Earnings Call: Q1 2018

Apr 19, 2018

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q1 2018 Teens Results Conference Call. I'm Irona, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mrs. Jessica Mitchell, Head of Investor Relations. Please go ahead, madam. Good afternoon, ladies and gentlemen, and welcome to ABB's 1st quarter results briefing. The press release and analyst presentation were published this morning at 6:45 am and can be found on our website. This briefing is being webcast via our IR website as well as being recorded. With me today are ABB's President and CEO, Ulf Spesshoefer and ABB's Chief Financial Officer, Timo Ihamuquila. 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. I will now hand you over to Uli. Thank you, Jess. Good afternoon, ladies and gentlemen, and welcome to everyone that has joined us today. As usual, we will start with a review of ABB's results for the quarter, and then I will provide a brief update on the ongoing execution of our strategy. Let's look first at Slide 4 and an overview of how we have delivered profitable growth in the Q1. With our transition year 2017 behind us, ABB is today a streamlined and strengthened company, well positioned in improving markets and ready to win in a world that is embracing the energy and 4th industrial revolutions faster than any of us could have anticipated. In the Q1, we continued to deliver on our strategy in our three focus areas of profitable growth, relentless execution and business led collaboration. Total orders for the quarter were up in all divisions, and we reported our 5th consecutive quarter of year on year growth in base orders, with base order growth in all regions. Our innovative digital solutions offering, ABB Ability, continues to be very positively received by our customers, Comprising today of more than 2 10 digital solutions, our ABB Ability portfolio is already one of the most compelling in the industry. We are actively managing our portfolio. I'm very pleased with the progress our teams are making on integrating B and R into ABB. And we are working towards completing the acquisition of GE Industrial Solutions by the end of the second quarter. Both of these transactions are pivotal for our group's future competitive position in Automation and Electrification. Our divisions continue to sharpen their focus on execution, building on the foundation laid through our 1,000 day programs. Relentless execution still represents a very significant opportunity for ABB. We continue to pursue net savings to better offset raw material costs and are driving improvements through more than 500 B and C Sigma projects alone across the group. Our Global Business Services covering finance, HR, IS and purchasing are now fully operational and supporting our business towards world class efficiency and effectiveness. Finally, we are continuing to strengthen and consolidate the ABB brand. In the Q1, we integrated the Baldor Electric Company name into our global ABB brand, and we became the title sponsor for the Formula E Electric Car Motor Racing Series, now known as the ABB Formula E Championship. So we have started the year with strong momentum and will firmly focus on continuing to unlock value for our shareholders. We are focused on our customers and committed to realizing value from our investments in sales, digital and R and D and driving relentless execution everywhere in our business. Now let me turn to the results. As you can see from Slide 5, we delivered solid order growth. Total orders for Q1 were up 6%, with increases in all divisions and continued momentum in base orders, which were up 5%, increasing in all regions. Revenues were up 1% at €8,600,000,000 As flagged earlier, the lower opening backlog for 20 18 had a dampening effect on revenues despite the good order growth we experienced. Book to bill increased to 1.13. Reported operational EBITDA margin was up 20 basis points to 12.3%. On EPS result on a constant currency basis was 6% higher at $0.31 per ordinary share. Cash flow from operating activities reflects a net outflow of €518,000,000 Also, we expect solid cash flow for the Q2 and the full year, and Timo will explain in more detail the details on this one. Slide 6 shows you our order pattern for the quarter. Both total and base orders are up year on year. Notably, we have seen some recovery in large orders, which reached approximately €1,000,000,000 in the quarter. Looking ahead, the project discussions and emerging pipeline for large orders is encouraging. Very large orders are expected to pick up in the medium term, although the timing of awards remains uncertain. Base order growth continues to show good momentum with growth in all regions. We aim to continue the trend in base orders in the coming quarters. In Europe, base orders rose 2% with really strong growth in Italy. The Americas experienced 1% growth with moderate growth from the United States, while growth in Brazil was higher and Canada lower than a year ago. Orders in Asia, Middle East, Africa rose 12%, with China up 12% and India up 18%. I will now hand over to Timo to take you through the results of our divisions. Thank you, Uli. Let's move on now to the divisional performance and numbers in more detail, starting with Power Grids on slide 7. Total orders were up 1%, the first time we've seen total orders grow in Power Grids since 2016. The division also delivered continued growth momentum in base orders, which rose 7%, while service orders also continued to grow. Despite key orders in several geographies, large orders were lower relative to a tough comparable last year when the division booked a very large order for an HVDC link between the U. K. And France. Revenues declined 4% year on year, reflecting the lower order backlog at the end of Q4. The backlog remains at minus 7% at the end of Q1, which will continue to dampen revenue. The operational earnings margin declined 20 basis points year on year due to lower revenues, mix and the ongoing investment in the division's PowerUp Transformation. As already noted, lower backlog and ongoing Power Up spending will also impact Q2 in Power Grids. We expect improvement in the second half and the division to be in its target margin corridor for the year as a whole. Moving on to Electrification Products on slide 8. 