Earnings Call: Q2 2012

Jul 26, 2012

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB Second Quarter 2012 Results Analyst 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 the conference is being recorded. After the presentation will be a Q and A session. At this time, it's my pleasure to hand over to Joe Hogan, CEO of ABB and Michel Desmare, CFO of ABB. Please go ahead gentlemen. Hi, good afternoon. Thanks for joining us. Michel and I will be here to walk through some of the slides and to take any questions. As always, the charts and the presentation that we're going speak from is on abb.com. I turn your attention also to Chart 2, which is our Safe Harbor statement. And let's quickly move to Chart 3. So just from a high level standpoint, we announced that both orders and revenues were higher despite obviously the uncertain market conditions that exist around the world today. Currency translation, there's a I would say kind of as an overlay, there's a lot of noise in our numbers and this presentation helps to clear up some of that noise. The 2 big areas of noise would be the Thomas and Betts acquisition along with the currency translation piece. And when you look at the currency translation, it reduced reported revenues by about $600,000,000 and EBITDA by about 100,000,000 dollars so substantial in that sense. China orders stabilized particularly in low voltage products where we had some issues in the Q1. North America is still strong for us. We saw a rebound in the Middle East and Europe steady. I'd say there's a 2 tier Europe between North and South. We'll talk about it, but at least it was a positive orders quarter. Order price pressure in power is easing and I say slightly, but we do see that easing. Steady power project margins over the last three quarters and Michel and I will explain that. Operational EBITDA decreased versus the Q2 of last year. Some negative mix and obviously the U. S. Strong dollar translation, but we saw some good progress quarter to quarter. Thomas and Betts acquisition is completed. Got about 6 weeks in and we'll walk you through how that looks. Then in division delivered really solid cash from operations, but we'll talk to you about some of the cash shortfall that we've had and as to why. Moving to Chart 4, we can see that orders were up 2 versus Q2 of last year. And then when you look from an organic standpoint up 9% and then plus 6% from an overall standpoint. Revenues organic about $3,000,000,000 at $9,700,000,000 Our order backlog, there are some questions this morning on order backlog. If you just from a U. S. Dollar standpoint minus 3, but in local currency, we actually saw an increase in our backlog close to $29,000,000,000 overall. An operational EBITDA standpoint, our numbers were 1.471. As you can see, that's about minus 5 overall, but minus 9 from an organic standpoint when you look at $60,000,000 they received from Thomas and Bets in the quarter. That gives us an operational EBITDA percent of about 15.1% versus 16% of last year. Net income down 27% and cash from operations down 33%. That will imply I guess some explanation and Michel and I will walk you through that shortly. Turning to Chart 5, steady on higher demand in most regions. And so this is a good chart in a sense when you look around the globe where we stand starting from the left hand side. You can see the Americas are up 20% overall excluding Thomas and Betts up 10% and really good progress in both power and automation, power up 26% and automation up 16%. So we were pleased with what we see in the Americas for this quarter. Moving to the right, we look at the Middle East and Africa up 34% and good progress in both power and automation in that area. And it's good that we could drive some good orders realization in that part of the world for this quarter. Moving more to the right is Asia minus 1. And the next page we'll talk more about how we can dissect Asia for you and how that works. But overall power up 12 and automation down 8. And then in Europe up 2 with automation up 4 and power up 2 in that sense. And we're really pleased to see Europe as strong as it was from an order standpoint given the economic uncertainty that obviously exists in Europe right now. Moving to Chart 6, this just breaks down from a country standpoint more than how we look at things at regions so you can get a better look at the business. You see Canada was up 30%, up 10% excluding TMB, United States up 13% and you exclude TMB overall and Brazil up 12 percent. When you look up above on Norway, plus 47%, a lot of that has to do with marine and then oil and gas that's associated with marine. The U. K. Up 35%, you can see Russia up 15%, Germany down 10%. We had one tough comparison to discrete automation and motion in Germany. But overall, we're seeing the German side down. We talk about a 2 tiered Europe though with Spain minus 30 and Italy minus 13. We continue to see pressure in that area. We had strong orders in Oman up 10x particularly in our power automation business overall in the power and automation businesses. India was up 11. In fact, we saw good operations turnaround in India too, which is establishing a positive trend for us. China was down 2% overall, but the low voltage products which is our biggest concern in the Q1 actually came back pretty strongly. You can see Australia is up 49%. And again that's the mining industry there primarily and the teams are doing a good job of driving our portfolio in that industry in Australia. Moving to chart 7 and this just takes a quick look at our Power Products and Power Systems performance overall. You could see that orders were up in Power Products about 5%, revenues were flat. Operational EBITDA versus the Q2 of last year down 15% at 14.7%. If you move down to the bottom part of it, what we're trying to show on this chart is that we over the last three quarters have had pretty consistent margins from an operational EBITDA standpoint in Power Products. And we're hoping that what we're showing here is we think we've found the floor here and we're going to fight hard to be able to maintain that and then bend this curve in the future. Overall Bernard and his team have done a good job in Power Products. One of the big things here is the team saving about $100,000,000 of cost in the Q2 in order to counteract the price that we still have in our backlog that's been coming through in that business. On Power Systems, orders were very strong. Michel and I were pleased with that. Revenues up 1%, but operational EBITDA down 37% at 6.2%. And if you go down below and look at that, we're pleased about the tender backlog. We like the realization of the orders for this quarter, but the margin slippage had to do with some small projects in different businesses around the world that had some slippage. And so it's not the kind of operational execution that we want to see in this business. And we're going to make sure that we continue to focus on this business so we can deliver more consistent results in the future. Moving down below, when you think in Chart 8, when you think about the successes and challenges of Power in Q2, 2012 and I'm sure there'll be several questions about this, We continue to see good orders and tendering activity across both businesses. One of the things we often don't talk about restructuring in our power division, but I can assure you that it goes on all the time. And one of the reasons we're quiet about it is because of the union concerns and different things we want to make sure that we get through as quickly as possible. But one of the things we wanted to make transparent in this announcement was power transformer capacity has been cut over the last 12 months. These are large power transformer capacity primarily by 10%, taking out between 60700 jobs. At the same time, you have to realize that we reposition that footprint to lower cost areas, so it can be more competitive too. So you we call it the cost growth paradigm and that we take out capability in some areas and then we increase capability in different areas too. From an M and A standpoint, we did have one small deal about $35,000,000 with