Earnings Call: Q2 2017

Jul 20, 2017

Ladies and gentlemen, good afternoon. Welcome to the ABB Second Quarter 2017 Results Conference Call. I am Maria, the Chorus Call operator. I would like to remind you that all participants will be in a listen only mode. And the conference is being recorded. 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. Ellen Abrahamson, Head of Investor Relations. Please go ahead. Thank you. Thank you, Maria. Good afternoon, ladies and gentlemen, and welcome to ABB's Q2 2017 results briefing. We have with us today ABB's President and CEO, Ulrichs Bithofer and ABB's Chief Financial Officer, Timo Iamutala. Uli and Timo will discuss the Q2 results and update us on the execution of our next level strategy and the 2017 outlook. After they speak, they will remain on the line and we will open the call for your questions. The press release and presentation were published this morning at 6:45 in the morning Central European Time and can be found on our website. This briefing is being webcast via our Investor Relations website and is being recorded. Before we begin, I would like to draw your attention to Slide 2, which provides notice that this call will contain forward looking statements and make use of non GAAP measures. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. With that, I will now hand over to Uli. Thank you very much, Arana. Good afternoon, ladies and gentlemen, and welcome to our conference call. If you move to Slide 3 of the presentation, let me summarize some of the key figures for the quarter. Our growth momentum is building. We delivered higher orders across all the regions. Overall, orders improved 3% compared to the Q2 20 16. Robotics and Motion was a strong contributor with 14% order growth. I'm very pleased to share with you today that as of today, we have sold more robots than in the full year of 2016, including many small, smaller version robots for the so called light industries. Industrial Automation also turned in a solid performance with orders up 8%. Base orders improved 3% and increased in 3 of our 4 divisions. Electrification Products was negatively impacted by having fewer business days and trading days in the quarter. Large orders increased 5% and represented 8% of orders unchanged compared with the same quarter a year ago. We delivered 1% revenue growth on the basis of a good book to bill ratio. We reported an operational EBITDA margin ratio. We reported an operational EBITDA margin of 12.4%, which was dampened by commodity prices and some overcapacity. This margin was not in line with our expectations. We are taking swift action to reverse the situation in the second half of twenty seventeen. Operational earnings per share reflect the impact of lower total operational EBITDA and a higher tax rate for the quarter. We are still committed to our medium term double digit growth target, and we are taking the necessary steps to achieve it. Cash flow from operating activities primarily reflects the timing of our short term employee incentive payments. Now let's turn to Slide 4 and consider our performance in the context of our 3 focus areas, profitable growth, relentless execution and business led collaboration. As I stated earlier, orders were up 3% and were higher in all regions. Service and software orders grew 8% as our service and software growth initiatives are paying off. We are pleased that our industry leading digital officer offering ABB Ability has already contributed to growth and our artificial intelligence partnership with IBM is being positively received by our customers. Our offering has been further strengthened by the successful completion of our acquisition of B and R, a global leader in machine and factory automation. Moreover, in the Q3, we expect to complete the recently announced acquisition of KeyMiles Group's mission critical network communication business. These acquisitions demonstrate our targeted and disciplined M and A approach. Our operational EBITDA margin was 12.4%, and all divisions were in their target margin corridor. Our Industrial Automation and Power Grids divisions turned in solid performance in the quarter. Our Electrification Products and Robotics and Motion divisions, despite some sequential improvement, could not compensate for the impact of commodity price increases and some overcapacity in selected businesses. Part of the issue was that we were not fast enough in securing product price increases in certain businesses, but we have since addressed this and are not expecting similar impacts in Q3 and Q4. Our white collar productivity program remains on track to deliver increased run rate savings of €1,300,000,000 by the end of 2017. Net working capital as a percentage of revenue decreased 90 basis points to 14.1%. This shows that our new cash culture is delivering results. We continue to improve country and account collaboration, helping us to build further growth momentum, especially in smaller countries. In 2016, we set up global and regional service centers to provide our businesses with high quality back office services in finance, human resources, information technology and supply chain management. The ramp up of our global business service centers in Krakow and Bangalore is well on track. We now have 2,500 employees providing high quality business services and are right in the middle of lifting and shifting the work that was previously done in some other countries. During the first half of twenty seventeen, we announced Executive Committee changes that even better reflect ABB's geographic balance. On April 1, Timo became our Chief Financial Officer and a member of the approved Executive Committee joining us from Nokia. Effective July 1, Chun Yang Gu, our Managing Director of ABB in China, became President of our Asia, Middle East and Africa region as well as a member of the Executive Committee. Chun Yang takes over from Frank Dugan, who was appointed President of the Europe region succeeding Bernard Huker, who retired after a distinguished career at ABB. As you can see from our 3 focus areas, ABB is truly continuing its transformation. Please turn to Slide 5 to give you some granularity and share with you the performance in terms of regional order development. We are seeing growth based growth across all three regions. In the Americas, orders grew 2%, driven by demand for energy efficient solutions in Industry Buildings and Transport as well by increased investment in automation. Total orders in the United States grew by 7% overall, bolstered by orders for robotics and traction solutions. Construction in Onshore Oil and Gas also contributed