Earnings Call: Q1 2016

Apr 20, 2016

Ladies and gentlemen, good morning or good afternoon. Welcome to the APP Q1 2016 Results Conference Call. I am Maria, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session. At this time, it's my pleasure to hand over to Ms. Alain Abrahamson, Head of Investor Relations. Please go ahead, madam. Good afternoon, ladies and gentlemen, and welcome to ABB's Q1 2016 results call. The press release and analyst presentation were published this morning at 7 am and can be found on our website. This call is being webcast via our IR website as well as being recorded. With me today are ABB's President and CEO, Ulrich Stiefhofer and ABB's Chief Financial Officer, Erik Elszczyk. They will give a review of the Q1 results as well as an update on the execution of the next level strategy. Before we begin, I would like to draw your attention to the important notices on Slide 2 of the ABB presentation regarding Safe Harbor and our use of non GAAP measures. This conference call will include forward looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. I would like to now hand over to Uli. Thank you, Alana. Good afternoon, ladies and gentlemen, and welcome to our conference call. Before we go into detail regarding the quarter, I would like to pay tribute to one of our longest serving Board members, Roger Anjali, who passed away in a plane crash along with his wife and 2 children and their partners on March 19. Roger was an extraordinary man, who contributed to the success of our company for more than a decade with his profound knowledge and charisma and was a good personal friend to myself. We will miss him very much. Now let's move to the results on Slide 3. We continue to deliver along our 3 focus areas of profitable growth, relentless execution and business led collaboration in the Q1 of 2016. Base orders were steady in the quarter, reflecting the positive effects of our focus on organic growth and of our new market oriented organization in a challenging environment. The decline in total orders reflects the very high level of large orders a year earlier. The share of large orders in the quarter represented 17% of total orders, a very strong quarterly figure, however, still less than in the Q1 2015. The order backlog grew by 4%. Book to bill was 1.17 and was positive, that means above 1, in all of our divisions. Our continuous focus on relentless execution contributed to operational EBITDA margin expansion by 0.9 percentage points to 12%. The increase was operationally led by the power grids improvement and ongoing group wide productivity and cost savings measures. We achieved further progress in Power Grids and the division started its Q1 within its target margin corridor. The strategic portfolio review of Power Grids division is on track. To ensure outside in critical perspective. We work on this review with external advisers during this review. We will report on this review at our Capital Markets Day on October 4 in Zurich. We continue to drive self help by focusing on growth opportunities in a disciplined way and set up our capacity adjustments, productivity measures and cost reductions to mitigate the market headwinds. As part of the second stage of our next level strategy, which we announced in September, we are accelerating our focus 1,000 day programs of white color productivity and working capital. Cash from operating activities was up EUR 200,000,000 a pretty impressive improvement on better working capital management. Our 4 new customer focused divisions are operational, and we are seeing the positive results. To ensure better collaboration and more customer face time, we have established a common sales platform across the group with salesforce.com. The platform is today already operational in 86 countries. To help us drive Besenkraft performance, we have announced and appointed Pasquale Abruzzese as Head of Quality and Operational Excellence. Pasquale is an acknowledged expert and leader in the field of business transformation, operation and quality management. He was instrumental in the implementation over more than a decade of the Honeywell Gold Operating System, a world class standardized approach, which played a key role in Honeywell's performance turnaround. Francois is currently the Chief of Operations of Philips. He will be joining us on June 2016. Now let's turn to Slide 4 for the key figures where I'll focus on a few key points. Orders were 7% lower in the quarter, mainly due to the tough comparable as stated earlier. Base orders, however, were steady. Revenues were minus 2%, primarily to timing of executing the order backlog and lower short cycle volumes. Operational EBITDA improved and margin was 12%, an improvement of close to 90 basis points to 12%. Operational earnings per share were up 3% on a constant currency basis despite a decline in revenues. Cash flow from operating activities was €252,000,000 a significant improvement compared to the year earlier. Now let me give you a perspective on the regional order performance on Slide 5. Orders in Europe altogether were down 7% in the quarter. Last year, we had won a record amount of large orders in Q1, including the NordLink order to provide a power transmission link between Norway and Germany worth more than €800,000,000 In the Q1 of this year, our large orders for Europe, while it's not at the same level as last year, were solid and included a $250,000,000 order for high voltage submarine cable system for the UK as well as $140,000,000 high voltage direct current converter station order. We also won equipment for orders equipment orders for our Specialty vessels, specifically in the cruise ship as well is in electric and hybrid ferries. The base orders in Europe grew by 6%. The table on the right shows the development by country. So for example, Germany grew 5%, Spain 27% and Turkey 24%. Norway and Italy were flat. The UK was impacted by a really difficult comparable as there was a very significant amount of small orders booked in the Q1 of 2015. Total orders in Americas declined 13 percent and base orders were 10% lower. Total orders for the U. S. Were down 13% due to lower industrial demand for power and automation solutions going into process industries such as oil and gas in the mining and metals sector. S.-based orders declined on a difficult prior period comparable. Canada and Brazil were down as of the demand from the resource sector of Ostfeld. Total orders for Asia, Middle East, Africa declined 2% compared with a very strong quarter a year ago when we secured a large marine order. Base orders grew 3% for the region. China grew 16%, primarily due to the 300,000,000 HVDC orders that we won this quarter. China's base orders declined slightly compared with the same period a year ago, following 3 quarters of double digit declines. Despite oil price uncertainty, double digit growth was achieved in Saudi with robust orders in the Gulf countries. Southeast Asia also saw a strong double digit growth of all the market development in Japan, Korea and Australia growth. These developments really show that our high approach of penetration innovation and expansion in a targeted way works even in a difficult market environment and that our broad geographic scope helps us identify and drive growth opportunities. With that, I'd like to hand over to Erik to give you a granularity on the divisional perspective. Thanks, Uli. On Slide 6, we can see the divisional performance. In Electrification Products, good order growth in Europe was more than offset by weaker demand in the U. S, China and Brazil. The lower levels of medium voltage products and low voltage products being sold in the industrial sector could not offset the positive development in construction and utility. Revenues were steady and operational EBITA margin was impacted by an unfavorable mix. Actions to address the capacity and shift in demand were initiated in the quarter. In district automation on motion, orders were impacted by weaker demand in the resources sector, oil and gas, mining and minerals. 