ABB Ltd
Q2 2017 Earnings Call Transcript

Published: 20 Jul 2017

[Operator:]

Ladies and gentlemen, good afternoon. Welcome to the ABB Second Quarter 2017 Results Conference Call. I am Maria, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session. [Operator Instructions]. At this time, it's my pleasure to hand over to Ms. Alanna Abrahamson, Head of Investor Relations. Please go ahead, thank you.

[Alanna Abrahamson:]

Thank you, Maria. Good afternoon, ladies and gentlemen and welcome to ABB's Second Quarter 2017 Results Briefing. We have with us today, ABB's President and CEO, Ulrich Spiesshofer; and ABB's Chief Financial Officer, Timo Ihamuotila. Uli and Timo will discuss the Q2 results and update us on the execution of our Next Level strategy and the 2017 outlook. After they speak, they will remain on the line and we will open the call for your questions. The press release and presentation were published this morning at 6

[Ulrich Spiesshofer:]

Thank you very much, Alanna. Good afternoon, ladies and gentlemen and welcome to our conference call. If you move to Slide 3 three of the presentation, let me summarize some of the key figures for the quarter. Our growth momentum is building, it delivered higher order of growth all the region, overall orders improved 3% compared to the second quarter of 2016. Robotics and Motion was a strong contributor with 14% order growth. I am very pleased to share with you today that as of today we have sold more robots than in the full year of 2016, including many small, smaller version robots for the so-called light industries. Industrial Automation also turned in a solid performance with orders up 8%. Base orders improved 3% and increased in three of our four divisions. Electrification Products was negatively impacted by having fewer business days and trading days in the quarter. Large orders increased 5% and represented 8% of orders unchanged compared to the same quarter a year ago. We delivered 1% revenue growth on the basis of a good book-to-bill ratio. We reported an operational EBITDA margin of 12.4%, which was dampened by commodity prices and some overcapacity. This margin was not in line with our expectations. We are taking swift action to reverse the situation in the second half of 2017. Operational earnings per share reflect the impact of lower total operational EBITDA and a higher tax rate for the quarter. We are still committed to our medium term double digit growth target and we are taking the necessary steps to achieve it. Cash flow from operating activities primarily reflects the timing of our short-term employee incentive payment. Now let's turn to Slide four and consider our performance in the context of our three focus areas, profitable growth, relentless execution and business collaboration. As I stated earlier, orders were up 3% and were higher in all regions. Service and software orders grew 8% as our service and software growth initiatives are paying off. We are pleased that our industry leading digital officer offering ABB Ability has already contributed to growth and our artificial intelligence partnership with IBM is being positively received by our customers. Our offering has been further strengthened by the successful completion of our acquisition of B&R, a global leader in machine and factory automation. Moreover, in the third quarter, we expect to complete a recently announced acquisition of KEYMILE one, mission critical network communication business. These acquisitions demonstrate our targeted and disciplined M&A approach. Our operational EBITDA margin was 12.4% and all divisions were in their target margin corridor. Our Industrial Automation and Power Grids divisions turned in solid performance in the quarter. Our Electrification Product and Robotics and Motion divisions, despite some sequential improvement could not compensate for the impact of commodity price increases and some over capacities in selected businesses. Part of the issue was that we were not fast enough in securing product price increases in certain businesses, but we have since addressed this and are not expecting similar impact in Q3 and Q4. Our white-collar productivity program remains on track to deliver increased run rate savings of $1.3 billion by the end of 2017. Net working capital as a percentage of revenues decreased 90 basis points to 14.1%. This shows that our new cash culture is delivering results. We continue to improve country and account collaboration, helping us to fill further growth momentum especially in smaller countries. In 2016, we set up global and regional service centers to provide our businesses with high quality back office services and finance, human resources, information technology and supply chain management. The ramp up of our global business service centers in Krakow and Bangalore is well on track. We now have 2500 employees providing high quality business services and are right in the middle of lifting and shifting the work that was previously done in some other countries. During the first half of 2017, we announced executive committee changes that even better reflects ABB's geographic balance. On April 1, Timo became our Chief Financial Officer and a member of the Group Executive Committee joining us from Nokia. Effective July 1, Chunyuan Gu our Managing Director of ABB in China, became President of our Asia, Middle East and Africa region, as well as a member of the executive committee. Chunyuan takes over from Frank Duggan, who was appointed President of the Europe region succeeding Bernhard Jucker, who retired after distinguished career at ABB. As you can see from our three focus areas, ABB is truly continuing its transformation. Please turn to Slide 5 to give you some granularity and share with you the performance and terms of regional order development. We are seeing growth based growth across all three regions. In the Americas, orders grew 2% driven by demand for energy efficient solutions in industry, buildings and transport as well by increased investment automation. Total orders in the United States grew by 7% overall, also by orders for Robotics and Traction Solutions. Construction in onshore oil and gas also contributed to this growth. Canada's order development was soft in the quarter primarily due to lower demand from industry and construction. Brazil experienced growth from crude investments in construction, but we need to point out that this growth compares to a very low 2016 order base. Growth in Europe was strong at 6% benefiting from growth based positive market development and industry trends for the infrastructure. We saw a double digit total growth order growth in the UK, Sweden, Finland, as well as in Spain and Turkey. This growth primarily came from Robotics, Traction Solutions, Crew Ships and Construction. Base orders grew 1% for the region. The Sweden, Spain and Turkey as the main positive contributors. In Asia, Middle East and Africa, total orders grew 2% with broad [ph] based orders up 9% for the quarter. India's order growth was up 11% and more than 20% in the base orders and was broad based. China had lower large order than a year ago, but delivered strong based order development. Again, Robotic Solutions continue to be a growth driver in China. Other positive contributors in the quarter were South Africa, Saudi Arabia and other parts of the Middle East. With that, I would now like to hand over to Timo.

