Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Q2 2014 results conference call. I'm Stephanie, the call's operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions any time by pressing Star and One on your telephone. To need assistance, please press Star and Zero to call an operator. At this time, it's my pleasure to hand over to Mr. Ulrich Spiesshofer, CEO. Please go ahead, sir.
Thank you, Stephanie. Welcome, and good afternoon, ladies and gentlemen. It's a pleasure to welcome you to our Q2 results call. As usual, I'm joined today by Eric Elzvik, our CFO. Let me also remind you that my remarks refer to the presentation that you can download from our website at abb.com. If you move to Chart two, before we get started, please refer to the important notices regarding any forward-looking statements made in the presentation. With that, let's start with Chart three. In the second quarter, three areas stand out in particular. The first is order growth. I am very pleased that we see significant improvement in our order situation. Last October, we said that we will drive organic growth through our strategic focus on penetration, innovation and expansion. Now we are delivering results.
Our targeted actions have clearly paid off and supported an overall increased order momentum in the quarter, including our two largest markets, the U.S. and China. The strong order intake of plus 13% on a like-for-like basis was driven by large as well as strong base order development. This has brought us back to a positive book-to-bill ratio of 1.04. Most divisions were positive, which is really encouraging. Secondly, our solid execution on revenues and cash is yielding results. Revenues amounted to $10.2 billion, steady versus a year ago, despite the $2 billion lower opening order backlog at the beginning of the year. This demonstrates a strong performance on order execution. Cash from operations improved by more than 60% to $888 million in the quarter as our net working capital improvement initiatives continued to pay off.
We delivered on our announced strategic portfolio pruning of businesses that have limited synergies with the rest of the portfolio. Since October last year, we have moved swiftly on our commitment to optimize the portfolio in a value-creating way and to strengthen our focus on the core. Thirdly, we have made significant progress in our step change program in Power Systems. Our division management, under the leadership of Claudio Facchin, has taken decisive actions to risk the PS portfolio, improve operations, and to adjust capacity. Importantly, we are implementing a new business model for the offshore wind EPC business. The group operational EBITDA continues to be impacted by a loss in the PS division, related mainly to ongoing charges in some large projects. We have set a clear priority to fix this business long-term.
As we said previously, the situation is likely to weigh on earnings in the coming quarters. Moving to Chart 4, here are the key figures for the quarter. About half of the 13% order improvement came from higher level of large orders. The most significant one was a $400 million HVDC link project from Canada in Power Systems, where we connect renewable power sources to the North American grid. This is a good example of the kind of large projects that we want with a more attractive risk-reward profile. We can provide significant customer value in our core technology area, where we have a solid track record on project execution. Out of the 14 HVDC Light projects commissioned today worldwide, ABB has successfully installed 13 of them. Base orders are also up 7% on a like-for-like basis this quarter, which is encouraging.
It shows that our growth initiatives are generating results. We'll come back with some examples in a few minutes. As already mentioned, the negative PS result had an impact on earnings. In the remaining divisions, however, operational EBITDA margin was stable to higher, excluding the expected dilutive impact of the Power-One acquisition in Discrete Automation and Motion. Let's move to Chart 5 for a closer look at the order development. First, these positive comparisons are with a soft 2013, especially on large orders, which were soft in the last year. However, order growth is encouraging in a number of areas. As mentioned at the beginning, the book-to-bill ratio is back to a healthier level, basically where it was two years ago. This will be supportive for our revenues, especially looking out to 2015.
We are building up the order backlog again with a good increase in Base orders as well as in higher quality large orders. The early cycle businesses continue to see growth, and we expect to see more large orders coming in the next few quarters. Chart six shows how the order growth was distributed regionally in the quarter. As already mentioned, the $400 million HVDC order in Canada helped the Americas growth. Orders also grew at a double-digit pace in the U.S. on a like-for-like basis, and Brazil improved from a low level last year. Asia was strong, led by good growth in China, where Power Products, Low Voltage Products, and Discrete Automation and Motion all had good growth. Europe remains a mixed bag. On aggregate, Europe was flat compared to a year ago, and we don't see much change in that going forward.
Germany was higher, as was most of Eastern Europe. Orders were lower in countries like Italy, France, and Sweden. Process Automation had a good quarter in the Middle East and Africa, which drove the majority of growth in that region. Let me now turn over to Eric to take you through the operational EBITDA bridge.