3rd party base orders rose 5% and growth was solid across all key segments and regions. Revenues were up 2% despite 2 fewer working days in key markets in the quarter. The order backlog at the end of the quarter was up 3% compared to the same period of last year. The division's operational EBITDA rose 6% with margins up 100 and 10 basis points year on year, reflecting good operational leverage and improved pricing. Let's then look at Industrial Automation on slide 9. This was a quarter of sound execution for the division. Comparable total orders improved 4%, driven by service and selective investment for Mining and Specialty Marine Vessel Solutions. Base orders were steady relative to a strong Q1 a year ago. Including BNR, reported total orders in nominal terms grew 26% versus last year. B and R continues to perform at or even ahead of our ambitious expectations. Revenues Automation were steady year on year, with base business performance in the quarter mitigating the order backlog. The division ended the quarter with a sequentially improved backlog, but still 8% down year on year. The lower order backlog will continue to weigh on revenues and requires the division to remain focused on business that can be booked and billed in the same quarter. The operating margin was up 40 basis points versus the Q1 of 2017, a strong outcome due to positive mix, strong project execution and cost savings in the quarter. We do not expect all these drivers to prevail into Q2. Turning to slide 10, we have Robotics and Motion, which generated order growth in all segments and regions. Total orders grew 11%, while base orders grew 9%, with stronger order intake also coming from the Process Industries this quarter. Revenues increased 8% on strong execution of the order backlog. The division delivered a 50 basis point increase year on year in operating margin aided by its focused approach to growth, which also led to improved under absorption along with better cost control. Overall, when we look at the divisions, the performance was as we indicated at the start of the year, with improved operating leverage in EP and RM and lower backlog impacting revenues, in particular, in PG. We look next at our operational EBITA margin bridge on slide 11. In the Q1, we continued to deliver net cost savings amounting to €87,000,000 including some ongoing benefit from the white collar productivity program that was completed in 2017 and good mitigation of pricing pressure in the quarter. Volumes and mix also had a positive impact contributing €29,000,000 28,000,000 respectively. This was partly offset by continued negative impacts from commodity price increases and our ongoing investments in growth, including investments in R and D, ABB Ability, sales and the Power Up program in our Power Grids division. The acquisition of BNR and the divestiture of the high voltage cables business had a net positive impact of CHF 24,000,000. Currency translation had a positive impact of CHF 81,000,000. Including all of these impacts, the Group achieved operational EBITA of CHF 1,060,000,000 increasing 12% year on year and a margin of 12.3%, up 20 basis points for year on year. Looking ahead, the closing of the GEIS transaction is still expected during the 2nd quarter, we expect this to reduce full year operating margin of our Electrification Products division by approximately 110 basis points to 130 basis points and for the Group approximately 30 basis points. Our ambition remains to deliver some margin accretion for the year as a whole, even net of the impact of GEIS. On slide 12, I would like to take you through a few group items relating to our results for the quarter. Let's look first at Group's corporate operational EBITA, which now also includes our non core business unit. The figure for the quarter was €149,000,000 The higher run rate relative to our annual guidance includes negative impact from non core activity and the phasing of a mix of items, including IS, digital investments as well as ForEx effects from the weaker U. S. Dollar. For the full year, we continue to expect corporate operational EBITA to be around €500,000,000 However, there could be some upward pressure depending, for example, on ForEx. Non operating items includes activities that you should mostly be familiar with. There is no change to our annual guidance on these items, although given the change in the U. S. Dollar exchange rate, there may be some variation due to FX effects through the year. As a reminder, full year guidance for GEIS integration costs are unchanged at €100,000,000 of which €80,000,000 is expected to be in non operating items. Expected costs this year for Power are also unchanged at €100,000,000 Around €40,000,000 of this is expected below the line. Cash flow from operating activities for the quarter reflects a net outflow of CHF 580,000,000 The main drivers are timing of employee incentive payments, which in 2017 were paid in the Q2 timing of cash flows for large projects, payables and receivables as well as the timing of tax payments, which all contributed to reduced cash flow in the quarter relative to last year. We expect strong cash flow from operating activities in Q2 and solid cash delivery for the full year. CapEx spending for Q1 came in around €190,000,000 and for the full year, we expect it to be around €1,000,000,000 euros ABB's effective tax rate for the quarter was 28% and for the full year, we continue to expect a rate of around 27%. One final remark. We closed a €1,500,000,000 bond issuance in the U. S. At the start of Q1. Net proceeds are planned to be used for general corporate purposes, including the funding of the GEIS transaction. And let me now hand back to Uli to update you on our progress in implementing our next level strategy. Thank you, Timo. Please turn to Slide 13. We are driving growth through our 4 entrepreneurial divisions with 2 focused value propositions: bringing electricity from any power plant to any plug and automating the industries from natural resources to finished products. These two value propositions reflect the industry leading focused portfolio we have shaped over the last years, where all divisions are today number 1 or 2 in their respective fields. This has focused our divisions on the markets they serve, and we look to drive growth in these key markets through our approach of penetration, innovation and expansion. We are making progress on all these fronts. Just to give you a few examples. We had a number of large order successes in Power Grids in the quarter, including orders for grid upgrades and digital substations. We also saw continued growth in the service business of our large installed base. In Electrification Products, we saw continued penetration in our specific target growth markets, such as food and beverage and data centers and strong growth momentum for our globally leading EV fast charging solutions. Industrial Automation saw some recovery in Process Industries and had a number of project wins, including ABB Ability Digital Solutions for mining and solid demand for innovative cruise ship solutions. In Robotics and Motion, we saw order momentum for motors and drive product in the process industries return, and we expanded in China with robotic solutions for EV, electric vehicle Moving next to Slide 14. We have another exciting example of how we are investing for profitable growth and positioning ABB to be a global leader of the 4th Industrial Revolution. We are investing €100,000,000 in a new global innovation and training compass for industrial automation at the home of B and R in Edelsberg, Austria. This builds on the successful integration of B and R and is the largest organic investment we have ever made in Industrial Automation. In the new campus, we will develop technologies for the factory of the future, from industrial control systems up to machine learning and artificial intelligence. The campus, which is expected to open in 2020, will house an automation academy to train customers, partners and employees in these technologies and create about 1,000 new jobs. Turning to Slide 15. We are expanding