Earnings Call: Q1 2017

Apr 20, 2017

Ladies and gentlemen, good afternoon. Welcome to the ABB First Quarter 2017 Results Analyst and Investors Conference Call. I am Maria, the CarsCall operator. I would like to remind you that all participants will be in listen only mode. And the conference is being recorded. After presentation, there will be a Q and A session. At this time, it's my pleasure to hand over to Ms. Ellen Abrahamson, Head of Investor Relations. Please go ahead, madam. Thank you, Maria. Good afternoon, ladies and gentlemen, and welcome to ABB's Q1 2017 results briefing. We have ABB's President and CEO, Ulrik Spiethauper our new Chief Financial Officer, Timo Iamutala and Erik Alsik with us today. Uli and Timo will discuss the Q1 results, update us on the execution of our next level strategy and 2017 outlook. The press release and presentation were published this morning at 6:45 and can be found on our website. This briefing is being webcast via our IR website as well as being recorded. Before we start, I would like to draw your attention to Slide 2, as this call will contain forward looking statements. These statements are based on the company's current expectations and current assumptions and are therefore subject to certain risks and uncertainties. With that, I would like to hand over to Uli. Thank you, Alana. Good afternoon, ladies and gentlemen, and welcome to our Q1 call. Looking at Slide 3, let me summarize some of the key figures for the quarter. Base orders improved 2% as we are seeing first signals of market stabilization in some process industries and some growth signals in early cycle businesses. Total orders reflect lower large contract awards in Industrial Automation and Power Grids. Large orders represented 10% of total orders compared with 17% in the same quarter a year ago. But overall, book to bill ratio is at 107, so we are building revenue for the future. We delivered 3% revenue growth on the basis of solid execution of our order backlog and good book to bill orders. We reported a steady operational EBITDA margin at 12.1%. If we consider the communicated 60 basis points insurance reserve adjustment made in 2016, the margin would have been significantly up, demonstrating solid operating leverage and our continued focus on productivity and costs. So our hard work is beginning to pay off. Cash flow from operating activities improved. However, this improvement primarily reflects the delay in employee incentive payments caused by the criminal case in South Korea. 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. ABB is continuing its transformation. In the Q1, we delivered our 2nd consecutive quarter of revenue growth. As stated earlier, we are building order backlog with a book to bill ratio of 107. We continued our active portfolio management, completing the sale of our high voltage cables business and recently announcing the acquisition of B and R, a leader in machine and factory automation. We commercially launched ABB Ability, our industry leading digital offering, and are pleased with the very positive customer response. In relation to Volantia's execution, we continued to build momentum on performance improvement. As stated earlier, our underlying performance was stronger than the reported numbers, suggest if you consider the positive adjustment booked in Q1 2016. Our white collar productivity program remains on track to deliver increased cost reductions of €1,300,000,000 by the end of 2017. Net income included a capital gain from the divestment of our Cadence business. This was partially offset by other charges covering liabilities that were retained from this business and certain other nonoperational items. Operational earnings per share improved 1% on a constant currency basis to 0.28 dollars We continued to make progress on transforming ABB into a leaner and more efficient technology leader. As announced in October, we enhanced our approach to performance and compensation as of January 1 to reward entrepreneurial spirit in our 4 divisions even more. Improved country and account collaboration is driving momentum in Food and Beverages, 3C and Service. For instance, Service and Software orders were up 7% in the quarter. 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. In Q1, we inaugurated our global service Center in Krakow. This state of the art side is creating white colored jobs in Poland and is now staffed already with more than 2,000 people. Please turn to the regional picture on Slide 5. In the Americas, orders were up 4% with base orders steady. The United States delivered 5% growth overall with a robust 3% in base orders, mainly driven by robotics, light industries and construction. Canada also delivered positive order development, reflecting a large mining order. However, base orders remained weak across all sectors as heavy industry continued to weigh on overall demand. Brazil remains tough, and we do not expect any recoveries there. Europe was positive in the quarter, mainly due to continued investment in high transmission and strong base order development across many end markets. In the quarter, ABB booked a EUR 280,000,000 high voltage direct current order to link the power networks of France and the U. K. Base order development was strong in Germany, U. K, Finland and Spain. Asia, Middle East and Africa declined 12%. This was driven by the very tough comparable in China related to a large ultrahighvoltagedirectcurrentproject on the customer side, which comprised 1 large order and many smaller orders last year. If we exclude this project from Q1 2017, growth would have been positive. The underlying demand drivers in China remained positive, driven by robotics, nonresidential construction and power conversion products. India experienced solid growth in the quarter, and demand was broadly based across all areas except for process industries. Saudi Arabia, however, continues to be subdued. All in all, base orders were up 2% overall and in most markets. It was a strong performance in a difficult market environment. With that, let me hand over for the first time to Timo, our new CFO. Thanks, Oli, and good to be here on my first ABB investor call. About 3 weeks into the job, I have had the following experiences: Day 2, the B and R acquisition announcement day 3, first roadshow day 9, board and AGM day 12, 1st Business Performance Reviews and now 1st Quarterly Results Announcement. So clock speed at ABB is clearly solid, and the ramp up for me has been very fast, which I like. Now I have met already many people in the ABB investor community, and I'm looking forward to working with all of you. I have relocated to Zurich, and my family will follow after the schools are out in the summer. Finally, before I go to my prepared remarks, I would like to thank Erik, whose help has been instrumental on my introduction to AB Businesses and Finance Processes. So let's turn to Slide 6, showing the Q1 divisional performance. I will take you through some of the highlights. Electrification Products had higher orders, reflecting improved market demand in many