Earnings Call: Q1 2014

Apr 29, 2014

Ladies and gentlemen, good morning or good afternoon. Welcome to the ADP First Quarter 2014 Results Earnings and Investor Conference Call. I'm Stephanie, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and this 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 Mr. Ulrich Bisshoefer, CEO. Please go ahead, sir. Thank you very much, Stefanie. Welcome and good afternoon, ladies and gentlemen. Thank you for joining us today to discuss our Q1 2014 results. With me is Erik Elswick, our CFO. As always, my remarks refer to the presentation that you can download from our website at abb.com. Before we get started, let me refer you to the important notices on Page 2, the Safe Harbor statement, regarding any forward looking statements made in the presentation. With that said, let's move on to chart number 3. Ladies and gentlemen, I can quickly summarize the Q1 in just a couple of sentences. We turned in a steady performance across the large majority of our businesses, a performance that has been overshadowed by the disappointment of another poor performance in the Power Systems division. We have now a clearer plan to bring PS back to health and ABB remains well positioned to achieve long term profitable growth and attractive shareholder returns. Let me review the highlights of the quarter in a little bit more detail. We delivered basically stable orders and revenues in a mixed environment as our broad early cycle exposure helped offset the continuing weakness in the late cycle and utility related parts of the business. For example, base orders were up 3%, led by low voltage products in Discrete Automation and Motion divisions, and they're higher in all three of our largest markets: the U. S, China and Germany, which is encouraging. Excluding Power Systems, operational EBITDA margins were steady. If you adjust for the dilutive effect of the PowerOne acquisition in Discrete Automation and Motion, which was expected. Cost savings are again in line with guidance of 3% to 5% of cost of sales, which further helped our earnings. Cash improved significantly as we gained some clear benefits from the many initiatives we are executing to improve net working capital management. So all in all, we have satisfactory performance in 4 of the 5 businesses. However, as I said, we are disappointed in the poorest Power Systems performance. I will come back to that in more detail shortly. I would like to emphasize upfront that the new leadership team in PS under Claudio Fakin has completed a comprehensive review of the business during the last 3 months and have launched a step change program in the division. This builds on, but goes also well beyond the previously announced strategic realignment. A number of key decisions have already been taken, and there will be more to come over the next few quarters. It's important to be clear that the transformation of BS will take longer than originally expected, but we are confident that the outcome will be a strong, profitable and competitive business. Finally, in line with our strategy to continuously optimize the portfolio and to focus driving profitable growth in our core Automation and Power businesses. We are selling the heating, ventilation and air conditioning business from Thomas and Betts and as we announced yesterday, the Power Solutions business from PowerOne. Both transactions are expected to close in the Q2. Let us move to chart number 4, where you find the key figures for the quarter. First, let me point out that as we promised after Q4, we will from now on give you a proper like for like comparison on orders and revenues that adjust for changes in business scope. This is in response to the feedback from many of you after the Q4 results that such a comparison would allow you to make a more meaningful analysis of our year over year performance. So we have responded to your input and will provide this information both at the group and divisional level from here on. Looking at the top line. I already mentioned the stability in orders and revenues, which is a reflection of both our good early cycle exposure and our balanced geographic scope. That in turn is the benefit we have gained from our acquisitions over the past few years, primarily in the North American market. The group's operational EBITDA has been hit by Power Systems as I said. That has masked the otherwise decent performance in most of the business. Net income is correspondingly lower. We are pleased with the cash performance in the quarter even if it still shows the seasonal Q1 buildup of working capital. The division has done a great job in implementing operational excellence initiatives related to better net working capital management across the company, and we see a large potential to keep driving those gains in the future. Erik will provide some color on that in a few minutes. So if you move on to Slide number 5, this shows our orders we received in the regions in the Q1. It's really interesting. Automation outperformed power in most markets, which you would expect given the current new spending by utilities on power transmission. An exception to that pattern is the Americas, where we saw increased power orders in the U. S. And Canada both from utility and industry customers. Base orders were also up in the U. S. On a like for like basis. Brazil was down across most of the business, but the decrease was the biggest in large process automation orders. Europe remains a mixed bag. Germany is flat versus a year ago, but that mainly reflects a large rail order we took there last year. Base orders in Germany are close to 10%, up both in automation and power. The U. K. Increased dramatically, thanks to a large rail related power order. Italy remains weak, but this is being driven primarily by a difficult comparison in power. Automation orders were slightly higher in the quarter. In Asia, base orders in China are higher led by a double digit improvement in automation. We are well positioned in automation in China where the government's growth initiatives around productivity, efficiency and environmental improvement are exactly where ABB plans place. Large orders in China were lower compared with the same quarter last year when we won a large transformer contract. India turned in a strong performance in the quarter