ABB Ltd
Q1 2016 Earnings Call Transcript

Published: 20 Apr 2016

[Operator:]

Ladies and gentlemen, good morning or good afternoon. Welcome to ABB Q1 2016 Results Conference Call. I’m 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 Mrs. Alanna Abrahamson, Head of Investor Relations. Please go ahead, madam.

[Alanna Abrahamson:]

Good afternoon, ladies and gentlemen, and welcome to ABB’s first quarter 2016 results call. The press release and analyst presentation were published this morning at 7

[Ulrich Spiesshofer:]

Thank you Alanna. Good afternoon ladies and gentlemen and welcome to our conference call. Before we go in to detail regarding the quarter, I would like to pay tribute to one of our longest serving Board members, Roger Agnelli, who passed away in a plane crash along with his wife and two children and their partners on March 19. Roger was an extraordinary man, who contributed to the success of our company for more than a decade with his profound knowledge and charisma and was a good personal friend to myself. We will miss him very much. Now let’s move to the results on slide 3. We continue to deliver along our three focus areas of profitable growth, relentless execution and business led collaboration in the first quarter of 2016. Base orders were steady in the quarter, reflecting the positive effect of our focus on organic growth and of our new margin oriented organization in a challenging environment. The decline in total orders reflect the very high level of large orders a year earlier. The share of large orders in the quarter represented 70% of total orders, a very strong quarterly figure, however, still less than in the first quarter of 2016. The order backlog grew by 4%, book-to-bill was 1.17 and was positive that means above 1 in all of our divisions. Our continuous focus on relentless execution contributed to operational EBITDA margin expansion by 0.9 percentage points to 12%. The increase was operationally led by the power grids improvement and ongoing group wise productivity and cost savings measures. We achieved further brokerage in power grids and the division started its first quarter within its highest margin corridor. The strategic portfolio issue of Power Grids division is on track to ensure outside incredible perspective. We work on this review with external advisors during this review. We will report on the review at our capital markets’ day on October 4 in Zurich. We continue to drive self-help by focusing on growth opportunities and anticipating and set up our capacity adjustment, productivity measures and cost reductions to mitigate the market headwinds. As part of the second stage of our next level strategy which we announced in September, we are accelerating our focused 1000 day programs of White Collar productivity and working capital. Cash from operating activities was up 200 million, a pretty impressive improvement on better working capital management. Our four new customer focused divisions are operational and we are seeing the positive results. To ensure better collaboration and more customer face time, we have established a common sales platform across the group at Salesforce.com. The platform is today already operational in 86 countries. To almost drive best-in-class performance, we have announced and appointed Pasquale Abruzzese as Head of Quality and Operational Excellence. Pasquale is an acknowledged expert and leader in the field of business transformation, operations and quality management. He was instrumental in the implementation over more than a decade of the Honeywell gold operating system; a world class standardize approach which played a key role in Honeywell’s performance turnaround. Pasquale is currently the Chief of Operations of Philips. He will be joining us on June 2016. Now let’s turn to slide 4 for the key figures. They are focused on a few key points. Order were 7% lower in the quarter mainly due to the tough comparable as stated earlier. Base orders however were steady. Revenues were -2% primarily through timing of executing the order backlog and lower short title volumes. Operational EBITDA improved and margin was 12%, an improvement of close to 90 basis points to 12%. Operational earnings per share were up 3% on a constant currency basis despite a little bit declines in revenues. Cash flow from operating activities was 252 million, a significant improvement compared to the year earlier. Now let me give you a perspective on the regional order performance on slide 5. Order in Europe altogether were down 7% in the quarter. Last year we had won a record amount of large orders in Q1 including the Nordlink order to provide a power transmission link between Norway and Germany worth more than 800 million. In the first quarter of this year, our large orders for Europe whilst not at the same level as last year were solid and included a $250 million for a high voltage submarine cable system for the UK as well as a 140 million high voltage direct current converter station order. We also won equipment orders for specialty vessels specifically in the cruise ships as well as in electric and hybrid cells. The base orders in Europe grew by 6%. The table on the right shows the development by country. So for example, Germany grew 5%, Spain 27% and Turkey 24%, Norway and Italy they are flat, and UK was impacted by a really difficult comparable as there was a very significant amount of small orders booked in the first quarter of 2015. Total orders in Americas declined 13% and base orders were 10% lower. Total orders for the US were down 13% due to lower industrial demand for power and automation solutions going in to process industries such as oil and gas and the mining and network sector. US base order declined on a difficult prior period comparable. Canada and Brazil were down as softer demand from the resource (inaudible). Total orders for Asia, Middle East and Africa declined 2% compared due to a very strong quarter a year ago, mainly secured a large marine order. Base orders grew 3% for the region, and China grew 16%, primarily due to the 300 million HVDC orders that we got this quarter. China’s base orders declined slightly compared this to a same period a year ago, following three quarters of double-digit declines. Despite the oil price uncertainty, double digit growth was achieved in Saudi, with robust orders in the Gulf countries. Southeast Asia also saw strong double-digit growth of all the market development in Japan, Korea and Australia [slowed]. These developments really show that our PIE approach of penetration, innovation and expansion in a targeted ways works even in a difficult market environment and that our growth geographic scope helps us identify and drive growth opportunities. With that I’d like to hand over to Eric to give you a better narrative on the divisional perspective.