markets and sectors. Operating EBITA margins improved on volume, mix productivity and cost savings. In January 2017, Electrification Products received some businesses from our former Discrete Automation and Motion division, namely our electric vehicle charging, solar and power quality businesses. This transfer has had a dampening effect on the margins in Electrification Products, and the division will most likely be outside its margin corridor for some quarters. Orders in robotics and motion grew 7% in the quarter and 13% on base orders. This order development was driven by strong demand in robotics and lighting industry as well as market stabilization in some process industries. We saw strong demand in China and the U. S. The margin was impacted by unfavorable mix and low capacity utilization. The demand pattern and the increasing order backlog will ease the situation over time. In Industrial Automation, total orders were weak on lower large orders specifically related to specialty vessels. However, base orders improved by 2%. Market stabilization is taking hold in some process industries. Industrial Automation has done a great job of cutting costs and increased its operational EBITA margin by 130 points to 13.3% on declining revenues. In other words, the division has adjusted capacity in response to market conditions. Before we go into Power Grids, I would like to remind everyone that we completed the sale of the high voltage cables business in February of this year. We are now reporting the cables business in corporate for the previous quarters of 2015 2016 and the 2 months in 2017 to ensure you can analyze the underlying business of Power Grids. Power Grids orders were lower, reflecting the timing of large contract awards and the inherently lumpy nature of those big awards. In Q1 20 sixteen's 2016 orders total orders included numerous mega orders and significant base orders. In particular, we had significant base orders related to an ultrahighvoltagedirectcurrentproject in China as well as orders in Saudi Arabia. Operational EBITII margin was exceptionally strong for Q1, driven by higher revenues, improved productivity, solid execution and continued cost savings. Please be sure to include in your models the PowerUp investment for the quarters to come. Let's move on to our operational EBITA margin bridge on Slide 7. As previously stated, in 2016, we had a CHF 50,000,000 positive adjustment to the Q1 2016 operational EBITA, which was related to the cumulative elimination of certain intercompany insurance reserves. So the underlying operational EBITA result in Q1 2016 was CHF 901,000,000 with a margin of 11.5%. In 2017, we achieved approximately €121,000,000 in net savings, which came from our ongoing cost savings program, pricing pressures and our white collar productivity program. Net volumes were positive for the quarter, reflecting the higher revenues, which was partially offset by additional investment in growth. Project margins were slightly positive 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, bad debt, changes on corporate provisions and other small one offs. The divested cables business also had a negative impact on operational EBITA in the quarter of SEK 13,000,000. Altogether, the group has achieved operational EBITA of approximately SEK 943,000,000 and a margin of 12.1%. Excluding the insurance adjustment, the improvement was €42,000,000 more in operational EBITA or 60 basis points of margin accretion. Let's then turn to Slide 8. Our working capital program is yielding positive results. As a percentage of revenues, net working capital is steadily declining year on year. However, we need to be cognizant that the improvement in cash flow from operating activities is primarily due to the delay in employee incentive payments caused by the South Korea case. We would expect for the first half of 2017 to be at a similar level or slightly better than the first half of twenty sixteen. And with that, let me now hand back to back over to you Ulf. Thank you, Timo. Before I update you on our next level strategy, let me address the big and unexpected challenge we faced in the Q1, a major case of embezzlement in our South Korea subsidiary. As soon as the incident came to light, I immediately launched a very thorough and deep investigation. We have hired independent investigators and are working closely with the authorities on the local level and Interpol globally. We have now reinforced our financial processes to ensure we meet our high standards everywhere. Preliminary measures have been taken, and new rules are already in effect. Let me just remind you, we have a 0 tolerance policy for unethical behavior, and we are absolutely serious about its enforcement. Let's turn to Slide 9. We launched at our Capital Markets Day in October 4, the 3rd stage of our NextDouble strategy, to unlock further value through our 4 key actions: driving growth in 4 market leading entrepreneurial divisions: a quantum leap in digital accelerating momentum and operational excellence and strengthening the global brand. Moving to Slide 10. In April 4, we truly lift that ambition and announced the acquisition of B and R. This was a true milestone for ABB as we are finally closing the historic gap in machine and factory automation that has existed since ABB was formed. This is our answer to the questions about Prokimer Logical Controllers, PLCs, that have been lynched for decades. B and R is a very attractive company and the world's largest pure play in machine and factory automation, which visits PLCs, Industrial DCs, Servo Motion Solutions and Application and Design Software Suite. It operates in an attractive €20,000,000,000 in machine and factory automation market segment that is growing 4% to 5% per year. It is a proven growth and innovation leader. In the last 20 years, the company has achieved 11% CAGR in a market that was growing at 4% to 5%. So it has continuously increased its market share. Let me put it this way. Strategically, this is probably the most important deal ABB has ever done. Our two portfolios are uniquely compatible, the financial rationale is impeccable, and together, we will be able to unlock tremendous growth in attractive industrial markets. Last but not least, ABB and B and R are perfect fit for the digital era. Our combined digitalization offering is unique, and we believe both very strongly that open architecture and full connectivity are key to competing on a long term basis. With this acquisition, ABB continues to shift its center of competitiveness. On Slide 11, we talk about what makes B and R so special and a true leader in machine and factory automation. It's its integrated product, software and solutions portfolio. B and R's, PLC, IPC and servo motion and drives and motors are acknowledged amongst the best in the industry and are really at the core of the offering. And combined with B and R's unique application design software capabilities, dictate the performance, productivity and efficiency of the customers' machines and factories to the next level. D and R's application