ABB Ltd
Q2 2012 Earnings Call Transcript

Published: 26 Jul 2012

[Operator:]

Ladies and gentlemen, good morning and good afternoon. Welcome to the ABB Second Quarter 2012 Results Analyst and Investor Conference Call. I'm Stephanie, the Chorus Call operator. [Operator Instructions] 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 Joe Hogan, CEO of ABB; and Michel Demaré, CFO of ABB. Please go ahead, gentlemen.

[Joseph M. Hogan:]

Hi, good afternoon, thanks for joining us. Michel and I will be here to walk through some of the slides and to take any questions. As always, the charts and the presentation that we're going to speak from is on abb.com. I turn your attention also to Chart 2, which is our Safe Harbor statement. And let's quickly move to Chart 3. So just from a high-level standpoint, we announced that both orders and revenues were higher despite, obviously, the uncertain market conditions that exist around the world today. Currency translation is, I would say, kind of an overrated. There's a lot of noise in our numbers, and hopefully, this presentation helps to clear up some of that noise. The 2 big areas of noise would be the Thomas & Betts acquisition along with the currency translation piece. And when you look at the currency translation, it reduced reported revenues by about $600 million and EBITDA by about $100 million, so substantial in that sense. China orders stabilized, particularly in Low Voltage Products, where we had some issues in the first quarter. North America, still strong for us. We saw a rebound in the Middle East, and Europe, steady. I'd say there's a two-tier Europe, between North and South, we'll talk about it. But at least, there was a positive order for the quarter. Order price pressure in power is easing, and I say slightly, but we do see that easing. Steady Power Project (sic) [Products] margins over the last 3 quarters, and Michel and I will explain that. Operational EBITDA decreased versus the second quarter of last year. Some negative mix, and obviously, the U.S. strong dollar translation, but we saw some good progress quarter-to-quarter. Thomas & Betts acquisition is completed. We got about 6 weeks in, and we'll walk you through how that looks. And in divisions, delivered really solid cash from operations. But we'll talk to you about some of the cash shortfall that we've had and as to why. Moving to Chart 4. You can see that the orders were up 2% versus second quarter of last year. And then when you look from an organic standpoint, up 9%, and then plus 6% from an overall standpoint. Revenues organic about 3% at $9.7 billion. Our order backlog, there's some questions this morning on order backlog, if you adjust from a U.S. dollar standpoint, minus 3%, but in local currency, we actually saw an increase in our backlog close to $29 billion, overall. From an operational EBITDA standpoint, our numbers were $1.471 billion, as you can see. That's about minus 5% overall, but minus 9% from an organic standpoint, when you look at the $60 million we received from Thomas & Betts in the quarter. That gives us an operational EBITDA percent of about 15.1% versus 16% of last year. Our net income, down 27%, and cash from operations, down 33%. That will imply, I guess, some explanation, and Michel and I will walk you through that shortly. Turning to Chart 5. Steady on higher demand in most regions. And so this is a good chart, in a sense, when you look around the globe where we stand. Starting from the left-hand side, you can see the Americas are up 20%, overall; excluding Thomas & Betts, up 10%. And really good progress in both power and automation

[Michel Demaré:]

Okay. Thank you, Joe. I'm afraid I will have to take you to a little bit more excruciating details this quarter, because we have had so many impacts from external factors that we want to help you also understand the true operational performance of the group this quarter. So if we start with the Chart 12, the operational EBITDA bridge. You can see that overall, the net operational EBITDA is down $76 million compared to the second quarter last year. I think we can break down this EBITDA bridge in 3 or 4 components. First of all, the first column, you see that the pricing impact was $235 million this quarter. But the good news is that we were again able to generate $277 million of cost savings. And so if you look, in fact, the pricing pressure plus project margins were totally offset by the cost savings. So, so far, the strategy has worked again. Then you can take a second group of analysis, where you see that we have continued, although at a little bit slow pace, our investment in selling and R&D, a net increase of $135 million. But that has also, since we are doing that now since 3 or 4 quarters, helped generate a volume gain that produced an additionally EBITDA in the range of $120 million. So we see factors offsetting each other, what we are left with is basically an impact of the business mix about $60 million. And the other column that you see at minus $64 million, which includes this $100 million of translation losses due to the high dollar, which saw about $100 million, partly offset by gains in the G&A and a little bit of positive commodity impact as well. And then finally, we have T&B that added almost $60 million for the quarter, we get to this net result of $76 million lower than a quarter ago. Moving to Chart 13. In terms of the cost savings update, we see about $280 million this quarter. Half of it comes from sourcing, 45% from operational excellence and about 5% from global footprint. What is interesting to see, also, is where it comes from. The Power divisions have generated about 2/3 of this savings, 65%; Automation, 25%. But I also want to emphasize that the part coming from Indirect Sourcing is actually improving quarter after quarter. It was 8% last quarter, it is 10% this time. So if you at it, year-to-date, after 2 quarters, we have taken out about $540 million of savings. And against that, we estimate we have lost a little bit less than $500 million in pricing. So the strategy still works there, and we're also happy to see that we are running at a run rate which is actually higher than the $1 billion target that we have fix ourselves in terms of savings. And so, we are pretty confident nowadays that we will be able to exceed this $1 billion target by the end of the year. Moving onto Chart 14. That is not an easy one, but we are really here trying to help you a little bit get to a true assessment of what has been the operational earning per share. And why do we do this, is because this quarter we have had really 2 very important influences

