Earnings Call: Q1 2015

Apr 29, 2015

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q1 2015 Results Conference Call. I am Maria, the Chorus Call operator. I would like to remind you that all participants will be in a listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session. At this time, it's my pleasure to hand over to Anna Abrahamson. Please go ahead, madam. Thank you very much. Good afternoon, ladies and gentlemen, and thank you for taking time to join us today for our Q1 2015 results call. As usual, you can find the presentation on our website. This call is being recorded and will be available on our website within the next hour. Before we get started, let me refer to the Safe Harbor statement 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 certain assumptions and are therefore subject to certain risks and uncertainties. The call will start with a summary of the results by Uli and Eric. Uli will then update you on the process progress, sorry, we are making to implement the next level strategy. Then we will move back to the Q and A. With that, I would like to hand over to Uli. Thank you very much, Alana. Good afternoon, ladies and gentlemen. Welcome and thank you for joining us today to discuss the Q1 2015 results. Before we start, let me make a few general remarks. We delivered a solid quarter in which we grew both net income and increased cash flow in line with our commitment to drive profitable growth and accelerate sustainable value creation. In a challenging environment, we doubled large orders and kept base orders steady. We grew orders in our 3 largest markets in countries, the U. S, China and Germany on a like for like basis and one key project due to our combined power and automation offering reflecting our competitive advantage. We brought revenue back to growth, benefiting from our order backlog and strong focus on growth segments in a difficult overall market. Book to bill in the Q1 was 1.2 higher than 2014. We continued to make progress in our power system step change program and delivered the 3rd consecutive profitable quarter. Mix effects and market challenges such as oil and gas weighed on margins in the rest of the group. We have taken decisive actions on cost and productivity to address this as a part of our ongoing focus on relentless execution. In total, we delivered a steady operational EBITDA margin in a challenging market. We are seeing first benefits of our next level strategy giving us confidence that we can take advantage of profitable growth opportunities ahead. We are driving cost out and are implementing additional restructuring to address market uncertainties in the quarters ahead. Now let us turn to slide number 3. In the Q1, we continue to deliver along our 3 focus areas: Profitable growth through our framework of penetration, innovation and expansion, which we call PIE, continued to pay off. Orders increased 15% on a like for like basis. We won attractive large orders in HVDC power transmission, in offshore oil and gas, in marine and in rail. Our pie initiatives contributed to higher base orders in 4 divisions despite a challenging market environment. Book to bill is now back above 1 in all divisions, which will support revenues in the quarters to come and into 2016 2017. We launched many new products at the recent Hanover Fair. 1 in particular was our revolutionary YuMi robot, which will play a key role in human robot collaboration in many industries. Revenues were up on a like for like basis and we delivered higher operational EBITDA and operational earnings per share on a constant currency basis. In relentless execution, we continue to drive the step change program in Power Systems and the division showed a solid improvement in profitability. We also rolled out our new performance oriented compensation model to more than 60,000 employees during the quarter. Business led collaboration is the 3rd focus area and in the Q1, as I mentioned, we announced a number of orders that we won because of our ability to jointly deliver integrated power and automation solutions into key growth sectors. Finally, we had a fantastic customer event in Houston, Texas, where we hosted more than 7 customers at our ABB Automation and Power World. This is a confirmation of our strong position in this important market. Now let's turn to chart number 4 to quickly review the Q1 key figures. First, let me remind you that as a part of the next level strategy, operational EBITDA is now our key operational profitability metric instead of EBITDA. Also, the foreign exchange translation impact was significant in the quarter. We flagged this already at the end of last year and I think most of you have already taken this into account. ForEx translation negatively affected reported orders by 13% and revenues and operational EBITA by 10%. Let me highlight a couple of other items on chart number 4. We continued to build our order backlog, which grew by 10% in the quarter. That in turn supported revenue growth of 3%. From an operational EBITA margin perspective, we remained at last year's level as improved results in Power Systems offset mix impacts in the other division. Let me take a moment to explain this. Discretionary spending in oil and gas declined in the quarter. This affected mainly process automation as well as the other product divisions, where we serve the oil and gas sector with a comprehensive set of products and services. Geographic mix also played a role. As an example, Russia had a negative impact on margins. While Russia represents only a small share of our total business, the severe ruble volatility and related drop in demand reduced volumes in some product lines. Lower demand in China related to infrastructure and construction reduced volumes in some businesses. We are already taking steps to adjust to these developments. We are accelerating our restructuring activities and you should expect restructuring related costs in 2015 to be between €250,000,000 300,000,000 euros approximately €50,000,000 higher compared to our original guidance of €200,000,000 to €250,000,000 Moving to the bottom line on Chart 4. Operational EPS increased by 5% in constant currencies and the positive cash flow from operations in the Q1 was reflected in €100,000,000 cash improvement compared with the same quarter last year. Let's now turn to chart number 5 for a look at our regional order development. As you know, we have streamlined our regional structure and now report orders and revenues in the newly shaped three regions by combining the Middle East, Africa and Asia into a single region, which we call EMEA. Orders were higher in all regions in the quarter with a strong contribution in Europe and EMEA from large orders in power transmission and offshore oil and gas. In the Americas, orders were steady to higher in all divisions, led by some large order wins by the Power Products division in the U. S. As I already mentioned, base orders were steady in the quarter, up in 4 divisions, but lower in process