with a 31% order increase and a strong double digit increase in base orders. Finally, we saw growth in the Middle East and Africa as an increase in oil and gas orders more than offset lower power demand. So turning to slide number 6. Here is an overview of the key divisional data. I won't bore you going through all of the data, but let me note a couple of highlights. Discrete Automation and Motion delivered a strong order increase mainly in the early cycle businesses. Revenues on a like for like basis were lower reflecting the lower opening order backlog in the Large Motors and Generators business, which is later in the cycle. The operational EBITDA margin adjusted for PowerOne acquisition was basically unchanged from the previous year. We have guided that PowerOne will face a choppy period for some quarters as the solar PV market adjusts to changing demand and subsidy patterns, but we remain optimistic about this business in the long term. Low Body's Products showed solid execution on revenues in the quarter, which is also reflected in a nicely improved profitability. Process Automation reported a record operational EBITDA margin on really good execution of system projects out of the backlog, mainly in Oil and Gas and in Marine. The lack of large orders was felt on the orders line. Tendering activity is positive in several parts of this business, but it's too early to talk about significant recovery in areas such as mining or metals. Power Products continues to deliver industry leading profitability and had a really solid performance. And it still stays a high performance business with a great track record. Power Systems shows a loss in the quarter. And as I said, I will describe what has happened there in a minute and get to more detail after Erik has spoken to you about some more of the financials. So over to you Erik who are on slide 7. Thank you, Uli. We have the operational EBITDA on chart number 7. So if you start with the net savings, we were at a positive about €25,000,000 for the quarter. The price pressure was lower in dollars in the quarter, mainly reflecting the reduction in revenues in Power Business, where it's also where we see most of the price pressure traditionally. Similarly, the reduced volumes in Power had some impact on the sourcing savings, while we continue to execute very well in the operational excellence programs. Cost saving remained in line with our ambition to take out an equivalent of 3% to 5% of cost of goods sold on a yearly basis. As we said before, price pressure in Power Products has stabilized at levels close to the long term average for this business. We can manage this through productivity improvements, supply chain measures, new product launches, channel actions, etcetera. So we have returned to what I will now call business as usual on the pricing side. On cost, continue to achieve our cost savings of all 3% to 5%, as I said before, on an annual basis. The volume effects were slightly negative in the quarter as revenue declined. This was further impacted by a small increase in the selling and R and D investments as we are now starting to drive our organic growth initiatives. Mix was slightly positive, mainly due to the growth in LP and DM, while the project margins were negative, mainly of course from Power Systems. And Uli will come back to that later as we said before. The other is a sum up of a lot of different impacts from margin acquisitions, some change in the G and A costs, ForEx impacts, provisions and gains and losses on sale of business, which is part of the normal business. So let's move to Chart 8 where we have the cash flow. As you know cash flow in the Q1 is typically impacted by seasonal effects of ramping up the working capital at the beginning of the year for revenue increase in the Q2. Nevertheless, I'm taking this into consideration. The total cash improved by approximately €280,000,000 cash flow level excluding the negative impact of Power Systems. It's about €80,000,000 from the other divisions, about €100,000,000 in corporate and then €100,000,000 negative in Power Systems versus a year ago. A lot of work is going on to address the net working capital with many small initiatives done on the lower level to really change the processes around inventories and receivables. If you look at this on division level and take the example of Discrete Automation and Motion, we generated more than EUR 100,000,000 additional cash compared to the same quarter last year. They are doing a very good job in working to balance the seasonal effects out. Out. And one of their net working capital projects was launched last year in Europe and expands the whole value chain for supplies to customers and have already resulted in a significant reduction in inventory and a very substantial decrease also in lead times, which of course helps us to do faster to the customers. And this methodology and way of working is now also being rolled out in markets outside Europe in DM and then later in other divisions. So with those local initiatives, I remain very confident that we have still a lot of potential to improve on net working capital and thus the cash flow. And we are aiming to get back into our guiding range of 11% to 14% of net working capital later this year. And with this, let me turn it back to Ulrich. Thanks, Erik. So I would like to update you on starting on slide 9 on the progress that we're making with the 3 focus areas in profitable growth business led collaboration and relentless execution and give you some real life examples what we're really doing quarter by quarter there in terms of concrete actions. So this is not a PowerPoint initiative. This is really very, very concrete activities that we're doing every day and it is driving really our efforts. Starting with profitable growth, we use a framework of penetration innovation and expansion to organize and drive our efforts in this area. Actions are being taken to increase penetration including our continued push on the sale of Power Solutions for example into the industry sector. So that basically means selling more of our product businesses on the power side and standardized power systems activities into the industrial sector. Well over onethree of our volumes in power are already going into industry, but there's more we can do in this