the other items maybe go down a little. And then taking your last question on Power Grids and Portfolio, we took the decision in 2016 to we're on a track for about €1,000,000,000 profit in this business. We're we're on a track for about €1,000,000,000 profit in this business. We have turned it around. It's growing again. So I think it's much, much worth today, and it proves to be a good decision that we have kept it in the portfolio. Now in the last couple of years, we were really, really active, not only with Power Grid, but also with other elements of our transformation. And we did a lot of things in terms of active portfolio management already, but we would not say that our portfolio is now cast in stone. We will continue to shape ABB, and we will continuously look for opportunities to shift the center of gravity of our company and really drive more profitable growth and continue to streamline and strengthen ABB. The guiding principle will be, as in 2016, always to what creates most value long term for our shareholders, and that applies for the entire portfolio. Thank you, Simon. Next question, please. The next question comes from Andreas Willi from JPMorgan. Please go ahead. Yes. Good afternoon, Uli, Timur, Tarek and Ches. I have a few follow-up questions on GIS. You gave the revenue number for the second half of the year, which is very helpful for our models. Given that we don't know seasonality of this business also in terms of profitability first half, second half, maybe you could help us a little bit what kind of full year run rate is for that business? And the second question on GIS is on the split of the costs. So the integration costs are a bit higher, but you're saying that 80% or below the line versus 50% when you announced the deal. And obviously, back then, it was €200,000,000 earmarked for investments into the product offering and similar things, which are kind of operating and not restructuring charges. So what happened to that €200,000,000 number given that you basically maintained the message on the 2020 margin for the division, but now have lower costs above the line. So I just try to reconcile that. And the last question around that is the GE purchase commitment for products. It seems less clear from GE that there's a clear commitment here to buy from you. You maybe elaborate a little bit what exactly is that commitment from GE to purchase from you? Thank you very much. So Andreas, good afternoon. Thank you for your questions. I'll quickly address the purchase agreement, and then I'll hand over to Timo on the financials. Look, we agreed as part of the value proposition to acquire this business to a quite substantial purchase agreement between ABB and GE. GE historically has always been a very important customer for ABB across a wide range of our offering, and we continue that pattern going forward. We are expanding it in the context of the supply agreement. For competitive reasons, we are not disclosing all the details on that one, but it is something that naturally will be developed now going forward, and the teams are already having now the 1st meetings to really safeguard and make sure that we are rolling in this direction. With that said, I hand over to Timo for your other questions on the financial model on GIS. Yes. Thanks, Andreas. So first of all, on the top line seasonality, there is not that huge seasonality here on the top line. So the overall is pretty close to this 2.7% what we looked at announcement of the transaction. And as I said, we expect approximately 1.35% for the second half. Then if you look at the overall cost, so it's natural that at this point in time, after working through the clean teams and all that, we have treatment which we can now see better, led to a treatment which we can now see better. I mean, at that point in time, we looked at it could be approximately fifty-fifty. But we will naturally continue on the plan to transition very fast to the ABB product offer. That's one of the key value drivers of the deal. So that part has really not changed. Thank you, Andreas. And we'll take the last question now. The next question comes from Daniela Costa from Goldman Sachs. Please go ahead. Hi, good afternoon. I have three questions. First, can you give us an idea and what percentage of your facilities in terms of manufacturing serve more than one division? That's my first question. And the second one related to that, sort of, can you rank in terms of interlinks between your divisions? What are the strongest versus the weakest interlinks? And the 3rd question is unrelated to this, but relates to the automation side, so industrial automation. Can you guide us through which end markets have better margin profile within the division? That would be great. Thank you. Okay. Look, Daniela, thank you very much for your questions. And I might disappoint you on the answer with some of them because for competitive reasons, we are not disclosing all the details how we run our global supply chain and where we produce what. But in terms of which business supports what, if you take the Power Grids business, the Power Grids business is focused on providing all the activities that you and all the products and systems that you need to run the grid between the power plant and the substation. There is some demand in power grids coming from electrification products. It's a relatively small part. The rest of it is pretty independent. If you take Industrial Automation, Industrial Automation buys on the one hand from TARAC Electrification Solutions, both for the industry space, but also, for example, for the marine space. So that's a more significant relationship here. But also Industrial Automation buys in a quite significant way motors and drives from the Robot and Motion division and integrate them into overall solutions. So I would say the strongest purchase from the other divisions is industrial automation that we see today. It's clear that an application product also buy some of the transformers that come out of the Power Grids division. So there is a relationship between these activities. Now on the margin profile, we are happy with the margin accretion that we are seeing at the moment. And our ambition is very clearly to have a good mix between highly profitable and more early development markets. If you take our end markets, it's clear that markets that are more at the beginning of the S curve like e mobility, like the microgrid space is not yet as profitable. I'm happy that e mobility is a breakeven. So that's a good one. We're going in the right direction. And then you have the different maturity. In general, our service business is a very attractive business, which is accretive in all of the divisions to the percentage of activity. But other than that, we are not disclosing any further details on that. Thank you, Daniela. And with that, we'll bring our call to a close today. Thank you very much to everybody for joining us today. 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.