3rd party base orders declined 5%. Revenues were lower on short cycle business and the timing of the order backlog. The decline in the margin was primarily due to lower volumes and under absorption. However, capacity adjustments are well underway and margin improved sequentially Q1 2016 over Q4 2015. DiEM is aiming to be within the target margin corridor on a full year basis. The Process Automation division saw a decline in orders due to the substantial drop in large orders compared to a year earlier. Service orders were up in the quarter, while third party base orders were down slightly. Revenues were lower as growth in services and marine partially offset the decline elsewhere. The margin declined due to an unfavorable mix, although it was partially offset by cost and productivity measures. In Power Grids, orders declined mainly because of the exceptionally large orders won in Q1 2015, which Ulrich already have mentioned. The base orders behind this grew 9% with a strong underlying performance in China, Saudi and Spain. The slight drop in revenues were primarily due to the execution of timing of the backlog. Power Grids reached the target margin corridor of 8% as a result of its ongoing step change program, improvement in the project margins and the continued cost out measures. In addition, corporate costs were positively impacted by a cumulative elimination of certain intercompany insurance reserves. Let's move to our operational EBITA bridge slide bridge on Slide 7. In this challenging market, we achieved approximately $85,000,000 of net savings. This includes the benefits that we have achieved regarding white collar productivity in the quarter. The net savings were partially offset by negative net volumes with the declining revenues, as I mentioned earlier. Most of the project margin improvements came from Power Grids as the division continues to successfully execute on the milestone of their program. Mix was approximately at 0 as fewer system orders were offset by Standard Products in this quarter. As always, the other category consists of many smaller items we cut off. Included here is salary inflation, changes in corporate provisions like insurance reserve this quarter, realized foreign exchange, gains and losses, certain commodity supply chain costs and other smaller one offs. And this as in the quarter the year earlier quarter, the forest translation had some negative impact, but much less than what we have had in the prior periods. All of these changes led to a group operational EBITDA of approximately $943,000,000 and an operational EBITA margin of 12%, an increase of 90 basis points. I would like to remind you that the restructuring related WCP for 2016 is expected to be approximately 300,000,000 to 400,000,000. The majority of this, we would expect to be booked in Q2. Let's now turn to Slide 8. We continue to improve the cash generation in Q1. Cash flow from operating activities was up by approximately $200,000,000 in the quarter. We have put a strong focus on working capital improvement measures, particularly inventory reduction, but also receivable collection within the implementation of the continuous value chain improvement system that we are driving throughout the operating units in the group. Our cash distribution to shareholders will once again be done in a tax efficient manners. If approved by the shareholders, the proposed dividend payment of CHF 0.74 per share will be paid out in July 2016. We continued our share buyback in Q1, purchasing shares with a buyback value of approximately €500,000,000 So in total, we have repurchased shares for about €2,700,000,000 since the program began 18 months ago. And we are on track to finalize this within the year as planned. As you can see, we continue to deliver on our pledge to drive sustainable value creation for our shareholders. Let me now turn it back to Uli. Thank you, Erik. Let's turn to Slide 9. We launched the 2nd stage of our Next Level strategy in September 2015 to accelerate ABB's transformation. Stage 2 comprises a significant set of actions to drive the shift of our center of gravity towards higher growth, greater competitiveness and lower risk, as well as the acceleration of programs to improve productivity and capital efficiency and further measures to simplify our organization. Implementation of Stage 2 continues along the next level strategy, 3 focus areas of profitable growth, relentless execution and business led collaboration. Now let's turn to Slide 10. So when we look into shifting the center of gravity of ABB, how are we really improving our competitiveness? One way is by enhancing our offering through what we call software led differentiation. For example, by driving the development of our offerings for industrial digitization and Internet of Things services and people that we call IoTSP. The growing share of renewable energy in the power supply adds a lot of complexity to the grid, which requires innovative technologies to manage the grid overall, the flow of the electrons, but also advanced solutions to manage the flow of data. With our unrivalled knowledge of electrical energy and industrial automation, we are ideally positioned to drive the digital grid. ABB Technology was selected for the UK's 1st digital substation, for example, as shown on this slide. We are providing the customer with improved control, higher safety and reduced maintenance costs, whilst integrating the renewables. Another example of our leading platform in industrial digitalization is our container terminal automation building that on our strong experience in IoT SP for the site. Through our automation systems in remote operation solution, we are able to control cranes and drive systems for all driverless cranes in the terminal. This makes the customer container terminal operation safer, greener and more productive. Slide 11 shows concrete examples how we drive profitable organic growth through our PIE framework of penetration, innovation and expansion. In terms of market penetration, we really made solid progress in Europe where we grew the base orders by 6%. In the region, we are deriving the first benefits also from the combination of our low voltage and medium voltage sales channels in the new Electrification Products division. The new market focused organization is really enabling greater focus, much better coverage of customer needs from one single organization and thus yielding positive results. Innovation continues to be a focus for growth, and we introduced many new products and solutions in the Q1 as well. 1 is our new smart sensing solution, which transforms assets like simple motors or