automation where we saw the impact of lower discretionary spending in oil and gas most. Geographically, base order growth was mixed. China was flat in line with slower macroeconomic growth. Base order growth was also flat in Germany and the U. K, but we saw good growth in important markets such as Italy and Sweden in Europe, India and Japan and Asia. Base orders in Canada were higher and grew by 4% in the U. S, mainly in Power. If you move to chart number 6, chart 6 reiterates what we said after the Q4 on the ForEx translation impact from an appreciation of the U. S. Dollar. In the Q1, the appreciation of the dollar resulted in a negative currency translation effect of 13% on orders and 10% on both revenues and operational EBITDA. We expect to have similar levels of negative translation in the coming quarters. I think most of you have taken this effect into account in your model. Chart 7 summarizes the impact of low oil prices on ABV in the Q1. As we said at the end of the last year, we have a balanced exposure to the oil and gas sector, both in terms of CapEx versus OpEx as well as upstream versus mid and downstream. In the Q1, we saw a strong decline in OpEx as customers put a large share of their discretionary spend on hold, which we already flagged during the quarter. We are taking steps to adjust capacity and productivity and are confident that we can successfully mitigate this impact. Long term, our expectation is that low oil prices will impact CapEx spending on new upstream and possibly down stream production. At the same time, we also expect some long term benefits such as lower input costs that will support industrial growth as well as the reallocation of fuel subsidies into infrastructure such as power transmission and distribution. Now I hand over to Erik to take you through the financials in more detail. Thank you, Uli. Let's look at the operational EBITA bridge on chart number 8. We continued success in reducing costs again, which more than offset price pressure in the quarter, generating a net positive of approximately €10,000,000 Net volume also had a positive impact, reflecting the operational leverage effect from higher revenues, mainly in the product divisions. Improvements in project execution also supported the margins in the quarter, which is mainly from the Power Systems division. These positives were partly offset by mix effects as Ole has described earlier. An example of mix effect is lower volumes in businesses that are exposed to the oil and gas OpEx and discretionary spending. Examples of geographic mix include the macro and ForEx turmoil in Russia, which resulted in lower volumes. Looking forward, we assume that this mix impact will persist and that's why we are taking additional restructuring step that was already mentioned by Uli. The other category consists you see to the right of the chart. Finally, divestitures, which we did during last year through our portfolio pruning reduced the operational EBITDA by approximately €30,000,000 Turning to chart number 9, where we show the overview of the divisional performance in the Q1. I will now go in some more detail. Starting with the top line. The orders were flat to high in all divisions on a like for like basis. The division Automation and Motion was flat, but we have to remember that it is on a difficult comparable from the Q1 2014 when we booked a €200,000,000 order for the Swedish Railways. Revenues are more mixed. The stormwater backlog in Power drove revenues growth in those divisions. Disclid Automation also achieved a 4% revenue growth in execution of its good backlog in robotics as well as power conversion equipment for rail customers. Low voltage products revenues, which are more closely linked to the short cycle economic development were flat. In process automation revenues declined by 4%, where the project backlog is still solid in oil and gas, but the short cycle spending was down which affected the book and bill business in the quarter. As stated before, most of the large project wins in PA in the quarter will only be delivered over multiple years, mainly in 2016 2017. Let's then move to the operational EBITA margins. If we start with DEM, the margin decline is partly the result of lower sales into the oil and gas sector or short cycle standard products. In LP, the margin decline is mainly a reflection of the slightly softer revenues and some of it is also related to the situation in Russia as we are earlier talking about. In Process Automation, the margin was mainly affected by the lower revenue volumes as well as mix, specifically related to the standard sale of standard products and services also into the oil and gas sector. On Power Products margin, the result is impacted by the ongoing footprint measures to build capacity in growing markets like Saudi and India, which resulted in a temporary under absorption of fixed costs as capacity in these new plants is being ramped up. PPP also saw some volume declines in Russia, which had negative effects on margins. Finally, in Power Systems division, we delivered a 3rd quarter of positive operational EBITDA. Overall, the main message on margin is that we are accelerating the cost and productivity actions in line with the priorities in our next level strategy that we have described to you over the last few quarters. Let's then turn to chart number 10. In the Q1, we generated around €100,000,000 more cash flow from operation. This is mainly driven by timing of project cash flows from Power Systems, but it also by continuing efforts to improve net working capital such as shorter lead times and higher inventory charge. We continue to improve cash generation in order to fund profitable growth and to support our dividend policy. The Board has recommended a dividend of $0.72 per share that amounts in total to about $1,700,000,000 In order to gain in order to again make the dividend tax efficient for shareholders, the Board has proposed it to be paid in 2 tranches. So if approved by shareholders at our Annual General Meeting tomorrow, a dividend of CHF0.55 per share will be paid from capital reserves, a return or cash per shareholders equivalent of about CHF 1,300,000,000 and that amount will be paid during next week. The second tranche of CHF 0.17 per share Swiss cents excuse me, per share or the equivalent of about $400,000,000 will take the form of a nominal value reduction and is expected to be paid to shareholders in late July or early August. At the same time, we are proceeding with the share buyback. We have bought back 21,000,000 shares this quarter at a value of around 450,000,000. So we have now completed around 30 percent of the $4,000,000,000 buyback program, which we announced last September. And let me now turn it back to Ole again. Thank you, Erik. Let's turn to Chart 11 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 Q1, we continued to make solid progress in each of these areas. To turn to chart 12 please. We drive profitable organic growth through our PIE framework