[Timo Ihamuotila:]

Thank you, Uli. Let's turn to Slide 6, where I will take you through some of the Q2 divisional highlights. Electrification Products was impacted in Q2 from fewer business days in 2017 compared to 2016. If we compare the first half year of 2016 versus 2017 by adjusting for the difference in business days, then orders were up 1% and revenues were up 2%. Operational EBITDA margins improved sequentially from Q1 2017, reaching the low end of our target margin corridor of 15%. However, the margins were lower for the quarter versus a year ago, mainly due to higher material costs, which more than offset productivity and cost savings. We have notified our customers of related price increases and commodity headwinds to have less of an impact in Q3 and Q4. The solar investor business also continued to have a dampening effect on the division's margins. Orders in Robotics and Motions were 14% higher as growth was seen in all regions and all business units. Third party based orders contributed with an 8% increase that was mainly driven by strong demand in Robotics, Traction and Light industry. Operational EBITDA margins were impacted by product mix, higher commodity prices and under absorption which more than offset our cost reduction measures. We will continue implement operational improvements as well as take additional capacity out where needed. In Industrial Automation, total orders grew by 8% due to selective CapEx investments in oil and gas, mining and crude ships. Third party based orders continued to be positive. While investment in process industries is especially offshore oil and gas remains subdued, selective investments in mining, exploration and downstream oil and gas are expected to continue. Revenues for the quarter were 7% lower reflecting the execution of a lower order backlog. Operational EBITDA margins increased slightly as cost and productivity savings offset the lower revenues. In Power Grids, third party based orders returned to growth and grew 2% on investments in emerging markets. The tendering pipeline is good but the timing of large contract awards is in some cases taking longer than expected. Operational EBITDA margin increased 50 basis points to 9.8% reflecting improved productivity, project execution and continued cost savings. And please remember the power up investment program when updating your models. As you know, we are now reporting the results from the divested cables business in corporate to ensure that the Power Grids' figures are clean. There is an update to the initial restatement and updated files can be found on the website. Regarding capacitive restructuring cost overall, we have not incurred much in the year-to-date. This figure is expected to increase significantly for the second half of 2017 and our guidance remains at $250 million. Let's move on to our operational EBITDA margin bridge on Slide 7. In Q2 2017, we continued to deliver on our cost savings programs. We achieved $121 million in net savings. This came from our ongoing cost savings program, pricing pressures and our white-collar productivity program. Commodity prices had $28 million negative impact on operational EBITDA as the costs for many of our raw materials continue to increase. We are showing this item separately for the quarter since the impact was more significant than in previous quarters. Net volumes were negative for the quarter as a result of lower operational revenues and additional investments in growth. Project margins were slightly higher versus a year ago. The mix was unfavorable, primarily due to lower margin products and solutions from Robotics and Motion that were delivered in the quarter. As discussed earlier, other includes a number of items like salary inflation, under absorption, changes in corporate provisions and other small one-offs. Altogether, the group achieved operational EBITDA of $1.42 billion and a margin of 12.4%. Let's then move to Slide 8. As a percentage of revenue, networking capital continued to decline year-on-year. However, we need to remain aware that we still have a lot of work to do to meet the target of 2 billion by year end. We have put a series of clear actions in place and remain committed to delivering. The cash flow from operating activities for the first half of 2017, was not as good as we expected. Compared to the first half of 2016, we had approximately 90 million less in operational cash flow from our cables business which was divested. We also paid more tax both direct and indirect than in the same period a year ago. One expected item was the delay in customer payments from Saudi Arabia which impacted cash by approximately 140 million. For full year 2017, we expect cash flow from operating activities to be somewhat above last year's levels. Let me now hand back to you Uli.

[Ulrich Spiesshofer:]