[Eric Elzvik:]

Thanks Uli. On slide 6, we can see the divisional performance. In electrification products, good order growth in Europe was more than offset by weaker demand in the US, China and Brazil. The lower levels of medium voltage products and low voltage products being sold in the industrial sector could not offset the positive development in construction and utility. Revenues were steady and operational EBITDA margin was impacted by an unfavorable mix. Actions (inaudible) capacity and shift in demand were initiated in the quarter. In this Discrete Automation and Motion orders were impacted by weaker demand in the resources sector, oil and gas, mining and minerals. Third party base orders declined 5%; revenues were lower on short cycle business and the timing of the order backlog. The decline in the margin was primarily due to lower volumes and under absorption. However capacity adjustments are well underway and margin improved sequentially Q1 2016 over Q4 2015. DM is aiming to be within the target margin corridor on a full year basis. The Process Automation division saw a decline in orders due to the substantial drop in large orders compared to a year earlier. Service orders were up in the quarter, while third party base orders were down slightly. Revenues were lower as growth in services and marine partially offset the decline elsewhere. The margin declined due to an unfavorable mix, although it was partially offset by cost and productivity measures. In Power Grids, orders declined mainly because of the exceptionally large orders won in Q1 2015 which resulted in a (inaudible), the base orders behind this grew at 9% with a strong underlying performance in China, Saudi and Spain. The slight drop in revenues were primarily due to the execution or timing of the backlog. Power Grids reached the target margin corridor of 8% as a result with ongoing step change program, improvement in the project margins, and the continued cost of measures. In addition, corporate costs were positively impacted by a cumulative elimination of certain intercompany insurance reserves. Let’s move to our operational EBITDA which is on slide 7. In this challenging market, we achieved approximately 85 million of net savings. This includes the benefits that we have achieved regarding White Collar productivity in the quarter. The net savings were partially offset by negative net volumes with the declining revenues, as I mentioned earlier. Most of the project margin improvements came from Power Grids, as the division continues to successfully execute on the milestone of their program. Mix was approximately at zero as fuel system orders were offset by standard products in this quarter. As always the other category consist of many smaller items which are up, included here is sudden inflation, changes in the corporate provisions like insurance reserve this quarter, realized foreign exchange gains and losses, certain commodity supply chain costs and other smaller ones. And it starts in the quarter, the year earlier quarter the [ForEx] inflation had some negative impact of much less than what we had in the prior period. All of these changes led to a group operational EBITDA of approximately 943 million and an operational EBITDA margin of 12%, an increase of 90 basis points. I would like to remind you that restructuring related WCP for 2016 is expected to be approximately 300 million to 400 million. A majority of this we will expect to be booked in Q2. Lets’ now turn to slide 8; we continue to improve the cash evaluation in Q1. Cash flow from operating activities was up by approximately 200 million in the quarter. We have put a strong focus on working capital improvement measures particularly inventory reduction, but also receivable collection, within the implementation of the continuous value chain improvement system that we are driving throughout the operating unit in the group. Our cash distribution to shareholders will once again be done in a tax efficient manner. If approved by the shareholders, the proposed dividend payment of 74 Swiss cents per share will be paid out in July 2016. We continued our share buyback in Q1 purchasing shares with buyback value of approximately 500 million. So in total, we have repurchased shares for about 2.7 billion since the program began 18 months ago. And we are on track to finalize this within the year as planned. As you can see, we continue to deliver on our pledge to drive sustainable value creation for our shareholders. Let me now turn it back to Uli.

[Ulrich Spiesshofer:]

