Earnings Call: Q1 2019

Apr 17, 2019

Ladies and gentlemen, welcome to the ABB Q1 2019 Results Conference Call. I'm Moira, 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. The presentation will be followed by a Q and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mrs. Jessica Mitchell, Head of Investor Relations. Please go ahead, madam. Thank you. Good afternoon, ladies and gentlemen, and welcome to this webcast and conference call, which will cover ABB's press announcements this morning and a briefing on ABB's Q1 results. We will then open the lines for you to ask questions. The press releases and analyst presentation were published this morning at 7 am and can be found on our website. This briefing is being webcast via our IR website as well as being recorded. With me today is our Chairman and Interim Chief Executive Officer, Peter Boza and ABB's Chief Financial Officer, Timo Ihamuotila. Before we begin, I would like to draw your attention to the important information regarding Safe Harbor notices and our use of non GAAP measures on Slide 2 of the ABB presentation. This conference call will include forward looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. With respect to our results, please also recall that further to the announcement of the sale of our Power Grids business on December 17th, the results of our Power Grids division are now presented as discontinued operations in our financial information. Our results from prior periods have therefore been recast and orders revenues and operational EBITDA results record our continuing operations and exclude Power Grids. Thank you for your attention, and I will now hand you over to Peter. Thank you, Jess, and a warm welcome to all of you for this call. I would like to start by providing you with the background to the leadership change we announced this morning and how we plan to manage this transition, after which I will hand over to Timo to take you through the results for the quarter. Over the last year, we have been very active as a board in working with the Executive Committee to define a new phase for ABB, positioning the company to be a leader in digital industries. The culture change we are seeking to drive through this transformation will take several years to achieve. Given the time frame, we believe the time is right to appoint a new CEO to steer ABB through this next phase of its development. As announced this morning, Ulrich Pisofor is stepping down as CEO after more than 5 years at the helm of nearly 14 years as a valued member of the Executive Committee. Effective immediately, I will lead the company as CEO on an interim basis in addition to my duties as Chairman until a successor has been appointed. I would like to take this opportunity to thank Uli for his many years of commitment and dedicated service to ABB. Over the past 5 years, he has laid the foundation for our company to compete in digital industries and to deliver profitable growth. He also turned around the robotics business a few years ago and strengthened our global brand and positioned us in the exciting e mobility space. We wish him all the best in his future private and professional endeavors. The Board of Directors Governance and Nomination Committee will now start the selection process aimed at choosing a candidate with the skills and attributes to drive a high performance, high integrity culture, consistent with our values and goals and to lead ABB for the future. As we take this step, I want to be clear that we will not change the strategy presented to you strategy update on the 28th February, which has the full support of the board. Our aim, as you hear as you see here on Slide 4, is to deliver long term value for shareholders through attractive growth, stronger margins and optimal deployment of capital. The new ABB investment proposition outlines a clear road map to achieve this and new medium term to achieve this and new medium term financial targets to which we are fully committed. The full attention of the Board and the Executive Committee remains firmly on driving operational execution to deliver these outcomes whilst managing the transformation. We will demonstrate our intent after the closing of the Power Grids transaction with our commitment to the return of net proceeds to shareholders and our commitment to delivering attractive returns over the longer term. For that, I will give back now or I give it to Timo to take us through the results. Thank you, Peter and Jes, and welcome from my side as well. I will start with a review of ABB's results for the quarter and then provide an update on our transformation agenda. Slide 5 provides an overview of the results from a financial perspective. As you can see, on a comparable basis, we delivered another quarter of solid growth in both orders and revenues despite the softening in some key end markets, such as discrete manufacturing and automotive. This demonstrates the quality and resilience of our new portfolio as we focus more in digital industries. Total orders were SEK 7,600,000,000 up 3% from Q1 2018, including base orders of SEK 7 point 3,000,000,000, which were up 6% year on year. Revenues were SEK 6,850,000,000, up 4%. Operational EBITA margin was 11.2%, impacted 100 basis points by stranded costs and a further 100 basis points by the dilution due to the consolidation of GEIS. The group's basic EPS of $0.25 was 6% lower, while operational EPS of $0.31 was up 5% year on year in constant currency terms. The group's cash flow from operating activities was a negative of SEK 256,000,000 for the Q1. This next slide shows you order development on a geographical basis. As said, for the Q1, total orders rose 3% and base orders rose 6%. In the Americas, total orders were up 9%, while base orders were up 7%, including strong growth in Canada. The United States was solid with total orders growing 7% and base orders growing 4%. In Europe, the picture was more mixed. Total orders were 3% lower, impacted by lower large orders in industrial automation in the region relative to the same period last year. Base orders in Europe were 6% higher, with strong order growth in Germany at plus 10% and solid 5% growth in Italy. Further, you can see that Asia, Middle East and Africa region also produced solid order growth, up 