Thank you, Ulrich. Good afternoon to all of you. Let's turn to chart seven, where we have tried this quarter to give you a picture of the impact of Power Systems separately on our EBITDA development. We have the same categories in the bridge as in the previous quarters. We have removed PS from each of them to show the performance in a clearer way. If you start with the net savings, we are again able to offset the price pressures with cost savings. In this context, the PS impact is not material. We are also stepping up heavily the cost savings momentum for the second half of 2014. There's always the seasonal effect on the cost savings. We are making additional efforts this year to step up these savings.
The net volume impact is negative, mainly reflecting the effect of higher selling expenses and R&D investments that we take now to drive the organic growth and which also has supported the overall order growth in the quarter. The mix shows mainly the effect of higher system revenues from Low Voltage Products and DM. Finally, on the project margins, excluding Power Systems, where we show a positive development. That is basically based on better and improved project execution in Process Automation and Low Voltage Systems. Just to remind you, when we talk about project margins in Low Voltage Products, we talk about Low Voltage Systems business, which typically accounts for some 15% of the division's revenues. The other is the usual impact from G&A expenses and value at other smaller items. That brings us to the PS impact, which in total is approximately $180 million for the quarter.
The largest part is project-related. It also includes the impact of lower margin order backlog being executed, so revenues as well as some mix effects. This is the basis on which we say that the profitability of the company remains steady versus a year ago if you exclude the negative PS results. We turn to chart number eight. We had another good quarter on cash, thanks to in large part our strong execution on net working capital management. We have a large number of improvements around the organization, running improvement programs that is contributing to this development. We are integrating the cash management into the successful process and productivity improvement initiatives. This methodology has proven quite effective, especially if you take a look at DM, which has very good results on the cash side for the quarter.
Inventory turns have been a major focus across the company. We also continue to drive improvements in other large parts of the networking capital, like trade payables and trade receivables. The networking capital as a percentage of revenue is slightly lower than it was a year ago. We are still near some 17%. As you know, our long-term ambition is to bring this back into our corridor, which we have announced earlier, of 11%-14%, which we think is sustainable long term. However, it will be difficult to get into the corridor for 2014. With that, I turn it back to Uli.
Thank you, Eric. Chart nine summarizes the key metrics by division. I won't go through all of them, but let me highlight a few areas in that field. First, Discrete Automation and Motion delivered a good top line paired with solid underlying profitability and excellent cash flow. The reported operational EBITDA margin reflects the dilutive effect of the Power-One acquisition. As you may recall, we highlighted this at the time of the acquisition. Excluding that impact, DM showed a slightly higher margin on a high level. In Low Voltage Products, reported orders were stable. However, excluding the previously announced divestments, the remaining ongoing business improved in the quarter. In Process Automation, orders were strong and the operational EBITDA margin and cash are up on good execution of oil and gas projects and continued strict cost control.
Growth initiatives in areas like rail and industrial power helped Power Products increase orders by 7% in a tough market. Good discipline on cost brought them another quarter of industry-leading profitability. Power Systems orders are higher, thanks to both large and Base order improvements. As I mentioned earlier, these are orders with improved margins and risk profiles. Let's move to Chart 10 to see what we are doing in Power Systems. First and foremost, we believe Power Systems is long-term, fundamentally an attractive business for ABB. Worldwide, there are huge challenges ahead to manage the grid of the future, and there is no other company as well-positioned as ABB to support our customers in this space. Before we talk about this, we must fix the current issues. These are mainly related to a small number of high-risk projects, but also include some operational issues.
As we have said before, we will fix this business for the long term. This means making fundamental changes, and there is no quick fix. This is a marathon, not a sprint. In the second quarter, we have taken and implemented decisive action. We have focused resources on high-risk areas and assigned special action teams to critical projects. New experienced leadership has been appointed in offshore wind, and clear mitigation plans are now in place. We are implementing a new business model for offshore wind, and from now on, we will only bid for projects where we can share the risks more equitable with all of our partners. However, there are still a number of critical project milestones ahead in 2014 and 2015, and because of the complexity of the projects, not all of the variables are fully predictable. The risk of further charges remains in coming quarters.
In solar, we are no longer tendering EPC projects and expect approximately 90% of our solar EPC backlog to be finalized by the end of 2014. We are also putting a lot of focus on accelerating growth in the base business. These are smaller projects where the risks are more manageable, and their margins tend to be higher. All in all, this is positive news, and we are making good progress to deliver on our commitment to fix this business. Let's move to Chart 11 and an update on some of the actions we are taking along our three focus areas of profitable growth, business-led collaboration, and relentless execution. As you may recall, this is the framework we have adopted to drive growth momentum into the future with a strong focus on increasing earnings per share and cash returns from our investments in growth.