transformers into intelligent machines that tell the customer when they need servicing and help therefore with uptime, speed and yield in industrial processes. This innovative solution makes condition monitoring the new standard for assets in industry and means also small and midsized companies can benefit from the advantages offered by the IoT SV given our giving our customers a truly decisive competitive advantage in running their operations. We are also continuing to expand into high growth marketing geographies. In transportation, we launched a new electrical power system for cruise ships called dynamic AC concept that serves the marine industry where we already provide well established products and systems such as our RCport propulsion solutions and DC electrification. This solution helps to reduce annual fuel consumption by up to 6%. On a large cruise ship, this could equate to 2,000 tonnes of fuel savings every year. Now let's move to Slide 12. In this environment, we continue to drive self help by accelerating our relentless execution efforts around the 1,000 day wide color productivity program as announced last September. Key actions include the optimization and consolidation of business functions into certain centers of excellence, like example, a bidding center for large projects out of India and support functions into streamlined shared service centers. We intend to reduce the globally shared services support centers into 4 regional and to 2 global centers from 68 today. So we're moving from 68 to 6. We have announced the locations of our 2 global business service centers, Bangalore and Dhruvkar, and have already filled the key management positions. In Bangalore, the 1st wave of functional activity transfer is already completed. So for example, HR was migrated from Australia and accounting from Singapore, Southeast Asia and the Gulf countries. The next wave of countries is well on track. The global HR delivery center also was established. These efforts keep us on track to deliver the €400,000,000 savings that we committed for the program in 2016. Turning to Slide 13. As announced when we launched the Stage 2 of the next level strategy, we are also accelerating our working capital program that aims to foster a cash for growth culture, meaning freeing up cash to grow our business from within. Collection of receivables was strong as well as inventory management. We now have well over 1,000 improvement actions across our activities around the world that are currently being implemented. We are driving, for example, value chain excellence from product design through manufacturing logistics. As an example, in our motors and generators business unit, we have achieved improvement on their net promoters call from customers on the one hand, sustainably ups the inventory turns and achieved therefore a double digit reduction in inventory in this business unit. Overall, the 1,000 day program on working capital is targeting to release about SEK 2,000,000,000 in cash by the end of 2017. We are well on track as we have freed up approximately €600,000,000 in cash for growth in the last 12 months during the ramp up phase of this program already. If you go to Slide 14, as you know, in January 2016, our new market oriented divisional structure came into effect. We realigned our business divisions to serve our customers better by organizing ourselves around our customers much more than in the past and reducing the amount of divisions from 5 to 4. We are seeing truly positive results from these actions. The customers like it and the feedback overall is very positive. They are now able to buy a more complete ABB portfolio from 1 division and receive faster deliveries and service. The change have also enabled a further simplification of our processes to enhance our agility and customer focus in submarket environment. So turning to Slide 15, let me summarize. We expect the challenging market conditions to continue and to face continued hard battle sailing in many segments. Therefore, we will continue to focus on self help, which means concentrating on driving growth in target segments and realizing the benefits of our new structure and focused execution initiatives. Our growth programs are performing well even in challenging markets, and we will continue to target above average growth in markets such as Africa Food and Beverage and Microgrids where we see particular potential. We have already undertaken significant capacity adjustment in those businesses that have seen lower volumes due to low oil price and other market weaknesses and uncertainties. At the same time, we will drive forward our accelerated execution programs of productivity and capital management. Having laid the foundations for ABB's transformation with a leaner, more customer focused organization, we are well positioned to better continuing market headwinds and drive profitable growth for the long term. We have announced that our Capital Markets Day will be on October 4 in Zurich. During this event, we will give an update on our next level strategy and also report on the strategic review of the Power Creds division. So in closing on Slide 16, ABB is a pioneering technology leader with strong positions in attractive markets, and we have demonstrated this quarter what we can get out of this positioning. We have a crystal clear transformational agenda to drive earnings per share and cash return on invested capital, which we are implementing with great rigor and perseverance. We remain committed to deliver attractive returns to all of our shareholders. As demonstrated within the Q1 and with the achievements over the last one and a half years, our next level strategy is delivering positive results and we will continue to accelerate sustainable value creation. With that, I'd like to conclude my remarks and thank you all for your attention. Let's open the line now for questions. I would like to remind everyone, we will limit questions to 2 questions for analysts. Our first question comes from Benedict Uglow, Morgan Stanley. Please go ahead. Good afternoon, Ulrik, Eric and Alana. So I had a couple of questions. The first one just relates to the China business in particular and getting a bit more color for what's actually going on there. If I look at last quarter, your business in China was down 21 percent. This quarter, it's sort of virtually back to flat minus 2% in base orders and up in overall orders. When I read the press release, obviously, it doesn't sound as if electrification or discrete automation had a big change in China, I. E, the improvement is down to power. But perhaps, Orest, you could sort of give us a sense of what you're seeing sequentially in the evolution of your low voltage and industrial automation businesses in China. So that was the first question. Second question is for Eric. Obviously, the calculating the net savings each quarter is going to be a little bit difficult. Could you help us with a bit of guidance on the run rate? $85,000,000 in the Q1 of net savings is quite high. Unless my model is wrong, that basically is bigger than what we saw for pretty much all of last year on net savings. Do you expect to maintain that current run rate? Or what might be the puts and takes? Thanks. Thank you very much, Ben, and good afternoon to you. Yes, look, on China, it's a really interesting situation