5% for total orders and 4% for base orders. In China, total orders grew 6%, while base orders grew 1%, reflecting softer demand in the discrete and process industries. Robotics orders grew modestly in China with strong solution orders more than offsetting softness in demand for robots. Now let's look more closely at the Q1 on divisional basis, starting with Electrification Products on Slide 7. We saw solid top line momentum with total orders increasing 6% and third party base orders rising 5%. The division saw strong growth in its systems business as well as across its core products business and in focused growth areas, including data centers and EV charging. Orders rose in all regions led by the Americas. Revenues were up 5% year on year, and the order backlog ended the quarter up 6% compared to the same period last year. We also saw solid growth in GEIS revenues. The division's operational EBITA margin was 2 80 basis points lower year on year. The effect of consolidating GEIS was approximately 2 70 basis points in the quarter. Underlying performance was steady with the positive impact of higher volumes offset by negative mix effects. As noted previously, over the remainder of 2019, we aim to offset much of the dilution to operational margin from a full year's consolidation of GES when compared to the full year of 2018 margin, which had only 6 months consolidation impact. However, for Q2, we still expect a significant dampening impact from GEIS when compared to the same quarter a year ago. Overall, we expect some accretion in Electrification's operational EBITA margin sequentially in Q2. Next on Slide 8, we have Industrial Automation. In this division, total order development reflects a tough comparison base for large orders, which were strong in the same period last year. However, 3rd party base orders improved 7% year on year. Base orders were strong across process industries, including pulp and paper and mining and in marine, while more subdued in discrete automation, particularly in the EMEA region. Year on year revenues were steady with good backlog execution. The order backlog was 2% higher at quarter end. Operating margins were 100 and 10 basis points lower relative to a strong Q1 2018, impacted by business mix and higher investments for growth. Looking ahead, under the new business model, Discrete Automation will combine with robotics. That will have a slight positive impact on the new Industrial Automation Business operational EBITA margin. We also expect the differential for the year on year margin to narrow next quarter when compared to the 110 basis points recorded in Q1. Turning to Robotics and Motion on Slide 9, which delivered a solid performance in the quarter. Total orders grew 5%, and third party base orders grew 4%, again a tough comparison for the same period last year. The division saw strong broad based growth in Motion with some large orders in Rail. In Robotics, orders were steady. Revenues improved 7%, supported by strong book and bill in motion. The order backlog at quarter end was up 9% year on year. The division delivered an operational EBITA margin of 15.1%, slightly down year on year as volume leverage in Motion was offset by significant negative mix in robotics due to more solutions revenues. Looking ahead to the Q2 under the new business model, we expect continued solid execution in the Motion business. The newly formed Robotics and Discrete Automation business is expected to see a significant dampening for Hormel dual headwinds of the softer robotics market and slowing of discrete manufacturing in some key geographies. Against this backdrop, the Robotics and Discrete Automation business could start its operations with an operational EBITA margin around the lower end of its new medium term target margin range. ABB is aiming to provide recast historic data for its new businesses to the market by middle of May. Let's now consider the main drivers of our margin on a year on year basis on Slide 10. Net cost savings amounted to €91,000,000 supported by our ongoing focus on supply chain management and productivity. We saw a more neutral impact from raw material costs of plus 3,000,000 Volumes had a positive impact, contributing €79,000,000 partly offset by the mix effects already discussed, which had a dampening effect of €39,000,000 Investments in growth, namely sales and R and D, were €29,000,000 higher year on year on a net basis. We have reduced our G and A through tighter management of functional costs such as information systems, while increasing investments for growth. We intend to drive this overall trend going forward as part of the ABB operating system. Other category shows a negative impact totaling €45,000,000 and FX headwind was €56,000,000 this quarter. On Slide 11, we break down the net income drivers to show the changes that have taken place following the announcement of the sale of Power Grids and our ABB OS simplification program. Non operating items reflect the continued implementation of normal restructuring programs within continuing operations as well as EUR 19,000,000 of restructuring and related costs associated with our simplification actions. On a cumulative basis, approximately €85,000,000 of the estimated €500,000,000 restructuring and implementation costs for ABB OS have now been recorded. Further, dollars 20,000,000 of Power Grids related transaction and separation costs were recorded in Q1. Looking at discontinued operations, where Power Grids performance is reflected, dollars 149,000,000 of net income was recorded. This result reflects seasonal operating trends in Power Grids, some negative impact from the business having been in transition mode, plus ongoing restructuring and investments in the PowerUp transformation. Looking forward, we revisit on Slide 12 our financial framework, where we set out our approximations for key items. I will focus only on a few metrics. We anticipate corporate and other operational EBITDA to be in the region of $225,000,000 in the second quarter and expect to eliminate stranded costs of approximately $10,000,000 in the period. Our ambition remains to eliminate around $60,000,000 of stranded costs by year end. Within non operating items, normal restructuring charges are estimated at approximately $25,000,000 trending lower