[Joseph M. Hogan:]

Thanks, Michel. Coming to Chart 17 which is the summary. So from a short-term standpoint, we -- all of us see the macro indicators around the world, in the United States, in Europe, and emerging markets remain mixed. But again, we were pleased with how the business performed in the face of those macro indicators, and so we're hopeful that, that will continue going forward. On Q2, stability in operating profits and margins in PP in recent quarters are good. We want to keep that trend going. Price pressure, again, we think is easing again. Remember we have -- this is a long cycle backlog, and so it doesn't mean that this will quickly materialize. And that's, again, why this cost out piece in both the Power businesses are so important that we addressed that. We are pleased about the resilience of orders in Europe. That is -- it's a two-tiered world between the South and North, but we were pleased with being aided the strength that we did see in the North to be able to calm the down cycle in the South. From a Chinese standpoint, I'd say the biggest variable that we saw was the Low Voltage Products turnaround. We do tie that to a better demand pattern in the construction industry. And we also would take, you might ask about our July orders in Low Voltage Products, so far it's continued on its trend. And that gives us a certain amount of confidence that, that could possibly continue through the quarter. And the sustained order growth across the portfolio in the United States, that's been going on for a while, and we would expect that to continue. We don't have any data that says that it should stop. And down below, management focus for the rest of 2012, it shouldn't be a mystery. We have a lot of focus on cost. We have a lot of focus on finding growth areas around the world and driving that. Acquisition integration and focus in making sure, in both Baldor and also in Thomas & Betts and the other acquisitions that we've done, that we continue to bring those together and to bring the most value out of those that we possibly can. And so with that, we're cautiously optimistic about the second half of the year. And that will end the presentation, and we'll turn it over for any questions that Michel and I can handle.

[Operator:]

[Operator Instructions] First question is from Mr. Mark Troman, Bank of America Merrill Lynch.

[Mark Troman:]

Just first question, I guess, there's always one on pricing. Interesting comments you're making about it leveling out, et cetera. Of the $235 million you put in your bridge of pricing, how much is in Power Products? Or roughly how much -- or how is it roughly distributed, I guess? And in Power Products specifically, what are the order -- what is the percentage change in orders looking like relative to what's going on in sales? And I guess, finally, just to go full circle on that, what is the typical lead-time we're looking at now for the newly priced orders to go through the sales line in that division? That's the question on pricing. And then secondly, on China, sort of intriguing comments, you've seen a pickup in Q2 versus Q1, particularly in low voltage. I don't know if you guys can just go through that in a bit more detail, because based -- I know it may be specifically for construction, but we're generally not seeing that in other companies. Was there a de-stocking in Q1 and is this a correction, or how would you read it? A bit of color on that would be very helpful.

[Michel Demaré:]

Okay. So the pricing impacts, obviously, as in the other quarters, our PP has been the one that has the biggest proportion of this pricing impact. I would say about 2/3 of that total is from Power Products. And actually if you take the total, I would say that more than 90% comes from the Power divisions. The Automation divisions are a bit better in Power. And that product is a bit less good in systems, so they kind of offset each other. So most of this pricing is really in the Power divisions, overall. In terms of the weight of pricing in orders versus revenues. As we see -- as we said we've seen certain improvement in the pricing on orders this quarter across all the business units, but obviously, a major difference compared to last quarter is for sure the Medium Voltage that have suffered as well from a mix issue in China in the first quarter that was corrected. And so, obviously, that has helped. At this stage, I would say that the pricing pace in orders trailed the revenues by 1% to slightly more. So that's sort of the kind of improvement that we have tried to reflect to you.