of penetration innovation and expansion. On Chart 12, examples of penetration success in the Q1 include our continued strong growth in Japan where we have been broadened beyond our small base in painting robots and turbocharger service. We delivered both power and automation solutions. For example, our leading solar portfolio between the panel and the grid in Japan as well as large EPC players who serve a variety of global industry sectors. Innovation is one of ABB's trademarks and we continued to launch new products in the Q1 including intelligent transformer sensors, production management software for the cement industry and control products for the power generation and water industries. Those of you who were at the Hannover Fair saw our official launch of the Qiyumi Collaborative Dual Arm Robot. This is really an exciting development, which will open large opportunities for profitable growth. For example, in the fast growing 3C industry as well as in other customer segments where small parts handling and packaging is important. On expansion, we announced a strategic partnership with Samsung in the area of micro grids, where we combine Samsung's battery energy technology with our grid offering. On Chart 13, I'll go into this in more detail. We believe microgrids will be a major element in the grid of the future. We offer microgrid solutions to 2 major power challenges. 1 is to provide economically viable power to communities in the developing world that are distanced from conventional power grids. More than 1,000,000,000 people in emerging markets today have no access to continuous electricity. The other is to support industrial and commercial facilities that cannot afford the risks of power interruptions from conventional DRIP. We are already very active in this small, but fast growing market based on our power conversion technologies, grid connection, power management and automation capabilities. Energy storage technology is a further key element in making microgrids more viable and Samsung is a leader in lithium ion battery technology. Our partnership with them will allow us to accelerate growth in this market on a global scale. Turning to Chart 14. Relentless execution is the 2nd focus area in the next level strategy for accelerating sustainable value creation. In the Q1, we took decisive actions to reduce structural costs, improve productivity and optimize the entire value chain and we expect to see the benefits of these actions in the coming quarters. We set the stage for further structural cost savings through multi year agreements with 3 strategic IT suppliers that we announced this morning to fully to simplify our server infrastructure, network setup and deliver of services to our customers and employees. When fully in place, we expect these measures to sustainably reduce our annual IT operational costs. On productivity, organizational measures to streamline back office operations along with portfolio pruning allowed us to increase employee productivity. We also reduced G and A expenses by 7% in the quarter. And as I mentioned earlier, we will accelerate actions to adjust our cost structure to changing market demand in areas such as oil and gas. At the same time, there's still much we can do through footprint actions to optimize the total value chain. For example, new production and R and D facilities in key markets such as Saudi, India and Czech Republic focus on being closer to our customers. In the past weeks, we opened manufacturing units in Saudi, Czech Republic for power that are among the most highly automated and cost efficient power equipment facilities in the world. This helps us to maintain our global technology and market leadership in this important sector. We also recently announced the closure of a motor factory in Sweden as we look at how to best serve our customer base and optimize our footprint. Let's move to chart number 15. The Power Systems division showed continued progress implementing our step change program to derisk the business and reposition it for future growth and profitability. Chart 15 shows you where we are after quarter 1 on delivering against our ambitions. Power Systems delivered a 3rd quarter of positive operational EBITDA. At the top is the focus to reach the target profitability. We still have some work to do, but the progress is encouraging. In offshore wind, 2 out of 3 platforms in offshore wind are energized. Today, Balvin 1 is connected to the grid and in operation. Dolwin 1 started trial operations in April and takeover is planned for later this year. And Dolvin 2 is progressing well. The platform is undergoing final installation and commissioning work in Norway. Once that is completed, the platform will sail out and be positioned in the North Sea. This is expected to happen in the Q3. On EPC Solar, we have completed all of the remaining projects and expect to finish the handover to our customers in 2015. Targeted partnerships in high growth markets remains a key focus like the Samsung partnership that I described earlier. We have also made progress on derisking the business by being more selective in the projects we take. This is reflected in our recent order bookings that include a subsea HVDC link between Germany and Norway, a high voltage cable system order in Denmark and a power plant automation system in South Africa. These are all projects with a more attractive risk profile where we already have a solid track record and execution and technology leadership. Turning now to chart 16. We told you after Q4 that we were rolling out a new compensation model that provides a better balance between group and individual rewards in order to drive a new performance culture towards accelerated sustainable value creation. In the Q1, we implemented this change for more than 60,000 employees and it has so far been very well received. We believe this is one of the most important changes we have made in the organization to drive value creation in the business both for our customers and for our shareholders. Let's turn to chart 17 and our actions to drive business led collaboration. Part of our business led collaboration effort is to deliver greater value to our customers by combining power and automation capabilities into integrated solutions that cover the entire customer value chain in utilities, industry and transport and infrastructure. This capability gives us a competitive advantage in sectors that require both high quality and reliable electrical power as well as automation technologies for maximum productivity and quality. These include power plant control, process industries, data centers, building infrastructure as well as rail and marine transportation where we won significant combined orders during the Q1. We see further substantial profitable growth opportunities ahead as power grids become more automated and as power quality and reliability together with industrial productivity in industry and infrastructure becomes more mission critical. So let me turn to