Thank you Eric. Let’s turn to slide 9; we launched a second stage of our next level strategy in September 2015 to accelerate ABB’s transformation. Stage two comprises a significant set of actions to tried to shift our center of gravity towards higher growth, greater competitiveness and lower risk as well as the acceleration of programs to improve productivity and capital efficiency and further mentions to simplify our organization. Implementation of stage two continues along the next level of strategies three focused areas of profitable growth, relentless execution and business led collaboration. Now let’s turn to slide 10, so when we look in to shifting the center of gravity of ABB, how are we really improving our competitiveness? One way is by enhancing our offering through what we call software led differentiation. For example by driving the development of our offering for the industrial digitalization and Internet of Things, Services and People that we call IoTSP. The growing share of renewable energy in the power supply adds a lot of complexity to the grid, which requires innovative technologies to manage the grid overall, the flow of the electrons, but also advanced solutions to manage the flow of data. With our unrivaled knowledge of electrical energy and industrial automation, we are ideally positioned to drive the digital grid. ABB Technology was selected for the UK’s first digital substation, for example, as show on this slide, we are providing the customer with this improved control, higher safety and reduced maintenance cost while integrating the renewals. Another example for our leading platform in industrial digitalization is our container terminal automation building that on our strong experience IoTSP for a site. Through our automation systems and remote operation solutions, we are able to control cranes and drive systems for all container cranes in the terminal. This makes the cost of container terminal operation safer, cleaner and more productive. Slide 11 shows concrete examples of how we drive profitable organic growth through our PIE framework of Penetration, innovation and expansion. In terms of market penetration, we really made solid progress in Europe where we drew the base orders by 6%. In the region we are dividing the first benefits also from the combination of our low voltage and medium voltage sales channels in the new electrification product division. The new market-focused organization is really enabling greater focus, much better coverage of customer needs from one single organization and thus yielding positive results. Innovation continues to be a focus for growth and we introduced many new products and solutions in the first quarter as well. One is our new smart sensing solution, which runs small assets like simple motors or transformers in to intelligent machines that will tell the customer when they need servicing and help therefore with uptime speed and yield in industrial processes. This innovative solution makes condition monitoring the new standard for assets in industry and means also small and mid-sized companies can benefit from the advantages offered by the IoTSP, giving our customers a true and decisive competitive advantage in running their operations. We’re also continuing to expand in to high growth markets and geographies. In transportation, we launched a new electrical power system for cruise ships called Dynamic AC concept that serves the marine industry that [validated] products and systems such as our Azipod propulsion solutions and DC electrification. This solution helps to reduce annual fuel consumption by up to 6%. On a large cruise ship this could equate to 2,000 tons of fuel savings every year. Now lets’ move to slide 12; in this environment we continue to drive self-help by accelerating our relentless execution and force around 2,000 day white-collar productivity program as announced last September. Key actions including optimization and consolidation of business functions in to certain attendance of excellence like for example a billing center for large projects out of India and support functions and to streamline shared service centers. We intend to reduce the globally shared services support centers in to four regional and two global centers from 68 today. So we’re moving from 68 to 6. We’ve announced the locations of our two global business service centers, Bangalore and Krakow and therefore already filled the key management positions. In Bangalore the first wave of functional activity transfer is already completed. So for example, HR migrated from Australia and accounting from Singapore, Southeast Asia and the Gulf countries. The next wave of countries is well on track. The global HR delivery center also was established. These efforts keep us on track to deliver the 400 million savings that we committed for a program in 2016. Turning to slide 13, as announced when we launched the stage 2 of the Next level strategy, we are also accelerating our working capital program, which aims to foster a cash for growth culture, meaning freeing up cash to grow our business from within. Collection of receivables was strong as well as inventory management. We now have well over improvement 1,000 improvement activities around the globe that are currently being implemented. They are driving for example value chain excellence from product designed through manufacturing logistics. As an example in our motors and generators business unit we have achieved improvement on their net promoter score from customers on the one hand, sustainably ups the inventory turns and achieve therefore a double-digit reduction in inventory in their business unit. Overall, the 1,000 day program on working capital is targeting to release about $2 billion in cash by the end of 2017. We are well on track as we have freed up approximately 600 million in cash for growth in the last 12 months during the wrap up face of this program already. If you to slide 14, as you know in January 2016 our new market oriented divisional structure came into effect. We realigned our business divisions to serve our customers better by organizing ourselves around our customers much more than in the past and reducing the amount of divisions from five to four. We are seeing truly positive results from these actions. The customers like it and the feedback overall is very positive. They are now able to buy a more complete ABB portfolio from one division and receive faster deliveries and service. The changes have also enabled a further simplification of our processes to enhance our agility in customer focus in a tough market environment. So turning to slide 15, let me summarize. We expect a challenging market conditions to continue and to face continued hardware selling in many segments. Therefore we will continue to focus on self-help which means concentrating on driving growth in target segments and realizing the benefits of our new structure and focused execution initiatives. Our growth programs are performing well even in challenging markets and we will continue to target above average growth in markets such as Africa Food and Beverage and micro grid may receive particular potential. We have already undertaken significant capacity adjustment in those businesses that have seen lower volumes due to lower oil price and other market weaknesses and uncertainties. At the same time, we will thrust forward our accelerated execution programs of productivity and capital management. Having laid the foundation for ABB’s transformation for a leaner more customer focused organization, we are now positioned to better continuing market headwinds and drive profitable growth for the long term. We have announced in our Capital Markets Day will be on October 4 in Zurich. During this event, we will give an update on our next public strategy and also report on the strategic review of the power grids division. So in closing on slide 16, ABB is a pioneering technology leader with strong position in attractive markets and we have demonstrated this quarter what we can get out of this positioning. We have a crystal clear transformational agenda to drive earnings per share and cash return on invested capital which we are implementing with great rigor and perseverance. We remain committed to deliver attractive returns to all of our shareholders. As demonstrated within the first quarter and with the achievements over the last 1.5 years, our next level strategy is delivering positive results and we will continue to accelerate sustainable value creation. With that I’d like to concluded my remarks and thank you all for your attention.

[Alanna Abrahamson:]

Let’s open the line now for questions. I would like to remind everyone that we will limit questions to two questions per analyst.

[Operator:]

[Operator Instructions] our first question comes from Benedict Uglow, Morgan Stanley. Please go ahead.

[Benedict Uglow:]

I have a couple of questions, the first one just relates to the China business in particular and getting a bit more color for what’s actually going on there. If I look at last quarter, your business in China was down 21%. This quarter it’s sort of virtually back to flat, minus 2% in base orders and up in overall orders, and when I read the press release, obviously it doesn’t sound as if electrification orders, grid automation had a big change in China i.e. the improvement in sense of power. So if you could give us a sense of what you’re seeing sequentially in the evolution of your low voltage in industrial businesses China. So that was the first question, second question is for Eric. Obviously calculating the net savings each quarter is going to be a little bit difficult. Could you helps us with a bit of guidance on the run rate, $85 million in the first quarter of net savings is quite high unless my model is wrong that basically is bigger than what we saw for pretty much all of last year on net savings. Do you expect to maintain that current run rate or what might be the puts and takes? Thanks.

