ABB Ltd
Q1 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Ladies and gentlemen, good morning or good afternoon, welcome to the ABB Q1 2015 Results Conference Call. I am Maria, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation there will be a Q&A session. [Operator Instructions] At this time, it’s my pleasure to hand over to Alanna Abrahamson. Please go ahead, madam.

[Alanna Abrahamson:]

Thank you very much. Good afternoon, ladies and gentlemen, and thank you for taking time to join us today for our first quarter 2015 results call. As usual, you can find the presentation on our website. This call is being recorded and will be available on our website within the next hour. Before we get started, let me refer to the Safe Harbor Statement on Page 2 of the ABB presentation. This conference call may include forward-looking statements. These statements are based on the company’s current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. The call will start with the summary of the results by Uli and Eric. Uli will then update on the process - progress, sorry, we are making to implement the next level strategy. Then we will move back to the Q&A. With that, I would like to hand over to Uli.

[Ulrich Spiesshofer:]

Thank you very much, Alanna. Good afternoon, ladies and gentlemen. Welcome and thank you for joining us today to discuss the first quarter 2015 result. Before we start let me make a few general remarks. We delivered a solid quarter in which we grew both net income and increased cash flow in line with our commitment to drive profitable growth and accelerate sustainable value creation. In a challenging environment, we doubled large orders and kept base orders steady. We grew orders in our three largest markets in countries the U.S., China and Germany on a like for like basis and one key project to our combined power and automation offering reflecting our competitive advantage. We brought revenue back to growth, benefitting from our order backlog and strong focus on growth segments in a difficult overall market. Book-to-bill in the first quarter was 1.2 higher than 2014. We continue to make progress in our Power Systems Step Change program and delivered the third consecutive profitable quarter. Mix effect and market challenges such as oil and gas, radar margins in the rest of the group. We have taken decisive actions on cost and productivity to address this as a part of our ongoing focus on relentless execution. In total, we delivered a steady operational EBITDA margin in a challenging market. We are seeing first benefits of our next level strategy, giving us confidence that we can take advantage of profitable growth opportunities ahead. We are driving cost out and are implementing additional restructuring to address market uncertainties in the quarters ahead. Let us now turn to Slide #3. In the first quarter, we continue to deliver along our three focus areas. Profitable growth through our framework of penetration, innovation, and expansion, which we call PIE, continues to payoff. Orders increased 15% on a like-for-like basis. We won attractive large orders in HVDC power transmission in offshore oil and gas in marine and in rail. Our PIE initiatives contributed to higher pace orders in four divisions, despite a challenging market environment. Book-to-bill is now back above one in all divisions, which will support revenues in the quarters to come and into 2016 and 2017. We launched many new products at a recent Hannover Fair, one in particular was our revolutionary YuMi robot, which will play a key role in human robot collaboration in many industries. Revenues were up on a like-for-like basis and we delivered higher operational EBITDA and operational earnings per share on a constant currency basis. In relentless execution, we continue to drive the step change program in Power Systems and the division showed a solid improvement in profitability. We also rolled out our new performance-oriented compensation model to more than 60,000 employees during the quarter. Business led collaboration is the third focus area and in this - in the first quarter, as I mentioned, we announced a number of orders that we won because of our ability to jointly deliver integrated power in automation solutions into key growth sectors. Finally, we had a fantastic customer event in Houston, Texas, where we hosted more than 7,000 customers at our ABB automation and power growth. This is a confirmation of our strong position in this important market. Let us turn to Chart #4 to quickly review the first quarter key figures. First, let me remind you that as a part of the next-level strategy, operational EBITDA is now our key operational profitability metric, instead of EBITDA. Also, the foreign exchange translation impact was significant in the quarter, reflect is already at the end of last year, and I think most of you have already taken this into account. Forex translation negatively affected reported orders by 13% and revenues and operational EBITDA by 10%. Let me highlight a couple of other items on Chart #4. We continue to build our order backlog, which grew by 10% in the quarter, that in turn supported revenue growth of 3%. From an operational EBITDA margin perspective, we remained at last year’s level as improved results in Power Systems offset mix impact in the other division. Let me take a moment to explain this. Discretionary spending in oil and gas declined in the quarter. This affected mainly Process Automation, as well as the other product division, where we served the oil and gas sector with a comprehensive set of product and services. Geographic mix also played a role. As an example, Russia had a negative impact on margins, while Russia represents only a small share of our total business, the severe ruble volatility and related drop in demand reduced volumes in some product lines. Low demand in China related to infrastructure and construction reduced volumes in some businesses. We are already taking steps to adjust to these developments. We are accelerating our restructuring activities and you should expect restructuring-related costs in 2015 to be between $250 million and $300 million, approximately $50 million higher compared to our original guidance of $200 million to $250 million. Moving to the bottom line on Chart 4, operational EPS increased by 5% in constant currency and the positive cash flow from operations in the first quarter was reflected in $100 million cash improvement compared with the same quarter last year. Let’s now turn to Chart #5, for a look at our regional order development. As you know, we have streamlined our regional structure and now report orders and revenues in the newly shaped three regions by combining the Middle East, Africa, and Asia into a single region, which we call AMEA. Orders were higher in all regions in the quarter with a strong contribution in Europe in AMEA from large orders in power transmission and offshore oil and gas. In the Americas, orders were steady to higher in all divisions led by some large orderings by the Power Products division in the U.S. As I already mentioned, base orders were steady in the quarter, up in four divisions, but lower in Process Automation, where we saw the impact of lower discretionary spending in oil and gas most. Geographically, base order growth was mix. China was led in line with slower macroeconomic growth. Base order growth was also flat in Germany and the UK, but we saw good growth in important markets, such as Italy and Sweden in Europe, India and Japan in Asia. Base orders in Canada were higher and grew by 4% in the U.S. mainly in Power. If we move to Chart #6, Chart 6 reiterates what we set as to the first quarter on the Forex translation impact from an appreciation of the U.S. dollar. In the first quarter, the appreciation of the dollar resulted in a negative currency translation effect of 13% on orders and 10% on both revenues and operational EBITDA. We expect to have similar levels of negative translation in the coming quarters. I think most of you have taken this effect into account in your model. Chart 7 summarizes the impact of low oil prices on ABB in the first quarter. As we said at the end of the last year, we have a balanced exposure to the oil and gas sector, both in terms of CapEx versus OpEx, as well as upstream business versus mid and downstream. In the first quarter, we saw a strong decline in OpEx, as customers put a large share of the discretionary spend on hold, which we already flagged during the quarter. We are taking steps to adjust capacity and productivity and are confident that we can successfully mitigate this impact. Long-term, our expectation is that low oil prices will impact CapEx spending on new upstream and possibly downstream production. At the same time, we also expect some long-term benefits, such as lower input cost that will support industrial growth, as well as the reallocation of fuel subsidies into infrastructure, such as power transmission and distribution. Now, I hand over to Eric to take you through the financials in more detail.