our reach and creating market impact with ABB Ability by continuing to penetrate the markets and by investing in our leading portfolio of ABB Ability solutions, which now includes more than 2 10 solutions focused on our customer segments in Utilities, Industry, Giant Spot and Infrastructure. ABB Ability's customer centric solutions based approach is key to our strategy to drive growth within our divisions through the expansion of our high value added solution offering. The slide shows examples of how we are doing this with recent projects in development in each of our divisions. Just to highlight 2, an order from the APAC Group in Australia for the world's longest underground power transmission system will use the ABB Ability Control and Protection System to improve the quality of power delivered and enhance reliability, security and efficiency of this smart grid solution. And ABB Ability collaborative operations, which is now available to industrial customers through 15 global centers, is increasing productivity through real time collaboration supported by advanced analytics for customers all around the world. As I look around our business, I see many such examples of how ABB Ability is changing face of our company, how we engage differently with our customers and how we are using it to create value in their and our businesses. Our leading portfolio and solutions based approach will continue to make us even stronger partner of choice in all of our divisions in all customer segments. Slide 16 provides an update on Active Portfolio Management as an ongoing part of our strategy. The integration of B and R, which was acquired in July 2017, is advancing very well. B and R is now our Machine and Factory Automation business unit and part of ABB's Industrial Automation division. The integration is very well on track, and we remain committed to increasing midterm revenues of B and R to more than $1,000,000,000 which was our stated ambition at the time of the announcement. The expanded business is firmly focused on increasing market penetration and with a combined offering, including B and R and ABB Products and Solutions. The process of closing the GEIS transaction is progressing, and we are making solid advances to secure all of the necessary regulatory approvals. The transaction is expected to close by the end of the Q2. We are preparing diligently for the integration and are ready to hit the ground running once we have closed the transaction and welcomed our new colleagues from GE. Our priority is, 1st and foremost, to manage the operational transition, to bring stability to the business and then to begin capture the sell cost synergies whilst we harmonize the unit's products and technologies with ABB's offering. Also in the Q1, we entered into exclusive negotiations with TE Connectivity for them to acquire our terminal block business in France. This is expected to complete around the middle of the year. Slide 17 brings us to relentless execution. With our 1,000 day program successfully completed, our focus on operational excellence continues undiminished, but is now lived and executed within our 4 divisions. We are maintaining solid cost savings momentum through a targeted approach to supply chain management and operational excellence right across the globe. Net cost savings are outpacing commodity headwinds, supporting our ongoing ambition of offsetting 3% to 5% of the group's cost of sales each year. Today, we have over 500 Lean 6 Sigma projects across our global operations well underway with the aim of driving world class efficiency and effectiveness in all our operations. At the same time, our Global Business Services Centers continue to drive productivity and are supporting best in class execution. Our enhanced compensation model is now fully implemented for 2018 with billings between compensation and the delivery of individual and team operational performance. This rewards all executive and senior level employees based on 65% individual and 35% team objectives, whilst the LTIP for executives is now closely linked to shareholder returns in the form of EPS and TSR as key measures. To summarize on Slide 18. ABB is well positioned in today's better markets. Many uncertainties remain, both economically and geopolitically, that we will need to navigate in the months ahead, but we firmly aim to sustain the growth momentum we are seeing across our businesses. Our streamlined and strengthened portfolio and operations are creating market impact within our divisions through our leading offering of ABB Ability Solutions. Our focus is now firmly on relentless execution to deliver profitable growth in the quarters ahead. Thank you for your attention. Thank you. We'll now open the line for your questions. The first question comes from James Stetler from Barclays. Please go ahead. Yes, thank you and good afternoon all. I'll just focus on the Power Grids division and indeed where you're still showing negative revenue growth. What gives you the confidence that orders will recover in H2? What kind of visibility do you have? And given all the excitement around the energy transition, what has been holding back utilities? And also if you could discuss what you're seeing on pricing? Is it going to get tougher to win these large projects? Thank you. Yes. Good afternoon, James. Thank you very much for your question. Yes. If you look at the Power Grids division, the base orders demonstrate very nicely the trend that we are seeing, meaning a good underlying growth. We had 7% base order growth in this quarter, which basically shows that the underlying market is intact and humming. On the large order side, you basically got in the past three effects. You got a subdued market in the past. You had the business model change that we had. And you had also a change on pattern where the projects were awarded all around the world. Now looking forward, what we see is a pickup of discussions on large scale projects, whether they are in China, whether in the Middle East, better than North America or better than in Europe. Now it's very clear, this large scale infrastructure projects are needed to basically connect the renewables in and to feed the raising demand of electricity for new areas of development like data centers and e mobility, but also for investments in industrial activities, for example, in the U. S, where the power grid is quite weak and needs a reinforcement to cope with the ambition to grow industry going forward altogether. Now we also need to understand that overall, the underlying market sentiment is good. However, the uncertainties that we have around ourselves are impacting investment appetite in the different parts of the world on a short term basis. So when you have developments on the regulatory side, on the trade side between U. S. And other parts, some of the customers might say, I delay a little bit or they might go ahead. Then we have developments in the Middle East, which are overall from a sentiment perspective quite encouraging. We need to watch that. So as always in the past, it will be also the same in the future, guiding when exactly these large projects will come in is something difficult to do. But the underlying the