[Ulrich Spiesshofer:]

On China it’s a really interesting situation overall. Let me just take a step back and look at the overall picture. China is going through a transition period from an investment driven economy to an innovation and consumption driven economy. I was just in the last half year, I think about four times in China and I was just there a couple of weeks ago again, and what you see there is, I think they have a government which has a very clear plan what they want to do. They realize the size of the challenge that they have in hand. But damages caused a couple of weeks ago with the Chinese government at a venue the 13th five year plan of China, I had a big smile on my face because they declared the 13th five year plan mentions very well ABB’s capabilities and strength whether its cleaning up and having more environmentally friendly power generation, whether its long distance power transmission, whether it is the automation and industrialization of industry or e-mobility, ABB is pretty strongly positioned in that field. Now when you look at the granularity, I’ll give you a little bit more granularity of our numbers there. We are proud that we are at the moment in China without being arrogant, I think Chunyuan Gu, our Head of China together with his team is doing a great job. And what is happening really there; on the one hand, if you look on the power grid side, we have invested significantly over the last year in leading edge technology on the other high voltage DC technology. And this is something that we are really truly leading, and state grid and other customers in China as yet and have given us quite a bit of orders recently to support their move towards a more stable, larger and more digital grid in China. So we are well positioned there. We got large orders, but we also got a very, very nice momentum on the base order side, for example on high voltage product where the localized production in China is really paying off. We got great in China a chain of products in that space and we now benefit from that one. The second piece outside of the power grid, if you take the perspective overall, it’s truly a mixed picture. Anything that’s close to the soil meaning process industries, meaning mining minerals, oil and gas is pretty tough at the moment in China. And the government has not only realized they have too many assets, they’ve also realized they have too many people and they are now reallocating them in different ways. If I look however there are pockets of growth that we can identify in the industry as well. The automotive industry in China is still growing, it’s now the largest automotive market and if you look at the complexity of the vehicles that are being put together the automation needs are quite strong and we have a long franchise there. It will be our first local player there, they have a local value of chain and robotics for example, and really that one is one that we enjoy continued strong customer relationships. Electrification, anything that goes in to the process industry and electrification was very weak. Anything that goes in to residential, we saw a small uptick. And especially when you look at our new product that we have brought out, we are targeting the middle class in China. There’s some pretty attractive products, for example, the retrofit free@home solution that we launched a year ago in China. This is paying off very well in investment. This retrofit solution that you basically can control around home with an iPhone, it’s paying off very, very nicely, and we see some solid growth in that one. On the process automation side, really the process industry itself are soft. But on the other hand, if you take for example, the marine sector that’s where we enjoy quite a bit of growth, and when you look in marine on the harbor side, there’s also still some investments that are going on. So what is very important for us is that we fly onsite and have the granularity of the market in mind and really focus our assets in there. And the last comment that I want to make on China is, if you look at the Chinese, I really call it a continent. We have been very strong at the, what I typically the Eastern Banana, that’s the east coast and we are pushing now very strong in a better collaborative approach than before in to the western regions. We have many, many facilities in that area that have more than a million. Historically we would have gone in there in the DU business unit by business unit approach. Now with the new collaborative approach we really take the whole force of ABB and we basically role in city by city with an overall ABB effort. So we are not out of the woods totally in China yet, but what the team has done is they have stabilized the business. On the grid side, we are growing quite strongly and on the other activities; we have found our way really to address those markets in a way that we don’t have further deterioration. So with that said, I hand over to Eric on your question on the saving net.

[Eric Elzvik:]

Okay Ben, when we get saving you know this is the combination of the price pressure and the cost savings that we have. We are quite pleased with the outcome in the quarter and obviously our white-collar productivity program savings are really starting to yield good results, as it’s the ongoing program of 3% to 5% to cost of goods sold, it is also included in the circulation. We driving those programs very, very hard and we should see also continued ramp up over the year. What exactly the net number will be quarter-by-quarter will then depend on the price that we have in those quarter. So clearly that we are also focused on that side, but it’s one that we have less of a control of, so I will not give you an exact forecast on the run rate, but it should clearly be higher than the numbers we have in the prior year, so we have more or less a small positive between those two items.

[Operator:]

Next question comes from Andreas Willi from JP Morgan. Please go ahead.

[Andreas Willi:]

I have a question on the US development, a similar question in terms of type of Ben asked on China. There the base orders have remained weak, what do you see there between industrial and power and between underlying demand or continued destocking that could maybe still be going on.