In China, our PIE initiatives around penetration, innovation, and expansion have helped us to grow the business despite the mixed macroeconomic environment. Chart 12 shows some of the actions that we have implemented in China. We have had good success in penetrating markets by expanding from Tier 1 cities in Eastern China into the large Tier 2 and Tier 3 cities in the interior. Today, ABB covers 500-plus cities together with partners, and we have in more than 100 cities our direct own operations. Our ambition is to add another 100 cities with own direct operations within the next three years, while at the same time delivering even more of our solutions through China's rapidly e-commerce infrastructure. Development of small HR robots for general industry applications in China is a great example of how innovation drives profitable growth.
We developed these robots to provide our customers in China with an economical, safe, and flexible automation solution for a wide variety of assembly situations. We think this sector of the robotics market has a big future, not only in China but globally. ABB in China is already the leader in this space. Building our service portfolio has allowed us to expand into new businesses where the service tradition is still new in China. Our innovative service solutions around energy efficiency, for example, are a great fit with the government's new priorities for economic development and environmentally sustainable growth. With our nationwide service network covering all of our business lines and the strong ABB in China, this is a very attractive growth area. Chart 13 shows you the same approach in the transportation sector. Here we are focusing on rail examples.
Rail is a market in which ABB can really deliver additional value, thanks to our combination of power and automation solutions. We cover the whole spectrum of customer needs as a solution supplier, from electric power infrastructure to high-speed propulsion and traction electronics, to energy-efficient turbochargers used in conventional diesel rail applications. As you may recall, we changed the way we drive these businesses last year by allocating certain cross-divisional industry verticals, like rail, to members of the senior management team. In this case, our executive committee member, Bernhard Jucker, head of our Power Products division, has the responsibility to ensure that we capture the growth opportunities in rail across all of ABB. So far in 2014, the team has done a really great job. Orders have exceeded $1 billion in the first six months and are almost 80% higher than in the same period last year.
We have a new R&D center in China dedicated to developing new solutions for our rail customers in Asia. We have also expanded our rail business by building up our service portfolio. This is another example how ABB delivers profitable growth through penetration, innovation, and expansion. Turning to Chart 14, business-led collaboration is another key for ABB to grow the business organically in a robust way. Here's an example also from our transportation portfolio. Earlier this year, we launched our Onboard DC Grid system to meet the growing need of ship owners to reduce operating costs in a tough business and competitive environment. An ABB Onboard DC Grid currently operating on a Norwegian offshore supply vessel has generated fuel savings of up to 27%, which is a significant advantage for our customers in this competitive market.
This is a solution co-developed across four divisions together with our corporate R&D teams. It's a great example of creating superior value by using customer needs to motivate and drive more effective collaboration across the business. Turning to chart 15, it's clear that ensuring the success of the step change program in Power Systems will continue to be a top priority and key focus of our relentless execution efforts. In addition, we have execution priorities in a number of other areas. Networking capital is an area that good progress is visible in the quarterly results. This involves hundreds of different projects that we have incorporated under Eric's leadership, working capital management into the group-wide operational excellence programs. Business integration is another key area. We are ahead of plan on achieving the cost synergies on the Thomas & Betts acquisition, and the integration of Power-One is fully on track.
This quarter, for example, Power-One successfully completed their brand migration from Power-One to ABB. As already mentioned, we have moved quickly on our commitment to optimize the portfolio. Let's move to chart 16 to look at this more closely. Since I took office last fall, we have moved to divest five businesses with limited synergies with the rest of ABB so that we can focus on our core business. Last October, we announced the Baldor genset business, which was mainly a combustion engine-based power source, basically outside of ABB's core area of electric power. We followed that in January with the full-service pulp and paper joint venture in Finland. As you may recall, this had a significant effect on Process Automation orders in the first quarter.
Since March, we have moved on three others, two of them, Thomas & Betts heating, vending, and air conditioning, and power solutions of Power-One were closed in the second quarter. The announced divestment of steel structures from Thomas & Betts is expected to be closed in the first quarter. These transactions show how we have moved swiftly to optimize the portfolio in a value-creating way. Let's now move to chart 16 for my summary. To summarize the second quarter, our organic growth initiatives started to bear fruit with double-digit order growth. We delivered steady revenues close to last year's level, despite the lower opening order backlog. We took decisive actions and implemented them to address the issues in Power Systems. Nevertheless, risks remain and are likely to weigh on our results in the coming quarters. Cash flow improved significantly and is a good sign for a healthy business.