to this growth. Canada's order development was soft in the quarter, primarily due to lower demand from industry and construction. Brazil experienced growth from grid investments in construction, but we need to point out that this growth compares to a very low 2016 order base. Growth in Europe was strong at 6%, benefiting from broad based positive market developments in Industry, Transport and Infrastructure. We saw double digit total growth order growth in the UK, Sweden, Finland as well as in Spain and Turkey. This growth primarily came from robotics, traction solutions, cruise ships and construction. Base orders grew 1% for the region with Sweden, Spain and Turkey as the main positive contributors. In Asia, Middle East and Africa, total orders grew 2% with board based orders up 9% for the quarter. India's order growth was up 11% and more than 20% in the base orders and was broad based. China had lower large order than a year ago, but delivered strong base order development. Again, robotic solutions continue to be a growth driver in China. Other positive contributors in the quarter were South Africa, Saudi Arabia and other parts of the Middle East. With that, I would like now to hand over to Timo. Thank you, Uli. Let's turn to Slide 6, where I will take you through some of the Q2 divisional highlights. Electrification Products was impacted in Q2 from fewer business days in 2017 compared to 2016. If we compare the first half year of twenty sixteen versus 2017 by for the difference in business days, then orders were up 1% and revenues were up 2%. Operational EBITA margins improved sequentially from Q1 2017, reaching the low end of our target margin corridor of 15%. However, the margins were lower for the quarter versus a year ago, mainly due to higher material costs, which more than offset productivity and cost savings. We have notified our customers of related price increases and expect commodity headwinds to have less of an impact in Q3 and Q4. The solar inverter business also continued to have a dampening effect on the division's margins. Orders in Robotics and Motions were 14% higher as growth was seen in all regions and all business units. 3rd party base orders contributed with an 8% increase that was mainly driven by strong demand in Robotics, Traction and Light Industry. Operational EBITA margins were impacted by product mix, higher commodity prices and under absorption, which more than offset our cost reduction measures. We will continue to implement operational improvements as well as take additional capacity out where needed. In Industrial Automation, total orders grew by 8% due to selective CapEx investments in Oil and Gas, Mining and Cruise ships. 3rd party base orders continued to be positive. While investment in Process Industries, especially Offshore Oil and Gas, remained subdued, selective investments in Mining, Exploration and Downstream Oil and Gas are expected to continue. Revenues for the quarter were 7% lower, reflecting the execution of a lower order backlog. Operational EBITA margins increased slightly as cost and productivity savings offset the lower revenue. In Power Grids, 3rd party base orders returned to growth and grew 2% on investments in emerging markets. The tendering pipeline is good, but the timing of large contract awards is, in some cases, taking longer than expected. Operational EBITA margin increased 50 basis points to 9.8%, reflecting improved productivity, project execution and continued cost savings. And please remember the PowerUp investment program when updating your models. As you know, we are now reporting the results from the divested cables business in Corporate to ensure that the Power Grids figures are clean. There is an update to the initial restatement and the updated files can be found on the website. Regarding capacity restructuring costs overall, we have not incurred much in the year to date. This figure is expected to increase significantly for the second half of twenty seventeen, and our guidance remains at €200,000,000 to €250,000,000 Let's move on to our operational EBITA bridge margin bridge on slide 7. In Q2 2017, we continued to deliver on our cost savings programs. We achieved approximately €121,000,000 in net savings. This came from our ongoing cost savings program, pricing pressures and our white collar productivity program. Commodity prices had a €28,000,000 negative impact on operational EBITA as the costs for many of our raw materials continued to increase. We are showing these items separately for the quarter since the impact was more significant than in previous quarters. Net volumes were negative for the quarter as a result of lower operational revenues and additional investments in growth. Project margins were slightly higher versus a year ago. The mix was unfavorable, primarily due to lower margin products and solutions from Robotics and Motion that were delivered in the quarter. As discussed earlier, other includes a number of items like salary inflation, under absorption, changes in corporate provisions and other small one offs. Altogether, the Group achieved operational EBITA of $1,042,000,000 and a margin of 12.4%. Let's then move to Slide 8. As a percentage of revenue, net working capital continued to decline year on year. However, we need to remain aware that we still have a lot of work to do to meet the target of SEK 2,000,000,000 by year end. We have put a series of clear actions in place and remain committed to delivering. The cash flow from operating activities for the first half of twenty seventeen was not as good as we expected. Compared to the first half of 2016, we had approximately €90,000,000 less in operational cash flow from our cables business, which was divested. We also paid more tax, both direct and indirect, than in the same period a year ago. One expected item was the delay in customer payments from Saudi Arabia, which impacted cash by approximately €140,000,000 For full year 2017, we expect cash flow from operating activities to be somewhat above last year's levels. Let me now hand the call back to you, Uli. Thank you very much, Timo. So let's turn to Slide number 9. We launched Stage 3 of our next level strategy at the Capital Markets Day in October 4 last year. It is designed to unlock further value through 4 key activities, driving growth in our 4 market leading entrepreneurial divisions, the quantum leap in digital activities through ABB Ability, accelerating the momentum in operational excellence and strengthening the global brand. With that, let's turn to Slide 10. Back in September 2014, when I laid out the next level strategy, we