underlying sentiment of the market is improving, which is positive. Now how do you get these projects? You get these project by having a fantastic installed base that gives credibility and leading technology. And when you look, we launched recently our new HVDC light solution, which is really industry leading in terms of efficiency. Confident that ABB will also in the future have a fair share of the projects that are coming in and get going. Now it's very clear in Power Grids, as in other markets that we're in, other businesses that we're in, there's competition out there. We are doing our homework and so does competition. So I would expect ongoing price challenges that we had in the past, also in the future. But this is something that we have to compensate with productivity and with technology leadership. And if you look at our margin, we still have the industry leading margin at a multiple of the next best competitor in this field. We have the program in place to improve the margin. We have demonstrated that we have improved the margin 500 basis points plus in the last couple of years. The target margin corridor for 10 to 14 stays intact, and we have the measures in place to aim into that corridor going forward. Thank you. The next question comes from Ben Uglow from Morgan Stanley. Good afternoon, everyone. Two questions. First of all, just around the base orders, it was a decent figure, but a big contrast between what we were seeing in China and then what we were seeing in Europe and the U. S. At sort of 1% to 2%. Can you just sort of run us through what you think is going on in those regions? And over the balance of the year, how should we think about the sort of base order development in Europe and the U. S. In particular? That's question 1. Question 2, briefly, that was a big swing on the cash flow. It was plus $500,000,000 to minus $500,000,000 Timo, can you calibrate it a bit more for us? How much exactly was down to the timing of the employee incentive? But also in particular within Power Grids, what is going on there? Is it all timing of receivables? Are there prepayment effects as well? Good afternoon, Ben. Welcome to the call. I'll take the first one and then I hand over to Timo. Let me just run you through on the quarter, what happened in terms of base and total orders by region, maybe also give you a little bit of a flavor by division and then give you a sentiment how this will develop going forward. If you start with the Americas, we had total orders basically flat. We had base orders slightly growing. But if you take the difference in the different businesses, it's quite remarkable because we had quite some strong base order growth on the Electrification side. The other divisions, they're either flat or slightly negative in base orders in the Q1. And you could just see that certain activities that were launched around behavior of the U. S. And trade activities had a certain impact on the sentiment there. I think this will be okay in the quarters going forward. This will normalize, and we will be back to growth there. On the large orders in especially in the U. S, let's see when the infrastructure activities finally the cork pops because the projects are prepared, the discussions are going on. But I think there's still a little bit of uncertainty when they will come in and when they can be growing and coming in the right way. Now if we move from the Americas over to Asia, Middle East, Africa, and if you take the developments that we had in China, that we had in India, that we had in the U. A. E, I'm quite happy what I've seen there because total orders up for the region 20 and base orders up being 12. With China, total orders being even up 22. India, total orders being up 24. Just to give you a little bit more flavor, Australia is up 20. This is very, very positive. UAE, we had really a sensational quarter where I was very, very happy where even base orders were up close to 30%. So there's very good momentum. And if you just look at ABB in this market, we are really well positioned. I think our many, many efforts to combine a strong local presence with a fully locally empowered management that's driving the local customer interface and that supporting by real leading edge technology, which is developed a lot in the local markets. More than 90% of what we have in China is being developed in China for China. And naturally, we got a very large footprint there and high level of productivity. So I'm quite optimistic on that part of the world that we will continue going forward in a solid way. And also in the future, the base order momentum will be solid. On the large orders, as you know, the large orders on the one hand come out of the PG space. And there, we have in China the normal volatility on larger orders, where sometimes in certain quarters, you get some, in some others, you don't. And there's nothing broken. The underlying sentiment of the market is quite okay. Now if I move over to Europe, we had total orders slightly down. And if you look at the comparable of the previous year where we had a couple of large ones, it was clear that it would be tough to have growth in total orders, but base orders are up. And if I just give you a couple of feelings there, If you take Germany, we were total orders up double digit and base orders basically steady. Switzerland up 50%, Spain, up very strongly. Italy, up in a good way. So we have quite some markets that have we have developed well. I think the industrial productivity that we see as a key area of attention of industrial players is a place where we can really work with our customers and support them going forward. If I look at Transport and Infrastructure, we had some very good development on the Marine side, but we also had really nice e mobility side and adjacent activities to reinforce the grid. And the rail activities where we basically have either new packages for rolling stock or retrofit is also going the right direction. So altogether, at the beginning of the year, we said all of our markets will be either steady or better in 2018. If we see exactly that picture and you see our order pattern reflected in that, now one thing is also very clear that local uncertainties or regional uncertainties are impacting that overall underlying sentiment now and then, and you have witnessed that in parts of the world now during the quarter. So altogether, I would say we aim firmly at having good continued base order momentum, and we take the large orders as they come in, in an extremely disciplined way with our new business model. With that, I hand over to question. So first of all, I mean, we have to look at this in a way that Q1 is always the seasonally weakest cash quarter. But you're right, the swing this quarter was a big one. And there we have some additional impacts going on, biggest being the bonus payments, which last year were paid in Q2 because of the Korea incident and are now have fully been paid in Q1. But then there is also timing of cash flows from large projects, timing of payables and receivables and also in this time timing of cash payments. And if you bridge this a little bit to our cash flow statement, so you can see the bonus payment change