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 conference 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&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to go to an operator. At this time, it's my pleasure to hand over to Joe Hogan, CEO of ABB, and Michel Demaré, 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 to speak from is on abb.com. I turn your attention also to chart two, which is our safe harbor statement. Let's quickly move to chart three. 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, I would say, kind of as an overlay, there's a lot of noise in our numbers, and hopefully, this presentation helps to clear up some of that noise. The two big areas of noise would be the Thomas & Betts acquisition, along with the currency translation piece.
When you look at the currency translation, it reduced reported revenues by about $600 million and EBITDA by about $100 million. Substantial in that sense. China orders stabilized, particularly in Low Voltage Products, where we had some issues in the first quarter. North America is still a strong force. We saw a rebound in the Middle East and Europe steady. I'd say there's a two-tier Europe between north and south. We'll talk about it, but at least it was a positive orders quarter. Order price pressure and 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 second quarter of last year. Some negative mix and obviously the U.S. strong dollar translation. We saw some good progress quarter-to-quarter.
Thomas & Betts acquisition's completed. Got about six weeks in, and we'll walk you through how that looks. Division delivered really solid cash from operations. We'll talk to you about some of the cash shortfall that we've had and as to why. Moving to chart four, we can see that orders were up two versus second quarter of last year. When you look from an organic standpoint, up nine and then plus six from an overall standpoint. Revenues organic about three at $9.7 billion. Our order backlog, there were some questions this morning on order backlog. If you just, from a U.S. dollar standpoint, minus three, but in local currency, we actually saw an increase in our backlog, close to $29 billion overall. From an operational EBITDA standpoint, our numbers were $1.471.
As you can see, that's about -5 overall, but -9 from an organic standpoint when you look at the $60 million they received from Thomas & Betts 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, Michel and I will walk you through that shortly. Turning to chart five, steady on higher demand in most regions. 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 & Betts up 10%. Really good progress in both Power and Automation. Power up 26% and Automation up 16%.
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. 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 at -1%. The next page, we'll talk more about how we can dissect Asia for you and how that works. Overall, Power up 12% and Automation down 8%. In Europe up 2%, with Automation up 4% and Power up 2% in that sense. 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 six, 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 can see Canada was up 30%, up 10% excluding T&B. United States up 13% when you exclude T&B overall, and Brazil up 12%. When you look up above on Norway, +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, Discrete Automation and Motion in Germany. Overall, we're seeing the German side down. We talk about a two-tiered Europe, though, with Spain -30% and Italy -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 a good operations turnaround in India too, which is establishing a positive trend for us. China was down 2% overall. The Low Voltage Products, which is our biggest concern in the first quarter, actually came back pretty strongly. You can see Australia is up 49%. 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 seven, this just takes a quick look at our Power Products and Power Systems performance overall. You can see that orders are up in Power Products about 5%. Revenues are flat. Operational EBITDA versus the second quarter of last year, down 15% at 14.7%.
If you move down to the bottom part of it, what we're trying to show in this chart is that we, over the last three quarters, have had pretty consistent margins from an operational EBITDA standpoint in Power Products. 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 million of cost in the second quarter 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%, operational EBITDA down 37% at 6.2%. 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. The margin slippage had to do with some small projects in different businesses around the world that had some slippage. It's not the kind of operational execution that we want to see in this business. We're going to make sure that we continue to focus on this business so it can deliver more consistent results in the future. Moving down below, when you think in chart eight, 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, the restructuring in our power division, but I can assure you that it goes on all the time. 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. 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 600 and 700 jobs. At the same time, you have to realize that we repositioned that footprint to lower cost areas so it can be more competitive too. We call it the cost growth paradigm, and we take out capability in some areas, and then we increase capability in different areas too.
From an M&A standpoint, we did have one small deal, about $35 million, with a company called Tropos, which is a 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. This works well with our Process Automation division too, in the sense of the systems work that they drive from a communication standpoint also. We're excited about that. Down below, the challenges. Obviously, the challenges have been the challenges we've had in this business, is continuing to take costs down in Power Products and continue to reposition ourselves to make sure that we can hold the margins that we have out there. There's going to be no letup 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. Service continues to be an area of leverage for us, where we've been sinking a lot of time and resources into services, and our lifecycle services are growing extremely well in that sense, and I'll talk more about that in a second. Moving to chart nine, this is the automation businesses overall, starting with Discrete Automation and Motion. I know there's a lot of concern in the first quarter about the overall margin of our Discrete Automation and Motion business.