overall. Let me just take a step back and look at the overall picture. China is going through a transition period from an investment driven economy to innovation and consumption driven economy. That was just in last half year, I think about 4 times in China and I was just there a couple of weeks ago again. And what you see there, I think we have a government which has a very clear plan what they want to do. They realize the size of the challenge that they have in hand. But when we discussed couple of weeks ago with Chinese government at our venue, the 13th 5 year plan of China, I had a big smile on my face because basically this 13 to 5 year plan matches very well ABB's capabilities and strengths, whether it's cleaning up and having more environment friendly power generation, whether it's long distance power transmission, whether it is the automation and industrialization of industry or e mobility, ABB is pretty strongly positioned in that field. Now when you look at the granularity, I give you a little bit more granularity of our numbers there. We are proud where we are. At the moment, in China without being arrogant. I think Jun Yang Gu, our Head of China and together with his team is doing a great job. And what is happening really there? On the one hand, if you look on the power grid side, we have invested significantly over the last year in leading edge technology on the ultra high voltage DC technology. And this is something that we are really truly leading and State Grid and other customers in China see that and have given us quite a bit of orders recently to support them in the move towards a more stable, larger and more digital grid in China. So we are well positioned there. We got large orders, but we also got a very, very nice momentum on the base order side, for example, on high voltage products, where the localized production in China is really paying off. We got great in China for China products in that space and we now benefit from that one. The second piece or outside of the power grid, if you take the perspective overall, it's truly a mixed picture. Anything that's close to the soil, meaning process industries, meaning mining, minerals, oil and gas is pretty tough at the moment in China. And the government has not only realized they have too many assets, they have also realized they have too many people and they are now reallocating them in different ways. If I look, however, there are pockets of growth that we can identify on the industry as well. The automotive industry in China is still growing. It's now the largest automotive market. And if you look at the complexity of the vehicles that are being put together, the automation needs are quite strong. And we have a long franchise there. We were the 1st global player that had a local value chain in robotics, for example. And really that one is one that we enjoy continued strong customer relationships in. If I like electrification, anything that goes into process industry on electrification was very weak. Anything that goes into residential, we saw a small uptick. And especially when you look at our new products that we have brought out, we are targeting the middle class in China with some pretty attractive products. For example, the retrofit free at home solution that we launched a year ago in China, this is paying off very well this investment. And this retrofit solution where you basically can control how home with an iPhone is paying off very, very nicely, and we see some solid growth in that one. On the Process Automation side, clearly, the Process Industries itself are soft. But on the other hand, if you take, for example, the marine sector, that's where we enjoy quite a bit of growth. And when you look in marine on the harbor side, there's also still some investments that are going on. So what is very important for us is that we fly on-site and have the granularity of the market in mind and really focus our assets in them. And the last comment that I want to make on China is, if you look at the Chinese, I really call it a continent. We have been very strong at what I typically call Eastern Banana, that's the East Coast. And we are pushing now very strong in a better collaborative approach than before into the Western regions. We have many, many cities in that area that have more than 1,000,000. Historically, we would have gone in there in the BU business unit by business unit approach now with the new collaborative approach. We really take the whole force of ABB and we basically roll in city by city with an overall ABB effort. So look, we are not out of the woods totally in China yet, but what the team has done is they have stabilized the business. On the grid side, we are growing quite strongly. And on the other activities, we have found our ability to address that market in a way that we don't have further deterioration. So with that said, I hand over to Erik on your question on the saving net. Okay, Ben. So when we get to the saving, as you know, this is a combination of the price pressure and the cost savings that we have. We were quite pleased with the outcome now in the quarter. And obviously, our white collar productivity program savings are really starting to yield good results. As it's the ongoing program of 3% to 5% of cost of goods sold, That is also included in this calculation. We are driving those programs very, very hard, and we should see also continued ramp up over the year. What exactly the net number will be quarter by quarter will then depend on the price pressure we have in those quarters. So it's clear that we also focus on that side, but it's one that we have less of a control of. So I will not give you an exact forecast on the run rate, but it should clearly be higher than what we had in the prior year when we had more or less a small positive on between those two items. Okay. And thanks for that, Erika. Is there just conceptually, is there any reason Ben, Ben, sorry. Ben, sorry. Get back in line and come back, I'm sure. Next one please. Next question comes from Andreas Willey from JPMorgan. Please go ahead. Yes. Good afternoon, everybody. I have a question on the U. S. Development, similar question in terms of type that Ben asked on China. There, the base orders have remained weak. What do you see there between kind of industrial and power and between kind of underlying demand or continued destocking that could maybe still be going on? Good afternoon Andreas and thanks for your question. Look, if you take the U. S, the we got hit this quarter very clearly and our orders are down. And if you look at the pattern behind it, a couple of points. Let me start on the industry side. We basically see a dual development in the industry in the U. S. Anything that's related to consumption, whether that's food and beverage, whether that's automotive, whether that's 3C, it's going quite okay, including the residential part. Anything that's related to process is really, really weak. And you see that a lot of capacity is being now considered for our customer side. There's a lot of capacity that will be reduced, especially on the new unconventional oil and gas exploration. We see that happening and there's a very timid investment pattern that we realized. So that one hit us really strongly in the Q1. If you go over to the utility side, there are still some projects out there, but