store and visual software are truly revolutionizing the development and use of software based solutions in the field of machine and factory automation. With B and R, ABB will be uniquely positioned as an industrial automation provider that offers customers the entire spectrum of technology and software solutions around measurement, control, actuation, robotics, digitalization and Electrification. On Slide 12, it shows that B and R is a truly perfect fit. ABB did not have made much in the way of PLCs or IPCs in machine and factory automation. B and R has a strong PLC and IPC offering and is the largest independent player focused on machine and factory automation. We looked at other alternatives, but none would have presented such a perfect strategic fit without significant overlaps. With B and R, we will be able to add an unrivaled portfolio of automation solutions for machine and factory automation to ABB's world leading offering in process automation, robotics, our digital platform ability and electrification. We will be uniquely positioned to seize the growth opportunities resulting from the 4th Industrial Revolution. Turning to Slide 13. This transformational acquisition will firm up ABB's position as the global 2 in Industrial Automation as we will be mastering the control loop not only in Process Automation, where we are currently the 1, but also in machine and factory automation. In the future, there will be just 2 major players in the world in this segment. Siemens is number 1 in factory automation. We are number 1 in process automation. And now we are a key player in factory automation as well. Please turn to Slide 14. As you can see, we are also truly transforming the Power Grids division for sustainable value creation. Since 2014, we have more than doubled the operating margin. We are committed to continue the transformation as we shift the center of gravity of this division. We are fundamentally changing the business model and limiting the risk across the business portfolio. We completed the sale of the El Catos business and are investing in ABB Ability and digitalization with bolt on acquisitions as we recently announced. As well, the team is driving actions around productivity, cost savings and OpEx improvements as well as focusing on excellence in relation to project execution. Power Grids continues to be a partner of choice for National and State Grids Worldwide as they build out and upgrade infrastructure. Let's turn to Slide 15. Until recently, ABB was a hidden digital champion. Just last month, we commercially launched ABB Ability with more than 180 customer segment specific solutions at our ADB Customer World event in Houston with more than 8,000 customers participating. The newly launched ADB Ability will drive growth by integrating all our digital solutions, the historic and the new ones, and services into 1 group wide powerful global offering. This will unlock tremendous opportunities for penetration of all customer segments and allow us to replicate the success of each digital offering across a wide range of businesses and markets. ADB Ability cements our leading position in the 4th Industrial Revolution and supports the competitiveness of our 4 entrepreneurial divisions. We will develop further our next generation digital solutions on an integrated cloud platform in partnership with Microsoft, the world's largest software company. And I can tell you, our customers are really excited about ABB Ability. Now let's turn to Slide 16. In September 2014, I laid out as part of the Next Level strategy a clear ambition to shift ABB's center of gravity towards strengthened competitiveness, higher growth and lower risk. We continue this transformation forcefully. Since the beginning of the year, a lot has been done. And just to name a few, the acquisition of B and R, a leader in machine and factory automation, was announced the acquisition of NUTS3D, a specialist in 3 d Visual Inspection, was announced and closed and integrated into our Robotics business. Our service and software offering and business has grown 7%. We launched commercially ABB Ability. We closed the high voltage cables divestment and many more actions. Truly a transformation time for ABB. Now let's conclude with Slide 17. In summary, ABB delivered solid results. Revenues are up 3% with a book to bill ratio of 1.0 7%. Base orders grew 2%, and total orders reflect the lower large contract awards in the quarter. Operational EBITDA margin was 12.1%. We had solid operating leverage in the quarter, considering the 60 basis points positive insurance reserve adjustment in 2016. Net income was $724,000,000 reflecting the impact from the sale of the cables business. Looking ahead, our outlook remains unchanged. 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 best be characterized as a transitional year for the world and for ABB. But long term growth drivers remain in place for utilities, industry, transport infrastructure, we believe the long term outlook is still positive. Thank you. Thank you, Uli and Timo. Before we open up the call for questions, I would like to hand over to Erik for a couple of comments. Thank you, Alana. I would just like to thank to take this opportunity to thank you all warmly for the good collaboration and the interaction we have had during my over 4 years as the CFO of ABB. I truly enjoyed the dialogue and, of course, your sometimes challenging questions and views. We always listen carefully and work hard to bring better insight and help to understand the great opportunities of ABB. And it was always important for me to build a mutual trust together. So thank you again to all of you. With that, let's open up the line for questions now. Let me remind everyone on the line that maximum two questions per person, please. The first question comes from Benedict Yuglow from Morgan Stanley. Please go ahead. Great. Thank you. Good afternoon, everyone. And just before I start, yes, I would like to pass on my best wishes to Eric. Thank you very much for all the time and help. Anyway, moving on, two questions, please. First of all, on China, the base order intake there obviously is negative minus 3%. Aure, can you give us a sense of base orders in China? If we exclude power, I don't know how much of this was specifically related to power, but how are the non power businesses doing electrification products, optics and motion, etcetera? And if there's any way of quantifying that a little bit, it would help. So that was question 1. Question 2, simple one. The run rate on the net cost savings has nudged up nicely from the second half of last year. It was running at ballpark $110,000,000 We're now slightly ahead of $120,000,000 Can you give us more color on exactly why the Q1 has been better in terms of the net cost savings? And obviously, to what extent could that be a sustainable run rate? Yes. Thanks. Good afternoon, Ben. I will take the first question, then we try out our new CFO on the second one. So let me talk you through on China. You have seen China, the total orders is down minus 27% and the base orders