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, a very respectable margin for the quarter. We saw lower demand in renewables and rail, 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 face of this, a lot of mix that we have going on. It's not mentioned in the highlights, but robotics had a very strong quarter overall. We had one large order for Ford in the U.S., too, that really helped from an order standpoint. Low Voltage Products is a big turnaround for this division in this quarter.
Thomas & Betts obviously skews the figures because you can see how much it was up with Thomas & Betts in six weeks. If you look at the numbers down below that shows the adjusted numbers for just looking at continuing operations outside of Thomas & Betts, you can see that orders were up 1%, revenues were minus 2%, and overall on operational EBITDA, about 17.7%. I'd say two things to really call attention to here outside of the T&B acquisition would be one is China turnaround, and we'll talk more about that, I'm sure, in the Q&A. We have seen really a dramatic improvement in the business. 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 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 first quarter. Tarak 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, it has to do with cost savings and higher margins in lifecycle service.
Our measurement products business has been doing extremely well year to year. 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 recovery 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, everything about a point and a half year-over-year, which is good. We've pushed price where we can. In discrete automation and motion, the team has pushed it there, too, where they can in certain parts of their business. Obviously, we closed the T&B 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 one-megawatt data center here in Switzerland. We've basically shown what our analysis had pretty much anticipated, which is about a 10%-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 to validate that and to push more interest in the marketplace. Down below, challenges and action plan. 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 billion dollars we originally mentioned as we started the year. Moving over to chart 11, which is on Thomas & Betts. We have the six 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 & Betts. Operational EBITDA margin has improved from 16.7 last year to 18.5%, which shows really good operations execution. From our income statement standpoint, you'll see $310 million of revenues that are in Low Voltage Products and $60 million of operating profits. The integration's on track.
We have some early wins in South America, particularly in using the infrastructure and capability of ABB to help some of Thomas & Betts' work overseas. In this case, it was a great example. 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 one, excluding the one-time charges. And now down below, also, just so that you can work the spreadsheets properly is, you can see acquisition-related cost is $70 million, $80 million for a full year. You can see what PPE will be in $120 million 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. Michel will take you from quarter to quarter walk.
Okay. Thank you, Joe. I'm afraid I will have to take you to even a bit more excruciating detail this quarter because we have had so many impacts from external factors that we want to help you also understand the true operational performance of the group this quarter. If we start with the chart 12, the operational EBITDA bridge, you can see that overall, the net operational EBITDA is down $76 million compared to the second quarter last year. I think we can break down this EBITDA bridge in three or four components. First of all, the first column, you see that the pricing impact was $235 million this quarter. The good news is that we were again able to generate $277 million of cost savings. If you look, in fact, the pricing pressure plus project margin were totally offset by the cost savings.
Far, the strategy has worked again. You can take a second group of analysis where you see that we have continued, although at a little bit slower pace on investment in selling and R&D, a net increase of $135 million. That has also, since we are doing that now since three or four quarter, helped to generate a volume gain that produced an additional EBITDA in the range of $120 million. With these factors offsetting each other, what we are left with is basically an impact of the business mix, about $60 million. The other column that you see at -$64 million, which includes this $100 million of translation losses due to the high dollar, which was about $100 million, partly offset by gains in the G&A and a little bit of positive commodity impact as well.
Finally, we had T&B that added almost $60 million for the quarter. We get to this net result of $76 million lower than a quarter ago. Moving to chart 13, in terms of the cost savings update, you see about $280 million 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 two-third of this savings, 65%, automation 25%. I also want to emphasize that the part coming from indirect sourcing is actually improving quarter after quarter. It was 8% last quarter. It is 10% this time. If you look at it year to date, after two quarters, we have taken out about $540 million of savings.