compared to Q1. Simplification program and Power Grids separation costs are conversely expected to trend higher as we move beyond the scoping phases into implementation. We anticipate around $100,000,000 $75,000,000 respectively, in the Q2 of 2019. As well, we anticipate solid operating cash flow generation for the year as a whole weighted to the second half. Moving to Slide 13, where we highlight some of the exciting developments around digital for the Q1. Partnering with industry leading companies is central to ABB's digital strategy. As you may recall, we enhanced the customer value add potential of ABB Ability with the announcement of a global software partnership with Dassault Systemes at our strategy update event on February 28. With this partnership, ABB will develop and provide customers with advanced digital trends, enabling customers to run ABB's solutions and their operations with improved efficiency, flexibility and sustainability. The first joint solution from the partnership was showcased at Hannover Messe in early April. On April 1, the company also signed a memorandum of understanding with Ericsson, a multinational networking and telecommunications company to collaborate on future 5 gs automation technologies for digital industries. 5 gs networks are set to provide inexpensive, reliable and low latency communications. ABB believes wireless automation technologies could prove particularly useful in distributed facilities or mobile operations, for example, in water and wastewater or mining operations. Our ongoing successful collaborations with customers is further evidenced this quarter by Tetra Pak, the world's leading food processing and packaging company. ABB partnered with Tetra Pak to develop an ABB Ability energy program that in pilot projects has reduced carbon emissions and cut energy costs by between 15% 25%. Moving forward, it will enable Tetra Pak's customers to run ABB Ability Solutions and their operations with improved flexibility and productivity. Let's move to our transformation agenda on Slide 14. We achieved several of the transformation milestones for new ABB during the quarter. An experienced management team is now in place to lead the Power Grids carve out process, and the separation of the business is on track. A strong During Q1, a new business led board that will govern ABB's global business services efforts was established, and the sales organization was transferred to the businesses. Effective April 1, 2019, ABB's 4 leading businesses became operational. Overall, the implementation of ABB's new operating model, ABB operating system is well underway. ABB is expecting to realize €500,000,000 run rate savings during 2020 through ABB operating system, of which €150,000,000 to €200,000,000 run rate is targeted during 2019. Savings in 2019 will be achieved mainly through the streamlining of group functions and country organizations as they move to the businesses and the establishment of a new leaner corporate structure. So let me summarize today's call with Slide 15 and our 2 main priorities for this year: running the company and managing the transformation. We delivered attractive order and revenue growth in the Q1, demonstrating the quality and resilience of the new ABB. Against a backdrop of more subdued activity in some end markets, we aim to grow revenues in 2019, supported by our healthy order backlog. We are firmly focused on operational execution and the turnaround of GEIS. Overall, we expect operational EBITA margins to be better in 2019, aided by noncore improvement, stranded cost elimination and our simplification program. Although GEIS integration will still be a headwind this year. We are making good progress on our transformation. The separation of Power Grids is on track, and the ABB operating system implementation is well underway. We're also very excited that our 4 leading businesses are now operational. Thank you for your attention, and we are now ready to open the line for questions. Thank you, Timo. May we please ask everyone to stick with our convention of only 2 questions per person. And then I'll hand back to the operator to open the questions for questions from the lines. We will now begin the question and answer The first question is from Martin Bjelke from Citi. Please go ahead. Thank you. This is Martin from Citi. The first question, Timo, you talked about the new ABB operating system now being underway. So just to clarify on that point, is the organizational structure now put in place fully for the €500,000,000 savings or all the people, the processes, the incentives, these kind of things, just to give us some comfort that with a transition of CEO that actually all the people on the ground that will be managing this transition are now fully in place? And the second question, and Peter perhaps this is one for you. On the press call this morning, a lot of mention of the word culture. I just wanted to understand what you meant by that in terms of retaining the existing culture or pushing the organization more towards a culture of productivity, of ownership or something else? Thank you. Okay. Thanks, Martin. Timo here. So I'll start with the first question. So regarding the APB operating system, first of all, we have the execution plans in place, and we continue to execute exactly as we were planning to execute. And when you look at the organizational structure, we have already moved the sales organization to the businesses because that, as we have said earlier, is one of the key risk managements to be able to execute on top line. And I think our Q1 execution on top line actually shows that at least so far this has been working. We have plans in place now for each of the countries on how they move through the system, I. E, the ABB operating system implementation with which the majority of the resources, as we have discussed, will move to the businesses. We also have an exact process with milestones in place, and we have also targets for the functional organization and countries being rolled out as we speak. So we are on track with the original plan on how we were planning to do this. Thanks, Martin, for the question. Regarding culture, let's just remind ourselves what we are doing. So we are not just getting rid of the matrix structure with the geographical