[Joseph M. Hogan:]

Mark, we also talked about how long does it take for things to bleed through from an order to a backlog to -- into, and Power Product is all over the board. I mean, the Medium Voltage Products has a very short cycle, a medium cycle business to it. Large power transformers are really large, and so it takes a long time, 18 months or 12 months, same way with the accentuated switchgear. And so I think you have to look at the portfolio itself. When we talk about price, obviously, large power transformers have been the most challenged part of the portfolio. I'd say in general, it takes 12 to 18 months for that to come through. And Mark, you said something, and I want to make it very clear. You said that price was flattening out. We didn't say that. We said that margin was flattening out, and we're driving this margin piece by the cost down that we've been having in this business. But we continue to see price down in the Power Products marketplace. It's just not as severe and not in line with the revenue like Michel...

[Michel Demaré:]

Right. The pace of price decline is slowing down.

[Joseph M. Hogan:]

And Mark, in your last question on China, Low Voltage Product. I'll tell you, our clarity on this isn't complete. But here's what we see. Was there some de-stocking and restocking between the first and the second quarter? I'd have to say, yes, absolutely. There's no way you would see that kind of a turnaround with some aspect of stocking and restocking. But at the same time, that's almost a discreet event. So but between June and July, we have seen a pickup in construction orders, and those construction orders have continued in July. And so I'm not making a forecast for the Chinese construction market, I'm only reporting on what we're seeing on the ground there. It's been favorable to this business. It's helped that turnaround between those 2 quarters. And Michel and I just wanted to report that as accurately as what we're seeing in the marketplace right now.

[Mark Troman:]

That's very helpful, Joe. Michel, just very quickly. On orders, did you say the orders were 1% better pretty much than what you see in sales? Is that correct?

[Michel Demaré:]

Yes, that's right. Roughly, about 1%. A bit different in each units, but roughly about 1% in detail.

[Operator:]

Next question is from Mr. Andreas Willi, JPMorgan.

[Andreas P. Willi:]

2 questions, please. The first one, to follow up on the outlook. We have seen some improvement in maybe some of the early cycle businesses, but we've seen all the growth slowing in some of the mid-cycle Automation businesses. So if you balance that, where do you think overall base order trends could move now? That's kind of moved down to around 1% growth. Is that the level we should expect, or should we read your outlook as that base orders have troughed in Q2 if you look across your board -- across the board? The second question on cash flow, obviously, I understand the currency impact on the quarter and the seasonality that Q4 will be stronger. But if we look at cash conversion for the last 6 quarters, which is just above 50%, but still lower than what we have seen in ABB in the past, even taking into account a higher CapEx. Are you happy on how inventories, payables, receivables and so, are developing? Or is there a more fundamental problem at cash conversion at ABB?

[Joseph M. Hogan:]

I'll take the first one on the base orders piece and give Michel the cash flow. I'm not going to project what I think our base order rate is going to be going into the third quarter. But if I use just a rational expectations model, I mean, the 0% to 2% base order growth that we've seen, if you look at our base order growth by region, we had about 4 of them up and 4 of them down in that sense, and correlating pretty strongly with what I read on the orders chart, overall. I think, if you get behind just raw base order numbers, Andreas, you take a look at China in itself is -- there are certain segments of the marketplace, like in LP and construction we talked about, are much better. But if you look at Discrete Automation and Motion, particularly in the renewables industry in China and our sales to that have been down in that marketplace quarter-to-quarter. So that hasn't revived itself. Transportation orders across both of those businesses, that we reported were down in the first quarter, continue to be down, and the nuclear industry hasn't coming back yet either. Our Medium Voltage business in Power Products in China, which we reported is affected by the nuclear piece and also by the transportation piece, what our sales teams would have effectively done is to really re-catalyze that business around some industrial channels and to push our products through those. And they have been very successful in doing that over the last 90 days, and it really helped to overcome that piece. So I think that's the kind of color. If you move to our other businesses, too, on the base side. Again, as I mentioned before, on the marine side, which we see in base orders and large orders have been good. And that's been -- it's really been marine associated with oil and gas. When you look at the PAPs, it's been a big part of that. And the mining and minerals piece continues to be strong, also. And automotive really reflected to our Robotics business. This changes continue to be pretty strong geographically, too.

[Michel Demaré:]