Against that, we estimate we have lost a little bit less than $500 million in pricing. The strategy still works there. We are also happy to see that we are running at a run rate, which is actually higher than the $1 billion target that we have fixed ourselves in terms of savings. We are pretty confident nowadays that we will be able to exceed this $1 billion 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 earning per share. Why we do that is because this quarter, we have had really two very important influences. One is the currencies, and the other one is the accounting related to our M&A activities.
Just in terms of currency, let's start first by reminding that if we compare the average exchange rate of the second quarter last year to the quarter this time, the U.S. currency has basically revalued by more than 20% against the Brazilian real and against the Indian rupee, by 12% against the EUR, 11% against the SEK, 8% against the CHF, and it has devalued against the Chinese yuan maybe by 3%. You see it's a huge volatility, which obviously in a company like ours, has a huge impact. Joe mentioned it before, we estimate that our top line was affected by about $600 million in reporting translation, because we report in U.S. dollar. We estimate that at EBITDA level, the impact was $100 million, which if you calculate after-tax in earning per share, represents about $0.03 a share.
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 million positive impact from this derivative. This time it was a negative $82 million. There again, because the U.S. dollar was higher, we have a negative delta of $140 million. Keep these amounts in mind for a while. I will come back to it. The second impact, as I said, is all the accounting related to M&A. Joe mentioned that we had about $70 million of one-offs linked to the T&B acquisition. We had another $20 million of other one-offs related to other acquisitions, so the total there was $90 million.
In terms of the amortization of PPA, which is a question that you also often ask, the total for the quarter was $82 million, out of which T&B was $33 million, and this $82 million compared to $51 million in the second quarter last year. Now I've given you all these numbers on a pre-tax basis. We go on an after-tax basis in the table. If we start from the top there, you see the reported net income and the reported earning per share. Earning per share was $0.29 compared to $0.39 last year. 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.
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 million, which means $0.05 a share. Finally, the impact of the one-offs, the $90 million, which after tax represents $65 million, which is another $0.03 a share. That is obviously a big difference when you adjust these three points to try to come to an operational net income that corresponds to the operational EBITDA that we always report. You see that in terms of earning 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.
Basically, if we say the local currency translation adjustment was $100 million, which is $0.03 a share, you see that comparing the two operation net income, in fact, we come to the same bottom line of $0.38. 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 $0.40 last year to $0.37 this year. If we add to this $0.37, the $0.03 of translation, in fact, we have unchanged operating earning per share from one year to the other. I hope I have not lost you. We can for sure take more questions on that, 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 US 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 million from $862 million to $902 million. On the other side, the corporate cash was a big outflow. 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 million and $150 million of outflows a year. 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.
As a general rule, at the corporate center, we're always long dollars, when we hedge, we sell dollar forward. Clearly when the dollar goes down, these hedges generate cash. When the dollar goes up, the hedges consume cash. You can see last year that we had, in fact, a positive corporate cash flow of about $30 million, which means that we had probably $150 million of corporate cost offset by $180 million of cash generation from hedges. This time we have a $300 million outflow, which means that on top of the $150 million of corporate costs, we had another $150 million of negative cash from the hedges. It makes it very complicated, I think it's worthwhile to explain the difference.
The net cash flow from operation is about $300 million lower than the same quarter last year, the cash from the divisions again is up $40 million. 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 fixed ourselves at our Capital Markets Day back in 2011. This is an 18-month assessment, as you can see, we have three green lights. The organic revenue growth after 18 months is at 11% annualized compared to the range of 7%-10%. Our operating EBITDA at 14.7% is still well within the corridor that we have fixed ourselves. Our earning 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. 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, that the fourth quarter is also very strong. 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 two cable factories that we are investing in in Sweden and in the U.S. That is still a target that should improve over the time. 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, pretty far away from the 20%. There as well, it's a matter of timing. We have made two large acquisitions, Baldor and Thomas & Betts. One we have since 16 months, the other since six weeks. Obviously, we can't expect this capital to yield the long-term IRRs that we have targeted for this acquisition. 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.
Again, that is a target by 2015, I will take some time at the next Capital Markets 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. With that, I pass it on to Joe for the conclusion.