[Ulrich Spiesshofer:]

If you take the US, we got hit this quarter very clearly and our orders are down. And if you look at that (inaudible) behind that are a couple of points. Let me start on the industry side, we basically see a dual development in the industry in the US. Anything that’s related to consumption whether that’s food and beverage, whether that’s automotive, whether that’s (inaudible) is going quite okay, including the residential parts. Anything that’s’ related to process is really weak. And you see that a lot of capacity is being now considered for - on our customer side there’s lot of capacity that will be reduced especially on the new unconventional oil and gas exploration. We see that happening and that’s a very timid investment pattern that we realize. So that won’t hit us really strongly in the first quarter. If you go over to the utility side, there are still some projects out there that we see a certain delay in decision making on some larger projects that has hit us in that context. I would expect this to come back on the utility side, and we need to make sure that we continue working with our customers what we do. If you look at the requirement in the North American grid, the US doesn’t have the most grid of the world, they need to really investment to avoid having blackout or having shutdowns, which will come. When we talk with utility customers they make selective investments, for example supporting the ramp up of renewables in the US. They see that coming in many places. We also see for example in California a take-up on e-mobility and charging stations require a reinforced distribution grid. But a lot of these projects are in the pipeline at the moment, and the first quarter was particularly weak in the order uptake that we had seen there.

[Andreas Willi:]

Second question to Eric on the earnings bridge, the volume column was negative even though if I assume pricing is not very different than the last quarter, you should have had volume growth, if I look at your overall organic sales growth. So why was the volume contribution in terms of profit a negative in an environment where you had positive volume growth, because I would assume that if its mixed it will be in the mix category and not in volume.

[Eric Elzvik:]

That’s correct. The revenues were down by 2% on a comparable basis and we do this on comparable basis. So that is the key reason why the volume is down. So this is strictly related to whether revenue is growing or the rest is in the mix side.

[Operator:]

Next question comes from James Stettler from Barclays.

[James Stettler:]

I have a question around power grid. If you look at the basically the growth of 9% very, very strong, is there anything one-off there, could you talk a bit about the bidding pipeline and indeed second part of the question also the pricing quality and how that will come out of the backlog in to the P&L.

[Eric Elzvik:]

If you think around power grid, if you look back historically, you need to differentiate between three things, first of all, our power product business and the net building blocks of power grid has always been strong and we really had a solid business there. The power systems challenges were always more related to our own challenges than they were to the market overall, and I think we need to really understand it when we go forward. And thirdly, when you look at the way we are running business now, we have already gone through a massive business model change and more disciplined approach to order intake and tendering on the previous power system side. So that’s just the opening statement on that one. Now if I look at the market dynamics, ABB is truly strongly positioned in that field and I give you a couple of reasons. If you look at the supply side dynamics, renewals are coming in at a very, very high speed. I was in India 1.5 weeks ago the first 700 megawatt plant on solar is now coming in at $0.043 per kilowatt hour IPP. So I would expect to have a tremendous momentum coming in to the grid from a renewal power generation side. That means the grid are undergoing a phase of demand changes and requirements which will require significant investments in two dimensions. One is, we need to make sure that the renewable power generation sources, which are typically further away get connected with a very low loss of power transmission at highest possible reliability. And secondly, we also need to make sure given the volatility and unpredictability of renewable power sources that we ramp up the automation and control capabilities in the grid, because that’s not only true in India. If you go today to Bavaria and you have a paint plant of BMWs in (inaudible), we need to make sure that the power quality even at Bavaria doesn’t diminish then when we have the going. So we need more control in the power quality to cater to our customers. Our customers realized that there’s more and more demand that way and it’s a great opportunity for us to differentiate ourselves. And if you on the demand side, the demand side dynamics, I can give you an example here from Switzerland more and more people are buying Tesla cars, more and more electric mobility is coming. There will be soon a car launched that will require a 150 kilowatts charger. In the past the charger was 5 kilowatt, it was like 5 hairdryers at the same time, when you switched them on nothing happens to the grid. But when you switch 150 of them on at the same time to charge a car then you have a significant increase of volatility and demand in to the grid and when you have 10 of them in line, you need to reinforce your distribution grid. So I’m quite optimistic on the growth pattern of that actually going forward. Now what we need to do is, we need to make sure we make money out of this. So the way we run this business has fundamentally changed. We have cut down a lot of the EPC activities, we have become more rigorous on our risk management. The tender that we have won have filled our backlog with a completely different quality of on the one hand profitability and on other hand risk profile. So as you see now, the margin coming up on the power grid side, this goes pretty well in line with the turnaround that we’re seeing in the operational model, but also there’s a strong demand going forward. So altogether this is an area where a significant growth in the market that can be realized, that’s an areas that is for our transformation of the power grids business that we are going through. We are already seeing a significant result, but this is on a comparable basis more than 200 basis points versus last year, now we are 200 basis points up and if you continue going down the path, I’m optimistic that we will have overtime more margin accretion in this business well within the target that we have committed to.

[Operator:]

Next question comes from Mark Troman from Bank of America. Please go ahead.

[Mark Troman:]

Got a question on organic sales the minus 2 they’ve reported in the quarter. I mean your book-to-bill looks pretty good 1.17 or 1.2 or so, and you had above 1 last year, base orders flat and I would imagine your backlogs starts getting delivered a little bit more than perhaps it was this quarter. So I guess the question is - and your comparatives got a bit easier certainly next two may not so much Q2. Should we just expect - is this the worst sales growth figure we are likely to see this year, that’s question number one, given those factors. And question number two, I had questions on China and the US, might be if I can switch to Europe, moved pretty well up six. If you could give a commentary on how you see Europe, because I guess in the past structurally you’ve been a bit less bullish versus the other region. So is this sort of the reasonable growth rate that you see in Europe care to stay in your view. Thank you.