Thank you very much Timo. So, let's turn to Slide number 9. The launch stage three of our next level strategy at the Capital Market's Day in October last year, it is designed to unlock further value through four key activities, driving growth in our four-market leading entrepreneurial divisions, the quantum leap in digital activities through ABB Ability, accelerating the momentum in operational excellence and strengthening the global brand. Let's turn to Slide 10. Back in September 2014, that are laid out in next level strategy, we made it very clear that it is our ambition to shift ABB's center of gravity towards strength in competitiveness, higher growth and lower risk. We are continuing this transformation. Since the beginning of 2017, we have made great progress. From a portfolio management standpoint, we have undertaken a number of actions while remaining disciplined in the way we go after this approach. We completed the acquisition of B&R, a leader in machine and factory automation through growth and innovation leader and we acquired NUB3D, a specialist in 3D visual software and solutions for Robotics. We have also announced the acquisition of KEYMILE's communication network business to strengthen our leading position in the digital grid which should flow in Q3. Besides acquiring these businesses, we divested those that are no longer core like the high voltage cables business in the first quarter of this year. Beyond these actions, we announced the partnership with IBM on artificial intelligence and executed successfully the launch of ABB Ability, our leading digital offering among many others. These are just truly transformative period for ABB. Please turn to Slide 11. We are very pleased that our leading digital offering, ABB Ability, which was launched at events in United States, Europe and most recently, in China in the first half of this year, is off to a very good start. ABB Ability reinforces our leading position in the fourth industrial revolution. By integrating all our digital solutions and services into one group by global offering and continuously expanding it, we can drive value for every one of our customers. With more than 100 AD industry specific digital solutions and services, ABB is unlocking tremendous value creation and growth opportunities in all of our customer segments. We invested already in eight ABB Ability collaborative operation centers around the world; two in the US, four in Europe and one in Asia and more is to come soon. We are partnering with IBM and Digital [Diagnostic] Technologies, to bring the best in artificial intelligence and analytics to our customers and is Microsoft and cloud in collaboration in certain vertical. Let's continue on Slide 12. Our Power Grids division is a true innovation leader and has made many investments in digital technologies in the past year, so today we are clearly leading in the digital grid. ABB Ability is providing solutions for state-of-the-art grid reliability, improved effectiveness and powerful charging stations just to mean some. Customers are very excited about the capabilities of ABB Ability and the advantages it is providing to them. To give you some examples, just last week, we announced a 30 million order in Sweden and Denmark for our HVDC line, for using our ABB Ability market technology to drive grid control reliability and effectiveness. Another notable order includes the ABB Ability intelligent power distribution solution for our new production line at semiconductor manufacturing in international corporation that allows unique win and reliability. And the win of our EV fast charging infrastructure for UK's first electric bus system in Harrogate, in Northern England. Solutions such as these are supporting the competitiveness of our four entrepreneurial divisions and of our customers all around the world. Please turn to Slide 13. As you can see from this graph, we are continuing the journey and truly transforming Power Grids for sustainable value creation. Since 2014, we have more than doubled the division's operational EBITDA margin, reflecting improved productivity and continued cost savings. We are fundamentally changing the division's business model and limiting risks across its entire business portfolio. this is being done by listing in businesses that increase our mix of services and software, while at the same time divesting parts that do not remain core to ABB and changing the business model. We are very pleased that we have handed over our last offshore wind contract [indiscernible] and are steadily flushing out all are the executive projects from the past. Additionally, the Power Grids' team is leading a range of activities including productivity, cost savings and operational improvements while staying focused on achieving excellence in project execution. For example, the acquisition of the mission critical communication network's business of Key miles will help us to enhance our capabilities and strengths as the leader in Digital Grid. The Power Grids continues to be the partner of choice for national, state institutions and utilities worldwide as they build or upgrade their infrastructure. Now let's turn to Slide 14. The graph on the left shows how ABB has continued its record of cost savings program, leveraging operational excellence and world-class supply chain management to achieve savings, equivalent to 3% to 5% of cost of sales each year. We will continue to drive cost out and remain on target. The graph on the right shows how our white-collar productivity savings program has outperformed the expectations and dislodged [ph] 2015. It is well on track to achieve its increased cost reduction target of 1.3 billion in run rate savings, while incurring lower restructuring and implementation cost than they had initially announced. So, let's conclude with Slide 15. ABB has continued to build growth momentum and our targeted initiatives are delivering results. Total and base orders grew 3% compared with the second quarter of 2016 with higher orders in all regions. Revenues were up 1%, the operational EBITDA margin was 12.4%, [indiscernible] by commodity price headwinds and some overcapacity saw more homework to do. Net income was 525 million, while cash flow from operating activates reflect the timing of short term incentive payments. Net working capital as a percentage of revenues was 14.1%, a reduction of 90 basis points on an annual basis. We have the right actions in place to deliver on the goals of our working capital program by the end of 2017. Looking ahead, the short-term picture is mixed. Uncertainty still hangs over global markets, but growth in China is expected to continue and indicators are still positive for the US. 2017 can be best characterized as a transition year for the world and for ABB, but long-term growth drivers remain in place for utilities, industry, transport and infrastructure. We firmly believe the long-term outlook is still positive. Thank you very much.

[Alanna Abrahamson:]

Thank you, Uli and Timo. Before we open up the line for questions, I would like to remind everyone on the call that we are having an Innovation and Technology Day on September 6 at the heart of our North American Robotics Operation just north of Detroit. This event will showcase ABB's leading capabilities and industrial automation for process and discrete industries ranging from Robotics and the recent B&R acquisition to our number one position in control, software and systems. We will also share the latest successes of ABB Ability and our digital offering. Please, if you have any questions, you can reach out to us, there is also registration on our website. With that, let's open up the line now for your questions please.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Andreas Willi, JPMorgan. Please go ahead, sir.