Thanks, Michel. Coming to chart 17, which is a summary. From a short-term standpoint, all of us see the macro indicators around the world, in the U.S. and Europe, and emerging markets remain mixed. Again, we were pleased with how the business performed in the face of those macro indicators, we're hopeful that that will continue going forward. On Q2, stability in operating profits in margins and PP in recent quarters are good. We want to keep that trend going. Price pressure, again, we think is easing. Again, remember, this is a long cycle backlog, it doesn't mean that this will quickly materialize. 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.
It's a 2-tiered world between the south and north, we were pleased with being able, the 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. We also would take, you might ask about our July orders in Low Voltage Products. So far, it's continued on that trend, that gives us a certain amount of confidence that that could possibly continue through the quarter. In the sustained order growth across the portfolio in the U.S., that's been going on for a while, we would expect that to continue. We don't have any data that says that it should stop.
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 & 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. With that, we're cautiously optimistic about the second half of the year. That will end the presentation, now we'll turn it over for any questions that Michel and I can handle.
We will now begin the question and answer session. Anyone who wishes to ask a question will press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star then two. Participants are requested to use only hands for asking a question. Anyone with a question, press star and one at this time. First question from Mr. Mark Sherwin, Bank of America, Merrill Lynch. Please go ahead, sir.
Yes. Good afternoon, Joe. Good afternoon, Michel. This is Mark with Bank of America.
Hey, Mark, can you tell us your volume? We can't quite hear you.
All right. Okay. How's that? Is that better?
Much better.
Yeah.
Okay. Thank you. Just first question, I guess there's always one on pricing. Interesting comments you're making about it leveling out, et cetera. Of the $235 million you put in your bridge of pricing, how much is in Power Products, or how is it roughly distributed, I guess? In Power Products specifically, what is the percentage change in orders looking like relative to what's going on in sales. I guess finally, just to go full circle on that, 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. Secondly, on China, 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, this is a correction, or how would you read it? A bit of color on that would be very helpful. Thank you.
Okay. Maybe I'll start with the pricing impact. 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 two-thirds of that total is from Power Products. Actually, if you take the total, I would say that more than 90% comes from the Power division. The Automation divisions are a bit better in Power, in the products, a bit less good in systems, so they kind of offset each other. Most of this pricing is really in the Power divisions overall. In terms of the rate of pricing in orders versus revenues, as we said, we have seen a certain improvement in the pricing on orders this quarter across all the business units.
Obviously, a 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 first quarter that was corrected. Obviously, that has helped. At this stage, I would say that the pricing pace in orders trails the revenues by 1% or slightly more. That's the kind of improvement that we have tried to flag to you.
Yeah. Mark, you also talked about how long does it take for things to bleed through from an order to a backlog. In Power Products, it's all over the board. The medium voltage products has a very short cycle, medium cycle business to it. Large power transformers are really large, so it takes a long time, 18 months to 12 months. Same with gas-insulated switchgear. I think you 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 price was flattening out. We didn't say that. We said that margin was flattening out.
Yeah. Right.
As we're driving this margin piece by the cost down that we've been having in this business, 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 talked a little better.
Right. The pace of price decline is slowing down. That's what it is.
Yeah. Mark, your last question on China, low voltage product. I tell you, our clarity on this isn't complete. Here's what we see is, was there some destocking and restocking between the first and the second quarter? I'd have to say, yeah, absolutely. There's no way you would see that kind of a turnaround with some aspect of stocking and restocking. At the same time, that's almost a discrete event. Between June and July, we have seen a pickup in construction orders, and those construction orders have continued into July. 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. Michel 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. Michel, 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.
Yeah. Okay.
Roughly about 1%. A bit different in each units, but roughly about 1% indeed, yeah.
Okay. Thank you very much.
Mark.
Next question from Andreas Willi, J.P. Morgan. Please go ahead, sir.
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. 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 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.
If we look at cash conversion for the last six quarters, which is just above 50%, that'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?
Andreas, 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's going to be going into the third quarter. If I use just a rational expectation model, the 0-2% base order growth that we've seen. If you look at our base order growth by region, we had about four of them up and four 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, Andreas, you take a look at China in itself. There are certain segments of the marketplace, like in LP and construction we talked about, were much better.