we see a certain delay in decision making on some larger projects that has hit us in that context. I would expect this to come back on the utility side, and we need to make sure that we continue working with our customers what we do. If you look at the requirements in the North American grid, the U. S. Doesn't have the most modern grid of the world. They need to really invest to avoid having blackout or having shutdowns, which will come. When we talk with utility customers, they make selective investments, for example, supporting the ramp up of renewables in the U. S. We see that coming in many places. We also see now, for example, in California, a take up on e mobility and charging stations require a reinforced distribution grid. But a lot of these projects are in the pipeline at the moment and the Q1 was particularly weak in the order update that we have seen there. And the second question to Erik on the earnings bridge. The volume column was negative, even though if I assume pricing is not very different than the last quarter, you should have had volume growth if I look at your overall organic sales growth. So why was the volume contribution in terms of profits a negative in an environment where you had positive volume growth? Because I would assume that if it's mix, it will be in the mix category and not in volume. That's correct. No, the revenues were down by 2%, Andreas, on a comparable basis, and we do this on a comparable basis. So that is the key reason why the volume is down. So this is strictly related to where the revenue is growing. All the rest is in the mix side. Thank you. You're welcome. Next question, please. Next question comes from James Stettler from Barclays. Please go ahead. Yes, good afternoon all. I have questions around Power Grids. I mean if you look at the base order growth of 9%, very, very strong. Is there anything one off there? Can you talk a bit about the bidding pipeline? And indeed, second part of the question, also the pricing quality and how that will come out of the backlog into the P and L? Thank you. Yes. Thank you very much, James. Look, if you take Power Grids, I think we need to if you look back historically, you need to differentiate between 3 things. First of all, our Power Products business and that building blocks of Power Grids has always been strong, and we really had a solid business there. The Power Systems challenges were always more related to our own challenges than they were to the market overall. And I think we need to really understand it when we go forward. And thirdly, when you look at the way we are running the business now, we have already gone through a massive business model change and more disciplined approach to order intake and tendering on the previous Power Systems side. So that's just an opening statement on that one. Now if I look at the market dynamics, ABB is truly strongly positioned in that field. And I give you a couple of reasons. If you look at the supply side dynamics, renewables are coming in at a very, very high speed. I was in India 1.5 weeks ago. Their first 700 megawatt plug on solar is now coming in at €0.043 per kilowatt hour IPP price. So I would expect to have a tremendous momentum coming into the grids from a renewable power generation side. That means the grids are undergoing a phase of demand changes and requirements, which will require significant investments in 2 dimensions. The one is we need to make sure that the renewable power generation sources, which are typically further away, get connected in a way with a very low loss power transmission at highest possible reliability. And secondly, we also need to make sure given the volatility and unpredictability of renewable power sources that we ramp up the automation and control capabilities in the crate because and that's not only true in India. If you go today to Bavaria and you have a paint plant of BMWs in Dingofing, we need to make sure that the power quality when a cloud goes over Bavaria doesn't diminish when we have that going. So we need more control on the power quality to get that to our customers. Our customers realize that there's more and more demand coming that way, and it's a great opportunity for us to differentiate ourselves. And if you go on the demand side, the demand side dynamics, look, I'll give you an example here from Switzerland, More and more people are buying Tesla cars. More and more electric mobility is coming. There will be sooner car launched that will require 150 kilowatts charger. In the past, the charger was 5 kilowatts. It was like 5 hair dryers. At the same time, when you switch them on, nothing happens to the grid. But when you switch 150 of them on at the same time to charge a car, then you have a significant increase of volatility and demand into the grid. And then you have 10 of them in line, you need to reinforce your distribution grid. So I'm quite optimistic on the growth pattern of that activity going forward. Now what we need to do is we need to make sure we make money out of this. So the way we run this business has fundamentally changed. We have cut down a lot of the EPC activities. We have become more rigorous on our risk management. The tender that we have won have filled our backlog with a completely different quality of, on the one hand, profitability and on the other hand, risk profile. So as you see now, the margin coming up on the Power Grids side, this goes pretty well in line with the turnarounds that we are seeing in the operational model, but also with the strong demand going forward. So altogether, this is an area that a significant growth in the markets that can be realized. That's an area where we, through our transformation of the Power Grids business that we are going through, we are already seeing significant results. Look, this business on a comparable basis was more than 200 basis points versus last year. Now we are 200 basis points up. And if we continue going down the path, I'm optimistic that we will have over time more margin accretion in this business well within the target bandwidth that we have committed to. Thanks, James. Next question please. Next question comes from Mark Thjomann from Bank of America. Please go ahead. Yes. Thank you. Good afternoon, Uli, Eric and Alana. I've got a question on organic sales, the minus 2 that you reported in the quarter. I mean, your book to bill looks pretty good at 1 point $17,000,000 or $1,200,000,000 or so. And you had above $1,000,000 last year, base orders flat. And I would imagine your backlog starts getting delivered a little bit more than perhaps it was this quarter. So I guess the question is and your comparatives get a bit easier certainly in H2, maybe not so much Q2. Should we just expect is this the worst sales growth figure we're likely to see this year? That's question number 1, given those factors. And question number 2, I guess we've had questions on China and the U. S. Maybe if I can switch it to Europe, because that looked to do pretty well up 6%. If you could give a commentary on how you see Europe? Because I guess in the past, I guess, structurally, you've been a bit less bullish Europe versus the other regions. So is this sort of reasonable growth rate that you see in Europe here to stay in your view? Thank you. Okay. So Marc to your first question, I think your argumentation was very