in the accrued liabilities and this is clearly the biggest item. And then when you look at our contract assets and liabilities, that's where the cash flow from large projects is evident, and that is clearly the reason why Power Grids is bigger than the other divisions when we look at our numbers bridging this because trade payables or receivables should be pretty self evident on the cash flow statement is that when we look at income taxes payable and receivable and other assets and liabilities, so the taxes are present in both those line items, taxes below the line in income taxes payable and receivable and then VAT timing differences are in other assets and liabilities. So overall, this is mainly driven by timing differences. And thus, we are saying that we expect solid cash flow for the year. Thank you, Ben. And we'll move on to the next question. The next question comes from Daniela Costa from Goldman Sachs. Please go ahead, madam. Hi, good afternoon. Two questions. So on the first question, just on your perspective from the length and the time to convert your backlog into actual sales. When how long do we shall we expect between seeing the momentum we have seen on the order on the base orders, particularly Libero, on the orders in general, converting hovering around and above 14%, but in general sort of margins are much better than they used to be at some points in the past. And we haven't seen operating leverage because we have been either negative or flat in terms of top line. How shall we think about the Industrial Automation margins? Has things improve in the resources segments and in the rest of the end markets that contribute to that and we see some operating leverage there, where could those margins go? Thank you. Yes. Good afternoon, Daniela. Thank you very much for your two questions. I start with the second and then I hand over to Timo for your first question on the timing of the backlog conversion. For me, Industrial Automation has done a beautiful job in the last couple of quarters, in the last years and in this quarter particularly to deliver very solid and steady execution despite all the volatility that we have around ourselves. On the one hand, B and R is going very, very well. We are very happy. And I can just share with you that just in March, B and R had the best month of its company history ever. That happened just before we announced the big investment there, so that's positive. If you look at the Marine sector, it's very clear that the backlog and the lower backlog raise in that business on the revenue. But you have a good foresight and you can manage and of course in a good way. And I think the team in Industrial Automation did a particularly good job in navigating capacity in the cost base in line with the backlog structure and the backlog quality and the revenue expected conversion that we have going. Now as you rightly say, I think the team has done a good job being, I wouldn't call it hovering, I would say, steady on a solid margin in the last couple of quarters. So really well done. We will probably have in the second quarter, third quarter, potentially 4th quarter, the lowest point in terms of impact of the past backlog, the lower backlog that we had. So this will be something that we need to focus strongly on, and I know that the team is navigating on it. In the Q1, we had some really good results on some execution of large scale projects that were wound down, and they were done in a better way than budgeted. So we are very happy to take that into the quarter. But don't expect that every quarter going forward. Naturally, we have the ambition to do that. And when growth comes back, this business has its cost base firm under control. So the moment revenue will start to pick up in this business, you will see good leverage. Now a special element on leverage will be also around the B and R activity. You might remember when we closed B and R, we communicated very clearly that on a relative scale, B and R has a pretty high SG and A. They have a pretty high R and D investment given the scale of their activity. And as we grow this business going forward, we will continue to invest forcefully in this business, but there will be also a leverage in there. B and R is roughly in line with the divisional results. And if we get then the double whammy of getting more volume into the B and R because it's growing very strongly and a recovering of the other markets in Industrial Automation, I would expect that towards the end of 2018, we create the momentum to get a solid accretion running into 2019. Okay. And then on the question of backlog conversion, we actually have now new disclosure in our disclosure material. So we have that on Note 8. And we had at the end of Q1 backlog of bit over than €23,700,000,000 and of that we expect 64% to convert to revenue during 2018, 23% 2019 and the balance thereafter. And if I look at these numbers and then would compare to the last year's situation on the same number, So the short cycle has actually increased in line with our strategy. But of course, in the company of this size, the swings are not massive. So this is changing gradually to shorter cycle as one would expect. Thank you, Daniela. And we'll take the next question. The next question comes from James Moore from Redburn. Please go ahead. Yes. Good afternoon, everyone, and thanks for taking my questions. I've got 3 on China, if I could, Uli. Firstly, great base order growth. Some are talking about a good short cycle growth in the quarter being caused by pre buy with distributors buying inventory before price rises. Do you think RM and EP benefited from some pre buy? Or do you think these rates of short cycle growth can sustain next quarter or the one after? Secondly, on power grid, state grid, which is the market, are talking about 30 percent less CapEx in the next 5 years versus the last. Are you seeing any pressure from that? And then finally, on robotics, if I could, you guys are doubling capacity. Cougar is quadrupling capacity. Are you yet seeing supply growth exceeds demand growth with any pricing pressure developing in that market or not? Okay. Good afternoon, James, and thanks for your questions. Let's go through your points there. Look, China is a market, and they just came out with the latest GDP numbers, with the consumption numbers, drove more than 6% as a country, which is remarkable. And our position in China is very solid. As I said before, more than 90% of what we sell locally, we make locally. I think we got a very, very strong local team. Basically, if you look at the org chart of ABB in China other than the CFO, we have all local players that have deep market intimacy, strong customer relationships and really understand what the customers need in that market. Our product offering there is very, very good. I think we got some leading solutions for the ambition that China has, whether it's in the industrial upgrade, whether it's in the integration of renewables in transporting that over long distances, whether it's in cleaner cities with our EV charging solutions that we have, whether it's our robotics business where we are the number 1. And I know that a lot of other people are thinking