And I will add also that the 2 Power businesses had a base order increase of about 5% each, 5% to 6%, as well as service. And service, actually, we were not happy with the way it will increase this quarter at 5%. So if you look at all that, we think indeed that there's a good base here to work from, and that dictates also the reason why we are a little bit more optimistic now. With regards to the cash, no, I'm not happy with the cash for sure. We are trying since a few years to try to have a much better cash flow spread all over the year instead of having always this concentration in Q4. But the other thing, a part of it is also due to the nature of the industry, especially with utility customers. We are working -- we have really launched, a few quarters ago, a long-term program, which is really working together with operational excellence people to try to work on the root causes also of design, networking capital and quality, on documentation, et cetera. And obviously, that takes a little bit more time to be produced. Meanwhile, we are more or less at 16% nowadays of networking capital. Our target is still to be in the range of 11% to 14%. I would say realistically, if we reached 13% at the end of the year, I would already be very happy. Now, 3% on $40 billion, that is $1.2 billion improvement that you can just get there. Whether we're going to reach 90% this year, I think that's going to be sharp, especially due to the currency effects. But again, if you look at it over 5 years, the last 5 years, we achieved the conversion of 100% and that was a combinations of years where we had 70% and years where we had a 130%. So I think we have to look at it a little bit more from that perspective, but I'm still quite confident that we're going to have a very strong second half and especially a very strong fourth quarter that should get as much closer to the standards that you have been used to.

[Operator:]

Next question is from Mr. Ben Uglow from Morgan Stanley.

[Ben Uglow:]

I have a few questions. One was just within the Power Products area, are there any product categories where you are actually definitively seeing sort of increases? Where rather than it just getting less fast, you're actually seeing a change in customer behavior where they are more willing to place orders at a higher price. So that was question number 1. Question number 2, and I'm sure Michel won't forgive me for asking this about the margin bridge. But when I look at the margin bridge and I sort of try to index all the rough numbers that have been coming out, when I look into the second half of this year, am I right to think that the pricing impact, if things stay where they are, should get a lot, lot less onerous for you? Because it was the fourth quarter of last year where you had a very, very tough pricing experience. That's an unfair question number 2. And then finally, in North America, very strong performance, still in Automation, and obviously, confident statements about the order situation. Listening to Rockwell yesterday, they appear to see some sort of change in trend during the quarter and lowered some of their revenue expectations. Did you see any change in pattern of your orders or your sort of industrial demand on the Automation side in North America during the quarter?

[Joseph M. Hogan:]

Ben, I will take your first 1. Michel will take the margin bridge, and then I'll come back to North American automation, okay? On PP, I don't want to walk through the 13 product group categories within PP and what we see and what we don't. But I'd say, if we take from the high points is substations in the Middle East and large power transformers, right? Since the duties have been assigned on Korean large power transformers in the United States, we have seen a price -- the market actually increase in that sense. And even though it had really nothing to do from a governmental standpoint in the Middle East, at the same time, we saw prices rise for Korean transformers in the Middle East also, and that's helped. But there's something that we have to explain there since, Ben, a lot of those we weren't even quoting on because the prices were too low. And so as the prices have come back, they begin to come back in the range, that we would consider to be something that we want to quote on. They're still not tripping margin in that sense, but there's something that puts back in the range with the right kind of cost control and focus in productivity in our sense, then we can be more competitive in there. And I would keep that conversation really around large power transformers right now. There's been no real change from a Medium Voltage standpoint, our Medium Voltage business. And for high voltage gas, since we have switchgear, it's still competitive, but it's hard, it's not as uniform as the market. We've introduced some new products in gasses and switchgear. They're significantly lower in cost and a better form factor that we'll be selling into the marketplace, and we'll be driving that really the later part of this year, as we get into 2013, it should help.

[Michel Demaré:]

And I think it's fair to say as well, that we keep expecting these price declines to come, because that is just how the other competition has put. And so maybe there's a bit too much focus on the price, too, because what is important is to counter this price pressure by coming with products that are designed for cheaper cost overall so that at the end, even if the price goes down, we can maintain the margin. And that's a little bit of the ingredients that we are trying to use there. So and that gets me into your second question on the margin, which I hear what you said. It is quite possible, although, because of just what I said, some products are just not sold anymore at the same prices than they were sold 2 or 3 years ago. But they also are now designed and manufactured at a cheaper cost. So you're going to have a price pressure, but still an acceptable margin. It is a certain likelihood, it is possible what you said, because the price pressure was extremely strong in Q2 -- in H2 last year. I would say, though, that we're not going to speculate on that, and that's why we keep going at full speed on the cost savings, and that we have really this intention that we confirmed today to even exceed the $1 billion of savings that we had announced at the beginning of the year.

[Joseph M. Hogan:]

And Ben, lastly, on North American automation. I can tell you that if you take our Low Voltage Business which I would have lined with somewhat with automation business, and this before T&B, we actually saw an upturn in orders in that business in the quarter. It could have some indirect relationship with T&B in the sense of distribution channels or whatever, but I wouldn't necessarily think that that's the case yet. When you look at our drives business, which is sold through Discrete Automation and Motion, we've actually seen an increase, a continuing increase in our drives in sales in that marketplace. And so that's a really good sign for us. If you take Baldor itself, and just their motors business in the United States, it's still positive growth. It's just slower growth quarter-to-quarter than what we saw last year, but look, there's some really tough comparisons. Because Baldor is running at high double-digit rates last year compared to this year. So look, I read -- Ben, I didn't listen to the Rockwell announcement, I wouldn't do that. But I actually read the transcripts from the Rockwell discussion. It looked to me like they were talking more about some currency translations issues in Brazil and also some issues in China. And I didn't see that much attention to the U.S. marketplace as you mentioned. So I was really surprised with your question.