We will continue to drive that improvement over the rest of the year. Finally, we continue to move quickly on our commitment to value-creating portfolio pruning and focus on our core of power and automation. Ladies and gentlemen, looking at the second half, the macro view remains as certain as it was three months ago. There are positive early cycle signals in some areas, such as the U.S., and less encouraging data in others, like some European countries. In this kind of a market, we will continue to drive profitable organic growth hard, business-led collaboration and relentless execution, will accelerate the implementation of our successful cost savings program even further. We feel more optimistic about the revenue development in the second half of the year than three months ago, it will take some time for the order growth we are seeing today to fully flow through to revenues.
We keep the cost and productivity focus at high levels over the rest of the year. Ladies and gentlemen, we are looking forward to welcoming many of you to our Capital Markets Day in London on September 9th. There we will present our strategy for profitable growth going forward, our new financial targets, and our priorities for value creation and capital allocation. With that, we would like to thank you for your attention and to open the call for questions.
We will now begin the question and answer session. Anyone who wishes to ask a question, press star and one on their touch-tone telephone. You will not want to [unintelligible]. If you wish to remove yourself from the question queue, you may press star then two. Participants are requested to [unintelligible] when asking a question. Anyone with a question, press star and one at this time. The first question is from Mr. Simon Tonnesson from Credit Suisse. Please go ahead, sir.
Thank you. Good afternoon, gentlemen. My first question is on offshore wind and Power Systems. Can you tell us what the completion rate is of DolWin1 as of today? Also quite interestingly, maybe, could you tell us whether you are close to the maximum penalty charge that you have in for this contract? Second question is on the strategy in Power Systems, and I appreciate that you will provide more details at the CMD in September, but in general, would you ever consider partnering up with a different player in Power Systems to potentially share technologies but also risks of project? Is that something that you would completely rule out as of today? The last question is on Process Automation with some good order development in the quarter.
I believe mining turned positive on a low base, also marine and oil and gas order seems to be still doing well. What is your outlook there for the second half, please? Thank you.
Okay. First of all, good afternoon, Simon. Let me go through these three points. On offshore wind on DolWin1, look, the joint commissioning activities related to the systems installed on the offshore converter platform, they are really presently underway. Together with the owner, TenneT, we work on that basically day and night. Keeping in mind the complexities and the stakeholders that we have involved, if everything goes to plan, the DolWin1 project is largely expected to be executed within this year. On the penalty charges, we don't disclose these amounts, but we are highly committed to drive a successful execution of DolWin1 within this year. On the strategy piece, look, Simon, this is exactly what we're already now doing in certain fields.
We announced the change in business model in offshore wind, where we are partnering up with others, in some cases with Aibel, how you have seen it in the new tenders. This is definitely something where we can benefit from by adding complementary skills and strengths of partners in the field. That's an approach that I personally like, not only for that space, I like it for all of ABB. If we do want to do business successfully, the partnering mindset is one that we're going to grow in the next couple of years in ABB even stronger in a successful way. You have just seen, we announced the partnership with Volvo on the truck and bus side, on the charging side. We have partnerships with other companies like Philips that we announced in the first quarter.
That's definitely a path that ABB will go to drive better growth and de-risk the business portfolio. On PA, look, you picked it up right. I'm quite pleased with the order development in the second quarter. At the moment, the tendering activities are significant, and we are carefully optimistic about the second half of the year in PA's order intake.
Thanks very much.
You're welcome, Simon.
The next question is from Mr. Ben Uglow from Morgan Stanley. Please go ahead, sir.
Afternoon, everyone. I had a couple of questions. I guess everybody's going to ask lots of questions about Power Systems, but I wanted to clarify something, Ulrich, that you said on the press call, that you reiterated the view that you could be close to breakeven in Power Systems, EBITDA over the course of the year. At the same time, you're saying that there's a risk of further project charges. Given that the first half loss is $53 million, what really are you signaling here? Is this that you do expect it to normalize, but there is a one-off risk of a big charge at the end? Or should we expect further losses on an ongoing basis in that division? So that was question number 1. Question number 2 is really, it just sounds as if you have a little bit more confidence about the situation in Power Systems.
What I wanted to understand is that simply operational, i.e., that you've got dedicated teams in place and you can see what they're doing, so your comfort level has gone up? Or is it also financial, i.e., that the guys have had a chance now to really go through the books contract by contract and figure out where the excess risks are?
Okay. Look, Ben, you're a sharp listener. In the press call, you picked up the comments around the breakeven. Look, let me just clarify. We are firmly committed to be on or above the breakeven in the fourth quarter, and we will continue to aim with full force for a breakeven for the full year. That's basically where we are at the moment, and that's what I wanted to say here, and hopefully that clarifies for you the situation. On your second question, around the confidence level. We have done unbelievable amount of work to really get a really good grasp of the business. We got more resources with significant competence enhancement in place. We have a direct line responsibility, which has now a really good transparency. The actions that we have decided to do are in full swing and under implementation.