also about adding capacity. I think it's important to grow the business within that capacity and stay ahead on that one. That brings me to my and on the short cycle piece, I wouldn't call out the pre buy that it would be a substantial impact that it would single out as an additional driver, James. There might be a little bit going on, but I wouldn't rate that as a massive, massive thing in the context of what's going on here. Now on China State Grid, as you rightly say, a very important customer of ABB that we have a very strong relationship with. We just got recently based on our leading edge technology in highest voltage direct current transmission. We got another set of orders. We are clearly seen as the technology leader in this field, and that's the way we will also be positioned. That means I'm not concerned about that pattern going forward. Naturally, we need to keep the ambition. We also need to wow our customers continuously with leading edge technology development. We have achieved a lot, and there's a lot in the pipeline that's coming going forward. On robotics, it's very interesting to see, on the one hand, the market development, which is super solid, is really strong. If you look at the growth momentum in robotics, not only in China, but also in other parts of the world, it's good. Just to give you a couple of drivers, we are really leading in the non automotive sectors with our application and solution based approach. We are growing very strongly. But even in automotive, the investments in EV, in electric vehicles that is at the moment really booming gives us a significant opportunity to participate in that market. Now we see a market which is solid. We need to make sure that we have the right amount people, that we have the right amount of capacity, and that's something that we are shaping in the right way in line with the market sentiment. But it's also important to make money and do this business in a disciplined way. And when I look at the one of the other competitors' development, ABB will not buy market share and ABB will not give in on the profitability of this business. We keep the commercial discipline. We keep and invest in our technology leadership. We got very strong people, and we are leading in solutions. And with that, I'm convinced that we can balance in a very nice day continuous profitable attractive growth with good commercial results. Thank you very much. You're most welcome. Thank you. Next question please. The next question comes from Mark Thromman from Bank of America Merrill Lynch. Please go ahead. Yes. Thank you very much. Good afternoon, everybody. Question 2 questions really on margins. Firstly, on Power Grids. We've seen obviously some margin decline given the sales declines. If large orders continue to get delayed and pushed out, will we see continued decline in that business in terms of sales and margin? Or do we think it can stabilize out even if the large order environment doesn't improve in coming quarters? That's question number 1. And question number 2, sort of opposite question really on the robotics and motion. Demand looked better in Large Motors and Drives. Maybe if you could give a bit of color on that. And does that mean we should expect steady progress on margin in that division? Thanks very much. Yes. Thanks and good afternoon, Marc. If you take the Power Grids situation, if you look at the share of large orders that we have significantly brought down by design, by getting out of the large scale EPC activities, and if you look going forward, we don't need a lot of large orders to keep the margin on the level that we have it at the moment. We are putting a lot of effort. In Power Grids alone, we have more than 100 6 Sigma programs Lean 6 Sigma programs going on. The digital push is coming well. Service is growing in a good way. So I think we can compensate and mitigate any effects that we would have there. And we aim really to be in our margin corridor in this year, independent, better large orders come in or not. They would anyway not hit that much of revenues this year. There would be more in the years to come going forward. Now on RM, you call it right. The demand for large motors and drives in the last couple of years was very, very subdued. And you might remember that last year, we were a little bit late in adjusting capacity, especially in these areas and therefore took a margin hit. The team has done a good job in adjusting capacity. We see the market coming back so that the sentiment in the market is really turning and it's coming back. I wouldn't call it a boom market, not at all, but it starts to come. And with the new established cost base, by the way, also with our leading edge product portfolio, I don't know whether you saw that. We recently launched the most energy efficient large motor that exists on the And then the customers go now out and invest again. We are not only having the best and the largest global motor business, we also have leading edge technology, which is ready to serve the customers in a good way. Going forward, if we have that, you should expect margin accretion if the growth momentum prevails and goes forward. You might remember where this business was a couple of years ago, and it's our firm ambition to aim towards the upper end of the margin corridor, ultimately medium term. And short term, we will create or we have created momentum to go in this direction. The next question comes from Guillermo Pigneurs from UBS. Please go ahead, sir. Good afternoon, everyone. Guillermo Pinault from UBS. Just a question on Electrification Products. Good operating leverage. Could you give more granularity on the pricing environment? So how much was pricing during the quarter? And what kind of actions are you taking at the moment? Would you expect to announce further price increases? Or should we think that at the moment, you're satisfied with what you get in the market? Thank you. Okay. Good afternoon, Guglielmo. On the pricing on EP, yes, look, you might remember, we had in the last couple of quarters once an issue that we didn't act swiftly enough on the pricing side. That is fixed. And now we are getting price in the market. We have commodity price increases on the one hand that allow us to demand price increases, but we got also fantastic innovation. We got really great product, which is a competitive benchmarking far ahead. I don't know whether you saw what we launched at Light and Building recently. I would welcome you come to Hanover. We got really the basket of innovation fully loaded with some super attractive industry leading innovations that are coming out. We got a very, very good and an efficient value chain. We have changed the operating model in EP in the last couple of years in a very forceful way. We have given much more power to the business, and they're operating in a much more and much more agile way. So altogether, I think the recipe is in place for additional margin accretion in the years to come and in the quarters to come. The team is doing a good job on that. And if we combine our strong reach, our leading edge technology, our growing service activities altogether, I'm firmly convinced that we are well positioned to