Earnings Call: Q2 2015

Jul 23, 2015

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Second Quarter 2015 Results Conference Call. I'm Selena, 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 presentation, there will be a Q and A session. At this time, it's my pleasure to hand over to Mrs. Alana Erhansen, Head of Investor Relations. Please go ahead, madam. Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us today for our Q2 2015 results call. I am joined by Ulrich Biedhofer, our CEO and Erik Alsick, our CFO. As usual, you can find the presentation on our website. This call is being recorded and will be available within the next hour. Before we get started, please refer to the important notices regarding Safe Harbor and on our use of non GAAP measures on Page 2 of the ABB presentation. This conference call may include 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 now hand it over to Uli. Before we get into details, let me summarize the Q2. We continued our steady focus on execution in a challenging market environment. By driving our next level strategy, we generated higher revenue and operational earnings per share against significant market headwinds. Let me highlight just a few points on Chart 3. We continued to deliver among our 3 focus areas: profitable growth through our framework of penetration, innovation and expansion continued to pay off and helped to mitigate the tough market environment. Orders declined 4%, which reflects the challenging markets we are facing and weaker demand in oil and gas, China and the U. S. Compared to a strong Q2 last year. Orders for the first half year are up 6%, driven mainly by large orders in the power businesses and supported by moderate growth in automation. We grew revenues by 3% in the 2nd quarter on a like for like basis, the same as in the first quarter. In line with our ambition to improve profitability, we expanded our operational EBITA margin by 100 basis points with increases in 3 divisions. We continued to cut costs in line with our commitment to generate savings equivalent to 3% to 5% of cost of sales. We also started to see results in lower G and A expenses, down 7% year to date from our efforts to simplify the organization. Most importantly, we delivered 9% growth in operational earnings per share on a constant currency basis. We see this 9% growth in tough times as clear evidence that our next level strategy is working. Let's turn now to Chart 4 for the key figures for Q2 and the first half year first half of the year. The year to date growth in orders, revenues and operational EBITDA margin remains at solid levels. Our order backlog is almost up 10% on a like for like basis versus the end of Q2 last year. That will continue to support revenues well into 2016 2017. Operational earnings per share on a constant currency basis, excluding the forex translation impact and other non operational items, grew 9%. On a year to date basis, the improvement was 8%. Cash from operations is down, mainly the result of positive revenue momentum towards the end of the quarter, resulting in higher current receivables and a lower associated cash from operations. We also had higher tax payments in the quarter compared to 1 year ago. Both of these are timing issues. Let me now give you a perspective on the regional order performance on Chart 5. Orders in Europe were up 7% and higher in both power and automation. This was supported by large power transmission orders in France and the UK to integrate renewables into the grid, as well as orders for radio solutions in Germany, Switzerland and Italy. Orders in the Americas were lower, largely because of the tough comparison with a strong second quarter last year, when we won large orders in Canada, the U. S. And South America. In the U. S, order growth in low voltage products and power products could not compensate the softer demand in oil and gas and the difficult year on year comparison in the other divisions. Asia was a mixed performance. China was weaker as we cautions during the quarter, while other important markets improved such as India and the Middle East. Base orders decreased slightly in the quarter, down 2% from Q2 2014. Base orders varied significantly by geography, as you can see on the table. Our broad geographic scope helped mitigate some of the weaker demand in our larger markets. Let me now turn over the presentation to Erik to take you through the financials in more detail. Thank you, Uli. Let's move to our operational EBITDA bridge on Chart 6. This quarter, we achieved a €6,000,000 positive in the net savings as we continue to compensate price pressure with cost savings. We also stepped up our actions to improve white collar productivity, which started to pay off in the second quarter with the G and A expense rate down by 7% for the first half of the year. This is not part of the net savings calculation, but is included in the other category in the chart. Net volume was positive, reflecting the leverage effect from higher revenues mainly in the product divisions. Better project execution supported margins in the quarter, mainly in Power Systems, but also to some extent in Process Automation. A further positive was the mix. This was mainly due to the higher share of revenues from LP and DM divisions, which had the highest margin in all the businesses in the portfolio. But also with in process automation, there was a positive mix effect contributing. The other category consists mainly of a number of smaller one off items. As in previous quarters, we had a large negative ForEx translation effect, more than EUR 100,000,000 in the quarter and we expect this trend and level to continue in Q3. Finally, divestitures through the portfolio pruning reduced operational EBITDA by about €9,000,000 These were the divestitures that we did during last year. This leads to an overall operational EBITDA of $1,58,000,000 and an 11.7 percent operational EBITDA margin, up 100 basis points. Now let's turn to Chart 7, which shows an overview of the divisional performance in the quarter. The highlight is the solid performance in LP, including decent order growth and solid margins despite the soft margins markets. Revenues are steady to high in all divisions on a like for like basis. The decline in the operational EBITA margin in Discrete Automation and Motion is mainly the result of the lower sales of high margin standard products into the oil and gas sector. And the effect here was biggest in the U. S. And in China in the quarter. We have taken clear actions to adapt to situation such as capacity adjustment, but also channel expansion and product innovations to further strengthen our position for long term growth. Process Automation reported 100 basis point margin improvement, and this is mainly the result of good order execution on a number of high margin projects from the order backlog. As we move into the second half, Process Automation faces significant headwinds mainly from the oil and gas market. So we continue to drive actions to minimize any impact from this. Power Products saw a slight margin decline. This was mainly related to production ramp up costs and they continue to deliver solid results in a tough environment. Power Systems continues its turnaround recovering from an operational EBITDA loss of almost €60,000,000 in Q2 last year to a positive of €42,000,000 this year, a 580 basis point margin improvement. The biggest moves in cash from operations are in DM, which is down versus a very strong Q2 last year. And in PA, we will see the impact of Project Milestone revenue bookings late in the quarters, which resulted in higher current receivables. Now let's turn to Chart 8 for a look at capital side. Cash from operations is lower in the quarter mainly related to timing differences. 