solid. And I would definitely say that we are fully committed to make this diverse sales growth quarter in the year. So we are committed to have the other ones better. If you look at the fundamentals, we have built backlog. We have positive book to bill. We have positive book to bill last year. We have positive book to bill now in the first quarter. We have built backlog. And it's very clear that now all hands are in deck to drive execution. We also have to very clearly say last year and the year before, we did a lot of internal homework. I kept the team really busy cleaning up the organization, making it simpler and getting all that going. That work is either done or in good hands now. So we have people really now driving the execution of our orders, of our revenue, being out there customers and you see that momentum really kicking in, in certain parts of the market. So the answer is yes. We aim very strongly to make this diverse sales growth quarter of the year. And then second, when you ask about Europe, Laduk, first of all, we are running Europe different than we did it before. You might remember, up to 2013 and 2013, we had split Europe into 3 different regions and each region was running their own dynamic. It's now one cohesive region. Bernard Jukow, who you know from his very rigorous process in running power products is now running Europe. And he is really driving the pie approach to a very, very good execution growth machine. He is really crunching the growth out there, making sure that on the distribution side, low voltage and medium voltage and electrification works now better together. We are ramping up the momentum in customer interaction on power grids, there with having now 1 division instead of 2. Customers don't need to think before they call ABB, do I have a system question or do I have a product question. They have a Power Grid question and they have now one discussion partner. If you look at the innovation pipeline that we have and the amount of innovations that we have brought into Europe, there is still some spending in Europe, especially on differentiating technology that helps companies to drive either uptime speed or yield. It means also getting factor cost down. The robotics business is one example in that one. On the process automation side, we have some offering. So altogether, I think and especially also the traction business is doing well in Europe with our highly energy efficient technology that we bring out in the market. So overall, the picture is 1 where good execution with a better addressed market granularity will help us. Now let me run you a little bit through some of the countries and share with you the pattern in the past and what we are seeing going forward. If you look at Northern Europe, Northern Europe altogether is quite well underway with one exception and the exception is Norway because in Norway we got pretty hard hit by the decline in the oil and gas sector, which is not a big surprise given what's going on around us. But altogether, Sweden, Finland, Denmark, I would say, are pretty well underway. And even in Norway, we have base orders slightly up this quarter, which is just showing that even in a tough market environment, we can do well. In Germany, we had on total orders clearly a hit because we had that large booking last year. But if we look at the base orders, they are up 5%. Italy is basically flattish on the base order side. And our Spanish and Turkish team are doing a great job, really being present with our customers. Now by coincidence, Spain was the 1st country where we rolled out salesforce.com as a sales support platform. I was recently down there and spent time with the sales people listening to them how it's going. And they are really highly energized. They really think we have invested very well and they are beating now the market with strong momentum altogether. If you look at the 4 divisions and their pattern in Europe altogether, Electrification Products, you know we have a very strong platform in Europe and Tarak and his team are doing well. We had growth in Electrification Products in this quarter, and I would expect to have more growth in the future. On the discrete side, we had some contraction on the process related stuff, but on rail, on solar and a couple of other activities, we are doing quite okay. Process automation got hit, as I said before, by Norway. But we got significant new orders in process automation on the cruise segment because all of China is going on a cruise. A lot of Americans keep going on a cruise and the demand for cruise ship is really very strong. And as you know, there are some very large shipyards in Europe that are providing that. So altogether, I would say good execution in Europe and a focused targeted market approach will help us to continue to aim for profitable growth. Thank you very much. Very interesting. You're welcome, Marc. Next question please. Next question comes from Simon Tonneson from Berenberg Bank. Please go ahead. Thanks. Good afternoon, everyone. My first question is on the cash flow development and the improvements there. You obviously talked about the working capital already. If I look at the swing on the operating cash flow, it seems most of it is driven by the turnaround of the power related business compared to last year. But if I look at, for example, discrete automation, there's still a weakening both in absolute terms and also as a percentage of sales, if I were to do that ratio. Could you just talk a bit about what you're seeing there and how that should develop over the coming quarters? And the second question is on the drivers of the EBIT, which you talked about net savings already, you talked a bit about volume. But it seems that particularly project margin mix and ForEx, and the first two might be changing compared to what we've seen last year. So project margins being less positive and mix being more positive, at least if Q1 were to continue. So I appreciate you're probably not going to give specific guidance, but if you could just help a bit more on these three factors within the EBIT bridge, how we should think about it in 2016 versus last year? Thanks very much. Simon, thank you very much for your question. I think Eric is ideally positioned to address. Okay. Hi, Simon. The on the cash flow side, you are perfectly right that the digital automation and motion had less cash flow in the Q1 this year, but that is against a very, very strong performance last year, both in conversion rates and in absolute. So they are doing well. They are taking money out of their working capital like the others. So most of the capital improvements is actually coming also out of working capital improvements in the other divisions. In pulp rates, we are, of course, happy that we are now back in negative anymore as we are washing out the old negative projects and the negative impact that we had on those projects. So I would say it is contribution from always almost all the corners in terms of contribution to cash flow. Then on your second question on the bridge, it's clear that the project margins continue to improve. We see the part of it step by step getting better. And as I think we have said on earlier calls, as we move through the backlog of power grids from the really most difficult projects to the more medium performing projects on the old