Abb Ltd (ABB) 2011 Q2 法說會逐字稿

Good afternoon. I'm Stephanie, the Chorus Call operator for this conference. Welcome to the ABB Second Quarter 2011 Results analysts and investors conference call. Please note that for the duration of the presentation all participants will be listen-only mode and the conference is being recorded. (Operator Instructions). For those journalists who have dialed in, your participation is in listen-only mode.

A podcast of this call will be available for one month following the conference. (Operator Instructions). This call must not be recorded for publication or broadcast.

At this time, I would like to turn the conference over to Mr. Joe Hogan, CEO of ABB. Please go ahead, sir.

Well, thank you and good morning, everyone, and thanks for joining the discussion today. As always, my comments in this call refer to the presentation that you can download from our website at abb.com.

Please refer to chart 2 for our Safe Harbor text covering any forward-looking statements we may make today.

So let me start with a summary of our first quarter performance on chart 3. This was a strong quarter where we continued to execute well, driving further revenue growth, cash generation and a solid increase in shareholder returns. Our recent acquisitions, especially Baldor Electric have, so far, proved their value with solid contributions to both the top and bottom line.

Orders are up 10% on an organic basis and totaled almost $10 billion, including acquisitions, with a strong performance out of emerging markets like India and Brazil, both up almost 40% this quarter. China also continued to grow, driven mainly by the automation businesses.

Revenues were higher in all divisions and we were pleased to see the growth momentum continue in Power Products, where we returned to positive territory for the first time in two years.

We generated a 22% increase in operational EBITDA to about $1.5 billion, resulting in an operational EBITDA margin of 16%. This represents a slight decline from the high levels of a year ago and I'll come back to that, the reasons for this, later on.

Net income was up more than 40% this quarter and cash flow rebounded strongly from the first quarter and is up more than $200 million compared to the second quarter of 2010.

Last but not least, our balance sheet is still one of the strongest in the sector with net cash at more than $1 billion. Moody's recognized the stability of our financial position with an upgrade to A2 from A3 and we successfully launched two US-denominated bonds in the quarter, raising about $1.25 billion in new long-term funding at attractive interest rates.

Chart 4 gives you an overview of the key figures for the quarter. I've already discussed the main points, about $600 million of revenues and $115 million in operational EBITDA in the quarter, came from acquisitions, mainly Baldor, but even excluding that contribution, orders were up 10% on a local currency basis, while revenues were 9% higher.

Our order backlog remained at a very high level, close to $30 billion, and we reported a very attractive increase in earnings per share and an improvement in the conversion of operational earnings to the bottom line. We reported restructuring-related costs of about $30 million in the quarter and a positive impact from hedge accounting of derivative transactions of about $60 million.

That gives us an operational EBIT of $1.3 billion and an operational EBIT margin for the group of 13.6, well within our target range.

Let's move to a divisional overview on chart 5. Chart 5 you can see how orders and revenues increased across the whole company in the second quarter. As I mentioned before, Power Products is back in the positive zone for the first time in two years. Discrete Automation had a good quarter with Baldor making a strong contribution.

The pace of order growth slowed in Low-Voltage Products in the second quarter compared to the very high levels we saw a year ago and that tough comparison explains, to a large extent, the difference in growth rates versus the first quarter this year. We also saw some order weakness in areas like control products used in renewable energy applications, as well as government subsidies to these sectors started to expire.

On the earnings side, again you can see a positive development across all divisions, except Power Products, where, as we said previously, weaker prices from orders in the backlog will continue to be a drag on EBIT margins through the rest of this year and into 2012. We've been taking costs out aggressively in this division in order to deliver an operational EBIT margin close to 15% this year that we've communicated previously. So really no change in the PP outlook.

Power Systems is back this quarter with a great contribution to earnings. This reflects both a return to profitability in the cables business, but also good execution of projects in other businesses like power generation and HVDC.

Discrete Automation's margin is slightly down versus a year ago, mainly the result of some cost pressures in the European motors business and a mix related to medium-voltage drive sales and we'll talk about that more later, also.

The margin on Low-Voltage Products mainly reflects the impact of higher systems revenues this quarter. We've told you before that some 20% of this division's business is in lower margin systems and the share of systems revenues can have a significant impact on the total margin.

We also have an impact from a very rapid increase in silver prices during the second quarter. This is a key element in the manufacture of some kinds of breakers and switches and the spike in silver prices outpaced our ability to adjust prices to compensate.

Finally, in Process Automation, we saw an increase in the share of lower-margin electrification projects flowing through revenues this quarter and that's the main reason behind the decline in margin in this division. Again, this is not a trend. We're confident that we can keep this business within its margin target range over the remainder of this year.

There are a few moving pieces in the results this quarter, so on chart 6, let me try to summarize some of the positives and negatives.

In Power Products, we saw revenue improvement continuing, a trend that we expect to continue over the rest of the year. The operational EBIT margin is close to our full-year goal of 15%, so we're on track to deliver against that one.

Power Systems had a great quarter and Baldor continued to hit on all cylinders, delivering solid top and bottom line. I'll come back to that in a moment.

Service orders continued to grow, which bodes well for future revenues and earnings and cash flow was very strong despite our higher working capital requirement to support top-line growth.

The negatives are mainly around the margins in Power Products and Low-Voltage Products. As I mentioned, the slower order growth in Low-Voltage Products partly reflects a challenging comparison with a strong Q2 last year when orders were up more than 20% and that impact was likely to persist over the rest of the year. We also saw lower demand in the renewables sector and there was some substantial pre-buying in China in Q1, ahead of our April 1 price increase that we instituted there.