1 was the timing of product deliveries and achievement of certain project milestones late in the quarter as I just mentioned in PA. This generated higher sales and trade receivables on local currency basis. All good use, we should stress, remained steady during the quarter. We would like to collect this cash in the coming quarters. This together with higher tax payments and other foreign translation effects impacted cash from operations. In the first half of the year, excluding the ForEx translation impact and the higher tax, the cash flows were near the same high level as for the first half year of twenty fourteen. We expect cash flows to normalize over the next two quarters in line with our solid track record in cash generation. Looking at our capital returns. In May, we paid out approximately CHF 1,400,000,000 in the first tranche of our annual dividend. Later this month, we will pay the remaining CHF 17 a share, which would equal about approximately CHF 400,000,000 We are proceeding with the buyback and purchased 23,000,000 shares this quarter at the value of around €500,000,000 Year to date, we have now purchased 44,000,000 shares at the value of approximately €1,000,000,000 this year. Since the program was announced last September, we have purchased a total of approximately SEK 77,000,000 with the total buyback value of about SEK 1,700,000,000. This means we are close to 50% of the total SEK 4,000,000,000 program we announced in September last year and which runs through September of 2016. So in total for 2015 so far, we are returning approximately $3,000,000,000 in cash to shareholders since the beginning of the year through the share buyback program and the dividend, while at the same time maintaining a stable net debt of approximately $2,800,000,000 Let me now turn it back to Ulrik. Thank you, Erik. Let's turn to Chart 9 and an update on how we are implementing our next level strategy through our 3 focus areas of profitable growth, relentless execution and business led collaboration. In the Q2, we continue to make progress in each of these areas. Chart 10 shows concrete examples how we drive profitable organic growth through our PIE framework of penetration, innovation and expansion. Successes in the Q2 include better penetration of OEM channels such as the European Mechanical Engineering sector. We have increased orders in the DM division from this sector by more than 10% so far this year and have more than doubled orders in DM and LP with several now jointly served key accounts. We achieved a number of innovation successes, including innovation of the year for the new Assiport D gearless ship propulsion system that reduces marine fuel consumption by 10% to 15% compared to Geared Systems. We are expanding continuously into high growth markets such as food and beverage, where our combined range of Power and Automation Solutions drove a solid double digit order growth so far this year. These organic growth actions are part of the overall shift in the center of gravity that we described to you last year when we introduced the next level strategy. If you turn to chart 11, let me quickly summarize what we mean by this. There are 3 elements in changing the center of gravity of ABB. 1 is to enhance the organic growth momentum, which is at the bottom right of the chart. We do this by implementing our PIE framework and expanding in a targeted way into high growth segments. On the bottom left, we show how we are derisking the business by adjusting the business model as we are doing, for example, in Power Systems and in terms of the economic cycle, where we aim for a better balance between early and late cycle businesses. At the top, we strengthened our competitiveness by having more solutions offerings, pushing harder on our service business, which is already €8,000,000,000 of our total portfolio and driving stronger our software led differentiation such as further building our leading position in asset management software. Moving to Chart 12. In the Q2, we made further progress in each of these three areas addressing the center of gravity of ABB. On organic growth, for example, we opened a new robotics factory in the U. S. The reindustrialization of the U. S. Is for real and being a local manufacturer of robots with a strong global network behind us allows us to have better service and shorter lead times in this important high growth market. We have improved our risk portfolio in Power Systems through the divestiture of the U. S. Cable factory. Also, for example, our continued investments in low voltage products are contributing to a better risk balance in ABV. The 2nd quarter growth in this business is very encouraging. On the competitiveness side, we continue to introduce new software and service solutions across all of our businesses, for example, for remote condition monitoring and servicing of both power and automation equipment installed at our customer sites. We are moving strongly to support our customers in the world of Industry 4.0, where people, services and things are fully interconnected. This is an important competitive differentiator and we intend to continue to be a leader in this field. Let's turn to Chart 13 for a quick update on the progress of our step change program in Power Systems. Last year at this time, we reported an operational EBITA loss in Power Systems close to €60,000,000 We committed to bring the business back to sustainable profitability. In the 2nd quarter results, it shows that we are delivering with a 5 80 basis point increase in operational EBITDA margin. In Offshore Wind, we continue to tick off key milestones in our remaining project portfolio. Our exit from solar EPC is now complete, and we are rolling out our recently announced partnerships in HVDC transmission and micro grids. Growing the base business is another lever for profitable growth. And in the Q2, we grow our base service business in PS by more than 20%. Turning to Chart 14. We continue to shift our performance management from the historical focus on EBITDA to true operational performance such as health and safety, customer service, cost and cash. This step up in operational performance management is key to driving margin accretion even in tough times and establishing a strong performance culture. We continue to take out costs equivalent to 3% to 5% of cost of sales and reduce structural cost in G and A by 7% year to date. With 3% revenue growth and the workforce reduction of some fifteen 100 employees since the beginning of the year, we also improved revenue productivity at a 4% run rate year to date. Turning now to Chart 15. Our new compensation model is one of the most important ways to drive a true performance culture. Many of you have asked how this works in practice. Historically, the system we use rewarded everyone equally based on the total group performance, taking no account of how they performed as individuals. The new system sets clear individual and company wide targets and drives culture change by rewarding illustrative example based on In this illustrative example based on our 2014 performance, business unit managers who missed their target under the PAS system would have received the same incentive as the one who outperformed, that is 86% of the total available amount. Under the new model, which is a combination of institutional and line of sight targets, managers are rewarded for specific performance that they drive individually. Here, low performers would see their incentive cut to 48%, while the out performers would receive 113 percent of the incentive opportunity. We are convinced that this shift will drive the behavior and culture change needed to successfully implement our next level strategy and achieve our value creation goals. Let's turn to Chart 16. Last quarter, we showed you how we combine our Power and Automation offering across divisions to deliver greater customer value. This chart shows you how we drive and support collaboration and generate profitable growth by simplifying the organization, providing processes and tools and optimizing the way we go to market. One example is the newly shaped role of our country Managing local customer needs. This