The combined resources of ABB with external partners, for example, the AlixPartners partner guys, we are really now on top of the things that are going on operationally, and we got the right people in place. We are driving this project in a pretty down-to-earth, well-connected way, where the operational reality, we have really good grip on it now, much better than we had a while ago. That's on the operational side. On the financial side, as with every new management, they have really gone under Eric's leadership through the books, worked through the current situation, and there also we have a much better grip on the situation. We understand the risks, we understand where we are in terms of the cost to complete, the cash to complete. You caught it right.
In this business, whilst we are not over the hill yet, and as I said, this Power System, it is not a nice inheritance that we have, we are now fueled up for the marathon run. We're going to get through, and we see the finishing line.
Okay. That's very helpful. Thank you.
You're welcome, Bill.
Thanks.
Next question from Mr. Andreas Willi, JPMorgan. Please go ahead, sir.
Good afternoon, everybody. My first question is on the market structure or the structure of these offshore wind orders you mentioned earlier. If a structure like we have seen earlier this year in the one that Siemens had won together with a partner, is that already a structure you would be comfortable with in terms of bidding to win these contracts? Or are you looking in further improvements in what the customers offers as well in terms of risk-sharing and overall risks for ABB? Second question is on Base order growth. The good step up, is that something that happened as we went through the quarter, or has there been a kind of a sequential improvement during Q3? Would you expect that in terms of the run rate to continue increasing to Q3?
The last question, just on the portfolio, you say the pruning is mostly done. Should we expect a pickup in M&A in the near term? Or are you likely waiting with any larger M&A until maybe the Power Systems risks are reduced?
Okay. First of all, good afternoon, Andreas, thanks for your questions. I will take the first and the third, I will then hand over to Eric to answer the second one. Now look, on offshore wind, I think it is a combination of what, how, and with whom. First of all, what do you offer? I think it's very important to make sure that we offer proven technology in a field where we started the journey with high levels of technological uncertainty. Whether it is the platform itself, whether it's the power electronic solution, or whether it's the installation approach that we use, it's very important that we look at the what, sorry, to de-risk what we're doing.
That's one change that we are executing together with our customers because it's their interest also to de-risk the setup of the project on the what dimension. The second piece is the how. That means the commercial agreements, the way you put risk sharing in the contracts with the customers, the way you schedule the projects, the way you align the time plans between customer and ABB or sometimes the global customer and some other providers, like the alignment between those offshore wind park being built, that you make sure the time schedule between the platform and the platform builder is aligned throughout the course of the project and not only at the beginning, at the kickoff, later on, then you have variances you don't want. That's important. That's the second piece. The third piece is really around with whom do you go out there?
Yes, absolutely, as I said before, we have decided we will use a partnership approach there, where we take complementary skills and really make sure that we benefit from strengths of partners combined with our own strengths. If we get that right, then we're going to have a more successful business there. That's the change in the market dynamics that we are driving together with our partners, that we also see the customers being very open with. In my last meeting with Mel Kroon at TenneT, we talked that very openly through, I think this is something in mutual interest, where customers and us benefit the same way. Your third question around portfolio. Now look, when I took office, we said, "Okay, how does our portfolio look like? What is distracting us, what is the core?" We went through that.
I'm really proud of what the team did in the last couple of months. First of all, getting this business ready for the divestiture, then finding a good home for them, selling them at good prices. In general, I'm quite pleased with the value creation that we got out of it. Then the disintegration and handing it over was done in a very good way. Yes, you absolutely got it right. We already have done a large part of that activity. Now going forward, our core focus will be on profitable organic growth, we will add acquisitions at the time when we find it appropriate.
Given that the situation that we have at the moment in Power Systems, there is definitely an appetite to fix Power Systems or get it to a level of predictability and comfort to ensure that management is not distracted throughout that very important exercise too much by doing too many things at the same time. With that, I hand over to Eric for comment on the base orders that you asked for.
If you take a look at the base order over the last few quarters, it has been growing. Now we have a higher growth in the quarter, and I would say that comes successively during the quarter. Looking forward into the rest of the year, 7% growth is a good growth. We assume that we will continue to grow the base orders in this order of magnitude. Whether it will accelerate or not, we will see. The comparable in the third quarter is also a relatively low one, so we should at least see that level.
Thank you very much.
You're welcome.
Next question from Mr. Mark Troman, Bank of America Merrill Lynch. Please go ahead, sir.