On LP's margins, we had the systems impact, together with higher input costs in breakers and switches that we couldn't offset fast enough with price increases. We don't expect this effect to persist as we push further price increases through the second half of this year.

On Power Products, the margin show the continuing impact of price pressure coming out of the backlog. That price pressure had not materialized at this point a year ago and, as you'd recall, PP had one of the highest EBIT margins ever in the second quarter of last year, over 18% on an operational basis.

Finally, in Process Automation we saw an increase in electrification projects running through the systems portfolio in the quarter, which diluted the margins somewhat. Last year's operating margins in Process Automation was also very strong, so the comparison is, again, more difficult than the first quarter.

Turning to chart 7, Asia and the Americas led the orders growth in Q2, up 24% and 68%, respectively. Automation and power orders were up in both regions, even excluding the impact of Baldor in the United States.

Europe orders also grew, both in Eastern and Western Europe, driven by growth across most automation-related sectors.

The Middle East, as you know, is a very lumpy business where the award of large projects makes quarterly comparisons fairly volatile. So while orders are down in the region, we don't see any trend developing there and, so far, we have not been negatively impacted by the political uncertainties there.

In chart 8 you see the development in some of our key country markets. Starting with the US, the Baldor acquisition had a dramatic impact on orders, but orders were still up more than 30%, excluding Baldor. Power orders grew almost 40% as utilities continued to invest in grid refurbishment and power distribution systems and equipment.

Both power and automation benefited from the continued expansion of the Brazilian economy. Mining investments, for example, supported automation growth while grid infrastructure spending gave a solid boost on the power side.

Germany was slightly lower in the quarter, with increased orders in automation, for example in building automation, offset by lower power orders.

India was the outperformer in Asia this quarter, up 39% in local currencies, with healthy order increases across the board. China continued to grow, again driven by automation, despite the recent slowdown in construction activity. South Korea made a strong contribution, more than doubling its order intake to more than $400 million in the quarter, with marine demand playing a key role. Orders from Australia and Japan also improved significantly, so we had a solid quarter across most countries in Asia.

Emerging markets continued to be a key growth driver for our orders. Total emerging market orders in the quarter grew 13% in local currencies and on an organic basis. Mature market growth, on a comparable basis, was 7%. The BRIC countries grew even faster, up 17%.

Let's take a closer look at our power business in the first quarter on chart 9. Overall, the trends we saw in the first quarter are continuing. Tendering activity in Power Systems is at record levels, with several large HVDC projects in the tender pipeline, mainly related to offshore wind power developments in Germany, but also in the high-power substation business.

Demand for power distribution solutions to support growing emerging economies and to improve network efficiency in mature markets continues to improve. While the recovery in power-transmission-related equipment orders is still ahead of us. We saw a nice increase in service orders in the quarter, up 19%, much of that from our successful Ventyx acquisition.

Our components business continues to do well and ABB is among the leading suppliers of insulation components for a wide range of power equipment. The accelerated shift to renewables, especially wind, that has followed the nuclear accident in Japan also provides us with some attractive upside. Meanwhile, we expect the demand for, especially, transformers to continue to improve.

We've already seen clear signs of that in the traction transformer business serving the rail sector, especially in China. The need for dry-type transformers and other specialized transformers to manage power flows in subsea oil and gas exportation, for example, with reduced environmental impact is also expected to grow.

There are still some risks in the business, although those have not been fundamentally changed since the first quarter. The macro concerns are well known, so some crisis in the debt markets could reduce the appetite for large, state-funded infrastructure investments, as I'm sure you understand.

Emerging competitors remain a challenge and there is still overcapacity and price pressure in parts of the power business, mainly large power transformers and some high-voltage equipment like gas-insulated switch gear. However, we continue to take steps to make use of the growth opportunities, while we try to mitigate the risks.

On the competitive side, we continue to push hard to intensify local R&D and product design so we can deliver the right products with the right specifications at a competitive cost, especially in the emerging markets.

Exports from our low-cost footprint will also play a key role and we're making progress in this area. Clearly, we need to continue to focus on cost savings, especially in Power Products, so that we can deliver against our margin targets. And finally, we aim to keep pushing on the service side to support more stable revenues and margins, going forward.

On the automation side in chart 10, again the overall picture remains favorable. Energy efficiency will continue to be a key demand driver and new regulations coming in Europe and Australia, for example, should provide further support in the next couple of years. This trend is also reflected in the Baldor performance this quarter and in our low-voltage drives business.

Robotics demand continued strong in the quarter and, again, achieved good profitability. Demand in oil and gas and petrochemicals, marine metals and pulp and paper sectors continued to drive growth in our mid-cycle businesses and, looking ahead, we see that trend continuing.

We've had increased prices in the first half in a number of our automation product businesses, reflecting both high demand and input cost increases. We will continue to implement price increases over the remainder of 2011.

Turning to chart 11, we're extremely pleased with the Baldor acquisition and the company made another solid contribution to both revenues and operational EBITDA. As you can see, sales were up almost 20% on a stand-alone basis and operational EBITDA was up 25% to generate an operational EBITDA margin of approximately 20% in the second quarter, an increase over the same quarter a year ago.

Both the revenue and cost synergies are developing in line with our expectations. We're seeing some upside potential from the sale of mechanical power transmission equipment outside the United States. The integration is also on track and we have been able to keep the key management team to ensure that the company continues its strong performance.

As we indicated after Q1, there were no major acquisition charges this quarter and we're now expecting a slightly higher amortization cost of that acquisition of about $110 million a year than the estimate in the first quarter. This impact will run through 2017, after which it will start to decline.

Let's look at the M&A picture on chart 12. We continued to make small, bolt-on acquisitions in the second quarter to fill strategic gaps and to gain access to markets that we think have good growth potential.