[Eric Elzvik:]

Thank you, Uli. Let’s look at the operational EBITDA bridge on Chart #8. We continued success in reducing cost again, which more than offset price pressure in the quarter, generating a net positive of approximately $10 million. Net volume also had a positive impact, reflecting the operational leverage effect from higher revenues, mainly in the product divisions. Improvements in product execution also supported the margins in the quarter, which is mainly from the Power Systems division. These positives were partly offset by mix effect, as Uli has described earlier. An example of mix effect is lower volumes in businesses that are exposed to the oil and gas OpEx and discretionary spending. Examples, geographic mix include the macro and Forex turmoil in Russia, which resulted in lower volumes. Looking forward, we assume that this mix impact will persist and thus far we are taking additional restructuring step that was already mentioned by Uli. The other category consists mainly of a number small one-offs. We have already explained the Forex translation effect we see to the right of the chart. Finally, the divestitures, which we did during last year through our portfolio pruning reduced the operational EBITDA by approximately $30 million. Turning to Chart #9, where we show the overview of the divisional performance in the first quarter. I will now go in some more detail. Starting with the top line, the orders were flat to high in all divisions on the like-for-like basis. The division Automation & Motion was flat, but we have to remember that it is on the difficult comparables from the first quarter 2014, when we booked the 200 million order with the Swedish Railways. Revenues are more mixed. The strong order backlog in Power drove revenues growth in those divisions. Discrete Automation also achieved the 4% revenue growth in execution of its good backlog in robotics, as well as our combustion equipment for rail customers. Low Voltage Products revenues, which are more closely linked to the short-cycle economic development were flat. In Process Automation revenues declined by 4%, with the project backlog is still solid in oil and gas but short-cycle spending was down which effected the book and bill business in the quarter. As stated before, most of the large project wins in PA in the quarter, will only be delivered over multiple years, mainly in 2016 and 2017. Let’s then move to the operational EBITDA margins. If you start with DAM, the margin decline is partly the result of lower sales into the oil and gas sector or short-cycle standard products. In LP, the margin decline is mainly reflection of the slightly softer the revenues and some of it is also related to the situation in Russia, as we have earlier talked about. In Process Automation, the margin was mainly affected by the lower revenue volumes as well as mix, specifically related to the standard - sale of the standard products and services also into the oil and gas sector. On Power Products margin the results is impacted by the ongoing footprint measures to build capacity in growing markets like Saudi and India, which resulted in the temporary under-absorption of fixed costs, as capacity in these new plants is being ramped up. PP also saw some volume decline within Russia, which have negative effect on margins. Finally, in Power Systems division we delivered a third quarter of positive operational EBITDA. Overall, the main message on margin is that we are accelerating the cost and productivity actions in line with the priorities in our next level strategy that we have described to you over the last few quarters. Let’s then turn to Chart #10. In the first quarter we generated around $100 million more cash flow from operation, which is mainly driven by timing of project cash flow from Power Systems, but it also continued by continuing efforts to improve network and capital such as shorter lead times and higher inventory turns. We continue to improve cash generation in order to fund profitable growth and to support our dividend policy. The board has recommended a dividend of CHF 0.72 per share, that amounting total to about $1.7 billion. In order to gain - in order to again make a dividend tax efficient for shareholders the board has proposed it to be paid in two tranches. So if approved by shareholders at our Annual General Meeting tomorrow, the dividend of CHF 0.55 per share will be paid from capital reserves. A return or cash per shareholders’ equivalent to about $1.3 billion, and that amount will be paid during next week. The second tranche of CHF 0.17 per share, or the equivalent to be about $400 million will take the form of a nominal value reduction and is expected to be paid to shareholders in late July or early August. At the same time, we are proceeding with a share buyback. We have bought back 21 million shares this quarter at the value of around $450 million. So we have now completed around 30% of the $4 billion buyback program, which we announced last September. Let me now turn it back to Uli again.