presidents and the country organizations. We are also moving a lot of things which have been done at the corporate level now into the 4 leading businesses. That means also they will have to have new tasks, but they also will have to take different decisions. They will have different accountabilities. They will run different processes. They will run different monitoring. And at the same time, we want them to be actually more frontline driven. They need to be more accountable. They need to monitor things in a different way. So therefore, we talk a lot about culture. Instead of waiting to corporate actually bring something into the businesses, they have to do it themselves. In order to get speed into the organization, we need to push down accountability. We need to push down the decision making process. We need to increase as we are now working from A to Z, that means actually from R and D through manufacturing to the frontline sales organization or the other way around, we will need a different decision taking, for example. And therefore, we need to strengthen the risk taking elements. We need to strengthen how they work with each other. And they cannot wait until corporate comes in and actually brings a new program and tries this. So therefore, culture needs to change. We also want to think globally, but act much more locally within the businesses. We want to have a more not fragmented, I would say, decentralized organization where the decisions are taken the close to the closest point possible to the customer. That all needs a different culture. That needs empowerment. That needs people to understand that when they take decisions, they're also accountable for it. That was never the structure which ABB had for the last 15 or 20 year, maybe even going back to the mid-90s. And that all needs to be built. And hence, we need a leader, and we need also 4 business leaders who can drive this. And that's why we put so much emphasis on culture, and I put personally a lot there because we need to help our people and leaders to drive this in a different way. For example, I'm sure some have used these type of examples. Manufacturing in ABB was a lot of times actually a business center, a profit center. We will change this around because that will be one of the changes where we go through and change accounting accountability structures. It's the front end which will actually drive the sales process and hence then later on the manufacturing process. So there are a lot of examples there, and that's what we are driving. And the board was intimately involved in the disc design, and I'm sure we'll come back to that question later on. And therefore, as a board, we will put a lot of emphasis on how we manage this transition from the old structure, the old accountabilities, the old culture into the new one. Thank you, Martin. We'll take the next question, operator. The next question is from Gael Debre from Deutsche Bank. Please go ahead. Thanks. Good afternoon, everybody. So I have two questions, please. The first one is about the market trends in China. I mean, looking at the macro stats, we've seen surprisingly strong industrial production growth numbers in China in March this morning. And I was curious to see if you felt the same kind of improvement in your Chinese operations in March or perhaps also in early April. So that's question number 1. And question number 2 is about the margin development in Industrial Automation. I think the Q1 print was probably the lowest reported in a very long time. And I mean from the have underinvested in the business in prior years and that you now need to step up investments to fuel growth again in that business. So I mean could you with that in mind, I mean could you discuss the margin trajectory here for the business and what we should expect in terms of mix and in terms of investments for Industrial Automation for the remainder of the year? Thank you. Okay. Thanks, Kyle. I will take these questions. So first of all, when we look at market trends in China, I can't comment on how the quarter went intra quarter, but we had a, I would say, solid development in China. We had 6% order growth. We had particularly good growth in Electrification Products. Robotics and Motion was a bit more mixed, I would say. In the Motion side, we had good development. Robotics was more flat. And then in IA, we went slightly down in China. Then when we look at the Industrial Automation margins and this 13%, so it is impacted both by mix impact where we have more solutions business. We have discussed this earlier that we would expect when we move more towards growth in Industrial Automation that the margin would come a little bit down, and then we will start building up from here. And you are correct that we invested also a bit more in areas like sales because when we look at our tendering pipeline, we feel that, that is the right place to invest. We, of course, have to balance this with the right amount of profitability. And that's why I also said today that we would expect the year on year gap to narrow from this 110 basis points when we move from Q1 to Q2. Thanks, Louise. Just in terms of the bridge, the $29,000,000 of investments in growth you had at the group level, would you be able to tell us how much of that was spent into Industrial Automation perhaps? Yes. I think it's pretty much their fair share, maybe slightly more, but not a big delta. Okay. Thank you, Gael. Next question? The next question is from Ben Uglow from Morgan Stanley. Please go ahead. Good afternoon, everyone. Thank you for taking the questions. Peter, on the press call this morning, you kind of talked a little bit about the attributes of the new potential Chief Executive. And I think you suggested that he would have to have some kind of strategy and a vision around digital. I guess my question is what really are you looking for here? Are you looking for somebody to come in and provide sort of hands off stewardship and look for somebody to come in and basically be more hands on and drive down the costs of ABB, which some would argue has been the central issue. So that's question number 1, what type of CEO should we think about? 