We announced the Mincom transaction during the quarter, which makes us one of the world's leading suppliers of enterprise asset and management software and solutions. Mincom does for the mining industry what Ventyx does for utilities, helping customers plan and optimize their assets to improve productivity and efficiency. It fits well with our existing business in the minerals and metals area and will allow us to offer a more complete solution to our process industry customers.

The Epyon acquisition strengthens our position in the developing market for fast-charging DC stations for electric vehicles and complements our existing strength in direct current technologies.

L&W closes our gaps in pulp and paper technology portfolio and brings us additional exposure to some key geographic markets, such as China.

As for the Trasfor deal, it'll help strengthen our position in the specialty transformer market, especially at lower voltages where transformers are mostly dry where this equipment is used in renewable energies, marine, oil and gas applications.

All of them meet our financial return criteria and they're all at digestible size, spread across several geographies that allow us to balance the integration challenges across the divisions and regions.

Let's turn to chart 16. We'll look at our EBITDA bridge. In an earlier chart, I gave you an overview of the changes in operational EBITDA and margin by division.

If we aggregate this across the Group, we achieved a 22% increase in operational EBITDA compared to the same quarter a year ago. This was due to our ability to, again, offset negative impacts of price erosion due to the combined effects of cost savings and volume increase and not the least to the dramatic improvement in profitability in Power Systems.

At the same time, we invested almost $90 million more than a year ago in increasing our sales path in key growth businesses and regions and in R&D and product development to secure our technology advantage. While positioning us for future profitable growth, these investments reduce our operational EBITDA margin this quarter by about a percentage point. On this basis, we see the margin developing in line with expectations.

Price pressure will continue, as we have said before, but we still think we can offset that by further cost savings and the resulting operational gearing benefits. So, the bottom line for us is that we continue to execute successfully to deliver our full-year margin targets.

Let's turn to our cost-savings program in chart 14. We again were able to take out significant cost in the quarter, some $270 million to bring our year-to-date savings to just under $500 million.

As you recall, we estimated at the beginning of the year that we would need to take out $1 billion in cost to mitigate the price erosion that we saw in our late cycle order backlog. So far, we're on track to get there. Sourcing was again a key area for cost improvement and accounted for more than half of the savings. Operational excellence measures to increase productivity also made a good contribution, while more footprint gains will come later.

On a divisional basis, it's no surprise to see the bulk of the savings on the power side and that's likely to continue, but it's important to note that we're still able to reduce costs in the automation businesses at the same time as we grow. This balance between cost and growth control will continue to be a priority for the Company in the coming quarters.

Chart 16 summarizes our cash flow performance in the quarter and, once again, we have shown our outstanding ability to generate cash. Despite increased requirements in net working capital to fuel growth, we were able to lift cash from operations by more than $200 million compared to the same quarter of 2010. Our net cash position is above $1 billion, even after the $1.6 billion dividend payment in May.

Chart 16 let me summarize. Looking first at Q2 results, we saw our revenue momentum continue to build, with growth in all divisions. Earnings and net income were up significantly and we delivered a healthy 44% increase in earnings per share. Pricing in the power transmission continued to weigh on margins and that will continue over the rest of the year. But we, again, took out significant costs and we're confident that will allow us to remain on track against our EBIT margin target. Lastly, as I just described, we continue to be a reliable generator of health cash flows.

Our outlook for the remainder of 2011 hasn't changed since the first quarter. Yes, macroeconomic concerns have increased around government debt in both the US and Europe and inflation management in China. We're watching these developments closely, but at this point we see nothing in our end markets to change our view for the rest of the year, which is continued customer investment in industrial solutions to increase capacity, efficiency and productivity and a recovery in power transmission demand.

We'll continue to increase prices whenever we need to, to help offset higher raw material costs and we'll keep driving our cost-out program to make sure we achieve our full-year target.

That concludes my formal remarks. Michel and I are here and be happy to answer any questions.

(Operator Instructions). The first question from Mrs. Christel Monot, UBS. Please go ahead, ma'am.

Yes, hi. Good afternoon, everyone. It's Christel here from UBS. I'm going to try to have two (inaudible) questions quickly.

The first one is on your investment in future growth of about $90 million this quarter. Can you give us some kind of an indication of what we should expect for the next couple of quarters, because it was significantly higher than Q1?

Second question would be on Power Products, in particular. Did I understand correctly that you're still fine with your target of 15% margin for the full year?

And in that context, I noticed that your orders in South Korea and China were up significant in power while yesterday I think Hyundai had a reported margin which have collapsed half compared to last year. So can you comment a bit on how your -- what you're doing in terms of -- to offset Asian competition or in terms of development against some of your Asian competitors? Thank you.

Yes, as far as the investment in selling and R&D is concerned, indeed, it has accelerated a little bit this quarter. The increase, I think, was a bit below $60 million in the first quarter. It's $85 million now.

It also depends a little bit how the outlook turns out. We are, obviously, checking that carefully so there will be a continued increase, but I don't think we will see a number higher than what you see here in terms of increase, or maybe the safest is to give you a range between what you saw in Q1 and what you're seeing this quarter, between $50 million and $80 million, say.

Christel, on Power Products, we've given you a target of 15% and we're pretty much within that range right now and we're comfortable with shooting for 15% for the year.

On South Korea and China, I could tell you that what we sell -- Hyundai is, obviously, a big company. We sell a lot of marine to South Korea, so it's not necessarily systemic demand for South Korea. It's a lot of EPCs or marine and shipbuilding work. And so we sell (inaudible), electrification systems and those kind of things to those marine applications and those have -- some for oil and gas, some for transportation, but that's, I'd say, the major part of the increase in that business there.

Okay?