area. For example, transformers and switchgear for offshore oil and gas, power distribution and equipment and systems used in marine and rail. The order we won in the quarter to upgrade our rail network in the U. K. Is a great example for that opportunity that we have here. On innovation, I hope that a lot of you visited the Hannover Fair recently. You will have seen at our stand our new IEC 5 high efficiency industrial motors that are really ready to capture the opportunities from the upcoming changes to motor efficiency standards in Europe and are in fact ahead of the European standard requirements. And we are the only company that has that at that scale across the entire range available to offer. These motors have basically about a 20% more energy efficiency compared to the current standard. And they do this with our permanent magnets that used rare earths. So that makes them really more economical and more sustainable and also from a supply chain perspective much more attractive to be produced. When we look at expansion as a growth driver, we will continue expanding through M and A. We will continue to expanding through organic investments. But we will also do more on partnerships. And this partnership or one of the partnerships that we announced in the quarter is a partnership with Philips which I think is a great example, because it basically allows the customers out there to link the ABB's automation software in commercial buildings with Philips connected lighting system. The result is a much more energy efficient way to control systems such as the lighting, the appliance, the building access, the HVAC in the building. So it's really a solution where 2 large global players come together to bring significant value to customers. And it really allows us to have an even stronger position in the building automation market together with a strong partner. To move on to Page 10, that shows some examples what we call business led collaboration really where we bring the power of ABB together. The rail upgrade order we won in Sweden this quarter is a great example where we are basically delivering products and services from multiple divisions to allow the customer to provide more reliable, more efficient, more convenient and more comfortable rail service. In fact, this train will become a benchmark in terms of efficiency, reliability without having to build a new train doing it through a retrofit. Our recent footprint announcement on manufacturing and R and D and supply chain in China and Brazil are further examples how we can increase productivity and bring more value to customers by having cross divisional product development, logistics assembly and service in a single location. In Xiamen at the East Coast of China, we are setting up a new development and production hub for low voltage products and power products, which will really give us a base for further improved productivity and optimize our footprint by further growing local R and D, low wattage in low wattage products and in the power businesses. And the total investment is about $300,000,000 over the next couple of years. In Brazil, we announced previously a $200,000,000 expansion program. We are expanding our technology development and production capacity to serve increasing domestic demand from industries such as Petrochem, Pulp and Paper, Oil and Gas and Mining as well as Energy. So typical customers in Plaso have tended to buy electrical equipment from multiple suppliers. Within this new factory, we can really locally act as a single vendor for locally engineered their site, assembled, packaged and tested and delivered equipment. And that's really a great opportunity for our customers and for us. The product scope includes switchgear drives, distribution equipment, automation system as well as the assembly of combat substations that we do there both for the industrial and for the power field. And then joint channel development is another key opportunity, an area that we are working now very, very aggressively in ABB. For example, we have teamed up in parts of our power and low voltage business in China, bringing a very attractive combined product offering to channel partners not only in the Tier 1, but also in Tier 2 and Tier 3 cities all across China, which will be a major growth engine for us to come in the future. On Chart 11, I show we show you a couple of examples and what we are doing in terms of relentless execution to make ABB even more robust and successful. We have demonstrated a good track record in cost takeout over the past several years, and we will continue this for a long time to come. One way we will do this is to expand our productivity improvement initiatives beyond the shop floor and into the engineering and sales offices where we have room to optimize support process and tools that will make our front end people more effective and give them more time to spend with the customers. So we're going to apply Lean 6 Sigma principles not only in the supply chain, but also in the administrative functions. Eric has already mentioned one of the network and capital initiatives underway in the Discrete Automation and Motion division, and we are driving this very hard throughout the entire company to really become much better than we already are in that field of capital efficiency. This is part of our long term commitment deliver an attractive cash return on investment, one of our main value creation metrics moving forward. Turning to Chart 12. Let me now take you through the Power Systems results and the step change in the division that will take us to long term consistent and profitable growth. As we said when we announced the new management team in Power Systems late last year, Claudio and his team were given the mandate to really reevaluate the business in a fundamental way, do a proper assessment and come up with clear priorities in the portfolio. They looked at the projects, the business portfolio, the execution, the people, the business model across all parts of the division. This review is now concluded and the team has established a clear set of focused areas. They have already started to implement a number of changes, and it will be more to come as we move through the year. So what is really different this time compared to what we announced previously? This step