backlog to the new one that we have now, we should see a continuous improvement here. The numbers might not be as high as we move forward on the quarters because they were quite significant in the turnaround, but it should still produce some positive impact. And on the ForEx, it is less than before. This simply has to do with the dollar. As you all know, the dollar has even weakened against the oil at the end of the quarter. So what we will have in the coming quarters will clearly depend on where the dollar is going for the rest of the year. But our base scenario, if the dollar stays around where it is today, is that this effect will weaken as we move forward quarter by quarter during this year. Yes. On the mix, we were basically around 0 now. The mix is obviously depending on how the backlog comes out. So it could be the positive, it could be negative. And it depends also a bit on how the recovery on the base orders and the short cycle business is coming because the more of such short book to bill business we have typically we have a positive impact on the mix. So that's one which is difficult to make the exact forecast on. Next question comes from Nathalie Falkmann from Carnegie. Please go ahead. Good afternoon. I will start with my first question. Korka, which is European Robotics, they were flagging for lower growth in robotics due to more stagnating automotive CapEx. Just a question how you see that? And do you think that the growth in general interest will be able to kind of push the overall robotics growth higher? Thank you very much, Nathalie. Thanks for your question. Januk, I don't comment that much on my competitors. I'd rather comment on what we are seeing here. ABB has a different customer portfolio than KUKA. In our customer portfolio at the moment, we see solid growth on the automotive side. But even more so, as you might remember very early about 5 years ago, we embarked on a strategy that has basically 2 angles. The one is, we said we want to have a stronger solution and application focus in robotics. And I think ABB is today the strongest because we have dedicated focused application centers on certain activities that both serve automotive industry and non automotive. So when you look, for example, at a car, differentiating enough and you will not sell differentiating enough and you will not sell that much. What you need to do is you need to create additional value. So when you have, for example, aluminum joining the other metals, you might have need a roller hemming or gluing or riveting technology. And when you have the application fully figured out, you can go to the customer and not sell him a naked robot. You can sell him the value out of the joining technology that you can get. And that's clearly a differentiating element of ABB. Secondly, we also have the strongest service attachment rate and we continue to do that. We have the best service network globally in robotics because we have such a large entity that we can basically piggyback on the G and A cost side and then we do service penetration all around the globe. And the third piece is really if you take the general industry, we have a very, very strong growth momentum in many areas of the general industry, whether it's the 3C industry, whether it is new areas where we use the robot. And when you take the competitive advantage that we have created by bringing out Yumi, which is the first truly collaborative 2 arm robot that works outside of a cage that is easy to program that also contributes. So I would say it's a combination of technology leadership. It's a combination of service reach and the solution and application focus. And this combined is the right mix between automotive and non automotive that positions us also well for the future. Thank you. And the second question was for Eric. Eric, you mentioned already that you have savings coming from white collar productivity program. Could you just help us understand how the benefits will come through through this year of the GBP 400,000,000 gross savings? Yes. As I said, we have a good ramp up in the first quarter on the savings. And as we have said also earlier on the call, we confirmed the SEK 400,000,000 gross savings for the full year and it should then ramp up over the year. And as we have also said in the earlier conversations, including Capital Markets Day, that we will be disappointed, if not at least half of those savings make it to the bottom line. And through the quarters, how do you see that coming through? Yes. We will not make specific guidance exactly on the quarters except that we have started well. We have a good ramp up, and obviously, it will ramp up as we drive our program upwards both this year and then into 2017. Thank you. Next question please. Next question comes from Martin Wilkie from Citi. Please go ahead. Yes, good afternoon. It's Martin from Citi. A couple of questions. The first one just on the base order growth. Even if we exclude Power Grids, the declines in the other business is probably not as bad as perhaps we'd feared given the macro data in Q4 and into Q1. Can you measure in any way whether you're taking market share? And I appreciate the markets you sell into are quite fragmented and complex, and it's not so simple perhaps to get quarterly shares. But do you think the collaborative efforts you're putting in place means that you're taking share? Or do you think efficiency investments generally have just been slightly better than some of the end markets? That was the first question. And then the second one is completely unrelated. You talked about an insurance provision release, I think, in corporate costs. You previously guided, I think, for €4,000,000 to €4,000,000 of corporate for the year. Just to understand if there's any sort of change to that guidance? Thank you very much. Yes. Good afternoon, Martin. Thank you for your question. On look, if you take the base order growth, I think you're right that we were probably doing okay given the massive deterioration of the end markets that we have seen. You might remember when I took office, I said very clearly that we want to create an organic auto growth machine. And the efforts that we have put in there over the last 2.5 years are really paying off. First, I think we have a much better grip on detailed market segment understanding than before. We really know much better what's going on. And as you rightly say, we've seen much better for success to address the opportunities that are out there. We focus our investments in a better way. So across the portfolio in ABB, we sit down once a month in what we call the growth board, where we prioritize capital allocation, where we prioritize activities and where we prioritize resources to really make sure we get the biggest bang for the buck in investments on the growth side, which I think is a really good one. Now on market share, you bet that our ambition is that we want to take market share. And the good news is with the better granularity that we have now in our understanding of the market, we can really track and monitor what the market share is. But more important, we also look what the market share drivers are. So I'll give you an example. In the past, the R and D money was basically allocated BU by BU, and each of the BUs came up with a certain list of money that they needed and projects. Today, we