[Ulrich Spiesshofer:]

Thank you, Eric. Let turn to Chart 11, and an update on how we are implementing our next level strategy through our three focus areas of profitable growth, relentless execution and business-led collaboration. In the first quarter, we continued to make solid progress in each of these areas. If you turn to Chart 12, please, we drive profitable organic growth through our PIE framework of Penetration, Innovation and Expansion. On Chart 12, examples of Penetration success in the first quarter include our continued strong growth in Japan, where we have been broadened beyond our small base in painting robots and turbocharger service. We delivered both power and automation solutions, for example, our leading solar portfolio between the panel and the grid in Japan, as well as large EPC players will serve a variety of global industry sectors. Innovation is one of ABB’s trademarks and we continued to launch new products in the first quarter including intelligent transformer sensors, production management software for the cement industry and control products for the power generation in water industry. Those of you who were at the Hannover fair, saw our official launch of the YuMi collaborative dual-arm robot. This is really an exciting development which will open large opportunities for profitable growth. For example, in the fast growing 3C industry as well as in other customer segments where small parts handling and packaging is important. On Expansion, we announced a strategic partnership with Samsung in the area of microgrids, where we combine Samsung’s battery energies technology with our grid offering. On Chart 13, I’ll go into this in more detail. We believe microgrids will be a major element in the grid of the future. We offer microgrid solutions to two major power challenges. One is to provide economically viable power to communities in the developing world that are distanced from conventional power grids. More than 1 billion people in emerging markets today have no access to continuous electricity. The other is to support industrial and commercial facilities that cannot afford the risks of power interruptions from conventional grid. We are already very active in this small but fast growing market based on our power conversion technologies, grid connection, power management and automation capabilities. Energy storage technology is a further key element in making microgrids more viable and Samsung is a leader in lithium-ion battery technology. Our partnership with them will allow us to accelerate growth in this market on a global scale. Turning to Chart 14, Relentless Execution is the second focus area in the next level strategy for accelerating sustainable value creation. In the first quarter, we took decisive actions to reduce structural cost, improve productivity and optimize the entire value chain. And we expect to see the benefits of these actions in the coming quarters. We set the stage for further structural cost savings through multiyear agreements with three strategic IT suppliers that we announced this morning to fully - to simplify our server infrastructure, network setup, and delivery of services to our customers and employees. When fully in place we expect these measures to sustainability reduce our annual IT operational costs. On productivity, organizational measures to streamline back-office operation, along with portfolio pruning allowed us to increase employee productivity. We also reduced G&A expenses by 7% in the quarter and as I mentioned earlier, we will accelerate actions to adjust our cost structure to changing market demands in areas such as oil and gas. At the same time there is still much we can do through footprint actions to optimize the total value chain. For example, new production in R&D facilities in key markets such as Saudi, India and Czech Republic focus on being closer to our customers. In the past weeks, we opened manufacturing units in Saudi, Czech Republic for power that are among the most highly automated and cost efficient power equipment facilities in the world. This helps us to maintain our global technology and market leadership in this important sector. We also recently announced the closure of a motor factory in Sweden as we look at how to best serve our customer base and optimize our footprint. Let’s move to Chart #15. The Power Systems division showed continued progress implementing our step change program to de-risk the business and reposition it for future growth and profitability. Chart 15 shows you where we are after quarter one, on delivering against our ambitions. Power Systems delivered a third quarter of positive operational EBITDA. At the top is to focus to reach the target profitability. We still have some work to do, but the progress is encouraging. In off-shore wind, two out of three platforms in off-shore wind are energized. Today, DolWin 1 is connected to the grid and in operation. DolWin 1 started drive operations in April and takeover is planned for later this year. And DolWin 2 is progressing well. The platform is undergoing final installation and commissioning work in Norway. Once that is completed, the platform will sale out and be positioned in the North Sea. This is expected to happen in the third quarter. On EPC Solar, we have completed all of the remaining projects and expect to finish the handover to our customers in 2015. Targeted partnerships in high growth markets remains a key focus like the Samsung partnership that I described earlier. We have also made progress on de-risking the business by being more selective in the projects we take. This is reflected in our recent order bookings that include a subsea HVDC link between Germany and Norway, a high-voltage cable system order in Denmark, and the power plant automation system in South Africa. These are all projects with more attractive risk profile where we already have a solid track record in execution and technology leadership. Turing now to Chart 16, we told you after Q4 that we were rolling out a new compensation model that provides a better balance between group and individual rewards in order to drive a new performance culture towards accelerated sustainable value creation. In the first quarter, we implemented this change for more than 60,000 employees and it has so far been very well received. We believe this is one of the most important changes we have made in the organization to drive value creation in the business both for our customers and for our shareholders. Let’s turn to Chart 17 and our actions to drive business-led collaboration. Part of our business-led collaboration effort is to deliver greater value to our customers by combining power and automation capabilities into integrated solutions that cover the entire customer value chain in utilities, industry, and transport and infrastructure. This capability gives us a competitive advantage in sectors that require both high quality and reliable electrical power, as well as automation technologies for maximum productivity and quality. This includes power plant control, process industries, datacenters, building infrastructure, as well as rail and marine transportation where we won significant combined orders during the first quarter. We see further substantial profitable growth opportunities ahead, as power grids become more automated and as power quality and reliability together with industrial productivity in industry and infrastructure becomes more mission critical. So let me turn to Chart 18. Finally, let me summarize the quarter and provide you an updated outlook. Our profitable growth initiatives drove a solid top line performance in the first quarter. PIE is working. We continued to build our backlog and book-to-bill across the business to support revenues in the coming quarters and years. We achieved a higher operational EPS on a constant currency basis and continue to make progress in the Power System step change program, which helped us to generate steady operational EBITDA margin for the group. At the same time we are accelerating cost and productivity measures to increase profitability in the other divisions in the coming quarters. We rolled out a new compensation model to accelerate value creation and won key orders based on our ability to jointly deliver integrated power and automation solutions. Finally, we further sharpened our focus on markets and customers by driving organizational simplification and productivity improvements. On the outlook, the picture has not changed much since the end of the last year. The short term picture is mixed and there’s still a lot of macro and geopolitical uncertainty in the market. We continue to expect growth in the U.S. We also see China continuing to grow but at a slower pace than in 2014. Europe growth remains modest and is still subject to macro uncertainties and upcoming political developments. The long-term demand outlook remains positive in our main end market. Lastly, headwinds from low oil prices and Forex translation are expected to continue over the rest of 2015, but we are confident that we can manage the uncertainties with the implementation of our next level strategy. We confirm our 2020 financial target. So in summary, we are seeing the benefits of implementation of the next level strategy, the higher EPS and cash flow. We are closer to our customers and better able to meet their changing needs and with that grow our business despite an uncertain market environment. We are taking actions in line with our strategy to increase profitability. And we are confident that we will continue to deliver on our commitments to customers, employees and shareholders. With that, I’d like to conclude my remarks and thank you all for your attention. Let’s open the lines now for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] First question comes from Mark Troman, Bank of America. Please go ahead.