[Operator:]

Next question, from Mr. William Mackie, Berenberg Bank.

[William Mackie:]

A couple questions. First, on Power Systems, could you just drill down on a little more behind the weakness in the operating result, and at least how you sort of aim to rectify the underperformance on a number of contracts across the world that you seem to have had recurring in a couple of quarters now? And then secondly, coming back to Low Voltage and, perhaps, tying that up with order intakes across Europe. We've had the mix effect coming up a number of occasions there and in Discrete Automation with regards to Italy. So perhaps, could you just highlight how you've seen demand trending within Italy and some of the other parts of Germany affecting those businesses?

[Michel Demaré:]

Okay. Yes, on the PS side, I would say that this continuous project slippage that you see is also been the result of the work we are doing to try to address these issues. A lot of these projects are partly old projects. It's also important to specify that there is actually very little in the business unit with systems, which makes this a larger offshore wind connection that we always mentioned there. The charges were less than $10 million, but we have had a few out of all the projects we take care of in the area of power generation automation, not to mention in India we have a substation. What we have done, really, is that the new management team here in PS has really now created a new job that really looks exclusively at all these other excellence issue around project management and trying to address that. We are also even using our own internal audit to review the work in progress, which sometimes also forces us to take some corrections to really make sure that we put all the problems on the table and can address that from the right perspective. So obviously, it's disappointing. We are disappointed, too. We are not giving up on the targets of PS to get back within their range, in fact, if you look last year, the last 2 quarters, PS had an EBITDA margin that was very close to 10%. We don't see any reason that they couldn't repeat this performance this year, but at the same time, as we say also every quarter, we remind that this is a project business. There's a lot of projects with high risks. And that, unfortunately, from time to time, there are some risks that come true. But I can reassure you that we are really very forcefully addressing it, and I hope that we can stabilize these project issues in the short term.

[Joseph M. Hogan:]

And, William, when you talk about LP, I just, looking at some data, overall -- and Michel, yes?

[Michel Demaré:]

In fact, overall, LP was still quite down in Italy for the quarter. It was, I think, something like 20%. But it was also because of some large order comparison, the base orders actually were down 7% compared to the same quarter last year. So still weak, but at least not in the kind of dramatic proportions that we have seen in the first quarter.

[Joseph M. Hogan:]

William, I think what's worth mentioning in that business, too, is our systems business that we talked about, negative mix in that business in the first quarter and fourth quarter last year. Actually the orders were down about 4% on the quarter, too. And so that kind of in line with what we normally see in this business. It's more of a kind of a mid-cycle business, it's not a real short cycle business. And so that was -- it wasn't really necessarily a phenomenon in the quarter, unlike we saw on the first quarter or 2.

[Michel Demaré:]

But I think one very positive development we have seen this quarter compared to the previous quarter is that all the product division, all the product units have shown positive order increase, while last quarter, in fact, the product units were down and the systems unit which carries much less margin was up. It's not here the case in revenue. So despite the better margin that you see this quarter in Low Voltage Products, it's actually still the result of a pretty weak product mix where revenues in the product division is down and revenues in the system divisions is up. But since there, the cycle is pretty short. Next time, we should get more of a positive mix now as these orders will translate into revenues.

[William Mackie:]

That's great. Can I just follow-up quickly on a separate topic, which is relating to wind and renewables. Specifically, there's been a strong surge in volumes in the renewables wind market perhaps in the first part of this year, but a lot of concerns over the U.S. specifically next year. I think Briis [ph] has aggregated a business with $1 billion plus of revenue there. How is it trended so far this year, and where do you see the potential risk as we run into 2013?

[Joseph M. Hogan:]

When you talk about Briis [ph] aggregating $1 billion business in wind, what are you referring to?

[Michel Demaré:]

Because it's not in the U.S. You are talking of...

[Joseph M. Hogan:]

You're talking about the offshore wind market in Europe?

[William Mackie:]

The business that you operate with in renewables in wind in conjunction with inverters, medium voltage equipment, drive equipment. So all of the...

[Joseph M. Hogan:]

Yes, that's very different. Is your question, William, about what we're seeing by geography based on wind?

[William Mackie:]

Yes.