includes supporting our sales team through simplified back office operations like the new regional shared service centers we are opening in Estonia and in India. An enabler of simpler and faster collaboration in sales is the rollout of salesforce.com. Common tools cut administrative time and increase time of our salespeople with our customers. Another example is working together across businesses to make better use of both existing and new sales channels. Using a common channel strategy, we can, for example, add PLCs and drives to our typical low voltage product offering into electrical equipment distribution networks. That gives them a broader offering for their customer and brings us a higher share of wallet. Turning to Chart 17 and our summary. The order intake in the 2nd quarter reflected a challenging market, particularly in oil and gas and in key markets like China and the U. S. Despite these headwinds, we grew revenues and delivered 100 basis point expansion in operational EBITDA margin. Operational earnings per share increased 9% on a constant currency basis, giving us confidence that the next level strategy is driving results even in tough markets. On the outlook, from a market perspective, the short term picture remains mixed and there is still significant macro and geopolitical uncertainty. We continue to expect modestly paced growth in the U. S. We also see China continuing to grow, but at a lower and slower pace than in 2014. The headwinds from low oil prices and ForEx translation are expected to continue over the rest of 2015. However, we are confident that we can manage the uncertainties through the steady implementation of our next level strategy. With that, let me summarize. We expect continued hard weather savings, but the execution of our next level strategy will enable us to stay on course. We remain committed to driving profitable growth and sustainable value creation in line with our targets. Before we move to the Q and A, let me remind you that we are holding our Annual Capital Markets Day on September 9 in London. We will use that opportunity to reflect on the 1st year since we announced the Next Level strategy and share with you how we will drive accelerated sustainable value creation in the years ahead. With that, I'd like to conclude my remarks and thank you all for your attention. Okay. Let's open the lines now for questions. The first question comes from Mr. Ben Yuglow from Morgan Stanley. Please go ahead. Great. Good afternoon, Ulrik, Erik and Lana. I had a couple. The first question, Ulrik, is really a general one. We've seen all kinds of different reporting by companies in the last couple of weeks. And frankly, it's very difficult to actually figure out what's going on in terms of the industrial demand trend. When you look at ABB, could you just give us a general sense regionally of what is actually happening in the different geographies and maybe 1 2 end markets. I mean if I were to characterize the quarter, it looks to me like your base orders have drifted down again and that's actually been happening for a couple of quarters. China, I would say, looks significantly worse quarter on quarter. U. S. Looks a bit worse and maybe Europe is actually picking up and is the outlier. How do you see that? Is that a fair analysis of what's going on in your business? The second question very briefly is for Eric. I don't really completely understand the mix effects going on in the margin bridge, which I know you love. In the Q1, mix was €78,000,000 negative. The 2nd quarter is €35,000,000 positive. But you mentioned the highest margin business is growing. It actually looks to me like the single biggest grower is actually Power Systems, the lowest margin business. So can you just sort of talk us through that? Okay. First of all, good afternoon, Ben, and thanks for your question. And I think you'll catch that it's difficult to see what's going on in the world and difficult to predict is absolutely accurate. That's the reality that we face at the moment. But let me try to give you a perspective going around the world. If you look at Europe, the 3 largest economies, Germany, Italy and France, recently carefully upgraded by a small notch, but visibly, their GDP growth forecast, which gives us hope that Europe might be coming back at a decent pace. Spain is coming back in a solid way. And we see Northern Europe developing in line with what we expected in the environment that we are in at the moment, meaning a moderate growth being there. If we move from Europe a little bit East and look at Russia and Ukraine, that's definitely a very questionable situation there and it's bottoming out. But this is a very low growth environment. In fact, it's further contraction to be expected. Moving from Europe to the Americas. The North America, look, it's really a mixed picture. If you look at the oil and gas side, it's pretty subdued. If you look at the related process industry, you will see some of the oil and gas hedges running out and where people hedge relatively high oil prices. And then it will flow into the material cost and in the factor cost of, for example, the aluminum side. And we expect some positive impetus coming out of that. On the discrete side, American Automotive has found its way back and is really performing pretty well. And the good news is in Automotive, the complexity of every car is going up in terms of automation, more materials, more joining technologies, which is good. And that was one of the reasons why we decided to put a plant as the first one of the global players into the North American market and get going. Brazil is driven by high level of political uncertainties and by some very significant macro headwinds, and we expect that to continue. Whilst we had last week a review with Colombia, Peru, Chile, there is a solid growth momentum in that market that we can benefit from. If you move then over to South Asia. In South Asia, the need for infrastructure is a good one. Another sector that is strong there is food and beverage because the market of food and beverage of packaged food and beverage especially is growing. People are moving from buying raw rice to packaged food, which needs automation. And then if you go to Australia, it's pretty low on since quite a while and we expect that to stay there for quite a bit. India has increased its outlook and we see good momentum. Solar in India is doing very well. We just got a 300 megawatt order, which is a fantastic achievement of the combined ex PowerOne ABB solar team. I'm really proud of what they are doing and we are definitely the leader in that fast growing solar market and also infrastructure investments will come up and we will see the impact of reduced fossil fuel subsidies in India and that money will go into infrastructure. And then comes China. And in China, short term, we have experienced and reflected very clearly a very soft market in the Q2. I would expect that during some of these bottoms out and in the towards the end of the second half of the year, China should come back. There is at the moment a lot of uncertainty on the financing side. There is a realization that a lot of industries on the process side have overcapacity has now finally been reflected into buying patterns. And we have also some competitors that are actively leading prices down in China, which is a journey that ABB does not join. We continue to differentiate ourselves with innovation and high customer service, and we have a strongly committed. So as you can see, Ben, it's really a mixed world out there. We have some positive elements in some end markets. Data centers still going pretty strong. Rail and rail infrastructure, an area where we have our proven one step back strategy where we don't do the tin box of a railcar. We fill it with our propulsion solutions, which is going very well. So they are in the 3C industry is not a one that we see having a huge amount of need on automation and power needs. So altogether, it's a mixed