2nd question, big picture, Timo, coming back to these margins. If I look at the growth, we're looking at mid single digit growth, 4% plus and have been in fairness for a little while. And the margins continue to not improve. And that's actually the case in all three divisions, not just Industrial Automation. Do you think this quarter is just a kind of one off? It's just an unfortunate coincidence? Or do you actually think there's something more structural going on, which is not allowing your margins to expand despite decent top line growth? Yes. Thanks, Ben. I'll raise the first one and then Timo will take the second one. When I started to answer Martin's question on currency before, I talked about the businesses. Now there is also, obviously, a major shift on the corporate side, and you're going more into that direction by linking it to my comments this morning. So the corporate side, where the head office is and the CEO is, that's where we will much more focus on strategic development, on business development. We will have some, obviously, fiduciary duties finance as well. We will have some overarching HR. And then we will have a strong component of, I will call this, R and D and ABB ability, which really then encapsulates also the digital side. But at the same time, there is no CEO in any company without having the ultimate responsibility for the businesses as well. But we want clearly establish, we call this entrepreneurial business leaders. We want to have strong business leaders in the verticals who drive their business, who drive what you just said also in terms of costs competitive cost structures, getting the business fixed for the, let's say, the growth side, etcetera, etcetera. So we are looking for a candidate going forward from the CEO side, which has very strong people skills, has very strong strategic skills but also has business development skills. Hence, we mentioned that the digital world, etcetera, etcetera, but also experience to run businesses like we have the 4 leading businesses. So ideally, it will be a person who has run such a vertical business with full bottom line accountability or was already a seasoned CEO somewhere. And so that's the profile we are looking for. But we will look specifically to the strategic elements, but also to, let's say, the people, culture elements because you need to lead in a different way if you really want to empower your individual businesses to capture the full value and the full growth. So that's what we see. And I also stressed this morning, we don't we want someone who will run this for a while. So we want to do this big change. And you know, as well as we do, culture change takes longer. We want to run the person should run it for quite a number of years so that it can give continuity. We restructure, and then we want to run it and build it strategically up in order to achieve our long term value the way we described it also on the 28th February. So I leave it at that. But it gives you kind of a profile we are looking for. Maybe you could ask why didn't you do it directly. We deliberately I can come back to that how the process worked later on. But we want to take the time to find the right person. And having been in this whole strategy discussions last year myself, knowing the company, I think what I'm doing as an interim is building a bridge into the future. Okay. And then thanks, Ben. On the operating leverage question. So maybe first of all, we had a bit of, let's say, ABB level operating leverage coming from lower cost corporate where some of the cost actions are, let's say, moderately starting to come through. Then when we look at business by business, so it is fair to say that in each of the 3 businesses this quarter, we had a negative mix even if in BP and RM we had positive volume. In EP, this was more driven by more low voltage systems and also medium voltage, and it's good actually that we are seeing some growth in that area. In IA, as we have discussed earlier, we had a bit more solutions business. And as I said, we would expect this gap to narrow now in IA going into Q2. In Robotics and Motion, it was really a tale of 2 stories because on Motion, we actually had solid leverage. But then in the Robotics, the mix really turned negative, and that then countered the overall mix in the whole Robotics and Motion business. Now looking forward, we are, of course, working through this in a way that, as we said, we expect to improve margin during this year. And at least at the latter part of the year, we would expect to see a bit better operating leverage to come through as well. The next question is from Graham Phillips from Jefferies. Please go ahead. Yes, good afternoon. My two questions. First, the one on the management changes. Quite a lot obviously going on in terms of betting in acquisitions, exiting power grids, particularly GEIS I'm interested in. Could you talk a little bit about who led the acquisition task force in you purchasing that business? And how is it performing in terms of organic growth? And what product areas or business areas can we think about? Because I think we still lack significant amount of information on that acquisition. And the second question was, again, just back on robotics and the mix shift. Can you talk a little bit about the competitive environment there, particularly on pricing and the impact to margin there? Thank you. I think Timo will take 1 the first question. The second part, I will open up. And then robotics, he does clearly as well. It depends, Graham, on the change management. I take it a little bit higher up from a strategic point of view. When the board went through the discussions with management last year, we had to take one big decision in this, how we actually move on the transformation forward whilst at the same time implementing GIS, but also doing the divestment of Power Grids and completely changing the setup of ABB. So you could have done this in kind of on a staged way, doing the first two, three things the 1st year and then later on the next. But that would have given us another 2, 3 years of big change, and we were just going through a few big years of change and different exercises, etcetera. So the board, together with management, decided, let's do this in one go. That means we have all of the things, as you mentioned, as well on the table. But I think we have resourced it in a way. We have