[Mark Troman:]

Yes, thank you, good afternoon, Ulrich and Eric.

[Ulrich Spiesshofer:]

Hi, Mark, how are you?

[Mark Troman:]

Very well, thank you. Just two questions for me please. Firstly on base orders and the second one margins. So on base orders, we - you have some areas that grew well as you highlighted in the presentation. Clearly, there was a marked slowdown to basically flat from the - I think it was 4% in Q4, just wanted to get your thoughts on that slowdown. I mean, clearly oil and gas has been a big part, does that really explains the bulk of it or have there been other things that have surprised you in terms of say, negative momentum or stalling? I’m basically trying to get a picture of how base orders may evolve. Have we got a lot more downside to see in the oil and gas space for example or is it more - is it a broader based impact? That’s question number one. And question number two on margins, Power Systems is clearly doing well at least it goes with expectations. But maybe the other divisions were a little bit soft. I mean, clearly Process Automation, we have some sales decline so I understand that. In Discrete and in Power they also looked just a little bit softer. I guess big picture question is, what does ABB have to do to get on positive margin trajectory? Is it just about volume backing back in the markets or is it about the restructuring? What can ABB do to get those margins improved if you like in the current environment? Thank you.

[Ulrich Spiesshofer:]

Okay. Thanks, Mark, for your question. I’ll take the first one and I’ll have the second one answered by Eric. If you look at our base order growth pattern, look, we grew four out of five divisions in the first quarter on base orders, which is - gives us a lot of confidence in terms of the underlying growth initiatives quality that we have put in. The key, technically our efforts to beat the market on base orders, in all of our businesses, we allocate the resources and the investments in line with the growth opportunities and naturally we restructure and we also cut the average needed where we don’t see an underlying opportunity for growth. If you look at the drivers of some slowdown, the one is definitely the oil and gas. We discretionary spend in the first quarter as we had flagged and expected to be pulled back by our customers. This is something that will probably stay for a while. Then we have an impact on base orders, also especially in Tarak’s business on Russia. And China, there is the construction field, which is a little bit softer. Now the good news is base orders, for example, in automotive in China has been growing quite strongly. So I think what we need to do is, we need to continue living PIE. We have clearly our heat maps. We have clearly out current very, very strong and close understanding of each of the segments. We need to drive wherever growth is possible. And we need to be very cautious on pockets where the growth is not yet as strong or as not as strong as it used to be. So it’s a differentiated approach, but our ambition is and will be to keep building the market on that one. The tech side I hand over to Eric on the margin question.

[Eric Elzvik:]

Yes, Mark, if you take a look at the margin situation, that you have identified yourself, which is basically the volume, which is down and then driving margin of higher margin product business mainly to oil and gas. And in the end, it is also the same mix question, mainly related to oil and gas and also spread around a little bit on other industries. On BP as - was already said, it has quite a bit with the ramp up cost for the new facilities we have in the lower-cost countries to have the footprint better setup, and also some effects on mix, mainly related again that to Russia. Your question on the outlook and then how the trajectory will be going forward, obviously, the cost reduction programs are taking and more and more effect that will have first support to margin. You’ve also seen that we will increase restructuring to take out additional costs, mainly in the areas, which are more severely impacted. The mix changes we have in the quarter and we see continue with the same mix and then obviously if that changes either in the more positive or more negative direction, will have an impact on margin. But I think last but not least is what Ulrich ended with, and that’s the PIE efforts on the base order growth. That base order growth is typically is higher margin products will support the margin trajectory going forward. So the clear determination is to continue to drive the margin in the upward direction.

[Mark Troman:]

Okay. Thank you very much. Very helpful.

[Ulrich Spiesshofer:]

You’re welcome, Mark.