also improve that business going forward. Maybe I'll just make a quick comment here just going to our operational EBITDA bridge. So when we look at the net savings there and if we take the white color productivity, actually even outside the white color productivity with our SCM and OpEx saving programs, we have been able to cover the commodity impact, which is clearly moving to the right direction. And in EP, in particular, we have been able to do it so that we have more than covered it. So I just wanted to give that piece of information because this was really discussed quite a bit last year, especially after Q2. Yes. Thank you. Okay. Thank you for that. Moving to the next question. The next question comes from Andreas Willey from JPMorgan. Please go ahead, sir. Good afternoon, everybody. I have a question on raw materials and the question on process automation or the part of industrial automation. On raw materials, how do you see that going forward the next few quarters? So copper and so have stabilized, but we have seen steel going up, aluminum the last few days going up very strongly. There's also, I think, some issue around electric steel and potential tariffs. So maybe you could talk a little bit about the raw material impact going forward in the coming quarters? The second question on Industry Automation. Industrial Automation, if we leave B and R and the Marine business to one side and basically make it more comparable to some of your peers in terms of the exposure, typical exposure to oil and gas, chemical mining, DCS systems. It seems like peers are delivering stronger results here. I mean, you said just earlier base orders seem to be down here in the U. S. It's a market that is recovering for all the others. Maybe you could elaborate a little bit what's going on here within kind of the core process Yes. Happy to look at that. Yes. Happy to look at that. If we start with your second question on Industrial Automation. If you take the center of gravity of ABB's Process Automation franchise and compare it to some of our peers, Couple of years ago, we were uniquely positioned because we were strong upstream North Sea. Now that's not when the center of the music plays at the moment. The music plays mainly on unconventional upstream U. S. And that's one where some of our competitors are much stronger positioned than ABB. So we have to give it to them structurally in that specific part of the market situation. They are now better positioned, and that explains the results. I think on the mining side, I would see this differently. In the mining side, ABB is well positioned, and we have a good offering, especially also with ABB Ability in that space. And we are navigating with that one pretty good. But that's the explanation, Andreas, to your first to your second question on the comparable. It's a structural disadvantage that we have that naturally we're working on to get this addressed organically and through other measures. But we also need to say, our short term, it is what it is. We have to deal with that in the best possible way. Now on the raw material side, if you take the electrical steel topic first, we are leading in terms of energy efficiency, reliability, productivity of our transformers and our motors. And then you take the U. S. Situation. In U. S, ABB has a very strong large scale footprint on motor and transformer manufacturing. In the U. S, we are market leader on both of them. And for certain types of this product, we are we have designed the product in a way that the energy efficiency is super depending on the quality of non grain oriented electric steel. So it's non grain oriented electric steel, which is really the key differentiator that we have in there. Now in the U. S, there's very little supply on that specific steel and that specific quality. And therefore, we are importing that steel from other parts of the world. And we are working now with the authorities explaining that this could be a good case to consider an exemption for ABB in that context. Let's see what comes out of that one. And on the commodity prices, yes, look, I'm happy to comment on the backward looking ones, but I'm not doing any comments on the forward looking piece. Otherwise, I would be probably a trader in raw materials and not be running ABB. It's very clear that we have seen significant increases in a lot of the commodities. Given the uncertainties of the world, I think it's very it would be super dangerous to predict the one or the other direction in the future. We are prepared for all the scenarios. And I think what we have done is, operationally, we have a much more agile systems that can really react faster from commodity price deltas up or down than in the past. We got caught a couple of times in the last years. We improved the system, and we are very well positioned to deal with that. Thank you, Andreas. You're welcome. Next question? The next question comes from Martin Wilkie from Citi. It's Martin from Citi. Just another couple of questions on Industrial Automation. Firstly, on B and R, you made the comment that the company had its best ever month in March. We've heard from Schneider Electric this morning also very positive on automation products in discrete markets. Just I mean, can you separate how much of that was strength in those end markets? Or are you now really seeing B and R taking share as it benefits from being integrated into the AB platform? That was the first question. The second one was around remarks you made earlier about some parts of processing signs of improvement already. Is this sort of upgrade productivity? It sounds like large products are coming much later, but just generally what you meant in terms of some of those process markets seeing some signs improvement? Thanks. Yes. Thanks, Martin. Look, when I talk about Bina, I have a big smile on my face because this is really going tremendously well. 1st, if you look at what's happening out there in the market, there's significant industrial productivity. And then you take the business model of B and R, it's particularly well suited for market segments that are not yet as mature in terms of industrial productivity because we have a solution oriented business model that makes it a customer very easy to design productivity in its OEM machinery. Now if you go to China, if you go to the emerging markets, this is a solution buyers market. And I can tell you we are super happy about the way the ABB brand supports the B and R value proposition in emerging markets. It might remind you, B and R is 2 thirds Europe and onesix each emerging markets Asia, Middle East, Africa and onesix in America. So pretty small. ABB has a very, very large franchise, a fantastic brand and a very, very strong pulling power and a great credibility with the customers in terms of quality, reliability. So a lot of the customers that in the past have seen B and R as a technology leader but saw them as subcritical and said, can I really trust them? Can I work with them in this market? Do they have the scale? Will they be around? Now it's very clear that we are supporting this in a great way, and we get going. So there is, on the one hand, underlying market sentiment, but