chart 18. Finally, let me summarize the quarter and provide you an updated outlook. Our profitable growth initiatives drove a solid top line performance in the Q1. Hai is working. We continued to build our backlog and book to bill across the business to support revenues in the coming quarters years. We achieved a higher operational EPS on a constant currency basis and continue to make progress in the Power Systems step change program, which helped us to generate steady operational EBITDA margin for the group. At the same time, we are accelerating cost and productivity measures to increase profitability in the other divisions in the coming quarters. We rolled out a new compensation model to accelerate value creation and won key orders based on our ability to jointly deliver integrated power and automation solutions. Finally, we further sharpened our focus on marketing customers by driving organizational simplification and productivity improvements. On the outlook, the picture has not changed much since the end of the last year. The short term picture is mixed and there is still a lot of macro and geopolitical uncertainty in the China continuing to grow, but at a slower pace than in 2014. Europe growth remains modest and is still subject to macro uncertainties and upcoming political developments. Outlook remains positive in our main end market. Lastly, headwinds from low oil prices and ForEx translation are expected to continue over the rest of 2015, but we are confident that we can manage the uncertainties through the implementation of our next level strategy. We confirm our 2020 financial target. So in summary, we are seeing the benefits of implementation of the next level strategy in higher EPS and cash flow. We are closer to our customers and better able to meet their changing needs. And with that, grow our business despite an uncertain market environment. We are taking actions in line with our strategy to increase profitability, and we are confident that we will continue to deliver on our commitments to customers, employees and shareholders. With that, I'd like to conclude my remarks and thank you all for your attention. Let's open the lines now for questions. First question comes from Mark Thromant, Bank of America. Please go ahead. Yes. Thank you. Good afternoon, Ulrich and Eric. Hi, Mark. How are you? Very well. Thank you. Just two questions for me, please. Firstly, on base orders and the second one on margins. So on base orders, we you had some areas that grew well as you've highlighted in the presentation. But clearly there was a marked slowdown to basically flat from the I think it was 4% in Q4. Just wanted to get your thoughts on that slowdown. Clearly oil and gas has been a big part. Is that really explains the bulk of it? Or have there been other things that have surprised you in terms of, let's say, negative momentum or stalling? I'm basically trying to get a picture of how base orders may evolve if we've got a lot more downside to see in the oil and gas space for example or is it more is it a broader based impact? That's question number 1. And question number 2 on margins. Power Systems clearly doing well at least against expectations, but maybe the other divisions were a little bit soft. I mean clearly Process Automation, we have some sales decline, so I understand that. In discrete and in power, they also looked at just a little bit softer. I guess big picture question is, what does ABB have to do to get on positive margin trajectory? Is it just about volume coming back in the markets? Or is it about the restructuring? What can ABB do to get those margins improved, if you like, in the current environment? Thank you. Okay. Thanks, Mark, for your question. I'll take the first one and I'll have the second one answer Barrick. If you look at our base order growth pattern, look we grew 4 out of 5 divisions in the Q1 on base orders, which gives us a lot of confidence in terms of the underlying growth initiatives quality that we have put in. We keep definitely our efforts to beat the market on base orders in all of our businesses. We allocate the resources and the investments in line with the growth opportunities. And naturally, we restructure and we also cut wherever it's needed where we don't see an underlying opportunity for growth. If you look at the drivers of some slowdown, the one is definitely the oil and gas. We see discretionary spend in the Q1 as we had flagged and expected to be pulled back by our customers. This is something that will probably stay for a while. Then we have an impact on base orders also especially in Tarek's business on Russia. And then you have China. There is the construction field which is a little bit softer. Now the good news is base orders, for example, in automotive in China have been growing quite strongly. So I think what we to do is we need to continue living pie. We have clearly our heat maps. We have clearly our current very, very strong and close understanding of each of the segments. We need to drive wherever growth is pockets where the growth is not yet as strong or not as strong as it used to be. So it's a differentiated approach, but our ambition is and will be to keep beating the market on that one. With that said, I hand over to Erik on the margin question. Yes. Marc, if you take a look at the margin situation, the PA you have identified yourself, it's basically the volume which is down and then driving margin of higher margin product business mainly to oil and gas. In the DM, it is also the same mix question mainly related to oil and gas and also spread around a little bit on other industries. On PP, as was already said, it has quite a bit to do with the ramp up cost for the new facilities we have in the lower cost countries to have the footprint better set up and also some effects of mix mainly related again there to Russia. Your question on the outlook and how the trajectory will be going forward. Obviously, the cost reduction programs are taking more and more effect. That will help us to support the margin. We have also seen that we will increase the restructuring to take out additional costs mainly in the areas which are most severely impacted. The mix changes we have in the quarter, we see continue with the same mix. And obviously, if that change is either in a more positive or more negative direction, we'll have an impact on margin. But I think last but not least is what Urdish ended with and that's the pie efforts on the base order growth. That base order growth which typically is higher margin products will support the margin trajectory going forward. So the clear determination is to continue to drive the margin in the upward direction. Okay. Thank you very much. Very helpful. You're welcome, Marc. Next question comes from Ben Ugloff, Morgan Stanley. Please go ahead. Afternoon, everyone. I had a couple of questions. The first and I know, Eric, you enjoyed these conversations, but the first was about the margin bridge. I appreciate that the cost savings