chain program goes well beyond our previously announced initiatives. We are building on what we have already done and have benefit fitted from those learnings. But the changes have not been fast and deep enough. So we are changing that now. For example, we have decided with immediate effect to stop bidding on engineering procurement and construction contracts in solar PV power generation project effective immediately. We have made some additional changes to management, and we are bringing in external experts, a company that you might know, AlixPartners, who have a solid track record in restructuring and in the offshore wind business to really help us drive the step change program with additional program management and senior change management experience that complements Claudio's team that we have in place. We have also broadened the scope of our assessment, and we are looking beyond the offshore wind connection business and the low value substation business in reassessing the rate we go to market across the entire portfolio. In the short term, we expect the division's results to remain under pressure. We still have significant execution risk on some critical projects. Working through the low margin order backlog, we'll also continue to pressure margins for several quarters to come. So while the Power Systems transformation will take longer than originally expected, we remain confident that the outcome will be a strong profitable and competitive business. So coming to the end and turning to chart number 13 as a summary. So first on the quarter, look, I would like to remind you with all the noise around Power Systems, 4 of our 5 divisions remain on track and delivered steady top line results in a mixed environment and operational earnings that were close to last year's level. Power Systems disappointed, but we have launched a step change program to deepen the transformation of the business and bring it back to profitability and growth levels that will offer an attractive return on investment. The cash performance improved, and we will continue to drive this key value creation metric over the rest of the year. Finally, we continued our disciplined portfolio pruning in line with our strategy to focus on driving profitable growth in our core Automation and Power businesses. As for the outlook, we don't see a meaningful change in the outlook and keep basically the guidance that we had at the end of the Q1 last year. Early cycle indicators are generally positive. The uncertainty remains on the timing of recovery in later cycle industries and utility transmission spend. So with all that, I would like to conclude my remarks. Thank you very much for your attention and open the lines to questions. We will now begin the question and answer session. The first question is from Mr. Mark Troman from Bank of America Merrill Lynch. Please go ahead sir. Thank you. Good afternoon, Horace. Good afternoon, Horace. Good afternoon, Horace. Okay. Firstly, Power Systems. I just try to understand what really went wrong in the quarter. It looks to be related obviously to the offshore wind primarily and some of the solar EPC. In Q4, we understood that it was obviously a weather related issue. So maybe if you could just elaborate what exactly or what list of issues went wrong in Q1? And if they are project issues, how far are we through the real problem projects that took the numbers down so significantly? So that would be question number 1. And then also just a follow-up on Power Systems. Given step change, which I guess is the latest initiative, when we look at your order rates in 2011, it was 9,000,000,000 dollars 2012 roughly 8, 13,600,000,000 and you did 1.5 or so in Q1. Would you expect I don't expect any sort of formal guidance, but would you expect that given the scope of this business and where you want to be €6,000,000,000 is roughly EUR 4,000,000 or could it be a lot lower than that? Thank you. Okay. So Mark thanks for your questions. I think they are all good questions. Looking at the Q1, we had operational weakness in EPC projects both project related but also some basic execution topics. We are working now. We're going deep into the processes that we have in place to really make sure we're doing it in the right way. We had again some delays on some of the projects. But it's not only the project business that we are looking now at. We really look at the entire business portfolio and make sure that the underlying quality and the margin quality of this business is being ramped up across the entire range of all the activities. So that you have our commitment that we're going to do this in the right way and that we're going to take the time that it needs to fix this. So we are working on it with urgency, but we are not getting into a hectic mode. We will take the time that is needed to work that one through in the time to come. Now on the step change please, a couple of more comments on that one. Look we have now a holistic program that is broken down from the overall divisional level down to every operating entity and we need to make sure that we drive really deep and very hard and very swiftly all the change actions that we have in place across the entire program. The external resources that we bring in has not only the program management capability, but also the technical and the system related experience in driving large scale system projects. So I'm confident that we're going to get this going in the right direction. Now on the order rate, look if we always said that we're going to do this the order intake in a disciplined way in this business, so we will not go out out of the sudden and take crazy orders just to fill the backlog. On the other hand, we are competitive in quite some areas of this portfolio and we are taking new orders. So at the moment, I'm confident that we will get additional orders in this business and get it to a scale that justifies us being in there. But I will not guide you in any more details on any numbers for the full year. Okay. Then that's fine. And so just to on what went wrong in Q1, was it a mixture of technical, human error, managerial sort of mistakes or a whole mix of those or Look, it was all of the above. We basically had some normal technical execution issues. We had some project timing issue, project management