Yes, just a followup, if you don't mind. On the $50 to $80 million investment you're doing, can you comment, elaborate a bit, give us some color of where you are investing, in particular? And that would be it from my side. Thank you.

Yes, we put it in R&D and sales, primarily. Actually, G&A is coming down as a percent of revenue.

I would say more in the automation divisions than in the power divisions.

Okay, thank you.

You're welcome.

Next question from Mr. James Moore, Redburn Partners. Please go ahead, sir.

Good afternoon, everyone. It's James at Redburn here. One question on orders where the rate of year-on-year growth came down, it looks like China is a part of that and China, on the automation front, has come down from a year-on-year growth of 37% to 11%. Is that just China slowing? Is it a comp? Is it the new normal?

Also, I noticed that large orders, which have consistently run at $1.6 billion, $1.7 billion over the last three quarters dropped to $1.2 billion and I just wonder from the visibility you have in your quotation, your tender pipeline, is this the new normal, the lower level, or will large orders bounce back?

And then finally, on automation margins, you had organic sales growth of about 15% across the three automation divisions, $600 million of extra revenue, but excluding Baldor and the cost savings, automation EBIT was pretty flat and I know you talked about silver costs and the various mix issues, but will there be a contribution margin for future growth in the next few quarters and, if so, what sort of level is it? Or will mix continue to erode the contribution margin?

Hey, James. First of all, on the China order side, it's hard to say what the new normal is. As I talked about in my opening comments, particularly in Low-Voltage systems, where we saw the biggest change from the first quarter to the second quarter in automation is we had an announced price increase. We announced it in the first quarter, but we implemented in the second. And so when you do those kind of things, you sometimes have a lot of orders that are placed ahead of that.

So, we had almost 30% growth in the business in that quarter and we had negative growth in Low-Voltage in the second quarter and it's hard for us to figure out right now how much of that is just a rush to avoid that price increase and how much can be the building construction industry being affected in China in some way. And so I think, obviously, that'll become more clear for us in the third quarter.

But we're -- as you look at the business, too, I think it's good to remember that about 80% of that business is between Europe and China, with 20% of the total being in China, overall. So it's an important part of the portfolio that we watch.

On the large order side, James, I'll tell you that I think it's an anomaly. Is it -- that's a new normal that you'd see that percent from a revenue standpoint and our expectation is that's going to pick up in the third and fourth quarters of this year.

On the automation margin side, Michel, can you talk --?

Well, yes, I think there is really some one-offs this quarter, as you mentioned, mix and systems, that will not always be there every quarter and the price increase combination of that, too. So I think that we should come back to our normal incremental margins in the future. These are businesses that have an EBITDA margin close to 20%, so you should have a few percentage more -- a few percentage points more on the incremental basis.

Obviously, it all depends how much they want to continue to invest in R&D and selling. That is part of it. But, no, I think that this was a few exceptions here that made the incremental margin abnormally low.

And all other things being equal, what's the sort of contribution margin we should expect from automation? Is it like a 20% level or --?

Well, given the fact that the average margin is close to 20%, indeed, you should have an incremental margin that is slightly above that, since you get, really, some volume absorption that helps with that. So, you should have it in the low 20s, indeed.

Okay. Thank you very much.

All right, James.

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

Good afternoon. I have two questions, please. The first one is on the earnings bridge. You show a small negative of $33 million in ForEx and other, but given the massive translation impact, the positive translation impact you had in Q2, which is probably about $100 million, I was just wondering whether there were any other larger items in there or whether that's a big negative transaction impact you saw in the quarter?

And the second question is on Power Products. If one looks at the price decline, maybe one can come to an estimate that maybe pricing and sales in Power Products could be down as much as 10%, year-on-year. Maybe you could give us the number what pricing and orders is down year-on-year? Many thanks.

Sure.

Yes, Andreas, on the first question, on the orders, obviously, ForEx translation, there's all kind of moving parts here and sometimes it's a little difficult to put that together, especially when you calculate it at the EBITDA level.

But basically what you have in this category of order is, on one part, the ForEx translation, on the other part the impact of the -- what would I call it, the commodities, the normal commodity raw materials, like copper, steel and now silver, in this case, for instance, that impacted us in Low-Voltage this quarter, as well as the change that you see in G&A.

So, we kind of put everything together, sometimes. In some quarters, it's almost not noticeable. In some other quarters, it is more. So it is a bit of a mixed bag of everything we need to finally manage to put this very complicated EBITDA bridge together. Because, as you know, the cost savings we are focusing on all the raw materials, excluding commodity raw materials, which is always taken apart.

On the PP price decline on incoming orders, I think -- Michel's going to look at it. I think it was 4% to 5%.

On orders it was 4%.

Okay, Andreas?

Thank you very much.

You're welcome.

Next question from Mr. Colin Gibson, HSBC. Please go ahead, sir.

Hi. Good afternoon, gentlemen. A couple of questions, please. Just like Andreas, I have one question on the EBITDA bridge only this one is the project margins item. Project margins plus 70 -- help me understand what that really means. Is that previous over-provisioning that is being backed out? Is that just a more -- on an underlying basis, a more profitable order stock of projects? What is that plus 70?

It's mainly the fact that last year in Q2 we had already quite some charges from this problem project that we were carrying through at the time. So, obviously, at this time, this project is over. We didn't have any other accidents. But on top of that, I would say that we have seen some projects that had a better margin this quarter than we had same quarter last year. But the major part is really the fact that we didn't have an execution problem like we had last year.

Fine. Okay, thank you.

And then, second question. I know Christel asked you a question already about Hyundai and I'm sure you don't sign up to do these calls just to talk about your competitors, but within the last 24 hours or so we had absolutely shocking numbers out from Crompton Greaves. They've always been seen as one of your more credible Indian competitors. I think their earnings were two-thirds below market expectations for the quarter.