[Ulrich Spiesshofer:]

So Mark to your first question, I think your argumentation was very solid, and I would definitely say that we are fully committed to make this diverse sales growth water in the year, so we are committed towards the other ones better. If you look at the fundamentals, we have good backlog, we have positive book-to-bill. We had positive book-to-bill last year, we have positive book-to-bill now in the first quarter, we have good backlog, and it’s very clear that now all hands are in deck to try the execution. We also have to very clearly say, last year and the year before we did a lot of internal homework. I kept the team really busy cleaning up the organization, making it simpler and getting all that going. That work is either done or in good hands now. So we have people really now driving the execution of our orders of our revenue, bring out their customers and you see that momentum really kicking in certain parts of the market. So the answer is yes, we aim very strongly to make this diverse sales growth fodder of the year. And then you asked about Europe, look first of all we’ve been running Europe different than we did it before. You might remember up to 2013 and in to 2013 we had split Europe in to three different regions and each region was running their own dynamic. It’s now one cohesive region. Bernard Jucker, whom you know from his very rigorous process in running power product is now running Europe. And he is really driving the [tie] approach to a very, very good execution growth machine. He’s really crunching the growth out there, making sure that on the distribution side, low voltage and medium voltage and that [amplification] works now better together, we are ramping up the momentum in the direction of power grids that is having now one [tradition] instead of two, customers don’t need to think before they call ABB, do I have a system question or do I have a product question. They have a power grid question, and they have now one discussion partner. If you look at the innovation pipeline that we have and the amount of innovations that we have brought in to Europe. There is still some spending in Europe especially on differentiating technology that helps companies to drive either uptime speed or yield, it means also getting vector cost down. The robotics business is one example and one on the process automation side we have some offering. So altogether and especially also the traction business is doing well in Europe. It’s our highly energy efficient technology that we bring out in the market. So overall the picture is one that good execution with a better organized market granularity will help us. Now let me run you a little bit through some of the countries and share with you the pattern in the past and what they are seeing going forward. If you look at Northern Europe, Northern Europe altogether is quite well under way with one exception and the exception is Norway, because in Norway we got pretty hard hit by the decline in the oil and gas sector which is not a big surprise given what’s going on around us. But altogether Sweden, Finland and Denmark I would say be pretty well under way. And even in Norway, we have faced on slightly up this quarter, which is just showing that even in a tough market environment we can do well. In Germany, we had in total really a hit because we had that large booking last year, and if you look at the base orders, they are 5%. Italy is basically flattish on the base order side, and our Spanish and Turkish team are doing a great job, really being present with our customers. Well by coincidence, Spain was the first country where we rolled out salesforce.com a sales support platform. I was recently down and spent time with the sales people listening to them how it’s going. And they are really highly energized. They really think we have invested very well and they are beating now the market the strong momentum altogether. If you look at the four divisions and their pattern, Europe altogether, electrification product, you know we have a very strong platform in Europe and Tarak and his team are doing well. We had growth in electrification product in this quarter and I would expect to have more growth in the future. On the discrete side, we had some contraction on the process related stuff, but on rail, on solar and a couple of other activities we are doing quite okay. Process automation got hit as I said before by Norway, but we got a significant new orders in process automation on the cruise segment, because all of China is going on a cruise, a lot of Americans keep going on a cruise and the demand for cruise ship is really very strong, and as you know, there are some very large shipyards in Europe that are providing that. So altogether I would say, good execution in Europe and a focused targeted margin approach to help us to continue to aim for profitable growth.

[Operator:]

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

[Simon Toennessen:]

My first question is on the cash flow development and the improvements there. And you obviously talked about the working capital already. If I look at the swing on the operating cash flow, it seems most of it is driven by the turnaround of the power related business compared to last year. But if look at for example, discreet automation, there’s still a weakening both in absolute terms and also as a percentage of sales if I were to do that ratio. Can you just talk a bit about what are you seeing there and how that should develop over the coming quarters. And the second question is on the drivers of the EBIT. You talked about net saving already, you talked a bit about volume. But it seems that particularly your project margin Nick and ForEx and the first two might be changing compared to what we’re seeing last year. So project margins being less positive and mix being more positive, or at least if Q1 were to continue. So I appreciate you’re probably not going to give specific guidance, but if you could just help a bit more on these three factors within the EBIT bridge, how we should think about it in ’16 versus last year.

[Eric Elzvik:]

On the cash flow side, you are perfectly right as the discreet automation and motion had left cash flow in the first quarter this year. But that is against a very, very strong performance last year, both in conversion rates and in absolute. So they have been doing well, they are taking money out of their working capital a lot like the others. So most of the capital improvements is actually coming also through working capital improvements in the other divisions. In projects we are of course happy that we are now in the positive and not being negative anymore as we are washing out the old leg of the project and the negative impact that we had on those projects. So I would say there’s contribution from almost all the corners in terms of contribution to cash flow. Then on your second question on the bridge, it is clear that the project margins continue to improve. We see the projects step by step getting better and something that was said on an earlier course, as we move through the backdrop of power grids from the really most difficult projects to the more medium performing projects on the old backlog to the new one that we have now, we should see a continuous improvement here. The numbers might not be as high as you move forward on the quarters because they require significant turnaround but it could still product some positive impact. And on the ForEx it is less than before and it simply has to do with the dollar. As you all know that the dollar has even weaken against oil at the end of the quarter. So what we’ll have in the coming quarters will clearly depend on where the dollar is going for the rest of the year. Above these scenario basically dollar stays around where it is today, if that its effect will weaken as we move forward quarter-by-quarter during this year.