prioritized it in the right way, and we are moving through that and building the future and our leading businesses position them for growth in the future. So this was a very deliberate decision to do this all in once rather than actually doing in a stage basis. Now I guess Timo can give you a little bit more on GIS and then also on the robotics question. Yes. So thanks, Graeme. On GIS, first of all, we are when you look at sort of on annual basis, when we measure this and we look at the development, we are in line with the plan we created. When we look forward, we all know that this business started with little lower margin than we would have expected when it came in. And we have very strong cost actions in place. When you look at our so called normal restructuring, a big part of that is coming already from the GEIS integration during Q1. So we are definitely executing the integration as we were planning. We are integrating this into 3 different business units in Electrification Products, and these integrations are already on the way. So as I said, there is no more like EPIS as it was. We are now integrating. And I would say after maybe Q3 2019, it's actually going to be difficult for us to even follow it totally separately. Then when we look at the robotics competitive situation, so even if the market has been tougher and it's been tougher to our competitors, as we have seen from their reporting when you look at second half of this year, our top line has held better because we have had more robotic solutions business. But unfortunately, in the beginning, that business is also slightly lower margin, and that has impacted our situation. When we look at the robotics business overall, we have actually gained share in our view. Okay. So just to say on the GEIS, I mean, it would be hope it would be disappointing that if just 12 months after acquiring it, you're not really tracking how it's going. I mean, that sounds to me like it's something that should be tracked because obviously fairly large acquisition. We knew the business was shrinking. You made the comment that margins were perhaps not as good as expected. Is there any way you can address that so investors can see how this acquisition is playing out? We will continue to give information. Yes, sorry, I didn't mean that we would not have tracking. Of course, we have the Board presented business case. And that Board presented business case is how the whole electrification products will develop with this asset and that we are tracking like hawks. I'm just saying that if you take cost out from business and you integrate it into different parts, at some point, that business becomes part of the bigger business. That's the whole point, how we will get the cost out. But yes, we are absolutely tracking it. And I can tell you that I have been presenting this tracking also in the board. So this is not like it would not be happening. So apologies if there was a wrong maybe connotation on the previous answer. This is part of every board meeting, Graham. So don't worry, we are tracking this one very closely. Thank you, Graham. And we'll move on to the next question. The next question is from Michael Hagmann from HSBC. Please go ahead. Thank you very much and welcome back, Peter. I was wondering, Peter, if you could tell us what you think for each division, the one to three reasons why these businesses have been delivering below par. And I understand all the culture stuff, the structural stuff of the organization and so on. What I'm really looking after is, is it product? Is it cost? Is it distribution? If you could maybe enlighten us a little bit to work out how easy it will be for the new leader to fix those issues? Thank you. Yes. Thank you, Michael. That's good to hear you again. I think your question is a little bit broad. To do this for every business, then we would like we would be here for quite a while. I think if we look at what we have done over the last few years, we have through the focus and through the various programs, we have sharpened the operational performance over time. And you have seen this, for example, in 2018 coming through in all the business on the top line growth side, both on the order and the revenues, etcetera. I think I would put the finger on between the top line and the bottom line or the EBIT line, whatever you want to use. That's where the operational sharpness, the productivity was not entirely to what we were planning when we went through all these stages. So I think that's the piece which we will need to simplify, where we need to have different disciplines, where we have to have really the business management focusing on the delivery side there. And I think that's what's being embedded also through the OS system now. That's also why we have decided to give them much more control over the costs which were sitting in corporate, so the 16,000, 17,000 people. So I'm not blaming the businesses alone or I'm not looking at them alone because this is the total totality you need to take and actually allocate the accountability in the businesses now in a different way because they were getting charged by the corporate side by things outside their businesses, which we're not responsible. And I think that's a piece which we are now fixing, etcetera. So I think for me, it's the operational sharp side, which we need to further strengthen. And a lot of that, in my opinion, has to do with accountability, decision making and the business models we are running in each of the businesses. So next step going down, you would then have to take each business apart. But I think I gave you the high level at this stage, but that's where we would, from a board, but also from a management perspective, say that's where we have got to sharpen things a little bit more. Thank you, Michael. No issues with the competitiveness of the product of the general offering? I think there, we I would say that we are confident and happy with that side. On Product Solution and Systems, I think ABB Ability was mentioned. We have obviously strengthened the portfolios in some parts. Now that's a general answer. 