[Operator:]

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

[Ben Uglow:]

Good afternoon, everyone. I had a couple of questions. The first and I know Eric, you enjoyed these conversations, but the first was about the margin bridge. The - I appreciate that the cost savings have been positive relative to price this quarter on the order of $9 million. But if I go back and look in the past, typically the cost savings have actually been quite a bit further ahead. And I guess, much of first question is, yes, how much of this is due to lower cost savings, or is it a price effect? And if it is a price effect, could you talk about that a little bit just in a general sense? And the reason I ask you is across the whole of capital goods this quarter, we are basically seeing much weaker pricing trends, and I think people expected. Is that true for ABB, and if so, which divisions do you feel are most affected? So that was question number one. Question number two was for Ulrich. I don’t want to put words in anybody’s mouth. But my interpretation of your outlook statement was that, it seemed much more incrementally cautious. I mean, you’ve called out specifically a slowdown in China. And what I really want to understand is, what is the basis for the caution? When you look at organic growth assumptions that analysts having in the market, are you feeling that organic growth could be under pressure for the next couple of quarters, or is it something just more general?

[Ulrich Spiesshofer:]

Okay. First of all, good afternoon, Ben, and thanks for your questions. I take the outlook first and then I hand over to Eric. Look, if you take our outlook statement, it reflects a tough world out there. We have seen during the second-half of last year a deterioration of certainty and an increase of volatility. If you look now what we have in our hands in the second - for the second quarter, you have in Europe a couple of issues that the world has to deal this, whether it’s the election in the UK, whether it’s Greece that has an impact. If you move over then, we have in Asia, yes, we have a slowdown in construction in China. At the same time, the Chinese government has eased, or has helped with some financial policies, and it will - that might have a positive impact on their distributors. So there is a wider range of possible outcomes, and we wanted to flag that and share that very openly, if you, to say, to share with you how we see the growth, as we go on. Our ambition remains unchanged. We will drive to beat the market on a continuous basis, as we have done. If you look at our order pattern, four divisions having base order growth, we have a book - positive book-to-bill in all of the divisions in the first quarter, really nice large orders, altogether gives us a confidence that we will also deliver on this one going forward. There will be very little tailwind if at all in the growth, in the quarters to come. So we really need to create or continue to create a self help. The PIE model works on that one. Our teams are better aligned than ever before. We’re closer to the customer. All the internal work is done. So all the forces are now really out and drive the growth with the ambition to beat the market. So that’s on the outlook and the market perspective. I let Eric, as you write the requested address the margin bridge.

[Eric Elzvik:]

Thanks. Yes, good afternoon, Ben. So on the pricing side, we really don’t see a significant change in the pricing terms, as we have described them over the last few quarters. Price pressure is a fact of life in most our businesses, and we - as we have seen successfully continued to match those with the cost-saving program. Yes, it is a little bit less on an absolute basis in this quarter, but there are two fairly big numbers behind this, this net number of nine, there is not really a term change. The only portion we could point to is in low-voltage product related to the Russian business with a ruble, where clearly with the import their European cost base into Russia. There has been some pressure on the prices that has contributed the situation on the margin impact from that side. So maybe on the margin, there is slightly negative because of that, but overall, I will not call it significant.

[Ben Uglow:]

Okay, and that’s helpful. There has not been any significant - yes, I’m just making sure that the margin changes that we’re seeing and I’m thinking obviously of discrete automation and to some extent Power Products. And I know obviously that you’ve called out the effects there, but I’m just making sure that we’re not seeing incrementally weak pricing in those divisions, you wouldn’t agree with that comment?

[Ulrich Spiesshofer:]

I think there is - there are changes up and down in the divisions, but I think overall, there is no significant change in the pattern we have talked about over the last few quarters.

[Ben Uglow:]

Okay. That’s great. Thank you very much.

[Operator:]

The next question comes from Andreas Willi, JPMorgan. Please go ahead.

[Andreas Willi:]

Yes, good afternoon, everybody. I have a couple of questions as well please. The first one on Russia, which you mentioned frequently in the call and in the press release, as a source of downside this quarter. Obviously in the past, you’ve highlighted Russia when questions came up so quite limited exposure to ABB. Is the profitability or was the profitability substantially above average that they can have a material effect? And are there other areas in your portfolio at the moment, where profitability stands out relative to their rest of the group, where we could see revenue pressure in the coming quarters areas like - some products in oil and gas, CapEx-related areas, high-end ships, LNG or FPSO, is there other areas that could also have a disproportionate impact on grew margins when they’re potentially slow? And the second question in terms of the large order bookings this quarter. The Statoil order that you booked in Process Automation, what’s the amount of revenues, if any that has been booked in Power Systems and the same for NordLink, which it looks like you haven’t booked all of those power products orders this quarter you had, but when should be expect basically the Power Products to benefit from some of the cross-selling into the large order? And last question in terms of the base order growth during the quarter, is it right to assume that it flowed as the quarter progressed, given the commentary at the annual results and mid-February was more positive from base orders than what we have now seen. And that basically relates to the acceleration in the oil and gas slowdown you’ve seen in all other companies in February on - from mid-February onwards basically? Thank you.

[Ulrich Spiesshofer:]

Okay. Thanks, Andreas, and good afternoon to you. Look, on the first question regarding Russia, the Russia business is indeed not very large of ABB’s less than 2% of the ABB group revenue. But the volatility, both in terms of the currency and the demand was significant. And since we are importing a lot of product from Europe into Russia, you had basically a double whammy, you had the currency and you had demand. So together that had an impact. It’s mainly on standard products business, it’s not an out ragingly use huge profitability to standard product situation that we have going into Russia. And that’s typically, when we have markets where we ship from one source to another one the standard products. If they get hit both by currency and by demand you have acquired significant impact and naturally we’re doing now all possible efforts to really make sure we mitigate that going forward. And we have already made some good progress in taking appropriate actions on that one. I’ll take your third question first on the - on the base order pattern, your observation is only partly right, because we had good base order growth in four divisions and there we have not seen a slowdown or any change in the oil and gas business. We have seen a contraction of discretionary oil and gas spending. And since a lot of this also has a certain kind of a quarterly effect where towards the end of the quarter there is a little bit more realize that had a certain impact, but I wouldn’t call it material in any way. With that, I hand over to Eric to give a little bit more insight on the larger order side, Andreas.