made it very clear that it is our ambition to shift ABB center of gravity towards strengthened competitiveness, higher growth and lower risk. We are continuing this transformation. Since the beginning of 2017, we have made great progress. From a portfolio management standpoint, we have undertaken a number of actions while remaining disciplined in the way we go after this approach. We completed the acquisition of B and R, a leader in machine and factory automation, a true growth and innovation leader and we acquired NAP3d, a specialist in 3 d visual inspection software and solutions for robotics. We have also announced the acquisition of KeyMath's Communication Network business to strengthen our leading position in the digital grid, which should close in Q3. Besides acquiring these businesses, we divested those that are not longer core like the high voltage cables business in the Q1 of this year. Beyond these actions, we announced a partnership with IBM on artificial intelligence and executed successfully the launch of ABB Ability, our leading digital offering among many others. This is a truly transformative period for ABB. Please turn to Slide 11. We are very pleased that our leading digital offering, ABB Ability, which was launched at events in the United States, Europe and most recently in China in the first half of this year is off to a very good start. ABB Ability reinforces our leading position in the 4th Industrial Revolution by integrating all our digital solutions and services into one group wide global offering and continuously expanding it, we can drive value for every one of our customers. With more than 180 industry specific digital solutions and services, ABB is unlocking tremendous value creation and growth opportunities in all of our customer segments. We invested already in 8 ABB Ability collaborative operation Centers around the world, 2 in the U. S, 4 in Europe and 1 in Asia and more is to come soon. We are partnering with IBM in digital technologies to bring the best in artificial intelligence analytics to our customers and with Microsoft and Cloud in collaboration in certain verticals. Let's continue on Slide 12. Our Power Grids division is a true innovation leader and has made many investments in digital technologies in the past year. So today, we are clearly leading in the digital grid. ABB Ability is providing solutions for state of the art grid reliability, improved asset effectiveness and powerful charging stations, just to mention some. Customers are very excited about the capabilities of ABB Ability and the advantages it is providing to them. To give you some examples, just like last week, we announced a €30,000,000 order in Sweden and Denmark for HVDC line for using our ABB Ability mark technology to drive grid control, reliability and effectiveness. Another notable order includes the ABB Ability intelligent power distribution solution for a new production line at Semiconductor Manufacturing International Corporation that allows unique win and reliability. And the win of our EV fast charging infrastructure for UK's first electric bus system in Harrogate in Northern England. Solutions such as these are supporting the competitiveness of our 4 entrepreneurial divisions and of our customers all around the world. Please turn to Slide 13. As you can see from this graph, we are continuing the journey and truly transforming Power Grids for sustainable value creation. Since 2014, we have more than doubled the division's operational EBITDA margin, reflecting improved productivity and continued cost savings. We are fundamentally changing the division's business model and limiting risks across its entire business portfolio. This is being done by investing in businesses that increase our mix of services and software, while at the same time, divesting parts that do not remain core to ABB and changing the business model. We are very pleased that we have handed over our last offshore wind contract, Dolby II, and are steadily flushing out all the legacy projects from the past. Additionally, the Power Grids team is leading a range of activities, including productivity, cost savings and operational improvements, while staying focused on achieving excellence in project execution. For example, the acquisition of the mission critical communication networks business of KEYMILE will help us to enhance our capabilities and strength as the leader in digital grids. The Power Grids continues to be the partner of choice for national, state institutions and utilities worldwide as they build or upgrade their infrastructure. Now let's turn to Slide 14. The graph on the left shows how ABB has continued its regular cost savings program, leveraging operational excellence and world class supply chain management to achieve savings equivalent to 3% to 5% of cost of sales each year. We will continue to drive cost out and remain on target. The graph on the right shows how our white color productivity savings program has outperformed expectations since its launch in 20 15. It is well on track to achieve its increased cost reduction target of €1,300,000,000 in run rate savings, while incurring lower restructuring and implementation costs than they initially announced. So let's conclude with Slide 15. NEB has continued to build growth momentum and our targeted initiatives are delivering results. Total and base orders grew 3% compared with the Q2 2016 with higher orders in all regions. Revenues were up 1%. The operational EBITDA margin was 12.4%, dampened by commodity price headwinds and some overcapacity, so more homework to do. Net income was €525,000,000 while cash flow from operating activities reflects the timing of short term incentive payments. Net working capital as a percentage of revenues was 14.1%, a reduction of 90 basis points on an annual basis. We have the right actions in place to deliver on the goals of our working capital program by the end of 2017. Looking ahead, the short term picture is mixed. Uncertainties still hangs over global markets, but growth in China is expected to continue and indicators are still positive for the U. S. 2017 can be best characterized as a transition year for the world and for ABB, But long term growth drivers remain in place for utilities, industry, transport and infrastructure. We firmly believe the long term outlook is still positive. Thank you very much. Thank you, Uli and Timo. Before we open up the line for questions, I would like to remind everyone on the call that we are having an Innovation and Technology Day on September 6 at the heart of our North American robotics operation just north of