[Joseph M. Hogan:]

Look, I think the U.S. market is at a standstill right now until the whole PPA piece is worked out. And that's -- I think that's still to be decided. We don't have a large wind exposure in the United States. At least not a material exposure. We do participate from an inverter standpoint, from a transformer standpoint or whatever, but I wouldn't say it's material in any sense. Our biggest participation from a wind standpoint right now are the offshore wind jobs that we have that are booked and being executed through Power Systems. I think you saw in the news today that Tenet was going to delay one of those -- the bidding and execution on one of those large offshore wind. That has just to do with the execution cycle, I think, being so large and in some questions around the execution of those forms. But we expect those investments to go forward. We expect to participate in those, I think they just might be staged differently depending on how the execution around the offshore goes. I hope that's what you're looking for.

[Operator:]

Next question, Mr. James Moore, Redburn Partners.

[James Moore:]

Some questions across the businesses, actually. In the Power Products business, I know there's been some questions on order pricing, am I getting the sense that maybe that's down 3% or 4% year-on-year. I'm just trying to get a feel for the sequential picture, and wondered if you could help us a little bit there on the regional side of the sequential picture, tying into the answer you gave earlier. On the Low Voltage business, you've kindly gave us an order number for Italy. I wondered if you could do the same for China against the down 20% that you saw in the first quarter, just to see how that's moved? And then in the Process Automation business, you've talked about what seems to me to be a better performance in the product side of the business which makes a decent margin. And we heard last time around about some difficulties in the turbocharging side of that business over a couple of quarters. Has this turbocharging got better, or is it just that measurements and other pieces have offset continued turbocharging weakness?

[Joseph M. Hogan:]

Well, Michel works on the sequential picture by region.

[Michel Demaré:]

Okay. I'm working on the pricing trend by country.

[Joseph M. Hogan:]

Okay. Just let me go to the Process Automation piece. Turbo orders actually weren't any better in the quarter than they were before, they were relatively flat to down. Obviously, the service part of that business is a good part of that business force, and that continues, and it's very robust in that sense. But those margins, actually, you can really take turbo out of it, the margins itself have to do with a really good project execution around the teams, too, so no surprise in that sense. And then some of the areas like measurement products has had some good sequential increases in margin from quarter-to-quarter. Our 800 XA business, too, we continue to improve. Our 800 XA, in the sense of the software margins in that business, too.

[Michel Demaré:]

And the shift in service, that's obviously...

[Joseph M. Hogan:]

Yes, [indiscernible]

[Michel Demaré:]

Yes. Process Automation is also in the process of cleaning up or upgrading its service portfolio or getting out of some of these full service contracts that we have made. And so you still see our quality service goals, but it is in fact much more life cycle service that we are taking out now, and that obviously is a much better margin for us, plus it has also more pull-through effect for the rest of the business, so that helps quite a while as well.

[James Moore:]

The improvements in Process Automation are more sustainable ones rather than just a sustainable quarter?

[Michel Demaré:]

Yes, because what you see is -- it's really on what you'll improve, and that you see almost quarter-by-quarter now on this. So it's really a combination of cost takeout, of portfolio enrichment with more product, better quality services, a little bit less systems and more connectivity on the systems projects as they come.

[Joseph M. Hogan:]

And that's a very conscious effort, James. From our standpoint, building that team standpoint, over the last, really, 18 months. On the LP China orders?

[Michel Demaré:]

So LP China orders were actually up 23% for the quarter. So there was, really, a very strong rebound from that.

[Joseph M. Hogan:]

Yes, I have the same thing.

[Michel Demaré:]

I saw Joe being skeptical so I went about checking the number. But it is right. We were not used to this number anymore. So up 23%. And then your question regarding sequential pricing on orders in PP. So indeed, it's an improvement compared to last quarter of a little bit more than 1% on average. Obviously, each business unit has a little bit different 1, but the best improvement is in Medium Voltage, for the reasons I mentioned already before. So that is, indeed, encouraging. We see really some price improvement in areas like U.S. or China. But I won't go in more details on that, I think it gives you an overall trend of what you need to know here.

[James Moore:]

That's very helpful. Could I just follow-up with one other? On currency, you kindly gave us the $100 million translation number, And I suppose the hedging, minus $82 million, is the hedging side of it, and you didn't talk much about transaction. Given your cost and revenues slight mismatch, do you also have a significant transaction negative going on in the quarter?