bag out there. With our heat maps and our pie approach, we have a much more granular grasp of the market. Our teams are closer with the customers. We free up their administration time and give them more time to customer. So altogether in a pretty mixed confident that we will keep steady execution in the quarters ahead. With that, I hand over to Erik for the second question. Yes. Ben on the mix, we have to remember that this is a quarter to quarter comparison. So we are comparing last year's Q2 to Q2 Q2 this year and also the same with Q1. And it's simply so that this is the mix between the divisions. Some divisions have higher margins, some have lower margins. Some of the revenue growth was higher in the high margin businesses. And it's also an element of the mix within the divisions that is in on the lower product group margins in the divisions. So this is what the result is when it comes out and it was negative in Q1. It is not positive this quarter. Okay. That's great. Thank you very much. Next question? The next question is from Mr. Andreas Willi from JPMorgan. Please go ahead. Yeah. Good afternoon, everybody. I have also two questions, please. The first one is on Process Automation. If you give us a little bit more granularity what's happening within that business. You've held up pretty well this quarter also relative to some other companies that have reported. Maybe you could just give us some indication how your maintenance and OpEx driven business is doing in Q2 and what you expect later this year and the CapEx business and the backlog when that starts to get weaker and also what the pricing is doing in the order intake there relative to what you're invoicing? And the second question is on your disposal. You have made the high voltage cable factory in the U. S. To Southwire in June. You built this factory about 3 years ago. What was the reason to exit that market again in terms of the strategy for the U. S. Cable business? And also maybe what was the revenues you will lose so we can model that? And whether the charge we had in Power Systems is related to the write down on that factory? Thank you. Okay. Good afternoon, Andreas, and thanks for your two questions. Let me start with Process Automation. Looking in Process Automation, if you look at the end markets that we are serving, oil and gas is definitely the one where the massive contraction of discretionary spending in Oil and Gas was a thing that we didn't expect at the magnitude that it came. But thank God, we have a strong backlog in Process Automation. We have a very agile way of addressing the workforce and we had some great execution opportunities during the quarter. We were completing some milestones on some really large projects and the team did a great job. I have to say, they really did a great job in executing these large projects and pushing the revenue out and that you naturally found in the margin in this quarter. You should not expect the same in the quarters to come. PA is definitely being impacted by the contraction in oil and gas and I expect it to carry on. But if you take the other industries, if you take especially pulp and paper is since quite a couple of years on a low level, we have a good service business in there. We do some brownfield upgrades in there. And that's humming along on a low level, but I think we got it well under control and it's working quite okay. If you take then the metals sector, that's one where we are hopeful that the fact that I described before that the oil that the factor cost hedges that some of the customers have on the oil that they use to produce aluminum will go down or will disappear and then they can buy at low factor cost, which will stimulate demand. If you take mining, mining is expected to basically drop to the level of CapEx in about of about 2,009, 2010, the top 80 customers or 80 players in that segment spend have spent in 2009 about €80,000,000,000,000,000 in CapEx. And that's probably where it will be coming down from about €150,000,000,000 last year. So we had a peak. But good news is that if you look at the underlying quality there, there's a lot of power and automation combined offering that we can do. We use the experience that we have in mining, driving uptime yield and speed by combining power and automation really in a successful way. What we have done in Boledin in Sweden has attracted a lot of attention and we're using that to drive growth in the Process Automation division. So basically, if you look at it, the drop in the oil and gas discretionary spending Andreas is for real and it's very significant, but we are able to balance that off with other activities and with a strong activity with our customers in the other sectors. The service piece in Process Automation got hit in the first half of the year. Now if you look at oil and gas, the amount of oil that's being pumped has not come down. So very soon responsible operators will start spending again on maintenance, on an uptime, otherwise they compromise uptime and reliability, which would be very, very dangerous in the times right now. Look on the disposal of the cable factory in the U. S, when you run a business, you need to look forward and see what is the right asset structure that you need to have to run your business successful. This factory was not part of that assessment and therefore, we decided to sell it. It's a tough call, as you can imagine, just having build this factory a couple of years ago, but things don't get better if you track them on. So my style is rather than we realize we have an opportunity to improve, then we cut and we move on and return the page. ABB has a very successful cable business globally, and we are expanding that cable business as we speak through new innovation and great product. We have a partnership formed with South Fire that in case we need the capacity of the factory, we can still tap it. I think it was a very responsible move. It helps us to take out fixed costs. It helps us to address a more volatile market in a more flexible resilient business model. And as you have seen in our center of gravity description, that's exactly what we are doing in terms of derisking the portfolio. So I think it's well in line. And yes, Power Systems got hit a little bit by that divestiture because as you can imagine, we've also brand new plant and we got hit there in the second quarter, but it was the right thing to do. We turn the page and we move on. Thank you very much. You're welcome. Next question? The next question is from Mr. James Stettler from Barclays. Please go ahead. Yes. Thank you. Good afternoon all. A question on discrete automation motion where you had a 120 basis point margin decline. What will it take to bring that back to where you were before? How long will it take? What needs to happen there? And should we be expecting any further costs? Just looking at your portfolio rationalization, what we've seen in the last few quarters, should we be looking forward to more divestments? Or has that sort of been completed? Okay. So good afternoon, James. On DM, if you take the pattern of DM in the second quarter, it was a really interesting journey because if you look at DM, we sell a lot of drives and motors not only as new but also as replacement in the upstream part of oil and gas. And given that customers are very, very careful there at the moment spending any money on anything, we had a very sharp drop in this high-tech, massive drop on that one. At So we had a massive drop on that one. At the same time, DM has a very strong franchise in China. As you know, we have really built that business in a very strong way. And whilst robotics going very well in China, the actuation part, the motors and drives part, especially the part that went through the channel, saw our contraction. Now on the contraction, as I said before, there is a end market overcapacity in the process industries and that will stay. The second piece is the distributors felt very strongly and I