Thank you. Good afternoon, Ulrich and Eric.
Hey, Mark. How are you, Mark?
Thank you. Okay, let's forget the inevitable question on Power Systems. Basically, I'm trying to get a kind of view on risks going into 2015. From what I've heard so far, most of DolWin1 and Solar EPC, whatever, 90% of that should be done by the end of this year. Ulrich, could you give some sort of idea, how much backlog or how much business do we have that needs to be executed in 2015? And I guess whether some of the newer contracts, for example, some of the Canada HVDC, whether that will be executed in 2015 or is that longer dated. I'm trying to get a view on what you have to execute in 2015. You already told us what you're trying to do in 2014. That was question one. Question two further short questions.
Base load is doing well, but low voltage looks to lack a bit of momentum. If we get a bit of commentary, clearly a high margin business, what's going on there in the market? Finally, on cost saves, you talked about stepping up momentum in cost saving in the second half of the year. Is that in response to increased price pressure, or should we expect a spread of cost save over price to increase in the second half bridge? Thank you very much.
Okay. Good question. Thanks, Mark. Look, as I said before, on the timing of the project, we aim to have DolWin1 executed this year, and that's what the team is really working for and get it going to make sure we get some progress going. I have to say, the collaboration with TenneT and with the suppliers, now that we have a different approach, much more hands-on and directly, it's really helping there. I have a higher level of confidence than I had a while ago. On DolWin1, you are aware there was a technical issue that we were not faulty for, that was influenced by basically the wind park provider. We are working with TenneT to get that one on track and sort it out.
As soon as that is sorted out, I'm confident that we will swiftly then also finalize the DolWin1 task. This is not fully in our hands at the moment. This is strongly influenced also by the wind park provider. That in TenneT's and our opinion, and we both share the same opinion, has caused this issue there. You have DolWin2. DolWin2 is the platform that sailed out the Dubai dry dock on June 12th. It is on its way around the Cape, and I'm really happy to share with you that yesterday it passed the Cape of Africa, so it's around the tricky thing, and it's coming now up towards the northern hemisphere. This project is planned to be completed within 2015. This is basically the offshore wind situation. Let's talk about the solar piece.
Look, on solar, we are disappointed how this was handled in the past, but I'm really encouraged with the team that we have put in place now. They're doing pretty well. As I said before, we expect 90% of that business to really be fleshed out within 2014 and only small parts to remain in 2015. These two buckets I want to clearly differentiate from the new HVDC order. The new HVDC order is bread and butter business to us that we can execute really well, where we got good resources in place. As I said before, 13 of the 14 globally commissioned projects in the world have been done successfully by ABB, and this is another one. This is our standard business. This is not something new, and I'm highly confident that the team will do a good job delivering this. This is a multi-year project.
This will not be done in 2015. This project goes beyond even 2017. This is a typical long-term HVDC long-distance connection. We have, for example, 360 kilometers of sea cable on that one. We're going to connect it to the North American grid. It goes over to Newfoundland. That's a project that I really like in Power Systems, and I look forward to harvest the margins out of that one. We have the LP situation. I will ask Eric to comment on that one. I take first the cost savings approach. Look, on cost savings, when you have the opportunity to cut costs, you should do it. We see an opportunity to widen the scope of our cost savings initiatives. We're looking stronger to drive white collar productivity. Given the growth momentum, we really need to free up salespeople's time as an example.
This is not about restructuring people. This is about allocating them to more value-added tasks by giving them better support and cutting costs in the execution on, for example, back office sales tasks, and that we are doing. Naturally, this is not only supposed to compensate price. This is also sometimes supposed to either fund additional investments or be taken to the bottom line. As we develop the successful implementation of these measures, we will decide how to take the funds out of these activities. With that, I hand over to Eric for a comment on the LP side.
Let's take a look at LP, where we had a 0% like-for-like growth reported in the quarter. If you take a look really behind that and with all the changes with the divestitures in LP from Thomas & Betts side, if you really take the ongoing underlying business of LP and look at that during the quarter, we still had a reasonable growth in that area. Don't forget that LP is also a mix of product and a bit of systems, as I mentioned earlier on the call. We are satisfied with that. LP has also quite a bit of exposure in Europe, and as you heard in the call from Uli earlier on the call, Europe is not a full clear growth pattern yet.
It is a bit of a mix, but we are quite pleased that we have reasonable growth in the underlying ongoing business in LP.
Okay. Thank you very much. Very clear.
You're welcome, Mark.
Next question from Daniela Costa, Goldman Sachs. Please go ahead, madam.