called Truckos which is the wireless systems and network communications. Actually, this is a small deal, but we're really excited about it. We think we acquired terrific technology. It's right in line with a very good business that we have in Power Systems on communications. And it really and this works well with our process automation division too in the sense of the systems work that they drive from a communication standpoint also. And so we're excited about that. Down below the challenges, I mean, obviously the challenges are have been the challenges we've had in this business is continuing to take cost down in Power Products and continue to reposition ourselves to make sure that we can hold the margins that we have out there. So there's no going to be no let up in that sense at all. We have a strong in country, for country focus, which means trying to make sure that we have the cost and specifications aligned with the countries as much as possible, so we can increasingly become competitive around the globe. And service continues to be an area of leverage for us. We've been sinking a lot of time and resources into service and our life cycle services are growing extremely well in that sense and I'll talk more about that in a second. So moving to Chart 9, and this is the automation businesses overall, starting with discrete automation and motion. I know there's a lot of concern in the Q1 about the overall margin of our discrete automation and motion business, but you can see our orders are down 2, revenues up 11, operational EBITDA up 6 and holding an operational EBITDA of 18.8 which is I feel very respectable margin for the quarter. We saw lower demand in renewables and rail and especially impacting our low voltage drives business. Good execution on revenues led by our robotics team and also medium voltage drives. Operational EBITDA margin is steady in the face of this, a lot of mix that we have going on. It's not mentioned in the highlights that robotics had a very strong quarter overall. And we had one large order for in the United States too that really helped from an order standpoint. On low voltage products is a big turnaround for this division in this quarter. And Thomas and Betts obviously skews the figures because you can see how much it was up with Thomas and Betts in 6 weeks. But if you look at the numbers down below that shows the adjusted numbers for just look at continuing operations outside of Thomas and Betts, you can see that orders were up 1, revenues were minus 2 and overall on operational EBITDA about 17.7%. I'd say 2 things to really call attention to here outside of the TMB acquisition would be 1 is China turnaround and we'll talk more about that I'm sure in the Q and A. But we have seen a really dramatic improvement in the business. And I'd say it's market related from a construction standpoint. It also has to do with our teams making sure that we hit all the channels that we can there and to push as hard as we can. The other side is on low voltage products has been some taking out some cost as quickly as we can in different parts of the world to help us stabilize that margin versus what we saw in the Q1. And Tarok and his team have done a good job there. Moving to Process Automation, this division has executed extremely well in the last 18 months. You can see their orders are up 3%, revenues up 5%, operational EBITDA up 8%, and really a good top of the range EBITDA margin on 13.1% overall. Oil and Gas and Marine tend to be the real strong areas that we're seeing in the marketplace. We do see weakness in pulp and paper in some parts of the metal industry overall. The higher EBITDA margin as mentioned below has to do with cost savings and higher margins and some life cycle service. And our measurement products business has been doing extremely well year to year and in fact they're driving growth and driving margin too. So really good showing in process automation. Moving to Chart 10, the challenges in automation for Q2, 2012 overall is obviously the rapid margin recover we saw in low voltage products has been a real plus for us in the quarter. Product pricing improvements, we've gotten some net pricing improvements in our low voltage products about everything about 1.5 year to year, which is good and we've pushed price where we can. And discrete automation in motion, the team has pushed it there too where they can in certain parts of their business. Obviously, we closed the TMB acquisition off to a good start. We'll talk about that in a moment. And then we also inaugurated a DC data center here in Switzerland. If you were at Capital Markets Day last year, we talked about how do we move into the data center marketplace with different and new technology. This is a 1 megawatt data center here in Switzerland. We've basically shown what our analysis had pretty much anticipated which is about a 10% to 15% savings in energy and about 15% savings in real estate and cost. And we're going to push that in different parts of the world and to show that to validate that and to push more interest in the marketplace. Down below challenges in accident plan, I mean we face an uncertain market as all of our competitors do too. So we have to continue to be fast and flexible on capacity adjustments with our team and also with our facilities. We have a strong focus on cost as you know and we're ahead on our cost program and we think we'll be above the $1,000,000,000 we originally mentioned as we started the year. So moving over to Chart 11 which is on Thomas and Betts. We have the 6 weeks as I mentioned before that's in our income statement since we consolidated the acquisition. We've seen in that from a steady standpoint 10% revenue growth on a full quarter basis for Thomas and Betts. Operational EBITDA margin has improved from 16.7% last year to 18.5%, so it's really good operations execution. So from our income statement standpoint, you'll see $310,000,000 of revenues that are in low voltage products and $60,000,000 of operating profit. So the integration is on track. We have some early wins in South America, particularly in using the infrastructure and capability of ABB to help some of Thomas and Beth's work overseas. In this case, it was a great example. And our synergy estimates that we had going in have been confirmed. We have really strong action started around that. And we strongly believe this will be EPS accretive in year 1, okay, excluding the one time charges. And now down below also there's just so that you can work the spreadsheets properly is you see acquisition related costs of $70,000,000 $80,000,000 for full year. You can see what PPE will be and $120,000,000 for full year of 2013. I'm going to turn it over to Michel on Chart 12. He's going to walk you through our EBITDA bridge, which is always a big hit in these kind of conferences and Michel will take it from quarter to quarter, quarter to quarter walk. Okay. Thank you, Jordan. I'm afraid I will have to take you to even a bit more excruciating details this quarter, true operational performance of the group this quarter. So if we start with the chart 12, the operational EBITDA bridge, you can see that overall the net operational EBITDA is down €76,000,000 compared to the Q2 last year. I think we can break down this EBITDA bridge in 3 or 4 components. First of all, the first column, you see that the pricing impact was €235,000,000 this quarter. But the good news is that we were again able to generate €277,000,000 of cost savings. And so if you look in fact that the pricing pressure plus project margin were totally offset by the cost savings. So far the strategy has worked again. Then you can take a second group of analysis where you see that we have continued although at a little bit slower pace our investment in selling and R and D, a net increase of €135,000,000 But that has also, since we are doing that now since 3 or 4 quarter, helped to generate a volume gain that produced an additional EBITDA in the range of €120,000,000 So with these factors offsetting each other, what we are left with is basically an impact of the business mix about €60,000,000 And the other column