are minus 3%. And if you look at the underlying momentum behind that, the whole negative element of that was due to HVDC projects on the customer side in Q1 2016. These HVDC projects, the way they are given to us in China, they both flow into large orders and in base orders. So that's the explanation of the miners. The underlying demand on China is quite positive in robotics, in discrete, in nonreservice construction, electric transport and in Power, that's okay. The Process segment, however, also remains weak, in line with China's move away from the overinvestment capacity that they have built. Now let me run you through the 3 other divisions. For electrification, we see a solid base order growth. It's supported by the pickup of the real estate market. If you go to Robotics and Motion, that's really, at the moment, our growth star in China. It's growing at a double digit pace, and we're very happy with the development there because that's now really hitting right on the sweet spot of China's demand on robotics and in Industrial Automation, that's good. If you take Industrial Automation, there is a decline in Peter's business. And there are basically two reasons. The one is the process industries are still very subdued. And on the other hand, the Marine business where we had some really nice orders in the Q1 last year was not that strong this year. So that's the explanation. I would describe the underlying momentum in China as sustainably solid, and that's something that we'll participate in the quarters to come. With that, Timo, over to you. Thanks, Sven. So my first answer in an investor call, and thanks, Uli. Yes, when you look at the net savings, this SEK 121,000,000, I don't know the number from second half of twenty sixteen, but you said it's SEK 110,000,000. I mean last year, we had SEK 85,000,000, and that consists of the savings from purchasing and operations, price erosion and then the white collar productivity. And this quarter, we actually had a good execution because the purchasing and operations were approximately as big as the price erosion. So really, majority of this comes from the white color or pretty much everything comes from the white color. And having looked at this, it's well in line with the $450,000,000 expected for the full year '17, and we are also tracking pretty well on pushing about half of that to the bottom line. Thank you. Next question, please. Next question comes from James Stettler, Barclays Bank. Please go ahead. Yes. Good afternoon all. My two questions are, first of all, can you talk a bit about pricing, what you're seeing and how successful you are in passing on raw material inflation on a group level? And then if we just drill down into Robotics in Motion, you took a lot of cost out last year. So somewhat disappointed to see 100 basis point drop there. Can you talk a bit about what's going on? How important the mix was? And how long it's going to take for this for the underutilization to be made up if you look at your order in flow coming through? Yes. Thank you very much for your two questions, Sharpe, as usual, James. If I take the pricing piece, that's an area that we really need to make sure we stay on our toes. Raw materials are coming up significantly. Some of when hedges run out, we need to make sure that we are prepared on the business that has been protected on the hedging side. As you might remember, Baidor, for example, has a built in into the business model automatic pricing mechanism. So however, we have that, we have triggered that. But as you rightly say, it's important that we catch that. If you take the pricing dynamics now, we always had the ambition that we say we take supply chain and OpEx together that should at least compensate pricing and then we have to white color on top of it where we take a significant part into the business lines. And that's basically what's happening out there. So you will see from us continued efforts that we neutralize pricing impact, whatever it is, that we get additional gains out of white color and that the pricing actions towards the market are being done in a swift way that we don't get into a squeeze with raising commodity prices. The second piece on Robotics and Motion, yes, look, that's a situation that we are as concerned about as you are on that topic. Robotics and Motion had a great top line run. So if you take the board the base activity and the base orders, it's up 13%. And then the question is, what do you do with the business that you know the market is coming back and you have surplus capacity? Do you take all the capacity out right away and then risk that you don't have the capacity to serve the market? Or do you do a mix? And basically, what you see here is a mix between taking a lot of responsible actions, but not enough to short term optimize the margin, but we have the capacity in place to really execute the backlog that we are building in a there's a pretty sharp momentum going upward. So my expectation is this is probably the drop quarter on Robotics and Motion. And from now on, the margin should go only where one way they should be up. Thank you, Uli. Thank you, James. Next question, please. Next question comes from Mark Thumann, Bank of America Merrill Lynch. Please go ahead. Yes, thanks very much. Good afternoon, Uli, Timo and Eric. Best of luck going forward. Thanks for your help. Basically in the OEON process markets, I wonder if you could just go through where you think we are in oil and gas, metals, mining, marine, etcetera, taking out the sort of large order effect. Obviously, base orders were up 2% in Industrial Automation. I guess, the comment is on stabilization. Could you give a bit more color on those process markets, which I guess affect robotics and motion as well as to have they bottomed out, when do you expect to pick up, etcetera? That's my only question. Okay. Thank you very much, Mark, for your questions. Let me just make a comment on Industrial Automation. I'm really proud what Peter has done with his team. Having a base order growth and a very significant margin accretion whilst the market is still very difficult out there. I think this is really very, very good results, and I'm very happy what Peter and his team has established and accomplished here. That was good job done. Now let me run you through the end markets, and I might go one level further down. If you take oil and gas, if you take upstream exploration, it's still expected to shrink from a customer demand this year, and it might even go into 'eighteen. So on upstream exploration, there will be further contraction of the demand on the customer side. On the conventional downstream activities, we see a certain pickup, a small pickup and a growth coming, and I come back, that's mainly driven by service activities because all the assets are running, by small investments and upgrades that we see out there. And the fastest growing is the unfinancial oil and gas in North America. That's probably the segment that's fastest growing of all that is out there. Now if you go from there to Mining, we don't see Mining