have been positive relative to price this quarter on the order of $9,000,000 But if I go back and look in the past, typically the cost savings have actually been quite a bit further ahead. And I guess my sort of first question is, how much of this is due to lower cost savings or is it a price effect? And if it is a price effect, could you talk about that a little bit just in a general sense? And the reason I ask is across the whole of capital goods this quarter, we are basically seeing much weaker pricing trends than I think people expected. Is that true of ABB? And if so, which divisions do you feel are most affected? So that was question number 1. Question number 2 was for Ulrich. I don't want to put words in anybody's mouth, but my interpretation of your outlook statement was that it seemed much more incrementally cautious. I mean, you called out specifically a slowdown in China. And what I really want to understand is what is the basis for the caution? When you look at organic growth assumptions that analysts have in the market, are you feeling that organic growth could be under pressure for the next couple of quarters Or is it something just more general? Okay. First of all, good afternoon, Ben, and thanks for your questions. I take the outlook first and then I hand over to Erik. Look, if you take our outlook statement, it reflects a tough world out there. We have seen during the second half of last year a deterioration of certainty and an increase of volatility. If you look now what we have in our hands in the for the Q2, you have in Europe a couple of issues that the world has to deal with whether that's the election in the U. K, whether it's Greece that has an impact. If you move over then, we have in Asia, yes, we have a slowdown in construction in China. At the same time, the Chinese government has eased or has helped with some financial policies and it will that might have a positive impact on the distributors. So there is a wider range of possible outcomes and we wanted to flag that and share that very openly with you to say to share with you how we see the world as we go on. Our ambition remains unchanged. We will try to beat the market on a continuous basis as we have done. If you look at our order pattern, 4 divisions having base order growth. We have a book positive book to bill in all of the divisions in the Q1, really nice large orders altogether gives us a confidence that we will also deliver on this one going forward. There will be very little tailwind, if at all, in the world in the quarters to come. So we really need to create or continue to create self help. The PIE model works on that one. Our teams are better aligned than ever before. We're closer to the customer. All the internal work is done. So all the forces are now really out and drive the growth with the ambition to beat the market. So that's on the outlook and the market perspective. Eric, as you rightly requested, addressed the margin bridge. Thanks. Yes. Good afternoon, Ben. So on the pricing side, we really don't see a significant change in the pricing trends as we have described them over the last few quarters. Price pressure is a fact of life in most of our businesses. And we as we have seen successfully continue to match those with the cost saving program. Yes, it is a little bit less on an absolute basis in this quarter, but there are 2 fairly big numbers behind this net number of 9%. So it's not really a trend change. The only portion we could point to is in low voltage product related to the Russian business with the ruble where clearly with the imports from the European cost base into Russia, there has been some pressure on the prices that has contributed to the situation and the margin impact from that side. So maybe on the margin, they're slightly negative because of that. But overall I will not call it significant. Okay. And that's helpful. There's not been any significant I'm just making sure that the margin changes that we're seeing and I'm thinking obviously of discrete automation and to some extent Power Products. I know obviously you've called out the effects there, but I'm just making sure that we're not seeing incrementally weak pricing in those divisions. You wouldn't agree with that comment? I think there is there are changes up and down in the divisions. But I think overall, there's no significant change in the pattern we have talked about over the last few quarters. Okay. That's great. Thank you very much. Next question comes from Andreas Willi, JPMorgan. Please go ahead. Yeah. Good afternoon, everybody. I have a couple of questions as well, please. The first one on Russia, which you mentioned frequently in the call and in the press release as a source of downside this quarter. Obviously, in the past, you've highlighted Russia when questions came up as of quite limited exposure to ABB. Is the profitability or was the profitability substantially above average that it can have a material effect? And are there other areas in your portfolio at the moment where profitability stands out relative to the rest of the group where we could see revenue pressure in the coming quarters areas like obviously the oil and some products in oil and gas CapEx related areas, high end ships LNG or FPSOs. Is there other areas that could also have a disproportionate impact on group margins when they're potentially slow? And the second question in terms of the large order bookings this quarter, the Stuttgart order that you booked in Process Automation, what's the amount of revenues, if any, that have been booked in Power Systems? And the same for NordLink, which it looks like you haven't booked a lot of Power Products orders this quarter yet. But when should we expect basically Power Products to benefit from some of the cross selling into the large order? And the last question in terms of the base order growth during the quarter, is it right to assume that it slowed as the quarter progressed given the commentary at the annual result in mid February was more positive on base orders than what we have now seen. And that basically relates to the acceleration in the oil and gas slowdown we have seen in all the companies in February from mid February onwards basically. Thank you. Okay. Thanks, Andreas, and good afternoon to you. Look, on the first question regarding Russia, the Russia business is indeed not very large for ABB. It's less than 2% of the ABB Group revenue. But the volatility both in terms of the currency and the demand was significant. And since we are importing a lot of product from Europe into Russia, you had basically a double whammy. You had the currency and you had demand. So together that had an impact. It's mainly on Standard Products business. It's not outrageously huge profitability. It's a standard product situation that we have going into Russia. And that's typically when we have markets where we shift from one source to another one, the standard product. If they get hit both by currency and by demand, you have a quite