[Eric Elzvik:]

Yes, good afternoon, Andreas. So the - your question was on the large orders booked in PA and in PS, and the sub-supplies from the internal suppliers. And the reality is that part of that sub-supply the orders have already been booked in the part of the quarter, and some parts are coming now in the coming quarters. We are trying as much as we can depending on how the real schedules in those projects look to have the internal and external bookings in the same quarters, but it’s not all possible because of the schedules and how the specification of the products are done.

[Andreas Willi:]

So what will Power Product have grown without the larger order related bookings from NordLink.

[Eric Elzvik:]

It is not substantial in that sense, Andreas

[Andreas Willi:]

Thank you very much.

[Ulrich Spiesshofer:]

You’re welcome.

[Operator:]

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

[James Stettler:]

Thank you. And good afternoon, all. Starting off just with this 150 basis point margin decline in PP and the footprint adjustment, is that something just we’re going to see in this quarter or how - for how many quarters, you think this impact will remain? In terms when you talk about good base order growth across four divisions, can you sort of define good or we talking two, three, or four, and so how significant was the drop in PA. And just in terms of the order pipeline, can you talk us through what you’re seeing in PS, and obviously very encouraging order with NordLink, is there more to come? Thank you.

[Ulrich Spiesshofer:]

Okay. So first of all, good afternoon, James. On the PP side, look we will not open every quarter a lot of factories, so we had a coincidence there in the first quarter we had to ramp up for the Eastern European piece, for the Saudi piece going on, that naturally costs some money because it’s beginning, you need to train the staff up. Then you get the volume in and then the factory takes off. So that’s - that you will not have a repeat of the same order of magnitude in terms of ramp up in the quarters to come. This will ease definitely off. I mean, naturally we’re working also very hard to mitigate the impact through additional cost reduction and restructuring measures as we have said. Let me take the second power related question, the pipeline on PS. If you look out into world, there is an interesting situation going on. On the one hand you have cautious spending and cautious investment policy by many utilities. And on the other hand, the number of large-scale collections, grid connections has never been bigger that has been discussed - that is being discussed. So there is a lot of tender activity, a lot of project discussions on connecting different countries, of connecting subsea, of connecting north and south, for example in the North American continent, so that is a continues good tender activity out there. Now, as you and I know on the award of this project. They are so large and they can easily slip from quarter-to-quarter. So we are not making any predictions out there but the underlying market opportunity out there is very good. We also see that our power offering for industry if you take the Statoil order in the North Sea, this quarter more and more, we are also taking our capabilities from the power side, on the industry side. And it’s really fantastic to see that the customers like Statoil in that case appreciate that we have an overall understanding of that business end-to-end. We help them on the automation side, this uptime and reliability, but for them this continuous power supply and power quality is as important for uptime reliabilities. So it’s really - you really see that the joint offering there hits home with large customers and I expect that to be another attractive growth driver going forward. Now, if you look at the base order pattern across the businesses, there’s not a huge variety between the different divisions that has been growing on base orders. On Process Automation, we have had a significant hit this quarter coming from base order deterioration. And if you look at it we have quite a significant amount of service and repeat business with oil and gas customers that flows slow PA. We have had in the first quarter customers being cautious on spending there and pulling back immediately that. So overall the impact on a relative base bigger on Process Automation negative and on the positive side it’s pretty much similar across the range of our other auto division.

[James Stettler:]

Great. Thank you.

[Ulrich Spiesshofer:]

You’re welcome.

[Operator:]

Next question comes from Martin Wilkie, Deutsche Bank. Please go ahead.

[Martin Wilkie:]

Hi, good afternoon. It’s Martin from Deutsche. Just going back to your commentary on China, it sounds like the automotive market was one of the reasons that the growth held up better and building is perhaps a bit slower. And if you could just talk through what your expectations are for that as we go through 2015 and particularly in the industrial side. We’ve heard comments from other companies that the sort of industrial production market is far slower. Is that feeding into your commentary that China is growing but slower or are there other dynamics that are sort of leading you to give those comments, just if we get a bit more granularity on your China expectations? Thanks.

[Ulrich Spiesshofer:]