Help us to understand what's happening in the Indian market that you can call, quote, India the outperformer this quarter and a domestic Indian player can be delivering a set of numbers like that?

Colin, I think, first of all, we know Crompton Greaves, I'd say the makeup of their revenue and the makeup of exactly what comprises their sales for this quarter, I'm not associated with and I'll have to study it some more. But, I mean, obviously, it's been a very competitive market in India and, I mean, if you studied Hyundai's results, too, and you saw the 8% operating profit that they had on their T&D side, it was not exactly stellar on that end, either.

And so, I think if you don't have good productivity and good technology right now out there and you're pushing really hard on it, you can accumulate a lot of low-margin types of items in your backlog. And I'm guessing that that's what happened with our competitor here.

Michel, you may have --

Yes, no. I think it just demonstrates what we have told you since many quarters is that it's a big price war out there and that a lot of competitors are really going very aggressively after market share. And that's why, for us, it's a matter of one time being selective and sometimes just withdrawing from tenders that we don't think there's anything in for us and, at the same time, working on this design and cost-cutting in order to keep improving the cost base.

Because, for sure, for the moment, it's all about price. And so, I mean, we are, for sure, not surprised to see the kind of margins they are coming out with.

And can I just ask, India over the last couple of years has been notable not only for a very competitive market on pricing, but also some pretty extreme volatility when it comes to volume growth. Where do you see -- obviously, we just had a decent quarter as far as you were concerned for volume growth in India. Do you see it staying this good for a while?

Well, decent? At 39% I call it more than decent. The fact is at this time is really across all segments. All five divisions are showing solid, double-digit growth, so we see it both on the industrial side as well as on the electric infrastructure side. As you know, there are still a few very large projects pending that we hope to soon get some news about those ones, as well.

But I agree with you, it's -- India is, sometimes, a bit unpredictable in terms of timing of awards and that's what makes it a little bit more volatile in terms of quarter-to-quarter comparisons.

I think, Colin, with our business, too, I think what helps us is having a broad portfolio of power and automation. So we're not living or dying on one particular Power Systems job or Power Products job that we might not like the margin or might not like the position. And so we can help to balance that out across the business, also.

All right, got it. Thanks a lot, gentlemen.

Okay, Colin.

Thanks, Colin.

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

Afternoon. I was interested, again, on the EBIT bridge. The pricing in the second quarter was down $281 million and it was down around $155 million in the first quarter. So the first thing was I just wanted to understand exactly why it was going down so much quarter on quarter. Is it simply the effect of a tougher comparison?

And then when we look at your sort of previous pricing guidance for the year, it would be for about $900 million and so I guess what's implied by that is that we have a second half in pricing that is as difficult as the first half. Are we sort of correct to assume that we should be having these kinds -- a similar effect in the second half?

Well, listen, I think when we had the first quarter results most of you were surprised that the impact in price was only $150 million while we had talked about $1 billion that we thought we would have to face during the whole year. And then we said at this time it depends a bit on the mix and what kind of products we have sold during this quarter.

So all we really said, it is not a linear development that you will see quarter after quarter. So there is, indeed, a big difference. But, in fact, if you see what happens this quarter, this is more or less in line with the guidance that we had given you for the year.

Again, it's not going to be linear for the second part of the year. It's difficult to say, but, as I said before, especially on the power side, it is still a lot of price war everywhere. And so we keep managing this Company with the idea that we are facing a $1 billion losses in terms of pricing headwind and, hence, we are putting together a cost saving program that is designed to fully offset this price impact.

Just one followup. On the pricing and orders being down 4% in the second quarter, how -- just remind us how that moves sequentially. So how far was it down in the first quarter?

Let me see. That -- it was 6%.

Okay. So quarter on quarter, there has been some amelioration of the pricing impact?

That is right, yes. Yes, that is correct. Yes, indeed, sir.

Thank you, Michel.

Next question from Mr. William Mackie, Berenberg Bank. Please go ahead, sir.

Hi. Good afternoon. A question on the Low-Voltage business. Given that the proportion changes from -- of the systems business quarter to quarter, perhaps you could give us an indication of how you thought the underlying profitability in the core products-related business developed during the quarter and what specifically was the impact of the silver price, which you've highlighted a number of times?

And then my second question would be, within the Power Systems business, you've now incorporated an element of the network systems activities, which always came at a higher operating level of profitability. Should we look at the level of returns that you've recorded in Q2 now as something sustainable, albeit that conditional on project execution, and, actually, structurally, should the returns actually increase now that the mix within Power Systems has changed?

Okay. On your first question, with regard to Low-Voltage, the silver hit has cost about 1% of margin for the business in this quarter. So that explains, more or less, half of the move there, the rest being the system mix and the increased spending in R&D and selling.

There again, like Joe mentioned before, we have now put in place, also, like we do for all the other commodities, an ongoing hedging program. So I think we will be able to better manage it in the future. So far, it was not an exposure that seemed very important for us, but when you get a sudden surge of 50%, suddenly it gets in your face, so we have to correct that issue. And that will be done very soon now.

For your second question, network management, actually, has always been part of Power Systems and before we acquired Ventyx it was actually not a business that contributed a lot to the bottom line, so it was, rather, dragging the margins down. Now, we see that we start having more software business, we expect that in the future it will start giving us a little bit more, especially the fact that Ventyx usually produces most of its profitability in the second half of the year.

So it can help a little bit, but it's still not a huge amount of revenues compared to substations, for instance, which is a very big part of the Power Systems division.