[Andreas Willi:]

Yes, good afternoon everybody. My first question is on pricing and how you manage pricing across the group. How do you connect basically essential planning and purchasing side of the business, that is the headwind from pricing, building with Salesforce and maybe why this delay in reaction has happened and what you are changing structurally to how you price in the company and maybe also in terms of the earnings bridge, where was the commodity impact shown in the past when it wasn't that material in terms of negatives or positives?

[Ulrich Spiesshofer:]

Okay, good afternoon Andreas. Thank you very much for your question. Now look on price there is different mechanics in place. First of all, in many areas of the business, for example in Power Grids, we have [indiscernible] price clause in our key long-term contracts so when commodity prices go up, the prices of the goods get automatically adjusted and you see that in the result of the quarter and Power Grids didn't get impacted on the raw material prices that strongly. Now if you look at EP and RM, there is no possibility to have the same quality of contracts in there because a lot of that is distribution business that runs slightly different. So there, as you rightly say, it is absolutely crucial that the connection between the raw material price increases and the pricing decisions on the front end is swift and be executed in a good way. The investment in salesforce.com helps us to automate that further and in the future, we will have even better connectivity between the frontend and the backend. It's very clear, that in the second quarter this year, we did not meet our expectation in swift price actions and this will be a topic that we are taking now on with the team as we automate this process is going forward to avoid the glitch as we have seen in the second quarter. Now on the commodity question, I'll let Timo answer that one.

[Timo Ihamuotila:]

Yes Andreas, on the earnings bridge, commodities was earlier in other but because it was more meaningful driver this quarter, we decided that it's better to show it separately.

[Andreas Willi:]

Yes, thank you. My follow-up question on Qatar, you won some substantial orders there over the last 12 months, maybe you could shed some light on the execution of these contracts given the current situation, if there is any risk here for ABB.

[Ulrich Spiesshofer:]

Now look Andreas, as in every country in the world, when there is uncertainty in the political environment, we make sure that we stay close with our customers, we work with them very closely to ensure execution is going in a swift way. At the moment, we have no reason to doubt that this will go ahead going forward. And naturally we are monitoring this situation in a responsible way.

[Alanna Abrahamson:]

Thank you, Andreas. Let me please remind everyone on the call who is in the question queue, I would like you to limit your questions to two questions please. Operator, we can take the next person.

[Operator:]

The next question comes from James Moore, Redburn. Please go ahead.

[James Moore:]

Hi everyone, Uli and team, thanks for taking my questions. I'll state two then. Firstly, on the margin, if I could, for the full year, I know you said that 2017 is a transition year, but can we do the 40 to 60 bps this year, I think your first half was down about 30 to 100 up in the second half. That's my first question. And secondly, on EP, can you please quantify the basis point impact in the quarter from the price versus raw material issue, are we talking 20 bps or 60 bps. Were you just trying to get a handle of what's not there in the second half?

[Ulrich Spiesshofer:]

Okay, so James, on the second question, we can't, because we're not disclose that level of detail, but both has an impact which was material in the second quarter and we are now taking forceful action to make sure that EP is tracking in the right direction after that miss in the second quarter. On the margin on the full year, look we announced very clearly that on the long-term basis our ambition is to raise, or have accretion of 40 to 60 basis points. We are firmly committed to lift towards that ambition. We are also firmly committed that the second half of the year we will lift this ambition and get as much towards this ambition as possible.

[Timo Ihamuotila:]

Yes, maybe Uli, if you are okay, I could add some drivers for the second half, not guidance, but drivers, so if you look at this first of all from FX perspective, so if we would assume that the FX would stay the same, then we would have less headwind from FX, same goes for commodity because we would expect the pricing strategies to start to kick in on the market on a tailwind, we would also expect slightly better mix. And then on the other hand we would expect the power up cost to go into BG [ph] and be a slight headwind. Then further on the actions side, so we do fairly little restructuring during the first half. With the $8 million altogether, our target 200 to 250 remains, so we are expecting to execute more restructuring in the second half and we are also taking discretionary cost measures now in such a way that it does not harm the long-term growth prospect of the company.

[Alanna Abrahamson:]

Thanks Timo. Next question please.

[Operator:]

Next question comes from Ben Uglow, Morgan Stanley. Please go ahead.

[Benedict Uglow:]

Hello, good afternoon everyone and couple of questions then. So first of all, just on Robotics and Motion. It's quite difficult to understand exactly what's going on there, because effectively you've got three large different businesses, so Robotics, Motors and Drives, what I wanted to know is can you give us any color or any kind of sense of how those different margins are performing and is it the case, I mean my assumption would be that it's the motors business which has gone down or is very low. So, is that correct and could we have some color there? Second question just on price increases. Obviously, they take time to come through, but we see this at Schneider and others, is it reasonable to expect full Robotics and Motion that you do see the positive effect of price increases coming through as early as the third quarter and will the second half margin should that second half margin for that one division be significantly better?