that you see at minus €64,000,000 which includes this €100,000,000 of translation losses due to the high dollar, which was about €100,000,000 partly offset by gains in the G and A and a little bit of positive commodity impact as well. And then finally, we had T and B that added almost €60,000,000 for the quarter. We get to this net result of €76,000,000 lower than a quarter ago. Moving to Chart 13. In terms of the cost savings update, so you see about €280,000,000 this quarter. Half of it comes from sourcing, 45% from operational excellence and about 5% from global footprint. What is interesting to see also is where it comes from. The Power divisions have generated about 2 third of this savings, 65 percent automation, 25%, but I also want to part coming from indirect sourcing is actually improving quarter after quarter. It was 8% last quarter. It is 10% this time. So if you look at it year to date after 2 quarters, we have taken out about €540,000,000 of savings. And against that, we estimate we have lost a little bit less than €500,000,000 in pricing. So the strategy still works there. We're also happy to see that we are running at a run rate, which is actually higher than the $1,000,000,000 target that we have fixed ourselves in terms of savings. And so we are pretty confident nowadays that we will be able to exceed this $1,000,000,000 target by the end of the year. Moving on to Chart 14. That is not an easy one, but we are really here trying to help you a little bit get to a true assessment of what has been the operational earnings per share. And why do we do that is because this quarter we have had really 2 very important influences. 1 is the currencies and the other one is the accounting related to our M and A activities. Just in terms of currency, let's start first by reminding that if we compare the average exchange rate of last quarter of the Q2 last year to the quarter this time, the U. S. Currency is basically revalued by more than 20% against the Brazilian reais against the Indian OP, by 12% against the euro, 11% against the Swedish krone, 8% against the Swiss francs and it has devalued against the Chinese, went maybe by 3%. So you see it's a huge volatility, which obviously in a company like ours has a huge impact. So Joe mentioned it before. We estimate that our top line was affected by about $600,000,000 in reporting translation because we report in U. S. Dollar. We estimate that EBITDA level the impact was €100,000,000 which if you calculate after tax in earning per share represents about €0.03 a share. But it has also obviously a side effect for instance on the results of all the derivatives which do not apply for hedge accounting which you know that every quarter we take these derivatives away in order to give you a true picture of operational EBITDA. The same quarter last year, we had a €58,000,000 positive impact from these derivatives. This time it was a negative €82,000,000 So there again because the dollar was higher we have a negative delta of Joe mentioned that we had about €70,000,000 of 1 offs, a Joao mentioned that we had about €70,000,000 of 1 offs linked to the T and B acquisition. We had another €20,000,000 of other one offs related to other acquisitions. So the total there was 90. And in terms of the amortization of PPA, which is a question that you also often ask, the total for the quarter was €82,000,000 out of which TMB was €33,000,000 and this €82,000,000 correspond to compare to €51,000,000 in the Q2 last year. So now I've given you all these numbers on a pretax basis. Now we go on an after tax basis in the table. So if we start from the top there, you'll see the reported net income and reported earnings per share. So earnings per share was €0.29 compared to €0.39 last year. So it's a 27% change in U. S. Dollar. We have then made the corrections the same way that we correct EBITDA to operational EBITDA, so correcting for restructuring related costs, which are not really significant here, Correcting for this impact of derivatives due to hedge accounting or non hedge accounting treatment on an after tax basis that is $100,000,000 which means $0.05 a share. And finally, the impact of the one offs, the €90,000,000 which after tax represents €65,000,000 which is another €0.03 a share. So that is obviously a big difference when you adjust these three points to try to come to an operational net income that correspond to the operational EBITDA that we always report, you see that in terms of earnings per share, we are comparing now the €0.38 of last year to €0.35 this year, which is a change of 9% in dollar terms, but of 3% in local currency. So basically, if we say the local currency translation adjustment was €100,000,000 which is €0.03 per share, you see that compared the 2 operation net income, in fact, we come to the same bottom line of €0.38 And if on top of that, some of you also like to deduct the PPA amortization related to all the acquisitions we have done so far, Once we do that, we basically compare EUR0.40 last year to EUR0.37 this year. And if we add to this EUR0.37 the EUR0.03 of translation, in fact, we have unchanged operating earnings per share from 1 year to the other. I hope I have not all lost you. We can for sure take more questions on that. But the differences this time were so important that we saw it was crucial that we give a good explanation to it. The strength of the U. S. Dollar going to Chart 15 has not only impacted the balance sheet, it has also impacted our cash flow. As you can see from the chart, the cash flow measured here as the cash flow from operation from the divisions has in fact been good. It has increased by €40,000,000 from €862,000,000 to €902,000,000 But on the other side, the corporate cash was a big outflow. And what do we have in corporate cash? We obviously have the normal corporate outflows like corporate cost and central research cost, which is usually between €130,000,000 €150,000,000 of outflows a year. But then we have also a lot of cash generated or spent from hedging corporate exposures, which can be for instance the operational dividends coming from subsidiaries in another currency or the balance sheet exposures that we have too. And as a general rule, at the corporate center, we're always long dollars. So when we hedges, we sell dollar forward. And so clearly, when the dollar goes down, these hedges generate cash. When the dollar goes up, the hedges consume cash. And you can see last year that we had in fact a positive corporate cash flow of about €30,000,000 which means that we had probably €150,000,000 of corporate cost offset by €180,000,000 of cash generation from hedges. This time, we have a €300,000,000 outflow, which means that on top of the €150,000,000 corporate cost, we had another €150,000,000 of negative cash from the hedges. It makes it very complicated, but I think it's worthwhile to explain the difference. So the net cash flow from operation is about €300,000,000 lower than the same quarter last year, but the cash from the divisions again is up €40,000,000 And with that, I pass it back to Joe. I still have another slide to cover, Chart 16. Let's also quickly review how we are doing compared to the targets that we have fixed ourselves at our Capital Market Day back in 2011. So this is an 18 month assessment. And as you can see, we have 3 green lights. The organic revenue growth after 18 months is at 11% annualized compared to the range of 7% to 10%. Our operating EBITDA at 14.7% is still well within the corridor that we have fixed ourselves. And our earnings per share growth after 18 months is going at an annualized rate of 11%, which is also within the band. When it comes to free cash flow conversion, we are a little bit above 60% after 18 months. So that is on the weak side. I should point out in any case that it's not the right thing to look at in the middle of the year because that is usually where the working capital is at the peak. You know that the 4th quarter is also very strong. But this is also a year where obviously we will be impacted by the ForEx, by the high dollar as well as by an unusually high capital spending program, especially