[Simon Toennessen:]

And on the mix?

[Eric Elzvik:]

Yeah on the mix we were basically around zero now. The mix is obviously depending on how the backlog comes out, so it could be positive, it could be negative, and it depends also a bit on how the recovery on the base orders and the short cycle business is coming, because the more of such short book-to-bill business you have, typically you’re having a positive impact on the mix. So that’s one which is typical to make an exact forecast on.

[Operator:]

Next question comes from Natalie Falkman from Carnegie. Please go ahead.

[Natalie Falkman:]

I will start with my question, Kuka which is your [peer] robotics they were flagging for lower growth in robotics due to more stagnating automotive CapEx. Just a question, how you see that and do you seem that [veggie] growth in general investors will be able to kind of push the overall robotics growth higher.

[Ulrich Spiesshofer:]

Now look I don’t comment that much on my competitors, I’d rather comment on what we’re seeing here. ABB has a different customer portfolio that Kuka. In our own customer portfolio at the moment we see solid growth on the automotive side. But even more so as you might remember very early about five year, we embarked on a strategy that has basically two angels; the one is that we want to have a stronger solution and an application focus in robotics. And I think ABB is today the strongest because we have dedicated, focused applications centers on certain activities that both serve automotive industry and non-automotive. So when you look for example, at a car just selling a robot to a car company is today not differentiating enough and you will not sell that much, but you need to do it. You need to create additional value. So when you have for example, aluminum joining this other metals, you might have neither roll a hemming or gluing or riveting technology and then you have the application fully figured out. You can go to the customers and not sell him a naked robot, you can sell him the value out of the joining technology that you can get, and that’s really a differentiating element of ABB. Secondly we have the strongest service attachment rate and we continue to do that. We have the best service network globally in robotics because we have such a large entity that we can basically piggy back on the G&A cost side when we do service penetration all around the globe. And the third piece is really, if you take the general industry, we have a very, very strong growth momentum in many area of the general industry, whether it’s the PC industry, whether it is new areas that we used the robot, and then you take the competitive advantage that we have created by bringing out YuMi, which is first truly collaborative two arm robot that works outside of the cage, that is easy to program. That also contributes. So I would say it’s a combination of technology leadership, it’s a combination of service reach and a solution and application focus and we’ve combined with the right mix between automotive and non-automotive that positions us also well for the future.

[Natalie Falkman:]

And the second question was Eric. Eric you mentioned already that you have savings coming from white-collar productivity program. Could you just help us understand how the set benefits will come with it of the 400 gross savings?

[Eric Elzvik:]

As I said we had a good ramp up in the fourth quarter on the savings, and as we have said also earlier on the call, we confirmed the 400 million gross saving for the full year and it should then ramp up over the year. And as we’ve also said in the earlier conversations including capital [offices] that we will be disappointed if not at least half of those savings make it to the bottom line.

[Natalie Falkman:]

And through the quarters how do you see that coming through.

[Eric Elzvik:]

We will not make specific guidance exactly on the quarter, except that we have started well, we have a good ramp up and obviously it will ramp up as we drive our program upwards both this year and then in to 2017.

[Operator:]

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

[Martin Wilkie:]

A couple of questions, the first one just on the base order growth. Even if we exclude power grids the declines in the other business is probably not as bad as perhaps we’d see or given the macro data in Q4 and in to Q1. Can you make it anyway, whether you’re taking market share? I appreciate the markets you sell in to are quite fragmented and complex and it’s not as simple perhaps to get quarterly shares. But do you think the collaborative efforts you’re putting in place means that you’re taking share or just think efficiency investments generally have just been sort of better than some of the end markets. That sums the first question and the second one is completely unrelated. You talked about insurance provision release I think in corporate cost. You previously guided I think for 4 to 4.50 of corporate for the year. Just to understand if there’s sort of change in that guidance.

[Ulrich Spiesshofer:]

Look if you take the base on growth, I think you’re right that we there are probably doing okay given the massive deterioration of the end markets that we have seen. You might remember when I took office, I said very clearly, that we want to create an organic order growth machine and the efforts that we have put in there over the last 2.5 years are really paying off. First, I think there’s a much better grip on detailed market segment understanding than before. We really know much better what’s going on and as you rightly said, we think much better for success to address opportunities that are out there. We focus our investments in a better way, so across the portfolio in ABB we sit down once a month in what we call the growth [boat] and we prioritize capable allocation there, we prioritize activities and then may be prioritize resources to really make sure we get the biggest bang for the (inaudible) in the investments on the growth side, which I think is a really good one. Now on market share you bet that our ambition is that we want to take market share, and the good news is that’s the better granularity that we have now in our understanding of the market, we can really track and monitor what the market share is. But more important, we also look more than market share [drivers]. So I’ll give you an example, in the past the R&D money was basically allocated [BU by BU] and each of the BUs came up with a certain list of money that they needed and project. Today they have a much more granular understanding and we focus our R&D money in a decisive and differentiating element that the customer really want to make sure that if we do work innovation, it makes a difference to the customer in the relevant segment that we are aiming. And I think we are not perfect yet, but I think we are grounded much better on that front. And the second part of your question on the insurance piece, I’ll let Eric answer in detail. But you might remember, we made a commitment to you that we will not hide, so when we have these kind of gains, when we have these kind of bookings we make them transparent, that they become really understandable to you. We did it very clearly this quarter and that’s something that you should expect also from us in terms of transparency and granularity going forward, as soon as something is really relevant in that context. Now on the guidance for the year Eric, I’ll let you talk a little bit about that.