Detroit. This event will showcase ABB's leading capabilities in industrial automation for process and discrete industries ranging from robotics and the recent B and R acquisition to our number one position in control, software and systems. We will also share the latest successes of ABB Ability and our digital offering. Please, if you have any questions, you can reach out to us. There's also registration on our website. With that, let's open up the line now for your questions, please. We will now begin the question and answer session. The first question comes from Andreas Willi, JPMorgan. Please go ahead. Good afternoon, everybody. My first question is on pricing and how you manage pricing across the group. How do you connect basically the central planning and purchasing side of the business that sees these headwinds from pricing building with sales force and maybe why this delay in reaction has happened and what you are changing structurally to how you manage price in the company? And maybe also in terms of the earnings bridge, where was the commodity impact shown in the past when it wasn't that material in terms of negatives or positives? Okay. Good afternoon, Andrea. Thank you very much for your question. You look on pricing, there's different mechanics in place. First of all, in many areas of the business, for example, in Power Grids, we have an automatic price clause in our key long term contracts. So when commodity prices go up, the prices of the goods get automatically adjusted. And you see that in the result of the quarter in Power Grids, Power Grids didn't get impacted on that on the raw material prices that strongly. Now if you look at EP and RM, there is no possibility to have the same quality of contracts in there because a lot of that is distribution business that runs slightly different. So there, as you rightly say, it's absolutely crucial that the connection between the raw material price increases and the pricing decisions on the front end is swift and we executed in a good way. The investment in salesforce.com helps us to automate that further. And in the future, we will have even better connectivity between the front end and the back end. It's very clear that in the Q2 this year, we did not meet our expectation in Swiss pricing actions. And this will be a topic that we are taking now on with the team as we automate these processes going forward to avoid the glitch as we have seen in the Q2. Now on the commodity question, I'll let Timo answer that one. Yes. Andreas, on the earnings bridge, commodities was earlier in other. But because it was more meaningful driver this quarter, we decided that it's better to show it separately. Yes. Thank you. My follow-up question on Qatar. You won some substantial orders there over the last 12 months. Maybe you could shed some light on the execution of these contracts given the current situation and whether there's any risks here for ABB? Look, Andreas, as in every country in the world, when there is uncertainty in the political environment, we make sure that we stay close with our customers. We work with them very closely to ensure execution is going in a swift way. At the moment, we have no reason to doubt that this will go ahead going forward. But naturally, we are monitoring the situation in a responsible way. Thank you, Andreas. Let me please remind everyone on the call who's in the question queue, I would like you to limit your questions to 2 questions, please. Operator, we can take the next person. The next question comes from James Moore, Redburn. Please go ahead. Hi, everyone. Uli, Timo, thanks for taking my questions. I'll say to 2 then. Firstly, on the margin, if I could, for the full year, I know you've said that 2017 is a transition year, but can we do the 40 to 60 bps this year? I think your first half was down about 30, so you'd need 100 up in the second half. That's my first question. And secondly, on EP, can you please quantify the basis point impact in the quarter from the price versus raw material issue? Are we talking 20 bps or 60 bps? We're just trying to get a handle of what's not there in the second half. Okay. So James, on the second question, we can't because we're not disclosing that level of detail. But both has an impact, which was mature in the Q2. And we are now taking forceful action to make sure that EP is tracking in the right direction miss in the Q2. On the margin on the full year, look, we announced very clearly that on the long term basis, our ambition is to raise or have accretion of 40 to 60 basis points. We are firmly committed to live towards that ambition. We are also firmly committed that the second half of the year, we will lift this ambition and get as much towards this ambition as possible. Yes. Maybe, Ole, if you're okay, I could add some drivers for the second half, not guidance, but drivers. So if you look at this, first of all, from FX perspective, so if we would assume that the FX would stay the same, then we would have less headwind from FX. Same goes for commodity because we would expect the pricing strategies to start to kick in on the market. On a tailwind, we would also expect slightly better mix. And then on the other hand, we would expect the power up cost to go into PG and be a slight headwind. Then further on the actions side, so we took fairly little restructuring during the first half, €58,000,000 altogether. Our target, the €200,000,000 to €250,000,000 remains. So we are expecting to execute more restructuring in the second half. And we are also taking discretionary cost measures now in such a way that it does not harm the long term growth prospect of the company. Thanks, Timo. Next question, please. Next question comes from Ben Uglow, Morgan Stanley. Please go ahead. Good afternoon, everyone. A couple of questions then. So first of all, just on Robotics and Motion, it's quite difficult to understand exactly what's going on there because effectively you've got 3 large different businesses, so robotics, motors and drives. What I want to know is can you give us any color or any kind of sense of how those different margins are performing? And is it the case, I mean, my assumption would be that it's the motors business which has gone down or is very low. So that's is that correct? And could we have some color there? 