1 can take this one down now. You will find everywhere, you will find some issues. This is just a normal business. You fix it and then you move on. I think we have been also transparent over the last 2, 3 years where we have some issues. Some we have some issues. Some we have actually taken out and do it in non core now when we started to risk adjust our portfolio through getting out of EPC, etcetera. So I think we have moved on there, but you will always find something. But grosser model, in that area, we are actually quite content. Can I just make a comment here? Timo here. So for example, if we take the motors business, just that there is visibility that there are businesses in the portfolio where the operational execution has significantly improved. When we look at the motors business, we have less under absorption. We have more tight manufacturing setup. We have better cost structure. We have better quality. The business is growing, and also the gross margin has gone up. So again, we need to just replicate some of these in other businesses to make sure that this operational excellence is really driven in different parts of our businesses. Thank you. Moving on, can we have another question, please? The next question is from Alok Katre from Societe Generale. Please go ahead. Hi, thanks for taking my questions. Couple of them. Firstly, just on Industrial Automation, Timo. We've seen base orders have been pretty strong for some time now, but we've kind of not seen a catch up on the sales line and I understand some of this could be the large order backlog as you work through. Just wondered when should we kind of expect the effects of this large order backlog being worked through to weigh in and revenues therefore to move a bit more closer to the base order business? Because I guess the large order environment isn't, let's say, as robust anyway. So that's question number 1. And then slightly coming back to the management change. I mean, this in the press call and also today, I think there's a big focus on culture change, but also on digital. Just wondering on the latter side, what exactly are the gaps that are being that you are thinking about in terms of the digital offerings? And then is it fair to say that the new CEO candidate that you would go out would have would we not be bound by the current vision and have the freedom to do his own assessment and foliar reviews, etcetera? Or because that's probably then allows you a bit more choice, I guess? So thanks, Aak. First, if I Timo here, if I start with the IA question. So it is true that our backlog in IA, which we have been now building during of the cruise orders, for example, these can be even some years out before they are revenued. So when we look at the order backlog coming to the revenue, we would expect to see, let's say, some modest improvement there maybe going into second half, but that's the situation regarding the IA backlog. Yes. Thanks, Alok. On the first one, I didn't say or we didn't say in the sense that we have got gaps in the digital offerings. We have actually said we made good progress on this side. What I said this morning is actually that we want someone with a strategic mind, who also has experience in the digital world, let me put it in a very general way. So from that point, if you just to correct that, that was not what I said or the intention if that came across like this. So the second one is a crucial one because quite clearly, when you change, there is always the perception that who comes in new will just turn everything upside down and do something else. I've quite clearly said we want someone in who then stays for the longer term, but we also have clearly made a statement that the Board and this is, by the way, also under Swiss law, the Board is actually responsible for the strategy, that the board is fully supportive and behind the strategy. And one of the key requirements will be that this strategy will stay and will be executed. Now you can always argue when you execute the strategy over 2, 3, 4 years, you will always find things which you will adjust over time because the world is not going to stand still, technology will move, etcetera, etcetera. Obviously, one would address that and also take that into account. But we have set our goals for the next few years, and we will execute this one. And to buy in into this strategy is a key requirement of any new person coming in. Thank you, Alok. Next question please, operator. The next question is from William Mackie from Kepler Cheuvreux. Please go ahead. Yes. Good afternoon. Thanks for the questions. A couple. And firstly, on strategy and cultural change again, Peter, as you highlight that the Board confirm and support the strategy, which is driving accountability and greater autonomy to your divisional heads. And I think where I guess there seems to be a bridge to cross is that the divisional heads you have today are products of a culture that has been developed over 15 or 20 years in ABB and now you are trying to change. So can you help us understand, given that the CEO will have a broader responsibility strategically, how you can assess that you have the right people at the divisional level in place to support this organizational and cultural change that you're targeting? And then secondly, on more detail perhaps with regard to the numbers, could you update us with regard to the short cycle industrial activity, how the B and R business has been developing within IA? Is that part of the responsibility for margin weakness? And then lastly, with regard to the corporate expense development, Timo, I noticed that there seem to be almost no charges relating to the legacy noncorestrokeEPC related business. Is that something we should now expect for the full year? Thank you. Okay. Thanks, William. Yes, key question. Because when you restructure and you put more autonomy, more decision power, you also measure, obviously, the difference on a full bottom line impact basis. You need to assess your leaders. That's quite clear. I would argue that not all of them have 15, 20 years in ABP. They themselves have also developed over time. They themselves are also part of the strategic change which we are going through. They also will grow in their roles because they will most probably for the first time, that's absolutely right, will be in charge of the entire business. And if things are not working, they will have to sort this out rather than relying on a corporate