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, that hasn't necessarily revived itself. Transportation orders across both of those businesses that we reported were down in the first quarter continue to be down, and the nuclear industry hasn't come 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 recatalyze that business around some industrial channels and to push our products through those, and they've been very successful in doing that over the last 90 days, and it really helped to overcome that piece. I think that's the kind of color.
If you move to 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. It's really been marine associated with oil and gas. When you look at the PA piece, it's been a big part of that, and the mining and minerals piece continues to be strong also. Automotive really reflected through our robotics business has continued to be pretty strong geographically, too.
Yeah. I would add also that the two power businesses.
Yes
Based on the increase of about 5%.
Yeah
5%-6%, as well as service. Service, actually, we were not happy with the increase this quarter at 5%. 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. 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. 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 the operational excellence people, to try to work on the root causes also of design, net working capital, on quality, on documentation, et cetera. Obviously, that takes a little bit more time to be produced. Meanwhile, we are more or less at 16% nowadays of net working capital. Our target is still to be in a range of 11%-14%. I would say realistically, if we reach 13% at the end of the year, I would already be very happy. Now, you know, 3% on $40 billion, that is $1.2 billion improvement that you can just get there. Whether we're going to reach 90% this year, I think that's going to be sharp, especially due to the currency effects.
If you look at it over five years, the last five years, we achieved a conversion of 100%, and that was a combination of years where we had 70% and years where we had 130%. I think we have to look at it 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 fourth quarter that should get us much closer to the standards that you have been used to.
Thank you.
Next question from Mr. Ben Uglow 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 rather than 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? That was question number 1. Question number 2, I'm sure Michel won't forgive me for asking this about the margin bridge. 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 less onerous for you?
It was the fourth quarter of last year where you had a very tough pricing experience. That's an unfair question number 2. 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. Michel will take the margin bridge, 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, I'd say if you take it from 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 U.S., we have seen a price, the market actually increase in that sense.
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. There's something that we have to explain that since, Ben. A lot of those we weren't even quoting on because the prices were too low.
As the prices have come back, they begin to come back in the range that we would consider to be something that we'd want to quote on. They're still not terrific margin in that sense.
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. Conversation really around large power transformers right now. There's been no real change from a medium voltage standpoint, our medium voltage business. For high voltage gas-insulated switchgear, it's still competitive. 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 and a better form factor that we'll be sending into the marketplace and we'll be driving that, really the later part of this year as we get into 2013, it should help.
I think it's fair to say as well that we keep expecting these price declines to come because that is just all the competition is put. 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. That's a little bit the ingredients that we are trying to use there. 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 two or three years ago, but they're also now designed and manufactured at a cheaper cost. 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 H2 last year. I would say, though, that we're 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 billion-dollar savings that we had announced at the beginning of the year.
Ben, lastly, on North American automation, I can tell you that if you take our low voltage business, which I would align with some with the automation business, and this is before T&B, we actually saw an upturn in orders in that business in the quarter. It could have some indirect relationship with T&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. That's a really good sign for us. If you take Baldor itself and just their motors business in the U.S., it's still positive growth. It's just slower growth quarter-to-quarter than what we saw last year.
Look, there's some really tough comparisons because Baldor was running at high double-digit rates last year compared to this year. Ben, I didn't listen to the Rockwell Automation announcement. I wouldn't do that. I actually read the transcripts from the Rockwell Automation discussion. It looked to me like they were talking more about some currency translations issues in Brazil and also some issues in China. I didn't see that much attention to the U.S. marketplace as you mentioned. I was really surprised with your question.
Brilliant. Thank you. Thank you very much indeed.
Thank you, buddy.
Next question from Mr. William Mackie, Berenberg Bank. Please go ahead, sir.
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, 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? 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. Perhaps could you just highlight how you've seen demand trending within Italy and some of the other parts of Germany affecting those businesses?
Yes, on the PS side, I would say that this continuous project slippage that you see has also been the result of the work we're doing to try to address these issues. A lot of these projects are pretty old projects. It's also important to specify that there's actually very little in the business unit Grid Systems, which makes this a large offshore wind connection that we always mention there. The charges were less than $10 million, 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 the new management team here in PS has really now created a new job that really looks exclusively at all this excellence issue around project management and trying to address that.
We 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 problems on the table and can address that from the right perspective. 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. 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 hits that come through.
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.