with the 2 cable factories that we are investing in Sweden and in the U. S. So that is still a target that should improve over the time. And then finally, the cash return on invested capital, it is yellow. It could even be orange because we are at this stage in the low teens, so pretty far away from the 20%. But there as well, it's a matter of timing. We have made 2 large acquisitions, Baldor and Tril Thomas and Betts. Once we have since 16 months, the other since 6 weeks. And obviously, we can't expect this capital to yield The long term IRRs that we have targeted for this acquisition, and it is clear also that because of where we are in the cycle, even the organic business is not for the moment generating the cash returns that we used to have a couple of years ago. But again, that is a target by 2015. And I will take some time at the next Capital Market Day to explain to you in more details how we have built this target and what are the recipes that we intend to use in order to reach it by 2015. And with that, I pass it on to Joe for the conclusion. Thanks, Michel. Coming to Chart 17, which is a summary. So from a short term standpoint, I mean, we all of us see the macro indicators around the world in the United States and Europe and emerging markets remain mixed. But again, we were pleased with how the business performed in the face of those macro indicators. And so we're hopeful that that will continue going forward. On Q2, stability in operating profits and margins and PP in recent quarters are good. We want to keep that trend going. Price pressure, again, we think is easing. Again, remember we have a this is a long cycle backlog and so it doesn't mean that this will quickly materialize. And that's again why this cost out piece in both the Power businesses is so important that we address that. We're pleased about the resilience of orders in Europe. That is it's a 2 tiered world between the South and North, but we were pleased with being able to strength that we did see in the North to be able to come the down cycle in the South. From a Chinese standpoint, I'd say the biggest variable that we saw was the low voltage products turnaround. We do tie that to a better demand pattern in the construction industry. And we also would say you might ask about our July orders in low voltage products. So far it's continued on that trend and that gives us a certain amount of confidence that that could possibly continue through the quarter. In the sustained order growth across portfolio in the United States, that's been going on for a while and we would expect that to continue. We don't have any data that says that it should stop. And down below management focus for the rest of 2012, it shouldn't be a mystery. We have a lot of focus on cost. We have a lot of focus on finding growth areas around the world and driving that. Acquisition integration and focus in making sure in both Baldor and also in Thomas and Betts and the other acquisitions we've done that we continue to bring those together and to bring the most value out of those that we possibly can. And so with that, we're cautiously optimistic about the second half of the year. And that will end the presentation. And now we'll turn it over for any questions that Michelle and I can handle. We will now begin the question and answer session. First question from Mr. Marc Drummond, Bank of America Merrill Lynch. Please go ahead sir. Yes. Good afternoon, Joe. Good afternoon, Michelle. Mark, can you tell us for volume? We can't quite hear you. All right. Okay. How's that? Is that better? Much better. Yes. Okay. Thank you. Yes, just first question, I guess, there's always one on pricing. Interesting comments you're making about it leveling out, etcetera. Of the $235,000,000 you put in your bridge of pricing, how much is in Power Products? Or roughly how much or how is it roughly distributed, I guess? And in Power Products specifically, what are the order what is the percentage change in orders looking like relative to what's going on in sales? And I guess finally just to go full circle on that. I mean what is the typical lead time we're looking at now for the newly priced orders to go through the sales line in that division? That's the question on pricing. And then secondly, on China, it's sort of intriguing comments you've seen the pickup in Q2 versus Q1 particularly in low voltage. I don't know if you guys can just go through that in a bit more detail because I know it's maybe specifically for construction, but we're generally not seeing that in other companies. Was there a destocking in Q1 and this is a correction? Or how would you read a bit of color on that would be very helpful? Thank you. Okay. Maybe I'll start with the pricing mix. Yes. So the pricing impact, obviously, as in the other quarters, PP has been the one that has the biggest proportion of this pricing impact. I would say about 2 thirds of that total is from Power Products. And actually, if you take the total, I would say that more than 90 percent comes from the Power division. So the Automation divisions are a bit better in Power. Inner products are a bit less good in systems, so they kind of offset each other. So most of this pricing is really in the power divisions overall. In terms of the rate of pricing and orders versus revenues, as we see as we said, we have seen certain improvement in the pricing on orders this quarter. Of course, all the business units, but obviously, major difference compared to last quarter is for sure in medium voltage that had suffered as well from a mix issue in China in the Q1 that was corrected. And so obviously, that has helped. At this stage, I would say that the pricing pace in all those trails the revenues by 1% or slightly more. So that's sort of the kind of improvement that we have tried to flag to you. Mark, you also talked about how long does it take for things to bleed through from an order to a backlog to into in Power Products, it's all over the board. I mean, the medium voltage products has a very short cycle, medium cycle business to it. Large power transformers are really large. And so it takes a long time 18 months to 12 months. Same way with the gasoline switchgear. And so I think have to look at the portfolio itself. When we talk about price, obviously, large power transformers have been the most challenged part of the portfolio. I'd say in general it takes 12 to 18 months for that to come through. Mark, you said something and I want to make it very clear. You said that we price was flattening out. We didn't say that. We said that margin was flattening out and we're driving this margin piece by the cost down that we've been having in this business. But we continue to see price down in the power products marketplace. It's just not as severe and not in line with revenue like Michel said a little better. Right. The face of price decline is slowing down. That's what it is. Yes. And Mark, your last question on China low voltage product. I tell you our clarity on this isn't complete, but here's what we see is was there some destocking and restocking between the 1st and the second quarter? I'd have to say, yes, absolutely. There's no way you would see that kind of a turnaround with some aspect of stocking and restocking. But at the same time, that's almost a discrete event. So but between June July, we have seen a pickup in construction orders and those construction orders have continued into July. And so I'm not making a forecast for the Chinese construction market. I'm only reporting on what we're seeing on the ground there. It's been favorable to this business. It's helped that turnaround between those two quarters. And Michelle and I just want to report that as accurately as we're seeing in the marketplace right now. Okay. That's very helpful. Thanks, Joe. Michelle, just very quickly, On orders, did you say the orders were 1% better pretty much than what you see in sales? Is that correct? Yes. That's right. About one roughly about 1%. A bit different in each units, but roughly about 1% in the year. Okay. Thank you very much. Next question from Mr. Andreas Willi, JPMorgan. Please go ahead. Good