[Eric Elzvik:]

So on the guidance for the year on the corporate we are not changing that number at this point in time. There is always positives and negative that goes in to this line and obviously this effect they have now in Q1 is going to help us with that number, but at this point in time we are not changing the guidance.

[Operator:]

Our last question comes from Daniela Costa from Goldman Sachs. Please go ahead.

[Daniela Costa:]

I have two quick things, the first one to just wanted to follow-up on the redevelopment of these orders. If you could give us any colors sort of how that evolved through the quarter, was there a trend of improvement and if its relevant to mention any differences by regions or businesses there. And then the second thing is to follow-up I think over the prior quarter. You had sort of expressed a view that on oil and gas the services side was hit first and then CapEx was supposed to hit, but that maintenance couldn’t be delayed for too long and I was wondering what have you seen in terms of what the customers are talking about regarding sort of the services and maintenance side, especially now with the slightly higher oil price than maybe when we had the last conference call.

[Ulrich Spiesshofer:]

Let me give you a little bit of granularity on the base order side for the quarter. I think it’s important that you understand the pattern here. If I take it by region, if I take the Americas first, that’s the most negative development. Our base orders are basically down 10% for the Americas and if you look at where we got hit most, it’s definitely here in the US, in Canada, we have a negative development there, and that’s basically related very strongly to the contractual on the unconventional oil and gas production that [precede] and the uncertainty on the investment activities. On the utility side, if you take Brazil, you might smile about it and don’t believe it, but we had close to 40% growth in Brazil on base orders because we won quite a bit of business especially in our product businesses in there. If I take the Asia, Middle East, Africa, we are up in base orders which is a great development. As I said before on China, we are basically flat a little bit negative minus 2%. But we were strong in Saudi and we were strong in Egypt. We were strong in Southeast Asia and so altogether that was good. South Korea and Japan was weak in the first quarter so we didn’t get what we wanted there in terms of growth. So altogether a mix picture in Asia, Middle East, Africa and then if I go over to Europe, as I said before, normally basically flat, a little bit positive but flat. Sweden up and Denmark up, so altogether we had a nice development there. So if you look at the underlying pattern, why are we getting this base orders growth. I think we’ve worked together with our distribution partners in a much better way than before. We become more relevant by combining our business across medium voltage and low voltage activities, and we stay disciplined on pricing which I think is very important in that context as well. Secondly if you take the base order development on the power side, we got fantastic innovations coming out, and that’s something that really differentiates us from competitors and in times like now their uptime and reliability of the grid is so important that renewables kick in, people would really focus strongly on the base activities. And if trust them to pick a country that I particularly personally quite happy about, if you take the largest market in Europe, Germany, our base orders across the range are up 5%. We had growth in discreet, we had growth in electrification. So altogether that’s a solid development. Now we shouldn’t be arrogant, never should be. But I think the growth machine that we have put in place is really working and investments in technology allow us to differentiate in times where customers really look very hard if they spend what is the value that they get out of the product. The second question was on the oil and gas side, what we are seeing there. Let me go through the different packets, first on service, we see that the service deterioration has significantly been slowed down and is not having the downward momentum any more that we’ve seen last year. Better that’s really important as it bounced up a lot, I don’t want to call that, but we have definitely seen a significant slow-down of the negative development which should help us altogether. You have seen us announcing some orders in oil and gas too, and I think the differentiating capabilities that we have there both on the control side, but for example, bringing control together across tower and the industrial process, the automation fees and the industrial process is differentiating us and helps us altogether. But oil and gas, I wouldn’t call it a turnaround of the market momentum yet. It’s still a very tough market out there. What we see however is investment on the downstream side, especially the non-integrated players that only have done downstream activities. They see now that the projections on the oil price will remain pretty subdued and pretty low for the time being, so they dare to make now investments on the new calibrated expectations also on some investments [Statoil] was public about it and I can talk about it. [Statoil] has basically re-calibrated all their project and their project pipeline to a lower oil price now, and now on the new oil price they have a revised priority of their project that is coming. And we see some tender discussions picking up, but I wouldn’t call it yet a turnaround in the market. So hopefully that gives you the clever narrative that you wanted.

[Daniela Costa:]

The first was actually regarding by month during the quarter.

[Ulrich Spiesshofer:]

Look we don’t disclose monthly details.

[Alanna Abrahamson:]

Thank you guys and thank you for a great call Uli and Eric. And I look forward to Q2 results in July, and please remember that we have our capital markets day on October 4 here in Zurich. So we hope all of you can make it here. Wonderful. Have a wonderful day. Thank you.

[Operator:]

Ladies and gentlemen, the conference is now over.