William, when you talk about LP, I just looking at some data overall.
Yeah.
Let me show you.
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. Still weak, but at least not in the kind of dramatic proportions that we have seen in the first quarter.
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 first quarter and fourth quarter last year. Actually, the orders were down about 4% on the quarter, too. That's kind of in line with what we normally see in this business. It's more of a mid-cycle business. It's not a real short-cycle business. It wasn't really necessarily a phenomenon in the quarter, like we saw in the first quarter, too.
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 a positive order increase.
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. 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. Since there the cycle is pretty short, next time we should get more of a positive mix now as 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 Brice Koch has aggregated a business with a billion-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 Bryce aggregating a billion-dollar business in wind, what are you referring to?
This is not in the U.S. You are talking of Northern Germany.
You're 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.
Oh, I see.
drive equipment, so all of it.
Yes. Ulrich. Yeah, okay.
Yeah. That's spread different. Is your question, William, about what we're seeing by geography based on wind?
Yes.
Look, I think, the U.S. market's at a standstill right now until the whole PTC piece is worked out. 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 TenneT was going to delay the bidding and execution of 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. 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 from Mr. James Moore, Redburn Partners. Please go ahead, sir.
Hi there, Joe. Hi, Michel.
Hi, James.
Hi. Some questions across the businesses, actually. In the Power Products business, I know there's been some questions on order pricing. 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 kindly 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 first quarter, just to see how that's moved. 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.
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?
I'm working on the pricing trend by country.
Yeah. Okay. Let me go to the Process Automation piece is, turbo orders actually weren't any better in a 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 for us, and that continues, and it's very robust in that sense. Those margins actually, you can really take turbo out of it. The margins themselves, they have to do with a really good project execution around the teams, too, so no surprise in that sense. 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 800xA in terms of the software margins in that business too.
The shift in service also with service and like that.
I actually didn't mention it, Michel. I think that's a really good point.
Yeah. 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. You still see a positive service growth, but it is in fact much more life cycle service that we are taking on now, and that obviously is a much better margin for us. 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.
Yes
it's a favorable quarter.
What you see as well, it's really a gradual improvement that you see almost quarter by quarter now on this. It's really a combination of cost takeout, of portfolio enrichment with more products, better quality services, a little bit less systems, and more selectivity on the system projects they take on.
That's a very conscious effort, James, from our standpoint and Veli-Matti and team's standpoint over the last really 18 months. On the LP China orders?
I have it here if you want. LP China orders were actually up 23% for the quarter. There was really a very strong rebound from that. Is that what you refer to?
Yeah, I have the same thing.
I saw Joe being skeptical. I double-check the number.
No, no.
He's right. We were not used to this number anymore. Up 23%. Your question regarding sequential pricing on orders in PP. 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. 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 million translation number, and I suppose the hedging minus $82 is the hedging side of it. 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, we are hedging them because they are shorter in nature. Are in the balance sheet, and we are hedging the balance sheet. That is part of this cash effect that you see in the corporate hedges for instance. Really, it's also something I will develop a little bit more on the Capital Markets Day in September. You could really say we have a structure for an 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.
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. These are the three. The transactions, they are in the balance sheet. We fully hedge everything, there is no impact on that one.
Okay. Thank you very much.
You're welcome.
Next question from Mr. Fredric Stahl 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 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 maybe should be a bit more in a balance when we look at our models here in the coming quarters?
Well, obviously, there are sometimes some large orders, but let me check here two 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
That obviously helps. Actually, all the Nordic countries in the first quarter have performed very well. This time, Sweden is a little bit down, but still quite constant. 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. Yes, it can be a bit more lumpy because oil and gas is obviously larger orders, but it has been really quite stable over quite a while now.
Okay, great. If you could 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. 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. From an automation standpoint in the U.S., this has continued. The mining part in the U.S. has been fairly strong. I think we've had a residual effect on the fracking that's been going on in the U.S., too. 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 frack for oil. There's a huge amount of motors and drives and different things that are associated with that industry. We indirectly benefit from that also. I'd say that's been one of the.
Automotive as well, robotics.
Yeah, that's true. Automotive, Michel has mentioned that automotive robotics has continued to do well for us also. As I mentioned in the introduction, we had a large order from Ford for robotics that really helped Discrete Automation and Motion in the second quarter.