met a lot of them in the Q2 and I was a couple of times in China. They basically felt uncertain about the financing conditions and they are careful with stock levels. And thirdly, we have a couple of competitors actively leading prices down in China and ABB will not follow that path. So we will keep our great product, we will keep the innovation pace going and we will ensure that we get paid to our offering. So in terms of what needs to happen in DM, on the one hand, as every responsible entrepreneur, we are taking out cost in the appropriate segments to make sure we are weathering the storm. In the U. S, we have in Bardo a very good flexible work model that helps us to take down capacity and take down costs without laying off people, which I think is something important. And then if you look at the China piece, I'm optimistic long term and medium term that China will come back. Short term, we need to manage through the trough that we see in summer and get through that. Your second question was around portfolio optimization. You have seen and basically since I've joined ABB close to 10 years ago, portfolio optimization is a part of the daily job. First, in the 1st couple of years, we sold a lot. Then in when I ran DM, on the one hand, we pruned the portfolio. On the other hand, we made some significant acquisitions. Then I started as CEO, we did a sizable portfolio pruning round taking out €1,000,000,000 And now with the cable factory, we just took a decision to take something else out, which was not part of our future plans for driving ABB in the way that we wanted. You should not expect any major disposals. We are basically we have done our homework on that one, but continuous fine tuning of the portfolio and continuous pruning is a part. And we also need to see how the markets go. And that will drive basically our actions. Great. Thank you. You're welcome, James. Next question? The next question is from Mr. Mark Thormann from Bank of America. Please go ahead. Yes. Thank you. Good afternoon, Uli, Erik and Alana. First of all, I'm trying to understand the demand commentary or the outlook, I think related to, I think, the first question, continued growth in the U. S, slower growth in China and obviously that clearly didn't happen in Q2. And then you talked I think a little bit about destocking. Is that outlook basically more short cycle comment that you've seen destocking in the U. S. And China and you expect that to improve in the second half? Or is it related more to the order pipeline you see in some of the larger projects? So I guess is the outlook more a short cycle business comments or a sort of longer cycle order comment? That's question number 1. Question, clearly, look, growth is obviously difficult for a lot of industrials. How do you see the acquisition environment? And you've obviously got a very strong balance sheet. Are acquisitions going to become more important feature of ABB's growth plans? That's question number 2. And finally, number 3, I think obviously over the last quarter, we've seen Cevian take a 5% stake. And they've obviously been active on several boards that they on companies they've been shareholder of. What can you tell us about discussions with them? Thank you. Okay. Look, Marc, on your first question, at the moment, calling the world right and calling the markets right is really an interesting challenge. Let me try to give you a little bit more granularity on the areas that you're interested in. If you take our order momentum in the U. S, we had a very tough comparable base to the previous year. If you look at the Q2 2014, we had 2 effects. The one was we got some very large power infrastructure orders in North America, very strong ones and quite a couple of them in the first half of the year and in the Q2 of 2014. Secondly, we had in the base businesses and the base product businesses, we had what I would call the shale gas bonanza. There was really an enormous momentum in the Q2 of of last year. This is not happening at the moment in the U. S. The Shell Guard Bonanza is definitely on a hold, and we don't expect that to come back very short term. And if you look at the power infrastructure spending, there is some really good tendering going on and we are involved in quite some significant tenders. Calling the timing on them is always difficult. So when you see market numbers from us, they have a certain assumption on what share of large orders will come, whether they really realize and the market is really developing that way or not in a certain quarter, it's a very difficult call to make. But I think on the underlying base business, there is a growth to be expected in the U. S. On a low level. And then it's depending on how the high peaks that we have had on the base business in Shell Guard and the large infrastructure projects compensates then that growth element. And that's basically what has Q2. If you look at it, we are down in the U. S. 10%. We are down in Canada 50%, because we had a very large transmission infrastructure project and some shale gas related effects in the Q2 of last year. So that's the points that you wanted to know here. The second point was around acquisition and the acquisition environment. Yes, look, we have said when we went out with next level, we see 3 drivers of growth. The one is a very strong focus on organic growth, and you have seen us with the better granularity and understanding on the organic growth opportunities. We're deploying a lot of investment in that field. I think this is the lowest risk growth opportunity. And knowing where you put salespeople and you get relatively quickly additional revenue is probably one of the best ways to drive the business growth in a relatively risk mitigated way. The second one is our partnerships, and I'm quite pleased with the way they are going. We have formed some of them, And this is a pretty asset light way of accelerating certain fields. You don't create any fixed cost. You don't have any CapEx. You just do 1,000 partnerships in driving growth opportunities with a stronger combined capability base. And then on the acquisition side, you read this right. We got a good balance sheet despite deploying €3,000,000,000 of capital returns to the shareholders in the first half of this year or at least committing to it. Last part of the dividend will now be paid in the next couple of weeks. We are ready from a balance sheet perspective to consider options on the acquisition side. Now what needs to become together is 3 things. The one is the financials in ABB need to be in order. And I think we have done some decent homework that we consider some acquisitions on a medium size. The second piece is we need to have the acquisition capacity. And if you look at where we were last year with the turnaround of Power Systems, the situation that we had in integration Thomas and Betts and PowerOne, we have made good progress and we are more ready than there than before. So from integration capacity, we are also in a much better shape. And thirdly, we need to have attractive targets available at a decent value creation story. And at the moment, the market is still a bit overheated. I think there is in certain segments quite a bit of ambition if you look at current share prices. So we want to be cautious because we don't want to only turn the money around, we want to create real value. We will continue to do bolt on acquisitions. You have seen us doing Comtech in the Q1. We will do more of that side. And when the time is right, ABB will also move on some medium sized targets. And the last one is now the question around Cevian. Now look, I And as with every other shareholder, we And as with every other shareholder, we are looking forward to have a constructive positive forward looking dialogue. It is absolutely our commitment to listen to any shareholder that has put its capital at work in ABB. We got a very clear strategy on what we're going to do in the next couple of years. The momentum in the Q2 