2nd question, just on price increases. Obviously, they take time to come through, but we see this at Schneider and others. Is it reasonable to expect for robotics in motion that you do see the positive effect of price increases coming through as early as the Q3? And will the second half margin, should that second half margin for that one division be significantly better? So this was very simple two questions. Thank you very much, Ben. Let me work them through. If you take the Robotics and Motion division, your observation is right. There are basically 3 building blocks. But within this building blocks, there's additional dynamics that I'm happy to share with you a little bit more granularity. Let us start with robotics. Robotics is growing significantly double digit, not starting with a 1. So this business is really taking off in a great way. And it's developing very, very favorably in a market which is very attractive. And our formula of running this business in a completely different business model than previously is really successful. Our robotics had in the Q2 a great run on orders. Robotics had into the 2nd quarter also some bulk shipments of large quantities of robots, which dampened the robotics margin slightly. That's a one off thing in the second quarter, but this is something that heavy had in there. Now if I move on to the drives business, the low voltage drives and medium voltage drives go undergo a different pattern. The medium voltage drives are tied to the process industries, to large CapEx projects. And that's an area where we have had a dampening on the top line. And naturally, also, we need to ensure that this business adjust its cost base in the appropriate way as fast as possible to get going. And as you rightly say, on the motor side, there is the key issue in Robotics and Motion. There's one element that's the commodity prices. If you look at a motor, it's a lot of copper and iron in there. The last 12 months, copper and iron have both raised more than 20%. So that's something that's really hitting us. And we need to make sure that we realize that commodity price increase through pricing actions as much as we can, as fast as we can. And I think there, the team in the second quarter could have acted even faster, and we are speeding that now up in the 3rd Q4. So I'm confident that in the second half of the year, we will work towards mitigating that effect. The second element in Motors and Generators is the capacity utilization. And there's a really interesting balance between on the one hand taking out costs and capacity and on the other hand having enough capacity available, especially on the engineering side also, when the larger motors pick up again, which are very often engineered to customer purpose, to have enough muscle there to participate in the upswing of the market. Honestly, in the Q2, that formula got a little bit out of sync and we are putting it now back in sync to make sure it is going in the right direction. So there is a glitch in RM and EP in the second quarter and we are mitigating it in a way as I just described. And on the pricing on the price activity, I think I answered that mostly. I had Andreas before I gave you the price mechanism, And that's something that we're acting quite forcefully on to ensure we safeguard the margin there as well. Thank you. Next question, please. Next question comes from James Stettler from Barclays. Please go ahead. Yes, thank you. Good afternoon all. Yes, just a quick follow on on pricing. I mean, when you raise prices, is it are these generally sticking? Are there any risks in certain areas that they don't more so than others? Question 1. Question 2, again coming back to Power Grids, so the backlog there is down 2%. We talk a lot about the tendering activity. What's really holding back? When do you see an inflection point? What really needs to happen for these orders to come in? Thank you. Thanks for the question. Now look on the pricing, as you're right, I would say, making price increases stick is very important. And there you have different dynamics. If you look pricing towards distributors, the way we pay our distributors, they get a commission on realized price. So there is an incentive to help us to push these price increases through in the market. So you can assume that on the distribution side, it's higher likely that we can push it through. On the OEM side and the end customer side, it's always a tough one, especially in segments where the market dynamics and the market demand is subdued. So this is more difficult. And the more you go towards Process Industries, the more difficult it is at the moment, because this is something that is a segment that's suffering from still low activity and low demand. On the Power Grids side, it's 2 elements or 3 elements. On the one hand, there's a market out there where you have volatility in the award of large projects. That's nothing new. We always have had it. The second point is we have a change in business model. We are consciously and that's the reason, one of the reasons why we are calling 2017 a transition year that is not fully comparable to 2016. We are changing the business model in many areas. We are not taking the EPC content anymore. We are not taking installation content anymore. We do more system integration and solution business. And that means that has a dampening effect on the top line in the way we take certain projects on and the role that we play and participate in certain projects. And the third point is selectivity. We want to make sure that in the future, we are not repeating the mistake from the past just to push the top line like crazy. We want to have a good quality underlying business. So these are the 3 drivers. If I look at the underlying market dynamics at the moment, I don't see any reason to be concerned. Medium, long term, this will be developing the right way. In short term, the business model changed, the selectivity and the market packages have contributed to where we are now. Thank you, Uli. Next question, please. Next question comes from Guillermo Peigneux, UBS. Please go ahead. Hi, good afternoon, Uli, Timo and Alana. Thank you for taking my questions. Just wanted to follow-up a little bit on the commodity inflation. I understand that at the moment the net pricing picture is unclear. But I'm kind of seeing that the P and L impact from the commodity inflation is there. So you could give us more clarity about the decrease in magnitude of the pressures you're facing from the raw material inflation? Luca, thank you very much for your question. I think we have said in that topic all we wanted to say. There is dynamic out there. You see steel, copper, silver, lead, all underlying a certain dynamic. And still, it depends in which region and what type you buy it. They're monitoring that very closely. We have a special commodity buying and commodity team for exchange traded commodities that are working