afternoon, gentlemen. Two questions, please. The first one to follow-up on the outlook. Obviously, you've seen some improvement maybe in some of the early cycle businesses, but we've seen order growth slowing in some of the mid cycle automation businesses. So if you balance that, where do you think overall base order trends could move now? They've kind of moved down to around 1% growth. Is that the level we should expect? Or should we read your outlook as that base orders have troughed in Q2 if you look across your board across the board? The second question on cash flow. Obviously, I understand the currency impact on the quarter and the seasonality that Q4 will be stronger. But if we look at cash conversion for the last 6 quarters, which is just above 50%, it's still lower than what we have seen at ABB in the past, even taking into account the higher CapEx. Are you happy on how inventories, payables, receivables and so are developing? Or is there a more fundamental problem at cash conversion at ABB? Andres, I'll take the first one on the base orders piece and give Michel the cash flow. I'm not going to project what I think our base order rate is going to be going into the Q3. But if I use just a rational expectation model, I mean the 0% to 2% base order growth that we've seen, if you look at our base order growth by region, we had about 4 of them up and 4 of them down in that sense and correlating pretty strongly with what I read on the orders chart overall. I think if you get behind just raw base order numbers, Andres, and you take a look at China in itself is there are certain segments of the marketplace like an LP and construction we talked about were much better. But if you look at discrete automation and motion, particularly in the renewables industry in China and our sales to that have been down in that marketplace quarter to quarter. So that hasn't necessarily revived itself. Transportation orders across both of those businesses that we reported were down in the Q1 continue to be down and the nuclear industry hasn't coming back yet either. Our medium voltage business and power products in China, which we reported is affected by the nuclear piece and also by the transportation piece. What our sales teams would effectively done is to really re catalyze that business around some industrial channels and to push our products through those and have been very successful in doing that over the last 90 days and it really helped to overcome that piece. So I think that's the kind of color. If you move through our other businesses too on the base side, again as I mentioned before the marine side which we see in base orders and larger orders have been good. And that's been it's really been marine associated with oil and gas. When you look at the PA piece, that's been a big part of that and the mining and minerals piece continues to be strong. Also in automotive really reflected through our robotics business It's continued to be pretty strong geographically too. Yes. And I would add also that the 2 power businesses had a base of the increase of about 5%, yes, 5% or 6% as well as service. And service actually we were not happy with the rate of increase this quarter at 5%. So if you look at all that, we think indeed that there is a good base here to work from and that dictates also the reason why we are a little bit more optimistic now. With regard to the cash, no, I'm not happy with the cash for sure. It's we are trying since a few years to try to have a much better cash flow spread over the year instead of having always this concentration in Q4. But I think a part of it is also due to the nature of the industry, especially with utility customers. We are working we have really launched a few quarters ago a long term program, which is really working together with operational excellence people to try to work on the root causes also of design networking capital and quality on documentation etcetera. And obviously, that takes a little bit more time to be produced. Meanwhile, we are more or less at 16% notice of net working capital. Our target is still to be in the range of €11,000,000,000 to €14,000,000 I would say realistically if we reach €13,000,000 at the end of the year, I would already be very happy. Now 3% on €40,000,000,000 that is €1,200,000,000 improvement that you can just get there. Whether we're going to reach 90 percent this year, I think that's going to be sharp, especially due to the currency effects. But again, if you look at it over 5 years, the last 5 years, we achieved a conversion of 100%, and that was a combination of years where we had 70% and years where we had 130%. So I think we have to look at a little bit more from that perspective, but I'm still quite confident that we're going to have a very strong second half and especially a very strong Q4 that should get us much closer to the standards that you have been used to. Thank you. Next question from Mr. Ben Yuglow from Morgan Stanley. Please go ahead sir. Afternoon. Hi Ben. Hi. I had a few questions. One was just within the Power Products area, are there any product categories where you are actually definitively seeing sort of increases where it just getting less bad, you're actually seeing a change in customer behavior where they are more willing to place orders at a higher price. So that was question number 1. Question number 2 and I'm sure Michel won't forgive me for asking this about the margin bridge. But when I look at the margin bridge and I sort of try to index all the rough numbers that have been coming out, when I look into the second half of this year, am I right to think that the pricing impact, if things stay where they are, should get a lot, lot less onerous for you, because it was the Q4 of last year where you had a very, very tough pricing experience. So that's an unfair question number 2. And then finally, in North America, very strong performance still in automation and obviously confident statements about the order situation. Listening to Rockwell yesterday, they appeared to see some sort of change in trend during the quarter and lowered some of their revenue expectations. Did you see any change in pattern of your orders or your sort of industrial demand on the automation side in North America during the quarter? Hey, Ben, I'll take your first one. Michelle will take the margin bridge and then I'll come back to North American Automation, okay? On PP, I don't want to walk through the 13 product group categories within PP and what we see and what we don't. But I'd say, if you take down the high points is, substations in the Middle East and large power transformers, right? Since the duties that have been assigned on Korean large power transformers in the United States, we have seen a price the market actually increase in that sense. And even though it had really nothing to do from a governmental standpoint in the Middle East, at the same time we saw prices rise for Korean transformers in the Middle East also and that's helped. But there's something that we have to explain that since then a lot of those we weren't even quoting on because the prices were too low. And so as the prices have come back, they begin to come back in the range that we would consider to be something that we want to quote on. There's still not terrific margin in that sense, but there's something that puts back in the range with the right kind of cost control and focus and productivity in our sense that we can be more competitive in there. And I would keep that conversation really around large power of power transformers right now. There's been no real change from a medium voltage standpoint, a medium voltage business. And for high voltage gas insulated switchgear, it's still competitive. But it's hard, it's not as uniform as a market. We've introduced some new products in gas insulated switchgear that are significantly lower in cost in a better form factor that we'll be sending into the marketplace and we'll be driving that really in the later part of this year as we get into 2013 it should help. And I think it's fair to say as well that we keep expecting these price declines to come because