have a much more granular understanding, and we focus our R and D money in the decisive and differentiating elements that the customers really want to make sure that if we do work on innovation, it makes a difference to the customer in the relevant segments that we are aiming. And I think we are better we are not perfect yet, but I think we are grounded much better on that one. Janu, and the second part of your question on the insurance fees, I'll let Eric answer in detail, but you might remember we made a commitment to you that we will not hide. So when we have this kind of gains, when we have this kind of bookings, we make them transparent that they become really understandable to you. We did that very clearly this quarter and that's something that you should expect also from us in terms of transparency and granularity going forward as soon as something is really relevant in that context. Now on the guidance for the year, Eric, I'll let you talk a little bit about that. Yes, Martin. So on the guidance for the year, on the corporate, we are not changing that number at this point in time. There is always positives and negatives that goes into this line. And obviously, this effect we had now in Q1 is going to help us with that number. But at this point in time, we are not changing the guidance. Okay. Thank you very much. Last question, please. Our last question comes from Daniela Costa from Goldman Sachs. Please go ahead. Hi, good afternoon. Thanks for taking my questions. I have 2 quick things. The first one is, I just wanted to follow-up on the development of base orders. If you could give us any color sort of how that developed through the quarter? Was there a trend of improvements? And if it's relevant to mention any differences by regions or businesses there? And then the second thing is to follow-up, I think, over the prior quarter, as you had sort of expressed the view that on oil and gas, the services side was hit first and then CapEx was supposed to be hit, but that maintenance couldn't be delayed for too long. And I was wondering what have you seen in terms of what the customers are talking about regarding sort of the services and maintenance side, especially now with the sort of slightly higher oil price than maybe when we had the last conference call? Thank you. Yes. Thank you very much, Jelan. Good afternoon to you. Let me give you a little bit of granularity on the base order side for the quarter. I think it's important that you understand the pattern. If I take it by region, if I take the Americas first, that's the most negative development. Our base orders are basically down 10% for the Americas. And if you look at where we got hit most, it's definitely we have in the U. S, in Canada, we have a negative development there and that's basically related very strongly to the contraction on the unconventional oil and gas production that has hit us and the uncertainty on the investment activities on the utility side. If you take Brazil, you might smile about it and don't believe it, but we had close 40% growth in Brazil on base orders because we won quite a bit of business, especially in our product businesses in there. If I take the Asia, Middle East, Africa, we are up in base orders, which is a great development. As said before, on China, we are basically flat a little bit negative minus 2%, but we were strong in Saudi, we were strong in Egypt, we were strong in Southeast Asia. And so altogether, that was good. South Korea and Japan was weak in the Q1, so we didn't get what we wanted there in terms of growth. So altogether, a mixed picture in Asia, Middle East, Africa. And then if I go over to Europe, as I said before, Norway basically flat, a little bit positive but flat. Sweden up and Denmark up. So altogether, we have had a nice development there. So if you look at the underlying pattern, why are we getting this base orders growth? I think we work together with our distribution partners in a much better way than before. We become more relevant by combining our business across medium voltage and low voltage activities, and we stay disciplined on pricing, which I think is very important in that context as well. Secondly, if you take the base order development on the power side, we got fantastic innovations coming out. And that's something that really differentiates us for competitors. And in times like now, the uptime and reliability of the grid is so important when the renewables kick in, people really focus strongly on the base activities there. And if I just then pick a country that I'm particularly personally quite happy about, if you take the largest market in Europe, Germany, our base order business or our base orders across the range up 5%. We had growth in discrete. We had growth in electrification. So altogether, that's a solid development. Now we shouldn't be arrogant, never should be. But I think that the growth machine that we have put in place is really working and the investments in technology allow us to differentiate in times where customers really look very hard if they spend what is the value that they get out of the product. The second question was on the oil and gas side, what we are seeing there. Yes, look, let me go through the different buckets. 1st, on service, we see that the service deterioration has significantly been slowed down and is not having the downward momentum anymore that we have seen last year. Whether that's really the bottom of the bathtub or not, I don't want to call that, but we have definitely seen a significant slowdown of the negative development, which should help us all together. You have seen us announcing some orders in oil and gas still. And I think the differentiating capabilities that we have there, both on the control side, but for example, bringing control together across power and the industrial process, the automation piece and the industrial process is differentiating us and helps us altogether. But oil and gas, I wouldn't call it a turnaround of the market momentum yet. It's still a very tough market out there. What we see, however, is investments on the downstream side, especially the non integrated players that only have done downstream activities. They see now that the projections on the oil price will remain pretty subdued and pretty low for the time being. So they dare to make now investments on the new calibrated expectations. Also on some investments, I just Stuttgart was public about it and I can talk about it. Stuttgart has basically recalibrated all their project and their project pipeline to a lower oil price now. And now on the new oil price, they have a revised priority of their project, but it's coming. And we see some tender discussions picking up, but I wouldn't call it yet a turnaround in the market. So hopefully that gives you the credibility that you want it. Yes. The first one was actually regarding by month during the quarter, but Okay. Look, we don't disclose monthly details. That's it. Okay. All right. Fair enough. Thanks. Thanks, Fran. Thank you, guys, and thank you for a great call, Uli and Erik, and look forward to Q2 results in July. And please remember that we have our Capital Markets Day, October 4 here in Zurich. So we hope all of you can make it here. Wonderful. Have a wonderful day. Thank you. Thank you. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.