has now shown that we are able to better the market with steady execution. But any comment and input how to improve that further is absolutely welcome, and we look forward to a constructive partnership over the years to come. And that's all I kind of say, because we will not disclose any details on individual shareholder discussions. Thank you, Marc. Thank you very much. I ask that all future people keep it down to 2 questions so that we can have as many people asking questions as possible. So let's go to the next set of questions, please. The next question is from Ms. Daniela Costa from Goldman Sachs. Please go ahead. Hi, good afternoon. So I'll keep it to 2. And the first one being, can you help us out understand the development that we should expect from here in Power Systems in terms of margin progression? I guess you've been the Sorry, this is the operator. Mrs. Koffler, your line is a bit different. Would you mind trying to disconnect and call back? Or I can use another one. Hear me? We cannot hear you, madam. I'm sorry. Should we take next from Redburn. Please go ahead. Yes. Good afternoon, everyone. Thanks for taking the questions. I'll have 2 then. The first question is on pricing. Could you perhaps update us a little bit on how the order pricing and revenue pricing is looking at the group level and how it's looking at divisionally and what sort of changes we've seen there? And the second question is on the short term outlook and the growth comment for U. S. And China, which you've had for a few quarters. I just want to be clear. Are you saying that the U. S. And China where base orders declined 6% and 14% in the second quarter, you think will be positive year on year in Q3? Okay. James, thank you very much for your questions. Let me start with the second one. Look, we don't comment on the development of orders in the next couple of quarters. We don't give guidance, but I will share with you where we see the market. And the market itself is growing in China and the market itself is growing in the U. S. At a much slower pace than the years before. Now what we need to make sure that we get our share of that market. As I explained before, there are participating and on the peak on a comparative basis to get tracked down and that was the effect that we have had. We do all bodies in our hands to really drive our penetration especially the penetration efforts in that case to mitigate the volatility effects of the peaks that we have had on certain segments to make sure that we get back into the growth pattern. We have an absolute commitment to drive ABB with total orders and with face order growth and we aim to work towards that as strong as we can in the rest of the year. Now on the pricing side, look pricing is a mixed bag really all around the world. Because if I take the U. S. First, take lower and medium voltage in the U. S, we had some competitors fighting in the last couple of quarters getting at each other float. And that's basically caused some quite strong reactions on the distributor side. We have now had one of the competitors that has now has historically let down prices announcing a price increase. So let's see how this comes out. I think in the U. S, we should expect that the market balance itself out and we go back to a normal pricing environment. There always you have pricing pressures, but not as significant as it was there. In China, it's similar. We have had a couple of guys very, very actively leading in down prices. One of them even stated he wants to build installed base in low voltage, which is an interesting business concept because there's not much service attached to the low voltage. But we leave them run their business and we run our business our way. We see pricing pressures in China, especially on the standard product distribution side. And here we need to make sure that our new products that are coming out are beating and all the others in terms of customer value and we got some great innovation coming that way. Our eMags breaker, if you take that for example in no voltage, that product is selling because it has an extremely attractive value proposition and it's selling very well. So we will not join the game on the pricing side. And what we also will do when we have succeeded again in the Q2 despite some really tough environment to compensate price impact with our cost out, You have seen we have not only done SCM and Quality and Operational Excellence. Our G and A is down 7% year to date, which means we really have done a lot of homework in that field. We have taken complexity out. We are establishing shared services. We are ramping now up India and Estonia as shared service centers to further attract the G and A. So we are active on the cost side. We are responsible on the price behavior side and we are very active on driving additional innovation through the channel. And with that, we should be able to address the challenges that are out there. Thank you very much. Just on the U. S. Demand answer. On the oil side, I hear you talking about finding other channels, but do you think that the U. S. Oil impact on demand for you as a business will basically bottom this year and not continue into 2016? Or do you think 2016 will be another tough year in oil in the U. S? Look, James, this is a very good question. If you take bottom this year. And then you need to see what's happening with the CapEx side, both upstream and downstream. On the upstream side, we see some very cautious behavior on longer term CapEx side. On the downstream side, it's really interesting. The lower oil price means also the products that come at the end out of the downstream chain become more attractive. And there we have to see how these two effects work against each other. So on downstream, I'm less pessimistic. On the upstream side, for the next couple of years, there will be a subdued spending on the CapEx side. Thanks, George. Thanks. You're welcome, James. Thanks, James. Next question, please. We have Mrs. Costa already on the line. Do you want to try again? Okay. Mrs. Costa, your line is open. Thanks so much for letting me try again. Hopefully, the line is better now. I can hear you very well, Daniela. Okay, great. I have two questions. So the first one was, can you help us think through the Power System margin recovery story from here on how that's going to be how you're going to get from the 2.5% to your targets basically? And the second thing is regarding the cash flow evolution. And I know you said basically some of these were some deliveries towards the end of the quarter. It seems like it's quite concentrated in process automation. Can you help us understand by region by end market and exactly what was going on in a little bit more detail? That would be great. Okay. Daniela, thanks for your questions. I take the first one and I give the cash flow question to Eric. If you take Power Systems, we basically got 2 tasks in our hand. The one is to execute the contaminated historic backlog of projects and make sure we do them in a way that the customer is very happy. On solar EPC, the team has done in May as a really great job. We got that out and we committed last year that we get the backlog out. It's done and that business is stopped. We are not taking any more new orders. We are doing very well on solar in terms of the overall order pattern, but with a new business model where we don't do EPC, where we do solutions, products and service. The 2nd bucket on the historic backlog is the offshore wind projects. And they cost a lot of money to complete. And if you look at the substitute margin still against our margin target range, 2.5 percent is nothing to write home about. If you look where our ambition long term is, these projects will cost during this year. During this summer and in fact in the next couple of days, we have some very significant milestones. If we succeed delivering the milestones and at the moment we are on track to deliver them, and you can trust me, each of