coming back in 2017. Yes, there is some OpEx and some service activities, but overall, this will remain difficult. And on Metals, this is a couple of activities. We see some discussions on projects. ABILITY is a very, very good offering for the process industries and the customers reacted very positively, but it's more us than the market that's coming back. And in Marine, it continues to do really to be a bipolar market. Oil and Gas Supply Vessels really have come down, I would call it a dead cat bounce in terms of coming down very, very significantly compared to the previous years. At the same time, Cruise is growing and we have a very strong position on cruise. So when you go on a cruise ship, there's a high likelihood that you need ABB equipment on any cruise ship in the world, but that market segment is not big enough to fully compensate the massive contraction on the marine side altogether. So for me, growth is this year is a year where some OpEx and service activities can be picked up. Naturally, visibility, they are very, very well positioned to be partner of the customers in improving the operations and get service to a different level. But altogether, the large CapEx is not there yet this year. Okay. And just sorry, I did have one more. Sorry, I forgot. The inflation question, I think James asked earlier. Would you do you regard that as good for ABB, the fact that some inflation is flowing through the system? Does that give you more opportunity to discuss price points to be a net winner? Or how do you see that? Well, first of all, it's a call for action. And we need to stay on our toes that we take responsible actions very swiftly because if commodity prices are coming up sharp, we need to make sure that we don't get into a squeeze that we don't want. So that's the first point. The second point is there might be a positive contribution to the top line momentum. I think this is too early to speculate how it exactly works through, but it's clearly the ambition for us that we are not jeopardizing margins. And if the continued raise of the raw materials will be there, If we manage to keep the margin, then it should have a positive impact on the top line momentum. Thank you, Uli. Thank you, Marc. Thank you. Next question, please. Next question comes from Andreas Willey, JPMorgan. Please go ahead. Yes, good afternoon, I have a question on Grid and one on the earnings bridge. On Grid, obviously, you had a very strong start to Q1. You mentioned there's some project benefits. You previously said that for the full year, we should look to similar or slightly improving margin compared to the 9 point 3% you had last year, but the seasonally weak Q1 is significantly ahead of that. Has anything changed in your thinking for the full year? Or is this just timing and project volatility, what we have seen in Q1? And the second question on the bridge, following on again from the earlier discussion on price. So if you increase prices to offset raw materials, that would benefit net savings in the bridge and then we would see the negative raw material impact also in the net savings? Or would that be in the other category? Because that's important to know terms of when we see net savings improve, whether that's just one side of the coin of higher raw materials that we lose elsewhere again. Okay. Thanks, Andreas. I will take the first and then hand over to Timo on the second one. Now let me just run you through the Power Grids story. I think Claudio and his team from an operational perspective are doing a very, very solid job in driving the underlying margin quality of this business. Mind you, in 2014, we were at 4.6 percent. In 2016, we were at 9.3 percent. And now we have a quarter where we are at 10.3%. So if you look at the underlying momentum, it's exactly what we promised to do first with the step change program, which was completed last October. And now with PowerUp, we are fundamentally changing the earnings quality of this business by derisking it, by changing the business model, by focusing more on service, by driving new digital offering. Service is growing very well within this business, and it helps us quite a bit going forward. Now if you look at the Q1, the Q1 is not the year. In the Q1, we had really strong execution, very, very good execution by the team. We didn't have any hits on projects, and it just speaks for the underlying quality of execution that we had implemented. Don't take that number and just extrapolate it for the full year. We will have we will be this year as we have committed at least in the 8% to 12% margin range that we have communicated before. So that's where we will navigate through, and it's actually our ambition to have a solid and constant execution. What I also ask you to keep in mind is we have flagged clearly that we will have costs for the Power Up program. The Q1 was a quarter where we had some of the costs, but there will be more coming during the year. If you look at in the Q1, out of the flagged, about €100,000,000 where we said about €60,000,000 will be operational and €40,000,000 will be non operational. Yet relatively low consumption of that anticipated cost, and that also helped with the overall margin. But looking at it, it's great to have power running at 10%. That's a multiple on any other competitor in this field in terms of profitability in a phase of massive transformation. So I think Claudio is doing a good job. Yes. And then, Andreas, on your second question, so if we look at the commodities, the exchange traded commodities are actually in the other category, but the rest of the cost of goods sold is in or that impact is in net savings. So it doesn't really change the answer what I had to the earlier question on the overall situation regarding the €450,000,000 and also pushing 50% of the total white collar productive savings to the bottom line. And it is definitely not the biggest driver of the other. Thank you very much, Timo Nuly. Next question, please. Next question comes from Martin Wilkie from Citi. Please go ahead. Thank you. Good afternoon. It's Martin from Citi. Just 2 unrelated questions. The first one is just stepping back to Power Grids. So obviously, we understand the very tough comparable in large orders for Power Grids there. I was wondering if you could just talk a little bit about the tender process as to is that still essentially unchanged? I mean, you've talked about some weakness in China and the Middle East or indeed, if because of this shift towards software and other parts and power grids, perhaps we should expect the run rate of large orders to be a bit lower in the future, just to understand that dynamic? And then secondly, unrelated, obviously, you did the PLC acquisition just a few weeks ago. Last quarter, you gave a fairly lengthy list of areas you might seek through acquisitions in. I just wanted to understand, does doing this deal essentially put you offside for a short while while you do integration and so forth? Or are you still seeing the possibility of doing further acquisitions in 2017? Thank you. So good