issue, coordination issues where we need to get better at. We had some human errors in there and that's what we really need to work on. Okay. Thank you. The next question is from Mr. Andreas Willey from JPMorgan. Please go ahead. Yeah. Good afternoon, everybody. My first question is on working capital, which is also partly related to Power Systems. You obviously had the buildup last year. You just said you aim to be within your target range. That's kind of a 4%, 5% reduction in working capital, which is kind of $2,000,000,000 So a big number. Maybe you could give us a little bit more around that. Is that what you target for this year, a EUR 2,000,000,000 working capital reduction? And how confident are you? And how much of it is visible things in power systems that you know once customers start paying you or you start delivering that this will unwind? Or how risky is this also tied to execution risks in general? And the second question is on SG and A, which ramped up quite a bit year on year. Maybe you could highlight a bit more by division where you're significantly increasing investments, whether this is what we should expect for the rest of the year? And how long until we see a payback, so until it becomes kind of self paying in terms of these investments? Thank you. Luca and Jair thank you very much for both questions. I will let Erik answering in a second more in detail on the numbers on that one. Both areas are areas that are high on the radar screen. So both on the working capital side and the SG and A side, we are doing quite a bit of work as Erik has already explained before to make sure we really drive this in a hard way. On the SG and A side, we had some special effects in the Q1 and Erik will now run you through both topics. Yes. So the net working capital, you are right that in the Q1, we are quite a few percentage points away from the range of 11% to 14%. But on a full year basis, we ended last year close to 15%. So it's basically 1 percentage point down at the year end measure. And that with all the efforts we have running, we have a reasonably good level of confidence that we can get that done by the end of the year. Obviously, the biggest outlier today is Power Systems. You have seen this negative cash flow again in the quarter in Power Systems, and that is a lot related to large payments on some of the challenging and difficult projects we have. So we need to get some of that cash coming back to ABB and there is a lot of that outstanding before the end of the year. And if you ask me whether there is a risk in that, I would say there is, of course, always risk whether that will come this year or next. The delivery schedules are being drawn out in time somewhat on those projects. So there is clearly a risk there. But the long term target is to take the Power Systems networking capital level down substantially. They are way above where they should be long term. So that is one of the biggest potentials we have. But all in all, it should mean we have a reasonable confidence that we should be able to get to the $14,000,000 by the end of the year. On SG and A, you have seen it has gone up in total. Part of that has to do obviously with the acquisitions. And most of the investments are going into low voltage and into the discrete where we are building the sales and service platform. We're obviously more careful in the slower growing areas in power even though we have also made some additional investments there. Process Automation, we are also quite careful with the expansion of the cost level given that the revenues are supported by a smaller backlog in Process Automation. And the increase also includes some onetime items in terms of restructuring and write offs and so on, which is in the numbers. So it is not fully the percent you see on the key data table if you look at it on a like to like basis, but it is still an increase. Thank you very much. You're welcome, Andreas. Next question from Mr. Simon Tonneson from Credit Suisse. Please go ahead, sir. Yeah, good afternoon. My first question just on Power Systems. I mean, you commented on the on what happened and the delays. I'll just get an idea in terms of timing. If I'm right, this dozen one contract was supposed to be operational last year. And obviously, we're seeing further delays regarding that contract. What's sort of the latest we could expect to see any charges? Just to get an idea of the timeline. I know it's difficult, but what when are you expecting to finish actually the installation of this contract? And when is this contract now supposed to be done? I mean you had €300,000,000 of charges for contract size of around $700,000,000 Just in theory, how much more charges could you theoretically accrue just from that contract? And where are you with regards to the Dolby and 2 contract? I think that's what €1,000,000,000 in size and it's supposed to be operational I think next year. And whether is there any risk that you might actually see further delays with regards to that? And the second question is just on the solar projects and power systems. Could you give us any kind of scale indication? And sort of how much orders have you won in 2013? Just to get an idea of what the order impact could be in 2014 if you're not bidding on those anymore. I think you had quite a few contracts in Canada, if I'm right. And if you actually won some of those contracts last year, I mean, you had already a 9% to 12% margin target at this time. So could I be right assuming that any new contract in those area have actually been in that margin range? Or is that wrong? If you could just comment on that. Thank you. Thanks, Simon. Thanks for your questions. Look, I'm not in the business of doing speculation. And on the Dolby 1 and then the Dolby 2, I can assure you we have the project team on high alert. We have weekly reviews where it goes up to the Executive Committee level weekly reviews on this project. We definitely have intent to get the Dolby 1 done within this year. And the Dolby 2 is out a little bit further. To speculate on that one whether we're going to make it or not, I don't want to do it. But I can assure you it has a completely different level of attention now compared to previously that we really make sure that it is going in the right way. And that's all I kind of say in that