that through. It is important that we fly on-site and have swift actions on the pricing and costing side. We are taking them now more forcefully in the Q3 and influence the team that everywhere, not only in IEA and in PG, we have a good result how we mitigate these topics. Okay. Next question, please. Next question comes from Martin Wilkie from Citi. Please go ahead. Thank you. Good afternoon. It's Martin from Citi. A couple of questions. The first one, you mentioned in the past and you alluded to a few moments ago that you wouldn't want to cut into muscle in some of the longer cycle markets. And so just to clarify, when we think of the overcapacity this quarter, some of the swift actions you mentioned for the second half, Have you changed your view as to when some of these markets might recover or the level that they may recover to? Or was this more sort of a temporary phasing issue in the quarter? And the second question then was just on cash. You mentioned payments in the Middle East. Just to understand, was that a small number of contracts, was it broader based? And therefore, what gives you confidence that, that doesn't become an issue again in the second half? Thank you. Martin, good afternoon and thank you for your question. On the muscle, our approach remains unchanged. We will not cut into the deep muscle of our engineering capabilities and the core differentiation opportunity that we have. So this is something that will not change. When you look at the outlook of certain activities, take the U. S, I think in January, February, the world was including ABB was quite excited about opportunities in the U. S. That has calmed down a little bit. If you look what's happening in Europe at the moment, we still have the elections in front of us. So we need to be careful there. And it's very clear that the expectation in certain spending patterns in parts of the world has been a little bit delayed and subdued and we need to manage that and that's the key cause that we missed a little bit on the Q2 and that we are fixing now going forward. So there's no change in the basic sentiment. There's just a glitch in the second quarter where we didn't meet the expectations and we are fixing that now we speak. With that, I hand over to Timo on the Middle East question. Okay. Thanks, Martin. So when we look at cash overall, we have a couple drivers here. And as I mentioned, this Saudi SEK 140,000,000 is a big driver. We also have some tax and we, of course, have a little bit lower results. So those were the main drivers. And as I said earlier, for the full year, we expect to be somewhat ahead for full year 'seventeen compared to full year 'sixteen. Then what comes to these receivables, we are not seeing that these are bad quality receivables. There is no problem with the quality of the receivables, and thus we really expect that this is a timing issue only. Thank you, Timo. Next question please. Next question comes from Simon Tonneson from Please go ahead. Yes. Good afternoon, everyone. Two questions. The first one is just generally on your on a group level, more or less, taking Q1 out. I know you're monitoring surely performance against how you're doing versus the market you're operating in. Can you just maybe only give us a feel sort of how you're seeing your performance right now against the market, let's say, in areas like the voltage, motion drives, medium high voltage process? I'm sure in robotics, the answer is pretty simple, but just in the other areas. And secondly, just on Industrial Automation. I mean, the oil price is down another 15%, I think, year to date. And I know you're not going to guide into next year, obviously, yet. But I think consensus looking for high single digit growth there for next year on EBITA in this business taking B and R out. And the book to bill remains below 1 there. What do you think can surprise on the upside there over the coming, let's say, couple of quarters? Thank you. Yes. Good afternoon, Simon. Thank you for your question. If I run through the portfolio and the portfolio dynamics and go through the 4 divisions. Let's start with the Power Grids. I think I answered already partly before the top line dynamics that we see there. We are more selective. We have changed the business model and the underlying market is patchy, but it's a solid market. So for me, '18 will be the 1st year where we compare against a similar 'seventeen in terms of the underlying business model, the way we run this business, And I expect that we get growth going. It's very clear that we stayed away from certain type of projects. It's very clear that we have been selective on projects that we just didn't want to have. We want to make sure that we serve our customer well with good solutions and we make decent money at a digestible risk profile in this business. If you take Industrial Automation, I think Peter and his team are doing a remarkable job increasing the margin in an environment that a backlog is down. The backlog is down about 7% quarter on quarter compared to last year's quarter. And despite that, they're doing a good job. So Peter runs a really nice forward looking business model where he takes cost and capacity, adjust it in a good way. Now the good news is, if you look at the growth pattern in this quarter, our power our Industrial Automation business is up in total orders 8% and in base orders 3 3rd party base orders 2%. So if I look at that together, great dynamics that the team has delivered. And if I go through where we are, in Asia, Middle East, Africa, in this business, the base orders is slightly up. So we were able to still get some good businesses in the Far East and Africa. We have a good activity in India. So altogether, this is going in the right direction there. But going forward, and I tied it to your second question on oil price, I think there is service activities picking up that we can do. There is some early cycle OpEx picking up. And I can tell you, especially in that segment, the resonance on the customer side on ABB ability is phenomenal. So we are really, really happy there. The customers the most used word of customers in that segment on Ability is finally. Finally, ABB, you have a comprehensive offering. We really love it. So I'm optimistic that this will help us converting to growth in the next year and go in the right direction despite the markets not being so strong. In Electrification Products, we have a very strong exposure to the utility side in Electrification Products, and that's a little bit subdued. So we had an issue there in the medium voltage side that we need to work on. On the industrial