there's also a significant share gain opportunity for us, and we are living that. About 2 weeks ago, I was together with our China team, the B and R team and our robotics, the automation teams. And it was really, really, really nice to see how they're working together. Last weekend, I spent with the teams in Italy. And in Italy, it's the same. The collaboration between ABB and B and R is going in a really remarkable way. And I'm really optimistic. The growth momentum is there. We already also have realized the first synergies in taking electrification pieces into the B and R chain towards OEM customers. We are using B and R Industrial PCs in the environment of robot cells going forward. So this is really a natural fit, and that's going far ahead of really ahead of expectations. This is well in line. Now on the process industry side, Martin, you understood it right. At the moment, it's a couple of things. It's spare parts. A lot of the industries have been running the assets very hot. So service and spare parts is coming back. We also see a lot of efforts on productivity upgrade with smaller activities, smaller projects on brownfield operations. We see that we see a lot of demanning and further automation activities that customers come to us and say, can you help us with ABB ability to drive productivity and especially workforce productivity in the site? We have now good discussions on potential future projects, but they have not converted yet at a scale to tenders that I would mark that as significant. Thank you. Thank you, Martin. And we'll now take the last question. The next question comes from Simon Tonneson from Berenberg. Please go ahead, sir. Yes. Good afternoon, everyone. Two questions, please. The first one on the EBITDA bridge. Just as a general trend, it seems mix and FX is making up for the lower net savings versus last year, certainly in Q1. Can you talk a bit about more what you're seeing from white collar contributing also maybe in the quarters ahead there? And how should we think about net savings? And given the €100,000,000 of B and R investment, should we expect an acceleration on the growth investment front, particularly with related to the EBIT bridge? And then secondly, on GIS and sort of an increasing number of questions I'm getting, and I appreciate you're in the closing at present. But can you provide maybe a bit more color how this business is trending maybe since you announced the deal or maybe since you've communicated it at least to the market? And aside from the issues that the GE mother is facing, it seems there's still a few other companies, for example, in the Lobalta distribution chain, which are still seeing quite a significant sort of negative impact being tied to GEIS there. So maybe any color on GEIS would be very helpful. Okay. You seem to be well set for GEIS, but I'll come back to that in a moment. But I'll let first Timo answer the EBIT push. Okay. Yes, thanks for the question. So first, as I said that the net savings is clearly bigger than the white color because white color is inside here. And we said that we expect white color for this year to be €250,000,000 So if you divide that by 4, you get a pretty good feeler on what we are expecting on that Q3. And then on the growth investments, our aim is to cover that part on the B and R inside IA as we see it. So of course, we do a lot of investment, but it should not be something which should show as an additional item here on this bridge as we see it currently. Thanks, Timo. Now let's talk about GEIS. Look, GEIS is the electrification cradle of North America. It is a business that we bought with very open eyes. When we announced the deal, we said very clearly, we see the qualities and we see the deficiencies of the business. And it's clear that we are preparing with our integration to address the opportunities on the one hand, but also the deficiencies in a very swift and in a very forceful way. And it's very clearly always that, first, we're going to stabilize this business, we're going to realize the cost synergies. And then we will really use the ABB capability, the offering to upgrade the businesses, underlying technology and product quality to wow our customers again going forward. Now it's very clear when you're in a closing period, the receiving end shouldn't talk about the business performance, so I will abstain from doing that. But I have not seen anything that would deviate from the scenarios that we have prepared for the development of the business. It's very clear that the one or the other competitor at the moment tries to buy his teeth into either the team or into the market. That is something that we are prepared to handle and doesn't surprise us. We are handling that in a very swift way. So we expect the closing for Q2. I can tell you the customers that we have met and that we are seeing out of the market are really excited about having that business in our hand. The employees are super excited. They are really, really happy. I recently spent time with some of them, and our team is together with them. They are really looking forward to become a part of ABB, maybe even more so than at the time of closing today. So that's also positive. The distribution channels, that's very clearly, there is and will be a space for that business, especially when ABB's innovation strength supports the quality of the offering. So altogether, the business case or the scenario of the development is well in line with our expectations altogether. So with that said, let me just summarize quickly and end our call here. If you look our Q1 results, they really underline the radical transformation that we have gone through in the last 3 years. If you take the Q1, we had the best revenue, EBITDA and EBITDA margin performance since early 2015. We have streamlined and strengthened our business through active portfolio management, and we have done a very, very massive business transformation. The business portfolio is today super simple to be explained. I think we got the cleanest, most focused portfolio in this industry, and we have confidence that we will deliver with our strategy in 2018 and beyond. We have, at the moment, total alignment between the Board, the management on executing the strategy. So altogether, we are well set for the future. And we achieved the results in the first quarter whilst strengthening ABB further. If you look at the invested we continue to invest in ABILITY. We continue to invest in R and D. We continue to invest in sales. We're investing in our people. Just recently, we launched the last building block of our people development program that we set up in the last couple of years to really take even better care of developing our people. We are paying our people and rewarding them with a newly shaped performance and compensation program. And we have really done a quantum leap in terms of positioning the brand of ABB, unifying it, bringing it together. And the investment of Formula E really helps us to position this even better in very attractive growth markets. So altogether, we always said we will make ABB 1st better, and then we will make it bigger and better, and that's what we are now embarking on going forward.