Yes, good afternoon, Martin. I’m happy to do, so. Looking - I was just recently in the China Development Forum there, a couple of CEOs sat down with Chinese government. So there’s quite some insight not only from our customer interface but also with the government in China. If you take the agenda, the China has given itself for this year and the years to come. There’s really a strong qualitative change of focus in China. It’s moving from a consumption driven growth to an innovation growth to a competitive industry, the way our labor army drives is not the decisive factor anymore. Their productivity improvements are really in the foreground to deliver. In addition, if you take the power generation infrastructure in China, huge investments on the solar, in the wind side whilst in parallel still investing in conventional power generation. That’s good for ABB. And if you look at it, we got now about 20,000 people in China, we have more than 85% of our product range fully localized local R&D, local value chain, local sourcing and that positions us very, very strongly. We have Chinese leadership there that understands the market and has strong market intimacy. So I think we are overall well-positioned. Then now let me talk a little bit about segments where we can get some clue. We have a couple of efforts going on, effort number one is we’re going west. We’re going west aggressively into Tier 2 and Tier 3 series. And the way we are doing it under the theme of what we call business led collaboration, we are doing it much more jointly across the different business units and divisions than previously in ABB. That gives you in SG&A, advantage of scale advantage, if you roll with all of them at the same time in a focused way into the west. The second piece is like - you look, compared to some other competitors we have a very strong robotics business. And robotics is not only a very strong business in itself it’s also a pillar that carries the flag of ABB into many new automation systems in automation situations. Take food and beverage, material handling in food and beverage, picking, packing, palletizing is an opportunity where ABB does a lot of business, which has recently got additional orders for robotization and automation. For example, in the dairy sector in China, which is a great growth opportunity. So for us what we do, we try to work our product portfolio towards the government agenda on automation and network upgrade. We have a very agile team that really understands the growth segments. And then we take our pillars in terms of capabilities and use them to pull in a wider solution offering. China is a solution market in the automation side, and that’s great for us, because we can then take, for example, the robot and under the robot wings, we bring in low-voltage products. We bring some motors. We bring drives. We bring complete solutions, and that’s a good one. So, look, China is - has a couple of challenges as an overall economy. The growth on a relative base might have come down a little bit. If you look at the absolute growth, it’s still a remarkable market delta opportunity for us. And I think we’re pretty well-positioned with our team and our capabilities to participate a little bit stronger than others, and naturally we are running the extra mile to keep it going that way.

[Martin Wilkie:]

And in terms of that changing mix of growth, I mean, I know you obviously don’t disclose the profitability by end market. But is there a concern that the buildings market is contracting if we think about sort of mix effects and so forth, or do you think the opportunities in robotics and so forth are sort of equally profitable as some of the businesses that may now be a little bit slower compared to the past?

[Ulrich Spiesshofer:]

Yes. Look, Martin, we need to be pretty agile here. If you take, for example, our excess on the industrial side that we have for our low-voltage products, others have strong channels of a low-voltage mainly in construction. ABB has a wider channel mix, and we benefit from shifting then volumes more on the industrial side. And if you look at the profitability of our products in China could always be even stronger, but I’m quite satisfied there.

[Martin Wilkie:]

Okay. Thank you very much.

[Ulrich Spiesshofer:]

You’re welcome, Martin.

[Operator:]

The next question comes from Daniela Costa, Goldman Sachs. Please go ahead.

[Daniela Costa:]

Thank you. Good afternoon. I actually have three things, the first two just to follow up on some of the commentary around the base orders in oil and gas and also your commentary around pricing. A few companies that are exposed to the same chain, or to the oil and gas chain have talked a lot about a large portion of this drop basically in absolute dollar amount being price driven basically and the oil companies asking for large price declines. So are you basically disagreeing, seeing different trends when you say that you don’t see much of an change of environment in pricing? That’s my first question. And then, just the second question also on process automation, overall the order, large and base included are up quite significantly. I imagine on the large ones maybe there are some oil and gas related ones as well. Do you have any worries around delays or cancellations there? And the third question related to basically inorganic growth. And you commented a little bit on it last quarter, basically on some of the areas. Has the fact that the outlook is perhaps a little bit more uncertain and the overall organic opportunity is maybe less uncertain got you more - thinking more actively about inorganic growth? Thank you

[Ulrich Spiesshofer:]

Okay. Good afternoon, Daniela, and thank you very much for your questions. If you take the oil and gas sector, I give you a couple of examples that ABB has some quite unique capability. Take the Statoil order on HVDC, such a connection between the mainland and an oil platform out there in the field is something that ABB has a very, very strong value proposition. And then you have great technology compared to other competitors, you still have an opportunity to get paid for the value that you’re providing. Understand the product side, we have long-term frame contracts with our customers both for service and for a standard product. And naturally we will always try to work with our customers if they have a need to optimize the business, but this is something that’s standard procedure. I wouldn’t say that ABB is totally immune to that one and Eric didn’t say that and I didn’t - wouldn’t say that, but we are working very strong to have the minimum possible impact of any of these requests that are out there. The second piece that you right address is on the PA backlog and the order backlog that we have now. We have a great mix of different orders. I might remind you the large mining orders that we got not too long ago. We have some great marine orders and actually we have some direct oil and gas orders as well. At the moment, we don’t see any major delays or cancellations and actually we were working very closely with our customers to make sure that stays that way altogether. And your third question on inorganic growth, I don’t want to change anything that we have said last quarter. We said that in 2015 after making progress on Power Systems, after having the integration of f Thomas & Betts and Power-One further progressed, if the time is right, we will consider doing inorganic moves, and that statement stays unchanged and when we have to say more happy to report at that time.

[Daniela Costa:]

Thank you.

[Ulrich Spiesshofer:]

You’re welcome.

[Operator:]

Next question comes from Fredric Stahl from UBS. Please go ahead.

[Fredric Stahl:]

Yes. Hi, good afternoon, Rick, Eric, it’s Fredric here from UBS. Maybe this one is for you, Eric. I don’t know if I’m misreading this, but it looks like you had a 29% currency hit on your Power Systems orders, if I look at your press release. Can you maybe clarify that for me? Question number one. And then, on - there is a - the European Commission is about to make a decision on antidumping taxes or barriers or whatever you want to call it on electric steel. Can you maybe talk a bit about how that could impact ABB’s business in Europe? And then finally, maybe you could update us on how Power-One performed in the quarter? Thank you.