side, I'm quite optimistic going forward that we're going to get the growth going again. That leaves me with Robotics and Motion. In Robotics, we are number 2 in Robotics now. We have the firm ambition to become number 1 if I look at top line pattern and the bottom line contribution. We are tracking very well towards that target in the right direction. The market is good, and we are constantly becoming market maker with new solutions in segments that haven't used robotics before, which is going in a very good way and I'm quite happy about that. 1 on the motion side, the more discrete oriented, consumer goods oriented, lighter drives and motors have a good dynamic, the larger ones I described before. So altogether, we are now for the Q3 in a base order positive territory. We have the actions in place to continue the growth momentum and it's our firm ambition in an uncertain world still to deliver growth going forward in the remaining of this year and next year. Thank you, Lee. Next question, please. Next question comes from Jeffrey Sprague from Vertical Research Partners. Please go ahead. Thank you. Good day everyone. Just two questions, if I may. First on B and R, obviously, you didn't own it in the quarter, but I'm wondering if you could give us a little color on the growth trajectory in the quarter. But if not, perhaps more importantly, as you look into the back half, anything we should be aware of in terms of getting this modeled correctly and just the trajectory on the top line there? And the second question is just on US T and D specifically. We have seen a number of utilities starting to talk about a higher spend rate, but we're really not seeing it come through yet in anyone's results. And just wondering if you could give us a little specific color on what you're seeing in the U. S. On the utility side? Thank you. Yes. Thank you very much, Jeffrey, for bringing up B and R. You made me a happy man talking about it. This is a great acquisition that really plugs the big gap we had in Machine and Factory Automation. The business is doing tremendously well. We are really happy with the development that it has. We are not publishing the detailed numbers of the business. But since the signing of the deal a couple of months ago, the business has developed fully in line with expectations. We are very happy with the growth momentum. The teams are working extremely well together. The culture fits like a glove. Our announcement on July 6 that we are building an additional new R and D center in the headquarter, also that we are expanding the activities in emerging markets that we are driving joint country growth plans and get going there. I think, yes, I'm optimistic that we will keep the growth trajectory in this business going forward. So there's no reason to change any assumptions at the moment. We are fully on track, and the activities are coming in rightly. Timur, you want to make some remarks on that one from the CFO perspective? Yes. If I can make a comment regarding because there was a question on the modeling, so maybe to shed some light there. I mean, of course, we have not yet worked through the full balance sheet consolidation, as you know, because this was a subsequent event on the quarter. But just for modeling purposes, on the PPA amortization, it should be something like €70,000,000 for second half. And this includes the step up from the inventory. And the $70,000,000 is probably split pretty evenly between Q3 and Q4. And then for the full year 'eighteen on PPA, we would expect about $80,000,000 And then, when you look at the profitability, so on the acquisition case, we said that this business is about 12% EBIT. And as there is no PPA inside the business at the moment, and then when it comes over to ABB, as we measure operational EBITA, when you take the PPA out, it should be around the same level as a starting point. So just wanted to give this. So I hope that helps you with your modeling now. Thank you, Timo, for that. Now on the U. S. T and D situation, yes, if you take our Power Grids business in North America, the total markets are the total orders for us are up in this market. We got a couple of larger ones. We got a large order in the Power Grids Grid Integration business. They'll be delivering a start com solution that helps us to get more capacity and stabilize an existing gate. The total orders in the U. S. And Mexico are up. So that's going in the right direction. And I was in the U. S. Now I think 9 times already this year, meeting very often with customers and sitting down. It's clear that the infrastructure in the U. S. Needs investment and a couple of drivers for it. Number 1, the average age of a large power transformer in the U. S. Is more than 35 years. The lifetime expectancy usually is about 30. So there is an upgrade need on that one. Secondly, the reshoring of industrial activity into the U. S. Will require investments in the grid. Thirdly, if you look at the ramp up of unconventional oil and gas in the U. S, which will be a big spending entity in the years to come. They also need reliable power supply. So altogether, there are good and solid drivers there, medium and long term to get it going. I don't want to speculate when the knot is being cut and a clarity comes in how the infrastructure program will come in. The signal that we are getting is there will be significant spending. We just have to be patient and close to our customers that in the moment this is coming and the knot is untied. We can roll into this in a good way. Our footprint in the U. S. Positions us clearly as the number 1 in Power Grids in the U. S. We are leading there. We are continuing investments. And it's also nice to see how ABB Ability helps customers in the utility sector with a planning of a grid that becomes more volatile with renewables and more demand side dynamics and how we are helping with asset health to address the challenges of an aging grid. So altogether, I'm cautiously optimistic. The timing is a question. The overall dynamics will be intact. Thank you. Next question please. Next question comes from Gael Debre from Deutsche Bank. Please go ahead. Thanks very much and good afternoon everybody. So my first question is on Power Grids where the book to bill has been below 1x for the past 5 quarters now. So I guess given the lead times in this business, it seems increasingly likely now that sales growth could actually turn negative in the next few quarters for Power Grids. So do you think that you perhaps need to be a bit less selective, a bit less shy in taking on orders going forward and that you would need to