afternoon, Martin, and thank you for your If I take the power grids situation from a market perspective, there's about 300 HVDC projects in the world in the next couple of years that will come our way that we need to address. So the underlying growth opportunities on the HVDC slide are good. If you look at the amount of solar capacity that will be integrated into the grid and the wind capacity that will be integrated into the grid, it will be at an all time peak this year, and I'd probably say the next the same next year and the year after again. So there's tremendous opportunities here to play in that market. At the moment, there's a lot of tender activity and early project discussions out there. So our sentiment on the market overall has not changed at all. However, the Q1 was a soft quarter in terms of award of large projects. Now you mentioned 2 specific markets, the Middle East and China. Look, in the Middle East, if you look at our Saudi number in the Q1, Saudi is down minus 40 on base orders. And that's mainly on the power side. It's really hitting us very, very strongly together with process that we have there. So this is something that will some then come back. There are project discussions out there that impact Saudi, but I think it's too early to call it a full swing back to a solid pattern. On China, the underlying momentum I was just with the Chinese government 3 weeks ago at an event. The underlying momentum and the ambition there is unchanged. The amount of new power capacity that comes in, in China this year is enormous. At the same time, there's an additional driver. They're retiring a lot of old 30 coal fired power plants and every mayor gets paid on that, how much he retires there. And that means we have also a replacement momentum in there in terms of capacity, which will be helpful. So there's no change between large and smaller activities in terms of the overall ambition. However, the business model on the larger side, we have changed absolutely fundamentally to ensure we have better underlying margin quality in the incoming backlog into this business. Now going over to your acquisition question. Look, we are extremely happy about the B and R acquisition. And I can tell you the employee, the customer response was very positive on it. So we are happy on that one. But the list of interested area is unchanged. And I would say for Peter, in Industrial Automation, he and his team will now have their hand full with B and R, and I would not expect major additional acquisitions in that division. But the way we run it today that we have 4 fully empowered entrepreneurs that run their selected, their each of the divisions, in tower space, in Claudio's space and in Sami's space, I would not rule out that we do something, but we always balance off the integration capacity from a financial perspective, from balance sheet perspective and very important from a management perspective. I have scars all over my body where this was not adhered to. I think this is something that we have learned and we do now in a very wise way. Thank you. Next question, please. Next question comes from Guillermo Peigneux from UBS. Please go ahead. Good afternoon, everyone. Guillermo Peigneux from UBS. Just a couple of questions first regarding PowerUp. Thank you for clarification. I was wondering whether what we should see now is an accelerated pace of investment implementation through the next three quarters or the same kind of 100 times 4 quarters run rate should be expected? And then a second question regarding the subscription business model for software. Some of your key issues are talking about it. Are you going to follow that transition as well? And can you time it to some extent? Thank you. Okay. Thank you, and good afternoon, Guillermo. Look, on Power Up, we guided very clearly. We expect about EUR 100,000,000 cost, EUR 60,000,000 of them operational, EUR 40,000,000 non operational during the year. So that's what you should have in your model. We're not giving guidance per quarter, but I already told you that we had relatively low consumption of that one in the Q1. That gives you a hint how it will be skewed towards the quarters to come. Now on the software side, the question that you're asking is an absolutely crucial and fundamental point that we are working on. Honestly, I'm less worried about the amount of software developers that we need in the future because ABB has already 1,000 of them and we will have them in the future to do the technical part of the software development. As you rightly say, the commercial side of the software offering into the market is a very important one, and there we are massively enforcing the team. Guido Sheurey, our Chief Digital Officer, has not only the task to build up a capability and offering platform, he has also the task to drive the commercialization to a much then more steadier pay as you use software as a service based business model that we would have a more repetitive revenue stream and a more constant revenue stream. That's one element of our shifting to center of gravity approach. It will impact all 4 of our divisions. Given the size of the software activities in the division, I would expect that in Industrial Automation and in the Power Grids division, you see short term the biggest impact on that one. On the robotics side, we already have more than 1,000 users on Robot Studio that are paying on a subscription basis and do that. We have a lot of continuous revenue stream now on the Asset Health customers that we have out there that are basically paying us a continuous fee going for that. We have changed the business model and some of our SCADA and process control software offering from a one off payment and digitization to a software as a service model. So that's a key element, and you will see more activities in that field in the future. Thank you very much. Next question, please. Next question comes from Jeffrey Sprague, Vertical Research Partners. Please go ahead. Thank you. Good day, everyone. Two questions around B and R. The strategic fit is quite obvious and congratulations on getting that done. My question is, could you give us a little more color or insight in terms of the investment that needs to be made to integrate it properly? What the integration profile looks like? Is there additional R and D investment that you anticipate? And the second part of the question, it's really kind of one big question, but the second part of the question would be, what is really the margin entitlement of that business? 