that is just how the competition is put. And so maybe there's a bit too much focus on the price too because what is important is to counter this price pressure by coming with products that are designed for cheaper cost overall, so that at the end even if the price goes down, we can maintain the margin. And that's a little bit the ingredients that we are trying to use that. So and that gets me into your second question on the margin, which I hear what you say. It is quite possible, although because of just what I said, some products are just not sold anymore at the same prices than they were sold 2 or 3 years ago, but they're also now designed and manufactured at a cheaper cost. So you can have a price pressure, but still an acceptable margin. It is a certain likelihood. It's possible what you say because the price pressure was extremely strong in Q2 in H2 last year. I would say though that we are not going to speculate on that and that's why we keep going at full speed on the cost savings and that we have really this intention that we confirm today to even exceed the $1,000,000,000 of savings that we had announced at the beginning of the year. And Ben lastly on North American Automation, I can tell you that our if you take our low voltage business, which I would align with some of the automation business and this is before T and B, We actually saw an upturn in orders in that business in the quarter. It could have some indirect relationship with T and B in the sense of distribution channels or whatever, but I wouldn't necessarily think that that's the case yet. When you look at our drives business, which is sold through discrete automation and motion, is we've actually seen an increase, a continuing increase in our drives and sales in that marketplace. And so that's a really good sign for us. If you take Baldor itself and just their motors business in the United States, it's still positive growth. It's just slower growth quarter to quarter than what we saw last year. But look there's some really tough comparisons because Battle Royale is running at high double digit rates last year compared to this year. So I look I read Ben I didn't listen to the Rockwell announcement. I wouldn't do that. But I actually read the transcripts from the Rockwell discussion. It looked to me like they were talking more about some currency translations issues in Brazil and also some issues in China. And I didn't see that much attention to the buddy. Next question from Mr. William Mackie, Berenberg Bank. Please go ahead. Thanks for the question and good afternoon. A couple of questions. First, on Power Systems, could you just drill down on a little more behind the weakness in the operating result And at least how you sort of aim to rectify the underperformance on a number of contracts across the world that you seem to have had there recurring in a couple of quarters now? And then secondly, coming back to low voltage and perhaps tying that up with order intakes across Europe, we've had the mix effect coming up on a number of occasions there and in discrete automation with regard to Italy. So perhaps could you just highlight how you've seen demand trending within Italy and some of the other parts of Germany affecting those businesses? Okay. Yes. So on the PS side, I would say that this continuous project slippage that you see is also with the result of the work we're doing to try to address these issues. A lot of these projects are pretty the old projects. It's also important to specify that there's actually very little in the business unit grid systems, which makes this large offshore wind connection that we always mentioned there. The charges were less than €10,000,000 but we have had a few other older projects to take care of in the area of power generation, automation and in the area of substation. What we have done really is that the new management team here in PS has really now created a new job that really looks exclusively at all this excellent issue around project management and trying to address that. We are also even using our internal audit to review the work in progress, which sometimes also forces us to take some corrections to really make sure that we put all the powers on the table and can address that from the right perspective. So obviously, it's disappointing. We are disappointed too. We're not giving up on the targets of PS to get back within their range. In fact, if you look last year, the last two quarters, PS had an EBITDA margin that was very close to 10%. We don't see any reason that they couldn't repeat this performance this year. But at the same time, as we say also every quarter, we remind that this is a project business with a lot of projects with high risk and that unfortunately from time to time there are some risks that come through. But I can reassure you that we are really very forcefully addressing it. And I hope that we can stabilize these project issues in the short term. And William when you talk about LP, I just looking to get some data overall. Yes. Michel, yes. In fact, overall, LP was still quite down in Italy for the quarter. It was I think something like 20%, But it was also because of some large order comparison. The base orders actually were down 7% compared to the same quarter last year. So still weak, but at least not in the kind of dramatic proportions that we have seen in the Q1. William, I think what's worth mentioning that business too is our systems business that we talked about negative mix in that business in the Q1 Q4 last year. Actually the orders were down about 4% on the quarter too. And so that's kind of in line with what we normally see in this business. It's more of a kind of a mid cycle business. It's not a real short cycle business. And so that was it wasn't really necessarily a phenomenon in the quarter like we saw in the Q1 too. But I think one very positive development we've seen this quarter compared to the previous quarter is that all the product division, all the product units have shown positive order increase. While last quarter, in fact, the product units were down and the system unit, which carries much less margin, was up. It's not yet the case in revenue. So despite the better margin that you see this quarter in low voltage products, it's actually still the result of a pretty weak product mix where revenues in the product divisions is down and revenues in the system divisions is up. But since there, the these orders will translate into revenues. These orders will translate into revenues. That's great. Could I just follow-up quickly on a separate topic which is relating to wind and renewables? Specifically, there's been a strong surge in volumes in the renewables wind market perhaps in the first part of this year, but a lot of concerns over the U. S. Specifically next year. I think Bryce Cochrane has aggregated a business with €1,000,000,000 plus of revenue there. How has it trended so far this year? And where do you see the potential risk as we run into 2013? When you talk about Breeze aggregating a $1,000,000,000 business in wind, what are you referring to? Because this is not in the U. S. You're talking of The talking about the offshore wind market in Europe? The business that you operate with in renewables in wind in conjunction with inverters, medium voltage equipment, drive equipment. Yes. Yes. Yes. Okay. Yes. But that's yes, that's pretty different. Is your question William about what we're seeing by geography based on wind? Yes. Look, I think the U. S. Market is at a standstill right now until the whole the TPA piece is worked out. And that's I think that's still to be decided. We don't have a large wind exposure in the United States, at least not a material exposure. We do participate from an inverter standpoint, from a transformer standpoint or whatever, but I wouldn't say it's material in any sense. Our biggest participation from a wind standpoint right now are the offshore wind jobs that we have that are booked and being executed through power systems. I think you saw in the news today that Tenet was going to delay one of those the bidding one of those large offshore wind farms. That