significant impact. And naturally, we're doing now all possible efforts to really make sure we mitigate that going forward. And we have already made some good progress in taking appropriate actions on that one. I take your 3rd question first on the base order pattern. Your observation is only partly right because we had good base order growth in 4 divisions and there we have not seen a slowdown or any change. In the oil and gas business, we have seen a contraction of discretionary oil and gas spending. And since a lot of this also has a certain kind of a quarterly effect where towards the end of the quarter there's a little bit more realized that had a certain impact, but I wouldn't call it material in any way. With that, I hand over to Erik to give you a little bit more insight on the large order side. Andreas? Yes. Good afternoon, Andreas. So the your question was on the large orders booked in PA and PS and the sub supplies from the internal suppliers. And the reality is that part of that sub supply the orders have already been booked and are part of the quarter and some parts are coming now in the coming quarters. We are trying as much as we can depending on how the real schedules in those projects look to have the internal and the external bookings in the same quarters. But it's not all possible because of all the schedules and how the specification of the products are done. So what will Power Products have grown without the large order related bookings from Nordling? It is not substantial in that sense Andreas. Thank you very much. You're welcome. Next question comes from James Stettler, Barclays. Please go ahead. Thank you and good afternoon all. Starting off just with this 150 basis point margin decline in PP and the footprint adjustment, is that something just we're going to see in this quarter or how for how many quarters you think this impact will remain? In terms of you talk about good base order growth across 4 divisions, can you sort of define good? Are we talking 2, 3 or 4? And so how significant was the drop in PA? And just in terms of the order pipeline, can you talk us through what you're seeing in PS? I'm obviously very encouraging order with NordLynk. Is there more to come? Thank you. Okay. So first of all, good afternoon, James. On the PP side, look, we will not open every quarter a lot of factories. So we had a coincidence where in the first quarter we had the ramp up for the Eastern European piece, for the Saudi piece going on. That naturally costs some money because at the beginning you need to train the staff up. Then you get the volume in and then the factory takes off. So that's that you will not have a repeat of the same order of magnitude in terms of ramp up in the quarters to come. This will ease definitely off. And naturally, we're working also very hard to mitigate the impact through additional cost reduction and restructuring measures as we have said. Let me take the 2nd power related question, the pipeline on PS. If you look out in the world, there is an interesting situation going on. On the one hand, you have cautious spending and cautious investment policy by many utilities. And on the other hand, the number of large scale connections, grid connections has never been bigger that has been discussed that is being discussed. So there is a lot of tender activity, a lot of project discussions on connecting different countries, of connecting Subsea, of connecting North and South, for example, in the North American continent. So there is a continuous good tender activity out there. Now as you and I know on the award of these projects, they are so large and they can easily slip from quarter to quarter. So we are not making any predictions out there. But the underlying market opportunity out there is very good. We also see that our power offering for industry, if you take the Statoil order in the North Sea this quarter, More and more, we are also taking our capabilities from the power side, on the industry side, and it's really fantastic to see that the customers like Stuttgart Oil in that case appreciate that we have an overall understanding of their business end to end. We help them on the automation side with up continuous power supply and power quality is as important for uptime reliability. So it's really you really see that the joint offering there hits home with large customers and I expect that to be another attractive growth driver going forward. Now if you look at the base order pattern across the businesses, there's not a huge variety between the different divisions that have been growing on base orders. On Process Automation, we have had a significant hit this quarter coming from a base order deterioration. And if you look at it, we have quite a significant amount of service and repeat business with oil and gas customers that flows through PA. We have had in the Q1 customers being cautious on spending there and pulling back immediately that. So overall, the impact on a relative base bigger on process automation negative. And on the positive side, it's pretty much similar across the range of our other divisions. Great. Thank you. You're welcome. Next question comes from Martin Wilkie, Deutsche Bank. Please go ahead. Hi, good afternoon. It's Martin from Deutsche. Just coming back to your commentary on China, it sounds like the automotive market was one of the reasons that the growth held up better and buildings perhaps a bit slower. And if you could just talk through what your expectations are for that as we go through 2015, particularly on the industrial side, we've heard comments from other companies that the sort of industrial production market is far slower. Is that feeding into your commentary that China is growing but slower? Or are there other dynamics that are leading you to give those comments? Just if we get a bit more granularity on your China expectations. Yes, Martin. Happy to do so. Look, I was just recently in the China Development Forum where a couple of CEOs sat down with Chinese government. So there's quite some insight not only from our customer interface, but also with the government in China. If you take the agenda that China has given itself for this year and the years to come, there's really a strong qualitative change of focus in China. It's moving from a consumption driven growth to an innovation growth to a competitive industry where labor arbitrage is not the decisive factor anymore, where productivity improvements are really in foreground to deliver. In addition, if you take the power generation infrastructure in China, huge investments wind side whilst in parallel still investing in conventional power generation. That's good for ABB. And if you look at it, we got now about 20,000 people in China. We have more than 85% of our product range fully localized, local R and D, local value chain, local sourcing. And that positions us very, very strongly. We have Chinese leadership there that understands the market and has strong market intimacy. So I think we