[Michel Demaré:]

No, in fact, the transactions, we are hedging them because they are shorter in nature. So in the balance sheet, and we are hedging the balance sheet, so that is part of this cash effect that you see in the corporate hedges for instance. So really, it's also something I will develop a little bit more on the Capital Markets Day in September, but you could really say we have a structure of foreign exchange exposure on one side, which is just where we sell compared to where we manufacture. We had a cash flow exposures which we always hedge, for instance, when we take a project. As soon as the project is awarded, we hedge all the cash flows. And then we have this translation exposure, which is just simply the translation of reporting all the revenues and profits that we have made in non-dollar countries and reporting that into a U.S. dollar income statement. So these are the 3, the transactions, they are in the balance sheet, we fully hedge everything, and so there is no impact on that one.

[Operator:]

Next question, from Mr. Fredric Stahl from UBS.

[Fredric Stahl:]

I just want to know, if we look at your order intake across Northern Europe and considering that Germany is down a bit here, is it still fair to -- is it fair to assume that the boost you had in Norway and U.K. is a bit more lumpy, even if base orders were up, as well, just by the nature of those end markets, and that we maybe should be a bit more balanced when we look at our models here in the coming quarters?

[Michel Demaré:]

Well, obviously, there are sometimes some large orders. But let me check here, 2 minutes, see if I can find some information on that. From what I recall, as I'm looking for -- Norway has had a very good performance already since quite a while, because it is a very important country, both on the marine side and on the...

[Joseph M. Hogan:]

Oil and gas side.

[Michel Demaré:]

Oil and gas side. And that obviously helps. Actually all the Nordic countries in the first quarter had performed very well. This time, in Sweden, it's a little bit down, but still quite constant. So what you see, in fact, is the Southern countries are really down, but we have seen a number of these countries, like Norway, like U.K., but also some Eastern European countries, also Russia, that they have really more than offset that. So, yes, it can be a bit more lumpy, because oil and gas is, obviously, larger orders, but it has been really quite stable over quite a while now.

[Fredric Stahl:]

Okay, great. And then if you could give some -- could you maybe give some examples on what's driving your U.S. growth at the moment? What kind of industries are still propelling, doing well for you?

[Joseph M. Hogan:]

Well, our Power business continue to expand there. And so I think both on the transmission and somewhat on the distribution side, that continues to go well. I think these are not large jobs necessarily, I think they're just upgrades to different areas around the country that we've cut off a big order with AP and just enhancing the grid over the quarter also from an automation standpoint in the United States. We -- this has continued, the mining part in the U.S. has been fairly strong. And I think we've had a residual effect on the frac-ing that's been going on in the United States, too. And that's, say, not just frac-ing for gas, if you look at a lot of the drill rigs there were in gas, and as the gas price has gone down, you probably know a lot of those rigs have been moved over to really frac for oil. And there's a huge amount of motors and drives and different things that are associated with that industry, so we indirectly benefit from that also. and I'd say that's been one of the...

[Michel Demaré:]

[indiscernible]

[Joseph M. Hogan:]

Yes, that's true, automotive. Michel has mentioned that automotive robotics has continued to do well for us also. And as I mentioned in the introduction, we had a large order from Ford for Robotics that really helped Discrete Automation and Motion in the second quarter.

[Operator:]

Next question from Mr. Olivier Esnou, Exane BNP Paribas.

[Olivier Esnou:]

First on the foreign exchange impact, I mean, a good granularity from you. I'm just wondering with the info you have now, is it possible to say if currency stay where they are now, what would be the impact in H2?

[Michel Demaré:]

You always compare to the same quarter last year. So we would have to make -- you would have to make an analysis to see a little bit what was the average of dollar rate in the third quarter last year to understand a bit what it is on there. So let's say, if the currency doesn't move, it will obviously have less impact on the hedges, and so the cash part of the hedges and the derivative part. But the translation, that one will have to go back, which I haven't done to the average rates of last year.

[Olivier Esnou:]

Okay. And maybe...

[Michel Demaré:]

But you see, more or less, the direction. I mean, obviously, the impact, when the dollar goes up, it's negative for us. So based on that, you can try to -- there's such a discrepancy of variation versus different currencies, that the 2 together is really difficult to do. Then again, Olivier, I really will try to spend some time about that in the Capital Markets Day, to really explain a bit in more detail these exposures. And I hope that can help, as well, to better understand what is behind the numbers.

[Olivier Esnou:]

Okay. And maybe a follow-up on the reinvestment piece in the bridge. If I look at it, it kind of continues to accelerate, and at the same time, all those are up but they decelerate. So I was wondering how you think about it, and what's the outlook for that part really?

[Michel Demaré:]

I don't think it really accelerated because in the first quarter, if I recall, the reinvestment was $145 million, so it's $10 million less. Obviously, it's a lot of people, so you cannot change the pace from 1 months to another. We have also, obviously, worked on a number of technology project, like we have talked about is this 1100 KB, HVDC transformer that we just finished the part of the test. It's really a pretty sizable investment that you can't change very fast. So we are, obviously, trying to slow down some programs to adjust to a slightly slower growth, but as I pointed out when I explained the bridge, I think that as long as these sales in R&D investments are taken care of by the EBITDA coming from marginal volume, we consider it, in a way, they are kind of self-financing themselves.