just has to do with the execution cycle. I think it being so large and some questions around the execution of those farms. But we expect those investments to go forward. We expect to participate in those. I think they just might be staged differently depending on how the execution around the offshore goes. I hope that's what you're looking for. That's great. Thank you very much. Next question Mr. James Moore, Redburn Partners. Please go ahead. Hi, Joe. Hi, Michelle. Some questions across the businesses actually. In the Power Products business, I know there's been some questions on order pricing. And I get the sense that maybe that's down 3%, 4% year on year. I was just trying to get a feel for the sequential picture and wondered if you could help us a little bit there on the regional side of the sequential picture, tying into the answer you gave earlier. On the low voltage business, you kind of gave us an order number for Italy. I wondered if you could do the same for China against the down 20% that you saw in the Q1 just to see how that's moved. And then in the Process Automation business, you've talked about what seems to me to be a better performance in the product side of the business, which makes a decent margin. And we heard last time around about some difficulties in the turbocharging side of that business over a couple of quarters. Has turbocharging got better? Or is it just that measurements and other pieces have offset continued turbocharging weakness? While Michel works on the sequential picture by region, okay? What do you mean on the pricing trend by currency? James, let me go to the process automation pieces. Turbo orders actually weren't any better in the quarter than they were before. They're relatively flat to down. Obviously, the service part of that business is a good part of that business and that continues and it's very robust in that sense. But those margins actually you can really take Turbo out of it. The margins itself have to do with a really good project execution around the teams too, so no surprise in that sense. And then some of the areas like measurement products has had some good sequential increases in margin from quarter to quarter. Our 800xa business too, we continue to improve in 800xa in the sense of the software margins in that business too. And the shift in service is obviously in service and like that. Yes. I think you mentioned that, Michel, I think, at the one point. Yes. Process Automation is also in the process of cleaning up or upgrading its service portfolio, getting out of some of these full service contracts that we have made. And so you still see a quality service goal, but it is, in fact, much more life cycle service that we are taking on now. And that obviously has a much better margin for us plus it has also more pull through effect for the rest of the business. So that helps quite a lot as well. The improvements in Process Automation are more sustainable ones rather than just a favorable quarter? Yes. What you see as well it's really a gradual improvement that you see almost quarter by quarter on this. So it's really a combination of cost takeout of portfolio enrichment with more products, better quality services and a bit less systems and more selectivity on the system project to take on. And that's a very conscious effort James from our standpoint and belly management team's standpoint over the last really 18 months. On the LP China orders? I'll have it here if you want. So LP China orders were actually up 23% for the quarter. So there was really a very strong rebound from that. Yes. I saw Joe being skeptical, so I'll double check the number. I know. We were not used to this number anymore. So up 23%. Then your question regarding sequential pricing on orders in PP. So indeed, it's an improvement compared to last quarter of a little bit more than 1% on average. Obviously, each business unit has a little bit different one. The best improvement is in medium voltage for the reasons I mentioned already before. So that is indeed encouraging. We see really some price improvement in areas like U. S. Or China, But I won't go in more details on that. I think it gives you an overall trend of what you need to know here. That's very helpful. Could I just follow-up with one other? On currency, you kind of gave us the €100,000,000 translation number. And I suppose the hedging minus €82,000,000 is the hedging side of it. And you guys don't talk much about transaction. Given your cost and revenue slight mismatch, do you also have a significant transaction negative going on in the quarter? No. In fact, the transactions, cash effect that you see in the corporate hedges for instance. So really it's also something I will develop a little bit more on the Capital Market Day in September. But you could really say we have a structure foreign exchange exposure one side, which is just where we sell compared to where we manufacture. We have cash flow exposures, which we always hedge, for instance, when we take a project. As soon as the project is awarded, we hedge all the cash flows. And then we have this translation exposure, which is just simply the translation of reporting all the revenues and profits that we have made in non dollar countries and reporting that into a U. S. Dollar income statement. So these are the 3. The transactions they are in the balance sheet. We fully hedge everything and so there is no impact on that one. Okay. Thank you very much. You're welcome. Next question from Mr. Frederik Staar from UBS. Please go ahead, sir. Yeah. Hi, gentlemen. I just wanted to know if we look at your order intake across Northern Europe and then considering that Germany is down a bit here, is it still fair to assume that the boost you had in Norway and U. K. Is a bit more lumpy even if base orders were up as well just by the nature of those end markets and that we may maybe should be a bit more balanced when we look at our models here in the coming quarters? Well, obviously, there are sometimes some large orders, but let me check here 2 minutes if I can find some information on that. From what I recall, as I'm looking for, Norway has had a very good performance already since quite a while because it is a very important country both on the marine side and on the oil and gas side. And that obviously helps. We had actually, all the Nordic countries in the Q1 had performed very well this time. And Sweden is a little bit down, but still quite constant. So what you see in fact is the southern countries are really down, but we have seen a number of these countries like Norway, like U. K, but also some Eastern European countries, also Russia that have really more than offset that. And so yes, it can be a bit more lumpy because oil and gas is obviously large orders, but it has been really quite stable over quite a while now. Okay, great. And then if you could give some could you maybe give some examples on what's driving your U. S. Growth at the moment? What kind of industries are still propelling doing well for you? Well, our power business continues to expand there. And so I'd say both on the transmission and somewhat on the distribution side that continues to go well. I think these are not large jobs necessarily. I think they're just upgrades in different areas around the country that we've caught up with. We announced a big order with AEP and just enhancing a grid over the quarter also. Because they from an automation standpoint United States, we this has continued the mining part in the U. S. Has been fairly strong. And I think we've had a residual effect on the fracking that's been going on in the United States too. And I'd say it's not just fracking for gas. If you look at a lot of the drill rigs that were in gas and as the gas price has gone down, you probably know a lot of those rigs have been moved over to really frac for oil. And there's a huge amount of motors and drives and different things that are associated with that industry. So we indirectly benefit from that also. And I'd say that's been one of the So let's get this one. Yeah. That's true. Automotive, Michel just mentioned that automotive robotics has