direction. We really need to make sure that with all of these projects and that's really the difference now also in terms of how we run the program here is we make it extremely operational and personal that people understand everybody understands what he personally has to contribute, what the deadline is, what the milestone is, what the expected input is and what people need to do. And I'm highly confident that with that effort, we will have an improved performance pattern. On the solar project, yes, look, we took about €200,000,000 to €300,000,000 last year in additional solar projects. I will not speculate on why on the previous management this was done. I will just tell you that effective now we have decided that we will not take any further orders. So we need to flush through the backlog and get that executed in the proper way. It's primarily projects in Canada and South Africa, which make up the majority of the backlog. And I'm confident that going into the next year, most of that backlog is behind us. And we have then a business where we don't have that track down anymore. Thanks very much. You're welcome, Simon. Next question from Jeffrey Sprague from Vertical Research Partners. Please go ahead, sir. Thank you. Thank you very much. Good day. A couple of questions. Again, back on PS. Where are you at currently on ABB product content on what on the projects that you're booking? Have you materially changed the complexion of what you're putting in the backlog today? Look, we have a certain ambition level for ABB content and for competitive regions for reasons we are not disclosing the precise number. But this is something that we absolutely have in there. So there is a connect between the Power Systems and the Power Products business that we have in there. Historically, it was about 1,000,000,000 that went from Power Systems into Power Products on an annual base. And we aim to still have good NABB content going forward in the Power Systems projects that we have either under execution or that we are taking as new projects. And And we are clearly reducing rapidly the backlog which has very low content. And obviously, the content is also different. It's not one number that we have everywhere should be the same content. Some are very high content. Some are a little bit lower. And it also depends on, of course, the margin mix in those kind of content numbers. But I think we can say clearly that we have implemented what was the intention to increase the content step by step over time. Yes, absolutely. Has there been any change in the way you're compensating business leaders, project managers, senior sales engineers in this business either a year or so ago with the changes or the step function change that you're announcing today? Look, we are not disclosing too many details, but I can tell you the following. For the project leaders of this large project $1,000,000,000 projects, yes, we have changed the compensation model that we basically tie certain incentives to milestones achievement to make sure that what we want to achieve, what the customer wants to achieve and what the individual wants to achieve is closely tied not only on the performance but also on the incentive management. Thank you. And then just finally for me, could you elaborate a little bit more on the strength in U. S. Power orders that you saw? What was the nature of that demand, project related or industrial? Look, you see at the moment in the U. S. Quite a bit of activity both on the industrial and on the power side. And in industrial side, the reindustrialization of some of the process industries, that's really an opportunity for us because every new process plant look, when new process plants are now built in the Pittsburgh area, they need better power supply and we are participating in that very actively. There is I'll give you another example. 1 of the largest projects that ABB has under execution outside of the U. S. Is Zatarra project with more than a €20,000,000,000 project volume. At the moment in the U. S, in the by the way, €20,000,000,000 project volume not for ABB, it's a total project. In the U. S, we have a couple of dozen of very large projects coming in on the industrial side And with an enforced focus on industrial power sales, we really want to participate in that one. And that's a significant part of the upswing that you have seen in the Q1. Thank you very much. You're welcome, Jeffrey. Next question from Mr. Olivier Esnou, Exane BNP Paribas. Please go ahead sir. Yes. Good afternoon. I'd like to come back to Power Systems. In terms of having an idea of where you are right now in the execution of this solar and problematic offshore wind contract. Is there a way you can give us an idea of the I don't know the weighted average percentage of completion here? So that you mentioned percentage of completion as being a key incentive driver from now on. I'd like to know approximately if those projects are 30% through 60% or a broad number to get a sense and maybe where you would like them to be by your end? Second question here is, can you give us an idea if you take solar and offshore wind power connection again? Roughly what percentage of power system sales that represents today? And third question, you mentioned earlier in the call with press today that you want to fix PS and bring it back to good level of performance and you were relating to the way BB did with the robotics business, which was a great turnaround. That was done on a purely organic basis at the time. It did not involve buying or selling asset as far as I remember. Are we in a similar situation here for PS? It's purely ABB with the current portfolio that you have to fix? Or in your broader strategic thinking, it could involve inorganic moves? Okay. Look, I'll take the last one first and then I hand over to Erik on that one. Look, if you look at the pattern how we fix the robotics business, it was pretty simple. We said we need to understand better what really differentiates us with the customer. So we basically started selling robots with a purpose by putting standard application on the robot instead of selling large scale systems project as the main aim to go forward. We made sure we commercialized the standard solutions. We packaged them in the right way. We standardized the technical