Thanks a lot for taking my questions. There's one main question and then two smaller things. My main question is, you're talking quite a few of the slides about service and how you're still pushing for that. I believe you've been around the 17% level in terms of orders that relate to service now for a while. A while ago, and I understand this was from before Ulrich's time, there was a slide at some point where we had penetration in the installed base was 25%, and you've aimed it to increase to 40% by 2015. Is that completely out of possibility now, or is that still a focus, basically, and where do we stand? The other ones, I was just curious, where are you in terms of CROI at the moment?
The third one is also curiosity on why did you decide to not give the breakdown between pricing and savings this quarter? Is it just that the absolute levels of both things are basically the same as in the prior last quarter or 2, there's no message there? The absolute levels of where both things stand have % of sales and then for pricing has % of orders have changed and are not meaningful anymore to talk about? Thank you.
Okay, Daniela. Thank you very much for your questions. Let me address the service piece quickly. Service is a fantastic opportunity for ABB. If you look at it, we have now about 13% growth in service. I'm really pleased with what we're doing there. Let me just explain to you what we are doing to drive this. We have now hired many hundreds of service salespeople. We have set up a dedicated service product management where we basically package the offering, make it commercially viable, make it repeatable. Basically have a solution app store for services that we go out and can sell with high impact, low risk, and relative lower cost to execute because we have repeatable solutions that you get in that one. Service is also something where we're not doing the classic life cycle service.
If you look at the value chain of our customers, we help them more and more on the planning side of the operations with engineering and consulting, for example, on the grid side. We use a lot of software on the automation side to provide services to planning our automation assets. On the other side of the value chain, if you look, for example, the Ventyx offering around asset health, what we have both in the utility and the mining sector, this is something that we are expanding very aggressively, and I have a high hope and high expectations to that one. In terms of the numbers, look, it's always difficult when you do acquisitions, how the service order share develops because you need to do it on a like-for-like basis.
If you exclude the large acquisitions, in 2010, we were at about 16%, and last year, we were at about 19%, 19.5%. We made some good progress, and we're going to drive that going forward. The 25%-40% installed base penetration, this is still the ambition to get there. Given the fast-growing installed base through the acquisition, the 40% is much bigger than it was a couple of years ago, and therefore, this target is probably a bit further out. For me, at the moment, it's important to drive the service business faster than the ABB overall growth, because given our overall very good growth is a tough ask for the team, but they are doing a good job. Secondly, to ensure that delivery models on service are such that the service growth is accretive to our business. That's the topic on service.
I hope that addresses your points. I let Eric talk about the netting out of cost and pricing here.
Also the CROI, I think.
Yes.
Let me start with the CROI, Daniela. With the good cash flow generation that you have seen now for the first half compared to last year, on a rolling basis, we have improved the CROI compared to a year ago a little bit, and that's in line with our announced desire to do so. Also, the net working capital effort, of course, helped to keep the capital base in place. On the bridge side, we have since the capital quarters combined the price and the cost because they really belong together.
We have showed the positive impact of that, which we still do this quarter. It is slightly lower, but we still have a cost saving above the 3%, in our 3%-5% range. It is really nothing new. It is continuing the same pattern as before. As I said, we will step it up more in the second half of this year, compared to what we have done before. That is both to make sure we counter the price differences, and also obviously to drive the cost rationalization as much as we can.
Okay, thank you.
You're welcome.
Next question from Mr. Fredric Stahl from UBS. Please go ahead, sir.
Hi, good afternoon, gentlemen. It's Fredric here from UBS.
Hi, Fredrik.
Hi, good afternoon. Two simple questions for me. First, R&D looks like it stepped up quite a bit in the quarter. Is that a temporary effect, or is this a new level going forward, maybe reflecting your growth ambitions? The second question is just if you can give us an idea what the profitability is of the steel structures business that you're selling out of Thomas & Betts. Thank you.
Okay. First of all, on R&D, Fredrik. Look, when you identify organic growth as an opportunity and you realize what you can do in terms of driving faster, in my eyes, very attractive organic growth, R&D investments are one of the drivers to really make sure that we penetrate the market and have the right offering to the customer in the right place. Therefore, we will continue our significant investment on R&D. You know that we are spending more than $1 billion annually in R&D, that's something that we will keep pushing. If you refer to the waterfall where we have basically sales and R&D together, we have invested both on the sales and on the R&D side, I'm really of the firm belief this is a very good investment that will fuel further organic growth, going forward.
On the steel structures business, we are not disclosing details on profitability on a detailed level. I can tell you, given the size and the profitability of the business, the announced divestiture price that we have been able to achieve is a good price for us, I'm really happy also that it found the right place, with the right owner, now after divestiture.