[Ulrich Spiesshofer:]

It is very simple two questions, thank you very much Ben. Let me work them through. If you take the Robotics and Motion division, your observation is right, there are basically three building blocks, but within this building block, there is additional dynamics that I'm happy to share with you a little bit more granularity. Let us start with Robotics. Robotics is growing significantly double digit not starting [indiscernible], so this business is really taking off in a great way and its developing very, very favorably in a market which is very attractive and our formula of running this business in a completely different business model then previously is really successful. Robotics had in the second quarter a great run on orders, Robotics had into the second quarter also some bulk shipment of large quantities of robots which dampened the Robotics margin slightly, that's a one-off thing in the second quarter but this is something that we had in there. Now as I move on to the Drives business, the low voltage drives and medium voltage drives undergo a different pattern. The medium voltage drives are tied to the process industries, to large CapEx projects and that's an area that we have had a dampening on the topline and naturally also we need to ensure that this business, adjusted cost base in the appropriate way as fast as possible to get going. And as you rightly say on the motor side, there is the key issue in Robotics and Motion, there is one element that's the commodity prices. I've looked at the Motor, it's a copper iron in there. The last 12 months cooper and iron have both raised more than 20%, so that's something that's really hitting us and we need to make sure that we realize that commodity price increase through pricing actions as much as we can, as fast as we can and I think there the team in the second quarter could have acted even faster and we are speeding that now up in the third and fourth quarter, so I am confident that in the second half of the year, we will work towards mitigating that affect. The second element in motors and generators is the capacity utilization and that's a really interesting balance between on the one hand taking out cost and capacity and on the other hand, having enough capacity available to especially on the engineering side also then the larger motors pick up again, which are very engineered to customer purpose to have enough muscle there to participate in the upswing of the market. Honestly, in the second quarter that formula cut a little bit out of sync and we are putting it now back in swing to make sure it is going in the right direction. So, there is a glitch in our M and EP in the second quarter and we are mitigating it in the way as I just described. On the price activity, I think I answered that mostly, if Andreas before I gave you the price mechanism and that's something that we are acting quite forcefully on to ensure we safeguard the margin as well.

[Alanna Abrahamson:]

Thank you. Our next question please?

[Operator:]

Next question comes from James Stettler from Barclays. Please go ahead.

[James Stettler:]

Yes, thank you. Good afternoon all. Yes, just a quick follow on, on pricing. When you raised prices are these generally sticking? Were there any risks in certain areas that they don't more so than others? Question one. Question two, again coming back to Power Grids, so the backlog there is down 2%. We talk a lot about the tendering activity, what's really holding back, when do you see an inflection point? What really needs to happen for these orders to come in? thank you.

[Ulrich Spiesshofer:]

Thanks really, thanks. Now look on the pricing, as your right side [ph] making price increases stick is very important and there you have different dynamics. If you look pricing towards distributors, the way we pay our distributors, they get a commission on realized price, so there is an incentive to help us to push this price decreases through in the market, so you can assume that on a distribution side, its highly likely that we can push it through and on the OEM side and then customer side, it's always a tough one especially in segments where the market dynamics and the market demand is subdued, so this is more difficult and the more you go towards process industries, the more difficult it is at the moment, because this is something that is a segment that's suffering from low activity and low demand. On the Power Grid side, its two elements or three elements. On the one hand, there is a market out there where you have volatility in the world of large projects, that's nothing new, we always have had it. The second point is, we have a change in business model. We are consciously and that's one of the reasons, one of the reasons why we are calling 2017 a transition year, that is not fully comparable to 2016, we are changing the business model in many areas, we are not taking the EPC content anymore, we are not taking installation content anymore, we do more system integration and solution business and that means that has a dampening effect on the top line in the way we take certain projects on in the role that we play and participate in certain projects. And the third point is selectivity. We want to make sure that in the future we are not repeating the mistakes from the past just to push the topline like [indiscernible], we want to have a good quality underlying business, that is our discreet drivers. If I look at our underlying market dynamics at the moment, I don't see any reason to be concerned, medium, long term this will be developing in the right way, in short then the business model changed to selectivity and the market [indiscernible] have contributed to where we are now.

[Alanna Abrahamson:]

Thank you Alaine, next question please.

[Operator:]

Next question comes from Guillermo Peigneux, UBS. Please go ahead.

[Guillermo Peigneux:]

Hi, good afternoon, Uli, Timo and Alanna, thank you for taking my questions. Just wanted to follow up a little bit on the commodity inflation. I understand that at the moment the net pricing picture isn't clear, but I'm kind of seeing that the P&L impact from the commodity inflation is there, so you could give us more clarity and about the decrease in magnitude of the pressures you're facing from the raw material inflation.

[Ulrich Spiesshofer:]

Thank you very much for your question. I think we have said in that topic all we wanted to say. There is dynamic out there, you see steel, copper, silver, lead all underlying a certain dynamic. In steel, it depends in which region and what target [ph] you buy it. We are monitoring it very closely. We have a special commodity buying and commodity team for exchange rate commodities that are working that through. It is important that we fly on site and have swift actions on the pricing and costing side. We are taking them now more forcefully in the third quarter and influenced the team that everywhere, not only in IA and PG, we have a good result, how we mitigate this topic.

[Alanna Abrahamson:]

Okay, next question please.

[Operator:]

Next question comes from Martin Wilkie from Citi. Please go ahead.