12% EBIT margin doesn't strike me as particularly strong for that business. Perhaps you have some view on the cost structure and where you might be able to take it. Let me take the second one first because it leads perfectly into your first question. The stand alone EBIT margin of a privately owned business, B and R, is 12%. B and R has invested constantly at least 10% of revenue in R and D, application development and software development. Now given the size of the business, you can expect some scale advantages of this business coming into ABD. Let me just give you a couple of examples for that one. When B and R goes into a new country, they need to open up a branch, they need to file for a business license, they need to hire all the basic people and then they get started. With ABB, we have a platform everywhere. So you should see a G and A leverage, which is very significant in the business over time that a business benefits from ABB, very attractive G and A platform. And if you just take SG and A and compare ABB against Rockwell and assume that B and R might be even higher on SG and A than Rockwell, then you see the journey that we will be going together on taking the G and A leverage. The second opportunity is in Supply Chain Management on the cost side. If you take B and R as a €600,000,000 company roughly, and you take ABB, which is about €20,000,000,000 external spend. We are buying a lot of electronics. We are buying a lot of components at a scale that B and I will never do that. So there is an opportunity in using Supply Chain Management. I just warn there, it will take some time because the one is price leveling on components that we already have in common, but other components will then need to be designed into the future product generations. So this will be something that comes over time. The 3rd cost synergy that will have an impact there as well is not on the B and R side, it's on our side because we will reverse integrate ABB's subscale PLC and servo drive activities into B and R. So there will be some efficiency gains coming out of that one as well. So that's the cost side. And if you look at the growth side, it will be easier for VNR to fund growth in the future because the incremental dollar needed to spend for a new country, for a new segment will be lower than it was in the past based on their stand alone offering. Again, if you take ABB Ability, our digital platform is something that B and R can truly benefit from. So your observation is right. There is probably music in the 12% number going forward, and you can be assured that we will try this music in a very forceful day. Now on the integration, given that this is a perfect fit with very little overlap with ABB, the integration approach will be the following. Number 1, this business will become a stand alone business unit within Peter Turvey's Industrial Automation division. Hans Zimmer, the Head of B and R, will continue, together with his entire management team, whose continuity has been assured in the future running this business. So we have management continuity, and we have also a certain independence, which is good for a business to continue its business model. The business model of B and R will not be changed. The underlying product brand in B and R that we have that is well established will not be changed. And what we will do is we will drive an integration approach that we call best of both worlds. Hans Zimmer and his team, our people work together and really see who can learn from whom to get the benefits of this combination going. Some of you might have met our Head of Corporate Development, Gregor Pum. Gregor will relocate with his family to Edgelsberg in Austria and become the integration leader. Gregor has been more than 10 years with ABB, well accepted and a wonderful person that has been deeply involved in the 10 years of working on this deal. So he's already known by B and R. He's very well accepted in ABB, and he will build a bridge going forward. So it's I expect a very smooth integration since we don't have to do any restructuring. This is basically boosting growth for the future as an integration approach. Thank you. Welcome. We have time for 2 more people to ask Next question comes from Gael Debre, Deutsche Bank. Please go ahead. Yes, thanks. Good afternoon, everybody. So I have two questions, please. The first one is in relation to the B and R acquisition. I'd like to better understand the long term growth outlook for the PLC market in an industrial Internet of Things world. I mean, it seems that more and more intelligence and communication capabilities are being applied now in a more decentralized way on factory floors. So basically, sensors, machines and actuators can probably at some point displace the importance of PLCs in the value chain, I guess, because they would be able to interact more together, they would be able to gain more in autonomy. So basically, I'd like to get your views on that, please. And my second question is on the impact of the mix behind the margin improvement that we've now seen for many quarters in Industrial Automation with sales down, but margins actually going up. So I guess my question is what we should expect for margins when the top line hopefully recovers in the course of 2018? Mean, is there still some operating leverage for that business with more upside to margins? Thank you. Okay. Look, first of all, good afternoon to you. I'm very grateful for the question on B and R and the role of PLC because that's exactly one of the hidden gems of this business. B and R is not a product business. P and R is a solutions business. And if you look at the solution to automate a machine, you need measurement and sensing, you need to control the brain and you need to actuation. Now where the brain comes from in the solution that B and R puts, for example, on a plastic injection molding machine, historically, it was always the PLC. Now it's the PLC or industrial PLC or industrial PC. In the future, it might be router based. And you know what, as long as you have the solution relationship with your customer, it does not even matter that much. What matters is that you have the domain expertise, that you understand the process drivers, and that's the way B and R operates. And let me just explain the business model how this works today. So imagine you are a plastic injection molding machinery OEM, and you say, I want to design the next series of machines. This company sits down with B and R, and they jointly design the functionality and automation of the new machine. So B and R works with the engineers of the OEM machinery customer, and they design them what is the best automation solution to have a competitive machine parameters. The moment the customer says, okay, that's it, I'm going to put you on my series, B and R is on that series of machine in the future. So designing that solution will use the building blocks for the solution on the sensing, the control and the actuation side. How exactly these building blocks develop over time will be open, and B and R has been an active driver even doing that. So it's exactly the beauty of this business, mom, that we are independent from just put it in a box and ship it over the counter kind of PLC model. It's not exactly not that one, and I'm very happy on that. Your second question on Industrial Automation. Look, if you take Industrial Automation, Peter's target range is 11% to 15% operational EBITDA over the cycle. He has managed to be today at 13.3%, and that's a really good accretion that has come up over quite a while. If you would see how Peter has transformed his business quite