the 3 projects are being part of my evening prayers and evening checking every day. We will have a significant easing both on the risk exposure and also in terms of the operating cost to complete this backlog. So for me on the offshore wind side, by the end of this year, we should have seen most of it through. We should have the most of the cost done and we should have also mitigated the risk downward significantly. So that significant drag on the margin on the rest of the portfolio will ease towards the end of the year. Now the second piece that we are doing is we are changing the center of gravity of Power Systems. We have basically reduced the EPC low margin, high volatility, high risk EPC part in a very significant way. If you look at the backlog that we have built with all the new projects, it's a completely different quality backlog. We are also driving the higher margin pieces you have seen the 20% base order growth in service in the Q2. We have a huge installed base all around the world. We can do much, much more. We just recently, for example, we met the installed base in Sub Sahara Africa, and we have more than 150,000 additional installations now in the system, which we didn't have before that we can go after. And then naturally, the network management, the grid consulting, the engineering piece there is also an attractive business that we're going to shape over time. So what you will see basically is this last year was the trough. This year, we are somewhere between the trough and the target range. When we drop out the really the drag that we have on the large offshore project, that will be a quantum step up in terms of profitability. And then we will work the business from the lower end of the bandwidth to the upper end of the bandwidth by changing the center of gravity, by making sure we do more on the engineering service, software and solutions side over the years to come. So it's a legacy piece that will be done by the end of the year. And there's a forward business model change, continued business model change and business center of gravity change that Claudio and his team are executing already today and will be executing over the years to come. So with that said, I hand over to Erik to give you a little bit more flavor on the cash flow side. Yes. Look, it's Daniela. For the cash flow, out of this difference and the reduction in cash flow, about EUR 100,000,000 is pure translation effect. Of the remaining portion, about 2 thirds is coming from receivables and from the milestones of product deliveries, which are mainly as you already spotted in the Process Automation division. And then you have a portion which is also coming from higher cash tax payment in the quarter, which always is a bit uneven pattern during the year how we pay the taxes. And if you compare for the 1st 6 months of the year 2015 against 2014 excluding the FX effects, divestments and those tax payments, we are roughly on the same level as last year, which is a reasonable level. So the conversion on year to date is basically steady from the year before. The Diskite Automation, as I mentioned already in the introduction, is down from a very high level last year. So the level in Discrete Automation is still a quite reasonable level what we have there. But we are working very hard to continue to drive cash and reduce net working capital. So we are seeing stabilization and further improvements now in the coming quarters. Thank you. Next set of questions, please. The next question is from Mr. Alexander Virgo from Nomura. Hi, good afternoon. Thanks very much for taking my questions. I just wondered if you could expand a little bit on the commentary in low voltage products with respect to your increased penetration offsetting the challenging conditions in China and the U. S. Obviously, China and the U. S. Is very challenging. So I'd just like to understand a little bit better about exactly what is going on the other side of that would be very helpful. Thank you. Good afternoon, Alexandra. Look on low voltage, I think Tarak and his team have really figured out the pie formula to a really good way. And I'll give you some very concrete examples. If you take the U. S, low voltage has grown in the Q2 in the U. S. And one of the drivers is that on the channel side, where we have now the legacy ABB channel access, we have Thomas and Betts and we have Baldor. Between the 3 of them, which were historically separately run, there's a tremendous opportunity to help each other and pull each other's products into the channel on the front end side. The distributors like it because they don't want to have that much complexity in their van and in their warehouses. The customers like it. So we get a higher share of wallet of the distributors by driving that. The second piece, if you take low voltage products, a lot of people think that as a quite dull product. That's not true. There's a lot of differentiation that you can do on the innovation side. If you take China, one of our best selling products that we launched a while ago is the free at home and the home automation solution, which is basically a retrofit solution where you rip out in your house the existing sockets you put others in and then you have a Wi Fi based, iPhone based building control. And I can tell you that sounds extremely well with the middle class in China, who is very technology oriented and drives it very strongly. And then if you move over to Europe, look, I'll give you an example in Germany, we train every year more than 10,000 installers. And these 10,000 installers, we can do much more together in the future. We are putting in now the solar offering from PowerOne and give that to our installers. We need to make sure that we and Bernard and Talak are working very well together between low voltage and medium voltage that we have a better collaboration on the channel on the front end side between medium and low voltage and have a seamless offering to win our industrial customer space. The third one that I want to mention in Europe is the OEM, the machinery OEM space. Historically ABB would have addressed them with different sales forces. Now we go with one coordinated access to the OEMs. And you have seen we have grown double digit now by doing that and putting in the product. So the pie formula is really one that when you leave it right, when you have your heat maps ready and you know exactly in which segments you are, how strong and what you can do. That's driving and then Tarek has done a great job doing that whilst maintaining pricing discipline and not falling into trap like some of our competitors by trying to keep volumes by lowering the prices. Okay. That's very helpful. Thank you very much. You're welcome, Alexander. Thank you. We will take 2 more sets of questions. Next step? The next one comes from Mr. Graham Phillips from Jefferies. Please go ahead. Hi. Yes. Thanks very much for taking my question. Two questions please here. Just on pricing a bit more of a follow-up. When you think about the overall pricing program, is there anything more that perhaps could be done because essentially if eventually it's just only offsetting the cost saving programs are being offset by the pricing. So is there some way that maybe in terms cost savings that you could increase the ramp? And the second point is on your discrete automation division. I wanted to think about the progression of margins. I appreciate your comment earlier about the impact in China there. But also when you look at Q3, there's typically a higher margin development. But with your new factory and the robot starting up, is that likely to result in margins being retarded initially or a lot of those costs going to be capitalized? Okay. Look, Glenn, thank you very much for your question. On the pricing side, look, one thing we haven't talked about is price realization. We always talk about how to mitigate the pricing impact. But the other thing that we are working on is how can I realize a