[Martin Wilkie:]

Hi, thank you. Good afternoon, its Martin from Citi. A couple of questions. The first one, you mentioned in the past and you reiterated a few months ago that you wouldn't want to cut into muscle in some of the longer cycle markets and so just to clarify, when we think of the overcapacity this quarter, some of the swift actually you mentioned in the second half, have you changed your view as to when some of these markets might recover or the level that they may recover to or is this more a sort of temporary fading issue in the quarter? And the second question then was just on cash. You mentioned payments in the Middle East, just understand, with a small number of contracts was it broader based and therefore what gives you confidence that that doesn't become an issue again in the second half. Thank you.

[Ulrich Spiesshofer:]

Hey Martin, good afternoon and thank you for your question. On the muscle, our approach remains unchanged. We will not cut in to the deep muscle of our engineering capabilities and the core differentiation opportunity that we have, so this is something that will not change. When you look at the outlook of certain activities, take the US, I think in January, February the road was including ABB, was quite excited about opportunities in the US that has come down a little bit. If you look at what's happening in Europe at the moment, we still have the elections in front of us. So, we need to be careful there. And it's very clear that the expectation in certain spending patterns in part of the world has been a little bit delayed and subdued and we need to manage that and that's the key cause that we missed a little bit on the second quarter and that we are fixing now going forward. So, there is no change in the basic sentiment. That's just a glitch in the second quarter that we did in media expectations and we are fixing it now as we speak. With that I hand over to Timo on the Middle East question.

[Timo Ihamuotila:]

Okay thanks Martin. So, when we look at the cash overall, we have a couple drivers here and as I mentioned, this Saudi 140 million is a big driver. We also have some tax and we of course have little bit lower results, so those were the main drivers. And as I said earlier, for the full year, we expect to be somewhat ahead for full year 2017, compared to full year 2016. Then what comes to these receivables, we are not seeing that these are bad quality receivables, i.e. there is no problem with the quality of the receivables and thus we really expect that this is a timing issue only.

[Alanna Abrahamson:]

Thank you, Timo. Next question please.

[Operator:]

Next question comes from Simon Toennessen from Berenberg. Please go ahead.

[Simon Toennessen:]

Yes, good afternoon everyone. Two questions. The first one is just generally on your portfolio. looking at the book-to-bill let's say over the last six or so quarters, you've been below one on the group level more or less taking Q1 out. I know you're monitoring performance against how you're doing versus the market you're operating in. can you just maybe Uli, give us a feel of sort of how you're seeing your performance right now against the market let's say in areas like the voltage, motion drives, medium, high voltage process. I am sure in Robotics the answer is pretty simple, but just in the other areas. And secondly just on Industrial Automation, I mean the oil price is down another 15% I think year-to-date, and I know you're not going to guide into next year obviously yet, but in consensus it's looking for high single digit growth there for next year on EBITDA in this business taking B&R out and the book-to-bill remains below one there. What do you think can surprise on the upside there over the coming let's say couple of quarters? Thank you.

[Ulrich Spiesshofer:]

Ye, good afternoon Simon, thank you for your question. Now if I run through the portfolio and the portfolio dynamics and go through the four divisions, let's start with the Power Grids, I think I answered already partly before the topline dynamics that we see there are bit more selective, we have changed the business model and the underlying market is patchy but it's a solid market. So, for me 18 will be the first year where we compare against a similar 17 in terms of the underlying business model that they will run this business and I expect we get growth going. It's very clear that we stayed away from certain type of projects, it's very clear that we have been selective on projects that we just didn't want to have. We want to make sure that to serve our customer well with good solutions and we make decent money at a digestible risk profile in this business. If you take industrial automation, I think Peter and his team are doing a remarkable job increasing the margin in an environment where the backlog is down, the backlog is down about 7%, quarter-on-quarter compared to last year's quarter and despite that, they are doing good jobs. So, peter runs a really nice forward-looking business model, where he takes cost and capacity adjusted in a good way. Now the good news is, if you look at the growth pattern in this quarter, our industrial automation business is up in total orders 8% and third-party base orders 2%. So, if I look at that together, great dynamics that the team has delivered. And if I go through where we are, in Asia, Middle East, Africa, in this business, the base orders are slightly up. So, we were able to still get some good businesses in the Far East, in Africa, we have good activity in India, so altogether this is going in the right direction there. But going forward and tied it to your second question on the oil price, I think there is service activities picking up that we can do, there is some early cycle OpEx picking up and I can tell you especially in that segment, the resonance on the customer sides on ABB Ability is phenomenal. So, we are really, really happy there. The customers, most used word of customers in that segment on Ability is finally ABB you have a comprehensive offering, you really love it. So, I'm optimistic that this will help us converging to grow in the next year and go in the right direction, despite the markets not being so strong. In Electrification Product, we have a very strong exposure to the utility side in the Electrification Product and that's a little bit subdued, so we had an issue there. In the medium voltage side, if we need to work on, on the industrial side, I'm quite optimistic going forward that we're going to get the drive going again. At least maybe for Robotics and Motion, in Robotics look, we are number two in Robotics now, we have the firm ambition to become number one, if I look at topline [indiscernible] the bottom-line contribution, we are tracking very well towards that target in the right direction, the market is good and we are constantly becoming market maker with new solutions in segments that haven't used Robotics before, which is going in a very good way and I'm quite happy about that. That's one on the motion side, the [indiscernible] oriented, consumer goods orientated, [indiscernible] drives and motors, have a good dynamic, the larger ones I described before. So altogether, we are now for the third quarter in a base order positive territory. We have the actions in place to continue the growth momentum and it is our firm ambition, in an uncertain world still to deliver growth going forward in the remaining of this year, next year.