Oh, okay. Thank you. Just a quick followup on the tax rate you indicated was 27% this morning. Do you think that was the second half or for the full year?

Yes, that would be the average for the full year. So the full year would end up at 27%. What happens there, we had that last year, too, we give more and more tax audits everywhere in the world and you are obliged to reserve against these tax audits until you get a green light from the tax inspector. And a lot of these tax audits get settled in the fourth quarter. And so we're still quite confident that the tax rate will come down. So the tax rate will be lower in the second half of the year so that we average 27% for the full year.

Thank you.

Next question from Mr. Martin Prozesky, Sanford Bernstein. Please go ahead, sir.

Good afternoon, gentlemen. Just two questions, please.

On your page on automation in the presentation, you mentioned that you're concerned about the speed of implementing price increases. Can you just give us some more color on where you expect that might be a problem? Is it specific geographies, product areas?

That's the first question and the second, in terms of inflation are there other areas? I think in Q1 you mentioned copper was a big input cost increase offset by electrical steels. Other than silver, are you seeing other developments on input costs that concern you at this stage?

On the automation price increases, it's pretty much across the board that we have to move and both in Discrete Automation and Motion there's a lot of focus right now on our machines business and our motors business and our generator business, too, because of some of the input costs there. And we're currently pushing that through. And so we'll push that hard across those product lines across every geography that they're in.

Low-Voltage Products, really, across the board also. I mean, this is -- we've seen very strong demand over the last year, year and a half, in that business. We feel that we could be -- should be driving more price and we, obviously, have higher input costs that we talked about. So, we're not going to be selective, in that sense. We're going to be very holistic in the sense of how we apply the price increases across that product line.

On the inflation in other areas, Michel, I --?

Actually, in the second quarter, if you compare it to the first quarter, most of the input costs of the major commodities we use came down compared to Q1, except silver, actually. So, that was not too much against us this quarter. But, again, we have constant hedging programs in place there, so the impact of these moves is always smoothed out throughout a few quarters. So, silver was a special circumstance because we were not hedging silver, so far.

And just one followup on the price increases. Do you have a specific timing on it or is it just throughout the year and it's on a rolling basis?

I would say most of them have already been announced now and the slide of -- the concern about speed of execution is that it was not fast enough to really impact our results in Q2. But -- so we now expect to see some impact in Q3 that would help get us back to the incremental margins that we were talking about before.

Great. Thank you.

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

Hi. It's Martin from Deutsche Bank.

A couple of questions just coming back to power. I appreciate you giving us some of the growth rates in pricing. We have seen some of your competitors saying that they think that, in absolute terms, power pricing has now bottomed. I just wondered if you subscribe to that view or if you see something a little bit different, given your products mix?

And then the second one was just to come back to the tender backlog. There's a chart you've showed us several times in the past. If you could just give us some sort of sense as to what sort of large projects could be in the pipeline over the next 6 to 12 months? Are you still seeing a healthy build of those large contracts? Thanks.

On the PP pricing bottoming, I think Michel has indicated we saw in our orders pattern some -- pricing of about down 4%, so -- but I would say, year to year, that we do think that we see some flattening. But, again, this is a big portfolio we have in Power Products. I'll tell you, the pressure is still on with our large power transformers and I think you know, as you work with us and you talk to us, that that's been the most pressured part of the portfolio.

A lot of activity out of the Middle East and that tends to be one of the most competitive places on earth. And so we still pricing challenges there.

But we do see a little stability, but you have to look at that almost country by country. It's different in Saudi Arabia than it is in Kuwait and different places, too. But I -- there is some hope there is what I'd say. But we'll see and I think the third and fourth quarters are going to be critical.

And it's for sure that if I look at this quarter, for instance, the growth of sales that Power Products did to the Power Systems division, which is usually to go to projects like in the Middle East and, obviously, carries, usually, lower margin was higher than the average division. So that has an impact, too.

These are still very important markets from a volume point of view, from a service point of view, so we need to defend our market shares, but we know that we have to, sometimes, give up some price.

On the tender backlog side, I'd say what we see is a continuing increase, a lot of it, in offshore wind farms. So HVDC Light that would be used to transport energy in a DC kind of a mode, from the ocean back to the land and that continues on.

We also -- we have a few larger land jobs, also. So I'd say we -- like we talked about, it's a record backlog and we think it's going to continue.

Again, we -- if we talk about the macroeconomic concerns and what government's going to do from a credit standpoint, but right now we see a pretty healthy tender backlog and we continue to quote on those larger jobs.

Does that help, Martin?

Thank you. Actually -- thank you.

Next question from Mr. Olivier Esnou, Exane BNP Paribas. Please go ahead, sir.

Hello, good afternoon.

Hello, Olivier.

Hello. I have two questions. Maybe one on the cash flow. When you said overall it's a pretty good cash flow, but when you look at the divisions, there's some very strong cash flow and some is weaker. Maybe you could comment on the Low-Voltage and Power Products cash performance, which I found a little bit weak? And then I have a follow-on.

No, I do agree with your remark. We have, in fact, good cash flow. That is true, also based on the fact that we have a huge jump in profitability this quarter. So, on that we keep converting the EBIT pretty well.

On the other side, you see, indeed, some net working capital buildup. We are at 15.4%. Usually in the middle of the year, it's always where we are, right at the top, and then we manage to get it down later in the year. Low-Voltage doesn't really surprise me, because they have been growing very fast in Q1, so there's a lot in that.

Power Products we have now put a program in place, because it's both in terms of inventories and in terms of receivables and that is not a good performance this quarter. I totally agree with that.

Okay. And in your ability to recover that, you're pretty confident?