fundamentally, it's remarkable. Let me start first. He was, in terms of white collar productivity, probably the fastest and most robust adopter on where we want to go in terms of delayering this business, in terms of taking out complexity and making it simpler to operate. Secondly, in terms of risk management and backlog quality, his very rigorous approach to risk management and underlying quality of tenders and tender processes is one that is quite remarkable. The 3rd piece is if you look at the relocation and the footprint change on engineering, he has ramped up very, very significantly engineering resources in India and other emerging marketplaces to complement other places and have a better cost mix on driving this. And then if you change the overall mix of the business, in Industrial Automation, we have about onethree software and services today. This will grow very significantly over the years to come, ABB Ability being a key element of it. As a part of ABB Ability, our 800XA control platform that we just brought out in use the universal IO as a true technology innovation that helps us to get the customer lower installation time and better adaptation of control solutions. So it's really a mix of technology leadership, of very good execution, of taking out costs that Peter has done and will continue to do going forward. So our ambition is to keep that business firmly within the bandwidth of the margin that we have announced. Now one important point that I always make here is Peter has cut a lot of fat, and he has drained the muscle. There might come a time over time if the market would further contract than we expect today. So if we would further contract than we expect today, we would have to have a discussion, do we want to start to cut muscle or do we want to keep the muscle because we believe in the market update? At the moment, we don't see that risk coming, but we just want to flag that will be the operating pattern that we will have in the future. You see it in Robotics and Motion with the 13% base order growth that we have decided. Yes, there is a little bit of capacity surplus, but if you look at the growing market, it goes in the right direction. So that's the operating pattern and the mix question from you, Gael. Thank you. Next question, please. Our last question comes from Andre Kukhnin from Credit Suisse. Please go ahead. Yes, good afternoon. Thanks very much for taking my questions. Really broad ones, I was very interested by your comment on the future of the automation competitive landscape saying there will be really 2 future critical players. Could you please elaborate on that and maybe how you see that playing out? Would love to hear more detail. And then the second one, just on the ABILITY commercial launch and really commercialization of that. I guess, frankly, how are you getting paid for it from the early experience? Yes. Okay. First, if you take the automation landscape, Jallouk, what do you really need to be a key global automation player? You need a couple of points. First of all, you need to be active in Discrete and in process. Siemens is the number 1 in Discrete. ABB is the number 1 in Process. We had a I'd like a birth defect. We had a gap in the machine and factory automation. We will close that now with the announced acquisition of B and R. And then we will have an unmatched portfolio. Nobody else in the world has measurement, control, actuation, robotics, a digital platform and electrification for both process and discrete industries. So we're pretty well positioned there. We have to give it to Siemens that they have done a wonderful job in building up a very strong factory automation capability. They are the number one. They are closing that gap a little bit with B and R, and we have a clear ambition. But what you also need to have is you need to be the master of the control loop to be really relevant long term. And mastering the control loop means you need to have a credible large scale installed base on the PLC side for factory, and you need to have a credible large scale installed base on DCS in the process automation field. Now there are 2 players which are at a scale that really differentiates from all the others. If you take the other players, the American players, they are either focused on process only or on discrete only, don't have the similar scale and don't have the comprehensive platform that is out there. There's even one player that has no control capabilities at all and is just around the sensing and the asset health piece and not in the center of the control loop. So that's the reason why I think we are now pretty well positioned as one of the top 2 players in the world. And naturally, there's no reason to be arrogant. This is a reason to stay humble and to make sure we continue to do our homework going forward. Now your second question on ability. Look, if you take the 180 solutions that we have launched in Houston, they are basically covering the entire span of different commercial models. Our ambition is very clearly to push stronger towards the subscription software as a service offering where we have a repetitive, predictable revenue stream at repetitive, predictable margin coming into ADBD, complementing our today's P and L. This is ramping up nicely, and this is something that we expect to come in the future even stronger. So if you take the planning and software capabilities that we have, whether it's robot studio or whether it's on B and R coming in on the automation studio for virtual commissioning, virtual installation. This is an offering that we basically give to our customers already today on a subscription basis. If you take the control platform that we have both on PLC in the future with B and R and on DCS already with ABB, This is typically a business where you have at the beginning a lot of engineering costs and a lot of engineering revenue. And then you install it, and there's a repetitive service opportunity that we need to drive even harder in the future and leverage that opportunity going forward. And then in addition, we have the Asset Health capability that the products speak to us and we help a customer to drive operations and maintenance in a way that we have optimized uptime, speed and yield. And for that one, the ideal profile is really to have subscription based, service based kind of arrangement. I just give you one example. Today, when you buy an ABB robot, you can have a service contract, including all what I just described. You pay a couple of $1,000 per robot a year, and we provide you a Chinese menu of different service ranging from just giving you the data up to having a certain uptime promise working with your customers. So that's what we're working towards. And I think the underlying margin and revenue quality of ABB will go up over time. Volatility will come down and predictability will be enhanced. Thank you, Lee. Thank you, Timo. And thank you, Eric. Thanks, everyone, on the line and appreciate you participating and have a wonderful day. Thank you. Ladies and gentlemen, the conference is now over.