design. And with that, we limited significantly risk. We also took the product part and did a very strong hop cut and footprint optimization and migration piece. And then we strengthened the project execution, front end, sales, engineering and program management activities. And it all together led to a nice turnaround. And pretty much that's the pattern that we're going to use on PS in turning it around. Look as on all other parts of the portfolio on ABB, we will not speculate on any inorganic activities. So there's no comment on that one. And on 2 previous questions, we have this information for internal management purposes, but we don't disclose it externally. Okay. So if I can just follow-up, you're saying that broadly what you did in robotics you think is somehow replicable to power systems today in your approach? Absolutely. Okay. Thank you. You're welcome Olivier. Next question from Mr. Ben Uglow from Morgan Stanley. Please go ahead, sir. Good afternoon, Ulrik. Good afternoon, Erik. Good. How are you? I'm all right. I've got a few questions. First of all, I guess I'm going to try in a different way to try to figure out what we should think of in terms of profitability in patterns. I understand that you don't want to commit to anything, but from our standpoint, from a modeling standpoint, it's a little bit of a black box. Is it reasonable within what you see today? And I understand that this is going to be an ongoing risk. But is it reasonable to assume that on a quarterly basis, you're not going to be back at breakeven over the course of 2014, I. E. That we should continue to expect ongoing charges and potential negative results over the remainder of the year. That was question number 1. Question number 2 relates to Power 1. Based on the information given in the press release and the comments on discrete automation margin ex Power 1, it looks like that has gone into a loss, an EBITDA loss, which I calculated at about $11,000,000 Is that correct? And what's driving the loss beyond CVR positions revenue going down? And how long will it take to get that one turned around in the Discrete Automation division? And then the third question, which I guess is more strategic and you may or may not be willing to comment. In theory, hypothetically, is Alstom definitely not interested in power generation assets? Okay. Pardon me. I think that Alstom is ABB not interested in power generation assets. This was a Freudian and I take that It was very Freudian. So Ben look the last one no comment. As you said earlier today, there is no comment. On PowerOne, we don't disclose details on PowerOne on that one. When we bought PowerOne, you might remember we bought PowerOne which was about €1,000,000,000 business for €1,000,000,000 We got €250,000,000 in cash with it. So we paid on a net base about €750,000,000 Now we're getting €120,000,000 roughly out of the divestiture. So we have €630,000,000 Having paid that for a number 2 position in solar inverters, I think it's a really good deal. We are very happy that the Power Solutions part which has nothing to do with solar has now found a good home with the new owners. I think there's a good fit between the company that's acquiring and has it will be good for everybody involved. In terms of the profitability, when we bought PowerOne, we said we expect a couple of softer years in line with the market development. That's what we are experiencing at the moment. I'm still confident that with A, our industrial base and B, with the market coming back up, we will get where we want to be. So altogether, I were able to do such a swift progress on the divestiture of it. So that's what I have on PowerOne. And Erud, do you want to take the first one on the On the margin side. Yes. This is, of course, a key question then and I understand where you are putting this question. Let me repeat what we said already in February. We are striving towards to try to get into the 9% to 12% percent range at the end of the strategic period, means end of next year. That statement remains unchanged. We are driving as much as we can to keep this business running. Can we tell you that there will not be more charges? No, we cannot unfortunately the way those projects are going. So obviously, the ambition is to drive improvements during the rest of this year, but we will not give you any specific guidance on the year. Okay. So we should assume that whatever improvement happens from here is basically going to be quite gradual, and we are looking at a pretty protracted and drawn out process. Is that fair? So what we're going to do, Ben, we're going to take the time that it takes to fix this business. We did exactly the same on the robotics side. We did not get nervous about it. We did not compromise quality of improvement with short term hypothetical gains that later on disappear again. This time we will really do this right. We're going to take the amount of quarters that we need. But I can tell you we are aiming very strongly to avoid to have a loss situation for the entire year in this business. We are really aiming very, very strongly not to have that. And then in September 9, when we get together on the Capital Markets Day, I'm quite confident that we are in a position to see a little bit better or significantly better the future. And yet we can update you on targets then specifically. So what we are telling you is the following: Give us time to fundamentally fix this business. We will do this right like we have done on the robotics side. We have put in the right resources. I'm confident in Claudio. I know that you might be not happy that you can't put it on the spreadsheet, but I'd rather tell you that in honesty than coming up with something that later on we can't keep. Next question from Mr. Frederic Stahl from UBS. Please go ahead sir. Hi, Ulrich. Hi, Erik. It's Frederic here at UBS. Hey, Frederic. Hi, guys. Could I ask you on the cost savings and the price declines and the dynamics there? Is it fair to assume that the both the price down and your cost savings is are correlated to input cost changes? That's question number 1. And question number 2, if you ignore your raw material costs, is it also fair that you as your behavior will when prices decline less, is it also fair that you will reduce your cost takeout and focus more on