[Ulrich Spiesshofer:]

Okay. First of all good afternoon, Fred, thanks for your question. Let me get started just question number two and three and then I will hand over to Eric on the first question on the Power Systems question that you had there. Look, on the antidumping situation, we observe that, we are very closer to that situation, but since it’s an ongoing process, I don’t want to comment any further and speculate on potential outcome. It is something that has been in the pipeline for a while. Now it’s becoming a little bit more concrete. And then we see then the direct impact we can report next time when we are together, but at the moment we have no additional comments on that one. Now on Power-One, if I look at Power-One and the development of the global solar market, the solar installations in terms of overall demand are going up. By the way they have gone up the last couple of years continuously. If you look, for example, our success story in Japan, where we have now really grown for a couple of quarters, constantly double-digit. Our leading edge solar portfolio between the panel and the grid is really strongly differentiating us from others and it’s a really great. So what we have done with Power-One is, first of all the Power-One brand has disappeared its all of the ABB portfolio. And if you look now, we’ve got the best portfolio between the panel and the grid of any competitor in the world. That positions us very well to work with solar EPCs. Last year we also decided that we’re going to exit solar EPC business, so these market segments have now certainty that ABB will look competes, that ABB is coming with its complete solution set, and that’s really coming nicely and in terms of the growth. So on Power-One the brand migration is done. The product integration between ABB and Power-One is done. The solution development is ongoing and we have made some great progress there and we are moving forward. So altogether, I would say that the commercial and the technical integration of Power-One is progressing in line with the plan. If you look at that business and that market specifically, there is a market consolidation going on in solar inverters and actually as in every as is in every consolidation cycle that that might have or has an impact on margins. But I’m pretty confident that not too long out that consolidation will come to an end, and then the market forces though hopefully allow us to also take the margin higher up on Power-One. So with that said, let me hand over to Eric on the Power Systems currency question that you had. Thank you.

[Eric Elzvik:]

Yes, Fredric, you are correct. We have a 29% FX impact on the Power Systems, and that has to do with the large orders and then the mix between the larger orders this quarter and the quarter back and obviously we booked some very big ones, oil related orders in Germany. So if you also take a look at the European conversion, it’s a 23% on average in Europe. So you can see those two numbers together and it is what it is. We also add that the Russian impact on the overall number obviously has there also an impact as that foreign exchange rate changed, but even much more than 23% or 29%.

[Fredric Stahl:]

That’s clear. Thank you very much, guys. Thank you.

[Ulrich Spiesshofer:]

You’re most welcome, Fredric.

[Operator:]

Last question comes from Natalie Falkman, Carnegie. Please go ahead.

[Natalie Falkman:]

Good afternoon, gentlemen. I have a couple of questions, first on the downstream. You mentioned the upstream and the OpEx. Do you see any more positive or negative or muted activity on the processing - oil and gas processing in the downstream? That’s the first question. The second question is on the power products. You’re saying that you’re ramping up in India and Saudi Arabia. Is it just because you think you’re going to have better demand there or is this for some particular more concrete projects that you’re doing that? And the last question is on the robotics. The industry of robotics have come with the numbers of the sector growth of 27%. If I remember correctly, I think that was in volume terms in 2014. Do you recognize yourself in that growth numbers? Thank you.

[Ulrich Spiesshofer:]

Okay, good afternoon, Natalie. And, thank you very much for your questions. Let me take the questions in the sequence that you asked it. First of all, on the downstream side, we don’t see any significant change in that field at the moment. Naturally, the uncertainty that the customers, especially the ones that are integrated both upstream and downstream have, has a certain impact on the discussions that are going on, but we don’t see any major project cancellations or delays or a delay in tender discussions. We don’t see that at the moment. And if you look at the underlying trend in Middle East, there’s more and more oil being taken down the value chain. I was just recently in the Sadara complex, if you look at the amount of downstream activity that’s being planned there to use oil rather - to convert it downstream then putting it into power generation. I think this is something that will probably stay for quite a while. Let see how it returns out over the next years, but at the moment we don’t see a significant change on that one. On PP, if you look at the Saudi and India situation, Saudi is a market where the infrastructure, the power infrastructure, by the way not only in Saudi, but also in the countries around Saudi where there is free trade arrangements and some good trade arrangements. It is important to have a very strong local footprint. We opened - just before Easter we opened the new factory there. And it was very well recognized and regarded by the customers that, okay, now you made a significant commitment, so that we have competitive advantage with having that local capability. We are also putting the newest technology in there to make sure we got great technology at a very high proximity to the customers and that’s something that in the future. I am cautiously optimistic that it will also pay off in the appropriate way. And similarly in India, India has certain specific requirements. It’s a very large market. I expect a significant amount of the oil and gas subsidies. It’s about $40 billion that were spent in the last years. To move over to the infrastructure side at Hannover Fair I had the opportunity to have a meeting with Prime Minister Modi, and he basically confirmed there will be more infrastructure spending, both on upgrading the existing infrastructure but then on larger projects, so altogether I think this is a worthwhile investment to have. And your third question on robotics, look, all I’m going to say, since we don’t disclose details on the BU level, we are very happy with our robotics business. Per Vegard is doing an excellent job. If you look at the innovation pipeline and the amount of innovation that we are pumping out, the new YuMi robot, which is really changing the world of automation on small parts assembly. I am optimistic that this will stay a business that makes us very happy in the long-term future.

[Natalie Falkman:]

Thank you very much.

[Ulrich Spiesshofer:]

You’re welcome, Natalie.

[Alanna Abrahamson:]

So with that we would like to conclude our Q1 results conference call. Thank you very much for your time. And looking forward to seeing you at some of our conferences where we will be.

[Operator:]

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