[Alanna Abrahamson:]

Thank you. Next question please.

[Operator:]

Next question comes from Jeffrey Sprague from Vertical Research Partners. Please go ahead.

[Jeffrey Sprague:]

Thank you. Good day everyone. Just two questions if I may. First on B&R, obviously you didn't own it in the quarter, but I'm wondering if you could give us a little color on the growth trajectory in the quarter, but if not, perhaps more importantly as you look into the back half, anything we should be aware of in terms of getting this modeled correctly and just a trajectory on the topline there. And the second question is just on US [indiscernible] specifically. We have seen a number of utilities starting to talk about a higher spend rate, but really not seeing it come through yet in any one's results and just wondered if you can give us a little specific color on what you're seeing in the US on the utilities side. Thank you.

[Ulrich Spiesshofer:]

Yes, thank you very much Jeffrey for bringing up B&R. you make me a happy man talking about it. This is a great acquisition that really [indiscernible] machine and factory automation. The business is doing tremendously well. We are really happy with the development that it has. We are not publishing the detailed numbers on the business, but since the signing of the deal couple of months ago, the business has developed fully in line with expectations, we are happy with the growth momentum. The teams are working extremely well together, it fits like a glove. Our announcement on July 6 that we are building an additional new R&D center in the headquarter, also that we are expanding the activities in emerging markets, that we are driving joint country growth plans and get going there. I think I'm optimistic that we will keep the growth trajectory in this business now going forward, so there is no reason to change any assumptions at the moment. We are fully on track and the activities are coming in nicely. Timo, you want to make some remarks on that one from the CFO perspective?

[Timo Ihamuotila:]

Yes, if I can make a comment regarding it because there was a question on the modeling, so maybe to shed some light there. And force, we have not yet worked through the full balance sheet consolidation as you know because this was a subsequent event on the quarter, but just for modeling purposes on the PPA amortization, it should be something like $70 million for second half and this includes the step up from the inventory and the 70 is probably split pretty evenly between Q3 and Q4. And then for the full year 18 on PPA, we would expect about $80 million. And then when you look at the profitability, so on the acquisition case we said that this business is about 12% and as there is no PPA inside the business at the moment and then when it comes over to ABB, as we measure operational EBITDA, when you take the PPA out, it should be around the same level as a starting point. So, just wanted it to be a bit.

[Ulrich Spiesshofer:]

So, I hope it helps you with your modeling now. Thank you, Timo, for that. Now, on the [indiscernible], now if you take our Power Grids business in North America, the total orders for us are up, in this market we've got a couple of larger ones, and we've got a large order in the Power Grids grid integration business where we're delivering a dotcom [ph] solution that helps us to get more capacity and stabilizing existing gate. The total orders in the US and Mexico are up. So that's going in the right direction and I was in the US now I think nine times already this year meeting very often these customers and sitting down. It's clear that the infrastructure in the US needs investment and a couple of drivers for it. Number one, the average age of a large power transformer in the US is more than 35 years. the lifetime expectancy usually is about 30, so there is an upgrade and need on that one. Secondly, the reshoring of industrial activity into the US will require investments in the grid. Now thirdly, if you look at the ramp up of unconventional oil and gas in the US which will be a big spending entity in the years to come, they also need reliable power supply. So altogether, there are good and solid drivers there, medium and long term to get it going. I don't want to speculate then the knot is being cut and a clarity comes in how the infrastructure will come in, the signal that we're getting is there will be a significant spend, we just have to be patient and close to our customers that in the moment, this is coming and the knot is untied, we can roll in todays in a good way. Our footprint in the US positions us clearly as the number one in Power Grids in the US, we are leading there, we are continuing investments and it's also nice to see how ABB Ability helps customers in the utility sector with the planning of a grid that becomes more volatile with renewables and more demand side dynamics and how we are helping this as it held to address the challenges of an aging grid. So altogether, I'm cautiously optimistic the timing is a question; the overall dynamics will be intact.

[Alanna Abrahamson:]

Thank you. Next question please.

[Operator:]

Next question comes from Gile DeBray from Deutsche Bank. Please go ahead.

[Gile DeBray:]

Thanks very much and good afternoon everybody. So, my first question is on Power Grids, where the book-to-bill has been below one times for the past five quarters now. So, I guess given the lead times in this business, it seems increasingly likely now that [indiscernible] could actually turn negative in the next few quarters for Power Grids. So, do you think that you perhaps need to be a bit less selective, a bit less shy in taking on orders going forward and that you will need to reinvest in the Salesforce at a much faster pace than what you've been doing so far. That's question number one. And question number two is, well again about the pricing trends. I think I remember that in Q1 you said that pricing was getting a bit better than a year ago, in particular in the low voltage area with price rises of around 1%. So, given the EBIT [ph] margin decrease in the electrification, does that mean that you actually need more than 1% price rise to offset the commodity cost? Thank you.

[Ulrich Spiesshofer:]

Thank you for your two question Gile and good afternoon to you. And if I take the Power Grids situation in the market, as I just laid out, the underlying drivers are intact and this will not change to selectivity pattern, because we want to build good quality backlog going forward. The Salesforce and frontend improvement is one of the element and one of the growth drivers between our power up program, so if I describe it very simple, the last couple of years were about making Power Grids a better business and even compromising topline to make it a better-quality business. The next couple of years will be about making this business better and bigger, but bigger in the new pattern of the business model, in the new offering, a much stronger digital effort, a much stronger services effort that we are driving going forward. So, there's no reason to shy away from that direction. At the Robotics turnaround that has gone through a similar pattern, successfully demonstrate if you have patience and perseverance and the right kind of long term perspective, a massive business model change might pay off at the very end and that's what we are aiming for in Power Grids as well.

[Alanna Abrahamson:]

Thank you.

[Ulrich Spiesshofer:]

On the pricing trend, look, in the second quarter it was very clear that the pricing measures that we had taken did -- they are not sufficient to realize the margin impact, that they neutralized the margin impact from the commodity price increases. We are driving now forceful actions both in the cost and the drive side to ensure Q3 and Q4 are in good shape. We are not disclosing then what exactly means in terms of the pricing, whether its 1% or 1.5%, we will take sufficient actions to compensate that. I would expect that we are trending towards 2% altogether to realize the opportunity to compensate the margin.

[Gile DeBray:]

Thank you.

[Alanna Abrahamson:]

We have time for one more question please.

[Operator:]

The last question comes from Jonathan Mounsey from Exane. Please go ahead.

[Jonathan Mounsey:]

Yes, thanks for fitting me in. just a couple of quick ones please. The savings programs, white collar program and also the working capital initiatives. I guess you are near the end of these programs than the beginning, I just wonder if you've given any thoughts what might come next sort of into 2019 and beyond. And just on, I guess it relates to both the M&A in terms of B&R, and Keymile which strike me as being sort of linked to the Ability program, filling out the offside, just wonder whether as you developed Ability, we need to do, other M&A to kind of create this cohesive end-to-end connected offering.

[Ulrich Spiesshofer:]

Hey good afternoon Jonathan, thank you very much for your questions. Yes, when we started next level, we said in the first couple of years, we will have group like programs where we ensure we get the hygiene and the cost base of ABB in good order, that's why we launched the working capital program, this is why we launched the white-collar program as programs that go across the entire group. I'm very happy with the progress on the white-collar productivity program, we will achieve the 1.3 billion cost out that we have committed and we will achieve that with less restructurings, so by the end of this year, the program will be finished. That does not mean that there are no further opportunities in white collar going forward, but in the future, we will run these programs through the divisions, the functions and the regions, so each of my leaders will have specific targets for his or her share of the white-collar community to drive further productivity going forward. So, Timo, as the CFO, will have a target as of first of January 2018, how to drive finance productivity, shocker stop [ph] will have it on HR, the functional leaders on R&D and other areas will still continue that, but we will not run it as a program anymore, it will be the responsibility of each of the leaders. I pass the question on working capital, hand over that to Timo in a moment, I will just quickly address first the B&R acquisition question. If you look at B&R, and Keymile, they were two very important acquisitions, B&R took us into machine and factory automation and filled the historic gap and it was just a perfect fit where we don't need to restructuring, where we just continued the growth story and invest to get this going. Keymile connectivity and communications [indiscernible] absolutely crucial element, doing that with the right cyber security solutions and with the right software capabilities to drive it in a safe and reliable way in the future digital grid is really paramount and Timo is adding to our capabilities there and gain, fills the gap that we had in the portfolio, it's a LEGO box in the offering that fills both in ability and in the digital grid capabilities. And you will see us doing more bolt-ons in the future. If you look at NUB3D, on division solution and mission [ph] software side in Robotics, if you look at others, that's the continuous bolt-on activities where we continuously enhance our solution capabilities going forward. With that I handover to Timo to make some comments on the working capital program.

[Timo Ihamuotila:]

Yes, thanks Uli, similar situation regarding working capital on the landing of the program. So, when we look at where we target to get after getting the 2 billion out, we should be in a good place against external benchmarks and then these programs first of all on receivables will become part of the global call to cash process and we will of course continue to drive it hard. Same is with regarding payables, so it will become part of the procure to pay process and again there we can do even more work through harmonization of payment terms in general. And then finally in inventory, I also think we have further opportunity after the 1000-day program lands, but that we have to look with bit longer term. But we have clear landing plans and action plans in place for landing the program.

[Alanna Abrahamson:]

Thank you very much Uli, Timo. I thank you everyone on the call. Just a reminder again, our Innovation and Technology Day, September 6, a great opportunity to see all of our technology and action. Have a wonderful day and a wonderful summer. Talk to you later.

[Ulrich Spiesshofer:]

Thank you very much to all.

[Operator:]

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. Good bye.