Very good. Thank you.
You're welcome, Fredric.
The next question is from Mr. Martin Wilkie from Deutsche Bank. Please go ahead, sir.
Hi, good afternoon. It's Martin from Deutsche Bank. Just a question on the Power Products margin. The margin there is pretty much around the average that it's been for the last couple of years, I was wondering if you could comment specifically. You mentioned for the group generally that you're seeing cost offsetting price and also investments in R&D and selling. Is that dynamic essentially the same inside Power Products? This level of margin is probably going to continue going forward because you're making these investments in selling and R&D and so forth to eat up some of those cost savings. If you could just give some sort of comment specifically around the trajectory in that margin. Thanks.
Okay, look, I think Bernhard and his team have done yet another quarter of a wonderful job. I'm really proud. If you look at the revenue development in Power Products based on the lower opening backlog and the Power Systems situation, which is a customer of Power Products. Given that, and the market dynamics that we see, Bernhard delivering 14.8% is a really solid performance. He and his team have a nice balanced approach to running this business. We have pushed up the R&D investments following our penetration, innovation, expansion approach, because we know now exactly where we're going to get a payback for investments in that space. We have committed to a margin band for Power Products that we will absolutely stay in. We are ramping up now the growth.
If you look at the 7% growth in Power Products, in a world where infrastructure investments on the utility side are still subdued. Investments, for example, in power solutions for the rail sector, Power Products specified offering for the industrial space. These kind of investments have really paid off, both on the sales side and on the R&D side. That's the point on Power Products here.
Okay. Thank you very much.
You're welcome. Now, I would say we take one more question.
The last question for today is from Mr. Jeff Sprague from Vertical Research. Please go ahead, sir.
Thank you. Good day, everyone. Thanks for fitting me in. Just a couple questions there on price, answer is well understood. I'm just wondering also on Low Voltage specifically, if you're seeing any change in pricing power and maybe discuss price in sales versus price in orders, if there's any difference there. On HVDC, I was wondering on these current projects, maybe give us some idea of what the expected margin profile might be or what it's been typically on programs that you've completed and the mix of ABB content on these projects versus pass-through and partner content. Finally, I was wondering if you could address in any way, even if it's kind of a rough guidepost, but how much of your current backlog is deliverable in the next 12 months?
Basically, trying to get a sense of what needs to be booked here, really to get some forward-looking numbers.
Okay. Hey, Jeff, good afternoon. Couple of comments regarding your question. On the price situation in Low Voltage Products. Look, the price in the order is the price in the revenue. There's not much different. This is a very short lead time business, it flows through very quickly. If you look at Low Voltage Products, it's really interesting. There is basically a northern hemisphere market and there's a southern hemisphere market. If you go into northern hemisphere, we are very strong established since many years, whether it's Europe, whether it's China, as strong markets. Now with Thomas & Betts, we have a very strong not only brand, but also access to channel in this field. Given the structure of this business, with high level of complexity, many SKUs, high entry hurdles, local kind of requirements.
This is a defendable, high profit business, I'm quite happy about that one. In the southern hemisphere, there we are going very aggressively for expansion, whether it's South Asia, whether it's Africa, whether it's South America. There we see competition from different fields. The benefits that we have in terms of our critical mass, in terms of the ABB set up to, that allows us to leverage SG&A across different divisions when we do new markets, should give us a competitive advantage going forward. I'm confident on the underlying profitability of this business also long term. On HVDC, look, we will not disclose details to you for competitive reasons. All I can say, this is a good project with healthy margins. You might remember we used to make money in Power Systems before the offshore wind and solar disaster.
This project historically contributed to our profitability and so will they, in the future, we have the other issues fixed in Power Systems. In the backlog, let me hand over to Eric.
Yeah. Let me add just to what you said, Uli. You asked us about the ABB content, it has good ABB content in those orders. It's a lot of products, both from PS and as well as PP in those projects. These are attractive ones, and we have quite a few of them also on the backlog that we are executing during next year and the following year. To the backlog. On a quarterly basis, when we enter each quarter, we basically have 80% of the revenues in the backlog with a higher number in PS and PP. The lowest one obviously in LP, which is more book-to-bill. It means we have fairly good visibility for the next quarter, and then if you look ahead, of course it gets less and less quarter by quarter.
Thank you.
This was the last question that we take for today. Let me remind you, we would be all looking very much forward to see you on September 9 in London at our Capital Markets Day. There we will hopefully answer all of your other questions and give you an exciting picture of the ABB of the future. Thank you very much for joining us this afternoon. Have a nice day.
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