growth, I. E. Invest a bit more take that leeway to invest a bit more in the business? Is that a fair assumption? Yes. Ferik, as I said quite a few quarters through, there is some correlation between the two that it is sometimes more difficult to get cost reductions when prices are more stable. And I think that's little bit what we are seeing now even though this is only a quarter and we are aiming to stay of course well within our 3% to 5% for the full year. And you have also seen in some of the other parts of the bridge that we are indeed investing a bit more into sales and other areas already today. Great. Thanks. And just to clarify one point Frederic, and you might not remember that. On the cost reduction side, we exclude the impact of exchange traded commodities. So if copper goes down, the direct copper purchases that we have is out. And that's just something that I want you to reflect when you look at our cost reduction situation because we have some changes in exchange traded commodity prices throughout the beginning of this year. But this is something that we net out when we talk about cost reduction. Okay. Very good. And then maybe some housekeeping question. Could you give us an idea how big the companies that you're disposing of now, how big are the revenues? I believe that has been disclosed. And for Power Solutions that was announced yesterday, it's about €250,000,000 per year. And for the HVAC business, it's about 3 models are the same, a little bit bigger. Very good. Thank you, sir. It is. Okay. Thank you. Next question from Mr. James Moore from Redburn Partners. Please go ahead sir. Yes. Good afternoon, Rick, Eric, everyone. My question is hi. My question is central on the PS margin as well. I was going to ask what you expect for the full year, but I heard your clear answer to Ben that you're really not happy to give that. So maybe I could just step back and try and understand the result today a bit better in PS. Now you said on the bridge that you've got €129 ish million of project costs. I assume the majority of that is in PS. I'm guessing €110,000,000 If you can give me the right number that would be great. But I want to be clear about what exactly that is. Is that solar EPC, offshore wind and substations? And secondly, if we then strip that number out, it looks like what we might call a clean operational pre charge EBITDA margin is around a 5.5% number. And that's been running at 8% or so. And so my other question is, it's clear that even if we exclude that, there is a step down in the profitability. And I'd really like to be clear in my mind about what that step down is excluding the project charges. I guess it's the operational gearing effect of the falling revenues at the reset. But I just want to be clear in my mind what's in the underlying profit margin step down in PS and what is in the charges? That would be very helpful. Thanks. Look, James, I have to disappoint you. We will not give you all the granularity that you want. But in terms of the levers that you mentioned, they are right. We have a revenue decline that mirrors the lower opening backlog from last year, which is significant and that finds naturally its home and on the cost deterioration then reflecting in a lower margin. And the second one is all of the above that you said, the wind piece, the solar piece is in the project hits. But we also have on the daily execution side some cost pressure on operational execution. And that altogether yielded in the impact that we have seen and that we have shown. And just so I'm clear in my mind, when you think about the outstanding risks for the back 9 months of the year, is it that you see the risks as more being in project charges or underlying profitability? If you would look at the historic performance of the business, it is definitely more related to the project related charges. We naturally work very hard to avoid all of them going forward. But it would be fair to anticipate that if something comes, it's probably the likelihood that it comes from the project side is higher. And if I may just one more. The underlying profitability if it is that sort of 5.5% picture can you in any way say if you think that's a low point? Look James, I will not comment on that one and I will not speculate whether your hypothetical calculation is right or wrong. Thank you. You're welcome. So we take one more question. The last question for today is from Mr. Andreas Brock from Nordea. Please go ahead sir. Thank you, Mylle. So just one question then. When I think about Process Automation, you mentioned that the I mean the margin has done pretty well in the last couple of quarters. And it feels like you're executing an order backlog there, which probably have pretty good margins. In addition, you're taking down costs. Would it be fair to assume that the order backlog, the future margins in that division are lower than they have been for the last couple of years? Look, we don't want to speculate on the quality of the order backlog in the single division. But what I can tell you is that Verimati and his team has done a wonderful job over the last couple of quarters and quite frankly throughout the entire financial crisis situation delivering really good execution. He has had based it on the project side, no risk, no major hits that would have derailed us. And the day to day operation and execution in this business is good. He has his cost firmly under control. He adjusts the cost in line with the revenue and the backlog development. So I'm confident that Belemard will continue to deliver good operational results. And there is also some mix effects in there as we have stepped out to some really low margin business there in that business. Fair enough. So it could be some structural improvement as well. Yes. Excellent. Thank you very much, Anton. Okay. With that one said, it was the last question. Thank you very much to all of you for attending. We will talk with you again either individually on the roadshow or in the summer results when we come out with the Q2. Let me remind you, Capital Markets Day 9th September is still valid. Okay. With that said, thank you very much, and have a nice day. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call. Thank you for participating in the conference. You may now disconnect your lines. Goodbye.