Well, let's say we have proven in the past, I think, that we had, sometimes, some weak quarters, but once we get everybody focused on it, we'll get it back. So we have always, so far, managed to keep new working capital, year on year, between 11% and 13% and I think that this year, again, we can finish the year at 13% or below.

Okay, thank you. Maybe just a followup. I would like to have some update on your mid-market strategy, to the extent that you can tell us a little bit about that. What I would like to get a sense of is, if you look at your sales to the emerging markets, how much of that, would you say, is in the mid-market today as a percentage of the total in power and in automation? Can you give us some sense of the portfolio there?

Well, Olivier, that's a -- it's a huge question, because, first of all, the mid-market is very dynamic. It kind of vibrates between lower high end to high end to the lower side of the marketplace. So it can be really subject to definition.

But when you are in a market like China, I would say that probably 50% to 60% of that market is what we call mid-market products. And that's changed pretty substantially, I'd say, over the last five years, but it reflects the competitiveness and, really, the enhanced engineering and manufacturing capabilities that are systemic in those countries.

I can't give you a specific number. I'd have to go country by country and place by place, but, oddly enough, there's a mid-market in Germany, also. There's a mid-market in the United States, also, and a part of our strategy is not just to develop the mid-market products in China and India, but to also have an export strategy from those products back into the developed world so we can be more competitive on that spectrum, too.

And you're fully happy with the development you see here, your ability to put out so mid-market products?

To say I'm totally happy about anything would be wrong, okay?

It never happens.

I'd say I would like to see this happen faster. We watch this very closely. I -- we call it our rewire efforts. We watch it by our specific geographies to make sure things are coming in place. But I would say I'm moderately happy.

I think what I also like is it's just not about cost. We bring technology into those things, too, so we have a chance to reduce weight or improve scope or those kinds of things through engineering and understanding that we have here in the business. We implement that, also, so we can be not just competitive on cost, but competitive on performance, too.

So, I like the direction. I like the progress in certain areas and in other areas I'd like to see it go faster and we will make it go faster.

All right, thank you.

Yes.

Next question from Mr. Alfred Glaser from Cheuvreux. Please go ahead, sir.

Yes. I'm Alfred from Cheuvreux.

I was wondering, on the demand side, you were underlining the current risks of a slowdown. Could you comment more in detail which end markets could be slowing in the near future or are currently slowing in your order intake and which other markets might be hit next, in that case? Overall, what kind of growth rate could we expect in base orders going forward after the very diverging numbers that we've seen between Q1 and Q2?

And then I had a second question on pricing. Coming back, again, on the power business, could you comment a bit more on distribution transformers and pricing in that segment, please?

The first markets to slow, I mean, the way I'd take that question would be you'd have to look at our business is short, medium and long cycle. Our shortest cycle businesses are in our Low-Voltage Products, overall. There's some part in Discrete Automation and Motion, but low-voltage. So, our expectation here is if we're going to see a slowdown, we'll, obviously, see it in that business first.

To what degree, I'd expect single digits, mid-single-digits to mid-to-upper-single-digits if we see a slowdown. If it's driven by this debt crisis, I don't have even a guess as to what would happen or how the pullback could be or destocking or all those things. But just in a normal cycle, I'd tell you to look at the low-voltage products business.

Base order rates, I think organically base order, 9% to 10%.

Yes, we start comparing now to the two quarters last year where we were increasing base order at 15%. So, obviously, the comparables are becoming, all the time, more difficult. So, it's not surprising to see it slowing down a little bit. Difficult to give you a forecast, but, yes, I agree with you that high-single-digit, low-double-digits look possible, but you guys have to take into account that the comparison hurdle is getting higher every quarter.

Especially we're at about a $10 billion quarterly order rate right now, which is pretty high in that sense.

Your last question had to do with pricing in distribution transformers, I believe, in power. I'd tell you that we've seen a bottoming and we see some recovery in that sense with the increase in demand. I would say it's not dramatic.

We're looking right now at our margin increases, trying to be as productive in that as we possible can, but we certainly see -- have seen the bottom in that and we've seen some type of rebound. You really have to take that by geography, too.

All right, thank you.

Yes.

Next question from Mr. [Klaus Bergelin], RBS. Please go ahead.

Yes, good afternoon. It's Klaus Bergelin from RBS. I have two questions, please.

Firstly, on Power Products, you said orders were higher in Americas, mainly as a result of grid refurbishment and power distribution investments in the US. Did I hear you correctly this morning that you saw orders up 14% in PP in the US in the quarter?

No, actually, 24%.

24%? Okay, great news.

And secondly, could you please tell us when the US business in PP started to grow for you and what the growth rate has been in previous quarters?

And then, as well, sorry a followup, what is your outlook ahead of US transmission spend, specifically relating to HVDC? Thanks.

While Michel looks for that historical information, I'll talk about US HVDC transmission spend. I think it's our anticipation -- we have several jobs we've actually been engineering and in the process of quoting on over the last couple of years. Those projects have been delayed, mainly because of some concern in the sense of energy usage in the United States and how soon that will come back, as the economy recovers.

And I think that's the major determinant here. It's not funding or some of the things you often hear in other geographies, it's just, overall, the rate of increase of electricity usage in certain parts of the United States and then, consequently, the need for that power and then putting that investment in place.

But I've been here three years now. I can -- at least, from what I understand from the team is there are a lot more HVDC projects being considered in the US now than there certainly was five years ago. So there seems to be an acceptance of the technology and to understand how to implement that technology better than, certainly, five years ago.

Okay. Just a sort of a quick followup. I mean, looking at the profitability in the US business in PP, what kind of margin are we looking at and, sort of specifically, what kind of capacity utilization rates are we looking at, at the moment? Is it still well below the average for the division or are we are getting sort of higher?