continued to do well for us also. And as I mentioned in the introduction, we had a large order from Ford for robotics that really helped discrete automation in motion in the second part. Okay. That's great color. Thank you. Thank you. Next question from Mr. Olivier Esmo, Exane BNP Paribas. Please go ahead sir. Yes. Hello. Good afternoon. Hi, good afternoon. Two questions please. First on the foreign exchange impact, I mean, good granularity from you. I was just wondering with the info you have now, is it possible to say if currencies stay where they are now, what would be the impact in H2? You always compare to the same quarter last year. So we would have to make you would have to you would have to make an analysis to see a little bit what was the average of dollar weight in the Q3 last year to understand a bit what it is on there. And so let's say if the currency doesn't move, we will obviously have less impact on the hedges. So the cash part of the hedges and the derivative part, but the translation that one will have to go back which I haven't done to the average rates of last year. Okay. And maybe If you see more or less the direction, I mean, obviously, the impact when the dollar goes up is a negative for us. So based on that, you can try the problem is a bit that there's such a discrepancy of variation versus different currencies that the 2 together is really difficult to do. There again Olivier, I really will try to spend some time about that on the Capital Markets Day to really explain a bit in more details these exposures and I hope that can help as well better understand what is behind the numbers. Okay. Thank you. And maybe a follow-up on the reinvestment piece in the bridge. If I look at it, it kind of continues to accelerate. At the same time, orders are up, but they decelerate. So I was wondering how you think about it. And what's the outlook for that part really? I don't think it I don't think it really accelerated because in the Q1, if I recall, the reinvestment was €145,000,000 so it's €10,000,000 less. Obviously, it's a lot of people, so you cannot change the pace from 1 month to another. We have also worked on a number of technology projects like we have talked about this 1100 kV HVDC transformer that we just finished to pass the test. It is already a pretty sizable investment that you can't change very fast. So we are obviously trying to slow down some programs to adjust to slightly slower growth. But as I pointed out when I explained the bridge, I think that as long as these sales and R and D investments are taken care by the EBITDA coming from marginal volume, you can say that in a way they are kind of self financing themselves. And plus I think it's buried in the other on the bridge side. Our G and A costs are actually down. Yes. And we take those G and A costs and we recycle them back into that part of the business that helps us grow too. Yes. I was looking at it on the 12 month rolling absolute, but I understand you're trying to slow it. How do you measure the actual volume contribution of that specific investment? Are you able to separate out the volume bridge what's on investment? We don't go in that details on the volume bridge, but let's say when Joe and I have business with you, for instance, to evaluate the return on selling expense, you have to really see in which country people invested in salespeople and start seeing the kind of growth rate you have in these countries compared to others where the effort has not been made. And I think that one is quite easy to measure. The return on research is always a bit more complex and has also a bit of a longer payback, but that is the price to pay to remain competitive here. And part of it is also investing in research to get cheaper design and offset the price pressure. So if we so as a kind of bottom line, how much of that piece do you think has to happen anyway? And how much is flexible depending on the very uncertain outlook we have? To be honest, I have never asked myself this question. So I can't really answer. And if Michel never asked himself, but I never asked either. All right. Next for the Capital Markets Day maybe. Okay. Thanks Olivier. Thanks Olivier. The last question for today is from Mrs. Daniella Costa, Goldman Sachs. Please go ahead, ma'am. Thank you. Good afternoon. Three points. The first one on market shares really you seem to have some underlying evolutions, which are better than some of the competitors that reported recently in terms of orders. Can you comment if you think some of this is related to market share changes in by segment? And the second one slightly related to that, but more focused in U. S. Power products. Have you started seeing some impacts from the anti dumping rule against the Korean companies? So what's the status there? And then finally, I think Michel mentioned in the presentation what was the cry level at the moment, but I couldn't understand it. So if you wouldn't mind repeating what's the present number? Thank you. I think our market share versus competition, I wouldn't say that we've taken any kind of excess market share versus competition in any meaningful way. You might be referring to one of our competitors' announcements and you saw what their T and D order growth rates were. And if you look at the margin in that business at the same time, it was kind of down. I can't explain that, okay? I can only explain that from a power product standpoint, the team has been executing well. We have a broad portfolio. But I don't see us out there and I can tell you in any direct way trying to gain share through price in any way shape or form. Our teams have been very good. And I think you've seen that in the sense of the 14.7% margin capability within Power Products is to be able to find business out there that we feel is reasonable from a margin standpoint and then drive cost as hard as we can to make sure that we maintain that capability. From the U. S. Power product standpoint anti dumping, remember the anti dumping has to do with large power transformers over a certain size. We have obviously seen our competition respond in that sense, but we're much more in the U. S. Than large power transformers. And when we do air insulated switchgear, there's big distribution transformer side that has not been addressed at all by the anti dumping piece and we don't have a case in that sense. And but we continue to drive productivity in that business and we continue to be very competitive. With regard to the cash return reinvested capital, I said that we were low teens, so close to 10%. And again, if you look in the last 18 months, we have spent about $11,000,000,000 of acquisitions. These acquisitions for the moment have a low single digit return. If you go back before this time when we started getting more acquisitive, so the CROIC was above 20%. And so the timing is an important role here. And I will develop that more at the Capital Market Day in September. And so with that, we'd like to thank you for joining us. And again, Michel and I were pleased with the progress that we saw in the Q2 versus the Q1. We know we still live in a time from a macroeconomic standpoint. There's a lot of questions out there, but we were pleased with the orders that we saw around the globe, the rebound in China, the continuing strength in the Northern Europe and the United States. And we're going to push like crazy to continue that trend going into the Q3 and we'll come back and report to you on it. And in the end, again reference to Capital Markets Day that Michel talked about, that's going to be at September 12. And it's going to be held in London and invitations are going to come out shortly with the agenda. And so we hope as many of you as possible to join us and we look forward to seeing you then. So with that, thanks again. And I know many are going on holiday. Hope you have a good holiday. And we'll be we'll check-in again within the Q3. Thanks again. Thank you. Bye bye. Ladies and gentlemen, the conference is now over. Thank you for choosing the Chorus Call facility and thank you for participating in the conference. You may now disconnect your lines. Goodbye.