reinvest in the sales force at a much faster pace than what you've been doing so far? That's question number 1. And question number 2 is, well, again about pricing trends. I think I remember that in Q1, you said that pricing was getting a bit better than a year ago, in particular in the low voltage area with price rises of around 1%. So given the 80 bps margin decrease in electrification, does that mean that you actually need more than a 1% price rise to offset the commodity costs? Thank you. Yes. Thank you for your 2 questions, Gail, and good afternoon to you. If I take the Power Grids situation in the market, as I just laid out, the underlying drivers are intact and we will not change the selectivity pattern because we want to build good quality backlog going forward. The sales force and front end improvement is one of the elements and one of the growth drivers within our Power Up program. So if I describe it very simple, the last couple of years were about making Power Grids a better business and even compromising top line to make it a better quality business. The next couple of years will be about making this business better and bigger, but bigger in the new pattern of the business model, in the new offering, a much stronger digital effort, a much stronger services effort that we are driving going forward. So there's no reason to shy away from that direction. As the robotics turnaround that has gone through a similar pattern successfully demonstrate if you have patience and perseverance and the right kind of long term perspective, a massive business model change might pay off at the very end, and that's what we're aiming for in Power Grids as well. Thank you. And on the pricing trend, on the pricing trend, look, in the Q2, it was very clear that the pricing measures that we had taken did not they're not sufficient to realize the margin impact or that they neutralize the margin impact from the commodity price increases. We are driving now forceful actions both on the cost and the price side to ensure Q3 and Q4 are in good shape. We are not disclosing then what exactly it means in terms of the pricing, whether it's 1% or 1.5%. We will take sufficient actions to compensate that. I would expect that we are trending towards 2% altogether to realize the opportunity to compensate the margin. Thank you. We have time for one more question, please. The last question comes from Jonathan Munsey from Exane. Please go ahead. Yes. Thanks for fitting me in. Just a couple of quick ones, please. The savings programs, white collar program and also the working capital initiatives, I guess we're getting nearer the end of these programs than the beginning. I just wonder if you've given any thoughts what might come next sort of into 2019 beyond? And just on I guess it relates to both the M and A you've done at B and R and KEYMILE, which strike me as being sort of linked to the ABILITY program filling out the offer. I just wonder whether as you develop ABILITY, there'll be need to do other M and A to kind of create this cohesive end to end connected offering? Yes. Good afternoon, Jonathan. Thank you very much for your questions. Yes. When we started next level, we said in the 1st couple of years, we will have group wide programs where we ensure we get the hygiene and the cost base of ABB in good order. That's why we launched the working capital program. This is why we launched the white collar program as programs that go across the entire group. I'm very happy with the progress on the White Color productivity program. We will achieve the €1,300,000,000 cost out that we have committed, and we will achieve that with less restructuring. So by the end of this year, the program will be finished. But that does not mean that there are no further opportunities in white color going forward. But in the future, we will run these programs through the divisions, the functions and the regions. So each of my leaders will have specific targets for his or her share of the white collar community to drive further productivity going forward. So Timo, as the CFO, will have a target as of 1st January 2018, how to drive finance productivity. Jean Christophe will have it on HR. The functional leaders on R and D and other areas will still continue that, but we will not run it as a program anymore. It will be the responsibility of each of the leaders. I part the question on working capital, hand over that to Timo in a moment. I will just quickly address first the B and R and acquisition question. If you look at B and R and KEYMILE, there were 2 very important acquisitions, B and R to get us into machine and factory automation and fill the historic gap. And it was just a perfect fit where we don't need to restructuring, where we just continue the growth story and invest to get this going. Key mile, connectivity and communications to drive that in a safe and reliable way in the future digital grid is really paramount. And Keyma is adding to our capabilities there. And again, fills the gap that we had in the portfolio. It's a LEGO box in the offering that fills both in ability and in the digital grid capabilities. And you will see us doing more bolt ons in the future. If you look at NAV 3d on the Vision Solution and Vision Software side and Robotics, if you look at others, that's the continuous bolt on activities where we continuously enhance our solution capabilities going forward. With that, I hand over to Timo to make some comments on the working capital program. Yes. So similar situation regarding working capital on the landing of the program. So when we look at where we target to get after getting the €2,000,000,000 out, we should be in a good place against external benchmarks. And then these programs, first of all, on receivables, will become part of the global quote to cash process, and we will, of course, continue to drive it hard. Same is regarding payables, so it will become part of the procure to pay process. And again, there, we can do even more work through harmonization of payment terms in general. And then finally, in the inventory, I also think we have further opportunity after the 1,000 day program lands, but that we have to look at a bit longer term. But we have clear landing plans and action plans in place for landing the program. Thank you very much, Uli Timo. Thank you everyone on the call. Just a reminder again, our Innovation and Technology Day, September 6, a great opportunity to see all of our technology in action. Have a wonderful day and a wonderful summer. Talk to you later. Thank you very much to all. Ladies and gentlemen, the conference is now over. Thank you