No, it is still below the average of the division, first, because, as you hint, capacity utilization there is still quite some capacity to use, for instance, in our very large distribution transformer plant. We are also having some operational issues that we work on. So, I think that once we can solve that, there's a good upside potential there and we count on these improvements, too, to the soft landing at 15% that Joe mentioned before.

So that is the first point. In terms of growth, in fact, this market has always been pretty solid for us. I have numbers here going back to early 2010 and, in fact, we have always had positive order development in the US in Power Products. It was single digit in the first half of 2010 and became double digit. Now for the first time it is in the 20s.

So the demand is really picking up and that's why I think, also, if we can fix our operational issues we have a good potential there for improved profitability.

Perfect. Thanks.

You're welcome.

Next question from Hampus Engellau from Handelsbanken. Please go ahead.

Thank you very much. I'll limit myself to two questions.

Firstly, on the back of the cost-cutting program, it seems in the (inaudible) we've been in that you're below the guided full-year number, if I remember correctly, at $250 million. Just if you could, still, clarify is that what you're expecting to take for the second half?

Last question is more related to Japan, if you've seen any extraordinary costs during the quarter? Thanks.

On the cost-cutting program, I think we're at $470 million as we go out the first half and it's a savings program and I'd say we're going to -- we have to hit $510 million, $520 million in the second half and it usually runs that way. So, we're pretty much right on what our commitment level has been.

But as to -- we have given an input that we would spend between $250 million and $280 million to implement this restructuring program and it may still happen. It might be a bit lower than that, but it all depends on the timing related with to the footprint part of that. Obviously, these costs come when we have to restructure some plants and some facilities and, obviously, there might be some coming, so I can't tell you yet, in terms of timing, when it would happen.

But I think it is still safe to consider that it takes spending of probably $250 million to generate $1 billion of savings. So that looks to me like a good bet from that point of view. Okay?

And on Japan?

On Japan I'd say, remember, we don't have extensive operations in Japan in the sense of our sales. Most of the disruption in Japan was on raw material supply throughout our -- particularly our automation business. That's settled down, pretty much. We don't see an issue there.

I think you can see industrial production in Japan is really suppressed right now, and so the economy is in pretty bad shape, but it's not anything that would materially affect our business right now that we report on.

And then to followup, should we expect any (inaudible) sales to (inaudible) from NSK or --?

No, I really -- you mean, in the sense from a competitive standpoint?

No, no, from --

From a supply standpoint?

Yes.

No. Not at all.

Okay, thanks.

The last question for today is from Mr. Sam Edmunds from Goldman Sachs. Please go ahead, sir.

Good afternoon, gentlemen. I was just wondering on your cost saving program, you've got about another $500 million to come in, in the second half of the year and looking at the charts and the presentation, most of that should come from footprint. I was just wondering how confident you can be that those savings are going to flow and why it is that the footprint savings are taking somewhat longer to come through than the others this year? Thanks.

Well, because, obviously, footprint is a very big decision, involving people, as well, because it is about closing plants. So I think that you have to plan very carefully and negotiate with unions when it is necessary, while operational excellence is ongoing programs that you have all the time and that, once initiated, they can reproduce themselves automatically. Sourcing is a negotiation, but as soon as you reach an agreement, it has an impact the day after.

So the footprint part is always the slowest to take place and it's also the one that you try to hold on to as long as you can, because this is the toughest part, the part that hurts the most employees, as well. So you always start a little bit with the one that has immediate impact and then after that, you tackle the longer-term ones.

Maybe I can make a --

Thank you.

Yes?

Sorry. Just that those plans are in place, so you can be pretty confident that those savings come through?

Yes, I think we have demonstrated in the past that we hold our commitments in terms of the savings and so, indeed, the plans are in place, yes. And I think it's very important. I mean, our goal -- and you see it again this quarter -- is always to try to offset the price impact with the cost savings and that is really how we manage this company and I think with that there have been a lot of questions today about margins.

I think it's still very important to analyze this EBIT bridge. If you look at this chart 13, the four first elements -- volume, product, project and cost take-out. For me, that is really, let's say, the market impact and what we try to do against it.

If you add these three together, that is about $380 million, net, that we have added. So if we had basically not reinvested part of that in selling and R&D, we would have had an incremental margin there of 25% on the incremental values that we have generated this quarter. So, I think it's important that you keep that in mind, too.

I think we are putting out this Company in a growth mode. We get now more organic revenues. We get more in organic profits. We have generated a high level of incremental margin on the organic business and because of that, the bottom line, in dollar terms, is much better.

Margins, sometimes, may give you a different indication, but maybe that is not so much what you should always focus on. I think the earnings per share is not just margin, just to make a point.

And maybe just a followup on that margin point. I was just wondering, in terms of the -- within your currency exposures, how much the negative translation, if you like, masked by the positive dollar, has cost you in margin terms during the second quarter?

I would really not think that it has cost us a lot, because we have ongoing hedging programs in place of all of our future cash flows. We also have footprint that is pretty much balanced between -- both in terms of revenues between the dollar zone and the euro zone and also in terms of costs, maybe slightly more euro cost, a bit more Swiss franc costs or maybe a slight disadvantage, but I wouldn't really quantify it as anything critical for the margins.

And --

That's lovely. Thanks very much.

Okay, Sam. Hey, look, thanks, again, for joining us. We appreciate the interest. We're proud of the results we have here. Obviously, there's some gives and takes that we have to explain, but overall, we like the direction of the Company and we remain optimistic about the future. And so we'll see what happens from a net macroeconomic standpoint, but from where we stand right now, we're optimistic about what we can do here as we (inaudible).

So we'll talk to you again in the third quarter. Thanks, again.

Thank you.

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.