restructuring program to bail them out, as I normally say. So they will grow in their roles. There is no doubt. They will be measured. We will see their performance. And we have the confidence that these 4 leaders are now excluded for the moment power grids that will go over to Hitachi, that they will drive this in the right way and will be part of the big cultural change. I sat together with them yesterday, and we actually already decided on a few things, which we are now pushing faster down into these business areas so that they will take full accountability of this. And I think that's a journey which we are going through now. And I have the confidence that they will absorb this and grow in their role as well. And I put a lot of emphasis on that because whenever I took actually a new role in the past, most of the time, they all they have questions, can you actually do this? But normally, you grow in a role. You have got capacity to go up. You are still learning, and I think that's what's going to happen here. And so therefore, we will drive this culture change also at the most senior levels, and they will grow into their role. Okay. Thank you, William. On the short cycle industrial activity, when we look at B and R, as we said, we have seen some slowing down in this grid, and B and R is part of that. So it has a bit of an impact on the Industrial Automation. And that's why I also highlighted that when we now move to Q2 and the Industrial Automation will be in the new structure where Discrete Automation moves together with robotics, we expect that to have a slight positive impact on Industrial Automation operational EBITDA margin. And then when we look at the corporate line, so we came in better than our estimate, and there is also about CHF 10,000,000 of improvement in side that line in noncore, but noncore can be lumpy. And there are also some savings coming through. And when we look at full year, we continue to expect to be on that €800,000,000 level for full year, as we said, after Q4 'eighteen. Thank you, Will. So we are getting close to the hour, and we'll take a last question from the line. The next question is from Jonathan Mounsey from Exane BNP Paribas. Please go ahead. Hi, good morning, afternoon even. It's been a long day. In terms of power grids and the carve outs, I think particularly in regards to the stranded cost, both in terms of the complexity and how long dated it is to resolve. Just thinking about a new CEO wishing to come in, maybe trim the portfolio further. Given how difficult it is with Power Grids, is it really possible to address the portfolio in the near term further in terms of the subdivision or even a whole division? Or do you now need to migrate to the new operating structure to create the optionality around the portfolio? Or do you, in fact, have are you happy with the portfolio as it stands today? Thanks, Jonathan. I think I will start with the answer to your last question. I think the portfolio which we have is the one which we are driving forward. That's also the one which we have agreed with the counterparty on VSC Hitachi. But on the other side, let's be very clear. We manage this business until it goes over to the other side. And therefore, we will take all the measures and all the steps in order to have a profitable business, which is in good shape when we are handing this one over. So if in 6 or 9 months' time, we have got we come to the conclusion that we need to act on the portfolio side, one would then start to implement that and think through, check and then implement it. So it doesn't mean it's all kind of fixed, but it's quite clear that the contract which we have says that we take our Power Grids business as is and bring it to the other side. But I think there is no leader and no business person in this world. If it doesn't work, then you need to take action because you want to have a profitable long term value generating business. So I think this question will be checked on an ongoing basis like you do for all your businesses. But I think the key plan for Power Grids this year is to hand over a profitable business in all with all its details in all the different business lines by the time we are closing the deal. Just to be clear, rather what I meant was on the remaining divisions, do you envisage the incoming CEO as perhaps trimming that portfolio? Or is it, in fact, not possible given the current structure of the group? Do you need to migrate to the new structure, the devolved structure, before a new CEO could possibly address the rest of the portfolio? Let me put it this way. As I said earlier in the call, we are doing everything at the same time. We are doing everything at the same time. So management is just focusing on the few things I have outlined there. Again, it is normal business practice that you generate value for the longer term, and hence, you are challenging yourself on all of the businesses you have at any time in the year. There is a portfolio process review, which we do inside the company, inside of ABB. And we manage, let's say, according to those processes and rules. So therefore, this is a constant process, which we are working between management and the Board. And if we see or experience anything, then we will take the appropriate actions. But my first comment was very important. It's not the structure or the legal side or the tax side or what have you, which would block us to do so. I think it's much more a management capacity to do this at the same time when we are carving out one business, when we are restructuring around the 30 years of another business, when we are building new accountability structures, when we are moving 17,000 people from the one side to the other, I think for any management in this world, this is quite a tough agenda, and that's what we are going to execute. But we will not lose sight of what one could improve on the other side. But I think we have managed now I say we, which means the Board and obviously management, we have got enough on the table at the moment. That's very clear. Thank you. Okay. Everybody, thank you very much for joining us. And as always, IR is available to follow-up with any remaining questions you may have. And with that, we'll say goodbye. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.