are overall well positioned. And now let me talk a little bit about segments where we can get some growth. We have a couple of efforts going on. Effort number 1 is we're going west. We're going west aggressively into Tier 2 and Tier 3 cities. And the way we are doing it under the theme of what we call business led collaboration, we are doing it much more jointly across the different business units and divisions than previously in ABB. That gives you an SG and A advantage, a scale advantage if you roll with all of them at the same time in a focused way into the West. The second piece is, look, compared to some other competitors, we have a very strong robotics business. And robotics is not only a very strong business in itself, it's also a pillar that carries the flag of ABB into many new automation systems and automation situations. Take food and beverage, material handling in food and beverage, picking, packing, palletizing is an opportunity where ABB does a lot of business. We just recently got additional orders for robotization and automation, for example, in the dairy sector in China, which is a great growth opportunity. So for us what we do, we try to work our product portfolio towards the government agenda on automation and network upgrade. We have a very agile team that really understands the growth segment. And then we take our pillars in terms of capabilities and use them to pull in a wider solution offering. China is a solution market in the automation side. And that's great for us because we can then take for example the robot and under the robot wings we bring in low voltage products, we bring some motors, we bring drives. We bring complete solutions and that's a good one. So look, China is has a couple of challenges as an overall economy. The growth on a relative base might have come down a little bit. If you look at the absolute growth, it's still a remarkable market delta opportunity for us. And I think we are pretty well positioned with our team and our capabilities to participate a little bit stronger than others. And naturally, we are running the extra mile to keep it going that way. And in terms of that changing mix of growth, I mean, I know you don't disclose the profitability by end market, but is it a concern that the buildings market is contracting if we think about sort of mix effects and so forth? Or do you think the opportunities in robotics and so forth are sort of equally profitable as some of the businesses that may now be a little bit slower compared to the past? Yes. Look, Martin, we need to be pretty agile here. If you take, for example, our excess on the industrial side that we have for our low voltage products, others have strong channels for low voltage mainly in construction. ABB has a wider channel mix. We benefit from shifting then volumes more on the industrial side. And if you look at the profitability of our products in China, could always be even stronger, but I'm quite satisfied there. Okay. Thank you very much. You're welcome, Martin. Next question comes from Daniella Costa, Goldman Sachs. Please go ahead. Thank you. Good afternoon. Actually, I have three things. The first two just to follow-up on some of the commentary around the base orders in oil and gas and also your commentary around pricing. A few companies that are exposed to the same chain or the oil and gas chain have talked a lot about a large portion of this drop basically in absolute dollar amounts being price driven basically and the oil companies asking for large price declines. So are you basically disagreeing, seeing different trends when you say that you don't see much of a change of environment in pricing? That's my first question. And then just second question also on Process Automation. Overall, the orders large and base included are up quite significantly. I imagine on the large ones, maybe there are some oil and gas related ones as well. Do you have any worries around delays or cancellations there? And the third question related to basically inorganic growth and you commented a little bit on it last quarter basically on some of the areas. Has the fact that the outlook is perhaps a little bit more uncertain than and the overall organic opportunity is maybe less uncertain got you more thinking more actively about inorganic growth? Thank you. Okay. Good afternoon, Daniela, and thank you very much for your questions. If you take the oil and gas sector, I give you a couple of examples where ABB has some quite unique capability. Take the start oil order on HVDC. Such a connection between the mainland and all platform out there in the field is something that ABB has a very, very strong value proposition. And then you have great technology compared to other competitors, you still have an opportunity to get paid for that value that you're providing. On the standard product side, we have long term frame contracts with our customers both for service and for the standard products. And naturally, we will always try to work with our customers if they have a need to optimize their business. But this is something standard procedure. I wouldn't say that ABB is totally immune to that point and Eric didn't say that and I wouldn't say that. But we are working very strongly to have the minimum possible impact of any of these requests that are out there. The second piece that you rightly address is on the PA backlog and the order backlog that we have now. We have a great mix of different orders. I might remind you the large mining orders that we got not too long ago. We have some great marine orders and actually we some direct oil and gas orders as well. At the moment, we don't see any major delays or cancellations and naturally we're working very closely with our customers to make sure that stays that way altogether. And your third question on inorganic growth, I don't want to change anything that we have said last quarter. We said that in 2015, after making progress on Power Systems, after having the integration of Thomas and Betts and PowerOne further progressed. If the time is right, we will consider doing inorganic moves and that statement stays unchanged. And when we have to say more, happy to report at that time. Thank you. You're welcome. Next question comes from Frederic Stahl from UBS. Please go ahead. Yeah. Hi. Good afternoon, Ulrik. Erik, it's Frederic here from UBS. Maybe this one is for you Erik. I don't know if I'm misreading this, but it looks like you had a 29% currency hit on your Power Systems orders, if I look at your press release. Can you maybe clarify that for me? Question number 1. And then on there is a the European Commission is about to make a decision on anti dumping taxes or barriers whatever you want to call it on electric steel. Can you maybe talk a bit about how that could impact ABB's business in Europe? And then finally, maybe you could update us on how PowerOne performed in the quarter? Thank you. Okay. First of all, good afternoon, Frederic, and thanks for your questions. Let me get started