[Joseph M. Hogan:]

And some, I think, it's buried in the other on the bridge side, our G&A costs were actually down. When we take those G&A costs and we recycle them back into that part of the business, it helps us grow to a bit.

[Olivier Esnou:]

Yes. I was looking at it on a 12-month trailing, absolute. But I understand you're trying to slow it. How do you measure the actual volume contribution of that specific investment? Are you able to separate out the volume bridge? What's the investment?

[Michel Demaré:]

We don't go into details on the volume bridge. But when, let's say, when Joe and I have a business review, for instance, to evaluate the return on selling expense, we have to really see in which country people invested in salespeople and starts seeing the kind of growth rate you have in these countries compared to others where the effort is not being made. And I think that one is quite easy to measure. The return on the reserves is always a bit more complex, and adds also a bit of a longer payback, but that is the price to pay to remain competitive here. And part of it is also investing in research to get to cheaper design and offset the price pressure.

[Olivier Esnou:]

So if we -- so as a kind of bottom line, how much of that piece do you think has to happen anyway? And how much is flexible depending on the very uncertain outlook we have?

[Michel Demaré:]

To be honest, I have never asked myself this question. So I can't really answer.

[Joseph M. Hogan:]

And if Michel never asked himself, then I never asked either.

[Operator:]

The last question for today is from Mrs. Daniela Costa, Goldman Sachs.

[Daniela Costa:]

3 points. The first one on market shares, really, you seem to have some underlying evolutions, which are better than some of the competitors that reported recently in terms of orders. Can you comment if you think some of these is related to market share changes by segment? And the second one, slightly related to that but more focused in U.S. Power Products, have you started seeing some impacts from the anti-dumping rule against the Korean companies, what's the status there? And then finally, I think Michel mentioned in the presentation, what was the CROI level at the moment, but I couldn't understand. And so if you wouldn't mind repeating what's the present number.

[Joseph M. Hogan:]

I think on market share versus competition, I wouldn't say that we have taken any kind of excess market share versus competition in any meaningful way. You might be referring to one of our competitor's announcements and you saw what their T&D order growth rates were. And if you look at the margin in that business at the same time, it was kind of down. I can't explain that, Okay? I can only explain that from a Power Products standpoint, the team has been executing well. We have a broad portfolio. But I don't see us out there, and I could tell you, in any direct way, trying to gain share through price in any way. The performance of our teams have been very good. And I think you seen that in the sense of the 14.7% margin capability within Power Products, is to be able to find business out there that we feel is reasonable from a margin standpoint and then drive costs as hard as we can to make sure that we maintain that capability. From the U.S. Power Products standpoint, anti-dumping. Remember, the anti-dumping has to do with large power transformers over a certain size. We have, obviously, seen our competition respond in that sense, but we're much more in the U.S. in large power transformers, than we do here. Air Insulated Switchgear, there's a big distribution transformer side that has not been addressed at all by the anti-dumping piece, and we don't have a case in that sense. And but we continue to drive productivity in that business, and we contend to be very competitive.

[Michel Demaré:]

I will speak out to the cash return on invested capital. I'd say that we are at low teens or close to 10%. And again, if you look in the last 18 months, we had spent about $11 billion of acquisitions. These acquisitions for the moment have a low single digit return. If you go back before this time when we start getting more liquidity so that we see our ROIC was above 20%, and so the timing is an important role here. And I will develop that more at the Capital Markets Day in September.

[Joseph M. Hogan:]

And so with that, we'd like to thank you for joining us. And again, Michel and I were pleased with the progress that we saw in the second quarter versus the first quarter. We know we still live in a time, from a macroeconomic standpoint, there's a lot of questions out there. But we were pleased with the orders that we saw around the globe, the rebound in China, the continuing strength in the Northern Europe and the United States. And we're going to push like crazy to continue that trend going into the third quarter, and we'll come back and report to you on it. And in the end, I'll again reference the Capital Markets Day that Michel talked about. That's going to be December 12. And it's going to be held in London, and invitations are going to come out shortly with the agenda. So we hope as many of you as possible to join us. And we look forward to seeing you then. So with that, thanks again. And I know many are going on a holiday, I hope you have a good holiday. And we'll check in again with you in the third quarter. Thanks again.

[Michel Demaré:]

Thank you. Bye-bye.

[Operator:]

Ladies and gentlemen, the conference is now over. Thank you for choosing the Chorus Call facility, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.