Okay. That's great, color. Thank you.
Thank you.
Next question from Mr. Olivier Esnou, Exane BNP Paribas. Please go ahead, sir.
Yes, hello. Good afternoon, Joe and Michel.
Hello, Olivier.
Two questions, please. First, on the foreign exchange impact, a 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 in terms of T&D impact?
You always compare to the same quarter last year. You would have to make an analysis to see a little bit what was the average dollar weight in the third quarter last year to understand a bit what it is on there. Let's say, if the currency doesn't move, we will obviously have less impact on the hedges. The cash part of the hedges and the derivative part. The translation, that one will have to go back, which I haven't done to the average rates of last year.
Okay. Maybe.
You see more or less the direction. Obviously, the impact when the dollar goes up is a negative for us. Based on that, you can try. The problem is a bit that there's such a discrepancy of variation versus different currencies that the two 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. I hope that can help as well better understand what is behind the numbers.
Okay, thank you. Maybe a follow-up on the reinvestment piece in the bridge. If I look at it kind of continues to accelerate. At the same time, orders are up, they decelerate. I was wondering how you think about it, and what's the outlook for that part, really?
I don't think it really accelerated because in the first quarter, if I recall, the reinvestment was $145 million, so it's $10 million less. Obviously, it's a lot of people, so you cannot change the pace from one month to another. We have also obviously worked on a number of technology projects, like we have talked about this 1,100 kV HVDC transformer that we just finished passed the test. It is already a pretty sizable investment that you can't change very fast. We are obviously trying to slow down some programs to adjust to a slightly slower growth. As I pointed out when I explained the bridge, I think that as long as these sales and R&D investments are taken care of by the EBITDA coming from marginal volume, you can say that in a way they are kind of self-financing themselves.
Plus, I think it's buried in the other on the bridge side, our G&A costs are actually down.
Yeah.
We take those G&A costs and we recycle them back into that part of the business that helps us grow, too.
Yeah.
Yeah, I was looking at it on a 12-month rolling absolute. 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 from the volume bridge what's from the investment?
We don't go in that details on the volume bridge. Let's say when Joe and I have a business review, for instance, to evaluate a return on selling expense, we 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. 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. Part of it is also investing in research to get to cheaper design and offset the price pressure.
As a kind of bottom line, how much of that piece do you think has to happen anyway? 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.
If Michel never asked himself that, I never asked either.
All right. For the Capital Markets Day, maybe.
Okay.
Thanks, Olivier.
Thanks, Olivier.
The last question for today is from Mrs. Daniela Costa, Goldman Sachs. Please go ahead, madam.
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 by segment? 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? What's the status there? Finally, I think Michel mentioned in the presentation what was the CROIC level at the moment, but I couldn't understand it. If you wouldn't mind repeating what's the present number. Thank you.
I think on 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 with their T&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 Products standpoint, the team has been executing well. We have a broad portfolio. I don't see us out there in, 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 Products 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. We're much more in the U.S. than large power transformers. We do air-insulated switchgear. There's a 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. We continue to drive productivity in that business, and we can tend to be very competitive.
With regard to the cash return on invested capital, I said that we were low teens or close to 10%. Again, if you look in the last 18 months, we have spent about $11 billion of acquisitions. These acquisitions, for the moment, have low single-digit returns. If you go back before this time, when we started getting more acquisitive, this CROIC was above 20%. Obviously, timing is an important role here, and I will develop that more at the Capital Markets Day in September.
With that, we'd like to thank you for joining us. Again, Michel and I were pleased with the progress that we saw in the second quarter versus the first quarter. 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 Northern Europe and the U.S. We're going to push like crazy to continue that trend going into the third quarter, and we'll come back and report to you on it. In the end, I'll again reference the Capital Markets Day that Michel talked about. That's going to be September 12th. It's going to be held in London, and invitations are going to come out shortly with the agenda.
We hope as many of you as possible can join us, and we look forward to seeing you then. With that, thanks again, and I know many are going on holiday. Hope you have a good holiday, and we'll check in again with you in the third quarter. Thanks again.
Thank you. Bye-bye.
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