good price of my customers? And it goes into all of the terms and conditions that you have. It goes into the overall setup of your value to your customers. And we have some dedicated programs going on, pilots in that field to drive pricing excellence and to increase pricing realization. And that's also a great way of mitigate pricing effects. On the second one, your catch is right. We have been able to mitigate pricing impact to the P and L by our cost savings. We will give you an update at the Capital Markets Day, how we're going to look at that in the future. As you might remember, we introduced the concept of 1,000 day programs and that will be one of the core topics that we give you an update on September 9, what we're going to do in the future. We need to realize all cost opportunities and we are ready to share more there with you in due course. And then if you take the DM journey on the margin side, I just need to take the robotics piece and then I'll let Eric cover that one. On the robotics factory, you should not expect a significant impact on the DM margin out of the new activity. Mind you, we already had a site up there where we're doing service and installation. Giving that site a full value chain was not such a large investment that the depreciation would significantly impact the DM margin on the overall division level in the quarters to come. Okay. I'm sorry. And just to follow-up on aftermarket pricing. Is there anything you can say about any pressure that's come into that part of the segment given that that's a significant portion of your revenues? We have a lot of customers that come to us and say, look, you are a service partner of company X. Can you reduce your prices? And our answer is we are working with a lot of them now to reduce the cost base jointly and addressing it. We had recently a very good experience with a company that provides rotating equipment into the oil and gas space and who has been a long term partner. They said, look, on the service side, I really can't afford at the moment what you say. Melville said, well, okay, you are under cost pressure. And we set up a joint team to address the cost challenge that they have and it has an amazing impact. We got more orders out of that because the customer liked what we suggest to them in terms of our joint offering. So we can't do that all the time. We cannot do that all the time. But in certain areas, we drive it. And I think it's a very responsible way to address the interest that the customer has lowering his cost base to the end customers in a joint base. With that said, I hand over to Erik on the DM margin. Yes. On the DM margin, which obviously is trending down because of the reasons that we have mentioned in the markets. The market trend that you are reporting on our outlook is hard weather sailing. It's tough conditions in the market. So we are making a lot of actions to improve and counter the margin development in DM, but we will not give specific estimates for the quarters that are right in front of us. Okay. Thank you for that. Next set of questions? The last question for today comes from Mr. Andrew Carter from Royal Bank of Canada. Please go ahead. Good afternoon and thank you for the opportunity. Most of the questions have been asked, but if I could just try 2. One of them was on Processed Automation where I think sort of earlier this year you talked about thinking that the backlog should be able to drive some sales growth in the full year. I recognize that hasn't been able to be done in sort of Q1 and Q2 and that maybe the outlook has deteriorated a little bit. But I wondered if you could give a little bit of an update and maybe talk about how the sales growth trend is sort of differing in the sales that are coming through from the backlog and also in terms of base orders? And then the second one was just on DM. And I just wondered if you could help us understand a little bit about the trend in the base orders that we see in Q1 and then into Q2 there? Okay. Look, Andrew, let me take the DEM one first and then move it to PA. The DEM portfolio is a pretty wide one. As you might remember, we have from robotics to solar, everything in there and singling out a single trend in any of this business would be very dangerous. So I give you a little bit more granularity here. If you take the 4 buckets, take the Industrial Motion piece first. On Industrial Motion, I laid out already that the process industry demand on base orders for motors and drives is subdued at the moment on the one hand by end markets, which are soft. And the larger the motor, the more softest the market. And by a cautious behavior on the distribution partners that we have. If you look at the Power Electronics piece, this is a pretty patchy situation there. We have some really good developments on the rail side. The rail converters and the rail infrastructure projects are going very well, whilst the larger kind of orders on excitation and also rectifiers on the aluminum side have not come through this year, and that's what you see in that field. If you take robotics, robotics is going very strong, and I'm very, very happy with the business development there, both on the large orders and on the small orders on the base orders there. We have a lot of repetitive orders, for example, in China in robotics from the 3C industry, the customers are more and more penetrating their plans with more automation offering. And mind you, robotics has also very strong service offering. And on the service side, we have we enjoy great stability and a great quality of the business. And then if you look at the renewables piece, the Powerwall integration from operational side is basically done. We have done it. We have also moved the brand from Powerwall to ABB in a very successful way. The business is taking off from an overall orders perspective. At the moment, there's a consolidation going on in solar inverters amongst all the players. You see that a lot of the smaller ones are disappearing. So when that's done, when the consolidation is through, you will see a better base order quality and a base order margin quality coming out of solar. So that's the granularity that I can give you. Calling it all together in the end, making a prediction for the next quarters, I would like to abstain from that going forward. And then if we go at PA, now look at in PA, then PA has about a 30% service path in the overall portfolio. The most massive contraction is discretionary OpEx and CapEx was around service. And that's the reason why you see the order decline in Pieda also. Yes, we have had some large orders. If you look at the first half of the year, we have had some good very large orders, but the base service business contraction is one that was much stronger than we expected, let's say, in January. We have taken cost action. We are taking capacity action. As you can see, the business is still riding on an okay margin. But you should not expect the good margin that was created by revenue execution from a significant backlog project to continue that way, because the mix between base order business and the backlog will change in the next couple of quarters. Calling the timing on that one right, Andrew, I would be careful, because at the moment, the world is really so uncertain and volatile. I would expect that this year is the trough year and that next year it gets stronger again. But when exactly that comes back, I can't tell you. So with that, I would like to thank everyone for their participation and their patience. I would like to remind you also that we sent out yesterday an invitation the Capital Markets Day and that we ask if you would like to participate in the Capital Markets Day that you please reply sooner rather than later. It will be in London on September 9 at the Hilton. So if you have any further questions, we're available here at Investor Relations. And thank you and have a wonderful day. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference.