Abb Ltd (ABB) 2013 Q1 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon. Welcome to the ABB first quarter 2013 results analyst and investor conference call. I'm Julia, 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 Mr. Joe Hogan, CEO of ABB, and Mr. Eric Elzvik, CFO of ABB. Please go ahead, gentlemen.

Hello, it's Joe and Eric. Thanks for joining the call, and good afternoon to everyone. As always, our comments on the call, you can refer to the presentation that's on our website at abb.com.

I call your attention to chart 2, and that's our Safe Harbor statement. And I challenge anybody to find a change in that for the last couple of quarters.

Moving on to chart 3, we feel good about the quarter overall, from an operational standpoint, and also from a strategic standpoint, too, and we'll talk more about that. Given the uncertainties in the global economy, we feel that we've performed as we should have, and as we planned. We continue to execute well, and we're balancing solid cost discipline that we see across the portfolio with targeted growth in businesses and regions where we have competitive advantages, especially in areas like industrial efficiency, power reliability, and renewable energy.

Our balanced portfolio and global footprint contributed to the resilient performance overall, allowing us to find and capture growth opportunities in a mixed market. For example, we won some key orders in marine and mining and robotics, and increased emerging market orders by double digits, by 10%.

We looked at total revenues on both an organic and an inorganic basis. Our execution on cost remains strong, with very tight discipline on our G&A expenses. Continued success in sourcing and productivity improvements saved us about $260 million in the quarter.

The Thomas & Betts integration and synergies are on track. We're very pleased with this acquisition and the improved balance it gives us in the North American marketplace.

The Power Products' team turned in another very good performance with an operational EBITDA margin of 14.9%, again within our guidance of 14.5% to 15% for the full year, thanks to solid execution on cost, and selective growth initiatives in more profitable end markets.

And we announced the planned acquisition of Power-One earlier this week to tap what we think will be one of the most dynamic and attractive power markets in the future with solar inverters. And it plays right into the combined strengths of Automation and Power, as we described earlier this week.

Moving on to chart 4, and looking at the quarterly overview. I already mentioned the mixed demand environment that we see out there, which you can see reflected in our top line numbers. We generated a solid increase in operating earnings and margins. This is partially due to an easier year-on-year comparison, as you recall we saw some weakness in the first quarter last year. But also the result of ongoing efforts to target more attractive end markets to improve our service offerings, and to be more selective on the kinds of projects we take, especially in Power.

And also, thanks to our continued success in balancing our growth and costs, which is the foundation of our strategy, our execution on cost remained strong in the first quarter, with tight discipline on G&A expenses, continued success in sourcing and productivity improvements, again, saved us $260 million. Eric will break that down for you in a moment.

We also achieved these results despite continued demand headwinds. Growth in the US decelerated further in the quarter, and industrial investments in much of Europe remain mixed.

Cash flow was lower than we'd like, but it's largely expected and mainly reflects the timing of project execution. So we expect to see a recovery in the coming quarters, as we always do at ABB given the cyclical nature of our cash.

Moving on to chart 5, this chart highlights what we think is a key competitive advantage for ABB, namely our very balanced business and geographic scope. For example, we now have some 60% of our business now coming from the Automation side, which helps us take up some of the slack that we've seen in the Power cycle.

Similarly, we've enhanced our presence in North America, and that's contributed to the resilience of our results. And the share of orders from a strong emerging markets presence is again returning to near 50%, 48% of total orders in Q1. This has helped mitigate much of the market turbulence, and allows us to tap opportunities for profitable growth.

Moving on to chart 6, here's a look at the regional highlights in some of our key industries. Starting with the Americas, orders were lower on an organic basis. That mainly reflects the tougher comps that we had versus Q1 last year in North America, especially in our Power business. As I mentioned earlier, we saw a continued year-on-year deceleration in order growth in the United States in Q1.

On the other hand, compared to Q4, and that's 2012, on a sequential basis, Automation orders in the US, and that's excluding Thomas & Betts, are showing some modest growth. We have to wait and see how this develops over the rest of the year, but we think that's a good sign.

Europe was also again a very mixed bag. This quarter we saw strong improvement in Eastern Europe; Poland/Lithuania HVDC large order link, in Russia, mine hoists. These offset weaker orders in some of our traditional Western European markets like Germany and Switzerland. However, we also saw good growth in countries like France in our Power business; in the Netherlands in all of our divisions, except for PA. So again, it's difficult to draw any general conclusions.

The only conclusion I'd draw from the European discussion is that we have really good diversification from what we can sell in Europe. And you see that in our portfolio that we can drive in the kind of economic environment over here that we're seeing, that we have just minus 1% in orders relatively flat, I think, is a great tribute to the diversity and the work of the team here.

Asia also improved. We saw China return to the demand levels of 2011 after a softer 2012 1Q. In the Middle East and Africa, our strong presence in South Africa helped us to offset some weaknesses in other parts of the Middle East and Africa.

Moving on to chart 7, here are just some key orders in. I don't want to walk through each one, but what I hope you see through this is just the diversification in region, and also product line that we have in these different orders. And you see it across the Automation portfolio and also the Power portfolio, too.

Moving to chart 8, and that's just a look at orders and revenue by individual divisions. So if we look at DM, revenues reflect execution of a strong order backlog, especially in robotics, and service revenues up 5%.

In LP, in low voltage products, really steady organic, we mean almost flat to 1% up. This is our earliest cycle business, and no matter where we are around the world, it's our biggest heads up in the sense of where economic activity is going, and so we see it relatively flat in that sense.

Process Automation, higher mining and marine orders offset weaknesses in other sectors. We get a lot of questions on how we're doing from a marine standpoint in a down marketplace, and our comments are a lot of the marine that we do in PA has to do with oil and gas and offshore. And that's why we've been able to tap into that sector that has some robust investment.

On PP, order selectivity in a challenging market overall, so Bernard and his team are just -- given the quotations that are out there today, and the diversity of our product line and also our global footprint, we're able to pick the jobs that we like, and there's enough robustness in the jobs out there to allow us to do that.

On PS, we talked extensively with you in the fourth quarter about our PS reset. You're starting to see some of the benefits of that with the 8.3% for the quarter overall we'll talk about in a moment, but it's also reflected in the orders being down in the sense that we're going to be more selective in the jobs that we take. And overall, you'll see this balance out as we go through the quarters of the year.

So moving on to chart 9, which is basically when you look at operational EBITDA and operational EBITDA margin, you can read through this yourself too, but we have higher revenues in DM, a little less favorable mix. And what we mean by that is that you have both medium-term and short-term products in the portfolio of DM. Right now, we have more of the medium term coming in, and that does give us a little bit of shift in mix and a shift in margins side.

LP margins up organically on improved cost control and better capacity utilization; PA improved project execution and higher Full Service margins. And Power Products, really favorable business mix and price pressure, and mostly offset by costs savings. That team continues to execute well, and PS we just talked about that.

So with that, I'll turn over to Eric, and he'll walk you through the waterfall.

Yes, if you take a look at the EBITDA bridge, we have here a presentation which reflects the factors that impact our operational EBITDA.

The format has been slightly changed from the last quarter. You see in the first column the net savings, the price pressure combined with the cost savings; that's the way we like to see it. And you can see we were successful to get a net effect out of that with more saving than price pressure in this quarter.

Looking at the volume effect, so despite the limited revenue increase, we have a positive effect from the volume as we have kept expenses under tight control, so $150 million improvement comes from there.

Looking then further to the mix, that is negative and it's mainly within the divisions. There's different mix between projects and products, geographies, it's a big variation in different places, but net to that is a slight pressure on the mix. And as you can see, Other is almost nothing before arriving at $1.360 million, and then adding the T&B contribution bringing us to the EBITDA margin of 15.0%, as you can see.

Looking at the EPS slide on chart number 11, you can see that we had on there, net income reduction of 3%. But if you consider the amortization and the timing differences mainly from derivatives that we booked from an accounting point of view every quarter, we had actually an operational net income, before amortization, an improvement of the earnings per share of 16%. So we think that's a good reflection also on how the operational EBITDA improved during the period.

Turning to chart number 12, just the update on Thomas & Betts. Integration is on track; we had a strong start in the year with stable revenues of roughly $590 million with about $100 million operational EBITDA. Margin at 16.6% versus 18.1% a year ago; that's against a strong comparable and also some of the mix impacts are in Thomas & Betts. But overall, integration is well on track, we are starting to get cost synergies and also some early signs of the revenue side.

Special items on amortization stays unchanged from before, so there is no change in the guidance on that side.

Continuing to chart number 13, on the cash flow, you can see that the divisional cash flow was lower than last year. That's mainly due to timing of project payments, as well as the cash impacts from the PS reset.

We have a seasonal effect on cash flow. The first quarter is always weaker, and this year was specifically even perhaps more weak than the normal cycle because of those effects.

All in all, the net working capital is at 16.4%, and we continue to work hard to improve this and foresee that we will have stronger cash flow in the coming quarters.

And so moving on to chart 14, the technology innovations chart, just we want to show you just some of the products that have been successful for us recently. We announced the 1,000 kilowatts central solar inverter and so, when we do a deal as we have with Power-One recently as we've mentioned, we do it from a standpoint of really understanding the market better than we did three or four years ago.

And so as we go into that acquisition, we understand the technology, the regions, some of the grid codes and different things that's responsible for and that's why we feel we can accelerate our efforts there, that that acquisition made a lot of sense at this point in time.

On the right-hand side, the launching of our first DC grid on a ship, a Norwegian offshore supply vessel. This is where about 20% of the energy is saved and a huge amount of cargo space is saved by going with DC. And we're looking to translating that into other marine applications that are intermittent like this that allow for that kind of technology.

Our low voltage breaker, which is our Emax breaker that's listed down below on the left-hand side. This is a product that we showed at the recent Hanover Fair, and it's an interesting product in a sense that it has 61850 code and a sense of communications of this and being able to do different load shedding. It's kind of an obvious invention that really hasn't been done before as to the really combined load shedding with a breaker. And it got a huge amount of attention at the Hanover Fair because it can save energy prices -- energy costs significantly in a short period of time.

And you do that because, when the breaker's ready to break, it's just says hey, this load is going to overpower me, so why don't we reduce that imbalanced load. It's almost a monitoring system on a sub-segment level, which is we're pretty excited about this across the board. And some of the payback periods we see for customers are less than six months on this, so it gives us a good sale cycle too.

On the right-hand side is the gearless conveyor mill drive, and so when we talk about some of the success we've had in the mining industry lately, some of it has been with gearless mill drives and also with mine hoists. And these are big pieces of mechanical equipment that ABB has very strong positions in. I think, we're not looking at a lot of Greenfield mining right now, given what's going on with commodities, but what we do see in the mining industry is a strong push toward productivity and really sweating the assets that you have in those mines, and we feel we can play into that cycle pretty well.

So moving to the next chart, which is the demand outlook into 2013. We really went by region here, and I think as we look at some of the other competitors in our segment that are talking out there, we don't think we're materially different from what we're seeing out there in our market, too. So in Americas, we give these arrows a slide up in Power and Automation and we'll see how the market develops. I think, as we see the construction cycle in America begin to tick up that it gives us some hope, particularly on our shorter cycle businesses.

On the European side, it's still uncertain. It is a two-speed economy. You saw the strength that we had in the eastern economies but still pressure in the west. We'll have to see how that develops.

Middle East and Africa's mixed also, but we still see a pretty good spend from a Power standpoint in the Middle East area, and then different resilience in parts of Africa, too.

On the Asian side, we had a good quarter in China. We had some, I think, tough comparables in India, particularly on the Power side, but Automation is hanging in, in that sense. And so overall, I think, again the economies we're seeing right now are not a lot different from what we anticipated in our budgetary process. It's just an uncertain economy that's flat and maybe some momentum in some of the economies and we're prepared to execute in that environment. And the first quarter's pretty indicative of how we feel that we'll be able to address it.

So the last chart; I think our outlook here just remains relatively unchanged. There's no clear sign in demand trends in the sense as we head into the second quarter of 2013 that would be materially different from what we've seen really in the fourth quarter of 2012 and the first quarter of 2013. Nevertheless, we feel good about our strategic position and our operation position, and we think that we can compete and perform very well in the economic cycle that we're encountering out there.

So with that, we'll turn it over for any questions that you might have for Eric and me.

I just have to say that we have added in the package on the web the presentation package, also the divisional order backlog in the back. There's been questions during the day on that and this is now available on the web.

(Operator Instructions). Ben Uglow, Morgan Stanley.

A couple of questions. First of all, can you give us a bit of general color on the order growth in China, both from the Power and Automation side, but actually I'm most interested in what you're seeing in the kind of what I call the factory environment? I presume that Low Voltage is doing okay, but we've had very different messages over the last couple of weeks from Siemens with their Automation business in China who felt things were getting tougher, and Schneider who felt things were bottoming out. I wondered what your take was on classic factory automation demand in China during the quarter. So that was question number one.

Question number two, can you give us just a bit more of a sense of this mix effect in Thomas & Betts? The reason being, the EBITDA margin has come down from over 18% to, I think it was at 16.5%, on stable revenues. What is it in Thomas & Betts' portfolio, is there a product category or a particular driver that's leading to those slightly softer margins?

Ben, I'll start with the mix effect in T&B. Last year, they had a very good quarter. Remember, they didn't really consolidate until second quarter of our side. They had a really good quarter in steel structures and a higher margin, significantly, versus this quarter. We're not in trouble; we're still in double digits in that business and all. It was just inordinately high last year, and that's the biggest mix factor from quarter to quarter.

What we see in that business from the electrical standpoint is very good. Again, we're seeing some increase in this construction cycle that is reflected in there also that helps. And so when we mention mix, Ben, that's the biggest mix factor that I can give you that makes sense.

Okay. And does that continue throughout the year, Joe?

No, I don't believe so. We have a good strong backlog in that business overall for about two or three years. Just like in our Power Products division, Ben, there's some good margin in there and some bad margin. You execute through it. And we feel very confident that it'll perform on a level this year as it did last year in total.

Thank you.

And I'll let Eric handle the China question.

Thank you. So on our side, the Low Voltage business is showing some signs of improvement, but not so strong signs of improvement. And then also the Discrete Automation division as a whole, it is a positive development in China; specifically, robotics continues a strong trend in China.

You know, Ben, I'm going to probably make a mistake here but give you a little bit of color, okay?

Please do.

I'd say when you look at Siemens' portfolio, they're pretty strong in medium voltage drives in China and they don't have a robots' platform, okay? We're strong in low voltage drives; we have a robotics platform. So it's a really hard comparison when you look at the economic cycles across the two businesses, and so we're going to get different looks. Robotics continue to be strong in that area, and our Low Voltage Drives business had a little bit of life into it this quarter versus what we had last year. And so I think it's a hard apples-and-apples comparison when Siemens says one thing and us another. It reflects a different part of the Chinese economy.

But when you're looking at -- you said you want to understand the manufacturing base, those are two things in DM, robots and low voltage drives, that I would tell you that would represent that segment of it pretty well.

Very helpful. Thank you.

Andreas Willi, JPMorgan.

Two questions, please. The first one on your outlook for the US; you, like other companies, are still more positive on the US overall. Your arrows still point up for 2013, but ABB, like many other industrial companies, actually had pretty weak Q1 orders or business trends in the US. You were down 12% organic -- or 16% organic in US on orders. Maybe you could just give us your insights into what you think is going on in the US industrial and on the power side? And what is needed to turn that around. You say Q2 will not be very different; are you banking on a big second half, basically, in the US?

And the second question in terms of pricing on the Transformer or Power Products side, you talked this morning on the press call that order pricing is still minus 2% to minus 3%, which is pretty similar to recent trends. With commodities now coming off, and with products like transformers carrying a lot of copper, oil and steel, how are you going to communicate with the markets, going forward, given the changes you may get on net and gross pricings, given the commodity impact? Thank you.

[Ben], on your first part on the US economy, remember, we're all feeling this thing right now, trying to figure out what it is but, say, last year we had a really good Power performance in the first quarter and so when you look at Power to Power, it was down. I don't think inherently there's a big change in the power market in the US between the years. When you look at the CapEx that's projected from a utility standpoint in the United States, it stayed pretty stable from year to year and so, Andreas, I'm not down on it. I think on the Power side, we should see a reasonable year there. I'm not talking about any big upside in the second half or anything like that, but I would talk about stability there.

On the Automation side, we really get our look through -- a lot of our look through Baldor and T&B. And in T&B, we saw stronger orders in the second part of March, and we saw a lot of weakness in January and the early parts of February.

Andreas, again, I'm going to speculate for you; you can do with what you want to with it. I think there was a lot of -- there's a couple of things you have to consider, from a macroeconomic standpoint. There's one is, toward the end of the year last year, I think there is a lot of gymnastics going on with companies in the sense they're trying to maximize some R&D credits, taxes were going to change in the United States. We were anticipating a lot of those things. And I think that, to a certain extent, contributed to some of the weaknesses we saw in some of the figures in January and February. And it's a guess, Andreas, okay?

And the first quarter last year was a very strong quarter, so you have to keep that in mind also.

Yes. And secondly, I'd say I think all the mess in the United States on the sequester and everything else, it just creates a level of anxiety and concern there that I think it helps to mute a construction cycle that started to gain some momentum in the second half of last year that we were hoping for, and so I think we're all just in a wait-and-see mode right now.

Now when we talk about the United States too, we have to include Canada because it's a significant amount of business we do in Canada, too. And frankly, Canada was weak overall, in the first part, but again we saw in March a pick-up in our Canadian business.

And so right now, I'd say we're just cautious and, if I had to guess anything, Andreas, I'd say, think of kind of trajecting a flat line out and we're trying to figure out what's the amplitude of this line. Is it going to start to increase as we go through the year or not? We don't know. But we're just prepared to deal with it any way that it does go, okay?

And, Eric, on the PP pricing?

Yes, I'll take the PP pricing. I think we'd rather have a minus 2% than a minus 2% to minus 3% as we quoted earlier today, so somewhere in that region, but rather minus 2% than minus 3%.

And then when you ask about how we're going to handle the decrease in copper prices and -- remember on the copper side, we're hedging ourselves out on transformers and stuff on large power transformers [to a large degree]. So that'll take a while to work through our backlog. It's not like we're just playing the market from quarter to quarter.

On the steel side, I don't know that we've seen any real significant reductions on electrical steel in our contracts. That'll begin to come up in the second quarter of this year when we renew those things.

Thank you very much.

Mark Troman, Bank of America Merrill Lynch.

Two questions, please. Firstly, a follow-up on pricing, because there's always a lot of questions on pricing. Joe, could you just describe what's going on in the overall market on pricing?

And to follow up on that, I was interested on your comments about being selective, if you like, especially within the Power Products division. So firstly, what's going on in the overall market? And secondly, how can you differentiate away from those market trends, I guess, and be more selective? If you give a few examples of that and what's going on.

And the second question, mining, you put some examples in a pack like mill drives and things. Obviously, mining is a tough market on the OE side for a lot of the equipment suppliers, and we're seeing Greenfield weakness, clearly. What gives you confidence you can keep going in the mining area? Is it a low penetration, or just you're offering good paybacks on the productivity you're offering? I'm just intrigued to hear what your thoughts are on how you can sell well in the mining space.

Well, as a start, Mark, on the mining side, just to say that I don't claim to say that I can see the future in this sense. But we've been pleased with the level of CapEx that we've seen in these kind of things, like mine hoists and gearless mill drives.

And remember, they're around ore bodies so you see them around -- you'll see it specifically around copper, around nickel, things that really have been precious. And even though the cost or the price has come down from a commodity standpoint, they're still at historical reasonable highs from a return standpoint.

So the mining companies tell us that the ore bodies are not as rich in specific minerals as what they've had in the past, so they have to pound them harder to get them out. And that's what a gearless mill drive does. It just takes a bunch of rocks and cracks them up to get down to the ore body and then you distill it.

Mine hoists just means you're going lower or you're venting your mine, so it's just says that they're working the mines harder. And I think we've seen the whole issue with the write offs of what went on in the mining industry last year, the changing of a lot of the CEOs and leadership there.

And I think the leadership teams that are put in place around the mine companies today, and I'm not talking, Mark, at all about coal. Coal has its own cycle; I'm talking about ore, okay? I think that the leadership that's in place is really dedicated into sweating assets more, not doing Greenfield, being more responsible from an operational standpoint.

And so am I optimistic we can keep this going? I'm not telling you I am or not. I'm just reporting on our performance so far and the reason for it, and some of the underlying drivers for it. And we certainly hope that it does.

On the pricing in the overall market, on Power Products and selectivity, what I can just tell you is the more -- one of the things that we have talked to you guys a lot about is the difference of Power Products because of the breadth of our product line and the breadth of the geography that we compete in.

So we see a lot of the market and we often see, I think, a lot more of the market than our competitors do because of that footprint and that vision. And so through that, we have rationalized our capacity. We're very careful in the sense from a productivity standpoint on these assets. And so we're just careful in the sense of what we let in the door. And we get to see more of what we can let in the door in that sense, and we tend to try to pick the things that we know that we can make and with a reasonable margin.

So as long as the markets stay at the levels that they are, it gives us the ability to be more selective in that sense. Eric, you know that. Any thoughts about this?

That's exactly what we are doing.

Okay, great. And just one follow-up; on the cost out program, Joe, I guess over the years now, this is building up to be a big number. How long can this keep going, this 3% to 5% of COGS or $1 billion? Is there still plenty of headroom, or is it all market driven? How should we think about that?

No, it's not all market driven. A lot of it, as we've talked about before, like with did at the Capital Markets Day last year, we look out two or three years on these projects, particularly with OpEx, what we have to do in order to drive that kind of productivity.

This year, on the sourcing side, we hit indirect costs a lot harder than we did last year. We had more visibility to it; we're getting more following in that sense. And so, again, in this strategic period out to 2015, we have very good visibility to be able to keep driving this. And I'd like to just hold that vision out to 2015, and there's nothing that tells us we're going to fall off a cliff after 2015 either, okay? We still think there's a lot of opportunity in the business. Eric, you --?

And as I recently said in one of the investor meetings, about half of it is supply chain and about half of it is operational excellence. And you have to see that operational excellence also includes doing cost reductions that come from redesign of products. And that's, of course, a continuous activity that's going over time.

So we are very confident with this 3% to 5%. In times of big economic upswing, it'll be more difficult to push the supply side of it, but on average, that's what we see.

Brilliant. Thanks very much.

Daniela Costa, Goldman Sachs.

One of the questions is actually a follow-up to your comments on raw materials, which you commented for Power. But I was wondering [are you] extend in and get also to the shorter cycle areas if some of the movements we have seen not also in copper but in things like silver, which over the past were big headwinds, if they actually could be somewhat of tailwinds as we go towards the rest of the year.

And the second thing, on the Japanese yen topic, and you talked about last quarter that you really were not seeing much changes in terms of the Japanese players, but could also use some sub-supply from Japan as an advantage. I'm wondering if anything has changed on that, or if you have taken advantage of more sub-supply from Japan, given where the currency has continued to move? Thank you.

I can take the copper and the raw material and silver, as you mentioned. Yes, there has been some downward pressure on those commodities, but also in the Automation business, in motors and in the low voltage products where we use the silver mostly. We also hedge it, so this will come over time, and we balance this over time and we're not speculating on any of those. So there will not be any real windfalls out of it. But whether there will be some tailwind over a period of time that could be, depending on how the prices are developing.

Also the forecast, of course, looking out for the rest of the year and into next year is not conclusive where those commodities will go, given where the growth will go mainly in Asia.

I think the China recovery is going to have a lot to do with how the commodity cycle goes. I think that's the main driver, as you all know.

On your question about the Japanese yen, nothing really has changed, Daniela, from what we saw and we reported on before. I haven't seen our competition acting in a different way in the sense of their pricing piece. Companies like [Sanic] from a robotics standpoint are very disciplined, and I don't think we'll see it in them. I watch it more when the Japanese competitors from a Power Product standpoint and I haven't seen any indication of that yet.

Remember, these dollar to yen ratios are not historically -- obviously the yen has been much higher in a sense but we, from an overall historical standpoint, we've seen these kind of yen levels before. So I think it's just taking some of the pressure off the Japanese exports, but I don't think it's a phase change at all.

Thank you.

Simon Toennessen, Credit Suisse.

Just two questions; the first one on Power Products. I believe your Power Products' margins was positively impacted by a good Medium Voltage performance, particularly in the last month of Q1, which I believe your Medium Voltage business is generating about 15% margins. Are you seeing similar trends into the second quarter as well?

And the second question is on your order backlog in general. You're flagging the strong order backlog, particularly in Discrete on the robotics side; can you talk a bit more about all of the Automation businesses? And in the case of ongoing short cycle momentum staying weaker for longer, how long do you think your order backlog across the Automation businesses can protect your organic revenue development?

On the first part of your question, on the PP Medium Voltage performance margins, I'm not going tell you if you're right or wrong on our margins, but it's a good guess. I'd say that Medium Voltage is our shortest cycle business within the Power Products side, so it's always really tough to call quarter to quarter where it's going to land.

The advice that I would give to the investor community, right now, is I don't see a significant difference or a change in demand pattern as we go into the second quarter. I don't see a big difference one way or another.

When it comes to the order backlog from an Automation standpoint, I think Eric's got a lot of experience there. I'll turn it over to him.

Yes, as I said earlier on the call, we have added a chart on the division backlog in the back of the pile to be looked at. But what you can see there is that the backlog is quite stable, basically, on the same level as last year. In local currencies, it's actually up by 2%, with a bit of variation between the different divisions. But PP is 2%, PS is minus 2%, Discrete is minus 2%.

Overall, we have still a positive book to bill, so we are not so worried with the inflow for the [load]. And Discrete for these reasons has a backlog of $4.5 billion at the end of the quarter, so it's a substantial part of all the business that is in the backlog, even on Discrete Automation.

And the quality of this backlog has also been improving in the Power side, which, of course, will help us longer term, not on the next quarters, but longer term on the quarters.

Great, thanks.

Jeffrey Sprague, Vertical Research Partners.

Just a couple of follow-up questions. First, on PS, the margin execution, out of the gate first quarter after the reset was a little bit better than I was expecting. I just wonder what we should expect there as the year unfolds; is there other stuff in the backlog that maybe presents a little bit of a setback on the journey to improvement? Or anything else just to be aware of as we think about how that rolls out?

Sure. Jeff, on that is, look, we were pleased with that. It really was good project execution, but as you indicated in your question, you have to start with a reasonable margin to be able to execute well in that sense.

As we go through the year, what we had promised on the reset as we move into the fourth quarter of this year, that we'll be in the 9% range, and we're still committed to that. This 8.3% was a little higher than what we thought, but we're going to encounter some pressure from backlog as we go through the year. And so I'd tell you, don't expect an increase on this margin, or this being a consistent margin, as you move into the next few quarters. We do have some pressure in that sense.

But, again, it's how we execute. It's also how some base orders come through in this business too that are shorter cycle that can happen, and we can ship?

But it is a good indication of our strategy, Jeff, and why we were confident last year in making the changes that we did. And we're still very confident of reaching that 9% by the end of the year.

Great. And just then two quick follow-ups; just back on the PP pricing, is the down to both the order price and the revenue price, if there's some distinction, if you could flesh that out?

And I'm wondering if you could just share with us what your actual China sales performance was in the quarter, up or down, sideways?

For Power Products? Go ahead, Eric.

Let me take the pricing question first. We have a 2% in the order side in the first quarter, maybe a little bit more than 2%, but somewhere around 2%, count on that. And on the revenue side, it's somewhere between 4% and 5% in the quarter.

Thank you.

From history.

And then Power Products, you were asking, Jeff, for Power Products shipments revenues in the --

No, I'm just thinking total ABB in China in the quarter. You gave us the order number; can you give us just the revenue number?

4%.

4%. Thank you very much.

Sebastien Gruter, Societe Generale.

Two questions, if I may? First on the Service and the gross margin, it was quite strong in the quarter, up almost 200 bps quarter on quarter, and year on year. What are the specific [predictive] mix impact in that quarter, or do you think this is a new sustainable level for the Service business?

And my second question would be about base orders down 5% organically in the quarter. Were there any meaningful change between January, February and March for this data? Thank you.

We're going to scramble for a second to grab you what you need here, Sebastien.

Okay. On the first one?

Yes, that's the worst. We're aware that --

What you say is the gross margin's up, and that's also because of mix in Service. We have lower content of [full] Service, and there's a mix between the divisions. There are quite different margin levels also on Service; some are extremely good, and some are still good. And when that mix comes out, it comes out slightly better with the gross margin on Service.

Yes. Joe, do you think this is a sustainable level, the 37% gross margin for the Service, as you improve the mix?

Yes, we are striving to drive up the margins in Service, like in all other places. So we hope that that is close to it. But there will always be a slight difference, quarter by quarter.

Yes, there's a lot of mix in Services. But when you look systemically, we're going to be pulling more and more Full Service out of that portfolio. I can't tell you we're going to maintain the margin that you saw. You're going to see some mix around it, but our trend will be to try to drive it up.

Okay. Thank you.

On the base orders, your question on the base order piece, I'd say that it was better in March than it was in January and February.

Okay. Thanks.

James Moore, Redburn Partners.

I've got three questions. On the PS business, I saw the orders have been weak for the last three quarters. I'm just wondering if that's the market or your selectivity? In other words, are you giving up about one-fifth of revenues, making no money? Is that the way it's working for the reset?

And on the net working capital, I see we've moved up to the 16.5% level, against the 13.5%. Is this just seasonality and do you feel you're on track there? And when do you think we can think about 13.5%?

And on the savings, I don't want to be overly mathematical, but unless I'm mistaken, if we take 4%, the midpoint of your 3% to 5% COGS, it's more like $1.1 billion/$1.2 billion than it is $1.0 billion. So should we think about a $1.1 billion/$1.2 billion this year, or more like $1.0 billion?

(laughter) While Eric's rifling through this thing, I'll give you the PS piece. On PS, it's a little bit of both. Remember, PS can live and die on large orders. And so, James, like we missed DolWin 2, that offshore platform; we lost that, we priced ourselves out of it. We knew what we were doing, and that was a selectivity thing on our part; we had enough offshore, in that sense.

We -- solid base orders on PS has actually got better in March than we had, again, in January and February, and so that's the best thing to watch.

I'd say this is not a linear kind of an approach. You're going to see this fluctuate up and down, depending on what we're bidding on. I'd say the biggest changes that we're making have to do with substations and how we quote on substations, and also in grid systems, in some of the grid systems, and that's where we're making most of these selective decisions on margins right now. I think you'll see it, James, begin to equal out and solidify over the next few quarters as we do that.

Okay.

Net working capital, I'm going to give that one completely to Eric and see what he says.

Yes, we were at 13.8% at the end of last year, which was a good achievement comparing to the earlier quarter in 2012. The guidance has been to be somewhere between 11% and 14%. Given the economic situation, I think it's rather in the upper end of that range at present and that's what we landed last year.

The 16% we have now is a seasonal situation; it was higher in the first quarter. We are working hard to improve that seasonality, but it will never go away completely. We feel quite confident that we will be able to bring it down towards the end of the year, in line what have done in the earlier years.

Okay. Thanks.

James, on the savings side, I'll just say, look we try to drive all we can from an overall standpoint and we've guided you toward $1 billion. Will it be $1.1 billion or $1.2 billion, it's too early in the game to tell you, but I'd say the weaker the economic activity out there, the more chance that we have to push on the FCM side. So I wouldn't necessarily equate that to upside if it happens, because that just means our demand patterns are [going to be] reflected by that kind of a thing, too. I think if you're trying to plug the spreadsheet right now, I'd stay on $1 billion.

Okay. Just to come back on the PS, just to think of it in a different way, if we look back in a couple of years' time and say how much of the PS revenue did you exit from the reset, could you give us a rough feeling?

I think when you look at the 2015 plan, we took out $4 billion, but we made it up completely in margin. So you ended up net-net the same on a margin standpoint.

And it's going according to that plan, is what I'm getting at, as you see yourself working into it?

Yes, honestly, James, you know it's a guess, right. We took $4 billion out; we took our best bet on what that might mean and so far it's playing out that way. We'll just report on it quarter to quarter, but I think that's the best we can tell you right now.

Great. Thanks, guys.

Olivier Esnou, Exane BNP Paribas.

A few questions, please. Coming back to the Power Systems business, the actual organic sales growth has been quite volatile, up double digit, down, up again. So since it's such a backlog business, can you maybe indicate what sort of organic sales growth profile we should put in for the year?

The second question is on the LP business; there's a nice margin improvement this quarter. You mentioned cost control and capacity utilization. Actually, there's very little organic growth this quarter, so I was wondering, is there just an extra net price gain, or most of the savings accruing to significantly more than usual to that division. How can we better understand the performance bridge here in LP?

Maybe lastly, I looked at the organic order growth, the actual order growth for Service, it's down this quarter. It hasn't been down for quite some time, and I know you're exiting bad business here as well, but it's not something you started this quarter. Can you give bit more of a sense of what was driving that down and how we should think about it for the rest of the year? Thank you.

I guess we'll start with orders growth and we'll just take them backwards. On the order growth for Services, look, it was down and some of it was mixed because of Full Service being down on year to year. We were pleased about though; it's roughly 19% or 20% of revenue overall from an order standpoint. Now the first quarter usually comes in that way, so it's not a big difference.

We don't see a material change in our Services business; it's really driving this across the board. We have to really take it business by business, but the Full Service, as we push that down, you're going to see some of these fluctuations at times. Don't look at that as -- we don't in any way feel that we have a systemic issue in Services, and we continue on our strategy to push Services to 20% of revenue during this strategic period.

On the sales growth, if we go back up to the organic sales growth for PS. When you say organic -- when we look overall if we land a few big jobs this year, we could have a significant increase in Power Systems. Right now, we run it at an idea that we're looking at Power Systems' orders about flat for the year, but we'll have to see. That can really swing, based on how large orders are between $0.5 billion and $1.5 billion could come in.

Your other question about LP, I think to be honest, we have really favorable comparisons this year. We had a very difficult quarter in the first quarter of last year. We had some operational issues in Italy; we had the China issue on orders. So when you look at that margin gain, I feel a lot of it has to do with we had business disruption last year, and this year we have more continuity. I wouldn't look at it as a big change in the sense of how we're operating.

There is also some positive price impact in LP.

Positive price. Maybe you just --

Not big numbers, but some positive.

That's true, yes.

Okay. Thank you. Maybe just a follow-on; on PS, I was more thinking about organic sales growth. So are you saying that even the sales figure for the year is quite dependent on some orders you could take during the year?

You're looking at the revenues rather than orders now?

No. I was thinking about the organic sales growth for PS for this year; that was my question. I want to make sure -- if you can guide on that.

As you could see in the first quarter, we had a 15% sales growth increase in PS.

Yes, but the previous quarter was down 4% for organic also, so it's been quite volatile.

And of course, (multiple speakers) timing of the backlog, but I think based on the backlog, you should expect to have any increase in PS during this year in sales. But you have to see then that quite a bit of that has to do with the old order backlog with very low margin orders that are going through also.

Right. It wasn't visible in Q1, the low margin backlog, but --

That's correct, but part of it was there, but it's different the time during the year. It does come a bit lumpy between the quarters, so it was --

Okay, so a small increase, yes? Okay.

Olivier, the way you look at that too, is just remember we're [hoping that] we'll be at 9% in this business from a margin standpoint in the fourth quarter. And we're working our way through this reset. There still is some backlog stuff we have to really get through.

Okay. Thank you.

William Mackie, Berenberg Bank.

Three questions, please. Firstly, quite big order declines in three of your key markets in Europe, in Germany, Italy and Switzerland there. And so could you throw a bit more light on how that fell between the divisions, and what the implications may be for the business outlook in the second or third quarters?

And then on Power Products, if I could come back to that, I recall during the quarter that you had cautioned that the margins could fall weaker in the business, and then it seems that they're pretty much stable with the fourth quarter result. So what was it that surprised you in there; was it just this Medium Voltage that you commented on earlier, or was there something else that moved in your favor?

And then lastly, I know it's not one of your big areas, but I think it's been profitable, but in the Middle East you seem to imply that, excluding South Africa, the Middle East was down. A number of other competitors have reported very strong market conditions in the Middle East for a number of your end segments. So is that something to do with your decision-making centrally, or within the region, or is there a mix effect that implied that the rest of the Middle East was down on an order perspective? Thanks.

Starting with the Middle East, I'd say we live and die in the Middle East on large orders, Will, so I wouldn't take the first quarter as any indication of the Middle East being up or down; it's just the way our orders cycle in that sense. And it's been broadly a big Power market for us [this year].

I talked about substations, and sometimes we [manage those] substations; sometimes we don't, and that would be the biggest swing on that end.

On the PP side, I'd say primarily the difference is Medium Voltage. We have limited visibility sometimes; it's our shortest cycle business and it was stronger than it was before. And I think, Eric, from what I've seen, you'd probably agree it's the primary driver.

That's the primary driver. There are some other mix issues too, but that's the primary driver.

Your question on Europe is a good one. Obviously, we saw some big weakness in Italy and Switzerland and also Germany. How that washes out by product line, Eric's got some data.

Just to give you some flavor without going in detail, in some of the countries it had to do with fairly low Power orders against high comparables. But I think we can say in overall that it is a lot of headwind in those large markets today.

Could you elaborate a little bit more? I think in the release you comment about the Motors and Drives business for DAM seeing particular weakness. Is that something which has shifted in the last few weeks, or how do you feel about that going into the next quarter?

In general, they are in a stable trend overall, but again there it depends. In their case also, and larger -- from their perspective, larger orders, which is not hundreds of millions, but larger orders from their perspective. And sometimes they fall in Italy, sometimes they fall in France, sometimes they fall in Germany. So that's why I try to summarize the answer, but yes, there is, for instance, in some European countries, lower demand than a year ago. But there was also high comparables in some of those countries, for instance in Germany, in the first quarter of last year.

I wouldn't draw a line through this one; I think we're just going to have to live from quarter to quarter here for a while and see what happens in Northern Europe.

And you have seen the list of countries with pluses and minuses; we had a similar list the quarter before, and you have fairly big swings in the percentages there too, but they were different countries. So I think the message is, we have been able to keep Europe flat, both as a whole, but also for Automation, respectively Power in total, but there are quite big swings between the countries.

And that's also the nature of the business, so I think you will also see that we have some good numbers in the Eastern part of Europe, which helps us with our widespread footprint we have now in Europe.

All right, Will?

Thank you.

James Stettler, Canaccord Genuity.

Automation's now 60% of total revenue. Where would you ideally like to see the breakdown between Automation and Power, let's say over the next five years? That's question number one.

Secondly, can you talk a bit about pricing trends outside of Power, in particular for example in the area of Motors?

And then finally, are you seeing any change in terms of conditions, in terms of customer advances in large projects?

First of all, from an Automation standpoint, look, what we've done in Automation versus Power is this hasn't been a conscious diversification to try to move the Power side down. The acquisitions have been a lot easier for us in Automation, because it's a more fragmented industry, and it's broader, and frankly, we have less antitrust issues there too, so it was easy.

The Power market's declined a little bit, too, so that hasn't helped, but ideally seeing this thing fluctuate in the 55%/45% range, and you're going to see ranges of 10% or so go over time, and some of them are long-cycle, mid-cycle and shorter-cycle businesses. But I think 60%/40% is kind of on extremes for what we would want to see and what I would expect to see overall in the portfolio.

On the pricing for Motors, I'm not aware of any increased intensity on Motor pricing in any geography. Eric, are you --?

I think, in general, the pricing in Automation -- let's make it more general than Motor specifically -- has been stable over the quarter. There's some areas of slight declines and some areas of improvement, but overall quite stable.

And your last question, James?

Customer prepayments; any changes there?

I haven't seen a big change between this year and first quarter of last year.

There's no big change in the pattern there. We are still getting advances.

Great. Thank you.

Okay, that concludes our call. Again, thanks for your interest. We're pleased with the operational performance of the quarter, and also strategically where we stand. As we mentioned, we face an uncertain economy, I think as you see with our other competitors too, but again, I want to express Eric's and my confidence that the teams are up for this, and we're ready to push hard to perform well in this current situation.

So again, thanks for your interest, and we'll be back to you at the end of the second quarter.

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. Goodbye.