with question number 23 and then I will hand over to Erik on the first question on the Power Systems question that you had there. Look on the antidumping situation, we observed that. We are very close to that situation. But since it's an ongoing process, I don't want to comment any further and speculate on potential outcome. It is something that has been in the pipeline for a while. Now it's becoming a little bit more concrete. And then we see then the direct impact we can report next time when we are together. But at the moment, we have no additional comments on that one. Now on Power 1, if I look at Power 1 and the development of the global solar market, the solar installations in terms of overall demand are going up. By the way, they have gone up the last couple of years continuously. If you look, for example, at our success story in Japan, where we have now really grown for a couple of quarters, constantly double digit. Our leading edge solar portfolio between the panel and the grid is really strongly differentiating us from others and is a really great source. So what we have done with PowerOne is first of all, the PowerOne brand has disappeared. It's all on ABB portfolio. And if you look now, we got the best portfolio between the panel and the grid of any competitor in the world. That positions us very well to work with solar EPCs. Last year, we also decided that we're going to exit solar EPC business. So this market segment has now certainty that ABB will not compete, that ABB is coming with its complete solution set and that's really coming nicely in terms of the growth. So on PowerOne, the brand migration is done. The product integration between AVB and PowerOne is done. The solution development is ongoing and we have made some great progress there and we are moving forward. So altogether, I would say the commercial and the technical integration of PowerOne is progressing in line with the plan. If you look at that business and that market specifically, there is a market consolidation going on in solar inverter. And naturally, as in every consolidation cycle, that might have or has an impact on margins. But I'm pretty confident that not too long out that consolidation will come to an end and then the market forces will hopefully allow us to also take the margin higher up on PowerOne. So with that said, let me hand over to Erik on the Power Systems currency question that you had. Thank you. Yes. Friedrich, you are correct. We have a 29% FX impact on the Power Systems And that has to do with the large orders and the mix between the large orders this quarter and the quarter back. And obviously, we booked some very big ones, oil related orders in Germany. So if you also take a look at the European conversion, it's a 23% on average in Europe. So you can see those two numbers together and it is what it is. And also that the Russian impact on the overall number obviously has there also an impact as that foreign exchange rate has changed by even much more than 23% or 29%. That's clear. Thank you very much guys. Thank you. You're most welcome, Frederic. Last question comes from Nathalie Parkman, Carnegie. Please go ahead. Good afternoon, gentlemen. I have a couple of questions. First on the downstream. You mentioned the upstream and the OpEx. Do you see any more positive or negative or muted activity on the processing oil and gas processing on the downstream? That's the first question. The second question is on the power products. You're saying that you're ramping up in India and Saudi Arabia. Is it just because you think you're going to have better demand there? Or is this for some industry of robotics have come with numbers of the sector growth of 27%, if I remember correctly. I think that was in volume terms in 2014. Do you recognize yourself in that growth numbers? Thank you. Okay. Good afternoon, Nathalie, and thank you very much for your questions. Let me take the questions in the sequence that you asked it. First of all, on the downstream side, we don't see any significant change in that field at the moment. Naturally, the uncertainty that the customers, especially the ones that are integrated both upstream and downstream, has a certain impact on the discussions that are going on, but we don't see any major project cancellations or delays or delay in tender discussions. We don't see that at the moment. If you look at the underlying trend in Middle East, there's more and more oil being taken down the value chain. I was just recently in the Sadara complex. If you look at the amount of downstream activity that's being planned there to use oil rather than to convert it downstream than putting it into power generation. I think this is something that will probably stay for quite a while. Let's see how it turns out over the next years. But at the moment, we don't see a significant change on that one. On PP, if you look at the Saudi and the India situation, Saudi is a market where the infrastructure, the power infrastructure and by the way, not only in Saudi, but also in the countries around Saudi where there is a free trade arrangement and some good trade arrangements. It is important to have a very strong local footprint. We opened just before Easter. We opened a new factory there, and it was very well recognized and regarded by the customers that, okay, now you made a significant commitment so that we have a competitive advantage with having that local capability. We're also putting the newest technology in there to make sure we got great technology at a very high proximity to the customers. And that's something that in the future, I'm cautiously optimistic that it will also pay off in the appropriate way. And similarly in India, India has certain specific requirements. It's a very large market. I expect a significant amount of the oil and gas subsidies. It's about €40,000,000,000 that we have spent in the last years to move over to the infrastructure side. At the Hannover Fair, I had the opportunity to have a meeting with Prime Minister Modi. And he basically confirmed there will be more infrastructure spending both on upgrading the existing infrastructure, but then on larger projects. So altogether, I think this is a worthwhile investment to have. And your third question on robotics, look all I got to say since we don't disclose details on the BU level, we are very happy with our robotics business. PVEGAARD is doing an excellent job. If you look at the innovation pipeline and the amount of innovation that we are pumping out, the new YuMi robot, which is really changing the world of automation on small parts assembly, I'm optimistic that this will stay a business that makes us a lot makes us very happy in the long term future. Thank you very much. You're welcome Nathalie. So with that, we would like to conclude our Q1 results conference call. Thank you very much for your time and looking forward to seeing you at some of our conferences where we will be. 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 line.